Annual investor conference - Eaton · • Leveraging EBS to drive productivity improvements across...
Transcript of 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…
3© 2019 Eaton. All rights reserved..
Agenda
Our future
Eaton today
Our history1
2
3
© 2019 Eaton. All rights reserved.. 4
•
•
•
5© 2019 Eaton. All rights reserved..
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
6© 2019 Eaton. All rights reserved..
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
7© 2019 Eaton. All rights reserved..
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
8© 2019 Eaton. All rights reserved..
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
9© 2019 Eaton. All rights reserved..
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
10© 2019 Eaton. All rights reserved..
Agenda
Our future
Eaton today
Our history1
2
3
11© 2019 Eaton. All rights reserved..
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
12© 2019 Eaton. All rights reserved..
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
13© 2019 Eaton. All rights reserved..
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
14© 2019 Eaton. All rights reserved..
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
15© 2019 Eaton. All rights reserved..
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
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• 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
Operating Margin What We Like
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
17© 2019 Eaton. All rights reserved..
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
Operating Margin What We Like
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
18© 2019 Eaton. All rights reserved..
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
Operating Margin What We Like
0%
25%
2019E Thru thecycle
Comm. OE
Military OE
Aftermarket
2018 End Market Mix
Other
76% US, 24% RoW
18%-22%
19© 2019 Eaton. All rights reserved..
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%
20© 2019 Eaton. All rights reserved..
•
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%
21© 2019 Eaton. All rights reserved..
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
22© 2019 Eaton. All rights reserved..
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
23© 2019 Eaton. All rights reserved..
Agenda
Our future
Eaton today
Our history
3
1
2
24© 2019 Eaton. All rights reserved..
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
25© 2019 Eaton. All rights reserved..
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
26© 2019 Eaton. All rights reserved..
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
27© 2019 Eaton. All rights reserved..
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
28© 2019 Eaton. All rights reserved..
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
29© 2019 Eaton. All rights reserved..
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
30© 2019 Eaton. All rights reserved..
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
31© 2019 Eaton. All rights reserved..
EBS is the foundation of our execution strategy and how we expand margins…
32© 2019 Eaton. All rights reserved..
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…
33© 2019 Eaton. All rights reserved..
…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
34© 2019 Eaton. All rights reserved..
Revenues
from
Connected
Intelligent
Products
Customer
Facing
Processes
Internal
Productivity
Industry 4.0 /
Intelligent
“Factory of the
Future”
Including the digitalization of the company
35© 2019 Eaton. All rights reserved..
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
36© 2019 Eaton. All rights reserved..
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
37© 2019 Eaton. All rights reserved..
$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
38© 2019 Eaton. All rights reserved..
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% +
39© 2019 Eaton. All rights reserved..
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
40© 2019 Eaton. All rights reserved..
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
41© 2019 Eaton. All rights reserved..