Deutsche Bank Global Industrials & Materials · Deutsche Bank Global Industrials & Materials Rick...

© 2019 Eaton. All Rights Reserved..

Deutsche Bank Global Industrials & Materials

Rick Fearon, Vice Chairman & Chief Financial and Planning OfficerJune 5, 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..

Agenda

• Global economic outlook

• Secular growth trends

• Eaton strategy

• U.S. – China relationship


We continue to expect a year of global growth in 2019…although trade disputes create storm clouds on the horizon

US 2019 growth % of total*

GDP 2.3% 25%

Mfg. IP 1.4% 17%

Brazil 2019 growth % of total*

GDP 1.0% 3%

Mfg. IP 1.0% 2%

Europe (EU 28) 2019 growth % of total*

GDP 1.4% 23%

Mfg. IP 0.8% 22%

China 2019 growth % of total*

GDP 6.3% 16%

Mfg. IP 5.6% 25%

Global 2019 growth

GDP 2.7%

Mfg. IP 1.2%

India 2019 growth % of total*

GDP 6.4% 3%

Mfg. IP 1.3% 3%

*2017 share of world GDP and manufacturing IP


Global economic growth is underpinned by low unemployment, solid consumer spending…

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3456789

101112

00 02 04 06 08 10 12 14 16 18 20

Une

mpl

oym

ent R

ate,

% (S

A)

Unemployment Rate

Source: U.S. BLS, BEA, Eurostat, IHS Economics, Eaton Economics, Data through March/April 2019

United States European Union

China -15-10-50510152025

-15-10

-505

10152025

08 10 12 14 16 18 20Y/

Y %

Cha

nge

Retail Sales Growth

European Union

United States

China

Retail Sales Growth


…and robust consumer confidence

0

50

100

150

200

250

0

50

100

150

200

250

08 10 12 14 16 18 20

Inde

x, 2

012=

100

U.S. Consumer Confidence

90

95

100

105

110

115

120

125

90

95

100

105

110

115

120

125

08 10 12 14 16 18 20

Inde

x, 2

012=

100

EU Consumer Confidence


U.S. and EU manufacturing industrial production growth has decelerated

-20

-15

-10

-5

0

5

10

-20

-15

-10

-5

0

5

10

08 09 10 11 12 13 14 15 16 17 18 19 20

Y/Y

% C

hang

e

Source: U.S. Federal Reserve, Eurostat, Eaton Economics, Data through March/April 2019

United States

European Union2018 YTD

United States 2.3 0.9European Union 1.6 0.5

Y/Y Growth (% Change)


-10-50510152025303540

-10-505

10152025303540

08 09 10 11 12 13 14 15 16 17 18 19 20

Y/Y

% C

hang

e

Eaton Alternative IP

Official IP

Industrial production growth in China appears to also have slightly decelerated

Source: National Bureau of Statistics, Eaton Economics, Data through April 2019

2018 YTDOfficial IP 6.2 6.2

Eaton Alt. IP 2.7 2.5



U.S. construction spending growth remains solid…

0.20.30.40.50.60.70.80.91.01.1

0.20.30.40.50.60.70.80.91.01.1

00 02 04 06 08 10 12 14 16 18 20

Trill

ions

$ (S

AAR

)U.S. Construction Spending

Source: U.S. Bureau of Economic Analysis, Eaton Economics, Data through 2019Q1

Nonresidential Structures (Private & Public)

Residential (New and Renovation)


02004006008001,0001,2001,4001,6001,8002,000

0102030405060708090

100

02 04 06 08 10 12 14 16 18 20M

illio

ns o

f sq.

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ers

(SAA

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China Construction Starts

…as does construction spending growth in the EU and China

400

500

600

700

800

900

1,000

400

500

600

700

800

900

1,000

0002040608101214161820

Bill

ions

€ (S

AAR

)

EU Construction Spending

Source: Eurostat, China National Bureau of Statistics, Eaton Economics, Data through 2018Q4, April 2019

Nonresidential Structures (Private & Public)

Residential (New and Renovation)

Office (left)

Housing (right)


$0$2$4$6$8$10$12

$0$2$4$6$8

$10$12

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Rolling 12 months Data Center Starts

Source: Dodge Data & Analytics, Eaton Economics, Data through April 2019

U.S. data center construction starts are strong


-25-20-15-10-5051015202530

-25-20-15-10

-505

1015202530

08 09 10 11 12 13 14 15 16 17 18 19 20

Y/Y

% C

hang

e

Note: Growth in air passenger traffic is measured by revenue passenger kilometers, Growth in air freight traffic is measured by freight ton kilometers

Source: International Air Transport Association, Eaton Economics, Data through April 2019

Air Freight

Passenger Traffic

Global air passenger traffic continues to show healthy growth while air freight growth has been impacted by trade issues

2018 YTDPassenger Traffic 6.5 4.8

Air Freight 3.5 -2.8



-50-40-30-20-1001020304050

-50-40-30-20-10

01020304050

13 14 15 16 17 18 19 20

Y/Y

% C

hang

e (3

MM

A)

Source: U.S. Census Bureau, Eaton Economics, Data through March 2019

Industrial Machinery

Construction Equipment

Farm Machinery

Truck & Bus

2018 YTDIndustrial Machinery 1.1 0.3

Construction Equipment 9.8 4.8Farm Machinery 17.6 11.2

Truck & Bus 12.5 20.4


Most key U.S. hydraulics markets continue to show good growth


0

10

20

30

40

0

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20

30

40

05060708091011121314151617181920

Bui

ld p

er m

onth

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(K, S

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Source: ACT Research, IHS Automotive, ANFAVEA, Eaton Economics, Data through April 2019, LV through 2019Q1

05101520253035

05

101520253035

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Production per m

onth, Units (K

, SA)

Brazil

Truck & Bus

Farm Machinery

40

60

80

100

40

60

80

100

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Prod

uctio

n(m

lns

unit

SAAR

)

Global Light Vehicle

NAFTA Class 8 build continues to grow while Brazil build has plateaued and global light motor vehicle production has declined


Agenda



• Eaton strategy



Data proliferation:Global data is expanding at a rate of

Industrial companies are preparing for an increasingly urban, electrified and connected world

Electrification: By 2050, EV’s are expected to increase U.S. power consumption by

Urbanization:Over people are expected to live in urban areas by 2050

A premium will be placed on reliable, efficient, safe, sustainable and connected technologies to solve tomorrow’s challenges

38%

6 billion

40% per year

Internet of things: Number of connected devices expected to grow to 75 billion

by 2025


In 2017, U.S. utilities deployed of demand response programs for every 1GW of new capacity added to the grid

of the U.S. storage market

by 2021

The way buildings use electricity will change dramatically over the next decade

~0.6GW

75% of electricity in the U.S. is consumed by buildings

Off the grid storage will account for 50%

California Title 24 requires solar on new homes after 2020 &net zero energy on commercial buildingsby 2030

U.S. smart home revenue is estimated to grow at a 13% CAGR from 2019-2023


40%

From 2014 to 2020 public cloudpower usage increased

By 2021, public cloud will account for 55% of all data center traffic

Data centers consume 3% of global electricity and are undergoing dramatic change

88%

of a data center’s operating expense is on energy

Li-ion battery prices have dropped 80%since 2010, driving DCs to invest in more renewables & storage

Hyperscale and co-lo data centers value reliable and scalable solutionsthat reduce their operational costs


Utilities are increasing smart grid investments above and beyond their typical capital spend

of new U.S. generation capacity added in 2017

Renewable power was 50%

650 million attempted cyberattacks in 2017

Source: Navigant Research

The U.S. electric vehicle market is expected to grow at a

20% CAGRto 2030

One large U.S. utility reported more than

The $2.5 billion North American smart grid software & services market is growing at a 6% CAGR, 3x the growth of the overall utility market

up from approximately 4 hours in 2016

The average 2017 power outage in the U.S. lasted 7.8 hours,


In 2030, 101Minternal combustion engine vehicles will be produced

HD diesel engine emissions standards require 50-90% reduction by 2025

By 2030, 24% of all vehicles produced will have some kind of alternative propulsion

A typical intelligent vehicle requires ~200 million lines of software code

Vehicle OEMs demand innovative solutions to solve stricter fuel economy and emissions challenges

Electric vehicle production estimated to grow at a 18% CAGR through 2030


Vehicle component manufacturer

Eaton is well positioned to take advantage of these growth trends

Eaton Past Eaton Today

Power Management Company

Eaton Future

Intelligent Power Management

Digitally-enabled revenues Insights

Software

AppsServices

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


Agenda



• Eaton strategy



Eaton combines leading power management businesses that capitalize on these secular trends

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 positionElectrical

Systems & Services

Eaton Advantages2018 Sales Mix

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

Over the last decade, we have transformed Eaton2008 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

This transformation adds to a long track record of improving profitability…


…which has enabled Eaton to grow Adjusted EPS at an 8% CAGR since 2000…

(1) Adjusted EPS excludes the per share impact of acquisition integration and divestiture charges, 2014 legal settlement, 2017 gain on formation of the Cummins JV, the impact of the 2017 U.S. tax reform, and the 2018 arbitration decision. For years 2012 and prior, Adjusted EPS has not been restated for the 2017 retrospective change in its method of accounting for certain inventories in the United States.

2000 – 2019 GuidanceCAGR

8%

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019G

Adjusted EPS 2000 - 2019 Guidance (1)


0100200300400500600700800900

10001100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Cumulative Shareholder Returns

Eaton S&P 500 Peer Group

2000 – May 31, 2019 CAGR

Return Index

12%

10%

6%

Notes:Peer Index is for the average of ABB, EMR, LR, ROK, SU, SIE, PH, DOV, HON, ITW, IR, UTXCumulative shareholder returns CAGR is calculated using end-point methodologySource: Eaton Analysis, Capital IQ

2019

…and deliver superior returns to our shareholders


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 remains focused on three key value drivers


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

We continually evaluate our portfolio of businesses againstspecific 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 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 expected to be 5.5% - 6.0% of sales going forward

Growing dividend in line with earnings growth> Over the last 10 years, dividend CAGR of 11%

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

Pursue acquisitions while retaining our discipline> Will focus on our Electrical, Aerospace and eMobility segments

1

2

3

4


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


We are on track to achieve our 2015-2020 goals

Metric 2015-2020 Goal

2015-2018 Actual 2019 Guidance Status

Annual Revenue Growth, excluding FX 2% - 4% 2% ~4%

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

Segment Margin 17% - 18% 16.8% 17.1% - 17.5%

Free Cash Flow Margin >10% 11.1% 11% - 12%

Annual EPS Growth 8% - 9% 8% 9%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

EBIT Margin, Segment Margin and Free Cash Flow Margin goals are for 2020. Actual performance for these three metrics for 2015-2018 is for 2018.


Agenda


• Secular market growth

• Eaton strategy



How scary will the ride down be?


Fundamentally, the U.S. – China trade dispute reflects a clash of cultures

Self perception “Number One” “Center of universe”

Core values Freedom Order

View of government Necessary evil Necessary good

Form of government Democratic Republic Responsive authoritarianism

Exemplar Missionary Inimitable

Foreigners Inclusive Exclusive

Time horizon Now Eternity

Change Invention Restoration and evolution

Foreign policy International order Harmonious hierarchy

Source: "Destinedfor War: Can Americaand China Escape Thucydides'sTrap?“ By Graham Allison


Source: U.S. Census Bureau, Eurostat, Eaton Economics, Data through March 2019

-40-30-20-10

0102030405060

08 10 12 14 16 18 20

Y/Y

% C

hang

e (3

MM

A)

EU Exports to China (€)

-40-30-20-10

0102030405060

08 10 12 14 16 18 20

Y/Y

% C

hang

e (3

MM

A)

U.S. Exports to China ($)

As trade tensions have escalated, EU exports to China have grown while U.S. exports have declined


China faces a world of declining workers and exports, leading it to focus on growth of consumer spending

0

10

20

30

40

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

China exports as % of GDP

05000

1000015000200002500030000350004000045000

Billi

ons o

f Yua

n

Annual Retail Spending

-0.4-0.3-0.2-0.1

00.10.20.30.40.5

China Labor Force Growth (%)

Y-O-Y Growth


Eaton is well positioned to manage through periods of international volatility

• For the last several decades, we have followed a production strategy of producing and selling in the same region

• Avoids trade disputes and tariffs• Since regional currencies tend to move together, largely avoids impact of currency changes• Allows for better service to customers

• In China, we operate approximately 25 plants of which about 90% of the output is sold within Asia

• To the extent we incur any tariffs, we have shown we can raise prices to offset the impact

• As a result, we expect to have relatively little impact from U.S. – China tariffs, other than the more general impact trade wars have on economic growth



Contact Information

Yan 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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