annual investor conference - eaton · • leveraging ebs to drive productivity improvements across...

© 2019 Eaton. All rights reserved..

Annual investor conference

Craig Arnold, Chairman and Chief Executive Officer

March 1, 2019

2© 2019 Eaton. All rights reserved..

• Eaton is a premier power management company comprised of market-leading businesses

each strong on its own, and better together

• 2018 was a record year and we expect momentum to continue in 2019

• We have a long history of evolving our portfolio and improving performance, and today we

are announcing plans to exit our Lighting and Automotive Fluid Conveyance businesses

• Our strategy is working, reflected in our strong results and the creation of better businesses

through the economic cycle

• Across the enterprise, we are investing for organic growth in areas aligned with secular

growth trends and in targeted markets

• We are establishing a new expectation for EPS performance thru the cycle

• a better company + significant cash flow + a strong balance sheet = consistency of earnings

Key takeaways for today…


Agenda

Our future

Eaton today

Our history1

2

3

© 2019 Eaton. All rights reserved.. 4

•

•

•


We have continuously changed the company by managing the portfolio

1911

Joseph Eaton

and Viggo

Torbensen

begin

manufacturing

truck axles

1930

Enter the engine

valve business

through purchase

of Wilcox-Rich

1994

Expand

electrical

business by

acquiring

Westinghouse

DCBU

1999

Grow fluid power

and aerospace

through Aeroquip-

Vickers

acquisition

1978

Acquire Cutler-

Hammer, establishing

an electrical business

while expanding

aerospace

2005-2008

Eaton Aerospace doubles

with acquisitions of

Cobham Aerospace Fluid

& Air Division,

PerkinElmer Aerospace

Division, and Argo-Tech

2000

Exit

semiconductor

business with

Axcelis spin-off

1958

Enter the

medium- and

heavy-duty

transmission

market by

acquiring Fuller

Manufacturing

1937

Open first

international plant

in Canada

1997

Divest

truck axle

business

2008

Expand electrical

business through

Moeller and

Phoenixtec

acquisitions

2012

Expand

electrical by

acquiring

Cooper

Industries

2017

Establish

ECATT JV

2012-2017

Integrate Cooper,

repair balance sheet,

significant share

repurchase, complete

multi-year restructuring

program

2019

Announced

acquisition

of Ulusoy

Elektrik


¹Eaton segment margins exclude acquisition integration charges

²Adjusted to exclude impact from 2018 arbitration decision and certain 2014 legal settlements

³Adjusted to exclude impact from 2018 arbitration decision

Transforming the company and creating a better portfolio of businesses

2008 2018

Electrical

Products

Electrical

Systems &

Services

Hydraulics

Aerospace

Vehicle Electrical

Products

Electrical

Systems &

Services

Hydraulics

Aerospace

eMobility

• Deployed over $14B of

capital in M&A towards

higher growth, higher

margin, and lower volatility

• Spent ~$1.3B on

restructuring and

integrating acquisitions

• Invested ~$11B in R&D and

capex to drive growth

• ~$16B free cash flow²

• ~$4.5B share repurchases

Vehicle

Revenue $15B

EBIT Margin 8.4%

Segment Margin¹ 12.2%

Free Cash Flow $1.0B

Free Cash Flow / Share $3.06

Revenue $22B

EBIT Margin³ 13.7%

Segment Margin 16.8%

Free Cash Flow³ $2.4B

Free Cash Flow³ / Share $5.47


Which will allow us to deliver strong results through the economic cycle

0%

20%

Lastcycle

trough(2009)

Futuretrough

Lastcyclepeak

(2005)

Futurepeak

Se

gm

en

t m

arg

in %

¹

• Transforming the portfolio to an improved

business mix

• Focusing on the outliers in our portfolio,

growing the head, fixing the tail

• Taking aggressive actions to optimize

cost structure and improve performance

• Leveraging EBS to drive productivity

improvements across the business

Peak-to-trough Margins Margin Drivers

¹Excludes acquisition integration charges


0%

20%

$0

$4

2000 2018

0%

25%

$0

$4

2000 20180%

20%

$0

$4

2000 2018

Sale

s (

$B

)

Sale

s (

$B

)

Sale

s (

$B

)

10%12%

14% 16%

17.0% -17.4%

2000 - 04 2005 - 09 2010 - 14 2015 - 18 2019 2020 Goal

~18%

0%

20%

$0

$8

2000 2018

Segment Operating Margin¹

Elec Products Hydraulics Aerospace Vehicle

Sale

s (

$B

)

Marg

in1

Marg

in1

Marg

in1

Marg

in1

1 Excludes acquisition integration charges

0%

20%

$0

$8

2000 2018

Elec S&S

Sale

s (

$B

)

Marg

in1

Our company has consistently improved and so has each of our businesses


This has led to above peer EBITDA and free cash flow margins

0

500

Eaton PeerMedian

EBITDA Margin

Improvement (bps)

2000-2018¹

¹Eaton results adjusted to exclude impact from 2018 arbitration decision

Peers include: ABB, DOV, EMR, HON, IR, ITW, LR, PH, ROK, SIE, SU, UTX

Source: Capital IQ, Eaton analysis

Free Cash Flow Margin

Improvement (bps)

2000-2018¹

0

1,000

Eaton PeerMedian

0%

20%

Eaton PeerMedian

EBITDA Margin

2018¹

0%

15%

Eaton PeerMedian

Free Cash Flow

Margin

2018¹

bps

bps


Agenda

Our future

Eaton today

Our history1

2

3


Today, Eaton is a leading power management company in difficult to disrupt industries

Electrical Products

Electrical Systems & Services

Hydraulics

Aerospace

Vehicle

eMobility

Electrical

Products

Hydraulics Aerospace Vehicle

• Leading businesses in large, global markets

selling well-recognized brands

• Aligned with secular, long-term growth drivers

• Doing mission critical work that protects people

and assets, while improving productivity

• Highly engineered products in markets where

application expertise matters

• Occupying valuable real estate that positions us

to grow in a connected and intelligent IoT world

• Significant scale, providing an attractive

cost position

Electrical

Systems &

Services

Operating Margin What We Like2018 Sales Mix

10%

20%

2018 2020 Goal

~18%

eMobility


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

But we will continue to evaluate our businesses against a common criteria


Today we’re announcing plans to spin off our Lighting business and divest our Automotive Fluid Conveyance business

Lighting$1.7B of sales

Automotive Fluid Conveyance$150M of sales

Timing /

process• Spin-off

• Expected to close by the end of 2019• Sale expected to close by the end of 2019

Business

overview

• A leading global provider of LED lighting solutions

• An extensive product portfolio

• Differentiated sales network with market

leading relationships

• Growth driven by increase in connected and

intelligent solutions, along with growing complexity

and technical requirements

• U.S. offices in Atlanta, GA, and ~5,000

employees worldwide

• Plan to domicile in Ireland

• Currently reported in Eaton’s Electrical

Products segment

• Manufacturer of power assisted steering lines, air

conditioning lines, active ride suspension lines, and

plastic engine components

• ~1,350 employees spread across facilities in

Germany, UK, Czech Republic, and China

• Serving global light and commercial vehicle OEMs

• Global manufacturing footprint

• Currently reported in Eaton’s Vehicle segment

Rationale• Ability for Lighting to prioritize and fund its

growth initiatives

• Margin performance is dilutive

• Set of products where we are not a market leader

• Business doesn’t align well with our portfolio criteria

• Margin performance is dilutive


And we recently announced the acquisition of Ulusoy Elektrik...

• On January 31, 2019, we announced the acquisition of

~82% controlling interest in Ulusoy Elektrik

• Purchase price of $214M, a LTM EBIT multiple of 7.2x

• Ulusoy Elektrik strengthens Eaton’s manufacturing

presence in Europe and Asia

• Primary manufacturing located in Ankara, Turkey, with

local assembly plant in Jakarta, Indonesia

• Provides low-cost, high quality manufacturing for the

Europe, Middle East, and Africa region

• Building upon our successful acquisition in 2012 of

Polimer Kauçuk Sanayi ve Pazarlama A.Ş.

• Strong manufacturing base and experience in country Ankara production facility

…adding to our IEC medium voltage assemblies business


Utility

Industrial facilities

Machine builders

Resi constr.

Data Center /

IT

• Strong margins driven by a portfolio of trusted

brands and differentiated products

• Growth driven by focus on innovative products and

ability to provide efficiency gains for our customers

• #1 or #2 position in numerous markets including NA

circuit protection, single phase UPS, and NA

structural support systems

• Strongest distribution network in NA

• Innovator in connected and intelligent solutions

Intelligent circuit

protection

Operating Margin What We Like

10%

20%

2019E Thru thecycle

Arc fault / ground fault

circuit interrupters

1-phase uninterruptible

power supply

2018 End Market Mix

58% US, 42% RoW

19%-22%

Electrical Products is a leading global player in low and medium-voltage products

Commercial

construction


• Strong margins driven by differentiated solutions and

the ability to manage complex customer projects

• Deep application expertise with proven ability to solve

our customers’ toughest challenges

• #1 or #2 position in numerous markets including harsh

& hazardous, NA low- and medium-voltage power

distribution, and NA three phase UPS

• Well-positioned to participate in connected and

intelligent solutions

• Leading NA services organization able to deliver

value-added services to our customers

3-phase uninterruptible

power supply

Power distribution

and controls

Harsh & hazardous


8%

18%

2019E Thru thecycle

Utility

Industrial facilities

Machine builders

Resi constr.

Data Center /

IT

2018 End Market Mix

65% US, 35% RoW

13%-16%

Electrical Systems and Services is also a leading global player in low and medium voltage solutions

Commercial

construction


Hydraulics is among the four largest players serving a diverse set of end markets

• In the midst of a cyclical expansion where we expect

strong market growth through 2020

• Serving the world’s most challenging applications

where power density matters

• One of the broadest product offerings in the industry

• Among strongest distribution networks in North

America, with 55% of our sales through distribution

• Large installed base driving aftermarket business,

which accounts for ~40% of sales

• Significant restructuring program has improved our

cost position and growth prospects

Hydraulic pump Hydraulic valves


Comm. VehiclesMaterial

Handling

Mfg.

Energy

Other

8%

18%

2019E Thru thecycle

2018 End Market Mix

43% US, 57% RoW

13%-16%

ProcessAgriculture

Construction

& Mining

Hydraulic hose

and fittings


Aerospace is a leader in hydraulics, motion control, and engine solutions

• Long-term growth underpinned by increasing

passenger and freight air traffic

• Risk averse and highly regulated industry where

pedigree matters – difficult to displace

• Strong intellectual property and patent protection

• Large installed base and strong aftermarket position

create predictable, high-margin revenue streams

• Market leader in hydraulic, conveyance,

and fuel systems

Air frame fuel pump Hydraulic pump Motion control

Secondary flight controls


0%

25%

2019E Thru thecycle

Comm. OE

Military OE

Aftermarket

2018 End Market Mix

Other

76% US, 24% RoW

18%-22%


Vehicle is a leading supplier of powertrain and engine air management products

• Need for better fuel economy and emission

regulations driving long-term growth

• Industry leader in valves and advanced valve

actuation – expect market growth over next 10 years

• Strategic JV partnerships increase access to global

markets and speed to market

• Established relationships with all global OEMs with

local manufacturing and customer support

• Long-term investments in manufacturing footprint drive

best-in-class scale and cost competitiveness

Clutches and transmissions Valve actuation Torque controls

Operating Margin What We Like2018 End Market Mix

HD Truck

LD / MD Truck

Ag. / Off-Highway /

Other

Passenger Car

10%

20%

2019E Thru thecycle

56% US, 44% RoW

17%-20%


•

Operating Margin What We Like2018 End Market Mix

Comm. vehicle + pass. car

Off-highway

eMobility is well positioned to participate in the fast growing electric vehicle market

• High growth market with large future addressable

market ($33B in 2030)

• Ability to combine our core competencies in Electrical

and Vehicle businesses to solve new

technical challenges

• Ability to leverage our supply chain scale, existing

manufacturing footprint, existing OEM relationships

and technology road maps across the enterprise

• Industry leader in power protection products

Power electronics Power systems Power distribution &

protection

0%

20%

2019E At maturity

~15%


Source: Capital IQ, Eaton analysis, CY ’14 thru CY ’18

1Eaton segment margins exclude acquisition integration charges

0%

20%

Electrical Peer Avg Hydraulics Peer Avg Aerospace Peer Avg Vehicle Peer Avg

All of our businesses perform well compared to peers

Electrical Peers: ABB, HUBB, LR, ROK, SU, Siemens-Industrial; Hydraulics Peers: Bosch-Industrial Technologies, Danfoss-Power Solutions, Moog-Industrial Systems, Parker Hannifin-

Diversified Industrial; Aerospace Peers: Moog-Aircraft Controls, Parker Hannifin-Aerospace Systems, Woodward-Aerospace; Vehicle Peers: ALSN, AXL, BWA, CMI

Segment Margin1

5-y

ea

r a

ve

rag

e s

eg

me

nt

ma

rgin

1


And Eaton is on track to achieve our 2020 financial goals

2015 – 2020 Goals2018

results

2019

guidance

2020

goal

2-4% annual revenue growth,

excluding FX6% 4-5% On track

17-18% segment margin 16.8% 17-17.4% On track

14-15% EBIT margin 13.7% 14-14.5% On track

>10% free cash flow as % of sales 11.1% 11-12% On track

8-9% EPS growth 16% 9% On track

Note: EBIT margin, free cash flow as a % of sales, and EPS growth numbers are adjusted to exclude the impact from the 2017 gain on formation of the Cummins JV, the

impact of 2017 U.S. tax reform, the 2018 arbitration decision, and the one-time impacts of the 2019 Lighting spin and sale of Automotive Fluid Conveyance


Agenda

Our future

Eaton today

Our history

3

1

2


Our future will be built around making a difference and doing things that matter…

…by connecting the work we do to solving meaningful real-world problems


Develop and engage

our employees

Delight our

customers

Support our

communities

By making power safe, reliable, and more efficient

Having a positive impact on all of our stakeholders


And building a purpose driven company that delivers for all stakeholders

We can deliver superior returns to shareholders and fulfill our

broader obligations to society.

This is how we build a better and sustainable company

• Be the preferred supplier to customers and channel partners

• Make work exciting, engaging and meaningful for our employees

• Ensure the safety, health and wellness of our employees

• Be a model of inclusion and diversity in our industry

• Make our communities stronger

• Be active stewards of the environment


With industry leading ESG practices

Social responsibilityEnvironment Governance

• $12M of funding available in 2018 to

strengthen local communities

• Recognized for our commitment to

LBGTQ+ equality by the Human

Rights Campaign

• Recognized as one of the best

employers for diversity, new

graduates, and women by Forbes

• ~50% of our manufacturing sites

certified as Zero Waste to Landfill

• 11% reduction in GHG emissions

since 2015

• 12 manufacturing sites with solar

photovoltaics deployed, producing

9.2M kWh of renewable energy per

year

• 50% diversity representation on

the Board of Directors

• Directors are elected annually

by majority voting in

uncontested elections

• Annual ethics training and

affirmation of our ethics policy

by all employees and directors

Committed to excellence in meeting obligations to stakeholders while delivering superior returns to shareholders


All made possible by creating a winning culture

An Eaton employee……

• Ethical…plays by the rules and acts with integrity.

• Passionate…cares deeply about what we do and sets high expectations.

• Accountable…seeks responsibility and takes ownership. We do what we say.

• Transparent…says what they think and make it OK to disagree.

• Efficient…values speed and simplicity, we eliminate waste.

• A learner…is curious, adaptable and willing to teach others.

…and builds trusting and supportive relationships with all stakeholders


Organic Growth – Develop technology leadership (safe, reliable,

efficient, connected, and intelligent), strategic partnerships, and

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), strategic and

criteria-based M&A

Our corporate strategy is working


Strategic partnershipsTechnology leadership Superior value

And we have increased focus on organic growth

• Intelligent Power Management focused

on intelligent machines, computational

intelligence, and data science

• In partnership with Microsoft, received the

Data Center Dynamics award for Mission

Critical Innovation

• Won the Leadership in Engineering

Achievement award for mobile

valve technology

• Established JV with Shaanxi Fast Gear

to gain access to China light duty truck

transmission market

• Accelerating growth in our distribution

channel and thru relationships with non-

traditional partners

• Partnered with NREL on microgrids,

energy storage, and grid edge controls

• Crouse-Hinds launching an IEC panel &

circuit breaker manufactured in China to

support global IEC growth

• Localized manufacturing of heavy duty

pump in China resulting in 30% cost

reduction and share gain with OEMs

• Localized automated manual light duty

truck transmission driving higher market

share in Brazil


EBS is the foundation of our execution strategy and how we expand margins…


Productivity plansOperational excellence Focus on outliers

• Increased our number of World Class

manufacturing plants by 75%

• Received multiple supplier excellence

awards for outstanding performance in

each Vehicle Group region

• Consolidated North American Electrical

Distribution network down to 3 regional

distribution centers

• Drove ~5% indirect purchase cost out in

2018 through our centralized, global

indirect purchasing office

• Investing to optimize our financial shared

service centers, driving 20-30% cost

reduction

• Launched in-house IoT solution that

reduces energy costs by 20%

• Successfully grew our North America

Vehicle Aftermarket business over 20%

• Drove ~50% growth and profitability

expansion in our medium voltage drives

business

• Divested a low margin wireless

connectivity business in Electrical

Products

…and run our business better…


…and leverage our scale thru shared services

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

leverageCash Flow

Generating strong

cash flow through

the cycle

Eaton Scale Benefits


Revenues

from

Connected

Intelligent

Products

Customer

Facing

Processes

Internal

Productivity

Industry 4.0 /

Intelligent

“Factory of the

Future”

Including the digitalization of the company


Reinvest in the business to drive organic growth1

2

3

4

Return cash to shareholders with a growing dividend

Pursue strategic acquisitions while maintaining price discipline

Repurchase shares of 1% - 2% of market cap annually

We are also disciplined in allocating capital


And generate significant cash flow thru the cycle

Operating cash flow¹

0

3

200

0

200

5

201

0

201

5

$B

of

Op

era

tin

g C

ash

Flo

w

Cash flow drivers

• Leading positions in large, global, difficult

to disrupt industries

• Implementing EBS to drive strong

margins and working capital management

• Reinvesting in both organic and inorganic

growth to drive additional growth and

profitability

Expect to generate in excess of $3B of operating cash flow annually

Pre-Cooper Post-Cooper

Midpoint of 2019 guidance

¹Adjusted to exclude impact from 2018 arbitration decision and certain 2014 legal settlements


$0

$1

$2

$3

2014 2015 2016 2017 2018 2019E

Cash Dividend / Share

0%

4%

2014 2015 2016 2017 2018 2019E

Share Repurchases / Market Cap on Jan 1 each year

Expect to buy 1%-2% of shares each yearDividend yield of ~3.5%

Which we consistently return to shareholders through dividends and repurchases


This will allow us to deliver strong results through an economic cycle

Expect to maintain EPS during a market contraction

Hypothetical

recession

Average over

next five years

Expansionary

period

Market growth (3%) - (4%) 2% - 3% +

Organic sales growth (2%) - (3%) 3% - 4% +

Segment Margin % ~18% 18% - 20% +

Free cash flowFlat in a

recession year~$2.8B +

Earnings per

share growthRoughly flat 8% - 10% +


Aspirational Goals

Our customers’ and

channel partners’

preferred choice

An engaged

workforce doing

meaningful work

A diverse and inclusive

organization

A safe and healthy work

environment

Supporting our

communities

Active stewards of the

environment

Leadership Expectations

Leaders must be

ethical, passionate,

accountable, efficient,

transparent,

learners…make good

decisions

EBS Processes

Standard set of processes

thru which we run the

company…teachable point

of view and a continuous

learning mindset

Leverage Scale

Leverage scale by

centralizing common

needs…driving efficiency

across the organization

Accelerate Growth

Accelerating growth thru

focused efforts on

technology, channel and

service, superior

value…the right to win

Margin Expansion

Driving productivity

improvements, optimizing

manufacturing and support

costs…managing the outliers

in our businesses

Capital Deployment

Investing in organic growth,

returning cash to

shareholders, acquisitions

that strengthen the

portfolio…maintaining a

disciplined approach

We have a consistent formula for how we create value and deliver superior returns to shareholders


Key takeaways for today…

• Eaton is a premier power management company comprised of market-leading businesses

each strong on its own, and better together

• 2018 was a record year and we expect momentum to continue in 2019

• We have a long history of evolving our portfolio and improving performance, and today we

are announcing plans to exit our Lighting and Automotive Fluid Conveyance businesses

• Our strategy is working, reflected in our strong results and the creation of better businesses

through the economic cycle

• Across the enterprise, we are investing for organic growth in areas aligned with secular

growth trends and in targeted markets

• We are establishing a new expectation for EPS performance thru the cycle

• a better company + significant cash flow + a strong balance sheet = consistency of earnings

annual investor conference - eaton · • leveraging ebs to drive productivity improvements across...

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