Ladies and gentlemen, thank you for standing by, and welcome to the Eaton first quarter earnings call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during today's call, please press star then zero. As a reminder, today's call is being recorded. Now I turn the conference over to your host, Yan Jin, Senior Vice President of Investor Relations. Please go ahead.
Hey, good morning. I'm Yan Jin, Eaton Senior Vice President of Investor Relations. Thank you all for joining us today for Eaton's first quarter 2020 earnings call. I hope that you and your families stay healthy and also stay safe. Right? With me today are Craig Arnold, our Chairman and CEO, and Richard Fearon, Vice Chairman and Chief Financial and Planning Officer. Our agenda today, including opening remarks by Craig, highlighting the company's performance in the first quarter. As we have done in our past calls, we'll be taking questions at the end of Craig's comments. The press release and the presentation we'll go through today have been posted on our website at www.eaton.com. Please note that both the press release and the presentation include reconciliations to non-GAAP measures. A webcast of this call is accessible on our website, and it will be available for replay.
I would like to remind you that our comments today will include statements related to 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 filing. With that, I will turn it over to Craig.
Thanks, Yan. Appreciate it. Hey, let me start on page three, and I'd like to begin by providing an overview of how Eaton is addressing the impact of COVID-19 with our key stakeholders, our employees, our customers, our shareholders, and certainly, our communities in general. The first thing I'd say is, I couldn't be more pleased with how well our team is managing through the crisis. As always, the safety of our employee has been, and continues to be, our top priority. Most of you are very familiar by now with the best practices around eliminating the spread of COVID-19. At Eaton, we've adopted them all, and I'd say that most of them, even before they were commonplace. We learned from what we saw in China. We activated and stood up our pandemic management and response team early and created a COVID-19 playbook.
This playbook has become part of the Eaton Business System. It specifies exactly what we expect of our factories and offices around the world, including how we ensure compliance. We also continue to serve customers around the world. As you're aware, most of our products have been deemed to be a critical part of the global infrastructure, and as a result, our factories remain open with very few exceptions. We are, however, seeing lower utilization and weak demand in some of our end markets. We have had some temporary closures in a couple facilities. Now, I'd also note that organic growth continues to be our top priority. We want to make sure that we're well positioned to take advantage of all opportunities, including the increases in expenditures on government infrastructure when it comes, and we do think it's coming.
I'm especially proud of the work that our employees are doing around the world to support our communities and caregivers. We've donated Eaton equipment. We're using our additive manufacturing capabilities to produce personal protective equipment, and we've increased our charitable giving to support those impacted by COVID-19. Finally, as I'll detail in the next couple of slides, we're also taking the appropriate cost reduction and cash management actions to ensure solid incremental profit margins, strong liquidity, and cash flow. Allow me to begin with liquidity and cash flow on page four, and both are actually in great shape. As of March 31st, we had $450 million of cash and short-term investments on hand, and access to $2 billion of undrawn multi-year bank facilities. In fact, we've never drawn on our bank facilities and then don't expect to use them during 2020.
We have been in touch with our bankers and are comfortable with our ability to access them if needed. We also have access to the commercial paper market, obviously. In 2020, we do have one relatively small debt maturity of $240 million, which is due at the end of Q4. As a point of reference, I'd note at the end of March that our debt to adjusted trailing 12-month EBITDA was only 2.1x . In terms of cash flow, we're updating our 2020 guidance, as you saw, and we expect now free cash flow to be in the range of $2.3 billion-$2.7 billion, with a midpoint of $2.5 billion. I'd say that while this is lower than our original forecast, it represents strong performance and shows our resilient cash flow in whatever economic environment we find ourselves in.
Our cash flow is more than sufficient to continue to invest in the business and to maintain our dividend. Many of you may not be aware, but Eaton has paid a dividend for nearly 100 years, and we don't see any scenario in which that would change. As planned, during Q1, we repurchased $1.3 billion of our shares using the proceeds from the lighting sale. As you're also aware, we expect to receive $3.3 billion of cash from the sale of hydraulics by the end of the year, leaving us with much higher liquidity and even lower leverage. With a strong balance sheet, our optionality for additional share repurchase and M&A really remains intact. We continue to think that our stock provides a very attractive return, given the 3.4% dividend yield and a free cash flow yield of more than 7%.
We're equally focused on ensuring that we deliver attractive decremental margins. That is one of our top priorities. We've moved quickly to put cost containment measures in place. We summarized some of these actions on page five. First, the first reduction was really the one taken by our leadership team. They took the first and the biggest cut, 25%-50% reduction in base salaries in Q2. Our board of directors also agreed to a 50% reduction in their cash retainer for Q2. These funds will actually go into an employee relief fund for those impacted by COVID-19. These actions are in place for Q2. They could be extended if the forecast to recovery comes later than expected.
We've also dramatically reduced discretionary expenses, put in place hiring freezes for all but a few critical roles, and a number of other actions that include unpaid leave for most of our salary workforce. We delayed the planned 2020 merit increase until next year, and we've taken a significant reduction, as you can imagine, or the elimination of incentive compensation. All difficult but necessary steps as we work to ensure that we approach the challenge with shared sacrifice, with those of us with the greatest means naturally shouldering a bigger piece of the responsibility or burden. Lastly, we've eliminated non-essential CapEx, and as you'll see in the updated CapEx guidance in a few slides, it's a pretty significant reduction.
Let me say that, while the pandemic is new for all of us, Eaton has managed through severe economic declines in the past, and quite frankly, we've always emerged as a stronger company. It's something we fully expect to do this time around. Moving to page six, I'll turn to our traditional set of charts on quarterly results. Q1 earnings per share were, as you saw, $1.7 on a GAAP basis and $1.9, excluding the $0.02 charge for acquisition and divestitures. Adjusted earnings per share were reduced by an estimate of $0.14 due to the impact of COVID-19. This is a bit more than the $0.10 impact that we had estimated in early March, as the impact of COVID-19 really spread beyond China and to the rest of the world.
Our sales of $4.8 billion were down 7% organically, which includes the 3% decline that we anticipated in our original guidance, plus an additional 4% or $200 million impact from COVID-19. This is some $50 million more than we estimated in early March, and you'll recall that at our March 2nd investor meeting, we indicated that revenue shortfall from COVID-19 would be approximately $150 million. Segment margins were 15.8%, down slightly from Q1 2019. I'd also note that this includes additional and unplanned restructuring charges as we made the decision to begin to right size some of the businesses that are being heavily impacted by this economic downturn. Other notable events in the quarter, we announced the sale of the hydraulics business to Danfoss for $3.3 billion, which we expect to close at the end of 2020.
We closed the sale of lighting for $1.4 billion, and we deployed $1.3 billion to repurchase shares, equal to 3.4% of our shares outstanding at the beginning of 2020. On page seven, we summarize our Q1 performance, and I'll just kind of note a few highlights here. First, we're changing our historical practice and are now recognizing all charges related to acquisition and divestitures at corporate rather than in the segment level. The gain, for example, on lighting would be at corporate, not in one of the segments. We think this makes it easier for you to forecast and model our segments as well as the overall company. Second, during Q1, acquisitions increased sales by 2%, which was more than offset by a 3.5% impact from divestitures. Negative currency also lowered sales by 1.5%. Finally, our team continued to actively manage costs.
This is what enabled us to deliver decremental margins of 17% in the quarter. We see, once again, this is a very strong set of results in this particular environment. Moving to page eight, we have the quarterly summary of our new Electrical Americas segment. Revenues were down 9%, with 2% decline in organic revenues as a result of COVID-19 and a 6% decline from the divestiture of lighting and negative currency impact, which fell by 1%. As you can see noted on the chart, if you exclude lighting and the COVID-19 impact, organic revenues were up 2%. Strength in Q1 was driven by commercial construction and the utility end markets. Operating margins increased by 20 basis points to 17.2%. This is mostly due to the favorable impact from the divestiture of the lighting business in early March.
Excluding lighting, orders were up 3% on a rolling 12-month basis, so pretty decent orders overall. Given the resegmentation, which combines Electrical Products and Electrical Systems and Services into Americas, we're now reporting orders on a 12-month rolling basis going forward. This will also be true for the Electrical Global segment. In the quarter, we saw strength in data centers and utility and residential markets really offset by weakness in industrial markets. Next on page nine, we have our Q1 results for the Electrical Global segment. Revenues were down 8%, with a 6% decline organically. This entire decline was driven by the impact of COVID-19, and most of this really coming out of China. We also had 1% growth from the Ulusoy acquisition and a negative currency impact of 3%. Operating margins declined 80 basis points to 14.5%.
I point out that this number does include increased restructuring charges that were not planned, that were taken in this segment. Orders declined 1% here on a rolling 12-month basis. In the quarter itself, we saw significant growth in data centers, and this was more than offset by decline, as you would imagine, in global oil and gas markets. On page 10, we summarize our Hydraulics Segment. You may recall that with the re-segmentation announced in March, this segment now includes only the hydraulics business. Filtration and Golf Grip are now reported as a part of the Aerospace Segment. I'd emphasize once again that we continue to expect the sale of this business to Danfoss to close at the end of 2020. Very strategic deal for them, and things look like they're remaining on track.
For Q1, revenues were down 16%, with 14% organic decline. This number includes an estimated 3% decline due to COVID-19 and negative currency impact of 2%. Operating margins improved 100 basis points to 10.8%. Orders for the quarter were down 11% year-over-year and driven really by continued weakness in global mobile equipment markets. Moving to page 11, we summarize our results for the Aerospace segment. Revenues were up 13% with - 1% organic growth. We estimate 3% of this decline due to COVID-19. Certainly saw a 14% increase as a result of the acquisition of Souriau-Sunbank. Operating margins declined 110 basis points to 21.6%, that's still very strong. This decline was primarily due to the acquisition of Souriau-Sunbank, which obviously came in at lower margins than the underlying business.
Organic orders declined 1% on a rolling 12-month basis, and in the quarter, we saw strength in military fighters and military aftermarket, but particular weakness, as you can imagine, in commercial transport. Turning to page 12, we look at our Vehicle segment. Revenues here declined 26%, of which 20% was organic. Included in the organic revenue decline, we estimated that COVID-19 had a negative impact of some 5%. In addition, the divestiture of the automotive fluid conveyance business impacted revenue by 4%, and we had a 2% negative impact from currency. I'd say here that the largest part of Q1 revenue decline was expected, and it's really the result of lower Class 8 OEM production, which was down some 31%, and continued weakness in global light vehicle markets, where production was down some 21%. As noted, operating margins declined 160 basis points to 13.5%.
I'd also point out here is despite a significant reduction in volume, decremental margins were less than 20% as our team continued to proactively manage both discretionary and fixed costs. Given COVID-19, we now expect NAFTA Class 8 production to be 180,000 units, down from our original forecast of 230,000 units, or nearly 50% lower than 2019. Our last segment is eMobility on page 13. Here, revenues were down 13%, with organic revenues down 12%, including an estimated 4% impact from COVID-19, and we had a 1% impact from negative currency. Operating margins declined to 1.4%. This is a result of volume reductions on legacy internal combustion engine platforms, as well as manufacturing startup costs associated with new wins on electric vehicle programs.
Lastly, we summarize our Q2 and 2020 outlook on page 14. I'll begin by stating that due to the economic uncertainty from the COVID-19 pandemic, we're withdrawing our full-year 2020 guidance. I wish we were in a position to provide revenue forecast, we just don't have that level of clarity at the moment. I would add that for the month of April, month-to-date revenues are running down approximately 30%. Inside of that 30%, obviously, Electrical would be better than that number and some of the more impacted businesses of Vehicle and Aerospace would be running slightly worse than that. I would expect the month of May and June to be somewhat stronger, clearly it's too early to tell for certain. We do have better visibility on decremental margins and free cash flow. Our guidance is as depicted.
We're targeting decremental margins of 30% for Q2 and 25%-30% for the full year. Like prior downturns, we're extraordinarily focused on cost control. We've taken a number of cost control actions already. Importantly, we have contingency plans in place to do more if needed. We do expect decremental margins to be higher in Q2, since it's the quarter where we'd expect, quite frankly, the largest volume impact, as well as the quarter that we'll see the biggest restructuring charge. Our CapEx forecast for the year is now approximately $400 million, down from our prior guidance of $550 million. Our free cash flow guidance, now at $2.3 billion-$2.7 billion, $2.5 billion at the midpoint. We continue to expect free cash flow conversion to remain strong. We're also maintaining our dividend, which we increased by 3% in February.
Let me just close by saying that while we recognize the kind of the overall uncertainty created by COVID-19 and its economic impact, as a company, we remain focused on generating strong cash flow, which we've always done. We're focused on implementing our long-term strategy around how we transform Eaton into a company that delivers, over the long term, higher growth, higher margins, and certainly more consistent earnings. With those opening comments, I will stop here, and I'll turn it over back to Yan for Q&A.
Hey, thanks, Craig. Before we begin our Q&A section of the call today, I do see here that we have a number of individuals in the queue with questions. Given our time constraint of only one hour today, please limit your opportunity to only one question and one follow-up. Thank you in advance for your cooperation. With that, I will turn it over to the operator, who will give you guys the instruction.
Thank you. Ladies and gentlemen, if you do wish to ask a question during today's conference, please press one zero on your touch-tone phone. You will hear an acknowledgement that you've been placed in queue. You may remove yourself from queue at any time by pressing one zero again. Once again, ladies and gentlemen, if you do have a question, please press one then zero at this time. Our first question is going to come from the line of Jeff Sprague from Vertical Research. Please go ahead.
Craig, I was wondering if you could address in a little more detail the specific actions you're taking to manage decrementals. In other words, you gave us some color on the employee actions and compensation. How much of that is temporary, and how do you see that kind of rolling through? Kind of the related follow-up maybe that I'll just ask right now is, you mentioned restructuring a couple times, too. That sounds a little bit more structural and permanent. Can you just unpack those two items and give us a little more color on how to kind of get our head around those?
Yeah, Jeff, thank you. Appreciate the question. Maybe I'll just begin by saying that, as you're well aware, we have really spent, as a company, in excess of $500 million over the last three or four years to really get at structural and fixed costs inside of our company. Those benefits are certainly playing through in our business today around better profitability at every point kind of in the economic window that we deal with. As you're aware as well, Jeff, unlike other companies today, we run restructuring through our P&L. Every year we're spending order of magnitude $60 million-$70 million worth of restructuring. Those restructuring programs are generally targeted at structural costs that go away and don't come back independent of what happens on the economic front. We continue to have a playbook around restructuring opportunities.
As we've discussed in the past, as we think about managing through periods where we have economic weakness, we have programs that are on the shelf that we can simply slide in and do a little bit more restructuring in periods where we find ourselves facing more economic weakness than we anticipate. As we think about those businesses inside of our company that are dealing with perhaps more structural and longer-term downturns as a result of COVID-19, what you're going to find is that we'll, in all likelihood, accelerate and pull in some of those restructuring initiatives to once again deal with fixed costs in those businesses.
At this point, as I mentioned, we will continue to run it through the P&L. It's one of the things that we think is important as you think about the company itself and looking at on a comparison basis. We think it's just part of running the business. That's stuff that we're focused on an ongoing basis.
To be clear, though, so you're just spending the normal $50-$70, or there's an elevated amount happening?
We are spending, we did in Q1, and we would expect to for the full year, to spend an elevated amount. That was part of the reason we called out even in our Q1 results that we did spend additional restructuring, more restructuring dollars than planned. For that restructuring, obviously, our results would have been even stronger.
Great. Thank you.
Thank you. Our next question is going to come from the line of Deane Dray from RBC Capital Markets. Please go ahead.
Thank you. Good morning, everyone.
Hi, Deane.
Hey. I appreciate all the color today. Given limited visibility, you're actually stepping up and giving the free cash flow guidance, which is pretty impressive. For the comment on April being down 30%, since you've shown the ability to separate how much you think the COVID-19 impact is for this first quarter, how much of April are you attributing to the April being down 30%? How much are you attributing that to COVID-19?
I think we'll probably be in a better position to really parse that as we get to the end of the quarter. Deane, from where we sit today, there's no reason to assume that 100% of that reduction isn't tied to COVID-19. I think if you take a look at how the company was performing prior to kind of COVID-19, and quite frankly, prior to it becoming a pandemic and hitting the rest of the world, the company was actually performing quite well, and we were in very good shape. There's absolutely no reason for us to believe that 100% of that reduction isn't tied to COVID-19. As you're well aware, as governments around the world have shut down economies and some of our customers have closed factories, all of that is really tied to COVID-19.
That's helpful. Craig, was interested in having you expand on your comment that your degree of confidence that there is going to be increased government spending coming on the infrastructure side. We've certainly seen this before. Just on an early look, how do you think you all are positioned? Any particular businesses that you think would benefit the most?
Yeah, I appreciate the question as well, Deane. What I'd say is that we're getting ready. We have a playbook that we've created as a result of living through, whether it's been hurricanes or other kind of events, where we today have an organization that we've stood up to really be prepared to deal with these economic stimulus plans as they come. We do believe, and we'll have to wait and see when it comes. We're starting to see kind of the early signs of it in China. We think the U.S. will eventually have an infrastructure spending plan, and it'll certainly benefit our company immensely, certainly with most of those benefits coming in our core electrical business. At this point-
That's great.
It's early, but we're getting ready.
Great. Just lastly, a comment. I don't know if your ears were burning, Wesco, in the last call, just had really nice things to say about Eaton's manufacturing precision and keeping the supply chain full for them in terms of having as a vendor. Congrats to you and the team.
No, thank you. Appreciate that. We have a very strong partnership with Wesco and with all of our distributors, and we're doing everything we can to keep them up and running.
Thank you. Our next question will come from the line of Joe Ritchie from Goldman Sachs. Please go ahead.
Hey, thank you. Good morning, everyone. Hope you guys are all well. Maybe just starting off, Craig, in just thinking about the restructuring plans, like temporary versus structural, it sounds like a lot of the plans that you outlined today seem more temporary in nature. I don't want to put words in your mouth, but so maybe you can address that. Secondly, why would now be a more opportune time to maybe accelerate some of the footprint rationalization plans that you've talked about in the past?
Yeah. Appreciate the question, Joe. The way we think about restructuring in general, anytime we talk about restructuring, we're, for the most part, always talking about structural changes. One of the things that we would expect each of our businesses to do, and as well as what we do in our support functions, is that we have to flex our businesses. As volume changes, there's a natural expectation and mechanism for us to flex our support costs, our manufacturing costs, as economic levels go up and down. Restructuring for us really is focused on making structural changes to the company. To your point, looking at things like the manufacturing footprint, the structural footprint, where we do work in different places around the world.
The only thing I would say about that is that, clearly we have a plan that we were focused on executing in 2020. We've already made a decision to accelerate some of those items and do more in 2020 than we originally anticipated. We would never intend to get out in front of our internal communication plans around what we would intend to do by making announcements. I will tell you, though, in the event that this economic contraction goes on longer or is worse than we anticipated, we have the ability to accelerate and pull in more ideas. Right now we have a plan that we've laid out. We're doing more than what we originally anticipated, and we feel good about the fact that we can accelerate that and do even more if the environment calls for it.
No, that's helpful, Craig. Maybe to that end, right? You guys have outlined decremental margins of 30% in the second quarter, 25%-30% for the year. There's got to be some type of scenario planning that's going on as well. I guess my question is what kind of downturn are you guys thinking about for a kind of 25%-30% type decremental for the year? And at what point, if things are actually worse than you anticipate, do those decrementals turn out to be a little bit higher than where we are today?
Yeah, I'd say is that, what we said is that we're living in an environment right now where we just don't have enough certainty and clarity around our markets to provide guidance. As you've seen, many of our customers are not providing guidance either. Tough for us to provide guidance when the customers aren't willing to kind of weigh in and put a stake in the ground either. What I would say today is that you can rest assured that we have done scenario planning. We've done scenario planning with respect to not only what do decrementals look like, what does cash flow look like? I would tell you, first of all, on cash flow, under every scenario, our cash flows remain strong. In fact, in many cases, as we continue to liquidate working capital, that could even improve under certain conditions.
With respect to the forecast and the range of possibilities, at this point we're not going to provide kind of the guidance, but just rest assured that we have an internal plan that lays out a number of different possibilities. We do believe that Q2 will be the weakest quarter. In the event that that downswing ends up being longer or more protracted than we're currently forecasting, we have the ability to do more. We hopefully will be in a position as we get to the end of Q2 to give you a better indication of what the year is going to look like. I know that probably doesn't answer your question directly, Joe, because we're just not in a position to give you kind of a view of revenue for the year. Hopefully we're maybe 60 days away from being able to do so.
Thank you. Our next question will come from the line of Scott Davis. Please go ahead.
Hi. Good morning, Craig and Rick.
Hi.
Morning, Scott.
Appreciate the color. I think one of the things I'd like to get a sense of, and we know your big distributors are healthy, but what's the sense of your smaller distributors and their financial health?
Yeah. At this point, Scott, I'd say that we don't anticipate at this juncture any distributor kind of issues as we work through this downturn. As you know, one of the good things about being deemed essential by most governments around the world is that mostly our distributors continued to deliver goods and services, and projects continued to be executed. They certainly will be impacted like everybody else. At this juncture, I'd say we've not seen any material change in the health of most of our distributors. We're obviously monitoring it closely, but at this juncture, there's nothing that we could really add that would really suggest that the smaller distributors are going to be somehow imperiled as a result of this particular economic downturn.
Scott, it's Rick. I might add that as I look at the payments from these distributors, we haven't seen any significant deterioration in the days that they're paying their invoices in.
Okay. That's super helpful. I just think when I think about our model, the toughest one to forecast is probably aerospace, because I would imagine your decremental margins here could be a bit higher than the average that you're calling out, just based really on the older planes are going to get parked or are already being parked. Can you internally model it and feel comfortable at least that the decrementals can be somewhat in the ballpark of what you're forecasting broader? Or should we expect something a little bit bigger?
I mean, look, I appreciate the question, Scott, just to be extraordinarily clear, we have absolutely modeled what we would anticipate the year to look like. Embedded in those assumptions around what the decrementals look like for Q2, what do decrementals look like for the full year, we've absolutely modeled what we think the range of possibilities for the year would be. That's why we've given a range in terms of decrementals for the year. Q2 will clearly be the most challenging quarter, and we're talking about a 30% decremental in Q2, which will be, for all intents and purposes, not a very attractive quarter, right, in terms of all the governments that have shut down activity around the world. Even in that quarter, we're saying we think we can deliver a 30% decremental.
We think the decrementals for the year can be better than that because we think the back half is better than Q2 is going to be. We absolutely have a plan that we've modeled. You're absolutely correct. The decrementals in aerospace would be higher than the decrementals in some of the other businesses, but on balance, we're very comfortable with the range of possibilities that we laid out.
Okay. That's very helpful. Best of luck, guys.
Thank you.
Thank you. We're going to have a question from the line of Ann Duignan from JP Morgan. Please go ahead.
Hi. Good morning. Thank you.
Thank you.
Maybe you could give us some more details on the data center performance in both of the electrical businesses. Can you quantify the size of the business or quantify the growth that you saw in the quarter versus the falloff in some of the other weaker areas like oil and gas? Just to help us think about modeling longer term, like strength in data centers continuing, maybe weakness in something like Crouse-Hinds continuing beyond Q2. Any help you can give us would be gratefully appreciated.
I think you just did a great job, Ann, of hitting the two outliers, because certainly on the positive side, data center orders were quite strong in the quarter. Up, let's say, mid double digit in the quarter. Very strong performance in the data center market. I think the data center market continues to be strong and if anything, kind of the work from home, the use of technology at home and the use of data in general, I think it once again strengthens the case for the long-term growth prospects for the data center market in general. We are very pleased with our own performance in data centers in the quarter, and we'd expect that market to remain quite attractive, even in the midst of this economic downturn.
On the other side of the equation, as you appropriately noted, the oil and gas markets are certainly being hit pretty hard by what's going on today by certainly the extraordinarily low oil prices and most of the major companies reducing their capital spending. We're obviously experiencing those reductions as well. I do think those are kind of the two bookends, if you think about today what's going on inside of our core electrical business. By the way, that pattern is pretty much true, whether you're looking at what's happening in the U.S. or you look at what's happening in markets outside of the U.S.
Would you like to size the decline in orders in Crouse-Hinds for us just as you did the data center upside?
Yeah, I'd say it's bigger. If you think about today, we talked about sales specifically in terms of what we experienced in the month of April when I talked about the fact that sales are down order of magnitude in April, some 30%. Some businesses are worse than that, some are better than that. I would say Crouse-Hinds would be in a category of where we're seeing more weakness than average inside of the company.
Anne, it's also useful to factor in that coming into this COVID-19 downturn, only about 30% of Crouse-Hinds was oil and gas. That's a reduction from what it had been at the time of the Cooper Industries acquisition.
Yeah, we never really saw the market recover to the levels that it was at the time we acquired Cooper. You're absolutely right, Rick. The impact on the company is less than it would have been, let's say four or five years ago. We're clearly seeing project delays.
Reminder. Thank you.
The project delays that we've seen to date really have been particularly in the oil and gas market. We haven't, quite frankly, seen significant cancellations at this point, but we have in fact seen delays.
Okay. Thank you. I'll leave it there. Appreciate it.
Thank you.
Our next question is going to come from the line of Nigel Coe from Wolfe Research. Please go ahead.
Thanks. Good morning, gents.
Hi, Nigel.
Yeah, obviously, nice quarter. I'm wondering, can you maybe just talk about the hydraulic sale. What kind of progress have you been able to make in terms of getting the deal closed or moving through the process given the shelter at home restrictions around the globe? Maybe just update us in terms of next major steps and timing of the close. Thanks.
Yeah. I'd say that we're certainly confident, as we've talked about, that the deal will close. As we announced earlier, we do expect the deal to close at the end of the year. In late January, we did file the purchase agreement as a material contract with the SEC. As you can see in the contract, the buyer doesn't really have outs for financing or regulatory issues. I'd say even more importantly than that, we're very much in touch with the team at Danfoss, and strategically this makes as much sense for them today as it did in the beginning. They're doing everything that they can to accelerate the closure of the transaction as well.
They remain very much still strategically committed to the deal and to the merits of the deal and still believe it will be extraordinarily beneficial to them both in the near and in the long term. It remains a very strong strategic fit for Danfoss overall. Obviously, we have to go through the regulatory approval process, which we're working through now. At this point, all that we can tell you is that we fully expect this deal to close, and the current estimate is by the end of the year. At this point, we'll have to wait and see to what extent, if anything, this COVID-19 impacted from a regulatory approval process. There's been no indication of that to date. From where we sit, everything remains on track.
That's great to hear. Thanks, Craig. My follow-on question is really on the footprint. You've been very open about the fact that Eaton's footprint obviously made great progress, but still not optimal at this point. Would you use this crisis and this slowdown to accelerate some of those footprint plans as you reposition coming out of this recession?
Yeah. The way I'd answer that question, Nigel, is at this juncture, I'd say that option is there. Depending upon the shape of the downturn, the depth of the downturn, and the recovery, we obviously have the ability to pull forward restructuring programs, to pull forward some of the plans that we've kind of thought through around how we could restructure the company. As we've said as well, we'll clearly make those announcements internally with our organization before we would talk about it externally. From where we sit today, we have a plan that we're fairly comfortable with using the assumptions that we outlined with respect to the company. Those options are clearly there. We feel confident that in the event that we needed to, we could accelerate some of these restructuring actions.
That's great, Craig. Thank you very much, and best of luck.
Thanks, Nigel.
Thanks.
Our next question will come from the line of Andrew Obin from Bank of America. Please go ahead.
Sure. This is David Ridley-Lane on for Andrew Obin. Can you maybe size the benefit of the restructuring actions you took in first quarter? I guess broadly, are these sort of in the timeline of a one-year payback?
Yeah, one of the things that we've made the decision, appreciate the question, but we did make the decision a couple of years ago that, as a company, we undertake restructuring every year. We thought that it would be better served, and you would be better served that, if these are going to be ongoing restructuring programs, things that we do systematically every year to deal with structural costs, that we don't call them out as one-time items because we do anticipate doing them on an ongoing basis. As I'd mentioned in my opening commentary, we size that normally at order of magnitude $60 million to $70 million a year. Clearly, we're going to do more this year. Once again, what we intend to do is to run it through our operations and not to call it out as a separate one-time item.
Now, if we ever got to the point where we had to do a very large, sizable plan over multiple years, we would perhaps consider taking a different pattern than that. As long as it's kind of in the ordinary course of the way we're running the company or if it's on the margin, it's not a significant departure from what we've spent historically, we would intend to just run it through operations.
Okay. Are lower raw material costs going to be a meaningful benefit for you in 2020 on the gross margin line?
Yeah, we absolutely would hope so. Certainly, we have experienced to date that most of the key raw materials that we acquire, whether that's copper, aluminum, silver, steel prices, have certainly turned favorable so far this year. In many cases, as we've talked about over the years, the way we really think about commodity costs in general is that they're neither a net drag or a net positive to earnings. To the extent that costs are going up, we intend to pass those costs on to customers in the marketplace. To the extent that they come down, the expectation is that over time, they would also come down as well. We're clearly seeing lower commodity prices today. Once again, the way we think about it over the long term is that it's not a net negative nor a net positive in terms of EPS.
Thank you very much.
Thank you.
Our next question is going to come from the line of John Inch from Gordon Haskett. Please go ahead.
Thank you. Good morning, everybody.
Morning.
Morning. I got dropped unfortunately earlier. Hopefully I'm not going over something you've already covered, Craig and Rick. I'm wondering if we could talk a little bit about the puts and takes on cash flow and maybe working capital. I'm presuming the shift from $2.9 to $2.5, the preponderance of that is just the lower earnings expectation. That said, how much working capital would you guys expect to release to kind of buffer cash this year? Secondly, on cash conversion, do you expect the cash conversion numbers on adjusted income to go higher? I'm assuming so. Any sense of how much higher those could fall out this year?
Yeah, I'd be happy to address your questions, John. First of all, just a few data points to consider. If you think about our classic working capital, receivables, inventory, less payables, it's about 19% of sales. As sales come down, you pull out that working capital. At the same time, as we've commented in the past, we came into this year with inventory levels above what they should have been. We've commented that as much as $300 million-$400 million higher than they should have been. What you're looking at is a situation now that future activity has fallen off. There is a real imperative and a real push within the company to pull down inventories in particular.
Just to give you an order of magnitude, if DOH at the end of March was the same as DOH at the end of 2019, our inventories would have been $400 million lower. The biggest opportunity is in DOH. The second opportunity is in receivables, where we're actually managing that pretty well. As is normally the case in a downturn, they pushed out a day to two, and we have every confidence that we will pull that back in. We're working very hard at that. On days payables, we have made progress and came in a little bit better than planned in March, and we believe that we can make further progress there.
Another perspective.
I'm sorry, go ahead. Sorry.
Yeah, I was just going to say another perspective I think that's helpful is that if you looked at our free cash flow, in 2008 and 2009, let's just look at history. From 2008 to 2009, our free cash flow improved 22%. If you looked at 2015 to 2016, again, another down market, our free cash flow was up 9%. Those improvements really were working capital related. Liquidating working capital to offset the decline in profits. At the same time, also, it's managing decrementals. The decrementals that we had in 2008 and 2009 were pretty attractive. They were a decremental of down 24% in 2008 and 2009. In fact, in 2015 and 2016, the decremental was only down 19%. It's a combination of managing decrementals and pulling working capital out.
To your last question, John, typically your cash conversion ratio improves, in these kinds of downturns due to the amount of working capital that you liquidate. We would expect that we would do much better on our free cash conversion, in 2020 compared to 2019.
That makes sense. Would you say, Rick, the inventories of the $300-$400 excess that you had, are they kind of more at an equilibrium as you closed out the quarter? I guess it's kind of a bit of a falling knife in terms of the future, right?
Yeah, that's not a problem.
Did it get burned off, much of that?
No, not much. We had future sales fall off. This is something we're working really, really hard, and I think we'll make a lot of progress in Q2. I don't know that we'll get it entirely back to where we'd like by the end of Q2. If the world begins to improve, as most forecasters think in Q3 and Q4, we will continue to constrain adding inventory back as volume starts rising.
I'd only add that if you think about the way the quarter unfolded, most of our businesses outside of China were doing just fine up until mid-March.
Yeah
We saw this fall off in the last two weeks of the quarter, which has driven some of this excess inventory and our ability to get it out. It just takes time. If you think about in general, if you have 90 days worth of inventory, you're about 90 days away from fixing an inventory problem.
No, totally makes sense. Just one more quick one. Craig, at the analyst meeting, you alluded to abundant supply chain efficiency or cost saving opportunities. I'm just wondering if the past few weeks has provided the backdrop to kind of review those opportunities. Perhaps would we ever see perhaps establish maybe some formal targets or initiatives or any of that kind of being communicated?
I'm sorry, say supply chain, you said specifically? When you say supply chain, you mean?
Yeah, that's right, around your supply chain. I think at the analyst meeting, it wasn't part of your presentation, but someone asked you about supply chain and you made a comment. No, there's actually quite a lot of opportunity, efficiency opportunities-
Okay
-if that's become a topic during the downturn as an opportunity.
I'd say in general, we do believe there are large opportunities within the supply chain and things that we're doing across the company to bring more visibility and to leverage the scale of the company more effectively across the enterprise. Those initiatives are ongoing and have been ongoing. I'd say that in the context of an economic downturn, there's obviously a greater sense of urgency around everything. I would put that into the same bucket of where we have opportunities to accelerate the ways in which we're leveraging the scale of the company. It's just getting a lot more attention during an economic downturn. I would put that in the category of kind of the ongoing continuous improvements around the way we're running the company.
Makes sense. Thanks very much.
Thank you.
Thanks.
Our next question then is going to come from the line of John Walsh from Credit Suisse. Please go ahead.
Hi. Good morning.
Hi.
Morning.
I guess a quick one. You highlighted your strong liquidity position. You mentioned share repurchase acquisitions. Should we think that actions like that are on hold until you close hydraulics? Or would you actually do something before that?
Yeah. What I'd say, John, is as we think about kind of the first thing I would say is that, typically, during economic downturns, there aren't a lot of transactions done in general, as valuations tend to decline, and it takes a while for the reality to set in terms of kind of what assets are worth. I would say that in general, you don't tend to find a lot of deals done during economic downturns for that reason. I will tell you that as you look and we continue to work the pipeline, and we continue to look at opportunities, I think practically speaking, from where we sit today, the kinds of things that make the most sense for us tend to be the tuck-in type of transactions. That's most of what we're looking at.
I would say, no, we think we have enough confidence in the cash flow of the company and enough confidence in that the transaction will close, that we certainly, if we needed to, if we found something that was really strategic at the right price. Right. We could take bridge loans. We could do things to finance a transaction till we got to the point where the cash flow from, let's say, the sale of hydraulics and, quite frankly, all the cash that we'll generate for the balance of this year came in. That's kind of the way we think about it. When that opportunity comes, we think we have enough financing flexibility to do a deal, once again, recognizing that we're going to maintain our discipline. We're not going to overreach.
We clearly feel like buying back our stock is certainly an option as well, and every deal's got to compete with that as an alternative. No, if we found something that was really strategic, at the right price, we would certainly have enough financing flexibility to do it, even in the near term.
Great. Just, I ask the question, we've heard some companies actually suspend or decide that they're no longer going to do share repo, but it sounds like that's not the case here. You would be able to do that if you so chose.
Yeah. I mean, our cash flow and liquidity remains quite strong. As I said in my opening commentary, given the cash that we'll generate, the optionality around M&A and share repurchases is absolutely still on the table for us. What we said as well is we still don't see a need to let a bunch of cash build up on our balance sheet. We generate a lot of free cash flow in periods of economic weakness, and our cash flows are amazingly consistent in good times and in bad. That option is still on the table for us.
Great. You touched a little bit on construction markets. Just wondering high level, if you're kind of viewing the COVID-19 disruptions as an event or if this kind of exacerbates some slowing of the cycle. We've had some companies use the word air pocket on new construction, just anything you're seeing on that kind of commercial vertical of your business.
I'd say for the most part, it's too early to really call. I mean, I think without a doubt, there'll be different segments of the market in our businesses that'll be affected differently. Perhaps in some cases, the shape of the recovery will look different depending upon which business we're in. I think, quite frankly, as we kind of sort through it at this point, it is just too early to call and say to what extent are these businesses going to look different on the other side of the COVID-19 economic downturn than they looked before? I mean, there's a lot of debate and speculation around aerospace. Certainly with oil prices being at the level that they're at today, there's been a lot of discussion around what happens with oil and gas markets on a go-forward basis.
We think the fundamentals around the global economy, before this event, were quite strong, and there's no reason to assume that once we get to the point where we have a therapeutic and a vaccine, that the world doesn't return to trend growth.
Great. Thank you.
Thank you. Our next question is going to come from the line of Julian Mitchell from Barclays. Please go ahead.
Hey, morning, this is Jawan for Julian.
Hey, Jawan.
Maybe taking a closer look at Electrical Global, you mentioned that some of the declines this quarter were attributed to China and Asia specifically, sort of obviously, but can you talk a bit about maybe what you're seeing in the region in April and whether you're seeing some signs of kind of normalization or a return to growth and maybe how you're using that as sort of a read to the Electrical Americas segment?
Yeah, appreciate the question. I think our experience in China specific, Julian, is very much like what you probably have heard from other companies where we did in fact see China come back in the month of March, not necessarily to the levels that it was at prior to the economic downturn, we did see a clear recovery in China. Our factories in China are all open. We're at full capacity today in terms of our available capacity. Some of the end markets continue to be weaker than they were before the economic downturn, I can tell you that if we have a China-like experience in the rest of the world, that would be extraordinarily positive, and much more positive than we're assuming in our base case. We do believe that the way China approached this particular economic event was different. It was more unified.
You found that companies in the economy went down and all came up kind of in a much more unified fashion, and that was fundamentally good for business and industry. Given the kind of disparate nature of the way that's taken place around the world and in other countries, we think the return to growth will be more gradual, more haphazard than probably what we're experiencing in China, and that's what we have in our base case.
Got it. Thank you. Maybe a follow-up on some of the restructuring plans. Is there sort of a focus here on aerospace just given that we could be in for a bit of a longer downturn and the first kind of significant downturn in some time for the end market? Is there a focus here on some of those off-the-shelf kind of restructuring programs to be targeted at aerospace, or is it more of a total company outlook?
No, I think it would be fair to say, Julian, that we are focused in those businesses that will likely see the biggest economic downturn and perhaps those businesses that will face the biggest structural issues. You can assume that to the extent that industries are going through pretty significant economic downturns, whether that's aerospace or oil and gas markets, you can assume that we are focusing our activities around restructuring in those businesses, in addition to the things that we're doing more broadly across the company.
Perfect. Thank you.
Okay, good. Thank you all. We have reached the end of our call, and we do appreciate everybody dialing in and ask question. As always, Chip and I will be available to address your follow-up calls. Thank you all for joining us today. Have a good day. Bye.
Thank you. That will conclude our conference for today. Thank you for your participation for using AT&T TeleConference Services. You may now disconnect.