Annual Investor Conference - · PDF fileAnnual Investor Conference ... • Optimizing mix of served markets, product lines, and businesses ... Value pricing tools

© 2016 Eaton. All Rights Reserved..

Annual Investor Conference

Craig Arnold, President and Chief Operating Officer February 26, 2016

2 © 2016 Eaton. All Rights Reserved..

Key themes for today • Aligned and experienced leadership team with new 5 year goals

• Breadth and depth to lead and deliver results • Track record of success

• Driving organic growth with a renewed focus • Delivering superior value, building channel and services, and innovating

• Reducing structural costs in a slower growth environment • $400M restructuring program in place with a robust pipeline of future opportunities • Focus on operational excellence expected to deliver margin expansion

• Generating strong cash and efficiently allocating capital • Providing 5% - 6% return to shareholders through dividends and share repurchases

• $3B repurchase plan from 2015 - 2018 • Optionality to re-enter M&A market

• Optimizing mix of served markets, product lines, and businesses • We have discrete criteria against which we evaluate our businesses


Delivering near-term results with significant upside • 100+ year old company with strong values and well defined

management processes

• Led by an experienced and aligned management team

• A leader in power management serving diverse markets

• Our strategy has served us well and the company is stronger than ever

• Introducing our 2015-2020 goals, an enhanced strategic direction, and a clear set of priorities

1

2

3


We are a company with a 100+ year history of adapting to change…

1911 Joseph Eaton

and Viggo Torbensen begin

manufacturing truck axles

2016 A leading power

management company with strong

businesses in attractive global

markets

1930 Enter the engine

valve space 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 also expanding

aerospace

2012 Acquire Cooper

Industries

2005-2008 Aerospace business

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

We have always been and will remain a values-based company


• Deploying a consistent Eaton leadership model

• Providing a diverse set of operational and functional leadership experiences

• Delivering intensive training at key stages of career progression

• Managing functional colleges within Eaton University

• Expecting leaders to teach leaders

• Ethical…Play by the rules

• Passionate…Share our vision of being the most admired, of being the best

• Accountable…Hold self and others accountable for doing what they say

• Learners…Strong desire to improve and help others

• Make good decisions…proven track record of performance

And accelerate their development by… We recruit leaders who are…

…and have high standards for those we recruit, develop, and promote


Which yields an experienced and effective leadership team…

President and COO • 15 years at Eaton • Member of Eaton board • Director Medtronic plc • COO, Industrial Sector • CEO, Fluid Power Group • 17 years at General Electric

• President of Lighting, Europe

• President of Appliances, Asia

CFO • 13 years at Eaton • Member of Eaton board • Lead Director PolyOne • 6 years at Transamerica

as SVP Corporate Development

• 5 years at NatSteel in Singapore as Chairman NatSteel Chemicals & VP Corporate Development

Electrical COO • 14 years at Eaton • President, Electrical

Americas • President, Electrical APAC

(based in China) • VP/GM, Electrical

Components Division • 6 years at Honeywell

• VP, Honeywell Field Solutions

Industrial COO • 16 years at Eaton • President, Aerospace • EVP, Eaton Business System • President, Hydraulics APAC

(based in China) • VP, Supply Chain, Fluid

Power Group • Managing Director, Eaton India • 6 years at Lucas Engineering and

Systems Consulting based in Europe

Craig Arnold Rick Fearon Revathi Advaithi Uday Yadav


…with depth in both the Electrical and Industrial sectors

These 10 leaders have over 200 years of combined Eaton experience

Jim McGill President, Electrical - Americas • 38 years at Eaton(1) • President, Electrical

Products Americas • President, Electrical APAC • President, Eaton APAC • EVP, Eaton Business System • EVP, Human Resources

Brian Brickhouse President, Electrical - APAC • 30 years at Eaton(1) • President, Power Quality Division • SVP/GM, Distributed PQ Division • SVP, Critical Power

Solutions Division • Powerware Commercial

integration leader

Frank Campbell President, Electrical and Eaton - EMEA • 31 years at Eaton(1)

• President, Electrical EMEA • SVP, Electrical Sales

and Marketing • VP/GM, Electrical Assemblies • VP/GM, Electrical

Commercial Facilities

Ken Davis President, Vehicle • 30 years at Eaton • President, Vehicle Group Americas • President, Light and Medium-

Duty Transmission • VP/GM, Clutch Division

Curt Hutchins President, Hydraulics • 12 years at Eaton • President, Heavy Duty

Transmission business • President, Eaton APAC • 16 years in consumer products

and aerospace industries

Nanda Kumar President, Aerospace • 25 years at Eaton • EVP, Eaton Business System • President, Vehicle EMEA • SVP/GM, Valvetrain • VP/GM, Specialty Controls and

Valve Actuation

(1) Incudes tenure at companies acquired by Eaton


Our leaders drive deployment of the Eaton Business System, the foundation of the company…

EBS is working and will continue to be integral to how we run the business

• Based on a belief in standard processes and measurements

• Provides a teachable point of view

• Ensures the transfer of best practices across the organization

• Encourages continuous learning and improvement

• Engages all functions, regions, and businesses


…and the way we leverage our scale for a competitive advantage

Plan • Business strategy • Annual goal setting • People development

Learn • Eaton University • Eaton Resource Groups • Expert Locator • Transferable practices

Assess • EBE business evaluation • OpA plant evaluation • MESH EHS assessment • Customer surveys

Execute • ProLaunch • Lean and Six Sigma • Value pricing tools • Acquisition

Integration Framework








1

2

3


Electrical Sector

Systems and Services Vehicle Aerospace Hydraulics Products

We deliver safe, reliable, and efficient power management solutions

Industrial Sector

Providing safe and efficient electrical solutions from generation through

distribution and control

2015 Sales: $7.0B 33% of sales





While helping our customers solve their most difficult challenges

Solutions for the world’s most demanding

power needs

Mission critical, safe, and reliable

solutions

Leader in fuel economy and

emissions reduction


Our strategy has been focused on maximizing the value of our company…

• Change the mix of our business • Higher growth, better value proposition, less capital intensity

• Upgrade the talent • People and process

• Run the business better • The Eaton Business System


…driving 100+ completed transactions since 2000 Number of Transactions

2000-2015

-70

0

70

Acquired Divested

Selected Acquisitions

Selected Divestitures

Cooper

Aerospace Distribution & Cockpit Controls

Vehicle Mirror Controls

Navy Controls

Automotive Vehicle Switch

Axcelis Technologies

Moeller Argo-Tech Phoenixtec Powerware PerkinElmer Aerospace

Boston Weatherhead

• Tied to annual strategic planning process

• A bottoms-up process with reviews conducted at multiple levels

• Assess industry and business attractiveness in short- and long-term

• In 2014, sold two small aerospace businesses; attractive industry, more valuable to others

70

SEL


Hydraulics

While building a company of leading franchises • Top 4 global player in a $200B market • 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 • 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 • 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 • Differentiated technology, customer service, and brand underscore high margins • High returns enabled by our value proposition and relatively low capital base

Electrical

Aerospace

Vehicle


That work together and make all of Eaton stronger

• Corporate structure and shared service centers drive cost savings

Benefits of scale

Cash generation

Corporate structure

Shared technology

Shared markets

• 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


0%

20%

$0

$4

2000 20150%

20%

$0

$4

2000 20150%

20%

$0

$4

2000 2015

Sale

s ($

B)

Sale

s ($

B)

Sale

s ($

B)

We have improved the performance of Eaton and each of our businesses

8.1% 8.7%

15.2%

2000 2002 2004 2006 2008 2010 2012 2014 2016Emidpoint

0%

20%

$0

$13

2000 2015

Segment Operating Margin¹

Electrical Hydraulics Aerospace Vehicle

Sale

s ($

B) M

argin

Margin

Margin

Margin

Expansion period average: 11.9%

Expansion period average: 14.3%

¹Excludes acquisition integration charges


Our performance compares well relative to our industry peers…

Source: Capital IQ, Eaton analysis, CY ’11 thru CY ’15 Excludes acquisition integration charges

0%

10%

20%

Electrical Hydraulics Aerospace Vehicle

5-Yr

. Avg

. Seg

men

t Mar

gin

ETN Peer Average

Segment Operating Margin Comparison

Electrical Peers: ABB, EMR, 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, BWA, CMI, Federal-Mogul-Powertrain


…and our diversified peers over the past five years

0%

10%

Eaton PeerAverage

0

500

Eaton PeerAverage

Sales Growth CAGR

2010-2015

EBITDA Margin Improvement (bps)

2010-2015

Diversified peers include: ABB, DHR, DOV, EMR, HON, IR, ITW, LR, PH, ROK, SIE, SU, UTX Source: Capital IQ, Eaton analysis

0%

10%

Eaton PeerAverage

Operating EPS CAGR

2010-2015








1

2

3


We anticipate weak market conditions in the near term with modest growth after 2017

Segment 2015-2020

Annual Market Growth

Comments

Global GDP Global Mfg IP

2.5% 2.1%

• Emerging market growth expected to remain lower than in the past decade

Electrical Products • Modest growth with tailwinds from housing, manufacturing, non-resi construction, and overall economic growth

Electrical Systems & Services

• Modest growth in construction, manufacturing, and data centers, partially offset by headwinds from oil & gas markets

Hydraulics • Market suppressed by short-term overcapacity in key end markets; likely to show improved growth from 2018

Aerospace • Large backlogs and increase in traffic will fuel steady growth in commercial markets with upside potential from defense

Vehicle • Divergent trends across vehicle classes and geographies resulting in flat to modest growth

Total Eaton 1% - 2% • Expected market growth CAGR from 2015 - 2020


We have established new 5-year goals and modified our long-term incentive plan

8-9% EPS growth

14-15% EBIT margin

>10% free cash flow

margin

2-4% annual revenue growth, excluding FX

17-18% segment margin

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


And are enhancing our corporate 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


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


In response, our R&D efforts are focused on three key areas to drive growth…

Safe & Reliable - Increasing safety to protect people and assets, providing reliability to maximize uptime for productive work

Energy Efficient - Reducing customers’ operating costs, conserving resources, protecting the environment

Intelligent & Connected - Adding intelligence and connectivity to products and systems; providing analytics to improve performance and lower cost

We have a global network of 6 innovation centers and ~10,000 engineers aligned on developing solutions in three critical areas:


…and growing our channel presence, aftermarket, and service opportunities

Channel strength Service capabilities Aftermarket opportunities

Over 13,000 authorized channel partners and 10,000 commercial resources

Aftermarket and service opportunity exceeds $27B and 2015 Eaton sales were over $4B

Over 2,000 service and project management specialists

looking for other channel pictures to consider


We’ll provide superior value with products that are cost efficient while meeting customer needs

• Value analysis / value engineering

• Design for 6 sigma

• Design for manufacturing

• Part rationalization

• Should-cost analysis

• Deep application knowledge

• Local product development

• Products match market and application requirements

• Serving a broader array of their product needs

Driving cost efficiency by… Meeting customer needs through…

The right products, for the right markets

Using the Eaton Value Cycle tool to develop winning value propositions

+ ++

+++


Running the business better through improved execution with the Eaton Business System

Move the mean Operational execution

Multi-year cost roadmap

• Fix, close, or sell underperforming businesses

• Invest to grow strong performers

• Capacity rationalization • Support cost leverage • Low-cost country

expansion

• World-class manufacturing

• Enhanced program management

• Technical Centers of Excellence

Implementing $400M restructuring program from 2015 - 2017


Our cost reduction plan will drive near-term results and strong incrementals as markets return

Low-cost country expansion Support cost leverage Capacity rationalization

• 57 plants closed over the last 5 years

• 8 plants to be closed as part of 2016 restructuring plans

• Significant opportunities to reduce facilities beyond 2016

Multi-year plan to optimize our footprint

• Increasing span of control • Reducing management layers • Shrinking corporate overhead • Streamlining support functions • New front-end growth tools

• Manufacturing sites in Philippines, Morocco, Romania, and Mexico

• Financial shared service centers in Mexico and India

• Innovation centers in Czech Republic and India

Localizing to better serve markets and reducing costs

Aggressively reducing fixed support costs


Our plants are performing well but there are many opportunities for improvement

High 5 Metrics Today World Class*

Safety (TRCR) 0.78 <0.5

Quality Cost 1.5% <0.9%

OTD (Promise) 92% >96%

Inventory (DOH) 67 <50

Productivity (Cost Out) 2% - 4% 5% - 8%

• Deploy continuous improvement framework

• Lean, six sigma, and quality standards and deployment

• Core competency training and development

• Transition to “pull” materials planning systems

Current performance and targets Key initiatives to drive improvement

*weighted average of Electrical Sector and Industrial Sector metrics


And we’re focused on improving the performance of outliers in our business

Fix the tail, grow the head

Focus area

Profitability distribution

Margins Lower Higher


We have defined the industry characteristics which will drive our portfolio decisions

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 segment margin at the trough

We evaluate businesses through the cycle


We expect 2% - 4% revenue CAGR from 2015 - 2020

• Organic growth, excluding FX, of 1% - 2%

• Providing superior value products

• Converting on channel and service strength

• Developing and bringing to market technically advanced products

• Acquisition growth of 1% - 2%

• After dividends and repurchases, sufficient capital available for acquisitions

• Acquisition priorities remain in our Electrical and Aerospace businesses

• Expect returns of 300 bps over cost-of-capital

In the context of our market outlook through 2020


And approximately 200 basis points of margin improvement by 2020

8.8%

11.4%

14-15% 12.7%

15.2%

17 -18%

2010¹ 2015¹ 2020 goalEBIT margin Segment margin

EBIT and segment margins Segment margin expectations

Segment 2015¹ Through the cycle

Electrical Products 16.9% 16% - 19%

Electrical Systems & Services 13.3% 13% - 16%

Hydraulics 10.1% 13% - 16%

Aerospace 17.2% 16% - 19%

Vehicle 17.5% 16% - 19%

¹Excludes acquisition integration charges


$0

$3

2010 2015 2020E

Free cash flow margin drivers

• Increased operating margins

• Decreasing pension funding requirement

• Continued focus on working capital management and disciplined capital expenditures

Free cash flow ($B)

With strong free cash flow over the five year time frame

~$11 - $12B of free cash flow from 2016 to 2020 $3B share repurchase program from 2015 - 2018


We expect to drive 8% - 9% annual earnings per share growth across the period…

Technical leadership Channel, service,

and aftermarket Superior value

Strategic Growth Initiatives

Operational excellence Multi-year cost roadmap Focus on outliers

Expand Margins

Invest to win Dividends and

share repurchases Accretive acquisitions

Disciplined Capital Allocation

8% - 9% Annual EPS Growth


…with self-help driving near-term earnings growth

EPS Growth Drivers (CAGR)

2015 - 2020 Organic growth 1% - 2%

Restructuring and OpEx 3% - 4%

Share repurchases 3%

Acquisitions 1%

Total 8% - 9%


A self-help strategy delivering near-term results with significant upside when markets improve

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

New leadership team aligned on achieving our 2015 - 2020 goals by:


Documents

Annual Investor Conference - · PDF fileAnnual Investor Conference ... • Optimizing mix of served markets, product lines, and businesses ... Value pricing tools