Okay. Good morning, everyone. Welcome to Eaton 20 20 Investor Conference and the engine, even Senior Vice President of Investor Relations. I'd like to talk about a couple, each before I turn over to the speaker this morning. This start this morning will start to go through our corporate presentation, start from Craig Arnold, our Chairman and CEO and Rick Freon, our West Chairman and Chief Financial And Planning Officer.
After that, we'll turn over to Uday Yada, our Chief Operating Officer for Electric Sector. Then he is Monimus, our Chief Operating Officer for industrial sector, gonna finish this morning's presentation. And after which, we'll take a 10 minute break. And, during the break, we'll come back with a Q and A section. So I'll ask you guys hold your question to the end.
Before I turn the word to Craig, I'd like to do attention for 3 last things. The first of all, for those of you joining us remotely, as we go through the presentations, the material we pull up on the, on the, on the webcast. And I would like to take, a quick review of our safe harbor statement, right? Some of the material today will include in the forward looking statements. And therefore, you know, including the future risk.
And also in connection with this statement, please review the risk that are called out in our 10 K as well as the statement you see here on the screen and in your material. And lastly, for those of you who have questions of the meeting, We have our contact information right here. And Chip and I, we're always happy to do the follow-up course. With that, I will turn it over to Craig.
Thank you, Jan. Appreciate it. And we certainly appreciate everybody coming out this morning. We were a little nervous about how many we have this morning, and it's great to see that everybody came out to attend. It's great to be back in New York again.
I would say that, I think we'd all wish it was under better circumstances given the market sell off. But, but, you know, but this too shall pass And I'd say that if there's a silver lining in all of this from lease from our perspective is that, you know, we're sitting on a pile of cash. Have a very strong balance sheet. And so we'll certainly be buying at these levels. One of the things that some of you may or may not have caught in terms of the news this morning is that we actually closed the lighting deal as well this morning.
And so that cash from that transaction came in just on time. And so once again, it's great to get that one behind us. If you'll recall, we made that announcement. Billy was, it was in this meeting about, 1 year ago. And so it's great to get that action behind us.
And let me just begin by telling you essentially what we'd like you to take away from today's meeting. Certainly, as we think about the company, Eaton is going through a transformation. I think you see that certainly in the activities that took place on the course 2019. But, we're really trying to transition the company to what we call an intelligent power management company. 4 industry leading businesses, that are certainly leaders in their own markets, but also stronger because they're a part of our company.
2019 was a strong year. Setting records for the company. And Rick will share some of the details of last year's accomplishments as well. Our businesses are really supported by a number of secular growth trends. It's certainly in an environment where growth is tough to come by.
It's really great to have a little wind in your sails. And we'll talk about some of those trends and the things that are helping us in the form of sustainability the fact that products are becoming more intelligent connected. This energy transition that's taking place across the world, and obviously, everything is becoming more electric. So we have a number of trends that are really helping us. We are, in fact, actively managing the portfolio and you saw that 2019, what we announced this year, but this has really been going on across the company for really the last 20 years.
And so that's just something that, we have done for a long time. And if you do a pro form a view of the company, some 85% of the company's profits will come from electrical and aerospace. And that is a very different company than we've been over our history. Cash generation is strong, continues to be strong. You can see if you are in 2020 forecast, our cash flow margins to be north of 14%, which we think are very much in the top quartile of our industry.
And as we think about the long and planning arise, and we think the company is very well positioned to deliver 8% to 10% EPS growth over the next 5 year planning So what else should you know about the company? Well, we talk about Eaton becoming this intelligent power management company. 4 global businesses, as I mentioned, most of which, you know, of our revenue and profits coming out of electrical and aerospace, But in addition to that, the company is very well aligned with these cyclic growth trends, the work that we do in every one of our businesses and one of the key criterias for us, is that we do mission critical work. The products and services that we sell, they're highly engineered, they're highly specified, difficult to replace. And the other thing we'll talk about a little bit in this meeting in the context of kind of this broader responsibility that corporations have, we'll take you back through where Eaton has always been on this issue is that we believe we can be one of your best investments.
And at the same time, we can certainly have a much broader impact on society overall, and we'll talk to you a little bit about that. And then most importantly, you know, why do we win? Why do customers buy from eating? One very strong brands, a real legacy, an enormous installed base inside of our businesses. Every one of our businesses are global.
All have scale. So they have the ability to be competitive around the world. We have a very broad suite of products and solutions and certainly, today, our organization, our commercial organization, deep domain knowledge and application expertise in the markets in which we compete. And we continue to make investments in the future. We talk about these secular growth trends of sustainability, connectivity, energy transition, more electric.
We're making these big investments that are certainly going to be a part of our customer solutions as they move forward. It. And so another way of saying that, we talk about the company is we make what matters work. Now that's a bit of marketing but it's also true. If you think about what we do as an organization, whether it's in big buildings, whether it's with airplanes at 30000 feet this idea of Making the things that matter, work is very much a part of the DNA of the company.
It's something that you would also see today, if you were in one of our factories, You'd see how we make safety work. If you were in one of our neighborhoods, you would see the things that we're doing to make our communities work. And so in every case, speaks to really how we're delivering societal benefits, but at the same time, delivering value for our customers, our employees, and certainly for you, our shareholders. And we capture the sentiment in our mission statement. Our mission statement is to improve the quality of life and the environment to the things that we do as a power management company.
It serves all of our stakeholders, including our customers, our communities, our employees and certainly you, our shareholders. So yes, we talk about the purpose of Eaton being broader than making money. But the reality is we're very much aligned with this idea that you can do both. You can be both a company that delivers extraordinary returns, but at the same time, except a broader responsibility in terms of your ability to make a difference to society. And that certainly has a certain amount of appeal to our employees and others.
But it's not just enough to have a mission statement. You have to also talk about what are the things that you're going to measure what are the things that are important to you as a company? And for us, it does begin with delivering superior returns to our shareholders. That's at the very top of our mission statement. But we also recognize that in order to do that, in order to deliver superior returns for shareholders over time, you have to do more than that.
You have to be your customer's number one choice and your channel partner's number one choice. You have to create an environment where employees want to work. And we'd like to think that our employees love the work that they do with Eaton, that we've helped them connect their personal passions to the things that they do and work. We'd like to think also as, in the center of our company, our employees are not only safe, but they're well, which is why safety is such an important piece of what we do. And we believe strongly in inclusiveness and diversity.
This idea of, and you can't be the very best company unless you're also attracting the best talent. And that means you have to pull from everyone in society and making sure we're creating the kind of environment inside of our where every employee feels like they can make a difference where they feel in many ways at home. And then certainly, our mission, it also includes taking care of the environment. Both in the form of the facilities and the way we run our facilities, but also in the form of the products that we make and the solutions that we deliver to our customers. And I'd say, you know, this mission and these aspirational goals that we set for the company, is really very much aligned with, what the business roundtable has recently come up with the new statement of business purpose.
And I'd say for Eaton, this is really where we've always been. We've always been a company that essentially has recognized the importance of doing both good for your shareholders and good for society overall. In this mission statement, certainly a recognition of that, that in order to do good for your shareholders, you have to do good by people who buy your products, you have to do good by the people who make your products and you also need to do good by the communities in which you operate. And it's also obviously becoming a much bigger issue in the investor community in the form of ESG or environmental, social and governance matters. This is something else that Eaton has always done extraordinarily well, throughout our history.
We have actually began publishing our sustainability report in 2006. We're a member of the Carbon Disclosure Project. And so sustainability has always been very much a part of the of our company. And if you think about whether it's on the environment, the things that we're doing to protect the environment, in our facilities and helping our customers do the same, or the things that we're doing to help create a better society by creating a culture inside of our company where everybody feels welcome, like to participate, and certainly in the form of governance, which we really just think about it as doing business right. Just a few of the numbers, in the case of the environment, And I'd say that we certainly have made tremendous progress over the years.
2019 was also another very strong year greenhouse gas reductions were improved by 10% last year. We actually have today inside of our company, 164 sites, that have zero waste to landfill. That's an 11% improvement over prior year. And under social responsibility, we were listed as 1 of the 100 best corporate by CR Magazine, and our safety numbers are just absolutely outstanding. We are already performing at what we call world class levels in safety.
0.54 is our total case reportable rate. And you can see here on the chart, it was an 18% improvement over last year. And so we're really making great progress there. And then, and under governance, we were named to the FTSE for Good Index, which is a a nice accomplishment. And we clearly have a lot of diversity in our company.
You see that in our management team, but also in our board of directors, which today is essentially 50% diverse between both women and minorities. And so very proud of our accomplishments here. So while the the mission and the culture of the company haven't changed. What has changed clearly is the makeup of our company. And you can see here from this chart, we, we, you know, Eaton is a very different company today than we were since our founding than we were 10 years ago or even 5 years ago.
This transformation of Eaton has been something that's been taking place for a pretty significant period of time. And it's really been a focus on creating a more sustainable company. And that means that as you think about how we deploy capital inside of our company, It's really tying the things that we do to secular growth trends so that we can position the company for faster growth, position the company for better margins and more consistency over time. Those are the things that we're trying to do. And I'd say today, this whole idea of answering our electrical guys, for some years, has really been tied to this notion that we believe all along around the world becoming more electric, not just more electric in your homes or buildings or offices, but also more electric as well.
And those things that moves, cars, trucks, planes. Everything is becoming more electric and we're participating in that trend through these portfolio actives. So we know where we want to play. And and we know that our businesses have some key financial hurdles also that they have to meet though. And one of the things that we introduced a number of years ago is this idea the criteria that every business inside of Eton has to meet in order to be a part of the company.
And we use this internally the way that we evaluate our businesses and how they're performing, we use this also as the screen when we think about M and A opportunities. And it's relatively simple. We say you have to be a leader. You have to grow in excess of GDP. You have to deliver high return on sales.
You have to deliver high returns in general in terms of return on assets, you have to be a consistent performer over time. This is the criteria that we use, and this is what led to a number of the portfolio actions that the company took during the course of certainly 2019, but this has really been with us for some time. As you can see from this chart, 120 plus transactions over the last 20 years. And so while every deal won't be as big and visible, as a hydraulics or a lighting, rest assured the company remains very active in terms of managing our portfolio as standing up a better business overall. So $4,000,000,000 of revenue divested, but also $1,400,000,000 of capital we deploy in what we think are really value creating acquisitions.
And this has led us to a decision, by the way, these portfolio actions to really re segment some of our segments. And so this is a bit of new information, for the group, and what we were intend to do is in our electrical business first, which we have historically reported as electrical products, and Electrical Systems And Services, we're going to change and re segment to Electrical Americas And Electrical Global. And the reason we're doing that is for a number of reasons. Number 1, I'd say that if you think about the electrical world, it really does divide between 2 industry standards. IEC ANSI in kind of the Americas and, excuse me, NEMA ANSI in the Americas and IEC in the rest of the world.
So that's one of the reasons why we've done it. Certainly, the sale of the lighting business, if you recall, that was a one point $7,000,000,000 part of the electrical products business. It really provided the impetus for thinking about it. And also, I'd say it's it's also better aligned with the way that we run the company. In our Aerospace business, when we'll be adding actually 3 businesses to Aerospace, we'll be adding an electrical connectors business that was housed inside of our electrical products business.
And this business was essentially selling electrical connectors to aerospace customers. And we simply think that's a better way of aligning these businesses with the end markets as opposed to the products themselves. And then we're also going to be adding the filtration and the golf grip businesses into the Aerospace segment. So what you'll have is you'll have a $7,000,000,000 electrical Americas segment, which will be made up of essentially North America, South America, South America, excuse, North America and South America. It will not include the Krausz Hines Or Beeline Businesses.
And then you'll have an electrical global business, which will include Europe, Middle East, Africa, India and Asia, and it will include the Krausz Hine and Beeline businesses. And the reason we're putting Krausz Hine and Beeline into global is that these products are in fact global products that are typically specified and sold globally around the world. And so this is the way we'll be reporting the company beginning this year. Aerospace, as noted, becomes a $3,000,000,000 segment of the company, adds about $1,000,000,000 of revenue. And so this will be something that will certainly help you with as you think about building your models going forward.
And so, you know, while this transformation around Eaton has been going on for a long time, right? And what we're showing you here is a look at what the company looked like back in 20 what the company looks like today in terms of, once again, you know, what the makeup of the company is and where the revenue comes from, where the profit comes from. And I'd say it's been a big transformation. The numbers that I like even better is that when I started with Eaton back in 2000, 58% of the company's profits back in 2000 actually came from vehicle and hydraulics. Today, and that would have left essentially 42% of the company's profitability came from electrical and from aerospace.
And today, 85 percent of our profits and revenue come from electrical and Aerospace. It's all pretty dramatic change in the makeup of the company. And as you think about kind of modeling, you know, who we are on a go forward basis, I think it's represented on this chart very well. And we've obviously done a lot over this period of time. We've expanded margins dramatically up 5.40 basis point.
We've got to the point where we generate $3,000,000,000 a year in free cash flow, and we've done a really, I think, effective job of redeploying capital into these value creating activities in our electrical and aerospace business. So
a point
point view is one way of looking at another way of looking at progress made over time is really looking at what's happened to your margins over time. And this chart is representative of essentially in our 5 year planning periods, how has Eton performed in terms of margins? And what you can see here clearly is that over every 5 year period, our margins have gotten consistently better. So this is a track record that we're proud of, and I would venture to say, this is something that you can expect to see from us over the next 5 year planning horizon as well. We will continue to expand margins as we move forward.
And so that brings us to this chart, which is a pro form a look at Eaton, what Eaton will look like. So you can see post the sale of Hydraulics will be an $18,000,000,000 as I mentioned, 85% of our sales will come from electrical and aerospace. We provided guidance around margins, during the Q1 earnings call, a 40 basis point improvement, and we're not changing that. But what we are telling you is that post 2020, also expect margins to expand by another 200 basis points. And we think the company gets to 20% operating margins over this planning horizon.
And each of our businesses to have margins that are above the average of our peers. And so we think this is a pretty strong story and one that's quite frankly backed up by very detailed plans and a 20 year track record of performance. In our Electrical segment, And what I'd really like to focus on here is, as you think about this new Electrical America segment, the end markets that we participate in, the things that ultimately drive Rev change slightly in this new configuration. So as I mentioned, it's $7,000,000,000 business. It will be very well balanced between the various end markets.
Commercial construction, industrial facilities, utility, data center, and residential. You can see, you know, the pie chart very well represented and very well penetrated in each of these important end markets. It may be helpful also for you to look at it on a historical basis. And on a historical basis, it's essentially 2 thirds of this business will be what we originally called electrical systems and 1 third products. Keep in mind that the lighting business, the $1,700,000,000 of revenue at mining, were actually reported in the Americas.
Lighting was primarily a US based company. Now, as you think about margins, the guidance, for 2020 is get the business of 20%. We think that margin continues to expand in the planning horizon, north of that. And so once again, we think this is a very attractive business of really strong share positions and very attractive margins. Next up is a look at Electrical Systems, the former Electrical Systems And Services business, excuse me, the electrical global business.
And what's different here when you think about it in terms of the end market mix is that because of the addition of the Harsen has this piece of the business Krausz and Beeline, it has a much bigger footprint in industrial facilities. So industrial facilities will be the biggest piece of this segment followed by commercial construction and then data centers, but also a very attractive business. You can see historically the business would have been very well bound between systems and services and products. Margins at the midpoint in 2020 or 17.4%. And once again, margins here continue to expand over the planning horizon getting to some 19% in the out year.
And in Aerospace, the 3rd business that's been resegmented. As I mentioned, you get to a $3,000,000,000 segment now in Aerospace. We think about the business as really a provider of fuel hydraulics, in electrical and conveying systems in the aerospace market, both for aircraft and the engine. And this business, I'd say that, if you think about this historical split, we've always talked about this business being a sixty-forty business 60% OE, 60% aftermarket, 40% aftermarket, 60% on the commercial side and and 40% military. And that split is largely unchanged as you think about modeling this business going forward.
In 2020, margins will be at the midpoint of 20%, down slightly from last year, primarily as a result of the acquisition of Soria, But once again, over the planning horizon, we think those margins continue to grow and get back to a 24% or north over this planning period. In our Vehicle segment, vehicle post the sale of hydraulics will be 13% of the company. We think about this business as really a leader in powertrain solutions and engineer management, very well balanced between light vehicle and commercial vehicles, very well balanced around the world. And this has been a business, quite frankly, I'd say that it has proven that they can deliver attractive returns, in both good times and bad. And certainly, if we think about 2020, North America Class 8 will be down 30%.
And our guidance at the midpoint is at 16% for this business. And so an attractive business with very strong share positions in the markets in which we compete and they've really proven that they can deliver attractive margins certainly through the cycle. It's also an important part of this transition to more electric. As you think about this next segment of e mobility, our presence, with these commercial vehicle customers and light vehicle customers is an important piece of how we're going to grow this next segment of e mobility. E mobility very small segment today, but as we noted, we expect to get this segment to be $2,000,000,000 to $4,000,000,000 over the kind of the planning period here.
And we'll really build this business from our legacy position and relationships with light vehicle customers, commercial customers, At the same time, bringing in technology that we've created in our electrical business. We described the business as essentially power conversion power distribution and power protection for the emerging electric electric vehicle market. And naturally, why margins are depressed this year, and will be for a little while, largely as a function of the heavy investment that's going into this segment. But we do expect it to get 15% return on sales over the planning period. Another thing I think is important to note about this business that's very different than the legacy vehicle business is that this is an asset light business.
Mostly what we do here is we do design, we do we do testing. There's not a lot of heavy capital investment in this business. And so the returns on this business, the profile will be very different than the return profile on the legacy vehicle business. The corporate strategy, while we report the company through these five segments, corporate strategy really is centered around these 3 planks and pillars that really haven't changed. What we're trying to do is really get 3 things.
We're trying to number 1, drive organic growth, through investments in technology, building partnerships and also delivering value to customer We're going to expand margins, in the three elements of, the things that we're driving here, number 1, the Eaton business system. Driving operational excellence on our factories and our functions and really what we call focus on the outliers, which essentially means doing more of those things that add great value and doing less of the things that destroy value. And lastly, like we've done over the years, We need to be very good at allocating capital, investing in businesses that, as well as delivering strong returns to shareholders as well as being a good acquirer and integrator of businesses that we've acquired. So in all three of these elements of the strategy will certainly be supported by the digitalization initiative that's taken place across the just a little bit on digital. Digital for us will actually impact every part of the company.
It's an enormous transformation that's taken place. I recently hired a new Chief Digital Officer, a gentleman by the name of Arvin Yarlagadda. He comes to Eaton, with a really strong background, having done digital transformations in other companies. And so we're really pleased to have them as a member of the organization. And as you can see here, as we think about the way organized to attack digital, it really is through these 4 different pillars.
1, it's about how do we generate internal productivity And that's really a lot of what's going on in the functions inside of our organization. It's about customer facing activities and the way we interact with customers and distributors. It's about factory 4.0 or how do we pull really a digital thread through our factories, including our supply chain And then lastly, how do we create new revenue models to generate growth inside of the company? And I, and I talked about here is that, I often say, in this digital world and the IoT world, it's great to be a company that makes the things. So organic growth, And this is, certainly something that you hear a lot from Uday and Heath about, but I did want to take this opportunity to at least set the stage talk about a few things that really cut across the company in the context of organic growth.
And one, I mentioned the outset. Circular growth trends will really be an opportunity for us to take advantage of some wind at our back in the context of what's going on in growth. And I'd say 3 important growth trains here that I think is important for you to understand. 1 is sustainability. And sustainability, which is really all things about the environment.
It's about safety, it's about the increasing regulations that come with these environmental concerns. And all three of those things will help us generate growth and you'll hear more about that later on. 2nd, it's about increasing the importance of connectivity, in a connected world. And as I noted, we make the things that generate the data. And that's a good place to be.
And now we're working on ways to how we monetize that. And third, everything is becoming more electric, more electrical content in homes and buildings and really in everything that moves. The 3rd trend is also influenced and aided by this energy transition that's taken place in society overall, from new source of energy to everything becoming a grid. And so once again, we think we're in a great position to take advantage of this trend. And against this backdrop, we need to do 6 things as a company or we're investing in 6 things as a company.
And it always will begin with us with where we're investing for innovation and technology and differentiation. At the same time, we won't lose sight of the fact we have to deliver value to our customers, and we're going to participate in increasing value streams that we see today. But we're also finding ways to partner for growth. And you'll see some examples of that in his presentation and things that we're doing to really leverage, partnerships around the world. But also as you think about this integrated energy solutions, which includes more electric includes energy transition.
These are two big things that you'll see covered in detail in both of the sector presentations. We're also investing in connectivity. In fact, that our products generate a rich kind of data stream that we'll find ways to monetize And we're looking at ways of creating new revenue streams. And this is something that you'll see specifically in Uday's presentation as he shares some examples there. So each of these initiatives very much important to what we're trying to do in creating a intelligent power management company for the future.
And just one thing before I leave this particular section of growth, I did want to at least share this pictorial because it represents in many ways what we talk about when we say integrated energy solutions on the prior page. And in this new ecosystem that we're creating, that we're participating in, power generation and power distribution really take on new meanings. Power will no longer only flow from left to right, from those who generate power to those who consume power. In this world, everything is a grid, with both the ability to deliver and to receive power, in this world, the backup power for your home in the event of a power outage, it'll be your car. So in this world, I'd say it does require it will require new solutions.
And if you think about what Eaton is doing to participate in this, we're making Things. We're making them intelligent. We're making sure that we connect them to the grid. We're making sure that they're cyber secure. And then from that, we're creating new business models around how we monetize the data that comes up for our devices.
So I think this is going to be an interesting evolution that takes place and Eaton is extraordinarily well positioned to participate in this new value chain. And now let me turn your attention one second to talk a little bit about the things that we're doing to expand margins. And I'd say here, expand margins is not because we don't make attractive margins today. We do in many of our businesses. I'd say make attractive margins here today because we know we can be better.
We see waste. We see the inefficiencies. And we owe it to ourselves and we owe it to you to, to get all that waste and inefficiency out of the system. And so this is really what this particular piece of expanding margins is all about. When you think about expanding margins, we begin with the belief that says waste is not acceptable.
And waste anything that doesn't add value from a shareholder perspective. And we believe strongly that if you standardize what you do, And if you standardize what you measure, you'll have an ability to both identify and eliminate waste. But it also requires a culture inside of our company that is relentlessly focused on learning and getting better. And that's really what the business system is all about side of our company. It's the way we plan.
It's the way we execute. It's the way we assess. It's the way we document learning inside the company and it's the way we improve. It's simply the way we work inside of eating it. So it's an important piece of our formula for expanding margins.
Another important part of how we expand margins is really around operational excellence in our factories. And if you went to an Eaton factory today, you see that every one of our factories are measuring the same things. They're measuring safety, they're measuring quality, they're measuring on time delivery, they're measuring productivity, in the measuring inventory levels. That's the way we define world class. And what you'd also see is what they're committed to do in the in the current year measured against what world class looks like in their industry.
So this idea of what you measure And what you drive the organization to is an important piece of, of what we hold our businesses accountable for. But we also hold our functions accountable to the same level of improvement. Our functions today are tasked with taking on work on behalf of our businesses, standing up centers of excellence around the world. Doing work in the back rooms, doing it better, and doing it at a lower cost than our businesses could do on their So this strategy of centers of excellence is really one of the places that we're really driving value in the functions inside of the company. And then on slide 30, the other the 3rd leg of this particular margin expansion story, and I would tell you that for me, perhaps my favorite chart in the presentation.
It really represents how we run the company. It's the simple idea of recognizing it there are high value and low value activities in every business and that every business is a normal distribution. There are places where you have essentially great margins, a great value proposition, great distribution and the right to win. And you ought to pivot and do more of that stuff. By contrast, in every business, there are places today that are consuming more of your time and resources, then they'll ever return.
And you ought to find a way to either improve those returns or step out of those activities. And so this idea of saying every business has a head and a tail, you know, in every business is a collection of things that we do well and don't do well. And really being much more focused around where and how we spend our time is a really important part of our formula of how we continue to expand margins. And print the things that really led us to make the decisions to step out of the businesses that we stepped out of during the course of 2019 and here in the early part of 2020. Really more broadly over our history of the company.
And so we'll continue to do more of this and expand margins. And the third negative strategy obviously is around how we allocate as I mentioned, the balance sheet is in great shape. It's never been better. You know, we don't have big debt to repay. Our pension plans are are essentially, you know, well funded.
And so we will generate a lot of cash over the next number of years and being good at the way we allocate capital is an important piece of what we have to do. And in that context, we've said, here are priorities, and they haven't changed. Number 1, we have to invest in every one of our businesses, giving them the capital that they need to be successful in the markets in which they compete. Organic growth is an important piece of the formula, and we need to capital to give them the capital to do that. Secondly, you said that we're going to continue to return cash to shareholders, the dividend that will continue to be in the top quartile, we'll buy back 1 to 2% of our shares every year And clearly, we'll have capacity left over to be back in the M and A market in a more meaningful way.
And the priorities continue to be We're going to focus on aerospace, and we're going to focus on electrical. So in this context to say, based upon what I've said and what you're going to hear later today from the following speakers, what can you expect from Eaton over the next 5 years? Well, we've already shared our guidance for 2020. Clearly, Rick will share some of the details on this, given the COVID-nineteen event, Q1 will likely be a little light and we're still really assessing what the year is going to look like overall. But I'd say, no broadly speaking, if you think about the next 5 years, the planning horizons that we typically got bringing, you can expect us to grow organically by 2% to 3% You can expect us to deliver 20 percent margins.
You can expect us to generate $3,000,000,000 of cash a year, and you can expect us to deliver 8% to 10% EPS growth. So we think it's a strong set of numbers in what's clearly a slow growth economic environment. And then lastly, if I can just stop and close with where I begin, we're building an intelligent power management company. All four of our businesses are leaders in their respective markets. They're strong on their own, but they're certainly better as a part of our company.
We continue to work the portfolio. We're building a better company, a company that is going to grow faster a company that's going to have higher margins and a company that's going to deliver more consistency of earnings over time. There are a number of secular growth trends that are really helping our businesses. We have some wind at our back. In addition to that, we're making big investments in organic growth.
Our cash flow is strong today and our cash flow will continue to be strong. We think that's one of the real undervalued and underappreciated assets of our company. In good times and bad, we generate extraordinary free cash flow, which gives us the opportunity to redeploy that cash in things like buying back shares and periods in which we have economic weakness. And then lastly, we're going to deliver EPS growth. And I think you, as you think about that commitment, I'd say it's backed up by number 1, a very strong track of a company has delivered for the last 20 years.
It's backed up by what we think is a very strong strategy and it's certainly backed up by a leadership team that is committed to getting it done. So with those comments, I'll turn it over to Rick Fearon. Thank you.
Thanks, Craig. In my presentation today, I'm gonna take you through highlights of our recent financial performance and then delve into some aspects of our 2020 guidance, including, I'll talk about, the coronavirus and, in, at least, what we estimate the impact is going to be in Q1. I'd like to leave you hopefully with with the 6 messages through this presentation. First of all, the 2019 was a very strong year for us on many dimensions, particularly on operating and free cash flow. Secondly, in 2020, our margins are going to improve yet again.
It's the 4th year that we've seen a significant improvement in margins. And that's a combination of self help efforts that we've engaged in as well as the significant portfolio changes that Craig talked about. 3rd, earnings per share we anticipate in 2020 are going to be flat and that's despite, the dilution from, the various divestitures, as well as, let's face it relatively sluggish markets. That may become even slightly more sluggish in dealing with this coronavirus. 4th, our business generates consistently strong cash flow and it's relatively invariant to downturns.
And I'll show you some data to back that up. Which in my mind is a characteristic of a very strong business profile. 5th, we expect to get to return $3,600,000,000 to $4,000,000,000 to the shareholders this year. That's after returning $2,200,000,000 in 2019, and evidence of our strong commitment to ensuring that we directly benefit shareholders each year. And then lastly, if you look at our TSR last year, it was 43%.
If you look at it over the last 20 years, so in other words, the beginning of 2000 to the end of 2019, it was 12.5%. And, and so over such a long period of time, I would submit that That's a really outstanding record, and I'll compare that to our peers in a few slides. A few highlights 4 of the records that we set during 2019. If you look at our adjusted segment margins, when I say adjusted, we're just taking out 2 things: acquisition and divestiture costs, as well as that, warranty charge that we talked about in our Q4 call that relates to a component from a supplier that, that had a defect in it. Take out those 2 things, our segment margins, 17.6%, our EBIT margins, 14.4%, and record EPS of 5.76, up 7% compared to the prior year.
Record cash flow generation, 2,900,000,000 free cash flow, 3,500,000,000 operating cash flow and 13.4 percent of sales, free cash flow to sales, and that also is a record for us. We returned, as I mentioned, $2,200,000,000 to our shareholders during the year, $1,200,000,000 in dividends, $1,000,000,000 in share repurchases, So that's a 3% dividend yield, as well as buying back 3% of the shares that were outstanding at the start of 2019. And we made all of those significant portfolio changes. 1,200,000,000 for the 3 acquisitions we completed in 2019. And then subsequent to 2019, we completed an additional acquisition, that of PDI, And we also closed on a new joint venture, each in Arabia that brings our electrical business into Saudi Arabia in a much bigger way, which while oil prices may right now be struggling a little bit over the long haul without a doubt, Saudi Arabia is still going to be a major factor.
In the world oil markets. And importantly, we exited lighting as of today. We exited automotive fluid conveyance at the end of last year, and hydraulics, we think will be very much towards the end of this year. So a year of records and a year of significant portfolio change, If you look at our total shareholder return, these are the data, and these just to orient you there. 1 year TSR is the TSR for the calendar 2019.
3 year TSR is the TSR for 2017, 2018, 2019. And then 20 year is starting, 11, 2000 all the way through the end of 'nineteen. And so if you look at this, you'll see We had a 43% TSR last year. That compares to 38% for the median of the peers that we compare ourselves to. I put those at the bottom the same ones in our proxy, and then 31.5% for the S and P 500.
If you look on the 3 year TSR, we were at 16 percent, the median peer was at 14% and the S and P was at 15%. And then if you look at a 20 year period, which is a pretty long period. Let's face it, to generate this consistent performance. We had a 12.5% return the median peer was 11% and the S and P 500 was 6%. So I would submit that those by anybody's reckoning are quite exceptional returns.
Turning to 2020, it's always helpful to start with a perspective on what we think is going to happen in the world economy. And so as of Wednesday of last week, this was our perspective. And, you do have to watch CNBC every day to make sure that things aren't, changing too rapidly. But let me just walk you through this, going clockwise around. First of all, global GDP, we think will be a 2.3% growth this year.
Now that is the slowest rate of growth since 2009. And it's a reflection of the fact that many economies like the U. S. Are very late in this economic cycle, having expanded for about 10 years. We still have trade issues that are impeding the free flow of goods, the way they they had traded around the year, the world before the trade war.
And in fact, If you look at growth in World Trade last year, it was quite modest because of the trade wars. We still have uncertainties related to the U. S. Election related to Brexit, and there has been a follow on effect from the trade wars that has constrained business investment. You see that in the U S, certainly, and you have seen it in other parts of the world.
And all of that is going to lead in our view to manufacturing, IP, industrial production growing at 1.2%, again, quite a subdued rate of growth. If you turn to and manufacturing IP. And it's really sort of a tale of 2 cities in Europe. The consumer and construction areas are doing quite fine. And in fact, if you look at construction growth in Europe last year, it was 5%.
Some of that's pent up demand, some of it stimulus from low interest rates and fiscal policies, but nonetheless, consumers and construction are doing fine in Europe. And it's really on the industrial side where we're seeing struggles, automotive, for example, business investment, and particularly in Germany, given it large export orientation. If you look at China, 5.7% GDP, 4.9% manufacturing IP, clearly, they're struggling to get activity levels moving faster in light of what has so far with the coronavirus. It's our view that they will achieve that. It's our view that they will put in sufficient stimulus, both fiscal and monetary to to hit these goals is very much an important part of the longer term goals that they've been driving for.
India. India was a disappointment growth wise last year. And we think this year are more of the same. India is dealing with several issues, is dealing with, frankly, a banking finance crisis that has constrained the ability to borrow money in so many areas. It's still dealing with the after effects of demonetization some of the other governmental policy changes.
And, and so if you look at that 1% manufacturing growth in India, this year, That's the lowest growth of manufacturing since 2009. Brazil, it'll be a reasonable year for Brazil with growth around 2% for both of, GDP and manufacturing IP and And it's really a tale of the domestic economy is accelerating, very low interest rates. In fact, the lowest interest rates in Brazil's history. Fiscal stimulus, a move by the Bolsonaro government to reduce regulations in many areas What's constraining them a little bit though is one of their major export markets, Argentina is in a very steep recession. And that's causing, export demand to fall fairly dramatically in Brazil.
And then lastly in the U. S, a year of subpar or sub trend GDP growth, driven by just the length of the cycle, but also business investment being Tepex still issue around trade disputes. But the consumer, very strong. Consumer and construction look at home building, we think it'll be a strong year on the consumer side. It's more on the business side that you're going to see some weakness.
So how does that impact our specific markets. What I'm showing you here is the key market drivers buy the new segmentation. So if you'll reflect back on our fourth quarter call, we showed it to you by our prior segmentation. So this is the way it's going to look. Going forward.
So if you look at Electrical America's 1% to 3% growth this year, the strongest parts are going to be in residential. You probably noticed that housing starts in December January, 1,600,000 housing starts, the highest since 2006, and in addition to the strong housing starts, which we think has legs to it given that we clearly have have not built in of housing in certain parts of the country. In addition to that, you've got regulatory changes that are forcing home builders to put in more sophisticated electrical breakers and other safety equipment. And that has been a significant, market. Utilities, we think we'll grow low single digits, and that's a function really of grid modernization, modernization, as well as some of these natural disasters in California and other places where they're needing to make the grid safer and more reliable.
Data Center markets of low single digits, a little bit less than last year, but we think that's really just a function of So much capacity has been put in in the last couple of years that there's a little bit of catch up going on now to light up that additional capacity that's already in the ground. On the commercial side, relatively flat, the strongest parts are going to be institutional things like educational and health care, on the office side, reasonable growth in office, and the weakest part will be in retail. And then, industrial market should see a modest decline. If you look at electrical global, 0% to 2% growth If you think back to what I just showed you around the world, it's understandable why the growth is less, for electrical global. And the pattern though is slightly different but not markedly different.
On the commercial side, good conditions in EMEA, I mentioned how strong construction has been. And Also in APAC, if you look at China construction data, it has been relatively strong and will we believe get stronger as stimulus is added to the system. Data Centers, low single digit growth, much the same as in the Americas, industrial markets, same reasons for the decline. And then because we have, Crouse Hinds in our oil and gas and harsh and hazardous in, electrical global, here's a comment on that. And those markets are likely to decline principally because of the depressed conditions in the oil field.
Aerospace, 1% to 3 on our call, we said 2% to 4%, but that's before we added the other businesses that have growth that is less than that in aerospace. So that's why it comes down to 1% to 3%. And this is going to see the strongest growth in the military side. For example, the F-thirty 5 in 2017 2018 output grew by 40% in 2019 grew by 50%. So you've got very strong growth in military fighters.
Commercial aftermarket supported by older aircraft in Houston, while the slowdown of travel in China is clearly not a positive, China, because of its prevalence of relatively new equipment has never been a huge aftermarket You know, it's an important and growing aftermarket, but it's never been, it currently is not a huge aftermarket. And so it isn't going to impact us as much as you might think. And then on the commercial OEM side, you all know about the Max, you know about the Dreamliner, the production by 21 will be down about 30% from 2019 levels. Vehicle growth in Brazil tempered a little bit by the Argentine situation, The internal combustion markets, we think will be down low single digits, actually not down too much in the U. S.
And Europe, down hardest in Asia in India and China. And then of course, the Class 8 market, we've talked about this many times, down to 2:30, about 30% decline. But frankly, 2:30 is not a bad level of activity. And so, we're going through a normal correct and or really just a return back towards a more normal level of activity compared to what it was last year. E mobility, double digit EV growth being offset by the slight decline in the internal combustion market.
And the internal combustion part of e mobility is still about 70% of our sales in e HD. And then lastly, hydraulics, it will be a segment this year. And it's just the hydraulics business. We pulled everything else out of it and this is what we expect to see. Some strength in China construction.
I don't know whether you focused on per Chinese regulations, they have to move to the, to the engine 4 regime starting in 'twenty one. And so there will be a little pre buy of construction equipment in China this year. We think inventories elsewhere probably have stabilized, but you're still going to see some end market weakness And I think you'll see that in the rental fleets, for example. This shows you the progress we made on segment margins. Craig showed you in 5 year blocks.
This just shows you for the last 5 years, what progress we made. And it's been quite dramatic. I mean, from 15% margins and 2015 'sixteen, we improved 80 basis points in 'seventeen, because it's 100 basis points in 'eighteen, another 80 basis points in 'nineteen to get to 17.6%. And then if you If you do a pro form a taking all of lighting and hydraulics out for 2020, you're going to end up at 19% margins in 2020. So this is dramatic improvement in our margins.
And how have we gotten there? Well, on the right hand side, you see all of the programs we've put in place operational excellence, productivity, grow they had fixed the tail, We've invested $6,000,000,000 in R and D in CapEx. We spent $550,000,000 on restructuring and all of these portfolio changes that Craig mentioned in his, earlier talk. These then are the margins under the new segmentation. And we in the appendix, to this book, we have America is going to have a margin around 20%, electrical global, it's going to be a little less, than electrical Americas, and it's just a function of the mix that is within that segment, but it's still going to be in the mid-17s.
Aerospace is going to be about 23% margin. Vehicle about 16%. E mobility quite suppressed because we're investing heavily on these new programs, putting R and D dollars in. And actually, we're also incurring some manufacturing startup costs as we begin early on some of the wins that we've had. We, as we've noted in several forums, we have, you know, won a very considerable number of new projects and Heath will take you through the details of that in his presentation.
And then Hydraulics is going to be in in the 11s. And so that's how you get to this, essentially 18% margin. If you think about broadly what's happening in 2020, it's a pretty simple story. You've got divestitures that are causing a reduction of income and a higher tax rate, slightly higher tax rate. The combination of those as reducing EPS by about $0.35, and we're offsetting that by acquisitions and share repurchases, the $2,400,000,000 to $2,800,000,000 of share repurchases.
That we're planning on. And as Craig mentioned, we are actively involved in the share repurchases. Well, no one likes to see his or her share price decline. If you're buying shares back. It's got a little bit of a silver lining in it.
So we are certainly, taking advantage of these weaker prices. Each and strong cash flow is, I think, sometimes underappreciated when people just look at GAAP EPS numbers. And given the very large number of acquisitions that we've done, and that has of course created a fair amount of intangibles that we have amortize on an annual basis. On the left here, you see cash EPS. So There's about $0.75 of intangibles.
This is the after tax impact of the intangible amortization So if you look at cash EPS in 2019, it's about $6.5. And so then if you were to use that number as opposed to the GAAP EPS and create a PE, you essentially get 2 turns of extra PE by using cash EPS. And if you look at our growth and free cash flow, it's grown at 12% over this 5 year period. So, you know, that's a quite a quite a rapid rate of growth. This slide gives you a few more key barometers of how successful a company is performing.
And if you look at free cash flow over there on the left, from $1,900,000,000 in 2015, we generated $2,900,000,000 in 20 19. So that's a 1,000,000,000 dollars increase in free cash flow over this time period. As a percentage of net income, the so called cash conversion ratio 130% last year, and we believe it will be very close to that this year. And again, that's evidence that the the EPS that you're generating is very much supported by the true cash generation of the business. And then free cash flow as a percentage of sales, 13.4% last year, we think it'll be over 14% this year.
So strong cash generation. Now I mentioned that if you look at our history, Eton has consistently generated strong cash flow. Despite changing market conditions. So this shows you starting in 2013 up to present and the line charge shows you the the growth in our end markets has best we can measure them. And clearly in 2015 2016, we have negative end markets, in 'nineteen, it was positive, but only to the tune of 1% to 1.5%.
And despite the changing markets, our cash flow steadily grown over this time period and of course, a very considerable growth in 2019. So we think that this is a very characteristic of our businesses. And this allows us to consistently take strong cash flow and reinvest in our businesses, return it to shareholders find value creating acquisitions. In fact, if you look at 20212022, we expect to have $12,000,000,000 available to spend. So that's free cash flow of $8,000,000,000 proceeds from These two sales, the lighting sale, 1,400,000,000 dollars, $1,340,000,000 after we pay taxes, and the sale of hydraulics will after tax generate $2,850,000,000.
So that's a little more than $4,000,000,000. So $12,000,000,000 to spend. And on the right, I just gave you our general view as to how we're going to be spending our cash flow. This is a little broader set of cash than on the left because it's essentially operating cash flow before R&D. And so what we're saying is where are those are that is the money we're investing.
And so this shows you that we're spreading it around about a quarter to R&D And CapEx, a quarter to dividends, a quarter to share repurchase. And then we've got another quarter that's totally open for acquisitions or should we decide to, sample. So a lot of cash out $12,000,000,000 in CapEx and R and D. So it's $1,200,000,000 a year, obviously. And if you think about it going forward, we this is our general model that will spend 5.5% to 6%, 3% in R And D, 2.5% to 3% in CapEx.
And that'll vary year by year. Now we think we spend this very efficiently and perhaps more efficiently than some of our peers. We have 40% of our engineers are in low cost countries. We've set up these centers in many locations, taking advantage of particularly deep expertise in a given marketplace and also what can be an attractive set of salaries and given places. And we think we're quite productive.
We generate over 1000 new patents a year, over 1000 patents. So we do have a very a ever growing, catalog of patents that we deploy, to better solve our customers' problems and frankly to improve our margins in many cases. Commenting on our dividend, it has been a philosophy of Eaton that paying a robust dividend is a commitment that we make to you, our shareholders. And we recommit to that commitment. If you look at our dividend per share growth over the last 10 years, it's grown on average.
10% a year. In 2019, it grew at 8% 2020. We increased it just last week at 3%. So you will see us continue to grow our dividend in line with our earnings growth. In our dividend yield, as of last week was 3 percent dividend yield, so a top quartile amongst our peers.
And the way we look at it is, in addition to being a commitment to our shareholders, this is money that the shareholders can reliably get, I mean, we in our history have never lowered our dividend and we've paid a dividend since 1926. So it's almost 100 years of dividend payments. And we feel that in times of turmoil, it's a great comfort to shareholders to have a high high dividend payout. In terms of share repurchases, we're stepping it up dramatically this year, as you can see from chart, we expect to be buying back somewhere between 6% 7% of our shares, this year. If you look back at what we've already done 2014 to 2019, we have bought back 16 percent of our shares at 74,000,000 shares.
Over that time period. And obviously, if we buy back, let's say, 7% of our shares this year, then in the period 14 to 20, we will have bought back almost a quarter of our shares. We think that's a smart thing to do for our shareholders. We, have a good record at buying at Lowe's and we actively manage this program on a day in, day out basis. So this year, we're expecting to buy $2,400,000,000 to $2,800,000,000.
Longer term, it's been our strategy to buy 1% to 2% back. But in periods of either exceptional weakness and share price or where we have a large quantity of capital that we can't readily redeploy into acquisitions, then you'll see us buyback more like we're doing this year. Now just to remind everybody, we have a quite disciplined M and A process. We're a great believer that the Eaton business system applies to not only running businesses that applies to buying businesses and integrating businesses. And that is what has allowed us to avoid the kinds of problems some people have gotten into we have never had an impairment related to an acquisition.
I mean, there aren't that many companies that can say that. And, and, so here's our approach. We decide on the areas of focus, in our we think those areas are electrical, aerospace and e mobility, And we're looking for technologies, geographic expansion, in other words, going into areas that we're not now in or where our presence is not as deep as we would like. Product gaps rounding out our portfolio as broad a set of products as we have, And if you look at, components that we have in our catalog, it's in the millions. You look at finished products, It's about 400,000 finished products.
Despite all that, there are product lines that we still don't have. And so we look to add those product lines. This innovative switchgear we did last year is a good example of that, a very specialty kind of underwater, underground type switchgear. And then channel coverage to expand our channel coverage to deepen our connection to our distribution. So that's area of focus.
And as we go through our planning, we look out and say, what kinds of companies would be additive to our strategy? And And when I say additive to our strategy, that's what the middle column deals with. What are the strategic criteria that we are after when we look at an acquisition. Well, 1st of all, we're looking for leaders in a key marketer region. We're looking for attractive opportunities for growth and profitability 3rd proprietary content, very critical because we aren't a maker of commoditized type equipment.
And then Lastly, alignment with secular growth drivers that have legs that we believe will propel the business forward over a period of time. But I always say a business to be attractive to buy has to be strategically attractive and financially attractive. This idea that is strategic, but don't worry, it'll make money, maybe at some point, we're not sure how, that just doesn't work for us. Because too often it doesn't make money. And so these are our financial criteria.
We target minimum returns 100 basis points over our cost of capital. We regard that as 8% to 9% cost of capital. Earnings per share accretive after 2 years. And an ability to drive sustainable top and bottom line synergies. And we generally are pretty skeptical of top line synergies, although in certain circumstance, for example, in Cooper, we convinced ourselves there were some, significant top line synergies and indeed they came about, but we're We're always very skeptical and want to make sure that that's a realistic state of affairs.
And so this just shows you the statistics on how active we've been. So in the since 2000, we've done 71 acquisitions. We've done 50 divestitures just since 2019, 5 acquisitions and JVs, and 3 divestitures. So we are getting back into that kind of active portfolio change mode. And and, you're seeing the benefits of it in our financials.
These were the 3 most significant, acquisitions, and that's why I'm not showing you, the 4th acquisition and the other JV. But Sorio Sunbanycarson has a disconnectors for aerospace, but we think that also has applicability into lots of areas within electrical and we're excited to take advantage of that plants in many different locations around the world. And these, again, are harsh and hazardous. So these are very specialized type connectors. In Turkey, we mentioned that last year at our meeting, that transaction has so far worked well.
We are, working through the integration plan and have not seen any real bumps in the road so far. Turkey and Indonesia and then PDI, which we just closed, within the last couple of weeks, and plants in Virginia and California, it rounds out an offering in data centers. Now our free cash flow generation, which is So very strong, as I just talked about, outpaces that of our electrical and multi industry peers. And on almost any way you would look at it. So here I've just shown you 4 perspectives.
1 is free cash flow margin and you see we're above the median and free cash flow margin. If you look at to the right, free cash flow conversion, we have one of the highest free cash flow conversions and the top quartile amongst electrical and multi peers. Free cash flow, per share growth And you see at the bottom right, again, being the top 3rd of that. And then if you look at free cash flow yield, we'd be in the top quartile there. And so all of this strong cash generation has not yet caused our multiple to catch up with our peers.
So I would suggest an opportunity that you would think over time, you know, very logically, if you generate that kind of cash flow, you would have a multiple that's very much in line, if not higher than the peers. But if we just were to get to the peers, that would be a $15 So, we think there is definitely a strong case for, for share price improvement. Now let me talk about Q1. I mean, it's clearly being impacted by the coronavirus. I don't think any global business could could say otherwise.
And we think at this point for Q1, the biggest impact on us is going to be sales within China. We don't think there's going to be much impact on sales outside China, in Q1, and of course, we'll see how the virus expands in the states, whether we have quarantines and things like that, that obviously could have an impact on sales later. But at this point, I think it's too uncertain to really call anything beyond Q1. And so Here's how we've sized it up. We have eaten sales to China customers, each month of about $100,000,000.
And if you think about the quarantines in effect in China and the decline in new business investment that we've seen so far, we expect to see a sales shortfall. I mean, did you give you an example of what what is happening in China. You may have seen this for the 1st 2 weeks of February in China. The, China automotive association forecast that automotive sales were down 95% for the 1st 2 weeks in February. And their estimate for all of February, they'll be down 80%.
Okay. Well, that obviously impacts us. We sell parts that go into the automotive arena. And so As we look at the likely impact on us and it does take a little bit of, of guesswork, it's very hard to know exactly how things come back in March, because frankly, our factories have come back a little faster in March than we had expected. And so that's good news.
I mean, we have, the workforce has grown larger than we thought it might, at this point. But our view right now is that probably the impact on us will be a reduction in EPS of about $0.10 in Q1. That's our best guess due to this reduction in sales in China. Now We also think that it's most likely that those sales will get caught up as you go through the rest of the year, partly because you'll have had pent up demand of consumers and partly because the Chinese government is clearly going to take fairly significant efforts to restimulate the economy. And just having observed this these re stimulation efforts over the years, we think that they will probably be successful in doing so.
As I mentioned, we don't expect sales outside China in Q1 really to be impacted in any, any material way. So this is our full back to the full year. Obviously, we are going to watch this closely to see what the impact of the coronavirus is as it rolls out beyond China. But just to reiterate, $560,000,000 to $590,000,000 adjusted EPS, and that's flat with 2019, essentially flat organic revenue. We've got 2% acquisition growth, but 7 point percent reduction due to divestitures.
You've got margins at, center around 18%. A tax rate that's just slightly higher than in 2019. And cash flow that's very much like 2019. So $3,400,000,000 to $3,600,000,000 operating cash flow, 2,800,000,000 to 3,000,000,000 free cash flow, CapEx, 550,000,000, and then I mentioned the share repurchase target. So just to close, bring you back to the key messages.
2019 was a strong year on so many dimensions, particularly cash flow. 2020 is going to see stronger margins and going to see EPS flat despite, having done several things that normally would have reduced EPS. Our cash flow, we believe you are likely to see continue to strongly grow over the next several years. We will use it to return substantial funds to shareholders. And we're proud of our TSR record and we believe that, the actions that we're taking should propel that same kind of momentum into the next 5 years.
So with that, I'm going to turn it over to Uday to, to give you a discussion of electrical
Thanks.
Hey. Good morning. It's, good to see you all again. It's just hard to believe, much has changed in the last 2 years? I certainly didn't expect to be standing here, sharing with you the direction of the electrical sector But, you know, over the last, 7 years or 7 months or so, I spent time around the world meeting our customers, spending high quality time with our teams around the world.
And you know, I'm more convinced than ever that with the right company at the right time, to succeed in this very changing industry, and that's why we're energized to share 4 key messages with you today. Now first, we have a leading electrical franchise with broad capabilities. And, you know, we've We're delivering strong market and financial results coming off a strong 2019. 2nd, our base business is vibrant and has strong potential for future growth. And we define it in Eaton as everything as a grid.
And I'll share why and what that means later on in the presentation. And then finally, our digital foundation, we've taken a different approach to building a digital platform. We built our software for the future, not the past, and you'll hear how this will enable energy transition and also new business models. So let's start with industry leadership. Now we have a track record of delivering innovative solutions to the market.
And we've built a strong set of capabilities across the entire value chain. And this has really positioned us quite uniquely to shape the future strongly positioned in the most dynamic and fastest growing part of the electrical power value chain Let me show you how this has historically worked starting on the left hand side of this screen. So power is generated instantly, by the utilities, when you switch on your lights at home, your computer, or the factory switches on a machine, it's transmitted through the power lines at the speed of light to the consumers of electrical power on the right side of the screen. And that's where we come in. It's our primary area of focus We pick up the power flow from the utility and ensure that it's distributed to you safely, reliably, and efficiently.
Now traditionally, power has flowed one way, as Craig mentioned, from left to right, but this is now changing dramatically. And this fairly radical transformation that's upon us impacts our primary area of focus actually creating new growth opportunities. So our capabilities are essential to delivering electrical power both today and in the future. And here's our capability chart. At the core, we have decades of technology innovation linked to ARC Science, Power Electronics And Material Science.
So ARC Science is as important today as it was when electricity was invented and power electronics is changing the future. Now these product capabilities are augmented by on the top right, our end to end services for lifecycle management, deep regional application expertise for local speed, and then an integrated digital platform that we'll talk more about. And then finally, our strong, impressive network of channel partners In many ways, the secret sauce behind our ability to win in the marketplace. And that's how we deliver value to our core market segments. So we've built our capabilities and expanded through acquisitions and partnerships.
It's a deliberate strategy that we've delivered in stages, and we started, as you know, as a U. S. Power distribution business, Then we moved into the global power quality and data center market entering a new high growth segment followed by the geographic expansion into Asia and Europe Then obviously, we built scale with Cooper, but also added a lot of capabilities along the value chain. And most recently, we've extended our capabilities with 3 acquisitions and a joint venture. So we've achieved our leadership position by building capabilities through acquisitions and also by investing organically churning out a number of industry first If you look at the blue area on the left, we've established a leading service business.
We've been strong on advanced product innovation, and we've created powerful, biblical centers of excellence. And all this has led over time to many industry first that you see on the right, including intelligent products for different market segments which underpins our digital strategy. Now Craig talked about it earlier, we made the things and those intelligent products of the foundation for our digital strategy. Now this strategy has led to profitable growth And as you can see, our revenue has expanded six times over the last 2 decades and operating profit has improved increased by a factor of 2.5 to a respectable 18% along with market share gains. Look, we know you see a lot of data from a lot of companies and that's why we want to share the context of this chart with you.
The sources we have on this chart are from recognized, recognized third parties, So on the left for products that we supply to the NEEMO markets over the last 8 years Our share has progressively grown from 26.5 percent to 30 percent to 3.5 points On the right hand side we've grown our global IT channel share in all regions in in China with a recognized leader at 35% and actually we've almost doubled our share in Europe and in the U. S. So moving to future growth, both the secular trends and the targets. It's very clear that our world is changing dramatically. Driven by decarbonization, the decentralization of power generation, the proliferation of data, and increased compute power.
And these trends play right And here's why. 1st, electrical demand, we see more electrification within buildings, electric vehicle demand is increasing, and the data growth and compute power that I mentioned earlier growing significantly as well. 2nd, a decentralized supply of electricity is becoming more common. It will be renewable in fact 50% will come from non carbon sources in the future which also drives the need for The infrastructure requirements are going to increase. So decentralized supply and the renewables I talked about create more stress on the system, as do weather events.
And this could lead to more outages and then cyber security breaches are creating a lot of vulnerability. Now all these secular trends create strong future growth potential for Eaton linked to 2 areas: 1st, the power infrastructure or grid modernization that Rick referred to, and second, the seismic transformation expansion is the core of what we do today. And number 2 will result in the growth due to energy transition and digital solutions. Now I wanna put this in perspective. So our ambition is to target a 50% increase in revenue over the next 5 years half from organic growth and half from acquisitions.
Clearly, these are very aggressive organic outgrowth targets. So I'm going to spend to that rest of today talking through what we think drives these numbers. So it starts with base business expansion. There are 4 drivers, safety and particularly safety code changes taking place, the resilience of the grid, the data growth and building electrification, and I'll break each of these down for you. First, our safety solutions portfolio, now delivering safe electrical power has been at the core of Eaton forever.
So we see revenue growth driven by code enhancements and changing customer preference, and there are 2 drivers First, there's a heightened focus to prevent fires around the globe from California to Australia Anything utilities are actually high percent of about anything that can cause a fire. And so utility budgets are being reprioritized. 2nd, new codes have been developed to address building fires caused by electrical faults. And the 2020 code requires smart products to prevent fires, fire hazards and buildings, and in 2023, more codes are actually going to kick in and all of this will drive more growth for Eaton. So residences are adopting our sophisticated art fault and ground fault breakers, for example, supporting this new code.
And just to give you a sense, this increases the value versus traditional products by a factor of 9 because of the sophistication of these particular products. Similarly, in utilities, they're adopting our advanced fuses to prevent fire damage and we're provide what we're providing today is generating 3 times the value of the traditional technology. And then we have tailored solutions to support the electrical power value chains resilience. Whether events, as you know, are causing costly damage, A aging infrastructure is leading to more downtime and expensive repairs. So our solutions are designed to help recover quickly when an outage occurs and minimize 2 things: the wider impact of the outage and the cost.
And so for example, just one example, our cyber secure reclosers identify a power problem and they reroute power. This contains the impact We are protecting the more re closers we have to put in place and therefore, again, more revenue for Eden. Now a large part of our business, as you know, is, is linked to the rapid growth of data, and data centers. Hyperscale data centers are expanding and their needs for energy efficiency, the optimization of space, and project speed are climbing, And our latest product developments and acquisitions support these trends again creating new growth opportunities. We've designed new switchboards to reduce their footprint and our overhead infrastructure supports new design approaches for data centers.
And then finally, most of us know that buildings are one of the largest consumers of energy in the world. So reaching these climate goals requires a further electrification of buildings moving away from fossil fuel based, fossil fuels such as natural gas. And this transition will take place in developed and developing economies at different rates. So our products again are ready design and ready for this transition. So now let's talk about energy transition or as we define it in Eaton and as Craig mentioned, everything as a grid.
We're moving to a world where electrical power is no longer just generated centrally, but locally at any location. Think of it as energy generation and supply democratized. So everything is a grid. Your resident is a grid. This hotel is a grid, a manufacturing plant is a grid, and a data center is a grid.
So how will this work? So let me show you how energy transition is changing the power value chain to create an everything as a grid environment. First from the left, the traditional power generation sources, they're being replaced almost every year in the US and globally renewable adoption is actually on the increase. Now if you move to the right side of this chart, in the past, you've been a consumer of energy. Now you're becoming both a producer and a consumer of energy, what's commonly known in the industry as a prosumer.
You produce your own energy, you consume your own energy, or you sell your energy back to the grid. So this is everything as a grid and how the future is going to play out. And two things are going on here. One is a production of energy locally, and the electrical power flow is no longer one one way. It's now multidirectional.
So this results in a vast network of producers and consumers all connected to this everything as a grid distribution system, very different from the past, and the bottom of this chart shows how we benefit. First, the need for storage and specialized infrastructure like EV charging will increase, and I'll share some examples of that shortly. The traditional electrical power infrastructure in this environment has to be upgraded to support this change. And then our software and services are needed to optimize all of this. And so we are actively engaged in this everything as a grid environment today.
So let me bring this to life for you. So here's an example of a building as a grid. The Catholic University of Lille in France were helping the university on its journey to 0 carbon emissions. And their goal is to reach 0 carbon by 2035. And so before I get into what we did, I'd like to give you some context this university had already installed solar panels in this historic building that you see in the picture here.
But they weren't consuming all the energy that they were producing, and they were selling it back to the grid at much unattractive rates or lower economical rates. So they decided to store this energy and use it for electric vehicle charging. And as we all know, solar energy is intermittent, so they wouldn't always have the energy when they needed it, and therefore, they needed storage And that's one of the reasons they came to us. So our project Sorry, our project was to help the university optimize the use of electric vehicle charging with the building acting as a grid. And they chose us for a number of reasons.
1, we provided the storage for the solution they needed. That was the core, that everything that we do in our solution is scalable. That's a really important element of our design, scalable as their needs started to increase. 3rd, we provided the flexibility to integrate in existing existing infrastructure. And that was a huge factor in their decision.
Can you find a company that is going to integrate with what we have today in a brownfield location. And then we understood and supported how the Building Energy Management that you see in the center optimizes the building as a grid. And then another benefit we talked about ESG, another benefit that they liked was our storage solution actually supports the Circular Economy through the recycling of our components in this solution. So that was another sort of additional benefit they liked. And as you can see the result, we got a 9 18% additional revenue on the installed electrical content.
So again, more revenue for Eaton as this starts to take place. Now I want to expand a little bit and talk about EV charging more broadly. What does EV charging marketplace as a whole? And what does it mean for Eaton? Well, actually increases our addressable market opportunity quite significantly.
And just to give you a sense of what this means for our growth prospects, Now as more charges are installed in buildings and you see that on the bottom going from 2 to 10 to 25, We get additional eaten content, and we're seeing this. In some cases, it jumps from almost nothing for a small installation, up to 50% more content for a larger deployment. And on the right, you see you know, what drives it? It's more power distribution equipment or upgrades to more energy storage and more sophisticated control software. So again, more revenue for return.
So here's another example of a plant as a grid. So we faced a very different environment in South Africa, and we helped this plant achieve a 50% reduction in downtime and energy costs improving revenue and profitability. So again, let me just give you some context. The power grid can be quite unreliable in South leading to a significant loss of power and lost production, and we're talking, in this case, losing a month's production every year in this plant. And the country is also experiencing rising energy costs.
And during sort of peak hours, the cost of energy can be four times the regular rate. So a very this very difficult situation triggered our engagement in this sort of turnkey project. The plant as a grid environment had solar generation in place, We introduced our energy storage, added power distribution backbone, and then introduced our intelligent micro grid control that you can see in the center. And the two reasons we were chosen, our storage was flexible, like before, and then our software allowed the plant to choose the most economical rate whether it was solar energy or energy coming from the grid, the main grid. And in one year, the solution avoided 20 production outages and the plant actually received the 2019 Hanover Messi award for industrial energy efficiency.
And then of course, this increased our content by 10% on a large installed base. So and it also frankly demonstrated again how to improve the environmental footprint in a largely fossil fuel based economy. Now let's move to another So we help the data center operating mostly in a renewable economy sell power back to the grid. And we enable this energy intensive data center to monetize its under utilized, emergency backup power that we provide and lower its costs and at the same time improve the performance of energy transition for the utility. So in a renewable just to go take a step back here, in a renewable environment, we have a lot of renewables, frequency drops or power drops are actually much more common.
You might have experienced this with the lights being dimmed or power being cut if you're in one of those environments. So to maintain frequency, A small amount of power is needed at short notice for a very limited amount of time, like a quick boost to prevent the power from sagging and regulating the frequency. To the sale of power for short intense periods of time is commonly referred to, as you know, as frequency response. And utilities have 3 choices. They can shed load, meaning cut power, they can invest in more equipment, increases the cost of energy transition itself or a third choice is to use someone else's underutilized assets and that's where we come in.
So our optimization software known as energy called energy aware provides this capability The UPS that you're probably familiar with for backup storage in a data center isn't frequently used because it's used for emergency. So now what it does is it creates a source of revenue and profit for, in this case, a multitenant data center, supporting these frequency response needs. And for us, in a greenfield deployment because of this business model, at least a 2 times our typical UPS content. So as a result, this energy intensive data center is creating a new business model but also playing its part in creating you know, our commitment to sustainability has been long standing in Eaton. You know, it's been at the core of our company for decades.
It's nothing new. Now while we're on sustainability, one more final example here. This solution that I'm going to share with you eliminates or dramatically reduces the use of SF6 gas. It's one of the most powerful greenhouse gases known to humankind. In fact, 23,000 times more impactful than CO2.
So just to give you some background, SF 6 is used in medium voltage and high voltage switch gear. It quenches arcs it to stop short circuits and prevents fires. So it has a very good purpose. It's a synthetic gas, though, and it's been banned in other industries. And as we move to a more renewable generation, more decentralized generation, it means more connections to the grid, more connections mean more electrical switch gear, and with that SF 6.
So this creates more of an opportunity for leakage of SF 6 as this move takes place. Now Eaton has a history of leadership in SF 6 free medium voltage switchgear. We've been working and doing this for decades, for decades. Shipping over a million sections over this time. And we continue to innovate with green gases to reduce the footprint.
So, you know, coming back to what Craig shared in his presentation, energy transition is at the heart of our company mission. And as you can see, hopefully, we're playing a major role as the electrical power value chain starts to transform. Now this transformation is further optimized by digital solutions. We recognize for a long time the role that digital solutions will play in the future. And I want to emphasize this in typical Eaton fashion We've been working hard behind the scenes for many years to build our platform and the capabilities around the world.
We've taken a, as we always do, a pragmatic, thoughtful approach with a strategic long term view and we believe this is critical to establishing a long term winning position. And our approach recognizes 2 things: It leverages our products in the field that are intelligent and I referred to earlier are intelligent and connected and it creates new business models, and I'll share an example of that today. And then second, in this everything as a grid environment, It's the everything as a grid environment performance is optimized by software and domain expertise. So those are the two things we'll talk about. Now going back to the everything as a grid value chain that you saw earlier, You now have a more complex environment.
You have energy flowing in many different directions, the rise of the prosumer that I just talked about who have who have their own very special requirements and therefore now a lot more variables to match supply and demand. So a company with our domain expertise has a key role to play in this transition. And our digital solutions actually are present across this entire value chain on the chart here. On the left hand side, you can see the grid scales, renewables and storage and distribution This leverages our fairly powerful capacity planning software and real time response software, and I'll share that a little later on. On the right hand side, You saw this a little bit earlier in the energy transition section.
Our algorithms and the software actually optimized performance within the decentralized grid. So what's important here is because our digital solutions are present both on the left hand side and the right hand side of this chart. We're uniquely positioned to provide insights to our customers And as traditional boundaries of producers and consumers start to blur, both are going to look for trusted support in their energy transition journey. So our digital platform is actually designed to support this future evolution that we see coming. And as you can see, the bottom of the chart We deliver on demand planning and decision support software.
We're creating some new business models. And then most importantly, creating a cyber secure infrastructure. Markets. And I want to talk a little bit about what that means. On our platform, sort of it enables 3 this ecosystem on three dimensions, on the left, apps and data monetization, so we have a portfolio intelligent, connected devices with software and services offering.
And this helps leverage our current installed base. In the middle, we're expanding our mindshare and reach by providing our information, making it available to our partners, to third parties and to customers so they can participate in designing future solutions. And on the right, the future, all of this improves customer satisfaction through the life cycle and our channel from digital design all the way to field services. So here's the deal on this. We've created a a unified development platform that supports a consistent, scalable interoperable set of digital solutions.
And the way we like to think about it 18 years, our approach is sort of analogous to the telecommunications environment, except we've created this platform to move directly to 5G bypassing the current state. And we see 5 advantages to this approach, and I want to share these with you. And frankly, our customers really value this. 1st, our devices and software are connected allowing secure access anytime anywhere And in this digital world that I'm sure all of you are very familiar with, one of the biggest challenges is the costly interfaces. In this situation, in this setup, no costly interfaces.
2nd, it's intuitive and easy to use, just like the Apple experience, And then it's open across eaten and non eaten solutions, giving our customers the flexibility they need, and I can't stress enough customers when they work bottom up, they're looking for flexibility and integration. And I was just talking to, our chief technology, obviously, yesterday, and he was telling me how for one application we're working on, we've integrated this product into this solution in a matter of hours, normally this would take about 3 or 4 weeks So this is a big difference in how we're approaching it. The other one is it's secure. We have designed cybersecurity from the ground up It's not an afterthought. And we're starting to get a lot of external recognition for what we're doing, building that core foundation and thinking about the future.
And of course it's intelligent. So our platform is actually ready now and it's built for the future. The 60% of the largest utilities in North America use our grid planning software and we're the largest player for planning in utilities. So capacity planning is changing dramatically. If you link this back with the energy transition we talked about and everything is a grid environment, is changing dramatically with renewables now coming onto the grid.
It's much more complex because we're now dealing with, obviously, renewables, dealing storage and believe it or not, when we talk with our customers, the unpredictable increases in EV demand that's taking place in different states. So these challenges are creating a fairly unique, change, let's say, creating fairly unique challenges for utilities as they plan their capacity and their CapEx. So what our software does, it simulates the renewables and storage twenty times faster than comparable offerings. It helps the utilities then upgrade their equipment in the right place for the right amount and we see much more demand for the soft software and the subscriptions behind it. Now if you move to the bottom right of the chart, which includes now our real time decision making software.
What happens here is this software is monitoring what happens on the grid real time and optimizing efficiency by automatically identifying faults and then rerouting power. And we get pulled in because we also it also supports our additional hardware. So not on this chart, there's a couple of examples here of some stats. For example, one of our customers has saved over 1,000,000 customer sustained outages over the last 5 years. And again, not on this chart, leading with this software sale, it's quite an interesting ratio, leading with this software sale actually has led to pulling in 10 to 15 times more additional value.
This time for our hardware products, like VAV V V VAR, or re closers. And so we see tremendous integration here. So just like we're doing across the industrial landscape, there's an example here using digital software and agriculture, and, I think it's a neat example that brings together the elements of the platform that I just kind of talk you through. You can see here, this is an overhead irrigation system in a 1000 acre farm in California. Each system is powered by multiple motors and pumps and it moves around the field in large circles, delivering water to the crops.
Digital solution. So what do we do? We simply connected our intelligent variable speed drive to the overhead irrigation system, we allowed the customer to monitor their pumps remotely via an app and here's the intelligence piece. Our insights into the quality of the electrical signal Our insights into the quality of the accrual signal predicts when the pumps will fail and it provides maintenance alerts helping them monitor actual water usage as well and increasing requirement in California. And there are other benefits better water conservation and a 17% reduction in energy costs.
And for Eaton, The benefit So now moving to how we're monetizing our cybersecurity expertise. And it's such an important subject. Eden is As far as we know, the only industrial company today that has its tools, processes, and labs accredited by an independent third party, accredited by an independent third party. And our knowledge of both power distribution and operational technology is fairly unique, having knowledge of both And what we can do is assess both vulnerability and implement the corrective actions. In this example with this customer, A hospital and as you know, a cyber attack in a hospital could be pretty catastrophic and we all know that that's going to be a challenge Here's where we came in and not the approach we adopted would lead to 2 things: a 30% faster recovery time if there was an attack and a 30 percentage point reduction in cybersecurity risk.
And this is an increasing area that we're getting pulled into by many of our customers. So let me, finish up here with some key messages that I shared at the beginning, but I hope you can see that you know, why we're so energized about the future of this electrical franchise? The growth of our base business that's vibrant and solid the opportunities for energy transition in the future and of course the future of our digital solutions. And what I want to stress is that there's been a history of leadership across the electrical sector over 2 decades that have built this franchise and we've been building towards this end. And so we really do believe we're in the right place at the right time with the right capabilities and I certainly look forward to answering some of your questions during the Q And A session.
So thank you very much. I'll hand over to Heath.
Good morning, everybody. My name is Heath Mano Smith, and I'm going to wrap up our team presentation today by explaining why we're so excited about the growth prospects we, of course, become a more streamlined, more focused portfolio on the key secular growth trends. Among those trends, of course, is the of the industrial depending on the application, but we firmly believe that those companies that offer solutions along the entire power chain, from mechanical, pneumatic to hydraulic, and of course, electrical are the ones that are gonna win. And so we're in a great position to do exactly that. Our e mobility business, of course, is a perfect platform to drive scale and expertise across the enterprise.
So I'm going to tell that story in the first half of the presentation, and then I'm going to back up and then talk about each business platform and why each one of them is terrific opportunity to pursue growth and expand margins. So starting with an overview of our businesses by the markets, We operate in harsh and hazardous environments as Craig explained, mission critical, highly engineered, highly specified, That's the spots we want to be. And each one of these businesses does exactly that. Each one addresses large addressable markets, Each one allows us to pursue growth in excess of GDP, consistent profitability, expanded margins, high return on assets. They're great businesses.
On the organic growth side, for vehicle, you know, we want to grow organically there. And I think the opportunity is actually the transition to electrical. It's obviously gives us growth opportunity for e mobility, but it also allows us to penetrate new markets. And I'll tell a story on how the regulations play into this and what the OEMs need. And so I'll spend some time discussing that.
And then of course, we want to grow both organically and inorganically and in aerospace and e mobility. It's no secret. We want to do acquisitions in the aerospace business and in the e mobility and electrical business. And of course, Sorio does both Sorio Sun Bank that we just completed. It's both aerospace and electrical.
We're excited about that, and I'll talk about that platform. So to give you a high level view of how in the operations, we're targeting growth. We want to grow 4% CAGR by 2025, primarily aerospace And E Mobility again. We'd like to do acquisitions. We got an ambitious team.
We have a great pipeline. But as Craig and Rick said, we will be disciplined about our capital. I guess my point as an operator is to tell you that, to execute on the strategies I'm about to articulate. As well. So I think this is a pretty exciting chart and you hopefully you remember it from Craig's presentation in new days as well.
I wanted to pull out the electrical ecosystem and just remind you, about the synergies that Eaton So as Uday just explained, one way to think about this trend is you have the stationary electrical market. And that's the unhighlighted portion. But then you have the industrial mobile markets. And between the two of them, Eaton is unique. It's competitively qualified to compete in this space because of the synergistic portfolio, synergistic markets synergistic technology.
And of course, in the, in the mobile markets, you are seeing exception a year, 16,000,000 of will be battery electric. You're seeing very significant growth in the commercial world as things become electrified, municipal buses even faster than that. And so exceptional growth and just to tell a tangible story and to reconnect with what Craig said, reminder, we're getting requests to do onboard chargers that are bidirection. So you take power to the vehicle, but then you can give the power back to the grid. So again, hopefully, that tells a story that Eaton is unique in this way, that we have the industry applications, and we have The content is becoming electrical as you have the sustainability regulations, lighter weight, etcetera.
And I can't think of a better place for our aerospace business than me sitting side by side our electrical sector. So I want to dig a little bit deeper into that point and and try to go a little more granular as to why we think we're unique and competitive in this space categories of power, you have mechanical, power chain. Eaton operates in all of them, and I'm trying to show along the bottom here that we operate along the entire power continuum. And of course, to narrow space, I know that we are executing the hydraulic transaction, but we still will offer hydraulic solutions. So we operate in all of them.
Some of our competitors may operate in only 1 or 2 of them or may be more pure play electrical. Weren't all of them. And as I said, we're finding that our customers are valuing solution providers that can operate in all categories at the same time. Pulling power from the engine to drive a motor, to drive a hydraulic pump to provide hydraulic actuation for flight controls. You know, that, that's all of the above.
That's every one of these categories. That's Eaton Blended Power Solutions. We offer mechanical all the way to electrical, everything in between. So digging into that electrical category a little bit, let's break that down a bit and talk about the electrical power chain. You have to pull energy, you have to store energy, on the on the mobile market, right, whatever application you're using, you have to safely distribute it You have to connect that power again safely and reliably to some sort of power consumer.
And that electrical power chain is virtually the same at a high level across all platforms. Vehicle, this is a picture, a pretty cool picture, if I must say, of an electrical vertical takeoff and lander and off road piece of equipment, that's the power chain, okay? So Now, let's break down that power chain into its core products and so I can explain what Eton does in this power chain in the mobile markets. You have power storage batteries and fuel cells. We don't operate there currently.
We do have power generation. We generators on aircraft. And again, I'm showing along the bottom where Eaton participates in these markets. Then you get to what I would call the heart of power the heart of the electrical power chain is power management, power conversion, power distribution. So in conversion inverters, converters, DC to AC, distribution circuit breakers, chargers, fuses, That's the heart of the electrical power chain, and that's where we're investing heavily in e mobility at the moment.
Then you get to connection. And of course, we just made a play, a large play in this business with the Sorio acquisition. So we've now extended the electrical power consumers we've been operating in this space for a long, long time. Motors, transmission motor controllers, actuators, linear actuators, rotary actuators, etcetera. So we have the entire electrical power chain.
To me, this story is best summed up with this slide. So in the middle, what kind of technology do you need to deliver the heart of the electrical power chain, the power management? You need inverters, converters, power electronics, circuit breakers, contactors and fuses. Well, guess what, we have a sector that does exactly that at world class levels for decades. It's self evident that we take that same technology and apply it in the industrial mobile markets.
And as you think about that portfolio, the stationary and the mobile and how that comes together. Hopefully, you can see the real technology synergy there. And to give you a more concrete example, take the picture of the UPS. As Uday explained, when the power goes down, it's pulling power from the battery, DC power, inverting it to AC, driving a data center. What happens in the vehicle?
You're pulling DC power from the battery, inverting it to AC, and you're driving the motor. It's the same basic technology, different applications. So that sets us up well compared to our traditional industrial peers, right? Supporting them. How do we stack up with the electrical peers who don't have our industrial footprint?
Well, I think pretty well, and this slide tells that story. We have engineers who have been in these industrial markets a long, long time have built a pedigree. They know how to design, systems in the specific application. So you take any of those applications, a vehicle, a land or aerospace, and then they can design it Given that various attributes that are necessary in that application on durability, density, you might have issues of course in aerospace with altitude, So it's a combination that makes eating unique and gives us competitive advantages. So to sum it up, we have the pedigree, we have the technology, we have the scale, and most importantly, we have the engineering talent and domain T's customer relationships to offer solutions that allow us to win in this space.
When it transition to a discussion on platform by platform about why we like them and talk about some of, the reasons we think that we're going to grow these businesses. I'm starting with e mobility, and that shouldn't be a surprise. That's, that essentially personifies the competitive advantage I just articulated. It operationalizes that advantage in one business. And so I guess what I would like to say, you've heard a lot about our e mobility business, but the most important point I think about it is the scale that it offers when you win.
So when you win on these platforms, vehicle platforms, which thankfully We have a solutions in this space. And we tell the story I just told around our electrical capabilities. We get in the door, right? But when you win, now you have scale of these kinds of wins or far exceed any other application in the industrial mobile markets. So you can drive manufacturing scale, supply chain scale, and frankly, talent scale across the enterprise.
And so we think it's again, Eaton unique because it has that vehicle business from which we can leverage the scale advantage. Do we think about the markets today? They're consistent with what we thought when we projected and when we launched e mobility. All the enablers are happening. Battery costs are coming down.
Charging stations are going in. You're seeing the great growth that we expected. You read all the announcements like I do around OEMs launching new, partnerships, new capital coming into this space. So All the facilitators for exceptional growth are all 84% of the passenger vehicle markets will have internal combustion engine technology in them. 92% of the commercial vehicles will.
That's not as important for e mobility, but that's important for our vehicle business, and I'll explain that in a bit. What's happened so far? $460,000,000 of mature year wind revenue. Those, those revenues will start showing up 2022, 2023 as we start manufacturing and selling, but we're winning these platforms. We have multibillion dollar opportunity pipeline.
And that shouldn't be surprising, again, because the story I just told resonates with our customers. They understand why Eaton and why we're uniquely qualified to compete and win here. And I'll point out that one of the reasons the opportunity pipeline is so large is that we're one of the few companies out there that offer both power electronics and power distribution. Many of our competitors do one or the other, very few do both. Again, that's not happenstance.
That's because have a large $12,000,000,000 electrical business sitting that right beside us. We have that capability because of our electrical sector. So right now, we're focused on execution. When we started this thing, I think we had 50 engineers. We're up to 450 engineers in this business.
We're investing in it to grow. They're well aligned. They're prioritized. They're working on their product roadmaps. It's actually quite exciting to meet with this team.
So they're focused on execution. They have to we have to deliver what we've already won. We have to pull more wins out of that pipeline. We got to deliver on these technology roadmaps. And at the end of the day, I would just say that the story for this year is Cution, which is fortunate for us because our vehicle business has a long legacy of doing exactly that.
So turning to vehicle, no, it's an interesting story and one I'm going to tell, but the idea is that the regulations continue drive innovation. There are regulations around CO2 and nitrogen oxides, that are compelling companies to continue to innovate and we have the deep customer relationships We understand those regulations, and we're a world leader in engineer engineer management. And I'm gonna tell that story a bit. As it relates to the P and L, we're going to face some headwinds this year from the market. No doubt, but the long term growth trends are solid.
And as Craig said, we've been delivering great operating margins in this business for a long, long time. How have we done that? We've been very active stewards of the portfolio. Much like all of Eaton, we've done it within vehicle. We've leveraged partnerships, which I'll explain.
We've invested in our footprint. We've divested businesses. We've grown the head and fix the tail. And that's what we're going to continue to do. And as I said, we are the world expert in internal combustion technology as it relates to air management.
And so with these regulations, these sustainability regulations, we do think we have a great place to play. We want to do less clean sheet designs, right? They want to optimize their current platforms as long as they can because a lot of that capital is going into electrification, autonomous driving, etcetera. So they need to extend their platforms, have less clean sheet designs, which we think favors the incumbents, the folks that have the capital in place, who have the know how, who have the technology, to compete and win. So they're looking for help in a big way, which we think we can offer and expand our addressable market.
At the end of the day, while a lot of the growth is going to the Eaton Cummins JV for automated transmissions, a lot of growth is going to e mobility. We still think this will be a $3,000,000,000 business with exceptional margin margins in 2030. So let's talk a little bit about that. What we've done over the years to, by way of partner ships. So, Nathan, we launched that JV, a valve JV in Japan and Korea.
We have formed 2 exceptional JVs with FAST, which is a subsidiary of Weichai in China. And we've grown, I think a triple digit, growth in our clutch JV in the heavy duty market. We have double digit share. By partnering with the Chinese manufacture and extending our growth into China in a big way. We intend to do the same way with our light duty transmission JV that we just formed We just started manufacturing late last year.
So we know how to partner with the right folks to drive growth, which we also did with the Eaton Cummins JV. I don't need to explain the strategy behind that, but you've seen it. It's the same idea. We know how to leverage partnerships. We work with others.
To grow and share is a big deal. And a great example on a smaller scale of fixing the tail that we've been talking about. We were very active and the operations about looking for these kinds of opportunities. We'll continue to do that. We've also invested heavily over the decades really in a global footprint, best cost country manufacturing and also putting the manufacturing where the growth is, where the sales are.
And so we have an exceptional global footprint that we think we can leverage to grow in emerging markets. But again, this is the key strategic driver for the vehicle business. These are the sustainability regulations CO2 reductions and pass car, you know, they're tough. They're tough for the OEMs to meet. On the commercial vehicle side, There's always been regulations around, nitrogen oxides or NOx.
But now we're adding in the CO2 as well. And so they have a tremendous challenge in doing why we have some solutions, and I'm going to give you some examples of why we think we're going to be able to provide these kinds of solutions and drive growth in the vehicle business. Here's a couple of them. EVaptive. It's essentially a vapor venting system.
In North America, when you fuel your car, you had there's regulations around containing the vapor of the fuel in the car. That regulation is being adopted around the world. It's been adopted in China. It's been adopted in Brazil. We think it's going to be adopted in EMEA.
And so we can literally take our core technology for which we're a market leader in this space in North America and, of course, drive sales around the world. This particular technology, was a twist on it that we've made it electronic and intelligent. So you can take one piece of hardware put it in multiple vehicle platforms with multiple tank variants. And you can customize the application of that piece costs around redesigning their tank or redesigning the vapor system, one piece of hardware, software controlled, And again, between these two things, we think it's going to drive a lot of sales. Our team is exceptionally excited about it.
Advanced valve train, variable valve actuation, Essentially, as you all know, the magic in, this space, combustion engine space is managing the chemistry of the combustion the variable valve technology for which we're a market leader allows us to do that. And again, as those regulations put pressure in forms, we think that this kind of product is going to drive growth in the vehicle business. Now switching to commercial vehicle, taking that same technology, Same capital, same knowhow. Now we have OEMs who are faced with NOx and CO2 emissions controls environments. We could take the technology, move it to commercial vehicle, where we also have deep domain expertise.
I think that's a pretty powerful story. We can reduce the OEMs, carbon dioxide and NOx emissions. At the same time. Similarly, in a traditional heavy duty vehicle, they've always managed exhaust gases. They do it through just normal back pressure They just recirculate the exhaust gas back through the engine.
And they rely on back pressure, which is a problem at lower speeds and idle speeds, because you don't have the transmission moving as fast to pump the air. But this, using again the capital and know how that we've developed in the passenger market, with our superchargers, we can precisely pump and meter the gases into the engine to optimize performance. That's a big deal. We can put air into parts of the engine that we'll never get it through normal back pressure. So we pump it precisely, and we can reduce the CO2.
These are things that are creating a lot of excitement in the heavy duty mark we're getting a lot of buzz and energy around these kinds of products. So this is my sum up slide for vehicle. I hope I I've explained myself well, but at the end of the day, you have internal combustion engines. We're we're a world leader. We know how to manage air within the vehicle.
There will be We are a world leader with our e mobility business and providing electric solutions, both power electronics and power distribution at the same time. And where they come together, you have your hybrid solutions, right, where you need to be able to do both anyway. So from passenger car to heavy duty, from combustion engine, to electric vehicle, we offer the entire solution. Let's turn to the aerospace business. As you know, very strong business, great margins and one that we want to continue to grow.
I guess I'd point out again, the most important point on this slide for me from a strategic perspective is the last one, the electrification. I mean, Given the story, I've just told around electrification. Hopefully, you see how well to the extent that the aerospace world fires. And and it is happening. We couldn't be more excited, right, because we have the expertise and scale to be able to offer solutions to these customers.
So it's a very exciting time for us strategically. And we've invested in that strategy. And I'll talk a minute about the Sorio acquisition. That's our inorganic growth strategy. Organic growth, I'm going to focus on the aftermarket and how we're focusing on our operations to drive and outgrow the market there.
And then of course, I'd like to catch up, everybody on the additive manufacturing. I think we launched it three and a half years ago, and we've had some significant wins that I'd like to update you on. So starting with, the acquisition. Sorio, some roughly $360,000,000 revenues. Again, harsh and hazardous, highly specified, highly engineered solutions, exactly where Eton participates The most exciting thing for me is we have 3200 new teammates joining the Eaton team, and there's a lot of energy, a lot of excitement as we integrate these companies and we see a ton of opportunities.
And the aerospace side, particularly is that more electric aircraft trend emerges we see all kinds of opportunities to pull through sales from each other. And then, of course, we do have an electrical channel. And as I think it was Rick explained, it provides an exciting platform for future growth. So if you think about the harsh and hazardous electrical connector market, I think if it is about a 10,000,000,000 market, half of it, Aerospace And Defense, that's where we'll currently play. That's what that's what Sorio does.
That's how we're going to leverage it. Craig mentioned, we're moving a mil aero business or maybe Rick did into that as well. It's electrical connect we can play there and But then you also have this heavy industrial application as well, heavy industrial or electrical, heavy electrical. It could be nuclear, oil and gas, rail, even vehicle, frankly, but it provides a nice platform. This expertise that we now have provides a nice platform for and our industrial sector.
How do we think about the aftermarket? Well, as you all know, you have to get on the programs to begin with. And over the last 4 years, we've had $4,400,000,000 of life of program value wins. It's a big number. We continue to get on the platforms.
We have an amazing team around the world who design solutions that would blow your mind away. We continue to get on the platforms, and that's good for its own organic growth story, but it's absolutely fuel for our aftermarket business, for which we have a very strong operational focus at the moment. And so We think by improving our operations, leveraging the right inventory, for example, and production we can deliver an over penetrate and spares market, for example. Rick mentioned the military aftermarket F-thirty 5 M-1s. They're many opportunities that we're winning and outgrowing the market by working on what Eaton does well.
Leveraging EBS and driving productivity in the plants. You think about repairs, you got to do the same thing. If you take a main engine fuel pump, And that gets shipped to our Euclid facility. That team has invested in industry 4.0, created the digital thread that we've been talking about improved operations and productivity in our turnaround time as a result. That increases throughput and we drive increased market share.
And then retrofits is an amazing opportunity for our engineers to again take a refresh. Some of these programs, they're twenty five years old. They need refresh the products. You think about an NIM 1 where they needed a new motor, lighter weight, higher power. Our teams are capable of doing that.
And we've done it and we're outgrowing. We intend to outgrow the aftermarket. Then my last substantive point before I wrap up, I wanted to bring you up to date on, additive manufacturing. For those that were in Cleveland, I think it was last year, we did have a printer there, if you remember. And you all know that you can't just buy a printer and start printing solutions in this space.
You have to have exceptional materials knowledge, process knowledge. Our engineers have been working with these components for decades. And more importantly, they're experts on how the components work within the system. You also have to be able, you have to have the customer relationships, relationships, you have to know how to get products certified. So with all of those things, our team continues to deliver wins.
And you take the A330neojet pump you know, I think it's easy to understand the value when you take the old jet pump and it had 11 separately machined parts all assembled together. And you take 1 printed part, 25% less weight, 25% less lead time. You can see the exceptional value that that delivers. A Ram air scoop, which is essentially an emergency vent for, for an engine, 22 parts down to 2, 25% reduction in weight, 50% reduction in lead time. And then the blue origin manifold, which that's the picture, we were asked to design something that fits within a specific size envelope with a specific way.
You couldn't even do that with traditional manufacturing processes. We were able to deliver it this way, saving £120, which, as you can imagine, is a lot of weight when you're launching into space. So The point is I get this team is driving hard and we're seeking value everywhere and they're delivering. So those are my messages. We've repositioned the portfolio.
That portfolio is well aligned with the electrification trend of the mobile markets, we can leverage Eaton's scale, pedigree expertise, particularly of our electrical sector business, And each one of our platforms provides amazing opportunities for growth and margin expansion.
Thanks, Heath. Thanks, Heath. It's always good to be ahead of the time. Now we, we can take a longer break so people can have more network with each other. We'll come back at 11:20 with Q and A.
Oh, Oh,
If we could all come back together, I'd appreciate it. And if I can have the, the Eaton management team, wherever you're at in the room, if I could have you Come to the head of the room. We're missing Uday. My guess is Uday's having coffee. There he is,
outside there.
Hey, I would hope that, that you would agree with me in concluding that, you know, there's an exciting transformation going on across Eaton, not only in the makeup of the company, But in a lot of the end markets that we serve, right? I think, you know, there's never been a more exciting time in the company's history than the one that we're dealing right now. We're going through fairly sizable transformations in a lot of our end markets. And the good news for us, each of these changes really plays to the things that do well. And so this team is just extraordinarily excited about the future that's out in front of us.
And, as I mentioned, we certainly have the right management team to deliver for you. Why don't we just begin the Q And A? And we'll try to get all the questions in, and we'll just start on the right side of the room. We'll work across the left, but hope to get everybody's question. Do you want to begin, Julian?
Thanks, Craig. Yes, maybe a question, for you and also for, Uday. If we look at the trickle re segmentation, the margins in the global piece are about 2 or 300 points lower than Americas And that's even with a higher product mix. So you know, like for like product, Americas versus product, global, much, much lower, in global. Maybe just talk through the reasons for that and and how what are you doing to get those electrical global margins up, and does it require some scale just to build margins of economies of scale through M And A?
Maybe I'll start with it and you can jump in. First of all, 17.4% margins at the midpoint. So not bad margins in Global, but certainly we have an opportunity to be better. And you think that because it does have a higher mix of products versus systems, then let's say the Americas, you would think that the margins would also perhaps be higher because historically speaking, products have had higher margins. What's unique about our Americas business more than anything is the fact that so much of what we do in the Americas goes through distribution.
So there's a channel benefit that we get in the Americas. And then to your point, there is a much bigger scale advantage that we have in the Americas business, whereas you saw from commodities chart, we have very large market shares in the Americas markets and the market shares around the world are not as attractive. But did you want to add anything to that? The only thing
I would add to that is, obviously includes a global business, the Krauszines Beeline business that's global in that segment. And that global business has some different competitive dynamics. And so I just add that to the mix.
So then just a quick
follow-up maybe for Craig and also for Rick. The free cash flow guidance, it's about $3,000,000,000 this year, maybe $2,800,000,000 pro form a for the divestments and acquisitions. The medium term goal is about GBP 3,000,000,000. Realize it's just a placeholder, but maybe why did you come up with that number? It doesn't imply much growth, versus just giving like a free cash flow margin aspiration or something.
Rick, do you want to take that one? Yes.
I mean, we well, 1st of all, we wanted to give you an absolute dollar amount that we thought we would generate and So we're not building in any acquisitions here other than the ones we've already done. And so what you see is when we lose hydraulics, you see that the free cash flow generation goes down, and then we grow back up, you know, to that 3,000,000,000 range. So that's that's the dynamic behind it.
And it's really the loss of lighting and the loss
of hydraulic. Lighting and hydraulic.
$4,000,000,000 of revenue that we're divesting that causes the little bit of a depression in our cash flow.
Yeah. Hi, Dan. Two questions on M And A. 1, Schneider, our 9th last rate the acquisition of a BIN software company at a very high multiple. I'd like to hear your thoughts on that and whether that's a direction that Eton Eton's electrical business might travel down or not, and why not, if not.
And then on, acquisitions in aerospace. Are you concerned at all that as we get through this coronavirus that, Securly, people will just travel less and that the aerospace industry will no longer be that, you know, high growth, attractive industries.
Great questions. Do you want to do you want to?
Yeah. Sure. I mean, obviously, it's very, good acquisition and, terrific to see the space changing. And I'd say that our approach in thinking is no different. We're interested in doing acquisitions partnering, in the software space to augment our digital solutions.
And so as Greg said, we remain disciplined around the future potential of these opportunities. They've got to deliver a good business case. They've got to grow and deliver decent margins in the long term. So We are looking and aware, and we're balanced in our approach, but certainly, it was a good acquisition for them.
And I'd just say once again, you know, we try to think about the company as saying that, we have a, we have a assumption around what our cost of capital is. We have alternative uses for cash as well. And so they paid a very high multiple for that company. And as we all know, A lot of software acquisitions have not gone well. Some F, some haven't.
And so, you know, our teams have been very prudent over the years to say and what can we do internally? We're going to obviously look at opportunities to augment that by acquisitions, but, but the multiples, and what the alternatives are for the use of cash will always be important consideration for us. Space. Do you want to take that one first, Eve, and then I can add to it?
Sure. I mean, we haven't spoke about directly about the impact of the coronavirus and our aspirations to do deals in this space, but I would answer no. I don't think it, in the long term, changes our aspiration to grow that business to do acquisitions in that space. I think it could have a short term impact, but the overall foundations of that business are strong. And if anything, we look for opportunities to grow it.
Yeah. And we we do believe, you know, we had SARS. There's been these events, you know, over the history, and, and they tend to be, you know, short lived. And so I don't think that tomorrow, all of a sudden, the world is going to become a different place and people of consumers are going to stop getting on planes and stop traveling. There's still a huge portion of the world that's not connected, where they're not, you know, the penetration of, of flying is still well below what it is in developed countries of the U.
S. And Europe. So now we think the long term growth prospects of aerospace continue to be very attractive and this will be kind of a, a little point on the horizon that we need to deal with, but we think the prospects are really good long term.
Yes, thank you. Let's stay on the coronavirus topic if we could. It just seems the story line is changing, every day, if not by the hour. But when you maybe you can share with us some of the within that $0.10 impact for the first quarter. The idea that it when you said it centered in China, it that may have been true a couple of weeks ago, but that's certainly not the case now.
And if you just address that as well as the assumption that everything bounces back and you still can reaffirm 2020, just the idea that there is likely to be some demand destruction if you could also address that as well.
No, I appreciate the question, Deena. So we're certainly living in a period right now where, you know, to your point, every day, there's new information What we can see today clearly is Q1, and we try to provide guidance in the context of Q1. It's still uncertain to what extent this thing has a relatively quick resolution or does it extend into Q2 and and what happens around the world. And so we just try to provide guidance in the context of what we can see today. We do believe that, today, because a lot of what we do today, we manufacture in country 4 country, And we're not necessarily heavily dependent upon, you know, China for the for supporting our businesses around the world.
There is obviously supply chain and other challenges that we're dealing with. To date, they look like it's relatively minor but quite frankly telling, we're also living off of inventory. And so I think the ultimate tests on what will happen, you know, is really some of it will have to wait until we get to the end of Q1 to really call the balance of the year. So it's really meant, I meant to be an attempt to say, let's call Q1 because we have a sense of what that is. We do feel fairly confident that there will be stimulus, you know, whether it's in China the U.
S. Around the world. That'll help maybe a little bit of growth in the second half. But at this point, I just take it as a placeholder for now.
I fully appreciate all of that. And then as a follow-up, I love your initial opening comments that, you're in a enviable position sitting on a pile of cash And then Rick's comment was, just to clarify, you have the intent and ability to buyback 7 percent of the shares, this year. Just how much of that is, the intent. It certainly looks as though you've got the cash to do it.
Well, we now have a $1,400,000,000 in the bank as of this
1,000,000,000 or more. More.
And, and then, you know, we're going to generate, free cash flow about 2.9 And so when you back out the dividend, and that gives you an idea of how much you have. So so we, we won't have likely any significant difficulty buying 2.4to2.8, assuming that we want to go ahead and execute and the commitment we've made is that, we believe that it's a prudent use of that 1,400,000,000 to return it back to the shareholders.
Okay, great.
Thanks. Appreciate all the details today. So maybe just starting out, when you take
a, when you listen to
both Uday and Heath, and he and they talked about their their growth ambitions across the portfolio. Seems like your internal targets, Craig, are higher than that the entire portfolio. So perhaps maybe first respond to that. And then secondly, as I as we think about Uday's business specifically, how do we start to think about the timing of some of this materializing into GDP plus type growth?
Yes. Great. I appreciate the question. And it probably wasn't lost on most of you the numbers that were reflected in my presentation, Rick's were lower than the growth assumptions that we have, the industrial and electrical business is running to. So the the internal plans are much more aspirational in terms of growth than what we build into our, what we call our top down model.
And what we, what we're trying to do here is really to set a baseline assumption around growth around not something that we know we can do, right? Not a lot of risk, we think, in the 2.5% growth number we can deliver 8% to 10% EPS growth, which we think is an attractive return using the 2.5%. Clearly, the sectors and the businesses are running to much bigger numbers. And we hope that they're successful in landing all that growth. We just thought it was prudent for the sake of laying up a 5 year commitment that, that we use a number that was more conservative than that.
And so we hedged their number back.
And Uday, could you respond just in terms of timing and seeing that the growth start to materialize?
Sure. So I just to add to what Craig said as well. When you look at that, when you do the math, you look at the numbers for that portion of the growth, it represents around a 50% aggressive outgrowth number on the base number that Craig kind of referenced, which is what we run what we run our teams to run to and be aggressive about In terms of timing, it's always hard to know exactly how this is all going to play out. And what I would say that you're going to see in the next 5 years quite an acceleration of this new environment that's playing out with everything as a grid, energy transition. We're seeing more and more opportunities pop up both in the U.
S. And obviously outside. I think the real explosion though will take place real explosion will take place in the next 10 years, so 5, beyond the 5 year horizon. So this next 5 year is going to be a real proof point, see what we can do, But that's the kind of time frame. Our customers are big customers are talking about and everyone's talking about.
The next five years will be significant as well.
That's helpful. One quick one for Rick on the free cash flow point. So 2019 was a good working capital year. I think you had about, call it, like roughly a $350,000,000 benefit from receivables and payables. How do we think about a normalized free cash flow margin for the company pro form a going forward?
Well, you know, to 2020, we think will be another good year, partly because the the one category you didn't mention was inventory and we have too much inventory and we expect and are putting lots of effort into bringing that down. And so, you know, if you were to adjust for those, those, you might argue, they're not one off, but you can't replicate the size of those every year, that, yeah, you're right, perhaps it's more like 13a half, something like that, as opposed to over 14 this And now, you know, that'll change though as our margin goes up, you know, as we continue to grind higher, add a couple of points in just our operating margin, that'll push the free cash flow margin higher as well.
Thank you. Thank you, Cliff France, and one for Rick and 1 for Heath, please. Can I follow-up on that question? I, I tend to like to look at turns as opposed to inventory dollars because clearly you're at a point where you're liquidating inventory and because of the perversity of GAAP accounting, it's a benefit for you in terms of cash flow. How do you Are there better ways to measure it?
Then I know this group wants to see the actual dollars, absolute dollars, but I'd rather understand the turns.
What we typically do, we measure days on hand, clicks are absolutely right. We expressed it here in dollars, is it just a way of getting a sense revealing what cash we're going to be able to deploy. But we, we measure every one of our businesses. And as I mentioned in my opening commentary, in the context of world class manufacturing, We measure every one of our factories, all 300 plus of them on days on hand. So we actually measured a number of days of inventory that we have on hand, and therein really lies the opportunity to get better.
We know today that we are not world class, in most of our factories around the amount of inventory days on hand that we have. And that's where we're driving the improvements.
Would you make that statement would you make, would you repeat that statement in terms of outside of the fact you built inventory for the Chinese New Year, and they're going to have to kind of doubly go through that?
Yes. Well, part of the issue, you know, there's the Chinese New Year issue this year that we're going to deal with. And we really, today, don't really have a way of really even completely quantifying that impact because it's too uncertain. But certainly, if you think about last year, for example, we were dealing with a lot of trade related friction in the them. And so we did build a bunch of buffer inventory in our system last year around all these trade disputes.
And that's part of what gonna free up working capital this year as we take some of those buffer inventories out of the system.
And then Heath, I'm sorry. Go ahead.
I just gotta add that that we, we do it even. More discretely than Craig suggested because we look at the inventory and then we use a rolling forecast of future sales to estimate the days on hand inventory. And so that's actually what our teams respond to with that, that DOH.
Keith, I was 17 years too early in the added amount factory revolution. So you may want to throw this question out. Are you looking at any of the kinds of things that Desos talking about these generative designs using AI and mission, part mission?
Say it again. The first
generative design. Letting the AI decide the configuration of the part as opposed to just getting the usual 20, 30% weight and size benefits
Well, I'll let, the team supplement me on this one, but I, not generally. I mean, we, we're We got to start small with the parts that we know that we can manufacture, get great margins on. So we are prioritizing our investments in those pieces that we know we can deliver great margin right now. We gotta build up the skill set. And then I would the next phase is to start to transition to this AI kind of perspective.
A lot of promise. AI offers a lot of promise around the future in terms of how it's going to help us do a lot of things better. Including how we're going to apply additive, but it's really too early in that journey to say we're using it today.
Obviously lots of great detail. So the path to 20% margins, number 1, how volume dependent is that? So if we do get to the 4% aspirational target, do we think that's upside to that number? And then do you need to do any restructuring to get to 20% or is it more run rate restructuring from here? That's my first question.
Yes, I'd say that it's mostly not volume dependent. We're really talking about is waste inefficiencies, grow the head, fix the tail, right? You think about the 3 buckets of activities that I talked about in terms of margin expansion. 1 is how we run our facilities to use the E business system, how we drive operational excellence, and how we'd be smarter around where we're allocating our time and our attention. Those are the things that we're counting on to drive margin expansion.
And then the question is Keith, I think. So the connector opportunity seems pretty exciting. You obviously have a very low share right there. Number 1, what do you think is Eton's fair share of that $10,000,000,000 market opportunity? And if you wanted to scale up in industrial connectors, is that organic or you need to do some bolt on acquisitions in there?
So the opportunity, we're developing the opportunity as we speak, we're looking at this industrial platform, the $5,000,000,000 that you saw. And we're looking at certainly we can do it organically. Through our sales teams, through the electrical distribution channel. And then I do think that there are specific harsh and hazardous spots where we bring specific technology and application expertise, where we'll look for those niche organic opportunities. But It also becomes an inorganic platform, we think, as well.
And and if you follow the theme that I'm trying to lay out along all of Eaton, You know, the magic of Eaton is combining these different business units. We talk in terms of sectors and businesses, but all the magic is in between the P and Ls and in between the base business and e mobility frames up that strategy in one business, but we can do that informally as well. And so what we're doing, we're working with Uday's team now to establish where we can grow inorganically on that electrical side And then, of course, the aerospace and defense, that's the $5,000,000,000 that we can go get right now. And as you say, there's plenty of room for growth. And that Sorio team is exceptional.
The Air Engineering expertise. There's a Sun Bank part of it too in North America. We connect that with the Milaero business that we're pulling in from electrical. And so we're already, well ahead of plan when it comes to integration synergies.
Great. Thank you.
The question I have is on, Uday's slide, I think 95 in terms of the walk for the targeting the 50% revenue growth potential in 5 years. And I think one of the plugs is obviously target acquisition value on the order of $3,000,000,000. I mean, you do bring a lot to bear in terms of, I think you mentioned, what, 60% of the software or 60% you serve 60 percent of the utilities and utility planning software across the board and you have substantial cost synergies in the channel I guess the question I have, is there any do not go parts of the value chain for you with respect to utility automation? Would you consider doing last mile or meters as part of that acquisition strategy. And then I have a follow-up.
That's a terrific question. And obviously, we have, I think a well thought through strategy around migrating through the value chain. And where we see opportunities essentially behind the meter or in front of the meter, we're going to be going after them either through organic or inorganic means. So I won't talk specifically about, a specific area, but I would say think more broadly around the whole chain we recognize these boundaries are blurring between, the the behind and in front of the meter. And so we are looking at the whole space to see what we could play.
And obviously, there are a lot of players around there as well, but it's definitely part of our thinking.
I'd say the other thing that's changing, you know, is it really talked about is that where you do metering, you know, today, you know, we can do revenue grade metering at the circuit breaker. So I think this whole space within the electrical arena is completely changing. And we are well positioned today, you know, to really participate on both sides of that equation.
Forgot. Yeah, you're right. Discribitec, I did notice that you could do that. The follow-up, is the following. I know you can't talk much about coronavirus aside from what you said in the first quarter, but I think you can speak about the risk assessment of your supply chains and components.
So maybe you could just a little bit of incremental color about how you're thinking of the risk of the back half of the year, if there's a broader disruption of the productive channel, particularly in Asia?
Yes, I'd say on that, it's too early to know. I mean, I can tell you that through Q1, supply chain constraints have not been a big piece of the issue. The bigger issue is really on the demand side as China has shut down. Rick shared some of the numbers with you. I think we'll have to see how this plays out.
Over the next month or 2 before we know, to what extent the supply chain is going to be able to keep up with the demand as it comes back into place. And then the reality is it just, it just hasn't been tested at this point. And so we'll have to wait and see. And as I'm sure you sheet, it's going to be the weakest link in the value chain that's going to create the issues. And where exactly are going to come from, we don't know at this point.
Yes, in these situations, even in the past, the biggest issues have always been Tier 2 and Tier 3 suppliers that know, something's hard to get your arms around, but we're we're all over it
as a leadership team here.
Thanks. Maybe just one for Uday and one for Heath, actually, just to get a little further in the weeds a couple of things you talked about. Uday, your examples about kind of, value upside across your various end market opportunities interesting. I was specifically interested in the data center example, and really kind of what sits inside that 2x opportunity. So obviously there's been latent power there for years, right, generators that are waiting for something bad to happen.
Battery is waiting for something bad to happen. Why is the revenue opportunity so big relative to that, you know, switchgear position that you would have?
So
you saw on the data center specifically? So that's a, I mean, if you subscribe to that model around frequency response, now you're now the data center operator has a new business model, where they can provide it back to the grid. So essentially for a relatively low additional content for them, you add another UPS in and you're now providing that backup power. So it's really two times what we would normally be providing into a data center. It's as simple as that.
So they're literally putting an extra UPS to be able to do this as opposed to better utilizing underutilized assets. Yes.
And it's
because they do their own payback And we we're part of that. It is a good payback for that kind of business model.
And it could be either or. I mean, in many cases, they are using your existing yeah, just try to be using your existing or can be as you think about sizing your backup power system, you could also make a decision that you can turn this into a revenue model. What's really changed is you say, why now? And I really think it's this changing grid dynamic and the increase of renewables. As you put more and more renewables on the grid, this issue of frequency regulation becomes an enormous issue.
So it creates a market opportunity for data centers in the cell back their power to the grids that do frequency regulation.
Right. And then, Heath, I was wondering if you
could comment a little bit on, filtration and that little gem that kind of popped out of the equation as things got, resorted here. What kind of end markets is that serve? And is that potentially a platform of making?
Yes. Good question, Jeff. I mean, it's It's a relatively niche business now, but we absolutely are going to take a hard look at that as it's switching over into the aerospace business. It operates in traditional industrial markets, some processing, but heavy industrial is how you should think about that market. And we think it's a great, great business.
We, we're evaluating whether or not we want to do some acquisitions that space. We, we talk about being disciplined with our capital, but I do think that's a gem of a business that, that we're going to take a hard look at.
Great. Craig, I'm wondering
if, you know, if, the economy does actually get a lot worse, can you guys just maybe remind us what is your potential recession playbook think you've talked, I think, Rick, you've talked before about sort of flat EPS. I don't remember what you said in margins, but if things progress, which you obviously can't foresee, none of us can. But if they actually get worse, because it's a movie target. What first question was, what would you expect Eaton to perform and what would your playbook be?
Yes, I mean, the first thing I would tell you is that we do have a playbook. And quite frankly, it's one that we actually even shared with our board during a board meeting last year that said, you know, we don't know which way the economy is going. And, but we want to be ready. And so in both of the sectors, you know, and their teams put forth plans, it says, scenario planning, if markets are flat, if markets are down 5, if markets are down 10, what would you do? So that in any event that somebody bad happens, it's not the first time we thought it through have a plan on the shelf.
And so, you know, I would tell you today that difficult to model what the real impact would be to EPS, especially in is that we kind of we have a view of restructuring the things that we'd like to get done over the next 5 year horizon in the event that we end up with an economic, you know, recession of some sort. We don't think that's into cards. We'd simply take some of these actions. We'd accelerate them. We'd pull them forward.
But, but clearly, we have plans that are on the shelf to deal with any potential economic, road bumps that we come into face with.
Then just as a follow-up, the digital opportunity now with your new digital officer and there's a little bit more content sprinkled throughout the presentations. Do you foresee a scenario where you might actually start to carve this out much more discreetly with, because I guess there's a lot, this embeds in a lot of the different businesses. And you might say, look, here's our revenue here is our software engineer compliment. These are kind of the targets we would like to foresee over whatever period of time, maybe we get there through M and A or organically or or whatever. I'm just wondering where this is leading.
Obviously, you've got a lot of opportunity. I just, I'm wondering if we're going to see this flash out a little bit more over time.
Yeah, you know, and I'll just I might take a part of the question that Udi can jump in as well, but you know, I'd say that first of all, when we think about digital, it there is a revenue generating piece, around how do we create new business models and services and softwares. And that's a really important part of the old digitalization initiative. But there is a piece around how do you drive internal productivity? How do we every single function inside of the company looking their activities and how do you automate them as a way of getting productivity inside of our organization? There's the whole piece around customer facing and how do we interface with customers and distributors to make sure that, you know, we're easy to do business with.
And obviously, it's a lot of what's going on in our factories. In terms of running our factories more efficiently and connecting them to supply chain. So digitalization is a much broader palette that, of opportunities as we think about deploying it inside of the company and, and, Auburn Yarlagadda, who's now works for me our CDO for the company will be driving all of those initiatives to the point specifically around breaking out revenue and say, here is my digital revenue versus my core revenue. We think a lot of that is, you know, essentially make work so much of what we do today in and around the components that we make that they will be intelligent, you know, they'll have software solution tied to them, but we typically sell them as an integrated solution. And so we may at some point in the future, separate software and services down the road.
But today, we don't think that there's a lot of extra value because they're sold in a way that is so integrated with the products and the services that we provide. Do you want to add anything to that, David?
No, I agree, broadly with what Craig said. And I would say it's just a function of maturity and time. And the the balance is always is always around you separate out a business that's solely integrated and linked with what our core business actually is to the extent that it starts to not get the support and perform. So it's a fine balance. But I think with Urban coming on board, who's a terrific add to the company, who's been through this before, we're going to take a step back and look at what's the best approach, and see how we can really drive growth in if there is a better way and we can focus, we'll do it.
I mean, it's all gonna be around what's the best way to get superior organic growth. And if it means breaking some portion of it out, we'll look at it. There's certain parts of our business today that are naturally already broken out. I would say the good planning piece that I talked about, the real time plan, that's in a separate division. That's what they focus on.
They're very good at it. So I think as things evolve, we'll probably relook at it again.
Okay. Are you right here? Thanks.
Going back the question around the big cash pile that you guys have now. If you could just talk a little bit about how the M and A pipeline looks. And I'm most curious about whether you'd be open to doing a larger deal or if you're still of the mind that bolt on acquisitions are best for Eaton?
Sure. I appreciate the question. You know, I'd say you know, from an M and A perspective, I would tell you that we are looking at more opportunities and we're more active than we've been in quite some time. But I'd also tell you that valuation is today I say are still relatively stretched. We don't have any particular aversion to doing bigger deals, but the reality is most of what we're looking at.
Just by virtue of the opportunities tend to be more in the bolt on, you know, kind of $100,000,000 to $200,000,000 revenue size because there's just more of them out there. And so I'd say that, you know, we would like to be more active, but at the same time, we recognize that, they have to be value creating for our shareholders. And and, today, we think we have a great ready made solution for cash. That's relatively risk free in buying our shares back. And we would like buying our shares at the price levels that they're at right now.
And so the hurdle rate will always be looking at, you know, what are the other opportunities to use cash And, and, and acquisition is always going to have to compete with, you know, your ability to buy back your shares and what kind of returns that you get in that context.
Got it. Thanks, Craig. And then, portfolio has obviously changed a lot in the past year. You guys have been really focused on that. If you could just speak to, you know, is the process now done?
We should think of the portfolio as kind of set as it is today, or is that something that's still being evaluated?
Yes, great question. And it really gets back to a little bit, when you think about portfolio, you think about portfolio in the context of the 5 or 6 reportable segments through which we report the company externally. We don't really think about portfolio that way. We really think about portfolio in the context of all of the different divisions and product lines and customers and markets and applications in which we compete. And that's why this idea around the normal distribution, the the head and fix the tail, every one of our businesses is a portfolio manager.
And we'd expect every one of our businesses, even our most attractive you know, business, the most financially profitable business is a normal distribution, has an opportunity to do more in those places where we make great returns and have a right to win. And even our most profitable business has places where you'd say you have a tale too and you ought to be thinking about what do you do with these pieces of a portfolio where you don't make attractive returns. And so we hold the entire company accountable for that. And so that will go on for a very long time. We're not even close to being at end of that opportunity.
So we'll get here first and then we'll get stuck. We'll get you both in before we're done.
Hi. Yeah. Sticking with M And A, on the $3,000,000,000 in particular, prospectively interested in adding to electrical, space been consolidating a long time, kind of the core consolidation dynamic Is is that driving that view or, aside from near adjacencies, are you considering you know, further flung adjacencies, whether that's ESS, just by way of example, and in particular in the context of having pitched the segment as a rapidly changing space?
Yeah. I mean, I'll I'll go first and, Udi, if you want to jump in it's fine. But, you know, first of all, I think about the 3 it's a placeholder. Will that number be bigger or smaller as we sit here today? We don't know.
Probably will be. It's simply a placeholder today. But in the context of where we're likely to go though, it's in all likelihood it'll be someplace where we can deliver value. And we have to pay for an acquisition. Therefore, we have to deliver synergies.
And so it's unlikely that we're going to go too far from our core businesses because if you do that, you just don't have the ability to pay for them. And so as we think about where the best opportunities If it's an adjacency, it's going to be a pretty near adjacency, you know, whether it's through the channel or the products or the technologies or customers, got to be something that we can leverage that gives us the ability to deliver synergies for us to really look at those kinds of acquisitions in the adjacency space.
Craig, where would you put Eaton today on the continuum of manufacturer versus more kind of design and assembly? Because a lot of what was was talked about today seems more kind of solutions based and value the customer and, you know, domain expertise that may be only eaten or someone, you know, intimate with you industry would would really know how to do. And I I guess where I go with that is, does that mean you're shedding capital over the next 5 years or whatever the outlook is as you try to push more on that end where it's less about bending metal and more about, you know, maybe not explicitly software, but something a little bit more kind of creative in the value chain?
Yes. You're absolutely right. I mean, and just by definition, we're becoming more electrical. And our electrical businesses have always been much more of a design, specify assembly test. That's their business they don't do a lot of heavy manufacturing in most of our electrical businesses as they talk about e mobility and the growth of everything, you know, more electric.
Also, these business models are much more asset light. Not a lot of heavy manufacturing like we would have, for example, in the hydraulics business or even the legacy vehicle business, which tend to be more capital intensive. And so I think without a doubt, we are certainly moving the company more in that direction.
And I guess just related to that, you've taken a lot of cost out over the last decade, including kind of the big post Cooper restructuring plan. How far have you pushed on that supply chain already given that you are more in that kind of design and assemble mentality and how much more can still be done? Like, would you consider that supply chain kind of optimized today?
No. Not even no, plenty of opportunity in the supply chain to continue to optimize and there's work that we have to do to be a better customer for our suppliers, for sure. But I think the reality is there's tons of opportunities today in and around how do we optimize supply chain, in terms of where we buy how do we leverage the scale of the company? How do we make sure that we're really taking into consideration the total cost of ownership? How do we deal with supplier quality, you know, and making sure we're picking the right suppliers.
So there's plenty of opportunity that remains in supply chain to fully optimize what we do, right? I think we've exhausted all the questions and, and we're, we're at lunch break. So let me just, once again, just close by saying, once again, appreciate you, you're coming out participate in the event, it's certainly an exciting story, one that we're obviously very pleased to tell. Think the transformation of Eton has been quite extraordinary over the last 20 years. We're not done.
We have more work to do. We look forward to continuing to grow the company, to grow earnings and to earn the right to be, one of your best investments. So thank you, and we'll see you all at lunch.