Q2 2020 Eaton Corporation PLC Earnings Call

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Putting cool with me today, a quick Arnold our chairman CEO and the rig feel let's chairman and chief financial and applying the office or our agenda today, including opening remarks by Craig highlighting the company's fulfillment in the second quarter as we have done our past calls will be taking questions Andrew correct comments the.

Yes release and a presentation. We will also today have been posted on our lives that at Www Dot Ethan Dot Com. Please note that both the press release and the presentation include reconciliation to non-GAAP measures a webcast of this call is assessed our website and a movie available for replay.

I would like to remind you that our comments today 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 risk and uncertainties that are describing our earning release and a presentation.

There are also online all related 8-K filings with that our turn it over to correct. Okay. Thanks yen. So we'll start on page three with recent highlights from the second quarter and as you can imagine I'm extraordinarily pleased with the way our teams have executed in the midst of this pandemic in the economic downturn.

We've done good job of keeping our employee safe have delivered for our customers and certainly generated exceptional cash flow all while flexing our costs at record rates.

Our results, while while off of last year, certainly in absolute terms were better than expectations and we continue to make an important important investments for the future.

Q2 earnings on a per share basis, 13 cents on a GAAP basis, and 70 cents on adjusted basis.

Which excludes 20 cents of charges related to acquisitions and divestitures and 37 cents related to the multi year restructuring program that we just announced.

Our Q2 revenues were 3.9 billion down 22% organically.

As we noted on our Q1 earnings call April was down approximately 30%. This was followed by slightly better volumes in May and then relatively strong finish in June which was down let's call it low double digits.

In fact in May this as a point of could maybe.

Occasion, our electrical business in the Americas in Europe, and Asia, all posted low single digit organic growth in revenue in the month of June and so once again in our electrical businesses as.

The remaining very resilient in the face of this pandemic and economic downturn.

Segment margins were 14.7% down 110 basis points from Q1.

And our decremental margins were at 25% five points better than our guidance of 30% once again, a good indication of how well our teams have done in controlling the elements that are really within our control.

However, recognizing that some of our businesses could be looking at a slow in certain which you could call April long recovery, we announced a multiyear restructuring program of $280 million, including $187 million charge in Q2.

These actions will reduce structural cost for sure and our targeted in.

Those end markets, including commercial aerospace oil and gas NAFTA class eight truck and North America, and European light vehicle markets.

Where these market have been certainly highly impacted I'll provide more details on this program and a few minutes, but they're covered on page 12.

The other clear highlight for the quarter was our operating cash flow, which was $757 million and free cash flow of 667 million.

Both very strong results and which gives us the ability to really reaffirm our free cash flow guidance of 2.3 billion to 2.7 billion in a midpoint of 2.5 billion and so.

Things continue to grade and converting.

On the cash as well.

Finally, as most of you know we made an important announcement during the quarter regarding sustainability and our commitment to 2030 sustainability goals.

I thought it'd be helpful. Just to put this announcement in the context in order to show you how it fits within the broader strategic framework of the company, which we do on page four.

Thanks, They simply stated in sustainability really as at the core of our mission, we talk about our mission being to improve the quality of life in the environment and certainly that means sustainability.

In fact, if you think about all of our value propositions with customers, they're built around creating safe reliable and efficient solutions, let's call them sustainable solutions and so as.

As we oftentimes say, what's good for the environment is good for Eaton.

We believe that meaningful efforts to support the environment are fundamental to how we create value for customers and it certainly plays where we think entered play a leadership role.

Hi, sustainability as we think about it really presents growth opportunities to help our customers solve their business goals and and to the extent and intense objective we've laid out 10 year.

Plans that include investing $3 billion in R&D, we create sustainable products over this period of time.

This will also include reducing our emissions from our install base of products and upstream sources by some 15%.

Just to maybe give you an example of where we think this really fits with our overall strategy.

Sustainability really is about capitalizing for Eaton Vance secular growth trends around electrification for sure across all our businesses and also in energy transition.

Sustainability I'd tell you is also important to how we run the company on a day to day basis. Since 2015, we reduced our absolute greenhouse gas emissions by some 16% and we're certainly on track to deliver our 2025 targets.

By 2030, we not committed to achieve science based targets of 50% reduction of greenhouse gas emissions from 2018 levels.

We're also committed to be carbon neutral by 2030 target that will achieve through a combination of initiatives, including carbon offset such as reforestation continued to optimize our sourcing of renewable electricity in our all of our operations as well as delivering energy storage solutions and so pretty comprehensive set of plans that we have.

That that we think will deliver this 2030 goal.

And finally to achieve these goals. We obviously have to continue to work on building a workforce that engaging and passionate about making a difference. So this will continue to be a large pirates of the company overall, so hopefully that provide just a little contact in terms of why we think sustainability for such an important initiative for Eaton and how we're going to convert on that.

Turning into accelerated growth for the company.

Now turning to page five we summarize our Q2 financial results and I noticed a couple of things on this page.

First acquisitions increased sales by 2% this was more than offset by the 8% impact from divestitures and also we had negative currency impact of negative 2%.

I'd also remind you that we now recognize oil charges related to acquisitions divestitures and restructuring at corporate rather than at the segment level.

And we did as because we'd hope it make it easier for you to do your forecast by quarter by segment without the volatility to comes with these types of onetime charge.

Okay.

Next on page six we show our results for electrical Americas revenues down, 29%, 9% decline organic revenue, 19% impact from M&A and this was primarily the divestiture of the lighting business and a small impact from negative currency as well of 1%.

Operating margins increased 130 basis points to 20.7%.

And these margins were certainly favorably impacted by the Divesture of lighting, but also our teams did a great job of controlling costs.

Really count at the impact of the economic impact the pull that 19.

Combination resulted in a very strong decremental margin performance up 16%.

So this segment continues to prove to be highly resilient. When you look at margins, but also when you look at orders and backlog.

Orders increased 2.1% on a rolling 12 month basis with strength in residential and utility and Datacenters.

And of note here, our datacenter orders actually were up from 7% on a rolling 12 month basis.

And lastly, our bookings remained strong they were up 11% versus last year.

Turning to page seven we have our results for the electrical global segment.

Revenues were down 16% for 14% decline in organic revenues and 2% headwind from currency.

Operating margins here declined some 160 basis points.

But to a very respectable 16% and decremental margins here.

We'll also very well managed coming in at 26%.

Orders declined 4.6% on a rolling 12 month basis.

With most of the significant declines coming as you would expect in global oil and gas markets and in industrial market. So not an unexpected result, with respect to where we saw strength and weakness.

And lastly, our backlog for electrical local increased 2% on a year over year base.

On page eight we summarize our hydraulic segment for Q2 revenues were down 32% with a 30% decline organically and that 2% currency impact operating margins were 9% and orders for the quarter were down 33.7%.

Year over year in this was driven really by weakness in both Oems in the distributor channel both.

We continue to work closely with handful loss.

Including the customary closing conditions of regulatory approvals and I would tell you that thing.

And cost organization range remains excited about owning the business.

We do however, and now expect the transaction to close at the end of Q1.

Next year.

The delay as you can imagine due to the cobot 19 impact which has impacted the pace of some of the regulatory approvals that we expect.

On page nine we summarize our results for the aerospace segment revenues declined 27% with.

A negative 35% inorganic growth offset by 8% increase from the acquisition of Soria.

Operating margins declined to 14.8% and really this is due to lower sales, but also.

The acquisition of Soria also had a dilutive impact on margins.

Orders declined 12.8% on a rolling 12 month basis with particular weakness in the quarter as you expect in commercial OEM and aftermarket.

It is worth noting I would tell you, though that orders for the military aftermarket were up 13% on a rolling 12 month basis.

Backlog was down 5% year over year overall.

Yes, certainly as everyone here I understand the commercial aerospace markets are grappling with significant declines in passenger demand and this is impacting our business and certainly impacting both the OEM and the aftermarket.

Yes, just maybe some context hearing of why we think about this as kind of a near term dislocation and were taken certainly the needed steps to position. This business of future. We remain confident in the long term attractiveness of aerospace market and we'll certainly do our what we need to do in order to manage our margins in the meantime.

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Next on page 10, we summarize the results for the vehicle segment revenues declined 59%, 52% of which was organic.

In addition to the divestiture of the automotive fluid conveyance business, which impacted revenues by 4%, we had 3% negative impact of currency.

The decrease in organic sales was really driven by I'd say widespread customer plant shutdowns due to cope with 19.

Really resulted in lower class eight OEM production as well as continued weakness in light vehicle production.

Once again, it's a little bit more color on this one during Q2 most of light and commercial OEM said shutdowns that range between six and eight weeks.

These shutdowns, which really began let's say in late March kurd throughout the month of equaling extended into mid may in so many of our customers was shut down for almost half the second quarter, but production is now certainly beginning to come back online.

Global light vehicle Mark production was down 55% in Q2 in class eight OEM build was down from 70% Q2.

We now project NAFTA classic production to be 175000 units for the year, which is down slightly from our prior forecast of 189000 units, but still down from 49% from 2019.

The steep reduction and certainly this sudden reduction in OEM production led to operating margins of a negative 6.4%.

But I would add this business has once again done a great job managing decrementals in despite this tremendous reduction in revenue delivered a respectable decremental margin 33%.

Not surprisingly in.

Much needed, we do expect better market conditions in the second half and our business will be well positioned to participate in this recovery.

Moving to page 11, we have our E mobility segment revenues were down 33% all of which was organic.

Anik margins of negative, 3.6%, keeping operating margins of negative 3.6%, primarily due to lower volumes in particular weakness in the legacy internal combustion engine platforms and once again the ongoing increase in R&D expenditure.

We continue to be enthused by the way.

About the long term potential of the business and and quite frankly have seen nothing but upward revisions in the expectation for the penetration of electric vehicle. So a market that we still think we'll be very attractive long term.

We're very well positioned once again with the common technology platforms that were creating leveraging the strength in our core electrical business.

Good example of this idea of everything becoming more electric is one of the recent wins that we've had.

With a truck OEM, a $21 million program for export powering barometer for a major commercial truck customer and so.

We're almost every aspect of our business there is more electrical content and we're well positioned once again through his particular segment to participate in that growth.

Overall, we want programs with a value of approximately 500 million dollar of mature year revenue.

On page 12, we show the details of our plans to accelerate and I'd say expand our restructuring actions and I say accelerate because for the most part we're pulling forward a number of the restructuring ideas that we would have done anyway.

Given the economic implications of the pandemic, we naturally have a greater sense of urgency and also more capacity to take on these projects.

We announced the $280 million multiyear restructuring program as we noted designed to eliminate structural costs and we've taken charges of 187 million in Q2, and we expect to see additional costs of 93 million realized through 2022.

Characterized as well as additional dollars we'd expect.

We will deliver over the next three years, some $33 million of charges in the second half of this year 55 million in 2021 and 5 million in 2022.

We would expect realized $200 million and mature you benefit from these actions once they're fully implemented and we think full year implementation is 2023.

Approximately two thirds of these costs are in our industrial businesses, principally vehicle in aerospace and therein, meaning one third is within our electoral sector, particularly within with an emphasis on our oil and gas business that will report through our electrical global segment.

Naturally we're focused on those businesses serving end markets that are more severely impacted by the pandemic.

And then turning to page 13, we do our best to provide.

Q3 outlook on revenues versus last year, and while you can imagine netting all these markets will be stronger than what we realized in Q2. This is really a year over year look for Q3 versus last year.

For electrical Americas, we expect organic revenue to be between down to wind up too so essentially flat with strength in residential utility datacenters offsetting.

Weakness in industrial markets.

For electrical global.

Current view is organic revenues will decline between 10 and 14%.

With strength in Asia Pacific and datacenter markets.

Offset by declines in Europe, and once again in the oil and gas market.

For aerospace, we expect organic revenues will be down between 28 and 32%.

With continued strength in military offset by really significant declines in all of the commercial markets.

Vehicle, we project revenues will decline between 30 and 34%. So markets are still very weak in absolute terms, but these markets will be up significantly from Q2 and for Emobility, We expect declines that between 13 and 17% once again.

Pressured from legacy internal combustion engine platforms.

And lastly, hydraulics, we think markets will be down between 23, 27%.

Great and overall, we're estimating Q3 revenues to be down between 13, and 17% and so and improvement.

Versus Q2, which was down some 22% apparel in absolute terms where markets are settling decline.

Moving to page 14 here, we provide our best look at guidance for Q3, and some commentary on the full year, but for Q3, we expect organic revenues to decline between 13 and 70%.

And this really does include what we know about July where we saw a low double digit declines.

Weve elected not to provide full year revenue guidance, given kind of the ongoing uncertainty around the pandemic and its impact on markets in Q4 as many of you aware, we are still dealing pandemic in various regions in the us and around the world. We're still seeing a growth in the number cases and so we're still.

Living in this period of uncertainty.

We do think Q2 will be the trough for organic revenue declines and barring a second wave with the pandemic Q4 should be better than Q3.

For Q3, and full year, we expect decremental margins up between 25 and 30%.

And for Q3, we expect our tax rate on an adjusted earnings to be between 15 and 16%.

We're maintaining our free to 2020 free cash flow guidance. The range of 2.3 to 2.7 billion and I would note that note that this range does in fact include now the impact related to the multiyear restructuring program that we announced the network not in our prior guidance.

As a point of reference in the first half just to give you some comfort around our ability to deliver this number we generated some 35% of our $2.5 billion midpoint. That's in our free cash flow guidance and this number is very consistent with our performance over the last five years and so we do tend to be a bit back half.

Loaded.

We are providing new guidance for share buybacks, and we're saying between 1.7 billion and $1.9 billion for the year.

Recall that we purchased repurchase.

The 3 billion of shares.

Q1, with the proceeds of the lighting sales.

We continued to deliver free strong strong free cash flow and we now plan to buyback between 400 $600 million our shares half a year.

And finally, we may be district.

Like we are doing here inside our company just bring it back to kind of the broader.

Longer term strategy, and where we're headed as an organization and we will continue to effectively manage to the short term challenges associated with pandemic, but we also remain focused on the broader strategic and financial goals.

That we laid out and our meeting in New York and we summarize once again here on page 15.

Number one ensuring that we continue to move the company in the direction of becoming what we say as an intelligent power management company that takes advantage of important secular growth trends and we talked about them being electrification energy transition LTM connectivity and blended power. So these trends are continuing and.

Despite whatever temporary hiccups, we are experiencing we think long term, it's the right place to be.

By doing so we're working on creating a company thats going to deliver better secular growth.

And better growth through various cycles higher margins and with much better earnings consistency.

Our long term goals have not changed it includes 2% to 3% organic growth, 20% segment margins, 8% to 9% EPS growth and $3 billion year free cash flow.

And with our strong cash flow will continue to be focused and disciplined and how we deployed by investing in organic growth at the top priority delivering top cortile dividend.

Ongoing programs share buyback that actively managing our portfolio, while being a disciplined acquirer.

So we continue to remain excited by the end story I Hope you are as well and with that I'll turn it back again.

Good Thanks, Craig before we started our trend they have lower core today I do see that we have a number of individuals into Q is questions. So appreciate the if you can limit yourself to needy just one question and a follow up thanks in other ones, where you'll corporation with that ill turn it over to the operator, who will gives you guys doing.

Structure.

Thank you and ladies and gentlemen, if you wish to ask a question. Please proceed from one.

Telephone keypad you may might carry your question at any time by repeating the mine and tariff man.

Speakerphone, please pick up your handset before passing the number once again, if you have a question.

Please press one zero.

And our first question is having the comp range from Deutsche Bank. Please go ahead.

Yes, thanks, good morning, guys.

Hi.

Hi, there so I guess, maybe starting with.

The restructuring actions that you guys are taking.

Craig So the information on the costs were helpful. I guess, maybe some color qualitatively around what you're actually focusing on headcount versus maybe footprint or other things and I guess I'm going with this is cadence of payback over the next few years, including the second half of 20 as well as I guess why it.

Taking some time to actually get a payback from those auction.

Yeah.

I appreciate the question Nicole and as I mentioned in my opening commentary and one of things we've talked about historically that we always has a company have kind of a future view of restructuring projects that we'd like to take on in the pacing items are generally tend to be.

Our own internal capacity to deal with them and manage them effectively as well as our customers' ability to absorb them without creating disruptions for them and certainly in the event of any economic downturn like this when it gives everybody more capacity to take on these projects and so yes.

A lot of what we're doing today, I'd say view and we talk about footprint versus head count I think the important.

Way to answer that question is that it's all structural and so these are all cost items that were taken on that will not come back in the event that.

When revenues return and so these are things that early focusing on.

Taking structural fixed cost out of our system, some of which will be headcount some of which will be around footprint. We have not yet made these announcements completely internally in terms of where those impacts are going to be and so we'll we'll wait and provide that detail a little later on but but it will be completely structural.

Do you point around timing I say.

Some of these items obviously, we'll.

Who will impact and have a benefit earlier than others.

But it's one of the things I would say as you think about the decremental margin does that we're delivering as a company and what's embedded in our guidance. It's one of the reasons. While we can deliver these very strong decrementals is because we are flexing our businesses and flexing our costs and so I'd say as we think about this payback.

280 million dollar and investment with a essentially a tool demand. Our return is a very attractive program in terms of the return on the investment and we'll get some of the benefits sooner some will come later, but in aggregate.

Extraordinarily strong returns on these dollars that we're investing.

Got it thanks, Craig that's helpful and.

Kind of teed up my follow up there I guess and I wanted to head on Decrementals for 25% was obviously impressive this quarter and above around 30% guidance I guess, how do we think about that through the rest of the wanting to me, we kind of know that to queue at least we hope will be wellpoint with respect to revenues. So I guess.

Any possibility that 25% could actually become something better and the second half as you guys execute on cost savings and perhaps you got a little bit of sequential improvement in revenues as well.

Yes, I appreciate the question and in our teams have done an extraordinary job year to date on decremental margins and as we flex costs and.

Embedded in that guidance of 25 to 30.

Is once again, the uncertainty around whether or not we end up experiencing a second wave of the depend emmick and as you know as well as anyone we're seeing these hot spots around the us and.

Potential threats of.

Going into some form of if not pull shutdowns retrenchments in many of our.

Markets and so.

It's still a lot of uncertainty and it's one of the reasons why we still have this fairly wide range of Decrementals as you can imagine as well we took a lot of extraordinary a onetime costs in Q2 around.

Time off without pay in.

Travel was essentially came to a grounding hall and so some of these costs look we'll certainly come back as the year unfolds, but if we don't end up with a second wave.

No.

In the second half a year and we will likely do better than kind of the midpoint of this range of decrementals that we laid out.

Thank you. Our next question will come from the line.

T. Please go ahead.

Hi, Thanks, good morning, everyone.

Hi.

Craig maybe just a starting out while we I'd love to hear your thoughts on just Nonres construction, specifically in your exposure to it.

There's a lot of concern as we kind of had into 2020 wine that the markets are going to downturn and so curious to hear how your higher businesses positions.

For potential Nonres downturn, and and now maybe remedies. These actions that your that you're taking.

Or potentially like offsetting measures for that.

Yes. Thanks, Joe appreciate the question and when you can use the term non res construction really that for us that's really most of our electrical business right because that's everything other than residential in residential today would account for less than 20% of our total business and so it's a really big category. The way we tend to think about it is that you know.

Maybe just take you through some of the key important segment for US we think.

As has been the case for some time, we think Datacenters continues to be a very strong market and are performing well in the near term and we think long term continues to be strong. We think the utility market continues to be a very attractive market and will perform well.

For the long term and has held up extremely well residential by the way and I know you ask the non risk question, but residential has just been extraordinarily strong and with essentially no.

Hi, double digit kind of growth numbers in Q2 overall, it's already continues to be extraordinarily strong and then do you mean I think the spirit of your question really get to this whole question, what's going to happen within commercial markets and has been a lot of talk and speculation around.

The death of the office and whether or not everybody is ever going to go back to the office again, I don't think Thats. The case by the way in fact, I can 0.2, examples where companies have actually had to take down more office space, because you've got the social distance now in offices and so you need more space to how is the same number of individuals but certainly there's there's certainly some risks to.

What we call the office piece of non res, there's certainly if you think about retail.

Those markets will probably be week, but offsetting that there will be other markets that are strong. We can we think that you think about warehousing as a segment. We think will be strong we think water wastewater market will be strong and so I think the fact that our electrical business has held up so well or better than others.

I would imagine is the fact that we do play across so many of these different end markets some of which are experiencing some of these negative forces other lose of which are.

Seeing positive impact and as a result, this business is extraordinarily resilient and so we remain very optimistic about the prospects of our electrical business, there will be dislocations and perhaps certain markets are certain regions of the world.

But by and large we think the market will be just fine and using kind of.

China as a good proxy for the rest of the world as they get teacher come through the pandemic, China is already back to positive growth both in sales and orders and so we're hopeful once we get through this and we get a vaccine we get a we give an effective therapeutic that.

The markets are likely going to return the trend level of growth.

That's helpful color Craig maybe my one quick follow up is more on just free cash flow I. It was that night do you guys affirm arrange for this year I guess as high as you're thinking about next year also in the context at some some of the cost actions that you're taking Oh, you know I know it's too difficult.

At this point to say you know exactly what the what that number will be next year, but is it growth starts to return to something that's a little bit more normal what are your thoughts on your ability to grow free cash flow and in 2021.

You know the way, we generally think about it is that certainly in periods like this as we de capitalize the business and were freeing up a lot of cash from from working capital, but also as you can pay as you saw on or is that the earnings are down dramatically and so as as we continue to be as we expand through an expansionary cycle the earnings will be up.

Secondly in wind with that your cash flows will be up and so if you think about eating overtime and through various cycles. Our cash flows have been aedis amazingly consistent.

In terms of generating very strong free cash flow you know really at all points of expansion and contraction.

With the doing it did you want to add some numbers, it's going to add a little color on the trends in electrical it.

We measure and a lot of different ways, but one of the ways you measure. It is looking at our negotiations for a large projects in the Americas, we have very good data and it's a very big business for us and if you take out the activities related to oil and gas our negotiations and the second quarter were flat.

With a year ago and selling it gives you some indication that.

The balance that Craig talked about all these different segment seen as they come together in a way that creates a lot of stability.

And.

That gives us a fair amount of confidence that even even with the turbulence on the macro economy.

There are enough sources of strengths that that those sources offset the the weak spot.

Okay.

Thank you My next question and spend the line of Jeff Sprague from vertical research. Please go ahead.

Thank you good day everyone.

I just would love to get a little additional color on vehicle, obviously, a very very tough quarter production and on the automotive side starts to sort of look better is locked down. These just give us a little sense of what you're thinking for the profit trajectory. There should just be the only quarter, where we see an operating.

Loss and.

Maybe give us a little color on how much if any of these restructuring benefits might flow through to those businesses in the back half.

Yes, I appreciate the question, Jeff and it's been it's been kind of a long time, because we've ever with as we lost money in our vehicle business and I just say once again, just an extraordinary combination events. When you look at some of these numbers around production both in class eight and in global light vehicle.

Essentially half the quarter was lost and so the team once again did I think an extraordinary job in maintaining a 33% decremental in that environment.

We certainly.

So look forward to volumes are going to be significantly better than did in Q2 that we would fully expect that the margins for the business.

This year will be double digit and we would not expect to see a loss in the vehicle business and any subsequent quarter barring another returned to dishes terrific market kind of event that we experienced over the last quarter.

The details around where the benefits are going to flow. Once again, we've not made internal announcements specifically to some of these initiatives and so we'll give you more color later on it certainly fully embedded in the decremental margin assumptions that we we've laid out for the year, but you said.

You can expect in our vehicle business to return to.

Attractive levels of profitability post Q2.

Great and second question just on Aero.

Do you think we've seen the bottom then.

Aftermarket activity or do we still got to kind of deal. It's a delayed impact of parked airplanes and use material on stuff kind of working its way through the system and maybe we're a quarter or two out on the bottom there.

Yes, I mean, it's a it's a it's in a good question and one that everybody.

Turning to get their arms around specifically in terms of you know what's the.

The outlook for aerospace specifically, what's the outlook for aftermarket in terms of or consumers are going to be comfortable getting back on planes flying again, which is as you know is what drives the aftermarket I'd say, we had pretty good.

Terrific numbers in terms of aftermarket in Q2 down fairly dramatically.

So it's tough to imagine that things could get much worse than what we experienced in Q2.

You know activity levels in general as you're well aware, our improving there's more planes flying today. There is more hours of twice today than they did have been certainly over Q2, many parts of the world in many regions of the world their numbers a better than hours in the US. If you think about Asia, you think about Europe, they they've done a.

Better job of getting handle alone the pandemic and so you're seeing the data there be.

Prove perhaps at a faster rate than the U.S. data.

So I think it's quite if it's and it's unclear today in a lot of claims on the ground that you took outside the apartment parting out.

Airplanes, and how that's going to impact the aftermarket I just think it's too early to tell whether that's going to have a prolonged impact or not.

Thank you. Our next question is feminine care Paul from Macquarie. Please go ahead.

Thanks, Good morning.

Good morning.

Just wanted to.

I can see all.

Yes, Richie framework and.

The down low double digits, so im sorry nights a week, if you're coming through very Frank thing. We can barely hear you. So maybe can you speak up a little bit.

Maybe I'll use my handset that better performance from yeah, nothing of I'm going to vary dodgy had said I need to invest something well home office facility philosophy design. So [laughter]. So the the July and now download them all up low double digits versus the Downspacing 17 framework.

And I understand you want to be conservative, but is there any reason why you know July would be better than than the Threeq framework and then just within that.

That's cool Americas.

Looking to be flat versus the down 9% in into Q.

Again, just whats flipping between two Q3 Q.

And you know any any end markets to coordinate that would be helpful. Yeah.

Hey, appreciate the question Nigel and I think what we're really trying to deal with here is you know.

How precise we can actually be setting any of these forecasts and and I would tell you that if you think about June and July kind of essentially running at about the same levels and as we think about our Q3 forecasts, we really think about it mostly as a continuation of what we experienced.

Over the last couple of months.

And so I think on the margin, whether it's one or two points.

Better or worse, it's really difficult the judge, but one of the things that has us a little bit nervous as it will freely admit is the fact that you are continuing to see.

The spread of coded 19 in so many parts of the U.S. and so if there is a if there is a concern that we have that could potentially take.

The next couple of months down slightly below what we've experienced over the last two months, it's whether or not the U.S. specifically and then you have obviously readings like India, and Brazil, whether or not we get a handle on the spread of the pandemic.

So that's the piece it has us all just a little bit nervous.

And perhaps a little bit conservative around.

What is the real outlook look like for the balance of Q3.

Yeah, and then there's national Americas, what slipping.

What's going to maturity better between chickens Ritchie.

Yes, and electrical Americas, I'd say that no for the most part they experienced kind of the same kind of shock to the system that they know the other kind of parts of our businesses experience, where you've got a lot of construction projects essentially to shut down in Q2 as you as you're well.

Where there were certain regions of the U.S., where construction was deemed a central there was other places where construction projects, where we're simply delayed and so I think the catch up effect that we're seeing a little bit in the Americas. Specifically is the fact that we would anticipate that that you don't see the kind of wholesale shutdowns of the U.S.

Economy that we experienced in part of Q2, and so on an incremental basis.

Quarter over quarter basis, we would expect the electrical Americas business to perform better.

Also Nigel it's Rick we had some.

Production challenges during Q2.

We had to re layout plants than we had some plants where plants had to be close for certain period due to call that issues.

So that constrained our sales and we've sorted through all that than.

That particularly in places like residential will will allow higher higher sales volumes in Q3.

Thank you and our next question is from David Raso from Evercore. Please go ahead.

Hi, Good morning. It can you clarify your comment if I heard you correctly the month of June.

Did you say electrical Americas posted low single digit revenue gross.

And the same thing for electrical global I'm, just trying to if that is correct. Yes, why does it stepped down to flat for Americas, and the third quarter, if you're ready up low single and then even Electra XVM Global goes from up single digits test for the next quarter down 12 Bucks midpoint I'm just trying understand what you what you really singing.

July in the electrical business, Yeah, no what I was really trying to convey in a common first for you heard me correctly, you know electrical essentially around the world actually did post positive sales growth in the month of June and what you often and it's all sometimes difficult to read too much into a given month because there's also some catch up right. We talked about the fact that.

We had as Rick noted we have factories that were shut down we have projects that were delayed and so we think it was certainly a little bit of catch up that took place in the month of June.

When a reasonable we experienced kind of growth across the region and projects that perhaps should have been delivered in in April and may that slipped into the month of June and so as the economy in the U.S specifically continue to open. So we do think give us some catch up in the month of June and so if one of the margins.

Things are slightly.

Worse or about the same as the June rate in subsequent months, it's really because of this catch up effect that we think we experienced in the month of June.

But is that what you're seeing in July I mean, especially global RMB going from up low single say there was some catch up.

Then a put down 12 in the third quarter have you seen that much give back are ready in July.

Look I think we'll be ready down that much and enjoy.

Yes, I'd say that you know.

Once again in terms of the easy global specifically, what we're experiencing overall as a company in terms of the guidance numbers that we provided.

No that's consistent with put the company's experience I don't think we provided specific guidance for electrical global its overall, but I, but I. So I'd say that it certainly consistent with our overall guidance for the quarter for Eaton overall, but I appreciate that thing international.

I'll call you call global but the international business being down 12 organically in the third quarter coming also the June that was up low single.

Just a couple of adults I just didn't see if you saw a big drop off in July are ready to suggest that for the electrical international business, but what we are seeing Dave as we are saying.

Pronounced weakness in oil and gas I mean is not coming back and so that's what's driving that the weakness and electrical global you know our global oil and gas businesses all reported in electrical global so that that's really the factor.

That is causing.

The markets to be as weak as we estimate if you were to take that out electrical global would look much like electrical Americas.

Sure up in the month of June oil was down Big I assume and you still put up low single digit growth in electrical international so.

Thanks anyway, I mean, I'm, just trying to under trying to understand that.

Okay, and then lastly, <unk> go ahead, I'm, just going to say that there is a lot to this.

This pent up demand and people we.

Being able to deliver on customers wanting us to deliver a projects that had gotten delay and and so that June is distorted by that a bit.

That's fair and its lasting clarification to an earlier question you say vehicle margins for the year.

I would be back to double digit.

Yes, I did.

That's impressive okay. Thank you very much I appreciate it.

Thank you in the next question is some Jeff Hammond from Keybanc. Please go ahead.

Hey, guys good morning.

Hi.

Just wanted to dig in on some of these markets that are proving more resilient in Americas can you just talk about where.

The incremental utility spend is seeing or where you're seeing the most resilience.

And you know on the data center side I know, we were planning for kind of an air pocket and that seems to be coming back is that coming back stronger or you know inline with expectations.

Yes, I'd say in the in the utility market, Jeff I think it's pretty broad based is what we're seeing really in utility markets.

Those markets are holding up fairly.

Fairly well and I can I would say that within the U.S. I can't really you know I don't know that there is very different story, depending upon you know what region of the you actually looking at but where we play in the utility space on the distribution side.

Obviously resilience in investing in unit grid resiliency continues to be an important.

Need in so many of our communities around the U.S. It continues to be fairly stable and predictable market in data center, specifically, what we're really seeing as a return and hyperscale as we've talked about.

Recalls hyperscale does tend to be lumpy you know you get large orders and then they'll go quiet for a while to get large orders again. So if you think about datacenters overall, we saw very strong growth.

In Hyperscale.

In the quarter.

That really is a return to growth as they continue to kind of build out the their requirements.

Okay, and then just on the hydraulic so that is that just a function of timing around or you know approvals or is there anything else going on.

You know how do you think it's the general you know slowdown in the market that you're experiencing in hydraulics and specifically in construction.

Yes.

The AG market is holding up a bit better certainly the China market is holding up very well in the context of a bit of depend demick and really have already returned to growth and so it's really just the general slowdown in the construction market, that's having a big impact on hydraulics and Jeff. If you are also asking about.

The timing of closing does the sale, it's really a function of many of the regulators are still working from home and so thats greatly slowed their ability to process.

All of the filings I mean, any large transaction like our sale of hydraulics.

We're talking about thousands and thousands of pages of material and without their staff that hands without the ability to easily copy things and and App team meetings. It just is taking longer and you're really seeing that for all acquisitions not just ours. So we're not surprised by it.

Hi.

You know things are progressing in a normal way, we're we're receiving the kinds of questions that we would expect to receive as just.

Taking a bit longer to get those questions.

And I mentioned in my opening commentary that you know how enthusiastic danfoss remains around the transaction itself and if if anybody wants to get a sense of their real enthusiasm. The the founder of the company in the CEO posted a video this week on on Linkedin, where they're making the.

Announcements through their organization about.

The bringing together these two businesses and and professing their enthusiasm to get this transaction closed and so.

We remained absolutely convinced that there your while it's been a core to delay the transaction will close and and they loved the transaction and it's kind of create real value for them.

Thank you and your next question is Tomcat and panel Gordon Haskett. Please go ahead.

Thanks, Good morning, everyone Hey.

Question, Rick just to put a finer point on this nonresi issue. We get these questions. All the time could you just remind us how big the new build portion for office buildings is a as a percent of say electrical Americas on global because that wouldn't be seem to be the one area that debatably right could be at risk score is not necessarily going to expand.

I can't imagine, it's that big but maybe you could just frame it out for us in terms of its magnitude.

Yeah, I don't have the new I don't have that's probably I mean, maybe give me one data point John that may be helpful free to kind of.

You know quantify or gauge the impact today, if you think about the office piece of kind of or electrical business. What goes into office build it you just under 20% of the total electrical boot business and so to your point within that some of its new build some of which retrofit and model.

Occasions and so.

Hopefully you know those that data points that you get what we can try to get to the data around what's new versus a remodel and refurb, but it's under 20% of the total business and I do say I think it's if it is debatable in terms of.

Where this is going to ultimately take us in terms of whether or not working from home is been wonderful.

To date.

And companies have manager to longer term I think its though an open question mark around efficiency and organizational effectiveness and working from home and as people come back to offices and this need to social distance is going to require more space and so I think it'll be an interesting one the watch in terms of.

How it unfolds.

Yeah, No I don't I don't disagree with that and I think you think historically, you've said retrofits sort of 40% to 50% of the whole electrical business. So maybe we can extrapolate by them I'm not sure like 25% to 30%.

For the whole electrical sector.

Okay, Alright, so I had the number one but that's that's still it's still windows it down.

Well just have the another clarification is the 280 charge on top of the 50 to 60, a quiet restructuring you guys do every year or are you going to be lumping in that 50 to 60 with the two weighty so kind of the whole thing gets called out over the next.

A couple of years of the charge enactment.

Yeah, It's really the latter John and that was that was my point that I was making in my opening commentary around.

We had a number of restructuring programs that we were tended to do anyway and.

Pulling those forward and accelerating them and so it's really the ladders, we intend to take this one charge.

You know related to the $280 million laid out the way, we articulated and that would then.

Yeah eliminate the other restructuring programs that we would have otherwise plan to do over the next three years.

Thank you our next question and spend the line and Andy Casey from Wells Fargo Securities. Please go ahead.

Hi, and.

Good morning still.

Can you talk about M&A potential I'm, just wondering if the dislocation.

Has created any incremental opportunities and then can you comment on any valuations you might be seeing.

Yeah I appreciate the question, Andy and certainly we remain obviously in a position where we have the balance sheet that gives us that optionality around keeping M&A on the table in and out and as we talk about our cash flow generation. This year, you know as well as.

Certainly the of the M&A event that will take place with the sale of hydraulics and we'd expect to bring in another 2.8 $55 billion of cash with that transaction when it closes so the balance sheets in great shape than we have plenty of firepower, having said that I would tell you, though that you know give.

And the level of uncertainty around market outlook.

As well as the fact that valuations and and companies coming to terms with the fact that perhaps some of their businesses aren't worth today, what they were worth maybe three or four months ago that does take some time for for that new reality to said it. So I would say today that valuations have not and expectations have not necessarily.

Come down commensurate with the change in market outlook and so those two things together says we will continue to actively work. The pipeline. We are in fact, having a number of conversations are focused and priorities continue to be a largely around the electrical business. We take in this environment, we'll have to see whether or not.

Aerospace.

Earlier is up the future of aerospace thing outlook clears up enough that for us to get back on you know kind of front foot.

Around an aerospace transaction, but but right now I'd say that.

We're working the pipeline, it's an active pipeline but.

Hi, wages have really not yet come in.

Okay. Thanks, Craig and then no real quick one I guess for Rick.

You gave the Q3 framework if you.

Just laid out the kind of nonrecurring stuffs like occurred in Q2.

Beneath that segment operating profit line do you expect any sizable change and things like corporate pension and other.

Not any significant change should be a relatively consistent.

Thank you and your next question is from the Lion Air Van can all been from Bank of America. Please go ahead.

I guess I guess still good good morning I'm.

Just a question on a inventories and the channel.

Can you just how you know have deal has been destock came during the whereas the level both in North America and internationally as far as you can see is there any if would you stop for restocking basically.

Yeah, I think you know the question around whether or not there's a need for restocking you know is still yet to be determined to Andrew I can tell you that we did experience. Some destocking during the course of Q2 and but that Destocking is certainly behind us now and today when we do our channel checks and talk to our distributor partners they'll tell you that they feel.

Inventory levels today are well aligned with their their outlook for revenue and so I think its a.

Too early may be to make a call on inventory restocking, but certainly the destocking of inventory has has stopped and is behind us now.

And just in terms of supply chain.

Hi.

You know between China between the sort of Mexico shutting down have you guys made any changes to your internal sourcing internal supply chain suppose coven. Thank you.

Yes, I say nothing material you know one of the things that we've always done and believed in strongly is your manufacturing and what we call center gold currency, which means essentially we what we sell in a region. We generally makena region. We do in fact ship some parts around and components around the world I would tell you that throughout this whole entire pandemic.

Our supply chain has held up extraordinarily well and I guess I can say you know with confidence that we didn't lose a single order because our supply chain broke down and somehow we ended up with an inability to deliver the bigger challenge that we experienced as a company really is what largely took place along the border.

Companies in country excuse me of had different criteria around what industries are deemed essential and so there was a period of time, we had some challenges with the Mexican definition versus the U.S. definition I can tell you that today, that's behind us as well.

But for the most parts supply chain has not been a big challenge for us during this current pandemic.

Thank you and our next question is from Julian Mitchell from Barclays. Please go ahead.

Hi, Good morning, maybe just I'm trying to understand the free cash flow a little bit better within that two and a half billion dollar midpoint. So this year.

Maybe help me understand whats the hydraulics contribution within that and also was the cash a portion of the restructuring charges in that number peaks.

I don't have that has the exact hydraulic ports and will address that offline. The cast part of the restructuring charge is probably on the order of 50 million and so that's why we believe that our guidance even inclusive of that cash portion of restructuring.

It's still hold true.

Understood. Thank you and then maybe just the second one around the.

Aerospace maybe margin dynamics help us understand.

What the impact Oh, sorry, I was sunbank was in that integration within the.

I think almost thousand bases points dropping the arrow margin in Q2.

And maybe how you see that impact from the acquisition playing out.

The balance of the yeah.

And I Didnt see quantify but maybe help us see what the commercial aftermarket revenue drop was in Q2. Please.

Yes, it's.

Sorry, if some bank into its impact on margins that have to do some quick math I happen to that Oh.

Let me just see what I have here.

Yeah, Yeah, yeah it.

I I.

I mean, the the margins a story of pre acquisition, we're in a high teens and you know that obviously compared to our business that was in the.

20% to 24% range and so I think the easiest way Julian is just to use those numbers and.

We also gave you know overall sales volume of Soria, which is about 300 million a year and a in so that should allow you to back into the impact from Soriano itself.

Hundreds bips or something like that I think probably 150 550.

Hey, good. Thank you all I think we have a rich to the end of all recall and we do appreciate everybody's question as always the chip and I will be available to address your follow up questions.

Thank you will join us today and to have a good day.

Thank you and that does conclude our conference for today. Thank you for your participation and fees and 18 key conferencing services you may now disconnect.

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Turning cool with me today, Greg <unk>, our chairman of Theyll, anorexia, let's chairman and Chief financial officer or agenda today, including opening remarks by Craig highlighting the company's performance in the second quarter as we have done our public schools will be taken quite the eight out of the curriculum.

The press release and a presentation also today have been posted on our website at www Dot Ethan Dot com.

No that both the press release and a presentation include recalled that Asian to non-GAAP measures what cause of this call is a sensible our website and it will be available for replay.

Let me remind you that all the comments today will include statements related to the expected future results of the company an order for forward looking statements.

Actual results may differ materially from our forecast or projection you know why do end up risk and uncertainties that I described <unk> earnings release, and a presentation. The old the online you already <unk> filings with that I would turn it over to correct.

Thanks, Yeah. It will start on page three with recent highlights from the second quarter and then as you can imagine yeah, I'm extraordinarily pleased with the way our teams have executed in the midst of this pandemic in the economic downturn.

We've done good job keeping our employee safe have deliberate for our customers and certainly generated exceptional cash flow all while flexing our costs at record right.

Our results.

You know why walk for last year, certainly in absolute terms were better than expectations and we continue to make an important.

<unk> investments for the future.

Q2 earnings on a per share basis, a 13 cents on a GAAP basis, and 70 cents on adjusted basis.

Which excludes 20 cents or charges related to acquisitions and divestitures and 37 cents related to the multi year restructuring program that we just announced.

Our Q2 revenues were 3.9 billion down 22% organically.

As we noted on our Q1 earnings call April was down approximately 30%. A this was followed by slightly better volumes in May and then you know relatively strong finish in June which was down let's call it low double digits.

In fact, I mean, just at the point of you know could maybe God application, our electrical business in the Americas, Europe and Asia, all posted low single digit organic growth in revenue in the month of June.

So once again, the electrical businesses need or remaining very resilient and the pace of this pandemic and economic downturn.

Segment margins were 14.7% down 110 basis points from Q1.

And our decremental margins were at 25% five points better than our guidance of 30% once again, a good indication of how well our teams have done in controlling the elements that are really within our control.

However, you know recognizing that some of our businesses could be looking at a slow and certain what you could call. It.

Long recovery, we announced a multiyear restructuring program up $280 million.

Including $187 million charge in Q2.

These actions will reduce structural cost for sure and our targeted in.

In markets, including commercial aerospace oil and gas NAFTA class, a truck and North America and European light vehicle markets.

Where are these markets have been certainly highly impacted I'll provide more details on this program in a few minutes, but they're covered on page 12.

You have a quarter highlight for the quarter was our operating cash flow, which was $757 million and free cash flow of 667 million.

Well very strong results and which gives us the ability to really reaffirm our free cash flow guidance up 2.3 billion to 2.7 billion in a midpoint of 2.5 billion here. So.

Teams continue to grade and converting Oh, the cash as well.

Finally, as most of you know we made an important announcement during the quarter regarding sustainability and our commitment to 2030 sustainability goals.

I thought it'd be helpful. Just to put this announcement in the context in order to show you how it fits within the broader strategic framework of the company, which we do on page four.

I think simply stated.

And you know sustainability really as at the core of our mission, we talk about our mission being to improve the quality of life in the environment and certainly that means sustainability.

Yes. In fact, if you think about all of our value proposition with customers. They are built around creating safe reliable and efficient solutions, let's call them sustainable solutions and so you know as we oftentimes say, what's good for the environment is good for Eaton.

We believe that meaningful efforts to support the environment are fundamental to how we create value for customers and it's certainly a place where we think we entered play a leadership role.

Hi, sustainability as we think about it really presents growth opportunities to help our customers solve their business gold and is it.

And Insys objective, we've laid out tenure.

Plans that include investing $3 billion in R&D to create sustainable products you know over this period of time.

It's also include reducing our emissions from our installed base of products and upstream sources by some 15%.

Just to maybe give me an example, where we think this really fits with our overall strategy.

Stain ability really is about capitalizing on secular growth trends around electrification for sure across all our businesses and also in energy transition.

Sustainability I'd tell you is also an important part of how we run the company one a day to day basis.

2015, we reduced our absolute greenhouse gas emissions by some 16% and we're currently on track to deliver our 2025 targets.

Slide 2030, we now have committed to achieve science based targets up 50% reduction greenhouse gas emissions from 2018 level.

We're also committed to be our carbon neutral by 23 target double achieved through accommodation.

Initiatives, including carbon offsets such as reforestation continue to optimize our sourcing of renewable electricity.

In our all of our operations as well as delivering energy storage solutions and so pretty comprehensive set of plans that we have set that we think will deliver this 2030 goal.

And finally to achieve these goals. We obviously have to continue to work on building a workforce that is engaging and passionate about making a difference. So this will continue to be a large priority for the company. Overall, so hopefully that provides us a little context in terms of why we think sustainability for such an important initiative for Eaton and how we're going to convert on that.

Turning into accelerated growth for the company.

Now turning to page five we summarized our Q2 financial results and I noticed a couple of things on this page.

First acquisitions increased sales by 2%.

It was more than offset by the 8% impact from divestitures and also we had negative currency impact of negative 2%.

I'd also remind you that we now recognize oil charges related to acquisitions divestitures and restructuring at corporate rather than at the segment level.

And we did this because we'd hope would make it easier for you to do your forecast by quarter by segment without the volatility that comes with these types of onetime charge.

Okay.

Next on page six we show our results for electrical Americas revenue is down 29%, 9% decline organic revenue, 19% impact from M&A and this was primarily the divestiture of the lighting business kind of small impact from negative currency as well.

Operating margins increased 130 basis points to 20.7%.

These margins were certainly favorably impacted by the divestiture lighting, but also our team did a great job controlling costs.

To really count or the impact of the economic impact the 19.

This combination resulted in a very strong decremental margin performance up 16%.

Segment continues to prove to be highly resilient. When you look at margins, but also when you look at orders and backlog.

Orders increased 2.1% on a rolling 12 month basis with site and residential and utility and Datacenters.

And of note here, our datacenter orders actually were up from 7% on a rolling 12 month basis.

And lastly, our bookings remained strong.

They were up 11% versus last year.

Turning to page seven we have our results for the electrical global segment.

Revenues were down 16%, 14% decline inorganic revenue.

And 2% headwind from currency.

Operating margins here declined 260 basis points.

But to a very respectable 60% decremental margins here.

We're also very well manage coming in at 26%.

Orders declined 4.6% on a rolling 12 month basis.

Most of the significant declines coming as you would expect in global oil and gas markets and in industrial markets. So not an unexpected result, with respect to where we saw strength and weakness.

And lastly, our backlog product will local increased 2% I want to year over year base.

On page eight we summarize our hydraulic segment for Q2 revenues were down 32% with a 30% decline organically and that Jupiter currency impact operating margins were 9% and orders for the quarter were down 33.7%.

Year over year, and this was driven really by weakness in both Oems in the distributor channel both.

We continue to work closely with and Paul.

Including the customary closing conditions or regulatory approval and I would tell you that big.

Landfall organization rain remain excited about winning the business.

We do however, and now expect the transaction to close at the end of Q1.

Next year.

The delay as you can imagine due to the gold at 19 impact which has impacted the pace of some of the regulatory approvals that we back.

On page nine we summarize our results for the aerospace segment revenues declined 27% with.

A negative 35% inorganic growth offset by 8% increase from the acquisition of Soria.

Operating margins declined to 14.8%. It really this is due to lower sales, but also.

The acquisition of story I also had a dilutive impact on margins.

Orders declined 12.8% on a rolling 12 month basis with particular weakness in the quarter as you expect in commercial OEM and aftermarket.

It is worth noting I would tell you, though that orders for the military aftermarket were up 13% on a rolling 12 month basis.

Backlog was down 5% year over year overall.

Yes, certainly as everyone here understand the commercial aerospace markets are grappling with significant declines in passenger demand and this is impacting our business and certainly impacting both the OEM and the aftermarket.

I guess, just maybe some context here you know why we think about this has kind of a near term dislocation and were taken certainly the needed steps to position. This business a future we remain confident in the long term attractiveness of aerospace market.

And we'll certainly do our what we need to do in order to manage our margins in the meantime.

Next on page 10, we summarize our results for the vehicle segment.

Revenues declined 59%, 52% of which was organic.

In addition to the divestiture of the automotive fluid conveyance business, which impacted revenues by 4%, we had 3% negative impact from currency.

Decrease in organic sales.

Driven by I'd say widespread customer plant shutdowns due to covert 19.

That's really resulted in lower class eight OEM production as well as continued weakness in light vehicle production.

Once again, it's a little bit more color on this one during Q2.

Most of light and commercial OEM side shutdowns that range between six and eight weeks.

The shutdowns, which really began let's say in late March.

Throughout the month of April and extended into mid May in so many of our customers was shutdown for almost half the second quarter.

Production is now certainly getting come back online.

Global light vehicle Mark production was down 55% in Q2 in class eight OEM build was down from 70% Q2.

We now project NAFTA class it production to be 175000 units for the year.

Down slightly from our prior forecast of 189000 units, but still down from 49% from 2019.

The reduction in certainly this sudden reduction knowing production led to operating margins of a negative 6.4%.

But I would add this business has once again done a great job managing decrementals and despite this tremendous reduction in revenue delivered a respectable decremental margin 33%.

Not surprisingly and.

Much needed, we do expect better market conditions in the second half and our business will be well positioned to participate in this recovery.

Moving to page 11, we have our E mobility segment revenues were down 33% all of which was organic.

Anik margins of negative 3.6%.

Operating margins of negative, 3.6%, primarily due to lower volumes and particular weakness in the legacy internal combustion engine platforms and once again the ongoing increase in R&D expenditure.

We continue to be enthused by the way about the long term potential of the business and and quite frankly have seen nothing but upward revisions in the expectation for the penetration of electric vehicle. So a market that we still think we'll be very attractive long term.

We're very well position once again with the common technology platforms that were creating leveraging the strength in our core electrical business.

Good example of this idea of everything becoming more electric is one of the recent wins that we've had.

The truck OEM 21 day at our program for export power in order for a major commercial truck customer and so.

We're almost every aspect of our business, there's more electrical content and we're well positioned once again through this particular segment to participate in that growth.

Overall, we have one programs with the value of approximately $500 million mature year revenue.

On page 12, we show the details of our plans to accelerate and I'd say expand our restructuring actions and I say accelerate because for the most part we're pulling forward a number of the restructuring ideas that we would've done anyway.

Given the economic implications of the pandemic, we naturally have a great a sense of urgency and also more capacity to take on these projects.

We announced the $280 million multiyear restructuring program I think we noted designed to eliminate structural cost and taking charges of 187 million in Q2, and we expect to see additional costs of 93 million realized through 2022.

Characterize those additional dollars we'd expect.

To deliver over the next three years, some 33 million of charges in the second half of this year 55 million in 2021 and 5 million in 2022.

We would expect realized $200 million a mature your benefit from these actions.

They are fully implemented and we think full year implementation is 2023.

Probably two thirds of these costs are in our industrial businesses principally vehicle in aerospace.

Meaning one third is with our electoral sector, particularly within with an emphasis on our oil and gas business that will report through our electrical global segment.

Naturally we're focused on those businesses serving end markets that are more severely impacted by the pandemic.

Turning to page 13, we do our best to provide.

Q3 outlook on revenues versus last year, and while you can imagine that all these markets will be stronger than what we realized in Q2. This is really a year over year look for Q3 versus last year.

For electrical Americas, we expect organic revenues to be.

Down to one up too so essentially flat with strength in residential utility data centers offsetting.

Weakness in industrial markets.

For electrical global.

Current view is organic revenues will decline between 10% to 14%.

With strength in Asia Pacific Datacenter markets.

Offset by declines in Europe, and once again in the oil and gas market.

Aerospace, we expect organic revenues will be down between 28, 32%.

Continued strength in military offset by really significant declines and all of the commercial markets and vehicle. We project revenues will decline between 30, and 34% submarket to sell very weak in absolute terms.

These markets will be up significantly from Q2, it pretty mobility, we expect declines of between 13 and 17% once again.

Pressured from legacy internal combustion engine platforms, and lastly for hydraulics, we think markets will be down between 23, 27%.

Great and overall, we're estimating Q3 revenues to be down between 13, and 17% and so in improvement.

Versus Q2, which was down from 22% hotel in absolute terms, where markets are still in decline.

Moving to page 14 here, we provide our best look at guidance for Q3, and some commentary on the full year, but for Q3, we expect organic revenues to decline between 13 and 70%.

This really does include what we know about July where we saw a low double digit declines.

Weve elected not to provide full year revenue guidance, given kind of the ongoing uncertainty around the pandemic and the impact of markets in Q4 as many of you aware, we are still dealing with the pandemic and various reasons.

Yes, and around the world, we're still seeing a growth in the number cases and so we're still living in this period of uncertainty.

We do think Q2 will be the trough organic revenue declines and barring a second wave with a pandemic Q4 should be better than Q3.

For Q3, and full year, we expect decremental margins up between 25 and 30%.

For Q3, we expect our tax rate want to adjusted earnings to be between 15 and 16%.

We're maintaining our free to 2020 free cash flow guidance. The range of 2.3 to 2.7 billion and I would note that this range does in fact include now the impact related to the multiyear restructuring program that we announced the network not in our prior guidance.

At the point of reference in the first half just to give you some comfort around our ability to deliver this number we generated some 35% of our $2.5 billion midpoint. That's in our free cash flow guidance and that number is very consistent with our performance over the last five years and so we do tend to be a bit back half.

Loaded.

We are providing new guidance for share buybacks, and we're saying between 1.7 billion and $1.9 billion for the year.

Recall that we purchased repurchase.

3 billion of shares.

Q1, with the proceeds of the lighting sales.

We continue to deliver free strong strong free cash flow and we now plan to buyback between 400 $600 million our share of half a year.

And finally, there may be distinct.

Like we are doing here inside our company this to bring it back to kind of the broader.

Longer term strategy, and where we're headed as an organization and we will continue to effectively manage to the short term challenges associated with pandemic, but we also remain focused on the broader strategic and financial goals.

That we laid out and our meeting in New York and we've summarized once again here on page 15.

Number one ensuring that we continue to move the company in the direction of becoming what we say as an intelligent power management company that takes advantage of important secular growth trends that we talked about them being electrification energy transition LTM connectivity and blended power. So these trends are continuing and.

Despite whatever temporary hiccups, we are experiencing we think long term, it's the right place to be.

By doing so we're working on creating a company that's going to deliver better secular growth.

And better growth through various cycles higher margins and with much better earnings consistency.

Long term goals have not changed it includes 2% to 3% organic growth, 20% segment margins, 8% to 9% EPS growth and $3 billion year free cash flow.

And with our strong cash flow will continue to be focused and disciplined and how we deploy it by investing in organic growth as a top priority delivering top quartile dividend.

An ongoing programs share buyback that actively managing our portfolio, while being a disciplined acquirer.

So we continue to remain excited by the story I Hope you are as well and with that I'll turn it back again.

Good Thanks, Craig before we started our Q and they have lower core today I do see that we have a number of individuals into Q with questions. So appreciate the if you can limit your opportunity just one question and a follow up thanks in the once where your corporation with that ill turn it over to the operator, we will gives you guys.

Structure.

Thank you and ladies and gentlemen, if you wish to ask a question. Please proceed from one zero on your telephone keypad you may recall your question at any time I repeat in the mine Antero man.

Speakerphone, please pick up your handset before passing the number once again, if you have a question.

Please press, one and then Hey route.

And our first question is kind of in the call Blaze from Deutsche Bank. Please go ahead.

Yes, thanks, good morning, guys.

Hi.

Hi, there so I guess, maybe starting with.

The restructuring actions that you guys are taking.

Craig So the information on the costs were helpful. I guess, maybe some color qualitatively around what you're actually focusing on headcount versus maybe footprint or other things and I guess, where I'm going with that says cadence of payback over the next few years, including the second half of 20 as well as I guess why its.

Taking some time to actually get the payback from those accent.

Yeah. Yeah. Appreciate the question, Nicole and again I mentioned in my opening commentary.

One of things we've talked about historically is that we always as a company have kind of a future view of restructuring projects that we'd like to take on in the pacing items are generally tend to be.

Our own internal capacity to deal with them and manage them effectively as well as our customers the ability to absorb them without creating disruptions for them.

And certainly in the event of any economic downturn like this when it gives everybody more capacity to take on these projects and so.

It's a lot of what we're doing today, I'd say view and we talk about footprint versus head count I think the important.

Way to answer that question is that it's all structural. So these are all cost items that were taken on that will not come back in the event that.

When revenues return and so these are things that early focusing on.

Taking structural fixed cost out of our system, some of which will be headcount some of which will be around footprint. We have not yet made these announcements completely internally in terms of where those impacts are going to be until we'll we'll wait and provide that detail a little later on but but it will be completely structural.

You pointed out a timing I'd say.

Some of these items, obviously, we'll who will impact and have a benefit earlier than others.

But it's one of the things outside you think about the decremental margin that we are delivering as a company and what's embedded in our guidance. It's one of the reasons why we can deliver these very strong decrementals is because we are flexing our businesses and flexing our costs and so I'd say as we think about this payback.

280 million dollar.

Investment with a essentially attuned to me in dollar terms. This is a very attractive program in terms of the return on the investment and we'll get some of the benefits sooner some will come later, but in aggregate.

Extraordinarily strong returns on these dollars that we're investing.

Got it thanks, Craig that's helpful and.

Teed up my follow up there I guess and I wanted to head on Decrementals. The 25% was obviously impressive this quarter and a positive around 30% guidance I guess, how do we think about dot through the rest of the timing to me, we kind of know that QQ at least we hope will be well point with respect to revenue. So I guess you know is there any possibility.

That 25% could actually become something better and the second half as you guys execute on cost savings and perhaps you got a little bit of sequential improvement in revenues as well.

Yes, I appreciate the question and in our teams have done an extraordinary job year to date on decremental margins and as we flex costs and.

That is in that guidance of 25 to 30.

Is once again, the uncertainty around whether or not we end up experiencing a second wave.

The the pandemic and as you know as well as anyone we're seeing these hot spots around the U.S. and.

Potential threats of.

Going into some form of if not pull shutdowns retrenchments and many of our.

Markets and so.

Still a lot of uncertainty and that's one of the reasons why we still have this fairly wide range of Decrementals as you can imagine as well we took a lot of extraordinary a onetime costs in Q2.

Around.

[music].

Time off without pay in.

Travel was essentially came to a grounding hall and so some of these costs look we'll certainly come back as the year unfolds, but if we don't end up with a second wave.

So in the second half of the year, we will likely do better than kind of the midpoint of this range of decrementals that we laid out.

Thank you. Our next question will come from the line Callaway Keith. Please go ahead.

Hi, Thanks, good morning, everyone.

Hi.

Hi, Craig maybe just a ferreting out why do we I'd love to hear your thoughts on just Nonres construction, specifically in your exposure to it.

A lot of concern as we kind of had into 2020 wine that the markets are going to downturn and so curious to hear how your how your businesses physicians.

For potential Nonres downturn, and and now maybe some of these these actions that your that you're taking.

Are potentially like offsetting measures for that.

Yes. Thanks I appreciate the question and when you use the term non res construction really that for us that's really most of our electrical business right because that's everything other than residential and residential today would account for less than 20% of our total business as a really big category. The way we tend to think about of is that.

Maybe just take you through some of the keep important segment for US we think.

As has been the case for some time, we think Datacenters continues to be a very strong market and are performing well in the near term and we think long term continues to be strong we think the utility market.

Continues to be a very attractive market and will perform well over the long term and has held up extremely well residential by the way and I know you asked the non risk question, but residential has just been extraordinarily strong and with essentially.

Hi, double digit kind of growth numbers in Q2 overall, so ready continues to be extraordinarily strong and then do you mean I think the kind of sphere of your question really get to this whole question, what's going to happen within commercial markets and has been a lot of talk and speculation around.

The death of the office and whether or not everybody is ever going to go back to the office again, I don't think Thats. The case by the way in fact, I can 0.2, examples where companies have actually had to take down more office space. Because you got the social distance now and offices and so you need more space to how is the same number of individuals but certainly there's there's certainly some risks to.

What we call the office piece of Nonres is certainly if you think about retail.

Those markets will probably be week, but offsetting that there'll be other markets that are strong we get we think that you think about warehousing.

Segment, we think will be strong we think water wastewater market will be strong and so I think the fact that our electrical business has held up so well or better than others would imagine is the fact that we do play across so many of these different end markets some of which are experiencing some of these negative forces other ways of which are.

Seeing positive impact and as a result, this business is extraordinarily resilient and so we remain very optimistic about the prospects of our electrical business, there will be dislocations and perhaps certain markets are certain regions of the world.

But by and large we think the market will be just fine and using kind of.

China as a good proxy for the rest of the world as they get it should come through the pandemic, China has already back the positive growth.

Both in sales and orders and so we're hopeful once we get through this and we get a vaccine we get a we give an effective therapeutic that.

The markets are likely going to return the trend levels of growth.

That's helpful color Craig maybe my one quick follow up his more than just free cash flow, but it was that night do you guys affirmed moraines for this year I guess as high as you're thinking about next year also in the context of some some of the cost actions that you're taking Oh I know, it's too difficult at this.

Okay, and say you know exactly what the what that number will be next year, but is it growth starts to return to something it's a little bit more normal what are your thoughts on your ability to grow free cash flow in 2021.

You know the way we generally think about of is that certainly in periods like this as we did capitalize the business and were freeing up a lot of cash from from working capital, but also as you can pay as you saw when are we done the earnings are down dramatically and so as as we continue to be as we expand through an expansionary cycle the earnings will be up signal.

Efficiently and with that your cash flows will be up and so if you think about eating overtime and through various cycles. Our cash flows have been a different amazingly consistent.

In terms of generating very strong free cash flow really at all points of expansion and contraction.

With the joint it did you want to add something we're just going to add a little color on the trends in electrical it.

We measured in a lot of different ways, but one of the way to measure. It is looking at our negotiations for a large projects in the Americas, we have very good data and it's a very big business for us than if you take out the activities related to oil and gas our negotiations and the second quarter were flat.

With a year ago and so it gives you some indication that.

The balance that Craig talked about of all these different segment seen as they come together in a way that creates a lot of stability.

And.

That gives us a fair amount of confidence that even even with the turbulence on the macro economy.

There are enough sources of strength that those sources offset the the weak spot.

Okay.

Thank you our next question and spend the lineup Jeff Sprague from vertical research. Please go ahead.

Thank you good day everyone.

I just would love to get a little additional color on a vehicle, obviously, a very very tough quarter production and on the automotive side starts to look better is locked down these.

Just give us a little sense of what you're thinking for the profit trajectory. There should this be the only quarter, where we see an operating loss on a.

Maybe give us a little color on how much if any of these restructuring benefits might flow through to those businesses in the back half.

Yeah I appreciate the question, Jeff and it's been it's been kind of a long time, because we've ever with as we lost money in our vehicle business and I just say once again, just an extraordinary combination events. When you look at some of these numbers around production both in class eight and global light vehicle.

Essentially half the quarter was lost and so the team once again did I think an extraordinary job and maintaining a 33% decremental in that environment, We certainly know.

So look forward to volumes are going to be significantly better than Q2 that we would fully expect that the margins for the business.

This year will be double digit and we would not expect to see a loss in the vehicle business and any subsequent quarter barring another returned to dishes terrific market kind of event that we experienced over the last quarter.

Details around where the benefits are going to flow. Once again, we've not made internal announcements specifically to some of these initiatives and so we'll give you more color later on it certainly fully embedded in the decremental margin assumptions that we we've laid out for the year, but you serve.

We can expect our vehicle business to return to.

Attractive levels of profitability post Q2.

Great and second question just on Aero.

Do you think we've seen the bottom then.

Aftermarket activity or do we still got to kind of deal. It's a delayed impact of parked airplanes and use material on stuff kind of working its way through the system.

Maybe or a quarter to out on the bottom there.

Yes, I mean, it if it's in a good question and one that everybody.

Trying to get their arms around specifically in terms of what's the.

The outlook for aerospace specifically, what's the outlook for aftermarket in terms of or consumers are going to be comfortable getting back on planes flying again, which is.

You know is what drives the aftermarket I'd say, we had pretty good.

Terrific numbers in terms of aftermarket in Q2.

Fairly dramatically.

So it's tough to imagine that things could get much worse than what we experienced in Q2.

Activity levels in general as you're well aware or improving there is more planes flying today. There is more hours of flight today than there have been certainly over Q2, many parts of the world in many regions of the world. There number is a better than hours in the U.S. If you think about Asia, you think about Europe, they've done a.

Better job of getting handle on the pandemic and so you're seeing the data there.

Improve perhaps at a faster rate than the U.S. data.

So I think it's quite if it's unclear today in a lot of claims on the ground that you took outside the apartment parting out.

Airplanes, and how that's going to impact the aftermarket I just think it's too early to tell whether thats going to have a prolonged impact or not.

Thank you. Our next question is Paul.

Well. Thank you Sir please go ahead.

Thanks, Good morning come on Craig's among Rick.

Just wanted to.

Sticking to your use of Threeg framework and.

The down low double digits.

Sorry nights a week if you are coming through a very Frank. Thanks, We can barely hear you. So maybe you can just speak up a little bit.

Maybe I'll use my handset that better perfect. Yeah, that's not going to I'm going to vary dodgy had said I need to invest.

Home office facility for love to redesign so [laughter].

So the the July.

Download them low double digits versus the Downspacing 17 framework and understand you want to be conservative but is there any reason why july would be better than than the Threeq framework and then just within that.

That's cool Americas in looking to be flat versus the down 9% into Q.

Again, just flipping between Twoq and Threeq you.

And any any end markets to call out there would be helpful.

Hi, I appreciate the question Nigel and I think what we're really trying to deal with here is you know.

How precise we can actually be setting any of these forecasts and and I would tell you that if you think about June and July kind of essentially running at about the same levels. As we think about our Q3 forecast, we really think about it mostly as a continuation of what we experienced.

Over the last couple of months.

And so I think on the margin year, whether it's one or two points.

Better or worse, it's really difficult the judge, but one of the things that has us a little bit nervous as it will freely admit is the fact that you are continuing to see.

Spread of covert 19 in so many parts of the us.

So if there is a if there is a concern that we have that could potentially take.

The next couple of months down slightly below what we've experienced over the last two months, it's whether or not the us specifically and then you have obviously regions like India, and Brazil, whether or not we get a handle on the spread of the pandemic.

So that's the piece it has us all just a little bit nervous.

And perhaps a little bit conservative around.

What is the real outlook look like for for the balance of Q3.

Yeah, and then congressional Americas, what slipping.

What's kind of maturity better seen tickets Ritchie.

Yes, and electrical Americas, I'd say that for the most part they experience kind of the same kind of shock to the system that they know the other kind of.

Parts of our businesses experienced where you've got a lot of construction projects essentially just shut down in Q2 as you as you're well aware there were certain regions of the us where construction was deemed a central there was other places where construction projects, where we're simply delayed and so I think the catch up effect that we're seeing a little bit in the Americas.

Specifically is the fact that we would anticipate that.

That you don't see the kind of wholesale shutdowns of the us economy that we experienced in part of Q2, so one of the incremental basis.

Quarter over quarter basis, we would expect the electrical Americas business to perform better.

Also Nigel it's Rick we had some.

Production challenges during Q2.

We had to re layout plants than we had some plants where plants had to be close for certain periods due to call that issues.

So that constrained our sales and we've sorted through all that then.

That particularly in places like residential will will allow higher higher sales volumes in Q3.

Thank you and our next question is from David Raso Evercore. Please go ahead.

Hi, Good morning can you clarify your comment if I heard you correctly the month of June.

Can you say electrical Americas posted low single digit revenue growth.

Same thing for electrical global I'm, just trying to if that is correct. Yeah. Why now why does it step down of the flat for Americas, and the third quarter, if you're ready up low single and then even Electra XVM Global goes from upper single digit tests for the next quarter down 12 Bucks midpoint.

I understand what you what you're really seeing in July in the electrical business you know what I'm really trying to convey in that kind of firstly you heard me correctly.

Electrical essentially around the world actually did post positive sales growth in the month of June now, but you also talked sometimes difficult to read too much into a given month because there's also some catch up right. We talked about the fact that we had as Rick noted we have factories that we shutdown we have projects that were delayed and so we think about.

Certainly a little bit of catch up that took place in the month of June and whatever reasons, what we experienced kind of growth across the region and projects that perhaps should have been delivered in in April and may that slipped into the month of June and so as the economy in the U.S specifically continue to opening and so we do think there were some catch up.

In the month of June and so if on the margins.

Things are slightly worse or about the same as the June rate in subsequent months, it's really because of this catch up effect that we think we experienced in the month of June.

But is that what you're seeing in July I mean, especially global or be going from up low single say there was some catch up.

And then put down 12 in the third quarter have you seen that much give back are ready in July.

Look I wouldnt ready down that much Angela.

Yeah, I'd say that.

Once again in terms of the global specifically, what we're experiencing overall as a company in terms of the guidance numbers that we provided.

No that's consistent with put the company's experience I don't think we provided specific guidance for electrical global its overall, but I, but I. So I'd say that it certainly consistent with our overall guidance for the quarter for Eaton overall I appreciate the thing international.

I'll call you call global but the international business being down 12 organically in the third quarter coming off of a June that was up low single.

It's just a number of adult I just don't see if you saw big drop off in July are ready to suggest that for the electrical international business, but what we are seeing Dave as we are thing.

Pronounced weakness in oil and gas I mean is not coming back and so that's what's driving that the weakness in electrical globally, our global oil and gas businesses all reported in electrical global so that that's really the factor.

That is causing.

The markets to be as weak as we estimate if you were to take that out electrical global would look much like electrical Americas.

Sure up in the month of June coil was down Big I assume and you still put up low single digit growth in electrical international so.

Anyway, I'm, just trying to try to understand.

Okay, and then lastly go ahead.

Say that there is a lot to this up.

This pent up demand.

People we.

Being able to deliver on customers wanting us to deliver.

Objects that had gotten delay and so that June is distorted by that a bit.

That's fair and its lots and clarification to an earlier question did you say vehicle margins for the year.

I would be back to double digit.

Yes, I did.

Okay. That's impressive okay. Thank you very much I appreciate it.

Thank you and the next question is some Jeff Hammond from Keybanc. Please go ahead.

Hey, guys good morning.

Right.

Just wanted to dig in on some of these markets that are proving more resilient in Americas can you just talk about where kind of the the incremental utility spend is seeing or where you're seeing the most resilience.

And on the datacenter side I know, we were planning for kind of an air pocket that seems to be coming back is that coming back stronger or you know inline with expectations.

Yes, I'd say in the in the utility market, Jeff I think it's pretty broad based is what we're seeing really in utility markets.

Those markets are holding up.

Fairly well and I can I would say that within the us I can't really.

I don't know that there is a very different story, depending upon what region of the you actually looking at.

But where we play in the utility space on the distribution side.

Obviously resilience.

In investing in grid resiliency continues to be an important.

Need in so many of our communities around the U.S. It continues to be fairly stable and predictable markets in data center, specifically, what we're really seeing as a return and hyperscale as we've talked about on prior calls Hyperscale does tend to be lumpy.

You get large orders and then they'll go quiet for a while to get large orders again. So if you think about datacenters overall, we saw very strong growth.

In hyper scale in the quarter.

That really is a return to growth as they continue to kind of a build out their requirements.

Okay, and then just on the hydraulic so that's just a function of timing around or you know approvals or is there anything else going off.

Yes, I think it's the general.

Slowdown in the market that you're experiencing in hydraulics and specifically in construction.

Yes.

The AG market is holding up a bit better certainly the China market is holding up very well in the context of.

Pandemic and really have already returned to growth. So it's really just the general slowdown in the construction market, that's having a big impact on hydraulics and Jeff. If you are also asking about the timing of closing does sale. It's really a function of many of the regulators are still working from home.

And so thats greatly slowed their ability to process.

As a filings I mean, any large transaction like our sale of hydraulics.

We're talking about thousands and thousands of pages of material and without their staff that hand without the ability to easily copy things.

And.

Our team meeting.

It's taking longer.

Really thing that for all acquisitions, not just ours, so we're not surprised by it.

Things are progressing in a normal way, we're we're receiving the kinds of questions that we would expect to receive is just.

Taking a bit longer to get those questions.

And I mentioned in my opening commentary that how enthusiastic Dan for us remains around the transaction itself and if if anybody wants to get a sense of their real enthusiasm.

The the founder of the company in the CEO posted a video.

This week on a linked did where they're making the announcements through their organization about.

Bringing together these two businesses and and professing their enthusiasm to get this transaction closed and so.

We remained absolutely convinced that there you while it's been a core to delay the transaction will close in and they love the transaction and it's going to create real value for them.

Thank you and our next question is Tomcat and panel Gordon Haskett. Please go ahead.

Thanks, Good morning, everyone Hey.

Just to put a finer point on this nonresi issued we get these questions. All the time could you just remind us how big the new builds portion for office buildings is.

<unk> percent of say electrical Americas on global because that would be seem to be the one area that debatably right could be at risk score is not necessarily going to expand I can't imagine it's that big but maybe you could just frame it out for us in terms of its magnitude.

Yeah, I don't have the new I don't have that's played to be maybe one data point, John that may be hopeful free to kind of.

Quantify or gauge the impact today, if you think about the office piece of.

Kind of or electrical business, what goes into office build it you just under 20% of the total electrical both business and so to your point within that some of its new build some of which retrofit and modifications and so.

Hopefully those that data point the UK, what we can try to get to the data around what's new versus remodel and refurb, but it's under 20% of the total business and I do say I think it's if it is debatable in terms of where this is going to ultimately take us in terms of whether or not working from home has been.

Wonderful.

To date.

In companies advantage its longer term I think its though an open question mark around efficiency and organizational effectiveness and working from home and as people come back to offices in this need to social distance is going to require more space and so I think it'll be interesting one the watch in terms of.

How it unfolds.

Yeah, No I don't I don't disagree with that and I think you think historically, you've said retrofits sort of 40% to 50% of the whole electrical business. So maybe we can extrapolate that I'm not sure like 25% to 30%.

For the whole electrical sector.

Okay, all right. So I had that number around but that's still it's still windows it down.

Just another clarification is the 280 charge on top of the 50 to 60 of quiet restructuring you guys. Do every year or are you going to be lumping in that 50 to 60 with the two weighty so kind of the whole thing gets called out over the next.

All of years of the charge enactment.

Yes, it's really the latter John and that was that was my point.

Making in my opening commentary around.

We had a number of restructuring programs that we were intended to do anyway and.

Pulling those forward is accelerating them and so it's really the ladders, we intend to take this one charge.

You know related to the $280 million laid out the way, we articulated and that would then.

Eliminate the other restructuring programs that we would have otherwise plan to do over the next three years.

Thank you. Our next question is from the line of Andy Casey from Wells Fargo Securities. Please go ahead.

Hi.

Good morning still.

Can you talk about M&A potential I'm, just wondering if the dislocation.

Has created any incremental opportunities and then can you comment on any valuations you might be seeing.

Yeah I appreciate the question, Andy and certainly we remain obviously in a position where we have the balance sheet that gives us that optionality around keeping M&A on the table and and and as we talk about cash flow generation this year as well as.

Certainly the of the M&A event that will take place with the sale of hydraulics and we'd expect to bring in another 2.8 $55 billion.

Cash with that transaction when it closes so the balance sheets in great shape, and we have plenty of firepower, having said that I would tell you though that.

Given the level of uncertainty around market outlook.

As well as the fact that valuations and and companies coming to terms with the fact of perhaps some of their businesses aren't worth today, what they were worth maybe three or four months ago that does take some time for that new reality to said it. So I would say today that valuations have not and expectations have not necessarily.

Come down commensurate with the change in market outlook and so those two things together says we will continue to actively work. The pipeline. We are in fact, having a number of conversations are focused and priorities continue to be.

Largely around the electrical business, we take in this environment, we'll have to see whether or not aerospace.

Clears up the future of aerospace thing outlook clears up enough that for us to get back on kind of front foot in and around in aerospace transaction.

But right now I'd say that.

We're working the pipeline, it's an active pipeline, but valuations have really not yet come in.

Okay. Thanks, Craig and then.

Quick one I guess for Rick.

You gave the Q3 framework if you.

Laid out.

Nonrecurring stuffs like occurred in Q2.

Beneath that segment operating profit line.

We expect any sizable change and things like corporate pension and other.

Not any significant change should be relatively consistent.

Thank you and our next question is from the line at the end to open from Bank of America. Please go ahead.

I guess I guess still good good morning.

Just a question on inventories and the channel.

You just how you don't have deal has been destock came during the second whereas the level both in North America and internationally as far as it comes is there any if what you stop for restocking basically.

Yeah, I think the question around whether or not there's a need for restocking is still yet to be determined to Andrew I can tell you that we did experience some destocking during the course of Q2.

And with that Destocking is certainly behind US now and today when we do our channel checks and talk to our distributor partners they'll tell you that they feel like inventory levels today are well aligned with their their outlook for revenue and so I think its uh huh.

Too early may be to make a call on inventory restocking, but certainly the destocking of inventory has has stopped and is behind us now.

And just in terms of supply chain.

Hi.

Between China between sort of Mexico shutting down have you guys made any changes to your internal sourcing internal supply chains post cobot. Thank you.

Yes, I say nothing material one of the things that we've always done and believed in strongly is in manufacturing and what we call as Ernie gold currency, which means essentially what we sell into regionally generally Macon region. We do in fact shipped some parts.

Around and components around the World I would tell you that throughout this whole entire pandemic our supply chain has held up extraordinarily well and again as I can say with confidence that we didnt lose a single order because our supply chain broke down and somehow we ended up with an inability to deliver the bigger challenge that we experienced as a company really what.

Currently took place along the border.

Companies in country excuse me of had different criteria around what industries are deemed essential and so there was a period of time, we had some challenges with the Mexican definition versus the US definition I can tell you that today, that's behind us as well.

But for the most parts supply chain has not been a big challenge for us during the current pandemic.

Thank you and our next question is found Julian Mitchell from Barclays. Please go ahead.

Hi, good morning.

Maybe just.

Trying to understand the free cash flow a little bit better.

In that soon <unk> billion dollar midpoint this year.

Maybe help me understand whats the hydraulics contribution within that.

And also see cash a portion of the restructuring charges in that number peaks.

Yes, I don't have at hand, the exact hydraulic ports and will address that offline. The cap part of the restructuring charge is probably on the order of 50 million.

So that's why we believe that our guidance even inclusive of that cast portion of restructuring.

It's still hold true.

Understood. Thank you.

And then maybe just a second one around the.

Aerospace maybe margin dynamics help us understand.

The impact of.

Sorry, I was sunbank was in that integration within the.

I think don't Miss thousand basis points, dropping the arrow margin in Q2.

And maybe how you see that impact.

The acquisition playing out.

The bottom simply yeah.

And I didn't know if you quantified, but maybe help us see what the commercial aftermarket revenue drop was in Q2. Please.

Yes.

Sorry, if some bank and its impact on margins have to do some quick math I happen to that.

With all of whom Rick.

Let me just see what I have here.

Yes it.

Yes.

I I.

The the margins at sorry, a pre acquisition, where in a high teens and.

That obviously compared to our business that was in the.

20% to 24% range and so I think the easiest way Julian is just to use those numbers.

And.

We also gave you, though overall sales volume of Soria, which is about 300 million a year and.

And so that should allow you to back into the impact from Soriano itself.

Hundreds phipps or something like that.

Thanks, probably 150 450.

Okay.

Okay. Good. Thank you all I think we have rich to the end of Oracle and we do appreciate everybody's question as always chip and I will be available to address your follow up questions.

Thank you will join us today and to have a good day.

Thank you and that does conclude our conference for today. Thank you for your participation and fees and 18 key conferencing services you may now disconnect.