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Text: As we have done on our past calls, we'll be taking questions at end of Craig's comments.
There are also outlined in our related 8-K filings.
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.
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.
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.
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.
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% earnings per share 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.
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.

user
compname says q2 sales fell 30%.
q2 sales fell 30 percent to 3.9 billion usd.
q2 earnings per share 0.13 usd.
qtrly organic sales were down 22 percent.
expect restructuring program to deliver mature year benefits of $200 million when fully implemented in 2023.
2020 full year free cash flow guidance reaffirmed at $2.3 billion to $2.7 billion.
adjusted earnings per share of $0.70 for q2 excluding charges.

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