Q3 2020 Eaton Corporation PLC Earnings Call

Third quarter earnings conference call at this point all the participant lines are in a listen only mode. However, there will be an opportunity for your questions. If youd like to ask a question.

On that.

Mr. Jim can you hear me. Please go ahead.

Okay now I can hear you okay. Good morning, everyone and the engine Eatons Senior Vice President of Investor Relations. Thank you all for joining us what Eatons third quarter 2020 earnings call with me today are great Arnold, our chairman and CEO, Andrew Krill, less chairman and Chief financial and the planning officer. Our agenda. Today includes opening remarks by Craig highlighting the comps.

His performance in the third quarter as we have done our past calls we'll be taking questions eight entities Craig's comments in the press release and the presentation. We will go through today have been posted on our website at Www Dot Eaton Dotcom. Please note that both the press release and the presentation, including reconciliations to non-GAAP measures.

A webcast of this call is accessible our website and will be available for replay I would like to remind you that our comments today will including statements related to expected future results of the company and are therefore forward looking statements. Our actual results may differ materially for our forecast the projection due to a wide range of risk.

And uncertainties that are described into our earning release and our presentation. They are also all line ill relate did 8-K filings with that I will turn it over to Craig Okay. Thanks.

Yes, let's start on page three with a highlight of our Q3 results and I'd say to begin by saying I'm really pleased with how the entire team has continued to deliver and perform during this ongoing pandemic and economic downturn in our results while certainly below last year in absolute terms they were much better than our guidance for the quarter Q.

Two three earnings per share at $1.11 on a GAAP basis, and $1.18 on an adjusted basis, which naturally excludes the five cents of charges related to acquisitions and divestitures.

And two cents related to multiyear restructuring program.

Our Q3 revenues of 4.5 billion down, 9% organically compared with last year, but up 16% versus Q2.

Segment margins were 17.6%.

These margins were 290 basis points above Q2 levels and our decremental margins of 25% were at the low end of our guidance range. Our organization I guess Marci again is doing an outstanding job of managing discretionary costs.

We also generated strong cash flow in the quarter operating cash flow was 921 million and our free cash flow was $832 million. As a result, we are reaffirming our 2020 guidance for cash flow with a midpoint of 2.5 billion, our free cash flow and narrowing the range.

Range too.

Two $2.4 billion to $2.6 billion, and lastly, we repurchased 177 million of shares during the quarter and we're at $1.5 billion on a year to date basis.

Turning to page four we summarize our Q3 results and I'll just highlight a few items here first acquisitions increased sales by 2%, but this was more than offset by the 8% impacted our divestitures and this was primarily as you'll recall, what the lighting business sector.

Second our second margins, 17.6% were down versus last year, but still at very healthy levels, especially given the reduction in revenue.

And lastly, I will just remind the.

The group that we now record all charges related to acquisitions and divestitures and restructuring costs at corporate rather than at the segment level and we hope it just makes it easier for you to model our results on a going forward basis.

Next on page five we show results for the electrical Americas segment.

And were very pleased that our largest operating segment returned to positive organic growth of 3% during the quarter.

This was better than the high end of our guidance range, which was up 2% and this was really driven by particular strength in residential and utility markets revenues were naturally impacted by the sales the lighting business, which reduced sales by 19%.

And negative currency impacted sales by 1%.

Operating margins increased 280 basis points to 22.2% and so our margins continued to be favorably impacted by the divestiture of lighting as well as by ongoing cost containment actions. Our Americas business continued to show resiliency also when you look at our orders and backlog orders were down 1% on a rolling 12 month.

Basis, excluding lighting and we saw once again, particularly strength in residential and also in datacenter markets similar.

Similar to what you've seen from others secular growth is being driven by really this increased focus on the home and this work from home environment and our all of our growing dependence on digital connectivity.

On a rolling 12 month basis residential orders were up 14% and datacenter orders were up mid single digit.

And sequentially Q3 orders were up 16% from Q2.

Lastly, our backlog was up 11% from last year delivering by once again. This noted strength in residential and data centers, but also by utility markets as utility markets are benefiting from the increased investment in smart grid and this energy transition that's taking place.

On page six we have a summary of our electrical global segment revenues were down 8% with 10% decline in organic revenues, partially offset by 2% tailwind from currency.

Lower organic sales were driven principally by weakness in oil and gas and industrial markets.

If you excluded oil and gas and industrial businesses.

European business was slightly negative and our Asia business was slightly positive.

Operating margins declined 280 basis points to 216.6%, but were up 60 basis points on a sequential basis.

Orders declined 6% on a rolling 12 month basis, but declines driven once again by oil and gas and industrial markets, partially offset by strength in residential datacenters and utility markets.

It's also worth noting here that datacenter orders were very strong in this segment, increasing some 40% on a rolling 12 month basis.

We also had solid sequential growth in orders up 12% from Q2, and lastly, we continue to grow our backlog, which increased 7% versus last year.

Moving to page seven we have the results of our hydraulic segment revenues were down 15%, which was all organic.

But this was much better than the 25% organic decline at the midpoint of our Q3 guidance as end markets recovered faster than anticipated.

Operating margins were 9.8% flat.

Flat with last year.

An encouraging Lee here I'd say, we saw momentum in our Q3 orders, which increased 8% with strength in both agricultural and construction equipment markets.

And lastly, we remain on track to close the Dan for Us.

Sales by the end of Q1 next year.

Next on page eight we have the financial summary of our aerospace segment revenues declined 13% down 26% organically, partially offset by a 12% increase from the acquisition of Soria and now a 1% positive currency impact.

Now you would expect organic revenue declines here were driven primarily by the continued downturn in commercial aviation, which was partially offset by growth in military.

On a sequential basis organic revenues were up 15% from Q2 levels.

And while at healthy levels operating margins declined to 18.5% due to lower sales volume in blended margins were certainly impacted by the impact of this or your acquisition.

I would note here that margins were up 370 basis points from Q2 and that the business is really doing an outstanding job of rightsizing and reducing discretionary costs.

Orders were down 22% on a rolling 12 month basis.

And the backlog was down 11%.

Turning to page nine we summarize our results for our vehicle segment revenues were down 25%, including 20% organic decline.

The divestiture of the automotive fluid conveyance business impacted revenues by 4%.

And we had a 1% negative headwind from currency.

The 20% decline in organic revenues was once again much better than what we expected that we at 32% decline at the midpoint of our guidance and both like motor vehicles as well as truck markets have rebounded more quickly than we anticipated.

In fact organic revenues were up some 75% from Q2.

Global light vehicle market production in the quarter was down 4% and class eight OEM build was down some 34% in Q3.

But given the strength that we now are seeing it we now project NAFTA class a truck production of some 200000 units for the year and this is up 14% from our prior forecast.

Operating margins were 14% down 430 basis points on a year over year basis, but up 20 basis points.

From Q2.

And we're also pleased to see that 31% decremental margin performance in this business given the magnitude of the revenue reduction is due to end markets.

And we certainly would expect these trends to continue through the balance of the year.

Moving to page 10, we have the results of our E. Mobility segment revenues were flat with organic revenue declining, 1% offset by 1% positive currency impact.

Operating margins were negative 2.5% as we continue to really increase investment in R&D in this segment.

In our focus in this segment continues to be on executing key program wins as well as actively managing what we're looking at now as a multi billion dollar pipeline of opportunities.

We continue to see the electrification market as a significant growth opportunity and we'd expect to see a sharp recovery as the market improves.

In fact, I mean, some analysts are estimating a year over year increase of more than 30% in Q4 alone.

Turning to page 11, we provide our Q4 outlook on organic revenues versus last year.

For electrical Americas, we expect organic revenues to be between flat and up 3% with.

With continued strength in residential and utility Datacenters healthcare warehousing and also in water wastewater.

Offset by some weakness in industrial markets, principally in office and lodging.

For electrical global we estimate organic revenues will decline between seven and 10% with strength in the Asia Pacific region, and data center markets, but being offset by weakness really in Europe, and some declines in the oil and gas market.

For Aerospace we project organic revenues will be down between 23, and 26% with continued strength in military, but with continuing and ongoing weakness in commercial OEM and commercial aftermarket.

For vehicle, we expect organic revenues will decline between seven and 10% with strong demand in China.

In other markets really continuing to recover from the Q2 loans.

And free mobility, we estimate organic revenues to be between flat and up 3%.

With recovering global vehicle markets, and then with particular strength in electric vehicles as well as.

And lastly for hydraulics, we estimated decline of between six and 9%.

So overall, we're estimating organic revenues to be down between five and 7% and this would be another quarter of sequential improvement as the global economy continues to improve.

Moving to page 12, we know what our outlook for Q4 and for the full year as I. Just noted we expect organic revenue declined that between five and 7%.

With modest sequential improvements versus Q3.

We also expect our Q4 decremental margins to be 25%, which is once again at the low end of our prior guidance range, which was between 25 and 30%.

Our Q4 tax rate on adjusted earnings is expected to be 14%.

And then turning to the full year, we are reaffirming the $2.5 billion mid point of our 2020 free cash flow guidance and narrowing the range to be between 2.4 billion and 2.6 billion.

I'd say, it's worth emphasizing once again, the predictable nature of our free cash flow.

We initiated guidance in the midst of the.

The downturn back in April and we really expect to be right in line with this number.

Free cash flow as a percentage of revenue continues to be very strong and for 2020. It's on track to exceed 2019, which was 13.4% Yeah. I'd also note in our free cash flow to adjusted earnings ratio.

Which is 142% on a year to date basis, and it's also well above 120% levels achieved in 2019.

An important element of our free cash flow has been in our working capital management, where we've reduced net working capital by more than $350 million year to date and this was driven principally by the reduction in inventory.

We plan to buyback $200 million to $400 million of our shares in Q4, and we're also reaffirming our full year guidance, which is between 1.7 and $1.9 billion.

Yes, so I think you'll agree that our cash flow generation remains resilient and it does really position us well for the upcoming economic recovery.

Next on page 13, we show our preliminary 2020 outlook by end market within both the electrical and industrial sectors and once again. These numbers reflect if you look at these end markets. The percentage of the sector revenue that is accounted for by these various end markets.

Within our electrical sector Datacenters utility residential institutional infrastructure end markets.

Make up some 50% of our revenue and each of these markets is closing up holding up well and expected to continue to grow.

Industrial end markets, which represents a 30% or the outlook is more mixed with some areas of strength, Mike and machinery and industrial facilities, but also some areas of weakness and particularly in oil and gas.

We understand that there's been some concern raised about the near term growth of commercial construction, but.

But I think it's important to note here that commercial construction only represents 20% of electrical sector revenues.

Within within commercial construction, we do see some areas of strength, Mike and warehousing.

That can you know, partially offset aries appeared to weaker weakness that we would see certainly in the office and lodging segment.

It's also worth noting I'd say here that retail is only 2% of total commercial construction markets, whereas the warehouse segment accounts for about 5% of the market. So this clearly some puts and takes in this market.

And lastly, within the industrial sector. Our primary outlook for 2020 includes growth within all the end markets with particular strength and truck and electric vehicles.

And finally, while we continue to manage through the short term challenges. The pandemic now we also remain focused on our broader strategic and financial goals, which we summarize on page 14.

And I begin by first saying that we continue to move the company in the direction of becoming an intelligent power management company. That's really taking advantage of these important secular growth trends that we've talked about in the past electrification energy transition Io Te connectivity digitalization.

And our reach recent announcement of the bright layer Digitalization initiative is a prime example of how this transformation continues.

In simple terms bright layer for us it really we were we extract data from our intelligent devices, it's where we use data science and machine learning to create new insights and software and it's where we partner with customers to develop value added solutions.

But I'd also say that the overriding goals of the company remain the same and that is to create a company that has better secular growth that has higher margins and better earnings consistency.

And with the added benefit of strong free cash flow and we will continue to be smart and how we deploy it investing in organic growth paying a top quartile dividend buying back shares and actively managing our portfolio, while being a disciplined acquirer.

And while perhaps delayed by a year or so you know our long term financial goals remain unchanged then.

Include 2% to 3% organic growth, 20% segment margins, 8% to 9% EPS growth and $3 billion, a year and free cash flow.

And so with that I'll stop and I'll turn it back over to yen.

And we will open up skewing, okay. Thanks, Craig before we begin the trend is actually on the call today, given the time constraint on insulin our pre.

Appreciate it Dave can limit your opportunity just to one question and a follow up thanks, Irina and the ones, where you're all corporation with that I'll turn it over to the operator will give you guys the instruction.

Thank you and once again, ladies and gentlemen, if you would like to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command.

And first we'll go to the line of Jeff Sprague with vertical research. Please go ahead.

Thank you good morning, everyone.

Morning, John.

Morning.

Couple of things first just on the on cash flow Craig the numbers.

You know have been very robust and thanks for kind of reiterating your longer term target I am wondering though as we.

We think about this 2021, you've laid out with the.

Kind of a return to growth at those Greens and yellows are correct.

Do you see the ability to actually grow free cash flow and dollars next year orders kind of the the national working capital swing and maybe other things kind of coming back into play a mute the ability to to grow cash flow I would assume that conversion would still be pretty good but really talking about.

Absolutely dollars.

I guess, maybe I'll take that yes that conversion will remain strong base as you know we have a lot of amortization.

That lowers the net income and of course, that's noncash we continue to believe that we have further price.

Progress on things like days on hand inventory I mean, we have improved markedly, but if as we talked about over 300 million generated so far this year, but we believe we probably can take another couple of hundred million out of that over time, and so that will be just an efficiency improvement that.

Well help us.

And of course, we'll have to put a little bit back into receivables.

It is simply to reflect sales growth.

But.

Absent hydraulics coming out and you got to remember, we if assuming hydraulics closes at the end of March you will lose the free cash flow from hydraulics and that will of course reduce free cash flow, but apart from that we think that the puts and takes are likely to allow us to maintain the free cash flow of about a.

Levels, it's Ben Yeah.

And as we've shared in the past funding our free cash flow is remarkably consistent through periods of economic expansion and contraction as the higher net income that we generate tends to be the offset for the increase since its consumption our use of working capital and so we do think that if you know next year will be a very good year as well a free.

Cash flow.

And maybe on the topic of hydraulics I don't know if there's anything else to say about the closing timeline, but.

What what is your thinking in terms of for lack of a better term kind of replacing those earnings whether it's kind of more of a running start on share repurchase and the early part of 2021 or perhaps the.

The M&A pipeline is active just.

No you're probably not working to precisely manage the ins and outs, but it still be interested to hear how you see that playing out in 2021.

You know and appreciate the question, Jeff and certainly as we think about our strategy around what we'd like to do with the company.

In the near term and in the longer term, it's really to take funds and reinvest in growth and we said from a priority standpoint, our priorities are largely a.

Around the electrical business and certainly as we think about aerospace if we can pick up an asset thats got relatively speaking higher defense exposure.

In valuations come into line, we felt like the aerospace market as well, but I would say that from where we sit today. What we've committed is that we wont let cash build up on the balance sheet. If we don't feel like we have line of sight to no meaningful M&A now that will continue to buybacks.

Here's a as a way of returning cash to shareholders, but I would say in terms of that as you think about.

The way 2021 will likely unfold is that we're not going to take you know the roughly $2.9 billion of proceeds and soon as we receive those proceeds go back and buy back a bunch of shares and so we will try to be as we've done in the past you know more opportunistic in terms of our share buyback program.

And buying at the right times into the market.

Great ill leave it there thank you.

Thank you.

And our next question is from Scott Davis with millions research. Please go ahead.

Hi, good morning, guys.

Thanks Scott.

Craig you mentioned in your remarks around aerospace around restructuring and Rightsizing Our farm, maybe more specifically I think you used the word rightsizing what does that mean, what is the new normal how do you kind of plan for.

You know I noticed obviously aerospace is green in your chart on slide 13, but.

Is there a specific target of 20% down our 15% down or something that you're rightsizing too or are your factories kind of flexible enough to.

Moderate down Yep, yep or moderate backup I should say because.

Decremental margins are pretty tough in the quarter and that business.

Yeah, No I'd say you know.

Obviously, if you think about all of our end markets. The aerospace market probably is the one.

That is certainly most challenged and probably where you have the.

The least certainty around what the future looks like in terms of the rate of improvement in that market. We do believe coming off of a now positively horrific year. This year that we do see some modest growth in the commercial aerospace market next year, but once again coming off of a very very low base, which is why we know that market will be.

Green for us and the military market will continue to.

Be performed is fine, but I'd say, we have done already based on the actions that we've already taken in the business. We have already size the business for the level of economic activity that we're experiencing today inside of aerospace and so we have.

Very good.

Quickly moved.

Going all the way back to Q2, two really are what I call rightsize the business for the level of economic activity that we are experiencing and to the extent that the world retire recovers faster than what we're currently envision in I think what we've said in the past we don't think at this market really returns to 2000.

In a 19 levels until probably sometime in you know.

Late 23, 24, and so we really are prepared for a long term kind of downturn in that business and weve structured the business in a way that allows us to deliver attractive margins and even at 18.5% and I call those very attractive margins for the aerospace business in the context of this economic environment and so we are.

We've done the work that we need to do to prepare the business to really continue to deliver attractive margins in this environment.

Okay, Thanks, Craig and just moving on to to the grid.

Kind of what's the smart grid really mean for you guys and.

As it relates to an add on to historic growth rates I know utilities never been.

Oh, that's fantastic of a growth rate historically for you guys, probably more like 2% to 3% what would the smart grid add.

Meaningfully to that historic growth rates, we can expect something higher or is it just a mix shift and span that.

No one gets taken from one side to the other and that the overall growth rate and utility is the same.

You know, we do think that.

This energy transition that we're going through.

Which includes you know smart grid does add meaningful growth to the historical utility business and and so I'd say that if you think about you know today the amount of investment that's going into renewables. If you think about today in the context of.

Everybody today is both a consumer and a seller of electricity of electrons as we think about everything has agreed that that we see you know woody out of spend some time sharing with the group during our Investor meeting, we do think that the investments that will be required to first of all harden the grid build more.

Units into the grid and then to think about how do you manage you know this environment, where electrons and moving you know in many different directions, you have to manage that power very differently. If you think about all of the growth in things like electric vehicles that are coming online in.

The additional low debt thats going to put on the grid.

The greatest going to have to get smarter in the way that it manages all these various loads and that's going to mean more opportunities for our electrical equipment and gear and software and the solutions that we bring to market and so while the utility market. Maybe historically has been you know, let's say a relatively slow growth.

Market, we do think the future for the utility market for at least you know.

At least.

In the near term and into the mid term is going to be very attractive.

Okay. Good luck, Craig Thanks, guys, Hey, Thank you. Thanks.

Our next question from and dining with JP Morgan. Please go ahead.

Yeah, Hi, good morning, actually Craig maybe along the same on a similar line, but a different region and you mentioned in your comments that talent electrical global ERP is still very weak and are you seeing any signs of life in that region and trying to take huge investments there.

Considering making in things like hydrogen and all the infrastructure that would have to be built at part bad.

And also more recently banned and stem their intention to record sales all owned buildings that I'm, just curious whether all of that those investments that they're talking about in Europe and are going to be year end style require private funding or whether you're hearing any signs of life over there and on the back of any age.

Humane gets you can imagine that secular changes that they're talking about thanks.

Yeah I appreciate the question and I'd say two spots maybe addressing the specific one around hydrogen I think it's a little early.

For us to really understand.

The role that hydrogen is going to play kind of in the in the overall energy equation, although there's a massive amounts of investments that are going in I think I would say to you to your broader point around building electrification. It's obviously, a very significant opportunity for Eaton both in Europe as well as in the US you know as it is.

Yeah, I'm sure you're aware, you're building say account for directly or indirectly. Some one third of energy consumption and nearly 40% of the direct and indirect cotwo emissions and so as we highlighted as a part of our energy transition growth discussion that that at the Investor Day, We think energy transition and the chain.

Ranging electrical power value chain is creating this what we call everything as a grid environment and with it is going to come just we think very large opportunities for us.

So what customers once again producing selling consuming.

Electrons it you really entering into an environment that is so much more complex that's going to require our type of equipment in our type of solutions specifically the EU. The legislation that you mentioned a large emphasis on climate friendly investments building innovation and obviously you know Eaton is very well positioned to come.

Capitalize on this market growth.

Ooh Green new deal they committed what 550 billion euros to be spent on climate friendly investments lot of that going into building renovation.

Doubling of spending in things like energy storage and digital solutions and so all of those things that is really beneficial to our company and I think we're very well positioned to take advantage of it.

And so you didnt. Thank you have the portfolio well enough positioned to take advantage of those opportunities when they arise.

Yes, yes, we do and I'd say, there's certainly some work that we need to do around some of these things and we're making those investments and things like energy storage and.

And and software solutions to be able to manage it.

Power, but.

But yes, I'd say by and large we are well positioned to participate and take advantage of it.

Okay I will leave it there in the interest of time. Thank you appreciate it. Thank you.

And next we'll go to Nicole Deblase with Deutsche Bank. Please go ahead.

Yeah. Thanks, good morning, guys.

Morning.

And can you maybe start with electric on that has I was pretty impressed by the margin performance fell during the quarter.

I'm just curious how you think about the sustainability of the margins that you're currently seeing there into the fourth quarter and into 20.

2021, particularly given that some of these temporary cost cuts starts to come back.

Yeah I appreciate the question and you know we did like so many other companies put in place on screen are quite a few of the that's cost measures as we dealt with the pandemic and I'd say there was a few of those cost measures that were in place in Q3 than they were in Q2 and will be Q1 from Q4.

And it will in Q3, but for the most part our base assumption is that most of those costs largely come back during the course of during.

During the course of 2021, but having said that the margin story in our electrical Americas business I say you should be expecting margins that are in this range for this for this business I'd say into the foreseeable future a lot of what we're doing is around improving our execution as you know we've also lots.

The company went and taken a number of restructuring programs that we would expect that would deliver benefits you know to offset some of the onetime cost measures. Although some of those could be more back end loaded, but no I would think that the margins that you're seeing today in the Americas business. It is very much in line with the way, we expect that business to perform.

Got it thanks, Craig that's really helpful and then.

For my follow up just thinking about you know channel inventory and I guess did you guys start to see any early signs of restocking in the channel.

Particularly you know in the electrical business and quite hour, maybe you could characterize just overall inventory levels as well.

Yes, yes, we did in fact I mean, we certainly saw on Q2 pretty large inventory drawdown, specifically in the electrical Americas business and certainly during the course of Q3, we did see some restocking that took place with most of our distributors and so I do as we come in.

Into Q4, I would say that distributor inventories today are pretty much well in line with where they've been historically when you go back to the number of days on hand that would be sitting in a distributor inventory.

Right now in the fourth quarter versus where we were lets say in Q1 those days on hands or about the same and so we think inventories today are very well aligned you know for the level of economic activity that we're forecasting you know into Q4 and into next year.

So we don't think theres another inventory build in front of us, but nor do we think that there's an inventory drawdown either so we think it's pretty well balanced and Nicole I might make this one addition to that that the only area where inventories I'm not yet really been rebuilt RM auto dealer lot I mean auto inventories are about 50 days normally there.

Our mid Sixtys and because sales have been so strong.

The auto Oems at that difficulty building enough cars to get the lots restock, so they'll probably in Q4 and maybe into Q1, you'll see some benefit from that.

Got it thanks, guys I'll pass it on.

Thank you.

And next we'll go to Nigel Coe with Wolfe Research. Please go ahead.

Thanks, Good morning.

I wanted to go back to the 2021 framework, if that's the right words and I'll.

Obviously, you know industrial is one of the the amber and markets and obviously, that's not a monolithic end market as a lots of different a buffer that it's the caution just tied to oil and gas and yeah, maybe heavy industrial markets. So a would machine to OEM be sort of a you know, especially number as well I mean any kind of color you can give us on the.

The different end markets that would be great.

Yeah, maybe I think you hit it when your commentary there Nigel I'd say that certainly everybody's we all understand what's going on right now in the oil and gas markets and some of the industrial markets, but am OEM.

Segment of the market the manufacturing segment of the market. We do think that those markets are become positive.

During the course of 2021, and that's a little bit of the offset and Binbin why we think in aggregate that market still grows.

And then all of US are you thinking about markets like Datacenters right in the context of what's going on and datacenter markets I talked about those orders being up some 40% in the quarter. So data center markets continue to be very robust.

Right, Yeah, I mean, I just I just would have put industrial the green, but that just as curious what drove it down suits being <unk> and then yeah, I mean, largely largely to oil and gas, it's largely oil and gas and petrochemical on and on balance if you put a net it all together Nigel it's probably going to be down but not dramatically down.

Okay. That's fair that's fair.

My follow on question is sticking with 2021 the outlook for aerospace and military you know that there was some question marks around military with a deep budget constraints and just wondering kind of how good a good visibility into sort of the next year for the military and the <unk> are there any constraints on commercial air recovery.

It's a lot of again concerns around the planes and and you know kind of buys parts from some top line seems to do you think that's a risk for 21.

Yeah, maybe dealing first part of your question around the military side I'd say you know we do typically have fairly good visibility those orders tend to be you know longer lead time we.

We do sell obviously into some of the depots depots and that service the military market, which tends to be let's say more short term, but by and large we have fairly good visibility and if you take a look at the defense budget in defense spending we don't anticipate that those things are going to be dramatically changed as we.

Got into the future and so we do think that that market that holds up fairly well and yeah.

Not.

Let's see runaway growth, but but solid growth nonetheless.

In in commercial aerospace and there's no question I think what you're seeing today in the market is that there are in fact, a lot of park planes.

What has happened in the industry historically is that a lot of these part claims never come back into service. They end up being parted out which then has an impact on the aftermarket I can tell you that from where we sit today given the level of let's say revenue passenger miles revenue passion kilometers activity levels has been so low that we've not seen a bunch of candles.

As a nation of parked aircraft, but we do anticipate as that market.

Improves and some of these older aircraft are not brought back into the market. We do anticipate that that will happen again at this point in time and the economic recovery and so we have a relatively muted view quite frankly of what the aerospace market is going to look like next year. Some like said some modest growth coming off of a pro.

Terrific downturn, this year, but but weve already factored in those those numbers into our outlook for the year.

Alright, great. Thanks.

<unk>.

And next we'll go to John inch with Gordon Haskett. Please go ahead.

Thank you good morning, everyone.

So you.

You know a lot of temporary cost if not most of them coming back next year, what kind of Incrementals are you planning for and I ask in the context that your Incrementals are your decrementals have been eating and no given all the cost take out you've done and you've got some pretty leverageable operationally businesses such as vehicle in the portfolio you'd be looking at some pretty big Incrementals. Despite.

Some of these temporary costs coming back next year, what sort of framework should we be thinking about.

Hey, John I. Appreciate the question. It's obviously one of the things that we're trying to work through right now as we work on our internal plans, which have not quite finished for next year, but I do think it is important to to once again note. The fact that we have taken out very sizeable, let's say onetime costs. This year.

Yes, so much of which had been temporary costs and that much of that cost will come back next year and that return of costs will have a muting impact on the incremental margins out in the fiscal and in our calendar year 21 year having.

Having said that we also have some offsets in some of the offsets being the fact that we've announced and launched this restructuring program, which is going to obviously add to be additive to the incremental margins year over year, but I won't but I would say as we think about for planning purposes. We'll certainly provide you some more guidance as we come out of our.

Our Q4 earnings call, but do but at this point I would say that you could you probably should be planning on incrementals that are a little bit lower than what you would typically see because we will in fact see costs come back next year that that were one time costs that were that were dealing with this year.

That that makes thanks, Greg can I just as a supplement to my question are you managing toward Incrementals at this point I'm I say this because you know Florida has this framework that they say well, it's just me, 35% incrementals little bit higher well spend the money away I think that's kind of their implication is that.

Is that how you're thinking about it in other words, let's just say because the vehicle and other operational gearing and we had a better than expected recovery you had big Incrementals, where you just don't want those flow through or would you be predisposed to try and take that money and apply it to kind of keep the metals in check or in a range.

Yeah, I mean, if I understand the question I mean every one of our businesses has a normal incremental rate you know percentage of fixed versus variable cost and so every business is expected to essentially manage their business in a very proactive way to you tube to manage margins on the way up and went way down flexing our.

Variable costs, and so I think that that expectation is absolutely built into every one of our businesses and then to the extent that we do better than that because we go beyond we were more effective or more efficient those benefits would tend to flow through and which is why we're delivering better than normal decremental margins this year, but the reason.

So far the results they flow through.

As they come.

We don't we don't really have much latitude around.

Managing them other than that.

No that makes sense and then maybe just as a follow up this might be for Reg.

You know if I didn't know the Democrats win a good platform. Its a jackup corporate tax rate I think they're trying to go after the guilty tax struck me that you guys as an Irish company are far better positioned than other companies Center U.S. based are domiciled, Rick give any preliminary thoughts about.

How you respectively might manage this to try and keep your tax rate down which is obviously getting very value added it to shareholders over the past several years.

But no you're exactly right John to point out that as an Irish domiciled company.

We don't really have issues with things like guilty you know our non us earnings are.

Or essentially not taxed at U.S. rates or by us provisions and so the only real impact of of what has been suggested by Biden that the corporate rate comes up is that our our income in the United States would face a higher tax rate, but our.

Our our.

Our income outside the us would really not be affected at all and and that's very different than a typical us domiciled company that would see both of us income and its non us income effective by the Biden proposals.

Yeah makes sense. Thanks, very much I think we can say confidently that we have an advantage today and that vantage. It lease maintains if not improves in the event of a it should improve by several points yeah for us compared to our a typical.

Yes, multi industrial.

Our next question from David Raso with Evercore ISI. Please go ahead.

Hi, good morning.

More near term I was curious why the electrical Americas organic sales growth rate in the fourth quarter is a little slower than the third quarter I mean, it feels in the channel Residentials accelerating seemed like utility, maybe as well and I'm just trying to understand why the slower growth rate is data is data center starting to come off of that or.

His industrial not even showing a second derivative improvement just trying to understand I guess I'm missing something there.

Yeah I appreciate the question David I'd say, it's in it's in obviously as you.

And certainty in terms of whether we're going to ultimately end up but you know the biggest delta in terms of Q2 versus Q through really is this inventory rebuild that we talked about that we saw.

In the distribution channel largely in the Americas and so we did in fact see some restocking that took place.

In the electrical Americas business and that's what's having you know what we took about a quarter over quarter.

Quarter over quarter basis, a little bit of a muting impact on what the growth trajectory looks like but I say no. We have not seen any slowdown in in the key markets had a strong whether that be residential or datacenters or utility those markets are continuing to perform just fine and as we think about you know the degree.

Both rates that we've laid out for the quarter, it's very much in line with what we saw at the end of September and into October.

And just to clarify the comment about the margins for electrical Americas from this 22% level, we just saw.

So we should expect that type of level I mean do you feel this is a business all else equal.

Even include any seasonality around the first quarter that there should be a two handle on the operating margin.

Or is the mix is maybe the restock data center strikes something that is providing a positive mix.

Maybe take that comment.

Maybe quite as literally as you meant that I want to make sure I understood your comments.

No and then maybe if you think about you know one of if you say if you think about what is it that's driving these margins to the levels that we are seeing now is one of the big.

Things is we in fact, we sold the lighting business and so the fact that we divested this dilutive lighting business has certainly helped margins quite a bit in the electrical business and our teams are doing a very effective job of running the business executing and taking out discretionary costs and so I'd say, either we're not prepared to make a call on a given quarter.

But if you think about the business on a 12 month basis, we think that level of profitability is very much in line with where this business should perform.

Terrific. Thank you for the clarification.

And next we'll go to Joe Ritchie with Goldman Sachs. Please go ahead.

Thanks, Good morning, everyone.

Good morning.

Maybe maybe just following up on John's question from earlier I, obviously, a big day here in the U.S. and I know his question was kind of limited to the tax implications, but I'm curious Craig just to hear your views on election outcomes and what that could potentially mean for your business over the next 12 to 24 months.

Yeah, I mean and at this point I mean, it is clearly speculation because we're not exactly sure of.

What the proposals would be from either one of the administrations.

But I would say that by and large I think you know infrastructure spending is certainly an agenda item for both administrations and I think that you know, we're we're hopeful and would expect probably an infrastructure bill of some sort and you know coming from either one of the candidates I think a lot of things that we talked about.

That are really secular trends that are impacting our industry, we talk about electrification digitization.

You know.

Energy transition. These things I think are much bigger than what's going on in the U.S. and in the U.S. administration and I can tell you you know despite the fact that the the current administration, perhaps has not been as focused on green, we continue to see increasing investments around the world in and essentially.

Energy transition in the greening of the economy. So I think are the secular growth trends that were experiencing inside of the global economy that are essentially bigger than any administration in the U.S. and I think are going to be positive for us independent of who's in the White House.

Got it that's a that's helpful. Craig and then maybe just my one follow on I know, we've talked a little bit about incrementals and decrementals, but just maybe honing in on the electrical the electrical global business.

Which side Decrementals tick up in Fourq you mean.

Maybe just a little bit more color whats happening, there and and whether we should see just kind of improved performance on that on the decrementals going forward.

Yeah, I mean, I'd say that we talk about the company. We've given you you know 25% Decrementals is what we expect for all of Eaton and in any given quarter you know depending upon what's going on in the business and what went on last year you can have some.

Parts and pieces moving around in our individual segments and so I would say there is nothing specifically that you should worry about with respect to the electrical global business that business is doing well theyre executing a incrementals could move around.

The higher slightly lower than the rest of the company, depending upon what quarter, but by and large we're very comfortable with the guidance that we provided and delivering the 25% Decrementals in Q4.

Okay got it thank you.

Our next question is from Julian Mitchell with Barclays. Please go ahead.

Hi, good morning.

Maybe I'm Craig circling back to your comments around slightly lower than normal Incrementals snacks. Yeah. So is the way to think about that but your gross margin is around 30%.

And so you know, it's slightly lower than normal incrementally something in the sort of low mid print.

Twentys is that a reasonable sort of place holder for now.

Yes, I'd say doing it would be would be higher than that I mean, we are typical incrementals, but you know what I would say would be you're probably north of that number that you started with and so would be certainly higher than that number.

And once again, we were not done with our plans for next year, and we would hope to be in a position.

When we do our Q4 earnings to give you a more definitive number, but but but I certainly higher than the number that you just quoted.

Thank you and then just honing in perhaps on.

The aerospace segment and the margins there understood they were down.

Fair amount year on year, but I suppose what I found most interesting was very high sequential incremental margin in aerospace.

40% plus.

So I just wanted to you know you're at that high teens margin run rate in the third quarter.

Is that a good sort of baseline now when you look out so you'll end market prognosis and the cost actions that I imagine a sand proportion of those are in the aerospace division.

And also.

Related to that longer term you talked about the aero market topline getting back to the old peak.

Maybe in three to four years time.

Should we assume aero can get back to prior peak margins, perhaps so well that.

I'm, what do you think the peak margin entitlement is for that business.

Yeah.

No I wouldn't say that if you think about the margin expectations for the business.

As we go forward and we're dealing at these levels of economic activity.

I think it's reasonable to assume that you know that you know the most recent quarter is probably a good predictor of where that business is expected to perform at at this level of economic activity. In this level of revenues you know to the question around the longer term without a doubt we would certainly expect this business.

To get back to prior peak margins that the business posted which were close to 25% as the market recovers whether or not we can get back there earlier or not I think it's really going to be a function of.

In many ways, what happens with the underlying mix of the business and and what happens principally with up with aftermarket as I think everybody understands and aerospace in a world.

The the margins are made and aftermarket which means.

You know revenue passenger miles, which means consumers have to get on planes and starting so I think it really a function of to what extent does the aftermarket business return in or.

Consumers and businesses comfortable putting people on planes and and flying again, and so too early to call at this juncture in terms of when it returns we certainly know that it will return, but but at this juncture just two related to ascertain when.

Great. Thank you.

Thank you.

Our next question from Andrew Obin with Bank of America Merrill Lynch. Please go ahead.

Oh, yes, good morning.

Good morning, Andrew.

Just a question on Emobility, you guys sort of I think made some intriguing statements about potential ramp in revenue is into the fourth quarter.

Just taking a longer term view.

How much of a ramp should we expect over the next couple of years and you keep talking about I guess the investment cycle.

You know how long is the investments icon sales as business really starts contributing a material.

Until this business starts moving the needle on profitability for Eaton.

Yeah, and it's and as I'm sure you appreciate Andrew with the automotive industry. I mean, these product development lifecycle. As you know are quite long I mean, they can be five years or so, especially when you think about launching a new technology and so what we've said before is that really you're talking about.

You know something around you know do.

You know from start to finish probably a 10 year cycle by time, it really starts to contribute.

Meaningfully to the profitability of the company, but but the ramp will largely depend upon the rate at which the automotive Oems start launching new vehicles into the marketplace, but I'd say, if you think from from us from a standing start to when does that really start delivering meaningful margin contribution to the company.

I you know I think something in the order of magnitude of five to 10 years would be a reasonable expectation.

Gotcha and sustainability of the revenue ramp near term.

You said the sustainability of the revenue ramp them yeah.

Yeah, Yeah, and Andrew one way to think about it is probably the easiest way to think about it about two thirds of the revenue that we're now in Emobility Golan to internal combustion cars. So this is electrical equipment going into that in a third goes into the battery electric and hybrid cars and so you're going to have different growth rates.

On those too but.

But right now we're in a big recovery period from the sharp down of Q2 and.

And so you're going to see in a pretty good growth in both of those two categories over the next several quarters.

Got you and just a follow up question on capital allocation on M&A I know.

No you guys said that electrical and aerospace are a focus but you know there are a couple of deals in the industry I guess, both on a site companies that went at a very very high multiples.

How does he think participate.

Participating in.

In these kind of deals.

And you know how do you think about just M&A in the software and Aiotv space is that an option given where the multiples are thank you.

No I mean it for appreciate your reference to the M&A and in one of the things that we pride ourselves on you know over many many years is the fact that we try to be very disciplined acquirer and recognizing for sure that you know software companies grow faster they trade at higher multiples.

In the two deals that you reference and understanding those businesses see the multiples that they went for we just think that there are much better ways of deploying capital and creating shareholder value than than the kind of multiples that those two transactions went out I mean, they just won an extraordinary multiples and.

We just think we have better more attractive alternatives in that that will deliver a better return for our shareholders but.

Right, but we will say you know what our capital allocation strategy continues to be focused on electrical and we are in fact looking at a number of opportunities. There I guess, there's nothing obviously that is eminent but we havent vaccine the deal pipeline pick up a bit we.

We continue to look at things in and around aerospace and once again as I mentioned.

Valuations would have to come in line in and be reflective of the current reality in uncertainty in that market before we do anything but a lot of.

We're obviously, having some conversations and discussions in that space as well, but we always have the option of buying back stock immediately but it's not the first choice, we would love to grow the company, but once again, if we if we're not able to deploy capital in.

In a shareholder friendly way towards an acquisition, we don't have to do a deal we're very comfortable with our ability to invest in the company organically grow the company organically and acquisitions, you know or way of accelerating a strategy of augmenting a strategy, but that but the prime path for us will continue to be.

The things that we're doing to focus on growing the company organically.

No. Thank you very much Greg appreciate her extensive answer thank you.

Our final question will be from Jeff Hammond with Keybanc. Please go ahead.

Hey, Thanks for fitting me in guys.

Just on data center the order rates have been you know really strong and I know this is a good secular market, but there tends to be these laws from time to time any anything you can speak to in the quoting activity that would point.

Point to continued strength or any kind of low end to 21.

Yeah, not really Jeff in fact, you know we had a very strong quarter. If you take a look at our global datacenter orders for the quarter were up some 9% and what we really saw over the last number of months is a really big returns Hyperscale and then as we've talked about on these calls and in prior earnings calls Hyperscale tends to be lumpy. These orders can you know when they go and they come when it comes.

Becoming large increment and so I mean, there's really nothing that we've seen in data centers that would suggest that the market is in any way pulling back and if you think about it makes a lot of sense.

Especially in the context of the environment that we're living in today, where everybody's working remotely you everybody's.

Zooming and Webex thing and you know teaming.

All of these technologies that we're all using to conduct business remotely just add more kind of accelerate to a market that is already growing quite rapidly and as the world continues to to digitize and connectivity and where you living in a in a fiveg environment in the not too distant future. All of these things will continue.

To add to kind of the momentum that we're seeing in the data center market. So we think that becomes a continues to be a very attractive market for the foreseeable future.

Okay, and then truck cycle seems to be Inflecting here, just give us a sense on how that you know your truck businesses within vehicle acts the same or different you know given the you know the JV structure.

Yeah, I'd say that if you know one of the things that we try to do by putting the joint venture together is really to kind of dampen some of these big cyclical swings.

In the outside impact that the truck business in North America had on the overall company and so I would what you ought to expect is that to see you know and.

In the bottom of a downturn to see a much smaller impact on the company and and in a bid in a bit in the event of and a big upswing, you probably going to see a more muted impact on that side as well, but keep in mind that the JV today is basically in North America class eight you know automated transmitter.

Yes, yeah.

Everything else globally clutch business aftermarket business all the other elements of that business, we still own and so we do expect to see you know attractive.

Growth in our vehicle business as this market returns to growth into 2021 and into the fourth quarter.

Okay. Thanks, a lot correct.

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

Thank you for joining us today and have a great day.

Ladies and gentlemen that does conclude your conference. Thank you for your participation you may now disconnect.

We're sorry your conference is ending now please hang up.

[music].

[music].

[music].

Okay. Good morning, everyone I'm, yet either senior Vice President Investor Relations. Thank you all for joining US what you thought quarter 2020 earnings call with me today I'll create Arnold, our chairman and CEO and Rick Phil, Let chairman and the Chief financial and the planning office Oh agenda. Today includes opening remarks by Craig highlighting the company's book.

Formats in the third quarter as well.

I've done our past calls, we'll be taking questions. It had to do with Craig's comments.

Press release and the presentation. We'll go through today have been posted on our website at Www Dot Eaton Dotcom. Please note that both the press release and the presentation, including recalls that agents to non-GAAP measures. A webcast of this call is that that's both our website and it will be available for replay I would like to remind you that all.

Our comments today will including statements related to expected future results of the company and are therefore forward looking statements.

Actual results may differ materially from our forecast the projection due to a wide range of risks and uncertainties that are described into all were earning release and a presentation. There also all like you know, we really did 8-K filing with that I will turn it over to Craig Okay. Thanks, Chad.

Well, let's start on page three with a highlight of our Q3 results and I'd say to begin by saying I'm really pleased with how the entire team has continued to deliver and perform during this ongoing pandemic and economic downturn.

Our results, while certainly below last year in absolute terms, they were much better than our guidance for the quarter.

Q3 earnings per share on $1.11 on a GAAP basis of $1.18 on an adjusted basis, which naturally excludes the five cents of charges related to acquisitions and divestitures.

And two cents related to a multiyear restructuring program our.

Our Q3 revenues of 4.5 billion down, 9% organically compared with last year, but up 16% versus Q2.

Segment margins were 17.6%.

These margins were towards the 90 basis points above Q2 levels and our decremental margins of 25% were at the low end of our guidance range. Our organization artist must say again is doing an outstanding job of managing discretionary costs.

We also generated strong cash flow in the quarter operating cash flow was 921 million and our free cash flow was 832 million.

As a result, we are reaffirming our 2020 guidance for cash flow with a midpoint of 2.5 billion of free cash flow and narrowing the range to 2.4 to 2.6 billion and.

And lastly, we repurchased 177 million of shares during the quarter and we're at 1.5 billion on a year to date basis.

Turning to page four we summarize our Q3 results and I'll just highlight a few items here first acquisitions increased sales by 2%, but this was more than offset by the 8% impact our divestitures and this was primarily as you'll recall what the lighting business.

Second our second margins at 17.6% were down versus last year, but still at very healthy levels, especially given the reduction in revenue.

Lastly, I would just remind the.

The group that we now record all charges related to acquisitions and divestitures and restructuring costs at corporate rather than at the segment level and we hope it just makes it easier for you to model our results on a going forward basis.

Next on page five we show results for the electrical Americas segment.

We're very pleased that our largest operating segment returned to positive organic growth of 3% during the quarter.

It was better than the high end of our guidance range, which was up 2% and this was really driven by particular strength in residential and utility markets.

Revenues were naturally impacted by the sales of writing business, which reduced sales by 19%.

And negative currency impacted sales by 1%.

Operating margins increased 280 basis points to 22.2%.

So our margins continued to be favorably impacted by the divestiture of lighting as well as by ongoing cost containment actions.

Americas business continued to show resiliency also when you look at our orders and backlog orders were down 1% on a rolling 12 month basis, excluding lighting and we saw once again, particularly strength in residential and also in datacenter markets sales.

Similar to what you've seen from others circling growth is being driven by it really this increased focus on the home and this work for home environment and our all of our growing dependence on digital connectivity.

On a rolling 12 month basis resident orders were up 14% and datacenter orders were up mid single digits.

And sequentially Q3 orders were up 16% from Q2.

Lastly, our backlog was up 11% from last year delivering by once again. This noted strength in residential and data centers, but also by utility markets as utility markets are benefiting from the increased investment in smart grid and this energy transition that's taking place.

On page six we have a summary of our electrical global segment revenues were down 8%, 10% decline in organic revenues, partially offset by 2% tailwind from currency.

Lower organic sales were driven principally by weakness in oil and gas and industrial markets.

If you exclude in oil and gas and industrial businesses.

European business was slightly negative and our Asia business was slightly positive.

Operating margins declined 280 basis points to 16.6%, but were up 60 basis points on a sequential basis.

Orders declined 6% on a rolling 12 month basis.

Clients, driven once again by oil and gas and industrial markets, partially offset by strength in residential datacenters and utility markets.

It's also worth noting here that datacenter orders were very strong in this segment, increasing some 40% on a rolling 12 month basis.

We also had solid sequential growth in orders up 12% from Q2, and lastly, we continue to grow our backlog, which increased 7% versus last year.

Moving to page seven we have the results of our hydraulic segment revenues were down 15%, which was all organic.

But this was much better than the 25% organic decline at the midpoint of our Q3 guidance as end markets recovered faster than anticipated.

Operating margins were 9.8% flat.

Flat with last year.

Encouragingly here I'd say, we saw momentum in our Q3 orders, which increased 8% with strength in both agricultural and construction equipment markets.

Lastly, we remain on track to close the dance off sales.

Sales by the end of Q1 next year.

Next on page eight we have the financial summary of our aerospace segment revenue declined 13% down 26% organically, partially offset by a 12% increase from the acquisition of Soria and a 1% positive currency impact.

Now as you would expect organic revenue declines here were driven primarily by the continued downturn in commercial aviation, which was partially offset by growth in military.

On a sequential basis organic revenues were up 15% from Q2 levels.

And while at healthy levels operating margins declined to 18.5% due to lower sales volume and margins were certainly impacted by the impact of this or your acquisition.

I would note here that margins were up 370 basis points from Q2 and that the business is really doing an outstanding job of rightsizing and reducing discretionary costs.

Orders were down 22% on a rolling 12 month basis.

And the backlog was down 11%.

Turning to page nine we summarize our results for vehicle segment revenues were down 25%, including 20% organic decline.

The divestiture of the automotive fluid conveyance business impacted revenues by 4%.

And we had a 1% negative headwind from currency.

The 20% decline in organic revenue was once again much better than what we expected, but we at 32% decline at the midpoint of our guidance and both like motor vehicles as well as truck markets have rebounded more quickly than we anticipated.

In fact organic revenues were up from 75% from Q2.

Global light vehicle market production in the quarter was down 4% and class eight OEM build was down some 34% in Q3.

But given the strength that we now are seeing we now project NAFTA class a truck production of some 200000 units for the year and this is up 14% from our prior forecast.

Operating margins were 14% down 430 basis points on a year over year basis, but up 20 basis points.

From Q2.

And we're also pleased to see the 31% decremental margin performance in this business given the magnitude of the revenue reduction is due to end markets.

And we certainly would expect these trends to continue through the balance of the year.

Moving to page 10, we have the results of our E. Mobility segment revenues were flat with organic revenue declining, 1% offset by 1% positive currency impact.

Operating margins were negative 2.5% as we continue to really increase investment in R&D in the segment.

In our focus in this segment continues to be on executing key program wins as well as actively managing what we're looking at now is a multi billion dollar pipeline of opportunities.

We continue to see the electrification market as a significant growth opportunity and we'd expect to see a sharp recovery as the market improves.

Back to me.

Some analysts are estimating a year over year increase of more than 30% in Q4 alone.

Turning to page 11, we provide our Q4 outlook on organic revenues versus last year.

For electrical Americas, we expect organic revenues to be between flat and up 3% with.

With continued strength in residential and utility Datacenters healthcare warehousing and also in water wastewater.

Offset by some weakness in industrial markets, principally in office and lodging.

For electrical global we estimate organic revenues will decline between seven and 10% with strength in the Asia Pacific region, and data center markets, but being offset by weakness really in Europe, and some declines in the oil and gas market.

For Aerospace we project organic revenues will be down between 23, and 26% with continued strength in military, but with continuing and ongoing weakness in commercial OEM and commercial aftermarket.

For vehicle, we expect organic revenues will decline between seven and 10% with strong demand in China.

In other markets really continuing to recover from the Q2 loans.

And free mobility, we estimate organic revenue to be between flat and up 3%.

With recovering global vehicle markets, and then with particular strength in electric vehicles as well.

And lastly for hydraulics, we estimate a decline of between six and 9%.

So overall, we're estimating organic revenues to be down between five and 7% and this would be another quarter of sequential improvement as the global economy continues to improve.

Moving to page 12, we know what our outlook for Q4 and for the full year as I. Just noted we expect organic revenue decline between five and 7%.

With modest sequential improvements versus Q3.

We also expect our Q4 decremental margins to be 25%, which is once again at the low end of our prior guidance range, which was between 25 and 30%.

Our Q4 tax rate on adjusted earnings is expected to be 14%.

And then turning to the full year, we are reaffirming the $2.5 billion midpoint of our 2020 free cash flow guidance and narrowing the range to be between $2.4 billion and $2.6 billion.

I'd say, it's worth emphasizing once again, the predictable nature of our free cash flow.

We initiated guidance in the midst of.

The downturn back in April and we really expect to be right in line with this number.

Free cash flow as a percentage of revenue continues to be very strong and for 2020, it's on track to exceed 2019, which was 13.4%.

I'd also note in our free cash flow to adjusted earnings ratio.

Which is 142% on a year to date basis, and it's also well above 120% levels achieved in 2019.

An important element of our free cash flow has been our working capital management, where we've reduced net working capital by more than $350 million year to date and this was driven principally by the reduction in inventory.

We plan to buyback $200 million to $400 million of our shares in Q4, and we're also reaffirming our full year guidance, which is between 1.7 and $1.9 billion.

Yes, so I think you'll agree that our cash flow generation remains resilient and it does really position us well for the upcoming economic recovery.

Next on page 13, we show our preliminary 2020 outlook by end market within both the electrical and industrial sectors and once again. These numbers reflect if you look at these end markets. The percentage of the sector revenue that is accounted for by these various end markets.

Within our electoral sector datacenters utility residential institutional infrastructure end markets.

Make up some 50% of our revenue in each of these markets is closing up holding up well and expected to continue to grow.

Industrial end markets, which represents a 30% or the outlook is more mixed with some areas of strength like in machinery and industrial facilities, but also some areas of weakness and particularly in oil and gas.

We understand that there's been some concern raised about the near term growth of commercial construction, but.

But I think it's important to note here that commercial construction only represents 20% of our electrical sector revenue.

With and within commercial construction, we do see some areas of strength, Mike and warehousing that can partially offset areas of potential weakness weakness that we would see certainly in the office and lodging segment.

It's also worth noting I'd say here that retail is only 2% of total commercial construction markets, whereas the warehouse segment accounts for about 5% of the market. So this clearly some puts and takes in this market.

And lastly, within the industrial sector. Our primary outlook for 2020 includes growth within all the end markets with particular strength and truck and electric vehicles.

And finally, while we continue to manage through the short term challenges the pandemic and we also remain focused on our broader strategic and financial goals, which we summarize on page 14.

I begin by first saying that we continue to move the company in the direction of becoming an intelligent power management company. That's really taking advantage of these important secular growth trends that we talked about in the past electrification energy transition aiotv connectivity digitalization.

And our reach recent announcement of the bright layer Digitalization initiative is a prime example of how this transformation continues.

In simple terms right.

Great layer for us it really we were we extract data from our intelligent devices, it's where we use data science and machine learning to create new insights and software and it's where we partner with customers to develop value added solutions.

But I'd also say that the overriding goals of the company remain the same and that is to create a company that has better secular growth that has higher margins and better earnings consistency.

And with the added benefit of strong free cash flow and we will continue to be smart and how we deploy it investing in organic growth paying a top quartile dividend buying back shares and actively managing our portfolio, while being a disciplined acquirer.

And while perhaps delayed by a year or so our long term financial goals remain unchanged. They include 2% to 3% organic growth, 20% segment margins, 8% to 9% EPS growth and $3 billion, a year and free cash flow.

And so with that I'll stop and I'll turn it back over to yen.

And we will open up QNX, okay. Thanks, Craig before we begin to trend is actually on the call today, given the time constraint on new fund our pre.

Appreciate it Dave can limit your opportunity just to one question and a follow up thanks, and the ones, where you're all corporation with that ill turn it over to the operator will give you guys the instruction.

Thank you and once again, ladies and gentlemen, if you would like to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command.

And first we'll go to the line of Jeff Sprague with vertical research. Please go ahead.

Thank you good morning, everyone.

Morning, John.

Morning.

Couple of things first just on the on cash flow Craig the numbers.

You know have been very robust and thanks for kind of reiterating your longer term target I am wondering though is we.

Think about this 2021, you've laid out with.

Kind of a return to growth as those Greens and yellows are correct.

You see the ability to actually grow free cash flow and dollars next year or does kind of the the natural working capital swing and maybe other things kind of coming back into play.

The ability to to grow cash flow I would assume that conversion would still be pretty good but really talking about absolute dollars.

I guess, maybe I'll take that yes. The conversion will remain strong base as you know we have a lot of amortization.

Lowers the net income and of course, that's noncash.

We continue to believe that we have further.

Progress on things like days on hand inventory I mean, we have improved markedly, but as we've talked about over $300 million generated so far this year, but we believe we probably can take another couple of hundred million out of that over time, and so that will be just an efficiency improvement.

It.

Will help us.

And of course, we'll have to put a little bit back into receivables.

Simply to reflect sales growth.

But.

Absent hydraulics coming out and you got to remember, we if assuming hydraulics closes at the end of March you will lose the free cash flow from hydraulics and that will of course to reduce free cash flow, but apart from that we think that the puts and takes are likely to allow us to maintain the free cash flow up about it.

The levels it's been.

And as we've shared in the past funding our free cash flow is remarkably consistent through periods of economic expansion and contraction as the higher net income that we generate tends to be the offset for the increase consumption. Our use of working capital and so we do think that next year will be a very good year as well a freak.

Cash flow.

And maybe on the topic of hydraulics I don't know if there's anything else to say about the closing timeline, but.

What's the what is your thinking in terms of for lack of a better term kind of replacing those earnings whether it's.

Kind of more of a running start on share repurchase in the early part of 2021 or perhaps.

The M&A pipeline is active just.

You're probably not working to precisely manage the ins and outs, but its still be interested to hear how you see that playing out in 2021.

Great. Appreciate the question, Jeff and then certainly as we think about that.

Our strategy around what we'd like to do with the company.

In the near term and in the longer term, it's really to take funds and reinvest in growth and we said from a priority standpoint, our priorities are largely.

Around the electrical business and certainly as we think about aerospace if we can pick up an asset thats got relatively speaking higher defense exposure.

And valuations come into line, we felt like the aerospace market as well, but I would say that from where we sit today. What we've committed is that we wont let cash build up on the balance sheet. If we don't feel like we have line of sight to.

Meaningful M&A now that will continue to buy back shares.

As a way of returning cash to shareholders, but I would say in terms of that as you think about.

The way 2021 will likely unfold is that we're not going to take that.

Roughly $2.9 billion of proceeds and soon as we receive those proceeds will go back and buy back a bunch of shares and so we will try to be as we've done in the past.

More opportunistic in terms of our share buyback program and buying at the right times into the market.

Great I'll leave it there thank you.

Thank you.

And our next question is from Scott Davis with Millennials Research. Please go ahead.

Hi, good morning, guys.

Got it.

Craig you mentioned in your remarks around aerospace around restructuring and Rightsizing, our or maybe more specifically I think you used the word rightsizing what does that mean, what is the new normal how do you kind of planned for.

I noticed obviously aerospace is green in your chart on slide 13, but.

Is there a specific target of 20% down our 15% down or something that you're rightsizing too.

Are your factories kind of flexible enough to.

Moderate down.

Yes, or moderate backup I should say because.

Decremental margins are pretty tough in the quarter and that business.

Yes, I'd say.

Obviously, if you think about all of our end markets. The aerospace market probably is the one.

That is certainly most challenged and probably where you have.

The least certainty around what the future looks like in terms of the rate of improvement in that market. We do believe coming off of a positively horrific year. This year that we do see some modest growth in the commercial aerospace market next year, but once again coming off of a very very low base, which is why we that market will be.

Green for us and the military market will continue to.

Be performed is fine, but I'd say, we have done already based on the actions that we've already taken in the business. We have already size the business for the level of economic activity that we're experiencing today inside of aerospace.

So we have.

Barry.

Quickly moved.

Going all the way back to Q2, two really what I call rightsize the business for the level of economic activity that we are experiencing and to the extent that the world return recovers faster than what we're currently envision and I think what we've said in the past we don't think that this market really return to 2000.

At a 19 levels until probably sometime in may.

Late 23, 24, and so we really are prepared for a long term kind of downturn in that business and weve structured the business in a way that allows us to deliver attractive margins and even at 18.5% I'd call. It a very attractive margins for the aerospace business and the context of this economic environment and so we are.

We've done the work that we need to do to prepare the business to really continue to deliver attractive margins in this environment.

Okay, Thanks, Craig and just moving on to to the grid.

Kind of what's the smart grid really mean for you guys and.

As it relates to an AD on the historic growth rates I know utilities never been.

All that fantastic of a growth rate historically for you guys, probably more like 2% to 3% what does smart grid to add to that.

Meaningfully to that historic growth rates, we can expect something higher or is it just a.

Shifting spend that now gets taken from one side to the other and that the overall growth rate can utility is the same.

No we do think that.

This energy transition that we're going through.

Which includes smart grid does add meaningful growth to the historical utility business and and.

So I'd say that if you think about today the amount of investments thats going into renewables. If you think about today in the context of.

Everybody today is both a consumer and a seller of electricity of electrons as we think about everything as a grid that we see.

I have spent some time sharing with the group during our Investor meeting, we do think that the investments that will be required to first of all hardening the grid build more resilience into the grid and then to think about how do you manage.

This environment, where electrons and moving.

In many different directions, and manage that power very differently. If you think about all of the growth in things like electric vehicles that are coming online in the additional load that thats going to put on the grid.

The greatest going to have to get smarter in the way that it manages all of these various loads and that's going to mean more opportunities for our electrical equipment and gear and software in the solutions that we bring to market and so while the utility market, maybe historically has been a let's.

Let's say a relatively slow growth market, we do think the future for the utility market for at least the.

At least the near term and into the mid term is going to be very attractive.

Okay. Good luck Craig Thanks, guys. Thank you. Thanks.

Our next question is from and Dine with Jpmorgan. Please go ahead.

Yes, hi, good morning, actually Craig maybe along similar.

Similar line, but a different region.

You mentioned in your comments that.

I'd like to global ERP is still very weak.

Are you seeing any signs of life in that region in terms of take huge investments there.

Tendering, making in things like hydrogen and all the infrastructure that would have to be built that part bad.

And also more recently they announce them their intention to retrofit all owned buildings that I'm just curious whether all of that those investments that they are talking about an European are going to be year end buyout require private funding or whether you're hearing any signs of life over there and on the back of any update.

Human to human that secular changes that I talked in my thanks.

Yeah I appreciate the question and I'd say two spots maybe addressing the specific one around hydrogen I think it's a little early.

For us to really understand.

The role that hydrogen is going to play kind of in the in the overall energy equation. Although there is massive amounts of investments that are going in I think I would say to you to your broader point around building electrification. It's obviously, a very significant opportunity for Eaton, both in Europe as well as in the us.

I'm sure you're aware your buildings today account for directly or indirectly some one third of energy consumption and nearly 40% of the direct and indirect cotwo emissions and so as we highlighted as a part of our energy transition growth discussion that that at the Investor Day, We think energy transition and.

And the changing electrical power value chain is creating this what we call everything as a grid environment and with it is going to come to US we think very large opportunities for us.

So with customers once again producing selling consuming.

Let trans you really into into an environment that is just so much more complex thats going to require our type of equipment in our type of solutions specifically the EU legislation that you mentioned a large emphasis on climate friendly investments building innovation and obviously Eaton is very well positioned to come.

Capitalize on this market growth.

Ooh Green new deal they committed what 550 billion euros to be spent on climate friendly investments lot of that going into building renovation.

Doubling of spending in things like energy storage and digital solutions and so all of those things that is really beneficial to our company and I think we're very well positioned to take advantage of it.

So you did thank you have the portfolio well enough positioned to take advantage of those opportunities when they arise.

Yes, yes, we do and I'd say, there's certainly some work that we need to do around some of these things that we're making those investments and things like energy storage and.

And and software solutions to be able to manage.

In power, but.

But I'd say by and large we are well positioned to participate and take advantage of it.

Okay I will leave it there in the interest of time. Thank you appreciate it. Thank you.

And next we'll go to Nicole Deblase with Deutsche Bank. Please go ahead.

Yeah. Thanks, good morning, guys.

Good morning.

And can you maybe start with I would like to comment because I was pretty impressed by the margin performance during the quarter.

Just curious how you think about the sustainability of the margins that you're currently seeing there into the fourth quarter and into 2021, particularly given that some of these temporary cost cuts start to come back.

No I appreciate the question and we did like so many other companies put in place on quite a few.

Thats caution measures as we dealt with the pandemic and I'd say there was a few of those cost measures that were in place in Q3 than they were in Q2 and will be Q1 for Q4 than it will in Q3, but for the most part our base assumption is that most of those costs largely come back during the course of.

During the course of 2021.

But having said that the margin story in our electrical Americas business I say, you should be expecting margins that are in this range for this for this business I'd say into the foreseeable future a lot of what we're doing is around improving our execution. As you know we have also launched the company wanted to take a number of restructuring pro.

Grams that we would expect that would deliver benefits.

To offset some of the onetime cost measures, although some of those could be more back end loaded, but no I would think that the margins that you're seeing today in the Americas business.

It's very much in line with the way, we expect that business to perform.

Got it thanks, Craig that's really helpful. And then for my follow up just thinking about channel inventory and I guess did you guys start to see any early signs of restocking in the channel.

Particularly in the electrical business and quite out of whack.

Maybe you could characterize just overall inventory levels as well.

Yes, yes, we did in fact I mean, we certainly saw on Q2 pretty large inventory drawdown, specifically in the electrical Americas business and certainly during the course of Q3, we did see some restocking that took place with most of our distributors and so as we come in.

To Q4, I would say that distributor inventories today are pretty much well in line with where they've been historically when you go back to the number of days on hand that would be sitting in a distributor inventory.

Right now in the fourth quarter versus where we were lets say in Q1 those days on hands or about the same and so we think inventories today or are very well aligned.

For the level of economic activity that we're forecasting into Q4 and into next year.

So we don't think theres another inventory build in front of us, but nor do we think that there is an inventory drawdown either so we think it's pretty well balanced rate and Nicole I might make just one addition to that that the only area where inventories I'm not yet really been rebuilt our end auto dealer lot I mean auto inventories are about 50 days normally there.

Our mid Sixtys and because sales have been so strong.

The auto Oems that difficulty building enough cars to get the lots restock, so they'll probably in Q4 and maybe into Q1, you will see some benefit from that.

Got it thanks, guys I'll pass it on.

Thank you.

And next we'll go to Nigel Coe with Wolfe Research. Please go ahead.

Thanks, Good morning.

Wanted to go back to the 2021.

Framework.

Right Watson.

The industrial is one of the the amber and markets and obviously, that's not a monolithic end market as it looks at different parts of that is the caution just tied to oil and gas and.

Yes, maybe heavy industrial markets so well.

Machine to Oems, the sort of a fashion number as well I mean any kind of color you can give us on the dividend markets that would be great.

Yes, I mean, I think you hit it on your commentary there.

Nigel I'd say that certainly everybody, we all understand what's going on right now in the oil and gas markets and some of the industrial markets, but am OEM segment.

Segment of the market the manufacturing segment of the market. We do think that those markets are will become positive.

During the course of 2021, and Thats, a little bit of the offset and getting them why we think in aggregate that market still grows.

And then all bets are off.

About markets like Datacenters right in the context of what's going on and datacenter markets I talked about those orders being up some 40% in the quarter. So datacenter markets continue to be very robust.

Right, Yes, I just I just would have put industrial the green, but just curious what drove it down suits PNM and then yes, I mean, largely largely oil and gas, it's largely oil and gas and petrochemical and on balance if you put a net it all together Nigel it's probably going to be down but not dramatically down.

Okay. That's fair that's fair.

My follow on question is sticking with 2021.

This basin and military.

That there was some question marks around military with but.

Budget constraints, and just wondering kind of how good to get visibility into sort of the next year, but the military and other any constraints on commercial recovery minutes a lot of.

Ken concerns around planes and and.

Parts from some top line seems to do you think thats a risk for 21.

Yes, maybe dealing with the first part of your question around the military side I'd say, we do typically have fairly good visibility those orders tend to be longer lead time.

We do so obviously into some of the depots depots that service the military market, which tends to be let's say more short term, but by and large we have fairly good visibility and if you take a look at the deferred.

Defense budget in defense spending we don't anticipate that those things are going to be dramatically changed as we look out into the future and so we do think that that market holds up fairly well and.

Not.

Let's say runaway growth, but but solid growth nonetheless in.

In commercial aerospace and there is no question I think what you're seeing today in the market is that there are in fact, a lot of park planes.

What has happened in the industry historically is that a lot of these part claims ever come back into service. They end up being parted out which then has an impact on the aftermarket I can tell you from your from where we sit today given the level of let's say revenue passenger miles revenue passion kilometers activity levels has been so low that we've not seen a bunch of cannabis.

As a nation of parked aircraft, but we do anticipate as that market.

Improved some of these older aircraft or not brought back into the market. We do anticipate that that will happen again at this point in the economic recovery and so we have a relatively muted view quite frankly of what the aerospace market is going to look like next year. Some like said some modest growth coming off of a pro.

Terrific downturn, this year, but but weve already factored in those those numbers into our outlook for the year.

Alright, great. Thanks.

And next we'll go to John inch with Gordon Haskett. Please go ahead.

Thank you good morning, everyone.

[music].

So correct you know.

A lot of temporary costs, if not most of them coming back next year, what kind of Incrementals are you planning for and I ask in the context that your incrementals or decrementals have been beating and given all the cost take out you've done and you've got some pretty leverageable operationally businesses such as vehicle in the portfolio you'd be looking at some pretty big Incrementals. Despite some.

These temporary costs coming back next year, what sort of framework should we be thinking about.

Hey, I appreciate the question. It's obviously one of the things that we're trying to work through right now as we work on our internal plans, which have not quite finished for next year, but I do think it is important to to once again note. The fact that we have taken out very sizeable, let's say onetime costs. This year.

So much of which have been temporary costs and that much of that cost will come back next year and that return of costs will have a muting impact on the incremental margins out in the fiscal and in our calendar year 21 year.

Having said that we also have some offsets and some of the offsets being the fact that we've announced and launched this restructuring program, which is going to obviously add.

To be additive to the incremental margins year over year, but I, what I would say as we think about for planning purposes. We'll certainly provide you some more guidance as we come out of our Q4 earnings call, but to but at this point I would say that you could you probably should be planning on incrementals that are a little bit lower.

Then what you would typically see because we will in fact see costs come back next year that.

That were one time costs that were that were dealing with this year.

That makes thanks, Greg can I just as a supplement to my question are you managing toward Incrementals at this point I say this because Florida has this framework that they say well it could be 35% incrementals is a bit higher well spend the money away I think thats kind of their implication is that is.

Is that how you're thinking about it in other words, let's just say because the vehicle and other operational gearing and we had a better than expected recovery you had big Incrementals, where are you just going to let those flow through or would you be predisposed to try and take that money and apply it to kind of keep decrementals in check or in a range.

Yes, I mean, if I understand the question I mean every one of our businesses has a normal incremental rate percentage of fixed versus variable cost and so every business is expected to essentially manage their business in a very proactive way to to to manage margins on the way up and and weigh down flexing.

Variable costs, and so I think that that expectation is absolutely built into every one of our businesses and then to the extent that we do better than that because we go beyond we were more effective or more efficient those benefits would tend to flow through and which is why we're delivering better than normal decremental margins this year, but the reason.

Also the results they flow through.

As they come.

We don't we.

We don't really have much latitude around man.

Managing them other than that.

No that makes sense and then maybe just as a follow up this might be for Reg.

If I didn't know the Democrats win.

Platform, Mr. Jackup corporate tax rate I think they're trying to go after the guilty tax.

Strike me that you guys as an Irish company are far better positioned than other companies.

Are you asking base through domiciled, Rick you have any preliminary thoughts about how you respectively might manage this to try and keep your tax rate down which is obviously getting very value added it to shareholders over the past several years.

Well I know you're exactly right John to point out that as an Irish domiciled company.

We don't really have issues with things like guilty, our non us earnings are are essentially not taxed.

Us rates or by us provisions and so the only real impact of.

What has been suggested by Biden that the corporate rate comes up is that our our income in the United States would face a higher tax rate, but our our.

Our income outside the us would really not be affected at all and and thats very different than a typical us domiciled company that what we see both of US income and its non us income affected by the Biden proposals.

Yes makes sense, thanks, very much I.

And I think we can say confidently that.

We have an advantage today and that vantage. It lease maintains if not improves in the event of a it should improve by several points for us compared to our.

A typical us multi industrial.

Our next question from David Raso with Evercore ISI. Please go ahead.

Hi, good morning.

More near term I was curious why the electrical Americas organic sales growth rate in the fourth quarter is a little slower than the third quarter I mean it.

Sales in the channel Residentials accelerating seemed like utility, maybe as well and I'm just trying to understand why the slower growth rate is data is data center starting to come off of that.

Or is industrial not even showing a second derivative improvement just trying to understand I guess I'm missing something there.

Yeah I appreciate the question David I'd say.

Lastly, it is.

And certainty in terms of whether we're going to ultimately end up but the biggest delta in terms of Q2 versus Q through really is this inventory rebuild that we talked about that we saw.

In the distribution channel largely in the Americas and so we did in fact see some restocking that took place.

In the electrical Americas business, and Thats whats, having one we took about a quarter over quarter.

Quarter over quarter basis, a little bit of a muting impact on what the growth trajectory looks like but I'd say no. We have not seen any slowdown in in the key markets had a strong whether that be residential or datacenters or utility those markets are continuing to perform just fine and as we think about that.

The growth rates that we've laid out for the quarter. It's very much in line with what we saw at the end of September and into October.

And just to clarify the comment about the margins for electrical Americas from this 22% level. We just saw what you said, we should expect that type of level. I mean do you feel this is a business all else equal.

Even include any seasonality around the first quarter that there should be a two handle on the operating margin.

Or is the mix is maybe the restock data center strikes something.

That is providing a positive mix.

Maybe take that comment.

Maybe quite as literally as you meant that I just want to make sure I understood your comments.

No and then if you think about one of the if you say if you think about what is it that to driving these margins to the levels that we are seeing now is one of the big.

Things as we effect, we sold the lighting business and so the fact that we divested this dilutive lighting business has certainly helped margins quite a bit in the electrical business and our teams are doing a very effective job of running the business executing and taking out discretionary costs. So I'd say that we're not prepared to make a call on a given quarter.

But if you think about the business on a 12 month basis, we think that level of profitability is very much in line with where this business should perform.

Terrific. Thank you for the clarification.

And next we'll go to Joe Ritchie with Goldman Sachs. Please go ahead.

Thanks, Good morning, everyone.

Good morning.

Maybe maybe just following up on John's question from earlier, obviously, a big day here in the U.S. and I know his question was kind of limited to the tax implications, but I'm curious Craig just to hear your views on election outcome and what that could potentially mean for your business over the next 12 to 24 months.

Yes, I mean and at this point I mean, it is clearly speculation because we're not exactly sure of.

What the proposals would be from either one of the administrations.

But I would say that by and large I think.

Infrastructure spending is certainly an agenda item for both administrations and I think that.

We're we're hopeful and would expect probably an infrastructure bill of some sort.

Coming from either one of the candidates I think a lot of things that we talked about that are really secular trends that are impacting our industry, we talk about electrification digitization.

Energy transition. These things I think are much bigger than what's going on in the U.S. and in the U.S. administration and I can tell you that despite the fact that the current administration, perhaps has not been as focused on green, we continue to see increasing investments around the world in.

And essentially energy transition in the greening of the economy. So I think are the secular growth trends that were experiencing inside of the global economy that are essentially bigger than any administration in the us and I think are going to be positive for us independent of who's in the White House.

Got it that's a that's helpful. Craig and then maybe just my one follow on I know, we've talked a little bit about incrementals and decrementals, but just maybe honing in on the electrical the electrical global business, which saw decrementals tick up and for Q.

Maybe just a little bit more color whats happening, there and and whether we should see just kind of improved performance on that on the decrementals going forward.

Yes, I mean, I'd say that we talk about the company. We've given you 25% Decrementals is what we expect for all the beat and in any given quarter, depending upon what's going on in the business and what went on last year you can have some.

Parts and pieces moving around in our individual segments and so I would say there is nothing specifically that you should worry about with respect to the electrical global business that business is doing well theyre executing.

Incrementals could move around slightly higher slightly lower than the rest of the company, depending upon what quarter, but by and large we're very comfortable with the guidance that we provided and delivering the 25% Decrementals in Q4.

Okay got it thank you.

Our next question is from Julian Mitchell with Barclays. Please go ahead.

Hi, good morning.

Maybe Craig circling back to your comments around.

Lower than normal Incrementals next year. So is the way to think about that.

Gross margin is around 30% and so slightly lower than normal incrementally is something in the sort of low mid.

Twentys is that a reasonable sort of place holder for now.

Yes, I'd say doing it it would be higher than that I mean, we are typical incrementals, but what I would say it would be probably north of that number that you started with and so it would be certainly higher than that number.

And once again, we were not done with our plans for next year, and we would hope to be in a position.

When we do our Q4 earnings to give you a more definitive number, but but but I certainly higher than the number that you just quoted.

Thank you and then just totally in perhaps selling them.

The aerospace segment and the margins there.

Good they were down.

Fair amount year on year, but I suppose what I found most interesting was very high sequential incremental margin in aerospace.

40% plus.

So I just wanted to.

Sure at that high teens margin run rate in the third quarter.

Is that a good sort of baseline now when you look out to your end market prognosis and the cost actions that I imagine a fair proportion of those are in the aerospace division.

And also.

Related to that longer term.

Talked about the Aero market topline getting back to the old peak.

Maybe in three to four years time.

Should we assume aero can get back to prior peak margins, perhaps so will that.

I'm, what do you think the peak margin entitlement is for that business.

Yeah.

No I would say that if you think about the margin expectations for the business.

As we go forward and we're dealing at these levels of economic activity.

I think it's reasonable to assume that you know that the most recent quarter is probably a good predictor of where that business is expected to perform at at this level of economic activity in this level of revenues.

To the question around the longer term now without a doubt we would certainly expect this business to get back to prior.

Prior peak margins that the business posted which were close to 25%.

The market recovers.

Whether or not we can get back there earlier or not I think it's really going to be a function of in many ways what happens with the underlying mix of the business and and what happens principally with up with aftermarket as I think everybody understands and aerospace world.

Most of the margins are made and aftermarket which means.

Revenue passenger miles, which means consumers have to get on planes and starting so I think it really a function of to what extent does the aftermarket business returned in or.

Consumers and businesses comfortable putting people on planes and and flying again, and so too early to call at this juncture in terms of when it returns, we certainly know that it will return, but but at this juncture. It is too early to to ascertain when.

Great. Thank you.

Thank you.

Our next question from Andrew Obin with Bank of America Merrill Lynch. Please go ahead.

Hi, yes, good morning.

Good morning.

Just a question on Emobility your guys sort of I think made some intriguing statements about potential ramp.

Revenues into the fourth quarter just.

Just taking a longer term view.

How much of a ramp should we expect over the next couple of years and you.

You keep talking about I guess the investment cycle.

How long is the investments icon sales this business really starts contributing a material.

Until this business starts moving the needle on profitability for Eaton.

Yeah, and it's and as I'm sure you appreciate Andrew with the automotive industry I mean, these product development lifecycle is.

Quite long I mean, they can be.

Five years, or so, especially when you think about launching a new technology and so what we said before was that really you are talking about something around.

[music].

I'm from start to finish probably a 10 year cycle by time, it really start to contribute.

Meaningfully to the profitability of the company, but but the ramp will largely depend upon.

The rate at which the automotive Oems start launching new vehicles into the marketplace, but I think if you think from from us from a standing start to when does that really start delivering meaningful margin contribution to the company.

Something in the order of magnitude of five to 10 years would be a reasonable expectation.

Got you and sustainability of the revenue ramp near term.

You said the sustainability of the revenue ramp yes.

Yes and.

Andrew one way to think about it is probably the easiest way to think about it about two thirds of the revenue that we are now in Emobility go until internal combustion cars. So this is electrical equipment going into that in a third goes into the battery electric and hybrid cars and so you're going to have different growth rates on those two.

But right now we're in a big recovery period from the sharp down of Q2 and.

And so you're going to see pretty good growth in both of those two categories over the next several quarters.

Got you and just a follow up question on capital allocation on M&A I know.

You guys said that electrical and aerospace are a focus but there are a couple of deals in the industry I guess, both on a site companies that went at a very very high multiples.

How does he think.

Participating.

In these kind of deals and you know how do you think about just M&A in the software and Aiotv space is that an option given where the multiples are thank you.

No I mean, it appreciate your reference to the M&A and one of the things that we pride ourselves on over many many years is the fact that we try to be very disciplined acquirer and recognizing for sure that software companies grow faster they trade at higher multiples.

In the two deals that you reference and understanding those business and seen the multiples that they went for we just think that there are much better ways of deploying capital and creating shareholder value than than the kind of multiples that those two transactions went ahead I mean, they just won an extraordinary multiples and we.

Just think we have better more attractive alternatives in that that will deliver a better return for our shareholders.

Right, but we will say you know what our capital allocation strategy continues to be focused on electrical and we are in fact looking at a number of opportunities. There I guess, there's nothing obviously that is eminent but we havent vaccine the deal pipeline pick up a bit.

We continue to look at things in and around aerospace and once again as I mentioned.

Valuations would have to come in line in and be reflective of the current reality and uncertainty in that market before we do anything but.

We're obviously, having some conversations and discussions in that space as well, but and we always have the option of buying back stock immediately it's not the first choice, we would love to grow the company.

But.

Once again, if we if we're not able to deploy capital in.

In a shareholder friendly way towards an acquisition, we don't have to do a deal we're very comfortable with our ability to invest in the company organically grow the company organically and acquisitions or way of accelerating a strategy of augmenting a strategy, but that but the prime path for us will continue to be.

The things that we're doing to focus on growing the company organically.

Thank you very much Greg appreciate her extensive answer thank you.

Our final question will be from Jeff Hammond with Keybanc. Please go ahead.

Hey, Thanks for fitting me in guys.

Just on data center, the order rates have been really strong and I know this is a good secular market, but there tends to be these laws from time to time any anything you can speak to in the quoting activity that would point to continued strength or any kind of low end to 21.

Not really Jeff in fact, we had a very strong quarter. If you take a look at our global datacenter orders for the quarter were up some 9% and what we really saw over the last number of months is a really returned hyperscale and then as we've talked about on these calls and in prior earnings calls Hyperscale tend to be lumpy. These orders come and they go and they come when they come.

They come in large increments and so I mean, there's really nothing that we've seen in datacenters that would suggest that the market is in any way pulling back and if you think about it makes a lot of sense.

Especially in the context of the environment that we're living in today, where everybody is working remotely everybody's.

Zooming and Webex seeing in teaming.

All of these technologies that we're all using to conduct business remotely just add more kind of accelerate to a market that is already growing quite rapidly and as the world continues to to digitize and connectivity and where you living in a fiveg environment in the not too distant future. All of these things will continue.

To add to kind of the momentum that we're seeing in the data center market. So we think that becomes a continues to be a very attractive market for the foreseeable future.

Okay, and then truck cycle seems to be Inflecting here, just give us a sense on how that.

Your your truck businesses within vehicle acts the same or different given the.

The JV structure.

Yes, I'd say that it's one of the things that we try to do by putting the joint venture together is really to kind of dampen some of these big cyclical swings.

<unk> outside the impact that the truck business in North America had on the overall company and so I would what you ought to expect is that the same.

See.

In the bottom of a downturn to see a much smaller impact on the company and and in the bid in a bit in the event of a big upswing, you probably going to see a more muted impact on that side as well, but keep in mind that the JV today is basically in North America class eight.

Automated transmissions.

Everything else globally clutch business aftermarket business all the other elements of that business, we still own and so we do expect to see a.

Attractive.

Growth in our vehicle business as this market returns the growth into 2021 and into the fourth quarter.

Okay. Thanks, a lot correct okay.

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

Thank you for joining us today and have a great day.

Ladies and gentlemen that does conclude your conference. Thank you for your participation you may now disconnect.