electrical products group conferencetorquecontrol.eaton.com/content/dam/eaton/company/... ·...

© 2018 Eaton. All Rights Reserved..

Electrical Products Group Conference

Craig Arnold, Chairman and Chief Executive Officer May 21, 2018

2 © 2018 Eaton. All Rights Reserved..

Forward Looking Statements and Non-GAAP Financial Information

This presentation includes certain non-GAAP measures as defined by SEC rules. A reconciliation of those measures to the most directly comparable GAAP equivalent is provided in the investor relations section of our website at www.eaton.com and is included in your packets.

This presentation or the comments we make today contain forward-looking statements concerning, among other matters, performance of our worldwide end markets, our anticipated capital allocation, second quarter 2018 expected organic revenue, tax rate and segment operating margin; full year 2018 earnings per share, margin expectations, capital expenditures, cash flow, tax rate, corporate expenses, projected revenue growth, foreign currency exchange impact, share repurchases, planned restructuring actions and three year earnings per share growth. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside the company’s control. The following factors could cause actual results to differ materially from those in the forward-looking statements: unanticipated changes in the markets for the company’s business segments; unanticipated downturns in business relationships with customers or their purchases from us; competitive pressures on sales and pricing; unanticipated changes in the cost of material and other production costs, or unexpected costs that cannot be recouped in product pricing; the introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; strikes or other labor unrest; the performance of recent acquisitions; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; interest rate changes; stock market and currency fluctuations; war, civil or political unrest or terrorism; and unanticipated deterioration of economic and financial conditions in the United States and around the world. We do not assume any obligation to update these forward-looking statements.

http://www.eaton.com/


Eaton – A Power Management Leader

• Successful power management strategy

• Recent investor topics

• Goals and guidance


• Leading businesses in large, global markets selling well-recognized brands

• Doing mission critical work that protects people and assets, while improving productivity

• Highly engineered products in markets where application expertise matters

• Aligned with secular, long-term growth drivers

• Occupying valuable real estate that positions us to grow in a connected and intelligent IoT world

• Significant scale, providing an attractive cost position

What We Like

Eaton is a leading power management company with premier global businesses

Electrical Sector

Industrial Sector

We announced formation of new eMobility segment with 2017 revenues of $0.3B

Electrical Products 2017 sales: $6.9B

Electrical Systems & Services 2017 sales: $5.7B


Our margins have improved over time and in every business Segment Operating Margin¹

1 Segment margins exclude acquisition integration charges


Our corporate strategy remains focused on three initiatives

Organic Growth – Develop technology leadership (safe, reliable, efficient, connected, and intelligent), convert on our channel and service strength, deliver superior value

Expand Margins – Accelerate our operational excellence, implement multi-year productivity plans, focus on outliers (fix the tail, grow the head)

Disciplined Capital Allocation – Invest to win, consistently return cash to shareholders (dividends, share buybacks), criteria-based product and business evaluation


Our growth is supported by secular trends

+ ++

+++

Global demographics – Greater urbanization and growing middle classes require increased infrastructure and investment for housing, work space, food, electricity, and transport

Environmental concerns and increased regulation – Climate change, air and water quality, and waste disposal necessitate more innovation and less reliance on fossil fuels

Energy efficiency and electrification – Highly influenced by regulations, environmental factors and energy efficiency

Intelligent products and connectivity – Value creation to be driven by the interconnectivity of products, systems and new business models

Increased demand for superior value solutions – Increasingly, customers are turning to alternatives providing superior value


Channel conversion Technology leadership Superior value • Industry leading technology - high

pressure fuel pump for aerospace, energy storage, microgrids

• Leveraging existing technologies for new applications - engine brake and Super Charger

• Investments in emerging technologies like IoT in all businesses - data centers and factories leading the way

• Investments in channel expansion • Partnering in China to gain market

access – recently announced light duty transmission JV

• Eaton Distributor Advantage Program • Software as a Service (SaaS) for data

centers

• Two-tiered product offerings to expand addressable market - hydraulic hose expanded market by 2x, 3-phase UPS product for emerging markets

• Localizing manufacturing - electrical components in China from 30% to 70%

• Develop new products for existing markets - new gas insulated switchgear offering

We have increased our focus on organic growth…

+ ++

+++


Productivity plans Operational excellence Focus on outliers

• 50% increase in world-class plants in 2017 • Over 400 employees achieved higher Six

Sigma Belt certification • EBS deployment - As Operating

Assessment results improved, plant manufacturing margins have improved by up to 20 percentage points

• Digital factory solution driving savings in our factories

• Completed 3-year restructuring program with $518M of mature year savings

• ~8% increase in employees in BCCs

• Leveraging Engine Air Management expertise to penetrate new markets

• Improved a transformer product’s margin by 500 bps through pricing, product development, and manufacturing changes

• 7,000+ SKU reduction in Hydraulics

…while running the business better


We are also generating scale benefits across the company

Technology Sharing expertise and developing

deep capabilities

Support Functions Sharing best practices and leveraging a

global network

Serving Customers

Deepen relationships by

providing a broader solution

Knowledge Sharing

Transferring best practices across

company

Corporate Structure

Highly efficient corporate structure

Access to New Markets Leveraging our

size and our diverse portfolio

Supply Chain Centralizing and optimizing our supply chain

Manufacturing Creating superior

operating leverage

Cash Flow Generating strong cash flow through

the cycle

Eaton Scale Benefits


We have a disciplined process to evaluate our businesses

We like our mix of businesses and are driving significant improvement

Ability to lead in large global markets

Above average growth potential

High margin potential

High returns

Consistent profitability

Addressable market >$2B

Long-term growth > real GDP

Segment operating margin in mid- to high-teens

Return on tangible assets mid-twenties or above

Minimum of low-teens margin at the trough

12 © 2018 Eaton. All rights reserved..

Our capital allocation strategy is focused on growth and returning capital to shareholders

Reinvest in the business to drive organic growth Capital expenditures plus R&D > 5.5% of sales since 2010

Return cash to shareholders with a growing dividend Over the last 10 years, dividend CAGR of 11%

Repurchase shares equal to 1% - 2% of our market capitalization In 2018, completing last year of our 2015 – 2018 $3B repurchase program

Pursue acquisitions Increased focus on acquisitions, while retaining our discipline

1

2

3

4

We expect ~$8B of FCF through 2020, average FCF conversion of >100%, and cash available post dividends of ~$4.5B


Recent Investor Topics

• What point in the cycle are our businesses?

• Margin progression for 2018 and incremental margin contribution

• Recent lighting market dynamics


The majority of our businesses remain in the early to mid portions of an economic cycle

• U.S. Industrial Construction • Global Defense Aerospace • Global Agricultural Equipment • Global Mining Equipment • Global IT Infrastructure • Global Industrial/Factory Machinery • European Construction • Global Oil and Gas Capital Spending

• NAFTA Class 8 Truck • Global LM Vehicle • China Non-Residential

Building Construction

• U.S. Utility Capital Spending • U.S. Non-Residential Construction • Construction Equipment • Commercial Aerospace • U.S. Residential Construction

Mid Growth Stage Late Growth Stage Early to Mid Growth Stage

We expect to see solid market growth for several years


We remain confident in our margin progression for 2018

• On-track to deliver a +90bps increase in segment margins in 2018 • 16.7% at midpoint of guidance – a record for full year margin performance

• Delivered ~30% incremental margins on organic volume in 1Q18; in line with our expectations

• Expecting to deliver at a 40% incremental rate for FY 2018 • Better price/cost performance • Increasing restructuring benefits • Higher seasonal volume in Electrical

• Our forecast includes up to date view on commodity costs • Price actions implemented/announced will cover all material inflation that we see • Business processes in place to act quickly if things change


Lighting market dynamics are challenging but manageable

• Market growth has slowed due to higher levels of LED penetration • Increased price pressure in value segment on some low specification products • Relatively higher growth in the light commercial markets negatively impacting

revenue and product mix

• Expect revenue growth to be down low single digit for 2018 • Comparables get easier for the remainder of the year

• Eaton is increasing focus on segments where we are differentiated • Connected lighting solutions continue to outpace overall market growth • Business is on track to deliver margin expectations for 2018

Q1 Insights

Outlook for the remainder of 2018


11-12% EPS growth

By 2020 14-15% EBIT

margin

Thru 2020 >10% free

cash flow as a percent of

sales

4-7% annual revenue growth, excluding FX

17-18% segment margin

2018 – 2020 Goals

2018 – 2020 goals • ~3-4% organic revenue growth • ~1-3% acquisition revenue growth

• ~170 bps segment margin expansion

• ~90 bps in 2018E at the mid-point • ~80 bps from 2019-20

• ~210 bps EBIT margin expansion • 10%+ free cash flow as a percent of sales • ~$8B free cash flow

We’re on track to achieving our 2020 financial goals…

Note: EPS, margin, and cash flow metrics exclude acquisition integration charges, 2017 gain on Eaton-Cummins JV formation, and 2017 impact of U.S. Tax Reform


…and have an achievable path to deliver 11% to 12% EPS growth thru 2020

EPS growth drivers (CAGR)

Contribution to EPS growth: 2018 - 2020 Comments

Organic growth 4 points Markets are accelerating

Restructuring and OpEx 4 points Restructuring program proceeding as planned

Share repurchases 2 points On track for $3B of repurchases from 2015-2018

Acquisitions 1 – 2 points Expect activity to pick up in 2018

Total 11% - 12% On track


We have raised our 2018 organic growth forecast to ~5%...

Segment 2018 organic revenue growth Key market drivers

Electrical Products ~3%

Industrial markets and large commercial applications up mid-single digits Small commercial applications show modest growth Single-phase power quality to grow low-single digits Lighting down low-single digits

Electrical Systems and Services

~4%

Power distribution assemblies in the Americas show strong growth Harsh and hazardous markets grow mid-single digits 3-phase UPS to grow low- to mid-single digits Utilities markets up low-single digits

Hydraulics ~13% Mobile equipment markets showing continued strength globally

Aerospace ~3% Commercial OEM markets showing continued growth Commercial aftermarket growth continues at solid pace Military OEM markets to grow modestly

Vehicle ~4% NAFTA class 8 truck market up to 295k units in 2018 Growth in Brazil truck markets Global light vehicle market up modestly

eMobility ~12% Working on over 30 future opportunities for growth Eaton ~5%


…and now expect a 90 bps improvement in our 2018 Segment Operating Margins over 2017

Segment 2018 Guidance

Electrical Products 18.7% - 19.3%

Electrical Systems and Services 13.8% - 14.4%

Hydraulics 14.2% - 14.8%

Aerospace 19.0% - 19.6%

Vehicle 16.5% - 17.1%

eMobility 12.0% - 13.0%

Eaton Consolidated 16.4% - 17.0%


A summary of our 2018 Guidance 2nd Quarter Outlook

$1.25 - $1.35 Earnings Per Share

Organic Revenue Growth ~5%

Segment Operating Margins 16.2% - 16.8%

Tax Rate 11.5% - 12.5%

2018 Full Year Outlook $5.10 - $5.30 Earnings Per Share

Organic Revenue Growth ~5%

Forex ~$250M

Divestitures $(150)M

Segment Operating Margins 16.4% - 17.0%

Corporate Expenses (interest, pension, other corporate) Increased $10M above 2017 levels

Tax Rate 12.5% - 14.5%

Operating Cash Flow $2.9B - $3.1B

Free Cash Flow $2.3B - $2.5B

Capex $575M

Share Repurchases $800M

Restructuring Costs $90M


Why we think Eaton is an attractive investment opportunity

* Excludes 2017 gain on Eaton Cummins joint venture and the income related to the new U.S. tax bill.

• Eaton’s major end markets have returned to growth with a positive outlook • We have attractive growth initiatives that will allow us to grow faster than our markets • Margins have significantly improved over time and will continue to get better.

• 2018 expected to be a record at guidance margins of 16.4% - 17.0%

• We continue to restructure and improve our businesses, to boost future margins • Our balance sheet is in good shape with net debt to capital below 30%

• U.S. qualified pension fund now 95% funded

• Cash flow continues to be very strong • FCF/net income for 2018 expected above 100% • Expect to generate over $8B in free cash flow over next three years

• We will deploy cash in shareholder friendly way • Will continue to grow dividends with earnings growth, dividend yield now ~3.5% • Targeting acquisitions with returns > 11-12% • Repurchasing 1-2% of outstanding shares on an ongoing basis

• We are on track to deliver 11%-12% EPS growth over the next three years*

* Excludes 2017 gain on Eaton Cummins joint venture and the income related to the new U.S. tax bill.

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