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Eaton Corporation PLC (NYSE:ETN)
Q2 2020 Earnings Call
Jul 29, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Yan Jin -- Senior Vice President of Investor Relations

[Technical Issues] With me today are Craig Arnold, our Chairman and CEO; and Rick Fearon, Vice Chairman and Chief Financial and Planning Officer. Our agenda today including opening remarks by Craig, highlighting the Company's performance in the second quarter. As we have done on our past calls, we'll be taking questions at end of Craig's comments. The press release and the presentation we'll go through today have been posted on our website at www.eaton.com.

Please note that both the press release and the presentation include reconciliation to non-GAAP measures. A webcast of this call is accessible on our website and it will be available for replay. I would like to remind you that our comments today will include statements related to expected future results of the Company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and the presentation. There are also outlined in our related 8-K filings.

With that, I will turn it over to Craig.

Craig Arnold -- Chairman and Chief Executive Officer

Okay. Thanks, Yan. We will start on Page 3, with recent highlights from the second quarter and as you can imagine, I'm extraordinarily pleased with the way our teams have executed in the midst of this pandemic in the economic downturn. We've done a good job of keeping our employees safe, have delivered for our customers and certainly generated exceptional cash flow, all while flexing our costs at record rates. Our results, while also of last year, certainly, in absolute terms, were better than expectations and we continue to make an important investments for the future.

Q2 earnings on a per share basis were $0.13 on a GAAP basis and $0.70 on adjusted basis, which excludes $0.20 of charges related to acquisitions and divestitures and $0.37 related to the multi-year restructuring program that we just announced. Our Q2 revenues were $3.9 billion, down 22% organically. As we noted on our Q1 earnings call, April was down approximately 30%, this was followed by slightly better volumes in May and then relatively strong finish in June, which was down, let's call it low double-digits.

And in fact, I mean, this has a point of maybe amplification, our Electrical business in the Americas, in Europe and Asia, all posted low-single digit organic growth in revenue in the month of June. And so once again, our Electrical businesses are remaining very resilient in the face of this pandemic an economic downturn.

Segment margins were 14.7%, down 110 basis points from Q1 and our detrimental margins were at 25%, 5 points better than our guidance of 30%. Once again a good indication of how well our teams have done in controlling the elements that are really within our control. However, recognizing that some of our businesses could be looking at a slow and certainly what you could call it, prolong recovery, we announced a multi-year restructuring program of $280 million, including $187 million charge in Q2.

These actions will reduce structural cost for sure and are targeted in those end markets, including commercial aerospace, oil and gas, NAFTA Class 8 truck and North America and European light vehicle markets, where these markets have been certainly highly impacted. I'll provide more details on this program in a few minutes, but they're covered on p

Age 12.

The other clear highlight for the quarter was our operating cash flow, which was $757 million and free cash flow of $667 million. Both very strong results and which gives us the ability to really reaffirm our free cash flow guidance of $2.3 billion to $2.7 billion and a midpoint of $2.5 billion. So teams continue to do great in converting on cash as well.

Finally, as most of you know, we made an important announcement during the quarter regarding sustainability and our commitment to 2030 sustainability goals. I thought it'd be helpful just to put this announcement in the context in order to show you how it fits within the broader strategic framework of the company, which we do on Page 4. I think, simply stated at Eaton, sustainability really is at the core of our mission.

We talk about our mission being to improve the quality of life in the environment. And certainly, that means, sustainability.

In fact, if you think about all of our value propositions with customers, they're built around creating safe, reliable and efficient solutions, let's call them sustainable solutions and so as we oftentimes say, what's good for the environment is good for Eaton.

We believe that meaningful efforts to support the environment are fundamental to how we create value for customers and it certainly plays where we think Eaton should play a leadership role. Sustainability, as we think about it, really presents growth opportunities to help our customers solve their business goals and to this extent and have been so subjective, we've laid out 10-year plans that include investing $3 billion in R&D to create sustainable products over this period of time.

This will also include reducing our emissions from our installed base of products and upstream sources by some 15%. Just to maybe give you an example of where we think this really fits with our overall strategy, sustainability really is about capitalizing for Eaton on secular growth trends, around electrification for sure, across all of our businesses and also in energy transition.

Sustainability, I'd tell you is also an important part of how we run the company on a day-to-day basis. Since 2015, we reduced our absolute greenhouse gas emissions by some 16% and we're certainly on track to deliver our 2025 targets. By 2030, we now have committed to achieve science-based targets of 50% reduction of greenhouse gas emissions from 2018 levels.

We're also committed to be carbon-neutral by 2030, a target we'll achieved through a combination of initiatives including carbon offsets such as reforestation continue to optimize our sourcing of renewable electricity in our -- all of our operations, as well as delivering energy storage solutions and so pretty comprehensive set of plans that we have that we think will deliver this 2030 goal.

And finally, to achieve these goals, we obviously have to continue to work on building a workforce that's engaged and passionate about making a difference. So this will continue to be a large project for the company overall.

So hopefully, that's provided just a little context in terms of why we think sustainability is such an important initiative for Eaton and how we're going to convert on that and turn it into accelerated growth for the company.

Now turning to Page 5, we summarize our Q2 financial results and I noticed a couple of things on this page. First, acquisitions increased sales by 2%, this was more than offset by the 8% impact from divestitures and also we had negative currency impact of negative 2%. I'd also remind you that we now recognize all charges related to acquisitions, divestitures and restructuring at corporate rather than at the segment level. And we did it because we would hope would make it easier for you to do your forecast by quarter, by segment without the volatility that comes with these types of one-time charges.

Next on Page 6, we show our results for Electrical Americas. Revenues down 29%, 9% decline organic revenue,19% impact from M&A and this was primarily the divestiture of the Lighting business and a small impact from negative currency as well of 1%.

Operating margins increased 130 basis points to 20.7% and these margins were certainly favorably impacted by the divestiture of Lighting, but also our teams did a great job of controlling costs to really counter the impact of the economic impact of COVID-19. This combination resulted in a very strong decremental margin performance, up 16%.

So this segment continues to prove to be highly resilient when you look at margins, but also when you look at orders and backlog. Orders increased 2.1% on a rolling 12-month basis with strength in residential and utility in data centers. And of note here, our data center orders actually were up some 7% on a rolling 12-month basis. And lastly, our bookings remain strong. They were up 11% versus last year.

Turning to Page 7, we have our results for the Electrical Global segment. Revenues were down 16% with 14% decline in organic revenues and 2% headwind from currency. Operating margins here declined some 160 basis points, but to a very respectable 16% and decremental margins here were also very well managed, coming in at 26%.

Orders declined 4.6% on a rolling 12-month basis, but with most of the significant declines coming, as you would expect in global oil and gas markets and in industrial markets. So, not an unexpected result with respect to where we saw strength and weakness. And lastly, our backlog for Electrical Global increased 2% on a year-over-year basis.

On Page 8, we summarized our Hydraulics segment. For Q2, revenues were down 32%, with a 30% decline organically and a 2% currency impact. Operating margins were 9% and orders for the quarter were down 33.7% year-over-year and this was driven really by weakness in both OEMs and the distributor channel both.

We continue to work closely with Danfoss in completing the customary closing conditions and regulatory approvals and I would tell you that Danfoss organization remains excited about owning the business. We do however now expect the transaction to close at the end of Q1 next year. The delay as you can imagine, due to the COVID-19 impact, which has impacted the pace of some of the regulatory approvals that we expect.

On Page 9, we summarize results for the Aerospace segment. Revenues declined 27% with a negative 35% in organic growth offset by 8% increase from the acquisition of Souriau. Operating margins declined to 14.8% and really this is due to lower sales, but also the acquisition of Souriau also had a dilutive impact on margins.

Orders declined 12.8% on a rolling 12-month basis with particular weakness in the quarter, as you would expect in commercial OEM and aftermarket, it is worth noting, I would tell you though that orders for the military aftermarket were up 13% on a rolling 12-month basis.

Backlog was down 5% year-over-year overall. Certainly, as everyone here understands the commercial aerospace markets are grappling with significant declines in passenger demand and this is impacting our business and certainly impacting both the OEM and the aftermarket.

Just maybe some context here, while we think about this as kind of a near-term dislocation and we're taking certainly the needed steps to position this business a future, we remain confident in the long-term attractiveness of aerospace market and we'll certainly do our -- what we need to do in order to manage our margins in the meantime.

Next on Page 10, we summarize the results for the Vehicle segment. Revenues declined 59%, 52% of which was organic in addition to the divestiture of the Automotive Fluid Conveyance business which impacted revenues by 4%, we had 3% negative impact of currency. The decrease in organic sales was really driven by I'd say, widespread customer plant shutdowns due to COVID-19, which really resulted in lower Class 8 OEM production as well as continued weakness in light vehicle production. Just once again, it's a little bit more color on this one, during Q2, most of light and commercial OEMs had shutdowns at range between six and eight weeks. These shut downs, which really began, let's say in late March, occurred throughout the month of April and extended into mid-May and so many of our customers were shut down for almost half the second quarter. But production is now certainly beginning to come back online.

Global light vehicle market production was down 55% in Q2 and Class 8 OEM build was down from 70% in Q2. We now project NAFTA Class 8 production to be 175,000 units for the year, which is down slightly from our prior forecast 189,000 units. But still down some 49% from 2019. This steep reduction and certainly -- this sudden reduction in OEM production led to operating margins of a negative 6.4%, but I would add, this business has once again done a great job managing decrementals and despite this tremendous reduction in revenue delivered a respectable decremental margin of 33%.

Not surprisingly, and much needed, we do expect better market conditions in the second half and our business will be well positioned to participate in this recovery.

Moving to Page 11, we have our eMobility segment. Revenues were down 33%, all of which was organic. Organic margins of negative 3.6% -- excuse me, operating margins of negative 3.6% primarily due to lower volumes and a particular weakness in the legacy internal combustion engine platforms. And once again, the ongoing increase in R&D expenditure.

We continue to be enthused by the way, about the long-term potential of the business and and quite frankly, have seen nothing but upward revisions in the expectation for the penetration of electric vehicles. And so a market that we still think will be very attractive long-term.

We're very well positioned once again with the common technology platforms that we're creating, leveraging the strength in our core Electrical business. A good example of this idea of everything becoming more Electric is one of the recent wins that we've had with the truck OEM, a $21 million program for export power inverter where major commercial truck customer and so, in almost every aspect of our business there is more electrical content and we're well positioned once again through this particular segment to participate in that growth. Overall, we've won programs with a value of approximately $500 million of mature-year revenue.

On Page 12, we show the details of our plans to accelerate and I'd say, expand our restructuring actions. And I say accelerate because for the most part, we're pulling forward a number of the restructuring ideas that we would have done anyway. Given the economic implications of the pandemic, we naturally have a greater sense of urgency and also more capacity to take on these projects. We announced the $280 million multi-year restructuring program, as I noted, designed to eliminate structural costs and we've taken charges of $187 million in Q2 and then we expect to see additional cost of $93 million realized through 2022. Just to characterize those additional dollars, we'd expect to deliver over the next three years some $33 million of charges in the second half of this year, $55 million in 2021 and $5 million in 2022.

We would expect to realize $200 million of mature-year benefits from these actions once they are fully implemented and we think full year implementation is 2023. Approximately two-thirds of these costs are in our Industrial businesses, principally, Vehicle and Aerospace and the remaining one-third is with our Electrical sector, particularly with an emphasis on our oil and gas business that will report through our Electrical Global segment. Naturally, we're focused on those businesses serving in the end markets that are more severely impacted by the pandemic.

And then, turning to Page 13, we do our best to provide Q3 outlook on revenues versus last year and while you can imagine that all these markets will be stronger than what we realized in Q2, this is really a year-over-year growth for Q3 versus last year. For Electrical Americas, we expect organic revenues to be between down 2% and up 2%, so essentially flat. With strength in residential, utility, data centers offsetting weakness in industrial markets. For Electrical Global, our current view is organic revenues will decline between 10% and 14% with strength in Asia-Pacific. And data center markets offset by declines in Europe and once again, in the oil and gas market.

For Aerospace, we expect organic revenues will be down between 28% and 32% with continued strength in Military offset by really significant declines in all of the commercial markets. And Vehicle, we project revenues will decline between 30% and 34%. Some markets are still very weak in absolute terms, but these markets will be up significantly from Q2. And for eMobility, we expect declines of between 13% and 17%, once again pressured from legacy internal combustion engine platforms.

And lastly, for Hydraulics, we think market will be down between 23% and 27%. Freight in overall, we're estimating Q3 revenues to be down between 13% and 17%, and so an improvement versus Q2, which was down some 20%, but still on absolute terms, where markets are still in decline.

Moving to Page 14, here we provide our best look at guidance for Q3 and some commentary on the full year, but for Q3, we expect organic revenues to decline between 13% and 17% and this really does include what we know about July, where we saw low double-digit declines. We've elected not to provide full year revenue guidance given the kind of the ongoing uncertainty around the pandemic and its impact on markets in Q4. As many of you aware, we are still dealing with the pandemic in various regions, the U.S. and around the world, we're still seeing a growth in the number of cases and so we're still living in this period of uncertainty.

We do think Q2 will be the trough for organic revenue declines and barring second wave of the pandemic, Q4 should be better than Q3. For Q3 and full year, we expect decremental margins of between 25% and 30% and for Q3, we expect our tax rate on adjusted earnings to be between 15% and 16%. We're maintaining our free -- 2020 free cash flow guidance, the range of $2.3 billion to $2.7 billion and I would note that this range does in fact, include now the impact related to the multi-year restructuring program that we announced, and that was not in our prior guidance.

As a point of reference, in the first half, just to give you some comfort around our ability to deliver this number, we generated some 35% of our $2.5 billion midpoint, that's in our free cash flow guidance and this number is very consistent with our performance over the last five years. And so we do tend to be a bit back half loaded. We're providing new guidance for share buybacks and we're seeing between $1.7 billion and $1.9 billion for the year. And recall that we repurchase $3 billion of shares in Q1 with the proceeds in the lighting sales. We continued to deliver free strong -- strong free cash flow and we now plan to buyback between $400 million and $600 million of our share is half of the year.

And finally, may be just a -- like we are doing here inside of our company, just to bring it back to kind of the broader longer-term strategy and where we're headed as an organization and we will continue to effectively manage through the short-term challenges associated with the pandemic, but we also remain focused on the broader strategic and financial goals that we've laid out in our meeting in New York and we've summarized once again here on Page 15.

Number one, ensuring that we continue to move the company in the direction of becoming what we see as an intelligent power management company, that takes advantage of important secular growth trends and we talked about them being electrification, energy transition, LTE connectivity and blended power. So these trends are continuing and despite whatever temporary hiccups we're experiencing, we think long-term it's the right place to be. By doing so, we're working on creating a company that's going to deliver better secular growth and better growth through various cycles, higher margins and with much better earnings consistency.

Our long-term goals have not changed, it include 2% to 3% organic growth, 20% segment margins, 8% to 9% EPS growth and $3 billion a year of free cash flow, and with our strong cash flow we'll continue to be focused and disciplined in how we deploy it. By investing in organic growth as a top priority, delivering top quartile dividends and ongoing program of share buyback and then actively managing our portfolio, while being a disciplined acquirer.

So we continue to remain excited by the Eaton's story, I hope you are as well. And with that, I'll turn it back to Yan.

Yan Jin -- Senior Vice President of Investor Relations

Okay. Good. Thanks, Craig. Before we start our Q&A of our call today, I do see that we have a number of individuals in the queue with questions, so I appreciate if you can limit your opportunity just to one question and a follow-up. Thanks again, the ones for your cooperation.

With that I will turn it over to the operator who will give you guys the instruction.

Questions and Answers:

Operator

[Operator Instructions] And our first question is from Nicole DeBlase from Deutsche Bank. Please go ahead.

Nicole DeBlase -- Deutsche Bank -- Analyst

Yeah, thanks. Good morning, guys.

Craig Arnold -- Chairman and Chief Executive Officer

Hi.

Yan Jin -- Senior Vice President of Investor Relations

Hi.

Nicole DeBlase -- Deutsche Bank -- Analyst

Hey there. So I guess, maybe starting with the restructuring actions that you guys are taking, Craig. So the information on the costs were helpful, I guess maybe some color qualitatively around what you're actually focusing on, headcount versus maybe footprint or other things. And I guess, where I'm going with this is cadence of payback over the next few years, including the second half of '20 as well as I guess, why it's taking some time to actually get the payback from those actions?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah. Yeah, I appreciate the question, Nicole. And again, as I mentioned in my opening commentary and one of things we've talked about historically is that, we always as a company have kind of a future view of restructuring projects that we'd like to take on. And the pacing items are generally tend to be our own internal capacity to deal them -- with them and manage them effectively as well as our customers' ability to absorb them without creating disruptions for them. And certainly, in the event of an economic downturn like this one, it gives everybody more capacity to take on these projects.

And so a lot of what we're doing today, I'd say, when you talk about footprint versus headcount, I think the important way to answer that question is that it's all structural. And so these are all cost items that we're taking on that will not come back in the event that our win revenues return and so these are things that we're really focusing on taking structural fixed cost out of our system, some of which will be headcount, some of which will be around footprint. We have not yet made these announcements completely internally in terms of where those impacts are going to be, and so we'll wait and provide that detail a little later on, but it will be completely structural.

Your point around timing, I think some of these items obviously will impact and have a benefit earlier than others, but it's one of the things I would say, if you think about the decremental margins that we're delivering as a company and what's embedded in our guidance, it's one of the reasons why we can deliver these very strong decrementals is because we are flexing our businesses and flexing our costs.

And so I'd say, as we think about this payback, a $280 million investment with a -- essentially a $200 million return, this is a very attractive program in terms of the return on the investment and we'll get some of the benefits sooner, some will come later, but in aggregate, it's a extraordinarily strong returns on these dollars that we're investing.

Nicole DeBlase -- Deutsche Bank -- Analyst

Got it. Thanks, Craig. That's helpful. And you kind of teed up my follow-up there, I guess. And I wanted to hit on decrementals. The 25% was obviously impressive this quarter and above your own 30% guidance. I guess, how do we think about that through the rest of the year. I mean to me, we kind of know that 2Q, at least we hope, will be the low point with respect to revenue. So I guess -- is there any possibility that 25% could actually become something better in the second half as you guys execute on cost savings and perhaps you get a little bit of sequential improvement in revenues as well?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah. I appreciate the question. And our team just have done an extraordinary job year-to-date on decremental margins and as we flex costs and embedded in that guidance of '25 to '30 is once again the uncertainty around whether not we end up experiencing a second wave of the pandemic. And as you know, as well as anyone, we're seeing these hotspots around the U.S. and potential threats of going into some form of -- if not full shutdowns, retrenchments, in many of our markets. And so there is still a lot of uncertainty and it's one of the reasons why we still have this fairly wide range of decrementals as you can imagine, as well. We took a lot of extraordinary one-time costs in Q2 around time off without pay and travel was essentially came to a grounding halt.

And so some of these costs will certainly come back as the year unfolds. But if we don't end up with a second wave in the second half of the year, we will likely do better than kind of the midpoint of this range of decrementals that we've laid out.

Operator

Thank you. Our next question will come from the line of Joe Ritchie. Please go ahead.

Joe Ritchie -- Goldman Sachs -- Analyst

Thanks. Good morning, everyone.

Craig Arnold -- Chairman and Chief Executive Officer

Hi.

Joe Ritchie -- Goldman Sachs -- Analyst

Craig, maybe just starting out, why don't we, I'd love to hear your thoughts on just non-res construction specifically and your exposure to it. There's a lot of concern as we kind of head into 2021 that the markets are going to downturn. And so be curious to just hear how your business is positioned for potential non-res downturn and how maybe, some of these actions that you're taking are potentially like offsetting measures for that.

Craig Arnold -- Chairman and Chief Executive Officer

Yeah. Yeah, thanks, Joe. Appreciate the question. And when we use the term non-res construction, really that's -- for us that's really most of our Electrical business, right, because that's everything other than residential, and residential today would account for less than 20% of our total business and so it's a really big category. The way we tend to think about it is that, maybe just take you through some of the key important segments first. We think as has been the case for some time, we think, data centers continues to be a very strong market and are performing well in the near term and we think long-term it continues to be strong. We think the utility market continues to be a very attractive market and will perform well over the long term and it sells up extremely well.

Residential, by the way and I know you asked the non-risk question but residential has just been extraordinarily strong and with essentially high double-digit kind of growth numbers in Q2 overall. So resi continues to be extraordinarily strong. And then, yeah, I mean I think that the kind of spirit of your question really get to this whole question, what's going to happen within commercial markets and there's has been a lot of talk and speculation around the death of the office and whether or not anybody's ever going to go back to the office again. I don't think that's the case by the way, in fact, I can point to examples where companies have actually had to take down more office space because you have to social distance now on offices and so, you need more space to house the same number of individuals. But certainly, there is -- there is certainly some risks to what we call the office piece of non-res, that certainly, if you think about retail, those markets will probably be weak. But offsetting that there'll be other markets that are strong. We think that -- you think about warehousing as a segment, we think will be strong, we think, water -- wastewater market will be strong. And so I think, the fact that our Electrical business has held up so well or better than others would imagine is the fact that we do play across so many of these different end markets, some of which are experiencing some of these negative forces, other ways -- of which are seeing positive impact and as a result, this business is extraordinarily resilient.

And so we remain very optimistic about the prospects of our Electrical business. There will be dislocations in perhaps, certain markets or certain regions of the world, but by and large, we think the market will be just fine and using kind of China as a good proxy for the rest of the world, as they get you come through the pandemic. China is already back to positive growth both in sales and orders. And so, we are hopeful once we get through this and we get a vaccine, we get a effective therapeutic, that the markets are likely going to return the trend level of growth.

Joe Ritchie -- Goldman Sachs -- Analyst

That's helpful color, Craig. Maybe my one quick follow-up is more on just free cash flow. It was nice to see you guys affirm the range for this year. I guess as you're thinking about next year also in the context of some of the cost actions that you're taking. I know it's too few difficult at this point to say exactly what the number will be next year, but if growth starts to return to something that's a little bit more normal, what are your thoughts on your ability to grow free cash flow in 2021?

Craig Arnold -- Chairman and Chief Executive Officer

The way we generally think about it is that, certainly in periods like this as we decapitalize the business and we're freeing up a lot of cash from working capital. But also, as you can -- as you saw on our recent -- the earnings are down dramatically. And so as we continue to, as we expand through an expansionary cycle, the earnings will be up significantly and with that your cash flows will be up. And so if you think about Eaton over time and through various cycles, our cash flows have been just amazingly consistent in terms of generating very strong free cash flow, really at all points of expansion and contraction.

Did you want to -- did you want to add something?

Richard H. Fearon -- Vice Chairman and Chief Financial and Planning Officer

Just going to add a, Joe, a little color on the trends in Electrical, we measure it in a lot of different ways, but one of the ways we measure it is looking at our negotiations for a large projects, in the Americas, we have very good data and it's a very big business for us and if you take out the activities related to oil and gas, our negotiations in the second quarter were flat with the year ago. And so it gives you some indication that the balance that Craig talked about on all these different segments, they come together in a way that creates a lot of stability and that gives us a fair amount of confidence that even with the turbulence on the macro economy, there are enough sources of strength that those sources offset the weak spot.

Yan Jin -- Senior Vice President of Investor Relations

Okay.

Operator

Thank you. Our next question is from the line of Jeff Sprague from Vertical Research. Please go ahead.

Jeff Sprague -- Vertical Research Partners -- Analyst

Thank you. Good day, everyone. And just would like to get a little additional color on Vehicle, obviously a very, very tough quarter production in -- on the automotive side, starts to look better as lockdowns ease. Just give us a little sense of what you're thinking for the profit trajectory there. Should this be the only quarter where we see an operating loss? And maybe, give us a little color on how much if any of these restructuring benefits might flow through to those businesses in the back half.

Craig Arnold -- Chairman and Chief Executive Officer

Yeah. I appreciate the question, Jeff, and it's been kind of a long time since we've ever -- since we lost money in our Vehicle business and I just say once again just an extraordinary combination of events when you look at some of these numbers around production, both in Class 8 and in global light vehicle. Essentially half the quarter was lost and so the team once again, did I think, an extraordinary job in maintaining a 33% decremental in that environment.

We certainly, if you look forward, the volumes are going to be significantly better than Q2, we would fully expect that the margins for the business this year will be double-digit and we would not expect to see a loss in the Vehicle business in any subsequent quarter, barring another return to this is horrific market kind of event that we experienced over the last quarter.

The details around where the benefits are going to flow, once again, we've not made internal announcements specifically to some of these initiatives. And so, we'll give you more color later on, it's certainly fully embedded in the decremental margin assumptions that we've laid out for the year, but you certainly can expect our Vehicle business to return to attractive levels of profitability post Q2.

Jeff Sprague -- Vertical Research Partners -- Analyst

Great. And second question just on Aerial, do you think we've seen the bottom in aftermarket activity or do we still got to kind of deal with the delayed impact of parked airplanes and used material and stuff kind of working its way through the system and maybe we're a quarter or two out on the bottom there?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah, I mean, it's a good question and one that everybody trying to get their arms around specifically in terms of what's the the outlook for Aerospace. Specifically, what's the outlook for aftermarket in terms of our consumers are going to be comfortable getting back on planes flying again which is, as you know is what drives the aftermarket. I'd say we had pretty prolific numbers in terms of aftermarket in Q2. Down fairly dramatically, so it's tough to imagine that things could get much worse than what we experienced in Q2.

Activity levels in general, as you're well aware are improving, there is more planes flying today, there's more hours of flights today than there have been certainly over Q2. Many parts of the world and many regions of the world, their numbers are better than ours, in the U.S. If you think about Asia, you think about Europe, they've done a better job of getting a handle on the pandemic and so you're seeing the data there improve perhaps, at a faster rate than the U.S. data.

So I think it's quite, it's unclear today and there's a lot of planes on the ground, you talk outside the parting out airplanes and how that's going to impact the aftermarket, I just think it's too early to tell whether that's going to have a prolonged impact or not.

Operator

Thank you. Our next question is from Nigel Coe from Wolfe Research. Please go ahead.

Nigel Coe -- Wolfe Research -- Analyst

Thanks, good morning. Good morning, Craig. Good Morning, Rick. I just wanted to really dig into your 3Q framework and some -- the down low-double digits...

Craig Arnold -- Chairman and Chief Executive Officer

I'm sorry, Nigel. We could -- you're coming through very faint, we can barely hear you, so maybe you can just pick up a little bit.

Nigel Coe -- Wolfe Research -- Analyst

Maybe I'll use my handset, is that better?

Craig Arnold -- Chairman and Chief Executive Officer

Perfect, perfect.

Nigel Coe -- Wolfe Research -- Analyst

Yeah. Now I've got a very dodgy headset, I need to invest. My home office still needs a lot to be desired. So the July down low double-digits versus the down facing 17 framework and I understand you want to be conservative, but is there any reason why July would be better than the 3Q framework. And then just within that, Electrical Americas is looking to be flat versus the down 9% in 2Q. Again just what's flipping between 2Q and 3Q? And any end markets to call out there would be helpful.

Craig Arnold -- Chairman and Chief Executive Officer

Yeah. Hey, appreciate the question, Nigel. And I think what we're really trying to deal with here is how precise we can actually be in setting any of these forecast and I would tell you that if you think about June and July kind of essentially running at about the same levels and as we think about our Q3 forecast, we really think about it mostly as a continuation of what we experienced over the last couple of months.

And so I think on the margin, whether it's 1 or 2 points better or worse, it's really difficult to judge. But one of the things that has us a little bit nervous as we'll freely admit is the fact that you are continuing to see the spread of COVID-19 in so many parts of the U.S. And so if there is a concern that we have that could potentially take the next couple of months down slightly below what we've experienced over the last two months, it's whether or not the U.S. specifically and then you have obviously regions like India and Brazil, whether or not we get a handle on the spread of the pandemic.

So that's the piece that has us all of this a little bit nervous and perhaps, a little bit conservative around what is the real outlook look like for the balance of Q3.

Nigel Coe -- Wolfe Research -- Analyst

Yeah. And then the Electrical Americas what's flipping -- what's got materially better between 2Q and 3Q?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah, in Electrical Americas, I'd say that, for the most part, they experienced kind of the same kind of shock to the system that the other parts of our businesses experience, where you've had a lot of construction projects essentially to shut down in Q2. As you're well aware, there were certain regions of the U.S. where construction was deemed essential, there was other places where construction projects were simply delayed. And so I think the catch-up effect that we're seeing a little bit in the Americas specifically, is the fact that we would anticipate that you don't see the kind of wholesale shutdowns of the U.S. economy that we experienced in part of Q2. And so on an incremental basis, quarter-over-quarter basis, we would expect the Electrical Americas business to perform better.

Richard H. Fearon -- Vice Chairman and Chief Financial and Planning Officer

Also, Nigel. It's Rick. We had some production challenges during Q2, we had to relayout plants and we had some plants where the plants had to be closed for certain period due to COVID issues. And so that constrained our sales and we've sorted through all that. And that, particularly, in places like residential will allow higher sales volumes in Q3.

Operator

Thank you. And our next question is from David Raso from Evercore. Please go ahead.

David Raso -- Evercore ISI -- Analyst

Hi, good morning. Can you clarify your comment, if I heard you correctly, the month of June did you say Electrical Americas posted low single-digit revenue growth? And the same thing for Electrical Global, I'm just trying to, if that is correct.

Craig Arnold -- Chairman and Chief Executive Officer

Yeah.

David Raso -- Evercore ISI -- Analyst

Why then does it step down of the flat for Americas in the third quarter if you're already up low-single and then even Electrical --- Global goes from up single-digit to actually the next quarter, down 12 at the midpoint? I'm just trying to understand what you're really seeing in July in the Electrical business.

Craig Arnold -- Chairman and Chief Executive Officer

Yeah. No. What I was really trying to convey in a comment, first of all, you heard me correctly. Electrical essentially around the world actually did pose positive sales growth in the month of June and what you opt in a -- it's oftentimes difficult to read too much into a given month because there's also some catch-up, right. We talked about the fact that we had, as Rick noted, we had factories that were shut down, we had projects that were delayed. And so we think there was certainly a little bit of catch-up that took place in the month of June, one of the reasons why we experienced kind of growth across the region and projects that perhaps, should have been delivered and in April or May that slipped into the month of June, and so as the economy in the U.S. specifically continued to open it. So we do think there were some catch-up in the month of June and so up on the margins, things are slightly worse or about the same as the June rate in subsequent months. It's really because of this catch-up effect that we think we experienced in the month of June.

David Raso -- Evercore ISI -- Analyst

And is that what you're seeing in July? I mean especially Global are we going from up low-single say, there was some catch-up and then put down 12 in the third quarter. Have you seen that much give back already in July? Is...

Craig Arnold -- Chairman and Chief Executive Officer

Yeah...

David Raso -- Evercore ISI -- Analyst

Actually Global were already down that much in July?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah, I'd say that once again, in terms of the, you say Global specifically, what we are experiencing overall as a company in terms of the guidance numbers that we provided, that's consistent with what the company is experiencing. I don't think we provided specific guidance for Electrical Global, it's overall. But I'd -- so I'd say that it's certainly consistent with our overall guidance for the quarter, for Eaton overall.

Richard H. Fearon -- Vice Chairman and Chief Financial and Planning Officer

But I think...

David Raso -- Evercore ISI -- Analyst

I appreciate that, I was just thinking international. You call it you call global, but the international business being down 12% organically in the third quarter coming off of June that was up low-single. It's just enough of a delta, I just wanted to see if you saw a big drop-off in July already to suggest that for the Electrical International business.

Richard H. Fearon -- Vice Chairman and Chief Financial and Planning Officer

But what we are seeing, Dave, is we are seeing pronounced weakness in oil and gas. I mean it is not coming back. And so that's what's driving that -- the weakness in Electrical Global, our global oil and gas business is all reported in Electrical Global. So that's, that's really the factor that is causing the markets to be as weak as we estimate. If you were to take that out, Electrical Global would look much like Electrical Americas.

David Raso -- Evercore ISI -- Analyst

Sure. In the month of June, oil was down big, I assume and do you still put up low-single digit growth in Electrical international, so...

Craig Arnold -- Chairman and Chief Executive Officer

I think...

David Raso -- Evercore ISI -- Analyst

Anyway, I mean, I'm just trying to understand that.

Craig Arnold -- Chairman and Chief Executive Officer

I think...

David Raso -- Evercore ISI -- Analyst

And then lastly -- go ahead.

Richard H. Fearon -- Vice Chairman and Chief Financial and Planning Officer

I was just going to say there is a lot to this this pent-up demand and people. We being able to deliver and customers wanting us deliver to projects that had gotten delayed and so that, June is distorted by that a bit.

David Raso -- Evercore ISI -- Analyst

That's fair. And this last in clarification to an earlier question. Did you say vehicle margins for the year would be back to double-digit?

Craig Arnold -- Chairman and Chief Executive Officer

Yes, I did.

David Raso -- Evercore ISI -- Analyst

Okay, that's impressive. Okay, thank you, very much. I appreciate it.

Operator

Thank you. And the next question is from Jeff Hammond from KeyBanc. Please go ahead.

Jeffrey D. Hammond -- KeyBanc Capital Markets -- Analyst

Hey, guys. Good morning.

Yan Jin -- Senior Vice President of Investor Relations

Hi.

Craig Arnold -- Chairman and Chief Executive Officer

Good Morning.

Jeffrey D. Hammond -- KeyBanc Capital Markets -- Analyst

Just want to dig in on some of these markets that are proving more resilient in Americas. Can you just talk about where kind of the incremental utility spend is seen or where you're seeing the most resilience? And on the data center side, I know we -- we're planning for kind of an air pocket that seems to be coming back, is that coming back stronger or in line with expectations?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah. I'd say in the utility market, Jeff, I think it's pretty broad based, is what we're seeing really in utility markets. Those markets are holding up fairly well and I can -- I would say that within the U.S., I can't really, I don't know that there is a very different story depending upon what region of the U.S. you're looking at the unit, but where we play in the utility space on the distribution side, as obviously resilience, investing in grid resilience continues to be an important need in so many of our communities around the U.S., it continues to be fairly stable and predictable market.

In data centers specifically, what we're really seeing is a return in hyperscale. As we've talked about on prior calls, hyperscale does tend to be lumpy. You get large orders and then they'll quiet for a while and then you get large orders, again. So if you think about data centers overall, we saw very strong growth in hyperscale in the quarter that really is a return to growth as they continue to kind of build out their requirements.

Jeffrey D. Hammond -- KeyBanc Capital Markets -- Analyst

Okay and then just on the Hydraulics, so -- is that just a function of timing around approvals or is there anything else going on?

Craig Arnold -- Chairman and Chief Executive Officer

I do think it's a general slowdown in the market that you're experiencing in hydraulics and specifically in construction, we see the Ag market is holding up a bit better. Certainly, the China market is holding up very well in the context of the pandemic and really have already returned to growth. And so it's really just the general slowdown in the construction market that's having a big impact on hydraulics.

Richard H. Fearon -- Vice Chairman and Chief Financial and Planning Officer

And Jeff, if you were also asking about the timing of closing the sale. It's really a function of many of the regulators are still working from home and so that's greatly slowed their ability to process all of the filings, I mean, in any large transaction like our sale of hydraulics, we're talking about thousands and thousand pages of material and without their staff at hand without the ability to easily copy things and and our team meetings. It is taking longer. And you really think that for all acquisitions not just ours, so we're not surprised by it. Things are progressing in a normal way. We're receiving the kinds of questions that we would expect to receive is just taking a bit longer to get those questions.

Craig Arnold -- Chairman and Chief Executive Officer

And I mentioned in my opening commentary that how enthusiastic Danfoss remains around the transaction itself and if anybody wants to get a sense of the real enthusiasm, the founder of the company and the CEO posted a video this week on LinkedIn, where they're making the announcements to the organization about the bringing together of these two businesses and an professing their enthusiasm to get this transaction closed, and so we remain absolutely convinced that -- while it's been a quarter delay, the transaction will close and and they love the transaction and it's going to create real value for them.

Operator

Thank you. And our next question is from John Inch from Gordon Heskett. Please go ahead.

John Inch -- Gordon Haskett -- Analyst

Thanks, good morning everyone. Hey, Craig and Rick, just to put a finer point on this non-resi issue, we get these questions all the time. Could you just remind us how big the new build portion for office buildings is, as a percent of say, Electrical Americas and Global, because that would be seem to be the one area that debatably right, could be at risk or is not necessarily going to expand. I can't imagine is that big, but maybe you could just frame it out for us in terms of its magnitude?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah, I don't have the new -- I don't have that split, I mean maybe, with one data point, John, that may be helpful for you to kind of quantify or gauge the impact. Today, if you think about the office piece of kind of our Electrical business, what goes into office build, it's just under 20% of the total Electrical business. And so, to your point, within that some of its new build, some of its retrofit and modifications. And so hopefully, those -- that data point is you -- well, we can try to get to the data around what's new versus remodel and refurb. But it's under 20% of the total business.

And I do say, I think, it is debatable in terms of where this is going to ultimately take us in terms of whether not working from home has been wonderful to date and companies have managed it longer term, I think it's still an open question mark around efficiency and organizational effectiveness and working from home and as people come back to offices and this need to social distance is going to require more space. And so I think it will be an interesting one to watch in terms of how it unfolds.

John Inch -- Gordon Haskett -- Analyst

Yeah, no, I don't disagree with that. And I think, historically you've said retrofits sort of 40% to 50% of the whole Electrical business, so maybe we can extrapolate that, I'm not sure.

Craig Arnold -- Chairman and Chief Executive Officer

More like 25% to 30% for the whole Electical sector.

John Inch -- Gordon Haskett -- Analyst

Okay. All right. So I had that number wrong. But that's, it still windows it down. Just as another clarification, is the $280 million charge on top of the $50 million to $60 million of quiet restructuring you guys do every year or are you going to be lumping in that $50 million to $60 million with the $280 million. So, kind of, the whole thing gets called out over the next couple of years of the charge enactment?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah. It's really the latter, John. And that was my point that I was making in my opening commentary around. We had a number of restructuring programs that we were intending to do anyway and pulling those forward and accelerating them and so it's really the latter. So, we intend to take this one charge related to the $280 million laid out the way we articulated and that would then eliminate the other restructuring programs that we would have otherwise planned to do over the next three years.

Operator

Thank you. Our next question is from the line of Andy Casey from Wells Fargo Security. Please go ahead.

Andrew Casey -- Wells Fargo Securities -- Analyst

Hi. And...

Craig Arnold -- Chairman and Chief Executive Officer

Hi. Good morning, still.

Andrew Casey -- Wells Fargo Securities -- Analyst

Can you talk about M&A potential? I'm just wondering if the dislocation has created any incremental opportunities. And then can you comment on any valuations you might be seeing?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah, appreciate the question, Andy. And certainly we remain obviously in a position where we have the balance sheet that gives us that optionality around keeping M&A on the table and and as we talked about our cash flow generation this year as well as certainly the M&A event that will take place with the sale of Hydraulics and we'd expect to bring in another $2.5[Phonetic] of cash with that transaction when it closes. So the balance sheet's in great shape and we have plenty of firepower.

Having said that, I would tell you though that given the level of uncertainty around market outlook as well as the fact that valuations and companies coming to terms with the fact that perhaps, some of their businesses aren't worth today what they were worth maybe three or four months ago, that does take some time for that new reality to set in. And so I would say today that valuations have not and expectations have not necessarily come down commensurate with the change in market outlook. And so, those two things together says, we will continue to actively work the pipeline, we are in fact, having a number of conversations, our focus and priorities continue to be largely around the Electrical business.

We think in this environment, we'll have to see whether not Aerospace clears up, the future of aerospace in outlook clears up and up that for us to get back on kind of the front foot in and around in Aerospace transaction. But right now, I'd say that we are working the pipeline, it's an active pipeline, but valuations have really not yet come in.

Andrew Casey -- Wells Fargo Securities -- Analyst

Okay. Thanks, Craig. And then a real quick one I guess for Rick. You gave the Q3 framework, if you isolate out kind of non-recurring stuff like occurred in Q2 beneath the segment operating profit line, do you expect any sizable change in things like corporate pension and other?

Richard H. Fearon -- Vice Chairman and Chief Financial and Planning Officer

Not any significant change should be relatively consistent.

Operator

Thank you. And our next question is from the line of Andrew Obin from Bank of America. Please go ahead.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Yes. I guess still good morning. Just a question on inventories in the channel. Can you just tell, have dealers been destocking during this? Where is the level, both in North America and internationally as far as you can see? Is there need for restocking basically?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah. I think the question around whether not there is a need for restocking is still yet to be determined, Andrew, I can tell you that we did experience some destocking during the course of Q2 and -- but that destocking certainly behind us now and today, when we do our channel checks and talk to our distributor partners, they'll tell you that they feel like the inventory levels today are well aligned with their outlook for revenue. And so I think it's too early maybe, to make a call on inventory restocking. But certainly the destocking of inventory has stopped and is behind us now.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

And just in terms of supply chain, I've -- between China, between sort of Mexico shutting down. Did you guys made any changes to your internal sourcing, internal supply chain post COVID? Thank you.

Craig Arnold -- Chairman and Chief Executive Officer

Yeah. I'd say nothing material. One of the things that we've always done and believed in strongly is manufacturing and what we call as zone currency which means essentially we -- what we sell in a region, we generally make in a region. We do in fact ship some parts around and components around the world. I would tell you that throughout this whole entire pandemic our supply chain has held up extraordinarily well and I can say with confidence that we didn't lose a single order because our supply chain broke down and somehow we ended up with an inability to deliver. The bigger challenge that we experienced as a company really is what largely took place along the border. As companies in -- countries, excuse me, have had different criteria around what industries are deemed essential. And so there was a period of time when we had some challenges with the Mexican definition versus the U.S. definition, I can tell you that today, that's behind us as well. But for the most part supply chain has not been a big challenge for us during this current pandemic.

Operator

Thank you. And our next question is from Julian Mitchell from Barclays. Please go ahead.

Julian Mitchell -- Barclays Investment Bank -- Analyst

Hi. Good morning. Maybe just trying to understand the free cash flow a little bit better. Within that $2.5 billion midpoint for this year, maybe help me understand what's the Hydraulics' contribution within that? And also what's the cash portion of the restructuring charges in that number, please.

Richard H. Fearon -- Vice Chairman and Chief Financial and Planning Officer

Yeah, I don't have it handy the exact Hydraulics portion, we'll address that offline. The cash part of the restructuring charge is probably on the order of $50 million. And so that's why we believe that our guidance even inclusive of that cash portion of restructuring still holds true.

Julian Mitchell -- Barclays Investment Bank -- Analyst

Understood. Thank you. And then maybe just a second one around the Aerospace, maybe, margin dynamics. Help us understand what the impact of Souriau-Sunbank was in that integration within the, I think, the almost 1,000 basis points drop in the Aero margin in Q2. And maybe how you see the impact from the acquisition playing out over the balance of the year. And I don't know if you'd quantified, but maybe help us see what the commercial aftermarket revenue drop was in Q2, please.

Craig Arnold -- Chairman and Chief Executive Officer

Yeah. It's -- Souriau-Sunbank and its impact on margins, I'd have to do some quick math but...

Richard H. Fearon -- Vice Chairman and Chief Financial and Planning Officer

I have but...

Craig Arnold -- Chairman and Chief Executive Officer

With all framework, let me just see what I have here. Yeah. Yet. I mean, the margins of Souriau pre-acquisition were in the high teens. And that obviously compared to our business, that was in the 22% to 24% range. And so I think the easiest way Julian, is just to use those numbers and we also gave you the overall sales volume of Souriau, which was about $300 million a year and so that should allow you to back into the impact from Souriau itself.

Richard H. Fearon -- Vice Chairman and Chief Financial and Planning Officer

100 bps or something like that?

Craig Arnold -- Chairman and Chief Executive Officer

I think probably 150 bps.

Richard H. Fearon -- Vice Chairman and Chief Financial and Planning Officer

150.

Yan Jin -- Senior Vice President of Investor Relations

Good. Thank you, all. I think we have reached to the end of our call and we do appreciate everybody's question. As always, Chairman and I will be available to address your follow-up questions. Thank you for joining us today and have a good day.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Yan Jin -- Senior Vice President of Investor Relations

Craig Arnold -- Chairman and Chief Executive Officer

Richard H. Fearon -- Vice Chairman and Chief Financial and Planning Officer

Nicole DeBlase -- Deutsche Bank -- Analyst

Joe Ritchie -- Goldman Sachs -- Analyst

Jeff Sprague -- Vertical Research Partners -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

David Raso -- Evercore ISI -- Analyst

Jeffrey D. Hammond -- KeyBanc Capital Markets -- Analyst

John Inch -- Gordon Haskett -- Analyst

Andrew Casey -- Wells Fargo Securities -- Analyst

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Julian Mitchell -- Barclays Investment Bank -- Analyst

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