Eaton Q3 2024 Earnings Call Transcript

Presentation

[Operator]

Ladies and and gentlemen, thank you for standing by, and welcome to the Eaton Third Quarter 2024 Earnings Conference Call. [Operator Instructions As a reminder, today's call is being recorded.

I would now like to turn the conference over to your host, Yan Jin. Please go ahead.

[Yan Jin, Senior Vice President of Investor Relations at Eaton]

Good morning. Thank you all for joining us for Eaton's Third Quarter 2024 Earnings Call.

With me today are Craig Arnold, our Chairman and CEO; and Olivier Leonetti, Executive Vice President and Chief Financial Officer.

Our agenda today includes the opening remarks by Craig. Then he will turn it over to Olivier, who will highlight the company's performance in the third quarter. As we have done in our past calls, we'll be taking questions at the end of Craig's closing commentary.

The press release and the presentation we'll go through today has been posted on our website. This presentation, including adjusted earnings per share, adjusted free cash flow and other non-GAAP measures. They are reconciled in the appendix.

A webcast of this call is accessible on our website and will be available for replay.

I would like to remind you that our comments today will include statements related to the expected future results of the company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projection due to a wide range of risks and uncertainties that are described into our earnings release and the presentation.

With that, I will turn it over to Craig.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Thanks, Yan.

We'll start on Page 3, where we summarize the key highlights of another strong quarter. We generated adjusted EPS of $2.84 a share, an all-time record and up 15% from prior year. We also delivered record segment margins of 24.3%, up 70 basis points from last year. And we're raising our guidance for segment margins and adjusted EPS for the year. We did experience a couple of extraordinary events in the quarter that impacted our revenue.

First, the widely publicized strike taking place in the aerospace industry and then Hurricane Helene, which impacted several of our Electrical Americas factories at the end-of-the quarter. While both of these events will have an impact on our revenue outlook for Q4, they're not impacting our demand and it's only timing. In fact, our markets continue to be strong. On a rolling 12-month basis, electrical orders were up 12% with Electrical Americas orders up 16% and aerospace orders increased by 6%. This led to another quarter of growing and record backlogs, up 26% for Electrical Americas, up 14% for aerospace with strong book-to-bill ratios. On balance, we're pleased with our results and are well positioned for a record year of performance and expect to carry strong momentum into 2025.

Turning to Page 4. We once again are sharing our overview of megatrends and how they're driving growth in our end markets. I think the key message here is one of breadth, both in the number of megatrends and the number of our end markets that are positively impacted. Something we think is unique to Eaton and will allow us to grow at an accelerated rate for years to come. Last quarter, we provided an end market update on our commercial and institutional segment, highlighting the strong growth outlook for institutional and infrastructure markets. Today, we intend to provide a forecast for residential markets and how energy transition is creating new growth opportunities in residential homes. And as we've done in recent earnings calls, we'll also provide an update on the growing number of mega projects announced during the quarter.

So let's begin with that on Slide 5 in the presentation. This chart shows a summary of mega projects that have been announced since January of 2021 in North America. As a reminder, a mega project is a project with an announced value of $1 billion or more. Through Q3, we're now at 504 projects with a cumulative value of $1.6 trillion. And the backlog now stands at $1.8 trillion, up 30% from last year. And I'd also point out the announcements are continuing to accelerate with Q3 up 48% versus Q2. Approximately 16% of these products have started and we expect a record number of starts in 2025. Many of you have asked the questions about cancellations, which we continue to monitor as well. To date, cancellations have been modest, around 10% and well below historical levels.

For projects that have started, we've won over $1.7 billion of orders and our win rate is almost 40%. Of note, we're in active negotiations on another $3 billion of orders, up 175% from last quarter. While mega projects continue to garner a lot of attention, deservedly so, the Dodge Momentum Index, which tracks commercial and institutional projects that are less than $500 million are also at record levels, up 22% in the quarter. Taken together, we think they provide a strong validation of the megatrends and support our view on the long-term outlook of our end markets.

As we prepare for the growth ahead, we're making investments in our manufacturing capacity naturally. And on Slide 6, we show an update of our incremental capacity investments, which now stand at $1.5 billion, up $500 million from our previous estimate. The increase reflects our increasing confidence in our outlook as well as increasing demand that we're now seeing in data center markets. These multi-year investments with the largest addition coming in the second-half of '25 and '26 and the capacity investments cover several product families and importantly can be used across most of electrical end markets. I'd also add that most of the additional capacity is what we consider a light assembly and modular, which allows us to be both flexible and efficient as we deploy capital. Overall, our expansion projects are on track with a number of sites starting to ramp-up production. For example, we recently opened a 110,000 square meter facility in Juarez, Mexico that produces motor controllers and switchboards. And we also opened a new manufacturing facility in the Dominican Republic that will increase our supply of Bussmann fuses.

Next, on Slide 7, we're highlighting our residential markets, which include naturally the electrical infrastructure for both new construction and renovation. Residential markets represent 6% of Eaton's total sales and 8% of electrical sales. And the key message here is that these secular trends that we've been talking about that are impacting our industrial and commercial markets are also impacting homes. As a result, the electrical content in homes continues to grow. The growth in solar, electric vehicles, energy storage and the electrification of heating and cooking are fundamentally changing in the requirements in home. And new safety codes and standards are also continuing to drive the need for higher electrical content. And as you know, the current IRA tax incentives for electrical panel upgrades are designed to support this growing need for more electrical power.

No doubt, residential markets have been feeling the impact of higher interest rates over the last couple of years. With markets now feeling like they've reached the bottom, the housing shortage remains and we should see positive growth from this point forward. Estimated at a 6% CAGR over the next four years from what's been a drag on growth over the last 24 months should turn positive now. With the -- and within the residential market, Eaton is especially well-positioned. As homes become more electrified, generate and sometimes sell electrical power, become bigger consumers of electricity, they also need to become smarter. We address these changes in our Everything as a Grid, including Homes slide -- which we show on Slide 8.

For more than a century, power has flowed in one direction from central power plants into homes. Today, there is a new reality, thanks to the addition of solar power, electric vehicles, energy storage, all on the top of the need to run a more electrified home. In simple terms, homes can now act as energy hubs, producing their own power, managing their electrical loads and selling power back to their local utility, all of which requires more sophisticated electrical equipment.

Eaton's home as a grid approach creates smart energy systems that allow homeowners to reduce costs, participate in demand response programs, improve resiliency, including islanding from the grid and to optimize the home by selecting which electrical loads they want to run during a power outage. So in addition to homes require more electrical power, homes now require -- are now required to be more intelligent, to be connected and to be integrated into a home as a grid solution.

Today's fully grid-ready homes have up to 5x the electrical content of a traditional home, a trend that will only increase overtime and a tremendous opportunity for Eaton. One example of how we're implementing our Home as a Grid strategy can be seen in the recently announced collaboration with Tesla. As you know, Tesla is one of the biggest names in energy storage, and they needed a solution that would allow homeowners and installers to simplify the integration of energy storage, solar and load management in the home. This is especially important in the existing home market of more than 40 million homes with only 100 amp service. Eaton's first to market and what we call AbleEdge smart breakers provide homeowners with intelligent load management capabilities. This technology allows homeowners to turn their standard loads into a smart load center without replacing the electrical panel. Together with our partners, our systems will manage your solar, your energy storage and your electrical loads. And it's simple to install. It provides better functionality and at a much lower cost than other solutions. In fact, we estimate our solution will be three to five times lower cost. Our AbleEdge smart breakers will be available in early 2025, and we look forward to growing our partnership with Tesla.

Now, I'll turn it over to Olivier to take us through the financial results for the quarter.

[Olivier Leonetti, Executive Vice President and Chief Financial Officer at Eaton]

Thanks, Craig.

I'll start by providing a summary of our Q3 results in which we once again set many new records. We posted third quarter record sales of $6.3 billion, up 8% both in total and organically. However, revenue was negatively impacted by about $50 million from Hurricane Helene and labor strikes in the aerospace industry. Without these impacts, organic growth will have been above our 8.5% guidance midpoint.

Operating profit grew 11% and segment margin expanded 70 basis points to 24.3%. Adjusted EPS of $2.84 increased by 15% over the prior year. This is a quarterly record and above the high-end of our guidance range. This performance resulted in all-time record cash flow performance, including operating cash flow of $1.3 billion, up 15% on a year-over-year basis and free cash flow of $1.1 billion, up 23% versus prior year.

On Slide 11, we summarize another very strong quarter for Electrical Americas. Before we go through the results, we want to acknowledge the significant impact that Hurricane Helene had on our employees and their communities. Electrical Americas employ more than 3,000 people in North and South Carolina in nine facilities and the safety of our team members is our top priority. We have continued to provide support to our employees, their families and affected communities, including providing essentials and financial assistance.

We are pleased to report that our facilities are back up and running to support all the strong consumer demand we are seeing in our markets. Despite these challenges, we set a new record for sales, operating profit and margins. Organic sales growth increased to 14%, reflecting strength in data center, commercial and institutional and utility end markets. On two-year stack, organic growth was up 33%. Electrical Americas has generated double digit growth -- organic growth for 11 consecutive quarters. Operating margin of 13.1% was up 240 basis points versus prior year, benefiting from higher sales and increased operational efficiencies that were partially offset by higher cost to support growth initiatives. On a rolling 12-month basis, orders reaccelerated to 16% from 11% last quarter, demonstrating continued tailwinds from the various megatrends. We had particular strength in the data center market where activity is increasingly robust. For example, Dodge data shows U.S. announced data center project starts are up 81% year-to-date nine months, surpassing 2023 levels in Q3 of 2024. US data center construction backlog is now estimated to extend out about nine years based on 2023 build rates.

Also, our major project negotiation pipeline is up approximately 60% year-to-date through nine months. Electrical Americas backlog increased 26% year-over-year with a book-to-bill ratio of 1.2 on a rolling 12-month basis. These results underscore the tailwinds from secular trends, strong execution and robust backlog that have allowed us to raise our guidance for the year, which we will discuss later in the presentation.

Next chart summarizes the results of our Electrical Global segment. Total revenue growth was of 5% included organic growth of 4% and FX tailwind of 1%. We had strength in data center and utility markets, partially offset by weakness in residential markets. Regionally, we saw continued strength in APAC with double-digit organic growth and mid single-digit organic growth in EMEA. Operating margin of 18.7% was generally in-line with our expectations for the quarter and down 310 basis-points versus prior year, primarily driven by a real-estate transaction in 2023. Orders were up 6% on a rolling 12-month basis with strength in data center, utility and MOEM markets. Backlog increased 19% over prior year and book-to-bill continues to remain strong. Q3 was 1.1 on a rolling 12-month basis.

Before moving to our industrial businesses, I'd like to briefly recap the combined electrical segments. For Q3, we posted organic growth of 11% and segment margin of 26.2%, which was up 70 basis points over prior year. On a rolling 12-month basis, orders were up 12% and book-to-bill ratios for our electrical sector remain strong at 1.1%. We remain confident in our positioning for continued growth with strong margins in our overall electrical business.

Page 13 highlights, our Aerospace segment. We posted Q3 record sales and all-time record operating profit. Total growth was 9%, including organic growth of 8% for the quarter, driven by strength in commercial OEM, commercial aftermarket and defense aftermarket. Operating margin was strong at 24.4%, up 30 basis points year-over-year and also up 290 basis points sequentially, which was driven by higher sales and mix. On a rolling 12-month basis, orders increased 6%, driven by strength in commercial OEM, commercial aftermarket and defense aftermarket. Year-over-year backlog increased 14% and was up 4% sequentially. On a rolling 12-month basis, our book-to-bill for our Aerospace segment remains strong at 1.1% and we are pleased with $2.3 billion Life of Program wins so far this year.

Moving to our Vehicle segment on Page 14. In the quarter, total revenue was down 7%, including a 6% organic decline, primarily driven by weakness in the light vehicle markets and 1 point of unfavorable FX. Operating margin came up at 19.4%, 200 basis points above prior year, driven by improved operating efficiencies. We have made progress here to increase margins, which this quarter exceeded our mid-term target of 19%. And we are pleased to have won $75 million in mature year sales in Q3 across our commercial and passenger vehicle portfolio.

On Page 15, we show results for our E-mobility business. Sales were up 2%, including organic growth of 1% from slower OEM new product launches and weakness consumer demand. Operating loss was $7 million and as we continue to incur launch costs related to new programs.

Moving to Page 16, we show our Electrical and Aerospace backlog updated through Q3. We continue to build backlog with electrical stepping up to $11.8 billion and aerospace reaching $3.7 billion for total backlog of $15.5 billion. Versus prior year, our backlogs have grown by 25% in electrical and 14% in aerospace. Electrical backlog benefited from acceleration in order intake from tailwinds of the secular trends, including hyperscale orders within the data center end market. As noted earlier, book-to-bill ratios from electrical and aerospace are 1.1 and 1.1 respectively. The continued growth in our backlog underscores our confidence in 2024 and beyond.

Now, I will turn it back to Craig for financial guidance updates and our initial thoughts on 2025.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Thanks, Olivier.

Turning to Page 17, we summarize our fiscal year organic growth and operating margin guidance. With less than a quarter to go, we've made a number of adjustments to provide our best forecast on how we expect to close the year. Overall, we continue to expect our 2024 organic growth to be between 8% and 9%. However, with the continuing aerospace industry labor strikes and the slowdown in vehicle markets, we now expect our revenue growth to be on the low end of our range.

We're raising our organic growth guidance in Electrical Americas by 100 basis points to 13% to 14% from 11.5% to 13.5%. We're lowering the range of our Aerospace business by 150 basis points due to the labor strike. We're also lowering our vehicle business to -- from down 3% to 5% to down to -- from flat to down 4%. And in E-mobility to 5% to 7% growth from 17% to 23% growth given the widely reported industry weakness and outlook.

For segment margins, we're increasing the company's margin guidance range by 20 basis points to 23.7% at the midpoint of our guidance. This is driven primarily by the outlook in our Electrical Americas business, where we're increasing our margin outlook by 70 basis points at the midpoint to 29.6%. And vehicle, where we're increasing our margin outlook by 150 basis points at the midpoint to 18%. We're also lowering our margin outlook for Electrical Global, Aerospace and E-mobility by 90, 50 and 150 basis points respectively. In total, the company is well positioned to continue to deliver strong financial performance and to close out the year well.

On Page 18, we enlist our additional guidance metrics for 2024 and Q4. For '24, our adjusted EPS is expected to be between $10.75 and $10.81 a share. The $10.78 midpoint represents 18% growth in adjusted EPS, an $0.08 raise over our prior guide and is also a $0.63 increase versus our original guidance for the year. For Q4, we expect organic growth to be between 6% and 7%, segment margins to be between 23.6% and 24% and adjusted EPS in a range of $2.78 to $2.84 a share. We do expect Hurricane Helene in the labor strike in aerospace industry to have an impact on our Q4 revenue and it's embedded in our guidance already.

As I noted, while we have reaffirmed a full-year organic growth range of 8% to 9%, based upon the impact from Hurricane Helene and labor strikes in aerospace, we expect to be at the lower end of the range. The impact from the Hurricane Helene is behind us and all of our sites are now up and running. The aerospace industry strike is still ongoing and while they could have an impact on our revenues based upon what's in our outlook, we don't expect an impact in our EPS.

If we can shift your attention to 2025, on Page 19, we provide our initial view on end market growth expectations for next year. As you can see here, we anticipate attractive growth in nearly all of our markets. We're expecting double-digit growth in data centers and distributed IT, commercial aerospace and electric vehicles. Solid growth in utility and modest growth across most of our other end markets. Commercial vehicle is the only market that's projected to decline. So overall, 2025 should be another year of significant growth with more than 90% of our end markets seeing positive growth. And as you know, our own growth outlook is supported by a strong order book, record backlogs and secular trends that continue to be favorable. We will provide our revenue forecast in February, but we do expect to grow faster in our end markets. The company is well positioned to deliver differentiated growth in 2025 and we think beyond.

While we'll provide more details in February, we did want to provide some initial assumptions for our 2025 guidance. Based upon the last chart, we expect our end markets in total to grow between 6% and 8% and for our incremental margins to be between 30% and 35%. Due to high interest expense and lower pension income, we anticipate roughly a $0.20 headwind on below the cost side -- below-the-line items and a tax-rate of approximately 18%. Our multi-year restructuring program costs are expected to be approximately $50 million with $75 million of savings. And we expect capital spending to be roughly between $900 million and $1 billion. Lastly, we continue to repurchase shares and we're estimating the number to be approximately $2 billion. While we're still in the early phases of our planning, we also expect another strong year of earnings growth.

So let me close on Page 21. Once again, the trends driving growth in our end market continue to play-out as expected and even better in our Electrical Americas business, driven by data center markets and the reindustrialization trend that we're seeing across multiple industries. We also delivered a strong quarter of financial results and continue to see outstanding execution on our key initiatives across the company. As a result, we raised our guidance for segment margins by 20 basis points and our EPS by $0.08 at the midpoint. And in the quarter, we're especially pleased to see the strength in our negotiations, our orders and the growth in our backlog, all of which are at record levels, validating our medium and long-term growth outlook. So we made the quarter with a high level of confidence when we say Eaton will deliver higher growth, higher margins and consistent earnings growth and improving free cash flow for years to come.

And with that, I'll open things up for questions that you may have. Thank you.

[Yan Jin, Senior Vice President of Investor Relations at Eaton]

Hey, thanks, Craig. For the Q&A today, please limit your opportunity just to one question and one follow-up. Thanks in advance for your cooperation. With that, I will turn it over to the operator to give you guys the instructions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line from Andrew Obin from Bank of America.

[Andrew Obin, Analyst at Bank of America Securities]

Yes, good morning.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Good morning.

[Olivier Leonetti, Executive Vice President and Chief Financial Officer at Eaton]

Good morning, Andrew.

[Yan Jin, Senior Vice President of Investor Relations at Eaton]

Good morning.

[Andrew Obin, Analyst at Bank of America Securities]

Yes. So it wouldn't be an Eaton call without a data center question. So maybe if you could give us more detail on how did your data center business perform on organic growth, orders and negotiations pipeline in the third quarter. Thank you.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

No, Andrew, we appreciate the question and as has been widely reported. The data center market just continues to perform much better than even we imagined. In the quarter itself, our data center sales were up 35%, our -- and that's, by the way, up from 27% in the prior quarter. So the rate of growth is accelerating. Our orders were up some 55% on a rolling 12-month basis and negotiations are up 90%. And so as you can tell from this data, we just continue to build a strong momentum in the data center market. And as we've said, we think that market is going to be very strong for years to come.

[Andrew Obin, Analyst at Bank of America Securities]

Terrific. And just a follow-up question. You have sort of highlighted the hurricane and I understand that you do have presence in the Carolinas. That's why we're highlighting. But maybe if you could put a finer point on the impact in the third quarter and how much of an impact do you expect in the fourth quarter? You did say that it's passed you, but just if there are any lingering impact in the fourth quarter that you're willing to quantify? Thank you.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

No, I appreciate that question as well, Andrew. And as I think most of the investors know, we have a fairly sizable footprint in the Carolinas. In fact, we have some 3,000 employees and multiple facilities that were actually in the path of the storm. Pleased to report that our facilities are all back up and running. All of our employees have been accounted for and safe. And so while it certainly was a bit of a challenge at the end-of-the quarter and at the beginning of this quarter, the -- it's all behind us now and the business and the sites are actually performing quite well. So yes, without a doubt, what I'd tell you is that the Americas put up really strong results in Q3. They could have been stronger, but for the hurricane. And certainly it's shaving a little bit of growth off of the revenue for the Electrical Americas business in the fourth quarter as well, but it just went into backlog. This is not lost business. This is simply timing. As you saw from our orders growth in the quarter and the backlog growth in the quarter, we will certainly realize that revenue. It's just timing.

And if I can just for a minute here, recognize our team. Our team just did an extraordinary job of supporting our employees and supporting the community, providing shelter, food, generators. Our team just rose to the occasion and we'd all be very proud of the way they represented our company in this moment of need and crisis for both our employees and the community.

[Operator]

Thank you. One moment for our next question. We'll now take a call from Nigel Coe at Wolfe Research.

[Nigel Coe, Analyst at Wolfe Research]

Thanks. Good morning, everyone. And Craig, thanks for the '25 early indications. Just a question I think for maybe Olivier. On the Electrical Americas margins, yes, obviously, you tend to be a little bit conservative here, but I think 4Q does tick down a little bit from 3Q. So seasonally, normally we see a little bit higher. So just a question there. But the broader question would be, we've seen a huge amount of operating leverage in the Americas. We've got some investment spending. How do we think about our operating leverage and margin going forward within that 35% construct. Do you think the Americas can be above that level going forward?

[Olivier Leonetti, Executive Vice President and Chief Financial Officer at Eaton]

Thank you for your question, Nigel. We are very pleased with the performance of our Electrical America business, both on the top line and the margin. To answer to your question directly, we do not believe we have reached our maximum potential. We still believe we have room for improvement. I would mention three levers. One, operating leverage on higher volume growth; two, improving of our manufacturing efficiencies in both our existing and new facilities. And finally, as you know, we have a restructuring program ongoing and those programs should deliver improvement in margin for the Americas. Also, you haven't asked the question, but we believe we have margin opportunities. We discussed that before in our electrical global business, but as well in our Aerospace business, Nigel.

[Nigel Coe, Analyst at Wolfe Research]

Okay, great. And any comments on 4Q would be helpful. But my follow-up question is around the '25 framework. You said 68% end market growth in '25. I think you've got an ambition to outgrow your end markets by about 2 points. So do we think about kind of the starting framework for next year, 6 to 8 or maybe a little bit higher than that?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

No, appreciate that question. And you're absolutely correct. We do have both an ambition and an expectation that our business will grow -- businesses will grow faster than their end markets. And as you can imagine, it's still very early and we're still working through our planning for 2025 and you can expect that we'll provide a framework for you with more details as we get to the Q4 earnings call next year. And obviously, Paulo will lay out a more wholesome mid and long-term strategic framework for you at our investor meeting in Q1 next year. But to your question specifically, we should expect to outgrow end markets the exact magnitude of which we're not prepared to say at this point as we're still working through our internal plans.

[Nigel Coe, Analyst at Wolfe Research]

Okay. Thanks, Craig.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Thank you.

[Operator]

Thank you. We will now take a call from Jeffrey Sprague from Vertical Research Partners.

[Jeffrey T. Sprague, Analyst at Vertical Research Partners]

Hey, thank you. Good morning, everyone. Good morning. A lot going on today, interesting times. I wonder Craig, if you could talk a little bit about capital deployment. It looks like with what you're saying on share repo, you're quite comfortable just to continue to put up the organic growth and buyback stock. But really the nature of my question is right, liquid cooling is getting more-and-more attention on the data center side, Schneider making a sizable bet, Vertiv there. You've got some kind of alliance or kind of partnership. So I know you're sort of on the periphery of this anyhow. But maybe just speak to do you view that as an important part of your offering or where else you might have holes that might need to be filled from an M&A standpoint?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

And I appreciate the question, Jeff. And obviously, to your point, data centers as a market is getting just a lot of attention and cooling as a space is also one of the hot topics. I'd say to us, if you think about it just more broadly around growth, we have growth opportunities everywhere. We talked about these numbers in our own data center business growing 35% in the quarter, 90% increase in negotiations. And so we have just tremendous opportunities to grow in data center and other markets without looking at an adjacency like cooling. I'm not saying that we would never consider doing something more deliberate there, but it is not required in any way for us to continue to post just significant growth and continue to win in the data center market. And so what I would tell you today is that we're focusing on organic growth. We're focusing on essentially executing well against the opportunities in front of us. Our deal pipeline in general to the broader question around capital deployment is certainly good today. And certainly, the pipeline is growing with opportunities and those opportunities are coming from lots of different areas, but certainly data centers for us is a key market that we're focused on.

[Jeffrey T. Sprague, Analyst at Vertical Research Partners]

Then speaking of capital deployment, just on the CapEx side, is the additional CapEx still oriented towards those kind of big pinch points of transformers and switch gear or is this sort of broadening out into other parts of the portfolio that are just looking tight given the kind of the growth that you see in front of you?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes. As I mentioned in my opening commentary, the incremental investment, we talked about $1 billion of incremental CapEx investment in the last earnings call, we've now taken that number up to $1.5 billion. And a lot of that increment is in fact going into these kinds of markets, data centers, transformers, some of these markets where we've just seen even faster growth than what we originally anticipated. And quite frankly, we're having customers come to us asking us to make multi-year commitments and signing up for multi-year agreements to provide their requirements and their needs. And so for us, it's just indicative of the underlying strength that we're seeing in our business and our willingness to invest. I mean, this is a case where the risk today is much more on the side of underinvesting, not overinvesting.

[Jeffrey T. Sprague, Analyst at Vertical Research Partners]

Understood. Thank you for the color.

[Olivier Leonetti, Executive Vice President and Chief Financial Officer at Eaton]

Thanks, Jeff.

[Operator]

Thank you. One moment for our next question. We'll now take a call from Chris Snyder at Morgan Stanley.

[Chris Snyder, Analyst at Morgan Stanley]

Thank you and appreciate all the color on the outlook. Maybe if I could ask on the mega projects. I think it's pretty surprising to see that only 16% of the $1.6 trillion have started. I guess does that similarly suggest that around maybe 85% or 84% of the orders related to these projects are still on the horizon? And then I know you guys said that the cancellations of these projects is below historical levels, but are they progressing more slowly in that the lag between announcement and order has extended versus maybe what we thought a couple of years ago? Thank you.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes. No, I think, Chris, you got it for the most part, right, in terms of the 16% of the projects have started and that does mean 84% or so of the projects are still out into the future. And so that's pretty straightforward math. And to the point around cancellations, yes, I mean they're running at roughly 10% and there's always been cancellations in these big mega projects historically and we tried to provide some color on how that 10% relates to historical cancellations and it's lower. And so bigger projects, more projects and lower cancellation rates, which is why we're so bullish on the growth.

And in terms of the progression question specifically, as you see in the data, the progression for us continues to look really, really positive. The numbers continue to grow quite dramatically, up 175% in terms of the quarter-over-quarter. I will tell you that there's obviously always a question around the industry's capacity and the ability to digest all of these projects in the time frame that they'd like, is there going to be enough labor? You've heard the debate in data centers, is there going to be enough power? And so what you might end up with quite frankly is just an extended longer cycle in the process overall, but these projects are generally pretty diverse as well. I mean they really -- they're cutting through in the early days. It was a lot of projects that were EV and battery, what we've seen in the last -- pivot in the last quarter is a lot of commercial and institutional projects, a lot of data center projects, a lot of power projects. And so just a broad base of different projects that are being essentially announced and we're certainly hopeful that turns into starts next year, which we think are going to be up nicely and a long-term growth outlook.

[Chris Snyder, Analyst at Morgan Stanley]

I appreciate that. And then maybe transitioning over to data center. Could you maybe just talk a little about Eaton's relationships with the big hyperscalers? And as those companies get better clarity on their forward CapEx plans and Eaton brings more capacity to market, does that change the way that you can enter into commercial agreements with those customers? Thank you.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes. So to your point, first of all, our relationship with hyperscalers, we have a very strong relationship with all of the hyperscale data center customers and it's -- and as we talked about before, clearly one of our fastest growing markets and even within the data center market, we're growing faster with hyperscalers in general, more so than -- but we're growing with co-lo as well. We're growing in on-prem, but we're growing most quickly with the hyperscalers. And to the point around commercial agreements, everybody is challenged right now around capacity. And as a result of that, the nature of the discussions, the visibility around projects, the forward commitments have changed as the hyperscalers and others are working to ensure that they have capacity in place to deal with their outlook and their growth. I mean, today, there is a little bit of a competing for capacity dynamic that's taking place in the marketplace, which has obviously led to better and more transparent, more committed commercial agreements with our customers.

[Chris Snyder, Analyst at Morgan Stanley]

Thank you.

[Operator]

Thank you. One moment for our next next question. We'll now take a call from Steve Tusa from J.P. Morgan. Hi, good morning. How are you?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Hey, Steve.

[Steve Tusa, Analyst at J.P. Morgan]

So just on the utility side, I mean, a lot going on there with all these customers raising budgets, but Hubble's results were a little bit weak. You guys actually are guiding just below double digit next year, I think in this initial market outlook. Maybe you could just talk about what you're seeing in utility and what the slowing is there? And then lastly, how you kind of participate, just remind us how you participate in generation applications?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes. The first thing I'd say is that in Q3, I mean, our utility business continued to perform well. Our utilities revenues increased mid-teens in Electrical Americas and low teens in Electrical Global. So I mean, obviously, when you think about different companies, they have different product portfolios, you have different customers, you have different mix, but our business is actually continuing to perform quite well. And we remain confident. We talked about our expectation that the utility market would grow at a growth rate of around 11% a year. Our customers continue to invest in CapEx to support this growth.

And so from where we sit, while there's always going to be temporary hiccups in periods of expansion and pause as they digest capacity, there's nothing that we've seen that would suggest that the utility market, at least where we play, won't continue to be a very strong market for years to come. If you think about the unfortunate ramifications of these storms that we're seeing around the world, certainly two big ones in the U.S. So they continue to spend money on resiliency to do grid hardening as the consumption and the demand for power continues to go up. Obviously, that's backing up into utilities having to increase capacity. And by the way, data centers are a really big important market for utility customers.

And then you have things like undergrounding that takes place and that's taking place in places like the West Coast where a lot of the utility infrastructure is being put underground, which is also creating growth opportunities for us. And so while once again, I know it's sometimes difficult to get an exact read on these markets based upon perhaps what peers are doing, but our utility business is strong and going well.

[Steve Tusa, Analyst at J.P. Morgan]

Okay. And then just lastly on the backlog and order side. These orders are becoming obviously a bit more lumpy, like you had a huge first quarter, nice bounce back here for my math in the third quarter, your backlog went up really nicely. It's up 25% year-over-year. Is this a kind of a sequentially like a stable level of orders? Do you see them continuing to pick up a bit sequentially from here? And then why with the backlog where it is today up 25% year-over-year and you're bringing on capacity, so you should be able to release much more of that backlog next year, why wouldn't things actually accelerate on a revenue basis, at least volume-wise next year for the electrical business?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

I'd say that first of all, to your question around orders in general, and as we try to characterize for the investors that we are living in a period of time now where orders have become a lot more lumpy than they've been historically. And a lot of that is tied to mega projects and it's one of the reasons why we started to talk about mega projects in these calls to give the investors transparency in terms of what has been a fundamental shift in the size of a lot of the projects that we're seeing in our electrical business. And with these big projects, with these mega projects, that just creates lumpiness in orders. And that's one of the reasons why we went to a rolling 12 months-to try to smooth out these patterns. And then once again, you try to dissect it anyway into a quarter, but we haven't exactly been successful in the smoothing, but the message is that you -- I mean, these orders will continue to be lumpy. As long as we're living in a world of these big mega projects, these orders will continue to be lumpy.

And the other thing I'd say what we try to do is that -- so we try to give you multiple views, right? It's not just orders. We try to say, hey, let me tell you about the front end of mega projects. Let me tell you about what's going on with our negotiations. We give you obviously revenue and we give you orders. And so that we try to give you a composite view of all the things that we look at that underlie the confidence in our view on what the world is going to look like going forward. Now, the question around should growth accelerate from this point forward.

I'd say on the volume side, as long as the capacity comes in line, yes, it's very possible that we could see volume acceleration. Now, I would caveat that by saying that we've had a lot of price in the business historically over the last couple of years. And as we've even transitioned this year, the relative contributions from volume versus price have changed quite significantly with most of the volume now, most of the growth now coming from volume. And so you're not going to have the same price tailwind that you've had to grow and growth as we look forward.

[Steve Tusa, Analyst at J.P. Morgan]

Makes perfect sense.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Thank you.

[Operator]

Thank you. One moment for our next question. We'll now take a call from Julian Mitchell at Barclays. Please go-ahead.

[Jack, Analyst at Barclays]

Hi, good morning. This is Jack on for Julian Mitchell. How much is the incapacity constrained at present? How are lead times trending in main electrical product categories like switchgear, UPS? What is the pace at which more capacity can come on stream?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes, that we broke up the last part of which you said, I didn't quite hear, broke up but in terms of...

[Jack, Analyst at Barclays]

What pace -- sorry, go ahead.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Your phone, we're having trouble with the connection, but let me -- I'll deal with the first part and then maybe you can come back to the second part of your question around how and where are we capacity constrained. We talk about this $1.5 billion of the incremental investment that we're making in capacity. A lot of that, most of that is going into our electrical business to deal with those specific areas and markets where we are capacity-constrained, be it in data center markets and things like transformers or electrical switchgear that really cuts across many of the different end markets that we serve. I talked about in some of my outbound commentary, the investments we've made in some of the circuit breakers as well as in things like bus and fuses. And so where we've had -- where we have capacity constraints, so we look forward and we see the potential for capacity constraints, we are proactively making those investments and trying to get out in front of it.

Having said that, lead times today are still not where we'd like them to be ideally. Largely a function of the fact that our businesses continue to be stronger than what we forecasted. No question even coming into this year, if you take a look at the revenue growth in our Electrical Americas business versus our original guide, I mean, those numbers are up quite significantly, both in revenue, orders, negotiations really across the board. And so I would just tell you that we are today working as closely with customers as we've ever had to make sure that we are getting out in front of the capacity requirements needed so that we don't end up being a bottleneck and a constraint for the industry.

[Jack, Analyst at Barclays]

So, that's helpful. Thank you.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Second half of your question, that maybe that addresses it or not?

[Jack, Analyst at Barclays]

Yes, that addressed it. Thank you. And on the '25 outlook, how are you thinking about Electrical Americas versus Global next year? There's a 1,000 basis point growth gap guided in '24. Is it a very wide gap again next year that's dialed-in?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes. I'd say it's too early for us to provide specific guidance on our various segments for 2025. But having said that, if you think about kind of these big megatrends that we've been talking to you about over the last couple of years, the Americas business has had a disproportionate benefit, a disproportionate number of them. If you think about what's going on in data centers today, there's data center growth taking place everywhere, but 70% of these data center projects are basically coming in the U.S. We talk about reindustrialization and the amount of money that's being put into increasing the US's manufacturing capacity. A lot of that is being disproportionately benefiting the U.S. and so to the extent that these megatrends continue to be what they are, you'll probably continue to see a disproportionate growth coming from the Americas business. Having said that, a lot of what we do in Europe today tends to be more of the short cycle and we are in fact seeing a bottoming in those markets. But long way of saying we're still working through the details and we'll give you a lot more color when it comes to early next year.

[Jack, Analyst at Barclays]

Understood. Thank you for the questions.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Thanks.

[Operator]

Thank you. One moment for our next question. We'll now take a call from Scott Davis at Melius Research.

[Scott Davis, Analyst at Melius Research]

Hey, good morning, guys.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Good morning, Scott.

[Scott Davis, Analyst at Melius Research]

Craig, you threw out a number earlier about a 40% win rate. And I just wanted to get a sense of context. It seems like given the capacity constraints that where you guys want to win, I would imagine you generally have pretty high odds of winning. And so does the 40% kind of reflect -- first of all, is there any historical context? Is that higher, is that normal? Is it -- but any color around that? Am I reading it right that there's just some projects maybe that are just less profitable and so you're going to be less aggressive bidding on them. And so it's -- that number can be -- it's hard for us to know whether that's a good number or a bad number, but perhaps that behind the scenes is that number is a little bit better than historical?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes. I appreciate the question, Scott. And I would tell you today, the instructions that we've given to our team is we want to win every order. We don't want to see ground on any order or in any segment of the business. But to your specific question around the win rate, yes, the 40% win rate would be higher than our underlying market share in Electrical Americas.

And so I think you can read that to be that we're winning at a higher rate than we have historically and that's certainly a good thing and bodes well for the future. And then you see why? I mean, largely, I would tell you it's because the bigger the project, the more complex the project, the more likely it is that we're going to win and that our solutions are going to be chosen over other alternatives. And so -- and that's just been historically true for the business that the more mission critical, the more complex the project, the -- it increases the rate of our winning. But if you think about the win rate across various segments and we talk about this 40% in the context of mega projects, these mega projects are broad. They are across almost every one of our verticals with the exception, let's say, of residential. And I would say there -- I quite frankly not looked at the data, but my guess is that our win rate is not terribly different across the various segments of the market?

[Scott Davis, Analyst at Melius Research]

Okay, that's helpful. And then I know there's been a lot of questions about capacity adds, but can you just give us a little bit of a sense of the breakdown of new rooftops versus kind of adding lines, that kind of thing. So just a sense of what that capacity looks like in footprint?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes. And I would tell you, I can always say it's really -- it's a combination of both. In many cases, it is in fact expanding in the context of an existing footprint where we have space available on a -- some land where we can build out our capacity. In some cases, it's adding lines to facilities and in some cases, it is brand-new greenfield facilities. And so I can only tell you that it's a mix or mixture of all three of those and very much consistent with where we see our requirements and where we have particular limitations. And so I'm not sure if I'm addressing your specific question, but I can just tell you that it really does cut through all three of those areas.

[Operator]

Thank you. One moment for our next question. We'll now take a call from Joe Ritchie at Goldman Sachs.

[Joe Ritchie, Analyst at The Goldman Sachs Group]

Hey guys, good morning.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Good morning.

[Joe Ritchie, Analyst at The Goldman Sachs Group]

Yes. So rather than like try to get you to say that you're going to do double-digit portfolio growth next year, even though that's what it seems like the framework is pointing to. I'm just curious, Craig, from a pricing standpoint, I know you said that's moderated. Would you still expect to get pricing across the portfolio in 2025?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes. The short answer, Joe, is yes. I mean, and if you think about our industry historically has gotten price, and I would say that we're probably back-in a more historical pattern of getting price each year, but not during this period of time when we came to -- if you go back to what happened over the last few years, you had the COVID-driven supply chain disruptions that drove in a period of extraordinary inflation. And so we had to get out in front of that and can recover inflation. Then you had the scarcity issue. And so as those issues continue to be in the rear-view mirror, we're going to go back to more of a normal level of price realization for the business. But absolutely, we will still get price into 2025. And by the way, price is embedded in those market numbers. We gave you the market assumptions for what we think the market is going to do in 2025 and we do incorporate price in that number as well.

[Joe Ritchie, Analyst at The Goldman Sachs Group]

Okay. Got it. That's helpful. And then I'm just trying to understand the linkage between the project negotiation pipeline being up 60%. And then your comments around 2025 starts expecting to hit a new high. As you kind of think about the pipeline, does that include some of the projects that have even started? Or is that just -- or are we talking about kind of like additives that the starts will be higher next year and what you're bidding on today is already what's kind of broken ground?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes. I'd say that it's -- that quite -- it's tough to really answer that question because these projects vary dramatically in terms of the type of projects that they are and the time between an announcement of start and completion. And what we said in prior calls is that from a completion standpoint, these projects are three to five years out. And so what certainly announcements become starts at some point and it does vary widely depending upon the project itself.

But I think the simple answer is, yes, a lot of these announcements today that we're -- that are embedded in our numbers will in fact become starts in 2025. And in fact, I mean, if we take a look at it over a longer period of time, let's say, '23 to '27, the last data point we had, we were forecasting, starts to be up some 23% over a period of beginning in 2023 going through 2027. We've not updated that number, but clearly, we're seeing an increase in construction starts and which is what you would naturally expect given the size of these announced projects.

[Joe Ritchie, Analyst at The Goldman Sachs Group]

Got it. Very helpful. Thank you.

[Operator]

Thank you. One moment for our next question. We'll now take a call from Tim Thein at Raymond James.

[Tim Thein, Analyst at Raymond James]

Great. Thank you. In the interest of time, maybe I'll squish two together, Craig. Maybe one on just on aerospace, maybe kind of talk through what -- whether it's orders or actual sales trends, just kind of as you navigate this strike impact to the extent that continues the implications in terms of the mix for you between the more on the commercial side between OEM and aftermarket? And then just, I guess, part B is just on the electrical side, as you talk about this project pipeline and the growth you're seeing there. Some of the big sectors that you've highlighted like obviously data centers, but I think power and industrial also being pretty fairly equipment intensive. So just how you think about that traditional rule of thumb in terms of kind of the electrical content per project? And if you're seeing any changes in that just given the complexion of the pipeline? Thank you.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes. So first, maybe to the aerospace question specifically and specifically as it relates to the strike impact. At this point, what we have and we have -- we made some assumptions naturally around what we think is going to happen during the course of Q4. And that's why I mentioned in the commentary, we don't know when these strikes are going to be resolved. We're hopeful that it happens sooner rather than later, but we don't know. And so that's why we said we've made an assumption that's baked into our Q4 outlook. If we're right, it's fine. If we're wrong, it could have a slightly bigger impact on our revenue outlook, but not going to have an impact on our earnings. We'll deliver the earnings under either circumstances, but we do feel like the industry will resolve these strikes probably at some point over the course of Q4, but who knows at this junction.

In terms of the mix, you're right. I mean, at some point, I mean, it has a positive impact on mix to the extent that the fleet of new aircraft are not being built and are having to run the existing fleet harder. That doesn't happen right away. There tends to be a lag effect of that, but ultimately speaking, as long as consumers continue to get on planes and fly and they are, it means the fleet is operating and in these older aircraft will need additional service, additional aftermarket components. And as you know, aftermarket is very favorable for Eaton and for other companies as well. And so we'll just have to wait-and-see how that plays out. Certainly disappointing that we needed to reduce our numbers to account for it. But once again, firmly believe that it's simply timing that these aircraft will be built, these aircraft are needed and it just pushes some of the demand into 2025 and beyond based upon the current issues that are taking place in the industry.

To your question on projects and the project pipeline in electrical, if I get the gist of your question there, yes, it does matter a lot, the kind of project. And we talk about in the electrical intensity of a project. And the electrical intensity of certain types of projects is very different. I mean, if you take data centers, for example, when we take a look at the non-res construction market, data center, for example, accounts for about 2% of non-res construction market, only 2%. Yet it's in the range of, let's call it, 15% to 20% of our electrical business. And that gives you a sense for the electrical intensity of certain kinds of projects versus others. And so for us, the good news is that if you think about the kinds of projects that are being built today, if you think about on the one extreme, you have a commercial office where the electrical intensity is quite low. Data centers on the other stream where the electrical intensity is very high. Utilities growing nicely, where the electrical intensity is very high. So the type of project matters greatly and where we sit today and our outlook, those -- that mix will continue to be favorable for our company.

[Tim Thein, Analyst at Raymond James]

Got it. Thank you.

[Operator]

Thank you. One moment for our next question. We will now take a call from Nicole DeBlase at Deutsche Bank.

[Nicole DeBlase, Analyst at Deutsche Bank Aktiengesellschaft]

Yes, thanks guys. Good morning and actually good afternoon now and thanks for fitting me in.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Sure.

[Nicole DeBlase, Analyst at Deutsche Bank Aktiengesellschaft]

I guess I'll just ask one in the interest of time. Could you talk a little bit about what you're seeing, Craig, in China. We've heard a few companies kind of say that things got a bit worse there this quarter. And then I guess you kind of mentioned hope that short cycle in Europe could be bottoming. So if you could maybe expand on, are you seeing any evidence of recovery there today?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes. I appreciate the question, Nicole. First on China. Our China business has performed very well. I mean, if we look at our China business specifically in Q3, we actually saw very good growth. I think our growth in China was close to double digits in Q3, and our outlook even going forward is pretty robust growth in our China business. I do think that that's mostly a function of things that we have done specifically in the context of our business. And as you know, we had a number of joint ventures that we signed in China that gave us just a lot of additional capability and capacity. And our team in China, we think one of the best in the industry, they're just winning. So our China business is doing well and our outlook for our China business continues to be strong.

To your -- to the point around Europe specifically, and that's where to your point, we are more exposed to short-cycle, which means residential MOEM as is Europe in general. And we do think we bottomed out, and we would think that as we look forward. Those markets continue to grow from this point and that's kind of embedded as well in our own outlook for Q4. We think that as interest rates perhaps start to moderate a bit and that helps the resi market, that helps some of the industrial markets as well. But I'd say we can call today on the short cycle stuff. It feels like we bumped along the bottom throughout the summer months and we started to see a little bit of lift-off in at least some of the markets, distributed IT, for example, in Q3 and the outlook for MOEM and residential is more positive as we look forward.

[Nicole DeBlase, Analyst at Deutsche Bank Aktiengesellschaft]

Thanks, Craig. I'll pass it on.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Thanks, Nicole.

[Operator]

Thank you. One moment for our next question. We'll now take a call from Andy Kaplowitz at Citi.

[Andrew Kaplowitz, Analyst at Smith Barney Citigroup]

Good afternoon, everyone.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Hey, Andy.

[Andrew Kaplowitz, Analyst at Smith Barney Citigroup]

Craig, can you give more color into Eaton's ability to offset ongoing vehicles market-related weakness? If you look in your vehicles margin trajectory, obviously that 19.4% and decline in growth was impressive. Is that a reflection of strong positioning in the market given favorable price versus costs and how long could that last if the vehicles end market stays weak?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes. I appreciate the question. We have worked hard in our vehicle business to first of all, run our business better and drive a better operational execution in our business. And we went through a period of time in our own vehicle business through supply chain disruptions and some other operational challenges inside of the business where we weren't executing as well as we know we can. And our team has just done a great job of essentially improving the way we run our factories and our facilities and sorting out inefficiencies in the plant. We've also been very active in that business on really managing the portfolio. One of the things we've talked to the investors about is that we expect every one of our businesses to be a portfolio manager.

Every business has a head, every business has a tail, every business has a piece of it where you'd say, we don't have a competitive advantage here. We don't make great margins. It's not a growth piece of the business and we got to have a plan to address it and fix it. And so we have been very active in managing the portfolio in terms of the things that we control in our vehicle business as well. And so the margins that we posted this quarter, I think are a reflection of the fact that our team is executing extremely well and we would expect them to continue to execute well as we move forward.

[Andrew Kaplowitz, Analyst at Smith Barney Citigroup]

And just a quick follow-up to that in relation to your restructuring efforts. I think you gave us $75 million for 2025. I would assume a sizable amount of that is in Electrical Global and that it's going to start to help you close the gap with Electrical Americas or how should we think about that?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes. I mean, without a doubt, I mean, if you think about where we're restructuring, it's generally going to be in those businesses where the margins are not at the level that we have in the rest of the company and certainly global is a piece of that formula as well. But the big challenge more than that and we'll do the restructuring. The big thing in Europe is markets. I mean, markets, as you've seen from not just Eaton, but from most of our peers and other companies in the region is that Europe today is just not getting the growth that we're seeing in the U.S. and in other regions of the world in China. So, I think more than anything, we need a return to growth in Europe. Our incremental margins are quite high on the back of a little bit of growth. And so that for us is the thing that we're focused on most is that we have to grow our business in Europe and that's going to ultimately close the gap with some of the margins that we see in the Americas business.

[Andrew Kaplowitz, Analyst at Smith Barney Citigroup]

I appreciate all the color.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Thanks, Andy.

[Operator]

Thank you. One moment for our next question. We'll now take a call from Joseph O'Dea at Wells Fargo.

[Joseph O'Dea, Analyst at Wells Fargo & Company]

Hi, thanks. I'll keep it to one. Craig, just want a little bit more color on the timing of all the capacity investments coming online. I'm sure it's staggered, but by the middle of next year, do you expect to have most of that online? And the reason for the question is, when we look at the electrical backlog moving up again sequentially at $11.8 billion, you're trying to think through the degree to which Eaton is in some instances, the bottleneck. How quickly you can work that down with some pretty significant capacity additions coming online, even to the degree that can Americas grow faster next year as that capacity comes online?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes. I think to answer the second part of your question, we're absolutely counting on that capacity addition coming in next year to help our volume growth and most of the capacity will really come in over the next, let's say, two to three years. Some of it's coming in now as we talked about in some of my final commentary. But maybe just to address maybe the broader question around the backlog. Backlog is actually a good thing. Past-due backlog is a bad thing. And I would tell you that our past-due backlog has come down. So we're doing a better job today of ensuring that we're delivering against our customer's expectation. But we have growing backlog largely because our markets are growing and we're getting much better visibility into our customer's requirements. And in many cases, we're getting longer lead-time visibility on orders. And so I would say in general, I would not think about a growing backlog as a problem in us being a bottleneck for the industry. A past-due backlog would suggest we're a bottleneck and for the industry, but I would tell you today that our lead times in general are very competitive with most of our peers.

[Joseph O'Dea, Analyst at Wells Fargo & Company]

Got it. Thank you.

[Operator]

Thank you. One moment for our next question. We'll now take our last question from Brett Linzey at Mizuho.

[Brett Linzey, Analyst at Mizuho Securities]

Hi, good afternoon. Thanks. I appreciate the thoughts on '25. I just wanted to follow up on the incremental margins. So the 30% to 35% on organic, should we think of this as the base level and then the restructuring savings would be on top of that? Or are there some offsets on some of this OpEx investment ramp relative to the restructuring savings? Just want to square those pieces. Thanks.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes. No, we've given you a range of 30% to 35%, but I should really think about that as an all-in incremental and that not putting the restructuring on top of that. What we've said historically, we said you ought to be thinking about 30% incrementals. And so we've tried to account for restructuring benefits in the different midpoint of where we think the incrementals are going to be. But I'd say that you have a couple of forces, obviously working for you and against you in terms of as we come through this ramp. On the one hand, obviously, we're getting volume leverage and that's very helpful. But on the other hand, we're also starting up new factories and there's always inefficiencies with factory start-ups. We're adding commercial resources to deal with the volume ramps that we're working through right now. So I'd say on balance, the -- take the midpoint or so or that 30% to 35% range, that's better than what we'd used for planning purposes for most of our plans. It's certainly below what we delivered this year for sure. And this year, I would just point out that there was a lot of price in what we delivered in the form of incrementals this year as well as we didn't have the same level of start-ups and ramp-ups in both our factory and commercial activities.

[Brett Linzey, Analyst at Mizuho Securities]

Appreciate the detail. Best of luck.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

All right. Thank you.

[Yan Jin, Senior Vice President of Investor Relations at Eaton]

Hey, thanks. Thanks, guys. I think I really appreciate everybody's questions. As always, the IR team is available to have any follow-up questions as you guys. Enjoy the rest of your day.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Yan Jin, Senior Vice President of Investor Relations
• Craig Arnold, Chairman and Chief Executive Officer
• Olivier Leonetti, Executive Vice President and Chief Financial Officer

Analysts

• Andrew Obin, Bank of America Securities
• Nigel Coe, Wolfe Research
• Jeffrey T. Sprague, Vertical Research Partners
• Chris Snyder, Morgan Stanley
• Steve Tusa, J.P. Morgan
• Jack, Barclays PLC
• Scott Davis, Melius Research
• Joe Ritchie, The Goldman Sachs Group, Inc.
• Tim Thein, Raymond James
• Nicole DeBlase, Deutsche Bank Aktiengesellschaft
• Andrew Kaplowitz, Smith Barney Citigroup
• Joseph O'Dea, Wells Fargo & Company
• Brett Linzey, Mizuho Securities