Okay. Good morning, everyone. Welcome to I'm Yan Jin, Eaton's Senior Vice President of Investor Relations. I'd like to talk about a couple of each items before I turn over to the speaker this morning. This morning, we'll start to go through our corporate presentation, start from Craig Arnold, our Chairman and CEO and Rick Freon, our Vice Chairman and Chief Financial and Planning Officer.
After that, we'll turn over to Uday Yadav, our Chief Operating Officer for Electrical Sector. Then he is Monemas, our Chief Operating Officer for Industrial Sector, who's going to finish this morning presentation. And after which, we'll take a 10 minute break. And during the break, we'll come back with a Q and A session. So I'll ask you guys to hold your question to the end.
Before I turn the word to Craig, I'd like to do your attention for 3 last things. The first of all, for those of you joining us remotely, as we go through the presentations, the material will be pulled up on the webcast. And I would like to take a quick review of our safe harbor statement, right? Some of the material today, we'll include in the forward looking statements and therefore, including the future risk. And also, in connection with this statement, please review the risk that are called out in our 10 ks as well as the statement you see here on the screen and in your material.
And lastly, for those of you who have questions at the meeting, we have our contact information right here, and Chip and I will always happy to do the follow-up calls. With that, I will turn it over to Craig.
Thank you, Yan. 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 this too shall pass. And I'd say that if there's a silver lining in all of this, at least from our perspective is that we're sitting on a pile of cash. We 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 recall, we made that announcement. Billory, it was in this meeting about 1 year ago.
And so it's great to get that transaction behind us. And let me just Certainly, as we think about the company, Eaton is going through a transformation. I 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 over the course of 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 in 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 your 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 term planning horizon, we think the company is very well positioned to deliver 8% to 10% EPS growth over the next 5 year planning horizon. 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 of our revenue and profits coming out of electrical and aerospace.
But in addition to that, the company is very well aligned with these secular growth trends. The work that we do in every one of our businesses and one of the key criteria 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, why do we win? Why do customers buy from Eton? 1, very strong brands, a real legacy, an enormous installed base inside of our businesses. Every one of our businesses are global.
They 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. 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 30,000 feet, this idea of making the things that matter work is very much a part of the DNA of the company.
And 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, it 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, accept a broader responsibility in terms of your ability to make a difference in 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 customers' number one choice and your channel partners' 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 at Eton, that we've helped them connect their personal passions to the things that they do at work. We'd like to think also as in the side of our company that 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 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 company, where every employee feels like they can make a difference where they feel in many ways at home. And then certainly, our mission 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, 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. And this mission statement, certainly a recognition of that, that in order to do good for your shareholders, you have to do good by the 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 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 fabric 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, I think, 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, 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 0 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 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 an under governance, we were named to the FTSE For Good Index, which is 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 mission while 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, Eton 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 franchise, more electric in your homes or buildings or offices, but more electric in your homes or buildings or offices, but also more electric as well and those things that moves, cars, trucks, trains, planes, everything is becoming more electric and we're participating in that trend through these portfolio actions. So we know where we want to play 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 of the criteria that every business inside of Eaton has to meet in order to be a part of the company. And we use this internally in 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 and standing up a better business overall. So $4,000,000,000 of revenue divested, but also $1,400,000,000 of capital redeployed 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 resegment some of our segments. And so this is a bit of new information for the group. And what we 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 resegment 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 1 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, also better aligned with the way that we run the company.
In our Aerospace business, 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 Gulf 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 me, North America and South America. It will not include the Krausz Heinz 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 Hein and Beeline businesses. And the reason we're putting Krausz Hein 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 $100,000,000 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 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 2000 and 8, what the company looks like today in terms of once again 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% of our profits and revenue come from electrical and aerospace. It's a pretty dramatic change in the makeup of the company. And as you think about kind of modeling 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 points. 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 to point view is one way of looking at it. 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 Eaton 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 business. As I mentioned, 85 percent 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, we 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 revenue change slightly in this new configuration. So as I mentioned, it's a $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 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, dollars 1,700,000,000 of revenue in lighting were actually reported in the Americas. Lighting was primarily a U.
S. Based company. As you think about margins, the guidance for 2020 is to get the business to 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 with really strong share positions and very attractive margins.
Next up is a look at Electrical Systems, the former Electrical Systems and Services business, or 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 harsh and hazardous 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 between systems and services and products. Margins at the midpoint 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, electrical and conveyance 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 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 at 20%, down slightly from last year, primarily as a result of the acquisition of Surya. But once again, over the planning horizon, we think those margins continue to grow and get back to 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 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 eMobility, 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, a 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 vehicle market. And naturally, while 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 to 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 assembly, 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 5 segments, the 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 customers. We're going to expand margins. And then the three elements of the things that we're driving here are 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 company. 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 general by the name of Arvind 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 him as a member of the organization. And as you can see here, as we think about the way we 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 that generate growth inside of the company? And I talked about here is that, I often say in this digital world, in the IoT world, it's great to be a company that makes the things. So organic growth, and this is certainly something that you're going to hear a lot from Uday and Heath about. But I did want to take this opportunity to at least set the stage and talk about a few things that really cut across the company in the context of organic growth.
And 1, I mentioned at the outset, secular 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 trends 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 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 sources 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, 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, and includes energy transition, these are 2 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 an 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 generation 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.
And in this world, the backup power for your home in the event of a power outage, it will 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 off 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 I'm going to turn you to just for one second to talk a little bit about the things that we're doing to expand margins. And I'd say here, expand margins 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 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 is anything that doesn't have value from a shareholder perspective. And we believe strongly that if you standardize what you do, 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 Eaton Business System is all about inside 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 Eaton. 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 and they're 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 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 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 own.
So this strategy of centers of excellence is really one of the places that we're really driving value in the functions inside the company. And then on Slide 30, the other the third 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 that 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 want 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 than they'll ever return. And you want 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, and 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 principally, it's the but 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 leg of the strategy obviously is around how we allocate capital. As I mentioned, the balance sheet is in great shape. It's never been better. We don't have big debt to repay. Our pension plans are essentially 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 our 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 the capital to give them the capital to do that. Secondly, we 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 the same. 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 say more broadly speaking, if you think about the next 5 years, the planning horizons that we typically operate in, you can expect us to grow organically by 2% to 3%. You can expect us to deliver 20% 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 began. We're building an intelligent power management company. All 4 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 in periods in which we have economic weakness. And then lastly, we're going to deliver 8% to 10% EPS growth.
And I think as you think about that commitment, I'd say it's backed up by number 1, a very strong track record 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 going to 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 at least what we estimate the impact is going to be in Q1. I'd like to leave you hopefully with the six 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.
If 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 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 the 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, from the beginning of 2000 to the end of 2019, it was 12.5%.
And so over such a long period of time, I would submit that's a really outstanding record and I'll compare that to our peers in a few slides. A few highlights for 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 cost as well as that warranty charge that we talked about in our Q4 call that relates to a component from a supplier that had a defect in it. You take out those two things, our segment margin, 17.6 percent, our EBIT margins, 14.4 percent and record EPS of $5.76 up 7% compared to the prior year. Record cash flow generation, dollars 2,900,000,000 free cash flow, dollars 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, dollars 2,200,000,000 to our shareholders during the year, dollars 1,200,000,000 in dividends, dollars 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. Dollars 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 'seventeen, 'eighteen and 'nineteen and then 'twenty year is starting, 1,000,000 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. They're 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 medium 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 at 2.3% growth this year. Now, that is the slowest rate of growth since 2,009. 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 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 Europe, the situation is even slower than the overall world with 1% GDP and a 1% contraction in 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's 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 its 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 happened 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 hit these goals. It's 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 more of the same. India is dealing with several issues. It's 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 of some of the other governmental policy changes.
And so if you look at that 1% manufacturing growth in India this year, That's the lowest growth of manufacturing since 2,009. Brazil, it'll be a reasonable year for Brazil with growth around 2% for both of GDP and manufacturing IP 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 TEPEBS still issue around trade disputes.
But the consumer very strong, consumer and construction, look at homebuilding, 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. Now how does that impact our specific markets? What I'm showing you here is the key market drivers by the new segmentation. So if you'll reflect back on our Q4 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 Americas, 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 not built enough housing in certain parts of the country.
In addition to that, you've got regulatory changes that are forcing homebuilders to put in more sophisticated electrical breakers and other safety equipment and that has been a significant propellant to the market. Utilities, we think will grow low single digits and that's a function really of grid 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 up 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 retail. And then industrial markets 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 Krausz Heinz and 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 five in 'seventeen and 'eighteen output grew by 40%, in 'nineteen grew by 50%. So you've got very strong growth in military fighters. Commercial aftermarket supported by older aircraft in use and 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. It's an important and growing aftermarket, but it's never been currently, it's 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, that 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 230%, about 30% decline. But frankly, 230% is not a bad level of activity. And so we're going through a normal correction or really just a level of activity compared to what it was last year. EMobility, 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 eMobility. And then lastly, hydraulics, it will be a segment this year and it is just the hydraulics business.
We've 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 Indian 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 in 2015 2016, we improved 80 basis points in 2017, gazuntide, 100 basis points in 'eighteen, another 80 basis points in 'nineteen to get to 17.6% and then 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, growth ahead, fix the tail. We've invested $6,000,000,000 in R and D and 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 all of the details on the historic margins per the new segmentation.
But just to show you what you have here, Americas is going to have a margin around 20%. Electrical Global is 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 start up costs as we begin early rate production on some of the wins that we've had. As we've noted in several forums, we have 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 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 is 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 these share repurchases. While 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. Echin's 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 to 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. 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 in free cash flow, it's grown at 12% over this 5 year period. So that's quite a rapid rate of growth.
This slide gives you a few more statistics around free cash flow, because we believe it's really one of the 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 2019. So that's 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 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, Eaton has consistently generated strong cash flow despite changing market conditions. So this shows you starting in 2013 up to present and the line shows you the growth in our end markets as best we can measure them. And clearly in 'fifteen and 'sixteen, 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 has steadily grown over this time period and of course a very considerable growth in 2019. So we think that this is a very attractive 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 2020, 2021, 2022, 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 $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 and 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 and 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 do more repurchases, for example. So a lot of cash optionality. Over the last 10 years, in fact, we have invested $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 we'll spend 5.5% to 6%, 3% in R and D, 2.5% to 3% in CapEx and that will 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 in given places.
And we think we're quite productive. We generate over 1,000 new patents a year, over 1,000 patents. So we do have a very 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. And our dividend yield as of last week was 3% 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 dividend payout. In terms of share repurchases, we're stepping it up dramatically this year. As you can see from this chart, we expect to be buying back somewhere between 6% 7% of our shares this year.
And if you look back at what we've already done 2014 to 2019, we have bought back 16% 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 'fourteen to 'twenty, 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 in share price or where we have a large quantity of capital that we can't readily redeploy into acquisitions, then you'll see us buy back 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, it 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 so here's our approach. We decide on the areas of focus. 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 the 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 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, first of all, we're looking for leaders in a key market or 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 it's 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 300 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 circumstances, for example, in Cooper, we convinced ourselves there were some significant top line synergies and indeed they came about. But 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 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 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 SOREO Sunbank, Carson Hazardous Connectors 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 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 in 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 in 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 third 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, 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 upside to our share 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 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 sales shortfall. I mean, to give you an example of what is happening in China, you may have seen this for the 1st 2 weeks of February in China. The China Automotive Association forecasts that automotive sales were down 95% for the 1st 2 weeks in February. And their estimate for all of February is 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 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 a 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 re stimulate the economy. And just having observed these restimulation efforts over the years, we think that they will probably be successful at doing so. As I mentioned, we don't expect sales outside China in Q1 really to be impacted in any material way.
So this is our full year guidance. It's unchanged. We while we as I said, we see an impact to Q1 at this point, we don't see an beyond China. But just to reiterate, dollars 5.60 to $5.90 adjusted EPS and that's flat with 2019, essentially flat organic revenue. We've got 2% acquisition growth, but 7 point 5% reduction due to divestitures.
You've got margins that center at 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, dollars 2,800,000,000 to 3,000,000,000 dollars 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 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 give you a discussion of Electrical. Thanks.
Thanks, It's good to see you all again. It's hard to believe how 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 over the last 7 months or so, I've spent time around the world meeting our customers, spending high quality time with our teams around the world. And I'm more convinced than ever that we're 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. First, we have a leading electrical franchise with broad capabilities and we've are 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 3rd, we're well positioned to benefit from the energy transition growth trend. And we define it in Eton 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. 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 of this industry as it undergoes transformation. So we're strongly positioned in the most dynamic and fastest growing part of the electrical power value chain. And 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. And 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 life cycle 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 firsts. If you look at the blue area on the left, we've established a leading service business. We've been strong in advanced product innovation, and we've created powerful digital centers of excellence.
And all this has led over time to many industry firsts that you see on the right, including intelligent products for different market segments, which underpins our digital strategy. Craig talked about it earlier, we made the things and those intelligent products are the foundation for our digital strategy. Now this strategy has led to profitable growth with market share gains. And as you can see, our revenue has expanded 6 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 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% to 30% to 3.5 points. On the right hand side, we've grown our global IT channel share in all regions. In China, we're the 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 to our sweet spot. 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 are 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 more storage, in fact, 13 times more storage than today. And third, 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 cybersecurity breaches are creating a lot of vulnerability.
Now all these secular trends create strong future growth potential for Eton linked to 2 areas. 1st, the power infrastructure or grid modernization that Rick referred to and second, the seismic transformation of the entire electrical value chain that is coming upon us. So number 1 is going to drive our base business expansion. It's the core of what we do today. And number 2 will result in the growth due to Energy Transition and digital solutions.
Now I want to 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 the 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. Delivering safe electrical power has been at the core of Eton 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 hypersensitive 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 in buildings. And in 2023, more codes are actually going to kick in. And all of this will drive more growth for Eton. So residences are adopting our sophisticated Arc 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 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 chain's resilience. Weather events as you know are causing costly damage, 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 recloses identify a power problem and they reroute power. This contains the impact to a smaller group of consumers. And the smaller the group of consumers 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 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, designed and ready for this transition. So now let's talk about energy transition or as we define it in Eton and as Craig mentioned, everything is 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 residence 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.
1st from the left, the traditional power generation sources, they're being replaced by grid scale storage, renewables. In fact, coal plants are being decommissioned almost every year in the U. S. 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 2 things are going on here. One is a production of energy locally, and the electrical power flow is no longer 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 bring 0 carbon by 2,035.
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 into the 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 system that you see in the
center optimizes the building 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 19 percent additional revenue on the installed electrical content. So again, more revenue for Eton as this starts to take place. Now I want to expand a little bit and talk about EV charging more broadly.
What is EV charging marketplace as a whole and what does it mean for Eton? Well, it 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 Eton 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 what drives it. It's more power distribution equipment or upgrades, some 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 plant. And the country is also experiencing rising energy costs. And during sort of peak hours, the cost of energy can be 4 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 microgrid control 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 1 year, the solution avoided 20 production outages and the plant actually received the 2019 Hannover Messe 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 example that couldn't be more different. This is a data center as a grid. 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 underutilized 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. So the sale of power for short intense periods of time is commonly referred to as you know as frequency response. 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 multi tenant data center supporting these frequency response needs. And for us, in a greenfield deployment because of this business model, it leads to 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 a more sustainable world. And as Craig shared earlier, our commitment to sustainability has been long standing in Eton.
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, SF6 is used in medium voltage and high voltage switchgear. It quenches arcs, it stops short circuits and prevents fire, 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 between more electrical switchgear and with that SF6. So this creates more of an opportunity for leakage of SF6 as this move takes place.
Now Eaton has a history of leadership in SF6 free medium voltage switchgear. We've been working and doing this for decades, shipping over a 1000000 sections over this time. And we continue to innovate with green gases to reduce the footprint. So 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've recognized for a long time the role that digital solutions will play in the future. And I want to emphasize this, in typical Eton 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 2 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 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 scale 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 optimize 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.
As you can see at 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. So we've built our digital platform to establish a leadership in our end markets. And I want to talk a little bit about what that means. Our platform sort of enables 3 this ecosystem on 3 dimensions.
On the left, apps and data monetization. So we have a portfolio of intelligent connected devices with software and services offering. And this helps leverage our current installed base. In the middle, we're expanding our mind share 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 unified development platform that supports a consistent, scalable, interoperable set of digital solutions. And the way we like to think about it in Eton is our approach is sort of analogous to the telecommunications environment, except we've created this platform to move directly to 5 gs, 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.
First, 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 Eaton and non Eaton 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 Officer 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, It's 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 changes, I'd say, are 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 20 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 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 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 is 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 VAVAR or reclosers. 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 in agriculture, and I think it's a neat example that brings together the elements of the platform that I just kind of talked you through. You can see here this is an overhead irrigation system in a 1,000 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. This customer gained a 30% productivity improvement because of our digital solution. So what do we do?
We simply connected our intelligent variable speed drives 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 electrical 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 Eton, the benefit is a monthly subscription for this kind of service. 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 can be a challenge. Here's where we came in and 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 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 Monosmith, and I'm going to wrap up our team presentation today by explaining why we're so excited about the growth prospects for our industrial businesses. So let me start with the repositioning. With the hydraulics transaction, we of course become a more streamlined, more focused portfolio on the key secular growth trends. Among those trends, of course, industrial mobile markets.
We couldn't be happier about that change, to be honest with you. We do think the rate of change will differ depending on the application. But we firmly believe that those companies that offer all solutions, intelligent customized solutions along the entire power chain from mechanical, pneumatic to hydraulic and, of course, electrical are the ones that are going to win. And so we're in a great position to do exactly that. Our eMobility 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 a 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 in. 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, we want to grow organically there. And I think the opportunity is actually the transition to electrical.
It obviously gives us growth opportunity for e mobility, but it also allows us to penetrate new markets. And I'll tell a story around 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 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, SOREO does both. SOREO Sunbank 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 in 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. But I guess my point as an operator is to tell you that we don't have to do the acquisitions to execute on the strategies I'm about to articulate. They'd be nice, they're adjacent to what we need to do, but overall, we can do it organically as well.
So I think this is a pretty I wanted to pull out the electrical ecosystem and just remind you about the synergies at So as Uday just explained, one way to think about this trend is you have the stationary electrical markets, and that's the unhighlighted portion. But then you have the industrial mobile markets. And between the 2 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 mobile markets, you are seeing exceptional 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 by direction. 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 industrial applications and we have the stationary side.
And I'd be remiss not to mention that, aerospace is also becoming more electric, more electric aircraft. 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 try to go a little more granular as to why we think we're unique and competitive in this space as the world electrifies. So starting with this power continuum.
If you're traditional if you break up the categories of power, you have mechanical, pneumatic and hydraulic. And now you're laying aside adjacent to that the electrical 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, in aerospace, 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 maybe more pure play electrical. We're in 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. So you think about an aerospace application where you might have an electric generator pulling power from the engine to drive a motor, to drive a hydraulic pump, to provide hydraulic actuation for flight controls.
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 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, pretty cool picture if I must say, of an electrical vertical takeoff and lander, an 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 Eaton 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 have 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 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 chain. And then you get your traditional industrial business 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, the 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 $12,000,000,000 electrical sector that does exactly that at world class levels for decades. It's self evident that we can 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. Sustain basic technology, different applications. So that sets us up well compared to our traditional industrial peers, right? They don't have a large electrical business 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 lander, aerospace, and then they can design it given the 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 of the technology that I described earlier from our electrical sector, but our deep domain expertise in the industrial business that makes Eaton 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 expertise, customer relationships to offer solutions that allow us to win in this space. I'm going to 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 eMobility and that shouldn't be a surprise. 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 eMobility 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 long legacy and history, a pedigree around winning in this space.
We know how to design safe and reliable solutions in this space. And we tell the electrical capabilities. We get in the door, right? But when you win, now you have scale of these kinds of wins are 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. How do we think about the markets today? They're consistent with what we thought when we projected and when we launched eMobility. 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 there. I do want to point out that we do expect by 2,030 that 84% of the passenger vehicle markets will have internal combustion engine technology.
92% of the commercial vehicles will. That's not as important for eMobility, 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 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 we have a large $12,000,000,000 electrical business sitting 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 4 50 engineers in this business. So 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.
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 execution, which is So turning to vehicle. 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 Engine Air Management. And I'm going to tell that story here in 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 fixed 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 think that we can leverage our technology at a time when the OEMs 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. And 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 margins in 2,030. So let's talk a little bit about that, what we've done over the years to by way Valve JV in Japan and Korea. We have formed 2 exceptional JVs with FAST, which is a subsidiary of Weichai in China.
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 manufacturer 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 risk.
We also tackle the portfolio. We have the FCD transaction, which is a big deal and a great example on a smaller scale of fixing the tail that we've been talking about. We're very active in 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 in pass car. 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 both at the same time. And I'm going to talk about 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, 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, there's a twist on in that we've made it electronic and intelligent. So you can take 1 piece of hardware, put it in multiple vehicle platforms with multiple tank variants. And you can customize the application of that piece of hardware within that system.
You don't need multiple different kinds of hardware. They don't need to have all the development 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 process within the tank, the air and the fuel chemistry. The more precise you are, the more efficient you can be, the more you can reduce the emissions. Variable valve technology for which we're a market leader allows us to do that. And again, as those regulations put pressure in the market, as people need more solutions and they need to extend their vehicle technology, same capital, same know how, now we have OEMs who are faced with NOx and CO2 emissions controls requirements.
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, we move to exhaust gas recirculation pumps. 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 will 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 market. 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've explained myself well. But at the end of the day, you have internal combustion engines where we're a world leader. We know how to manage air within the vehicle. There will be 84% of the market combustion engine technology passenger car, 92% commercial vehicle. We are a world leader with our eMobility 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 electrifies, 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 3.5 years ago, and we've had some significant wins that I'd like to update you on. So starting with the acquisition. Sorio Sun Bank, roughly $360,000,000 revenues.
Again, harsh and hazardous, highly specified, highly engineered solutions, exactly where Eaton participates. The most exciting thing for me is we have 3,200 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. In the aerospace side, particularly, as 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 of it as about a $10,000,000,000 market, half of it aerospace and defense. That's where we'll currently play. 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 connectors. We can play there and win for all of the reasons that I've just articulated. High growth, it's an exciting opportunity. 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 thinking about future opportunities for growth. And we intend to look for those opportunities between the electrical sector 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 and over penetrate and spares market, for example. Rick mentioned the military aftermarket F-thirty 5, M1s. There are so 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 and 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 25 years old. They need to refresh the products.
You think about an M1 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, you have to know how to get product certified. So with all of those things, our team continues to deliver wins.
And you take the A330neo jet pump, 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, 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 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 weight, 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. Thank you.
Thanks, Chris. It's always good to be ahead of the time. Now 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. Yes.
Thank you.
If we could all come back together, I'd appreciate it. And if I can have 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 is having coffee. There he is
outside there.
I would hope that you would agree with me in concluding that 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. I think there's never been a more exciting time in the company's history than the one that we're dealing with 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. So 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 we hope to get everybody's question in. Do you want to begin, Julian?
Thanks, Craig. Yes, maybe a question for you and also for Uday. If we look at the electrical resegmentation, the margins in the global piece are about 200 points or 300 points lower than Americas, and that's even with a higher product mix. So like for like product Americas versus product global much, much lower in global. Maybe just talk through the reasons for that 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, Udi 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 than,
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 Moody's chart, we have very large market shares in the Americas markets and the market shares around the world are not as attractive. Rudy, do you want to add anything
to that? The only thing I would add to that is, obviously includes a global business, the Crouse Hinds Beeline business, it's global in that segment. And that global business has some different competitive dynamics. And so I just add that to the mix.
Yes. 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 €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? Sure.
Rick, you want to take that one?
Yes. I mean, we well, first 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 that we grow back up to that $3,000,000,000 range. So that's the dynamic behind it.
And it's really the loss of lighting and the loss
of hydraulics. Lighting and hydraulics.
$4,000,000,000 of revenue that we're divesting that causes the little bit of a depression in our cash flow.
Yes. Hi, Dan. Two questions on M and A. 1, Schneider announced last week the acquisition of a BIM software company at a very high multiple. I'd like to hear your thoughts on that and whether that's a direction that Eaton'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 secularly people will just travel less and that the aerospace industry will no longer be that high growth attractive industries?
Great questions.
Do you want
to do Yes, sure. I mean, obviously, it's a very good acquisition and terrific to see the space changing. And I'd say that our approach and thinking is no different. We're interested in doing acquisitions, partnering in the software space to augment our digital solutions. And so as Rick 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 good acquisition for them.
And I'd just say once again, we try to think about the company is saying that we have an 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 have, some haven't. And so our teams have been very prudent over the years to say, what can we do internally.
We're going to obviously look at opportunities to augment that by acquisitions, but the multiples and what the alternatives are for the use of cash will always be important consideration for us. And in the context of aerospace, Heath? 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 the 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.
Yes. And we do believe we had SARS, there's been these events over the history and they tend to be 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 or 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 the penetration 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 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 like the storyline is changing every day, if not by the hour. But when you maybe you can share with us some of the Q1. The idea that when you said it centered in China, 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 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, Deane. We're certainly living in a period right now where 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 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 for country and we're not necessarily heavily dependent upon China for supporting our businesses around the world. There is obviously supply chain and other challenges that we're dealing with. Today, they look like it's relatively minor. But quite frankly, today, we're also living off of inventory. And so I think the ultimate test on what will happen is really something that we'll have to wait until we get to the end of Q1 to really call the balance of the year.
So it's really 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, whether it's in China or the U. S. Around the world, that will 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 an enviable position sitting on a pile of cash. And then Rick's comment was just to clarify, you have the intent and ability to buy back 7% of the shares this year? And just how much of that is the intent? It certainly looks as though you've got the cash to do it, but
Well, we now have $1,400,000,000 in the bank as of this morning. $1,400,000,000 more. More. And then we're going to generate free cash flow of about 2.9 And so when you back out the dividend, and that gives you an idea of how much you have. So we won't have likely any significant difficulty buying 2.4 to 2.8, 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 when you listen to both Uday and Heath and they talked about their growth ambitions across the portfolio, it seems like your internal targets, Craig, are higher than that of the entire portfolio. So perhaps maybe first respond to that. And then secondly, as I as we think about Oodie'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 that the numbers that were reflected in my presentation, Rick's were lower than the growth assumptions that we have the industrial and electrical businesses running to. So the internal plans are much more aspirational in terms of growth than what we built into our what we call our top down model.
And what we're trying to do here is really to set a baseline assumption around growth, around that's 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 out a 5 year commitment 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 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 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 but 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 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 our big customers are talking about and everyone's talking about.
The next 5 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, 2020, we think, will be another good year, partly because 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 if you were to adjust for those, you might argue, they're not one off, but you can't replicate the size of those every year. That yes, you're right, perhaps it's more like 13.5%, something like that as opposed to over 14% this year.
And now that will change though as our margin goes up. As we continue to grind higher, add a couple of points in just our operating margin, that will push the free cash flow margin higher as well.
Great.
Thank you, Cliff Ransom. One for Rick and one for Heath, please. Can I follow-up on that question? I tend to like to look at turns as opposed to inventory dollars, because clearly you're in 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?
And 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. You're absolutely right. We expressed it here in dollars, because it's just a way of getting a sense for billing what cash we're going to be able to deploy. But 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 there 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 repeat that statement in terms of outside of the fact you'd 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, 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
system.
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's going to 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 was
just going to add that 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 DOH.
Keith, I was 17 years too early in the additive manufacturing revolution, so you may want to throw this question out. Are you Heath, I was 17 years too early in the additive manufacturing revolution, so you may want to throw this question out. Are you looking at any of the kinds of things that Dassault is talking about these generative designs using AI and mission part mission?
Say it again, the
first Generative design, letting 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 not generally. I mean, 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 got to build up the skill set.
And then 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.
Thanks. 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 there's upside to that number? And then do you need to do any outside 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. What 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, use the Eaton Business System, how we drive operational excellence and how we 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.
Okay, great. And then a question for 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 do you need to do some bolt on acquisitions in there?
So the opportunity, we're developing the opportunity. I'm 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 if you follow the theme that I'm trying to lay out along all of Eaton, 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 units. And eMobility 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 in their 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 a 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% 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 behind and in front of the meter.
And so we are looking at the whole space to see where we can play in it. And obviously, there are a lot of players around there as well, but it's definitely part of our thinking.
And I'd say the other thing that's changing, when you talked about is that where you do metering. Today, 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 to really participate on both sides of that equation.
And I forgot. You're right. DistribuTec, 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 Q1, but I think you can speak about the risk assessment of your supply chains and components.
So maybe you could just give a little bit incremental color about how you're thinking of the risk in 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 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 hasn't been tested at this point.
And so let's have to wait and see. And as I'm sure you appreciate, it's going to be the weakest link in the value chain that's going to create the issues. And where exactly you're 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 sometimes hard to get your arms around, but we're all over it
as a leadership team. Thanks.
Maybe just one for Uday
and one for Heath actually just to get a little further in the weeds on a couple of things you talked about. Uday, your examples about kind of value upside across your various end market opportunities is 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, batteries waiting for something bad to happen. Why is the revenue opportunity so big relative to that switchgear position that you would have?
So you
talk about the data center specifically? Yes. Yes. 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 2 times what we would normally be providing into a data center. It's as simple as that.
So they're literally putting in extra UPS to be able to do this as opposed to better utilizing underutilized assets?
Yes. It's because they do their own payback and we're part of that and it's a good payback for that kind of business model.
And it could be either or. I mean, in many cases, they are using their existing Yes. Should be using their existing or it 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. And 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 sell back their power to the grid to 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 does that serve? And is that potentially a platform in the making?
Yes. Good question, Jeff. I mean, 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 filtration market. And we think it's a great, great business.
We're evaluating whether or not we want to do some acquisitions that space. We talk about being disciplined with our capital, but I do think that's a gem of a business that we're going to take a hard look at.
Craig,
I'm wondering if the economy does actually get a lot worse. Can you guys just maybe remind us what is your potential recession playbook? I think you've talked I think, Rick, you've talked before about sort of flat EPS. I don't remember what you said on 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 Eton 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 shared with our Board during a Board meeting last year that said, we don't know which way the economy is going, but we want to be ready. And so in both
of the
sectors and their teams put forth plans that says scenario planning, if markets are flat, if markets are down 5, if markets are down 10, what would you do? So that in the event that something bad happens, it's not the first time we thought it through and have a plan on the shelf. And so I would tell you today that difficult to model what the real impact would be to EPS, especially in the near term. We would likely do more restructuring. And the way we think about it in general end up with an economic recession of some sort, we don't think that's in the cards.
We'd simply take some of these actions, we'd accelerate them, we'd pull them forward. 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 revenues, here's our here's our software engineer complement. 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 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 flesh out a little bit more over time.
Yes. I might take a part of the question, Udi can jump in as well. But I'd say that, first of all, when we think about digital, it's there is a revenue generating piece around how do we create new business models and services and software. That's a really important part of the whole 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 at 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 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 Arben 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 essentially make work.
So much of what we do today in and around the components that we make, they'll be intelligent, they'll have software solutions 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 are 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, Uday?
No, I agree broadly with what Craig said. And I would say it's just a function of maturity and time. And the balance 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 Arvind 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.
And if there is a better way and we can focus, we'll do it. I mean, it's all going to 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 are certain parts of our business today that are naturally already broken out. I would say the grid 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.
Going back to 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 Eton?
Sure. Appreciate the question. I'd say 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 valuations 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 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, 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 today, we think we have a great ready made solution for cash that's relatively risk free and buying our shares back. And we like buying our shares back at the price levels that they're at right now. And so the hurdle rate will always be looking at what are the other opportunities to use cash and acquisition is always going to have to compete with your ability to buy back the 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, 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 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 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 tail 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 the end of that opportunity.
So we'll get here first and then we'll get you both in before we're done.
Hi. Yes, 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 that driving that view or aside from near adjacencies, are you considering 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?
I'll go first and Udi, if you want to jump in on that, it's fine. But 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 will 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, whether it's through the channel or the products or the technologies or customers, it's 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 talked about today seems more kind of solutions based and value to customer and domain expertise that maybe only Eaton or someone intimate with the electoral industry would really know how to do. And I guess where I go with that is, does that mean you're shedding capital intensity value chain? Yes, you're absolutely 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 model. They don't do a lot of heavy manufacturing in most of our electrical businesses.
As I talked about e mobility and the growth of everything 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 in the 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 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. I think we've exhausted all the questions and we're at lunch break.
So let me just once again just close by saying, once again, appreciate you coming out to participate in the event. It's certainly an exciting story, one that we're obviously very pleased to tell. I think the transformation of Eaton has been quite extraordinary over the last 20 years. We're not done. We have more work to do, but 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.