Good morning, Court. With me today are Craig Arnold, our Chairman and CEO, and Rick Fearum, Vice Chairman and Chief Financial And Planning Officer. Our agenda today, including opening remarks by Craig, highlighting the company's performance in the second quarter. As we have done on our past calls, we will be taking questions at the end of the correct comments. The press release and the presentation we'll go through today have been posted on our website at www.eaton.com.
Please note that both the press release and the presentation include reconciliation to non GAAP measures. A webcast of this call is accessible on our website and will be available for replay. I would like to remind you that our comments today would include statements related to the expected future results of the company and are therefore forward looking statements. Our actual results may differ materially from our forecasted projections, due to a wide range of risks and uncertainties that are described in our earnings release and presentation. They're also outlined in our related 8 K filings, With that, I will turn it over to Craig.
Okay. Thanks, Jen. And we'll start on page 3 with recent highlights from the second quarter. And as you can and I'm extraordinarily pleased with the way our teams have executed in the midst of this pandemic and the economic downturn. We've done a good job of keeping our employees safe, have delivered for our customers and certainly generated exceptional cash flow, all while flexing our costs at record rates.
Our results, while well off of last year, certainly in absolute terms, were better than expectations, and we continue to make an important investments for the future. Q2 earnings on a per share basis $0.13 on a GAAP basis and $0.70 on adjusted basis, which excludes $0.20 of charges related to acquisitions and divestitures, and $0.37 related to the multiyear restructuring program that we just announced. $3,900,000,000, down 22 percent organically. As we noted on our Q1 earnings call, April was down approximately 30%, this was followed by slightly better volumes in May. And then relatively, you know, strong finish in June, which was down, let's call it low double digits.
In fact, I mean, this has a point of, you know, maybe hamplification, our electrical business in the Americas, in Europe and Asia, all posted low single digit organic growth in revenue in the month of June. And so once again, our electrical businesses are remaining very resilient in the face of this pandemic and economic downturn. Segment margins were 14.7% down 110 basis points from Q1, and our decremental margins were at 25%. 5 points better than our guidance of 30%. Once again, a good indication of how well our teams have done controlling the elements that are really within our control.
However, recognizing that some of our businesses could be looking at a slow and certain which you could call a prolonged recovery, we announced, a multi year restructuring program of $280,000,000 including $187,000,000 charge in Q2. These actions will reduce structural costs for sure and are targeted in, those end markets, including commercial aerospace, oil and gas, Napta Class 8 truck in North America and European light vehicle markets, you know, where these markets have been certainly highly impacted. I'll provide more details on this program in a few minutes, but they're covered on Page 12. The other clear highlight for the quarter was our operating cash flow, which was $757,000,000 and free cash flow of $667,000,000, both very strong results and which gives us the ability to really reaffirm our free cash flow guidance of $2,300,000,000 to $2,700,000,000 and a midpoint of $2,500,000,000. And so teams continue to grade in converting, on cash as well.
Finally, as most of you know, we made an important announcement quarter regarding sustainability and our commitment to 2030 sustainability goals. I thought it'd be helpful just to put this announced in the context in order to show you how it fits within the broader strategic framework of the company, which we do on page 4. I'd say simply stated, you know, at Eaton, you know, sustainability really is at the core of our mission. We talk about our mission being to improve the quality of life and the environment and certainly that means sustainability. And in fact, if you think about all of our value propositions with customers, they're built around creating safe, reliable, and efficient solutions.
Let's call them sustainable solutions. And so, you know, as we oftentimes say, you know, what's good for the environment is good for eating. We believe that meaningful efforts to support the environment, you know, are fundamental to how we create value for customers, and it's place where we think Eton should play a leadership role. Sustainability, as we think about it, really presents growth opportunities, you know, help our customers solve their business goals. And to this extent, and against this objective, we've laid out 10 year plans that include investing $3,000,000,000 in R and D to create sustainable products over this period of time.
This will also include reducing our emissions from our installed base of products and upstream sources by some 15%. Just to maybe give an example of where we think this really fits with our overall strategy, sustainability really is about capitalizing for Eaton on secular growth trends around electrification for sure across all of our businesses and also in energy transition. Sustainability, I'd tell you is also an important part of how we run the company on a day to day basis, since 2015, We reduced our absolute greenhouse gas emissions by some 16% and we're certainly on track to deliver our 2025 targets. By 2030, we now have committed to achieve science based targets of 50% reduction of greenhouse gas emissions from 2018 levels. We're also committed to be, carbon neutral by 2030, a target that will achieve through a combination of initiatives, including carbon offsets, such as reforestation, continue to optimize our sourcing of renewable electricity, in all of our operations as well as delivering energy storage solutions.
And so pretty comprehensive set of plans that we have that we think will deliver this 2030 goal. And finally, to achieve these goals, we obviously have to continue to work on building a work for us that's engaged and passionate about making a difference. And so this will continue to be a large priority for the company overall. Hopefully, that provides just a little context in terms of why we think sustainability is such an important initiative for Eaton and how we're going to convert on that and turn it into accelerated growth for the company. Now turning to Page 5, we summarize our Q2 financial results, and I'd note just a couple of things on this page.
First, acquisitions increased sales by 2%. This was more than offset by the 8% impact from divestitures, and also we had negative currency, impact of negative 2%. Now, I'd also remind you that, we now recognize all charges related to acquisitions, divestitures, and restructuring at corporate rather than at the segment level. And we did this because we'd hope to make easier for you to do Next, on Page 6, we show our results for Electrical Americas, revenues down 29%, 9% decline organic revenue, 19% impact from M And A. And this was primarily the divestiture of the lighting business and a small impact from negative currency as well of 1%.
Operating margins increased 130 basis points to 20.7 percent, and these margins were certainly favorably impacted by the divestiture lighting but also our team did a great job of controlling costs, to really counter the impact of the economic impact of COVID-nineteen. This combination resulted in a very strong decremental margin performance of 16%. So this segment continues to prove to be highly resilient, when you look at margins, but also when you look at orders and backlog, orders increased 2.1% on a rolling 12 month basis with strength in residential and utility and data centers. And of note here, our data center orders actually were up some 7% on a rolling 12 month basis. And lastly, our bookings remained strong.
They were up 11% versus last year. Turning to Page 7. We have our results for the Electrical Global segment. Revenues were down 16% with 14% decline in organic revenues, and 2% headwind from currency. Operating margins here declined some 160 basis points But to a very, you know, respectable 16% and decremental margins here, we're also very well managed coming in at 26%.
Orders declined 4.6% on a rolling 12 month basis, but with most of the significant declines coming, as you would expect, in global oil and gas markets and in industrial markets. So not an unexpected result, with respect to where we saw strength and weakness. And lastly, our backlog for Electrical Global increased 2% on a year over year basis. On page 8, we summarize our hydraulic segment for Q2 revenues were down 32% with a 30% decline organically and a 2 currency impact. Operating margins were 9% and orders for the quarter were down 33.7% year over year.
And this was driven really by weakness in both OEMs and the distributor channel, both. We continue to work closely with Danfoss, and completing the customary closing additions and regulatory approvals. And I would tell you that Danfoss organization remains excited about owning the business. We do, however, now expect the transaction to close at the end of Q1, next year. The delay, as you can imagine, due to the COVID-nineteen impact, which has impacted the pace of some of the regulatory approvals that we expect.
On Page 9, we summarize our results for the Aerospace segment. Revenues declined 27% with a negative 35% in organic growth, offset by 8% increase from the acquisition of Soria. Operating margins declined to 14.8%. And really, this is due to lower sales, but also, the acquisition of Soria also had a dilutive impact on margins. Orders declined 12.8% on a rolling 12 month basis with particular weakness in the quarter as you would expect in commercial OEM and aftermarket, It is worth noting, I would tell you though, that orders for the military aftermarket were up 13% on a rolling 12 month basis.
Backlog was down 5% commercial aerospace markets are grappling with significant declines in passenger demand and this is impacting our business and certainly impacting both the OEM and the market. Just maybe some context here, while we think about this as kind of a near term dislocation and we're taking certainly the needed steps to position this business, for future, we remain confident in the long term attractiveness of aerospace market and we'll certainly do what we need to do in order to manage our margins in the meantime. Next, on Page 10, we summarize the results for the vehicle segment. Revenues declined 59%, 52% of which was organic, In addition to the divestiture of the automotive fluid conveyance business, which impacted revenues by 4%, we had 3% negative impact on currency, the decrease in organic sales was really driven by, I'd say, widespread customer plant shutdowns due to COVID-nineteen, which really resulted in lower class 8 OEM production as well as continued weakness in light vehicle production. Just once again, it's a little bit more color on this one during Q2.
Most light and commercial OEMs had shutdowns that range between 6 8 weeks. These shutdowns, which really began, let's say, in late March occurred throughout the month of April and extended into mid May. And so many of our customers were shut down for almost half the second quarter, but production is now certainly beginning to come back online. Global light vehicle market production was down 55% in Q2 and Class 8 OEM build was down from 70% in Q2. We now project MAP to Classic production to be 175,000 units for the year, which is down slightly from our prior forecast of 180 9000 units, but still down some 49% from 2019.
The steep reduction and certainly this sudden reduction in oil production led to operating margins of a negative 6.4%. But I would add, you know, this business has once again done a great job managing decrementals, and despite this tremendous reduction in revenue, delivered a respectable decremental margin of 33%. Not surprisingly and, much needed. We do expect better market conditions in the second half, and our business will be well positioned to paid in this recovery. Moving to Page 11.
We have our e mobility segment. Revenues were down 33%, all of which was organic, organic margins of negative 3.6 percent, excuse me, operating margins of negative 3.6%, primarily due to lower volumes and particular weakness in the legacy internal combustion engine platforms and once again, the ongoing increase in R and D expenditure. We continue to be enthused by the way, about the long term potential of the business and quite frankly, have seen nothing but upward revisions in the expectation for the penetration of electric vehicles. And so a market that we still think will be very attractive long term we're very well positioned once again with the common technology platforms that we're creating, leveraging the strength in our core electrical business. A good example of this idea of everything becoming more electric is one of the recent wins that we've had with the truck OEM, a $21,000,000 program for export power inverter for a major commercial truck customer.
And so in almost every aspect of our business, there's more electrical content and we're well positioned once again through this particular segment to participate in that growth. Overall, we've won programs, with a value approximately $500,000,000 of mature year revenue. On Page 12, we show the details of our plans to accelerate and I'd say expand our restructuring actions. And I say accelerate because for the most part, we're pulling forward, a number of the restructuring ideas that we would have done anyway. Given the economic implications of the pandemic, we naturally have a greater sense of urgency and also more capacity to take on these projects.
We announced the $280,000,000 multi year restructuring program, as I noted, designed to eliminate structural costs, we've taken charges of $187,000,000 in Q2, and we expect to see additional costs of $93,000,000 realized through 2022. Just to characterize those additional dollars we'd expect, you know, to deliver over the next 3 years, some $33,000,000 of charges in the second half of this year, $55,000,000 in 20.21 $5,000,000 in 20.22. Would expect to realize $200,000,000 of material benefits from these actions, once they're fully implemented, and we think full year implementation is 2023. Approximately 2 thirds of these costs are in our industrial businesses, principally vehicle and aerospace, and the remaining 1 third is within our electrical sector, particularly with an emphasis on our oil and gas business that will report through our Electrical Global segment. Naturally, we're focused on those businesses serving end markets that are more severely impacted by the pandemic.
And then turning to Page 13, we do our best to provide, a Q3 outlook on revenues versus last year. And while you can imagine that, I think all of these markets will be stronger than what we realized in Q2. This is really a year over year look for Q3 versus last year. For Electrical Americas, we expect organic revenue to be between down 2 and up 2, so essentially flat. With strength in residential utility data centers, offsetting weakness in industrial markets.
For Electrical Global, our current view is organic revenues will decline between 10% and 14% with strength in Asia Pacific, in data center markets, offset by declines in Europe and once again in the oil and gas market. For Aerospace, we expect organic revenues will be down between 28% 32% with continued strength in military, all set by really significant declines in all of the commercial markets. And, for vehicle, we project revenues will decline between 30% 34%. So markets are still very weak in absolute terms, but these markets will be up significantly from Q2. And for e mobility, we expect declines of between 13% 17%, once again, pressured from the legacy internal combustion engine platforms.
And lastly, for Hydraulics, we think market will be down between 23% 27%. Freaton overall, we're estimating Q3 revenues to be down between 13% 17%. And so an improvement, versus Q2, we was down some 22%, but that was in absolute terms, markets are still undefined. Moving to page 14, here, we provide our best look at guidance for Q3 and some commentary on the full year, but for Q3, we expect organic revenues to decline between 13% 70%. And this really does include what we know about July, where we saw low double digit declines.
We've elected not to provide full year revenue guidance given kind of the ongoing uncertainty around the pandemic and its impact on markets in Q4. As many of you are aware, we are still dealing with the pandemic and in various reasons of the U. S. And around the world, we're still seeing, growth in a number of cases. And so we're still living in this period of uncertainty.
We do think Q2 will be the trough for organic revenue declines and barring a second wave of the pandemic Q4 should be better than Q3. For Q3 and full year, we expect decremental margins of between 25% 30%. And for Q3, we expect our tax rate on adjusted earnings to be between 15% 16%. We're maintaining our free 2020 free cash flow guidance, the range of $2,300,000,000 to $2,700,000,000. And I would note that this range does, in fact, include now the impact related to the multi year restructuring program that we announced, and that was not in our prior guidance.
As a point of reference, in the first half, just to give you some comfort around our ability to deliver this number, we generated some 35 percent of our $2,500,000,000 midpoint that's in our free capital guidance. And this number is very consistent with our performance over the last 5 years So we do tend to be a bit back half loaded. We're providing new guidance for share buybacks and, saying between $1,700,000,000 $1,900,000,000 for the year, and recall that we purchased repurchase 1,300,000,000 of shares in Q1 with the proceeds of the lighting sale. We continue to deliver free, strong, strong free cash flow, and we now plan to buyback between $460,000,000 of our shares in half of the year. And finally, and maybe just like we are joined here inside of our company, just to bring it back to kind of the broader longer term strategy and where we're headed as an organization.
And we will continue to effectively manage through the short term challenges and so with the pandemic, but we also remain focused on the broader strategic and financial goals that we've laid out in our meeting in New York, we've summarized once again here on Page 15. Number 1, ensuring that we continue to move the company in the direction of becoming what we say an intelligent power management company that takes advantage of important secular growth trends, and we talked about them being electrification, energy transition, IoT connectivity and blended power. So these trends are continuing. And despite whatever temporary hiccups we're experiencing, we think long term place to be. By doing so, we're working on creating a company that's going to deliver better secular growth.
And better growth through various cycles, higher margins and with much better earnings consistency. Our long term goals have not changed. It includes 2% to 3% organic growth, 20 percent segment margins, 8% to 9% EPS growth, and $3,000,000,000 a year of free cash flow. And with our strong cash flow, we'll continue to be focused and disciplined in how we deploy it by investing in organic growth as a top priority, delivering top quartile dividends, an ongoing program of share buyback and then actively managing our portfolio, while being a disciplined acquirer. So we continue to remain excited by the story.
I hope you are as well. And with that, I'll turn it back again.
Okay, good. Thanks, Craig. Before we start our Q and A of our call today, I do see that we have a number of individuals in the queue with questions. So appreciate if you can limit your opportunity, just one question and a follow-up. Thanks, Ian, the ones for your cooperation.
With that, I will turn it over to the operator who will give you guys the instruction.
Thank you. For questions. And our first question is from Nicole Blaze from Deutsche Bank. Please go ahead.
Yes, thanks. Good morning, guys.
Hi.
Hi there. So I guess maybe starting with, the restructuring actions that you guys are taking, Craig. So the the information on the costs were helpful. I guess maybe some color qualitatively around what you're actually focusing on had count versus maybe footprint or other things. And I guess where I'm going with this is cadence of payback over the next few years, including the second half of twenty as well as I guess why it's taking some time to actually get the payback from those actions.
Yes, appreciate the question, Nicole. And as I mentioned in my opening commentary, and one of the things we've talked about historically is that we always, as a company, have kind of a future view of restructuring projects that we'd like to take on. And the pacing items generally tend to be our own internal capacity to deal them with them and manage them effectively, as well as our customer's ability to absorb them without creating disruptions for them. And certainly in the event of an economic downturn like this one, it gives everybody more capacity to take on these projects. And so a lot of what we're doing today, I'd say when you talk about footprint versus headcount, I think the important, you know, way to answer that question is that it's all structural.
And so these are all cost items that were taken on that will not come back in the event that, you know, or when revenues return. And so these are things that are really focusing on, you know, taking structural fixed costs out of our system, some of which will be headcount, some of which will be around footprint. We have not yet made these announcements completely internally in terms of where those impacts are going to be. And so we'll wait and provide that detail a little later on, but, it will be completely structural. To your point around timing, I think somebody's items obviously will, will impact and have a benefit earlier than others.
But it's one of the things I would say. As you think about the decremental margins that we're delivering as a company and what's embedded in our guidance, it's one of the reasons why we can deliver these very strong decrementals is because we are flexing our business is inflexing our costs. And so I'd say, as we think about this payback, you know, a 2 $80,000,000 investment with a, you know, essentially a $200,000,000 return. This is a very attractive program in terms of the return on the investment. And we'll get some of the benefits sooner, some will come later, but in aggregate, it's an extraordinarily strong returns on these dollars that we're investing.
Got it. Thanks, Craig. That's helpful. And You kind of teed up my follow-up there, I guess. And I wanted to hit on decrementals.
The 25% was obviously impressive this quarter and above your own 30% guidance. I guess, how do we think about that through the rest of the year? I mean, to me, we kind of know that 2Q, at least we hope, will be the low point with respect to revenues. So I guess, you know, is there any possibility that 25% could actually become something better in the second half as you guys execute on cost savings and perhaps you get a little bit of sequential improvement in revenues as well?
Yes, I appreciate the question. And our teams just have done an extraordinary job, year to on decremental margins and as we flex costs and embedded in that guidance of $25,000,000 to $30,000,000,000 is once again, the uncertainty around whether or we end up experiencing a second wave of the pandemic. And as you know, as well as anyone, we're seeing these hotspots around the U. S. And potential threats of going into some form of, if not full shutdowns retrenchments in many of our, markets.
And so there's still a lot of uncertainty. And it's one of the reasons why we still have this fairly wide range of decrementals, as you can imagine, as well. We took a lot of extraordinary, one time costs in Q2, around, you know, time off without pay and travel was essentially came to a grounding halt. And so some of these costs will certainly come back as the year unfolds. But, you know, if we don't end up with a second wave, in the second half of the year, we will likely do better than kind of the midpoint of this range of decrementals that we've laid out.
Thank
you. Our next question will come from the line of Joel Ritchie. Please go ahead.
Thanks. Good morning, everyone.
Hi.
Craig, maybe just starting out, why don't we love to hear your thoughts on just non res construction specifically in your exposure to it. There's a lot of concern as we kind of head into 2021 that the markets are going to downturn. And so be curious to just hear how your business is positioned for potential non res downturn and how maybe some of these actions that you're taking, are potentially like offsetting measures for that?
Yes, thanks. I appreciate the question. And when you use the non res construction, really that's, you know, for us, that's really most of our electrical business, right, because that's everything other than residential and residential today, account for less than 20% of our total business. And so it's a really big category. The way we tend to think about it is that, you know, maybe just take you through some of the key important segments for us.
We think, as has been the case for some time, we think data centers continue to be a very strong market and are performing well in the near term and we think long term continues to be strong. We think the utility market continues to be a very attractive market and will perform well, over the long term and has held up extremely well. Residential, by the way, and I know you asked the non risk question, but residential has just been extraordinarily strong and with essentially, you know, high double digit kind of growth numbers, in Q2 overall. So resi continues to be extraordinarily strong. And then I mean, I think that the kind of spear view question really gets to this whole question, what's going to happen within commercial markets?
And there's been a lot of talk and speculation around the death of the office and whether or not anybody's ever going to go back to the office again. I don't think that's the case, by the way. In fact, can point to examples where companies have actually had to take down more office space because you have the social distance now in offices. And so you need more space to house the same number of individuals, but certainly there's, there's certainly some risk to, you know, what we call the office piece of non res certainly, if you think about retail, you know, those markets will probably be weak, but offsetting that, there'll be other markets that are strong. We can, we think that you think about warehousing, you know, as a segment, we think will be strong.
We think water, wastewater market will be strong. And so I think the fact that our electrical business has held up so well or better than others would imagine is the fact that we do play across so many of these different end markets some of which are experiencing some of these negative forces, otherwise of which are, you know, seeing positive impact. And as a result, this business is extraordinarily resilient. And so we remain very optimistic about the prospects of our electrical business There will be dislocations in perhaps certain markets or certain regions of the world. But by and large, we think the market will be just fine and using kind of China as a good proxy for the rest of the world as they get, did you come through the pandemic?
China has already backed the positive growth. Both in sales and orders. And so we're hopeful once we get through this and we get a vaccine, we get a, we get an effective therapeutic that, you know, the markets are likely going to return the trend level of growth.
That's helpful color, Greg. Maybe my one quick follow-up is more on just free cash flow. It was nice to see you guys affirm the range for this year. I guess as you're thinking about next year also in the context of some of the cost actions that you're taking. I know it's too difficult at this point to say exactly what the what the number will be next year.
But if growth starts to return to something that's a little bit more normal, what are your thoughts on your ability to grow free cash flow in 2021?
The way we generally think about it is that certainly in periods like this as we de capitalized the business and we're freeing up a lot of cash from working capital. But also, as you can, as you saw in our the earnings are down dramatically, And so as we continue, as we expand through an expansionary cycle, the earnings will be up significantly. And when with that, your cash flows will be up. And so if you think about eating over time and through various cycles, our cash flows have been just amazingly consistent in terms of generating very strong free cash flow, you know, really at all points of expansion and contraction. Did you want to, did you want to add something there?
I'm just going to add, Joe, a little color on the trends in electrical. We measure it in a lot of different ways, but One of the ways we measure it is looking at our negotiations for large projects in the Americas. We have very good data and it's a very big business for us. And if you take out the activities related to oil and gas, our negotiations in the second quarter were flat. With a year ago.
And so it gives you some indication that, that the balance that Craig talked about of all these different segments they come together in a way that creates a lot of stability, and that gives us a fair amount of confidence that even with the turbulence and the macro economy, there are enough sources of strength that those sources offset the weak spot.
Our next question is from the line of Jeff Brad from Vertical Research. Please go ahead.
Thank you. Good day, everyone. If you just would like a little additional color on vehicle, obviously, a very, very tough quarter production on the automotive side starts to look better as the lockdowns ease. Just
give us
a little sense of what you're thinking for the profit trajectory there. Should this be the only quarter where we see an operating loss and maybe give us a little color on how much, if any, these restructuring benefits might flow through to those businesses in the back half?
Yes, I appreciate the question, Jeff. And it's been kind of a long time since we've ever since we lost money in our vehicle business. And I did say once again, just an extraordinary combination of events when you look at some of these numbers around production, both in Class 8 and in global light vehicle, you know, and essentially half the quarter was lost. And so the team once again did, I think, an extraordinary job maintaining a 33% decremental in that environment. You know, we certainly, you know, as you look forward, volumes are going to be significantly better than in Q2.
We would fully expect that the margins for the business, you know, this year will be double digit And we would not expect to see a loss in the vehicle business in any subsequent quarter, you know, barring another return to dishes horrific market kind of event that we experienced over the last quarter. You know, the details around, you know, we're benefits are going to flow. Once again, we've not made internal announcements specifically to some of these initiatives. And so we'll give you more color later on, it's certainly fully embedded in the decremental margin assumptions that we've laid out for the year. But, you certainly can expect our vehicle business to return to, you know, attractive levels of profitability post Q2.
Great. And second question, just on aero, do you think we've seen the bottom in, aftermarket activity or do we still got to kind of deal with the delayed impact of parked airplanes and used material and stuff kind of working way through the system and maybe we're a quarter or 2 out on the bottom there?
Yes, I mean, it's a good question and one that everybody trying to get their arms around specifically in terms of what's the outlook for Aerospace specifically what's the outlook for aftermarket in terms of our consumers are going to be comfortable getting back on planes flying again, which is, as you know, is what drives the aftermarket. I'd say we had pretty horrific numbers in terms of aftermarket in Q2, down fairly dramatically, So it's tough to imagine that things could get much worse than what we experienced in Q2, activity levels in general, as you're well aware, you know, are improving. There's more planes flying today. There's more hours of, you know, flights today than their there have been certainly over Q2. Many parts of the world and many regions of the world, their numbers are better than ours in the U.
S. If you think about Asia, you think about Europe, they've done a better job of getting a handle on the pandemic. And so you're seeing the data there, be, you know, improve perhaps at a faster rate than the U. S. Data.
So I think it's quite it's an unclear today and there's a lot of planes on the ground and you talk about the idea of part parting out airplanes and how that's going to impact the aftermarket. I just think it's too early to tell whether that's going to have a prolonged impact or not. Thank
you. Our next question is from Nigel Cole from Wolfe Research. Please go ahead.
Thanks. Good morning. Good morning, Craig. Good morning, Rick.
I just wanted to
really dig into your your 3G framework and, the down low double digits.
I'm sorry Nigel, we could, you're coming to a very frank think we can barely hear you. So maybe you can just speak up a little bit.
Maybe I'll use my handset. Is that better?
Perfect.
Perfect. Yes. I've got a very dodgy headset. I need to invest. My home office still needs a lot to be desired.
So So the July download of digest versus the down 1317 framework. I understand you want to be conservative, but is there any reason why July would be better than the 3Q framework? And then just within that, Electrical Americas looking to be flat versus the down 9% in 2Q. Again, just what's flipping between 2Q and 3Q And any end markets to call out there would be helpful.
I think, you know, what we're really trying to deal with here is, you know, how precise we can actually be in setting any of these forecasts. And I would tell you, think about June July kind of essentially running at about the same levels. And as we think about our acute 3 forecast. We really think about it mostly as a continuation of what we experienced, over the last couple of months And so I think on the margin, whether it's 1 or 2 points, you know, better or worse, it's really difficult to judge But, you know, one of the things that has us a little bit nervous as we'll freely admit is the fact that you are continuing to see the spread of COVID-nineteen in so many parts of the U. S.
And so if there's a, if there's a concern that we have that could potentially take the next couple of months down slightly below what we've experienced over the last 2 months. It's whether or not the U S, specifically, and then you have obviously regions like India and Brazil, whether or not we get a handle on the spread of the pandemic. So that's the piece that has us all just a little bit nervous, and perhaps a little bit conservative around, what does the real outlook look like for the balance of Q3?
Yes. And then Electrical Americas, what's slipping what's going to maturity better between 2Q and 3Q?
Yes, in Electrical Americas, I'd say that for the most part, they experienced kind of the same kind of shock to the system that, you know, the other kind of parts of our businesses experience where you've had a lot of construction projects essentially to shut down in Q2. As you, as you're well aware, there were certain Regions of the U. S. Where construction was deemed essential. There's other places where construction projects were simply delayed.
And so I think the catch up effect that we're seeing a little bit, in the Americas specifically is the fact that, you know, we would anticipate that, you know, that you don't see the kind of wholesale shutdowns of the U. S. Economy that we experienced in part of Q2. And so on an incremental basis, quarter over quarter basis, we would expect the Electrical Americas business to perform better.
Also, Nigel, it's Rick. We had some production challenges during Q2, we had to re layout plants and we had some plants where plants had to be closed for certain periods due to COVID issues. And so that constrained our sales. And we've sorted through all that. And and that, particularly in places like residential, will allow higher sales volumes in Q3.
Thank you. And our next question is from David Raso from Evercore. Please go ahead.
Hi, good morning. Can you clarify your comment? If I heard you correctly, the month of June, did you say Electrical America has posted low single digit revenue growth? Same thing for Electrical Global. I'm just trying to if that is correct.
Why then does it step down the flat for Americas in the third quarter, if you're already up low single, and then even less global goes from up single digit actually the next quarter down 12 at the midpoint. I'm just trying to understand what you're really seeing in July in the electrical business.
Yes. No, what I was really trying to convey in that comment, first of all, you heard me correctly. Electrical essentially around the world actually did post positive sales growth in the month of June. What you often it's oftentimes difficult to read too much into a given month because there's also some catch up, right? We talked about the fact that we had, as Rick noted, we have factories that were shut down, we have projects that were delayed.
And so we think there was certainly a little bit of catch up that took place in the month of June. One of these is what we experienced kind of growth across the region and projects that perhaps should have been delivered in in April or May that slipped into the month of June. And so as the economy in the U. S. Specifically continue to open.
And so we do think there was some catch up in the month of June. And so if on the margins, things are slightly worse or about the same as the June rate in subsequent months. It's really because of this catch up effect that we think we experienced in the month of June.
But is that what you're seeing in July? I mean, especially global be going from up low single, say there was some catch up, then it put down 12 in third quarter. Have you seen that much giveback already in July? Is it less people ready down that motion in July?
Yes, I'd say that once again, in terms of the, you say, global specifically, what we're experiencing overall as a company in terms of the guidance numbers that we provided you know, that's consistent with what the company's experience. I don't think we provided specific guidance for electrical global, it's, you know, overall. But I'd, but I'd so I'd say that, you know, it's certainly consistent with our overall guidance for the quarter for Eaton overall.
I appreciate that. Yes, I'm just saying international, you call it global, but the international business being down 12 organically in the third quarter, coming off of a June that was up low single. It's just enough of a delta. I just didn't see if you saw a big drop off in July already to suggest that for the electrical international business?
What we are seeing, David, is we are seeing, pronounced weakness in oil and gas. I mean, not coming back. And so that's what's driving that, the weakness in electrical Global. Our global oil and gas business is all reported in Electrical Global. So that's really the factor, that is causing, the markets to be as weak as we estimate.
If you were to take that out, electrical global would look much like electrical America.
Sure. And the month of June oil was down big, I assume. And you still put up low single digit growth in Electrical International, so? Anyway, I mean, I'm just trying to understand it. And then lastly, go ahead.
I was just going to say that there is a lot to this, this pent up demand and people we being able to deliver on customers wanting us to deliver projects that had gotten delayed. And so that June is distorted by that a bit.
That's fair. And just lastly, a clarification to an earlier question, did you say vehicle margins for the year would be back to double digit?
Yes, I did.
Thank you. The next question is from Jeff Hammond from KeyBanc. Please go ahead.
Hey guys, good morning. Just want to dig in on some of these markets that are proving more resilient in Americas. Can you talk about where kind of the incremental utility spend is seen or where you're seeing the most resilience And on the data center side, I know we were planning for kind of an air pocket that seems to be coming back. Is that coming back stronger or in line with expectations?
Yes, I'd say in the utility market, Jeff, I think it's pretty broad based is what we're seeing really in utility markets. Those markets are holding up fairly well in that. And I would say that within the U S, I can't really, you know, I don't know that there's a very different story, depending upon, you know, what region of the U. S. You're looking at, being about where we play in the utility space on the distribution side, you know, as obviously resilience in investing in grid resilience continues to be an important, you know, need in so many of our communities around the U.
S. It continues to be fairly stable and predictable market. In data center specifically, what we're really seeing is a return in hyperscale as we've talked about, you know, on prior calls, hyperscale does tend to be lumpy. You know, you get large orders and then they'll go quiet for a while and you large orders again. So if you think about data centers overall, we saw very strong growth, in hyperscale, in the quarter that really is a return to growth as they continue to kind of, build out their requirements.
Okay. And then just on the hydraulic sale, is that just a function of timing around approvals or is there anything else going on?
I only think it's the general slowdown in the market experience in hydraulics and specifically in construction, the ag market is holding up a bit better. Certainly, the China market is holding up very well in the context of, of the pandemic and really have already returned to growth. And so it's really just a general slowdown in the construction market that's having a big impact on hydraulics.
And Jeff, if you were also asking about the timing of closing the sale. It's really a function of many of the regulators are still working from home. Is action like our sale of hydraulics, we're talking about 1000 and 1000 of pages of material. And without their staffs at hand, without the ability to easily copy things and, and, have team meetings, it just is taking longer and really seeing that for all acquisitions, not just ours. So we're not surprised by it.
Things are progressing in a normal way. We're receiving the kinds of questions that we would expect to receive is just, taking a bit longer to get those questions.
And I mentioned in my opening commentary that, you know, how enthusiastic Dan remains around the transaction itself. And if anybody wants to get a sense of their real enthusiasm, the founder of the company and the CEO posted a video this week on, on LinkedIn, where they're making the announcements to their organization about bringing together of these two businesses and, and confessing their enthusiasm to get this transaction closed. And so, we remained absolutely convinced that while it's been a quarter delay, the transaction will close and they loved the transaction and it's going to create real value for them.
Ahead.
Thanks. Good morning, everyone. Hey, Craig and Rick, just to put a finer point on this non resi, it We get these questions all the time. Could you just remind us how big the new build portion for office buildings percent of, say, Electrical Americas And Global, because that would be seem to be the one area that debatably, right, could be at risk or is not necessarily going to expand. Can't imagine it's that big, but maybe you could just frame it out for us in terms of its magnitude.
Yes, I don't have the new I don't have that split. I mean, maybe one data point, John, that may be helpful for you to kind of quantify or gauge the impact. Today, if you think about the office piece of, kind of our electrical business, what goes into office build, it's just under 20% of the total electrical business. And so to your point, within that, some of it's new build, some of it's retrofit and modifications. And so hopefully, you know, those that data point is, you know, well, we can try to get you the data around what's new versus, and refurb, but it's under 20 percent of the total business.
And I do say, I think it is debatable in terms of where this is going to ultimately take us in terms of whether or not working from home has been wonderful, you know, to date, and companies have managed it longer term. I think it's still an open question mark around efficiency and organizational effectiveness and working from home. And as people come back to offices and this need to social distance is going to require more space. And so I think it'll be an interesting one to watch in terms of how it unfolds.
Yes. No, I don't disagree with that. And I think you think historically you've said retrofits sort of 40% to 50% of the whole electrical business. So maybe we can rapolate that. I'm not sure.
More like 25% to 30% for the whole electrical sector.
Okay, all right. So I had that number wrong, but that's it's still windows it down. Just as another clarification, is the 280 charge on top of the 50 to 60 of quiet restructuring you guys do every year? Or are you going to be lumping in that 50 to 60 with the 280? So kind of the whole thing gets called out over the next couple of years of the charge, enactment?
Yes, it's really the latter, John. And that was my point that I was making in my opening commentary around we had a number of restructuring programs that we were intended to do anyway and pulling those forward and accelerating them. So it's really the latter. So we intend to take this one charge, you know, related to the $280,000,000 laid out the way we articulated And that would then, you know, eliminate the other restructuring programs that we would have otherwise planned to do over the next 3 years.
Thank you. Our next question is from the line of Andy Casey from Wells Fargo Securities. Please go ahead.
Hi, Ann. Good morning, still. Can you talk about M and A potential? I'm just wondering if the location has created any incremental opportunities? And then can you comment on any valuations you might be seeing?
Yes, appreciate the question, Andy. And certainly, we remain obviously in a position where we have the balance sheet that gives us that optionality around keeping M and A on the table. And, and, and as we talked about, our cash flow generation this year, as well as certainly the M and A event that will take place with the sale of hydraulics and we'd expect to bring in another $2,850,000,000 of cash with that transaction when it closes So the balance sheet is in great shape and we have plenty of firepower. You know, having said that, I would tell you though, that, you know, given the level of uncertainty around market outlook as well as the fact that, you know, valuations and companies coming to terms with the fact that perhaps some of their businesses aren't worth today, what they were worth maybe 3 or 4 months ago. That does take some time for that new reality to set in.
And so I would say today that valuations have not and expectations have not necessarily come down commensurate with the change in market outlook. And so those two things together says we will continue to actively work the pipeline. We are, in fact, having a number of conversations. Our focus and priorities continue to be, largely around the electrical business. We think in this environment, we'll have to see, you know, whether or not Aerospace, clears up the future of Aerospace and Outlook clears up enough that for us to get back on, you know, kind of, front foot and then around an Aerospace transaction.
But, but right now, I'd say that, We're working the pipeline. It's an active pipeline, but, valuations have really not yet come in.
Okay. Thanks, Greg. And then a real quick one, I guess, for Rick. You gave the Q3 framework. If you ice laid out the kind of nonrecurring stuff like occurred in Q2, beneath the segment operating profit line, you expect any sizable change in things like corporate pension and other?
Not any significant change. It should be relatively consistent.
And our next question is from the line of Andrew Obin Bank of America. Please go ahead.
Yes. I guess still good morning. Just a question on, inventories in the channel. Can you just tell, have dealers been destocking during this? Where is the level both in North America and Internationally as far as you can see, is there a need for destocking basically?
Yes, I think the question around whether or not there's a need for restocking is still yet to be determined, Andrew. I can tell you that we did experience some destocking during the course of Q2. And but that destocking is certainly behind us now. And today, when we do our channel checks and talk to our distributor partners, they'll tell you they feel like the inventory levels today are well aligned with their, you know, their outlook for revenue. And so I think it's, you know, too early maybe to make a call on inventory restocking, but certainly the destocking of inventory, has stopped and is behind us now.
And just in terms of supply chain, I've between China, between sort of Mexico shutting down, Have you guys made any changes to your internal sourcing, internal supply chains post COVID? Thank you.
Yes. I'd say nothing material. One of the things that we've always done and believed and strongly is, manufacturing in what we call zone of currency, which means essentially we what we sell in a region, we generally make in a region. We do, in fact, ship some parts around and components around the world. I would tell you that throughout this whole entire pandemic, our supply chain has held up extraordinarily well.
And I can say, you know, with confidence that we didn't lose a single order because our supply chain broke down and somehow we ended up with an inability to deliver the bigger challenge that we experienced as a company really is what largely took place along the border. As companies and country, excuse me, have had different criteria around what industries are deemed essential. So there was a period of time when we had some challenges with the Mexican definition versus the U. S. Definition.
I can tell you that today, that's behind us as well. But for the most part, supply chain has not been a big challenge for us during this current pandemic.
Thank you. And our next question is from Julian Mitchell from Barclay Please go ahead.
Hi, good morning. Maybe just trying to understand the free cash flow a little bit better within that $2,500,000,000 midpoint for this year, maybe help me understand what's the hydraulics contribution within that And also, what's the cash portion of the restructuring charges in that number, please?
Yes, I don't have at hand the exact hydraulic force and we'll address that offline. The cash part of the restructuring charge is probably on the order of $50,000,000. And so that's why we believe that our guidance, even inclusive of that, cash portion of restructuring, still hold true.
Understood. Thank you. And then maybe just a second one around the aerospace, maybe margin dynamics, help us understand what the impact of Suryos Sun Bank was and that integration within the, I think almost 1000 basis points drop in the aero margin in Q2, and maybe how you see that impact from the acquisition playing out over the balance of the year? And I don't know if you quantified, but maybe help us see what the commercial aftermarket revenue drop was in Q2, please.
Yes, it's, Surrey is some bank and its impact on margins. I'd have to do some quick math. Have adult handbook? It's let me just see what I have here.
I mean, the margins at Soriel Free acquisition were in the high teens and that obviously compare our business that was in the 22% to 24% range. And so I think the easiest way Julien, it's just to use those numbers and, we also gave you the overall sales volume of Sorio, which was about $300,000,000 a year. And, and so that should allow you to back into the impact from Sorio itself.
100 bps or something like that?
I think probably 150 bps.
Good. Thank you all. I think we have reached to the end of our call. 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 good day.
Thank you. And that does conclude our conference for today. You for your participation and for using AT and T conferencing services. You may now disconnect.