Annual investor conference Uday Yadav, President and COO - Industrial Sector March 1, 2019
Today s themes Vehicle electrification strategy is on track New growth opportunities from intelligent products and differentiated IoT solutions Positioned to capture continued Aerospace Aftermarket growth New regional growth opportunities in Vehicle and Hydraulics Managing Hydraulics operating complexities, addressing margin inefficiencies through improved execution 2
The Industrial Sector serves a diverse set of end markets End-market mix Geographic mix Hydraulics Aerospace $8.7B Construction & mining Agriculture Oil & gas Commercial vehicles Industrial machining Material handling Industrial processing Commercial transports Regional jets Business jets General aviation Civil rotorcraft Commercial aftermarket Military transports Rest of World 42% 2019E Sales Recreation Filtration Hydraulics aftermarket Vehicle & emobility Military fighters Military rotorcraft Military aftermarket United States 58% Commercial vehicles Passenger vehicles Medium-duty trucks Off-highway Light-duty trucks Agriculture Construction & material handling Vehicle aftermarket 3
Industrial Sector overview Aerospace Hydraulics Vehicle emobility $1.9B 2018 sales $2.8B 2018 sales $3.5B 2018 sales $320M 2018 sales 2019E Sales & ROS ~$2.1B 21.4% - 22.0% ~$2.9B 14.0% - 14.6% ~$3.4B 17.4% - 18.0% ~$0.35B 6.1% - 6.7% Key Applications Commercial aircraft Military aircraft Mobile equipment Stationary equipment Commercial vehicles Passenger cars Commercial & Passenger Off road Key Products Hydraulic pumps, motors & valves Fuel pumps & valves Conveyance & ducting Hydraulic pumps, motors & valves Hydraulic steering controls Conveyance & fittings Valves & valve actuation Transmission & clutches Torque control Advanced combustion EV Fuses EV transmissions Inverters & converters On-board chargers Megatrends Global demographics Environmental concerns Energy efficiency Intelligent & connected Demand for superior value solutions EV = all electric vehicle architectures 4
Dynamic industry shifts continue to create opportunities for growth Intelligent, connected, and autonomous Cloud enabled products in the field Investing in portfolio shift over next decade Electrification / blended power Expanding electrification portfolio Leveraging enterprise-wide capabilities Additive manufacturing Active customer engagement Center of excellence investment Electrification / blended power Intelligent, connected, and autonomous Additive manufacturing Strategic partnerships Tiered-product offering Restructuring and repositioning Regional growth Tiered-product offering Expanding addressable market Delivering superior customer value Regional growth Localization of products Customer tailored solutions Restructuring and repositioning World-class manufacturing footprint Improving customers supply chain Strategic partnerships Gaining scale & competitiveness Product & geographic adjacencies Driving organic growth by continuing to invest in our core capabilities 5
Today s topics 1 Electrification, Blended Power TM and emobility status 2 Creating intelligent and connected growth opportunities 3 Accelerating Aerospace aftermarket growth 4 Capitalizing on new regional growth opportunities in Vehicle and Hydraulics 5 Managing Hydraulics operational complexity and execution 6
Electrification of industrial mobile markets impacts powertrain and actuation functions 1. Powertrain 2. Actuation Vehicle/eMobility Shift towards electric vehicles Hydraulics Mobile markets transitioning Aerospace Migration to more electric aircraft Eaton s Leveraged Capabilities Core products, manufacturing footprint, supply chain, and Blended Power TM technology roadmaps Leveraging Eaton s Electrical scale, pedigree, and differentiated technical capabilities to uniquely penetrate multiple end markets 7
emobility business launched in March 2018 is right on track Eaton s deep expertise makes us a trusted partner to customers Vehicle domain knowledge Understand vehicle dynamics + Electric power capabilities Managing electrical power Market growing in line with our projections Robust pursuit pipeline continues to grow as our electric vehicle market credibility increases Rapid ramp up of global organization Significantly advanced portfolio breadth High customer engagement and confidence Power electronics & conversion Power distribution & protection Capturing opportunities earlier than planned with accelerated product development Targeting $2B to $4B in revenue by 2030 8
Electric vehicle market growth aligned with projections Longer term EV market adoption rates continue to be in line with our projections EV Market Mix Expectations Number of vehicles produced (in millions) Light Vehicle 115 Commercial Vehicle Multiple enablers continue to drive electrification adoption 94 98% 88% 6.1 97% 7.8 89% OEMs continue strategic repositioning 2018 2030E Internal combustion engine Hybrid / Plug-in Hybrid 2018 2030E Battery electric vehicle Contains internal combustion engine By 2025, ~25% of our vehicle portfolio exposure will be linked to higher growth, EV end markets EV = all electric vehicle architectures 9
Increased depth of portfolio over last 12 months with accelerated product development Power Electronics Managing electrical power Traction inverter 48v auxiliary inverter Power Distribution and Protection Safely and reliably distributing power Resettable circuit protection Program win DC/DC converter On board charger Power Systems Managing mechanical power EV fuel tank isolation valve EV transmission Low and high voltage fuses Power distribution unit Won development agreement 48V mild hybrid and we are winning across the portfolio EV = all electric vehicle architectures 10
New technical challenges for customers are creating opportunities New We need innovative solutions!! New Technical Challenges? Higher power density Smaller and more efficient electronics Increased More intelligent solutions Integrated and coordinated components Uniquely positioned with expertise in vehicle dynamics and managing high-voltage power 11
Eaton s technology provides solutions for critical customer challenges Power Electronics Traction Inverter Incorporates increased power density, better thermal management, high efficiency electronics and control algorithms Better range Durability Scalability Power Distribution and Protection emobility Intelligent PDU Considered the brains in controlling and understanding the health of the high voltage electronics and wiring Predictive failures Power Distribution and Protection Resettable Circuit Protection A resettable device that includes embedded sensing to enable precise trip levels to be set by the OEM Precise setting Durability and safety improvement Accelerating product development is capturing earlier than planned opportunities 12
Achieving significant program wins and traction with customers since March 2018 launch Traction Inverter Win Current Scorecard Campaign Win Process $100M+ Mature year revenue win $900M Pursuit pipeline Pursuit 3 to 9 months ~$450M life of program win Major global automotive OEM customer Won with superior technical solution against global competitors 11 Development agreements $200M+ Mature year program wins Development programs 12 to 30 months Launch to mature year revenue 24 to 36 months Strong momentum with program wins and development agreements 13
emobility next 12 month focus Volume ramp up emobility New business wins Product development Expansion in key growth markets Volume ramp up: Successfully launch new programs and volume ramp up on key products New business wins: Deliver on 2018 development agreements, secure more in 2019, and achieve >$200M in mature year revenue from new business wins Expansion in key growth markets: Expand capacity and capabilities in key growth markets and deliver operational excellence at automotive performance level Product development: Continue to develop product portfolio Well positioned to leverage new capabilities and win in high-growth EV markets EV = all electric vehicle architectures 14
Today s topics 1 Electrification, Blended PowerTM and emobility status 2 Creating intelligent and connected growth opportunities 3 Accelerating Aerospace aftermarket growth 4 Capitalizing on new regional growth opportunities in Vehicle and Hydraulics 5 Managing Hydraulics operational complexity and execution 15
Our portfolio continues to evolve with intelligent and connected products and IoT solutions Products Intelligence Enabled Connected IoT Solutions Widening scope across the industrial markets Transmissions Pumps Intelligent Power Predictive maintenance Process optimization Intelligent valves Blended Power TM Machine learning Asset management Enhancing customer value from intelligent and connected products Providing benefits from products that adapt to real-time performance needs Evaluating several new business models and solutions to capitalize IoT capabilities Early in IoT journey, but tangible solutions begin to demonstrate real revenue opportunities 16
Intelligent products enabling Hydraulic solutions Mobile controls are a $2B market; growing at ~3% CAGR, advanced controls growing at 3x to 4x faster Customer Needs Eaton Solution Customer Benefits Enhanced efficiency and productivity Lower operating costs Easy set up and operation Improved safety CMT and CMA valves Integrated sensing, distributed control, and independent metering features On-board software enables valve to take input commands, interpret sensors and respond quickly Set up in days or weeks vs. weeks to months ~$200M revenue opportunity 10%-15% Fuel savings Improved boom 75% oscillation Faster placement 50%improved control 17
Creating new revenue opportunities through IoT solutions sugarcane harvester End User Pain Points Downtime due to unplanned failures Crops are in remote and harsh environments Harvester machine is complex with a wide range of sizes and features Equipped with over 70 hydraulic components Crop yield loss Assets planning and scheduling Eaton s intelligent and connected products provide solutions addressing end user needs 18
Critical element in sugarcane harvester ecosystem, delivering immediate, real-time benefits Intelligent real-time vehicle control and performance Cloud analytics and edge computing applied to speed control and contamination to improve equipment availability and reduce yield loss Cloud-based analytics for fleet optimization Cloud data supports utilization and overall fleet efficiency, prediction of equipment condition, harvest yield optimization, and maintenance Speed control & optimization Pump displacement & system pressure Fleet planning & asset optimization Partner IoT Cloud Asset availability Engine speed Pump rate Motor speed Maintenance scheduling Field data Contamination monitoring Equipment condition Harvest data Maintenance schedule ~$50M new 2019 Eaton. revenue All rights reserved.. opportunity Benefits to customer 10%+ ~10% Reduction in yield loss Reduction in downtime 19 19
Eaton is helping shape the ground refueling ecosystem End User Pain Points Pit valve Digital monitor Flight Delays Fuel nozzle Water detector Ground refueling ecosystem is complex and inefficient Eaton has a leadership position in intelligent ground refueling systems Low asset utilization Unscheduled downtime Eaton s position in the ecosystem enables it to provide broader benefits through an IoT platform 20
Integrating diverse information sets to provide optimal asset management and improved turn-around-time OIL & GAS CO. Intelligent fueling Eaton s intelligent digital pressure control system reduces fueling time by 30% Fueling monitor Flow rate Incident records Eaton IoT Cloud Water contamination Flight data Truck location Operator performance Fuel pressure Fueling demand/volume Cloud-based analytics for fleet optimization Data collected is sent to cloud to provide deep analytical insights in overall fleet performance, health, and utilization Optimized scheduling Fleet management Operations manager AIRLINE FUELER Ground re-fueling end-to-end time Minutes INTERPLANE FUELER E-tix Operator Fueling process Post fueling tasks Prior to fueling tasks Benefits to customer 20%+ Improved asset utilization 21 21
Today s topics 1 Electrification, Blended PowerTM and emobility status 2 Creating intelligent and connected growth opportunities 3 Accelerating Aerospace aftermarket growth 4 Capitalizing on new regional growth opportunities in Vehicle and Hydraulics 5 Managing Hydraulics operational complexity and execution 22
Aftermarket focus shifting Aerospace mix and driving profitable growth over next five years Continuing to shift Aerospace mix Targeting $1B aftermarket sales by 2023, driven by a continued strategic focus on: Eaton Aerospace Business Mix 37% 39% 42% 2013 2018 2023 Driving retrofits, modifications, and upgrades Capitalizing on repairs in engine super cycle and innovating around the repair cycle Leveraging increased military spending Aftermarket 2019 2023 CAGR Aftermarket 4% Market OEM & other 6% Eaton ~$250M new aftermarket revenues opportunity over the next five years 23
Growing retrofits, modifications, and upgrades # of aircraft Aerospace Lifecycle Insertion Opportunities Early service Reliability 1 2 In-service fleet Mature fleet Performance 3 Sunsetting Life extension Opportunity to win share on in-service aircraft Providing customer value through: Improved product performance Expanded capability (tech insertion) 0 10 20 30 40 50 60 yrs. R&D, design First metal cut Production Production Entry into service In-service support End of production With life extension Final aircraft retired Extended product life Key growth opportunity independent of market conditions Proven track record of ability to capitalize on later lifecycle opportunities 24
Successful retrofits and upgrades on in-service aircraft Airbus A320 Electric Motor-Pump Boeing CH-47 EPUSHA Retrofit of A320 ACMP, offering improved reliability Two per aircraft, dual source application 500+ aircraft upgraded to-date Strong market share on new aircraft Replaced manual handpump with electric pump Reduces personnel exposure to harm US Army pre-f model fleet retrofitted Now seeing follow-on repair demand Providing enhanced safety & aircraft readiness through higher reliability & technology insertion EPUSHA: electric pump for utility system hydraulic accumulator 25
Engine super-cycle driving repair opportunities Legacy narrowbody and regional jet engine shop visits peaking in 2025 +9% +20% 2019 2025 All other commercial engines Legacy narrowbody and regional jets CF34 V2500 CFM56* Shop visits +34% At peak in 2022 +20% At peak in 2023 +23% At peak in 2025 Rapid fleet and traffic growth driving significant engine repair and overhaul opportunity Shop visit cycle for key legacy engines not peaking until 2022 and beyond Strong aftermarket content on legacy engines for fuel and conveyance systems Component repair share of engine overhaul spend increasing Engine repair and overhaul a key driver of aftermarket growth *Note: CFM56 reflects CFM56-5A, 5B, & 7B only Source: Aviation Week 2019 Commercial Fleet/MRO Forecast 26
Innovating around the repair cycle with intelligent solutions Aircraft engine tubes and ducts represent a significant element of engine maintenance Customer pain points 1 Eaton Intelligent Solution Digitized data collection Repair turn time 80% Maintenance time 2 Machine intelligence Lifecycle cost $$ 3 Eaton repair 50% Wastage Cost Intelligent and connected solutions will enable improved uptime and reduce total lifecycle costs 27
Realizing anticipated benefits from improved military budget conditions Life extensions and fleet readiness continue to be a key area of focus for the military Eaton benefiting from strong maintenance demand, including spares for aging platforms Targeting platforms for product upgrades, increasing safety, reliability, and affordability Investing in additive manufacturing solutions to reduce lead times and repair turn times F-15 engine-driven hydraulic pump 1,000+ F-15 in service with three pumps per aircraft Dual source application Highly reliable product, reducing total life cycle cost M-1 engine-driven hydraulic pump 1,200+ unit spares order with Defense Logistics Agency Actively pursuing additional platform opportunities Supporting military fleet with spares, repairs, and upgrades 28
Today s topics 1 Electrification, Blended PowerTM and emobility status 2 Creating intelligent and connected growth opportunities 3 Accelerating Aerospace aftermarket growth 4 Capitalizing on new regional growth opportunities in Vehicle and Hydraulics 5 Managing Hydraulics operational complexity and execution 29
Regional growth and partnerships are strategic drivers of Vehicle s transformation Brazil, India, and China expected to grow from 20% to 30% of Vehicle Group revenue by: Emerging Markets Revenue Growth 20% 30% Building regional capabilities 2018 2023 Improving cost structure through manufacturing, engineering, and supply base Brazil, China, India Rest of World Significantly growing unconsolidated revenues from partnerships in Asia 70% 2023 revenue booked business Growth in emerging markets through product offering, footprint, localization, and technology 30
Growing share with the right footprint and technology Brazil India China Great Market Position Doubling Business Expanding & Growing Core Local content with superior operational excellence High quality manufacturing base Expansion of manufacturing capability Footprint Large manufacturing capability Technology R&D focus on regional needs Local automated transmission product Superior design and reliable products Tailored to local needs Solutions tailored around increasing regulations Strong local application expertise Growing share Light automated transmission Strong partnership model with vertically integrated customers High quality valvetrain products Higher torque transmissions Torque, engine brake, fuel vapor and valvetrain Partnerships enable fast market access Brazil, India, and China revenue growing ~$350M in incremental revenue over five years 31
Hydraulics capitalizing on China s evolving construction market dynamics Early stage economic development Large infrastructure projects Utilizes heavy-duty equipment Maturing economies have small scale projects and smaller equipment Early Excavators make up 75% of a $6.5B construction equipment addressable market Urbanization rates driving shift towards small excavators driven by a number of benefits, including: Versatile and multifunctional Sharp turn radius Easy to transport Better noise control Mature Mini excavators growing 3x to 4x faster than broader excavator market 32
Our strong suite of components for the small excavator segment positions us to lead Swing Drive Eaton is a market leader in track and swing drives due to: Main Control Valve Higher torque capabilities enables heavier loads Precise control Hose & Fittings Main Pump Better noise level SiCV/MCD HRCs Track Drive Customers benefit from increased productivity and improved fuel efficiency Eaton has the right technology and footprint to deliver ~$100M of incremental revenue 33
Today s topics 1 Electrification, Blended PowerTM and emobility status 2 Creating intelligent and connected growth opportunities 3 Accelerating Aerospace aftermarket growth 4 Capitalizing on new regional growth opportunities in Vehicle and Hydraulics 5 Managing Hydraulics operational complexity and execution 34
Hydraulics business vs. our enterprise-wide evaluation criteria Ability to lead in large global markets Addressable market >$2B Above average growth potential Long-term growth > real GDP High returns Return on tangible assets mid-twenties or above Consistent profitability Minimum of low-teens margins at the trough High margin potential Segment operating margins in mid- to high- teens Restructuring actions taken to improve overall margin and consistency 35
With restructuring actions underway, market ramped faster than expected creating significant challenges Restructuring Actions Closed 6 plants Right sized 5 plants Built 320K sq ft facility Expanded 150K sq ft facility Moved 35 product lines 175K part numbers eliminated Fixed cost 200bps improvement as % of sales Internal Execution Challenges External Market Dynamics Facility ramp up delays Quick market recovery 81 new suppliers Supply chain constraints Adjusting to new business model Tight freight dynamics 100bps to 200bps Unplanned equipment downtime New exit taxes Increased temp labor & scrap New tariff implications Margin inefficiencies Inefficiencies isolated and improving in 2019 and largely resolved by end of 2020 36
Action plans in place and capability being bolstered to address inefficiencies Inefficiencies Challenges in ramping up new capacity Hydraulics Margin Drivers Freight Material Inefficiencies Labor overtime Unplanned equipment downtime Increased usage and scrap Freight Supply chain complexity Premium freight Material Economics Higher prices Supplier switching costs 48% Improvement 2018 2019 2020 Inefficiencies expected to be largely resolved by end of 2020 Confirming peak-to-trough through the cycle margins of 13% to 16% 37
Today s themes Vehicle electrification strategy is on track Successful emobility launch Broadened portfolio development driving signature platform wins New growth opportunities from intelligent products and differentiated IoT solutions Game changing intelligent mobile valve technology Solving challenges in the sugar cane industry and aerospace refueling segment Positioned to capture continued Aerospace Aftermarket growth Taking advantage of modification and upgrade insertion opportunities Innovating around the repair lifecycle through IoT and process optimization New regional growth opportunities in Vehicle and Hydraulics Shifting Vehicle mix towards higher growth countries through technology, localization, and partnerships Hydraulics capitalizing on China s evolving construction market dynamics Managing Hydraulics operating complexities Addressing margin inefficiencies through improved execution 38
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