Safehold Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 3, 2022

There are 15 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Eaton Corporation 4th Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Senior Vice President of Investor Relations, Mr.

Operator

Yan Jin. Please go ahead.

Speaker 1

Hey, good morning, everyone. I'm Yanjun, Eaton's Senior Vice President of Investor Relations. Thank you all for joining us for Eaton's Q4 2021 earnings call. With me today are Craig Arnold, our Chairman and CEO and Tom Oakray, Executive Vice President and Chief Financial Officer. Our agenda today, including the opening remarks by Craig, highlighting the company's performance in the Q4, we will be taking questions to aid in with Craig's comments.

Speaker 1

The press release and the presentation we'll go through today have been posted on our website. This presentation includes the adjusted earnings per share, Adjusted free cash flow and other non GAAP measures. The reconciled in the appendix. A webcast of this call is accessible on our website will be available for replay. I will remind you that our comments today will include statements related to the expected future results of the company and are there for forward looking statements.

Speaker 1

Our actual results may differ materially from our forecasted projection due to a wide range of risks and It outlines in our presentation release and presentation. With that, I will turn it over to Craig.

Speaker 2

Okay. Thanks, Ian. Let's start on Page 3 with a few highlights of the quarter. And I'll begin by saying that despite what's now very well publicized and ongoing supply chain issues, Our team delivered solid results in the quarter and a record performance for the year. And in Q4, we generated adjusted EPS of 1.72 A 4th quarter record.

Speaker 2

Our sales of $4,800,000,000 up 6% organically. And I'd say here, we had particular strength In residential, data centers and in industrial markets. And I'd say also our aftermarket businesses in both commercial The Eaton Vehicle continued to deliver strong growth. We were certainly impacted by supply chain constraints, which Had an impact on our revenue, and I'd say especially in our Electrical Americas and our Vehicle segment. The good news is the markets remain strong.

Speaker 2

Order growth accelerated in the quarter, and we ended the year with a record backlog. For our combined Electrical business, Orders were up 21% on a rolling 12 month basis, and our backlog was up 56%. Our Aerospace business also had a significant increase in orders, up 19% on a rolling 12 month basis, and the backlog was up 16%. We also continue to post strong segment margins, 19.3% in the quarter and a Q4 record. Nice to hear, the actions that we've taken to mitigate inflation, our portfolio changes and the restructuring savings are all contributing to the I'd also note that we benefited from favorable mix in the quarter.

Speaker 2

And I'd say that our portfolio changes continue to be an important part of our strategy. We're pleased to have completed the Royal Power Solutions transactions a few weeks ago and the addition of Royal Power will allow us to accelerate our growth in e mobility And actually in the broader electrical market as the economy continues to adopt more electric solutions. So I'd say, I think you'd agree that we're not sitting still. We're managing the things that we control operationally, while continuing to advance our strategic agenda. Moving to Page 4, I'll highlight a few additional points on our quarterly results.

Speaker 2

First, total revenues of up 2%. We increased operating profit by 14%, so continue to demonstrate strong operating leverage. 2nd, Acquisitions increased revenues by 7%, which was more than offset by the sale of hydraulics, which was a 10% headwind. And while not complete, we're certainly pleased with our progress on the portfolio. We continue to drive changes to support out that our margins of 19.3%, as I noted, were above the guidance range of 18.8% to 19.2%.

Speaker 2

And I think a good indicator of our team's ability to execute operationally, while once again managing the things that were in our control. And lastly, as we noted both adjusted EPS of $1.72 and segment margins of $19.3 were Q4 records In the face of these significant supply chain constraints that we've been dealing with. Next on Page 5, We show the financial results of our Electrical Americas segment. Revenues were up 13%, 5% organic and 8% From the Triplight acquisition, the organic sales growth was really driven by strength in residential, industrial and data center markets. And on a sequential basis, organic growth did step up from 1% in Q3 to 5%.

Speaker 2

So we're making progress, but still, as I noted, operating margins of 19.2 Percent were down 190 basis points year over year and the decline was driven really by higher input costs, labor and supply chain inefficiencies and disruptions in our facilities. And on price recovery, we're making good progress. We made good progress in the quarter, but certainly not fast enough to prevent some margin erosion on the net between inflation and price and the way that plays through to operating margins. And as noted in my opening remarks, market demand remains strong, which was reflected in orders and the growth in our backlog. On a rolling 12 month basis, orders were up some 20%, accelerating from up 17% in Q3 3% 13% in Q2.

Speaker 2

And our backlog reached another record, up 57% from last year and that's 7% higher than it was in Q3. The strongest markets continue to be residential and data centers. And I say here also beyond orders, we also have strong momentum in our negotiation pipeline, which was up some 11% in the quarter. Turning to Page 6, we summarize our Electrical Global segment. And as you can see, we delivered really strong results in this segment.

Speaker 2

Organic growth was 15% With strength in all regions and particular strength in commercial, data center and industrial markets, we also delivered significant operating leverage with operating margins 19.5 percent and incremental margins of 40%. We did have a little bit of favorable mix here from our exposure to Industrial end markets, but we do expect this to continue. Like the Americas, orders remain strong, 22% increase on a rolling 12 month basis and a step up from the 17% number we posted in Q3. And our growth in our backlog remained above 50%. In this segment, order strength was especially strong in data centers, Residential and Utility Markets.

Speaker 2

Yes, so I'd say overall, I'd say that our Electrical Global business had a very strong quarter on top of a strong year And it's really carrying a lot of strong momentum into 2022. Moving to Page 7, we summarize the results for our Aerospace segment. As you can see, we had a strong quarter. The industry's recovery has certainly begun. Revenues increased 40%, 4% organic, Operating margins were 24.9 percent, an all time record and up 660 basis points from prior year.

Speaker 2

In the quarter, we had solid incremental margins of more than 40%, which were helped by favorable mix, particularly the growth in aftermarket And by our portfolio actions. Another bright spot in the quarter was the growth in orders and backlog. On a rolling 12 month basis, orders turned positive in Q3 And we're up 19% in Q4 with particular strength in commercial markets. Commercial transport, And lastly, our backlog was up 16% from last year. Next on Page 8, we show the financial results of our vehicle business.

Speaker 2

Revenue was down 2%, 1% organic, 1% from currency. We had strong organic growth in North America truck and in our South America business, which was offset by weakness in global light vehicle markets. As you're aware, we had certainly significant supply chain constraints in the segments, including a number of customer shutdowns that impacted our revenue. We do have, we think, the worst is behind us here, and we'll see improvement in supply chain related disruptions this year. Overall, I think our team executed well, delivering solid margins of 16.4% and decremental margins of 30%.

Speaker 2

Turning to Page 9, we have the results for our eMobility business. Revenues were up 4%, with growth Like our vehicle business, we experienced significant supply chain constraints and customer shutdowns in this segment. And operating margins were negative 9.1 percent as we continue to invest heavily in R and D and startup costs associated with new program wins. As I mentioned earlier, we acquired Royal Power Solutions in January, and it will be reported within the eMobility segment. This is an important acquisition.

Speaker 2

It's part of our strategy to improve the long term growth rate of Eaton. First, it expands our addressable market Free Mobility with a portfolio of highly engineered terminal connectors for electrical applications. Yes, 2nd, Royal Power has a strong track record of profitable growth and will continue to grow as the electrical content in And third, Royal will allow us to offer a more complete customer solution As we bundle their products with our own power protection and power conversion products that we're selling in e mobility markets. I'd say here, with organic growth momentum, the completion of Royal Power acquisition, we're well positioned to realize our long term objective here, which is building a new $2,000,000,000 to $4,000,000,000 e mobility business inside of Eaton. And our cumulative new program wins are now at $800,000,000 material revenue when you include the impact of new wins from Royal Power.

Speaker 2

Moving to Page 10, I'll just take a minute to recap 2021 performance before we turn our focus to 2022. First, we delivered strong organic growth for the year, up 10% with significant strength in our Electrical Global segment, Up 15%, vehicle up 21% and e mobility up 16%. And I'm especially proud of the team for delivering record segment margins of 18 point 9%, a 2 50 basis point improvement over 2020, despite the challenging supply chain environment. Our team executed at a high level and delivered incremental margins of 43%. We also had one of the most transformative years in the history of the company when you think about the portfolio.

Speaker 2

We completed $8,000,000,000 of portfolio actions toward Our goal of building this higher growth, higher margin and company with more earnings consistency. And we're off to a good start in 2022 with another value The results of our disciplined execution, the Transformative portfolio actions allowed us to deliver 35% growth in adjusted EPS. And importantly, our shareholders were well rewarded for their commitment to Eaton with a total shareholder return of 47% for the year. Our 2021 results certainly set a high bar for what we expect of ourselves and I'm sure what you expect of others of us as well. But we're up for the challenge and we think the best years are still in front of us.

Speaker 2

So let's just turn our focus to 2022. On Page 11, we show organic growth and margin guidance by segment. Overall, we expect organic growth to be 7% to 9%. Starting with our electrical businesses, Americas and Global are both expected to grow 7% to 9%, and we expect these businesses In aerospace, we expect organic growth of 10% to 12% with strong growth in both commercial OE and aftermarket channels. Our base assumption here is that travel continues to expand from the COVID impacted downturns without Any significant new variants.

Speaker 2

And we expect low single digit growth in military markets. For vehicle, we're anticipating organic growth of 7.5% to 9.5% with strength in both light motor vehicles and truck markets. And in eMobility, we're expecting organic growth to be 11% to 13%, driven by the continued strength in electric vehicles. And just turning to segment margins, we expect Eaton to be between 19.9% 20.3%. At the midpoint, this is 120 basis point improvement over our record margins that we delivered in 2021.

Speaker 2

And we expect to see margin expansion in all of our segments. Turning to Page 12, we cover the balance of our 2022 guidance. Organic growth, as we noted, is expected to be 7% to 9%, with acquisitions and divestitures subtracting 3.5% And currency is expected to be flat. We're also forecasting cost to be flat and our tax rate to be between 16% 17%. Adjusted EPS is projected to be in a range of $7.30 to $7.70 At the midpoint of $7.50 a 13% increase.

Speaker 2

Operating cash flow is expected Between $3,000,000,000 $3,200,000,000 and CapEx will be approximately $650,000,000 At the midpoint, Our operating cash flow is expected to increase 15% versus last year. Our free cash flow is expected to be between 2 point $4,000,000,000 $2,600,000,000 and at the midpoint of $2,500,000,000 also a 15% increase. This represents free cash flow to sales of approximately 12% and free cash flow to net income of approximately 100%. And we expect share repurchases to be between $200,000,000 $300,000,000 And this really reflects our pivot What we think is going to be a higher priority on tuck in acquisitions. And lastly, our Q1 guidance is as follows.

Speaker 2

We expect Adjusted EPS to be between $1.55 $1.65 organic revenue growth to be up 7% to 9%, Segment margins to come in between 18.4% 18.8%, and we expect our tax rate to be between 15% 16%. Hey, if you just allow me for a moment, I'd like to just close with once again Page 13, which is a brief summary Now we think you should think about the company. I'd say, first, our top line is supported by strong secular growth trends. And I'd say of note, most of this growth impact is just beginning to show up on our revenue. So most of it's still out in front of us.

Speaker 2

We've proven that we know how to expand margins and are comfortable with our ability to deliver 11% to 13% EPS growth over our planning horizon. We also have clear capital allocation priorities and a disciplined approach to M and A, which we think is paying off. As a result, I'd say we're a different company today. We've transformed our portfolio. We're now a company that will deliver Higher growth, better margins, more earnings consistency.

Speaker 2

And I'd say, once again, we're not done. We also have a long standing commitment to ESG. It remains at the forefront of what we do every day. In fact, sustainability for us is really a part of how we drive growth in the company. Many of you have gotten to know our Chief Sustainability Officer, Harold Jones, and you'll be hearing more from him at our Investor Meeting next month.

Speaker 2

In the short term, you can count on us to continue to manage through these operating challenges as a result of COVID, The supply chain disruptions and labor shortages by managing the things we can control. 2021, we think, was an important proof point on our journey to transform the company and we're proud of our results. More importantly, we're ready to do it again this year. Now I'll turn it back to Yan, and we'll be happy to address your questions.

Speaker 1

Thank you, Craig. For the Q and A of our call today, With that, I will turn it

Operator

Our first question will come from the line of Josh Krowinski with Morgan Stanley. Please go ahead.

Speaker 3

So a couple of questions here.

Speaker 4

I guess first on free cash flow conversion. How should we think about some of the moving pieces around there, Working capital or otherwise, and when do you think we start to get back to kind of more historical conversion rates?

Speaker 5

So thanks for the question, Josh. Appreciate it. We intentionally used GAAP earnings The reason we did this is it's important to look at GAAP earnings when you're going through multi year restructurings and doing a lot of M and A. So there's really Four main items that you need to think about as it relates to free cash flow conversion. 1 is Acquisition, integration and divestiture costs, which are going to generate cash requirements for us in 2022.

Speaker 5

The other one is the multi year restructuring program. Now while we're at the tail end of that, we will have cash requirements, which will also be in 2022. Another element is CapEx. As you probably noted for our guide, we're up $75,000,000 in CapEx investing to grow. And then the final one is a smaller one, but It's relevant.

Speaker 5

The CARES Act, we still have 50%, which is due, which we'll pay in 2022. So If you're using adjusted earnings, you likely got in the low 80s, mid 80s. If you adjust For those four items, you're going to be well into the mid-90s. So I don't think it's a departure between what we've done Historically, I think it's consistent. The other thing I would note is we're also growing operating cash flow by $400,000,000

Speaker 2

And the year, which is significant. And I'd just add in addition to that, Josh, we're obviously not through A number of these supply chain related challenges and so I could we're certainly as we think about today, how do we protect customers, how do we get out in front of some of these Supply chain constraints, we're still sitting on a fairly large pile of working capital, specifically in inventory as we're dealing with some of these supply chain related issues.

Speaker 4

Got it. That's helpful. And then I guess just speaking of supply chain, probably the volume output here It was held back, and we can see that in the 1Q guide, I guess, specifically in electrical. But if order rates hold, what sort of volume growth Are you guys thinking about, it's kind of in a second half or exit rate or as some of these supply chain issues abate, how do you guys think about that in the guide here?

Speaker 2

Yes. I mean, it's certainly a tough question to really address. I mean, as you can appreciate, we and others have got this Wrong in terms of how long the supply chain constraints would be with us. But certainly, the underlying order growth in the businesses is a good proxy for where the real demand is. And I'm sure the question that sits just behind this one is that, to what extent do you believe there's over ordering taking place, Restocking in the channel, and I can tell you as we continue to test for that, we're not seeing it.

Speaker 2

And Our distributors are certainly today calling for more inventory than we're currently able to deliver to them. So much of our business is project driven. And so on projects, you're not over ordering on a project. A project is a project. And If you just look at the order levels that we're seeing in our business, I mean orders and sales at some point converge To the extent that there isn't a bunch of over ordering taking place, and so we feel really good about the underlying strength in our markets.

Speaker 2

You see this tremendous growth in our backlog, and eventually this stuff is converted to sales. And so, I mean, we're talking about a guidance of 7% to 9%, which is well below the underlying order rate that we've seen in our electrical business. And so at some point, those two things converge.

Speaker 5

Yes. I guess for perspective, Josh, we estimated in Q4, just in the Americas, we probably lost about $100,000,000 in sales related This is prior disruption.

Speaker 2

Right, timing. We didn't do so. We think that's once those revenues are pushed into 2022, It just went into the backlog.

Speaker 6

Appreciate the color. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Andrew Obin with Bank of America. Please go ahead.

Speaker 7

Hi, yes. Good morning.

Speaker 2

Hey, Andrew.

Speaker 7

Hey, how are you? Just a question on backlog. How much visibility do you currently have From your project backlog and how does the margin profile of those projects look relative to the current input costs, because sort of mixed message From various folks as to how that's going to play out in 2022? Thank you.

Speaker 2

Yes. I'd say that we're naturally sitting on a lot More visibility today than we have ever in the history of the business. When you think about this 57% 56% growth And the backlog for our global electrical businesses. And so we have much better visibility today than we would have Going into almost any year in the history of the company, and I'd say with respect to pricing in the backlog, I mean, we naturally have seen This inflation trend coming for some time now, we certainly have had the ability to anticipate where it was going as well With respect to commodity inflation, so we're very comfortable today with pricing in our backlog and that's certainly reflected in the guidance that we have, but We don't expect, like perhaps you've heard from some others, to have a margin impact as a result of a backlog that's not reflective Of today's commodity prices.

Speaker 7

Excellent. And just maybe to build on the previous So you are highlighting that sort of the underlying free cash flow conversion is close to 100%. But Look, I think cash flow is one of the factors here. As we sort of enter this growth, What looks like industrial growth period, how generally do you think about sort of investments needed In capacity, working capital, supply chain, to keep up with demand in the longer term And how do you see managing it and what kind of impact do you foresee it having on margins, free cash flow conversions, return on capital, etcetera? Just Big picture question.

Speaker 7

Thank you.

Speaker 2

Yes. I'd say if you think about we talk about these important secular growth trends and the fact that we do expect our businesses as we look forward to be a much faster growing business than we have historically. And we have had to, and we've talked about some examples before, make some fairly sizable investments To deal with some of this growth that we're going to be that we're booking today and will be coming into the future. And so I would say, As you look into the future, certain with respect to investments in capacity to support demand, We would expect to see a bit of a tick up in capital spending requirements. Our revenue is going to be growing as well.

Speaker 2

And so if you think about CapEx as a percentage of sales, it probably won't be a material change, but there'll probably be a bit of a tick up. And on the working capital side, I'd say today we still have opportunities. We are sitting today on record investments In inventory, as we try to protect our customers and protect our sites so that they can keep running. So I would say, I would not anticipate today a large investment in working capital once we get through Some of the supply chain specific driven transitory items, I would hope that at some point, it will be a source of cash Even as we continue to grow the business and we literally have built that much inventory inside of the company to really try to protect customers. But on the working capital on the CapEx side, we would anticipate continuing to make investments In capacity in our facilities, in resiliency to ensure that we have the ability to support the growth that we see coming.

Speaker 5

Yes, Andrea, I think it's also important to note is we're not walking away from our objective of 100% free cash flow Conversion and 14% free cash flow as a percentage of sales, that remains something that we're focused on too.

Speaker 7

Really appreciate it. Thanks so much.

Operator

Thank you. Our next question comes from the line of Jeff Sprague with Vertical Research. Please go ahead.

Speaker 8

Thank you. Good morning, everyone.

Speaker 2

Good morning, Jeff.

Speaker 8

Hey, good morning. If we could just kind of peel the price cost part a little I just wonder specifically on price, if you can give us some sense of what the realization was in the quarter And what is embedded in your guide? And also as part of that, Craig, you just kind of mentioned you didn't expect price Cost to be a margin headwind. So are we it sounds like we're probably positive on dollar rate Perhaps maybe you could confirm that and just clarify the margin impact, if you will. Yes.

Speaker 2

I appreciate the question, Jeff. And this is obviously one that we're spending a lot of time internally on ensuring that we're Recovering all of the commodity inflation that we're seeing in our business. So my opening comment here, I talked about the fact that We saw a margin impact in our Electrical Americas business, specifically As it relates to price and cost, largely because we are in fact recovering the dollars, but we're not getting a margin. At least in the Q4, we did not get a margin on top of the recovery. And so it obviously had a dilutive impact on the margin rate.

Speaker 2

As we look forward, we do expect that we'll be slightly positive In price costs, we think about 2022 and that will just continue to build from this point forward. So 2022 will be a better year. It will be less of a headwind, for sure than we experienced in 2021. And we certainly would expect from an EPS standpoint that it will be positive to our EPS earnings. On the specific question on what the dollar percent is, Jeff, as we talked about on the last earnings call, and I know it's a number that everybody is looking for and I can understand why.

Speaker 2

But we're in so many different businesses and we have very different inflation rates. When you think about something in Krausz Heinz, which It has a really heavy content of steel versus something that's in one of our other businesses. And so the inflation rates are quite variable. So we have chosen not to provide that number so as not to confuse customers around prices they're seeing versus what we're talking about on our earnings

Speaker 8

Thank you for that. Since you mentioned steel, maybe I'll go there with my follow-up. Obviously, the futures are pointing a lot lower. Perhaps you just give us an update on the likely lag effects of Perhaps deflation on steel coming through the system, you do have some big backlogs to work through. So Certainly, I would suspect it's going to take a couple of quarters, but any color there on steel specifically or just the other key commodity inputs that we're all keeping an eye on here?

Speaker 2

Yes. We appreciate the question as well. And like you mentioned, we are in fact seeing steel prices kind of retrench a little bit Versus where they were last year and certainly where they were in the Q4. And the typical lag time on that can be Anywhere from 30 days to 90 days, depending upon which segment of the business and what type of agreement we have with our suppliers. But I would say with respect to commodities overall is that we're really not seeing commodities overall essentially improve.

Speaker 2

Copper is up. Resin costs are still high. The cost of semiconductors, if you can get them, are up dramatically. So we are still living in this inflationary environment. And we would anticipate for much of 2022 That we continue to operate in this elevated environment of input costs.

Speaker 2

Steel is the one kind of good guy right now, but There are more than enough other bad guys out there in terms of where we're still seeing inflation that are offsetting the benefits that we're going to see from steel.

Speaker 8

Great. Thanks for the color.

Operator

Thank you. Our next question comes from

Speaker 9

I just kind of want to go back to the free cash flow and working capital discussion. So completely understand that this is an area of opportunity and that's Have you embedded continued working capital build or are you anticipating that it will be a source of cash for this year?

Speaker 2

I think what's embedded correct me if I'm wrong, Tom, I think it's a slight positive. Yes. What's embedded in our forecast?

Speaker 5

We're looking Some networking capital improvement primarily as it relates to inventory. Right.

Speaker 2

So it's not a big needle mover for us In 2022, it is a slight positive is what I'd say.

Speaker 9

Okay, perfect. Understood.

Operator

And once again,

Speaker 2

it could be an area of opportunity. If we get through some of these supply chain related Challenges and more quickly than we're currently anticipating, it certainly could be an opportunity to generate stronger free cash flow.

Speaker 9

Of course. Got it. Thank you. And then I guess just kind of following up and finishing up the price cost discussion. Craig, you specifically caught out Americas, which makes sense.

Speaker 9

Are you having price cost headwinds at the margin line in any of your other segments? Or is this just really isolated as predominantly an Americas issue.

Speaker 2

I'd say we're having price cost headwinds in all of our businesses for the most part. It is just most acute in the Americas. And so I'd say, we haven't we've just and if you think about Today, what's going on and it's kind of interesting what's going on around the world. It's really the U. S.

Speaker 2

Businesses in general that have had the biggest challenges Around price cost, and that's largely on the input side. The inflation that we've experienced in our Americas businesses, in our U. S.-based businesses Has been significantly higher than what we've seen in other markets around the world. But we're having, let's say, Inflationary pressures every place. It's just most acute in the U.

Speaker 2

S.-based businesses.

Speaker 9

Thank you. I'll pass it on.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of John Walsh with Credit Suisse. Please go ahead.

Speaker 10

Hi, good morning.

Speaker 2

Good morning, Jeff.

Speaker 10

Maybe the first one, can you give us a little more Detail on what you're seeing in the data center market globally and if you are actually booking out now to 20 23 on some of those projects.

Speaker 2

Yes, John, the data center market has been Extraordinarily strong for us during the course of the year and on the back of really what's been a multiyear trend of really strong market. And whether we're looking at hyperscale, whether we're looking at co locations, whether we look at even on prem, each of those markets Have been extremely strong and as has been the IT channel in general. And so I'd say today, We think about where we're challenged around our ability to really service customer demand, and it's these really strong markets of data centers and residential that Certainly have built very large backlogs. And today, we're struggling to keep up with demand. And quite frankly, we think that market does stay strong for a very long period of time.

Speaker 2

And when you link it back to some of the earlier conversations of Where are you going to need to make some capital investments to really deal with some of these longer term growth trends? It's going to be in markets like Data centers, which we think is going to be strong for a very long period of time as the world continues to, as I've said before, Generate, consume, process, store, just increasing amounts of data. And so I and we're sitting on kind of the verge of Another big growth wave when we think about 5 gs, when you think about autonomous vehicles. And so we think that market is going to be strong for a very long time,

Speaker 10

Space margins, if I did the math right, it looks like there's a little pressure on the conversion, obviously absolute numbers, A nice improvement. Is that mix or is there something else happening there?

Speaker 2

So when you say pressure on conversion, you're talking about incremental margins in the quarter?

Speaker 10

Yes, the incremental margins, maybe that's just mix With OE growing faster or something happening commercial military, I'm calculating something in like the upper 20s, Mid to upper 20s. Mid to

Speaker 2

upper 20s. The incremental margins for Aerospace Business was 40%. Yes. 4-0. Yes.

Speaker 2

Yes. Over the Oh,

Speaker 10

I'm saying in the guide, sorry, in the forward look for 2022.

Speaker 2

Why don't you let us get back to you on that in terms of the incremental Margin is in the guide and I think you have an acquisition impact in that as well. So and I'm not sure what you're assuming in terms of stripping out acquisitions, which obviously don't come at a normal incremental, The underlying margin rate of the business, so why don't you let us get back to you on that one and maybe deal with that offline? Sure.

Speaker 10

Appreciate you taking the questions. Thank you.

Speaker 2

All right. Thank you.

Operator

Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please go ahead.

Speaker 11

Thank you. Good morning, everyone.

Speaker 2

Good morning.

Speaker 11

So Craig, look, interesting dynamic occurring in the market right now on the inventory side. And saw you guys build inventories this Quarter, which makes a ton of sense, obviously, to be able to supply the market. But I kind of want to try to square that the comments on Distributor inventories being lean, clearly no inventories if you're doing a project. What's your sense in the OEMs? Because we are hearing from some of our companies that they are building inventories, but everybody is also saying that the market is still very lean out there.

Speaker 2

Yes. And I'd say that I mean, I think it's fair to say everybody would like to build inventory, and we're getting lots of requests To get back to historical levels of inventory with our distributors and we're always carrying inventory, many of them Don't. Some of them do. But keep in mind, so much of what we do today is project business in our electrical. And on projects, you typically are not finding, obviously, any inventory build there.

Speaker 2

And so I'd say that This is one that it's certainly been one that we've been concerned about, we've been watching, we've been testing for it in terms of whether or not There is over inventory in the system, whether or not there's double ordering in the system. And I can just tell you, having Talked with and been engaged with a number of our teams and our distributors, that's not what we're hearing or seeing. They would like more inventory and their inventory levels today are below where they'd like them to be given their forward look on revenue growth.

Speaker 11

Yes, that makes sense, Greg. I appreciate the comments there. I guess my one Follow on question, I guess, would be more around like Electrical Americas margins and clearly understand the pressures that you're feeling this quarter. I think lots of other companies We're feeling the same. How do you think I know that you guys have pretty healthy margin expansion baked into 2022.

Speaker 11

At what point does that start to turn positive year over year? And then maybe just providing a little bit more color around the cadence would be helpful.

Speaker 2

So when do margins turn positive year over year? I mean, what quarter did the margins turn positive?

Speaker 11

Yes, just cadence around like the puts and takes on margins as we progress through 2022 in Electrical Americas.

Speaker 2

Yes. I'd say that certainly, by the time we hit Q2, we would expect that our margins would turn positive. I mean, obviously, we're dealing with A number of factors right now in the business. And obviously, what's getting a lot of attention right now is supply chain related issues. But I could tell you also, Yes, because part of the challenge, as I mentioned in my speaking opening commentary, that we're seeing significant labor related issues and inefficiencies in We had pretty large absentees in a number of our facilities at the end of last year, the beginning part of this year As a result of COVID, our suppliers are seeing the same thing.

Speaker 2

And so it's not just supply chain and We can't get parts and in many cases, we were challenged to get labor and to run our factories efficiently. And so all of these inefficiencies Today, you're kind of built into the results in Q4 and to a certain extent in Q1 as well. So I think it's really Q2. By the time we really Get beyond some of the labor inefficiencies, we do think that supply chain continues to get better Every quarter, but in some cases, we think we're going to be dealing with supply chain challenges for the entire year when you think about components like semiconductors. But other components, whether Copper, steel or resins, we do think those things continue to get better every quarter.

Speaker 11

Makes sense. Thank you, Greg.

Speaker 5

It's important to note that at the midpoint, which you saw in our prepared remarks, we're 90 bps above The prior year margins in Electrical Americas, so that reflects the bullishness that we feel about things correcting throughout the year.

Speaker 11

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Please go ahead.

Speaker 2

Hi, Julian.

Speaker 12

Hi, good morning. Good morning. One starting point perhaps was just within the Electrical Americas business, I just wanted to try and understand sort of on the residential side of that, how much was residential as a whole As a proportion of that business today and how strongly was the business up last year? And when you're thinking about this Year ahead. Are you dialing in any kind of slowdown there?

Speaker 12

I think people are obviously pretty cautious about a number of other Resi facing product categories in multi industry right now.

Speaker 2

Sure. I appreciate the question. I mean resi today, I think we'd say 18% roughly of our business would go into residential markets, and that market did grow strongly During the course of 2021, I'd say that business was probably up Double digit. Around 10%. Yes.

Speaker 2

So and we're clearly expecting that market to see somewhat of a slowdown, Which is baked into our guidance for 2022. Still growth in the market, but not at the heavy levels that we experienced over the course of 2021. The other thing I think is important though as you think about residential markets to keep in mind, as you really think about this market over The near and the longer term is that it's not just the growth in the housing stock. It really is also the growth in the electrical Content in buildings, residential buildings, multifamily buildings, as They adopt the new electrical codes. It requires additional electrical content.

Speaker 2

And as we really start moving Seriously into energy transition, we think the opportunities continue to grow at a really attractive rate as consumers Have put electric cars in their garages and they have to change their electrical infrastructure, support the electric vehicles as consumers Continue to look at things to improve their resiliency, whether that's solar, the ability to island the home, The ability to sell energy back to the grid, all of these things, all of these kind of secular growth trends that are taking place more broadly And the economy are going to also have an impact on residential. And even though, let's say, the housing numbers are not going to grow dramatically, the electrical content, We think it's going to grow at some multiple of that. That's what we've seen over the last, let's say, 10 to 15 years and that really didn't even have the impact of some of these energy transition related trends that we're talking about. The resi for us, we think, continues to be a really attractive market. We have great position in residential, and it's one we'll continue to invest in.

Speaker 12

Thanks very much. And then my second question, I guess, is touching on what Joe had mentioned earlier about inventories. Because I guess if I look at, So automotive is 1 air or light vehicles where we've heard about all the constraints. But there was a very large OEM earlier this week who said Wholesale volumes are up 20% plus in 2022 and they could liquidate inventory Early in the year. So that I thought was interesting because it suggests that that's a massive OEM Who feels like they have enough goods on hand to satisfy double digit growth this year.

Speaker 12

And so I just want to sort of push a little bit on that point and ask, are there any areas when you look across different regions or different markets Where your sales people or your channel partners may think maybe there has been a good amount of inventory Bill Tarp, I don't know if there's any kind of broad views you had on end markets that had more or less inventory relative to norms as you look today.

Speaker 2

Hey, I'm sure they're out there someplace, Julian. I can tell you that if they're out there, their voices are being drowned out Probably 100 to 1 on the other side of customers asking us for more. And specifically, as it relates to automotive inventory levels, I mean, The inventory levels today continue to run at record low levels. I mean, you think about an industry in the U. S.

Speaker 2

That has typically run 75 days Inventory has been running under 30 days of inventory. And so I'm surprised that any automotive OEM would say that They're comfortable with the levels of inventories. We're not hearing that from any of our customers. And so that, I think, is a bit of an outlier.

Speaker 12

That's helpful. Thank you.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from Nigel Coe with Wolfe Research. Please go ahead.

Speaker 13

Thanks a lot. Good morning. You did 9% growth across Electrical in 2021. Your forecast is 7% to 9% in 2022. Your long term target is 4% to 6%.

Speaker 13

So I don't want to get too far ahead of March, the March Investor Day, but how are you thinking about growth Beyond 'twenty two Electrical, I'm assuming it might be above 4% to 6%. But and then kind of a lot all I said that is you're highlighting utility data center Resi, a little bit surprised you're not highlighting industrial and commercial institutional turning around because we are seeing some strength in orders there. Just wondering what you've seen in those 2 specific end markets.

Speaker 2

Yes. First of all, I appreciate your question Around the longer term growth outlook in our electrical businesses and to your point, we will be addressing that at our Investor Day next month. And I do think it's reasonable to assume that we've seen certainly more strength than we anticipated, and it would be fair to We anticipate that that number is going to move up slightly. With respect to the end markets, and I'd say for us, certainly, we talked about industrial markets are doing well, and we talked about that as being one of the strong markets for us in general. And so we are seeing the strength in industrial.

Speaker 2

We're certainly seeing the strength in utility resi data centers. Even in commercial, I'd say if you think about commercial, we've talked about this before, We're still seeing growth in office, low single digit growth. It's not huge there, but we're still seeing Positive growth in the office segment, and but also what goes into commercial is things like warehouses. As you think about the continued expansion of the Amazons of the world and the warehouse segments that have Much higher, once again, electrical intensity than an office building or a retail store. We continue to think that there's going to be positive mix associated with as we continue to move more and more of our Retail activity online.

Speaker 2

And so as we said, we think all of the markets are going to be growing next year, but we will see some What we think would be outsized strength in data centers, in industrial markets, in utility markets, But every market we would anticipate would see positive growth.

Speaker 5

Yes. I mean to Craig's point, commercial and institutional, we saw high single digit This year growth in the overall market and for industrial we saw mid teens growth, so very strong.

Speaker 13

That's great color. And then a follow on for Tom on free cash conversion. Sorry to go back to this one. The four things you called out make total sense. I see 0 point 25 So, see some comments on restructuring charges and also kind of push acquisition charge of things we call it In the GAAP to headline earnings, but is that stuff wrapped up in purchase accounting on the balance sheet that's going to have cash outflows this year?

Speaker 13

Is this more of a purchase accounting issue?

Speaker 5

No, no. It's really the four things that I described, the acquisition, integration and divestiture, the multi year restructuring, the CapEx and the CARES Act. And I think you're Probably alluding to pension funding and those types of things, nothing extraordinary there.

Speaker 13

Okay. Thanks a lot.

Speaker 7

Thank you.

Operator

Thank you. Our next question comes from the line of Scott Davis with Melius Research. Please go ahead.

Speaker 14

Good morning, everybody.

Speaker 2

Good morning, Pat. Most of

Speaker 14

my questions have been asked. I'm kind of curious, it's been a while since we had an How what's your order book look like in that part of the world? And I would imagine Probably taken some costs out of that business since the last peak, but perhaps you can just give us a little bit

Speaker 2

Yes, I appreciate the questions, Scott. And for those of you who've followed Crowdsigns over the year, No, that business that we acquired many years ago from Cooper was a very profitable business, went through a cyclical industry downturn. When we think about industrial, when we talk about industrial strengthening, that's where a lot of the crowd science business goes. I mean, many of you think about it as an oil and gas business, but A lot of what they do today goes into industrial markets, and that business is in fact growing. And so we are clearly seeing a rebound In the cryo science business, a lot of the industrial markets that they support and serve are growing nicely.

Speaker 2

And so we certainly think we're at the once again the front end of what should be a pretty attractive recovery in those markets.

Speaker 14

Okay, good. And then as a follow on, just thinking in terms of the Projects that are out there that you're bidding on, are there less people bidding on projects today than perhaps a couple of years ago, just given The reality that everybody's kind of sold out or is the competitive dynamic not really changed much.

Speaker 2

I would say that the fact that everybody is sold out means that I think everybody is being more selective around the projects that they take and it obviously Changes the price dynamic in the marketplace. And so I'd say that I can't necessarily say that We're seeing less competition on projects. Lead times are being pushed out for lots of companies. And like I said, It's never easy to recover inflation, but we're in an environment today where given how well known the issue is and how public and visible it is, it's Probably as easy as it's ever been in my professional career, because everybody kind of understands what we're dealing with. But I'd say, I can't really speak to whether or not we're seeing fewer bidders on projects, but I think every company, ourselves included, Have the ability to be a bit more selective today, given the fact that there's more demand in the risk capacity.

Operator

Thank you. Our next question comes from the line of Brett Linzey with Mizuho America. Please go ahead.

Speaker 3

Hi, good morning all.

Speaker 2

Good morning.

Speaker 3

Wanted to come back to capital deployment. This is probably the lowest Share repo guide we've seen in a number of years and you mentioned a focus on bolt ons. Could you just spend a moment and talk about the actionability of the pipeline, Some of the sizes you're shopping and just trying to understand where you're looking within the portfolio.

Speaker 2

Yes, appreciate the question. I mean, you've probably observed over the course of the last 24 months, we've done quite a bit of portfolio transformation, selling businesses, lighting, hydraulics, and we've done a number of acquisitions. And we continue to prioritize our electrical business, and certainly making investments in electrical that are really tied These big segment growth trends that we've talked about of electrification, digitalization, energy transition, And we'll continue to look for things in that space. You saw us acquire this company called Green Motion last year, which is a play into Electric Vehicle Charging Infrastructure. You've seen us do a number of transactions in the Asia Pacific region To really participate in a very fast growing Chinese market and participate in what we call the Tier 3 It's a Tier 2 market where we historically have not played.

Speaker 2

So you're going to see us do things geographically that allow us to Penetrate underserved markets. You've seen us do the Triplight acquisition, which is obviously Important play into data centers in the IT channel. And so I think what you can expect as we move forward is For us to continue to do transactions in this kind of size and scale, Really focused on kind of these really important aspects of where we think the future growth is going to. We've said that aerospace continues to be a priority, and we've done a number of important acquisitions in aerospace. We like The composition of aerospace businesses, these are technology, highly differentiated businesses.

Speaker 2

You get paid for your technology. We have very strong aftermarkets. We want to make sure that we're on growth platforms, and that was essentially the play with Cabo. They're sole sourced on virtually every platform that they're on. They have a growth outlet for that business that takes $700,000,000 to $1,000,000,000 based upon programs that they've already won.

Speaker 2

And it's a very profitable business with a strong aftermarket. And so You can count on us to continue to look for acquisitions that are very much consistent with what you've seen us do Over the last few years, and I'd say the pipeline today is better than it's been in a while. We're looking at a number Of opportunities to really buttress our capabilities in and around some of these spaces that we talked about. Obviously, we're not in a position to talk about anything or to announce anything. But what you're seeing from us is a Pivot towards as we think about how do we deploy our capital and how we can create the most value for shareholders, We think that we can find value creating acquisitions at a fair price for them and generate more value today incrementally than Perhaps buying back our stock.

Speaker 2

But having said that, we've said before, we're not going to let cash build up on the balance sheet. If we can't get deals done, we will go back into the market and buy our stock So we're just always just trading off. How do we create the most value for shareholders, either through M and A or stock buyback So similar way, returning capital to shareholders. But it's been a great time seen from us and We like what we're looking at in front of us and we would hope to be able to deploy more capital towards value creating M and A.

Speaker 5

The only thing I would add is the secular trends give us some really exciting opportunities such as Royal Power that we can leverage across e mobility, aerospace and our electrical sectors. So it's exciting that we're seeing read across.

Speaker 3

That's great. And then just one last one for me on Utility T and D, you noted as a driver of the order activity Within international, I didn't get a call out in the Americas business. So I'm just curious, what are you hearing from customers around CapEx? Any change in tone there at all?

Speaker 2

Yes. I'd say that the P and D market continues to be an attractive market. I think as you think about A place where it's in desperate need of some significant investments in aging infrastructure the one hand, but also once again the changing nature of the grid, which is also driving the need and requirement for some fairly significant Investments and upgrades in the grid and grid resiliency. And so, yes, we think that in the Americas as well, Continues to be a really positive story for some years to come. Grew mid single digits last year.

Speaker 2

We

Operator

Thank you. And our final question today will come from the line of Markus Mittermeier with UBS. Please go ahead.

Speaker 6

Yes. Hi, good morning, everyone. Craig, you mentioned in your opening remarks that in the Electrical Americas, your negotiation pipeline is Up 11%, if I remember the number right. Is there anything already in there on some of the semiconductor activity that we see we've heard From some machine builders that there's some early activity there. Just wanted to check if that's already part of that pipeline.

Speaker 2

Yes. I appreciate the question. I don't it's a question I can't really answer. I don't have that information on my fingertips right now in terms of Where the additional negotiations are coming from down at that level of specificity. But maybe Yen, we'll ask Yen Jin to follow-up

Speaker 6

But the semiconductor opportunity obviously still remains sort of an interesting one.

Speaker 2

There's no question. I mean, To the extent that you end up with a fairly sizable infrastructure build out, restoring and semiconductors and the like, those are all markets that Need our electrical switchgear. And so they certainly create great growth opportunities for us.

Speaker 6

Great. And then just maybe a very quick one on You mentioned on Krausz Heinz earlier the strong growth obviously that you see there. Should I Interpret the very strong margin profile largely as an effect of Krausz Heinz or is it more broad based inside of Electrical Global here in the quarter?

Speaker 2

It's definitely broad based. Yes. CrowdHein is helping, but our electrical Your business in electrical is doing a great job of expanding margins. And so we're seeing it both in Let's call it the traditional electrical business and we're seeing it in crowd signs as well. The 19.5% margins in the quarter, Which is an all time record for our global and it's really contributions from them and quite frankly, contributions from our Asia team as well.

Speaker 2

I mean, our Asia business as well, Dramatic improvement in profitability over the last number of years. And so we're really seeing it. If you think about what makes up Global, it is what we do regionally in Asia, what we do regionally in Europe, and then it's the global crowd science business. These tend to be Global businesses, but all three of those businesses saw significant improvements in profitability during the course of 2021.

Speaker 6

Great. Thank you very much. Good luck.

Speaker 1

Thank you. Good. Thanks guys. As always,

Operator

You may now disconnect.

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Safehold Q4 2021
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