Eaton Corporation plc (ETN) Earnings Call Transcript

Good morning, everyone. Welcome to Eaton's 2022 Investor Conference. I'm Yan Jin, Senior Vice President of Investor Relations. We're thrilled to have our investors from around the world joining us for today's event. It's our second year meeting virtually, and we really hope to be back together in person in the near future. Today, you will hear about Eaton's progress on our journey to becoming an intelligent power management company. We are proud of the results we have achieved and how we are building a strong future for all our stakeholders. Let's look at today's agenda. We will start off with our Chairman and CEO, Craig Arnold; followed by our CFO, Tom Okray. Then our Chief Sustainability Officer, Harold Jones, will discuss how we are making progress on our ESG commitments. And we will also hear from our sector Presidents, Uday and Heath, on growth strategies and updates to key initiatives in our electrical and industrial sectors. After a 10-minute break, we'll host a Q&A section. We're looking forward to hearing from you and answering all of your questions. Before I hand the stage over to Craig, a few reminders. First, I would like to draw your attention to our safe harbor statement. Some of the information we share today will include forward-looking statements subject to uncertainties outlined in our statements here and in our 10-K. Second, the presentations covered during today's event will be available for download on our website, eaton.com. Finally, if you have questions after today's session, the IR team and I will be happy to hear from you. Feel free to e-mail or call us. With that, I will turn it over to our Chairman and CEO, Craig Arnold.

Thanks, Yan, and welcome to the 2022 Investor Meeting. And I think we can all agree that we've become efficient in working in this virtual format. But I'm certainly looking forward to returning to in-person meetings later this year. During last year's meeting, I said there's never been a better time to be an investor at Eaton. Despite the challenge of 2021, today, we have an even greater conviction in this statement. As you know, Eaton is an intelligent power management company that's been focused on ESG for many years. We're also a company in transformation with a goal of delivering higher growth, higher margins and earnings consistency. And last year, we delivered one of the most transformational years in the history of the company. By now, you've also heard us talk about and emphasize the importance of climate change and how sustainability is impacting our industry, creating growth opportunities in electrification, digitalization and energy transition. It's important to note that we're in the early stages of this growth super cycle, which could run for a decade or more. You've also seen us post record margins last year despite historic supply chain issues. But we've done this over the last 20 years, and it's a direct result of our operating model, the Eaton Business System. EBS is how we set expectations, drive execution, transfer knowledge across the company, and it works, allowing our operating system and our management teams to deliver what we promise. And 2022 will be another strong year of revenue and earnings growth, and we're also increasing our midterm financial outlook and now expect higher growth, higher segment margins and higher EPS over the 5-year planning horizon. Now for those of you who don't know the company well, let me take a few minutes to share who the company is today, and how we've transformed over the years and what has allowed us to deliver the financial results that we've had. Here's a look at Eaton today in the markets that we serve. As an intelligent power management company, what holds the portfolio together is that all of our businesses manage power. We make power safe, reliable and efficient. And increasingly, intelligence and connectivity are playing a role in all of our businesses. We also serve a wide range of end markets, as noted on this slide, all of which have attractive market outlooks, driven by secular growth trends and recovery of a couple of our important end markets and all have attractive margin characteristics. In addition to delivering power management solutions, our businesses share a number of important characteristics that give us the right to win in our markets. They're focused on sustainability, aligned with secular growth trends, the products and solutions we provide are mission critical, keeping your power on, your data flowing and your transportation moving, which means our products are highly engineered and highly specified and difficult to replace. And as a big part of our transformation story, 90% of the profits now come from our Electrical and Aerospace businesses, and we're winning in the marketplace. We win because we have trusted brands. We have a strong network of distribution partners and the necessary application expertise. We also have the required products at the scale required to serve global and regional markets. And we see this as a powerful combination that gives us the right to win and the ability to deliver industry leading returns to our shareholders. We're also delivering for our broadest stakeholders. And none of this will be possible without a team of engaged and passionate employees, which is why 6 years ago, we updated the mission of the company, defining not just what we do but why we do it. Our mission is to provide power management solutions that improve the quality of life in the environment. And it's rooted in the belief that the best way to serve shareholders is by assuring that all of our stakeholders, our customers, our communities and especially our employees are also well served. And beyond our mission, we have a set of aspirational goals, which are noted here. We begin with safety and the wellness of all our employees, especially important in the light of the pandemic that we've all been living through. Beyond safety, we want to create an environment where employees can find their passion at work because we know that's when they do their best work. We also want to create a company culture that values inclusion and diversity to be a place, where everyone feels welcome, to be the first choice of customers and channel partners. We also understand that we have a responsibility for the communities where we operate, that we should get back, making them stronger. And lastly, our mission includes taking care of the environment, both in the way we run our facilities but also to the products and solutions that we create. It's through our mission state and our aspirational goals that we define what we value, what we measure and what we do, and it's how we'll deliver superior returns to our shareholders. We're also proud of our ongoing leadership in the area of environmental, social and governance factors. We publish our ESG report every year. And 2 years ago, we plan -- we announced plans to cut emissions from our operations by 50%. To date, emissions have been reduced by 10%, and we have strong momentum across the company. We also had another strong year on safety, reducing our total recordable rate by 7% and our days away case rate by 26%. And 67% of our sites have already reached the goal of having 0 waste to landfill, on our way to 100%. Consistent with our values, we're taking actions to help create a better society by being a corporate citizen -- a good corporate citizen. And we once again have been recognized for our efforts, being named to the list of 100 most-loved companies by Newsweek, a top 50 company for STEM Workforce Diversity by Ethisphere and to Fortune list of the world's Most Admired Companies. Lastly, our governance model ensures that we always do business the right way. This is another area we've been recognized for our leadership and why it continues to be such an important part of how we run the company. And I'll let my Eaton overview comments with a summary of our leadership model. A lot has been written about the power of strong culture and how it creates long-term value inside and outside of the company. We completely agree with the sentiment and have created a leadership model that clearly articulates the behaviors we expect from our employees and the things that we'll measure. Taken together, they create the culture of the company. We expect our employees to be ethical, passionate, accountable, efficient, transparent and learners. And we measure our ability to get results to build organizational capability, to think and act strategically, all while enabling a digital mindset. This is the criteria we use to recruit, to develop, to promote, and we've operationalized it across the company, which means our employees evaluate themselves and are evaluated by their leaders using this criteria every year. And the benefits are showing up. They're showing up in high employee engagement scores and increasing capabilities of our teams. I noted in my opening comments that 2021 was one of the most transformational years in the history of the company. And as you can imagine, this doesn't happen by accident. It's the result of thoughtful consideration and decisions on the type of company we want to create. But this is not new for Eaton. And as this chart reflects, Eaton has been around for a long time, since 1911. We're the 15th oldest listed company on the New York Stock Exchange. And I suggest that the only way a company can endure and thrive over 110 years is by having a willingness to change. We're a very different company today than we were 50 years ago, 20 years ago or even 5 years ago. Through each one of these transformational periods, the company embraced the realities of a changing world and a necessity for us to change as well. And in the last 20 years, we've completed over 120 transactions, 76 acquisitions, 50 divestitures, and we've transformed the company. And with each transformation, we become stronger, a company with higher growth, higher margins and better earnings consistency. And we do so by using our strategic and financial criteria to evaluate businesses, those that we're in today and those that we're considering for acquisitions. The strategic criteria includes businesses that are leaders in large global markets with technology that's valued and a source of differentiation, serving markets with strong customer and channel affinity and markets that are tied to sustainable solutions, and our financial criteria is equally important. We're looking for industries with above-average growth for businesses that deliver high margins and high returns on capital, and that remain attractive even during a market contraction. But I add that the criteria is the easy part. The tough part is having the operational discipline to follow through. And I think our 120-plus transactions demonstrate our resolve and commitment to do what we say. We're a better, more resilient company because of it. And the last few years were no exception. We deployed $7 billion to strengthen our Electrical, Aerospace and eMobility businesses by acquiring businesses that grow in aggregate at 7% a year and businesses with 27% segment margins, while generating $5 billion in proceeds from the sale of slow-growth and lower-margin businesses in -- through connectors and lighting and in hydraulics. We've also reduced earnings volatility by joint venturing our North America Truck Transmission business with Cummins. These businesses collectively grow at 2.5% a year and had 12% segment margins. Taken together, these transactions added 50 basis points to our underlying growth rate and 250 basis points to our segment margins. And I'd also note that we've maintained our pricing discipline in the process, paying multiples that were in line with our expectations and lower multiples than the one that Eaton trades at. As a result, Eaton is a different company today. And this chart comparing the evolution of the company over the last 10 years illustrates that point. In 2012, about 50% of our profits came from Electrical and Aerospace, and Eaton segment margins were 13.8%. Over this period of time, we invested $13 billion in CapEx and R&D, $20 billion in acquisitions, $7 billion of share repurchases, creating a company that will deliver 630 basis points more in segment margin at the midpoint of our 2022 guidance. And with Electrical and Aerospace now accounting for 90% of our profits. So our active portfolio management, coupled with our operational execution, has allowed us to deliver an impressive track rate record of margin expansion. This chart reflects how our company has performed over time and within our 5-year planning periods. As you can see, the company has consistently improved with almost 600 basis points improvement over this period. This chart summarizes margins for Eaton overall, but you see the same pattern for every one of our businesses. And we're not done. We have plenty of opportunity to continue to expand margins as we look forward. Our free cash flow track record has been equally impressive. As you can see here, it has steadily improved over the same 5-year planning horizon. Our average free cash flow during the '01 to '05 period was $600 million, and it was $2.4 billion between 2016 and 2021, an increase of $1.8 billion when you compare these 2 periods. And once again, we would expect our next 5-year period to see additional improvements. And as you would expect, our strong results have translated into very strong financial returns for our shareholders, not just for 1 year but over the last 20 years. For the sake of comparison, we charted total shareholder return for 1 year, 3 years and 20 years. I compared our results with the S&P, with the median of our peer group and the XLI or the Industrial Index. In every case, Eaton has outperformed the benchmarks, and we think our best days are still in front of us. But enough about the past. Let's talk about where we go from here, our areas of strategic focus and what you can expect from us in terms of our financial performance. For some time now, we've been focused on 3 pillars of our corporate strategy, improving organic growth, expanding margins and effectively allocating capital. This will not change. Our businesses are tasked with improving their rate of organic growth by investing in technology, including digital, forming strategic partnerships and creating superior value for our customers. Uday and Heath will share a number of outstanding examples of this in their presentation. Second, expanding margins. Here, we continue to do what has worked, utilizing the Eaton Business System, driving operational excellence in our factories and functions and focusing our efforts on those things that deliver the best returns. And lastly, we'll continue to be disciplined in the way we allocate capital, investing to drive organic growth, improving our portfolio through acquisitions and divestitures and returning capital to shareholders. And all 3 elements of our strategy are enhanced and supported by the digitalization initiatives taking place across the company. In last year's investor meeting and during the course of the year, many of you had an opportunity to hear from our Chief Digital Officer, Arvind Yarlagadda. Arvind is not on the program today, but will be available to answer questions. I did think it was important to include a reminder of our digital framework and how we expect to benefit from these initiatives. As you can see from the chart, our team is organized around 4 key work streams. The first pillar is how we're creating new revenue sources from our intelligent connected products. We're estimating some $500 million of incremental revenue between now and 2025. We're also continuing to invest in our customer and channel-facing processes where we expect to eliminate inefficiencies, driving 4% improvement in sales productivity. This is largely about how we become easier to do business with. And you've all heard about Industry 4.0, an initiative that has become even more important, given the current labor shortages. As we digitize our factories and supply chain, we expect to increase the rate of productivity by 5% to 10%. And lastly, it's about how we leverage digital technology to increase productivity and effectiveness in our support functions. Each of our functions have a productivity target, which is baked into our annual budgeting process and so we expect to see some 10% improvement. And as you can see, digitalization is impacting every part of the company, and we expect to see significant benefits over the next 5 years. Turning to Slide 20. I think you'll agree that we've consistently transformed the portfolio. We've expanded margins, delivered strong free cash flow and have outperformed our peers and total shareholder return. The one area where we have not lived up to our own expectations is in organic growth, and that's about to change. We now expect organic growth to be between 5% and 8% a year over the next 5 years. This number is up from the 4% to 6% target we set last year. And as you will see, our businesses have even higher targets. Higher growth because our markets will benefit from very favorable secular growth trends and higher growth as a result of our portfolio changes and as a result of our organic growth initiatives. So let me begin by highlighting what we see as perhaps the most important secular trends that we'll see in our lifetime, the downstream impact of climate change and technology-enabled connectivity. As we all know, climate change is driving the need to transition from fossil fuels to renewables. And everyone is finally on board with this necessity, governments, businesses, consumers because renewables create electrical power, we need to change what we use to fuel our lives, to move from gasoline-powered cars to electric, to move from gas and oil leading our buildings to electric, from cooking with gas to cooking with electricity, hence, the term energy transition that you've heard us all talk about. All very good news for electrical companies. On the other side, you have this incredible advancement in technology, which is allowing us to access more and more data. Today, everything is connected or soon will be. And as the world becomes more connected, it creates opportunities for new insights, new value streams, new opportunities to improve the effectiveness and the efficiency of everything, and we're just getting started. The result is big numbers like those you see here, 50% of global GDP making Net 0 pledges, 30 billion new connected devices, 57% increase in electricity demand and 75 million new EV charges. All strong secular trends that will derive future growth in our end markets. So at Eaton, we're focused on 3 pillars as a way to change the growth rate of the company, sustainability, digitalization and energy transition. On sustainability, we're requiring that every new product go through an environmental assessment to evaluate how our products will impact the environment and how they will help us accelerate growth. We're requiring our product to be digital by design that they have built in intelligence and ability to process and transmit data. And any transition is where we live. As the world adopts renewables, it will naturally drive growth for our core electrical business. But we're also making big investments to participate in new value streams like electric vehicles, electrical charging infrastructure, energy storage and grid resiliency, just to name a few. And we're uniquely positioned to benefit from these secular trends, and you'll hear so much more about this from our presenters today. It's also helpful that many of the core technologies needed to support the future of energy management are common across the company. And while we serve 8 different end markets, power electronics, energy management systems, advanced materials and digital design tools are all common. You'll see some real-life examples in Heath's presentation as he talks about what we're doing in our eMobility business and in our electrical connectors business. And Uday will take you through the energy transition that's taking place. He will show you how it's creating everything as a grid environment and how future building systems will be designed to accommodate the proliferation of electric cars and distributed energy resources. Each of these initiatives is an important part of how we're transforming the company, how we'll deliver more sustainable solutions and why we expect our future growth to far exceed our paths. In Life Technology, we're making common investments and are funding tools to accelerate growth and reduce transaction costs. We've been at this one for some time now, and we're already seeing significant benefits as noted here. We begin on making investments in our digital platform a decade ago, beginning by moving our transactions to EDI and e-commerce, and recently, have developed collaboration platforms that allow us to work real time with our partners. We're now finding ways to use this platform to do digital marketing and to grow the pipeline of opportunities we're pursuing. The big investments are behind us, and we're now focusing on how we leverage the platform for growth. Next, allow me to turn your attention to how we intend to continue to expand margins. We've made great progress over the years and make attractive margins today, but we know we can do better. We see the remaining inefficiencies and waste, and we owe it to ourselves to do better. So we set a goal of improving margins by 450 to 550 basis points over the 5-year planning period, and this is up 50 basis points from last year. And you can think about our margin improvement strategy across 3 initiatives: first in how we run the business by using the Eaton Business System, or EBS. It's how we set expectations to drive execution, do assessments and learn. Next, it's through operational excellence and how we run our factories and functions. Here, we've made progress, but large opportunities remain. And lastly, in how we actively manage the portfolio of businesses, products and markets that we participate in, shedding low-value activities and doubling down on those activities to create the greatest value. And for those of you who follow the company for some time, you've heard us talk about EBS. EBS is where we establish organizational expectations on performance. It's the common set of processes and tools that we use to run the company, the way we do performance assessments, and most importantly, how we transfer knowledge across the company. It's also how we make sure the organization is learning and getting better. And as you can see from the chart, it's built around 4 standards. It includes, for example, the way we do strategic planning. It includes the tools we use to drive continuous improvement in our plants and functions, a common way of benchmarking and assessing performance, and it ensures that we identify and transfer learnings across the organization. And as depicted, you should think about it as a closed-loop process. We plan, we execute, we assess, we learn, which then feeds back into how we plan, all underpinned by our values and our high expectations. Another important initiative for expanding margins is operational excellency in our manufacturing sites and in all our support functions. In manufacturing, it's about how we create world-class manufacturing plants, which we define as excellence in 5 areas, safety, quality, on-time delivery, productivity and inventory management. You'll see this metric in every plant, along with the performance commitments for the year and a reference to a world-class benchmark. And as we noted earlier, Industry 4.0 is just beginning to take hold in our factories. Between these 2, we expect to deliver over $400 million of cost out over the next 5 years, and we expect functional excellence as well. Every one of our functions is tasked with leveraging scale across the company, creating standard work, taking on those tasks that can be done better and more efficiently when centralized and digitizing repetitive tasks. And we've been at this for a few years now, but I'm excited by the next wave of improvement that we'd expect to drive through our digital initiative across the company. Naturally, this is an important part of what we're counting on to drive attractive income margins over our planning horizon. The other important initiative for expanding margins is active portfolio management. This slide represents a simple idea, but it's an also important part of the way we run the company. Some of you have heard me say, this is perhaps my favorite chart. The idea is simple. Do more of high-valued activities and less of lower-value activities, what we call, grow the head and fix the tail. The truth is that every business, no matter how good or bad, has both a head and a tail. Every business is a normal distribution. There are businesses where you have the right products, the right channel and high margins. You have the right to win and you should do more of this. By contrast, every business has a tail, low-margin businesses that are consuming more of your time than they should, given the returns. The idea is to do more of the good stuff and less of the marginal stuff. And we apply this to everything we do, not just M&A. Factories, product lines, market segments, all represent opportunities to be thoughtful about what you do and don't do and what you want to do more of and less so. And every year, we raised the bar on our own expectations. The third leg of our strategy focuses on how we allocate capital. This is something we continue to do well and where we have a strong track record. We'll have some $10 billion of cash optionality between now and 2025 without issuing equity. And you can count on us to continue to be disciplined and setting expectations for strong returns on capital invested. Slide 31 includes a summary of our capital allocation priorities, and they haven't changed. But I think we all know the easy part is making the chart. The difficult part is having a discipline to stick with it. So our first priority remains investing in each of our businesses to drive organic growth. I strongly believe that if you're in a business, you need to play to win every day. And this means making the resources available to compete effectively and in every business. Second, we intend to continue to pay an attractive dividend. In fact, we've paid a dividend for the last 98 years. Third, acquisitions continue to be an important part of our growth and margin expansion strategy. We've done over 70 acquisitions in the last 20 years and see it as an important part of how we continue to transform the company and increase our growth rate. And lastly, we'll continue to buy back shares, offsetting dilution and being opportunistic as cash builds up. And turning our attention to financial expectations between now and 2025, here's what we expect. Organic revenue to grow by 5% to 8% a year, up 150 basis points at the midpoint from last year. For our segment margins to hit 21.5%. For our free cash flow margins to be about 14%, and for us to deliver 12% to 14% growth rate in our earnings. We also expect to continue to see progress in segment margins with Electrical Americas at 22%, Electrical Global at 20%, Aerospace getting above prior peaks at 25%, Vehicle at 19% and our midterm target for eMobility is 11% on our way to the 15% target we set for 2030. In closing, I'd like to summarize by saying that we're building an intelligent power management company. We're proud of our ESG track record. It's the right thing to do, and we're a better company because of it, and it will drive growth. Our strong results in the midst of last year's supply chain disruption were a good indication of how much the company has changed. Proof that our portfolio transformation is working, but we're not done. We remain focused on building a company with higher growth and higher margins and more earnings consistency. And as we look forward, perhaps the biggest change you'll see from us is in our organic growth rate. There are 3 very powerful trends shaping the future of our industries: energy transition, digitalization and electrification. When coupled with specific outgrowth initiatives, we think we're entering a growth super cycle that could last a decade. And you can continue to count on always to do what we've always done well, using our proving operating model to drive margin expansion. Digitalization is how we'll take it to the next level. Finally, we're raising our midterm outlook for growth, for margins and for EPS, a forecast we think will allow Eaton to outperform our peers and continue to be one of your best investments. Thank you. And now I'll turn it over to Tom Okray, our Chief Financial Officer. Tom?

Thanks, Craig. I'm very happy to be with you today. In my presentation, I'd like to leave you with 5 key messages. First, 2021 was an exceptional year for Eaton across numerous financial metrics despite ongoing challenges. Second, given underlying fundamentals, we are confident in our ability to deliver relative to the guidance we provided last month, including our organic growth goals and another year of record margins. Third, we remain keenly focused on supply chain constraints and anticipate significant improvement in the second half of the year. As we look ahead, alleviating supply chain issues will provide a tailwind to growth given record high backlogs. Fourth, we generate significant cash flow and anticipate returning our cash flow margin exceeding 14% and cash flow conversion on adjusted earnings in the mid-90s. Finally, we're very good stewards of capital and remain disciplined in deploying capital. We are driving growth through our organic and inorganic investments while providing returns on capital through a competitive dividend and share repurchases. For the rest of my talk, I'll recap financial results and guidance, discuss what we're doing on supply chain and the progress we're making on functional productivity, and then I'll go into more detail on capital allocation. I'm extremely pleased with our 2021 results. We had strong organic revenue growth of 10% last year, with particular strengths in Electrical Global, Vehicle and eMobility. We posted record adjusted segment margins of 18.9%, that's up 250 basis points versus 2020 and reflects 43% incremental margins. It's also 130 basis points over our previous record in 2019. Additionally, we posted record adjusted EPS of $6.62, up 35% versus last year and up 15% from our previous record in 2019. 2021 was truly a transformative year for our portfolio. We completed $8 billion in acquisitions and divestitures. Consistent with our objectives, the acquisition of Carbon Mission Systems and Tripp Lite and the divestiture of Hydraulics will result in higher growth, higher margins and more consistent performance for the company. We continued that transformation in early 2022 with the acquisition of Royal Power, an exciting opportunity to build additional scale and drive growth in our eMobility business as well as applications in other segments. Finally, our total shareholder return of 47% last year compared quite favorably to the S&P 500 and our peers. Turning to 2022, I wanted to provide some context on how we're thinking about our end markets. One key takeaway is that we expect our markets to remain strong in 2022. Starting on the left side with the electrical sector markets, you'll see that all markets are expected to grow in 2022. I'll highlight just a couple of these. We expect the data center and distributed IT market to lead the way with double-digit growth, driven by continued rapid build-out of hyperscale facilities. Industrial markets are expected to have tailwinds in 2022 with a significant snapback in energy and mining CapEx. Strong global manufacturing activity leading to capacity additions and MRO; worker shortages, leading to increased automation; and the beginning stages of U.S. onshoring trend, due to ramifications from the supply chain constraints and trade disputes. Now moving to the right side of the chart, the industrial sector markets. Again, generally good growth across the board. Notably, commercial aerospace is expected to be quite strong as the market continues recovering from the effects of COVID. ICE-powered light vehicles show strong growth from a low base in 2021 caused by the supply chain shortages. And finally, electric vehicle markets continue to be strong given the secular trends. Our revenue growth for 2022 is supported not only by these strong underlying fundamentals but also the substantial year-over-year backlog growth in our Electrical and Aerospace businesses, driven in large part by the supply constraints. As the supply chain normalizes, we expect these backlogs will provide strong revenue tailwinds. Here are a couple of charts showing our orders and backlog progressions for the Electrical and Aerospace businesses. You can see that each of them grew every quarter last year. For a North American electrical business, approximately 75% of the new orders are nonstandard product or project related, and it's greater than 60% for our Electrical Global business. This gives us good confidence in the quality of our backlog. We have a lot of momentum coming into the year that provides a tailwind to growth, and we're off to a good start in 2022. Looking ahead, you can see that their fiscal stimulus packages in various parts of the world that are driving investment in areas aligned with energy transition, digitization and electrification themes. These are becoming a more important part of policy, and we will benefit from them. The $1.2 trillion U.S. infrastructure bill that was passed late last year has many parts that will support growth in our business, with 2023 and 2024 being the years with the highest amount of spend. Of particular note, is approximately $88 billion set aside for power grid updates and EV charging networks and incentives. We expect these to be particularly helpful to our businesses. In Europe, we just started to see the spending for the EUR 807 billion set aside as part of the new generation EU stimulus. The bill outlines that approximately EUR 240 billion is to be spent on green energy transition and approximately EUR 160 billion is set aside to be spent on digital transition. In China, the government has set clear goals to lower carbon emissions and set out targets to help reach them with growth in combined wind and solar power generation capacity over the next decade and strong push to get new energy vehicles to account for 20% of vehicle sales. There will be significant investment in energy transition. Furthermore, the government has laid out plans to strengthen its grid by 2025 to include more wind, solar and low-emission coal plants. This chart contains the same data that we shared during our Q4 call. 2022 will be another year of strong growth with high single-digit to low double-digit organic growth for each segment. Given our order momentum, backlog and favorable market conditions, we have very much confidence in this growth. Combined with 2021, we expect 18% cumulative organic growth since 2020. We also expect margin expansion in each of our segments, with an overall 40% year-over-year incremental margin that includes continuing tailwinds from accretive acquisitions and offsets for inflation through price and productivity. The growth of adjusted EPS in 2022 is driven by a few factors. First, we have strong organic growth with strong incrementals. Acquisitions partially offset lost earnings from the sale of Hydraulics. Finally, there are a few small items that get us to the $7.50 midpoint of our guidance range. This yields about 13% year-over-year EPS growth in '22. At the midpoint of guidance, we expect $2.45 billion free cash flow in 2022. This translates to free cash flow conversion on adjusted net income of approximately 83%. Within the 83% conversion, there are 4 items that I discussed on our year-end call that need to be normalized, including cash spent on restructuring and acquisitions and divestitures, to get an accurate picture of our free cash flow conversion. In addition, as we lay the groundwork for growth, our CapEx has been higher than normal. Each of these bring down conversion by approximately 3 percentage points. Finally, a remaining payment for the CARES Act in 2022 will reduce free cash flow conversion by approximately 2 percentage points. Once you've normalized for these 4 items, we get to a free cash flow conversion of 94% on adjusted earnings. We expect that free cash flow conversion will be in the mid-90s over the midterm. Continuing with cash flow, we expect continued progress on free cash flow margin and to return 14% in the next couple of years. A lot of that growth will come from additional profit resulting from continued organic growth at solid incrementals. We should also see an uplift as we complete our multiyear restructuring program. Additionally, we will see benefit from several initiatives that are well underway to optimize our working capital. This leads to our discussion on what we're doing in supply chain and functional productivity. Supply chains are on the top of everyone's mind, and it's on the top of ours as well. As we work through supply chain issues that we're seeing across the globe, we're focused on addressing constraints and recovering costs through productivity and pricing. From what we see today, we expect supply chain constraints to significantly improve beginning in the second half of 2022, with the exception of semiconductors, which will still be constrained until 2023. We are using these constraints as an opportunity to make our supply chain more robust in both the short and long term. Our first focus is securing supply. Our team is working closely with all our suppliers to ensure that we have visibility to material availability and that we have what we need to address the large backlog that we have. We're having ongoing conversations that ensure long-term partnerships with key suppliers. We're also focused on creating a stronger, healthier and more resilient supply chain with the implementation of digital supply chain systems and risk management processes that will increase our ability to detect problems early in order to mitigate them. Finally, given the ever-changing conditions, we're focused on digital initiatives and increasing our local sourcing to shorten supplier lead times where possible. We're also redesigning product lines to use alternative components. These actions will allow us to react quickly to changing conditions. Moving on to functional productivity and digitization. One observation on my first year is that we've just really begun this journey. Too much of our time is spent collecting and compiling information. We have significant opportunities to improve our processes through digitization. This will enable our corporate functions to meet the 10% productivity objective laid out by Craig earlier. Another observation is that we have additional opportunities to benefit from streamlining activities within our global functions, such as finance, supply chain and technology. By doing so, we will get cost benefits from scale plus the additional benefit of faster and more accurate analysis and reporting. In the end, our expectation is that we use better digital tools to compile and report data to free up our people for higher-level activities and faster and better decision making. Now I'll turn to capital allocation. Here, we lay out our capital allocation strategy, which lines up well with what we said last year. Our #1 priority is reinvesting in the business to drive organic growth. Second is continuing our long-standing practice of returning cash to shareholders by growing our dividend and maintaining a competitive yield. Our next priority is driving inorganic growth in Electrical, Aerospace and eMobility, continuing the progress that we made in the last year. Finally, we plan to return excess cash to shareholders through share repurchases. Innovation and differentiated products are key enablers to organic growth. In 2022, we're investing over $1.3 billion in CapEx and R&D in sustainable products with over 90% of our investments enabling reduction in greenhouse gases for ourselves and our customers. We have refocused our R&D with the goal of establishing technology leadership in end markets that have strong secular tailwinds, such as power electronics, energy systems and software, and data sciences. Examples of leadership we're developing in this area include distributed energy, resource product development to help both utilities and building owners with the energy transition to renewables and our large investments in developing eMobility inverters. To achieve leadership in these areas, we're looking to invest around 6% of sales. We expect to invest about 3.5% of sales in R&D, with our CapEx normalizing to approximately historical trends. To ensure that we spend efficiently, we have disciplined stage gate product development processes for all our initiatives. We generate over 1,000 new patents a year. This helps us have an ever-growing catalog of products that we deploy to better solve customers' problems, and frankly, improve our margins in many cases. We have a long history of paying a dividend dating back to 1923. Our philosophy continues to be to steadily grow the dividend over time. As you've seen, we have increased the dividend even after years where earnings declined, including 2012, 2014 and even 2020. We expect to maintain a reasonable payout ratio of approximately 50% of free cash flow that will allow us the flexibility to invest in organic growth and M&A. Here, we show that we've increased our dividend at an 8% annual rate over the past 10 years, and we just announced a 7% increase last week. Our dividend results in a yield that is competitive with our peers at approximately 2%. Our next capital allocation priority is investing in M&A. We have a disciplined process that we've honed during over 75 acquisitions since 2000. An acquisition target has to be strategically attractive and fit our areas of focus and qualitative criteria. I won't repeat the strategic and financial criteria that Craig discussed earlier. Instead, I'm going to focus on the specifics of the financial criteria on the right side of the chart. Overall, we seek to add 1% to 3% inorganic growth annually on top of our organic growth. Today, that means about $200 million to $600 million run rate. This can, of course, be somewhat lumpy as witnessed by our acquiring over $1 billion revenue in the last year. Part of the strategic attractiveness of a business will manifest itself in sustainable revenue and cost-out synergies. These synergies are us doing more with the business than it had done in the past, leading to higher profit and returns. As part of our approach of being a disciplined acquirer, we target returns of at least 200 to 300 basis points over our cost of capital and expect acquisitions to be accretive to adjusted EPS after 2 years. These tenets provide a value-creating return to our shareholders. Here, I'm recapping our full year guidance, which is unchanged. Since we talked last, we only feel more confident in our guidance. Just to reiterate, 7% to 9% organic growth on top of already very strong 2021 growth, another year of record-setting segment margins of 19.9% to 20.3%; $7.30 to $7.70 adjusted EPS, which is up more than 10% on our record adjusted EPS from last year; $2.35 billion to $2.55 billion free cash flow; and $200 million to $300 million in share repurchases. To close, I'd like to bring you back to our key messages. 2021 was a strong year on so many dimensions, particularly growth in margins. 2022 is going to be an even better year with continued strong organic growth, along with growing margins and EPS and was already a record 2021. We expect to see stronger growth as we strengthen our supply chain and constraints are alleviated. Our business continues to generate significant cash flow, which we will continue to invest judiciously. And finally, we remain disciplined on capital allocation with a focus on investing in growth in 2022, both organically and through M&A. With that, I'll turn it over to Harold.

Thank you, Tom, our Chief Financial Officer, and hello, everyone. It's great to be with you today at our 2022 Annual Investor Conference, and I have the privilege to share with you Eaton's sustainability story. Before we begin, I'd like to show you a brief video. [Presentation]

I wanted to kick things off today with that very exciting video overview of how Eaton is helping drive a low carbon or no carbon economic feature while also helping our customers and society. So let's dive into that more and transition that I'll be covering today. During our conversation, I'd like to talk to you about 4 things. One is that Eaton has a long-standing commitment to sustainability. In fact, we've been doing sustainability for many, many years. Sustainability is reflected in our mission and aspirational goals and the focus was sharpened in 2020 when we announced in the world our Ambitious 2030 sustainability targets. Second, beyond the goals, sustainability is core to who we are as a company and how we grow not only today but into the future. You'll hear more from my colleagues on exactly how we're doing that in the next segment. Third, we're making solid and meaningful progress. Our Eaton Business System, EBS, drive standards and performance excellence. And building on that strong foundation, we have already made significant progress since announcing our targets. I'll share with you some of those results today. And last, trust. We speak of trust in the form of governance and transparency. I can tell you without a doubt that our Board and senior leadership teams are heavily committed to sustainability and to assuring that we properly govern these processes with the utmost transparency as we move toward 2030. As I mentioned, our commitment to sustainability has been longstanding. And what I'm showing here is 1.5 decades of highlights that illustrate the commitment, and there are many more. Eaton published its first sustainability report in 2007, 15 years ago. We submitted our first report to the CDP over 10 years ago. And beginning in 2015, we established a goal to be 0 waste to landfill, and we've made tremendous progress on that. When the business roundtable announces purpose of a corporation, we were a signatory, simply because our aspirations, as Craig Arnold has spoken about before, were 100% in alignment with that purpose and definition. And in 2020, we announced the world with focus and clarity where Eaton wants to be in sustainability over the next decade. More recently, we established a goal around manufacturing sites, achieving 0 water discharge, particularly in areas around the world deemed to be water stressed. Now let me turn to our mission and how we're making good on it. Many of us frame sustainability as environment, social and governance, ESG. We understand environmental stewardship, which is why we've established science-based targets that matter. We equally focus on decarbonization solutions that help our customers fix their toughest sustainability challenges. Of course, inclusion and diversity, developing and engaging our workforce and ensuring health and safety and well-being are all powerfully captured in our aspirational goals. And as for governance, as I said before, our Board and senior leadership are all heavily engaged. For as long as Eaton has been around, doing business right has been a core tenet. Of course, we're committed to transparency and reporting to the highest global standards available. So with that a foundation, let's turn our attention to how we're approaching solving one of society's toughest problems, carbon. Last year in Glasgow, the world gathered at what is known as COP26, a conference where climate leaders and regulators and others came together to talk about climate change. When the conference ended and all the accounting was done, they nationally declared commitments, which, by the way, are the commitments made by countries around the world on how much carbon they're going to take out, add it to a substantial number, 4 gigatons, but that, unfortunately, is simply not enough. Science tells us that an additional 20-plus gigatons must be removed from the atmosphere each year. And that is why Eaton is boldly focused on 3 powerful priorities aimed at decarbonizing energy, optimizing energy usage across the world energy transition, electrification and digitalization. And again, you'll hear from my colleagues with much more color on these topics. By focusing -- but our focus is on supporting our customers in solving their toughest sustainability challenges, and we're not going to stop there. We're also going to lead by example by reducing our own footprint. And that is why in 2021, we decided to join the race to 0, an organization that encourages science-based commitments on carbon reduction, creates decent jobs and unlocks sustainability. So how are we going to get there? Our goals are built on our aspirational goals, which touch on many facets of who we aspire to be. We aspire to be a preferred supplier to our customers, to make more convenient meaningful and exciting to our employees, to be strong partners in the communities in which we live and work, to putting our people first by assuring the health, safety and well-being, to being a model of inclusion and diversity and active stewards of the environment. Our carbon reduction targets are science-based and aligned with a 1.5-degree future. And we're investing $3 billion in research and development between 2020 and 2030 for sustainable solutions, and we're committed to volunteering our time and talent to the committees in which we live and work. We've committed to disclose our minority and gender-pay equity results. And of course, as I said before, we've established internal footprint reduction goals, including carbon reduction, carbon neutrality, the circle economy with a 0 waste program and 0 weight water discharge. All of these goals are aligned with the United Nations Sustainable Development Goals, highlighted on the right side of the page. These goals set out to comprehensively accomplish what is deemed necessary to sustain human life and society and the environment. Let me add that we're equally committed to transparency, and that's why we've chosen to adopt the highest global standards for reporting. These include the Global Reporting Initiative, the Sustainability Accounting Centers Board and the Task Force on Climate-related Financial Disclosure frameworks. Let me now turn to how we're thinking about growth through the lens of sustainability. We first start by understanding the megatrend driving the global economy, and this is just a short list of few things that we consider. One is data and connectivity. I was glad that our first Chief Digital Officer spoke at the same analyst conference last year. Of course, Net 0 pledges, not only from companies, but from broad industrial groups like the aviation and aerospace industries and others. The acceleration of renewable energy. And of course, what we all experienced or are experiencing every day the explosive increase on more electrical aircraft, more electrical vehicles, full electric vehicles and so forth. So we take these megatrends as background and we focus on what our customers need and how we can meet those needs while driving growth for the company. In 2020 alone, Eaton filed over 1,000 patents, which we share with you because it reveals the innovation and energy that our engineers and technical teams unleash every day when they come to work. You will also note that we classify 47% of our products sold as positive impact products. Today, there are no global industry standards for clean technology. That is why Eaton, working with nongovernmental organizations and other partners, have established a positive impact framework. Let me just walk through a couple of those parameters. Of course, each of these products must compete economically, but we also consider energy reduction and optimization, carbon reduction, the reduction of chemicals that are injurious to the environment, public health and safety. Clean technology focuses on 2 parameters that the product reduces carbon and optimizes energy use. Taken all together, these are some of the indicators that we're using to drive our focus on the customer and drive growth in the company. Turning inward to our footprint. Here, too, we're demonstrating strong meaningful progress. We're moving our goals -- we're moving on our goals toward renewable energy, waste and water. Today, 2/3 of our manufacturing sites are discharging 0 waste to landfill. 11 of our sites have 0 water discharge, recycling or reusing every drop of water. Once again, the CDP recognized Eaton at the leadership level. And from 2018 through 2021, we have reduced our greenhouse gas emissions by an estimated 9%. We have done that not working in isolation but partnering with organizations, such as the MIT, Shine Group. We have equally powerful relations and partnerships with the U.S. Department of Energy and the World Business Council on Sustainable Development. Turning to some other areas of progress. In alignment with our aspiration to be a model of inclusion and diversity, we realized a new milestone in 2021, with 2/3 of our Board of Directors now women or U.S. minorities. We're very proud of that, but we're not stopping there. We have goals to improve diversity across our company. Outside our commitment also extends the suppliers. In 2021, we purchased $650 million in goods and services from small businesses and diverse suppliers. In alignment with our aspiration to make work meaningful and engaging to our employees, we were pleased to see 86% of employee survey say they're proud to work at Eaton. And in the spirit of our commitment to transparency, we published our first TCFD report, and we are one of a few companies among our peer group to issue such a report. So how is the world responding and saying about all of this? While building on the notion of transparency, we report our progress to our sustainability report talking directly to investors and being active in social media and other communication platforms, and the world is taking notice. 3BL Magazine named Eaton, a best corporate citizen. Fortune Magazine named Eaton, one of the world's most admired companies. And we're delighted again to see institutional investors describe Eaton's ESG disclosures among the very best. And Readers Choice named Eaton as a top employer for STEM. \ And these are just a few examples of the recognition we've received. So in the last several minutes, I have shared with you our commitment to sustainability that it is long-standing and will remain so well into the future. It is core to what we do, who we are and how we grow. And as I've shared, we've made solid and meaningful progress, building on the foundation of the Eaton Business System. Of course, our governance and transparency should earn your trust and confidence that we're committed to sustainability and will deliver on our ESG commitments. Thank you. And now I'd like to introduce Uday Yadav, President and Chief Operating Officer of the Electrical sector.

Thanks, Harold. Appreciate it. Good morning. Hope you're all well and staying safe. This is the second year using this format. And while it's extremely efficient, I very much miss the in-person interaction. And I'm hopeful, we can put this virus behind us and get back to some level of normalcy and human connection soon. Look, at the last two years, have been like no other in my career, with COVID, supply chain and labor challenges and now what we've seen on our screens in the last few days with Ukraine. Our teams around the world have proven to be absolutely resilient, for which we're truly appreciative. With their efforts, we delivered all-time high record margins in 2021. We've accelerated our strategic momentum and gained even greater confidence and conviction in our future growth. Three main reasons. First, we're raising our 2025 revenue target to $19 billion. It's up $1 billion from last year's target because we experienced stronger growth than anticipated in 2021, and we see a stronger near-term growth outlook than we did this time, last year. Second, we're entering an electrical industry super cycle. This super cycle will transform the industry, creating a significant growth outlook versus our historical norms. And this confirms, frankly, Everything as a Grid approach that we shared with you last year and the year before. And third, as a result, this will expand our addressable market. The topology of the grid is rapidly changing, increasing, of course, the complexity of the electrical system, and we very much like that because that means we can sell more gear, more design services, more support services, all leading to recurring -- increasing recurring revenue. And we're making acquisitions and forming joint ventures. This gives us access to adjacent markets and allows us to penetrate regional market segments, where we have been historically underrepresented. So as a reminder, the Electrical sector has 2 reporting segments, 4 operating groups. We serve customers across 6 key market segments. And our estimated revenue in 2022, it will be just shy of $14 billion. And we had a strong 2021, where we delivered all-in growth, excluding Lighting from our base, of almost 14% and organically around 9%. Almost all end market segments grew robustly. In 2021, we made acquisitions and investments that expand our future addressable market by almost $30 billion and position us for growth in our target market segments. Let me show you a few examples. Tripp Lite, we bolstered our single-phase UPS business, giving us access now to a $9 billion high-margin connectivity market. It delivered nearly 19% year-over-year growth, well above our expectations and the team is off to a great start. Green Motion. This company gives us a strong foundation for EV charging. It provides a new field of play, and the Green Motion team has launched in 6 countries as part of our Building as a Grid approach. And then our HuanYu JV in China. Our joint venture here has given us access to the Tier 3 commercial and residential building markets in China. This has been, obviously, impacted in the short term by the China construction markets. Yan Jin, it makes products for data centers. We had one major product gap in Asia, that is now filled. And this JV has allowed us to provide bundled solutions to data centers and [ when ] made a new business. It saw 22% growth last year, and our team just dialed in a $46 million win with one of the top-10 China commercial developers, feel really good. And finally, our investment in Reactive. Reactive is a small startup that helps utilities maintain reliability, as they add renewables. It pinpoints where utilities could have an inertia problem, and we have a good pipeline now to sell their software and then eventually implement remediation. As we look to the future, we'll continue to grow our revenue and expand our margins. If you look to the right on the graph, the 2025 projection of $16.5 billion. This includes both our organic growth and the Tripp Lite acquisition, a 30% increase from 2021. And now, if you look at the green line on the top, you can see how our margins have increased, and it's certainly worth noting that in 2021, on less revenue than in 2018, our margins are [ 290 ] basis points higher over this period. So you can see, we have a solid playbook to further expand our margins. So now let's break down how we expect to get to $19 billion by 2025. As I said, we're raising our outlook because in 2021, we delivered $1 billion more in revenue than we had planned at this time last year, as a result of strong organic growth and a good start to our inorganic target. We felt it was appropriate, given the future growth rates that we're seeing, with those strong margins of base Electrical business, is ahead of schedule. The energy transition that we're focused on, is accelerating. We're up 65% over last year and well ahead of the ramp that we had expected. And the yellow area is where is the digital solutions. It's on track with a lot of capability building. We're expanding our resources and also the product offerings. So energy transition projections have accelerated over the last 12 months. We've now entered an electrical industry super cycle. Globally, EV adoption is now forecasted to be 40% by 2030, up from just 25% last year. Net zero financing pledges that boost energy transition, have increased 25x to greater than $100 trillion over the next 30 years. And then energy storage is forecast to grow 4x higher than 2021. And the reason for this is to maximize flexibility and avoid peak charges. And this provides tailwinds to our Everything as a Grid approach. And finally, grid modernization. This infrastructure investment of $73 billion is a single largest federal power investment in U.S. history. So as the globe shifts to a net zero carbon energy system, the electrical industry's role will expand to become the central switchboard powering the future. The sources of power will become more renewable and the uses of power will become more electric. So you can see, we are right in the middle of all of this change. This complexity is good for Eaton and it's what we do. It's right what we do and right in the middle. So we are well positioned to lead the evolution of the electrical power value chain and master the complexity that I just talked about. Traditionally, it's always been about managing supply, and now it's about managing demand and distribution, which is Eaton's primary focus, as many of you know. And the way the world consumes, producers and sales energy is evolving. So let me explain. Power will move from being generated centrally with unidirectional flow to decentralized generation with multidirectional flow. The relationships between producers of energy and consumers of energy will change, as everything has the potential to become a grid. And safety challenges will increase exponentially, where we have extensive experience. So our focus is on helping our customers simplify the safe transition to a sustainable and resilient digital electrical future. As the electrical industry super cycle accelerates, we will continue expanding our value add for each market segment, expanding our role and the right to win. And we see changes on both sides of the meter. Let me start on the right side of this graph, and this is behind the meter. We see a massive expansion of our role, as energy management becomes key and electrical systems become more complex. As we add EV, storage, solar, microgrids and more electrical loads, the end customer now has a much more complex problem to solve and needs our help. To the left-hand side of the screen, that's in front of the meter, our presence for utility companies will help them solve new and challenging problems, as a grid topology changes. So as you can see, our presence on both sides of the meter affords us an opportunity to provide unique value. So now to market segment growth. These are strong markets, and we have significant outgrowth planned over the next 5 years. Our 5-year growth targets across all market segments are driven by a combination of strong market fundamentals and significant outgrowth. Along the top are our 6 end-market segments. And we have used the 2020 as the base for consistency with prior years. Now on the bottom right, you can see our new CAGR of 8.2% versus the 6.2% that we shared at this time last year, an increase of 200 basis points, driven by the strong 2021 and a brighter outlook. And if we're using 2021 as a base, which I'm sure is in your minds, we intend to grow at 6.6%, up from 5% last year. And not on the chart, but shortening the time frame from 2022 to 2024, our CAGR is 7%. So let's focus on the segments outlined on the left with Commercial. This is our largest segment with the greatest degree of outgrowth due to energy transition and digital. Next, Residential. Our content per home will increase, driven by code and increasing preference for the Smart Home. And now utility growth, this will be much higher than historical norms, as the grid topology changes. And in the orange, data centers and distributed IT continue to be hot with the highest overall growth. And finally, Industrial and Machinery, rounding out our growth, overall. So let's take a little bit of a deeper dive into the first 3 segments. First, commercial buildings. Now, we have a major presence supplying new construction and upgrades in many fast-growing subsegments within Commercial, from health care to education to distribution centers. Their increasing sustainability needs lead us to project revenue of $4.5 billion by 2025, and that's a 40% increase from that base. So why is this? Let me give you some context here. Electrical consumption will increase over the next three decades. That's clear, despite the efficiency improvements. Second, to limit climate change increase to 1.5 degrees, 50% of the CO2 reduction target is actually linked to the electrification of buildings. So we are right in the middle of a societal obligation that has been at the core of our company for decades. You heard Harold talk about our ESG commitments. And to meet this commitment, the Building sector has no choice but to be successful, and our role is central. Now the trends for driving growth, these are already in motion. The EU regulations on energy retrofit for existing business -- buildings, have almost doubled from 1% to 2% of existing stock. That's a big change. The requirements and regulations for electrification of new buildings are driving electrical content at the municipal level, even in the U.S., you can see this in California. And this, overall, has increased the complexity. So customers are telling us in our conversations that they must decarbonize soon, and we are seeing this more and more and somewhat at scale. So here's just a quick example of how commercial buildings are increasing in complexity. Let's just look at a distribution warehouse, for example, one of our fastest-growing segments. The historic approach was simple. On the left, you back up the trucks, there's an HVAC involved. You can use pen and paper, you can manage maintenance. It's a pretty simple approach. Today and in the future, there are two important vectors for growth that compound on each other. First, the underlying volume is increasing due to the acceleration of e-commerce. And then second, on top of that, this drives the need for more sophisticated energy management and more of our content per warehouse. So if you look at the right, you've now got electric forklifts, heating, robots, EV, charging for the fleet. This is a mission-critical operation to imagine an unreliable power [ fee ] can disrupt the operations, impacting service significantly. And the larger parent companies have ESG goals, leading to the need for microgrids, solar and storage. So the need to optimize the whole ecosystem really drives our services and content. And I'll share a case study a little later on. And so what does this do? This creates opportunities to move beyond our build and commission focus and evolve our role as an energy expert. So today, we participate in all phases of the Building life cycle. You see that in the blue circles. Most of our focus is on the Build and Commission stage of the life cycle. We bundle power distribution, commercial wiring, cable management, life safety and distributed IT. And we're also now bonding larger packages, microgrid, storage and EV charging, to support energy transition. So the big question is how do all of our capabilities need to be designed to get the best economic energy outcome for the customer. We're in the design phase, we provide design services and modeling capability to assist the building owners. We are doing this today, with the complexity and the need create more opportunity to help owners navigate their changing energy needs. And on the right, under operate, maintain -- operate -- sorry, optimize and maintain. We're adding field services and software like Brightlayer. And I'll share an example of where we are doing this with a major EV charging customer, in a moment. So we have an opportunity now to nearly double our addressable market due to the additional content and expanded role in the value chain, the additional content and expanded role in the value chain. At the bottom of this chart is our base Electrical business. You can see, it's very healthy, a high-margin engine that propels us. Now, add two things on top of this, the accelerating energy transition and the digital solutions and services. And as you can see, these are two large addressable markets. The rapid growth of EV charging, microgrids and storage, where we're increasing our participation, creates more opportunity of $15 billion in Europe and the Americas. And on the upper right, digital solutions and services is creating another $10 billion market. All in all, a very exciting set of opportunities for us. So here are three examples of how and why we're winning in this segment, and they're each very different. From left to right, first is converting an existing building to a distribution warehouse. In the middle, new construction of a future-ready headquarters, where a customer is preparing for energy transition, and on the right, an existing complex facility looking to deploy distributed energy resources. Let's start with the example on the left of a large e-commerce customer with a national footprint that's adding a significant number of distribution centers every year. So we're using our design services to configure the optimal electrical content and energy consumption. We're helping speed the rollout with rapid design services and deployment of a customized power distribution solution. Now, in the middle, this is a new building headquarters for a large financial services company. They were very aware of their future sustainability needs and commitments, and their plan was not to implement right away, but wanted to be ready for the future. So we provided the design services for microgrid control and Brightlayer load monitoring, leading to expanded content. And then finally, on the right, we have several projects being -- deploying distributed energy resources in these complex facilities for turnkey projects that increases our content, depending on the project, anything from 25% to 200%. And of course, we've built a healthy pipeline as well. Now, here's another example. Beyond the commercial building, our team is winning major infrastructure projects. And this example involves EV fast-charging networks. We just won a sizable $40 million follow-on order with our unique, proven and certified solution that brings together our full breadth of capabilities, creating high barriers to entry, improving customer satisfaction and reducing cost for the customer. So just for context, the fast-charging [ network ] operators around the world are really at the tip of the spear for this part of energy transition. These companies face multiple application challenges during rollout and ongoing operation. And this is shown on the left side of the chart. First, they must prevent high peak charges, when multiple cars arrive at the same time during a peak demand period, they can pay financial penalties. They have hundreds of sites in remote locations. They need permit capability to connect to the grid and real-time monitoring on the state of the battery charge to promote reliability. And then real estate for these projects is limited. So today's designs need to have a compact footprint. So if you move to the center of this chart, this is our robust integrated solution. To resolve peak charges, you really have two choices, right? Reduce the charge being delivered, which then takes longer and leads to a poor cost -- consumer or customer experience or you implement a storage solution that allows you to deliver a good charging experience without taxing the grid. This is at the center of our solution, leveraging our power conversion and backup capability. And then our power distribution expertise gets power lines from the utility, physically attach it to storage and the distribution panel, leveraging our very important electrical code qualifications. We custom design the energy storage with lithium-ion, integrated into a compact outdoor enclosure. And then our EnergyAware capability, you've heard about before, manages and controls the use of the battery charge. Brightlayer then remotely monitors and diagnoses the battery health, distribution and availability of power for charging. And then our design services team that we talked about before, does all the upfront design work, configuring the solution, installing it and provides ongoing monitoring and maintenance. This is a great example of our experience integrating storage into the existing grid topology, working with electrical code enforcement bodies to address safety, concerns they have with storage being fed back to the grid, a big issue, solving this peak demand management challenge and then applying turnkey ownership in an expandable, addressable market. So now, let's turn to the Residential Building segment. We provide power infrastructure for new construction or renovations, and this will lead to a $1.7 billion revenue in 2025, an increase of nearly 50% from the 2020 base. Homeowners like you are looking for safety, comfort, convenience and energy efficiency. And here are the trends driving our growth in this market that you may be seeing in your own home. Safety codes are driving the need for more sophisticated content like circuit breakers. Second, WiFi, connected appliances, lighting, voice control to Smart Home devices are increasing. And energy consumption ratings on appliances or LED bulbs are now more common. And then the residential energy storage market is projected to be worth almost $14 billion in 2027. Now, what is less well-known, is that behind the scenes, the way electricity is distributed and used in your home, is evolving as well. And it will provide the foundation for your connected home solutions. So here's your future home. Thanks to the Smart Grid, you'll need new solutions. You may have a home energy management software, connected wiring devices, storage, smart EV and charging station. And at the center of this, all of this is controlled by our smart load center. So a smart load center is a critical control point to measure and monitor the use of electrical power in each device in your home, anything from your washing machine, your refrigerator to your cell phone being charged. And our presence at the source of electrical power distribution or the intelligent control panel in your home and our presence and the use of electrical power through WiFi-enabled devices, puts us in a unique position to win in the connected home. So we're at the source and we're at the end use. And this provides Eaton up to 5x more value per home. And here's how we're winning. We've expanded our partner ecosystem for smart devices. We've recently announced a number of new partnerships to go to market with companies like Samsung and LG. These companies are standardizing on our solution. We'll be providing a new EV-charging circuit breaker that will eliminate the need for [indiscernible] installed charging box. That's a big change. And your connected -- the new connected home that you have, will be -- will enable any new device that comes your way. So let's just quickly zoom in on the sophisticated load center. This or the panel in your home creates a holistic view of your electricity consumption patterns. It also supports utilities demand response programs to help them balance supply and demand. And you'll be able to monitor your energy usage in real-time through our app. You can see what appliances are using the most energy and when to make changes for home energy management. So a fundamental change in the connected home, and we're right in the middle of making this happen. So now for the Utilities segment, we provide, as many of you know, solutions from the substation edge of transmission in front of the meter to downstream uses behind the meter. We're projecting a $2.4 billion revenue or a 30% increase. This segment is going through a massive upheaval, as the topology of the grid changes. This brings a whole new set of challenges to the industry that are driving our growth. The intermittency, for example, of renewable generation, 60% of new U.S. utility [ scale ] generation will be renewable. A dramatically-increasing and less-predictable load profile will lead to the need for more meters -- behind-the-meter storage and safety challenges. Finally, the need for resiliency in the face of catastrophic events like wildfires, the need for reliable delivery of power and cybersecurity needs are driving a $29 billion infrastructure investment for the Infrastructure Investment and Jobs Act. All of these, supported by changing -- a changing regulatory environment, will drive above-historical-norm growth. So this -- large -- increasingly dynamic nature of the grid necessitates a much more sophisticated modeling and management of the distribution network. And here are some challenges that Utilities are facing. First, their ability to support peak demand has been made infinitely more difficult due to the transition from a peaker plant with reserve capacity to virtual power plants. Second is, they have to balance -- balancing supply and demand in real-time, redirecting power to where it's needed, injecting voltage to maintain clean and consistent power to provide stability; and third, increasing weather events. Utilities need to isolate their problems to minimize or contain the impact of fewer people. And all of these requirements play to our sweet spot. Now, because we are a leader in next-generation distributed solutions, we are winning, as the industry races to address the complexities of the Smart Grid. Our intelligent, for example, cybersecure [ closer ] revenues are accelerating. This [ sexualizes ] the grid, isolating an outage to a smaller group of customers, improving reliability. Our SF6-free underground Switchgear orders are up 75%, in part, due to regulations. This improves resiliency and sustainability. So for example, we are benefiting from a Utility customer, who's investing in strategic undergrounding, and one customer recently, just recently announced a $20 billion investment in 10,000 miles of undergrounding as a wildfire risk reduction measure, and we see this, sort of, continuing. And then finally, our Brightlayer utility suite leads with the software and then pulls in anything from 10x to 15x in hardware and services. So a really strong play in the Utility segment that's going to propel a large portion of our growth here. So here's an example now of where we're engaged by a major U.S.-based Utility customer to help them avoid charges, driven again by new regulations. So regulations driving change again. Just to give context, as more and more distributed energy resources are put in place behind the meter, the equipment and what can flow back to the grid has to be sized correctly or it can lead to an outage. And historically, installation companies would work with the utility to size their distribution energy resources. So then when an outage occurred due to the installation or perhaps incorrect sizing, the utility was not accountable for its advice. Well, the regulations changed in 2021, holding utilities liable for an outage due to the deployment of distributed energy resources. So moving to the center of this slide, our ability to model behind the meter usage directly now feeds the utility power models, ensuring a much higher degree of fidelity, so we help them reduce their liability and provide a more safe, efficient environment. So a really exciting time in Utilities in the next several years. Now the data center and IT segment, as you know, continues to be hot, as we spent time on talking about it in the past. Spending on cloud service continue unabated. We provide these critical power solutions for data centers of all sizes, and we expect our revenues to almost double from the 2020 base to $3.7 billion in 2025. And this is driven, as you know, by online shopping increasing, crypto, the metaverse, gaming. And consumers will spend almost $480 billion on cloud services this year. That's phenomenal. Then the $200 billion co-location data center market is on a tear as well. That model is evolving and changing. And then we expect $250 billion global spending on edge computing in 2024, is that growth, and that's the reason -- one of the reasons we acquired Tripp Lite. So here's the data center of the future. We provide a complete power infrastructure and control software, assisting many of our customers with their sustainability goals. So for global [ hyperscale ] customers, revenue was up 25%, and we continue to invest in capacity around the world and in innovation. And if we zoom into Asia, the YiNeng JV provided us a final product, as we said, that allows us to provide a complete-package solution, and the customer response has been outstanding, with sales overall up to 22%, and we broke it into many new accounts. And then Brightlayer, which we've talked about, is driving recurring revenue with Data-as-a-Service. So here's an example. We were engaged by a leading U.S. telecom provider that was experiencing equipment failures and outages. And this led to reduced customer satisfaction and higher annual costs. And outage cost them almost $7 million in losses per year. So our Brightlayer data center suite was deployed to help their network operations center monitor their 1,600 sites and 30,000 pieces of equipment. And our solution helps them predict outages before they occur, by monitoring voltage and frequency usage. So how do we do this? Really, it's our rich history of third-party device integration due to Brightlayer's interoperable architecture and our ability to handle large amounts of data with a scalable database, and that really allowed us to deliver. Providing this Data-as-a-Service, our customer, in this case, experienced a 90% reduction in outages, and we have a multiyear contract with recurring revenue. So this is a solid example of how our capabilities are being deployed for revenue generation and how we're continuing to leverage Brightlayer. I want to spend a moment on a new topic, industrial facilities. We're leveraging everything we do to support the emerging role of the hydrogen market energy transition. So just stepping back for a minute, hydrogen solves many key decarbonization problems, as many of you know. First, as a feedstock into hard-to-abate industries such as steel and cement production. Second, as an end-use energy source in the heavy-duty transportation sector. And then third, as a way to provide long-duration storage of renewable electricity beyond the current range of batteries. And so by 2050, there are estimates that hydrogen can represent 10% of total energy consumption. And in the near term, this represents a market for our capabilities that grows around 6% CAGR through 2025, and the addressable market is estimated to be $150 billion by 2025. So hydrogen as part of a net zero objective, is in the early innings. And as oil and gas customers pivot to hydrogen production, we think our relation sits with them, and EPCs will be critical. Well, we know it is. And Eaton is really poised to win because of those relationships with the EPCs and the oil and gas majors. The customers recognize our harsh and hazardous expertise, plus our global project execution, and that they'll need of this to play across the hydrogen supply chain. And also, we're looking at a $50 billion project pipeline, it's early, but with rapidly-increasing potential. For all of the disruptions the world has experienced, and they've been significant, Eaton has found itself at the right place, at the right time. We've delivered all-time record high margins. We have the right strategy and a great team, and we are confident that our momentum will accelerate into the future. So thank you for your time, and now he's Heath.

Thank you, Uday, and good morning. I'm really excited to talk to you today about the future of the industrial sector. The sector story is part of a broader strategy, laid out by Craig, Tom, Harold and Uday, which fully leverages Eaton's scale, unique portfolio and company-wide capabilities. A couple of months into 2022, there's little doubt our markets are continuing to recover in the short term. But importantly, the medium- and long-term growth prospects for each of our businesses is also very strong. And that's a direct result of just how well our capabilities are aligned with prevailing megatrends. We have been laser-focused on executing our strategy, and we like how we are positioned today. So I'm going to walk through several topics today, but I wanted to share some key messages. First, as I mentioned, we like how we are positioned. Our portfolio has continued to evolve organically and inorganically. And as Craig explained, these changes have created a less-cyclical, more profitable and higher-growth portfolio, which is better positioned to take advantage of longer-term secular trends. Second, the electrification and sustainability are continuing to gain traction, which has absolutely validated our strategy. Eaton has leaned into these trends, positioning our portfolio for growth. Our Vehicle business continues to add more sustainable offerings, while our eMobility business further strengthened its position in the growing electric vehicle market with the recent acquisition of Royal Power. Finally, our recent Aerospace acquisitions are creating excellent near-term growth opportunities. And as I will explain, we expect significant growth over the next several years. Our industrial-sector portfolio is comprised of three world-class businesses, Aerospace, eMobility and Vehicle. Aerospace is clearly going to grow significantly, as air traffic recovery continues. You will recall that our eMobility business is our business that supports electrification in mobile markets. And those markets will also be growing significantly, as the industry enjoys tailwinds from new regulations and capital investment. And of course, our Vehicle business serves customers that continue to push for innovation that supports more sustainable solutions across multiple power platforms, which is precisely where Eaton invests. Each of these businesses serve large and growing addressable markets, which are recovering nicely out of the pandemic. Further, the recent acquisitions of Cobham, Souriau-Sunbank and Royal Power have expanded our addressable markets by well over $20 billion, cutting across all of our existing industrial and electrical markets. We will continue to press inorganically as well, particularly in our Aerospace and eMobility businesses. And focusing on profitability, 2022 will be another year of margins in Aerospace and Vehicle. And eMobility profit is still in the investment phase, but margins continue to trend positively. And as I will show you in a few minutes, we remain on target for our profitability goals. Just a quick reminder of our 2025 top-line targets, which we have laid out previously. Importantly, we are on target for hitting them. Some of the growth is coming from market recovery, but much of it is coming from outgrowth in our markets. We will absolutely continue to benefit, as sustainability regulation or our customers continue to drive demand for our mission-critical products. In fact, by investing in organic growth and product innovation in each of these large and growing markets, -- and by enriching our business mix with the acquisitions of Cobham and Royal Power, we remain on target for the $9 billion of revenue, shown here. I want to give you some details into how the growth in the industrial sector specifically breaks down. And as you can see, each of our businesses is outgrowing the market into 2025. The sector is expected to outgrow the market by 300 basis points, driving our 8% organic growth. We will also be shifting our revenue mix over the 5-year time horizon from roughly 50% Vehicle to roughly 30% Vehicle and almost 70% Aerospace and eMobility. From a bottom line perspective, and as Craig has explained, about 90% of our profits already come from Electrical in our Aerospace business. As you can see, with this organic growth profile, which is absolutely achievable and with the acquisitions already completed, we are projecting $8.3 billion of revenue. But again, with continued execution, capital discipline, we clearly have direct line of sight to our $9 billion target. I don't need to spend a lot of time here, given Harold's message, but needless to say, investments in sustainability provide great tailwinds for our businesses. These targets and others like them have been a huge driver for our customers, as they look for multiple sustainable solutions. It's a massive challenge for our markets and customers, but it creates exceptional opportunity for Eaton. And these opportunities are not limited to electrification. They are in any sustainable solution and in all power system architectures, including traditional combustion engines. And Eaton has positioned itself as a trusted partner with solutions across the power spectrum, from advanced combustion engines to hybrid engines and to electrified-driven engines. All of these market dynamics really come together in our Vehicle business, where multiple power management solutions are needed at the same time. Change is happening first and fastest in this business. Overall, our Vehicle business is roughly $2.8 billion in sales, and we are a leading player in several product categories that customers need for hitting those sustainability targets I mentioned earlier. Supporting our customers clean-technology transitions is key for our business and what drives opportunities for significant value creation for Eaton. We need to flex and we need to adapt to meet the needs of our customers, which themselves are learning and adapting quickly to what works best on their particular platforms. And when we think about the vehicle markets, our customers certainly expect vehicle production growth in the next few years. There are a couple of other important takeaways from this chart. First, the battery electric vehicle market shown here in blue, will continue to grow share to over 18% by 2025, which is, of course, great for our eMobility business. Second, internal combustion engines, obviously, are not going away, and we expect those platforms to be approximately 80% of the light vehicle market and over 90% of the commercial vehicle market by 2025. Customers certainly have accelerated investment in the EV space, but they're also actively seeking sustainable solutions for a range of vehicle architectures because of the longer-term transition. Commercial vehicle markets will take longer than light vehicle markets to change this, but more subsystems and commercial vehicles will get electrified sooner. Again, a nice tailwind for us. Last year, we shared some of our progress on 48-volt electrical systems and described how Eaton is helping Commercial customers to serve those subsystem electrification needs. Again, our customers are seeking suppliers with an ability to play in all places simultaneously, internal combustion, hybrid and full electrification. And in that regard, here's a slide that serves as a proof point, sustainable Eaton solutions such as variable valve actuation, exhaust gas recirculation systems and exhaust thermal management controllers shown here, helped to reduce both NO and CO2 emissions in pure or hybrid internal combustion engines. These technologies are not going away. In fact, they're growing. And as you can see on this slide, Eaton is already having new successes with our customers, and we expect to accelerate over the next few years, as many new programs are awarded. I thought it might be useful to step back and think about the nature of the transformation that has occurred and will occur in this business. Our brand recognition and pedigree for developing advanced, safe and highly-reliable solutions for any vehicle architecture has a competitive advantage. And it allows us to flex and meet the major changes our customers are experiencing. And as you look at our Vehicle business over the longer term, there has been and will be a fairly-dramatic transformation to position ourselves for these dynamics. In 2015, our business was $3.7 billion, and the top line was very connected to North American Class 8 markets. As you know, we formed some JV partnerships, shown here on the left. It allowed us to work together with our partners and go after new markets, but it also reduced our top line exposure to North American transmission markets, which will be single digits by 2025, down from roughly 25%. And by 2025, 25% of our revenue will instead come from the Electrical space, and total revenue with eMobility, shown here, will be $4 billion. Carrying out to 2030 and given our investments in new sustainable technologies, we absolutely have line of sight to $6 billion combined revenue, not even counting on consolidated revenue from the joint ventures. And half of that revenue, as you can see on this chart, is coming from our fast-growing eMobility business. So now, I'd like to turn attention to that part of the strategy, eMobility. Clearly, the electrification trend in mobile markets is accelerating. As we look forward into 2022, we are an inflection point for growth in this business. We launched eMobility 4 years ago. We continue to like the attractive future market growth profile this segment brings to Eaton, with the addressable market growing substantially to around $60 billion by 2030. One of the primary reasons for us entering this electric vehicle space, namely, leveraging our vehicle domain expertise with our electrical sector capabilities, continues to be a strong, competitive advantage for us. And as I described last year, we are developing this technology at scale, first, in vehicle markets, but our expertise in power electronics, power distribution and power trains will also scale at some point into commercial vehicles, off-road vehicles, vertical takeoff and landers and other Aerospace applications. That dynamic is described here on this slide. We continue to leverage our organizational scale from our Electrical sector and our resources across Eaton to advance the effort. Since launch, we have achieved roughly $800 million of mature-year program wins. Our pipeline of opportunities also continues to increase. In other words, the dynamic we expected in the market, when we launched eMobility, is, in fact, happening and even accelerating. That dynamic is particularly exciting at Eaton because of our unique portfolio. Our applications vary across our mobile end markets, ranging from aircraft to passenger cars and commercial vehicles, markets we have been reliably serving for decades. And as we've explained over the last couple of years, as these market segments adopt electrification, whether hybrid or all-electric, the electric power chain will be fundamentally the same. The power is stored and sourced, the electrical power is then managed safely and distributed in the way to fit the needs of the specific application. It has been transported to the location, where needed, with high reliability and minimal energy loss, and it is used to drive efficient propulsion or -- and this is an important point, it could also be used to actuate systems on the platform. So maybe not propulsion, but other subsystems may need to be electrified on something like a commercial vehicle, for example. So our outlook hasn't changed. Our power electronics and software expertise cuts through all Eaton markets, mobile and industrial. Our eMobility business is simply about leveraging those core building blocks across multiple mobile markets, with the light vehicle market going first at scale eMobility is the platform for scaling our electrification expertise. And as we think about eMobility in the specific Vehicle context, it is traditionally focused on power management and power transmission. With the acquisition of Royal Power, we now are able to address connection. Electric terminals and connectors are everywhere in the Vehicle and a great addition to our portfolio. More to come on Royal Power in a couple of minutes, but essentially, Eaton's portfolio is now positioned around 4 product families: Power Electronics, Power Distribution and Protection, Powertrain or we call it e-Powertrain, which includes EV gearing and transmissions. And now terminals and connectors. Again, I'll touch on terminals and connectors, when I talk about Royal Power. But with respect to the other 3 areas in which Eaton competes, you can see on this slide, we have key wins in each. For example, we are launching a $250 million plus high-voltage inverter program with a large European manufacturer. We're also having success with our electrified powertrain. This is an example, where we are leveraging our traditional vehicle gearing and powertrain expertise to obtain a key win with a North American OEM. And finally, we are continuing to capitalize on innovation and power protection, securing two significant wins with our Breaktor solution. The industry's first resettable device for switching and protecting electrical loads on vehicles. In fact, Breaktor brings to life in a single product, the competitive advantage of Eaton's company-wide capabilities. A lot of the foundational development work was done by electrical sectors' breaker and relay teams in Europe. And our eMobility team has been able to take that innovation, developed in the electrical sector and drive it into vehicle applications. Please take a look at this video describing Breaktor. [Presentation]

Exciting stuff. And it demonstrates precisely the kind of competitive advantage Eaton enjoys with its unique portfolio. And if you now migrate from a component view and think about the broader system, you can see the same dynamic at play. Uday has discussed the trend of Everything as a Grid. Well, the idea of using an electric car to power loads, particularly powering a home during a power outage, for example, is quickly gaining interest from car manufacturers and homeowners alike. Certainly, we can all see the potential value of a vehicle-to-home or vehicle-to-the-grid convenience, safety, avoidance of upfront costs that are [indiscernible] demand, for example, vehicle-to-grid enables EV owners to earn revenue from the utility while helping balance the grid, while vehicle-to-home eliminates the need for a backup generator. Simply put, a vehicle to everything, energy transition could be quite valuable. And among the biggest challenges facing this concept include the lack of a market-ready scalable technologies that can enable bidirectional power flow, both on the vehicle and off. But Eaton, given its portfolio, can scale investments in both our Vehicle and Electrical sectors. We are developing technologies such as battery distribution units, power distribution units and onboard charging products that can communicate and work seamlessly in a broader Eaton product ecosystem. In other words, we can capture value by advantage of our unique portfolio to better manage power flow between both worlds, on vehicle and off vehicle. And our strategy isn't just a long-term vision. It's starting to manifest itself in near-term growth profile. In fact, eMobility is poised for rapid growth, as we are on target for $1.2 billion by 2025, with approximately 80% of this revenue already booked. Notably, and as I mentioned earlier, our pipelines continue to grow, as more capital continues to flow in this space. And as you can see, we are also anticipating a significant shift in our business mix towards high-voltage offerings, ramping up from roughly 25% today to approximately 60%. And we remain on track for $2 billion to $4 billion by 2030, with an operating margin of 15%. The last thing I will note about this slide is, you can see there, the introduction of Royal Power into the growth equation. So I'd like to shift the discussion and spend a little more time to introduce you to Royal Power Solutions. We are thrilled to bring the Royal Power into the Eaton family. The new team and portfolio are fantastic. We love to play where there is significant intellectual property and mission-critical applications. That is exactly what Royal Power is. And we think it can be a key growth platform for us. As we described previously, Royal gives us capability in terminals and connectors with a portfolio of highly-differentiated products. The offerings from Royal are used in many power distribution units and power electronic systems that eMobility is offering today. Its products can also serve other Eaton-wide end markets, creating an opportunity to leverage technology across both sectors. But focusing on the Vehicle space for a moment. And as you can imagine, electrical connection is a critical technology, as mobile markets become electrified. Here's a graphic showing the inside of a typical power distribution unit, which is a system that Eaton sells to electric vehicle OEMs today. And visually, you can see how Royal Power's product portfolio of terminals, islets and busbars, shown here in green, is a great fit and complementary to both our component-level offerings of a Breaktor or a fuse and also the system-level offering of a power distribution unit. This creates tremendous design, cost and scale advantages. In fact, Eaton content on a power distribution unit has more than doubled since the acquisition. Importantly, Eaton is now also positioned for the trend in vehicles towards more connections. We estimate that connection points on the Vehicle will grow by roughly 40% in next-generation platforms. Two innovations by Royal that we are particularly excited about, are high-power lockbox terminals and [ Rigiflex ] high-voltage busbars. High-power lockbox terminals are truly game-changing technology, which is more efficient than competitive products at higher current levels, extending the life of the battery. This is a patented technology that meets strict, harsh and hazardous environment standards that existing products in the market are simply unable to achieve. [ Rigiflex ] is a high-voltage busbar technology that uses one continuous piece of material. It minimizes design time and lead time while enabling complex geometries. Customers can have more compact system-level designs for their battery, power distribution unit and inverter. As you can see, both of these technologies are being adopted by major customers, which certainly demonstrates the opportunity in front of us, as we start to take these products into the broader Eaton channels and customer relationships. With our broad portfolio of solutions, it's easy to see that we are well positioned to increase our content per vehicle. In this chart, we are using our content per vehicle on a traditional internal combustion engine platform as the baseline and comparing it to our expected future content per vehicle, once our eMobility business is at scale. And as you can see, the numbers are clearly compelling. You may recall, this isn't the only acquisition we've done recently, regarding connector technology. At the tail end of 2019, we acquired Souriau-Sunbank, which also offers patented technology in the Aerospace connector market. With the acquisitions of Royal and Souriau-SunBank, Eaton is now very well positioned to meet customer needs for electrical connectivity across a wide range of end markets. We will continue to look for bolt-on acquisitions, where we can acquire differentiated technology with broad applicability across Eaton. And in this particular case, we think there's at least a $20 billion connector market opportunity across all of Eaton's end markets. And in each of those markets, Eaton cannot only play as a solution provider for the component connectors themselves, we also offer a system-wide electrical expertise behind the connector. Let me change gears and discuss our Aerospace business, which should experience near-term and long-term growth as our markets recovery, but it's more than a market recovery story. With our recent acquisitions, we've also clearly changed the fundamental growth profile of this business. Our Aerospace business will be roughly $3.2 billion in sales this year. We continue to like our position, steady market growth from here, long-cycle industry, advantaged-technology position, sole-source content. Our business is expected to demonstrate strong organic growth from 2025, driven by content on ramping growth platforms and a strong focus on our aftermarket. And again, of course, we've added to our core products like hydraulics, fuel, ceiling and conveyance with the acquisitions of Souriau and Cobham in the last couple of years. While the recovery of the commercial market could come sooner or later, we are anticipating the recovery of air traffic in the 2024 time frame to pre-pandemic levels, with favorable longer-term growth as the pandemic restrictions ease. We have already seen strong recovery in domestic U.S. travel, while international travel markets remain pretty sluggish, obviously. Overall, the military markets have remained flattish, but we are on several key platforms. On the right, we show some of these defense platforms and their growing build rates over the next few years. This slide shows in more detail why we like our position. With our recent acquisitions, we have greatly increased our content on the KC-46 and the F-35, for example. And those platforms are critical to long-term defense readiness and have strong budgetary support in Congress. In sum, our organic and inorganic growth focus has put us on some fast-growing long life cycle platform in critical applications. The growth story for our Aerospace business is really that simple. And the numbers are compelling. When you look at the bigger picture, given our portfolio changes, our Aerospace business has also undergone a fairly dramatic transformation. The combination of Eaton and Souriau has, of course, created new opportunities for growth in U.S. aerospace and defense markets, but also in various industrial end markets in the emerging area of space. Carbon emission systems has created more portfolio opportunities in space as well and key product areas like air separation modules for fuel [indiscernible]. Not to mention the combined fuel expertise in our engineering teams that allows us to design a complete fuel-system offering for next-generation platforms. And as the markets recover, we are on the right platforms with the right products. And as you can see, this is driving substantial short-term growth for Eaton. So in closing, I hope you take away the view that we are continuing to take disciplined and deliberate actions to improve our portfolio and position our business for growth. Our franchises are stronger than ever. Vehicle and eMobility are well positioned to provide our customers with sustainable solutions across the spectrum of traditional, hybrid and all-electric platforms. Aerospace has industry-leading margins with a more balanced and diversified portfolio, resulting in great growth prospects, going forward. And finally, importantly, our portfolio strategy allows us to build electrification expertise and then scale that expertise across multiple platforms to compete and win. So let me thank you for your time and attention, and I will turn it back over to Yan, who will help handle the transition to Q&A. Thank you.

Thanks, Heath. We will take a 10-minute break. [Operator Instructions] See you a little bit.

[Operator Instructions] I would now like to turn the conference over to our host, Senior Vice President of Investor Relations, Mr. Yan Jin. Please go ahead.

Thanks again for joining us today for the Q&A section today. [Operator Instructions] So now let's start the Q&A.

Our first question will come from the line of Nicole DeBlase with Deutsche Bank.

Can you guys hear me?

No, no.

Okay. Okay. Good. I don't know [indiscernible] sorry about that. So I guess starting with organic growth. I think the 5% to 8% CAGR compares to like 8% growth in 2021 and 2022. So there's some concern that you guys are embedding a substantial slowdown in the rest of the forecast period. If you could just talk to that?

I appreciate the question. And I would hope that you come away from today's presentation like me, just absolutely excited and thrilled by the growth story that both Uday and Keith took you through, I think, as I said before, an exciting time to be an electrical company and an even more exciting time to be part of Eaton. The easy way to think about what appears on the surface to be a little bit of slowdown in growth, is really a function of what we're dealing with right now, coming off of the pandemic-induced market, kind of, retrenchment as well as the fact that we've been living in an inflationary environment over the last couple of years. And so if you think about the underlying growth rate in our businesses, we're actually not seeing any slowdown in growth, in fact, probably a bit of pickup in the growth rate, but it's really this function of the base that we're comparing to beginning in 2020, market's recovery as well as the fact that we've been living in this inflationary environment, we don't anticipate the same level of inflation as we move forward. But the actual growth rates would be improving, but for those 2 dynamics.

Got it. And then I guess, just to clarify on your part of the slide deck, you guys have like a 12% to 14% EPS CAGR and it didn't specify over what period that was. Is that also like 2020 to 2025? Or is that just your annual target for EPS growth?

Yes. That's really beginning in the 2020 period. One of the things that we do, Nicole, is we have these 5-year planning periods for the company. So we always talk about our targets, whether it's revenue growth or EPS growth in our 5-year planning horizon. So that's really the way you should think about it.

Our next question comes from the line of Nigel Coe of Wolfe Research.

Thanks for all the information. By the way, it's just really helpful. Just wanted to look into the kind of dig into electrical margins. And obviously, 20% for global, 22% America is pretty good levels, but 50 basis points above where we are in 2022. So just wondering if there's accelerated investment spend, maybe increased scope of the design and build phase is causing a little bit of margin in here. But any color in terms of what -- why are we only seeing 50 basis points of margin expansion over the next 3 years?

Okay, maybe I'll go first, and we'll let Uday jump in. One of the things we try to do is we think about laying out our 5-year plans -- and it is a 5-year planning horizon, and we try not to get to be far out in front of our skis. And so we like to deliver things. And as we deliver, we like to take the numbers up and take commitments up. And so I think the way you should really think about this guidance in general is that, we set goals for the 5-year period. We've made significant progress. We are ahead of schedule in growth. We are ahead of schedule in margins. What you should really think about this year as an interim checkpoint where we've said, "Hey, based upon the fact that we've made progress, we've taken the numbers up." And I would hope, based upon all of the great work that's taken place in the businesses, that we talk next year, we'll probably be able to adjust those numbers again, but I just really think about this as until we've done it and delivered it, we're trying not to get too far in front of ourselves putting numbers out there. And as you know, we dealt with a big uncertainty in 2020 with COVID. And at this point, it's not quite 100% clear what kind of inflationary and labor environment we're going to be dealing with looking forward. So you can really think about that as just being prudent in terms of the way we set those goals.

Yes. I understood. And then my follow-on is on eMobility. And really just digging into Siemens exiting the Valeo JV. I guess I was a little bit surprised, but maybe it's because these businesses are best served by existing suppliers. So -- and given that you do have a legacy auto business, just wondering if you could address 2 things. Number one, how does your eMobility business today compare from a technology or a product perspective from the players as Valeo and others? And then secondly, maybe talk about the importance of having that legacy auto business?

Sure, Nigel. This is Heath. Thanks for the question, really important question. As we think about the eMobility, we've largely played and will continue to play more in the component space where we offer innovation relative to our competitors. You see a lot of -- I won't speak to specific competitors, but there's a lot of capital flowing to what I would call drives motor inverter controllers. We're not participating in that space of a packaged motor drive. We do have some inverters but it's a component and we're agnostic to the OEMs in that way. And so we're not seeking to compete with the OEMs on the drives. We're seeking to add value in their electrical systems. And as I mentioned in the presentation, you just heard that we're really focused around those 4 component areas of power distribution, terminals and connectors, what I would call e-power drives, which are gearing and torque and then terminals and connectors. And so we're finding a lot of traction in those 4 different spaces. We're not going after the same motor drives that a lot of our competitors are going after. And then I think on the second piece around the vehicle business, we're seeing a lot of traction working together with eMobility and vehicle. When we walk into an OEM on the commercial vehicle side, and they want to talk about 48-volt systems, they're talking about 48-volt because they need to electrify more of their systems, but at the same time, they still have combustion engine needs. So the fact that we can talk about variable valve actuation and a 48-volt system and a fuel burner or an e-heater critically important to these system engineers as they talk about all the requirements that they're going to need to hit in the mid-'25, '26, '27 time frame. So we're seeing a ton of traction in our pipeline and opportunities because of that pedigree and the combination of those 2 businesses.

And I would also add, Nigel, to the point that you raised, I mean I think I do think one of the things that you mentioned that we are unique as a company and the fact that today, we are a player in the vehicle market. We are a player in the electrical market. And so we have a seat at the table with all of the global OEMs. And it is a big leap. If you don't really understand the customer and the application taking high-voltage electricity, putting them on a mobile platform, if you've never done it before that's not necessarily an easy thing to do, which is why you've probably seen some of these other companies look to partner where we have in-house these capabilities. And so I do think that our value-prop is unique and different than some of the other competitors in the market.

Next, we go to the line of Josh Pokrzywinski with Morgan Stanley.

Craig, just on the electrical outlook here in the raise versus last year. How much should we think about is price, if any? And then I know you want to monitor and adjust that 22% Electrical Americas number as you go. But is there sort of like a known gap today as you think about some of those big raw material inputs that probably normalize it at some point. Maybe not soon enough to bake into '22, but thinking about the next couple of years and normalized supply demand there?

Yes. I'd say, Josh, I mean, I do think as we think about the margin question specifically, is that we'll monitor this as we go along, but there's absolutely -- there's nothing that we know about today that say that there should be some sort of governor on our ability to deliver attractive incremental margins on growth. Now having said that, we are having to invest more in the business. I mean this growth doesn't come for free. So we are putting more investments in R&D, we're putting more investments in capital as we are preparing the company to deal with this growth super cycle that we talked about. So there is, in fact, more investment going into the business, which has a little bit of a dampening effect. But largely, this is simply around once again -- once we get to the number, a little closer to the number, we'll take a look at it and probably then have a lot more confidence in taking the number up. But there's nothing specifically -- specific in the business that is creating any concerns. And to the point around price, we have price certainly built into the '21 numbers. We obviously got significant price in '21. We'll get price at '22, but then we really are anticipating that price normalizes in the out years. And so there is not a lot of price in the out years in that forecast. Uday, do you want to add anything to that?

Yes, sure. Let me just add to Craig's comments, a little bit of color to the numbers that we shared. So just to rewind a little bit, the $1 billion that we're ahead of as a result of this year are part of 2 areas. One is around $500 million linked with increased volume and some price. The other $0.5 billion was related to the Tripp Lite acquisition, which grew more than we expected. And that's why when you look out additional $0.5 billion of organic growth is linked largely to our improving outlook on organic growth rates. And so as Craig said, the price part of it is fairly normalized as you go in the out years. And to Craig's point earlier, just to reemphasize some numbers, we are increasing our R&D as a percentage of sales to historically high levels. And we -- and 40% of our capital investment in the business is going towards growth. So both points is adding a little more color to what Craig said.

Got it. That's helpful. And then just a follow-up here, I guess, more broadly on incentive comp. You got a lot of new initiatives. Certainly, the markets have evolved a lot in the last couple of years with electrification and energy transition. But still, at the end of the day, you guys are an industrial company. So like free cash flow growth is important as well. Like Harold talked about the ESG initiatives. How would you sort of talk about the shift in how management is being kind of evaluated and compensated given some of these new kind of vectors that we're talking about today?

And I appreciate the question, Josh, in terms of the basic outline of our comp plan really doesn't change in terms of as we define what percentage of the profits that we share that we generate, that we share with the management team. It's still really focused largely on earnings growth and cash flow growth and total shareholder return. We think those 3 metrics are really the right metrics to really drive the right behavior and really to make sure that management's interests are aligned with the shareholders. Now underneath that in terms of as you think about how do we evaluate our businesses, how do we evaluate our leaders, we clearly, in that case, have metrics that we're measuring around ESG, whether it's safety or the products that we're investing in. As Harold talked about in this presentation, that each business has a goal to invest a certain amount. Every business has to go through a screening as it relates to how does it impact sustainability, how does that impact growth. And so it's fully baked into the measures of our businesses and in the individuals and the individual performance assessments. But in terms of what defines the pool of dollars available, we think it's best to keep that really focused on the things that we think shareholders ultimately value most, which is cash, earnings and total shareholder returns.

Yes. And Josh, good to hear your voice. And Craig, if I could maybe just add a comment. So exactly what Craig said, but just a little bit more color underneath all of that. So annually, the Chairman puts our goals, we all sign up to those goals. Among those goals, for example, are a commitment to drive NPI through a sustainability lunch. And so we look at that very carefully. Our technology teams, our operating leaders will take a look at that. We have goals around operational excellence. When we talk about footprint, those are looked at I can assure that Heath and Uday and their operating -- quarterly operating reviews, maybe daily reviews in some instances, are looking at those very carefully. All of those add up annually to individual performance ratings and, just as Craig described, impacting how we drive our focus on sustainability.

Our next question comes from the line of Andrew Obin with Bank of America.

Just a question on portfolio management. Electrical and Aerospace now represents 90% of the profit. How does Vehicle continue to fit within the portfolio?

Yes. I almost want to push replay and say, Heath, maybe go back and have do your presentation again.

Well, I would say a few things. One, as Craig and Tom have indicated in the past, we're going to constantly evaluate our portfolio, and we will stay nimble, we'll stay flexible. And we look at this question often, not just with respect to segments, but businesses within our reporting segments. We're -- as you know, we're fixing the tail constantly. And we've done that in this business. And so we've done a lot of heavy lifting in the Vehicle business already as we looked at this years ago and made a lot of traction with respect to bridging the Vehicle business to the new realities in the new world in a high-growth market. And that includes the divestiture of the Conveyance business. It includes forming the JV with Cummins on the transmission side. And we formed other JVs as well. So we've done a lot to the portfolio already. And now it feels like, Andrew, that we're really at a fulcrum because we're having customer discussions around sustainability. And the way I think about this business is it's a sustainability business. Our customers need us to meet the CO2 and NOx standards coming up in '26 and '27. And so a lot of our investments, the majority of our investments are going into these very innovative, sustainable technologies to help our customers bridge the gap. So when you think about 48-volt systems, for example, those are investments we're making to help our customers in the next generation of their platforms. Gearing, torque, these investments are going to help engine break variable valve actuation, all of these technologies apply in a hybrid world, which we will be for the next 10 to 20 years in many of our markets. And so as we go talk to our customers, having the ability to talk about vehicle and electrification at the same time is really, really important. I think if you look at Craig's slides that he presented today and described around how we think about our portfolio strategically and financially, this business hits the marks right now. It's a market leader. We have innovative solutions. We have the right to compete and win. And at the same time, it has high financial standards. We're targeting 18% plus margins this year. So we'll keep looking at it, Andrew. But right now, it's really a growth vertical for the business.

And I would only add to that point, Heath. Really, if you take a look at our track record, right, more than 50 divestitures over the last 20 years, I think you can count on us to be disciplined and essentially follow the processes that we've laid out that says a business has to be strategically important as it delivers strong financial returns. And we look at that every year across every business, not just the 5 reportable segments that we have, but across every place where we can make an independent decision around should we be in or out. And you can trust that if we decide at any point in time that this business is no longer either strategically important or needs the financial hurdles, we'll do what we've done in the past. We'll pivot and we'll divest or we'll make some other kind of plans for that business. And you can count on us continuing to do that.

Got you. And just a follow-up question. You guys did talk about the EV market, but my impression is that EV market has been accelerating faster than most expected. But just looking at your projected market growth rate for eMobility, it's a 14% CAGR from 2020 to '25, given everything you said, why is it only 14%?

Well, that number in the slide is really a function of the current mix of our business. Just a reminder that 25% of our eMobility business is high voltage, the other 75% is low voltage or in the commercial ag space. And so that 14% is off of our -- as a market calculation based off of our current business. But the eMobility business, you see growing from $300 million to $1.2 billion. That's where the outgrowth is coming from. So that's north of 30%. And then going from to $1.2 billion to $3.0 billion as a midpoint for our 2030, all very achievable, and that's going to be a 300% growth rate. So very quickly here, I would say next year when we start ramping a bunch of the program wins, as I said in the presentation this morning, almost 90% of our revenues already booked for 2025. And so as that starts coming online next year, you're going to see our market growth or our growth far exceed the market growth in any of that. At this point, to me, it's not about market growth, that's there. It's coming. It's about execution and picking your spots because there's lots of opportunities flowing right now.

Taking an opportunity to just talk about the importance of electrification more broadly because everybody is focused on eMobility. But inside of all of these other platforms, whether it's commercial vehicles or construction equipment, aerospace, everything is becoming electrified.

Yes. No, absolutely. And I thought, Craig did a great job. If you really think about Eaton these days around thinking about these megatrends and electrification, digitization and energy transition, these businesses on the industrial side fit seamlessly into those big megatrends and they're largely verticals for those trends as we think about growth opportunities. And electrification, in particular, it's exciting. Because a car, for example, as you saw in one of those slides, connects to the grid. And as we think about energy transition, the unique real estate that Eaton has to take from the car and back to the grid and vice versa is exceptional, and it creates competitive advantage in the way that Craig just described, we have a unique value proposition in that regard. You think about electrification of airplanes, full propulsion will take decades, but systems are going to get electrified first. And we're on testing rigs and platforms for electric actuation of secondary flight controls. We're working on electric hydro power packs. And so we know how to work with electrical solutions directly as a result of our portfolio and what we offer on the electrical sector side. The key for us is managing our engineering team and talent to transcend the P&L. To not think through leadership and technology just through the lens of P&L, but moving power electronics across all of our P&L at the same time. And Eaton has a unique portfolio to execute on that vision.

Our next question comes from the line of Deane Dray with RBC Capital Markets.

I realize it's not a 5-year horizon topic, but it is topical. I was hoping you could comment on Eaton's Russia exposure or any kind of contingency planning going on that you could share?

Yes, I appreciate the question, Deane, and can imagine what's going on today in the Ukraine is on everybody's mind. And so I'd say that for Eaton, it's really from a revenue standpoint, it's immaterial. The revenue side of the equation, we don't do a lot of business today in Russia or the Ukraine, so it would -- really would have a de minimis impact on the company. We're obviously looking closely also about supply chain-related issues. And from a direct material supplier, we don't once again have any big or meaningful suppliers that we're worried about. We are a little bit worried about the Tier 3 and Tier 4 suppliers, it should go downstream and while not any of them would be impacted whether it's either directly because of the conflict that's going on or because of the sanctions that are being imposed. But at this juncture, as near as we can tell, we don't anticipate that, that's going to have any material impact on the company.

That's real helpful. And as a follow-up for Tom, one of the metrics that did not change was the free cash flow margin opportunity. I know it's going to be a bigger pie so there'll be free cash flow growth. But what are the goals, especially in the free cash flow conversion in the mid-90s for an industrial company is not top tier, but you certainly should have that potential. So what is going on to boost the free cash flow conversion? I know there's still restructuring going on as well. And hopefully, you've got to, at some point, convert to a pay-as-you-go restructuring. So that would be real helpful?

Yes, I appreciate the question, Deane. As we stated in the presentation, over the midterm, we will have our free cash flow margin in the 14% range. And then the conversion on adjusted earnings we plan to be at least in the mid-90s. Some things we're working on, obviously, optimizing working capital. You may have seen in this year, we let our working cap -- we let our inventory get up to around 15% of sales, doing that to protect our customers as well as to support the ramp-up in our revenue growth. Normally, we like that to be in the 12% to 13% range, and that number will come down gradually over the next couple of years. So that will be something that will really allow us to help out. And obviously, we'll always work on our cash conversion cycle, and we think there's opportunity to get better there. So we'll take the challenge of the 100% on the free cash flow conversion, but we believe we can easily be solidly in the 90%.

Deane, I would only add to Craig's response on the Ukraine situation that he answered it clearly from the Eaton perspective. But we do have customers, and you've seen some press that may be impacted. It's just way too early to tell. I mean, the titanium production, palladium for catalytic converters, nickel for lithium-ion batteries. It just kind of depends on how long that goes. Some of the Western OEM vehicle companies have stopped doing business with Russia. You've seen some of those announcements too. So from an external market perspective, there may be impact it's just going to take longer to tell.

Our next question comes from the line of Jeff Sprague with Vertical Research.

I totally agree these electrification trends are inexorable at this point, very broadly speaking. But do you see any kind of pause in the thought process, particularly as it relates to grid and especially in the wake of what's happened in the last week that maybe we're pushing this too fast to leaning off possible, and we're not quite ready for it. Obviously, the German greens appeared to have a change of heart over the weekend. So just wonder if you could address that? And maybe kind of part and parcel to getting comfortable that we're not ahead of ourselves on the grid is really where we're at on storage. So maybe Uday could drill a little bit deeper on the storage side of it to make sure we have the grid stability that we need?

Okay. So maybe I'll take the first part of that question, Jeff, and then Uday can pick up the grid piece. I'd say my personal point of view, and this is one where obviously probably be lots of point of view, and it's subject to debate that I think the horse is out of the gate. And I think it's -- on the one hand, clearly, what's happening today in the Ukraine is a reminder that there's a lot of oil dependencies around the world. But I'd say that it was also a report that came up this week as well on the impact of climate change and the fact that the impact and the damage that's been done is probably worse than what we anticipated. And so I think climate change as an accidental threat has been largely accepted by governments, by businesses, by the consumer, as I talked about in my presentation. And I think if you look at some of the investments that are currently going on, you take the automotive industry as a great example, I mean, they've already made the pivot. And it's really at this juncture, I don't think there's any going back given where they put their big investments. And so certainly, oil and gas will be around for a long time. But if you think about on the increment -- on the margin of where all of the investments are going, I mean, it's clearly going into renewables. It's clearly, therefore, having this downstream impact on what we all have to do as a society to go through this energy transition. So I don't think there's any stopping at this point. We reached such velocity today that I don't think it's any turning back. But maybe, Uday, do you want to talk about specifically the grid-related question?

Yes. I mean I think you answered it very well, but let me just add to what Craig said, maybe a little more color is there's no question that carbon -- when you take carbon out of the power sector exacerbates these market tensions, right? It's been happening for a while when China eliminated their coal, you have this activist pressure going on with oil and gas companies. But I think that -- and even we saw that last year with what happened in Texas and so on. But for the foreseeable future, I think we have to recognize that gas is going to be for the lesser evil to support the transition to renewables. It's a far better option than oil or coal. And this has to be obviously recognized. Nuclear is very expensive. The second part of the policy that needs to continue is a lot more interconnections between the grid to improve the balancing. And then the third point around flexibility to start looking at more storage, both behind the meter and front of the meter. And I would say that it varies around the world. If you look at China, they've -- in the last 2 years, they've grown their storage 100% each year. I mean there's significant growth. And I think to Craig's point, we can't -- it's going to continue. In fact, I'd say when you look at the 75% of all new power additions now are coming from solar and wind. So this is a trend that's continuing. I would say that whilst it's still not cost effective or economical, governments around the world do need to look more closely at hydrogen for storage purposes. So basically, what I would say is we need to continue investing in renewables, flexibility around storage, connectors and have states start to play a more start-up role for hydrogen just as they did with solar and wind, which is now very economical. But I think this trend is sort of irreversible in terms of where we're going.

Great. And I wonder if you could just, anyone on the team here, give us a little bit more color on Brightlayer in terms of just kind of broader customer adoption, the revenues attached to it, to what extent have new business models developed? Any additional color there kind of on a holistic Eaton basis would be of interest.