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ETN Eaton

Participants
Yan Jin Senior Vice President, Investor Relations
Craig Arnold Chairman & Chief Executive Officer
Tom Okray Executive Vice President and Chief Financial Officer
Nicole Deblase Deutsche Bank
Andrew Obin Bank of America
Nigel Coe Wolfe Research
Jeff Sprague Vertical Research
Scott Davis Melius Research
John Inch Gordon Haskett
Jeff Hammond KeyBanc
Josh Pokrzywinski Morgan Stanley
Joe Ritchie Goldman Sachs
Ann Duignan JP Morgan
Julian Mitchell Barclays
Call transcript
Operator

Ladies and gentlemen, thank you for standing by. Welcome to Eaton's First Quarter Earnings Call. At this time, all participants are in a listen-only mode and later we'll conduct a question-and-answer session. [Operator Instructions] As a reminder, today's conference is being recorded. And I would now like to turn the conference over to our host, Eaton's Senior Vice President of Investor Relations, Mr. Yan Jin. Please go ahead.

Yan Jin

Good morning, guys. Thank you all for joining us for Eaton first quarter 2021 earnings call. With me today are Craig Arnold, our Chairman and CEO; and Tom Okray, Executive Vice President and Chief Financial Officer.

Our agenda today, including opening remarks by Craig highlighting the Company's performance in the first quarter.

As we have done on our past calls, we'll be taking questions at end of Craig's comments. The press release and the presentation we'll go through today have been posted on our website at www.eaton.com. This presentation, including adjusted earnings per share, adjusted free cash flow and other non-GAAP measures that are reconciled in the appendix. A webcast of this call is accessible on our website and will be available for replay. I would like to remind you that our comments today will include statements related to the expected future results of the Company and are therefore forward-looking statements.

Our actual results may differ materially from our forecasted projection due to a wide range of the risk and uncertainty as described in our earnings release and presentation. With that, I will turn it over to Craig.

Craig Arnold

Thanks, Yan. Appreciate it. We'll start on Page 3 with recent highlights. And first, I'd just say we had a terrific quarter, and we're significantly increasing our full year guidance, as you saw.

Our teams have just done an outstanding job of managing through this dynamic market environment, which is reflected in our strong results. Q1 adjusted earnings per share of $1.44 were a solid 15% increased year-over-year and 18% above the midpoint of our guidance.

Our Q1 revenues of $4.7 billion were up 0.5% organically, which was well above the high end of our guidance range of down 3%. This outperformance was driven primarily by the two electrical segments as well as our Vehicle business.

We also posted a Q1 record for segment margins of 17.7%. And looking at our incrementals, we generated $73 million of higher profits despite having $97 million of lower revenues. This was the result of, we'd say, strong execution, ongoing improvements in the cost structure from the multiyear restructuring program that we announced in the second quarter of 2020 as well as closely managing price and inflation in the quarter.

Our cash flow was also very strong. Adjusted operating cash flow increased by 42%, and our adjusted free cash flow increased by 62%, and we have another successful quarter of M&A closing three deals. We're also making good progress towards the closure of the previously announced acquisition of Cobham Mission Systems as well as the divestiture of Hydraulics. And finally, we recently announced the agreement to acquire 50% of Jiangsu YiNeng Electric bus way business in China, an important part of our growth strategy for the Asia Pacific region. Having been quite busy on the M&A front, we thought it would be helpful to provide a summary of these three recent deals. We covered trip light and Cobham Mission Systems acquisitions in some depth on the investor meetings. But each of these three deals here certainly advanced our strategic growth objectives in our electrical business.

First, Green Motion based in Switzerland. It expands our capabilities in the electrical charging market, where we expect to see significant growth over the next decade linked to energy transition. Their proven charger designs and advanced power management capabilities and building software are valuable additions to our existing energy storage and power distribution offerings that support our view of everything as a grid.

We also closed our previously announced investment in Hanyu. Hanyu is based in China and provides a strong portfolio of products that will open up significant growth opportunities in our business throughout Asia Pacific. They make cost-effective circuit breakers and contactors and that give us access to Tier 2 and Tier 3 markets in Asia Pacific. And finally, last week, we're pleased to announce the agreement to acquire 50% of Jiangsu YiNeng Electric bus way business in China. YiNeng's strong bus way capabilities in China, combined with Eaton's broad portfolio of products, will really position us well to participate in the high-growth data center, industrial and high-end commercial segments, and allowing us to pull-through related electrical products. The Hunyu and YiNeng transactions, I'd also add, significantly expand our addressable market in China and in Asia Pacific, certainly allowing us to accelerate our growth rate in the region.

Moving to Page 5. We summarize our Q1 financial results, and I'll just note a couple of points here.

First, acquisitions increased sales by 1%, but this was more than offset by the divestiture of Lighting, which reduced sales by 5.5%. And you'll recall that we sold the Lighting business in March of 2020. And second, segment margins of $831 million were 10% above prior year, and this is despite a 2% decline in total revenue. This is largely the result that, I'd say, of solid execution, restructuring savings and really our ability to effectively manage price and inflation during the quarter.

We expect the inflation impact to worsen, certainly in Q2, but we will full -- more than fully offset this for the full year. And lastly, our adjusted earnings of $577 million, up 12% and when combined with our lower share count, we delivered a 15% increase in our adjusted EPS.

Turning to Page 6.

You see the results for our Electrical Americas segment. Revenues were up 2% organically, driven by strength in data centers, residential and utility markets, which offset weakness in industrial and commercial markets. The acquisition of Tripp Lite and PDI added 2% of revenues, while the divestiture of lighting reduced revenues by 14%. We're very pleased to also have closed the Tripp Lite acquisition sooner than planned and to welcome their team to the Eaton family. Operating margins, as you can see, increased sharply, up 330 basis points to 20.5%, a quarterly record. And as you can see, profits were $24 million higher on significantly lower revenues. These results, once again, were driven by good execution, cost savings and really favorable mix due to the divestiture of lighting. We're also pleased with the 11% orders growth in the quarter. This was driven by once again strength in data center and residential markets.

Our backlog was actually up 23% versus last year and due to ongoing strength in, once again, data center and residential markets.

We are also encouraged to see some very large orders in select commercial markets perhaps a sign here that these markets too, are beginning to turn positive. And while it's difficult to judge, we do think the order strength could have been due to some concern about some of the supply chain shortages that you certainly have been reading about.

Next, on Page 7. We show the results for our Electrical Global segment. We posted a 5% organic growth with 5% favorable impact from currency, largely due to the weaker; dollar. Organic revenue growth was driven by strength in data centers, residential and utility markets.

You can see the pattern here.

We also delivered 250 basis points increase in operating margins and posted a new Q1 record of 17%.

Our incremental margins in the segment were also strong, more than 40% and and we're also driven by good cost control measures, saving from actions taken from our multiyear restructuring program. Orders grew 7% in the quarter, and like sales, the primary contributors to the growth came from data centers, residential and utility markets. I'd say dragged down by the earlier COVID-related declines, orders declined 12% -- excuse me, 5% on a rolling 12-month basis. And lastly, here, our backlog was up 17% versus last year, driven by the same three end markets.

Moving to Page 8. We summarize our Hydraulics segment. Revenues increased 11%, with strong 9% organic growth and 2% positive currency impact. Operating margin stepped up significantly to 15%, a 420 basis point improvement over last year. And our Q1 orders were also very strong, up 53%, driven primarily by strength in mobile equipment markets.

As we anticipated, Danfoss did receive conditional regulatory approval from the EU to acquired Hydraulics business, which is an important step in the process, and this sale is still expected to close in the second quarter here.

Turning to Page 9.

We have the financial results for our Aerospace segment. Revenues were down 24%, including 26% organic decline, driven by the continued downturn in commercial aviation. Currency, as you can see, added 2% to revenues. And as you can also see, operating margins were down 310 basis points to 18.5%, down but still at very attractive levels overall.

Our team, I give them a lot of credit. They moved quickly to flex the business and were able to really deliver better than normal decremental margins of approximately 30%. Orders were down 36% on a rolling 12-month basis, once again, due to the ongoing downturn in commercial aerospace markets.

Now however, I would add, on a sequential basis, we are starting to see some improvement as orders were up 14% from Q4. And lastly, our previously announced acquisition of Cobham Mission Systems remains on track, and we expect the transaction to close at the beginning of Q4 2021.

Next, on Page 10, we show the results of our Vehicle segment.

As you can see, revenues increased 9% and were much stronger than anticipated. The strongest growth came from global commercial vehicle markets and from the Chinese light vehicle market. This as a point of reference here, NAFTA Class 8 production was up some 12%. Operating margins also improved significantly here to 17.3%, another quarterly record and a 380 basis point increase with incremental margins of nearly 60%. The strong margin performance was driven certainly by increased volume and also from savings from the multiyear restructuring program that we've undertaken. And despite volumes that were still below pre pandemic levels, this business is approaching our target segment margins of 18%, so making very strong progress in our vehicle segment. And one additional noteworthy development in this segment was the introduction of the new automated transmission for the heavy-duty truck market in China through our Eaton Cummins JV. This product, I'd say, is already getting great traction and seeing strong growth in the market.

Turning to Page 11. We summarize our e-mobility segment.

Here, revenues increased 15%: 13% organic and 2% from currency. We experienced solid growth in global vehicle markets, which was driven here both by high and low-voltage products. Operating margins were a negative 8.4% as we continue to invest heavily in R&D. And as I've reported in the past, we continue to manage just a really robust pipeline of opportunities. Of note in Q1, we secured a multiyear agreement with a leading global automotive customer to buy our next-generation break door circuit protection technology for battery electric vehicles. This award represents $33 million in material revenue sales, and we hope to be awarded additional vehicle platforms using the same technology. And this win, I would say, it really does highlight the strength of our electrical pedigree and how we're able to leverage this strength to grow in the e-mobility markets. And on Slide 12, we've updated our organic revenue guidance for the year.

As you can see, we're significantly increasing our organic revenue growth for the year with our strong Q1 results. We're optimistic about the remainder of 2021.

Our strong order book and growing backlog basis that markets and market demand is really increasing and improving across most of our end markets. We now expect overall Eaton organic growth to be up 7% to 9%, and this is up from 4% to 6% previously. And while we're experiencing some supply chain issues, we have confidence in our team's ability to manage through these temporary challenges.

As you can see, we've kept our forecast for aerospace unchanged. Vehicle has increased by 600 basis points. Electrical Globals increased by 400 basis points and all other segments have increased by 300 basis points. Encouragingly, I'd say here about our Electrical segment, we're seeing higher-than-expected demand across all of our markets with the exception of utility, and that market remains in line with our original outlook, which was for mid-single-digit growth, a really strong performance in the electrical segments.

Moving to Page 13. We show our updated segment margin guidance for the year, where we're also significantly increasing our guidance.

For Eaton overall, we're increasing segment margins by 50 basis points at the midpoint with a range of 17.8% to 18.3%. And we've raised our margin guidance in each of our segments with the exception of Aerospace and e-mobility, which are unchanged. Compared with our original guidance, we expect to deliver better incremental margins for sure on this higher volume. I'd also note that for the full year, we continue to expect net price versus inflation to be neutral. And on Page 14, we have the balance of our 2021 guidance. We're raising our full year adjusted EPS by $0.50 to $5.90 to $6.30, a midpoint of $6.10. And this is a 9% increase over our prior guidance and a 24% increase over 2020. With our recent M&A activities, we now expect a net 4% headwind from acquisitions and divestitures, down from our prior outlook of 8%. I say it's also worth noting here that our segment margin guidance of 18.1% to 18.5% is 190 basis points increase at the midpoint over 2020 and will be an all-time record. It's also -- this is a point of reference, above our pre pandemic margins of 17.6%, which we posted in 2019, which was also an all-time record.

So we're off to a strong start, and I'd say, well on our way to achieve our longer-term targets of getting to 21% segment margins. The remaining components of our full year 2021 guidance remain unchanged. And lastly, for Q2, our guidance is as follows.

We expect to be between $1.45 and $1.55 on earnings, for organic revenue to be up 24% to 28% and for segment margins to come in between 17.5% and 17.9%. And if I could, just finally, on Page 15, I'll wrap up with a kind of a high-level summary of why we think Eaton remains an attractive long-term investment. And I begin with first, our intelligent power management strategy really does position us to capitalize on these key secular growth trends that we've talked about for the last couple of years: electrification, energy transition and digitalization. And we're gaining traction here. In all of these areas, we put a number of new wins.

Our technology solutions, including our Brightlayer platform are being well received by customers. And as a result, we continue to expect higher-than-historical organic growth rates for the Company. And over the next five years, we're reaffirming our view that 4% to 6% outlook looks very much in hand.

Now this accelerated growth plus our, what I call, proven ability to deliver margin expansion will allow us to deliver on average 11% to 13% EPS growth per year over the next five years. We'll also continue to deliver very strong free cash flow, which provides the optionality to invest in organic growth, to add strategic acquisitions and to return cash to shareholders. And our commitment to ESG remains strong. We'll continue to develop sustainable solutions for our customers, for our own businesses and certainly for the environment that we all share.

So with that, I'd like to turn it back to Yan. Obviously, we're very pleased with a really strong start to the year and looking forward to answering your questions.

Yan Jin

Thanks, Craig. [Operator Instructions] I appreciate that if you can just limit your opportunity to just one question and one follow-up. And with that, I will turn it over to the operator to give you guys the instruction.

Operator

Thank you. [Operator Instructions] Our first question today is going to come from the line of Nicole Deblase with Deutsche Bank. Please go ahead.

Nicole DeBlase

Maybe we could just start with a clarification question, getting a lot of inbounds from investors about this.

So when we look at the guidance today relative to where you were a few months ago, what's been added in with respect to Hydraulics into the second quarter? And then the incremental earnings associated with Tripp Lite closing early?

Craig Arnold

Yes. I appreciate the question, Nicole. It's obviously been a very busy quarter with a number of, I call it, positive moving pieces.

So our current assumption in Hydraulics is that it would close here in the second quarter.

And so you could think about a couple of months at about $0.05 a month for Hydraulics. And then specifically, as it relates to Tripp Lite, we were -- you could add about $0.10 or so for -- excuse me, about $0.07 for Tripp Lite. And then there's a couple of cents negative associated with the acquisition of Green Motion.

So about $0.15 or so between the M&A activity.

Nicole DeBlase

Okay. Got it, Craig. That's really clear. And then maybe you could talk a little bit about price cost.

So I know you said neutral for the full year. But as we think about the phasing of margins throughout the year, are there certain quarters where you will be facing more of a price cost headwind? And so we should be factoring that into our segment margin assumption?

Craig Arnold

Yes. No, certainly appreciate that question as well, and it's obviously one of the bigger topics that we're dealing with internally. And I think you're dealing with in terms of trying to model our results and others. And I'd say that what we experienced in Q1, I'd say, is largely, we were able to offset a lot of this commodity inflation that we had been experiencing through hedges and working out of inventory and other agreements.

And so the biggest impact for us will be in Q2. And it's one of the reasons why you look at our Q2 guidance, and you say it may be a little muted given the very strong Q1. But that really is the quarter where we expect to see the biggest impact of material cost inflation. We're obviously getting price in the marketplace. It does take us typically a quarter or two to fully get pricing seeded into the marketplace.

And so certainly, Q2 will be the most challenging quarter. It's certainly factored into our guidance that we've laid out, and it will get better from that point forward.

So Q3 and Q4 will be certainly better on an incremental basis than Q2 will be. Fully offsetting it for the year, I would add as well, it's sometimes in hyperinflationary environment, it's tough to get a full incremental margin on material cost inflation will certainly more than offset it. But certainly, if you think about in hyperinflationary environment, you generally don't get a full incremental margin on inflation.

Operator

We'll go next to the line of Andrew Obin of Bank of America. Please go ahead.

Andrew Obin

Just a question.

You guys did these deals in China, and you don't see a lot of companies in the U.S. being a being physically able to sort of find things to do in China and be sort of executed on them. Can you just give us a bit more background as to how these deals came around and also very intriguing opportunity that you're able to do more deals like that in China?

Craig Arnold

Yes. Thanks for the question as well. And we are absolutely thrilled with what our local team has been able to do in the China market, and I would, in fact, put the emphasis on our local team. And our local team having been in the market for a number of years, building strong relationships with some of the electrical companies in the region, we're able to pull off some really attractive deals and I think a lot of that is attributed to the fact that we're willing to partner. These are JVs that we have 50% of. We won't consolidate the revenue. At least in China, we'll leverage their products and their low-cost footprint and we will consolidate revenues as we grow these businesses outside of China. But I say it's a combination of our local team's connectivity to the market. And Eaton's willingness and proven track record of really being a very successful JV partner.

As you know, we have a number of JVs inside of our company in China, in our aerospace business in China. And I think we have a very strong reputation in the country around a company that can very effectively -- you can very effectively partner with. And at the same time, do things that are helpful to both our company and to the companies that we're partnering with.

And so we're thrilled with it. I would add that to your other question, we are, in fact, having a number of other conversations around other similar types of transactions. Nothing to announce here today, but we're hopeful that we will continue to build on kind of this pattern of filling product gaps and whether that's a gap because it's a technology that we don't have like the bus way products in the China market or it's a product gap in the form of the ability to really compete in the local market because you have a low cost product. We see other opportunities to do very similar things in other parts of the portfolio.

Andrew Obin

Fascinating. And then just a question on data centers. Can you just give us color on how much visibility do you have in hyperscale enterprise and maybe by region, it's just -- it's been such a hot market and such a big driver of growth for you guys? Just -- do you have one quarter visibility, six months a year? Just maybe a bit more of a deep dive here.

Craig Arnold

Yes. I mean -- and certainly, the data center market has been one of the hottest markets in the electrical space, and we see that market growing by low double digits.

And so it's a very strong market. And we think it will be a very strong market for a very long time. And we get back to this whole idea of saying, to the extent that you believe that the world will continue to generate, consume, process and store increasing amounts of data. The data center market will continue to be a very attractive market to be in for a very long time. And in terms of visibility, specifically in hyperscale, we're typically in the 6 to 12 months out window in terms of having fairly good visibility.

As we've said, historically, hyperscale specifically tend to be a relatively lumpy market.

And so orders come sometimes in big slugs in one quarter or one year versus the others as they reconfigure their data centers. But certainly, when you look at the market more broadly, we are just drilled by our position in this market and by the prospects to continue to grow here.

Operator

We'll go next to the line of Nigel Coe with Wolfe Research. Please go ahead.

Nigel Coe

So I wanted to get into Electrical Americas a little bit deeper. Obviously, very impressive margin leverage there.

You called out residential and data center as particularly strong markets. Is there any mix impact here, Craig? We're used to industrial being margin accretive, maybe commercial being dilutive. But how does residential and data center impact margin mix?

Craig Arnold

Yes. I'd say, if anything, to your point, Nigel, I think you know the business well that we tend to make higher margins on a relative basis in the industrial side of the business and the more commercially oriented stuff tends to be lower margin.

And so we certainly have not experienced any positive mix in the Electrical Americas business.

I think this margin that you're seeing in us posting these record levels of margins is really a function of the things that we talked about, which is our teams are executing well. We're certainly benefiting from some restructuring that we've done as a company, and the volume is obviously helping. And the big one is, obviously, if you think about electrical Americas, we divested the Lighting business. And as we continue to work the portfolio in what we call growth ahead and shrink to tail, we continue to do things inside of the Company to ensure that we're serving attractive markets. But no, we would expect that there's more room to grow, and when we think about margin expansion in our Electrical Americas segment, and certainly, as the industrial markets come back, that's going to certainly be accretive to margins.

Nigel Coe

Right.

Okay. Great. And then on the end markets, you basically said that all of them were going higher with the exception of utility, which remains in the mid single-digit range. And you called out strength in Global, not U.S.

So I'm just wondering what we're seeing in the U.S. utility space. Are we seeing maybe slightly softer trends in the first half of the year? Any color there would be helpful.

Craig Arnold

I mean the utility markets, for us, I say, are largely performing in line with what we originally said. We knew as we started the year, the utility markets would be a relatively strong market at mid-single-digit growth. And the market is just really continuing to perform in line with those numbers.

And so really, the distinction, I'd say between the commentary around global versus the U.S. is really a function of change versus our original expectation.

And so we have utility markets continue to be a very attractive space. We think with the work that we've talked about and the things that are going on around energy transition, hardening of the grid, grid resilience, we're seeing a lot of good activity.

If you look at our broader negotiations in our Electrical business, they were up quite significantly from the fourth quarter.

And so yes, this is a market that we continue to be optimistic about and we think the utility segment, very much different than its history is really going to be one of the important growth vectors for the Company as we look forward.

Operator

We'll go next to the line of Jeff Sprague of Vertical Research. Please go ahead.

Jeff Sprague

Craig, maybe just to pick up a little bit on that discussion about industrial. Are you actually seeing anywhere in your business, kind of early signs of some of those later cycle elements of your business are beginning to pick up? Perhaps it hasn't materialized in orders yet, but just kind of what you're hearing from your customers and the channel would be interesting.

Craig Arnold

Yes. It's obviously too early, Jeff, to declare victory on any of this stuff, but we are certainly seeing some early signs in the industrial markets of things starting to to come back. And as I mentioned, negotiations for it, as you know, in our business, it's -- you have a pipeline, you do negotiations and you end up with a booking and ultimately a sale.

And so we track negotiations in our business and they are up quite significantly from the fourth quarter and most of that increase, I'd say the biggest part of that increase in what we call our negotiations is coming from our industrial businesses.

And so we're certainly seeing some green shoots there.

You see a lot of discussion about this whole trend towards reshoring. And you certainly see that today in the semiconductor market, for example, where a number of very large semiconductor companies have announced very sizable projects here in the U.S., and those are very big industrial projects.

And so yes, we're clearly seeing some early signs, too early to, let's say, once again, to clear that we know exactly where we're headed here, but certainly encouraging.

Jeff Sprague

And secondly, unrelated, but just back to what you're doing here on M&A. Maybe just a little more on Green Motion. It sounded like that was a really interesting partner at your Analyst Day.

You chose, obviously, to just kind of take them out in entirety what was the thought process there? And it sounds like maybe there's no revenues, but you feel like you have -- or very little, but you have some revenue visibility out into 23 and 24.

Craig Arnold

Yes. I mean, Green Motion is a company that started back in 2009, so it's a relatively new organization as everything in and around kind of electrification of vehicles is new and so they are -- some revenues, but revenues are relatively modest at this point.

As I mentioned, dilutive to margins as we continue to invest in this business, but yet, strategically, I mean it's just a perfect fit for us. And we see, Uday, and his team spend a lot of time talking about energy transition and what it's going to mean in terms of opportunities with respect to the grid as electric vehicles continue to grow. And they have both the hardware and the software technology and the billing systems to allow us to really participate in this really fast-growing and exciting space.

And so today, they have a solution that works perfectly in the Nordic countries and most of Europe. We'll be taking that technology and integrating it with what we're currently doing in North America.

So that we have a solution for the North American market as well.

And so it's really an important part of our strategy and it really accelerates what we would have done organically inside of our company by acquiring this company. This gives us, I'd say, at least a couple of year head start for what we were planning to do organically.

I think if you think about it in terms of our longer-term goals of where we said we'd be by 2030, probably doesn't change that materially because we planned on making these investments organically.

So -- but it certainly accelerates our progress.

Operator

We'll go next to the line of Scott Davis with Melius Research. Please go ahead.

Scott Davis

Good morning. A lot of good stuff talked about so far. But if we backed up a little bit, Craig, and just talk through the supply chain issues.

Your company, your business mix is a little bit different than kind of our average. How would you rank the supply chain issues? Is it more around -- is it more about higher raw material costs? Is it more about freight? I mean, how do you you guys think about it? And how are you managing it?

Craig Arnold

And I'd say, it's probably fair to say, Scott, we're dealing with all of those challenges. We're dealing with certainly -- if you look at the basket of commodities that we buy, whether that's copper, aluminum, sheet steel, we're probably seeing today levels of inflation in those key raw materials that probably are at levels that we have not seen since probably 2010, 2011.

And so clearly, commodity cost increase is on our key. Input material is quite a significant challenge.

As you mentioned freight around the world and is up dramatically as well. And then with these challenges, obviously, you're dealing with the intermittent availability issues on things like you reading the newspaper with respect to semiconductors, which is impacting our vehicle business and also, to a certain extent, is impacting our electrical business.

And so I think we're dealing with this entire kind of portfolio of challenges right now in the market, and our teams are managing through it extraordinarily well. And I would tell you that the good news in all of this is a great indicator of just how strong the market is.

And so the other side of dealing with these challenges around inflation and freight and the like is that something very positive must be going on in your end markets, and that's really what we're experiencing. And as you know, getting price as a company is something that we do. It's certainly easier. In certain cases, distribution, for example, as long as the market moves, price is a good thing for distribution.

And so today, I would tell you that we're dealing with each of these challenges, and there'll be certainly intermittent hiccups that we'll see in a business or any product line or in a quarter. But by and large, our teams are managing it well, and we'd expect things to start to to improve beginning in Q3. And by the time you get to Q4, perhaps at the end of the year for a lot of the bigger issues to be behind us. But we're managing through all of these challenges, but we've been here before. This is nothing new for our company. We've dealt with inflation before. We've dealt with these intermittent supply chain issues before, and I'm confident that we'll manage through this one extremely well as well.

Scott Davis

That's helpful, Craig. And just -- I think this is part of Jeff's question, but you mentioned the semiconductor fabs and kind of this onshoring thing, but I always think of the rule of thumb, new factories, kind of 10% of it is going to be electrical content. How do you guys think about a semiconductor fab? I've actually never been in one.

So is it is it heavier electrical content than an average kind of widget factory? Is it lighter, perhaps some -- clearly would be...

Craig Arnold

The energy requirements of a semiconductor facility would tend to be higher than your typical commercial project, for example.

And so the electrical intensity of that kind of project would be much, much higher.

One of the other markets that we didn't talk about as well is water wastewater. That's another one of these markets. I would tell you where that we're starting to see growth in projects with another market that once again has higher electrical intensity in some of the other products on the industrial side.

Operator

We'll go next to the line of John Inch of Gordon Haskett. Please go ahead.

John Inch

Hey, Craig, is aerospace right-sized for a pending commercial flight rebound over the next couple of years, likely on a lagging shop visit after market basis but still a rebound nonetheless? Or would you actually have to begin to rehire?

Craig Arnold

And I appreciate that question, John. It's a little different one that we're getting around aerospace these days, but certainly appreciate it. And I would tell you that one of the things that we've done is we've lived through cyclical businesses and have a lot of experience side of our company around how do you manage these businesses that go through from periods of time, these pretty big cyclical swings, and so I would tell you that our business is sized appropriately and is well positioned for a rebound in commercial aerospace. The bigger challenge is always tend to be the supply chain.

So what we're trying to do and make sure that it's not only -- we have our house in order, and we're ready for the rebound. But also throughout the supply chain that everyone is prepared and like everything else in these businesses, it's the weakest link that tend to create issues for your businesses.

And so yes, our business itself very well footed with a viewpoint of -- we think it's '23, '24 recovery. We did take some restructuring actions inside of the business. Most of it was around fixed structural costs that will not come back, things that we would have done anyway, even in a more healthy environment. And as we talked about these prior years, what we try to do in each of our businesses have what we call shovel-ready projects.

And so this list of restructuring projects that we would undertake at any point in time. And then we simply accelerate them or decelerate them based upon the market environment that we're living in. And that's simply what we did in aerospace. Things that we wanted to do anyway, we would have done them any way, we simply accelerated them during this period of low economic activity, but not things that take capacity and capability to respond out of the system.

So we're in great shape. And obviously, we're working with our suppliers to make sure that they're also prepared for the ramp.

John Inch

It sounds like a -- it's a pretty good positioning to be in. Maybe just as a follow-up, Tom, I wanted to ask, in your first 90 days, what have you uncovered? And I'm sure with your boss sitting there, you're going to say a lot of positive things, but I'm wondering also, though, if you could talk about areas for maybe opportunities for Eaton and where your background could be additive to this, so maybe like some areas for improvement? I don't know whatever, whatever you'd like to say?

Tom Okray

Yes. I appreciate it, John. I guess a few things that I've seen.

The first one is just a tremendous amount of opportunity. I knew that coming in. And it's even more than I expected. And specifically in the area of organic growth, I think that's a great opportunity for us. And hopefully, that's something that I can be, additive to another thing that I've found is with all of the issues that we've been managing, whether it be commodities or supply chain, just the professionalism of the organization to get after it and just to mitigate it, has been really remarkable and the final thing is just a really top-notch leadership team that wants to win. And all of that is just a great combination, and I couldn't be happier to be here.

Operator

Next, we'll go to the line of Jeff Hammond with KeyBanc. Please go ahead.

Jeff Hammond

Craig, I think early in the year or when you first gave your outlook, commercial construction and oil and gas were laggards. Can you just kind of frame what you're seeing there and how you're feeling about those end markets versus a couple of months ago?

Craig Arnold

Yes. Appreciate the question, Jeff. And I'd say, largely speaking, I mean, in the context of what's happening in our electrical business overall, they are felt clearly laggards. Within commercial, there are certain segments that continue to do well. We've talked about, for example, warehousing, for example, as a segment that is very strong. And once again, it's another one of these markets with a much higher electrical intensity than other commercial applications. But the commercial market, I'd say, our view on it, in general, what we call commercial and institutional is that this year, we're calling that market to be flat to up slightly. But still a lag relative to the overall electrical market that we're seeing in general, and then in oil and gas, while we are another place where we're certainly seeing some green shoots and the market is certainly firming. The rig count is increasing. We're starting to see more MRO projects and the like.

So that market is improving. But once again, relative to the overall electrical market, that market is still a laggard versus the overall electrical market. In that market, we're still calling to be essentially largely flat on the year, but still not a return to kind of the growth that we certainly would expect to see, perhaps beginning at the end of this year into next year.

Jeff Hammond

Okay. That's helpful. And then just on vehicle, you guys raised your outlook pretty materially and certainly 1Q is a lot better. And that seems to be where a lot of the supply chain and semiconductor chip issues are. Can you just speak to kind of the push-pull of kind of raising that pretty materially versus some of the supply chain headwinds you're seeing in those markets?

Craig Arnold

Yes. And I appreciate that. And I'd say that if you think about the semiconductor issue, it certainly has hit the light vehicle market harder than it has, let's say, the commercial vehicle market. I mean not to say if there aren't challenges in commercial vehicles, there are we have issues there as well, but it's certainly been a much bigger issue in the light vehicle market. And the one thing that's helped us a little bit, I would say, with respect to the way the OEMs are responding to kind of the shortages of semiconductors is that they're tending to make decisions to manufacture to produce, they're more expensive vehicles.

And so what you're finding is trucks and things where they tend to make higher margins are also the places where Eaton has higher content.

And so our impact in the way we're being impacted by this semiconductor issue is being somewhat muted by the way the OEMs are prioritizing what they produce.

And so as we think about Q2, it's maybe a 2% to 3% impact on revenues. And revenues would have been 2% to 3% higher, but for the semiconductor issue. Overall, and so our teams are once again managing it well, but it is a real issue and one that we expect to really deal with throughout Q2 and maybe even into Q3.

Operator

Thank you. We'll go to the line of Josh Pokrzywinski of Morgan Stanley. Please go ahead.

Josh Pokrzywinski

Craig, maybe to follow-up on your earlier comments in electrical. It sounded like you thought you guys were benefiting a little bit from supply chain shortages, maybe some advance ordering or, I don't know, double ordering, and people just sort of trying to get ahead of supply constraints. How much of that 23% backlog growth that you saw in the Americas would you attribute to something that's maybe a bit more atypical versus the underlying business? Just trying to get a handle on what, until the timing that mechanism might be worth?

Craig Arnold

Yes. I mean, it's obviously a difficult question to really know for certain in terms of the behavior and what's going on specifically in the channel. I would say that, we probably did see some order surges that took place at the end of Q1 in the month of March. Tough to call it double ordering, I think some of that ordering could be certainly trying to get out in front of price increases, some of that or could be to put in some safety stock to protect against concerns about shortages. But I would say that overall, if you think about inventory levels -- I say inventory levels, in general, I'd say, or still probably slightly below where they really ought to be.

If you think about some of the end markets of residential and others and, let's say, in some of our factory OEM equipment markets, inventory levels there are probably well below where they need to be, and we're still kind of hand to mouth with respect to dealing with some of the demand that we're seeing.

And so I would say kind of the spirit of the question is, do we think this strength that we're seeing in the Electrical business has legs? Or is it a little bit of an artificial pop that we're seeing? I think mostly, we're comfortable that it's real. The underlying demand that we're seeing in these end markets is real and that's what's really driving the ordering more than anything. And we'd love to be in a position today where we actually had more inventory in that same sentiment, I would tell you would be largely true for almost, all of our customers.

Josh Pokrzywinski

Got it. That's helpful. And then maybe just following up on electrical obviously, at the Analyst Day, a lot of discussion around electrification and sort of some secular shifts in the way customers are buying.

As you guys are bidding on projects, is there some, I don't know, higher content level that you're seeing show up that would suggest this is playing out? Or is this just kind of project velocity picking up rather than, I guess, project content?

Craig Arnold

No. I would say that it's both. It's both velocity and it's also content. And one I always go back to, which is an easy one to relate to, it's really what's going on even in residential construction today.

If you think about today, the electrical content in your homes as you move from a standard mechanical circuit breaker to an electronic circuit breaker or a circuit breaker that has the ability to do fault protection. I mean, we're seeing more electrical content in almost every project that we participate in, in almost every single end market. I just think this idea of -- as we talk about the digitization connectivity, these broader secular growth trends are really requiring an increase in the electrical content in the equipment that we provide.

So I would say it's both. It's both the velocity of projects as well as increased content on every project that we sell.

Operator

We'll go next to the line of Joe Ritchie of Goldman Sachs. Please go ahead.

Joe Ritchie

So Craig, I know you've been pretty front footed on the investments that you've been making on the e-mobility offering. Saw this interesting announcement last week with ABB, like initiating a carve-out of their business, their business being smaller than your business today. I'm just curious, you guys have been front footed as well in terms of your portfolio. I guess how are you thinking about this business longer term? And is this a potential opportunity for a carve-out of this business as you build momentum?

Craig Arnold

Yes. We obviously filed that announcement as well from ABB. And I'd say that every company has got their own strategy around how you unlock value in your organization. And as we think about the connectivity between what we do in our e-mobility business with our broader electrical business, we see just tons of synergies between them.

And so we really think about that as being a key growth platform for Eaton and a great source of synergies with respect to the way we develop technology, the way we leverage scale in our supply chain.

And so we really do see it as an integrated part of our company as we go forward.

If you think about one of the examples that we mentioned in the earnings call today around this break tour technology, which is basically a resettable circuit breaker that's used in a vehicle application in a market that has historically only used fuses, that's a great example. That core technology came from our electrical business. That's where it was developed and so our e-mobility team lifted that technology naturally modified it for the commercial vehicle space. and here, we landed a number of key wins that are, we think, at maturity we could be talking about this $100 million worth of business in this kind of space around this break door technology once we get to full maturity and we bed down all the wins that we're working on right now.

So, we really do see it as a core piece of the way we run the Company, the way we leverage our scale and the way we'll ultimately grow our business and synergies that will flow back to both our electrical and to our e-mobility segment.

Joe Ritchie

Makes a lot of sense, Greg. I appreciate the color there. I guess my follow-on question, and I know we've talked a lot about different end market trends, but I'd be curious if you guys could quantify how April has been trending relative to some of the intra-quarter trends that you saw in the first quarter?

Craig Arnold

Yes. I'd say that we had a good April. And actually, we're working to get some rather modest comps given COVID-19 last year. But the month of April for us came in very strong and came in actually slightly better than what we were forecasting.

And so at this juncture, we think everything is looking good for another strong quarter in Q2.

Operator

Next we'll go to the line of Ann Duignan of JP Morgan. Please go ahead.

Ann Duignan

Most of my questions have been answered. But just maybe on the electrical side, can you talk about any growing interest or quoting in terms of state and local government, either retrofitting for renewable energy requirements or retrofitting for modernization of infrastructure, are you seeing any of that kind of activity pick back up? I mean taking local budgets are in better shape than we might have anticipated now with all the money they've gotten in terms of aid. I'm just curious if you're seeing any evidence of green shoots there.

Craig Arnold

Yes, I appreciate that question as well, Ann, and you're absolutely right. I mean the infrastructure needs in our country are vast and what's happening today in terms of the stimulus programs that are being either approved already or proposed by the Biden administration are going to put significant dollars in the hands of both state and local governments. And I can tell you today, it's early days.

In terms of what's been approved already, I'd say that we are starting to see some of those projects. And when you look at kind of the C-30 report, the public sector has tended to be a little stronger than the private sector. When you think about what's going on in commercial construction.

And so we obviously have seen some of that already. But the biggest piece of it, we think, is still out in front of us. And we think that -- and obviously, it's going to depend upon where these dollars go in terms of this infrastructure build. If it's in roads and bridges, that probably won't have a material impact on our company. But if it's where the Biden administration is pointing a lot of those dollars, whether that's in the reduced energy consumption, the greening of the economy, electrification of the economy, building out the electrical infrastructure, grid resiliency, a lot of the things that the administration are talking about not baked into our current forecast and outlook could be another real, I'd say, leg of growth for our company and we're hopeful. But I think today, we've seen very little of that really show up in our business.

Ann Duignan

Okay. That's helpful. And then just back on Green Motion on the electrical charging company in Europe, can you talk a little bit about what is so differentiated about that company because we think that charging as being commoditized very quickly over time? I mean, the barriers to entry are not that high, and it's very regional and there's standard issues across different countries, I mean, just talk a little bit about hi-tech company and why you think they will be the winner?

Craig Arnold

Yes. I'd say, clearly, when you think about the charging infrastructure side of there is obviously the hardware and I think when you think about the piece that's -- today, you could argue is not very differentiated. It's really the hardware itself. It's the equipment. We view that as really more of as a gateway and the real value creation really comes in the software associated with how do you manage the charging infrastructure.

And so yes, they have charging, and they have the hardware associated with charging and that piece for us is interesting because we do think that depending upon the application that you're in, all charging isn't the same. There is an opportunity, we believe, depending upon which segment of the market you're serving, where the charging infrastructure in and of itself is important. We think there's an opportunity to really pull-through and couple the charging infrastructure with what we do on the electrical equipment on year side, which we think will be value creating. But the real value ultimately is really in the software and the way the solutions around how do you manage the charging of vehicles, of fleets, manage the load in a smart way in a really complex environment. And that's ultimately where we see the biggest value and what really intrigued us a lot about what Green Motion has already done and the ability to do billing as well and what Green Motion has already done in the Nordic countries.

Operator

And we have time for one more question that will come from the line of Julian Mitchell of Barclays. Please go ahead.

Julian Mitchell

Maybe just a clarification question around the free cash flow, I don't think anyone's asked about it yet, but that guidance was unchanged, I think, from before. The adjusted net income guide was raised by about £200 million.

So just wondered what the moving pieces are? Is it around bigger working capital headwinds? Or is it more to do with perhaps a lot of those sort of adjustments to EPS noncash? Just wanted to check on that? Thank you.

Craig Arnold

Julian, I think the way to think about it, the working capital piece, it's just early. I'd say that today, we are dealing with a number of uncertainties as it relates to supply chain, and we may need to build a little bridge inventory to deal with some of these supply chain challenges.

And so the way I think about it more than anything is, it's just early in the year and some uncertainty around how some of the supply chain challenges are going to work their way through the system.

As you saw in the numbers, we had a very strong Q1 and in free cash flow, better than our plan for sure. And there's nothing particularly that we can see today that would prevent that from playing through for the year, but it's just early and there's a number of these uncertainties around what's going on in the supply chain. And that's what kind of held us back from taking that guidance up at this point.

Julian Mitchell

And then just a quick follow-up on aerospace specifically, the margin guide for the year embeds maybe a 200, 300-point step-up from Q1 for the balance of the year. I assume that's commercial aftermarket recovering and carrying a very high mix tailwind with it. Maybe just help us understand what your assumption is for commercial aftermarket sales growth for the year in that context?

Craig Arnold

Yes.

So commercial aftermarket, the aftermarket typically lags the OEM by a quarter or two and so we are certainly expecting a lift in aftermarket as we get into the second half of the year, and that's certainly going to be very much accretive to margins overall.

So that's certainly baked into our assumptions. And the other place, as I said, we did a lot of restructuring in the Company. A lot of that went into Aerospace. And certainly, as our restructuring programs get completed we'll see those benefits as well show up in our expanded margins. But we're very comfortable with the margin outlook for Aerospace. Even in Q1, the margins that we delivered in that business of 18.5%, very attractive margins on volumes are down dramatically.

And so as we think about the business and the margin profile overall, nothing that I'd say would be extraordinary or Herculean in our effort to deliver the forecast.

Yan Jin

Okay, guys, I think thanks for all the questions.

As always, Chip, and I will be available for any follow-up questions. Have a good day.

Craig Arnold

All right. Thank you.

Yan Jin

Thank you, guys. Bye.

Operator

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T event conferencing.

You may now disconnect.