Bernstein Strategic Decisions Conference
Craig Arnold – Chairman & Chief Executive Officer
June 2, 2016
© 2016 Eaton. All rights reserved.
Forward Looking Statements and NonGAAP Financial Information
The information provided at our conference today will include forward-looking statements concerning,
among other matters, performance of our worldwide end markets, second quarter 2016 net income and
operating earnings per share, full year 2016 net income and operating earnings per share, segment
margins, capital expenditures, cash flow, tax rate, corporate expenses, projected revenue growth, foreign
currency exchange impact, capital allocation plans and the costs and benefits associated with planned
restructuring actions. 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; increases 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; the impact of acquisitions and divestitures; unanticipated
difficulties integrating acquisitions or realizing expected synergies from the Cooper acquisition; new laws
and governmental regulations; interest rate changes; changes in currency exchange rates; stock market
fluctuations; 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 contained in your packet.
© 2016 Eaton. All rights reserved.
2
Eaton delivers safe, reliable and efficient
power management solutions
Electrical Sector
Industrial Sector
Systems and
Services
Hydraulics
Aerospace
Vehicle
2015 Sales: $7.0B
2015 Sales: $5.9B
2015 Sales: $2.5B
2015 Sales: $1.8B
2015 Sales: $3.7B
33% of sales
28% of sales
12% of sales
9% of sales
18% of sales
Solutions for the world’s
most demanding
power needs
Mission critical,
safe, and reliable
solutions
Leader in fuel
economy and
emissions reduction
Products
Providing safe and efficient electrical
solutions from generation through
distribution and control
While helping our customers solve their most difficult challenges
© 2016 Eaton. All rights reserved.
3
We expect to see a number of megatrends
continue to drive our business
Population growth - Growing population, urbanization, and middle class
requiring places to live, food to eat, and increasing amounts of electricity
Environmental concerns and increased regulation - Air and water quality,
and solid waste disposal will necessitate increased innovation
Energy efficiency - Highly influenced by environmental factors, energy
efficiency will continue to be a major driver of growth
Intelligent products and connectivity - Value creation to be driven by the
interconnectivity of products and systems
+++
++
Increased demand for superior value solutions - Increasingly, customers
are turning to alternatives providing superior value
+
© 2016 Eaton. All rights reserved.
4
We have built a company of leading franchises…
• Top 4 global player in a $200B market
Electrical
• Growth driven by a global focus on efficiency requirements and infrastructure needs
• Strong margins driven by a portfolio of great brands and a leading channel position
• Among the 3 largest players in a diverse $40B market
Hydraulics
• Serving the world’s most challenging applications with power density solutions
• Positioned for strong returns as industry recovers
• Among leaders in $10B+ niche within global aerospace market
Aerospace
• Strong growth potential underscored by long-term trend of increasing passenger and freight air traffic
• Low volatility driven by long lead-times, a robust backlog, and strong aftermarket demand
• Leader in $45B market providing solutions to improve performance, emissions, and fuel economy
Vehicle
• Differentiated technology, customer service, and brand underscore high margins
• High returns enabled by our value proposition and relatively low capital base
© 2016 Eaton. All rights reserved.
5
…that work together and make all of Eaton
stronger
Benefits of
scale
Shared
technology
Shared
markets
Cash
generation
Corporate
structure
• Corporate structure
and shared service
centers drive
cost savings
• Leverage expertise
in engineering and
technologies
across segments
• Deepen relationships
with customers
through providing a
broader solution
• Generating strong and
consistent cash flow
through the cycle
• Highly efficient
corporate structure
• Eight global shared
service centers
• Development
synergies in
electronics, software,
prognostics, and
diagnostics
• Serving common
customers in
industrial, MOEM,
mining, and oil and
gas markets
• Free cash flow grew
16% CAGR over past
5 years
• Corporate cost ~1%
of sales
One Eaton
© 2016 Eaton. All rights reserved.
6
The businesses in our portfolio are
evaluated against a clear set of criteria
Ability to lead in large global markets
 Addressable market >$2B
Above average growth potential
 Long-term growth > real GDP
High margin potential
 Segment operating margin in mid- to high-teens
High returns
 Return on tangible assets mid-twenties or above
Consistent profitability
 Minimum of low-teens segment margin at the trough
We evaluate businesses through the cycle
© 2016 Eaton. All rights reserved.
7
We have steadily improved the performance
of our businesses
Segment Operating Margin¹
15.2%
Expansion period average: 14.3%
Expansion period average: 11.9%
8.1%
2004
Electrical
$4
2010
$0
2015
¹Excludes acquisition integration charges
20%
0%
2000
2016E
midpoint
$4
20%
$0
2015
© 2016 Eaton. All rights reserved.
0%
2000
2015
$4
20%
Margin
0%
2014
Vehicle
Margin
$0
2012
Aerospace
Margin
Margin
Sales ($B)
20%
2000
2008
Hydraulics
Sales ($B)
$13
2006
Sales ($B)
2002
Sales ($B)
2000
8.7%
$0
0%
2000
2015
8
Free cash flow has grown $1.0B over the
past five years, resulting in $1.9B in 2015
Free Cash Flow ($B)
$2
$1
$0
2010
2011
2012
2013
2014*
2015
16% annual growth in free cash flow over the past 5 years
* Adjusted for legal settlements
© 2016 Eaton. All rights reserved.
9
Our dividend has increased steadily and
provides an attractive yield to investors
Dividend yield as of 04/30/16
Dividend per share
5%
$2
10 year CAGR through 2016: 12%
5 year CAGR through 2016: 11%
4%
3%
$1
2%
1%
$0
DHR
IR
HON
ITW
PH
LR
UTX
ROK
DOV
EMR
SU
ETN
ABB
SIE
0%
We have increased our quarterly dividend for 2016 by 3.6%, from $0.55 to $0.57
Source: Capital IQ, Eaton analysis
© 2016 Eaton. All rights reserved.
10
We have established new 5-year goals
and modified our long-term incentive plan
Our new 5 year goals...
Aligned management incentives…
•
Significant equity holding
requirements for senior management
•
Short-term compensation plan is
directly linked to EPS growth and
cash flow return
•
New long-term incentive plan aligned
with relative total shareholder return
© 2016 Eaton. All rights reserved.
11
Eaton has a three-pronged 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
© 2016 Eaton. All rights reserved.
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We have a targeted focus on driving
organic growth…
+++
++
+
Technology
Leadership
Channel Conversion
•
R&D efforts focused on
three key trends:
•
Safe and reliable
•
Energy efficient
•
Intelligent and
connected
•
•
Leverage existing
channel & commercial
resources
Capture larger portion
of aftermarket
opportunity
Drive more servicerelated sales
© 2016 Eaton. All rights reserved.
Superior Value
• Better meet our
customers’ needs
• Drive improved cost
efficiency
• Develop the right
products for the right
markets
13
…and are focused on improving performance
through cost reduction and operational execution
Multi-year cost
roadmap
Operational
execution
• Capacity
rationalization
• World-class
manufacturing
• Support cost
leverage
• Enhanced program
management
• Low-cost country
expansion
• Technical Centers
of Excellence
Move the mean
• Fix, close, or sell
underperforming
businesses
• Invest to grow
strong
performers
Implementing $400M restructuring program from 2015 - 2017
© 2016 Eaton. All rights reserved.
14
Our 2015-2017 restructuring program is
expected to generate over $400M in savings
2015 Actuals
Cost
Annual
Benefits
$(129)
$78
2016 Estimate
Cost
Incremental
Annual
Benefits
$(140)
$185
2017 Estimate
Total
Cost
Incremental
Annual
Benefits
Estimated
Cost
Estimated
Cumulative
Benefits
$(130)
$105
$(399)
$418*
•
Total three year program spend of $400M will yield $418M in cumulative benefits
•
$174M incremental profit in 2016 versus 2015
•
$115M incremental profit in 2017 versus 2016
* Full year effect of 2017 actions yield additional $50M of benefit in 2018
© 2016 Eaton. All rights reserved.
15
Our capital allocation strategy is now focused
on growth and returning capital to shareholders
1
Reinvest in the business to drive organic growth: capital expenditures
between 2.5% - 3.0% of sales and R&D of ~3.0% of sales
2
Return cash to shareholders with a growing dividend: Over the last 10
years, dividend CAGR of 12%
3
Repurchase shares equal to at least 1% - 2% of our market capitalization
per year; in times of multiple compression, such as now, target higher share
repurchase amounts
4
For balance of available capital, look for acquisitions which advance our
strategy and return at least 300 bps over our cost of capital
© 2016 Eaton. All rights reserved.
16
Earnings growth is being driven by actions
under management’s control
EPS Growth Drivers (CAGR)
2015 - 2020
Organic growth
1% - 2%
Restructuring and OpEx
3% - 4%
Share repurchases
3%
Acquisitions
1%
Total
8% - 9%
© 2016 Eaton. All rights reserved.
17
In 2016, organic growth for Eaton is
expected to be (2)% - (4)%
Segment
Electrical
Products
2016 Organic
Revenue Growth
1% - 3%
Key Drivers
Strength in North American residential and non-residential markets
Solid growth in lighting, but lower than previous years
Modest growth in EMEA driven by industrial and construction markets
Weakness in industrial controls
APAC remains sluggish
Electrical
Systems
and
Services
(2)% - (4)%
Strength in large scale data centers
Utility spend on distribution equipment starting to rise
Harsh and hazardous, challenging environment
Large power distribution assemblies remain soft
Declines in APAC on soft construction and harsh and hazardous markets
Hydraulics
(9)% - (11)%
Global agriculture equipment markets weak, particularly large equipment
China equipment sales down as they work down inventories
Oil & gas and mining markets weak on low commodity prices
Aerospace
1% - 3%
Vehicle
(10)% - (12)%
Eaton
(2)% - (4)%
Strength in civilian OEM aircraft markets
Civilian aftermarket growing at trend
Defense spending flat, an improvement after several years of decline
North American, European and Chinese light vehicle markets continue to grow
NAFTA Class 8 Trucks down sharply
Latin American markets down, less sharply than in 2015
© 2016 Eaton. All rights reserved.
18
2016 guidance
Organic Revenue Growth
(2)% - (4)%
Acquisition Revenue
$35M
Forex
(1)%
Segment Operating Margins
15.3% - 15.9%
$80M below
2015 levels
Corporate Expenses
Tax Rate
Operating/Net
Income EPS
9% - 11%
Full Year
$4.15 - $4.45
Q2
$1.00 - $1.10
Operating Cash Flow
$2.6B - $2.8B
Free Cash Flow
$2.1B - $2.3B
CAPEX
Electrical
Products
17.4% 18.0%
Electrical
Systems and
Services
13.1% 13.7%
Hydraulics
10.0% 10.6%
Aerospace
17.8% 18.4%
Vehicle
16.2% 16.8%
$525M
© 2016 Eaton. All rights reserved.
19
Our self-help strategy will deliver near-term results
with significant upside when markets improve
New leadership team aligned on achieving our 2015 - 2020 goals by:
Accelerating organic growth with a focus on three key initiatives
• Focusing R&D efforts on three critical areas
• Expanding channel position and aftermarket
• Providing superior value
Expanding margin by improving our cost position
• Enhanced focus on operational excellence
• $400M multi-year restructuring program
• Improving outliers, fix poor performers, and grow top performers
Generating significant cash with disciplined capital allocation
• Investing for organic growth
• Delivering attractive cash returns to shareholders
• $3B share buyback and attractive dividend
• Providing funding for acquisitions
© 2016 Eaton. All rights reserved.
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