2020 Guidance and Financial Overview · Flat earnings per share in 2019 and 2020 excludes...
Transcript of 2020 Guidance and Financial Overview · Flat earnings per share in 2019 and 2020 excludes...
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2020 Guidance and Financial Overview
Rick Fearon, Vice Chairman, Chief Financial and Planning Officer March 2, 2020
© 2020 Eaton. All rights reserved.
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Today’s key messages
© 2020 Eaton. All rights reserved.
2019 was a year of strong performance for Eaton, particularly in cash flow generation
Self-help efforts and portfolio actions expected to result in higher adjusted margins in 2020
We anticipate earnings per share will be flat in 2020 despite the divestitures and sluggish markets
Our business generates consistently growing cash flow
We expect to return $3.6B to $4.0B to shareholders through dividend and share repurchases in 2020
We generated 43% TSR in 2019 and over the last 20 years have generated 12.5%, considerably outpacing the median peer
Flat earnings per share in 2019 and 2020 excludes acquisition integration and divesture costs and in 2019 Vehicle segment warranty charge
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Record adjusted margins and earnings per share, excluding acquisition and divestiture costs and the Vehicle segment warranty charge
• Record 17.6% segment margin and 14.4% EBIT margin• Record eps of $5.76
Record cash flow generation• $2.9B free cash flow• 13.4% free cash flow as a percent of sales
Significant cash returned to shareholders through an attractive dividend and meaningful share repurchases
• $1.2B dividends, a top quartile yield of 3.0%• $1.0B share repurchases, equivalent to 3% of shares outstanding at the beginning of 2019
Repositioning the portfolio for higher growth, stronger margins, and more consistent performance• Invested $1.2B for three acquisitions in Aerospace and Electrical
• Just closed acquisition of PDI and new joint venture, Eaton Arabia• Exiting Lighting, Hydraulics, and Automotive Fluid Conveyance
2019 was another strong year for Eaton…
© 2020 Eaton. All rights reserved.
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20 year TSR
0%
15%
Eaton Peer median S&P 500
Annu
aliz
ed T
SR
0%
50%
Eaton Peer median S&P 500
Annu
aliz
ed T
SR
1 year TSR
0%
20%
Eaton Peer median S&P 500
Annu
aliz
ed T
SR
3 year TSR
…adding to our long track record of strong returns to shareholders
© 2020 Eaton. All rights reserved.
1, 3 and 20 year TSR from 1/1/2019, 1/1/2017 and 1/1/2000 through 1/1/2020, respectivelyPeers are as shown in the most recent proxy: ABB, ALSN, AXL, BWA, CMI, DE, DOV, EMR, HUBB, HON, IR, ITW, LR, MOG, PH, ROK, SIE, SU, UTC, WWDSource Data: Capital IQ, Eaton analysis
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US 2020 growth % of total
GDP 1.6% 25%
Mfg. IP (0.6)% 17%
Brazil 2020 growth % of total
GDP 1.8% 2%
Mfg. IP 1.8% 2%
Europe (EU 28)
2020 growth % of total
GDP 1.0% 23%
Mfg. IP (1.0)% 21%
China 2020 growth % of total
GDP 5.7% 17%
Mfg. IP 4.9% 28%
Global 2020 growthGDP 2.3%Mfg. IP 1.2%
India 2020 growth % of total
GDP 5.4% 3%
Mfg. IP 1.2% 3%
We expect below-trend economic growth in 2020
© 2020 Eaton. All rights reserved.
% of total is share of 2018 world GDP and manufacturing IP
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2020 organic growth expected to be flat
© 2020 Eaton. All rights reserved.
Segment 2020 organic revenue growth Key market drivers
Electrical Americas 1% - 3%
Residential products up mid-single digitsUtilities markets up low-single digitsData center markets up low-single digitsCommercial projects to remain at high levels of activityIndustrial markets should see modest declines
Electrical Global 0% - 2%Commercial projects in EMEA and APAC up modestlyData center markets up low-single digitsIndustrial markets should see modest declinesHarsh and hazardous markets to decline amid oil & gas capex pullback
Aerospace 1% - 3%Continued strength in military OEM marketCommercial aftermarket supported by older aircraft in useCommercial OEM weakness due to MAX production halt and twin-aisle weakness
Vehicle (7)% - (9)%Growth in Brazil vehicle marketsGlobal internal combustion engine light vehicle markets down low-single digitsNA Class 8 truck market down to 230K from 2018 & 2019 elevated levels
eMobility 3% - 5% Double digit electric vehicle growth offset by declines in legacy internal combustion engine platforms
Hydraulics (5)% - (7)%China construction equipment markets may continue to see boost from regulationHydraulics inventory levels should stabilize after significant destockingEnd market demand for mobile equipment is falling globally
Eaton (1)% - 1%
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• Renewed focus on operational excellence, productivity, and growing the head / fixing the tail
• Invested $6B in R&D and CapEx
• Invested ~$550M in restructuring our operations
• Significant portfolio changes• Divestitures of Lighting, Hydraulics, and Automotive
Fluid Conveyance• Acquisitions of Souriau-Sunbank, Ulusoy,
Innovative Switchgear, and PDI• Formation of Cummins, SFGW, and Eaton Arabia
joint ventures
10%
15%
20%
2015 2016 2017 2018 2019 2020PF
Segm
ent M
argi
n
Segment Margin 2015 - 2019
Over the last 5 years, our self-help actions and portfolio changes resulted in much improved margins
© 2020 Eaton. All rights reserved.
excluding Lighting and Hydraulics
Segment margin excludes acquisition integration and divesture costs and 2019 Vehicle segment warranty charge
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Margins under new segmentation
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Margins under new segmentation 2019 2020 guidance
Electrical Americas 18.9% 19.7% - 20.3%
Electrical Global 17.3% 17.1% - 17.7%
Aerospace 24.0% 22.7% - 23.3%
Vehicle 16.8% 15.7% - 16.3%
eMobility 5.3% 2.5% - 3.1%
Hydraulics 8.8% 11.0% - 11.6%
Total Eaton 17.6% 17.8% - 18.2%
Segment margin excludes acquisition integration and divesture costs and 2019 Vehicle segment warranty charge
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Adjusted EPS for 2020 is expected to be in the range of $5.60 to $5.90 - Divestitures of Lighting and Automotive Fluid Conveyance - Higher tax rate+ Accretion from the acquisitions of Souriau-Sunbank, Ulusoy, PDI,
and Innovative Switchgear+ Benefits of $2.4B - $2.8B of share repurchases
We expect Adjusted EPS to be flat in 2020 as acquisitions and share repurchases offset divestitures and a higher tax rate
© 2020 Eaton. All rights reserved.
$5.00
$6.00
2019
Div
estit
ure
Tax
Acqu
isiti
on
Shar
e re
purc
hase
2020
E
Flat adjusted EPS in 2019 and 2020 excludes acquisition integration and divestiture costs and in 2019 Vehicle segment warranty charge
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$0
$1
$2
$3
$4
$5
$6
$7
$8
2015 2016 2017 2018 2019 2020E
EPS Cash EPS
$0
$1
$2
$3
$4
$5
$6
$7
$8
2015 2016 2017 2018 2019 2020E
Cash EPS Free cash flow per shareOn average ~$0.75 higher than EPS
2020 guidance range
On a per share basis, we generate strong and growing cash flow
© 2020 Eaton. All rights reserved.
EPS excludes acquisition integration and divestiture charges, in 2019 excludes Vehicle segment warranty charge, in 2018 excludes impact of arbitration decision, in 2017 excludes gain on formation of Cummins JV, and in 2017 excludes income from U.S. tax reformCash EPS is EPS as defined as above plus per share after-tax corporate amortizationFree cash flow per share excludes payments for 2018 arbitration decision
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Free Cash Flow
$1B
$2B
$3B
2015 2016 2017 2018 2019 2020E
Free Cash Flow as a % of Net Income
50%
100%
150%
2015 2016 2017 2018 2019 2020E
2020 guidance range
Free cash flow is at record levels, with cash conversion of ~130% and free cash flow margin over 13%
© 2020 Eaton. All rights reserved.
Free cash flow excludes payments for the 2018 arbitration decision Net income excludes 2017 gain on the formation of the Cummins JV, 2017 income from U.S. tax reform, and 2018 arbitration decision
Free Cash Flow as a % of Sales
0%
6%
12%
18%
2015 2016 2017 2018 2019 2020E
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-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
-$1.5
$0.0
$1.5
$3.0
2013 2014 2015 2016 2017 2018 2019
Eaton Market G
rowth, %
YoYFr
ee C
ash
Flow
($B)
Free Cash Flow Eaton Market Growth
Our cash flow has consistently grown through varied market conditions
© 2020 Eaton. All rights reserved.
Free cash flow excludes payments for 2018 arbitration decision and certain 2014 legal settlements
Eaton Free Cash Flow vs. Eaton Market Growth
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Next 3 years2020 – 2022 cumulative
Free cash flow
Proceeds from sale of business
Available cash
R&D and Capex
Share repurchases
Dividends
~$4B
~$8B
~$12B
We expect to have ~$12B cash available for deployment over the next 3 years
Period of increased optionality2020 – 2022 cumulative
© 2020 Eaton. All rights reserved.
Optionality
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Annual CapEx + R&D Reinvestment • Annual reinvestment in organic growth
of $1.2B • Expect to reinvest 5.5% - 6% of sales going
forward
• ~3% in R&D
• ~2.5% - 3% in CapEx
• 40% of our engineers are in low-cost countries• Are awarded over 1,000 new patents each year
Over the last 10 years, we have invested ~$12B in CapEx and R&D
© 2020 Eaton. All rights reserved.
$0.0
$0.5
$1.0
$1.5
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E
Rei
nves
tmen
t ($B
)
CapEx R&D
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Dividend Yield(as of Feb 26, 2020)
3.0% dividend yield, top quartile among peers
$0
$1
$2
$3
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Dividend per Share(2010 – 2020)
10% dividend per share CAGR 2010 - 2020
0%
1%
2%
3%
4%
SIE
ABBN ET
N
EMR SU ITW
HO
N
UTX
RO
K LR PH
DO
V IR
We continue to grow our dividend rapidly, offering shareholders a top quartile yield
© 2020 Eaton. All rights reserved.
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0%
2%
4%
6%
8%
$0
$1
$2
$3
2014
2015
2016
2017
2018
2019
2020
E
Eaton Share Repurchases
$B s
pent
on
repu
rcha
ses
% of prior year-end share count repurchased
• Repurchased $5.2B of shares from 2014 - 2019• 16% of our shares
• Expect to repurchase $2.4B to $2.8B worth of shares in 2020
• In future years, anticipate repurchasing 1% - 2% of shares per year
• $400M - $800M per year at current market cap
We are stepping up our repurchases in 2020
© 2020 Eaton. All rights reserved.
2020 guidance range
17© 2020 Eaton. All rights reserved.
Areas of focus
• Electrical• Aerospace• eMobility
• Technologies• Geographic expansion• Product gaps• Channel coverage
and service
Qualitative criteria Financial criteria
We have a disciplined M&A process and a clear set of target criteria for evaluating future acquisitions
• Leadership in a key strategic market or region
• Attractive opportunities for growth and profitability
• Proprietary content in products and services
• Alignment with secular growth drivers
• Target minimum returns of 300 bps above costof capital
• Earnings per share accretive after 2 years
• Ability to drive sustainable top and bottom line synergies
18© 2020 Eaton. All rights reserved.
We have actively managed our portfolio, with over 120 M&A transactions since 2000
Since 200071ACQUISITIONS 50 DIVESTITURES
5 ACQUISITIONS / JVs 3 DIVESTITURESSince 2019
Includes planned sales of Lighting and Hydraulics
1919© 2020 Eaton. All rights reserved.
Sales Employees Plants
$363M ~3,200France, Dominican
Republic, India, Morocco, Mexico,
and U.S.
$126M ~780 Turkey and Indonesia
$125M ~325 Virginia and California
Ulusoy Elektrik
Power Distribution, Inc.
Souriau-Sunbank
Since the start of 2019 we have invested $1.4B in acquisitions / JVs
Products
20Free cash flow is cash from operations minus capital expenditures Source data: Capital IQ, Eaton analysis
0%
4%
8%
SIE
PH ETN SU
EMR
UTX LR
HO
N IR
DO
V
ITW
RO
K
ABBN
Peer median
-6%
0%
6%
12%
RO
K
ITW PH ETN
HO
N LR
UTX IR
DO
V
SU SIE
EMR
ABBN
Peer median
© 2020 Eaton. All rights reserved.
Our free cash flow generation outpaces our electrical and multi-industry peers…
2019 Free Cash Flow Conversion
Free Cash Flow Yield(as of Feb 26, 2020)
Free Cash Flow Per Share Growth (10 year CAGR through 2019)
2019 Free Cash Flow Margin
0%
10%
20%IT
W
HO
N
RO
K LR
EMR
ETN PH SU
DO
V IR
UTX SI
E
ABBN
Peer median
50%
100%
150%
SU PH ETN LR
UTX SI
E IR
EMR
RO
K
DO
V
ABBN ITW
HO
N
Peer median
21
6x
12x
18x
RO
K
ITW
ABBN LR
HO
N IR
DO
V
PH
EMR SU ETN
SIE
UTX
EV /
EBIT
DA Peer median
© 2020 Eaton. All rights reserved.
…but our multiple continues to be lower than the peers
~$15 upside potential from trading at the peer median multiple
Note: EV / LTM EBITDA multiple as of February 26, 2020Source data: Capital IQ, Eaton analysis
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Our results in Q1 are being impacted by the coronavirus
© 2020 Eaton. All rights reserved.
Eaton sales to China customers total ~$100M per month
With the quarantines now in effect and the decline in new business investment due to disruption in normal business decision-making and execution, we expect to see a significant shortfall in sales in Q1
‒ Most likely the sales will be caught up as we go through the rest of the year
We do not expect sales outside Asia to be impacted much, since we sell almost everything we make in China into China and the rest of Asia
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2020 Full Year Outlook
Adjusted Earnings Per Share $5.60 - $5.90
Organic Revenue (1)% - 1%
Acquisition Revenue 2%
Divested Revenue (7.5%)
Adjusted Segment Operating Margins 17.8% - 18.2%
Corporate Expenses (interest, pension, other corporate) Flat with 2019 levels
Tax Rate on Adjusted Earnings 14.8% - 15.8%
Operating Cash Flow $3.4B - $3.6B
Free Cash Flow $2.8B - $3.0B
Capex $550M
Share Repurchases $2.4B - $2.8B
2020 guidance
© 2020 Eaton. All rights reserved.
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Today’s key messages
© 2020 Eaton. All rights reserved.
2019 was a year of strong performance for Eaton, particularly in cash flow generation
Self-help efforts and portfolio actions expected to result in higher adjusted margins in 2020
We anticipate earnings per share will be flat in 2020 despite the divestitures and sluggish markets
Our business generates consistently growing cash flow
We expect to return $3.6B to $4.0B to shareholders through dividend and share repurchases in 2020
We generated 43% TSR in 2019 and over the last 20 years have generated 12.5%, considerably outpacing the median peer
Flat earnings per share in 2019 and 2020 excludes acquisition integration and divesture costs and in 2019 Vehicle segment warranty charge
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