electrical products group conference · distribution network down to 3 regional distribution...

© 2019 Eaton. All Rights Reserved..

Electrical Products Group Conference

Craig Arnold, Chairman and Chief Executive OfficerMay 21, 2019

2© 2019 Eaton. All Rights Reserved..

Forward Looking Statements and Non-GAAP Financial Information

This presentation or the comments we make on our call today contain forward-looking statements concerning, among other matters, performance of our worldwide end markets, second quarter and full year 2019 adjusted earnings per share, expected organic revenue growth, segment operating margins, EBIT margins, currency translation, pension expense, acquisitions, share repurchases, capitalexpenditures, cash flow, corporate expenses, revenue growth, foreign currency exchange impact, 2019 and beyond expected effective tax rate, our 2020 goals, capital allocation plans, pension funding needs, strategic growth initiatives, the impact of potential tariffs, the divestiture of our Automotive Fluid Conveyance business and the intended spin-off our lighting business. 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 purchasesfrom 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 ormarketing 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.

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.

http://www.eaton.com/

3© 2019 Eaton. All rights reserved..

Eaton – A Power Management Leader

• Our Performance

• Our Strategy

• Goals and Guidance


Eaton is a leading power management company with premier global businesses

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


Operating Margin What We Like2018 Sales Mix

10%

20%

2018 2020 Goal

~18%

eMobility


¹Eaton segment margins exclude acquisition integration charges²Adjusted to exclude impact from 2018 arbitration decision and certain 2014 legal settlements³Adjusted to exclude impact from 2018 arbitration decision

We have transformed the company and created a better portfolio of businesses

2008 2018

Electrical Products


Hydraulics

Aerospace

Vehicle Electrical Products


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 $15BEBIT Margin 8.4%Segment Margin¹ 12.2%Free Cash Flow $1.0BFree Cash Flow / Share $3.06

Revenue $22BEBIT Margin³ 13.7%Segment Margin 16.8%Free Cash Flow³ $2.4BFree Cash Flow³ / Share $5.47


0%

20%

$0

$4

2000 20180%

25%

$0

$4

2000 20180%

20%

$0

$4

2000 2018

Sale

s ($

B)

Sale

s ($

B)

Sale

s ($

B)

10% 12% 14% 16%17.1% -17.5%

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) M

argin1

Margin

1

Margin

1

Margin

1

1 Excludes acquisition integration charges

0%

20%

$0

$8

2000 2018

Elec S&S

Sale

s ($

B) M

argin1

And have a consistent track record of improvement


Vehicle component manufacturer

Eaton’s future will be built on digitally-enabled solutions, what we call Intelligent Power Management

Eaton Past Eaton Today

Power Management Company

Eaton Future

Intelligent Power Management

Digitally-enabled revenues Insights

Software

AppsServices



• Our Performance

• Our Strategy



Strategic Growth Initiatives – 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 corporate strategy is working


Strategic partnershipsTechnology leadership Superior value

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 mobilevalve 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


We have IoT Centers of Excellence that are creating intelligent power management solutions

Energy management circuit breaker

xStorage Home

Intelligent ground refueling systems

Integrated Hydraulics Sensing and Software Solution

Intelligent factory PredictPulse™


Our eMobility business increased its portfolio over last 12 months by accelerating product development…

Power ElectronicsManaging electrical power

Power SystemsManaging mechanical power

Power Distribution and ProtectionSafely and reliably distributing power

Traction inverter

DC/DC converter

On board charger

48v auxiliary inverter

EV fuel tank isolation valve

Low and high voltage fuses

48V mild hybrid

EV transmission

Resettable circuit protection

Power distribution unit

…and we are winning across the portfolio

Won development agreement

Program win

EV = all electric vehicle architectures


…achieving significant program wins and building a strong program pipeline since March 2018 launch

Development programs

Launch to mature year revenue

Pursuit3 to 9 months

12 to 30 months

Campaign Win Process

24 to 36 months

Strong momentum with program wins and development agreements

$1.1B11Development

agreements

$200M+Mature yearprogram wins

Pursuit pipeline

Current ScorecardTraction Inverter Win

$100M+ Mature year revenue win

• ~$450M life of program win

• Major global automotive OEM customer, PSA

• Won with superior technical solution against global competitors


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

We remain focused on running the business better


And delivering scale benefits across the organization

TechnologySharing expertise and developing

deep capabilities

Support FunctionsSharing 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 MarketsLeveraging our

size and our diverse portfolio

Supply ChainCentralizing and optimizing our supply chain

ManufacturingCreating superior

operating leverage

Cash FlowGenerating strong cash flow through

the cycle

Eaton Scale Benefits


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

Reinvest in the business to drive organic growthCapital expenditures plus R&D expected to be 5.5% - 6.0% of sales going forward

Growing dividend in line with earnings growthOver the last 10 years, dividend CAGR of 11%

Repurchase shares each year equal to 1% - 2% of our market capitalizationRepurchased $3.5B of shares from 2015-2018, exceeding our $3B commitment

Pursue acquisitions while retaining our disciplineWill focus on our Electrical, Aerospace and eMobility segments

1

2

3

4

We expect ~$8B of FCF through 2021, average FCF conversion of >100%, and cash available post dividends of ~$4.5B


We expect to have record amounts of cash to re-deploy over the next 3 years

Past 5 Years2014-2018 cumulative

Next 3 Years2019-2021 cumulative

Free cash flow1

Pension contributions2

Debt pay-down

Available cash

We expect to have ~$1.5B cash available annually for repurchases and M&A

R&D and Capex

Dividends

Share repurchases

Optionality

Period of increased optionality

24%

14%

32%

30%

Dividend

1 Excluding US qualified pension contributions, payments for 2018 arbitration decision, and certain 2014 legal settlements

$5B ~$3.5B

$2B $0B

$1B $0B

$11B ~$8B

$3B ~$4.5B

2019-2021 cumulative

2 US qualified pension plans


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

And have a disciplined process to continually evaluate our portfolio of businesses using a specific criteria

We like our mix of businesses and are driving significant improvement


Our recently announced portfolio decisions demonstrate our active approach to portfolio management

Heavy duty truck transmission JV with Cummins

Acquisition of Turkish electrical switchgear manufacturer Ulusoy

Light duty truck transmission/clutch JVs with Shaanxi Fast Gear

Announced spin-off of Eaton Lighting Business

We have completed 68 acquisitions and 47 divestitures since 2000



• Our Performance

• Our Strategy



We are on track to achieve our 2020 financial goals

2015 – 2020 Goals 2018 results

2019 guidance

2020goal

2-4% annual revenue growth, excluding FX 6% ~4% On track

17-18% segment margin 16.8% 17.1-17.5% On track

14-15% EBIT margin 13.7% 14.1-14.6% 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


Our 2019 organic growth is expected to be ~4%Segment 2019 organic

revenue growth Key market drivers

Electrical Products 4 - 5%

Industrial markets and large commercial projects up mid-single digitsSingle-phase power quality to grow mid-single digitsLighting up low-to-mid single digitsSmall commercial projects to grow low-single digits

Electrical Systems and Services

6 - 7%

Power distribution assemblies in the Americas show strong growthData center markets to grow high-single digitsHarsh and hazardous markets grow mid-single digitsUtilities markets up low-single digits

Hydraulics 3 - 4% Mobile equipment markets growing low-single digits Industrial equipment markets flat

Aerospace 9 - 10% Commercial OEM and aftermarket markets showing solid growthContinued strength in military OEM and aftermarket

Vehicle (4) - (5)%Growth in Brazil truck markets, impacted by decline in Argentina export marketNAFTA Class 8 truck market flat with 2018 at high levelsGlobal light vehicle market down slightly

eMobility 11 - 12% Continued progress on over 30 growth opportunitiesEaton ~4%


We expect to fully offset the impact of tariffs

• Tariff update• May 10, 2019 – Government announced intent to increase List 3 from 10% to 25%• May 14, 2019 – Government announced intent to impose tariffs on additional

$300B of imports - comments due by June 17, 2019• May 17, 2019 – Government reached deal with Canada, Mexico to lift steel,

aluminum tariffs

• We are confident in our ability to offset tariff impacts in 2019• We expect $100M of additional tariff costs in 2019• Pricing increases/cost reductions will cover the expected tariff impact• We have strong management processes in place to ensure timely execution


While continuing to expand segment margins with many reaching record highs

Segment 2017 segment margin1

2018 segmentmargin

2019E segmentmargin

Electrical Products 17.9% 18.4% 19.0% - 19.6%

Electrical Systems & Services 13.6% 14.9% 15.2% - 15.8%

Hydraulics 11.7% 13.4% 13.4% - 14.0%

Aerospace 19.0% 21.0% 21.8% - 22.4%

Vehicle 16.3% 17.5% 16.5% - 17.1%

eMobility 17.7% 13.8% 6.1% - 6.7%

Total Eaton 15.8% 16.8% 17.1% - 17.5%

¹Segment operating margin excludes acquisition integration chargesNote: Cells highlighted in light green were an all-time record at the time; cells highlighted in dark green will be an all-time record if midpoint is achieved

25© 2019 Eaton. All rights reserved.

Our 2019 guidance is unchanged2nd Quarter Outlook (1)

$1.45 - $1.55 Adjusted Earnings Per Share

Organic Revenue Growth ~4%

Forex $(100)M

Segment Operating Margins 17.2% - 17.6%

Corporate Expenses Flat with 2Q18

Tax Rate 13.5% - 14.5%

2019 Full Year Outlook (1)

$5.72 - $6.02 Adjusted Earnings Per Share

Organic Revenue Growth ~4%

Acquisition Revenue Growth $100M

Forex $(300)M

Segment Operating Margins 17.1% - 17.5%

Corporate (interest, pension, other corp) Flat with 2018 levels

Tax Rate 14.0% - 16.0%

Operating Cash Flow $3.1B - $3.3B

Free Cash Flow $2.5B - $2.7B

Capex $600M

Share Repurchases $400M(1) Guidance excludes acquisition integration and divestiture transaction costs from the Ulusoy acquisition, the impact of the spin of Lighting business and the sale of Automotive Fluid Conveyance business.


• Expect to see solid growth in end market and ~4% organic revenue growth in 2019• Attractive growth initiatives will allow us to grow faster than our markets

• Segment margins have significantly improved over time and will continue to get better • 2019 expected to be another record year, with guidance margins of 17.1% - 17.5%

• We have a long history of evolving our portfolio and improving performance• Announced spin of Lighting and sale of Automotive Fluid Conveyance

• Cash flow generation remains strong with FCF/net income above 100%• Expect to generate over ~$8B in free cash flow over next three years

• We will deploy cash in a shareholder friendly way • Do not anticipate further U.S. pension contributions or debt paydown• Will continue to grow dividends with earnings growth, dividend yield now ~3.5% • Targeting acquisitions with returns > 11-12%

• We are on track to deliver our 2019 guidance

Eaton is an attractive investment opportunity


Contact InformationYan Jin – Senior Vice President, Investor RelationsPhone: +1 (440) 523-7558Email: [email protected]

Chip Walker – Director, Investor RelationsPhone: +1 (440) 523-2284Email: [email protected]

Rachel Morrison – Administrator, Investor RelationsPhone: +1 (440) 523-3634Email: [email protected]

mailto:[email protected]



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