Eaton Corporation plc (ETN) Earnings Call Transcript & Summary

I think we're like 1 minute late. This is the last session of the day for me, but we saved the best for last. We here have -- we have Craig Arnold, Eaton's Chairman and CEO. And I think what a difference a year make. I think we were in this room last year, much bigger in-person attendance this year. So -- and as I said, we definitely sort of try to present Craig later in the day because he is clearly one of the highlights for us in terms of the attendance. Thanks so much for being here.

Thank you.

And I think the format is going to be we're going to jump into the fireside chat. And if folks in the audience have questions, feel free to interrupt. And we'll keep -- but hopefully, we'll have time for some Q&A at the end. Craig, really, really appreciate you being back in London. It's always a pleasure and...

Great. Great to be back. I was telling Andrew, last year, I took a gift home with me. I actually got COVID at this conference last year. So hopefully, this year, I can go home unencumbered.

Well, it's a packed room with more people coming in. So I hope so for all of our sake.

So let's start with the long-term growth targets. Eaton is running ahead of its 5-year goals from 2020, '25, including its organic revenue growth targets, 5% to 8%. Based on '21, '22 growth and '23 guidance, the midpoint of this guide would imply deceleration in '24, '25. So is Eaton planning on raising its long-term growth targets in the near future?

Yes. I appreciate the question. And to the point that you raised, Andrew, we're clearly running ahead. I mean, the growth rate, if you give us credit for the growth that we laid out for 2023 would be 10% over the last 3 years. And when you look at it in the context of a 5% to 8% number, you'd say -- you'd actually look to a slowdown in the subsequent years. But the reality is we expect to do better than that. And so those goals were set back in 2020. We clearly have done better over the last number of years due to a lot of the secular growth trends that we've talked about. And obviously, we've gotten a bit more price than what we assumed when we laid those plans out. And so we will update the goals. We haven't yet decided exactly when, but you should expect us to do better than those numbers that were laid out. And we would not expect to see a material slowdown.

Excellent. So maybe we can talk about reinvestment in the business. So '23 guidance implies 8% organic growth at the midpoint and 9% EPS growth in '22. Revenue did grow 13%, and EPS grew 14. So excluding 2020, historically, Eaton has displayed more operating leverage, right, growing earnings around 3x organic growth. So how are you thinking about operating leverage and reinvesting for growth in this high-growth environment because I think one of the things you stressed at your Analyst Day was, I think, that you do believe that you're in a higher structural growth environment.

Yes, no question. We do believe Eaton is a growth company today, and we're in really attractive growth industries. And a lot of that is obviously tied to these secular growth trends that we spent a lot of time talking about around energy transition, digitalization and electrification. On the margin side, as you make this transition from a company that's historically done modest growth to a growth company, it requires investment. And so we're putting fairly sizable capital investments into the business right now with 6 new manufacturing facilities we've invested in last year. Along with that, obviously, comes a lot of support costs to support the ramp-up of these facilities. So we do think that a 30% incremental rate for 2023 is a reasonable planning assumption for this year, but there's certainly opportunities to do better than that. Our incremental rates last year as a company were some 40%. And so I do think there's potentially upside to that number. But as we sit here today, with an understanding of where we need to make these investments to support the future organic growth, we think 30% is the right planning assumption for now.

Excellent. So maybe R&D, what are your key R&D priorities across the portfolio? And where are you reinvesting the most?

Yes. R&D for Eaton as a company tends to run at a relatively modest 3% to 4% of sales. And so it's not a very heavy kind of R&D burden that we have in general as an organization. The priorities really are tied to the secular growth trends. If you think about energy transition and the investments that we're making in and around our products to, number one, make them intelligent. And so there's a whole piece around how do you digitize the company to build intelligence into everything that you make so that you have the ability to essentially stream data, create insights, create software offerings on top of that. So there's a whole piece of investment that we're making in and around how do we digitize the company. We're obviously making investments that deal with electrification. If you think about today, the growth of electrical vehicles and the charging infrastructure that needs to go with it. And when you think about the charging infrastructure, most of you are logically thinking about kind of the charger itself that you use to plug your car into. But behind that charger is a lot of investment that needs to take place in the infrastructure to support the need for more electricity, to support the need for the ability to do smart charging and balance the load when you're charging a fleet of vehicles and upgrading in the transformers and the other infrastructure around supporting electrification. Certainly, in our eMobility business today, we're investing very heavily to really create new products and new solutions to deal with this growth segment. As I think most of you are aware, we said we're going to create a $2 billion to $4 billion new segment of the company in eMobility, and we're running ahead of that target. That was a 2030 target. We're running ahead, but we're having to invest in a whole suite of new electrification products, whether that's inverters, converters, power distribution. We had a big win that we talked about just recently in the fourth quarter. We won about a $400 million piece of business, a brand-new win in our eMobility platform around power distribution, battery distribution units. And I'd say these are all programs that are exciting growth opportunities for the company, but they're all requiring more R&D, more investment and as well as ramping up new manufacturing facilities, which also require more investment and more spending.

I mean, I think when people ask me, how should we play reshoring? And I think we definitely like Eaton's definitely for me at the top of the list, I think. I think you've stated in one of the calls, for example, each semi fab has like 10% electric content. I would imagine it's pretty high for EV battery plant as well. So what sort of visibility do you have on reshoring and moving supply chain back to the U.S.? And as I said, I mean, seemingly, our data indicates that there should be visibility for semiconductor fabs and EV facility construction into '24, '25. How is sort of the real pipeline -- that's how we research. But how is your pipeline in the real world trending? And are you seeing conversations actually start translating into orders?

Yes. Appreciate the question. It's one of -- we talk about these 3 big secular trends of energy transition, electrification, digitalization. On top of that, one of the other big trends that are certainly benefiting our company is the reindustrialization of the U.S. And you see that in the form of manufacturing new semiconductor plants, new investments that are coming in for battery production, for EV production, new LNG plants. And so there is this whole reindustrialization that's taking place in the U.S. right now that's really resulting in a lot of increased investments in manufacturing. This one piece of data that I've mentioned to some of you in the one-on-ones is that in 2022, manufacturing construction starts were up almost 200% in the U.S. And that is essentially the reindustrialization of the U.S. where there's been so much underinvestment for a long period of time. There is certainly a spirit of nationalism. That's probably a piece of that as well. There's a lot of Buy America tied to a lot of the stimulus spending that the government has launched. In fact, if you recall, there's actually been 3 stimulus plans. There was the -- first of all, there was the inflation -- lastly there was the Inflation Reduction Act. Before that, there was the CHIPS Act, then it was the Infrastructure Act. All of these stimulus plans are basically encouraging U.S. manufacturing companies, U.S. industries to basically bring manufacturing back to the U.S. And that's creating a bit of a building boom on the manufacturing side in the U.S., and we are very well positioned to take advantage of that.

And so you are seeing -- so other real orders?

Absolutely. I mean, it's early for some of them. So the first one was the Infrastructure Act. Just tied to the Infrastructure Act, we have about a $500 million pipeline that we're working on right now, already $200 million of orders that we've already received. But once again, we are in the very early stages of most of these stimulus plans. And so most of the benefit of all of these programs are still some time to come. It will be -- we'll see benefits throughout this year, but largely into '24 and '25.

But I'll just use this example just to put a -- so I think we sort of estimated $166 billion. I mean, this is just looking at the announced list and what's going to be built, $166 billion of semiconductor construction, 10% content. So that's a TAM of, I don't know, let's call it, $16 billion for the industry. You have 1/3 of the industry. That's like $5 billion to $6 billion in Eaton's pockets over the next 3 years. When do you start having conversations with people -- when do these orders get finalized? If I start digging a hole Jan 1, '23, when would Eaton get a firm order for this plant?

Yes. So it obviously varies widely. By the way, I wish it was easy as the way you just articulated. So I'll take the $5 billion now and exit stage left but a little work that we need to do between now and then to realize that opportunity. But it varies widely depending upon the kinds of project. Semiconductor plants would be maybe on the longer end of it, where we would probably -- if it's a 3-year project, probably simply is halfway through we'd start to see the electrical content and orders show up.

So orders, not shipments.

Yes. Yes, shipments, maybe you're 12 -- 2 years out or perhaps on a shipment, you're maybe 18 months out to 12 months out on an order on the long end of it in a semiconductor facility, but it runs the gamut. And it could be as short as 6 months, could be as long as 3 years. It just depends upon the project itself.

And how long of a tail can reshoring have? Because we've seen announcement EVs, we've seen semis, but once again, you are the biggest player in North America. What kind of conversations are you having with your fellow CEOs about follow-through to this investment several years out?

Yes. And I'd say it's not just reshoring. I mean, reshoring is obviously an important piece of it. Industrialization of the U.S. is an important piece. But if you think about today that the trends that we think are relevant and the reason why we think this company is going to see great growth, at least over the next decade, really ties to the culmination of all of these different trends. Yes, reshoring, but yes also electrification, yes also energy transition. Yes also digitalization. Yes also government stimulus spending. So you have all of these factors that are converging today to create just a tremendous growth opportunity for our company and our industry. And I don't think there's been a better time, by the way, to be in the electrical industry than right now.

And do you guys have capacity to meet demand? And how do you think strategically about the capacity to meet all that demand?

Yes. I say yes and no. I mean clearly, one of the reasons why we built record backlogs over the course of the last 12 months is that we don't have enough capacity today to meet all the demand. And so we are making investments today, as I mentioned, 6 new manufacturing facilities last year alone and more to come to really get ready for this ramp that's out in front of us. And so we are today making some investments to prepare for what we think is going to be a very long-term growth kind of outlook for the company.

And what about labor? And how do you think about labor? Is it -- does that mean that maybe more is not in place like Mexico versus North America? How do you view labor availability and what to do where?

Yes, appreciate the question, Andrew. Labor is clearly one of the challenges that we're facing today. And it varies widely by what part of the U.S. that you're in. But in general, today, labor is as often the bottleneck as is supply chain as is whether or not you have the manufacturing capacity. And so we're obviously working on things that we can do differently, working on automation as a potential solution to deal with some of these labor issues. We're working on, quite frankly, leveraging our regional manufacturing capabilities, the buttress, our capacity in the U.S. where we're short. But labor is clearly one of the bigger challenges and quite frankly, an unanticipated challenge that we're dealing with right now. I mean, coming out of COVID, we find very much like many of you that a lot of our workforce didn't come back to work. And as a result, we're having to scramble today to really build enough labor capacity in our facilities.

So let's go to data center because I think every meeting with Eaton, people definitely ask you about data center. So maybe we can talk about several ways to sort of slide, enterprise, colo, hyperscalers, right, U.S. versus the rest of the world. And just generally, how much visibility do you have because -- right, I mean, in one-on-ones, people question hyperscalers or Meta sort of slowing CapEx. How should we think about Eaton?

Yes. For us, data centers obviously is a really important segment for us. In fact, it's our second largest segment when you think about the company overall. And we have very good visibility into the data center market. Certainly, when you think about the hyperscale segment, which say, let's say, it accounts for about 1/3 or so of the data center market. You also, to your point, have colo. You have on-prem or enterprise. And we have great visibility into hyperscale. And we too have seen some of the bigger announcements around some of the big hyperscalers slowing down their investment in data centers. But I think the important message is it's a slowdown in the rate of growth. It's not a reduction in growth. And so we still expect to see fairly significant growth in hyperscale based upon the commitments and the order book that we currently have with our hyperscale data center customers. But as a segment, I would tell you though, it's one of the most exciting segments that we participate in. And we think it's one of the segments that has really a great path to growth over the next decade or so. And I get back to this point about what do you have to believe, to believe that data center market is going to be a great market for a long time. You have to believe that the world is going to continue to generate, process, store increasing amounts of data, and the world is going to continue to be more connected than ever. If you believe that, you're going to need more data centers. Think about AI, ChatGPT, which, I guess, is the rage that everybody is talking about today. And so you have a major hyperscaler saying, we're going to delay an investment to reconfigure our data centers to deal with this explosive growth that we're expecting in AI. And when they do that, by the way, the electrical intensity and the processing capabilities of data centers go up, which means more electrical content and a really good thing for Eaton. So we're excited by data centers and what it means to the future of the company.

And maybe touch on Aerospace. I think clearly, on commercial, we've had a lot of good news on commercial. Seems the message wide-bodies are doing better. You're probably seeing something similar. But maybe go on defense and military. And you sort of indicated that you have this breakthrough in growth coming. And A, how do you feel about it? And are there any sort of details of the President's budget that changed your mind one way or the other?

Yes. So today, in our Aerospace business, we're about 50-50. We're 50% commercial. We're 50% defense. We're certainly seeing this huge ramp on the commercial side. And if you take a look at both Airbus and Boeing and their outlook for the OEM build over the next 5 years or so, very attractive growth rates announced by both of these OEMs. And by the way, on the aftermarket side, and we're about 60% OE, 40% aftermarket, we expect the aftermarket business as people continue to get on planes, come to events like this, aftermarket is going to continue to grow quite attractively. On the defense side, the defense budget in 2022 was taken up 10%. So obviously, we're optimistic about what that's going to mean for our opportunity on the defense side. The defense budget this year is still working through the details. But our own -- inside of Eaton, our own defense business, our order bookings were up some 80% on the defense side in 2022. And so we said for us, as we look forward, based upon the programs that we're on, the platforms that we're on, we think 2024 becomes a really attractive breakout year for growth on the defense side as well. So you have all this positive momentum on the electrical side. You have commercial aerospace that's ramping right now. And behind that, you have defense, is going to really kick in, in 2024. And so as we look forward, we think growth inside of the company is well positioned to kind of really sustain us for, we think, a decade.

So the cake -- regardless of the President's budget right now, the cake is sort of baked for '24 already?

Exactly. And it's really -- in Aerospace in general and certainly in defense, it's really a function of are you on the right platforms? And are you on the platforms that are essentially getting the investment dollars? And if you're on the right platforms, independent of what happens in the industry, you can see very good growth, and that's where we sit.

So going back, and I think we'll just sort of wrap up with margins, and I think it goes back to your long-term targets, but maybe ask the question a little bit different. So your long-term target is 21.5% in '25. '22 segment margins were 20.2%. Is it fairly -- for now, is it fair to assume that it's fairly linear projection given your framework, but more importantly -- so that's part one of the question. But part two of the question, as you think about path forward, what are the key levers in your mind to take these structurally high -- because clearly, you guys seem to be confident that in the long run, you're able to do that.

Sure. No, and I appreciate the question, and very much like the revenue growth numbers, you should probably expect that we'll beat that number. And we're running ahead of the goal that we set back in 2020. So it would be reasonable to assume that we would do better than that based upon the trajectory that we're on. And I'll just give you one data point, for example, record profitability in 2022. And at the same time, we had a year of record inefficiencies. So we had our worst year ever in terms of our operational inefficiencies, but yet we posted the best margin that we ever did. And we beat the original plan that we set for the company. That was largely a function of supply chain-induced inefficiencies. And they were every place and pretty pervasive. And so we clearly have an opportunity independent of the broader initiatives that we work on to drive margin improvement to just get the inefficiencies out of our operations. But on top of that, we talk about more strategically and structurally how do you improve margins. One, well, you got to run your operations better and more efficiently. We talk about what it means to be a world-class manufacturing plant. And we have plenty of opportunity there to continue to drive better performance in our operations. We also talk about this idea of the portfolio, and we will continue to do portfolio management. And it doesn't mean necessarily that we're going to change the reportable segments. We may or we may not based upon kind of the strategic and the financial returns. But it does mean that every business inside of our portfolio, every general manager has to be a portfolio manager. Every business has a head. Every business has a tail. Every business has a part of it where you make extraordinary margins, you have the right to win, you have great technology, and you should do more of that. Conversely, every business has a tail. Every business has a -- some 10% of the business where you'd say the margins aren't great. Maybe you're strategically disadvantaged, and you got to think about what you do with that piece of the portfolio. So we'll continue to do portfolio management that will help us expand margins. And then the third leg is really around the things that we're doing to help digitize the company, to take low value-added repetitive task, automate them and find smarter ways of running our backroom functions. And so we have a playbook. It's all part of the Eaton Business System, which is the way we run the company, the standard set of processes and tools that we use to help continue to drive margin expansion inside of the company.

Yes. We were sort of -- we try to focus this one in the long term, but I'm sure folks in the audience would love to hear if you have any updates or commentary on the first quarter '23 guidance. Any thoughts also about the events of the past couple of weeks.

Sure. Yes, I'd say on guidance on the quarter, the quarter is largely playing out the way we anticipated. We ended 2022 with quite strong momentum in our businesses around growth and our performance, and that's largely continued into Q1. And so really no update on the quarter other than to say things are essentially playing out largely as we anticipated. In terms of these recent events in terms of the banking crisis or lack of confidence that we went through over the last week or 10 days or so, I'd say just too early to say whether or not that's going to have any particular ripple effect or impact on our business. We certainly have not seen any impact to date. A lot of the projects and things that we're focused on, we're doing a lot of large projects, a lot of critical infrastructure projects. And so we would not anticipate there to be an impact, but it's, quite frankly, just too early to know.

Got you. So maybe talk a little bit about sort of channel and what you're seeing in the channel. So a couple of things. So on one hand, I think we were just then -- before I go into bigger question, we were expecting, I think, as supply chains normalize, we would have expected the channel to -- inventory in the channel to sort of maybe go down, maybe channel inventory to OEs. And if you look at the macro data, that did not happen. I think our explanation was that part of it was concerned about China reopened. So it seems that I think China reopened has gone better than expected, I would say, probably better than you expected on the margin.

Yes.

So should we start seeing on the margin, inventory normalize at -- with your suppliers in the channel? Or do you think this is just the new state of the world?

Yes. I guess this is a great question. We get it all the time around inventory levels in the channel and our own inventory levels. And setting aside for a second that we can always be better and be more efficient in terms of our days on hand inventory and the channel itself, if you look at really inventory levels today, as a function of the forward view of the business with respect to orders growth that you've seen, the backlog that you've built, the industry and we have actually become more efficient. And so if you just simply look at the growth in inventory as a function of the growth in backlog, this inventory build is actually less than what you'd expect to basically consume the backlog that we've created inside of our businesses. And so I don't know today if I'd say looking backwards, inventories are clearly at an elevated level, and there's work to be done. Looking forward at the order book, looking forward at the backlog, I'd say inventories are very well aligned with where you'd expect them to be, maybe a little light of where you'd expect them to be. And I can tell you today, the conversations I'm having with our distributors is not about ordering less. It's about I need more. And so we've not yet reached a point today where we've had conversations with our distributors around, hey, I have too much inventory, slow down ordering, I'm generally still on the other side of that. Now there's always potentially regional or customers exception to that. So I'm not saying that's the case every place. But more generally, no, inventories have not been a challenge, and we need these inventory levels to support this new growth outlook for the markets in which we're participating.

And from that perspective, sort of I think lead times have been extended. Do you find -- and I think we sort of spoken with your team at various industry events. And obviously, I think Eaton has been very proactive on managing backlog, very proactive in managing prices. Do you find it's easier to live in a world with more visibility? Do you think going forward, you will encourage your customers to place orders earlier so you do have more visibility on your production?

Yes, I'd say that in an ideal world, we'd love more visibility. And we'd love the ability to say, give us 12-month lead times, right? Give us an opportunity to respond much more effectively and build those capabilities back through our extended supply chains. And that's kind of an ideal state. I think today, asking our customers to live in this environment for an extended period of time is really not practical from that perspective because it's visibility that in many cases, they don't have. So today, I'd say we have to get better as an industry. We have to get better as an integrated supply chain so that we have what we call quick response capability. We're able to respond more quickly to demand signals. And it's one of the reasons why there's a lot of work going on today around things like reshoring, bringing some of these supply chains a little closer to the point where the products are built. And so I do think that we have to do more work that the levels of backlogs that we're living with today, the lead times today are well beyond what would be normal and well beyond what we or the industry should be satisfied with.

Got you. And what about also -- as I said, you guys have been -- sort of led the industry on pricing, we shall say that. But what is the risk of sort of negative of deflation? And commodities are going down. Supply chains are normalizing. What's the risk of you sort of going back and sort of customers saying, "Hey, we want discounts."

I'd say, first of all, I'd say we're not out of the woods. We are still, in fact, living in an inflationary environment. There's lots of elements, it's not just commodities. And on commodities, I say there's a mixed bag between things that are higher, things that are lower. Wage inflation today is a real challenge, and wages are going up. So we are still living in an inflationary environment, and we expect to get price this year. We have price increases planned in the marketplace this year in anticipation of the fact that there's going to be inflation and quite frankly, in many cases, catching up for price that we would like to have gotten last year but didn't realize based upon customer contracts and other negotiations. And so getting more price this year is clearly a piece of what we'd expect to do. And we're not yet to the point where we'd say inflation is completely behind us. I think you saw some of that in the macro data here in the U.K. for sure and the data that came out yesterday. But -- so inflation is not at this point in the rear window. But I'd say even more broadly than that, as an industry, price tends to be sticky. I mean, a lot of what we do goes through distribution. So I would say that as an industry, if you're looking at historically speaking, even in the event where commodities moderate somewhat, the industry tends to hold on to price. And so a long way of saying, no, I would not expect to give back price. In fact, we're still trying to get price during the course of 2023.

Excellent. And just as you get more of these large projects, right? I mean, my understanding probably is there is more direct ordering on these mega projects, right?

Sure.

I mean, if you look, there probably was -- well, the data shows it was 0 capacity additions in North America for like almost 20 years.

Yes.

As you're actually starting to add real capacity, what's the role of distributors in this new world where there are more big projects, and you are going more direct?

And what I would say is we're not really going more direct. I mean, I think we have a...

Oh, you're not. It's just...

Yes, the mix -- the mix changes. But I'd say for us, distribution plays an extraordinarily important role in how we go to market. The nature of our business is that it's highly distributed, lots of various projects. These businesses tend to be regional. The opportunities and the projects tend to be regional, and distribution plays a really important and vital role. So we think distribution will always be a key part of how we go to market and how we serve the market. And that role, if anything, will only increase as we move forward. To your point, large industrial projects do tend to be projects that are sold direct. And we have seen more of those of late. And as a result, our mix may change slightly between what -- where we go direct, where we go through distribution. But it really doesn't change in any way the role of distribution as we think about our medium- and long-term strategy.

Maybe just we will touch on portfolio management, but we'll finish up with China. A couple of things. A, just give us an update because I think you guys are really smart on China. If you can just give us an update what has transpired over the past 3 months. And B, just longer term, you have an interesting JV strategy in china. Sort of part 2 of the question, sort of related to part 1, but not really.

Yes. No, I'd say that China probably went through COVID in this way probably faster than any other country probably in the world. I think in our own operations, 80% of our employees had COVID within the first couple of few weeks and recovered and back to work. And so they really came through this COVID wave as they reopened the country much faster than I think anyone anticipated and were back to work much faster than anyone anticipated. And so what we're seeing in China is largely speaking here in Q1 is markets that are performing a bit better than what we anticipated. And the outlook for the year, as we sit here today, is a bit better than what we originally anticipated when we set our profit planning expectations for the year. So we're encouraged by China and we think it's going to be a good year, maybe a slightly better year than we originally anticipated. To your other point around our strategy in terms of how do we play the China market opportunity. First, I'd say, for us, China is an important market. And in fact, China is the largest market for almost every industrial industry, including the ones in which we participate. So it's a market that is very large and one that we would expect to fully participate in. Now the way we participate and we think the right strategy for Eaton is there's 3 tiers generally to the China market. There's Tier 1 highly differentiated, technologically sophisticated products. You typically find most of the global players participating in this market. And then there's what they call Tier 3 and Tier 2 products, which tend to be less differentiated, more commoditized, a lot of Chinese competitors. We decided that the right way for Eaton to participate in those markets is to do it through these joint ventures that we set up. So we've done 3 of them in the last year or so. Maybe we'll do more. But we think it's the right risk-adjusted strategy for participating in China instead of putting down a lot of your own capital competing in an industry that already has player capacity, leverage what they've done, the investments that they've made, be a minority partner. These are 50-50 JVs for the most part, but they consolidate, we don't, but also take these same products and sell them into the other emerging regions where they have the same requirements, where we will consolidate the revenue on everything that's sold out of these joint ventures outside of the China market. So we think for us, it's the right strategy for China. It's working well. These JVs are doing...

What are the areas of the JVs?

Sorry?

What are the areas of their JVs?

So -- excuse me, it's all electrical. So it's around electrical components, air circuit breakers, molded case circuit breakers, it's bus bar. There are certain JVs that are focused on energy transition markets. So...

Got you. So let's go to portfolio management, and you sort of have an enviable problem that the stock is trading at a premium. So you do carry premium valuation. So how do you think about managing your portfolio? And because a lot of questions about divestitures. But how does a company that trades at a premium sort of think about divest -- you've divested the assets. You got paid for it. The multiple has gone up. So -- but the next stage now that you are getting paid for all of your assets, how do you think about portfolio management under these circumstances?

Yes. And I'd say our strategy and the way we think about portfolio management really hasn't changed. And as I mentioned, you tend to think about portfolio management in these very large reportable segments. We think about it any place that we can make an independent decision around should we be in or out, we think about that as an opportunity to be a better portfolio manager. So every one of our general managers, regional presidents, they all need to be portfolio managers. They all need to think about their business as a normal distribution. And as I've said many times, it doesn't matter how profitable the business is on average. Every business has a head. Every business has a tail. Every business has an opportunity to be better. And so that's what we're really driving in terms of our culture inside of the company and processes inside the company to require the businesses to look at their portfolio of businesses, of markets, of customers, of applications through this lens of what does the normal distribution look like, and where do you have an opportunity to be better. So that's the way we think about portfolio management more broadly as a company. As it relates to the existing portfolio, the big reportable segments, and I would tell you that every one of these segments goes through a process with our Board every year. And we have a strategic criteria, and we have a financial criteria. And we assess these businesses for their strategic importance, for their financial capabilities and -- are they additive or subtractive, and we decide whether they're worth more to Eaton or would they be worth more to somebody else. We do that for every part of the company, not just vehicle. I know that's normally the question that's just behind the question. What about vehicle? But we do that for every part of the company. And today, we like the portfolio. We like the hand that we have. We like the fact that today, there's a lot of synergies between the portfolio. You think about today, as a company, our strategy basically is to follow the electron and that electron that exists in buildings, in offices, in your home. It's showing up now in passenger cars. It's showing up in commercial vehicles. It's showing up in the aircraft market, and we have the ability to leverage this technology across all of these different end markets.

So maybe we have a minute left. We have a full audience. Maybe somebody wants to ask a question. Very comprehensive presentation. But we do have 45 seconds. So I'll ask you a question on eMobility. So how should we think about the path to scaling on eMobility because I think part of what we've discovered as analysts is that as you sort of win new business, you have to make the investment. So when does the new business start translating to operating leverage?

Great. Appreciate the question because we are investing heavily in that business. And every time we win a new platform, it means big investments are required. We just won, for example, as I mentioned, this $400 million platform that's going to require more investment. And so what we said is that we've laid out the longer-term target, which is $2 billion to $4 billion of revenue by 2030. We laid out an interim target of $1.2 billion and 11% return on sales. I can tell you we're ahead of that interim target, which was the 2025 target. So we ought to beat the revenue, and we ought to beat the profitability. But it is a business today that's in the growth cycle.

It's a bit of a hockey stick.

Yes. It's a bit of a hockey stick because it's about scale, right? And we have these huge investments today that have been amortized over relatively small volumes. And so big investment phase, but it's an exciting business with tremendous growth, and we're happy to be there.

Well, thanks so much for being here. It's been a pleasure. Thank you.

Thank you.