Eaton Corporation A Premier Diversified Industrial

Transcription

1 Eaton Corporation A Premier Diversified Industrial Citigroup s 19 th Annual Global Industrial Manufacturing Conference March 7, Eaton Corporation. All rights reserved.

2 Forward Looking Statements and Non-GAAP Financial Information The information provided at our conference today will include forward-looking statements relating to our future sales, net income, net income per share, operating earnings, operating earnings per share, revenues from new business awards and potential new business awards, cost improvement initiatives, worldwide markets and certain other estimates and goals for future years. Those statements can be identified by the indication that they are for future periods and should be used with caution. They are subject to various risks and uncertainties, many of which are outside the Company s control. Factors that could cause actual results to differ materially from those in the forward-looking statements include: 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; unexpected increases in the cost of material and other production costs that cannot be recouped in product pricing; introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; acquisitions and divestitures; our ability to integrate recent acquisitions and close pending transactions; new laws and governmental regulations; interest rate changes; 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 available under the heading Reconciliations of Non-GAAP Financial Information next to a copy of this presentation on the investor relations page of our website at and, for those in attendance, it is also in your packet. 1

3 Eaton Corporation A Premier Diversified Industrial Performance against 2005 Goals Raising the bar with our 2010 Goals Our powerful portfolio today 2006 guidance and Excel 07 2

4 We set challenging goals to drive dramatic change throughout Eaton Our 2005 Statement of Goals At Least 10% Sales & Earnings Growth Through the Cycle Fixed Capital Intensity to 4.0% of Sales Premier Eaton Ultimate Goal: 13% EBIT 18-22% Return on Equity Decrease Inventory by an Additional 25% 3

5 We achieved remarkable results against those goals 2005 Goal Actual Achieve Goal? DI Rank % Sales Growth 7% N 10% Earnings Growth 24% Y 2 13% EBIT 9.5% N 13 Capital Expense / Sales < 4.5%; in 2003, adjusted target to <4.0% Decrease inventory by 15%; in 2003, adjusted target to 25% 2005 Actual: 22.2% Return on Equity 3.3% Y 14 21% N 6 6 Note Sales and earnings growth are average annual return, 2000 to 2005; inventory improvement is change in DOH from Q4:99 to Q4:05, with Q4:05 excluding the 4 Hayward Filtration, Tractech & Cobham and PerkinElmer Aerospace acquisitions.

6 We performed well as our market growth moderated in 2005 Primary Market Index YoY Change Change 8% 5% Net Sales $ 9,817M $ 11,115M +13% Operating Earnings $ 675M $ 829M +23% EPS As reported $ 4.13 $ % Operating $ 4.30 $ % 5

7 Operational performance has increased profits and returns Change Return on Equity 20% 22% bps Return on Invested Capital 14% 15% + 50 bps Segment Operating Margin 11.7% 12.6% + 90 bps CapEx / Sales 3.4% 3.3% -10 bps Operating Cash Flow $ 838M $ 1,135M 35% Note Segment margin includes restructuring charges. 6

8 We have improved returns on invested capital significantly 20% Return on Invested Capital 15% 10% 5% 0% Eaton ROIC Median DI ROIC Note ROIC excludes restructuring expense. 7

9 as well as our free cash flow generation $1,000 10% Free Cash Flow $800 8% $600 6% $400 4% $200 2% Free Cash Flow / Sales $ % 8 FCF has increased over 475% since 2000, while FCF/Sales has increased 530 BPS

10 Our success has been reflected in our shareholder returns 250 Cumulative Total Return to Shareholders Eaton S&P 500 S&P 1500 Mach DI Group Total shareholder return 2 nd among DIs since 2000 Note DI Group represents a market capitalization weighted index of CR, DHR, DOV, EMR, GE, HON, IR, ITT, ITW, PH, SI, SPW, TMO, TXT, TYC, UTX; 9 Source of all DI Group company information is Compustat.

11 Eaton Corporation A Premier Diversified Industrial Performance against 2005 Goals Raising the bar with our 2010 Goals Our powerful portfolio today 2006 guidance and Excel 07 10

12 Premier Eaton in 2010: Our Corporate Goals Eaton Corporation Premier Diversified Industrial 15% Income Growth 15% ROIC 10% Sales Growth 9% FCF to Sales 11

13 Growth is a priority in achieving our 2010 goals 12% 10% 8% 6% 4% 2% 0% 4% 2% 4% Eaton Growth Model Acquisition Market Out Performance End Market Growth Premier Eaton 2010 Revenue $8.3B $11.1B $18 B + Net new sales of $1.5B from new products & services by 2010 Innovation Summits Design Bursts 12

14 We will accelerate initiatives to grow profitably globally $16 Sales by Geography ($B) Achieve $2.5B in sales from Asia / Pacific by 2010 $12 $8 $ North America Europe Latin America Asia Pacific Target new customers and channels Grow existing operations and joint ventures Leverage recent wins in Chinese & Indian markets Increase corporate development activity across the region 13

15 We will continue to grow the portfolio through acquisitions & JVs 30 Corporate Development Activity # of Deals Acquisition JV Alliance Divestiture 14

16 EBS: A shared system aligning our Groups in operating excellence, Eaton Business System EBS is the sum of the tools and processes developed across our businesses, aligned and integrated, into a single operating philosophy. Rapid Deployment of Best Practices Prescriptive Processes Continuous Assessment EBS for Growth Eaton Value Cycle Innovation Management 15

17 directly raising margins by moving results to the winning zone 15% 12% 9% 6% 3% 0% Segment Operating Margin Learning Zone Improving Zone Winning Zone Benchmark Moving from Learning to Winning typically raises return on sales by over 10%-age points In 2005, over 75% of facilities were in the Winning Zone Reduced the facilities in the Learning Zone from 14% in 2003 to <5% in 2005 Note Segment operating margin excludes restructuring charges. 16

18 Eaton Corporation A Premier Diversified Industrial Performance against 2005 Goals Raising the bar with our 2010 Goals Our powerful portfolio today 2006 guidance and Excel 07 17

19 We have balanced our businesses through the cycle 100% 80% 60% 7% 8% 19% 25% 32% No Cycle Late $1.9B in Revenues Automotive, Electrical Service, Defense, Filtration $2.4B in Revenues Commercial Aerospace & Nonresidential Construction 40% 20% 0% 67% 2005 Sales by Geography 19% 23% 2005 US & Canada Sales Mid Early $1.4B in Revenues Hydraulics & Medium Duty Truck $1.7B in Revenues Residential Electric, NAFTA Class 8 Trucks Asia / Pacific Latin America Europe U.S. and Canada 18

20 while simultaneously improving our business mix 2000 Sales $ 8,309 M 2005 Sales $ 11,115 M 22% 15% 29% 33% 18% 20% Electrical Truck 31% Fluid Power Auto 32% Electrical Fluid Power Truck Auto 19

21 Electrical has real revenue and margin momentum Fourth consecutive year of solid market outgrowth Third consecutive year of increased profitability Significant increase in profitability during the 2 nd half of and 2005 Power Quality Company of the Year 1 Operating Margin 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 1st Half 2nd Half Note Operating margin excludes restructuring expense 1 Awarded by Frost & Sullivan 20

22 that is sustainable by leveraging a new business model Over the last two years we have been assembling the capabilities to address a full range of our customers needs Capability Expanding Actions Powerware Allow us to Position ourselves as the experts in Power Systems CAT (ISO) JV $500 million integrated service organization Common software group Numerous product enhancements Power Management Largest Field service network in NA Knowledge-Based Offerings Power Distribution Complete range of power electrical distribution products Power Quality #1 global supplier of large UPS Systems Over 10,000 MW of UPS in operation Alliances / Partnerships CAT HP Johnson Controls 21

23 Fluid Power has diversified its mix and acquired growth platforms Hydraulics 50% On/Off highway and stationary #1 steering and motors Aerospace 35% Commercial and defense #1 fluid conveyance Fluid Connectors 12% Global A/C and PS connectors #1 air-conditioning worldwide Filtration 3% Industrial filtration systems #1 bag filtration 22

24 by making key acquisitions to drive further growth Market Overview Market at beginning of strong recovery 16% in 06 Acquisitions strengthen position Significant content on new platforms A380, 787, VLJ Total business now 60-65% commercial Eaton OEM Commercial Sales vs. Commercial Market Acquisitions ETN Aero Commercial Commercial Market Performance 23

25 Truck continues to produce high returns New business model is producing 20% ROS and will deliver 14% ROS in 2007 New products/technology adding strong value Expansion into new markets and geographies is dampening cyclicality Growing Aftermarket Light / Medium growth Expanding outside the US Excel 07 to further position business for 2007 class 8 market downturn and subsequent rebound 24

26 and is positioned for success despite an expected 2007 downturn % 15.7% 14% 12.5% 8.2% Q1 Q2 Q3 Q4 Q1-Q NAFTA Class 8 Volume (000s units)* * Annualized rate ROS 25

27 Automotive s strategic focus remains successful Fuel Economy & Emissions Engine Air Mgmt. Trans Controls Exh Gas Recirc Technical Solutions Strategic Focus Passenger Safety Traction & Stability Mirror Controls Fuel Tank Controls Asian Expansion Regional Supply Asian Brands New Markets Growth in Alternative Markets Performance Products Truck/Specialty Engines Strategy addresses changing market dynamics 26

28 by maintaining strong market positions with global market leaders Alternative Markets 20% 32% General Motors & Ford (NAFTA) Asia & Asian OEM s 8% Premium & Performance Brands 10% 30% DCX & OEM s in Europe Eaton CAGR % ( E) * Note: Includes 20% of Nittan sales Alternative Markets PPD Truck/Specialty Engine Producers (Eaton equity) -2 GM / Ford (NAFTA) DCX / European OEM's Premium & Performance Asia & Asian OEM's Alternative Markets 27

29 Eaton Corporation A Premier Diversified Industrial Performance against 2005 Goals Raising the bar with our 2010 Goals Our powerful portfolio today 2006 guidance and Excel 07 28

30 2006 is expected to be a year of average market growth E Electrical Index 5% 5% 4-5% Fluid Power Index 8% 3% 4-5% Truck Index 30% 14% 0% Automotive Index -1% -1% -1% Eaton Consolidated Index 8% 5% 3% Note Eaton Consolidated Index based on prior year-end sales weights. 29

31 Growth and higher margins drive higher operating EPS 2005 Operating EPS $ Market growth $ $0.66 Growth above market $ $0.58 Acquisition and JV growth $0.27 Acquisition synergies $0.14 Amortization expense ($0.07) Interest and other corporate expense ($0.13) Healthcare and pension expense ($0.36) Options expense ($0.16) Currency, LIFO, & Other ($0.10) Decreased shares $0.04 Net Increase $ $ Operating EPS $ $6.25

32 Cash generation in 2006 is projected to be strong ($ Millions) 2005 Net Income, Dep n & Amort. $ 1,214 Incremental Net Income & Dep n Change in Working Capital Pension Contribution Other Cash From Operations Capital Expenditures ( ) (100) $ 1,100 1,200 ( ) 2006 Free Cash Flow Dividends Paid $ ($ 209) 31

33 Excel 07 Actions today for power tomorrow What Eaton will do: Results in 2007: Address resource levels & unit performance where 2005 was below expectations Actively manage resources in businesses where end markets may soften in Exit products lines no longer able to create sufficient shareholder value Consolidate or relocate manufacturing locations for greater competitiveness Lowering of cost structure $ 60M increase in earnings 5-10% earnings increase 32

34 Taking another large step in 2006 as a premier diversified industrial Market Outgrowth 2006 Guidance $300 M Incremental Sales from Acquisitions and JVs $475 M Operating EPS $ $6.25 Fully Diluted EPS $ $6.05 Operating Cash Flow Free Cash Flow $1.1 - $1.2 B $750 - $850 M 33

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