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Eaton Corporation PLC (NYSE:ETN)
Q3 2020 Earnings Call
Nov 3, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Eaton Third Quarter Earnings Conference Call. [Operator Instructions] Mr. Jin, can you hear me? Please go ahead.

Yan Jin -- Senior Vice President, Investor Relations

Okay. Now I can hear you. Okay. Good morning, everyone. I'm Yan Jin, Eaton's Senior Vice President of Investor Relations. Thank you all for joining us for Eaton's third quarter 2020 earnings call. With me today are Craig Arnold, our Chairman and CEO; and Rick Fearon, Vice Chairman and Chief Financial and Planning Officer. Our agenda today includes opening remarks by Craig, highlighting the company's performance in the third quarter. As we have done on our past calls, we'll be taking questions at the end of Craig's comments. The press release and 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 including 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 into our earnings release and the presentation. They 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. Let's start on page 3 with the highlight of our Q3 results. And I'd say that -- begin by saying, I'm really pleased with how the Eaton team has continued to deliver and perform during this ongoing pandemic and economic downturn. And our results while certainly below last year in absolute terms, they were much better than our guidance for the quarter. Q3 earnings per share at $1.11 on a GAAP basis and $1.18 on adjusted basis, which naturally excludes the $0.05 of charges related to acquisitions and divestitures and $0.02 related to multi-year restructuring program. Our Q3 revenues of $4.5 billion, down 9% organically compared to last year, but up 16% versus Q2. Segment margins were 17.6%. These margins were 290 basis points above Q2 levels and our decremental margins of 25% were at the low end of our guidance range.

And our organization, I guess must say again is doing an outstanding job of managing discretionary costs. We also generated strong cash flow in the quarter, operating cash flow was $921 million and our free cash flow was $832 million. As a result, we are reaffirming our 2020 guidance for cash flow with a midpoint of $2.5 billion of free cash flow and narrowing the range to $2.4 billion to $2.6 billion. And lastly, we repurchased 177 million of shares during the quarter, and we're at 1.5 billion on a year-to-date basis. Turning to page 4, we summarize our Q3 results and I'll just highlight a few items here. First, acquisitions increased sales by 2% but this was more than offset by the 80% impact of our divestitures. And this was primarily, as you'll recall the Lighting business. Second, our segment margins at 17.6% were down versus last year, but still at very healthy levels, especially given the reduction in revenue.

And lastly, I would just remind the group that we now record all charges related to acquisitions and divestitures and restructuring costs at corporate rather than at the segment level, and we hope that this makes it easier for you to model our results on a going forward basis. Next on page 5, we show our results for the Electrical Americas segment and we're very pleased that our largest operating segment return to positive organic growth of 3% during the quarter, so it's better than the high end of our guidance range, which was up 2% and this was really driven by particular strength in residential and utility markets. Revenues were naturally impacted by the sale of the Lighting business, which reduced sales by 19% and negative currency impacted sales by 1%.

Operating margins increased 280 basis points to 22.2%. And so our margins continue to be favorably impacted by the divestiture of Lighting as well as by ongoing cost containment actions. Our Americas business continued to show resiliency also when you look at our orders and backlog. Orders were down 1% on a rolling 12-month basis excluding Lighting and we saw once again particular strength in residential and also in data center markets. Similar to what you've seen from others, secular growth is being driven by -- really this increased focus on the home in this work from home environment and our, all of our growing dependence on digital connectivity. On a rolling 12-month basis residential orders were up 14% and data center orders were up mid-single digit, and sequentially Q3 orders were up 16% from Q2.

Lastly, our backlog was up 11% from last year delivered by once again this noted strength in residential and data centers, but also by utility markets as utility markets are benefiting from increased investment in smart grid and this energy transition that's taking place. On page 6, we have a summary of our Electrical Global segment. Revenues were down 8% with 10% decline in organic revenues, partially offset by 2% tailwind from currency. Lower organic sales were driven principally by weakness in oil and gas and industrial markets. If you excluded oil and gas and industrial businesses, our European business was slightly negative and our Asia business was slightly positive. Operating margins declined 280 basis points to 16.6% but were up 60 basis points on a sequential basis. Orders declined 6% on a rolling 12-month basis, but the decline is driven once again by oil and gas and industrial markets, partially offset by strength in residential, data centers and utility markets.

It's also worth noting here that data center orders were very strong in this segment increasing some 40% on a rolling 12-month basis. We also had solid sequential growth in orders up 12% from Q2. And lastly, we continue to grow our backlog, which increased 7% versus last year. Moving to page 7, we have the results of our Hydraulics segment. Revenues were down 15%, which was all organic, but this was much better than the 25% organic decline at the midpoint of our Q3 guidance as end markets recovered faster than anticipated. Operating margins were 9.8% flat with last year and encouragingly here, I'd say we saw momentum in our Q3 orders, which increased 8% with strength in both agricultural and construction equipment markets. And lastly, we remain on track to close the Danfoss sale by the end of Q1 next year.

Next on page 8, we have the financial summary of our Aerospace segment. Revenues declined 13%, down 26% organically, partially offset by a 12% increase from the acquisition of Souriau and a 1% positive currency impact. And as you would expect organic revenue declines here were driven primarily by the continued downturn at Commercial Aviation, which was partially offset by growth in Military. On a sequential basis, organic revenues were up 15% from Q2 levels. And while at healthy levels, operating margins declined 18.5% due to lower sales volume and margins were certainly impacted by the impact of the Souriau acquisition. I would note here that margins were up 370 basis points from Q2 and that the business is really doing an outstanding job of rightsizing and reducing discretionary costs. Orders were down 22% on a rolling 12 month basis and the backlog was down 11%.

Turning to page 9, we summarize the results for our Vehicle segment. Revenues were down 25% including 20% organic decline. The divestiture of the Automotive Fluid Conveyance business impacted revenues by 4% and we had a 1% negative headwind from currency. The 20% decline in organic revenues was once again much better than what we expected. We had 32% decline at the midpoint of our guidance and both light motor vehicles as well as truck markets have rebounded more quickly than we anticipated. In fact, organic revenues were up some 75% from Q2. Global light vehicle market production in the quarter was down 4% and Class 8 OEM build was down some 34% in Q3. But given the strength that we now are seeing, we now project NAFTA Class 8 truck production of some 200,000 units for the year, and this is up 14% from our prior forecast.

Operating margins were 14%, down 430 basis points on a year-over-year basis, but up 20 basis points from Q2. And we're also pleased to see the 31% decremental margin performance in this business given the magnitude of the revenue reductions due to end markets. And we certainly would expect these trends to continue through the balance of the year. Moving to page 10, we have the results of our eMobility segment. Revenues were flat with organic revenue declining 1%, offset by 1% positive currency impact. Operating margins were a negative 2.5% as we continue to really increase investment in R&D in the segment. And our focus in this segment continues to be on executing key program wins as well as actively managing what we're looking at now as a multi-billion dollar pipeline of opportunities.

We continue to see the electrification market as a significant growth opportunity and we'd expect to see a sharp recovery as the market improves. In fact, I mean, some analysts are estimating a year-over-year increase of more than 30% in Q4 alone. Turning to page 11, we provide our Q4 outlook on organic revenues versus last year. For Electrical Americas, we expect organic revenues to be between flat and up 3% with continued strength in residential and utility, data centers, healthcare, warehousing and also in wastewater offset by some weakness in industrial markets, principally in office and lodging. For Electrical Global, we estimate organic revenues will decline between 7% and 10% with strength in the Asia-Pacific region and data center markets but being offset by weakness really in Europe and some declines in the oil and gas market.

For Aerospace, we project organic revenues will be down between 23% and 26% with continued strength in Military but with continuing and ongoing weakness in commercial OEM and commercial aftermarket. For Vehicle, we expect organic revenues will decline between 7% and 10% with strong demand in China and other markets really continuing to recover from the Q2 lows. And for eMobility, we estimate organic revenues to be between flat and up 3% with recovering global vehicle markets and then, with particular strength in electric vehicles as well. And lastly, for Hydraulics we estimate a decline of between 6% and 9%. And so overall, we're estimating organic revenues to be down between 5% and 7% and this would be another quarter of sequential improvement as the global economy continues to improve.

Moving to page 12, we note our outlook for Q4 and for the full year. As I just noted, we expect organic revenue declines between 5% and 7% with modest sequential improvement versus Q3. We also expect our Q4 decremental margins to be 25%, which is once again at the low end of our prior guidance range, which was between 25% and 30%. Our Q4 tax rate on adjusted earnings is expected to be 14%. And then turning for the full year we're reaffirming the $2.5 billion midpoint of our 2020 free cash flow guidance and narrowing the range to be between $2.4 billion and $2.6 billion. I think it's worth emphasizing once again the predictable nature of our free cash flow. We initiated guidance in the midst of the downturn, back in April, and we really expect to be right in line with this number.

Free cash flow as a percentage of revenue continues to be very strong. And for 2020 it's on track to exceed 2019, which was 13.4%. I'd also note our free cash flow to adjusted earnings ratio, which is a 142% on a year-to-date basis. And it's also well above 120% levels achieved in 2019. And an important element of our free cash flow has been our working capital management where we reduced net working capital by more than $350 million year-to-date and this was driven principally by the reduction in inventory. We plan to buy back $200 million to $400 million of our shares in Q4. And we're also reaffirming our full year guidance, which is between $1.7 billion and $1.9 billion. So I think you'll agree that our cash flow generation remains resilient and it does really position us well for the upcoming economic recovery.

Next on page 13, we show our preliminary 2020 outlook by end market within both the Electrical and Industrial sectors and once again these numbers reflect if you look at these end markets, the percentage of the sector revenue that is accounted for by these various end markets. Within our Electrical sector, data centers, utility, residential, institutional and infrastructure end markets -- make up some 50% of our revenue and each of these market is holding up well and expected to continue to grow. Industrial end markets, which represent some 30% where the outlook is more mix with some areas of strength like in machinery and industrial facilities, but also some areas of weakness and particularly in oil and gas.

We understand that there has been some concern raised about the near-term growth of commercial construction, but I think it's important to note here that commercial construction only represents 20% of our Electrical sector revenues and within commercial construction, we do see some areas of strength like in warehousing that can partially offset areas of potential weakness that we would see, certainly in the Office and Lodging segment. It's also worth noting I'd say here that retail is only 2% of total commercial construction markets whereas the Warehouse segment accounts for about 5% of the market. So there's clearly some puts and takes in this market.

And lastly, within the Industrial sector, our primary outlook for 2020 includes growth within all of the end markets, with particular strength in truck and electric vehicles. And finally, while we continue to manage through the short-term challenges of the pandemic, we also remain focused on our broader strategic and financial goals, which we summarize on page 14. I'll begin by first saying that we continue to move the company in the direction of becoming an intelligent power management company that's really taking advantage of these important secular growth trends that we've talked about in the past, electrification, energy transition, IoT connectivity, digitalization and our recent announcement of the bright layer digitalization initiative as a prime example of how this transformation continues.

In simple bright layer for us is really where we extract data from our intelligent devices. It's where we use data science and machine learning to create new insights in software and it's where we partner with customers to develop value-added solutions. But I'd also say that the overriding goals of the company remain the same and that's to create a company that has better secular growth; that has higher margins and better earnings consistency. And with the added benefit of strong free cash flow we'll continue to be smart in how we deploy it, investing in organic growth, paying a top quartile dividend, buying back shares and actively managing our portfolio, while being a disciplined acquirer. And while perhaps delayed by a year or so, our long-term financial goals remain unchanged. They include 2% to 3% organic growth, 20% segment margins, 8% to 9% EPS growth, and $3 billion a year in free cash flow.

And so with that, I'll stop and I'll turn it back over to Yan and we'll open up for Q&A.

Yan Jin -- Senior Vice President, Investor Relations

Okay. Thanks, Craig. Before we begin the Q&A session of the call today, given the time constraint only for an hour, appreciate if you can limit your opportunity just to one question and a follow-up. Thanks ones for your corporation. With that I will turn it over to the operator to give you guys the instruction.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And first we'll go to line of Jeff Sprague with Vertical Research. Please go ahead.

Jeff Sprague -- Vertical Research Partners -- Analyst

Thank you. Good morning, everyone.

Craig Arnold -- Chairman and Chief Executive Officer

Good morning Jeff.

Jeff Sprague -- Vertical Research Partners -- Analyst

Good morning. Couple of things. First, just on cash flow, Craig, the numbers have been very robust, and thanks for kind of reiterating your longer-term target. I am wondering though as we think about this 2021 you've laid out with kind of a return to growth if those greens and yellows are correct. Do you see the ability to actually grow free cash flow in dollars next year -- orders kind of the natural working capital swing and maybe other things kind of coming back into play mute the ability to grow cash flow? I would assume the conversion would still be pretty good but really talking about absolute dollars.

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

Again, Jeff, maybe I'll take that. Yes. The conversion will remain strong. As you know, we have a lot of amortization that lowers the net income and of course that's non-cash. We continue to believe that we have further progress on things like days on hand inventory. I mean we have improved markedly but as we talked about over $300 million generated so far this year, but we believe we probably can take another couple of hundred million out of that over time and so that will be just an efficiency improvement that will help us. And of course, we'll have to put a little bit back into receivables simply to reflect sales growth. But absent Hydraulics coming out and you got to remember if assuming Hydraulics closes at the end of March, you will lose the free cash flow from Hydraulics and that will of course to reduce free cash flow. But apart from that we think that the puts and takes are likely to allow us to maintain the free cash flow about at the levels it's been.

Craig Arnold -- Chairman and Chief Executive Officer

Yeah, and as we've shared in the past, I mean, our free cash flow is remarkably consistent through periods of economic expansion and contraction as the higher net income that we generate tends to be the offset for the increased consumption, our use of working capital. And so we do think that next year will be a very good year as well as free cash flow.

Jeff Sprague -- Vertical Research Partners -- Analyst

And maybe on the topic if Hydraulics. I don't know if there's anything else to say about the closing timeline, but what is your thinking in terms of, for lack of a better term kind of replacing those earnings whether it's kind of more of a running start on share repurchase in the early part of 2021 or perhaps the M&A pipeline is active. Just you're probably not working to precisely manage the ins and outs but it'll still be interesting to hear how you see that playing out in 2021?

Craig Arnold -- Chairman and Chief Executive Officer

Appreciate the question, Jeff, and certainly as we think about our strategy around what we'd like to do with the company in the near term and in the longer term, it's really to take funds and reinvest in growth. And we've said, from a priority standpoint, our priorities are largely around the Electrical business, and certainly as we think about Aerospace, if we can pick up an asset that's got relatively speaking, higher defense exposure and valuations come into line we felt like the Aerospace market as well. But I would say that from where we sit today what we've committed is that we won't let cash just build up on the balance sheet. If we don't feel like we have line of sight to meaningful M&A that we'll continue to buy back shares as a way of returning cash to shareholders. But I would say in terms of, as you think about the way 2021 will likely unfold is that we're not going to take roughly $2.9 billion of proceeds and soon as we receive those proceeds, go back and buy back a bunch of shares and so we'll try to be as we've done in the past, more opportunistic in terms of our share buyback program and buying at the right times into the market.

Jeff Sprague -- Vertical Research Partners -- Analyst

Great. I'll leave it there. Thank you.

Craig Arnold -- Chairman and Chief Executive Officer

Okay, thank you.

Operator

And our next question is from Scott Davis with Melius Research. Please go ahead.

Scott Davis -- Melius Research -- Analyst

Hi, good morning guys.

Craig Arnold -- Chairman and Chief Executive Officer

Hi Scott.

Scott Davis -- Melius Research -- Analyst

Craig, you mentioned in your remarks around Aerospace around restructuring and rightsizing or maybe more specifically, I think you used the word rightsizing. What does that mean? What is the new normal? How do you kind of plan for -- I noticed obviously Aerospace is green in your chart on slide 13, but is there a specific target of 20% down or 15% down or something that you're rightsizing to or your factory is kind of flexible enough to moderate down or moderate back up, I should say, because your decremental margins are pretty tough in the quarter in that business?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah, no, I'd say, obviously if you think about all of our end markets, the Aerospace market probably is the one that is certainly most challenged and probably where you have the least certainty around what the future looks like in terms of the rate of improvement in that market. We do believe coming off of a positively horrific year this year that we do see some modest growth in the commercial aerospace market next year. But once again coming off of a very, very low base, which is why we think that market will be green for us and the military market will continue to performed this fine. But I'd say we have done already based on the actions that we've already taken in the business, we have already sized the business for the level of economic activity that we're experiencing today inside of Aerospace.

And so we have very quickly moved -- going all the way back to Q2 to really what I call right size the business for the level of economic activity that we are experiencing and to the extent that the world recovers faster than what we're currently envision and I think what we've said in the past is we don't think that this market really returns to 2019 levels until probably sometime in late '23, '24. And so we really are prepared for a long-term kind of downturn in that business and we've structured the business in a way that allows us to deliver attractive margins and even at 18.5%. And I'd call those very attractive margins for the Aerospace business in the context of this economic environment and so we've done the work that we need to do to prepare the business to really continue to deliver attractive margins in this environment.

Scott Davis -- Melius Research -- Analyst

Okay. Thanks, Craig. And just moving on to the grid and kind of what does smart grid really mean for you guys? And as it relates to an add-on to historic growth rates, I know utility's never been all that fantastic of a growth rate. I think historically for you guys probably more like 2% to 3%. Does smart grid add meaningfully to that historic growth rate so we can expect something higher or is there just a mix shift of spend that gets taken from one side into the other and the overall growth rate in utility is the same?

Craig Arnold -- Chairman and Chief Executive Officer

We do think that this energy transition that we're going through, which includes smart grid does add meaningful growth to the historical utility business. And so I'd say that if you think about today, the amount of investments that's going into renewables. If you think about today in the context of -- everybody today is both a consumer and a seller of electricity of electrons as we think about everything as a grid that we know that -- Uday Yadav spend some time sharing with the group during investor meeting. We do think that the investments that will be required to first of all harden the grid, build more resilience into the grid and then to think about how do you manage this environment where electrons are moving in many different directions, you have to manage that power very differently? If you think about all of the growth in things like electric vehicles that are coming online and the additional load that that's going to put on the grid. The grid is going to have to get smarter in the way that it manages all of these various loads and that's going to mean more opportunities for our Electrical Equipment and gear and software and the solutions that we bring to market. And so while the utility market maybe historically has been, let's say, a relatively slow growth market, we do think the future for the utility market for at least the near term and into the mid-term is going to be very attractive.

Scott Davis -- Melius Research -- Analyst

Okay. Good luck, Craig. Thanks guys.

Craig Arnold -- Chairman and Chief Executive Officer

Thank you.

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

Thanks.

Operator

Our next question is from Ann Duignan with J.P. Morgan. Please go ahead.

Ann Duignan -- J.P. Morgan Securities -- Analyst

Yeah, hi, good morning. Actually Craig maybe along similar lines but a different region -- you mentioned in your comments that Electrical Global Europe was still very weak. Are you seeing any signs of life in that region in terms of the huge investments there considering making in things like hydrogen and all the infrastructure that would have to be built at to support that? And also more recently they announced their intention to retrofit all old building. So, I'm just curious whether all of those investments that they're talking about in Europe is going to be years out and require private funding or whether you're hearing any signs of life over there on the back of any of these humongous secular changes that they're talking about? Thanks.

Craig Arnold -- Chairman and Chief Executive Officer

Yeah. Appreciate the question Ann and I'd say addressing the specific one around hydrogen, I think it's a little early for us to really understand the role that hydrogen is going to play kind of in the overall energy equation although there's massive amounts of investments that are going in. I would say to your broader point around building electrification. It's obviously a very significant opportunity for Eaton both in Europe as well as in the U.S., as I'm sure you're aware, you're building say account for directly or indirectly some one-third of energy consumption and nearly 40% of the direct and indirect CO2 emissions. And so as we highlighted as a part of our energy transition growth discussion at the Investor Day we think energy transition and the change in Electrical Power value chain is creating this -- what we call everything as a grid environment and with it is going to come this -- we think very large opportunities for us.

So customers once again producing, selling, consuming electrons -- you're really entering into an environment that is so much more complex that's going to require our type of equipment and our type of solutions. Specifically, the EU, the legislation that you mentioned, large emphasis on climate-friendly investments, building innovation and obviously, Eaton is very well positioned to capitalize on this market growth. And the EU Green New Deal, they've committed about EUR550 billion to be spent on climate-friendly investments, a lot of that going into building renovation, doubling of spending in things like energy storage and digital solutions. And so all of those things are just really beneficial to our company and I think we're very well positioned to take advantage of it.

Ann Duignan -- J.P. Morgan Securities -- Analyst

So you do think you have the portfolio well in a position to take advantage of those opportunities when they arise?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah, we do, and I think there is certainly some work that we need to do around some of these things that we're making those investments and things like energy storage and software solutions to be able to manage power. But I'd say by and large we are well positioned to participate and take advantage of it.

Ann Duignan -- J.P. Morgan Securities -- Analyst

Okay, I'll leave it there in the interest of time. Thank you. Appreciate it.

Craig Arnold -- Chairman and Chief Executive Officer

Okay, thank you.

Operator

And next we'll go to Nicole DeBlase with Deutsche Bank. Please go ahead.

Nigel Coe -- Wolfe Research -- Analyst

Yeah, thanks, good morning guys.

Craig Arnold -- Chairman and Chief Executive Officer

Good morning.

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

Hi.

Nicole DeBlase -- Deutsche Bank -- Analyst

Can we maybe start with Electrical Americas? I was pretty impressed by the margin performance there during the quarter. I'm just curious how you think about the sustainability of the margins that you're currently seeing there into the fourth quarter and into 2021, particularly given that some of these temporary cost cut starts to come back?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah, no, I appreciate the question and we did like so many other companies put in place quite a few cost measures as we dealt with the pandemic, and I'd say there was few of those cost measures that were in place in Q3 than they were in Q2 and there'll Q1 for Q4 than there will in Q3. But for the most part our base assumption is that most of those costs largely come back during the course of 2021. But having said that, the margin story in our Electrical Americas business I say, you should be expecting margins that are in this range for this business, I'd say into the foreseeable future. A lot of what we're doing is around improving our execution. As you know, we've also like the company want to take a number of restructuring programs that we would expect that will deliver benefits to offset some of the one-time cost measures, although some of those could be more back-end loaded. But no, I would think that the margins that you're seeing today in the Americas business is very much in line with the way we expect that business to perform.

Nicole DeBlase -- Deutsche Bank -- Analyst

Got it. Thanks, Craig. That's really helpful. And then for my follow up just thinking about channel inventory and I guess, did you guys start to see any early signs of restocking in the channel, particularly in the Electrical business in the quarter or maybe you could characterize just overall inventory levels as well?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah, yeah, we did. In fact, I mean we certainly saw in Q2 pretty large inventory drawdown, specifically in the Electrical Americas business. And certainly, during the course of Q3, we did see some restocking that took place with most of our distributors. And so as we come into Q4, I would say that distributor inventories today are pretty much well in line with where they've been historically. When you go back to the number of days on hand that would be sitting in a distributor inventory right now in the fourth quarter versus where we were let's say in Q1. Those days on hands are about the same. And so we think inventory today are very well aligned for the level of economic activity that we're forecasting into Q4 and into next year. So we don't think there's another inventory build in front of us. But, nor do we think that there is an inventory drawdown either. So we think it's pretty well balanced right now.

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

And Nicole, I might make this one addition to that that the only area where inventories have not yet really been rebuilt are in auto dealer lots. I mean, auto inventories are about 50 days. Normally they're mid-60s and because sales have been so strong, the auto OEMs have had difficulty building enough cars to get the lots restocked, so they're probably in Q4 and maybe into Q1 you'll see some benefit from that.

Nicole DeBlase -- Deutsche Bank -- Analyst

Got it. Thanks guys. I'll pass it on.

Craig Arnold -- Chairman and Chief Executive Officer

Thank you.

Operator

And next we'll go to Nigel Coe with Wolfe Research. Please go ahead.

Nigel Coe -- Wolfe Research -- Analyst

Thanks, good morning. Wanted to go back to the 2021 framework if that's the right words and obviously industrial is one of the Amber in markets and obviously that's not a monolithic end market. There's a lots of different parts of that. Is the caution just tied to oil and gas and maybe heavy industrial markets? So would machine to OEM the sort of a flash number as well? I mean any kind of color you can give us on the different end markets there would be great.

Craig Arnold -- Chairman and Chief Executive Officer

Yeah, I mean, I think you hit it in your commentary there, Nigel. I'd say that certainly everybody's -- we all understand what's going on right now in the oil and gas markets and some of the industrial markets but MOEM segment of the market, the manufacturing segment of the market. We do think that those markets are become positive during the course of 2021 and that's a little bit of the offset and why we think in aggregate that market still grows. And then obviously, you think about markets like data centers, right, in the context of what's going in data center markets. I talked about those orders being up some 40% in the quarter. So data center markets continue to be very robust.

Nigel Coe -- Wolfe Research -- Analyst

Right. Yeah, I mean I just sort of put industrial as green, but curious what drove it down to be a number and then.

Craig Arnold -- Chairman and Chief Executive Officer

Yeah, I mean largely its oil and gas.

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

It's largely oil and gas and petrochemical and on balance, if you put it net it all together, Nigel, it's probably going to be down but not dramatically down.

Nigel Coe -- Wolfe Research -- Analyst

Okay, that's fair, that's very fair. My follow-on question is sticking with 2021, the outlook for Aerospace and Military. There are some question marks around Military with DoD budget constraints, I'm just wondering kind of how good is your visibility into sort of the next year for Military? And are there any constraints on commercial aero recovery? I mean, there is a lot of again concerns around parked planes and kind of cannibalized parts from parked planes. Do you think that's a risk for '21?

Craig Arnold -- Chairman and Chief Executive Officer

It may be dealing with the first part of your question around the military side, I'd say we do typically have fairly good visibility those orders tend to be longer lead time. We do sell obviously into some of the depots that service the military market, which tend to be, let's say more short term. But by and large we have fairly good visibility and if you take a look at the defense budget and defense spending, we don't anticipate that those things are going to be dramatically changed as we look out into the future. And so we do think that that market holds up fairly well. And, let's say, one away growth, but solid growth nonetheless. In commercial aerospace, there is no question. I think what you're seeing today in the market is that there are in fact a lot of parked planes. What has happened in the industry historically is that a lot of these parked planes never come back into service.

They end up being parted out which then has an impact on the aftermarket. I can tell you from where we sit today, given the level of let's say revenue passenger miles, revenue passenger kilometers activity levels have been so low that we've not seen a bunch of cannibalization of parked aircraft, but we do anticipate as that market improves and some of these older aircraft are not brought back into the market, we do anticipate that that will happen again at this point in the economic recovery. And so we have relatively muted view quite frankly of what the aerospace market is going to look like next year some like I said, some modest growth coming off of a pretty horrific downturn this year but we've already factored in those numbers into our outlook for the year.

Nigel Coe -- Wolfe Research -- Analyst

That's great. Thanks.

Operator

And next we'll go to John Inch with Gordon Haskett. Please go ahead.

John Inch -- Gordon Haskett -- Analyst

Thank you. Good morning, everyone. So Craig and Rick, a lot of temporary cost, if not most of them coming back next year. What kind of incrementals are you planning for and I ask in the context that your incrementals or your decrementals have been beating in. Given all the cost take-out, you've done and you've got some pretty leverageable operationally businesses such as vehicle in the portfolio. If we're looking at some pretty big incrementals despite some of these temporary costs coming back next year, what sort of framework should we be thinking about?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah John, appreciate the question and it's obviously one of the things that we're trying to work through right now as we work on our internal plans, which have not quite finished for next year, but I do think it is important to once again note the fact that we have taken out very sizable, let's say one-time cost this year. So much of which have been temporary costs and then much of that cost will come back next year and that return of cost will have a muting impact on the incremental margins out in the fiscal year -- in our calendar year, '21 year.

Having said that, we also have some offsets and some of the offsets being the fact that we've announced and launched this restructuring program, which is going to obviously add -- to be additive to the incremental margins year-over-year. But I would say, as we think about for planning purposes we'll certainly provide you some more guidance as we come out of our Q4 earnings call. But at this point, I would say that you probably should be planning on incrementals that are a little bit lower than what you would typically see because we will in fact see cost come back next year that were one-time costs that we're dealing with this year.

John Inch -- Gordon Haskett -- Analyst

That makes sense, Craig. Can I just as a supplement to my question, are you managing toward incrementals at this point? I say this because you know Fortive has this framework that they say well it's just to be 35% incrementals in a bit higher, we'll spend the money away. I think that's kind of their implication. Is that how you're thinking about it? In other words, let's just say because of vehicle and other operational gearing and we had a better than expected recovery, you had big incrementals, were you just in the those flow through or would you be predisposed to try and take that money and apply it to kind of keeping incrementals in check or in a range?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah, I mean, if I understand the question. I mean, every one of our businesses has a normal incremental rate percentage of fixed versus variable costs and so every business is expected to essentially manage their business in a very proactive way to manage margins on the way up and the way down flexing our variable cost and so I think that that expectation is absolutely built into every one of our businesses and then to the extent that we do better than that because we go beyond we more effective or more efficient those benefits would tend to flow through and which is why we're delivering better than normal decremental margins this year. But the results are the results they flow through as they come. We don't really have much latitude around managing them other than that.

John Inch -- Gordon Haskett -- Analyst

Yeah, I mean, if I understand the question. I mean, every one of our businesses has a normal incremental rate percentage of fixed versus variable costs and so every business is expected to essentially manage their business in a very proactive way to manage margins on the way up and the way down flexing our variable cost and so I think that that expectation is absolutely built into every one of our businesses and then to the extent that we do better than that because we go beyond we more effective or more efficient those benefits would tend to flow through and which is why we're delivering better than normal decremental margins this year. But the results are the results they flow through as they come. We don't really have much latitude around managing them other than that.

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

I know you're exactly right John to point out that as an Irish-domiciled company we don't really have issues with things like guilty. Our non-U.S. earnings are essentially not taxed at a U.S. rate served by U.S. provisions. And so, the only real impact of what has been suggested by Biden that the corporate rate comes up is that our income in the United States would face a higher tax rate but our income outside the U.S. would really not be affected at all. And that's very different than a typical U.S. domiciled company that would see both its U.S. income and its non-U.S. income affected by the Biden proposals.

John Inch -- Gordon Haskett -- Analyst

Yeah, makes sense. Thanks very much.

Craig Arnold -- Chairman and Chief Executive Officer

I think we can say confidently that we have an advantage today and that advantage at least maintains if not improves in the event of a.

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

It should improve by several points for us compared to a typical U.S. multi industrial

Operator

Our next question is from David Raso with Evercore ISI. Please go ahead.

David Raso -- Evercore ISI -- Analyst

Hi, good morning. More near-term, I was curious why the Electrical Americas organic sales growth rate in the fourth quarter is a little slower than the third quarter? I mean, it feels in the channel residential is accelerating same as utility maybe is as well. And I'm just trying to understand why the slower growth rate? Is data center starting to come off a bit or is industrial not even showing a second derivative improvement? Just trying to understand in case I'm missing something there.

Craig Arnold -- Chairman and Chief Executive Officer

Yeah. I appreciate the question David. And I'd say and obviously there's uncertainty in terms of where we're going to ultimately end up, but the biggest delta in terms of Q2 versus Q3 really is this inventory rebuild that we talked about that we saw in the distribution channel, largely in the Americas. And so we did in fact see some restocking that took place in the Electrical Americas business and that's what's having we think about our quarter-over-quarter basis a little bit of a muting impact on what the growth trajectory looks like. But I'd say no, we've not seen any slowdown in the key markets that are strong, whether that'd be residential or data centers or utility; those markets are continuing to perform just fine. And as we think about the growth rates that we've laid out for the quarter, it's very much in line with what we saw at the end of September and into October.

David Raso -- Evercore ISI -- Analyst

And just to clarify the comment about the margins for Electrical Americas from this 22% level we just saw. You said we should expect that type of level. I mean do you feel this is a business, all else equal even include any seasonality around the first quarter that there should be a two handle on the operating margin, or is the mix is maybe the restock, data center strength, something that is providing a positive mix? We shouldn't maybe take that comment maybe quite as literally as you meant today? Just want to make sure I understood your comments?

Craig Arnold -- Chairman and Chief Executive Officer

No, I mean if you think about one of, if you say if you think about what is it that's driving these margins to the levels that we are seeing now one of the big things is we fact we sold the Lighting business and so the fact that we divested this dilutive Lighting business has certainly helped margins quite a bit in the Electrical business and our teams are doing a very effective job of running the business. Executing and taking out discretionary costs and so I'd say we're not prepared to make a call on a given quarter, but if you think about the business on a 12 month basis. We think that level of profitability is very much in line with where this business should perform.

David Raso -- Evercore ISI -- Analyst

Terrific, thank you for the clarification.

Operator

And next we'll go to Joe Ritchie with Goldman Sachs. Please go ahead.

Joe Ritchie -- Goldman Sachs -- Analyst

Thanks, good morning everyone.

Craig Arnold -- Chairman and Chief Executive Officer

Good morning.

Joe Ritchie -- Goldman Sachs -- Analyst

Maybe just following up on John's question from earlier. Obviously a big day here in the U.S., and I know this question was kind of limited to the tax implications. But I'm curious, Craig just to hear your views on election outcomes and what that could potentially mean for your business over the next 12 to 24 months?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah. And I mean at this point, I mean it is clearly speculation, because we're not exactly sure of what the proposals would be from either one of the administration's but I would say that by and large, I think infrastructure spending is certainly an agenda item for both administrations. And I think that we are hopeful and would expect probably an infrastructure bill of some sort coming from either one of the candidates. I think a lot of things that we talked about that are really secular trends that are impacting our industry we talk about electrification digitalization energy transition these things I think are much bigger than what's going on in the U.S. and in the U.S. administration. I can tell you. Despite the fact that in the current administration perhaps has not been as focused on green. We continue to see increasing investments around the world in essentially energy transition and the Greening of the economy. So I think there are the secular growth trends that we're experiencing inside of the global economy that are essentially bigger than any administration in the U.S. and I think are going to be positive for us. Independent of who's in the White House.

Joe Ritchie -- Goldman Sachs -- Analyst

Got it. That's helpful. Craig. And then maybe just my one follow on, I know we've talked a little bit about incrementals and decrementals but just maybe honing in on the Electrical the Electrical Global Business, which saw decrementals tick up in 4Q. Maybe just a little bit more color what's happening there and whether we should see just kind of improved performance on the decrementals are going forward?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah, I mean, I'd say that we talk about the company. We've given you percent decrementals is what we expect for all of Eaton and in any given quarter. The pending upon what's going on in the business and what went on last year, you can have some parts and pieces moving around in our individual segments. And so I would say there's nothing specifically that you should worry about with respect to the Electrical Global business, that business is doing well, they're executing we are decrementals could move around slightly higher, slightly lower than the rest of the company. Depending upon what quarter. But by and large, we're very comfortable with the guidance that we provided and delivering the percent decrementals in Q4.

Joe Ritchie -- Goldman Sachs -- Analyst

Okay, got it. Thank you.

Operator

Our next question is from Julian Mitchell with Barclays. Please go ahead.

Julian Mitchell -- Barclays -- Analyst

Hi, good morning. Maybe Craig circling back to your comments around slightly lower than normal incrementals next year. So is the way to think about that, but your gross margin is around 30% and so a slightly lower than normal incremental is something in the sort of low mid '20s is that a reasonable sort of place holder for now?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah, I'd say, Julian to be higher than that. I mean we, our typical incrementals but what purity would say it would be probably north of a number that you started with and so it would be certainly higher than that number. And once again we are not done with our plans for next year and we would hope to be in a position when we do our Q4 earnings to give you a more definitive number. But, but it's certainly higher than the number that you just quoted.

Julian Mitchell -- Barclays -- Analyst

Thank you. And then just hoping in perhaps on the Aerospace segment and the margins there. Understood they were down a fair amount year-on-year, but I suppose what I found most interesting was very high sequential incremental margin in Aerospace, 40% plus. So I just wondered if you're at the high-teens margin run rate in the third quarter is that a good sort of baseline now when you look out to your end market prognosis and the cost actions that I imagine a fair proportion of those are in the Aerospace division? And also related to that longer term, you talked about the aero market top line, getting back to the old peak may be in three to four years time. Should we assume Aero can get back to prior peak margins perhaps before that and what do you think the peak margin entitlement is for that business?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah. I won't say that if you think about the margin expectations for the business. As we go forward and we're dealing at these levels of economic activity. I think it's reasonable to assume that you know that the most recent quarter is probably a good predictor of where that business is expected to perform at this level of economic activity in this level of revenues to the question around the longer-term without a doubt, we would certainly expect this business to get back to prior peak margins, that the business posted which were close to 20% as the market recovers whether not we can get back there. Earlier, not I think it's really going to be a function of, in many ways.

What happens with the underlying mix of the business and. And what happens principally with aftermarket as I think everybody and in Aerospace world. Most of the margins are made an aftermarket, which mean revenue passenger miles which means consumers have to get on planes starting so I think it really will be a function of, to what extent does the aftermarket business return and or consumers and businesses comfortable putting people on planes and flying again and so too early to call at this juncture. In terms of when it returns we certainly know that it will return, but at this juncture just too early to ascertain when.

Julian Mitchell -- Barclays -- Analyst

Great, thank you.

Craig Arnold -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question is from Andrew Obin with Bank of America Merrill Lynch. Please go ahead.

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

Good morning.

Craig Arnold -- Chairman and Chief Executive Officer

Good morning.

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

Hi Andrew.

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

Just a question on e mobility you guys sort of I things made some intriguing statements about potential ramp in revenues into the fourth quarter. Just taking a longer-term view, how much of our ramp should we expect over the next couple of years? You keep talking about, I guess the investment cycle -- how long as the investment cycle until this business really starts contributing a material -- until this business starts moving the needle on profitability for Eaton.

Craig Arnold -- Chairman and Chief Executive Officer

Yeah. And it's -- and as I'm sure you appreciate Andrew with the automotive industry, I mean these product development lifecycles are quite long. I mean they can be five years or so, especially when you think about launching a new technology and so what we've said before is that really you're talking about something around from start to finish, probably a 10-year cycle by time it really start to contribute meaningfully to the profitability of the company. But the ramp largely dependent upon the rate at which the automotive OEMs start launching new vehicles into the marketplace, but if you think from us, from a standing start to when does it really started delivering meaningful margin contributions to the company, I think something in the order magnitude of 5 to 10 years would be a reasonable expectation.

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

Got you and sustainability of the revenue ramp near term?

Craig Arnold -- Chairman and Chief Executive Officer

The sustainability of the revenue ramp?

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

Yeah. And Andrew one way to think about it is probably the easiest way to think about it about two-thirds of the revenues that now in eMobility go into internal combustion cars. So this is electrical equipment going into that and a third goes into the battery electric and hybrid cars and so you're going to have different growth rates in those two. But right now we're in a big recovery period from the sharp down of Q2, and so you're going to see pretty good growth in both of those two categories over the next several quarters.

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

Got you. And just a follow-up question on capital allocation and M&A. I know you guys said that Electrical and Aerospace or a focus, but there are a couple of deals in the industry. I guess both OSI companies that went at a very, very high multiples. How does Eaton think participating in these kind of deals. And how do you think about just M&A in the software and IoT space? Is that an option given where the multiples are? Thank you.

Craig Arnold -- Chairman and Chief Executive Officer

No, I mean it. Appreciate your reference of the M&A and one of the things that we pride of ourselves on over many, many years, is the fact that we try to be very disciplined acquirer and recognizing for sure that software companies grow faster they trade at higher multiples in 2 deals that you referenced and understanding those business has seen a multiples that they went for, we just think that there are much better ways of deploying capital in creating shareholder value. Then, then the kind of multiples that those two transactions went out, I mean, be just one an extraordinary multiples and we just think we have better more attractive alternative than that that will deliver better return for our shareholders. But we will say our capital allocation strategy continues to be focused on Electrical and we are in fact looking at a number of opportunities there.

I guess there is nothing, obviously that is eminent but we have in fact seen the deal pipeline pick up a bit. We continue to look at things in it around Aerospace and once again, as I mentioned valuations would have to come in line and be reflective of the current reality and uncertainty in that market before we do anything, but there are obviously having some conversations and discussions in that space as well. But, and we always have the option of buying back stock. I mean we, it's not the first choice. We would love to grow the company. But once again, if we, if we're not able to deploy capital in a shareholder-friendly way toward an acquisition, we don't have to do a deal, we're very comfortable with our ability to invest in the company organically grow the company organically and acquisitions. Our way of accelerating a strategy of augmenting a strategy, but the prime path for us will continue to be the things that we're doing to focus on growing the company organically.

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

No. Thank you very much Craig. Appreciate your extensive answer. Thank you.

Operator

Our final question will be from Jeff Hammond with KeyBanc. Please go ahead.

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

Hey, thanks for fitting me in guys. Just on data center the order rates have been really strong and I know this is a good secular market, but there tends to be these levels from time to time. Anything you can speak to in the quoting activity that would point to continued strength or any kind of low-end to '21?

Craig Arnold -- Chairman and Chief Executive Officer

No really Jeff. In fact, we had a very strong quarter. If you take a look at our global data center orders for the quarter, we were up some 9% and what we really saw over the last number of months is a really return of Hyperscale and as we've talked about on these calls and in prior earnings calls hyperscale tend to be lumpy. These orders come and they go and they come when they come, they come in large increments. And so, I mean there is really nothing that we've seen in data centers that would suggest that the market is in any way pulling back. And if you think about it, it makes a lot of sense, especially in the context of the environment that we're living in today where everybody's working remotely, everybody's Zooming and WebExing and Teaming all of these technologies that we're all using to conduct business remotely just add more kind of accelerate to a market that is already growing quite rapidly in as the world continues to digitize and connectivity and where you're living in a and a 5G environment in the not too distant future. All of these things will continue to add to kind of the momentum that we're seeing in the data center market. So we think that becomes -- continues to be a very attractive market for the foreseeable future.

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

Okay and then truck cycle seems to be inflecting here, just give us a sense on how that your truck business within vehicle ex the same or different given the the JV structure?

Craig Arnold -- Chairman and Chief Executive Officer

Yeah, I'd say that it's one of the things that we try to do by putting the joint venture together is really to kind of dampen some of these big cyclical swings in the outside impact that the truck business in North America had on the overall company. And so I would -- what you would expect is that to see in the bottom of the downturn to see a much smaller impact on the company and in a bidder in a bit in the event of a big upswing. You probably going to see a more muted impact on that side as well, but keep in mind that the JV today is basically in North America, Class 8 automated transmissions. I mean everything else globally coach business aftermarket business, all the other elements of that business. We still own and so we do expect to see attractive growth in our Vehicle business, as this market returns to growth into 2021 and into the fourth quarter.

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

Okay, thanks a lot Craig.

Yan Jin -- Senior Vice President, Investor Relations

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

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Yan Jin -- Senior Vice President, Investor Relations

Craig Arnold -- Chairman and Chief Executive Officer

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

Jeff Sprague -- Vertical Research Partners -- Analyst

Scott Davis -- Melius Research -- Analyst

Ann Duignan -- J.P. Morgan Securities -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

Nicole DeBlase -- Deutsche Bank -- Analyst

John Inch -- Gordon Haskett -- Analyst

David Raso -- Evercore ISI -- Analyst

Joe Ritchie -- Goldman Sachs -- Analyst

Julian Mitchell -- Barclays -- Analyst

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

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

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