Deutsche Bank Global Industrials & Materials · Deutsche Bank Global Industrials & Materials Rick...
Transcript of Deutsche Bank Global Industrials & Materials · Deutsche Bank Global Industrials & Materials Rick...
© 2019 Eaton. All Rights Reserved..
Deutsche Bank Global Industrials & Materials
Rick Fearon, Vice Chairman & Chief Financial and Planning OfficerJune 5, 2019
2© 2019 Eaton. All Rights Reserved..
Forward Looking Statements and Non-GAAP Financial Information
This presentation or the comments we make on our call today contain forward-looking statements concerning, among other matters, performance of our worldwide end markets, second quarter and full year 2019 adjusted earnings per share, expected organic revenue growth, segment operating margins, EBIT margins, currency translation, pension expense, acquisitions, share repurchases, capitalexpenditures, cash flow, corporate expenses, revenue growth, foreign currency exchange impact, 2019 and beyond expected effective tax rate, our 2020 goals, capital allocation plans, pension funding needs, strategic growth initiatives, the impact of potential tariffs, the divestiture of our Automotive Fluid Conveyance business and the intended spin-off our lighting business. 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 purchasesfrom us; competitive pressures on sales and pricing; unanticipated changes 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 ormarketing difficulties; unexpected claims, charges, litigation or dispute resolutions; strikes or other labor unrest; the performance of recent acquisitions; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; interest rate changes; stock market and currency fluctuations; war, civil or political unrest or terrorism; 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 included in your packets.
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Agenda
• Global economic outlook
• Secular growth trends
• Eaton strategy
• U.S. – China relationship
4© 2019 Eaton. All rights reserved..
We continue to expect a year of global growth in 2019…although trade disputes create storm clouds on the horizon
US 2019 growth % of total*
GDP 2.3% 25%
Mfg. IP 1.4% 17%
Brazil 2019 growth % of total*
GDP 1.0% 3%
Mfg. IP 1.0% 2%
Europe (EU 28) 2019 growth % of total*
GDP 1.4% 23%
Mfg. IP 0.8% 22%
China 2019 growth % of total*
GDP 6.3% 16%
Mfg. IP 5.6% 25%
Global 2019 growth
GDP 2.7%
Mfg. IP 1.2%
India 2019 growth % of total*
GDP 6.4% 3%
Mfg. IP 1.3% 3%
*2017 share of world GDP and manufacturing IP
5© 2019 Eaton. All rights reserved..
Global economic growth is underpinned by low unemployment, solid consumer spending…
3456789101112
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101112
00 02 04 06 08 10 12 14 16 18 20
Une
mpl
oym
ent R
ate,
% (S
A)
Unemployment Rate
Source: U.S. BLS, BEA, Eurostat, IHS Economics, Eaton Economics, Data through March/April 2019
United States European Union
China -15-10-50510152025
-15-10
-505
10152025
08 10 12 14 16 18 20Y/
Y %
Cha
nge
Retail Sales Growth
European Union
United States
China
Retail Sales Growth
6© 2019 Eaton. All rights reserved..
…and robust consumer confidence
0
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100
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0
50
100
150
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250
08 10 12 14 16 18 20
Inde
x, 2
012=
100
U.S. Consumer Confidence
90
95
100
105
110
115
120
125
90
95
100
105
110
115
120
125
08 10 12 14 16 18 20
Inde
x, 2
012=
100
EU Consumer Confidence
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U.S. and EU manufacturing industrial production growth has decelerated
-20
-15
-10
-5
0
5
10
-20
-15
-10
-5
0
5
10
08 09 10 11 12 13 14 15 16 17 18 19 20
Y/Y
% C
hang
e
Source: U.S. Federal Reserve, Eurostat, Eaton Economics, Data through March/April 2019
United States
European Union2018 YTD
United States 2.3 0.9European Union 1.6 0.5
Y/Y Growth (% Change)
8© 2019 Eaton. All rights reserved..
-10-50510152025303540
-10-505
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Y/Y
% C
hang
e
Eaton Alternative IP
Official IP
Industrial production growth in China appears to also have slightly decelerated
Source: National Bureau of Statistics, Eaton Economics, Data through April 2019
2018 YTDOfficial IP 6.2 6.2
Eaton Alt. IP 2.7 2.5
Y/Y Growth (% Change)
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U.S. construction spending growth remains solid…
0.20.30.40.50.60.70.80.91.01.1
0.20.30.40.50.60.70.80.91.01.1
00 02 04 06 08 10 12 14 16 18 20
Trill
ions
$ (S
AAR
)U.S. Construction Spending
Source: U.S. Bureau of Economic Analysis, Eaton Economics, Data through 2019Q1
Nonresidential Structures (Private & Public)
Residential (New and Renovation)
10© 2019 Eaton. All rights reserved..
02004006008001,0001,2001,4001,6001,8002,000
0102030405060708090
100
02 04 06 08 10 12 14 16 18 20M
illio
ns o
f sq.
met
ers
(SAA
R)
China Construction Starts
…as does construction spending growth in the EU and China
400
500
600
700
800
900
1,000
400
500
600
700
800
900
1,000
0002040608101214161820
Bill
ions
€ (S
AAR
)
EU Construction Spending
Source: Eurostat, China National Bureau of Statistics, Eaton Economics, Data through 2018Q4, April 2019
Nonresidential Structures (Private & Public)
Residential (New and Renovation)
Office (left)
Housing (right)
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$0$2$4$6$8$10$12
$0$2$4$6$8
$10$12
Jan-
14A
pr-1
4Ju
l-14
Oct
-14
Jan-
15A
pr-1
5Ju
l-15
Oct
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pr-1
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l-16
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pr-1
8Ju
l-18
Oct
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pr-1
9
B$
Rolling 12 months Data Center Starts
Source: Dodge Data & Analytics, Eaton Economics, Data through April 2019
U.S. data center construction starts are strong
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-25-20-15-10-5051015202530
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1015202530
08 09 10 11 12 13 14 15 16 17 18 19 20
Y/Y
% C
hang
e
Note: Growth in air passenger traffic is measured by revenue passenger kilometers, Growth in air freight traffic is measured by freight ton kilometers
Source: International Air Transport Association, Eaton Economics, Data through April 2019
Air Freight
Passenger Traffic
Global air passenger traffic continues to show healthy growth while air freight growth has been impacted by trade issues
2018 YTDPassenger Traffic 6.5 4.8
Air Freight 3.5 -2.8
Y/Y Growth (% Change)
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-50-40-30-20-10
01020304050
13 14 15 16 17 18 19 20
Y/Y
% C
hang
e (3
MM
A)
Source: U.S. Census Bureau, Eaton Economics, Data through March 2019
Industrial Machinery
Construction Equipment
Farm Machinery
Truck & Bus
2018 YTDIndustrial Machinery 1.1 0.3
Construction Equipment 9.8 4.8Farm Machinery 17.6 11.2
Truck & Bus 12.5 20.4
Y/Y Growth (% Change)
Most key U.S. hydraulics markets continue to show good growth
14© 2019 Eaton. All rights reserved..
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40
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40
05060708091011121314151617181920
Bui
ld p
er m
onth
, U
nits
(K, S
A)
NA Class 8 Truck
Source: ACT Research, IHS Automotive, ANFAVEA, Eaton Economics, Data through April 2019, LV through 2019Q1
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Production per m
onth, Units (K
, SA)
Brazil
Truck & Bus
Farm Machinery
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100
40
60
80
100
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Prod
uctio
n(m
lns
unit
SAAR
)
Global Light Vehicle
NAFTA Class 8 build continues to grow while Brazil build has plateaued and global light motor vehicle production has declined
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Agenda
• Global economic outlook
• Secular growth trends
• Eaton strategy
• U.S. – China relationship
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Data proliferation:Global data is expanding at a rate of
Industrial companies are preparing for an increasingly urban, electrified and connected world
Electrification: By 2050, EV’s are expected to increase U.S. power consumption by
Urbanization:Over people are expected to live in urban areas by 2050
A premium will be placed on reliable, efficient, safe, sustainable and connected technologies to solve tomorrow’s challenges
38%
6 billion
40% per year
Internet of things: Number of connected devices expected to grow to 75 billion
by 2025
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In 2017, U.S. utilities deployed of demand response programs for every 1GW of new capacity added to the grid
of the U.S. storage market
by 2021
The way buildings use electricity will change dramatically over the next decade
~0.6GW
75% of electricity in the U.S. is consumed by buildings
Off the grid storage will account for 50%
California Title 24 requires solar on new homes after 2020 &net zero energy on commercial buildingsby 2030
U.S. smart home revenue is estimated to grow at a 13% CAGR from 2019-2023
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40%
From 2014 to 2020 public cloudpower usage increased
By 2021, public cloud will account for 55% of all data center traffic
Data centers consume 3% of global electricity and are undergoing dramatic change
88%
of a data center’s operating expense is on energy
Li-ion battery prices have dropped 80%since 2010, driving DCs to invest in more renewables & storage
Hyperscale and co-lo data centers value reliable and scalable solutionsthat reduce their operational costs
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Utilities are increasing smart grid investments above and beyond their typical capital spend
of new U.S. generation capacity added in 2017
Renewable power was 50%
650 million attempted cyberattacks in 2017
Source: Navigant Research
The U.S. electric vehicle market is expected to grow at a
20% CAGRto 2030
One large U.S. utility reported more than
The $2.5 billion North American smart grid software & services market is growing at a 6% CAGR, 3x the growth of the overall utility market
up from approximately 4 hours in 2016
The average 2017 power outage in the U.S. lasted 7.8 hours,
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In 2030, 101Minternal combustion engine vehicles will be produced
HD diesel engine emissions standards require 50-90% reduction by 2025
By 2030, 24% of all vehicles produced will have some kind of alternative propulsion
A typical intelligent vehicle requires ~200 million lines of software code
Vehicle OEMs demand innovative solutions to solve stricter fuel economy and emissions challenges
Electric vehicle production estimated to grow at a 18% CAGR through 2030
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Vehicle component manufacturer
Eaton is well positioned to take advantage of these growth trends
Eaton Past Eaton Today
Power Management Company
Eaton Future
Intelligent Power Management
Digitally-enabled revenues Insights
Software
AppsServices
Eaton’s future will be built on digitally-enabled solutions, what we call Intelligent Power Management
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Agenda
• Global economic outlook
• Secular growth trends
• Eaton strategy
• U.S. – China relationship
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Eaton combines leading power management businesses that capitalize on these secular trends
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 positionElectrical
Systems & Services
Eaton Advantages2018 Sales Mix
eMobility
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¹Eaton segment margins exclude acquisition integration charges²Adjusted to exclude impact from 2018 arbitration decision and certain 2014 legal settlements³Adjusted to exclude impact from 2018 arbitration decision
Over the last decade, we have transformed Eaton2008 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 $15BEBIT Margin 8.4%Segment Margin¹ 12.2%Free Cash Flow $1.0BFree Cash Flow / Share $3.06
Revenue $22BEBIT Margin³ 13.7%Segment Margin 16.8%Free Cash Flow³ $2.4BFree Cash Flow³ / Share $5.47
25© 2019 Eaton. All rights reserved..
0%
20%
$0
$4
2000 20180%
25%
$0
$4
2000 20180%
20%
$0
$4
2000 2018
Sale
s ($
B)
Sale
s ($
B)
Sale
s ($
B)
10% 12% 14% 16%17.1% -17.5%
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) M
argin1
Margin
1
Margin
1
Margin
1
1 Excludes acquisition integration charges
0%
20%
$0
$8
2000 2018
Elec S&S
Sale
s ($
B) M
argin1
This transformation adds to a long track record of improving profitability…
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…which has enabled Eaton to grow Adjusted EPS at an 8% CAGR since 2000…
(1) Adjusted EPS excludes the per share impact of acquisition integration and divestiture charges, 2014 legal settlement, 2017 gain on formation of the Cummins JV, the impact of the 2017 U.S. tax reform, and the 2018 arbitration decision. For years 2012 and prior, Adjusted EPS has not been restated for the 2017 retrospective change in its method of accounting for certain inventories in the United States.
2000 – 2019 GuidanceCAGR
8%
$-
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019G
Adjusted EPS 2000 - 2019 Guidance (1)
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0100200300400500600700800900
10001100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Cumulative Shareholder Returns
Eaton S&P 500 Peer Group
2000 – May 31, 2019 CAGR
Return Index
12%
10%
6%
Notes:Peer Index is for the average of ABB, EMR, LR, ROK, SU, SIE, PH, DOV, HON, ITW, IR, UTXCumulative shareholder returns CAGR is calculated using end-point methodologySource: Eaton Analysis, Capital IQ
2019
…and deliver superior returns to our shareholders
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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 remains focused on three key value drivers
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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
We continually evaluate our portfolio of businesses againstspecific criteria
We like our mix of businesses and are driving significant improvement
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Our recently announced portfolio decisions demonstrate our active approach to portfolio management
Heavy duty truck transmission JV with Cummins
Acquisition of Turkish electrical switchgear manufacturer Ulusoy
Light duty truck transmission/clutch JVs with Shaanxi Fast Gear
Announced spin-off of Eaton Lighting Business
We have completed 68 acquisitions and 47 divestitures since 2000
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Our capital allocation strategy is focused on growth and returning capital to shareholders
Reinvest in the business to drive organic growth> Capital expenditures plus R&D expected to be 5.5% - 6.0% of sales going forward
Growing dividend in line with earnings growth> Over the last 10 years, dividend CAGR of 11%
Repurchase shares each year equal to 1% - 2% of our market capitalization> Repurchased $3.5B of shares from 2015-2018, exceeding our $3B commitment
Pursue acquisitions while retaining our discipline> Will focus on our Electrical, Aerospace and eMobility segments
1
2
3
4
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We expect to have record amounts of cash to re-deploy over the next three years
Past 5 Years2014-2018 cumulative
Next 3 Years2019-2021 cumulative
Free cash flow1
Pension contributions2
Debt pay-down
Available cash
We expect to have ~$1.5B cash available annually for repurchases and M&A
R&D and Capex
Dividends
Share repurchases
Optionality
Period of increased optionality
24%
14%
32%
30%
Dividend
1 Excluding US qualified pension contributions, payments for 2018 arbitration decision, and certain 2014 legal settlements
$5B ~$3.5B
$2B $0B
$1B $0B
$11B ~$8B
$3B ~$4.5B
2019-2021 cumulative
2 US qualified pension plans
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We are on track to achieve our 2015-2020 goals
Metric 2015-2020 Goal
2015-2018 Actual 2019 Guidance Status
Annual Revenue Growth, excluding FX 2% - 4% 2% ~4%
EBIT Margin 14% - 15% 13.7% 14.1% - 14.6%
Segment Margin 17% - 18% 16.8% 17.1% - 17.5%
Free Cash Flow Margin >10% 11.1% 11% - 12%
Annual EPS Growth 8% - 9% 8% 9%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
EBIT Margin, Segment Margin and Free Cash Flow Margin goals are for 2020. Actual performance for these three metrics for 2015-2018 is for 2018.
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Agenda
• Global economic outlook
• Secular market growth
• Eaton strategy
• U.S. – China relationship
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How scary will the ride down be?
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Fundamentally, the U.S. – China trade dispute reflects a clash of cultures
Self perception “Number One” “Center of universe”
Core values Freedom Order
View of government Necessary evil Necessary good
Form of government Democratic Republic Responsive authoritarianism
Exemplar Missionary Inimitable
Foreigners Inclusive Exclusive
Time horizon Now Eternity
Change Invention Restoration and evolution
Foreign policy International order Harmonious hierarchy
Source: "Destinedfor War: Can Americaand China Escape Thucydides'sTrap?“ By Graham Allison
37© 2019 Eaton. All rights reserved..
Source: U.S. Census Bureau, Eurostat, Eaton Economics, Data through March 2019
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Y/Y
% C
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EU Exports to China (€)
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Y/Y
% C
hang
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MM
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U.S. Exports to China ($)
As trade tensions have escalated, EU exports to China have grown while U.S. exports have declined
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China faces a world of declining workers and exports, leading it to focus on growth of consumer spending
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China exports as % of GDP
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1000015000200002500030000350004000045000
Billi
ons o
f Yua
n
Annual Retail Spending
-0.4-0.3-0.2-0.1
00.10.20.30.40.5
China Labor Force Growth (%)
Y-O-Y Growth
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Eaton is well positioned to manage through periods of international volatility
• For the last several decades, we have followed a production strategy of producing and selling in the same region
• Avoids trade disputes and tariffs• Since regional currencies tend to move together, largely avoids impact of currency changes• Allows for better service to customers
• In China, we operate approximately 25 plants of which about 90% of the output is sold within Asia
• To the extent we incur any tariffs, we have shown we can raise prices to offset the impact
• As a result, we expect to have relatively little impact from U.S. – China tariffs, other than the more general impact trade wars have on economic growth
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Contact Information
Yan Jin – Senior Vice President, Investor RelationsPhone: +1 (440) 523-7558Email: [email protected]
Chip Walker – Director, Investor RelationsPhone: +1 (440) 523-2284Email: [email protected]
Rachel Morrison – Administrator, Investor RelationsPhone: +1 (440) 523-3634Email: [email protected]
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