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CORE U.S. Multi-Industry Q321 Catalysts, and Questions for Management Teams Ahead of industrial conferences and company investor meetings in the coming weeks, we provide a list of questions for US Multi-Industry management teams, and links to recent salient reports. Our questions tend to exclude near-term demand topics, as we assume those are asked anyway. Broad topics that we hope to hear more color on: (i) How quickly is demand normalizing towards typical seasonal trends after several consecutive quarters of above seasonal revenue trends? (ii) How much is China slowing further in the 2H (having slowed from ~50% y-o-y growth in Q1 to ~17% growth in Q2)? (iii) On average, MI companies are expecting 2H21 incremental operating margins y-o-y to reach the low 20%s (vs the high 20%s in the 1H) – how conservative does this seem, as many input costs (inc. freight and labor) do not appear to be easing much? (iv) Did the companies that guided 2H op. margins down y-o-y (despite sales growth) guide too conservatively (ALLE, SWK)? (v) In A&D, are we seeing the Delta variant of Covid having any major impact on Aero AM demand, and is there any more clarity in Defense regarding why several MI companies are cutting sales guidance? (vi) How quickly are Resi / Consumer markets losing momentum y-o-y in the face of tougher 2H comps? (vii) Do we see any sign of M&A discipline re-appearing, or will very expensive M&A remain the norm (esp. in the software realm – EMR, FTV, HON, ROK, ROP are among those most likely to do software M&A; see our takeaways on recent M&A)? (viii) Does anyone beyond CARR, GE, IR and ROP (such as DOV, EMR, MMM, SWK) want to sell assets amidst a market with exuberant bullishness, or it is better to only keep buying businesses when prices are very high? Who could offer interesting updates / news before Q3 earnings? (i) CFX: Could we see another round of equity issuance to fund MedTech M&A, followed by the offset of further Rales’ share purchases? (ii) EMR: Any more color on the portfolio review? (iii) FLOW: When will we hear the outcome of the strategic review? (iv) IR: With the major PE firm’s role / holdings shrinking, does this smooth the path for a transaction with SPX FLOW? (v) JCI: Will the Sept 8 Investor Day give investors further confidence that the ~40% incremental margin guidance for 2022-2023, and a double-digit EPS CAGR, are attainable? (vi) LII: Any news on the choice of a new CEO? (vii) MMM: News flow / court pronouncements on the various major litigation items (earplugs, PFAS, Bair Hugger). (viii) PH: Will TDG lodge a formal bid for Meggitt by Sept 14, or will the Meggitt shareholder vote on the PH bid on Sept 21 be the near-final key step? Main debates / positioning: (i) Is there any price or valuation too high for ‘thematic winners’ or any price or valuation too low for ‘thematic losers’? (ii) Who might be the next thematic plays, as the bar does not seem very high for joining this ‘club’ anymore? (iii) Is there a real ‘changing of the guard’ underway in HVAC leadership, or are we just over-extrapolating from one quarter’s results? (iv) Are we on the cusp of a capex supercycle? Shorter-term investor positioning appears least favorably disposed towards CFX, LII, HON, ITW, PNR, ROK, ROP, and most favorably disposed towards CARR, DOV, ETN, FTV, JCI, NVT. For our views on current MI trends, please see our report. We show inside (Fig. 1) the dates of upcoming catalysts and Investor Days. Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 186. Equity Research 18 August 2021 INDUSTRY UPDATE U.S. Multi-Industry NEUTRAL Unchanged For a full list of our ratings, price target and earnings changes in this report, please see table on page 2. U.S. Multi-Industry Julian Mitchell +1 212 526 1661 julian.mitchell@barclays.com BCI, US Trish Gorman +1 212 526 9154 trish.gorman@barclays.com BCI, US Kiran Patel-O'Connor +1 212 526 4758 kiran.patel-o'connor@barclays.com BCI, US Matthew Shaffer +1 212 526 8431 matthew.shaffer@barclays.com BCI, US Restricted - Internal Barclays | U.S. Multi-Industry Summary of our Ratings, Price Targets and Earnings Changes in this Report (all changes are shown in bold) Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E) Old New 17-Aug-21 Old New %Chg Old New %Chg Old New %Chg U.S. Multi-Industry Neu Neu Allegion plc (ALLE) OW OW 140.09 176.00 176.00 - 5.50 5.50 - 6.40 6.40 - APi Group (APG) OW OW 22.46 24.00 24.00 - 1.08 1.08 - 1.28 1.28 - Carrier Global Corp. (CARR) OW OW 55.15 60.00 60.00 - 2.20 2.20 - 2.49 2.49 - Colfax Corporation (CFX) UW UW 48.30 44.00 44.00 - 2.24 2.24 - 2.57 2.57 - Dover Corporation (DOV) OW OW 173.02 185.00 185.00 - 7.55 7.55 - 8.24 8.24 - Eaton Corporation (ETN) EW EW 166.90 165.00 165.00 - 6.88 6.88 - 7.38 7.38 - Emerson Electric Co. (EMR) EW EW 102.71 98.00 98.00 - 4.10 4.10 - 4.50 4.50 - Fortive Corporation (FTV) EW EW 74.76 75.00 75.00 - 2.77 2.77 - 3.01 3.01 - Gates Industrial Corp. Plc (GTES) OW OW 16.23 22.00 22.00 - 1.40 1.40 - 1.54 1.54 - General Electric (GE) OW OW 101.62 16.00 16.00 - 0.26 0.26 - 0.57 0.57 - Honeywell International Inc. (HON) OW OW 231.45 253.00 253.00 - 8.16 8.16 - 9.18 9.18 - Illinois Tool Works Inc. (ITW) UW UW 233.22 217.00 217.00 - 8.90 8.90 - 9.36 9.36 - Ingersoll Rand Inc. (IR) OW OW 50.85 60.00 60.00 - 1.85 1.85 - 2.17 2.20 1 Johnson Controls International (JCI) OW OW 73.00 75.00 75.00 - 2.67 2.67 - 3.27 3.27 - Kennametal (KMT) EW EW 36.00 37.00 37.00 - 2.28 2.28 - 2.77 2.77 - Lennox International (LII) EW EW 334.12 350.00 350.00 - 13.54 13.54 - 15.22 15.22 - nVent Electric plc (NVT) OW OW 33.04 49.00 49.00 - 1.91 1.91 - 2.15 2.15 - Otis Worldwide Corp. (OTIS) EW EW 90.74 86.00 86.00 - 2.99 2.99 - 3.27 3.27 - Parker-Hannifin Corp (PH) OW OW 296.34 340.00 340.00 - 17.30 17.30 - 18.88 18.88 - Pentair plc (PNR) UW UW 78.89 64.00 64.00 - 3.43 3.43 - 3.59 3.59 - Rockwell Automation Inc. (ROK) EW EW 313.25 280.00 280.00 - 9.43 9.43 - 10.39 10.39 - Roper Technologies Inc (ROP) OW OW 485.93 550.00 550.00 - 15.29 15.29 - 16.72 16.72 - SPX Flow (FLOW) EW EW 77.66 75.00 75.00 - 2.87 2.87 - 3.73 3.73 - Stanley Black & Decker Inc. (SWK) OW OW 194.50 230.00 230.00 - 11.80 11.80 - 12.90 12.90 - The 3M Company (MMM) UW UW 199.55 185.00 185.00 - 10.12 10.12 - 10.66 10.66 - Trane Technologies plc (TT) OW OW 193.63 216.00 216.00 - 6.06 6.06 - 7.33 7.33 - Vontier Corporation (VNT) OW OW 33.83 50.00 50.00 - 2.83 2.83 - 2.84 2.84 - Source: Barclays Research. Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency. FY1(E): Current fiscal year estimates by Barclays Research. FY2(E): Next fiscal year estimates by Barclays Research. Stock Rating: OW: Overweight; EW: Equal Weight; UW: Underweight; RS: Rating Suspended Industry View: Pos: Positive; Neu: Neutral; Neg: Negative 18 August 2021 2 Barclays | U.S. Multi-Industry TABLE OF CONTENTS MULTI-INDUSTRY RECENT HIGHLIGHTS – LINKS TO NOTES ............... 5 UPCOMING EVENTS / CATALYSTS .............................................................. 6 SECTOR PERFORMANCE: HOW DID THE COMPANIES / STOCKS PERFORM OVER THE MOST RECENT EARNINGS SEASON? .................. 7 ALLEGION............................................................................................................ 8 API GROUP........................................................................................................12 CARRIER ............................................................................................................. 17 COLFAX .............................................................................................................. 23 DOVER ................................................................................................................ 27 EMERSON ELECTRIC.......................................................................................33 EATON ................................................................................................................ 38 SPX FLOW .........................................................................................................43 FORTIVE .............................................................................................................48 GATES INDUSTRIAL........................................................................................52 GENERAL ELECTRIC ........................................................................................55 HONEYWELL .....................................................................................................61 ILLINOIS TOOL WORKS INC..........................................................................67 INGERSOLL RAND ...........................................................................................72 JOHNSON CONTROLS ....................................................................................76 KENNAMETAL ..................................................................................................81 LENNOX .............................................................................................................84 MMM ..................................................................................................................88 NVENT ................................................................................................................94 OTIS WORLDWIDE..........................................................................................99 PARKER HANNIFIN ....................................................................................... 105 PENTAIR.......................................................................................................... 109 18 August 2021 3 Barclays | U.S. Multi-Industry ROCKWELL AUTOMATION........................................................................ 113 ROPER TECH .................................................................................................. 119 STANLEY BLACK & DECKER....................................................................... 125 TRANE TECHNOLOGIES.............................................................................. 131 VONTIER CORPORATION........................................................................... 135 M&A / CAPITAL DEPLOYMENT SCENARIOS ........................................ 139 COMPANY ONE PAGERS ............................................................................ 151 18 August 2021 4 Barclays | U.S. Multi-Industry Multi-Industry Recent Highlights – Links to Notes We update IR estimates to reflect the ~$730m in share repurchases (announced 8/3/2021), and other models to reflect 10-Q / 10-K data. Key themes / topics we recently explored: Sector Notes: I. US Multi-Industry: AHRI HVAC June Data: Sell-in slows (Implications for CARR, JCI, LII, TT); August 12, 2021 II. Global Multi-Industry: Process Automation: Yokogawa results suggest very gradual O&G spending recovery; August 10, 2021 III. Global Multi-Industry: Gas Turbine Demand / Market Share 6M 21 Update: Market bounces (for now), GE at 46% share; August 9, 2021 IV. US Multi-Industry: Q2 21 LfE #3: 14 Learnings from Earnings, bottom-up and top-down takeaways / guides; August 8, 2021 V. US Multi-Industry: US June Imports: Trends vs OEM sales in Buildings (Locks, HVAC, Electrical equip.) & Tools markets; August 5, 2021 VI. US Multi-Industry: HARDI HVAC Data: +20-25% growth in June Resi sell-through (CARR, JCI, LII, TT); July 29, 2021 VII. US Multi-Industry: Transport Refrigeration – June Builds up 28% y/y, TTM Orders appear to have peaked, per ACT prelim. data: Implications for CARR and TT; July 20, 2021 VIII. US Multi-Industry: 6 conclusions from FTV, ROK recent M&A deals; IR, ROP look very attractive; July 13, 2021 IX. US Multi-Industry: Q2 Preview: A waiting game - more beats & raises, but peaking trends; July 8, 2021 X. US Multi-Industry: Buildings – Resi vs Non-resi expectations; Stock dis-connects; June 25, 2021 XI. US Multi-Industry: Mask / respirator demand rolling over; Implications for HON, MMM; June 15, 2021 XII. US Multi-Industry: The return of capex? Sector implications; some reasons for caution; June 9, 2021 XIII. US Multi-Industry: TMT Hardware / Software – Hardware momentum peaking, Software improving; June 7, 2021 XIV. US Multi-Industry: Electrical equipment – Hot Grid Summer vs Cool Utility Capex outlooks; June 4, 2021 XV. US Multi-Industry: Valuation – looking for dis-connects, as multiples may start to level out; June 3, 2021 XVI. US Multi-Industry: End-Market Outlook – from ‘RESET’ to ‘CREST’ Framework; Filtering stocks through Early / Late / Short / Long Cycle Lenses; May 26, 2021 XVII. US Multi-Industry: As China growth slows, which names may have the most risk / reward?; May 20, 2021 XVIII. US Multi-Industry: Semiconductors & electronics demand strength / potential US investments: Multi-Industry Implications; February 24, 2021 XIX. Global Multi-Industry: 2021 likely to be a busy year for Portfolio Change, Capital Deployment; Scenario Analysis; January 21, 2021 Short Cycle Industrials: XX. US Multi-Industry: US July ISM – Peaking trends likely weigh on SCI valuations; August 2, 2021 XXI. US Multi-Industry: Short Cycle Industrials: Further valuation compression likely; PH looks most 'washed out'; June 18, 2021 XXII. US Multi-Industry: Short Cycle Industrials: Tailwinds peaking, including revenue growth; May 14, 2021 XXIII. US Multi-Industry: Short Cycle Industrial Update: Sales momentum, but neutral ‘Traffic light’; December 29, 2020 Rating Changes / Primers: XXIV. FTV: Primer; June 15, 2021 XXV. ITW: Downgrade to UW; Cycle context provides a tough backdrop; May 26, 2021 XXVI. JCI: Upgrade to OW; Sales and margin self-help momentum; May 26, 2021 XXVII. ALLE: Upgrade to OW; Top-line outlook improving; Conservative ’21 guide; April 6, 2021 XXVIII. CFX: Downgrade to UW; Spin limbo likely, FCF and cycle questions for 2022; April 6, 2021 18 August 2021 5 Barclays | U.S. Multi-Industry Upcoming Events / Catalysts FIGURE 1 Upcoming Events Company Allegion APi Group Carrier Colfax Dover Emerson Eaton SPX Flow Ticker ALLE APG CARR CFX DOV EMR ETN FLOW Fortive FTV Gates General Electric Honeywell Illinois Tool Works GTES GE HON ITW Ingersoll-Rand IR Johnson Controls Kennametal Lennox MMM nVent JCI KMT LII MMM NVT Otis OTIS Parker Hannifin Pentair Rockwell Automation Roper Tech Stanley PH PNR ROK ROP SWK Trane Technologies TT Vontier VNT Source: Barclays Research Scope for major cap. deployment? Chubb F&S deal expected to close (4Q 2021) Hydraulics sale proceeds Use of P&E sale proceeds VNT spin/sale proceeds; ServiceChannel deal expected to close (Q3 2021) HPS, SV sale proceeds; FLOW strategic review Meggitt deal expected to close (3Q 2022) Plex deal expected to close (2H 21) MTD Products deal expected to close in 2H21 DRB Systems deal expected to close (Q3 2021) New financial targets / new CEO update? Investor Day (Q4 2021) Investor Day (November 2021) Investor Day (September 8, 2021) Investor Day (Early 2022) CEO Todd Bluedorn steps down Mid-2022 Investor Day (March 2022) Investor Day (November 2021) Portfolio change / strategic review? Ongoing JV / p'ship 'clean up'; Chubb F&S sale expected to close (4Q 2021) Portfolio review with the board, October 2021 Undergoing a strategic review (Board authorized on July 26, 2021) Other events Separation into two companies (Q122) GECAS sale expected to close (Q4 2021); Ongoing exit from O&G (2021-23) Decision on Security pending Investor Day (Dec 2021) Meggitt Shareholder vote (Sept 21, '21) Automation Fair (Nov 10-11 '21) 18 August 2021 6 Barclays | U.S. Multi-Industry Sector Performance: How did the companies / stocks perform over the most recent earnings season? FIGURE 2 Q2 21 Earnings Heat Map ALLE APG CARR CFX DOV EMR ETN FLOW FTV GTES GE HON IR ITW JCI KMT LII MMM NVT OTIS PH PNR ROK ROP SWK TT VNT % 'Green' Price Perf. Relative to S&P Price Perf. Absolute Green = Outperf. S&P* Red = Underperf. S&P* *During Earnings Period Green >0% * Red <0% * *During Earnings Period 67% 78% Y-o-Y Organic Growth in Q2, compared to Q1 Y-o-Y Gross Margin Perf. Y-o-Y EBIT Margin EPS Guidance Growth in Q2, compared Y-o-Y EPS Growth in Q2, Raised / Lowered to Q1 compared to Q1 / Reiterate Grew Capex Y-o-Y Beat Barclays Beat Barclays Estimates on Op. Estimates on Sales Profit Beat Barclays Estimates on EPS Green = Accelerated Red = Slowed Blank = Flat 96% Green = Expanded Red = Compressed Blank = N/A 78% Green = Accelerated Red = Slowed 59% Green = Accelerated Red = Slowed Blank = NA 70% Green = Raised Red = Lowered Blank = Held / Initiated / Withdrawn 81% Green = Raised Red = Lowered Blank = Same 70% Green = Beat Red = Missed Blank = In-line Green = Beat Red = Missed Blank = In-line Green = Beat Red = Missed Blank = In-line 68% 63% 81% Source: Barclays Research, Bloomberg, Company Data 18 August 2021 7 Barclays | U.S. Multi-Industry ALLEGION ALLE Stock Rating OVERWEIGHT Industry View NEUTRAL Price Target USD 176.00 Price (17-Aug-2021) USD 140.09 Potential Upside/Downside +25.6% 18 August 2021 Recent Key Reports: ALLE: Greenfield non-resi starting to turn; Margin headwinds likely temporary; July 22, 2021 ALLE: Upgrade to OW; Top-line outlook improving; Conservative ’21 guide; April 6, 2021 General What does the company use to track the next 6-12 months’ outlook in end-market demand? Clearly conversations with customers are important, but given that ALLE products are installed late into a construction project’s life-cycle, does management have more forward looking reports that are tracked? Management commented that the non-residential backlog is at record levels exiting Q221 (including commercial backlog in the Americas at double normal levels), after falling to a 3-year low in late 2020 – when is this expected to translate meaningfully to revenues? ALLE experienced a rather sluggish recovery following the last downturn, taking >5 years for sales / EBITDA to return to prior peaks. How fast a recovery should we see this time? Is the company seeing any difference in behavior post-Covid (pricing, uptake of postCovid remedial solutions, budgetary pressure) among its customer base depending on vertical (Multi-family residential vs. Office vs. Hospitality vs. Retail, et al.) or geographic region? How are negotiations going with customers regarding the upgrades they are making to commercial buildings as a result of Covid-19 (touchless control, IAQ)? Is there an opportunity for the company to benefit from these? What opportunities is Covid creating sales wise in terms of the increasing focus on contactless access control, thermal imaging, etc.? Could there be substantial mediumterm tailwinds from these trends? How does management think Covid is affecting, and will affect, the demand for Residential Security structurally / in the next few years, assuming more ‘work from home’ in general in the US? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding stimulus in Education for instance, or corporate tax rates? How confident is management that it can offset higher cost inflation with pricing, and how have its practices on pricing improved in recent years? Should we expect electro-mechanical lock growth to return to a +DD for the mediumterm (similar to the growth rate over 2016-2018) or could it slow as penetration rises? Is pricing pressure increasing in electro-mechanical, due to new entrants / market maturity / e-commerce becoming a larger channel to market? Management in February 2021 noted that electromechanical locks could represent ~50% of revenues over the next 3-5 years – how did it arrive at this target? What implications is Covid having for the ramp-up of the electro-mechanical penetration rate? 8 Barclays | U.S. Multi-Industry 18 August 2021 How does electro-mechanical security penetration compare in different regions / market verticals globally? Latch raised more capital in early FY21 and will be investing aggressively…how interested is ALLE in moving into the services / subscription market? Does ALLE see a plethora of aggressive new competitors emerging, with more of an electronic / pure IT background? Does ALLE have to acquire constantly in order to stay ahead in the electro-mechanical arena, or does it have sufficient in-house expertise? How much of current investment spend is targeted towards IoT and electro-mechanical capabilities? What is the progress being made on the ‘ALLE Ventures’ initiatives? What are recent technologies that management views as disruptive, and worth either a partnership or outright acquisition? Does the rise of electro-mechanical locks mean that R&D will need to be elevated and / or increase (from ~2% of sales), or is the majority of the investment step-up behind us from an electro-mechanical standpoint? ALLE tends to prefer ‘open standards’ when dealing with the electro-mechanical world; what are the negative and positives of this approach? How is management assessing the strength of ALLE’s IoT and electro-mechanical offerings relative to peers? How does management assess the impact of AMZN’s ‘Amazon One’ product (launched in late 2020)? Does this present a threat to ALLE? Initial progress / uptake on AMZN ‘Key’ was underwhelming...Is the uptake improving? Are there any key areas of differentiation to call out between Schlage and other product offerings on the AMZN Key platform? ALLE’s technology was selected to be featured in the Amazon ‘Turnkey’ initiative (through Realogy, covered by Matt Bouley); is the impact of any single such partnership immaterial, or does this one in particular represent a positive trend for the company? Does ALLE see any implications from ADT’s partnership with Google, which was announced in mid-2020? In a ‘normal’ year, how many price increases does ALLE typically put through? Does the company have a target for how much of a price benefit the top-line should see every year? Is there a possibility that electronic locks become margin accretive to the overall portfolio (currently have similar operating margins but higher EBIT $, due to higher ASP $), maybe due to manufacturing efficiencies / lower investment needs? Is there any increase in competition at the low end of the Residential mechanical security market in the Americas...for instance from emerging market providers...what is ALLE’s strategy at this end of the market? Data seem to show a sharp rise in Chinese lock exports over the past couple of years – does this weigh on US pricing trends? Specification Writing has been frequently cited as a competitive advantage (particularly on the non-residential side); is there any evidence of lower end competition attempting to replicate this service? What market conditions would incentivize these types of competitors to make this change? 9 Barclays | U.S. Multi-Industry 18 August 2021 The company’s manufacturing base does not seem that highly automated – is there scope for more automation, or does the amount of engineering / specification work provide a major barrier to entry that means the degree of automation will likely remain low? Portfolio We have seen ALLE move a little more into the door space with M&A (such as GWA, Republic Doors) – how attractive is this market for ALLE; how does the sales growth and margin profile compare with its core locks / door opener business? Does ALLE have any appetite to broaden its exposure within the Security market, for instance into areas such as electronic monitoring, or expand into broader commercial building controls? On M&A, are there any larger acquisitions in the pipeline? ALLE has historically shied away from doing larger deals, while acknowledging that larger potential targets are out there. How does the company feel about the need for pure software / electronics M&A now relative to 18 months ago? Does it view it as more or less necessary than before? What has really been the primary ‘hurdle’ for doing a large deal, and what would cause management perspectives on that to change? Balance sheet / Capital allocation How much of future capital deployment should M&A comprise? Does the company need to do more electronic type acquisitions to ensure it is not left behind amid rising IT penetration in the locks / security market? The company is now below its target leverage range – would ALLE consider stepping up the buyback if it remains below this range, or is M&A always the priority? Americas Management noted that the Americas non-residential backlog is at record levels exiting Q221; looking past the +HSD non-resi growth in Q2 off a depressed Covid ‘comp’ year on year, what slope of Americas non-residential revenue recovery should we expect? How should it differ vs the recovery from the 2009 downturn? How does management assess the slope of ‘normalization’ within the Resi business, following outsized (70%+) growth in recent quarters? Can ALLE discuss how it sees the different sales growth rates of various US non-resi construction verticals over the next 12 months? How would ALLE characterize the recovery trajectory in the Institutional, Commercial, and Manufacturing sub-segments? What percentage of revenue is comprised of large institutional projects that can sit in backlog for multiple years (i.e., what % of revenue has the most visibility)? ALLE has cited that a potential structural headwind could be that building codes in the US converge / standardize, similar to those in Europe, creating simpler contracts that require less need for specification. Is there any evidence of this happening? What would be the signs that management look for? What is the update on the progress on the Lennar partnership? 10 Barclays | U.S. Multi-Industry How satisfied is management regarding the Americas ‘channel’ since ‘clean-up’ efforts in 2019? Were there any lessons learned that can be applied to other regional channels? The company has exceptionally high operating margins in the Americas (~29% EBIT margins in 2020) – is there really runway for this to move higher in the medium term? What are the levers behind any such further increase? How wide is the profitability gap between Residential and Non-residential sales? Which segment offers the most margin upside in the medium-term? Will there be a margin tailwind generated by manufacturing efficiencies once electromechanical locks comprise a more significant share of revenue? International ALLE consolidated its EMEA and APAC segments into one International segment starting in early 2021 – how satisfied is ALLE with the progress thus far? With the consolidation of EMEA and APAC into an International segment, Tim Eckersley (former head of the Americas region) was appointed as the head of the business unit. What elements of Mr. Eckersley’s ‘playbook’ from the Americas is he using to turn around the international business, and how will his strategy be different from his predecessors? Management described in early 2021 that it should see record margins in the segment in 2021, enabled by strong growth for higher margin electronic locks. Outside of mix shifts, how has early progress been in terms of margin expansion? Are acquisitions needed to push profit margins higher, or can the current portfolio / market share allow for a large margin step-up? How satisfied is ALLE with its manufacturing footprint in EMEIA, post the Turkey production facility close? Within APAC, the biggest markets today are Australia / New Zealand for ALLE...how well-positioned is ALLE in N Asia (S Korea, Japan), where security technology adoption can be faster than in the US / Europe? What is the strategy for China – what is ALLE’s market share in this country? 18 August 2021 11 Barclays | U.S. Multi-Industry API GROUP APG Stock Rating OVERWEIGHT Industry View NEUTRAL Price Target USD 24.00 Price (17-Aug-2021) USD 22.46 Potential Upside/Downside +6.9% Recent Key Reports: APG: Short-term margin, FCF pressure; MT EPS power of $2+; August 11, 2021 US Multi-Industry: APG purchases Chubb from CARR; A win-win transaction; July 27, 2021 APG Investor Day: Impressive margin potential, M&A opportunity set; April 22, 2021 APG: Takeaways from Meetings with Management; Guidance Update; December 13, 2020 APG: Self-help and M&A vehicle, at a low valuation; Initiate at Overweight; September 22, 2020 General What has changed, other than the more ambitious M&A approach, since APG was bought by J2 - how much of the operating management or approach has changed? At APG’s 2021 investor day, the company highlighted the aspiration to add $1bn / $150m of acquired revenues / EBITDA respectively, by 2023 – this implies the company pays ~9X for assets with 15% EBITDA margins. APG’s EBITDA margins are sub-12% at present and the company trades at ~10X NTM EBITDA, how does the company expect to buy higher quality assets at lower valuations vs its own? Within commercial buildings - does APG compete against the likes of JCI, HON or partner with them? In light of management’s focus on the ‘already built’ environment and on growing inspection work, how does management assess the company’s exposure to non-resi new construction activity? What are the company’s aspirations for this exposure over time? The Chubb business had problems while under Carrier ownership in recent years, with the main issues being low growth (the organic sales CAGR is ~500bps below that of APG in the 5-6 years pre-Covid), and low operating margins - what does APG intend to do differently? How does this business perform better under APG? Chubb’s operating margins are ~10% on our estimates (below that of APG overall) – where does APG see room for margin improvement at Chubb? The company has cited mix as one area of potential improvement – what exposures are more attractive / higher-margin within the current Chubb portfolio that APG aspires to grow? What kind of financial returns should we expect Chubb to generate in Year 3 or 5 postthe deals? How large are the cost / revenue synergies that APG can extract from this deal? How much investment is needed in the Chubb business, following a period of underinvestment under CARR/UTC ownership? After the recent Chubb acquisition, how long does APG need to ‘digest’ this and lower its leverage levels, before becoming active on the M&A front again? APG’s business historically was very US-centric...now its portfolio will be much more global in nature post-Chubb (30% in Canada & Europe sales, 10% in Asia) – how confident is APG management that it can run these overseas businesses well? 18 August 2021 12 Barclays | U.S. Multi-Industry 18 August 2021 How does APi’s non-residential commercial exposure compare with the institutional exposure in terms of size and business activity (i.e., weighted towards inspection or service)? Which sub verticals within Commercial/Institutional (i.e., retail / office / hospitality / school etc.) does APG have the greatest strength in? How does APG’s market share look within these markets and which ones is management targeting for potential share expansion? What’s management’s assessment/outlook of top-line growth among the eight endmarkets that APG splits its revenue into (life science, mechanical, infrastructure etc.)? Within Infrastructure in particular, what are the impacts we could see on end market growth from cuts to state and local budgets post Covid? In the September 2019 presentation, management laid out 2018-2025E CAGR for Fire Safety (+8%) and 2018-2022E for various infrastructure markets (water +8%, highway/street +6%, comm. +2%, electric +2%, pipelines +2%); have these assessments changed significantly post Covid? How do margin profiles vary by the Non-Resi sub verticals? How are these differences playing into the project selectivity efforts? At the 2021 investor day, management laid out 5 internal opportunities capable of driving ~$85m in EBITDA growth by 2023, largely independent of volume growth including: 1) improve mix by growing annual inspection revenues by 10%+(+$55-65m); 2) disciplined project / customer selection (i.e. contract loss rate; +$0-7m); 3) pricing opportunities (+$4-6m); 4) leverage SG&A / COGS (+$10-15m); 5) operational excellence (+$5-7m) – however, management only assigned a 50% probability to this opportunity as a whole – which of these levers does management view as the greatest opportunity for growth? Which of these seem more likely vs less likely? On the Q221 earnings call, management highlighted that the total company should produce ‘in excess of $800m’ of adj. EBITDA by the end of 2025, including $315-335m of contribution from Chubb; what top-line assumptions are embedded in this, and how much of the anticipated EBITDA growth is from volumes vs cost out? What is the timing of the ‘costs to achieve’ / restructuring charges associated with the Chubb acquisition? Management set out to halve its project loss rate in 2020 (from 1.5% in 2019) and fell shy of this goal, reaching ~0.8% in 2020, and is now targeting ~0.70% in 2021. How big of a margin tailwind was the reduction in project loss to margins in 2020 and what is the expected benefit for 2021? What gives management confidence in attaining 0.7% in 2021? Is there scope to push the project loss rate down further beyond 0.70%? As the project loss rate falls by ~10 bps, how big of a tailwind does that tend to be to adj. EBITDA margins? Recurring service has been a major focus for APG in recent years, with the goal of reaching 50% of revenue – what is the definition of ‘recurring service’? How is management driving this mix shift, and does APG’s strategy differ on this front across its segments and end-markets? How soon should we expect the 50% recurring service goal to be reached? What are some end market or geographic market adjacencies that the company views as attractive to enter both organically and through M&A? 13 Barclays | U.S. Multi-Industry What has enabled APG to gain market share from the likes of Simplex Grinnell (within Tyco / JCI) in recent years? How would management assess its market share across its various businesses? How is the integration of the acquisition of SK Fire Safety proceeding? Does this business overlap with the Chubb business and are there synergies between these two businesses in Europe? How do operating metrics in the US compare vs international operations (growth/margins/mix)? The company has said it intends to grow the top-line by expanding its channel presence – how does the company intend to go about this? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding stimulus in Education for instance, or corporate tax rates? It seems labor represents the largest portion of direct costs and this is typically ‘variable’ in nature – but we have also seen the substantive investments the company has made in developing its people (i.e., Chief Learning Officer, Leadership Development Center etc.); how does management think about this balance of managing costs while retaining / developing talent? Apart from labor, what are the main input costs and how does the company source its materials? Given the company’s acquisitive history and portfolio of smaller businesses, how does management centralize operations (if at all)? Are there shared operating systems or business practices across all businesses? What are the typical incremental and decremental margins of APG? Given the relatively low gross margin, how much scope is there for APG to leverage volume growth on the upturn? Can incremental margins ever reach 20%? Are there MT/LT growth targets by segment, or if not how does normalized/run-rate growth look by segment and relative to one another? APG has emphasized selectivity in its end-markets, focusing on the 'best dollar' instead of the 'last dollar', which has caused it to avoid price focused end-markets such as hospitality, retail, entertainment, and new construction for schools. Are there any other end-markets that APG is interested in entering or exiting, or is management satisfied with its current mix? Which end-markets tend to carry the highest and lowest margins? Regarding rising cost inflation, how quickly is APG typically able to adjust prices to pass on raw material inflation to customers, and to what degree are price ‘escalators’ built into projects? FCF conversion in 2021 is only ~70% of EBITDA – how confident is APG in returning to the 80% rate in 2022? Portfolio What is the value in having these three segments in the same company? Are there cross-segment synergies (on the cost side or selling side)? Is there a scenario in which it no longer makes sense to keep all 3 segments? 18 August 2021 14 Barclays | U.S. Multi-Industry 18 August 2021 How does management think about the ‘core’ businesses in the portfolio? What are the common attributes of these businesses? Is the Industrial Services segment ‘core’ to the portfolio (particularly in light of comments indicating the company does not plan to invest additional capital in this segment moving forward, and with its 2021 revenues falling sharply due to greater project selectivity)? APG has made some divestitures in recent quarters, how does management think about ‘fixing’ vs exiting assets? Management acquired SK Fire Safety in October 2020, with the goal of further expanding its presence in Europe with the help of the SK Fire Safety team, and the recent Chubb acquisition also helps to expand APG’s presence in the region. What regions in Europe does management view as most attractive? How does management assess the overlap / synergy potential between SK Fire Safety and Chubb? In addition to SK Fire Safety, APG acquired 3 other businesses (2 in Safety Services, 1 in Specialty Services); what was the rationale behind acquiring these businesses? Management has traditionally paid 5-6x EBITDA for small, bolt-on type acquisitions, but paid a higher multiple for the most recent deals (~11.5x for SKF, ~13X for Chubb). Is this the ‘new normal’ we should expect for future deals, or were these two larger transactions (SK Fire Safety, Chubb) unusually attractive assets? How large is the pool of attractive targets at 5-6x EBITDA / how sustainable is it to target these types of multiples? How has APG’s M&A criteria changed over time? Per the criteria laid out at the 2021 investor day, margin expansion opportunity was absent vs the criteria laid out in the Sept. 2019 presentation – what sparked this change? Among APG’s acquisition criteria, experienced management, strong FCF, and a recurring revenue profile appear to be more of the focus for potential M&A targets vs. pure growth; is this a correct assessment? How low can top-line growth be at a target to render it as unattractive? What does the typical integration process look like for acquired companies? Does existing management typically stay on? What benefits do target companies get from becoming part of APG? How important are synergies when assessing a potential M&A target? In what areas does APG typically see/realize synergy benefits? What are some of the acquisitions in the past that management considers the biggest ‘successes’? What are some that in retrospect could have gone better? Clarify the interplay between Martin and Russ - how involved is Martin…what role does he play in M&A at APG? How does the board assess / benchmark the operating performance of management? What are the strategic priorities / financial metrics they focus on? The board currently has 9 people, based on the mandatory retirement age, Lord Paul Myners’ seat will be open in 2021– what characteristics does the board seek in a new member? Is it likely the seat will be filled or is it possible the board shrinks to 8 people? Jarden Corporation was ultimately acquired by Newell Rubbermaid; is the targeted ‘end game’ for APG likely to be a similar scenario? 15 Barclays | U.S. Multi-Industry Balance sheet / Capital allocation What is the ‘high-end’ leverage ratio the company is comfortable assuming alongside a larger acquisition? APG previously mentioned typical M&A targets are small family-owned businesses, how does this impact the M&A pipeline and management’s ‘bandwidth’ in assessing deals? How would management assess the health of the M&A pipeline following the October 2020 acquisitions, and the pending acquisition of Chubb (expected to close at the end of Q421)? Is this significantly different in Europe relative to the US? What financial returns should we expect from the acquisitions made over the last 12 months? 18 August 2021 16 Barclays | U.S. Multi-Industry CARRIER CARR Stock Rating OVERWEIGHT Industry View NEUTRAL Price Target USD 60.00 Price (17-Aug-2021) USD 55.15 Potential Upside/Downside +8.8% Recent Key Reports: US Multi-Industry: AHRI HVAC June Data: Sell-in slows (Implications for CARR, JCI, LII, TT); August 12, 2021 CARR: Encouraging cost management; Portfolio change underway; July 29, 2021 US Multi-Industry: APG purchases Chubb from CARR; A win-win transaction; July 27, 2021 US Multi-Industry: HARDI HVAC Data: +20-25% growth in June Resi sell-through (CARR, JCI, LII, TT); July 29, 2021 US Multi-Industry: Transport Refrigeration – June Builds up 28% y/y, TTM Orders appear to have peaked, per ACT prelim. data: Implications for CARR and TT; July 20, 2021 US Multi-Industry: Maersk MCI reefer divestment process; CARR, TT potential implications; June 11, 2021 US Multi-Industry: US Education Stimulus Implications: HVAC, Access Control, and Building Controls; March 24, 2021 18 August 2021 General Around 18 months since the spin-out, what are the main areas that management feels CARR has the most work to do to improve as a stand-alone public company? One of the reasons for spinning out was to allow CARR to focus on its top-line growth more – where does CARR think it is taking share at present, and what are the biggest opportunities for it to take share in the medium-term? Having announced the sale of Chubb, does management now view all aspects of the current portfolio as ‘core’? Is there any aspiration to continue to shift towards being a pure play HVAC company? Two of CARR’s large Applied HVAC competitors are very actively trying to push up their Service content and attachment rates… where does CARR think it is in making progress on this front? The Carrier 700 program is now around ~50% of the way through its savings…how is the program playing out relative to expectations…the program has already been increased by $100m since inception – could we see another increase and / or an extension of the program beyond 2022? How much of the gross savings from ‘Carrier 700’ targeted through 2022 should drop through into EBIT (after the impacts of inflation, re-investments, et al.)? Over 50% of the original $600m in gross savings (now $700m) were due to accrue from supply chain savings; what areas in particular or product categories is Carrier aiming to ‘squeeze’ the most in order to attain these savings? What are the largest cost items within the supply chain? Some investment spend is being pulled into 2021 from 2022 – what is the risk that the investment spend in 2022 ends up being raised as well, as CARR seeks to ‘catch up’ with peers? Where is the ‘pulled forward’ spending being focused in 2021? 17 Barclays | U.S. Multi-Industry 18 August 2021 How much catch-up re-investment spend is needed to recover lost market share, and how much will these hurt profit margins for the next year or two? How are negotiations going with customers regarding the upgrades they are contemplating making to commercial buildings as a result of Covid-19? CARR has sized the IAQ opportunity as a $9-10bn market – what was the reasoning behind this figure? TT is seeing a 2% incremental growth tailwind from IAQ at present – is CARR seeing similar? Is the company seeing any difference in behavior post-Covid (pricing, uptake of postCovid remedial solutions, budgetary pressure) among its customer base depending on vertical (Multi-family residential vs. Office vs. Hospitality vs. Retail, et al.) or geographic region? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding stimulus in Education for instance, or corporate tax rates? Can management expand a little on CARR’s ‘Healthy Buildings Program’ which it recently launched? What differentiates this offering from those of the company’s commercial HVAC peers? How does management think Covid is affecting and will affect the demand for Residential and F&S and HVAC products structurally / in the next few years, assuming more ‘work from home’ in general in the US? Has Covid changed the company’s assessment of its Security products portfolio given the increasing focus on contactless access control, thermal imaging, etc.? Could there be substantial medium term tailwinds from these trends? JCI and TT have large Controls businesses…Carrier has a Controls business within F&S – does it think this is large enough, or is there a major sales synergy to be gained from bulking up in building automation / building management controls, and bundling it with Fire & Security and / or HVAC? Sales are guided to grow at a mid-single digit pace for the medium-term – does this embed market share gains? What does it embed for pricing? What has changed and is changing in the Carrier Operating System, relative to the UTX ACE system? Carrier is targeting 50bps of operating margin expansion per year once the initial headwind from re-investment passes – what does this embed for price / cost, and base volume operating leverage? When thinking about the impact of mix on CARR’s margins, what are the main factors we should bear in mind when looking ahead (for instance, China’s sales rebound likely had a negative mix effect on margins in the 1H 21)? Carrier claims it has re-invested for 3+ years - where are the areas where it is reaping the market share rewards from this re-investment? CARR has discussed on earnings calls the need to spend on automation…how much scope is there to increase the productivity more broadly, and automation content specifically, of CARR’s plants globally? How should we think about medium-term growth outlook for equity income relative to the rest of Carrier? 18 Barclays | U.S. Multi-Industry What should the tax rate be in the medium-term (the 24% tax rate guided for 2021 is above the Multi-Industry average)? Services are 30% of Carrier sales – how quickly can Carrier expand this share? What is the optimal share of sales that could accrue from Services in the long-term? Across the three segments, how should they rank in terms of the scope for organic sales growth and operating margin expansion in the medium-term? Which markets does CARR think will be most / least affected from a structural (rather than cyclical) standpoint by Covid-19, in terms of headwinds and tailwinds? Any nuances here to note from a geographic standpoint? Carrier has fallen behind certain peers in Asia / broader emerging markets (particularly in HVAC and Refrigeration) – what is it doing to try and improve its position in these regions? Regarding AFFF liabilities, CARR recently disclosed that it has been cited in ~1,300 cases (Q2 2021 10-Q, vs 900 in Q121)…what key milestones / cases should we look out for in terms of the sizing of its liabilities? How does Carrier expect the clean-up costs / overall liabilities to be split between the upstream suppliers of PFOA / PFAS chemicals (such as MMM), vs the mid-downstream users of the base chemicals (such as Carrier)? What are the differences and similarities that Carrier sees between asbestos liabilities historically, and what is likely to happen regarding AFFF / PFOA / PFAS liabilities? Does CARR see any AFFF liability implications of Michael Regan running the EPA, or of the Biden administration’s position on PFAS more broadly? Portfolio / M&A The Chubb sale increases CARR’s HVACR exposure to ~85% of total revenues (vs ~75% prior) – does the company still view the remaining F&S product assets as ‘core’? What share of revenues does the company aim for the HVACR business to comprise over time? How keen is CARR to undertake ‘Digital’ or software M&A deals? How core is commercial refrigeration to CARR? What are the pluses and minuses of this business / industry? On portfolio simplification, CARR executed on the full Beijer stake sale in late 2020…there are still 55+ JVs and partnerships – how much of a priority is it for CARR to rationalize this number, and how quickly could we see this number come down? How confident is CARR in its ability to integrate acquisitions, given it has not done consistent M&A for over a decade – in which segments or markets should we expect M&A to be concentrated in, if any? What constraints does the tax-free nature of the spin of Carrier place on any future M&A / divestments activity (in terms of asset sales / spin-offs / MoEs / RMTs, et al.)? Trane mentioned that share gains among the major HVAC OEMs may make large-scale (top 5) consolidation very difficult from an anti-trust perspective – does CARR agree with this assessment? 18 August 2021 19 Barclays | U.S. Multi-Industry 18 August 2021 If Carrier saw two of its major HVAC peers merge, would it feel pressure to also undertake large-scale HVAC M&A to ensure that it can compete effectively in the long term? Is it fair to assume that future M&A would focus on Commercial buildings rather than Residential markets? In terms of M&A, is Carrier more interested to expand in its core markets (including Marine Transport), or more into adjacencies such as Access Control? Balance sheet / Cash flow / Capital deployment On capital deployment, CARR has raised its dividend and initiated a small buyback – how keen is the company to resume M&A, or are shareholder returns a bigger priority for excess cash? What is the target medium-term / through-cycle balance sheet leverage level? What are the cash costs of the restructuring measures (relating to the ‘Carrier 700’ savings) and how will they trend each year in 2021 / 2022? What measures will Carrier take to improve cash conversion at the non-consolidated entities? How does cash conversion compare at ‘core’ Carrier vs the non-consolidated entities? Will consistent 100% FCF conversion ever be possible (guidance is for 90-100% in the medium-term), or do the pension income in the P&L (several hundred bps headwind to conversion) and the JV income / cash delta (several hundred bps headwind to conversion) preclude this? Capex was $312m in 2020 (1.7% of sales) and is guided to rise modestly in 2021 (to $375m)—how should it trend in the medium term? Working capital is cited as an area of improvement for FCF conversion – what steps are being taken? Where does Carrier think its working capital management is inefficient relative to industry peers? How should we expect the dividend to grow relative to earnings in the medium term? How are the discussions with the credit rating agencies going? As Carrier continues to de-lever (~2.3x at end-Q2 2021, and likely less than 1X post Chubb sale), would M&A or buybacks be the preferred use of cash as optionality increases? Fire & Security What is primarily inhibiting growth in Fire & Security (minimal sales growth over the last several years, in common with many industry peers)? Are there more structural or cyclical factors to blame? On the Product side, how intense is pricing pressure? In which product categories is pricing pressure more or less intense? How does Carrier cope with the rise of emerging market based manufacturers in Products (such as HikVision, et al.)? Does the company see any major implications from the GOOG-ADT partnership announced in mid-2020? 20 Barclays | U.S. Multi-Industry 18 August 2021 Residential markets only represent 12% of sales—how attractive are these markets? How does their profitability compare with the rest of the segment? Why do F&S Residential markets appear tougher for Carrier to thrive in, than the Resi HVAC markets? HVAC Controls are allocated to this business (given the electronics content in Controls and in this segment); how much overlap is there between HVAC Controls and F&S in sales terms? Do the F&S sales teams sell the HVAC Controls? How large is the controls business, and what is its profitability level? Carrier sounds interested in expanding its position in the Access Control market – to what extent does it partner or compete with established players such as Allegion or Assa Abloy? Within Access Control, Carrier claims 60% of its sales are Digital – what exactly does it offer here? Who does it sell to – internet service providers / building operators / commercial vs residential? Carrier is increasing its R&D by 10% / year in F&S – what are the target areas for this investment? HVAC How does management assess the path to ‘normalization’ of growth in the Resi HVAC business? How likely is there to be a pending ‘air pocket’ of demand? What steps will Carrier take to try and realize its ambition of becoming #1 in Applied HVAC, against #3 today? How willing is Carrier to use pricing as a weapon in order to grow its Applied OE or AM market share? How, and how quickly can Carrier increase its post-warranty service attachment rate in large HVAC (currently ~25% against HVAC peers at 50%+)? The company in early 2021 announced the acquisition of a majority stake in Giwee / Chigo in China – how strong a presence will this give CARR in VRF markets? What are the sales, sales growth and margin profiles of this asset? What is the state of the VRF relationship with Toshiba? How satisfied is Carrier with the Watsco relationship in N America? Carrier has mentioned the scale of the regulatory drivers behind a huge product refresh (which largely needs to occur by 2024) – what impact will these changes on industry demand in the medium-term, and on pricing in the industry? How much pressure will these regulatory-driven investment needs place on Carrier margins? Looking to 2022, does the company worry that we are late in the Residential replacement cycle in the US, or does it think that growth in the Resi HVAC market overall including new build can still reach a mid-single-digit level next year? Does the company anticipate much ‘pre-buy’ in US Resi HVAC in 2022, ahead of the next SEER change in 2023? Where does Carrier think we are in the US Resi HVAC replacement cycle? Does it see any reason why a ‘cliff’ would be imminent? 21 Barclays | U.S. Multi-Industry How much of the ‘Carrier 700’ savings will be booked in HVAC; how much of these savings will fall within Commercial vs. Residential HVAC? What is the operating margin differential between Commercial and Residential HVAC? Refrigeration Commercial refrigeration is an area that many peers have struggled in and largely given up (LII, TT); why does Carrier think it can win in this market? What medium-term growth should we expect to see in Commercial refrigeration? In Transport, TT’s ThermoKing brand has made a big push into APUs, and also into markets such as rail, bus and air freight, beyond the traditional container and truck reefer markets – how well positioned is Carrier in these other markets? The ‘cold chain’ is a concept which peers such as JCI and TT used to highlight, but they appear to have given up on it – why is this? What value does Carrier think it can really derive from its breadth of offering across the ‘cold chain’? Refrigeration accrues a high share of its sales from the EMEA region, at >40% (vs the rest of Carrier at 25-30%)—how efficient is its cost base in the region? Does this high EMEA sales exposure weigh on operating margins? What wide is the operating margin differential between Commercial and Transport refrigeration? Marine Container comprises 20-30% of Transport Refrigeration revenues – what is the profitability like in this business vs NA Truck & Trailer, Europe Truck & Trailer? 18 August 2021 22 Barclays | U.S. Multi-Industry COLFAX CFX Stock Rating UNDERWEIGHT Industry View NEUTRAL Price Target USD 44.00 Price (17-Aug-2021) USD 48.30 Potential Upside/Downside -8.9% Recent Key Reports: CFX: Weak MedTech profitability, peaking ESAB top-line trends; July 29, 2021 CFX: Downgrade to UW; Spin limbo likely, FCF and cycle questions for 2022; April 6, 2021 CFX Investor Day: Positive Q1 comments; MedTech FCF remains opaque; March 11, 2021 CFX: Separation announced; Queries on the growth outlook; Spin limbo likely; March 4, 2021 General What was the rationale behind announcing the separation into two companies in early 2021? Why not wait until MedTech had more scale? Was the timing of the split news partly because the bounce in share price meant that equity could be issued (twice now, in just six months) to de-lever the balance sheet quickly, and hence MedTech didn’t need the bigger revenue scale in order to be standalone? The company has now issued equity twice in the last 6 months to fund debt paydown and M&A within MedTech – how is the MedTech business expected to fund its own operations / M&A post separation? Will equity issuance be a regular source of capital for the M&A post separation? What does the M&A pipeline look like beyond the Mathys deal? Is there bandwidth to do more deals prior to separation? In the Q221 slides management highlighted the opportunity to execute on accretive acquisitions within ESAB – how does the company prioritize M&A between the two businesses ahead of the spin? MedTech has seen low incremental margins in upturns and high decremental margins in downturns over the past two years – why is this? What is being done under CBS to change underlying business processes to improve incremental margins? Where does the company view the run-rate incremental margins for each business post the pending separation? Why are FCF margins so low, given where FCF margins are at peers (ITW), and the application of CBS? FCF conversion is guided to exceed $275m in 2021 (>85% conversion vs adj. NI); what are the main drivers of this improvement? Is there runway to head towards 100%+ in the long-term—why would FCF stay below 100% of earnings (why wouldn’t earnings and cash flow approximate over time)? How different are the FCF dynamics between the two businesses at present, and how are the major sources / uses of cash expected to change post-separation? How does management think about where FCF margins should be in the long run (they have peaked at a mid-single-digit level in recent years) for both businesses? Does management see any significant potential impacts for either of the two separate companies from the policies of the new Administration in the US – regarding infrastructure stimulus efforts for instance, or corporate tax rates? 18 August 2021 23 Barclays | U.S. Multi-Industry 18 August 2021 Management seem confident in their ability to offset input cost inflation within FabTech with additional price in 2021 – how does management assess this dynamic within MedTech? What was the net price / cost impact over 2017-2018 in DJO? Does CFX believe it will be able to offset any such headwind when the two platforms are standalone? Balance sheet / Capital allocation What was the rationale behind the recent equity issuances? How keen is CFX to undertake additional M&A (in addition to Mathys) prior to the separation? Management have communicated that ESAB will be 2.5-3X levered post separation, implying ~1X leverage at MedTech - what is the appropriate leverage ratio / capital structure for these two businesses longer term? How should we think about the dividend payouts at ESAB vs MedTech? What are the financial criteria for M&A in ESAB vs MedTech? Fabrication Tech Price is guided to be an 11% tailwind to organic growth in FY21 (as of Q221), how is this expected to trend into 2022? ESAB is targeting MSD core growth over time but the long term core growth rate over time (in the 5-10 years pre-Covid) has been 0-1% - is the expected acceleration in core growth set to be driven by end-market acceleration, or by market share gains at ESAB? What are the main growth ‘Accelerators’ that ESAB is implementing? ESAB has talked about Digital Solutions, 2nd Wave robotics and Medical & Specialty Gas Control as being segments that can grow 6-8% annually…what is CFX’s revenue exposure / what are its plans in these areas? 50% of sales are in emerging markets…how does profitability differ vs developed markets? In China, it is #1 among global players – what is its ‘all-in’ position? ESAB is #3 in N America – what can it do to increase share domestically? FCF conversion is targeted at 100%+ long-term…why has FCF conversion been so volatile in recent years (70% in 2018, 90-100% in 2021)? What are the main levers in pushing adjusted EBITDA margins from 17%+ in 2021 to 20%+ in the long-term? What are ‘normal’ incremental margins in FabTech? Management previously communicated FabTech could see low-40%’s incremental margins in this upturn, offset by ~10pts of growth investments; gross margins in this business are ~35%; what gives management confidence that incremental margins exc-investments could be that much higher than gross margins? Consumables are ~69% of sales – is this the right ratio longer-term? Q2 21 marked the highest organic growth y/y that the ESAB business has ever seen (+44% vs prior high of +11% in Q4 18) – in light of current pricing, end-market trends and inventory levels, how does management assess the slope of ‘normalization’ within this business? 24 Barclays | U.S. Multi-Industry 18 August 2021 Med Tech The DJO / MedTech business had 22% EBITDA margins in 2019 vs the 2021 guide for core MedTech margins of 20%+ - what are the learnings from the DJO integration and the path to getting Mathys margins up? Why are MedTech operating margins lower in 2021 than in 2019, despite higher sales? How does the regulatory environment in Europe compare with that of the US? Does the MedTech business have the infrastructure in place in the region to operate the Mathys business effectively and develop new products? How does the growth outlook for the extremities market look relative to shoulder / knees? How do the competitive dynamics in this market compare with the current markets CFX competes in (i.e., level of concentration; salesforce go to market, et al.)? Reconstructive and Prevention & Rehabilitation saw similar growth in Q2 21 - how is the top-line recovery likely to differ between these businesses? What are the main drivers of demand in each business, and what share of P&R revenues are tied to Reconstructive? What are the main levers in pushing adjusted EBITDA margins from ~18% in 2020 to 25%+ in the long-term? What is the gross margin profile / operating margin profile of Reconstructive vs. P&R? What should operating leverage be longer term? Management have cited product vitality within Reconstructive / P&R was 30%+ / 7% in 2018, and expects these to be 30%+ / 20%+ in the future – does this mean the company will invest more heavily within P&R? How does the company expect to maintain its positioning within Reconstructive without investing heavily in new products, particularly against the likes of the Stryker and Zimmers of the world? How is the rollout of clinic workflow solutions (MotionMD) progressing? What is the current penetration rate and what is the longer-term opportunity? How is management planning to monetize the fuller suite of offerings? How has Covid accelerated the transition of procedures towards Ambulatory Service Centers (ASCs; i.e. outpatient treatment centers)? How is the MedTech business positioned to take advantage of the ASC transition vs the larger competitors? Will the company be able to maintain / grow this positioning over time if the larger competitors pose an increased risk in the Hospital system environment (i.e. as systems move to increasingly concentrated supply agreements)? Does MedTech need a robotics solution to be competitive in the Hospital system environment? As the company thinks about adding small footprint robotics platforms, is the preference to develop in-house, inorganically, or a combination of the two? Is management more excited about the growth opportunities in the Reconstructive, or Prevention & Rehabilitation parts of the business? What is pricing pressure / power like at DJO? What are the key input costs associated with the business? Is there risk to pricing associated with Healthcare reform and how should we think about the potential impact of that? What competitive advantages protect DJO’s position in the surgical implant market? 25 Barclays | U.S. Multi-Industry How does Stryker’s entry into the Reverse Shoulder market via the acquisition of Wright Medical impact the competitive landscape? How does management think about the core businesses of the Medical portfolio moving forward? Is everything in the business at present considered to be ‘core’? 18 August 2021 26 Barclays | U.S. Multi-Industry DOVER DOV Stock Rating OVERWEIGHT Industry View NEUTRAL Price Target USD 185.00 Price (17-Aug-2021) USD 173.02 Potential Upside/Downside +6.9% 18 August 2021 Recent Key Reports: DOV: Execution, discipline likely to matter more, as industrial growth slows; July 20, 2021 DOV: CEO, CFO Virtual Meeting - Strong finish to 2020; Upbeat tone on margin runway, FCF expansion; December 20, 2020 DOV: Fueling Solutions Virtual Meeting; VNT Implications; November 19, 2020 DOV: Hygienic & Life Sci showcased; Co trending towards high-end of guide; September 14, 2020 General How does the slope/shape of this recovery likely compare with prior recoveries? How does management assess the path to ‘normalization’ following outsized growth in the Q221? How clear is the path to 20% segment EBIT margins in the medium-term from the 16% level seen in 2020? Which segments should drive the majority of the uplift to get DOV there, and firm-wide, are the levers more around SG&A or COGS reduction? DOV is guiding for 25-35% conversion or incremental margins in 2021 firm-wide – this includes $50m in net productivity tailwinds…is this type of operating leverage sustainable for the medium-term? What impressions does Mr. Tobin have of the degree of operating margin upside that is possible or desirable at DOV, with the COGS right-sizing and SG&A reductions having been underway for some time, assuming the current portfolio remains intact? How are margin expansion efforts at Fueling Solutions and Food Retail progressing? How much of the operating margin gap vs. peers (such as in Fueling Solutions vs. VNT, or in Imaging & ID vs. DHR) is ‘structural’? How confident is management it can offset higher cost inflation with pricing, and how have its practices on pricing improved in recent years? In terms of IT infrastructure efficiency, DOV is taking out $25m cost over 20202021…how much more runway is there from initiatives such as this? In terms of reducing the manufacturing inefficiencies that have been a common problem for DOV in recent years, in various businesses (most recently at Fluids) – what is viewed as the low-hanging fruit, and what will be tougher to change? Where are we right now in the roll-out of Dover Business Services, in terms of improving back-office efficiency? There is >$15m of cost reduction through 2021 from Finance efficiency – is there more room to go in 2022+ from such measures? How confident is Mr. Tobin that he has the right senior leadership in place today? Mr Tobin abolished the segment head structure in 2019 amidst a re-segmentation – what are some of the improvements that DOV has seen since then and is the resegmentation having the desired effect? DOV has around 18 operating units now, down from 35 a decade ago – is the company’s structure sufficiently simplified, in management’s view? 27 Barclays | U.S. Multi-Industry DOV has talked more about Digital and e-commerce capabilities recently. What are some of the practical examples / applications of this, and which are the most successful at present in driving up sales? How much capex is needed to upgrade the manufacturing productivity of the company, or is capex at a normal run rate in 2021 and beyond? FCF margins are guided to be flat to down 200bps in 2021 due to capex and working capital, to 12-14% of sales…what is the medium-term level of FCF margin DOV can achieve – can it move up by several hundred bps from this 12% level, and exceed the 14% level in 2020, if operating margins keep moving up? In late 2019, DOV talked about four areas of focus for operational improvement – Footprint, Automation, Continuous Improvement, and Performance – where do we sit today in terms of the progress in each, and which of these could be most impactful in delivering earnings improvements over the next 12-18 months? Services and software are 8% of sales and consumables are 11% of sales – where could these ratios reach in the medium-term, assuming desirable portfolio changes? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding infrastructure stimulus for instance, or corporate tax rates? Is the company re-organizing any of its global supply chains in light of Covid, et al.? Portfolio One of the characteristics of portfolio transformation that Mr Tobin highlighted at the investor day in late 2019 was the less cyclical nature of DOV’s portfolio – how satisfied is management with DOV’s performance in the 2020 downturn, and the recovery in 2021, in this respect? Does management see much upside potential to the equity value of DOV, on a SOTP basis? Does DOV think the stock is getting sufficient credit for the greater transparency in the company today? Peers such as Lennox and TT sold their retail refrigeration businesses over the past few years. How much more time is management willing to spend in order to keep trying to turn around Refrigeration & Food Equipment, where EBITDA margins are still well below the other 4 segments? DOV has not been afraid to exit large assets, such as Knowles and Apergy. What are the synergies of having the five current segments all within the same portfolio? Does management have a clear sense of what type of assets it thinks should belong within DOV in the long-term? R&F accrues only 10-15% of sales from recurring & replacement activity – is this a typically desirable sales mix, from management’s standpoint? Balance sheet / Capital allocation DOV’s track record on M&A is fairly mixed over the past couple of decades. Does DOV have the ‘right’ to do much M&A presently (deals larger than Belanger)? Is there a risk that stepping up to do more M&A right now would distract from the operational improvements underway? 18 August 2021 28 Barclays | U.S. Multi-Industry 18 August 2021 DOV is targeting a ROIC of 10%+ from M&A by Year 3 – how easy it is to find acquisitions that fit this criterion given the current elevated public market valuations? There is the stated aspiration to do Software M&A – can these really hit the 10%+ ROIC goal by Year 3, given public and private (FTV-ServiceChannel, ROK-Plex, ROP-Vertafore, EMR-OSI, HON-Sparta) recent valuations for software assets? Is there any ambition to add a 6th segment at some point, or DOV will stick with its current areas of M&A focus (Fluid Handling, Hygienic & Pharma, P&ID, Precision Components, Software)? What is the size of deals within the M&A pipeline (historically deal sizes are ~$100m)? Are there any large deals being considered? Is it mostly bolt-ons, or is return profile the only focus, with the search being irrespective of deal size? What would be an example of a ‘strategic’ deal worth going up to 3.5X leverage for? Which segment’s product portfolio would make the most sense to expand? How would DOV characterize the M&A market and its pipeline at present? What are the most attractive areas for capital deployment today (presumably not in Refrigeration)? How attractive is M&A relative to buybacks today? Imaging & Identification What does the recovery slope in the Textile business look like following the Q2 21 bounce, and what is the medium-term growth rate in the Textile business, where margins collapsed in mid-2020? Digital Printing has historically been one of DOV’s fastest growing businesses; are there opportunities for consolidation or increased organic investment to scale up this business? How fragmented is the market place here? How is DOV positioning itself in Digital Printing vs traditional Marking & Coding? How does DOV view itself in terms of positioning against DHR? Does it think it can outgrow DHR? How is DOV differentiated in this market? Engineered Products When thinking about Engineered Products at Dover – what are the one or two attributes / brands that management wants investors to focus on, given its disparate business mix? Waste management and Auto AM repairs are each one third of sales...is this a desirable sales mix? DOV has the #1 or #2 market position in every sub-segment; what technology / structural drivers does the company need to invest in, to sustain these leading positions? How does DOV assess the recovery slope / outlook for its municipal spending / waste collection exposed businesses? Management mentioned that some cost actions may be necessary, have these taken shape? What is the ‘spread’ on operating margins across the different assets within EP? EP has a very diverse portfolio still – is there any reason why the stable of brands will be intact in 5 years’ time? 29 Barclays | U.S. Multi-Industry 18 August 2021 Where is management prioritizing market share gains / R&D / investments to drive growth? Fueling Solutions DOV has sized the 2021 NA EMV revenue headwind at less than $50m, vs VNT at $75100m, despite both holding the view that penetration is ~70% at present – what are the differences in revenue mix that might explain this delta? In terms of the US EMV shift, DOV noted ~70% penetration at year-end 2020, and expects an incremental 20-25% in the following years. How much of this ‘tail’ is likely to occur in 2021 vs. thereafter? DOV has essentially ‘neutralized’ the 2021 EMV headwinds with inorganic investment, is this a segment management intends to deploy capital to more actively for inorganic investment? What adjacencies are most attractive in this segment? Within retail fueling, is the China revenue headwind from double-wall tank now behind it? How would management assess the outlook for the China business in the mediumterm? Which regions is DOV prioritizing to drive growth? Post the EMV liability shift in the US, management pointed to regulatory tailwinds in emerging markets. How big are these opportunities, and over what time frame should we expect these opportunities to materialize? Within retail fueling, what is the margin differential between the dispensers and the ‘kits’ (dispensers have a much higher ASP, is this commensurate with the margin profile)? What is the margin differential between different types of dispensers? Management noted in November 2020 that a significant proportion of margin expansion to date has been related to synergies from M&A, with future margin upside more tied to business mix. Given the higher margins in Systems & Software (14% of FS 2020 sales) and Aftermarket Parts and Services (14% of FS 2020 sales), how high of a share of mix could these comprise long-term? Within retail fueling, are there any major differences in terms of margins across geographies? In retail fueling, what kind of risk does DOV see in the long term from the rise of electric vehicles? The company partnered with ABB to enter the EV charger market; how large of an opportunity could this be for DOV, and how quickly can it be scaled up? Is management open to more partnerships in the EV space, and how satisfied is it with its position in the EV world? OPW Vehicle Wash (~$100m+ in revenue, >$2bn TAM by 2030) is viewed as a favourable opportunity given consumer demand trends, the potential for improving operator economics, and accelerating demand for automated car washes. Is management satisfied with its current portfolio, or is it considering further M&A in this space (perhaps to expand its software and access solutions offerings)? Pumps & Process Solutions Why is this market viewed as so attractive, when many Pumps manufacturers struggle to earn high operating margins – how does DOV differentiate in this field? 30 Barclays | U.S. Multi-Industry 18 August 2021 In terms of sales mix, Hygienic & Life Sciences were 21% of 2020 sales…is this a natural area for DOV to expand inorganically? Given the double-digit growth rate DOV has seen in its Biopharma & Medical business ($200m in revenue) over the last 10+ years, does DOV plan on pursuing additional M&A in this space, or is it satisfied with its current portfolio (CPC, Quattroflow, Em-tec)? CPC’s revenue has grown ~4x over 2005-2020, with continued double-digit sales growth expected ahead. The company recently expanded in to Thermal (highperformance computing, data centers, EV infrastructure); how big of an opportunity could this be for growth ahead? What is the long-term desired business mix between biopharma / medical (75% of sales) and thermal & other (25% of sales)? DOV acquired Em-tec in 2020, citing opportunities to accelerate growth via access to DOV’s existing global sales channel and integrating Em-tec’s products with DOV pumps to provide better flow control and solutions to customers. How satisfied is management with the progress on this front to date? How quickly should Em-tec grow over the next several years? How did the O&G (17% of ’20 sales) and Industrial (36% of ’20 sales) businesses perform in the recent downturn in terms of volume declines and decremental margins? What are the expectations for performance through the current upturn? Is management satisfied with keeping them despite their cyclicality? 26% of ‘20 sales came from Plastics & polymers – which end-markets are key here? Adj. EBITDA margins are in the high-20%’s – is there still room to expand? Refrigeration & Food Equipment 2021 feels like a ‘big year’ for Refrigeration & Food Equipment to prove it deserves its place in the DOV portfolio – management have said they expect ‘material’ margin improvement within this segment; what kind of operating leverage should we expect in 2021 and 2022? ~70% of this segment’s sales are in Refrigeration, with the majority of this business serving big box retail / grocery stores...how have orders trended here recently? What is the through cycle growth rate outlook for this specific business? How worried is management that many of the growth problems here are structural vs. cyclical? Where does customer capex stand relative to replacement spending / depreciation levels right now in the US? How fast can footprint rationalization / overall restructuring take place in refrigeration? In a flat revenue environment, how much does the company think it can expand profit margins from their planned initiatives? What is the timing of when the company thinks the 15-16% EBIT margin goal can be attained in the retail refrigeration business? What is the impact on profit margins as the ‘wallet share’ of spend shifts to smaller format stores (more unique specification required)? The company has discussed the appeal of increasing its mix of sales (now 15-20%) from Food Equipment (‘hot’ business, relative to the ‘cold’ side / Refrigeration) for several years, but there has been no obvious measure taken to do this – does this mean that DOV no longer thinks such a shift (towards ‘hot’, from ‘cold’) is attractive, and if 31 Barclays | U.S. Multi-Industry not, why not? What is the margin differential between DOV’s Refrigeration, and Food Equipment, businesses? There has been some consolidation in Food equipment (The Ali Group-Welbilt); how appealing is this market to DOV to undertake M&A in? How core is ‘heat exchangers’ (~15% of sales; we have seen other companies exit this type of asset), and how high is its profitability vs. Refrigeration? 18 August 2021 32 Barclays | U.S. Multi-Industry EMERSON ELECTRIC EMR Stock Rating EQUAL WEIGHT Industry View NEUTRAL Price Target USD 98.00 Price (17-Aug-2021) USD 102.71 Potential Upside/Downside -4.6% Recent Key Reports: EMR: AS recovery may be dampened by O&G; Strong cost management; August 4, 2021 EMR: Management Meetings: Fresh approach, portfolio analysis, near-term demand strength; April 16, 2021 EMR: Investor Day and Jan. orders initial takeaways; February 16, 2021 EMR: CEO change announced; Thoughts on next steps; 2019 arguments may get re-heated; February 1, 2021 General Mr. Karsanbhai’s initial priorities as CEO revolve around changing the culture (more inclusive, more diverse), changing the portfolio (more software, sustainability), and executing operationally - how soon should we expect the outcomes of any formal portfolio review? Does the Board / management think that the company has too much O&G exposure, for a world where ESG considerations are increasingly prevalent, and given we have seen three severe O&G downturns in 10 years? Management seems clear that they think O&G spending has a negative long-term CAGR…but what mechanisms can EMR use to reduce this O&G exposure – divesting seems difficult as the O&G businesses are some of the most profitable inside the company? EMR anticipates C&RS sales growth of 5-7% over 2020-2023 vs 3-5% in AS; what explains the difference – is it largely structural tailwinds in HVAC vs structural headwinds in AS? Or simply the fact that C&RS is enjoying much higher growth in 2021 than AS? What share of the 2021+ restructuring savings are likely to be reinvested (particularly in Automation Solutions, in areas such as Service and Digital Transformation); what share of the gross savings from restructuring look set to be retained as net savings after factoring in base inflation, et al? Does management think that it is ‘under-earning’ in any of its main businesses, relative to peers? EMR at its 2021 Investor Day talked about a $2.4bn in sales ‘Software innovations’ business across the whole company – how does this overlap with the $750m Digital Transformation business? What is the growth rate of this business – high single digit growth is the aspiration – is that consistent with history? EMR targets 20% of total sales to come from software (vs 14% in 2020) – over what timeframe could this be reached? EMR classified its firm-wide ‘Data Management & Services’ sales as being worth $1.1bn in 2020, with another $1.6bn in ‘Control’ sales…what is the top-line growth and profitability difference between these two? What is the expected growth rate of the remaining $14.1bn in sales accruing from Devices / Instruments / Sensors? EMR targets ~24% adjusted EBITDA margins in 2023 vs. 21.5% in 2019 and 21.8% in 2020, implying ~$1bn of EBITDA growth over 2020-2023 – this includes headwinds of $500m in wage inflation and $200m in freight / other inflation headwinds, and $365m 18 August 2021 33 Barclays | U.S. Multi-Industry in tailwinds from price net of cost – does EMR still feel confident in these figures given the broader environment around inflation? How comfortable is EMR with its pricing power across the company at present? Are its competitors also pushing through price increases as they look to cope with the current environment? Does EMR expect to see much ‘on-shoring’ among customers into the US and W Europe? When would it expect to see this become meaningful, if ever? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding infrastructure stimulus for instance, or corporate tax rates? Portfolio If EMR looks to push to do more Digital-type M&A (OSI Inc.), while selling traditional hardware businesses, does it worry about the potential large disparity in valuations between the purchase and sale prices, and the impact of this on the company’s returns profile? Would EMR ever look to adopt a Schneider - Aveva style structure if its software assets attained sufficient scale (such that the listed software asset, majority-owned by EMR, could undertake software M&A at valuations similar to its own)? What are the pluses and minuses of this approach? Does management view there being much / any SOTP-based upside potential for the shares? How does management view its electrical equipment business (Appleton) in general – is it a potential exit candidate, or having expanded more into Utility markets with the OSIPower acquisition in 2020, is EMR also thinking about expanding more generally in electrical equipment into those markets? Are there pieces within Tools & Home that might be ripe for divestment? What are the sales and margins of the ‘Home’ portion of this business? Could we see Tools and Home each be sold / exited, or is one of them viewed as ‘core’, alongside Automation Solutions, and Climate? Does EMR think it can make its push into the data management stack of plant operations, without hiking its own R&D, and / or undertaking large software M&A? The acquisition of GE Intelligent Platforms a couple of years ago helped to bulk up AS’ PLC market share – does EMR envisage doing more PLC deals? How much investment is needed to reinvigorate the GE IP assets / how are they performing? Is EMR’s current push into Factory automation held back a little by its divestment of Drives and Motors in 2016...many of its Factory automation / PLC peers have drives and / or motors businesses (ABB, Mitsubishi Electric, ROK, Schneider, Siemens), so they seem to think there is some synergy. Balance sheet / Capital allocation How does EMR assess the attractiveness of M&A targets between AS and C&RS at present – does the C&RS higher medium-term sales growth rate render it more attractive as an M&A focus? 18 August 2021 34 Barclays | U.S. Multi-Industry EMR notes that it will retain its discipline on valuation when pursuing M&A – what does this mean in terms of financial / returns criteria for M&A? Does the valuation multiple paid for OSI (~23X EBITDA) represent a likely typical multiple that EMR would pay for large software assets? How large is the pipeline of potential M&A targets of this type? How does the company assess the M&A environment in automation at present...does Discrete or Hybrid or Process automation appeal most in terms of M&A? Automation Solutions How does EMR think this 2021-2022 revenue recovery (shape / slope) could compare with prior recoveries in 2017 or 2011? Is it fair to say this recovery may be slower / shallower than prior ones in process automation markets, due to the weaker recovery in O&G customer spending? EMR classified its AS ‘Standalone software & associated services’ sales as being worth $1.1bn in 2020, with another $1.4bn in ‘Control’ sales…what is the top-line growth and profitability difference between these two? What is the expected growth rate of the remaining $8.7bn in sales accruing from Instrumentation & Final Control? Standalone software & associated engineering services are $1.1bn in sales, with Embedded device & control software also $1.1bn in sales…how high are operating margins across these two pieces? EMR has highlighted that standalone software license sales are growing at a double digit CAGR – how large is this business? How is the salesforce being incentivised to grow the recurring share of these sales from 35% in 2020 up to 45% by 2023? How should we think about the AS order project funnel? How much is the backlog likely to expand in FY21, as KOB1 (large project) activity remains subdued? How different is the recovery outlook across KOB1, 2 and 3 activity at present? EMR sounds keen that KOB3 activity (MRO, aftermarket) should sustain a 50% share of AS sales through this upturn, rather than dipping down as project-type activity takes over...what steps are being taken to drive this? What type of penetration rate does EMR expect to see in its ~$123bn installed base over time, for its Digital Transformation business? How does the Digital Transformation unit bid for projects – alongside the Systems bids? With Instruments as well? Who does EMR view as the main competitors for its Digital Transformation business…are non-traditional automation suppliers - i.e., IT companies - becoming more and more visible in this area as competitors? How confident is EMR in attaining 300bps+ of adj. EBITDA margin expansion over 20212023 (to reach 24% by 2023 vs. 20.8% in 2020) – does this require a major rebound in O&G sales? The CFO noted on the Q221 earnings call that AS is running a year ahead of its margin plan – what is driving this? How different are the incremental margins for KOB1 vs KOB2 vs KOB3 activity? Is the underlying 30% incremental margin goal in AS much dependent on the sales mix between KOBs? 18 August 2021 35 Barclays | U.S. Multi-Industry 18 August 2021 EMR is very strong in petrochemical, power, and O&G markets in automation…what are some of the initiatives it is taking to grow market share in other end markets, such as Hybrid or Discrete manufacturing industries? Per the 2021 Investor Day, EMR expects Discrete industries to grow 6% over 20202023, and Life Sciences to grow by 8% over 2020-2023 – what growth rate does it expect for its traditional petrochemical, power, and O&G markets in automation? Would EMR ever contemplate divesting any O&G assets, as it seeks to push Automation Solutions into other markets? What are the products, markets or segments where EMR is looking to grow share – DCS perhaps? Are there notable market share shifts among the major Process Automation players at present? What became of ExxonMobil’s Open Process Automation effort with Lockheed Martin (covered by David Strauss)? EMR was not part of the initial wave of suppliers (per 2018) for this effort – why is this? Although the XOM (covered by Jeanine Wai) effort with ‘open standards’ failed, in the long run does it not make sense for the industry to have more open standards? How does EMR propose to adapt to this trend? PNR Valves & Controls acquisition – how is the integration trending? What financial returns is it generating in 2021 (Year 5 post-the deal)? How is the integration of OSI Inc. trending? What medium-term growth rate should we expect for this business? How well placed is it to benefit from potential grid infrastructure investments in the US? Commercial & Residential Solutions It seems there are minimal software sales at C&RS – is there any desire to change this? What can EMR do to expand the $0.2bn of Control sales at C&RS? How does management see the post-Covid environment impacting demand in C&RS structurally? Where does management think we sit now in the Residential HVAC replacement cycle in the US, and how has Covid altered this view, if at all? How quickly could C&RS operating leverage return to the 30% level, in light of input cost headwinds / the buying power at the HVAC OEMs? Operating margins were flat-to-down annually over the last 4 years (pre-Covid)…how confident is EMR in attaining the 200bps+ of adj. EBITDA margin expansion over 20212023 (to reach the 28% goal)? How does EMR view the pricing environment in the global tools market? In which segments does EMR think it is losing or winning share? How is the HVAC compressor market share trending at present? What are the regulatory changes that EMR thinks could be most impactful for top-line growth in the next few years? How does EMR prioritize investments between Commercial vs. Residential markets, if at all? 36 Barclays | U.S. Multi-Industry Healthcare, Transport, Industrial, Food Service, Food retail markets comprise 1% / 4% / 7% / 7% / 9% of sales – which are the priorities for investments right now? Is there any concern that technology changes in the HVAC industry (the rise of VRF, et al.) may lead EMR to lose some of its high market share in compressors? How likely does EMR think large-scale HVAC OEM consolidation is in the US...what impact might this have on EMR’s compressor business? How well automated does management think the manufacturing footprint of C&RS is? Is there significant runway remaining to increase plant productivity? EMR is under-growing peers in Tools such as SWK...How does EMR assess the longterm outlook for the industrial power tool market? Does management have interest in increasing its tools platform further, beyond the TXT Tools & Test deal? What financial returns should we expect the TXT Tools & Test deal to generate by Year 5 (2023), and how has EMR adapted the channel / brand strategy of the business since it was acquired in 2018? How large is the Home business in terms of sales and profitability? Is this essentially InSinkerator? What synergies are there between Tools, and the Home brands? How core is the ‘Home’ part of the business? 18 August 2021 37 Barclays | U.S. Multi-Industry EATON ETN Stock Rating EQUAL WEIGHT Industry View NEUTRAL Price Target USD 165.00 Price (17-Aug-2021) USD 166.90 Potential Upside/Downside -1.1% 18 August 2021 Recent Key Reports: ETN: Managing the cost environment well; 2022 test for structural growth, FCF; August 3, 2021 ETN Investor Conference: High organic growth ambitions; ~$9 in ‘25 EPS implied; March 1, 2021 ETN: Cobham Mission Systems deal – Reasonable valuation; KC46 may offset cycle timing question marks; February 1, 2021 ETN: Tripp Lite deal – High synergies likely; Low valuation stands out in an expensive M&A environment; January 31, 2021 General How does the slope/shape and expected duration of this recovery likely compare with the 2017 / 2010 recoveries? Craig Arnold highlighted when he became CEO that he would adopt a ‘Grow the head, and fix the tail’ approach regarding ETN. ETN has since sold Hydraulics and Lighting – what are some examples of the ‘fix the tail’ approach? After the recent Tripp Lite and Cobham Mission Systems acquisitions which help to ‘grow the head’, how long does ETN need to ‘digest’ these / lower its leverage levels, before becoming active on the M&A front again? ETN’s portfolio is very much ‘traditional hardware’ in nature; given the recent acquisitions (Tripp Lite, Cobham Mission Systems) follow in this vein, does the company aspire to grow recurring revenues or move into more software-based / Digital business (similar to other recent MI transactions)? ETN raised the mid-term organic sales growth expectation substantially at the 2021 investor day, from 2.5% at the midpoint previously to a 5% midpoint goal, representing a material improvement vs the +1% organic sales CAGR seen in the 5 years pre-Covid – management highlighted various secular drivers to support such growth (EV charging, Digital, etc.), when should we expect to see a material contribution from these themes? What percentage of the portfolio will these comprise over time? ETN has previously been dismissive of the margin potential in EV charging infrastructure given intense competition – why did it change its view, and what profitability level does it think it can earn in this market over time? ETN raised the mid-term segment margin target to 21% at the 2021 investor day, from 20% prior, with the only upgraded segment margin target being EA (to 22%, from 21% prior; with the remaining unchanged); given the recent acquisitions and $200m restructuring program (announced Q2 20), is there much opportunity for segment margins to exceed this? How is the progress on the $200m mature year run rate savings fixed cost reduction program (by 2022) – what is the phasing on these savings? What is the timeframe for the $3bn annual FCF goal (vs 2021 guidance of ~$2.1-2.3bn)? What is the cadence of the cash flow restructuring charges over the 2H 21 / 2022 from the fixed cost reduction program? 38 Barclays | U.S. Multi-Industry 18 August 2021 Does ETN expect to see much ‘on-shoring’ among customers into the US and W Europe? When would it expect to see this become meaningful, if ever? Given Mr Okray's distribution expertise (most recently as CFO of Grainger), what is his assessment of the state of ETN's distributor processes thus far? Are any changes being made to ETN’s distributor strategies? Is the company re-organizing any of its global supply chains in light of Covid, et al? Is a 14-16% medium term tax rate likely still following the recent portfolio moves? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding stimulus in Education for instance, or corporate tax rates? Portfolio Does the company think there is material share price upside potential at ETN from a SoTP perspective? What are the most important aspects of the ‘One Eaton’ approach? What is the benefit of keeping the remaining assets together in the same portfolio? How has the view of ‘One Eaton’ articulated 3 years ago changed now, given the divestments of Lighting and Hydraulics announced since then? The eMobility business is likely to be loss-making in 2021 (per company guidance)…are acquisitions needed to ensure it has sufficient scale to be self-sustaining in the longterm? Why did ETN keep Vehicle but sell Hydraulics? Does Vehicle have more synergies with the Aero and Electrical businesses? Hydraulics was reportedly sold due to its high cyclicality and low margin profile; does management have aspirations to sell any other parts of the portfolio with similar characteristics (such as Vehicle)? What kind of financial returns should we expect Tripp Lite and Cobham Mission Systems to generate in Year 3 or 5 post-the deals? How large are the cost / revenue synergies that ETN can extract from each of these two deals? How did Tripp Lite and Cobham Mission Systems perform through the Covid downturn and what are the organic sales growth outlooks for these businesses over the next 12 months? Balance sheet / Capital allocation With net leverage likely 2-2.5X exiting 2021, when can the company become active on M&A again? What are the company’s top capital allocation priorities medium-term? ETN has deployed ~$20bn on acquisitions focused in both Electrical and Defense since 2010 (~$25bn following CMS / TL), and highlighted at the 2021 investor day expectations for an additional $5-7bn in capacity through 2025 (~$2bn post-TL / CMS) - are these markets still the focus for future M&A? What types of assets (exc-US, adjacencies?) would ETN look to add to its portfolio from this point? Beyond 2021, are we likely to see M&A take precedence over buybacks, or is the spend likely to be more balanced now given the Tripp Lite and Cobham Mission Systems acquisitions? 39 Barclays | U.S. Multi-Industry 18 August 2021 Aerospace How wide a gap does ETN think we will see in Commercial AM between the flight hours recovery and its own Commercial AM sales? Does it see a big medium-term risk from cannibalization of used parts / the scale of USM parts swamping the sale of new AM parts? When does the company think that global passenger traffic / flight hours will return to 2019 levels? How does ETN assess the recovery slope outlooks for Commercial AM vs OE? Why does management view military / Cobham Mission Systems as an attractive endmarket to add to within Aerospace now, as Defense budgets may be peaking – how does the company assess the growth outlook for this business over the next 12-24 months? What near-term and medium-term growth assumptions does ETN have for its Defense business? Is there any incremental weakness that ETN is seeing in this market? Military / Defense recent demand commentary has been mixed – some call out international weakness, others cite various programs getting pulled forward, while ETN views Defense that everything is largely as expected – what differences in mix or exposure explain the differences in market views? In commercial, has ETN noticed any heightened impact from the greater OEM efforts to squeeze the margins of their suppliers – how has ETN’s ‘power’ as a supplier shifted over the last 10 years? What aspects of the industry are most attractive...does ETN think it should migrate its portfolio toward software / avionics (just as UTX did via the COL acquisition) in order to mitigate the pricing pressure from the OEMs on traditional mechanical components (Souriau-Sunbank / Cobham Mission Systems are very much traditional hardware businesses though)? What is R&D/sales in 2021…How is R&D likely to trend through the recovery? Is the 24% segment margin target (as laid out at the company’s 2021 Investor Day) still realistic / attainable in light of the current environment (~20.1-20.5% margins guided for 2021)? How much of this target is volume-dependent? How is the integration of Souriau-Sunbank deal proceeding? How have the financial returns from the Souriau-Sunbank deal tracked to-date, and have the expectations for returns over the next 3-5 years changed at all since the acquisition closed? How did this business perform through Covid and what is its organic sales growth outlook over the next 12 months? Former Hydraulics Businesses Who does management consider to be the major competitors for the golf grip and filtration businesses? Why were they not sold to Danfoss or someone else, with the rest of the segment? Does management view the two former Hydraulics businesses as core to the Eaton portfolio? What type of margin and FCF profile do they have? What scale does management envision the remaining Hydraulics businesses attaining over time? 40 Barclays | U.S. Multi-Industry 18 August 2021 Electrical Why is ETN so much more positive on the Electrical growth outlook now, than what that business has delivered in terms of organic growth over the past decade? What is the lead time before orders are converted into revenue in Electrical Americas / Global? Which end-markets are expected to have the most ‘staying power’ through the recovery? There is considerable investor discussion regarding ‘Electrification’ / Utility grid spending – does ETN think a growth rate above a low single digit pace is likely? Tripp Lite appears to have significant overlap with ETN’s electrical business, where does management expect to realize the most synergies and how big could the opportunity be? ETN cited a ~12% revenue CAGR within Data Centers & Distributed IT by through 2025 (with Tripp Lite) at the 2021 investor day, what are the underlying market assumptions here in light of the amount of capacity added in recent years (which may need to be ‘digested’), and at the same time the potential tailwinds from more Work from home activity? Within Electrical Americas and Electrical Global, what is the visibility like on the strength of the datacenter demand outlook? Is there any difference in demand or profitability between single-phase and three-phase Power Quality? Do Americas / Global have similar exposure? How big and what is Tripp Lite’s exposure to data centers? How does the sales growth outlook for this business look over the next 12-18 months? What was the rationale behind acquiring the 50% stake in HuanYu High Tech and expanding the company’s LV exposure in China and the Asia-Pacific region? Is there much overlap with ETN’s existing products / distribution in that region? What benefit does ETN get from acquiring the 50% stake in HuanYu High Tech vs. purchasing the company outright? How are negotiations going with customers regarding the upgrades they are contemplating making to commercial buildings as a result of Covid-19? How can the company benefit from these in its Electrical business? How does management currently assess the recovery slope for non-residential construction markets, given the weaker demand in hospitality, retail, office et al. and in light of emerging variant virus strains? For the Residential business, how quickly does ETN expect growth to decelerate after the recent Covid-related bounce? Electrical revenue growth was pretty muted in the most recent upturn (+2% organic sales CAGR overall from 2012 to 2019); does ETN think that the commoditization of LV and MV markets is accelerating? Is there much evidence of lower-cost competition eroding the pricing power of the large incumbents such as ETN? How should we think about the pace of growth in the next up-cycle? Within Electrical Americas - the medium-term margin goal is 22%, but the business is delivered 20.2% margins in 2020 despite sales declines and 2021 is guided just below 21% at the high end - how high could Electrical Americas margins go in the mediumterm? 41 Barclays | U.S. Multi-Industry 18 August 2021 The Electrical Americas segment has a higher share of sales from lower-margin Systems sales than Electrical Global, but it has higher operating margins than Electrical Global – why is this, and what can be done to close the margin gap within Systems, and Products, at Electrical Global? Does ETN worry that its Electrical business is too hardware centric? Is it planning to try to up-scale the business into IoT / software more? Why does ETN think that the Cooper deal did not drive faster sales growth for its Electrical business in the intervening ~9 years? What portion of the current backlog / order book is large projects, and what is their margin differential? Is it more difficult to pass through price on these projects? How are overall margins in this backlog vs. what is reported in the P&L today? What share of Electrical Global sales accrue from the global brands - Crouse-Hinds, and B-Line? What is the margin profile of Crouse Hinds relative to the segment average? eMobility Management are targeting $2-4bn in revenue in this segment by 2030; this implies a 25-30% CAGR from 2020...is the expectation that this is achieved largely via organic investment or will organic growth be supplemented by M&A. If it is the latter, what are the holes in the eMobility portfolio? Can assets in this vertical be acquired for reasonable valuation multiples? Who are the main OEM customers of this segment today? eMobility is expected to be loss-making again in 2021; when does the company expect this segment to be profitable? How much of its sales relate to ICE vehicles still? Based on the significant internal investment that is required to scale this business, what profit margins does management hope to achieve over the next decade? How has the recent downturn / rebound altered the expectations for this segment in terms of EV development and adoption? Vehicle What is the strategy to cope with the accelerating rise of electric vehicles? How much of a risk will this trend be to Vehicle sales in the next 5 years? How is management viewing the differing recovery slopes, and sustainability therein, in Light vehicles vs Trucks? How does the company expect the Vehicle segment recovery to track with auto builds, particularly in light of recent semiconductor supply chain issues? How is the truck JV with Cummins (covered by Adam Seiden) progressing (in terms of demand and profitability)? Does management worry about rising vertical integration in the truck industry – how much of ETN’s sales are at risk from this threat? Is the company taking much share in the MD truck transmission market, since the launch of its Procision dual-clutch automatic transmission product? Does management think the supercharger business within light vehicles can cope well with the rise of electric vehicles? How much of the segment’s sales accrue from superchargers? 42 Barclays | U.S. Multi-Industry SPX FLOW FLOW Stock Rating EQUAL WEIGHT Industry View NEUTRAL Price Target USD 75.00 Price (17-Aug-2021) USD 77.66 Potential Upside/Downside -3.4% 18 August 2021 Recent Key Reports: FLOW: Steady margin progress; Strategic review underway; August 4, 2021 US Multi-Industry: FLOW rejects IR proposal; Potential next steps for FLOW, IR; July 19, 2021 IR-FLOW: News reports of takeover approaches; July 18, 2021 FLOW Investor Day: Ambitious margin goals; Encouraging capital allocation framework; March 11, 2021 General FLOW at its 2021 Investor Day outlined that it aspires to grow LSD-MSD organically over 2021-2023. Beyond the Covid-driven rebound in 2021, why would growth step up when neither segment displayed an ability to grow consistently pre-Covid? The rejection for Ingersoll Rand’s proposal stated that the $85/share offer ‘significantly undervalues’ SPX Flow and its future growth prospects – but prior to this being public, shares were trading consistently in the $60 range – how does management balance this with share repurchases being at the bottom of the capital allocation priority list (i.e. if an $8/share offer was too low, why was FLOW not buying back shares 30% below this level)? Management outlined at its 2021 Investor Day the desire to reach ~40% gross margin levels (vs. 34.7% in 2020), partially driven by $15m of gross supply chain savings. To what extent does management expect these savings to be offset by cost inflation (FLOW expects to be price / cost positive in 2021, for example)? FLOW highlighted its goal of mid-teens operating margins by 2023 (vs. ~9% in 2020), with various factors contributing (price / mix 200-250 bps, productivity / supply chain 150-200 bps, SG&A savings 200-250 bps). Can management elaborate on the factors that underlie the price / mix ‘bucket’? What are management’s expectations for margin expansion by segment? What should we expect medium-term incremental margins to be, post the near-term cost savings programs? To what extent does management think 80 / 20 can sustainably improve incremental margins? How does FLOW’s desire to expand margins / ‘drive profitable growth’ align with its aspirations to grow the top-line above its historical average? FLOW has shifted its end-market exposure to 70% Short Cycle and 30% Long Cycle in 2020 (from 60% Short Cycle and 40% Long Cycle in 2015). What does FLOW think is the optimal mix? How does the margin profile of Short Cycle compare with Long Cycle? FLOW has significantly reduced its dry dairy exposure with Dairy now representing 16% of 2020 revenue. Does management view this as the appropriate mix? Are there any end-markets where FLOW would like to grow its exposure (such as Air Treatment – 10%; Marine / Water / Mining – 8%; Chemicals – 8%)? Free cash flow conversion has been >100% over the past couple of years and is guided to be >100% again in 2021 and the medium term. However, FCF margins remain low (6% in 2020; well below the MI average). Should FCF margins expand alongside operating margins? What is a realistic medium-term FCF margin target? 43 Barclays | U.S. Multi-Industry 18 August 2021 FLOW’s portfolio is very hardware focused at present, does management aspire to increase the share of recurring / software / healthcare sales akin to shifts among broader MI companies? R&D increased by ~$3m in 2020 after having been fairly low historically (~1% of sales) – and is guided to step up by another $3-5m in 2021, while capex is also guided to step up to ~$40m in 2021 (vs. ~$20-25m, on average per year from 2017-2019); what are the appropriate medium-term R&D / capex run-rates in order to sufficiently fund the company’s planned internal investments? FLOW segmented its products into ‘Grow’ (+MSD-LDD growth, above company average gross margins, 90% of time allocated to growth), ‘Balance’ (Flat-MSD growth, company average gross margins, 50% of time allocated to growth), and ‘Create’ (Flat-LSD growth, below company average gross margins). What share of revenues does each ‘bucket’ represent? What gives management confidence the ‘Grow’ bucket can sustain +MSDLDD growth? How has the early progress on margin improvement been for the ‘Create’ products? In early 2020 the company implemented a host of initiatives based on the foundation of 80/20 into its strategy, with early results including reducing quick ship lead times by ~50% and N&H pumps lead times by ~70%. Can management provide any other early examples of how 80/20 has contributed to margin expansion? How does the new $25m productivity program (announced Q4 20, expected to yield $10m savings in 2H 21 and $15m in 2022) compare with the 2-3% cost-out program completed in Q4 20? How did FLOW decide to pursue an 80/20 strategy? Has management hired any key personnel from outside the company to enact this strategy? Does management see a larger scope for 80/20 driven margin opportunities in N&H or Industrial? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding infrastructure stimulus or corporate tax rates for instance? Portfolio In the announcement to explore strategic alternatives, the company cited additional inquiries received from interested parties – what characteristics the company is looking for in a potential combination? Would main considerations be related to end-market exposure? Or cost synergies? Selling synergies? Are there large synergies between the two segments? Would it make sense to separate into companies? Does management see upside to the shares from a SOTP perspective? Would management consider re-adding a ‘third leg’ to the business? How should we think about future M&A capital being allocated between the two operating segments? New product development has been named a strategic focus area, what verticals look most attractive for expansion or a potential entry? FLOW launched 16 new products in 2020, after 8 in 2019, with the current pipeline featuring larger impact / revenue projects. Does management have a targeted vitality index? Do these new products tend to carry higher margins? 44 Barclays | U.S. Multi-Industry Balance sheet / Capital allocation How soon does FLOW intend to return to its 1.5x to 2.5x target leverage, given its low leverage today? Management commented that the current strategic review does not prohibit the company from undertaking M&A – in this light, how does the company balance its pursuit of bolt-on acquisitions vs transformational acquisitions (with the latter potentially being the outcome of strategic deliberation)? FLOW initiated a dividend beginning in Q1 21. What was the rationale behind this decision? How high could its dividend pay-out ratio go? FLOW prioritized its uses of cash as organic investment > M&A > capital returns > debt repayment > operational cash needs. Why gives management confidence in its ability to create value through M&A, given the limited track record? Management is targeted $400-600m in M&A spend by 2023, used to acquire $200300m in revenues (implying a ~2x EV/sales acquisition multiple) What gives FLOW confidence it can find acquisition targets for this multiple / which satisfy its return targets (CROIC>WACC in 3-5 years, accretive to gross / EBITDA margins), given the buoyant M&A environment? FLOW announced the acquisition of Philadelphia Mixing Solutions in April 2021, which generated $50m in revenue in 2020 (FLOW paid ~$65m, implying a 1.3x TTM sales multiple) – how is the integration of this business proceeding? What enabled FLOW to acquire a seemingly higher quality asset than the company average (>40% gross margins vs. the ~35% corporate average) at a very reasonable multiple? Are there many other assets of this size and quality available in the market? FLOW highlighted that Philadelphia Mixing enhances its organic growth profile, with growth in-line with FLOW’s 3-year targets (+L-MSD). What is the historical growth rate of this business? Within its stated growth verticals (Chem, petrochem, water/wastewater, pharma, and nutrition & health), which have grown / are likely to grow the fastest? Philadelphia Mixing complements FLOW’s existing mixing business (given >75% of its sales are in NA), will benefit from economies of scale, operational / supply chain initiatives, etc. Given these factors, how accretive does FLOW expect the deal to be to adj. EPS and over what time frame? Beyond Philadelphia Mixing Solutions, FLOW recently acquired Posi Lock Puller (paying ~1.7x 2019 sales), UTG Mixing Group (~12x EBITDA; ~10x post synergies) and also purchased the remaining shares of its Korean joint venture. What was the strategic rationale behind these moves? Are there any synergy targets associated Posi Lock Puller or UTG Mixing Group? How is the integration process progressing? FLOW recently expressed confidence in the M&A pipeline, with typical targets having revenue in the $25 to $100m range. How quickly does it expect opportunities beyond the recently announced Posi Lock Puller / UTG Mixing Group / Philadelphia Mixing deals to materialize? The types of M&A targets that the company is looking at are likely to be ‘higher quality’ assets that have a large AM content and premium pricing power...what is the upper threshold of valuation multiples that the company would be willing to pay for these kind of deals, and how confident is FLOW in its own ability to drive acquisition synergies? 18 August 2021 45 Barclays | U.S. Multi-Industry 18 August 2021 Nutrition & Health Price has served as a tailwind for the segment in the past, how does management view FLOW’s pricing power in the broader market in the long term? Is there risk of ‘commoditization’ of some of the company’s offerings? Is there a broad need to reduce the still-high dairy exposure, given the mixed structural trends (rise of alternative non-dairy products etc.)? Mix continues to be a major contributor to margin swings from quarter to quarter, does management consider this a normal course of business, or are there opportunities to ‘smooth’ out margins? N&H orders historically have not necessarily led revenue trends (2H 19 organic orders +DD vs 1H 20 organic sales down mid-teens; 2H 20 order trends saw accelerating declines while revenue trends appear to be recovering) – what causes this gap, is it a function of larger projects getting converted more slowly? How does management view the backlog conversion to revenues playing out over the next 12-24 months? What does N&H’s conversion ratio from OE to AM look like? Are there opportunities for improving aftermarket offerings within the business? Beyond large dry dairy systems, FLOW continues to prune within this segment (to the tune of ~$25m expected in Q4 21, for example). Beyond this, how much low / no margin business is left in the segment? Is it possible to achieve the stated ~3% growth rate while continuously pruning? The global F&B / N&H market was sized as ~$24bn, growing at ~3% per year at FLOW’s 2021 Investor Day. What gives the company confidence the segment can grow at this rate in the medium-term, given the poor growth profile in the years pre-Covid? Personal Care & Other represented ~10% of N&H revenues in 2020, and appears to be a growth focus going forward. How quickly does FLOW think this end-market can grow in the medium-term? The company appears to be losing substantial market share (for instance relative to GEA); why is this, and is there any reason the share should turn around? Or is this all attributable to the removal of large projects from the company’s revenue growth, and underlying market share has remained steady? The systems business tends to carry ~25% gross margins, much lower than SCI businesses (which tend to carry ~45-50% gross margins). Why is the spread so large between the two? Capex has declined significantly over the past few years, is there any chance that there will need to be a step-up sometime in the near future, particularly as factory modernization has been highlighted as an avenue for further improvement in the business? Precision Solutions (former Industrial) Are there businesses within Precision Solutions that management would be willing to forego or divest in order to improve the profile of the segment as a whole, similar to what was done in N&H with dry dairy systems? How does FLOW think this 2021-2022 revenue recovery (shape / slope) could compare with prior industrial recoveries in 2017 or 2011? 46 Barclays | U.S. Multi-Industry The global Industrial market was sized as ~$100bn, growing at ~3.5% per year at FLOW’s 2021 Investor Day. What gives the company confidence the segment can grow at this rate in the medium-term, given the poor growth profile in the years pre-Covid? Which areas does FLOW think it is winning or losing market share in? Does management see additional opportunities for leveraging technology across segments, as was done with moving Braun+Luebbe to Industrial (rather than divesting with Power & Energy)? Are there any criteria that could possibly be applied to other ‘non-core’ assets within Precision Solutions right now (maybe to reduce ‘lumpiness’ from projects)? Mixing appears to be a key M&A area for FLOW within Precision Solutions (per the UTG Mixing, Philadelphia Mixing deals). Following these deals, is FLOW satisfied with its current offerings, or does the company foresee more deals in this area on the horizon? Management recently acquired Posi Lock Puller in its Hydraulics business. Is FLOW interested in further growing its Hydraulics franchise? The company wants to increase its aftermarket penetration – how is it doing this? Are there specific end markets where this penetration is sub-scale (Marine / HVAC / General Industrial)? How wide is the spread of operating margins across different units within the segment? Why did the company choose to change the name of this segment to Precision Solutions from Industrial at Q221 earnings? 18 August 2021 47 Barclays | U.S. Multi-Industry FORTIVE FTV Stock Rating EQUAL WEIGHT Industry View NEUTRAL Price Target USD 75.00 Price (17-Aug-2021) USD 74.76 Potential Upside/Downside +0.3% 18 August 2021 Recent Key Reports: FTV: Margin outlook rests on FBS & AHS; Short cycle / AHS growth balance; July 30, 2021 FTV: Q2 Pre-announcement in-line; Highly-priced acquisition of ServiceChannel; July 12, 2021 FTV: Primer; June 15, 2021 FTV: Investor Day: Portfolio transition making good progress; M&A returns of HSD-10% by Year 4-5; May 19, 2021 US Multi-Industry: RESET, to Recovery; D/grade Industry View to Neutral, FTV, LII, ROK to EW; November 29, 2020 General How much of total sales accrue from SaaS sales today, and how does this split out across the three segments? FTV is guiding for ~35-40% incremental margins in 2021 (including 40% in the 2H) – is this the right placeholder for the medium-term, or could ongoing software and recurring revenue mix transitions mean that incremental margins expand in the medium-term closer to 40%+? How is the ‘FORT’ concept at Fortive developing? Are there examples of where it has driven growth or margins? The recently announced acquisition of ServiceChannel further builds up the Facility / Asset Lifecycle businesses (after the acquisitions of Gordian and Accruent) – what is it that is so uniquely attractive about this market? What is unique or differentiated about ServiceChannel and FTV’s overall offerings in what seems to be a highly competitive market? How are the most recently integrated acquisitions performing - in particular ASP, Gordian, Accruent, Intelex, Censis? What sort of Year 5 financial returns should we expect on these acquisitions? Some of the acquired assets have not seen particularly high organic sales growth in recent years. Does management worry that it will take some time / higher investment, in order to turn these businesses around and generate higher growth? What is the organic growth rate of Accruent, Gordian and ASP since they joined the portfolio? ‘Recurring sales’ are one third of sales – how does FTV define them? Software is a low double-digit share of company sales - how high are margins in the software businesses overall, and what is their organic growth outlook? What are the risks of the SaaS model relative to FTV’s current core business model - how will management ensure minimal top-line ‘hiccups’ as the customer base transitions to this new model from a license fee basis? How satisfied is management with the digitization of the FTV portfolio on an organic basis, for instance with efforts like Fluke Digital Systems? FTV has talked about increasing the non-US sales mix at various businesses across the company, including Accruent, Tektronix, Sensing – how is this playing out? Should we 48 Barclays | U.S. Multi-Industry see much extra investment in ‘feet on the street’ in emerging markets in these businesses? R&D has run at 6-7% of sales - how does FTV ensure it generates high returns on this high investment? How much are the new acquisitions expected to drive up this investment (assuming these businesses need a higher run-rate of investment to stay competitive in their respective markets)? The company has mentioned $35m of specific investments over Q2-Q4 2021 – what areas are these are aimed at, and what type of returns are they likely to generate? How does FTV think this 2021-2022 Short Cycle Industrial revenue recovery (shape / slope) could compare with prior recoveries in 2017 or 2011? How confident is management it can offset higher cost inflation with pricing, and how have its practices on pricing improved in recent years? Is the company reorganizing any of its global supply chains in light of Covid, et al.? If we see China-US tariffs start to be dismantled, how material could the impact for FTV’s margins be? The tax rate is in the mid-teens…is such a low tax rate sustainable, for a US-domiciled company? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding infrastructure stimulus for instance, or corporate tax rates? Portfolio Did the 2020 downturn change / affect FTV’s perception of the type of asset it wants to acquire? What growth assumptions are included in your guide that ServiceChannel will generate a 10% ROIC in Year 5? To what extent are these assumptions back-loaded? What gives FTV confidence it will hit these targets? Where does FTV see / expect to see revenue synergies for ServiceChannel with its existing Facility / Asset Lifecycle businesses (such as Gordian and Accruent)? What opportunities does FTV see that will help uplift ServiceChannel’s +LSD operating margins (on our estimates) to get closer to in-line with the company average? The company has made considerable effort via M&A and divestments to render the portfolio less cyclical and less volatile…how satisfied is management with the outcome of these efforts, in terms of achieving that lower volatility during the 2020 downturn? Why is Tektronix not viewed as being under the ‘Intelligent Operating Solutions’ umbrella, unlike Fluke – is it something to do with their specific end-markets / products, or rather it relates to the business model / acquisitions that FTV has done that are adjacent to these two brands? Should we expect most M&A to be concentrated in software at IOS, or healthcare assets at AHS? Equity market multiples are high, and FTV has been active at divesting businesses in the past 4 years…with the VNT exit now completed, should we expect further divestments 18 August 2021 49 Barclays | U.S. Multi-Industry 18 August 2021 perhaps? To that end, what is the latest at Qualitrol – there was little or no mention of it on the last few earnings calls for instance? How high a priority for M&A is the Advanced Healthcare Solutions segment? How satisfied is the company with the build-up of that platform thus far? Should we expect Precision Technologies to receive the least amount of M&A capital among the three segments, consistent with recent years? Balance sheet / Capital allocation FTV paid 16-17X EBITDA for deals such as Accruent, Gordian, Intelex, and more recently >50X EBITDA (Year 2) for ServiceChannel, with software valuation multiples continuing to rise further…is FTV confident it can generate high financial returns from using the firepower it has to deploy in the current environment? What is the maximum balance sheet leverage that FTV would be willing to employ? Is there any way the upper threshold for leverage moves over 3.5X? In this light, what size of transactions are currently in the M&A funnel? After the recent ServiceChannel acquisition, does FTV need a period to ‘digest’ and lower its leverage levels before becoming active on the M&A front again? One way in which peer Roper has avoided paying high M&A valuation multiples, on average, throughout its history is by acquiring companies almost exclusively from private equity, and FTV appears to be adopting a similar approach in software. What are the pluses and minuses of this approach? Is there any perceived ‘sweet spot’ in terms of size of deal for management? Advanced Healthcare Solutions What share of sales are ‘recurring’? What share of the installed base of ASP in different geographies is under service contracts? Within the AHS segment, ASP consumables had a tough time for most of 2020 and were still down in Q1 21 in N America – these grew at a +high-teens pace in Q2 21, but segment margins were down >300bps y/y…. what kind of recovery could we see for them over the balance of the year, and what are the margin implications for AHS from this rebound? There are another couple of quarters of y-o-y sales uplift at AHS from ASP TSAs rolling off and this is driving a near-term delta between core and total revenue growth at AHS – how is the overall integration of ASP proceeding, in terms of synergies etc.? Within ASP, how is it looking to benefit from the shift towards minimally invasive surgeries? How is FTV tracking to its initial target of $70m in Year 3 synergies for ASP? Are there any lessons to be learned from DHR in terms of which verticals are most attractive (i.e., Biologics as opposed to Dental)? What kind of operating leverage should we expect in AHS throughout the recovery in elective procedures? Were there any learnings from the Covid downturn that might help protect profitability should variant strains emerge? Why is management not concerned about the ‘single use’ phenomenon eroding the long-term organic growth of the sterilization business (within ASP)? 50 Barclays | U.S. Multi-Industry 18 August 2021 Intelligent Operating Solutions In the IOS segment, how should we expect sales growth at Gordian and Accruent to play out as we move through 2021, after a sluggish 2020? What kind of lead indicators should we use to track their pipeline of activity in the recovery? How rapid the pace of growth normalization likely to be? What is the market share of Gordian, Accruent, and ServiceChannel in their respective markets; how synergistic are these three brands with each other? The Industrial Scientific business (acquired in 2017) has 65% of sales which are recurring... and its subscription based iNET service has enjoyed a 10%+ sales CAGR over the past 3 years – how well is FTV applying the lessons learned from this subscription transition to the rest of the segment? Within software exc-Healthcare, does FTV find ‘Application’ or ‘Network’ assets (using ROP’s classification) to be more attractive? Is Fluke Digital gaining much customer traction? How is the progress on pushing Industrial Scientific and Accruent to have a more global / less US-centric sales mix? What is the progress on pushing Accruent to win more Federal business? How fast is Gordian’s Job Order Contracting solution growing, and how is it differentiated vs its rivals? Precision Technologies In Precision Technologies, it seems semiconductor and electronics end-markets are booming…how much of PT’s sales accrue from these markets, and what kind of growth rate for them is being dialed into the segment core growth guidance for 2021? Beyond 2021, should we expect a LSD CAGR to resume? How much of Tektronix’s sales relate to software and services today, and what is being done to expand this share? Tektronix has been trying to push into certain high growth segments such as Data Center, Automotive, and Power – what is its success rate in this effort? Tektronix has been trying to expand share in China – where does it sit today, and what is the market share in China? Qualitrol (within Field Solutions) had experienced a weak few years of top-line growth what is the outlook for this business, and in the Middle East specifically? Why does FTV view it as an attractive asset? When should we expect growth to return? Sensing is one of the remaining discrete automation related assets in the portfolio what are the merits of retaining this business (5% consumables / service), rather than selling it? Sensing is a very competitive market – how does FTV differentiate here? How is the company looking to expand Sensing’s sales mix beyond N America (~70% of sales)? How is Pacific Scientific looking to benefit from the emergence of private operators in Space / the ‘commercialization’ of the Space market? 51 Barclays | U.S. Multi-Industry GATES INDUSTRIAL GTES Stock Rating OVERWEIGHT Industry View NEUTRAL Price Target USD 22.00 Price (17-Aug-2021) USD 16.23 Potential Upside/Downside +35.6% Recent Key Reports: GTES: Incremental margins stand out; FCF margins improving; August 9, 2021 US Multi-Industry: Short Cycle Industrial 2H Outlook; Downgrade KMT, Upgrade (Page 9) GTES; August 9, 2020 General How does GTES think this 2021-2022 revenue upturn (shape / slope) could compare with prior recoveries in 2017 or 2011? Overall the company has ~6% market share globally, out of a total market of $59bn. What are the main areas where the company thinks that it is taking share today; certainly in the US, the Industrial performance at present seems to be outstripping that of the peers – what underpins this? Within Power Transmission, GTES has 7% share, split between automotive ($10bn, where GTES has higher share) and industrial ($20bn); what is the Co doing to drive up share further in the highlighted submarkets such as Personal Mobility (~$1bn TAM where Gates holds a ~5% share), Precision Motion Control (~$1bn, ~2.5%), Belt-to-Belt (~$2bn, ~12%), and chain to belt (~$6bn, ~2.5%)? Where is GTES most targeting its investments right now in terms of its end-market exposures? Operating margins already look very high vs. peers (such as PH, Danfoss in Fluid Power); how much more room is left for further expansion? Is there more scope to push up margins at the gross margin level, or around the SG&A cost line? Management has stated that its targeted gross margin is ‘north of 40%’. Does management have any additional ‘levers’ at its disposal to achieve this goal, or will it be achieved through volume leverage and benefits from the existing restructuring plan? Personal Mobility has been highlighted as a growth opportunity, with the funnel in recent quarters at all-time highs. Mobility and Recreation represented ~3% of sales in 2020 (~$85m); how large does management envisage this business becoming? How quickly is it likely to grow over the medium term? What is the margin profile of Personal Mobility relative to GTES’ corporate average? What type of incremental EBITDA margins should we expect in for GTES beyond the near-term? Does a 35-40% rate sound appropriate in both segments? When can we expect the 24% firm-wide EBITDA margin range to be hit? Pricing has been very strong in both segments – how does the company drive this pricing power and is this sustainable? Is the pricing power a function of passing on higher costs, or will GTES be able to continue raising prices more stable commodity / freight pricing environment? Fluid Power represents $1.2bn of revenue, with an implied 4% share of a $29bn addressable market (automotive at $14bn, and industrial at $15bn); what is the company doing to drive up share further in the highlighted submarkets such as Engine Systems Fluids (~$14bn TAM, ~3% share), Oil & Gas Hose (~$4bn, 2%), and the Premium Hydraulic Hose market (~$6bn)? 18 August 2021 52 Barclays | U.S. Multi-Industry Has GTES been able to maintain exclusivity in deals with distributors such as Motion Industries and Kaman? How quickly is the belt-to-belt growth initiative occurring and when will this contribute meaningfully to the top-line? GTES has sized it as a $2bn opportunity (across various mobile and stationary applications). Fluid Power has ~70% of sales from N America…how quickly can it grow market share internationally? Does the company see the need for R&D / Sales to increase in order to drive greater product innovation (from its current ~2% of sales level)? In the Hydraulics market, does GTES think that it is investing more than its peers, who tend to have more diverse business portfolios (e.g., the MXT product launch)? Are there any concerns that footprint consolidation efforts will swing the pendulum too far back and lead to a return of capacity restriction issues down the line? How confident is management in assessing a normalized long-term production capacity level given the large swings in peaks and troughs seen over the past few years? Within automotive, GTES highlighted that its content on full electric vehicles (FEV) and ‘mild hybrid’ vehicles is 1.2X higher than in traditional ICE vehicles, while it has 1.4X the content on regular hybrid vehicles. What is profitability like on the EV / hybrid side? How is GTES’ market share on EV platforms at the various OEMs, during this ICE-EV transition? AM currently makes up ~65% of the overall portfolio, what is the margin differential between the AM business and OE; is 65% share the ‘ideal’ mix, or is GTES agnostic about the share of sales from AM, depending on the pace of OE growth? Does GTES see any implications / impact from the 2021 sale of Hydraulics to Danfoss, by ETN? FCF conversion has typically run at <100% in recent years, and 80%+ is guided for 2021… what is the LT FCF conversion rate? Should we expect FCF margins to expand at a similar pace to operating and net margins in the medium-term – what kind of working capital rate can the business run with? How is management thinking about the implications of a rising input cost environment? Does GTES believe it can offset this with price? Is the company re-organizing any of its global supply chains in light of Covid et al.? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding corporate tax rates for instance? Portfolio The GTES portfolio is very much ‘traditional hardware’ based at a time when many industrial companies are looking to become more ‘software-industrial’ or ‘connected’, what is GTES doing to ensure that it will not be ‘left behind’ as a hardware play, in a world where more and more of the value may end up accruing to software? Is there anything GTES can do to increase its share of sales that are recurring / less cyclical? Does the company feel comfortable with its current ramp-up of product innovation to stay ahead of the IoT / Software Industrial trend? 18 August 2021 53 Barclays | U.S. Multi-Industry Several SMID cap Multi-Industry peers (CFX, FLOW, GDI/IR) have undergone major portfolio shifts; does GTES envisage contemplating anything similar, or is it satisfied with the current business mix? What are the synergies between the two segments? Balance sheet / Capital allocation Gates is on track to reach ~2-3X ND/EBITDA at end-2021 (having ended Q221 at 3X)…when can it start to think about going on the offense regarding capital deployment, aside from simply de-levering? If M&A is about to become more active, what types of acquisitions may prove most attractive? Does GTES have a strong inhouse team to handle / process the M&A pipeline, as its acquisition history is very limited? What is the minimum level of ‘maintenance Capex’ that the company can run with? What is the approach to dividends, and what is the target balance sheet leverage ratio, given the cyclicality of the end-markets? GTES has completed a few small M&A deals and expressed interest in continuing to make ‘opportunistic deals’ even with its high financial leverage – how will the company balance acquisition activity with the stated goal of lowering leverage going forward? After GTES reduces its leverage, how should we expect the company to allocate capital? The Atlas and Rapro acquisitions - what is the expected ROI? How are these acquisitions progressing in terms of growth / margin accretion? Would the company be willing to exceed its long-term ND/EBITDA target (3.0X) for an acquisition? 18 August 2021 54 Barclays | U.S. Multi-Industry GENERAL ELECTRIC GE Stock Rating OVERWEIGHT Industry View NEUTRAL Price Target USD 16.00 Price (17-Aug-2021) USD 101.62 Potential Upside/Downside -84.3% Recent Key Reports: GE Aviation: Engine utilization down ~27% into early August vs down ~42% in Q2; August 16, 2021 Global Multi-Industry: Gas Turbine Demand / Market Share 6M 21 Update: Market bounces (for now), GE at 46% share; August 9, 2021 GE: Healthcare CEO change; Portfolio likely will continue to evolve; June 24, 2021 GE / Safran: CFM launches RISE; Open Fan Technology; June 14, 2021 GE: CFO meeting; Firmer footing: Brighter FCF outlook; Cash pile holds up; November 13, 2020 General How satisfied is management with the operating changes underway at the company? What are the major areas that are proving most difficult to change / improve? To what extent are ‘Lean’ practices embedded within the manufacturing and operating culture at GE? How ready is the organization and the operating management to switch its focus towards high and consistent cash generation, away from hitting short-term EPS targets? The CEO has talked about ‘shifting decision making’ as a key priority to the segments, away from the center – what does this mean in practical terms / daily operating management? How many P&Ls is the company running with at present – help us understand the scale and difference between the Tier 1 / 2 / 3 P&Ls? Why did GE not sell GECAS when it was booming in 2019, and instead wait to sell it at the trough of an Aerospace downturn in early 2021? GE is paying out maybe $4bn+ over the NTM in fees to pay down debt early following the GECAS sale – this is equivalent to the majority of the value of its 46% stake in AerCap, post-transaction; why is this $4bn+ in fees an efficient use of the cash raised from the sale? The CEO has highlighted on several occasions that FCF margins should reach a high single digit rate…what are the main levers / segment assumptions needed to hit this goal? What is the confidence that we could see this 7-9% FCF margin as soon as 2023? Does this high single digit FCF margin level not look conservative if Aviation can return to old peaks (FCF margins in the low teens), as it would imply Power and Renewable are still stuck at very low single digit FCF margins? Two thirds of the FCF improvement in 2021 is based on working capital inflows…the concern would be that this then reverses in 2022…what is the ‘right’ level of working capital for GE over time, understanding that progress collections can swing around with orders? Should we see further substantial FCF improvement in 2022, perhaps even commensurate with the 2021 increase y-o-y? Or will working capital headwinds (after tailwinds in 2021) lower the FCF expansion? 18 August 2021 55 Barclays | U.S. Multi-Industry When considering uses of cash following the GECAS sale and the immediate delevering, what are the relative merits of the different mechanisms as GE sees them today (push out debt maturities further, shrink the pension under-funding, think about raising dividends or doing more M&A etc.)? How much heavy lifting in terms of footprint and fixed cost reduction / restructuring is still needed in order to get the cost base right sized? What should restructuring charges be for the medium-term, after ~$1.2-1.3bn annually over 2020-2021? What medium-term assumptions around the slope of the top-line recovery at Aviation and Power are being used to scale the size of the current restructuring programs at these two segments? How is pricing power across the four segments – has the volatile demand environment led to a step-down in competitive discipline, esp. in Power or Renewables? How confident is management that there are no more ‘known unknowns’ or ‘unknown unknowns’ at Capital that could require another large cash outflow (like Insurance in January 2018)? Corporate – this comprises $7bn of managed gross costs, against the current adjusted ‘corporate cost’ in financial statements of $1.6bn (2020); can the company help us foot these two figures together – where does the remaining $5-6bn of ‘other costs’ reside at the segments? Post-GECAS sale, and amidst greater decentralization at the company, how large should GE’s corporate cost be annually? How much importance does management ascribe to matters such as Digital and Additive, which we have not heard much about in recent years? How does the Industrial Software business ($1.2bn in sales) that was announced in late 2018 fit with the Digital efforts throughout GE? Is the Software / Predix push all within Corporate now? Is the company reorganizing any of its global supply chains in light of Covid, et al.? ESG is a major investor topic – how does GE fit into the ESG investing framework, and what is the company doing / what will it do, to make itself more ESG-worthy? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding stimulus policies for instance, or corporate tax rates? Portfolio What are the updated thoughts on the strategic logic of keeping Healthcare within GE? How strong does FCF need to be in the non-Healthcare RemainCo in order for Healthcare to be (partially) exited? Should we view the appointment of a new head of Healthcare (an external healthcare public Co CEO) in 2021 as the precursor to a partial IPO of Healthcare in 2022-2023? In light of Siemens’ 2020 spin out of Energy, how appealing is it to GE to spin off Power to stand on its own as a public company? What are the benefits / costs of this? Could Power Portfolio stand on its own as a public company? Does the depth and scale of the recent downturn in commercial aerospace mean GE is likely to contemplate bulking up the Military side of Aviation? 18 August 2021 56 Barclays | U.S. Multi-Industry 18 August 2021 How much of the Power / Renewables businesses are viewed as ‘core’ to GE – could we see the $5-6bn of Power Portfolio (Steam, Power Conversion, Nuclear) be broken up / divested in pieces – is there any logic to keeping it together? What are the financial / operating thresholds / metrics that a business needs to show, for it to remain part of GE in the medium term? With GE’s two largest businesses being Aviation and Power, what will the company do to allay concerns over the volatility in cash flows (i.e., commercial engine programs require massive cash injections, and Thermal Power can face prolonged downturns / high development costs for new turbines), as they are both long-cycle in nature? Will GE therefore need to keep a large stake in Healthcare, or some other less cyclical asset, in order to ‘smooth out’ its cash flow? What implications does the lack of Short Cycle businesses left in the GE portfolio (GE used to have Appliances, Plastics, Lighting etc.) have for the expected future dividend pay-out, and desirable leverage ratio, for GE Industrial? Balance sheet / Capital allocation GE targets $10-15bn of gross cash in 2023+, after $24bn Industrial gross cash at end2020…how does it arrive at this $10-15bn figure? How important is the credit rating to GE / getting a higher credit rating, following the de-levering with the GECAS sale? The pension does not require additional funding for several years – does GE view it as an efficient use of capital to shrink the underfunding voluntarily? Aviation It seems Aviation FCF is being guided at $1-2bn or so in 2021 – is there any reason why GE cannot return to the prior $4-5bn annual FCF at Aviation in the medium-term? Does this level of FCF require old peaks on passenger traffic to be hit, or could it get there more quickly given productivity measures? When does GE think that global passenger traffic / flight hours return to 2019 levels? How is GE thinking about the recovery slope for its engine business on WB vs NB aircraft? Why are shop visits expected to be only flat in 2021 even with the growth in air traffic? How much of a risk does GE view used parts being, in terms of driving a dis-connect between flight hours recovering, and commercial AM sales? How much risk from this is embedded in GE’s guidance for shop visits to reach 2019 levels almost, by 2023? To what extent can GE and the other engine OEMs control the pool of USM / used parts, and limit the extent of cannibalization of the new replacement / AM parts? Why were payables such a FCF headwind for Aviation in 2020? The MAX grounding was a $1.4bn headwind to 2019 Aviation CFOA…what impact is the MAX getting back on track having on Aviation FCF in 2021 / 2022? GE took some write-downs in 2020 for long-term service agreements – what is the risk of further large charges here? How successfully is GE / CFM increasing its market share on non-MAX aircraft with the LEAP engine, in light of the MAX’s issues? 57 Barclays | U.S. Multi-Industry 18 August 2021 Is there any impact being seen from the July 2018 IATA – CFM agreement that was aimed at increasing competition in the MRO market for engines (for instance, non-CFM parts / repairs can be used by any licensee of the CFM Engine Shop Manual)? What is the composition by engine program of the Commercial AM sales? How much is CF6 / CFM56 / GENx? How worried is GE about the pace of decline in future AM sales from the legacy Commercial AM engines? What is the update on the GE9X engine / 777X program? In Military, rival Pratt has very strong positions on the next-gen US fighter, tanker and bomber. GE though has won the US Army helicopter award. How should we think about the growth outlook for GE Military in the medium-term? In Military, GE is having some execution / efficiency issues in 2020-2021 – what exactly is the problem, and when should we expect a resolution of them? On regional jets, rival Pratt has made major market share in-roads into new aircraft from Embraer (not covered), Bombardier (covered by David Strauss), Mitsubishi (not covered) – does GE have a strategy to re-take share in this segment of the market, or is it not too concerned about it? In business jets, how is the market share (current and anticipated) of the Passport engine? How is the engine performing in service? How keen is GE to augment its very strong global market share in jet engines and expand into other products such as avionics or electrical or mechanical components (wheels, landing gear, hydraulics)? What is the update on the GE Avionics offering - are there any potential aircraft platforms on the horizon that GE could win? GE/CFM announced its plan to develop Open Fan technology for the 2030s – why did GE/CFM not choose to develop a ‘geared’ jet engine, similar to the GTF offered by Pratt & Whitney? What are the pluses and minuses of Open Fan vs GTF technology? Capital What approximate level of medium-term earnings can the ‘new’ Capital generate, after $0.6bn of losses guided for 2021? Will the business need more cash support from Industrial to fund LT Care and other obligations post-2022? How core is the remaining $17bn of assets exc-cash and insurance at end-2021 excGECAS? What’s the go-forward equity base of the business in 2022+? Is it a purely economic decision whether to pay someone to take the Long-term Care liabilities off GE’s hands vs. let them wind down over time, or is there a point at which the management / board would pay someone to take it off their hands sooner, simply to remove an overhang on GE’s valuation multiple? Healthcare This business is perceived to have been under-invested in in recent years – is that the case? Is much catch-up investment needed here? How much does R&D need to climb? 58 Barclays | U.S. Multi-Industry 18 August 2021 FCF conversion is guided to be >100% in 2021 and 2022 – is that a good go-forward rate in the medium-term? Operating margin expansion has been rapid in recent years – what are the main levers behind this? What are the main focus growth areas of the business within Imaging / Ultrasound / Life Care Solutions / Pharmaceutical Diagnostics? Where does GE think its market positions are strongest among these sub-segments? What sort of base pricing pressure does GE see across the business? Which are the areas where pricing pressure is most intense? Does GE think the business receives sufficient attention / investment inside the current portfolio? What impact is the ‘Buy China’ push by the government there in healthcare having, if any? Power What is the appropriate long-term FCF conversion or margin profile that the business can generate? How confident is GE regarding the goal of a high single digit operating margin for Gas Power in 2021? Gas Power has a $0.8bn cash usage in 2021 from long term AR factoring run-offs and restructuring – how large should this number be, beyond 2021? Power Portfolio has a negative cash impact of $0.6-0.7bn in 2021 from restructuring, project close-out, and legal settlements…how large should this number be, beyond 2021? If Power stays at low single digit FCF margins in the next couple of years, would this increase the likelihood that pieces such Power Portfolio are exited, or would GE continue to work to improve these margins indefinitely? Gas Power FCF is targeted to be positive in 2021, and reach 90% conversion in 2022 – what is assumed for capex and working capital within that figure? What should LT op. margins be in Gas Power (against a low-single-digit rate in 2020), assuming the Gas market does stabilize at 25-30GW / year? What should the Service margins be in the long-run? Power’s profitability over the past 2-3 years has suffered from Service pricing falling…how severe is Service pricing pressure expected to be for the medium-term? How long will the exit from Steam Power OE take, and what are the 2021-2022 cash costs of that exit? What will the revenue and margins be in the Steam Power business at that point? Steam Services are targeting HSD FCF margins – what are they today? Power Conversion appears on track to move operating margins from a double digit negative in 2020 to profitability in 2021 – how high can margins go in the mediumterm? It seems GE’s cost to serve in Power AM is consistently coming in too high; what is being done to lower this cost to serve / improve Service productivity? 59 Barclays | U.S. Multi-Industry What is the current confidence level in the quality of the backlog today in Power? The backlog is large, and there were substantial ‘clean-up’ costs (for projects, operational issues, liquidated damages etc.) in the past 18 months... how many more quarters or years will this clean-up take? Is there much sign that the contractual service business (~$4bn in sales in 2018) is starting to suffer from utility customers trying to renegotiate contracts lower because of falling gas turbine utilization in developed economies? How stable is the CSA book of business? What is the difference in the operating margin profile between the contractual and the transactional service business? Is GE seeing more competition for Service, from third-party / non-OEM aftermarket providers, whether in the US (as the large pool of service contracts on equipment installed in the US ‘gas boom’ of 2000-2002 became more open to other suppliers) or overseas? Ansaldo emerged as a company with a stronger portfolio in Power Generation (OE and AM) after the GE–Alstom deal asset sales, and its partnership with Shanghai Electric – is it proving a bigger competitive threat now? Renewables Renewables’ turnaround appears to be gathering steam, on cash and profitability – how does GE feel about the long term growth and margin prospects in the business? Peers in wind turbine manufacturing are suffering from higher steel costs – it seems that GE is protected for now (2021) by its hedging programs – how big could the margin headwind in 2022 be from steel as these hedges roll off? Is there any reason to think that FCF or operating margins can ever reach a double-digit rate? If they cannot, why would GE want to remain in this market, rather than IPO the business? How are the operating margins in Onshore wind at present? What is the target level? How much of Onshore wind is service, and what are the margins here? What is the strategy to turn around the Grid business ($4bn in sales)? The target of breakeven earnings by 2022 – how ambitious is this? Does GE still view Grid as an attractive long-term market (having entered it via the Alstom deal), esp. with all the hype around Electrification at present; could GE exit Grid (as ABB has done, selling a majority stake to Hitachi), or does it see large sales or cost synergies with its Thermal Power Generation / Renewable assets? How much is GE investing to win share in offshore wind, and what is the expected investment in 2021? What volumes does the goal of breakeven profit and positive FCF by 2022 need? What market share aspirations does GE have in offshore wind? What global market share is implied by the goal of a $3bn offshore wind business by 2024? Hydro is loss-making still – why is that the case, 6 years since the Alstom deal closed? Why is a breakeven not expected until 2023? What margins are current service / OE contracts being booked at, in orders? 18 August 2021 60 Barclays | U.S. Multi-Industry HONEYWELL HON Stock Rating OVERWEIGHT Industry View NEUTRAL Price Target USD 253.00 Price (17-Aug-2021) USD 231.45 Potential Upside/Downside +9.3% Recent Key Reports: HON: Tough Q4 comps; Brighter 2022 outlook on sales, op. leverage; July 23, 2021 US Multi-Industry: Mask / respirator demand rolling over; Implications for HON, MMM; June 15, 2021 HON acquires Sparta Systems; Push into life sciences QMS software; MI Implications; December 22, 2020 General Darius Adamczyk’s #1 priority since becoming CEO has been to increase HON’s organic sales growth rate – how satisfied is management with the progress so far? HON recently shifted its main US listing to the Nasdaq – what rationale lay behind this change? Connected Enterprise – how large is this today / how fast is it growing (in 2018, the company had $1.5bn in Connected Enterprise sales)? How rapid is the progress in scaling up Forge in terms of penetrating the $100bn TAM that the company has highlighted? How does ‘Forge’ overlap with the Connected Enterprise offering…is it run on a P&L basis or is it cross functional? How can we on the outside track the success of Forge over time? HON expects its Digital push to yield >$500m in run-rate benefits (sales, costs, cash), including >$50m of savings from ERP systems reduction (by end of 2021)…what are some other examples of how this Digital push is driving internal improvements? What are the medium-term goals for Digital’s benefits to HON? It looks as if the Digital push is driving down the number of HON websites from 1500 previously to ~50 in 2021, with the number of ERP systems falling by >50% in 2021…should we assume that most of the HON Digital improvements are largely in the ‘run rate’ of costs by 2022? HON’s ‘Supply Chain transformation’ initiative has targeted $500m of savings – what is the progress on this target? How is the company progressing on its effort to improve the ‘supply base delivery’ by 810 points? One of HON’s goals is to become a ‘software industrial’ company, but the valuations necessary to accelerate this are high – HON paid >20X EBITDA for Sparta Systems in late 2020, and ROK and FTV are paying more than this in 2021 – what valuation is HON willing to pay for software deals? Amidst the portfolio transformation efforts, HON recently bought a software company (Sparta) for 10X sales and divested a footwear business (to Rocky Brands) for 1X sales…how sensitive is management to the risks of damaging returns by having a wide disparity between purchase and sale prices, as it seeks to transform HON into a ‘software industrial’ company? How is management thinking about the implications of a rising input cost environment? How is the pricing / cost environment in Advanced Materials (within PMT)? 18 August 2021 61 Barclays | U.S. Multi-Industry How confident is HON that PMT can generate margin expansion in 2021, given the potential decline in its organic sales? Does the push towards Software, and the ambition to have higher organic sales growth, imply that R&D / sales (4-4.5%, Co-funded) will rise over time? HON has talked much more about Breakthrough Initiatives (BTI) and Velocity Product Development (VPD) in recent years…how important could these be in driving up the company’s overall organic growth rate…how does the company measure the success of such efforts? We have heard little regarding Honeywell Ventures since its 2017 launch…how does its progress compare with management’s original expectations? Is the company re-organizing any of its global supply chains in light of Covid, et al.? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding Education / infrastructure stimulus efforts for instance, or corporate tax rates? Portfolio How satisfied is management with the portfolio size and shape? How comprehensive / thorough was the initial portfolio review in 2017 that led to the decision to spin off two assets in 2018...has much changed since that initial review? Does the post-Covid environment mean that another major portfolio review is necessary? Given high public valuations and improving demand trends in most businesses, could we see more divestments in 2021-2022? How do ESG factors affect how HON thinks about its portfolio management (as relates to PMT’s place in the portfolio for instance)? How confident is HON in the long-term growth profile of UOP and HPS given their O&G intensity? Is it more likely HON shrinks this O&G intensity via divestments or via M&A (in other areas), or both? There has been considerable Aerospace industry consolidation in recent years…HON stood by on the sidelines in this respect – how eager would it be to engage in future consolidation, particularly as the Commercial part of the industry is only just emerging from its downturn? What share of the portfolio now is ‘long cycle’; is this the ‘right’ mix for HON? HON has made a (very successful) push into Warehouse automation via the Intelligrated and Transnorm deals, augmenting its strength in Process automation (HPS)...is it not logical to make a push into Hybrid / Factory automation? If HON chooses to exit more assets, is it more likely to exit via spin-outs or outright asset sales? How core is HBT to HON – it is the smallest of the four businesses and looks likely to receive little M&A capital? 18 August 2021 62 Barclays | U.S. Multi-Industry Balance sheet / Capital allocation Has Covid / the recent downturn affected how management thinks about capital deployment? Bolt-on deals ($2-3bn in size) have been the stated preference thus far for M&A…how full is the pipeline for such transactions? Into which segments would management most want to deploy M&A capital? Is the company becoming less rigid in its M&A financial criteria, given how high equity market valuations are? If the right deal arises, how far would HON be willing to stretch the balance sheet? In SPS, how broad a portfolio does HON want to have in SPS / warehouse automation specifically – for example, would HON be interested in adding exposure in areas such as fork lift trucks, or is this viewed as too commoditized? How likely is it that HON could make a large standalone software acquisition (i.e. multiples of the $1.3bn paid for Sparta) in the next year or two, as part of its aspiration to become a software-industrial company? In HBT, would HON be interested in buying parts of SWK Security if they become available? it Which segments are the most / least likely to receive M&A capital? How much cash can PMT expect to receive, given its O&G intensity? Aerospace How wide a gap does HON think we will see in Commercial AM between the flight hours recovery, and its own Commercial AM sales? Does it see a big medium-term risk from cannibalization of used parts / the scale of USM parts swamping the sale of new AM parts? When does the company think that global passenger traffic / flight hours will return to 2019 levels? What recovery slope does HON expect for business jets now that we are back to preCovid demand levels? How satisfied is HON with the mix of business – 50% Defense & Space, 50% Commercial? Does Covid change how it thinks about the right ‘balance’ of exposures for the business? How confident is HON that the more mechanical parts of its portfolio (exc-Connected, Avionics and Engines) can see margin expansion / reasonable pricing power, amidst efforts from the OEMs to squeeze their suppliers? The company was generating double-digit growth from ‘Connected’, software, upgrades, and high growth regions pre-Covid…how have the Connected and software sales held up in the current downturn? What is the market growing in these verticals which companies is HON taking share from, if at all? HON’s Defense business is declining now after three strong years – how long will this downturn continue? 18 August 2021 63 Barclays | U.S. Multi-Industry In Defense & Space, how different is the medium-term revenue growth outlook in US vs International D&S spending? How different is profitability in US vs International for HON? How is HON positioned in Space, as new commercial entrants into the Space market seem to be gaining traction? What new OE platforms is HON most focused on winning over the next couple of years, in Commercial and Military? Given the margin performance (28-29% op. margins in late 2020/early 2021), how much higher could the 27% long-term margin goal be raised to? Building Technologies How are negotiations going with customers regarding the upgrades they are contemplating making to commercial buildings as a result of Covid-19? How large a tailwind could these changes be for HBT? HON announced a cooperation with SAP in mid-2020 – can the company explain how significant this could be, and how it differentiates HBT’s offering? Could Covid mean this is a very muted recovery slope for non-residential construction markets than normal, given the weaker demand in hospitality, retail, office, et al.? What is the revenue split of HON’s main verticals? Is the company seeing large differences in behavior post-Covid (pricing, uptake of postCovid remedial solutions, budgetary pressure) among its customer base depending on vertical (Multi-family residential vs. Office vs Hospitality vs. Retail, et al.) or geographic region? What opportunities are there for HBT to benefit from Covid’s impact, in terms of solutions such as contactless security, thermal imaging, et al? How attractive is the end-market growth profile in HBT...for example, peers such as SWK and CARR saw growth headwinds (pre-Covid) in their commercial Security businesses? How much of HBT’s markets are challenged by major structural problems (price pressure for instance)? What kind of price pressure does the business face, in Hardware vs. Controls / Automation? In Smart City, HON has talked about $125m+ in annual sales for 2023 – where are we on the path to hitting that target? How high are the profitability levels? What are the risks for a supplier like HON from competing in these big ticket projects? Who are HON’s main rivals for the Smart City contracts, and are they different from its traditional HBT competitors? HON has a weak position in Security and Electrical & Lighting Controls, relative to BMS, Fire, Software / analytics and Install / Services – does it see many potential M&A targets in these two fields, or is it comfortable with its position in those markets? HON is trying to increase its share of sales from Services…what are the levers it is using to drive up Services sales? How will HON take back the services / aftermarket on the 20% of its installed base that is not serviced by HON itself? Why is it not servicing all of its installed base? 18 August 2021 64 Barclays | U.S. Multi-Industry How much of the business is pure software, and what is the profitability like on this software? How much of the business is SAAS? What is the strategy for dealing with low-cost, high-volume competitors in the hardware world, such as Hikvision? Is there any real differentiation in the building controls / commercial building security market – how are attrition rates trending? Does HON see large synergies between offering Building / energy controls, and HVAC equipment, as JCI, TT and others argue for? Or does HON view HVAC as a fundamentally different offering, and it has no / little desire to expand into the HVAC world (in 2016, HON seemed interested in merging with UTX, partly because of the sales / cost synergy opportunity from being able to offer both HVAC equipment and building controls; see press reports on the merger)? HBT was targeting operating margin expansion to ~23% in the long-term, but margins have already reached 22% in recent quarters – how much higher could this target be? Performance Materials & Technologies How does HON think about adjusting its portfolio / strategy in PMT given O&G markets have had three severe downturns in only 11 years – does the regularity and severity of these downturns affect how the company views and operates the segment? It has been several years since UOP and HPS were merged under the PMT umbrella – how satisfied is HON with the cross-selling underway across the two businesses, which is a unique opportunity relative to the pure play peers? Post-Covid, does the LT goal of 25% operating margins at PMT still hold (vs 20% in 2020), and what are the levers to get there? Within process, Smart Energy has had a tough time since the acquisition of Elster – how is this business performing now? How much competition is HON now seeing from newer entrants in process automation, who have more of a pure IT background (such as Ansys, or AspenTech), if any? Does HON see the R&D requirements at HPS increasing, as IT penetration of plants increases, and amidst the increasing customer need for their automation suppliers to excel at digital, as well as hardware, offerings? What does HON think of the multi-year push from XOM to drive Open Process automation standards? Within UOP, what Breakthrough Growth Initiatives is UOP most excited about at present? Which ones could be the most material sales growth drivers in the next 2-3 years? Within UOP, HON has been positive on the Gasoline growth outlook for some time, but has this view been tempered at all by the emergence of electric vehicles – how does HON think about the interplay between electric vehicles and the LT growth outlook for UOP? How does UOP fit with the CEO’s focus on HON becoming a ‘Software Industrial’ company? 18 August 2021 65 Barclays | U.S. Multi-Industry Why is the company keeping much of Advanced Materials (the ‘High Purity chemicals and materials’ piece, which is 25% of Advanced Material sales, is guided to see only 3% market growth, for example), instead of spinning it off, per ASIX? How is Solstice progressing – the $1bn of R&D and growth capex was recouped with 5 years of the first commercial sale? How additive is Solstice growth to PMT segment margins? What are the key regulations surrounding refrigerants over the next 5-10 years and what will the impact be for HON? Where do we stand now on the matter of illegal refrigeration ‘dumping’ actions that have taken place periodically in Europe? Safety & Productivity Solutions Revenue growth has been very high – how much of this is attributable to end-market growth, vs HON share gains? Is HON seeing much evidence of ‘on-shoring’ among its customers on the Productivity side? HON was losing market share in Productivity Solutions / Services over 2018-2019, but growth returned in 2020-2021…how is market share trending now? Given the margin performance over the past year or two (14% margins in 2020), how realistic is the LT 18-20% operating margin goal…should we assume it is a target for >5 years’ time? How are margins in Warehouse and Workflow Solutions specifically – what is the LT aspiration? How severe is pricing pressure in Warehouse automation? Within Warehouse and Workflow Solutions, how different are the margins between OE, and AM sales? What is the typical conversion rate of OE wins to service contracts on that equipment? Within Safety, HON has a strong position in PPE – what market share does it have here? How large an earnings impact will the roll off in mask sales have for HON? How quickly is HON augmenting Intelligrated’s traditionally hardware-centric offering, with more software? Around 50% of Intelligrated sales are for large projects...peers such as Kion and Daifuku have come unstuck in recent times handling this large project risk (engineering shortfalls, et al.) – how comfortable is HON handling this risk? Advanced Sensing is a high growth market, but one where it appears hard for manufacturers of the sensors to differentiate…how does HON differentiate in this market? How is pricing pressure here? Machine vision seems to be core to many of the end markets that SPS serves, especially warehouse automation…is this an area that may see more internal or external investment by HON? Is HON content with its current sensing / sensors portfolio? 18 August 2021 66 Barclays | U.S. Multi-Industry ILLINOIS TOOL WORKS INC ITW Stock Rating UNDERWEIGHT Industry View NEUTRAL Price Target USD 217.00 Price (17-Aug-2021) USD 233.22 Potential Upside/Downside -7.0% 18 August 2021 Recent Key Reports: ITW: 80/20 execution; Top-line trends likely drag down relative valuation; July 30, 2021 ITW: Downgrade to UW; Cycle context provides a tough backdrop; May 26, 2021 ITW Initiation: Strong sales & margin recovery loom, but seems priced for perfection; August 25, 2020 General ITW has talked about the opportunity for market share gains over the past 12 months…. has it seen this play out? What are some of the areas where it might be benefiting / will benefit from these share gains into 2022? ITW had talked a couple of years ago about adding 1-2% of enterprise organic sales growth via ‘Finishing the job’ vs its pre-Covid ITW 2-3% CAGR…how satisfied is it with the progress here? Which segments have really benefited from this focus, and which ones could soon show the benefits? What scale of top-line growth headwind should we expect from PLS / Product Line Simplification efforts in the medium-term? What type of incremental margins should we expect ITW to generate medium-term, after ~40% operating leverage looks likely in 2021 despite input cost headwinds? In the past couple of quarters as sales have rebounded, most segments have enjoyed similar operating leverage – should we expect this relatively tight range to continue for the segments that continue to recover? Auto OEM faces tough ‘comps’ year on year and supply chain constraints, but how should we think about operating leverage in this segment relative to the others over time? Did the experience of the 2020 Covid downturn affect how much structural margin improvement ITW thinks it can drive, relative to that 28% 2023 core margin goal? How does the company ensure that ‘Enterprise Initiatives’, which have driven 100bps+ of margin expansion per year for several years, stay vibrant and productive? ITW announced its first acquisition since 2016 in Jan. 2021, with the MTS T&S transaction; what characteristics of this business made it an attractive target? What informed the timing of this transaction, does this mean the company feels its existing businesses (exc those earmarked for divestiture in 2022) are ‘close enough’ to ‘Full Potential’? As of the company’s 2018 Investor Day, ITW categorized 55% of its revenues as ‘Ready to Grow / Growing’, 39% as ‘Ready to Grow/ Not Yet Growing, and 6% of revenues as ‘Long-Term Growth-Challenged’. Has Covid presented any structural changes that have altered the way management views its revenues through this framework? How confident is management of handling price / cost in 2021 (guided to be a 5060bps headwind to margins in FY21 vs. a 40-50bps headwind to margins in 20172018); what has changed since the last period of rising input costs or is different in this inflationary period such that management expects to fully offset potential headwinds? How does ITW think this 2021-2022 Short Cycle Industrial revenue recovery (shape / slope / duration) could compare with prior recoveries in 2017 or 2011? 67 Barclays | U.S. Multi-Industry 18 August 2021 Does management see any potential major impacts from policy proposals under the new Administration in the US (relating to stimulus, or corporate tax rate changes)? Is the company reorganizing any of its global supply chains in light of Covid, et al.? Portfolio The company said in early 2021 that it would delay major divestments until 2022 as those businesses likely rebound in 2021…how did the seven divisions that were viewed as ‘growth challenged’ perform during the downturn, relative to the rest of ITW? The MTS T&S deal - what characteristics of this business made it an attractive target? What is the historical organic sales growth rate of this asset? What are the main levers that ITW will use to push up the MTS T&S margins from 6% to the 20%+ firm-wide level in terms of FTB / sourcing /divestments? Management have sounded increasingly keen to do M&A, and should still have ample capacity following the close of the MTS transaction – what end-markets screen most attractive at present? Is it realistic that ITW could actively contemplate adding an 8th segment via M&A, or acquisitions will likely remain in the existing seven segments? ITW’s portfolio is very hardware focused at present, does management aspire to increase the share of recurring / software / healthcare sales akin to shifts among broader MI companies? Balance sheet / Capital allocation How does management think about prioritizing the use of cash for share repurchases vs growing the dividend vs M&A? ITW’s buyback run rate in 2020-2021 is below the $1.5bn LT placeholder (guided at $1bn in FY21)…is that placeholder lower now because of the company’s M&A aspirations, or simply reflects Covid and its lingering aftermath? ITW’s capital allocation priorities measured as a share of operating cash flow since 2013 have been external investments (35-45%), funding the dividend (35-40%) and internal investments (20-25%) – how does this change as the company pivots to more of a focus on top-line growth? Automotive OEM How has the segment’s “80” changed over time? How does the rise of EVs impact this? How does the company expect the segment’s recovery to track with auto builds, particularly in light of recent semiconductor supply chain issues? At the 2018 investor day, the company identified the greatest potential drivers for incremental content / vehicle were among Chinese OEMs in the Body & Interior and Power Train – what’s the company’s progress on this initiative? ITW estimated new products could add $40/car to its current (as of 2018) $200/car content on EVs, what is the content today on EVs? Are there any significant differences in the margin on products for EVs vs ICE vs Hybrid? Does ITW expect the shift to EVs to cannibalize its ICE revenues? How is the company navigating this transition? 68 Barclays | U.S. Multi-Industry 18 August 2021 Does the company have a new product ‘vitality index’ or tangible measure for what percentage of segment revenues accrue from new products? How satisfied is ITW with the recent product launches in the segment in expanding content per vehicle? Can / does the company aspire to mitigate its exposure to auto production cycles? Auto OEM margins peaked at 24% in 2015-2016, and look set to be 20-21% in 2021…Does 24% represent the ‘ceiling’ for where segment margins can go? Food Equipment Food Equipment has been one of the most heavily impacted segments by Covid and subsequently experienced among the highest growth rate in Q2 21 – how does management assess the slope / duration of recovery in this segment (in terms of restaurants vs retail vs institutional)? Has Covid-19 changed the way ITW looks at the current “80” products in this segment? Given the structural impact Covid has had on restaurants / institutions, when does management expect to return to 2019 revenue levels? How does management assess the slope of recovery in Restaurants vs QSR, vs Institutional (HC, Lodging, etc.) vs Grocery? Warewashing seems to be an attractive market with generally higher price points (vs. hot/cold side equipment) and one in which major competitors, WBT (covered by Adam Seiden) & MIDD (not covered), do not compete. If ITW has 20-30% share in this market, who are the other major competitors and what is their positioning like? How big is the opportunity in this market? Does ITW see any implications (pricing, competition) from the announced merger between The Ali Group and Welbilt? How much of Food Equipment is warewashing vs cooking, refrigeration, and food processing? How have the dynamics around Food Retail changed since Amazon (covered by Ross Sandler) bought Whole Foods in 2017? Is this still driving weakness in Food Retail? What are the major drivers within this end market? What does the replacement cycle for Food Equipment look like? What is the average useful life of equipment and when was the last major investment cycle? How is ITW impacted by the movement towards the 'connected kitchen' and digitization on the front and back end? Has ITW invested to develop a ‘connected’ offering? Test & Measurement and Electronics Growth in this business appears to be relatively low at present compared with the broader semiconductor / electronics supply chain - is this a function of mix / timing? ITW announced the acquisition of MTS T&S in January 2021 (expected to close in late Q321 or early Q421) – how much overlap is there with ITW’s existing business and how much synergy potential is there from this deal? Management likened the MTS T&S opportunity to Instron back in 2005, with entry operating margins of 6% expected to rise to ‘ITW caliber’ (i.e. >20%) by the end of year 5 – what does the margin ramp of this business look like? What are the expected costs to achieve that? When is this business expected to meaningfully impact segment margins? 69 Barclays | U.S. Multi-Industry 18 August 2021 Management identified further share penetration opportunity within T&ME (14-25%) – who does the company view as the main competitors and how does ITW plan to take share? ITW’s current Test & Measurement and Electronics exposure is highly diversified – which areas of T&ME are most attractive to grow ITW’s presence in (either organically or inorganically)? How much of this segment is tied to Semiconductor cycles vs general capital spending? Does the company aspire to decrease the segment revenue exposure to cyclical endmarkets? Are there any significant margin differences between Test & Measurement vs. Electronics? T&ME accrues the majority of revenues from international geographies (~60% EMEA + APAC & Other), which regions are most attractive (in terms of revenue growth opportunity / profitability) that the company currently operates in / would look to expand in? T&ME margins expanded by 1,000bps over 2014-2019 and there is still one division ‘earmarked’ to divest within the segment (which was put on hold due to the pandemic) – how much room is there for additional margin improvement in this segment? How big is the expected divestment and what is the anticipated margin impact? Welding How does ITW assess the current geographic footprint of the Welding segment? Are there regions in which ITW is looking to grow its presence? What is ITW’s competitive advantage vs Lincoln Electric Welding and Colfax FabTech? CFX Welding / ESAB has talked about Digital Solutions, 2nd Wave robotics and Medical & Specialty Gas Control as being segments that can grow 6-8% annually…what is ITW’s revenue exposure here / what are its plans in these areas? ITW has a higher mix of Equipment vs. Consumables as compared with direct peers (~60% equipment vs peers 30-40%) – does this difference in mix help explain the margin differential vs peers? How do pricing dynamics differ across Equipment vs Consumables? What is the difference in margin on ITW’s Welding equipment vs consumables? Does ITW currently have the ‘right’ mix of equipment vs consumables? As ITW looks to take market share from competitors; what does this mean for the margin dynamics in the business? Are there any pricing concessions being made to increase volume? Is there a significant difference between ITW’s market share on the commercial side (smaller businesses / individual users) vs industrial? Do these businesses have similar margins? Poly & Fluids At one point ITW sized the Polymers & Fluids market at ~$30bn – this implies ITW maintains ~5% share, well below its targeted 15-20% market share within its ‘80’ markets – is 15-20% market share attainable for this segment? 70 Barclays | U.S. Multi-Industry Who are the main competitors in Polymers & Fluids and how does ITW intend to grow share? How do the margins between Automotive AM, Polymers, and Fluids compare? Poly & Fluids segment margins reached an all-time high of 27.3% in Q221 (prior high was 26.5% in Q3 20), having averaged 23.5% since 2019, after ~20% in the period prior to 2019 – is this margin improvement structural? Is ~27% a new potential run-rate margin for this business or did it benefit from any one-time / temporary savings? Poly & Fluids averaged 0% organic revenue growth from 2014-2019 while Auto OEM averaged ~3% organic revenue growth over the same period – given Poly & Fluids’ auto aftermarket exposure, why hasn’t this segment seen higher growth historically? Construction Products How does management think Covid is affecting, and will affect, the demand for Residential repair & remodel activity structurally / in the next few years, assuming more ‘work from home’ in general in the US / W Europe? What share of revenues go through ‘big box’ retailers? Does ITW have the right mix of sales through ‘big box’ retailers? Does ITW have a robust e-commerce platform for Construction Products? Is this a channel the company is looking to expand? Geographically, are there any significant differences in margins? Is it easier to pass price in the US vs. Canada? How does management assess the severity of the 2H 21 / 1H 22 ‘comps’? Can this business see positive organic sales growth through the 1H 22? Specialty Products Management has often said that the Specialty Products segment serves as an ‘incubator’ for developing larger platforms – what are some of the ‘gems’ of the Specialty Products segment? How does management think about which of these businesses could become an 8th segment? Who does ITW define as close peers for the Specialty Products segment? How does management think about drivers of growth in this segment? In which of these products does the company have the highest market share and / or biggest competitive differentiation? 18 August 2021 71 Barclays | U.S. Multi-Industry INGERSOLL RAND IR Stock Rating OVERWEIGHT Industry View NEUTRAL Price Target USD 60.00 Price (17-Aug-2021) USD 50.85 Potential Upside/Downside +18.0% 18 August 2021 Recent Key Reports: IR: Strong execution; Disciplined M&A approach should yield high accretion; July 29, 2021 US Multi-Industry: FLOW rejects IR proposal; Potential next steps for FLOW, IR; July 19, 2021 IR-FLOW: News reports of takeover approaches; July 18, 2021 US Multi-Industry: 6 conclusions from FTV, ROK recent M&A deals; IR, ROP look very attractive; July 13, 2021 IR: CEO, CFO Virtual Meeting: Compounder flywheel starting to hum; Seepex a +ve sign of deals to come; June 24, 2021 General Management is trying to make IR more focused on recurring, less cyclical sales – how satisfied is management with the performance of the IT&S and P&ST segments during the recent downturn? IR had mentioned at the Investor Day in 2019 that it wants to be viewed as a ‘high quality compounder’ – what does this mean for future strategy? How does IR think this 2021-2022 Short Cycle Industrial revenue recovery (shape / slope) could compare with prior recoveries in 2017 or 2011? What is the phasing of the remaining RMT deal synergy savings ($350+m funnel) over 2021-2023? What is the annual phasing of the $450m of costs to achieve deal synergies (and other restructuring measures) over 2020-2023? How much of these costs are ‘cash’ vs P&L? When looking at the total $300m deal synergies medium-term goal, how much of this, or whatever synergy number is attained in the end, does the company expect to reinvest in product development / a top-line acceleration, and how much will be retained in the bottom-line? IR noted its opportunity in Water and Wastewater in Q320, with a $5bn market opportunity, with growth of at least 2x GDP. How big of a revenue stream is this for IR in IT&S as well as P&ST at present? FCF conversion is guided to at least 100% in 2021 (implying a mid-teens FCF margin), what type of FCF conversion / margin should we expect in the medium-term? Management has recently described reducing the tax rate as a ‘good, meaningful, opportunity’ – how low of a tax rate should we expect in the medium-term, barring any major US tax regulation shifts? What is the background of the Innovate 2 Value Program - how should we think about the timing of savings, and which segments will see the majority of the I2V effort? What portion of IR’s sales are genuinely recurring in the two remaining segments – what is management’s target for this in 5-10 years, if it has one? How confident is management it can offset higher cost inflation with pricing, and how have its practices on pricing improved in recent years? Is the company re-organizing any of its global supply chains in light of Covid, et al.? 72 Barclays | U.S. Multi-Industry 18 August 2021 Does management see any significant potential impacts from the policies of the new Administration in the US – regarding infrastructure stimulus for instance, or corporate tax rates? Portfolio What aspects of FLOW were most attractive to IR? Are there other ways to attain these attributes? What kind of financial returns should we expect Maximus and Seepex to generate in Year 3 or 5 post-the deals? How large are the cost / revenue synergies that IR can extract from these businesses? With now 4 positive displacement pump technologies in the portfolio following the Seepex acquisition (progressive cavity pump manufacturer), what is IR’s appetite to acquire additional technologies and what synergies (if any) could there be? How did Maximus and Seepex perform through the Covid downturn and what are the organic sales growth outlooks for this business over the next 12 months? Should we expect IR’s M&A strategy going forward will be focused on Hardware assets bought at reasonable (<20X EBITDA) multiples? IR has minimal software exposure – how attractive is this as an avenue for M&A? What are the main criteria behind deciding which assets will remain in the IR portfolio longer-term? Having announced the divestments of both HPS (50% stake) and Specialty Vehicle, are there any other parts of the portfolio the company considers may be non-core? Power Tools demand is booming right now – is this not a good time to divest the business? 30% of sales are generated from products that are related to water – is this an interesting M&A target area? How much of IR’s overall revenue base does the company think can be readily associated with Environmentally or Sustainability-inspired trends (if we include hydrogen etc.)? Balance sheet / Capital allocation IR after Q221 earnings introduced a buyback program – does this have any implications for IR’s near-term M&A ambitions? What was the context of this decision? IR will still have balance sheet leverage at or below the MI Avg at end-2021… does the company need a ‘digestion’ period following Seepex and Maximus, or can the company do additional M&A this year? Should we expect IR to pursue bolt-on targets or would management consider adding another segment? Should we assume the P&ST segment will receive more M&A capital vs IT&S, until the latter is more the way through IR RMT synergies? What is the longer-term strategy / thinking around shareholder returns as an avenue of capital deployment (e.g. buybacks / dividends)? What is the ROIC expected to be on M&A deals such as Tuthill Vacuum, RunTech, DV Systems, MP Pumps, and Albin Pump, Seepex, and Maximus? 73 Barclays | U.S. Multi-Industry 18 August 2021 Industrial Technologies & Services What market share does IR have in compressors in various regions / markets postRMT? How does IR think it is performing market share wise against its peers in compressors? Does IR believe that long-term compressor market dynamics are more favorable now given the consolidation in recent years? How is pricing power? One reason why Atlas Copco has such high margins is its Service / AM network – how close can IR come to replicating that, once it integrates the legacy IR Industrial installed base? What is the opportunity to expand margins in Europe (~25% of Industrial sales), where Atlas has significant scale advantages vs IR compressors today? What is a realistic medium-term EBITDA margin goal in the IT&S segment, vs Atlas CT EBITDA margins of mid-high 20%s? What are margins in the 60% of segment sales that accrue from compressors? How satisfied is management with IR’s efforts to increase its Aftermarket business in compressors? How much of a gap is there in AM between IR and the global leader? What can the company do to accelerate the through-cycle organic sales growth of the IT&S, given that the 10-year organic sales CAGR of former IR Industrial is ~2%? What is IR’s position in the oil free compressor market? How much investment is needed to become a leader in this market - what is the margin differential between oil-based and oil-free compressor products? Around 40% of segment sales are non-compressor related – vacuum, blowers, winches, power tool products – which of these are more or less of a priority for future investment? In which areas is IR’s market position strongest or weakest? How wide are the margin differences across these different products? Precision & Science Technologies Pumps is a very fragmented market, with masses of competitors – how does IR differentiate here? What are the main pump technologies that IR thinks it is strongest at…where does it want to be bigger, and what are the pump technologies it is least interested in? What are the main drivers of P&ST sales, excluding the 25-30% of sales that are Medical, as it seems very diverse (including animal health, water, industrial, food & beverage et al.)? What is the medium-term growth outlook for this business? IR noted it has a >$90m Hydrogen Refueling & Dispensing funnel (through its Haskel brand) as of Q3 20, with a $2.5bn market opportunity by 2027. At present, how large is the market, how quickly is it growing, and what is IR’s market share? How does the margin profile of this vertical compare to the P&ST average? What are the main verticals within the Medical business that drive its sales? Is management satisfied with the OE (~85% of sales) vs. AM (~15% of sales) mix in this business? What is it doing to increase the AM share? What level of incremental margins should we expect in the recovery? Is there much of a margin difference between the Medical and non-Medical parts of the business? 74 Barclays | U.S. Multi-Industry Which end-markets or products beyond Medical is IR focused on expanding its presence in? Water, for instance, has been viewed as an attractive growth market on and off in the past two decades. Does management see any significant gaps in the P&ST portfolio that could serve as attractive opportunities for larger M&A? Who are the closest peers / most common competitors for this segment? 18 August 2021 75 Barclays | U.S. Multi-Industry JOHNSON CONTROLS JCI Stock Rating OVERWEIGHT Industry View NEUTRAL Price Target USD 75.00 Price (17-Aug-2021) USD 73.00 Potential Upside/Downside +2.7% Recent Key Reports: US Multi-Industry: AHRI HVAC June Data: Sell-in slows (Implications for CARR, JCI, LII, TT); August 12, 2021 JCI: Brighter Services outlook; Core incremental margins on track; August 1, 2021 JCI: Upgrade to OW; Sales and margin self-help momentum; May 26, 2021 US Multi-Industry: US Education Stimulus Implications: HVAC, Access Control, and Building Controls; March 24, 2021 General What slope of recovery in Non-residential markets should we expect over 2021-2022 – how is Covid’s aftermath shaping this recovery? Overall full-service average contract attachment rates are ~40% or so…do these vary substantially by region or by product (F&S vs Applied HVAC)? These full-service attachment rates have already improved sharply in 2021 (+370bps YTD), what are the main drivers behind this acceleration? If it has been so easy to drive up this attachment rate, why did management not focus on this earlier? How does the new digital platform, OpenBlue (launched in mid-2020), differ from the Metasys offering, and what new synergies can it bring across the portfolio offerings? What differentiates OpenBlue from its peers? Is there any timeline on when we might start to see the Service top-line growth rate reflect the ambition that OpenBlue could add 2-3% to this growth? How did JCI arrive at this 2-3% figure? What is the cannibalization risk of this product relative to existing JCI Service offerings? One critique of JCI’s building control systems historically is that they were too ‘closed’ – does OpenBlue represent a reversal of this? Will OpenBlue be compatible with third party hardware/services or will it be restricted to the JCI ‘ecosystem’? Are there any pilot programs underway, that help explain what level of savings / efficiencies the building operators can generate from deploying OpenBlue? What is the pricing model for OpenBlue? How is it sold by JCI? OpenBlue appears to have a key focus on data and AI, will this data be owned by JCI and be able to be used across client Buildings or will it owned by the client and ‘locked’ to each client ‘account’? Will JCI develop AI capabilities in house or is the company seeking to partner with other companies in this space? On profitability, what are the margin implications of the Service attachment rate and OpenBlue initiatives; i.e., higher investments now that weigh on near-term Service margins, and then higher LT margins, or will the Service push be immediately marginaccretive? Management have stated there is a 300bps operating margin gap to peers – does it think it can close this gap by 2023, when the run-rate savings from the new COGS and SG&A productivity plans are largely in place? 18 August 2021 76 Barclays | U.S. Multi-Industry 18 August 2021 Management has said that incremental margins should reach 40%+ over 2022-2023 because of the COGS and SG&A productivity efforts (due to drive $550m of net savings once complete); what is the confidence level here, given the cost inflation environment? Which segment offers the scope for the highest margin upside over 2021-2023? A portion of the COGS and SG&A gross savings are being reinvested (e.g., $90m of the $250m COGS savings) – what are the priority areas for this reinvestment? Corporate costs have come down sharply in recent years…how much more room is there to lower this? How much more ‘stranded cost’ from Power Solutions is there left to shrink? How is pricing / profitability on the Install business in the backlog, vs P&L margins that are around the mid-single digits? Are there things JCI can do to improve these, for instance as we look ahead to a likely Install sales recovery in 2022? JCI sounds very confident of maintaining positive price / cost even amidst high cost inflation pressure – what underpins this confidence? On FCF, should we assume 100% conversion is the go-forward medium-term rate? In terms of FCF margins, JCI is set to have a FCF margin of around 8-9% in 2021…should these FCF margins move up at the same rate as operating or net income margins over the long-term? Is the company seeing any difference in behavior post-Covid (pricing, uptake of postCovid remedial solutions, budgetary pressure) among its customer base depending on vertical (Multi-family residential vs. Office vs. Hospitality vs. Retail, et al.) or geographic region? How are negotiations going with customers regarding the upgrades they are contemplating making to commercial buildings as a result of Covid-19? How large is the potential air purification systems opportunity in particular? Air Purification / Indoor Air Quality has emerged as a popular topic among investors given the past 18 months; how does JCI size this opportunity (CARR and Ferguson provided a $9-10bn estimate of the TAM) and what kind of market share could the company claim? TT is seeing a ~2% revenue tailwind from IAQ at present – is JCI experiencing similar? How is management assessing the changes in work from home trends following the Covid pandemic? What level of disruption could this cause in commercial building use, and HVAC / Building controls equipment/service needs? Could Covid yield a meaningful growth tailwind for the Security portfolio given the increasing focus on contactless access control, thermal imaging, etc.? How successful has JCI been in driving sales synergies between Building management controls / HVAC and Fire & Security, in the 4-5 years since the TYC deal closed...does the company think it is getting more successful in driving sales synergies from being able to offer HVAC Controls, and HVAC equipment? The Security market faces some challenges; how much of the pressure on Security market growth is arising from structural factors (maybe a typical commercial building’s ‘wallet share’ accruing to security install and service work is falling, as technology improves, for example so upgrades can be downloaded by wireless, straight onto ‘smart devices’, and do not need a fleet of technicians coming around to the building?) vs. cyclical factors? 77 Barclays | U.S. Multi-Industry How is price discipline globally in Commercial and Residential HVAC? Is price pressure intensifying in Fire & Security, given the competitive pressures? What are the main moving pieces in the P&L within the Equity income line (worth 9% of EBIT), and the Non-Controlling Interest line (worth 12% of net income)? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding stimulus in Education for instance, or corporate tax rates? Any updates on the PFAS / AFFF litigation or cases involving the use of the ‘government contractor defense’? How concerned is management on the risks of further liabilities, following the booking of a $140m environmental cash charge in the June 2019 Q and settling a class action lawsuit related to Marinette, Wisconsin in January 2021? Does JCI see any PFAS implications of Michael Regan being the head of the EPA, or of the Biden administration’s position on PFAS more broadly? Will JCI be affected by the PFAS Action Act of 2021? Is the company reorganizing any of its global supply chains in light of Covid, et al.? When will we receive an update / refresh on the company’s medium-term financial targets (these were last issued in late 2016) – will we hear these at the September Investor Day? Portfolio 4-5 years on from the Tyco merger, how satisfied is JCI with growth in the Fire & Security business – the investor perception is that growth at TYC and industry is fairly low…Are there some portfolio actions that JCI might want to take at Tyco to rejuvenate its growth rate? CARR recently divested Chubb – why does JCI view the F&S Field business as so much more attractive than CARR does? How large is the synergy between F&S Field and the rest of the company at JCI? JCI divested Scott Safety several years ago…what scale of further portfolio pruning could still take place at the company? How satisfied is management with the current product suite (particularly in F&S); do Locks / Low Voltage represent attractive Product adjacencies in terms of increasing the Security offering and Energy efficiency exposure? How is JCI performing overall in its major JVs / partnerships in terms of sales and earnings / cashflow – HiSense, China Hitachi and so forth? How satisfied is management with the current JVs/minority interests that JCI holds? In what verticals does management view the most opportunity to increase/decrease ownership? How keen is JCI to expand further into, or shrink, its Residential building-facing markets (vs Commercial), which are ~15% of sales? Does management think that large-scale HVAC consolidation is very likely in the next few years? What type of combinations would make the most sense, in management’s view? 18 August 2021 78 Barclays | U.S. Multi-Industry Trane mentioned that share gains among the major HVAC OEMs may make large-scale (top 5) consolidation very difficult from an anti-trust perspective – does JCI agree with this assessment? Would the company consider adding another ‘leg’ / building out a product portfolio separate from F&S / HVAC / Building Controls? Does JCI agree with certain competitors that there are ‘structural headwinds’ facing the Commercial Security market that could necessitate a retooling / pruning of the business? Or does management feel that they are well positioned to be a continued market share taker and consequently are somewhat insulated from such headwinds? Does the company view Transport Refrigeration as an attractive market to enter / is the ‘Cold chain’ concept appealing in terms of expanding into Refrigeration markets? What are the primary ‘product line gaps’ that are being looked at by the company? Balance sheet / Capital allocation JCI’s recent buyback spend has been significantly larger than most MI peers – from this point, what is the priority for buybacks vs other forms of capital deployment? Does the Silent-Aire deal show that management is looking to become more aggressive on acquisitions again now that TYC is well-integrated and operational execution has improved? How attractive are M&A opportunities at present? JCI historically was quite acquisitive – should we expect M&A to step up over the next 18 months, or are buybacks and dividends likely to consume the vast majority of the capital deployment? What are the company’s main M&A criteria? What level of leverage does JCI feel comfortable with, over the medium-term? Global Products What share of Commercial and Residential HVAC equipment come from New Construction vs. Replacement? How is the shape of recovery among these verticals over the next few years following the Covid downturn? How does management think Covid affects the demand for Residential HVAC structurally / in the next few years, assuming more ‘work from home’ in general in the US? Where does management think we sit now in the Residential HVAC replacement cycle in the US, and how has Covid altered this view, if at all? In Global Products, how satisfied is JCI with its positioning in Residential HVAC within the US and the Rest of World business? What are the main upcoming emissions / refrigerant standards changes in the HVACR world, which could impact demand / the industry, either domestically or globally? How does JCI feel about the quality of its product portfolio relative to peers? Are there any particular verticals within the HVAC market (low/mid/high end in terms of price & efficiency) where the company wants to expand its share? 18 August 2021 79 Barclays | U.S. Multi-Industry What is the margin differential between the Building Management / HVACR Equipment / Fire & Life Safety sections of the business? Where could Products margins rise to, in the long run? How does JCI cope with strong competition from emerging market based manufacturers (such as Hikvision)? What type of pricing pressure does the company see in hardware now? Does the company see any major implications from the GOOG-ADT partnership announced in mid-2020? Field What is the share of Install vs. Service activity by region? How wide are the margin differentials between the two activities? What is the ‘mix’ of longer-term contractual service agreements in Field relative to more ‘ad hoc’ service sales? Is the mix higher recently (i.e., is there greater intake of contractual service agreements now than there was previously)? How is JCI prioritizing its efforts at top-line growth between Install and Service? How are attrition rates on the Service business trending? N AM margins expanded in FY20, despite Covid impacts, following three years of flat results, is this setting the stage for margin expansion to accelerate in upcoming years? In APAC Field, how is the competitive landscape - is there much pricing pressure, particularly in China? How aggressive are local Install and Service providers in China? Looking to EMEA/LA, operating margins were ~10% in 2020 – what can be done to push these higher? Is it realistic they could ever reach the margin rate (13-14%) in APAC/NA? How wide is the margin breadth across countries / regions? Is there much of a case for pruning / exiting some of the country exposure? 18 August 2021 80 Barclays | U.S. Multi-Industry KENNAMETAL KMT Stock Rating EQUAL WEIGHT Industry View NEUTRAL Price Target USD 37.00 Price (17-Aug-2021) USD 36.00 Potential Upside/Downside +2.8% Recent Key Reports: KMT: High confidence on FY22 operating leverage, cash conversion; August 3, 2021 KMT: CFO Meetings; Greater clarity on margin moving parts; Break-even FCF; November 15, 2020 US Multi-Industry: Short Cycle Industrial 2H Outlook; Downgrade KMT, Upgrade (Page 9) GTES; August 9, 2020 General KMT has seen four revenue downturns over the past decade; what is the slope and longevity of the revenue upturn that we should expect this time vs the recent recoveries? Recently, total company incremental / decremental margins have been quoted at around 40% - does the company still think incremental margins can reach this level over the next few years? What gives KMT confidence in achieving ‘strong operating leverage (excluding prior year temporary cost actions)’ in FY22? How soon does KMT expect that operating margins can reach prior ~15% peaks? Will additional cost actions be required to achieve these levels? Macro / demand conditions mean that the $600-675m FY21 EBITDA target is some years off…what is the risk that the $2.5-2.6bn sales target for this EBITDA level is not reached for a very long time, given structural pressure in O&G, ICE Automotive, and Aerospace OE markets? Is management tempted perhaps to re-set the medium-term targets, as their realization appears to be very far out / the investment community does not assume these goals are hit in the next five years? Is this what the purpose of the early 2022 investor day might be? Management highlighted focusing on the ‘fit for purpose’ tools market as a key rationale for combining its Widia and Industrial segments to form the Metal Cutting segment. How is this shift in strategy progressing? What gives management confidence it can gain market share over the likes of Sandvik and IMC through the combination of the Widia and Industrial segments? What type of margins does ‘fit for purpose’ tend to carry, relative to the rest of Metal Cutting? One of the initiatives that Mr. Rossi has implemented as CEO is pricing adjustments more frequently than once per year...how is the price strategy playing out in this environment of high cost inflation? Have the market share losses that KMT experienced over the last 10 years now stabilized? Is a step up in re-investment required to ensure this does not occur again? How is management balancing the desire to make market share gains, with margin expansion targets? Where has the company been successful in outcompeting peers beyond price? 18 August 2021 81 Barclays | U.S. Multi-Industry 18 August 2021 How significant (headwind or tailwind) could the rise of Electric Vehicles be to KMT’s longer-term Automotive market growth rate, given the high tooling intensity of Auto ICE / combustion engines? What is the content per vehicle on Hybrids vs. ICE and EVs? What are the dynamics for profitability relative to tungsten prices? In the past, KMT has suffered both when tungsten prices inflate and deflate, why is this? Can the company quantify what scale of tungsten EBIT tailwind it / the Infrastructure business will see in FY22, assuming tungsten prices hold at current levels? How far ahead of sale does the company typically stock its Tungsten inventory? Beyond tungsten, Raw material headwinds and timing of input cost increases have been lumpy, particularly in their impact on Infrastructure profitability.... In Infrastructure how do KMT’s cost indexes work, and what is the lag in timing between inflation and the recognition of increased / decreased COGS in the P&L? KMT in mid-2020 announced its 6th plant closure under the Simplification & Modernization plan – how much more fragmented than Sandvik SMS’ manufacturing base will KMT’s be, once this plan is complete? FY 22 capex is around ~$120m (half of FY 20 levels, but similar to the ~$123m in FY21). Is this a reasonable capex level to assume medium-term, or are there additional investment needs? The FY22 Primary Working Capital as a % of sales guide of ‘trending towards 30% by FY22 year-end’ marks a nearly 250bps+ decrease in working capital from end FY21 (32.7%) – what levers does KMT expect to pull to reach this? I As the current modernization program is near completion, what kind of FCF conversion and FCF margin does management think KMT can achieve? Business model-wise, is there are anything KMT can do to make the business more stable / more recurring / less volatile? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding infrastructure stimulus, or corporate tax rates for instance? Portfolio Sandvik SMS has made some acquisitions in software...how appealing is the push towards software / Digital for KMT – what can it do here? Longer term – how does management see the rise of additive manufacturing impacting the KMT business model? How has management prepared for this potential disruption? Is there potential for KMT to expand into this area through M&A? Does KMT have any desire to reduce its Energy exposure, given the frequency and severity of downturns in O&G markets, and structurally lower capex environment? Could we see KMT add a third segment once the current Modernization plan nears its end, or is management very satisfied with the current portfolio mix? Does KMT need to own a Tungsten powder business? How satisfied is management with the degree of KMT’s vertical integration? In the longer-term, post simplification / modernization initiatives, what end-markets / adjacencies could KMT see itself expanding further into? Where would KMT like to reduce its exposure? 82 Barclays | U.S. Multi-Industry Balance sheet / Capital allocation KMT announced a share repurchase program at FQ4 21 earnings – to what extent will repurchases play a role in allocating capital in the future relative to M&A versus using it solely as a means to ‘help to offset dilution’? Net debt / EBITDA is ~1.6X as of June 2021, how quickly will management look to start re-deploying cash beyond dividends? How fragmented is the metalworking tools industry? Is there opportunity for consolidation? If so, how would KMT participate? 18 August 2021 83 Barclays | U.S. Multi-Industry LENNOX LII Stock Rating EQUAL WEIGHT Industry View NEUTRAL Price Target USD 350.00 Price (17-Aug-2021) USD 334.12 Potential Upside/Downside +4.8% Recent Key Reports: US Multi-Industry: AHRI HVAC June Data: Sell-in slows (Implications for CARR, JCI, LII, TT); August 12, 2021 LII: Resi demand is Cresting, but an HVAC Replacement cliff remains unlikely; July 26, 2021 LII: CEO Transition, Guidance increase in-line; Consolidation implications, Next steps; July 14, 2021 LII: CEO Virtual Meeting - Upbeat tone on demand into 2022+; Industry competitive discipline holding; June 23, 2021 LII: Investor Day: Margin bridge looks reasonable; Comm’l Backlog rebound; December 16, 2020 General What qualities is the board looking for in the next CEO? Is the company considering both internal and external candidates? How does management think Covid is affecting, and will affect, the demand for Residential HVAC structurally / in the next few years, assuming more 'work from home' in general in the US, if at all? How is LII thinking about the Resi replacement market trends into 2022? What level of disruption could Covid cause in commercial building use, and HVAC / Building controls equipment/service needs? What slope of Commercial HVAC recovery is LII expecting this time, compared with prior recoveries? The Parts Plus effort is about to see another surge, with the number of stores having been flat for 3-4 years…what kind of sales growth tailwind could this new push to 350+ stores by 2025, against 224 today, generate? How are negotiations going with customers regarding the upgrades they are contemplating making to commercial buildings as a result of Covid-19? How large is the potential air purification systems opportunity in particular? Air Purification has emerged as a popular topic among investors over the past 18 months, how does LII size this opportunity (CARR and Ferguson have sized the IAQ market as being worth a $9-10bn opportunity, while TT said IAQ is adding close to 2% of incremental sales growth at present) and what kind of market share could the company claim? How does the raft of vaccines affect customer decisions regarding IAQ investment? What share of Commercial and Residential HVAC equipment come from New Construction vs. Replacement? How does the shape of recovery differ among these verticals over the next few years following the current downturn? How confident is LII in the mid-high 20s% incremental margin guide for 2021, given cost inflation? Management set a 6% medium-term revenue CAGR target (through 2023) at its December 2020 investor day; how does management assess the different contributions from price, volume, higher end mix etc. within this goal? 18 August 2021 84 Barclays | U.S. Multi-Industry 18 August 2021 Is LII seeing any change in behavior among OEM rivals amidst major portfolio change, such as Carrier since it spun out, JCI having divested Power, TT since it exited Industrial? Over the last several years, restructuring actions have been focused in Mexico with the Saltillo manufacturing facility, but now we are seeing somewhat of a shift towards domestic US restructuring / plant modernization - how much opportunity is there for further cost out actions in the US, besides the already announced plans? TT tied up with Mitsubishi on VRF in 2018, and York has a strong partner on VRF with Hitachi; how is LII's Midea relationship performing in VRF? What is the company's updated view on the growth prospects for this technology? What are the main upcoming emissions / refrigerant standards changes that could impact demand / the HVACR industry, either domestically or globally? How successful have e-commerce initiatives been / what share of parts sales today are conducted online and how do margins look in that channel vs in physical stores? Where does LII feel it is in its Digital Investment (e.g., E-commerce, Controls, Factory Productivity) cycle (i.e., 'early innings' or later in the process)? Does the company feel it is ahead or behind competitors (particularly HVAC OEMs) in this regard (~38% of LII's Residential sales are currently through e-commerce, with a 50% target by 2023)? FCF is down substantially in 2021….in the long run, should we expect FCF margins to move up broadly in-line with the operating margins? Has Covid changed management's thoughts on expanding its physical retail presence vs ecommerce initiatives? LII's business is very N America centric (90% of sales); what are its ambitions to develop more of an overseas presence, if any? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding stimulus in Education for instance, or corporate tax rates? Portfolio Trane mentioned that share gains among the major HVAC OEMs may make large-scale (top 5) consolidation very difficult from an anti-trust perspective – does LII agree with this assessment? The Refrigeration business has gone through a number of portfolio changes in recent years…. how satisfied is LII with the state of the portfolio today? Does it feel it has sufficient scale in European HVAC to succeed, with maybe $150m or so in annual revenue… is this an area it would look to add to via M&A? In 2018, LII announced the sale of ~25% of the Refrigeration segment. This was followed in 2019 by the announcement to divest its Kysor Warren business. Is the company content with the remaining Refrigeration portfolio, or are there other assets which are non-core? Would LII prefer to stay focused on its core of unitary HVAC, or is it at all interested in making a push into Applied HVAC / transport refrigeration / VRF (beyond the current Midea relationship)? Barring a large HVAC deal, what M&A areas would LII like to address with smaller boltons? 85 Barclays | U.S. Multi-Industry 18 August 2021 Balance Sheet / Capital Allocation Above the $600m of buybacks, how likely is it that we see LII deploy cash in 2021, for instance on acquisitions? How is the M&A landscape at present compared with recent years, when LII looks at its M&A funnel? What is the maximum leverage ratio that LII would be willing to move to...would management be willing to issue equity for the right transaction? Will the dividend pay-out ratio stay consistent? Commercial Is there anything LII can do to increase the ‘stickiness’ of its Commercial replacement business in terms of increasing the recurring or contractual share of this replacement activity – this is something that many of the HVAC OEM peers seem to be aiming for at present? Is the company seeing any difference in behavior post-Covid (pricing, uptake of postCovid remedial solutions, budgetary pressure) among its customer base depending on vertical (Multi-family residential vs. Office vs. Hospitality vs. Retail et al.) or geographic region (US vs Europe)? LII has enjoyed major share gains here in the past decade...some of its peers claim they have revamped their product portfolios - is there any sign of this in the marketplace? LII was targeting National Account Services sales of ~$250m by 2023 (from ~$180m in 2020, or a low double digit CAGR), significantly above the growth for the rest of Commercial. Do these sales somehow come at the expense of the other parts of Commercial? Put another way, what other parts of Commercial does LII believe will shrink or grow very slowly? LII is targeting 19-21% segment operating margins by 2023, however margins have been flattish since 2016; what gives management the confidence that it can reaccelerate margin expansion? Trane and York claim there are big synergies from offering both HVAC Controls, and HVAC Equipment to Commercial customers in particular. Does LII agree with this claim? It seems as if the company is indeed investing more in Controls itself now? LII seems to be making a big push with its iCON light building automation offering - how is it differentiated…is it cheaper than the incumbent peer offerings? Service represents 15-20% of segment sales...how much of this is contractual as opposed to spare parts / ad hoc activity? Are profitability levels here the same as for OE? It has grown substantially in recent years relative to Equipment...is this growth rate gap sustainable? Factory productivity (for example to do with labor constraints in Arkansas) has been a headwind on and off in recent years - how comfortable is management with this issue today Refrigeration If Refrigeration operating margins hit the 12-14% 2023 goal, but that is the ceiling, is that sufficient for LII to keep the business in its current shape? Refrigeration looks likely to grow +DD in 2021, after falling 12% organically in 2020. Beyond this year, how does management see the growth outlook in Refrigeration? Is 86 Barclays | U.S. Multi-Industry there any reason this business should grow above +LSD medium-term, given the low historical growth profile? Has Covid shifted the dynamics of this end market given recent higher utilization of grocery stores and other food service? How will these trends play out in upcoming years as the market 'normalizes'? The remaining legacy Refrigeration business is predominately Heatcraft. Is this a core asset? What is the outlook here in terms of organic sales growth and margins? Europe Refrigeration revenue is targeted to grow rapidly - how exactly is LII driving this growth, and what is the progress on this growth initiative? Are there any verticals within Refrigeration where management would like to add to / reduce its exposure (out of Food Retail ~18% / Food Service ~24% / Cold Storage ~20% / Non-Food ~12% / European HVAC ~26%)? Residential How does management assess the path to ‘normalization’ of growth in the Resi HVAC business? ~80% of the Residential business is replacement demand. How does LII assess where we are in the Resi replacement cycle in the US? Is there any reason to be concerned near-term, when looking at the timing of prior cycle OE peaks, and extrapolating from that to replacement demand? How does Covid and the post-Covid rebound affect the Resi HVAC market outlook for 2022 / the medium-term, if at all? Does LII expect much pre-buy in 2022 ahead of another SEER standards’ change in 2023? How has Covid impacted the outlook for the replacement cycle? Has management assessed the impact on increasing work from home trends on medium term demand? If we look at the N America HVAC Parts & supplies business, that was just under $400m of sales in 2020, and is targeted to reach $700m in 2024 – what kind of operating leverage can LII generate off this $300m or so of extra sales? How does LII think about the merits of selling via Direct (70-75% of sales) vs. Independent distributor channels? Have the challenges with dealer market share following the tornado impacts caused management to further emphasize direct sales? 18 August 2021 87 Barclays | U.S. Multi-Industry MMM MMM Stock Rating UNDERWEIGHT Industry View NEUTRAL Price Target USD 185.00 Price (17-Aug-2021) USD 199.55 Potential Upside/Downside -7.3% Recent Key Reports: MMM: Four growth engines cooling; Mixed margin outlook; Liabilities rising; July 28, 2021 MMM: 3rd earplugs legal test / bellwether case goes against MMM; Rising risk of potential liabilities; June 20, 2021 US Multi-Industry: Mask / respirator demand rolling over; Implications for HON, MMM; June 15, 2021 US Multi-Industry: PFAS Liability Update: MMM, CC, DD, JCI, CTVA; December 22, 2020 MMM: CEO, CFO virtual meeting: Greater focus on agility, tracking, go-to-market; conservative balance sheet approach; November 24, 2020 General What medium-term structural headwinds or tailwinds could Covid create across the company’s businesses, and could this perspective drive accelerated portfolio change, after a couple of years in this respect? The company has 12 ‘top priorities for growth’ – Automotive Electrification, Advanced wound care, Connected safety, Connected Roads, Custom Orthodontics, Food Safety, Grid Modernization, Structural Bonding, Surface Finishing, Biopharma Filtration, Air Quality, Population Health – what are MMM’s sales across these 12 markets today; against what appears to be an $80bn addressable market? Is there any way to quantify the impact of these initiatives on future organic growth? How did sales in these ‘priority growth’ areas hold up during the Covid downturn? Has the pandemic changed MMM’s view of the relative importance of any of the Priority Growth platforms, and whether to invest even more in those? Are the 12 Priority Growth areas…are they on track to hit that 10-15% sales CAGR goal over 2019-2023? How does MMM think this 2021-2022 Short Cycle Industrial revenue recovery (shape / slope) could compare with prior recoveries in 2017 or 2011? The company announced a new global operating model and streamlined structure in early 2020 – how satisfied is management with the changes wrought to date by such moves? Does MMM worry that ‘bad news’ is not filtering up quickly enough to the top management, and this is one reason why there have been several guidance cuts since early 2018, or was the lowered earnings guidance over 2018-2020 solely due to the weak demand environment? MMM has had a series of restructuring measures in the last 2-3 years, including the latest round in December 2020, but margins are a long way off making the progress that was guided to in November 2018, when the company was aiming for 200-300bps of margin improvement by 2023…should we expect further restructuring measures into 2022 in order to make the 2023 goals more realizable? What learnings are there from Business Transformation since 2016, and the restructuring measures undertaken in 2018-2019, to ensure that the latest round of restructuring measures will be a success? 18 August 2021 88 Barclays | U.S. Multi-Industry It looks as if the company in 2021 will be a little below the 30-40% incremental margin placeholder for the medium-term, partly due to temporary costs rebounding and price/cost headwinds…is management confident this range of incremental margins is the right level, given the investments that MMM might need to make to rejuvenate organic growth? How much of a mix tailwind to margins has the recent sales recovery in China, Auto, Electronics, and PPE contributed? What is MMM doing differently, if anything, to ensure that it is maximizing the returns from its high organic reinvestment rates in areas such as R&D and Capex? What share of firm-wide R&D and capex are channelled towards the 12 priority growth areas? Pre-Covid, organic sales growth had disappointed within MMM’s ‘non-cyclical’ businesses (i.e., Health Care & Consumer), running below the MT goals, why is this, when peers (esp. in HC) have seen decent growth? Are there some structural challenges here (for instance in Oral care)? Many industrial companies are focused more and more on Digital / IoT / Software. Given MMM’s product mix today, it does not appear to be well-positioned at first glance as regards some of these trends – what is the strategy at MMM to benefit from them to ensure that its organic top-line growth can outgrow IPI / GDP? As some of the channels to market are changing in segments such as Consumer and Healthcare (such as the rise of e-commerce disrupting traditional distribution channels), is it wise for MMM to look to reduce SG&A spending (by 100bps as a share of sales, by 2023), or is the ‘Selling’ part of this expected to remain high...what types of G&A / SG&A reductions are underway? Does MMM view much of its business as being at risk from greater structural pressures (growth / margins) than 5-10 years ago? How is management assessing the increasing competition from ‘generics’ against the 3M brand? How should we think about the outlook for pricing trends in the current macro environment? Is MMM satisfied with the level of pricing across businesses / geographies? Is MMM confident it can deal with input cost headwinds with higher prices? How confident is MMM that gross margins can expand in the medium term (by +100200bps by 2023, as laid out in late 2018), when it provided a similar goal in 2016, and yet the gross margins have fallen in the interim, and are also down since the 2023 target was initiated? What is changing now to reverse the GM pressure? There has been substantial management turnover since Mike Roman became CEO in 2018, most recently with the CFO change and the departure of Paul Keel in 2020; how satisfied is Mr Roman now with the senior management currently in place at MMM? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding Infrastructure stimulus for instance, or corporate tax rates? Is the company re-organizing any of its global supply chains in light of Covid et al? In early 2021, MMM noted that litigation expenses would likely rise – what is the latest update on the suits relating to military earplugs (per the recent court decisions in Aprilearly-mid 2020), and Bair Hugger? 18 August 2021 89 Barclays | U.S. Multi-Industry What are the next steps / deadlines / policy actions regarding PFAS, that could crystallize whether MMM has to take more charges for environmental factors? In light of rising charges being booked for PFAS, how confident is MMM that its reserves ($400-500m) for ‘other environmental liabilities’ are sufficient? How is management assessing the implications on environmental liabilities from the new administration, given Mr Biden’s comments around PFAS clean-up? MMM reached a settlement with Wolverine Worldwide in 2020 wherein the company paid Wolverine $55m to settle its claims. Relative to the $70m penalty Wolverine was facing from the state of Michigan, 3M’s payment represents a large share of that liability. Is management concerned this has set a precedent for ‘mid and downstream’ PFAS users to seek compensation from 3M in the event they are sued? In recent times 3M has begun adjusting earnings on a more frequent basis, how should we think of ‘earnings quality’ in the medium term? Is there a desire to return to pure GAAP reporting, or has management found the adjustments to be helpful for investors? Portfolio It sounds as if there should be a sharper focus on ‘portfolio prioritization’ (based on the November 2018 Investor Day), but we have not seen many divestments in the past couple of years – is it because MMM already divested the majority of its low margin assets over the past 5-10 years, so future disposals may be quite dilutive, or is it more for macro reasons, and hence we should expect divestments to step up now that the macro environment is more normal? Can the problem of underwhelming top-line organic growth (at least relative to MMM’s MT targets) in recent years at Healthcare and Consumer be partially solved through increased asset exits (given the success of this approach at the S&G and E&E segments over 2013-2018)? Balance sheet / Capital allocation MMM has been targeting synergies of 8% as a share of Acelity sales; how is the integration of Acelity proceeding? What financial returns by Year 5 should we expect Acelity to generate? What scale of M&A deal could MMM contemplate in the next 12 months – Acelity-sized, or smaller? How much optionality on the balance sheet does MMM think it has today – what is the preferred leverage range for the company, in light of the litigation backdrop? How should we think about the pace of share repurchases in 2021 and beyond? Has the Board’s view of the merits of buybacks changed at all, and in light of the PFOA / PFAS claims? Is $1bn a year a good placeholder? The company has 12 ‘top priorities for growth’ – should we assume all / most M&A capital will flow to these 12 areas? Consumer MMM has re-focused on expanding demand generation in this segment since the reorganization in early 2019 – what measures are being taken to do this, and how successful are these measures proving? 18 August 2021 90 Barclays | U.S. Multi-Industry 18 August 2021 How well is the segment positioned to take advantage of more ‘work from home’ secular changes as a result of Covid vs losing from less office activity? How does this segment benefit from being part of MMM, rather than a stand-alone business? Does MMM worry that its B2B focus means that it will always struggle to match market growth rates in the B2C world, given some of the structural changes among consumers and consumer markets, and MMM may struggle to keep pace with these, as Consumer is a fairly small part of MMM / may not be a huge focus for it? EBIT was flat for 4-5 years pre-Covid…what levers are being pulled to enable profit growth? Where can operating margins expand to, medium-term? How does MMM toggle between focusing on end-consumers, relative to distributors – is it making more effort now to focus on the former? What is the company doing to increase brand awareness? How ambitious is MMM on growing Consumer in emerging markets, where the division’s exposure is fairly small relative to other MMM segments? How does MMM Consumer position itself moving forward to best cope with / benefit from the emergence of e-commerce? Could this be an opportunity for MMM, rather than simply a threat (for instance by enabling faster emerging market MMM product penetration, without MMM having to make large organic or M&A investments in brand on the ground in those markets)? Are operating margin levels for MMM the same, regardless of its channel (brick & mortar vs. online) to market? Healthcare MMM missed its 4-6% organic sales growth target for several years pre-Covid...is this because the end-market has not been growing as quickly as expected, or is it because of market share losses at MMM / changes in business mix? What is changing now to ensure that this MT MSD organic sales growth target can be attained? There is a perception that the Health Care segment has under-invested in recent years, and this is one reason for its sluggish top-line growth and lack of operating leverage in margins – does management think that EBIT margins are now at a new run-rate in the mid-20%’s because of portfolio changes, amortization, and the need for re-investment in the business? When can EBIT margins return to prior peaks? Due to a shift in distributor alliances, channel destocking, and successful preventative care, the US Dental equipment and consumables market was weak pre-Covid. MMM’s oral care business was outgrowing peers over the last two years pre-Covid. What is the reason for this and what is the outlook for the US oral care market, where growth has been underwhelming for several years? Would MMM look to expand its presence in the ‘Protect’ part of the Oral care market, as this may be out-growing the ‘Fix’ part? Does MMM see any implications from, or change in behavior at, Envista regarding its oral care business since its IPO? 91 Barclays | U.S. Multi-Industry Infection prevention is MMM’s largest Healthcare business and appears to have many secular tailwinds at present; advanced wound care has been cited as a ‘top priority for growth’. How is MMM now positioned in this market and what internal investments are required to further accelerate its growth? Health Information Systems was put up for sale in 2015, and has subsequently turned around. Does the M*Modal acquisition suggest MMM is doubling down its efforts and investment in the IT world of healthcare? How is the Healthcare IT platform performing? Safety & Industrial MMM undertook considerable M&A in the Personal Safety market (Capital Safety, Scott Safety) 5-10 years ago – how happy is management with the Safety portfolio now (HON recently divested a small part of its business, in footwear)? Does management believe Covid could have spurred a higher ‘floor’ in personal safety demand as customers become more safety oriented, or are these trends around PPE temporary? What is the outlook for respirators post-Covid / how much could this demand slow down? Assuming widespread vaccine roll-outs in 2021, how much of a PPE headwind to sales could we see in late 2021 / 2022, and what margin implications could this carry? Are there any areas in this business (e.g., Personal Safety, or Automotive AM) that the company believes can grow meaningfully faster than the rest of the segment on a runrate basis? It feels as if most investors model them within 50-100bps of one another, but management probably has different views, given growth has diverged quite a bit in recent quarters? Across the 7 different sub-sectors, which are the highest and lowest margin businesses? How much more of a presence, and in what form, does MMM seek on the plant floor, amidst much discussion from management regarding increasing its factory-facing share of sales? Is there any interest from management in divesting itself of its exposure to Roofing Granules? It is quite a lumpy part of the business impacted by things expressly outside of management’s control (MRO spend tied to storm patterns), is the business very margin accretive to the rest of the segment (which would make a sale strategically unwise)? Transportation & Electronics MMM has spent considerable time talking about Automotive Electrification, and the company has ~$200m revenue exposure across different segments – how much resides in T&E? Management believes this is a $6bn market growing at 8-10%. Who does MMM compete with? How consolidated is this market? Are there opportunities for M&A or are valuation levels prohibitive? In Electronics, how different are the demand trends / outlook in the consumer device businesses (Display Materials) relative to capex / corporate spending (Electronics Materials)? Is profitability similar for both? MMM’s electronics sales appear to be more sluggish than trends in the broader semiconductor / consumer electronics markets – does it reflect mix differences, or just timing, and MMM should see a large pick-up later in 2021? 18 August 2021 92 Barclays | U.S. Multi-Industry What is MMM’s datacenter revenue exposure today? How quickly is this market expected to grow over the next five years? The OLED transition in Electronics has been a $50-150m headwind y-o-y to revenue each year – has this transition largely run its course by now? How is MMM positioned in OLED technology? The Energy piece has shrunk, through ongoing portfolio rationalization - how core is the remaining Electrical Markets piece? What is the longer-term growth outlook for this business? Are the high operating margins in Electronics (close to 30%) sustainable, given the rapid pace of technology change / large branded OEMs’ power over their suppliers in Electronics? 18 August 2021 93 Barclays | U.S. Multi-Industry NVENT NVT Stock Rating OVERWEIGHT Industry View NEUTRAL Price Target USD 49.00 Price (17-Aug-2021) USD 33.04 Potential Upside/Downside +48.3% Recent Key Reports: NVT: Strong margin, FCF management; Valuation discount to shrink; August 3, 2021 NVT: Acquisition of CIS Global - high growth, high margin, reasonable price; June 9, 2021 NVT Management Meetings: Confidence in higher growth; Firmer Thermal footing; March 10, 2021 NVT: Investor Meeting: Higher growth, premium FCF, major under-valuation; March 3, 2021 General NVT’s organic sales growth was flat-LSD over 5-6 years pre-Covid, but NVT is targeting an acceleration in growth over the next 3 years- how much of this acceleration is endmarket driven, and how much relates to specific market share gains at NVT? Organic growth is targeted at GDP +1-2% through cycle. What gives management confidence it can achieve this goal, given the slow growth pre-Covid? Which are the areas that management thinks offer the easiest ‘wins’ in terms of re-taking share? What are the main levers to move to >20% long-term operating margins (vs 17% in 2019); which business offers the most scope for margin expansion? What are the medium / long-term goals for margins in each of the three businesses? Are there major differences between NVT’s profit margins in N America and International (as we see at some other US electrical equipment players)? Incremental margin ambitions for 2021 have fallen from the original 30% goal, due to cost inflation – it sounds as if this gross headwind could be ~$125m this year – how much have NVT’s pricing practices improved in recent years? How confident is NVT that it can enact sufficient price increases to help offset inflation – does it expect its competitors to follow suit and push up prices as well? If inflation does accelerate more quickly than the company expects, are there some contingency measures that can be quickly enacted in order to offset this cost pressure? How meaningful are they? NVT sized its exposure to Telecom / 5G as ~$75m (representing ~3% of a ~$2.5bn market), Power Utilities as ~$50m (~1.7% of a ~$3bn market) and Data Center & Networking Solutions as ~$135m (~2.7% of a ~$5bn opportunity). What is being done to expand market share in these opportunity areas, given that current share is below company average market share (~3.3% market share in a ~$60bn market)? In datacenters, does NVT think we might be in for a period of ‘digestion’, following a period of very high capacity build-outs? What is NVT’s typical $ content per datacenter – is it strongest in hyperscale or smaller scale DCs? How does the acquisition of CIS Global enhance NVT’s positioning in the datacenter market? 18 August 2021 94 Barclays | U.S. Multi-Industry 18 August 2021 The emerging market sales exposure is below that of most Multi-Industry companies...are there any concerns that expansion into these markets could lead to erosion of NVT’s high operating margins? Is the company seeing any evidence of increased appetite for ‘onshoring’ investment among its customer base? CFO Ms Zawoyski seems to be implementing significant changes to the processes surrounding working capital management (particularly inventory reduction); can management give detail as to where these are focused (i.e. within the company), and how quickly these can take place? Beyond working capital, which other key areas of operational improvement are being explored? It has been almost three years since the spin; how comfortable is management with the manufacturing processes / operations at NVT, or is there substantial room for improvement left, such as via higher automation? Over the years, there has been a common investor concern regarding lower-end / Chinese competitors impinging on the Fastener / Electrical protection business, what are NVT’s thoughts on this – how high are the barriers to entry? Relative to its current R&D investment (2.2% of sales in 2020), management expressed a target of 3% of sales – how did it arrive at this target rate? The NVT vitality index is midteens at present, with the goal of reaching 20% in the long-term. These new products are expected to contribute ~1 point to growth each year at accretive margins; if this goal is hit, would the margin tailwinds be meaningful enough to offset the headwinds associated with increasing the R&D to sales ratio by ~80 bps? To what extent can these digital advancements, or other measures, make the business model more recurring and less cyclical? NVT expects its Digital Transformation plan to add $20-40m+ in sales, add 100+bps to margins, and drive working capital benefits. How did management determine these goals? Over what time frame does it expect to achieve them? Software was described on a continuum of ‘Design and Configure (Specify & Build)’, ‘Embedded (Run & Control)’, ‘Connect (Access & Management)’, and ‘Analyze (Optimize & Predict). The ‘Design and Configure’ category current enables >$250m in revenue, with the ‘Embedded’ category driving >$80m in revenue; current revenue was not sized for the other two categories. How big of an opportunity does management see in each category medium-term? The four largest North American and Global Electrical Distributors represent ~25% (or ~$500m) of NVT’s revenue at present, with a ~$1bn serviced available opportunity and Europe highlighted as an opportunity area (7-9% growth over the next 3 years). Beyond Rexel, how has the progress with European distributors been of late? Margins at NVT are already high relative to peers such as HUBB (not covered), Littelfuse (not covered), Thermon (not covered), ETN, and Schneider (covered by Shane McKenna) – what are the structural reasons behind why its margins should be higher / have further room to improve? Who does NVT view as its closest peer set, when it is assessing the performance of the company, in terms of overall financials, as well as for market share comparisons across its respective businesses? 95 Barclays | U.S. Multi-Industry 18 August 2021 What M&A integration systems have been put into place since the spin? How have these new processes taken hold in recent deals? How would management assess the progress of the Eldon and WBT acquisitions? How confident is NVT in the health of the M&A funnel? How does the ‘SPARK’ operating system differ from Pentair ‘PIMS’, or Honeywell ‘HOS’ (given Ms. Wozniak spent many years at HON)? NVT’s stated FCF conversion goal is >=100%, with FCF margins targeted at >15%. Given that FCF margins already reached 15% in 2020, how much higher can they climb post working capital efforts (to <20% of sales)? Is the company re-organizing any of its global supply chains in light of Covid, et al? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding stimulus in infrastructure or Education for instance, or corporate tax rates? Balance sheet / Capital allocation / Portfolio Is there any desire for the company to reduce its cyclicality via portfolio moves? Specifically, are there any concerns over the Energy / O&G exposure in the business, that could be solved either through divestments or acquisitions in other areas? How satisfied is management with the performance of the portfolio during the 2020 downturn – does this experience change how management views any parts of the portfolio? The capital allocation priorities have shifted in the last couple of years from buybacks to M&A it seems – should we expect M&A to comprise most of the excess cash uses in the next year or two as NVT seeks to rejuvenate top-line growth, and the scale of buybacks are more to simply offset dilution? Are there businesses in the portfolio that are not viewed as ‘core’, now that nVent has a clearer idea of its priorities as a standalone company? Are there certain levels of returns / margins / organic growth that a business needs to maintain in order to remain part of the portfolio? At its 2021 Investor Day, NVT targeted M&A adding a point of more of growth each year; how did management come to this aspiration? What is the timeline for management to start thinking about absorbing larger M&A deals...Would the company envisage adding a fourth leg to the business, or is it more likely to build out existing platforms? What are the financial criteria for M&A deals? Does management prefer to look at ‘fixer-uppers’, or businesses that are already very well-run, when assessing M&A? Medium term balance sheet leverage aspirations are 2.0-2.5X; what is the upper limit if the right M&A opportunity presents itself? Enclosures How much of the Enclosures business is levered to datacenter build outs? Management has discussed a new Commercial team focused on ‘Data & Networking Solutions’ – what traction is it having to date? How does NVT differentiate itself in this competitive vertical? What is driving (presumable) market share gains in this industry? 96 Barclays | U.S. Multi-Industry NVT sized the Enclosures electrification markets as $8bn globally, with $2bn / $2bn / $1bn / $1bn opportunities in North America / Europe / India / China. Management has expressed an interest in broadening the company’s geographic footprint (with China / India / Middle East highlighted as focus areas, given APAC is ~7% of segment sales at present). Does it require M&A to do this (as was the case with Eldon, which opened up a $2bn opportunity), given distribution barriers to entry in different regions? Were the 21% margins of 2015 unsustainable due to under-investment? Or is this a level that we should expect the segment to return to? Schroff used to be described as one of the less desirable assets in the PNR portfolio – how does management view this business, and what has been done / is being done to turn it around? Do the Eldon and CIS Global acquisitions put Enclosures within ‘striking distance’ of Rittal for #1 market share globally? With Eldon and CIS Global expanding the international footprint, how does NVT envision its international strategy moving forward? How does NVT assess the synergy potential for CIS Global with the existing Enclosures segment (both scale and source)? Thermal Management The Thermal business has been under significant pressure for some years…what does management think the realistic through cycle growth rate is for this business? NVT took a $212m non-cash goodwill impairment charge in Q3 20 - are there any pieces of Thermal Management (such as the O&G exposed businesses) that the company might consider pruning? NVT sized the TM markets as ~$18bn globally, with $3.3bn served today (~18% market share). Chemicals, Commercial & Residential, and Infrastructure were highlighted as growth areas; what is NVT’s ideal mix in each of these verticals? What steps are being taken to improve Thermal’s growth and / or profitability profile? How meaningful are the synergies between Thermal and the rest of the portfolio? Large projects have had a big impact on both top and bottom lines for the company, particularly in Thermal Management – how is management thinking about these large projects moving forward? Is there a way to help smooth this type of work out or reduce the exposure to it? NVT often discusses new product introductions as being a major driver of organic sales growth in this segment, what is the context of this? What share of the growth is driven by these introductions? Although several of the projects in this business seem to be ‘Long Cycle’ in nature, the backlog is only ~20-25% of annual revenue. How long do the larger orders stay in the backlog? What is the average lifespan of an order in the Backlog? Electrical & Fastening Solutions Electrical & Fastening has ~70% of revenue in North America – can it be expanded geographically on an organic basis, or is the distribution network not robust enough outside the US to make this a feasible prospect? 18 August 2021 97 Barclays | U.S. Multi-Industry EFS historically has been the segment where NVT has had the most success in terms of price in rising input cost environments (+4% over 2018), should we expect a similar degree of price increases in 2021? What factors lead to NVT having success in driving price in this segment? NVT sized the EFS electrification markets as $16bn globally, with $2.5bn served today (~15.5% market share). Of this $16bn market, ~$11.5bn is in areas outside North America, with NVT’s sales exposure being ~73% NAM at present. Is M&A part of the strategy to enter these markets (as was the case with Eldon in Enclosures, which opened up a $2bn opportunity), given distribution barriers to entry in different regions? Organic sales growth was ~1.5% on average over 2016-2019 within EFS (below the MI average)…what is being done to accelerate growth in the segment? What does management think is an appropriate through-cycle growth rate? EBITA margins were fairly steady over 2017-2020 at 25-26%, and remain below prior peaks seen in 2016. Were the 28% margins of 2016 unsustainable due to underinvestment? Or is this a level that we should expect the segment to return to? ERICO has been within NVT since 2015 – does the management team think this business has been integrated successfully? What are the financial returns on this acquisition? NVT is investing in efficiency / productivity improvements at EFS facilities to help drive margin expansion over the next five years; have any lessons been learned here that may serve as an opportunity for the other segments? 18 August 2021 98 Barclays | U.S. Multi-Industry OTIS WORLDWIDE OTIS Stock Rating EQUAL WEIGHT Industry View NEUTRAL Price Target USD 86.00 Price (17-Aug-2021) USD 90.74 Potential Upside/Downside -5.2% Recent Key reports: OTIS: Top-line levers being pulled; Margins weathering the cost storm well; July 26, 2021 OTIS: CEO, CFO Call: NE orders, pricing under scrutiny; Executing on Self-help; MI implications; September 8, 2020 General What are some of the biggest changes that management are implementing since Otis emerged from under the UTC ‘umbrella’? Which of these changes will have a shorter or longer-term payback? There is a major focus on making Otis a ‘competitive growth company’ now – what are the main levers to achieve this? How satisfied is Otis with its efforts to drive top-line growth? Otis had a strong 1H21 in orders and sales, in absolute and relative terms – how sustainable does it think the orders outperformance in 2H21 is? Which are the areas where management is most hopeful of taking share on an ongoing basis? Organic sales growth is guided at a low to mid-single-digit rate for the medium-term – does this embed any market share gains? What does it embed for pricing pressure? What trends is Otis seeing on pricing at present across incoming orders at the two segments? Otis is now expecting a $70-80m raw material cost headwind (vs $35-40m prior; raised at Q221 earnings); what lessons were learned during the last period of input cost inflation and how has that affected the pricing outlook? Are competitors also raising prices? How is management viewing the net impact of Covid on medium-term elevator demand across OE and Service? How high is the risk that apartment and non-residential buildings occupancy may be weaker for longer due to Covid / more ‘work from home’ / more single family home usage, and that this will impact pricing significantly on the Service side (as the customers’ budgets are squeezed), esp. in N America and W Europe? What are the main solutions that Otis is offering customers post-Covid (relating to UV filters, contactless control, destination dispatch et al.); are these a major net tailwind vs its prior offering, or likely to reflect more of a cannibalization of its pre-Covid services? In which of these post-Covid solutions is there the biggest ability for Otis to differentiate vs its peers? Which of these solutions offers the most material sales / earnings tailwind for Otis? Otis recently launched a lower tier destination dispatch offering - what is the market uptake like for this? How much of the addressable market did this product add for Otis? Is Otis seeing any difference in post-Covid behavior (pricing, uptake of post-Covid solutions, budgetary pressure) among its customer base depending on end-market vertical (for example in Residential, which is 60%+ of sales, relative to Office / hospitality), or geographic region? 18 August 2021 99 Barclays | U.S. Multi-Industry 18 August 2021 The medium-term guidance (pre-Covid) of +20-30bps of adj. operating margin expansion annually – what does this embed for core operating leverage, and pricing pressure, in each of the two segments? What incremental pricing power / $ revenue per unit does the ‘connected’ / Otis ONE products give Otis? Or is the benefit of this all on the cost to serve side (i.e. margins, not top-line)? Does Otis charge any price premium (on OE or service) for ‘connected’ vs nonconnected units? What impact is the rise of ‘connected’ units (~500K units at the start of 2021) having on attrition rates for Otis in Service (we heard that in Spain, cancellation rates on the Otis ‘connected’ units are only a third of those seen on non-connected units)? Given that 25-30% of units (as of November 2020) are connected in Spain (vs. 10% prior to 2016) has driven ‘one of the lowest attrition rates in the world’ for OTIS, but Zardoya Otis’ margins consistently declined since 2016 due to pricing pressure. Are margins likely to improve in other regions due to digital offerings, or will this initiative merely serve as an offset to pricing pressure in most regions? How quickly should the number of ‘connected’ units grow in the medium-term – is it around 100K units / year? Installation & Field costs are 60-70% of total costs – what measures are being enacted to drive up service productivity (average maintenance hours / unit fell by 2% over 20172019)? Otis is targeting ~3% in gross factory supply chain savings annually; >65% of its material spend ($2.3bn / year in total) is sourced from local suppliers – to what extent can these costs be squeezed – what is the target reduction in the supplier count? What is the progress on this effort to date? SG&A/sales is guided to drop by 100-150bps in the medium-term (from 13.8% in 2019); What are the main levers behind this reduction? How many P&Ls and ERP systems is Otis operating today? What is the progress on this effort to date? Digital strategic investments were guided to expand - are we at a steady run-rate now? R&D / sales was maintained at ~1.6% in 2020 - why is management confident that this re-investment rate is sufficient for Otis to win market share? What it Otis' strategy in Digital - how much does it have to 'catch-up', if at all, with Kone and Schindler in this respect? ~25% of Otis’ units are currently connected (as of end-2020), with a goal of 60%+ in the medium-term. How quickly does OTIS expect to reach its goal, and what factors could accelerate or slow down this roll-out? Restructuring expenses are guided at $60-70m in 2021 – what is the medium-term restructuring run-rate? What share of restructuring typically is cash-related? The effective tax rate is guided at 29.0% for 2021, and is guided to decline to 25-28% in the medium-term – what annual reduction in the tax rate should investors expect from 2022+? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding stimulus in Education for instance, or corporate tax rates? 100 Barclays | U.S. Multi-Industry Kone and Schindler have spent considerable time and effort to master the 'modularization / standardization' of their manufacturing processes in E&E; how is Otis performing in this respect? What constraints does the tax-free nature of the spin of Otis place on any future M&A / divestments activity (in terms of asset sales / spin-offs / MoEs / RMTs et al.), if any? If Otis were to undertake larger consolidation, would it make sense to consolidate with an OEM based in Asia, as Western markets appear to be fairly consolidated? How, strategically, is Otis thinking about its majority stake in Zardoya Otis, and its stake in other JVs (such as in China, Kuwait, Malaysia, Saudi Arabia, UAE) or non-consolidated entities? Does management view the current structure of these entities as being optimal; if not, how quickly, and how, can these structures be changed? The acquisition of ThyssenKrupp Elevator by private equity – what impact does Otis expect this to have, if any, on the competitive landscape in the E&E industry? What color can Otis provide on the Escalator business – what share of sales does it comprise, what is the regional and OE vs AM split, and how are profitability levels? On FX – how much transaction exposure is there at Otis? FCF conversion is guided to be >100% of net income in the medium-term, but the NCI dividend’s absence from the FCF definition (but inclusion in net income) should drive this ratio up – is the >100% target (as opposed to, say, 120%+) partly then due to high working capital and capex needs? Working capital / sales is <5% at Otis – is this a good run-rate; could this ratio ever go negative as a share of sales? Which parts of working capital offer the most leverage in terms of the scope for further reductions? Capex / sales for 2021 is running at ~1.2%; is this the correct medium-term run-rate? How much of a headwind to near-term FCF are the Transition Service Agreements? When do they abate? Free cash flow margins are guided to reach ~10% in 2021 (exc-NCI); once interest and tax rates are normalized, what level of medium-term FCF margin can Otis generate? Balance sheet / Capital allocation Otis is ~1.7X levered (ND/EBITDA) and seems to be running ahead of plan on delevering – when can Otis start to use the balance sheet more ‘offensively’ (vs debt reduction), and what will its main capital allocation priorities be? Otis has guided for $750m in share repurchases in 2021 – how is the Board thinking about the relative merits of buybacks vs M&A, as Otis has balance sheet optionality in 2021? How much does Otis intend to spend per year on buying up local independent service providers? In which regions does it prioritize these acquisitions? What valuation multiples do these service provider acquisitions typically occur at, and what is the typical profitability level of these ISPs that Otis acquires? What is the target medium-term / through-cycle balance sheet leverage level? 18 August 2021 101 Barclays | U.S. Multi-Industry 18 August 2021 The dividend is set to remain at a 40% payout ratio for the medium term; would the company consider raising this, or is all excess cash in future earmarked for M&A / buybacks? New Equipment In China, Otis anticipates a flat unit market over 2020-2024, and for its own unit sales to grow at a low single digit pace; what is assumed for Price / mix in China for Otis? How is the launch of the Gen2 Prime product (for the entry-level, low-rise buildings market) being received by customers? Does Otis expect itself and other overseas OEMs to win share collectively against local manufacturers in China – is it seeing the consolidation among local manufacturers accelerate (as the OE unit shipment market has fallen from ~600K / year in 2014 to ~550K / year in 2019)? The top 10 E&E OEMs now comprise >90% share in China – is there any scope for more consolidation? Otis claims that it out-grew the China market by ~150bps over 2015-2019 – is this outgrowth persisting? In China, there appears to be consolidation underway among the property developers, with the large property developers taking a larger and larger share of the real estate investment market – how well is Otis positioned for this trend? How are operating margins in China relative to other New Equipment markets? Otis was early in expanding into emerging markets relative to many peers, but it lost the #1 spot in China to Kone almost a decade ago, and the perception is that it fell behind in other emerging markets too – what is it doing to re-take share in emerging markets beyond China, such as S E Asia, India, the Middle East, Latin America? How satisfied is Otis that it has the right product and brand for different ‘tiers’ of the market in various regions – is it still too focused on the high end? How much of Otis’ overall operating margin decline over the past decade accrued from New equipment margins declining? How much of this related to China OE vs other regions? Service Otis has >2m units under a maintenance contract (driving $6bn in sales) – around 0.5m of these were not installed by Otis – is it looking to increase this number / how aggressively is OTIS going after maintenance contracts on other OEMs’ equipment? How is profitability on these 0.5m units (maintained but not installed) vs the 1.5m units that Otis installed and maintains? Around 2m units have been installed by Otis, but it does not have a maintenance contract on them – what is the progress on trying to shrink this number, if any? Otis has around a 60% conversion rate of New equipment installs globally, to Service contracts - how has this ratio changed in recent years, and what is the outlook / target for this ratio? The new equipment unit conversion rate to service is ~90% excluding China and Russia; where does Otis think the industry ranks today on these metrics in these two countries, and what is its strategy to increase these ratios in China and Russia; how large is the Russian market? 102 Barclays | U.S. Multi-Industry Globally, Otis claims a 94% maintenance contract retention rate (up from 93% in 2019) – is this near a ceiling now? How much does it vary by region (e.g. it was ~94% in EMEA in 2019)? Otis claims a 12% reduction in cancellation rates since 2016 – how far can cancellation rates fall? How many units that Otis maintains (within the >2m figure) were not installed by it (is it several hundred thousand or so?); how has this figure grown in recent years, and what is the outlook for growth? Are there certain other OEMs’ equipment for whom it is harder for Otis to gain a maintenance contract on than others (e.g. the other ‘Big Three’, because their Digital presence makes their Service contracts stickier on their installed base, relative to the smaller OEMs)? 60% of the ~18m unit global installed base for the industry (per 2020) is serviced by independent service providers – in which regions or market tiers is this share higher or lower, and where is this share that is serviced by the ISPs rising or falling most notably? How has the $ value of Otis’ Service contract per maintained unit trended in recent years – what are the main levers that it is pulling to try to increase this $ value per maintenance contract? What are the major regional differences regarding the $ value of maintenance contracts? In which regions is it easiest / hardest to increase the $ value of maintenance contracts? How different are service sales / unit in different geographic regions? Service sales / unit grew by 2.1% organically in 2019 in EMEA – what was the performance in 2020; what is a good run-rate for the medium-term post-Covid? Has the re-tooling of the Otis service technician workforce with more digital tools / better technology paid off in terms of lowering attrition rates in the business? In which regions or markets is Otis' attrition rate rising or falling? How does Otis’ strategy differ for growth in Modernization relative to Maintenance & Repair? How about the strategy within M&R; i.e. Maintenance vs Repair? Rising digital content in the industry arguably helps the large OEM incumbents - is Otis seeing this actually play out though i.e. are the large OEMs now starting to take share against smaller Service providers, who cannot compete in a Digital world, due to their inability to invest / master the technology changes? Or is the pace of change so glacial, that it is hard to discern year-to-year? Is Otis seeing many new competitors who have a Digital background? How is Otis’ performance in terms of driving down installation hours / unit? How is the cost per installation trending? There has been an impressive reduction in average maintenance hours / unit in EMEA, which declined by ~3% / 4% in 2018 / 2019 respectively – what was the performance in 2020; what is a good run-rate for the medium-term post-Covid? Otis Europe sales have declined over the past decade on an organic basis; Otis expects the installed base to grow at a low-single-digit level – how is pricing on AM in the region trending? Could we see flat $ sales in the medium-term, even if the units installed base grows slightly, or will the Service sales $ per unit installed rise? 18 August 2021 103 Barclays | U.S. Multi-Industry China’s installed base is guided to grow at a high-single-digit pace through 2024 (from ~6m units in 2019, to ~9m units by 2024; Otis maintained ~210K units in China per 2019), with a double-digit CAGR expected for Otis’ service portfolio in China – what is driving this growth, and how is the pricing in China Service? Does Otis expect that margins for China Service will ever match global levels (20% of Otis’ China sales are Service)? Could high growth in the China Service business represent a meaningful margin mix headwind in the medium-term? There are >13K independent service providers in China – what was this figure a decade ago, and where does Otis think it will be a decade from now? In China among top developers and infrastructure projects, Otis’ conversion rates are 80% from equipment to service contracts, but they are only 30% for other activities – how does Otis sees these two numbers trending in the medium-term? Modernization sales represent ~18% of Service sales; operating margins are similar to New equipment – is there scope for these to move higher? How much of Otis’ overall operating margin decline over the past decade accrued from Service margins declining? How much of this decline related to EMEA vs other regions? 18 August 2021 104 Barclays | U.S. Multi-Industry PARKER HANNIFIN PH Stock Rating OVERWEIGHT Industry View NEUTRAL Price Target USD 340.00 Price (17-Aug-2021) USD 296.34 Potential Upside/Downside +14.7% Recent Key reports: US Multi-Industry/Aerospace & Defense: TDG unsolicited bid for Meggitt; Thoughts & Implications: August 11, 2021 PH: Not priced for current FCF margins or a 'thematic' growth rate; August 5, 2021 PH: Acquisition of Meggitt; MI, A&D Implications; August 2, 2021 General The company thinks it can grow 170bps above the market in the next few years (+3.2% organic sales CAGR vs. +1.5% global IPI growth). Where are the main areas of likely market share gain? Are there specific end markets or products that are driving this outgrowth? How does PH think this Industrial upturn may compare with prior ones – similar to 2017, or 2014, or 2011, or it will have its own nuances / shape? Is the company seeing any evidence of increased appetite for ‘onshoring’ investment among its customer base? Regarding Meggitt, where does PH see the most opportunity for revenue / cost synergies? Is PH seeing any pushback from customers, especially in military / defense markets, regarding its combination with Meggitt? Regarding commitments PH has made to the UK government for purchasing Meggitt (such as maintaining and increasing R&D budget in the UK by 20% over the next 5 years, increasing UK apprenticeships by 10%, maintaining existing R&D product engineering and direct labour people count in the region, and maintaining the four current divisions of Meggitt post transaction close), will these limit the possible cost synergies from this acquisition? What incremental margin off volume growth (operating leverage) should we expect for PH over the medium-term - is 30% the right level? How have the Clarcor as well as Lord and Exotic deals, and the realignment efforts, affected the view of the medium-term incremental margins that PH should be able to generate? When PH looks at best in class industrials, the markets it operates in, and the productivity generated by the WIN program, is there any reason why margins cannot keep moving well into the mid-20%s+ range, on a segment operating margin or EBITDA basis (we will hear more on this at the March 2022 Investor Day)? How satisfied is management with the organic sales and profitability performance at Clarcor, Lord, and Exotic in the recent downturn; what does the slope of recovery look like in these three businesses? How is the synergy extraction at Lord progressing? How high can medium-term FCF margins go, relative to the 12-13% level pre-Covid, and 16.5% in 2021? The company has simplified from 126 divisions, down to 80+, since FY15. Is there further simplification potential here from de-layering the organizational structure? 18 August 2021 105 Barclays | U.S. Multi-Industry 18 August 2021 Part of the focus of the Win 3.0 strategy appears to be centered around new product development, does management have any MT targets for metrics such as annual NPI or Vitality Index levels? How much of a headwind could the $225m+ of discretionary cost-out in 2021 be to profit margins in 2022? Automation in its own plants has been a topic that Parker often cites…how large is the productivity opportunity ahead from higher automation in PH’s plants globally? Can management give notable examples of how ‘Kaizen’ drove better business practices since a ‘heavy’ phase of implementation since the fall of 2018? What is PH’s ultimate goal regarding its digital platform? Does it wish to develop some subscription based business models in certain areas? Does the company have the core competency to roll these initiatives out based on in-house skills, or will M&A be necessary? Is the company reorganizing any of its global supply chains in light of Covid, et al? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding infrastructure stimulus, or corporate tax rates? Balance sheet / Capital allocation Leverage is currently at ~2X ND/EBITDA, and we should see EBITDA growth accelerate now…is all of PH’s available capital earmarked for Meggitt, or is there room to do small bolt-ons in the interim? PH has talked about pent-up capex needs in the broader economy….is there that same need within PH itself, or will capex stay fairly similar going forward? Where does management see the most opportunity to channel spending as part of the FY22 (and MT) target of raising capex to 2% of sales (from ~1.5% in FY21)? How quickly will this spending ramp up given current higher leverage levels? What is the preferred use of any excess cash, in light of the recent deals (both completed and announced)? What should we expect for buybacks in the medium-term, or will these be small as debt reduction and M&A are the main priorities? M&A focus areas include aerospace, engineered materials, instrumentation, and filtration...Following the M&A deals in 2019, and recently announced deal in FY22, should we expect future M&A deals to be focused on Instrumentation or will the focus remain broad (Clarcor, Lord, Exotic, Meggitt focus on filtration, engineered materials, aerospace, and aerospace, respectively)? Portfolio PH is one of the more diversified companies in industrials in terms of end market mix...Are there any specific end-markets or products where the company would like to have a bigger presence in, or are there some current exposures in the portfolio today that aren’t necessarily core to PH in future? Does the Meggitt transaction, in addition to Exotic in 2019, signal that PH intends to be more focused on aerospace markets moving forward, or is the portfolio sufficiently balanced in this respect now (with A&D being one third of the sales)? 106 Barclays | U.S. Multi-Industry Portfolio management appears to be more pervasive now at PH than in the past, but it has not divested many assets in recent years…why is this? How rigorous a portfolio review process is there at the company – what characteristics does a business need to exhibit for it to be divested? Does the company see any strategic implications from ETN’s sale of Hydraulics to Danfoss? What Year 3 or Year 5 returns should we expect from the Lord and Exotic acquisitions? Management recently highlighted that Clarcor’s 80% AM exposure made it more resilient during the 2019-2020 downturn; will AM be a more important factor in future acquisitions (at LORD, MRO was historically a mid-20%s share of sales)? Diversified Industrial What are the operating margins for the main sub-segments within the Industrial platform? Is there a large discrepancy between Motion Systems, Engineered Materials, Filtration, etc.? PH executed well in terms of protecting margins from rising cost inflation during CY18 / early CY19 – how nimble is its pricing strategy at present? Are the margins generally not that sensitive to external cost inflation, as we see cost inflation returning? Expanding the global distribution network has been a focus for management. How is the progress on this front? What are the implications of this expansion for the company in terms of the longer-term organic growth and margin profile? How satisfied is management with the progress on Clarcor integration? What is the 5year economic return on this transaction? Some of PH’s products are dependent on fuel delivery systems in both light Auto and Heavy Vehicle. What is management’s view on the rise of Electric Vehicles and their potential impact on PH? What are management’s expectations for the recovery slope / shape / duration in North America vs. International? When looking at the two Industrial businesses, does PH see similar long term margin expansion runway at both? Given LORD’s partial overlap between DI and Aerospace, did the acquisition inspire management to seek out additional synergy opportunities between DI and Aerospace? Does the WIN 3.0 system encourage cross-segment initiatives or is more feasible to keep these efforts silo’ed? Did the downturn show management any additional opportunities to expand service/MRO offerings in the legacy business (currently ~55% of sales)? How much lower is PH’s market share in International relative to N America? Which regions in International is PH most keen on increasing market share? How satisfied is PH with its competitive position in emerging markets? Does PH worry much about the threat from emerging competitors, for instance based in China? 18 August 2021 107 Barclays | U.S. Multi-Industry Is the FCF margin similar across both Industrial businesses / proportionate with the difference in operating margins? Given the end market diversity and changing PH portfolio (and increased sales base), has management considered re-segmenting Diversified Industrial to provide more color for investors? Aerospace Systems How wide a gap does PH think we will see in Commercial AM between the flight hours recovery, and its own Commercial AM sales? Does it see a big medium-term risk from cannibalization of used parts / the scale of USM parts swamping the sale of new AM parts? Should we expect higher Aerospace incremental margins in the early part of its recovery, due to likely Mix tailwinds from commercial aerospace aftermarket rebounding first? Assuming Aerospace organic sales return to prior peaks within 3-4 years, how much higher than the old peak margin of 20.5% seen in FY20, could margins be at that point, given the progress made in integrating Lord and Exotic? When does the company think that global passenger traffic / flight hours will return to 2019 levels? Does PH think it can increase its AM presence (30-35% of segment sales, with Commercial at 15-20%) over the next few years? What are the main initiatives being taken to do this? What is the optimal split of OE / AM for the Aero business? How is PH aiming to deal with the efforts by the Commercial OEMs to squeeze their suppliers...this threat seems clearest in traditional mechanical components, which appear to be the bulk of PH’s Aerospace sales – is this a big concern, or it is just part of normal business in this industry, rather than something new? How long is the guided for slump (FY22) in Military OE sales expected to last at present? Was this slump a surprise to management? 18 August 2021 108 Barclays | U.S. Multi-Industry PENTAIR PNR Stock Rating UNDERWEIGHT Industry View NEUTRAL Price Target USD 64.00 Price (17-Aug-2021) USD 78.89 Potential Upside/Downside -18.9% 18 August 2021 Recent Key Reports: PNR: Olympic scale Pool growth; Reassuring cost control; July 28, 2021 PNR: Investor Day: 21% op. margin by '25; Cresting top-line concerns; June 10, 2021 PNR: Re-visiting SOTP, Pool data in light of Hayward IPO, ongoing MI splits; March 7, 2021 General How is management assessing the changes in work from home trends following the Covid pandemic? How does management think Covid is and will affect the demand for Residential pools structurally / in the next few years, assuming more ‘work from home’ in general in the US? How does management assess the path to ‘normalization’ of growth in the Resi pools business, and current inventory levels in the channel? Management is targeting 300bps of margin expansion by 2025 (~21% EBITA margins how does management intend to go about this (supply chain, procurement, et al.)? How much of this improvement is volume based vs self-help? Is this target still attainable should the current inflationary environment persist? Incorporated in PNR’s 2025 targets is a 1-2% contribution to top-line growth per year from ‘Strategic Growth Initiatives’, which is expected to drop through at 15% (vs the company core at 30%) – how will the company differentiate the core operating leverage vs the SGI impact? How long are SGIs expected to weigh on operating leverage? Management expects price + productivity to offset inflation in 2021 – what lessons did PNR learn from the last inflationary period (in which input costs / tariffs represented a 80bps / -210bps headwind to margins in 2017 / 2018); aside from productivity, how should ‘pure’ price / cost trend? What range of price increases can PNR push through in 2021? Does it expect its competitors to follow suit? The extent of the early 2019 guidance reductions suggested that internal transparency / the flow of bad news up to senior management, had substantial room to improve – what has been done to improve this flow of information inside PNR since then? The company has talked more about moving toward a direct sales model and being ‘closer to the customer’, in order to drive ‘differentiated growth’ – are there any metrics the company wishes to hit in the medium term to show this effort is having the desired impact? What can the top-line benefit of this approach ultimately be? PNR experienced supply chain disruptions due to Covid-19, particularly in its Pool business. Management has expressed a desire to move towards a more localized supply chain, what is the timeline / progress of that change? Are there are any other supply chain optimization initiatives PNR is considering? Is the company re-organizing any of its global supply chains in light of Covid, et al? It has been ~3 years since the spin out of NVT, how satisfied is PNR with the progress it has made at building a stronger stand-alone Water company? Does management see any significant implications from the Hayward IPO (competitively, for instance)? 109 Barclays | U.S. Multi-Industry Have any adjustments been made to the operating system ‘PIMS’ since the sale of V&C and the spin of NVT? Portfolio How satisfied is management with the performance of PNR’s portfolio in the downturn? Could we see any portfolio exits given how high public multiples are? There is some consolidation underway in the Flow control market – is PNR interested in participating as a buyer or as a seller regarding its I&FT segment? What are the synergies between the two segments? In light of the Hayward IPO, would management ever consider spinning its Pool assets? Does management see share price upside at PNR from a SOTP perspective? Balance sheet / Capital allocation Management has shown an interest in increasing capex and R&D spend - which segment could benefit most from additional investment? How much of the R&D will focus on expanding into new product verticals vs. strengthening the company’s current offerings? What financial returns (by Year 3 / Year 5) should we expect to see from the Aquion, Pelican, in-floor pool cleaner, and Ken’s Beverage acquisitions? What rate of return can we expect from M&A in general at PNR? The company has more optionality on the balance sheet than it has had in quite some time – how does the management team think about the trade-offs between M&A and share repurchase? Will the company utilize repurchases on an ongoing / programmatic basis as part of its capital deployment strategy, or is it dependent on whether or not viable M&A options can be found first? PNR expressed interest in deploying M&A capital in the Consumer Solutions business. Is management more interested in acquiring businesses within Pool or Water Solutions? Does the M&A environment / pipeline for PNR differ much across the two markets at present? At 2021 Investor Day, management highlighted its use of free cash flow from 20182021 (45% share repurchases, 25% dividends, 20% M&A, and 10% capex), how does PNR expect this cash usage mix to change over the next 3-5 years? Consumer Solutions PNR’s Consumer sales have lagged those of distributor Pool Corp for much of the last 3 years – is there a natural ‘entitlement’ for the two to match each other over time, or is a gap likely to persist? What underlying assumptions for the hospitality, food and beverage, and commercial foodservice end-markets are embedded in the 2021 guidance? Does PNR expect a meaningful ‘hangover’ following the Department of Energy regulation (July 2021) that fuelled demand for variable speed pumps? At the 2018 Investor Day, management set a target for 50% penetration of variable speed pumps in existing pools by 2022 – what is the current progress here? 18 August 2021 110 Barclays | U.S. Multi-Industry 18 August 2021 Beyond large distributors (such as Pool Corp), the channel appears to be highly fragmented, how can management improve insights on the status/performance of those smaller dealers? PNR’s gross margins at the total company level are ~35%, below Pool peers such as Hayward and Fluidra (both >45%). How about FCF margins (Hayward’s are ~23%)? Are PNR Pool margins similar to these levels, and if not, what can be done to close this ‘gap’? What is PNR’s market share in Pool (Hayward’s IPO materials imply share in the high 30%s in North America) and what level of share gains is it targeting? Fluidra appears to have dominant share in the European Pool Market (>70%), with very high share in APAC as well (~35-40%). How interested is management in expanding PNR’s share within these regions? Can this occur organically, or are acquisitions necessary - are there many potential M&A targets worth pursuing? How does the PNR Pool margin profile between geographic regions differ, if at all? Management appears to be encouraged by the potential of new tech within the Pool space, are any of these offerings unique to PNR? Can they aid in preserving pricing power in the medium term? How much of the business is sold via an e-commerce platform? Does the company believe this will start to take more share of the overall revenue platform? Are the margins much different depending on the sales channels? PNR is beginning to enter the office water market, how confident is management that the company can compete in such a fragmented space (particularly where other large players are also looking to make an entrance)? Has Covid-19 changed any of the thinking here? What other markets does the company see as an opportunity to leverage current products and expertise? What do the margins compare in water systems vs water softening? At the 2018 Investor Day, management set a target for a 40% attachment rate of drinking water systems to softening sales by 2022 – what is the current progress here? Management highlighted its Water Treatment DTC offering grew by 25% in 2020. What are the longer-term growth expectations for water treatment DTC offerings? What is the margin profile for DTC? Industrial & Flow Tech PNR is targeting LSD organic growth in the segment in the long-term – is it because of a low market growth rate, or the segment is not well positioned in its markets? Pumps is one of the more diverse product categories which the company participates in (some are highly commoditized, other parts are very specified, etc.) – where does management believe it has a technological or market leading position, and are there areas in which PNR think it is lacking? Is there much O&G / Energy exposure left in this business? Precision spraying had seen fairly high growth until 2020, which had helped to drive up margins – how much higher are the margins in this business, and how large is the revenue base? How wide is the margin differential across the various pieces within Filtration? 111 Barclays | U.S. Multi-Industry Filtration has made a concerted effort to shift away from the project business, into the aftermarket / components / systems, what is the sales mix today for this business (was 50 /50 previously), and where is it likely to be in the medium-term? What does the aftermarket cycle look like within the Ag businesses? Has management considered shedding lower margin Ag businesses (irrigation) to improve the profile of the segment as a whole? The business is currently 35% residential, 35% industrial, 15% commercial, and 15% agriculture, what does management see as the ideal mix – which areas does it want to focus more on? PNR’s presence in ‘niche’ verticals (for example C02 recapture within F&B) has offered some protection to the business from broader end market slowdowns, does management see additional incremental revenue opportunities in niche areas or are the markets simply too small to be worthwhile? PNR has significantly reduced its exposure to the Industrial Filtration vertical; given current structural tailwinds in that market (such as PFAS related clean up demand), what would it take for the company to reconsider this exit and accept new projects? Management has commented on the scope to raise margins in I&FT. What margin levels is PNR targeting in the medium-term, and what are the levers to achieving margin expansion? Within Industrial Filtration, management highlighted opportunities in biogas and carbon capture at the 2021 Investor Day – how large could these be for PNR? What are the longer term expectations for these markets? 18 August 2021 112 Barclays | U.S. Multi-Industry ROCKWELL AUTOMATION ROK Stock Rating EQUAL WEIGHT Industry View NEUTRAL Price Target USD 280.00 Price (17-Aug-2021) USD 313.25 Potential Upside/Downside -10.6% Recent Key Reports: ROK: 2021 growth in-line with SCI peers; 2022 'acid test' on secular growth; July 27, 2021 ROK: Acquisition of Plex boosts Software ARR presence; June 25, 2021 US Multi-Industry: 6 conclusions from FTV, ROK recent M&A deals; IR, ROP look very attractive; July 13, 2021 ROK: CFO Virtual Meetings: Strong near-term demand, optimism on MT outlook and market share; June 21, 2021 General How does ROK think this 2021-2022 Discrete automation revenue recovery (shape / slope / duration) could compare with prior recoveries in 2017 or 2011? ROK recently guided its FY 2021 Process Automation organic revenues y/y to -LSD (-MSD prior) which still suggests the end-market remains challenged. How soon does ROK anticipate Process will recover, and how does management think about the slope of the Process revenue recovery compared with prior recoveries? Is there the risk that this Process recovery is slower than prior ones due to the sluggish O&G spending rebound? Rolling together the M&A and organic growth aspiration, regarding the $9bn+ sales figure for the long-term – under what timeframe should investors expect this figure to be hit? In which industries does ROK think ‘onshoring’ in the US could become a reality, other than in semiconductors; how rapid and how meaningfully could spending related to this theme occur? Does ROK think the broader US macro backdrop in terms of potential corporate tax rate changes / a more regulated environment for corporates may mute onshoring? In greenfield plants (for instance related to onshoring trends), what is the share of spending on the new plant that ROK views as an addressable market for the company? ROK has spoken favourably of pursuing partnerships with software assets as a go-tomarket strategy (similar to PTC). Why did ROK choose to acquire Plex and pay a rich multiple as opposed to partnering? What kind of financial returns should we expect from Plex Systems to generate in Year 3 or 5 post-the deal? How large are the cost / revenue synergies that ROK can extract from this business? ROK has mentioned the importance of having software offerings be close to the plant floor / be on-premise – but Plex is all ‘cloud-based’ – why did ROK shift its stance on this topic? Is ROK winning much business in the new US semiconductor plants / does it expect to win much future business? Given commentary from Auto OEMs that the chip shortage should start to wane in the back-half of this year, should we expect a similar result for ROK? 18 August 2021 113 Barclays | U.S. Multi-Industry 18 August 2021 How does ROK assess the current prospects for medium-term capital spending across its end-markets? How likely is the bounce in capex that is occurring in 2021 to ‘followthrough’ in 2022+? ROK in late 2020 expanded its Strategic Alliance with PTC to include PLM and SAAS products – how broad will this PLM effort be, and does it reflect a change in strategy on ROK’s part? Does the broadening of this partnership reflect an environment where the IT penetration of the plant or factory floor is starting to accelerate more than had been the case / faster than ROK had expected? Does the higher investment spend in 2021 which is weighing on margins reflect a need on ROK’s part to ‘catch-up’ (with IT pure plays, or traditional automation rivals who have done considerable software M&A), as IT penetration of manufacturing increases perhaps more quickly than before? Where is the higher 2021 spend being concentrated? Is there a risk that this higher level of 2021 investment persists into 2022 and beyond? Does the higher investment spend needed to drive up ARR and broader software growth put at risk the 30-35% incremental margin target in the medium-term? In the context of potentially higher investment spend requirements / higher R&D, in order to increase its software sales and accelerate top-line growth, why is ROK comfortable that it can sustain 30-35% earnings conversion at a MSD organic sales growth rate? Will the sales (such as subscription-based software sales) resulting from these higher investments carry higher operating margins than ROK’s current business? Pure software is ~7-8% of total ROK sales (~10% with Plex)…how high a share of the total could this reach in 5 years’ time? ROK recently introduced annual recurring revenue (ARR) as a target metric in its management compensation structure (guided to be >10% by 2025)...How is this defined? To what extent is achieving this goal a function of M&A vs. organic investment, and what are the main pillars of its ARR today? What is the definition of ARR at ROK (the definition varies widely across different software companies)? What ‘cannibalization’ is ROK seeing / is ROK worried about amidst rising IT penetration on the plant floor? Does ROK worry that traditional discrete automation products (PLCs, drives, etc.) which form the vast majority of its sales mix today will lose their share of ‘wallet’ in the plant, in the transition to more software / digital spend, and hence ROK needs to very rapidly shift its own sales mix (towards CAD, PLM, MES, plant design and other software), if it is to generate similar (or faster) organic growth in future, relative to the past? R&D is just under 6% of sales for ROK… what share of this spend is on software specifically (as opposed to software enabled hardware), and how has this changed in recent years? When we look at ROK’s three-segment structure, how much of the higher investment, and more generally R&D, is being allocated to each division? Over the medium-term, which of the three operating segments does ROK think offers the highest potential for organic sales growth and / or operating margin expansion? ‘Information Solutions and Connected Services’ (network security, remote monitoring, data analytics) are the terms ROK uses to describe its sales related to processing and using the data generated by a growing number of increasingly ‘smart assets’ on the 114 Barclays | U.S. Multi-Industry 18 August 2021 plant floor...these comprised ~$0.4bn in sales in 2020, are expected to reach $0.5bn in 2021, and grow double digits in the coming years– which verticals or regions is ROK seeing the highest growth in? What is the profitability rate at Information Solutions and Connected Services? One of management’s mantras is ‘simplification’ (amid a more crowded / complicated plant floor) – but is there a risk that a more ‘monolithic’ / one-stop-shop approach from a single automation supplier (offering drives, motors, PLCs, CAD, PLM, MES etc.) can offer this simplicity in a way that a more ‘open’ / best-of-breed approach (another of ROK’s mantras) cannot (as it involves numerous different companies partnering together project-by-project)? ROK’s recurring sales (such as datacenter leasing, subscription software, embedded engineers) amount to ~$0.4bn / year today ($0.55bn with Plex). How quickly can it grow this business – is all of this revenue essentially subscription-based sales, with a high renewal rate? How does profitability here compare with the firm-wide average? Does ROK worry that traditional discrete automation products (PLCs, drives, etc.) which form the vast majority of its sales mix today will lose their share of ‘wallet’ in the plant, in the transition to more software / digital spend, and hence ROK needs to very rapidly shift its own sales mix (towards CAD, PLM, MES, plant design), if it is to generate similar (or faster) organic growth in future, relative to the past? Does ROK worry that the combination of the ‘cloud’ and smarter devices on the plant floor will render the PLC layer obsolete in the plant in 10-15 years’ time (with risk to ROK, as controller sales represent one third of its total revenue)? Where does management see the most opportunity in the rise of ‘edge’ computing/processing in automation? Does ROK feel prepared for the potential disruption brought by the shift? How does ROK view the relative growth opportunities in Industrial PCs vs PLCs – in 2020 it acquired ASEM (Italian industrial PC manufacturer)? Which customer applications / markets are Industrial PCs more / less suited to, than PLCs? How satisfied is ROK with its process industries market share progress, and does it still see this as a key strategic area where it can take more share than in its discrete business, or has the focus shifted more to discrete, given the weaker LT outlook for O&G spending? In Process automation / O&G, what is ROK’s perspective on the LMT / XOM Open Process automation standards effort – does it view this as an opportunity to win share? In China, is ROK satisfied with its positioning in the market, as other discrete automation companies at present seem to have higher growth there? What is the impact of vehicle electrification on ROK’s Transportation business likely to be? How is the Fanuc partnership in Automotive developing? How large are the sales from this partnership now? In the automotive world, there is a huge transition in the mix of capex and production capacity among OEMs and suppliers in terms of EV vs ICE vehicles…how well positioned is ROK in the EV world at present in different regions, and at what pace does it expect its EV sales to grow in the medium-term, vs its non-EV sales? Does ROK worry that its market share and / or profitability in the Automotive / Truck markets will be lower in the EV world, than in ICE? 115 Barclays | U.S. Multi-Industry Does management see the potential for new MT/LT structural tailwinds from the rise of electric and autonomous vehicle? How significantly will client facilities need to be retooled (and further automated) as part of these new opportunities? Is the company re-organizing any of its global supply chains in light of Covid, et al.? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding infrastructure stimulus or corporate tax rates for instance? Balance sheet / Capital allocation For several years, ROK has had the aspiration to add at least 1% of sales from M&A each year – how satisfied is management with the progress in this regard? Does ROK need a ‘digestion’ period following the recently announced Plex acquisition? ROK paid ~15X sales for Plex – is this the ‘going rate’ we should expect to be paid for future high growth software acquisitions at ROK? What is the appropriate balance sheet leverage ratio for ROK in the long-term? ROK is willing to increase leverage to 3.5X for the right M&A deal – would it ever consider issuing equity? ROK has focused on bolt-on deals to date – how likely is it that the company pursues a larger deal? ROK has four focus areas for M&A – Information software, Connected Services, Process Automation, and Smart products / Information solutions – does it have the right M&A teams (size, experience) in place now to execute on more and larger deals? ROK has successfully stepped up its acquisition activity in recent years, but software assets are trading hands for very high valuations – how attractive does ROK view the M&A landscape at present, and how willing is it to ‘pay up’ for these high growth software businesses? Would ROK ever look to adopt a Schneider - Aveva style structure if its software assets attained sufficient scale (such that the listed software asset, majority-owned by ROK, could undertake software M&A at valuations similar to its own)? What are the pluses and minuses of this approach? How would ROK prefer to toggle between buybacks / dividends / M&A in the long run? Should dividends just grow in-line with earnings, for instance? Is there any appetite on management’s part to move into Warehouse automation, in order to augment its position in Hybrid / Process / Discrete markets? Does the Sensia deal, and the fact that we have had 3 severe O&G industry downturns in only 11 years, mean that ROK will not pursue further M&A in the Upstream O&G market now? PTC partnership In May 2021, ROK and PTC issued filings laying out the terms under which PTC would give ROK a fair warning if it is in strategic discussions with other parties – what should ROK shareholders read into this? 18 August 2021 116 Barclays | U.S. Multi-Industry 18 August 2021 Is it fair to say that the Plex acquisition and the updated shareholder agreement of 2021 mean it is less likely now that ROK would look to increase its stake in PTC? What milestones are ROK hitting as regards its partnership with PTC? How should we measure the success of this partnership at present? What type of ‘exclusivity’ does ROK have with PTC now, and vice versa? Intelligent Devices What differentiates ROK’s independent car technology and track and trace capabilities? How do these lower the TCO for customers? Which end-markets does management intend to focus on penetrating or expanding share in with the independent car technology / track and trace capabilities? ROK recently began disclosing orders in this segment – what is the historical lag for turning orders into sales? This business has had relatively steady low-20%s operating margins since FY18 – what has driven this stability? Is there anything structural about the cost or customer base that would prohibit these margins from reaching mid-20%s? Which products does management intend to invest the most heavily in – drives, motion, safety, sensing, industrial components, configured-to-order products? What degree of growth / level of margins does management target in the medium-term in this segment? How do the margins compare across different products in this segment? Lifecycle Services How does ROK intend to drive recurring revenue growth in its Lifecycle Services business? Lifecycle Services has the lowest margins of the 3 new reporting segments (by >500bps) – why are margins in this segment so much lower? Is this expected to change over time as recurring revenue grows as a share of sales? What degree of growth / level of margins does management target in the medium-term in this segment? How important is the role of consulting for ROK regarding its customers... how many consultants does it have – is this an area it needs to build up more, to ensure that it has good access to the senior management levels of customers / decision makers, well ‘above’ just the plant floor or the IT departments, now that IT / OT / capex / opex are blurring together? ROK has now added 3 small bolt-ons that support the Cybersecurity offering within Lifecycle Services (Avnet, Oylo, Kalypso) – does ROK now have the resources to develop a competitive Cybersecurity offering in-house? How does the company think about ‘making’ vs ‘buying’ these capabilities? What share of revenues in Lifecycle Services are recurring in nature at present? How do the margins on these revenues compare with that of perpetual sales? How and why does ROK intend to accelerate the adoption of Augmented Reality within Lifecycle Services? 117 Barclays | U.S. Multi-Industry Management has mentioned that despite the cyclical nature of its end market, Sensia would see growth that would be somewhat independent of oil price moves…has this played out as expected? Who does ROK view as its main competitors in this segment? Software & Control Software comprises 7-8% (~10% with Plex) of ROK sales (or $0.5bn exc-Plex, $0.65bn inc-Plex), the main product being in Control & Visualization, at $0.2bn in sales); most of it is based on a perpetual license model today – how quickly can management convert this towards more of a subscription basis? Pure software represents 25% (30% inc-Plex) of sales in the segment…how high could this share be in 5 years’ time? ROK recently began disclosing orders in this segment – what is the historical lag for turning orders into sales? What degree of growth / level of margins does management target in the medium-term in this segment? Manufacturing Execution Systems (MES) software should be a large market, and one that ROK is well placed to benefit from – why is the market so small (ROK’s sales are only $0.1bn); does ROK view this is as a market where it can drive up the addressable market size, and its own share, dramatically? How does ROK’s Software & Control offering benefit customers (factory floor, plant manager, operations management), and what differentiates ROK’s offering vs peers? In Q4 21 ROK intends to introduce a next generation automation control software – how does this differ from the company’s existing offering? How does ROK think about the decision to make vs buy or partner with other companies regarding its software & control solutions? 18 August 2021 118 Barclays | U.S. Multi-Industry ROPER TECH ROP Stock Rating OVERWEIGHT Industry View NEUTRAL Price Target USD 550.00 Price (17-Aug-2021) USD 485.93 Potential Upside/Downside +13.2% Recent Key Reports: ROP: Software growth, disciplined M&A to step up, as the macro decelerates; July 25, 2021 US Multi-Industry: 6 conclusions from FTV, ROK recent M&A deals; IR, ROP look very attractive; July 13, 2021 ROP: CEO, CFO Meeting – Upbeat tone on growth, operating leverage, M&A; Business model continues to compound; May 31, 2021 ROP: Upgrade to OW; An ‘unfashionable’ stock, but de-rating looks extreme; March 18, 2021 General How are Mr Hunn’s twin goals of increasing the focus on organic growth, and improving upon the talent development at ROP, playing out? How satisfied are management with the progress in these two respects? There is a common perception that ROP’s software growth is underwhelming given that software is meant to grow faster than most markets – what is management’s response to this view? There is a common investor view that ROP buys assets with limited synergy to its base business, and then does little to improve them once it acquires them – what does ROP think of this view, and what are the examples it can give of businesses that have improved substantially under ROP ownership in terms of operating margins or returns or organic growth? It can be difficult for investors to think about the slope of ROP’s recovery post-Covid, because the exact mix of its end-markets is somewhat opaque from the outside - can ROP help clarify the half a dozen or so main end-markets for the company and the rough share of sales they each comprise? Could we expect an Investor Day at some point in the next year to clarify the company’s sales mix after considerable portfolio change in recent years? There is a common investor view that Roper does limited innovation organically, and ‘buys in’ the innovation via its M&A activity, particularly in software…what does ROP think of this view, and what are the main examples of new product introductions in software that it has launched for businesses acquired over the past 5+ years? Is ROP confident that its software organic sales can return to that pre Covid growth rate of MSD+, or are there any structural / business model headwinds that would preclude this? Recurring software sales grew at a mid-single-digit pace in 2020 – how much of the software business is ‘recurring’ now? What share of total sales comes from SaaS? What will this reach in the medium term? How does an increasing share of sales from SaaS impact ROP’s net working capital and cash flow generation profile? Recent acquisitions have made it very clear that the company continues to focus on Software-based deals. Does management worry that valuations for Private equity assets 18 August 2021 119 Barclays | U.S. Multi-Industry 18 August 2021 / Software M&A have started to become excessive, or do low interest rates make acquisitions more attractive? How is the integration / EPS accretion from Vertafore, ROP’s largest transaction to date, proceeding? Management are looking more towards improving organic growth – how does it do this without jeopardizing ROP’s de-centralized operating culture? R&D/sales has risen considerably in recent years, targeted at 9% of sales in 2021 – is it likely to keep rising as software comprises a larger share of earnings/sales? How much of the R&D is allocated to the software businesses? One of the big internal initiatives in ROP right now relates to talent development. How is this progressing at the company (i.e., what ‘inning’ would the company say it is in of this transition)? As part of the talent development, it seems the role of Group Executives is on the rise – how many of the latter are there now, and what is their role? How does management view the role of Group Executives as the number of portfolio companies expand? Are there concerns the Group Executives role could create a new information barrier (and subsequently, inefficiencies) between senior leadership and the operations at portfolio companies? How does management plan to balance a greater focus on talent development with the decentralized operating nature of the portfolio companies? Are there certain pieces of the business (i.e. by business type: Industrial vs. Software, or Network vs. Application within software) that are integrating the push to higher organic growth more quickly than others? Does ROP view the Application Software segment as offering more or less attractive organic and inorganic growth opportunities relative to Network Software & Systems? What does the company view as its primary ‘moats’ preventing other companies from entering its niche end markets? For example, what prevents a larger Pumps provider from attempting to steal market share from Cornell Pump? How does ROP typically ‘screen’ the executives of acquired companies and figure out if they will fit well with ROP’s CRI focus? It seems as if the vast majority of senior management is retained following acquisitions, can ROP give an example (over the past decade) where this was not the case and why it occurred? With little integration / cost synergy push / centralization of M&A deals after they have been acquired, how does ROP align incentives of the newly integrated companies with those of the core business? What is the typical rate of employee attrition seen at newly acquired companies? Is it very small since ROP has no enterprise-wide compensation structure? What’s the average length of ROP’s current SaaS contracts? What does the optimal contract length look like in the medium term? What is ROP’s definition of ‘ARR’, and how large is its ARR? How important is the difference in investment horizon for ROP relative to PE firms when making investment decisions around acquisitions? Net working capital - how low can working capital go in the medium-term, and how large a share of sales could deferred revenue become? 120 Barclays | U.S. Multi-Industry What level of operating leverage does ROP target in the medium-term? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding infrastructure stimulus for instance, or corporate tax rates? Portfolio ROP recently announced the divestiture of Zetec (announced August 10, 2021; ~$350m transaction value with $64m / $17m in TTM Rev / EBITDA); given high public market valuations, would ROP contemplate divesting more non-core, low growth, low softwareintensive assets? Have management’s views regarding divestments changed at all in light of current market valuations and the recent Zetec divestiture? As ROP grows larger, how will its M&A deal size scale up, and how will this factor into ROP’s desire to remain in ‘niche’ markets (vs moving into larger TAMs that may risk fiercer competition)? With two of the company’s most recent deals (iPipeline and Vertafore) being in Insurance, does management view this end market as particularly attractive and is there the desire to expand ROP’s presence in this space / the Financials sector in general? Construction / buildings management software has been a popular area of M&A for ROP and FTV; how does ROP's approach differ from FTV, and why does it view this as an attractive market niche? Should we expect the two software segments to receive 90%+ of M&A capital? How attractive is hardware M&A for instance in Healthcare within M&AS? What share of assets in the portfolio do not fit the required recurring revenue, software or cash flow return on investment profile that ROP is seeking? If so, is ROP a proactive, or simply reactive, seller? The Short Cycle industrial hardware businesses have had two downturns in only 5 years, yet management seems steadfast in keeping them in the portfolio - what is the logic behind this? Would the businesses just not fetch the appropriate sale multiple to justify a divestment? Does management see any upside potential in a SOTP equity value approach for ROP? Is ROP satisfied with the scale of its exposure to Oil & Gas markets given the very high volatility of this industry in recent years – would it see any reason to exit some of this exposure over the medium-term? Balance sheet / Capital allocation ROP has typically viewed transactions with PE firms as a good source of value, does management still hold that view given the increasing convergence of private valuations with (high) public valuations? Management noted on the Q2 21 earnings call that “As our balance sheet becomes more offensive towards the end of the year, our active pipeline of M&A targets will enable us to resume capital deployment in our usual process-oriented and disciplined manner.” Does the divestment of Zetec accelerate this at all given the $350m of cash proceeds? 18 August 2021 121 Barclays | U.S. Multi-Industry What is the optimal level of leverage in the medium term and how much is management willing to exceed that for the right deal? What financial returns should we expect from the Foundry / iPipeline / EPSi / Vertafore acquisitions? Network Software & Systems How satisfied is management with the segment so far in the current upturn? Network Software (mostly SaaS) grew low-single-digits in 1H21 and is guided to grow +HSD in the 2H21…to what extent should we expect growth to normalize in 2022+? EBITDA margins are flat/down in recent years…what kind of operating leverage should we see at NSS medium-term? What is the potential TAM of the congestion pricing market given the New York City contract win at TransCore? Does management believe ROP can lead this market with the experience gained from this major project? How are the competitive dynamics in this market? What’s the latest thinking on the TransCore NYC project revenue recognition timing? Tag shipments appear to be normalizing for the balance of the year (per the Q221 call), what kind of operating leverage these see in the recovery? Management has noted that Covid-19 drove faster adoption of its SaaS or cloud-based recurring revenue solutions - can ROP provide examples of this acceleration within NS&S? How rapidly did the adoption curve shift relative to a ‘normal’ environment? How has organic growth held up at iPipeline during the integration process? What is management’s medium term target organic sales run rate? Is ROP seeing any increased competition at DAT / Freight Match, as the broader fleet management / telematics arena seems to be seeing more and more competition, from the likes of Verizon and others? How does it see this market evolving? What growth profile should we expect for Toll & Traffic in the medium-term? Does ROP continue to invest to ensure it is winning share in this industry? What are the differences between businesses in Network Software vs. Application Software? It seems as if an argument can be made for certain acquisitions to be classified in either (i.e., Foundry)? The company has frequently highlighted that the R&D spend (as a % of sales) at the software businesses is much higher…what is the % of R&D spend in Network Software? Is it the same or higher than in Application Software? The construction / building management software sector seems to be undergoing some changes in terms of ownership and new entrants, per FTV’s recent acquisitions; how fragmented is this market – how well-positioned does ROP view ConstructConnect, and does it need to keep acquiring in this area in order to stay ahead? Application Software How satisfied was management with the segment during the recent downturn? The business recovered to +MSD in the 1H21 and is guided to grow +HSD in the 2H21…to what extent should we expect the growth rate to normalize in 2022+? 18 August 2021 122 Barclays | U.S. Multi-Industry Adjusted EBITDA margins saw a big bounce in 2020 despite flattish organic sales…what is the normal operating leverage in the segment? How quickly could the license / service revenue rebound in 2021 and 2022? Perpetual license was down mid-teens in 2020, could we not see a faster rebound in 2021 and 2022? What are some examples of how the Covid downturn accelerated the uptake of SaaS or cloud-based recurring revenue solutions? How rapidly did the adoption curve shift relative to a ‘normal’ environment? How is integration of the Vertafore acquisition progressing? With the increasing focus on SaaS offerings, how does management view deferred revenues in terms of working capital management and the asset-light model in the long term? How much of a headwind could the SaaS transition be to the perpetual license business in 2021 and the medium-term? What lessons did ROP learn from the challenges faced at Sunquest and the salesforce retooling efforts at PowerPlan in terms of operating/integrating a software acquisition? Did this change how management analyses future deals? What is preventing Data Innovations and CliniSys from facing the competitive challenges seen at Sunquest given they all operate in the Lab Software market? When Deltek was acquired, management cited it as a key beneficiary of any increased US infrastructure spending – what are management’s expectations for infrastructure spending/stimulus in the medium term? Gross margins are in the high 60%s level – are future increases in gross margins likely to occur more from portfolio changes rather than organic / productivity measures, given how high the GMs are now? Measurement & Analytical Solutions What organic CAGR could we expect in the Industrial businesses (20-30% of sales)? How sensitive are the sales of businesses such as Neptune to changes in State and Municipal budgets? What share of total company sales do these revenue streams represent? With new product launches at Neptune and Verathon serving as significant growth drivers in recent quarters, does ROP plan on having an increased focus on product development? The company has highlighted a rising share of recurring revenue from one-time use consumables within the healthcare businesses, does management see continuing opportunity within this market? How high could the share of recurring revenue reach within the segment? Who are Neptune’s main peers, and what is the medium-term outlook for this business? Which parts of this segment is ROP spending the most capital / time to develop – Products / Alternative site Healthcare / Acute care? 18 August 2021 123 Barclays | U.S. Multi-Industry Process Technologies Process Tech is highly cyclical - what is the long-term growth outlook for this business? 40% of sales non-O&G related…does management view these as having a higher LT growth outlook than the O&G side? Are there big synergies between the O&G and nonO&G businesses, or could O&G be exited easily? Does management see opportunities to reduce the segment’s cyclicality via portfolio change or other means? What is driving the share gains at Cornell? How much of the strong growth at present is driven by Food vs. Ag vs. Water markets? 18 August 2021 124 Barclays | U.S. Multi-Industry STANLEY BLACK & DECKER SWK Stock Rating OVERWEIGHT Industry View NEUTRAL Price Target USD 230.00 Price (17-Aug-2021) USD 194.50 Potential Upside/Downside +18.3% 18 August 2021 Recent Key Reports: SWK: Confirms acquisition of the remaining 80% stake in MTD for $1.6bn; August 17, 2021 SWK: Tools normalization more discounted here; Costs headwind still rising; July 27, 2021 SWK Growth Summit: Strong drivers for continued organic out-growth vs sector average in place: May 13, 2021 General The revised 2021 guide embeds +5-8% organic sales growth in Tools & Storage in the 2H (vs prior expectations for a -2% to -4% decline) … how did SWK arrive at this outlook and what assumptions does it embed around the Professional / DIY channel behavior, for example? Does the better than anticipated demand in 2021 to-date ‘pull forward’ much demand from 2022? How is management assessing the changes in work from home trends following the Covid pandemic, and what this might mean in driving demand for its Tools business? How does management think Covid is and will affect the demand for Residential repair & remodel activity structurally / in the next few years, assuming more ‘work from home’ in general in the US / W Europe? SWK has $125m of net carry over savings in 2021 (and $300-500m over the next 3+ years), which should help generate 25-30% operating leverage this year despite input cost headwinds, and ~50bps annually thereafter…how should we think about longerterm operating leverage at Tools & Storage and at the company, in terms of what is a desirable drop-through, while still re-investing for growth? How quickly can the ‘margin resiliency’ savings of $50-60m (not included in 2H guidance) be put into place in 2021, if FX or input cost headwinds become a bigger issue? Within ‘margin resiliency’, which ‘pool’ does the company feel it has the most preexisting expertise in: 1) Price / margin excellence; 2) Next generation procurement, 3) Supply Chain & Industry 4.0; 4) Indirect Spend & Functional excellence? What is the planned spending associated with SWK’s total cost out program underway at present? What is the weighting of the cash costs of this restructuring effort, and how will they weigh on FCF over 2021-2022? How have pricing initiatives played out, relative to expectations; is SWK seeing any evidence of weaker pricing among competitors amidst a very volatile demand environment? How does SWK feel about ‘pricing power’ across its three segments? If cost inflation falls in 2022, will SWK be able to retain any price increases pushed through in 2021? How confident is SWK about being able to offset the expected ~$300m / $160m of input cost / transit headwinds in 2021? Is it confident that its peers will push up prices, or could there be a market share battle? FCF margins have moved higher in the past two years but likely move lower in 2021 to ~10.5% because of working capital and capex needs….in the long run should we expect 125 Barclays | U.S. Multi-Industry 18 August 2021 FCF conversion to = 100% of GAAP net income, and for FCF margins to move higher alongside operating or net P&L margins, up by several hundred bps? How is the SFS 2.0 effort to reduce SG&A expenses progressing, in light of Covid…how does this effort overlap with ‘Margin resiliency’? What is the sustainable medium-term SG&A/sales ratio that SWK is aiming for? It seems as if the most recent ‘Breakthrough Innovation’ was signalled to be in Industrial for some time, and then subsequently changed to Tools & Storage? Is this an indication for the future of the Industrial business, or is it just much tougher to find that sort of innovation in Industrial? It seems as if there are discrete ‘Breakthrough’ teams assigned to business units / segments…are there any examples in recent history where different teams were moved to other segments in order to expedite a ‘Breakthrough’ process, or are the teams always kept separate? Is there a timetable as to when other Breakthrough innovations (similar to FLEXVOLT, Atomic, etc. in magnitude) may start to appear? Could we see several within 6-12 months, or is it likely to be much more spread out (FLEXVOLT was some time ago)? Can the company expand on its ‘digital’ initiatives – how large could the ‘connected jobsite’ opportunity be? Does SWK view Digital Marketing as a major point of differentiation from Peers (particularly large Peers that participate in the Tools & Storage markets)? How do marketing strategies that are catered to DIY / Consumer customers differ from Professional contractors? Management reiterated the 2022 financial targets (set pre-Covid, in mid-2019) at the 2021 investor day, despite being ahead of the prior 3-year view (from 2019); why did the company choose not to update these? When should we expect a new set of midterm targets? Is the company re-organizing any of its global supply chains in light of Covid, et al.? How is the progress on the new Craftsman plant in the US? What factors informed the company’s decision to invest further in N America ($260m footprint investment announced at the 2021 investor day)? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding infrastructure stimulus for instance, or corporate tax rates? Management highlighted organic catalysts capable of driving +5-6% organic revenue growth annually across T&S ($0.5bn), Outdoor (~$0.2bn), Industrial (~$2bn), and Security (~$0.2bn) – what are the underlying market and share gain assumptions within this target? Portfolio How satisfied is SWK with the 2020 downturn performance of the Industrial and Security businesses? SWK has talked about restructuring the portfolio in Industrial, and also reviewing the status of the Security business within SWK – should we expect decisions on either front in 2021, or more likely in 2022 once we see the fundamentals in these businesses improve over the next 12 months? 126 Barclays | U.S. Multi-Industry Could Covid and its aftermath increase the appeal of keeping Security within SWK, or it is too early to tell? What would the estimated dis-synergies / stranded costs be, from exiting Security? What about tax leakage? Have other parties expressed interest in the Security business already? Does the recent sale by CARR of Chubb affect at all SWK’s thinking on its Security business? Are the PE firms who missed out on Chubb now looking at the SWK asset? Do further M&A deals to build out Industrial make more or less sense today, given where we are in the Auto / O&G / Industrial cycles? What is the type of revenue exposure that is attractive in this market? As SWK seems to become a more and more Tools-centric company, how does management think about the potential impacts of this shift on its valuation multiple? At the 2021 Investor Day, the company highlighted ‘Electrification’ opportunities across both Tools and Industrial – are there opportunities here as it pertains to Security? How important is ‘Electrification’ as a theme for SWK going forward? Balance sheet / Capital allocation What are the key assumptions underpinning the guided 2022 $0.50 of EPS accretion / 2025 $1.00 of accretion, of the MTD deal? Why have MTD’s sales only flat-lined in recent years – is it losing a lot of market share? The MTD move – how should we think about medium-term top-line growth in this business, and where SWK can take its 6% operating margins to? Does the 10% operating margin aspiration for MTD in 2022 represent the ‘ceiling’? With the acquisition of the remaining 80% of MTD Products having been announced, are there any other types of assets that look interesting, or will this asset likely dominate M&A for SWK over 2021-2022? Has SWK’s criteria for future M&A changed at all as a result of recent deals / the Covid downturn? Does management see the possibility for future Lawn & Garden M&A, or do the MTD and Craftsman deals give SWK sufficient ‘presence’ in this market for the medium-term? How is the integration of the CAM acquisition (closed early 2020) proceeding? What returns should investors expect from this acquisition in Year 3 or 5? How attractive are share buybacks relative to M&A? Tools & Storage Market share has increased strongly since the Black & Decker deal in the US...is there any room for further increases here? How can the company increase its penetration / share in emerging markets organically, or does this have to be all via M&A? What kind of pricing increases are possible for SWK to push through in T&S in an inflationary environment such as 2021? How does it expect its Tools competitors to react in terms of price discipline at a time of cost inflation? 18 August 2021 127 Barclays | U.S. Multi-Industry 18 August 2021 Within the company’s ongoing effort to tie-up the Tool Industry, what ‘price-point’ / end customer does SWK feel has the most room for consolidation (i.e. low-price point consumer, or high-price point professional)? Operating margins in Tools & Storage could reach 19-20% in 2021 vs old peaks of 1617% – does SWK see any natural ceiling to the business because of channel dynamics or competition, or could these margins keep expanding into the 20%’s in the mediumterm? How much can e-commerce help expand T&S’ footprint in markets exc-US where its market share is relatively low? What is a SWK’s targeted market share / a reasonable timeframe for achieving such within the $1.7tn International eCommerce market (by 2025, as highlighted at the 2021 investor day)? Besides potential margin differential, what are the primary differences between Ecommerce and standard sales channels (i.e., pricing increases, customer base, etc.)? How does management think about the emergence of e-commerce as an opportunity (SWK has ~$2bn / ~20% of Tools sales on-line now)? How do its profitability levels compare with the ‘brick and mortar’ business? How important has the e-commerce business been for driving T&S growth recently? What are likely medium-term growth rates for e-commerce? Craftsman: SWK recently updated its medium-term sales goal for Craftsman – what does this assume for the impact from Sears in the coming years? How quickly should Craftsman profit margins converge with the base business? How quickly can SWK localize manufacturing in the US? FLEXVOLT: Is there any scope for pricing improvement in FLEXVOLT, i.e., if the technology remains relatively unchallenged, can there be a higher premium charged for the product? SWK often speaks of the FLEXVOLT transition as an ‘ongoing educational’ process, what’s the progress on it? Are customers close to being fully educated on the topic? HDS said at its 2019 Investor Day that over 60% of tools sold on the market today are cordless, where is that ratio today and where could this ratio end up? Should we still expect FLEXVOLT sales to grow at a 20-30% rate for another couple of years (post-Covid)? What cannibalization rates is SWK seeing from FLEXVOLT? Is this exacerbated by the addition of products such as Atomic and Extreme? SWK’s Lawn & Garden business within Tools is ~$900m in revenues (per the 2021 investor day) and has outgrown the underlying market by 8% over the last 5 years – who is the company taking market share from and in which categories? Which of MTD’s complementary capabilities does SWK view as possessing the highest synergy potential (dealer channel, manufacturing / engineering expertise, robotics expertise)? Within Hand Tools (~$25bn TAM), management highlighted opportunities within elite construction cutting ($1bn market opportunity), ‘owning the toolbox’ ($1.6bn TAM), and 'mechanics of the future’ (~$3bn TAM) – what makes these niches vs other vertical within Hand Tools? SWK has 35% new product vitality within Hand Tools – how high can this metric go / where does management aspire to drive this ratio long-term? 128 Barclays | U.S. Multi-Industry 18 August 2021 Industrial In Autos, it is clear that SWK views EV as a positive opportunity given the content per vehicle is 3-6X larger on an EV (per the 2021 investor day). What gives SWK confidence that it will be able to capitalize on this trend, particularly since many other companies have cited similar opportunities? How does SWK think this 2021-2022 industrial revenue upturn (shape / slope) could compare with prior recoveries in 2017 or 2011? SWK acquired CAM in early 2020, which had ~$375m in sales in 2019; when does the company think that global passenger traffic / flight hours return to 2019 levels, and how is the integration of CAM proceeding – what Year 3 or Year 5 ROIC should we expect? One of the motivating factors behind the IES Attachments and CAM M&A deals was to diversify the portfolio away from O&G exposure, is there any scope for outright portfolio pruning regarding the O&G end-market, or do we need to wait for a major industry recovery now given the state of the downturn? Operating margins were flat for several years pre-Covid...can restructuring solve this, or does portfolio rightsizing seem a more appropriate action? Within the Industrial business, what is the Margin differential between the Engineered Fastening and Infrastructure (Attachment Tools + Oil & Gas) businesses? Within Engineered Fastening, what are the margins of Automotive OE / Automotive Systems / Industrial, respectively? Are there any long-term profitability targets for the business? Or is it too difficult given it is constantly in flux due to M&A / divestments? Security Management highlighted the aspiration for Security to return to 15% operating margins at the 2021 investor day (vs 2021 guidance of 10-11%), what are the biggest levers management intends to use to drive this? Does the company need to prune parts of the portfolio or the existing businesses are capable of carrying 15% operating margins? How are negotiations going with customers regarding the upgrades they are contemplating making to commercial buildings as a result of Covid-19? Is there an opportunity for the company to benefit from these? Is the company seeing any difference in behavior post-Covid (pricing, uptake of postCovid remedial solutions, budgetary pressure) among its customer base depending on vertical (Multi-family residential vs. Office vs Hospitality vs. Retail et al.) or geographic region? What opportunities is Covid creating sales-wise in terms of the increasing focus on contactless access control, thermal imaging etc.? Could there be substantial medium term tailwinds from these trends? Do all of the growth initiatives that SWK has outlined to regenerate organic growth (lower cost to serve, catering to small-mid size customers, generating usable data analytics reports) need to be achieved in order for management to consider the turnaround a success (thus abating the need for a divestment)? Of the three initiatives highlighted by management (Small & mid-size business solutions, advanced analytical solutions, lowering cost-to-serve), where is management most satisfied with its progress, and where does it feel it needs to improve? 129 Barclays | U.S. Multi-Industry What is the progress on these various sales growth initiatives? What level of margin degradation to achieve these goals is viewed as acceptable? Organic sales growth was zero in recent years (pre-Covid); what future growth threshold is viewed as acceptable for SWK to keep this business within the portfolio? Are attrition rates rising on the monitoring side, and is this hurting sales and margins? Few companies in this sector are seeing much growth (JCI, CARR). Are there major structural headwinds now that may mean growth is subdued indefinitely? How high is the FCF conversion of Security? What would the company’s FCF conversion or FCF margin be excluding Security? Management has identified Electronic Security as a ~$130bn market…is this getting larger or smaller with the ‘structural changes’ taking place in the industry? Or is it more that the largest players are being supplanted by smaller competitors? 18 August 2021 130 Barclays | U.S. Multi-Industry TRANE TECHNOLOGIES TT Stock Rating OVERWEIGHT Industry View NEUTRAL Price Target USD 216.00 Price (17-Aug-2021) USD 193.63 Potential Upside/Downside +11.6% Recent Key Reports: US Multi-Industry: AHRI HVAC June Data: Sell-in slows (Implications for CARR, JCI, LII, TT); August 12, 2021 TT: This Trane is likely back on track soon; NT revenues capped by supply; August 4, 2021 US Multi-Industry: Transport Refrigeration – June Builds up 28% y/y, TTM Orders appear to have peaked, per ACT prelim. data: Implications for CARR and TT; July 20, 2021 TT: CEO, CFO Meetings: Focused business, larger TAMs yield superior growth outlook; June 16, 2021 US Multi-Industry: Maersk MCI reefer divestment process; CARR, TT potential implications; June 11, 2021 TT: CEO Transition; Next steps and MI Implications; June 4, 2021 General The company changed CEO in mid-2021, for the first time in 11 years…should we expect any substantial changes, or will it be largely status quo? What type of through-cycle organic sales growth should TT generate, given the global backdrop of rising degree days / higher energy efficiency needs among customers? Only 15-20% of Trane non-resi HVAC sales are Greenfield OE - for the other 80%+, what is the profitability level, and how fast has it grown in recent years? How much of these sales are contractual service (as opposed to spare parts / ad hoc service), and what are the typical lengths of the contracts? Air Purification has emerged as a popular topic among investors given the events of the past 18 months; TT has sized this opportunity as capable of adding 1-2% to annual revenues (vs. CARR and Ferguson's estimate of a $9-10bn IAQ TAM) and recently said it is adding closer to ~2% of extra sales growth in 2021 – how far into the medium-term is this growth tailwind expected to persist? How does the increased prevalence of vaccines affect customer decisions regarding IAQ investment? Is the company seeing any difference in behavior post-Covid (pricing, uptake of postCovid remedial solutions, budgetary pressure) among its customer base depending on vertical (Multi-family residential vs. Office vs Hospitality vs. Retail et al.) or geographic region? How is management assessing the changes in work from home trends following the Covid pandemic? What level of disruption could this cause in commercial building use, and HVAC / Building controls equipment/service needs? Incremental margins are trending below the LT average goal of 25% in 2021 due to cost inflation and FX? Could we see a higher rate of operating leverage over 2022 and 2023 as the Transformation savings continue to be generated, assuming cost inflation normalizes, or is the ‘gravity’ of the 25% medium-term incremental margin placeholder likely to re-assert itself? How is overall price discipline globally across HVACR markets? 18 August 2021 131 Barclays | U.S. Multi-Industry Post-the stranded costs elimination following the RMT, what should the corporate cost run-rate be? IT and supply chain productivity are a key effort at present, to drive $160m of savings – what are some of the examples of savings that TT can give us, now that these programs are gaining momentum in the relatively new, simpler portfolio post-RMT? How different are the operating margins between the four main pieces of TT (Commercial HVAC equipment, Commercial Service, Parts & Contracting, Resi HVAC, Transport Refrigeration)? Are high teens EBIT margins a realistic or desirable medium-term aspiration, in common with some HVAC peers? Has anything changed competitively now there are more 'focused' management teams at Carrier and York / JCI (both are 'Buildings' pure-plays) in the Commercial HVAC space? A portion of the growth algorithm at TT has been due to market share gains at their expense – is the company confident of maintaining this? What are the main upcoming emissions / refrigerant standards changes which could impact demand / the industry, either domestically or globally? 70% of TT sales are in N America - how keen is management to diversify its geographic sales footprint? Can it do this all organically? How is the progress in China in terms of the push to take market share in more inland and lower-tier cities? How large is the Rental business, and what are its returns? There is some debate about how much of the HVAC market VRF technology will end up comprising in N America...how is the Mitsubishi Electric JV on VRF performing (since May 2018), and what does the JV mean for TT's relationship with the other VRF partners that the company has? Management are guiding for >100% FCF conversion in 2021…what kind of working capital level is sustainable for the long-term? FCF margins are probably around 10% in 2021…can they keep moving up alongside operating margins? Is the company re-organizing any of its global supply chains in light of Covid, et al.? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding stimulus in Education for instance, or corporate tax rates? Non-Resi / Resi / TK-specific questions How much of the Non-residential HVAC sales are into Applied product vs Unitary product? How does this split in terms of OE vs AM, or by geography? What are the attachment ratios for the commercial HVAC contractual or recurring service agreements at present? How much do these differ by region or market, and how quickly does management think it can increase these attachment rates? What is the average contract length for aftermarket agreements currently? What would be the company's target in the medium-term? 18 August 2021 132 Barclays | U.S. Multi-Industry How much 'outcome-based' service does TT offer (for instance in terms of guaranteeing energy performance in a commercial building, to customers)? What share of Commercial and Residential HVAC equipment come from New Construction vs. Replacement? How does the shape of recovery differ among these verticals over the next few years following the current downturn? How much of the Non-residential HVAC sales (60% of sales) are into institutional construction vs commercial construction markets? How does this split in terms of OE vs AM? In Non-resi, TT has enjoyed considerable success with its Energy Controls business, taking market share in commercial buildings from York, what is the growth outlook like here? How is profitability in this business compared with the rest of TT? Has recent data suggested that the non-resi market may be rebounding sooner than TT previously expected? At Q2 21, TT commented that it was ‘cautiously optimistic’ about improving non-resi markets in 2H21 with increased vaccination rates. In Thermo King, how much of it is tied to the US truck & trailer market now, in terms of OE and replacement? What is the sales split for TK? How does TT view the state of the overall US Resi HVAC cycle….is there any reason to expect any kind of cliff in replacement demand in 2022? Should we expect any significant pre-buy in the US Resi HVAC market ahead of the SEER change in 2023? When thinking about Thermo King, the business tends to have volatile cycles….2021 should see high growth, but how long does TT think this new upturn can continue? ACT forecasts that Reefer trailer scrappage and fleet age will rise over the next few years, does TT agree with this outlook and would this create some level of structural tailwinds for demand in the medium term? Portfolio Which areas of TT does management think are most attractive in terms of adding to, inorganically? TT recently said that share gains among the major OEMs in recent years may create barriers to large-scale consolidation among the ‘Big 5’...how significant could anti-trust barriers be in terms of preventing large-scale consolidation among the US OEMs? What are the main criteria / attributes of partners that TT considers when weighing up M&A? TT completed 3 CHVAC channel acquisitions in late 2020 / early 2021…what kind of financial returns should we expect from these transactions? TT does not have a large building management / controls business – does it need to make IT type acquisitions in order to ensure it stays ahead in CHVAC as buildings increasingly digitize? Are all assets within TT considered 'Core', post the divestment of Industrial? 18 August 2021 133 Barclays | U.S. Multi-Industry Balance sheet / Capital allocation TT's leverage (~1X ND/EBITDA) is well below its peers following the RMT, what does management think is the optimal leverage level for the company in the medium term? What would be the most attractive uses of capital raised via levering up? Does TT need to loosen any of its rather strict financial M&A criteria in order to complete acquisitions of scale, as it is a very frothy M&A market? How much room is there to lever up, in the context of the company's BBB credit rating? 18 August 2021 134 Barclays | U.S. Multi-Industry VONTIER CORPORATION VNT Stock Rating OVERWEIGHT Industry View NEUTRAL Price Target USD 50.00 Price (17-Aug-2021) USD 33.83 Potential Upside/Downside +47.8% Recent Key Reports: VNT: Brighter '22 and strong margin execution suggest discount to shrink; August 6, 2021 VNT: Q2 Pre-announcement; Reasonably-priced acquisition of DRB Systems; July 19, 2021 VNT: Initiation: High quality, low valuation, with Mobility eco-system upside; October 12, 2020 General As a new stand-alone public company, what are the main things that VNT is doing differently now, compared with when it was under the FTV/DHR 'umbrella'? How confident is VNT in the EMV headwind assumptions laid out for 2022, at the Q221 earnings? What kind of decremental margins will the EMV headwind in 2022 carry – the same as 2021 (~50%)? Does the recently announced acquisition of DRB Systems (expected to close in Q3 21) signal VNT is likely to primarily pursue hardware M&A, away from EV charging, as that and software acquisitions are too expensive? While early days, with the EMV deadline in the US behind us (April 2021), how has the transition trended relative to expectations? The target of GDP+ core growth medium-term - how is this expected to differ across the two segments / five operating companies? How is pricing power – what margin impact is expected in 2021+ from higher input costs? Which business does the company have the most pricing power in? what are the ‘typical’ pricing structures and seasonal cadences across the businesses? The target of 25-50bps of core operating margin expansion annually in the mediumterm - how is this expected to be split between gross margins and opex control? FTV did not put much inorganic investment into the business in recent years - how much organic under-investment has there been and what type of catch-up spending is needed? What are the priorities for strategic investments? What does management mean when it says it wants to increase the 'returns' on its R&D? how can it measure whether it is being successful in this approach? How do the current elevated equity market valuations for EV related stocks make VNT think about its stakes in Tritium and Driivz? Why did the company decide not to exercise its option in Tritium- how does it view its stake now? Is it possible for VNT to find assets to buy that offer decent top-line growth in areas such as EV or telematics or payments in this current market of elevated valuations, while meeting its M&A criteria of DD ROIC by Year 5? What are some of the main tweaks or adjustments being made to FBS / DBS to make it more relevant for Vontier? What are the synergies between the Mobility and Diagnostics segments, if any? 18 August 2021 135 Barclays | U.S. Multi-Industry 18 August 2021 DHR and FTV have exited numerous businesses down the years; how quickly should we assume that VNT might look to shed assets? VNT has 20 manufacturing sites globally - is there scope to consolidate this number? Just over 10% of sales are classified as 'Environmental' - which products does this comprise? Does management see any significant potential impacts from the policies of the new Administration in the US – regarding infrastructure stimulus for instance, or corporate tax rates? Capital Deployment / Balance Sheet VNT has now earmarked ~$0.8bn of the $1.5bn available M&A capital for the acquisition of DRB Systems (expected to close in Q321) - how soon can VNT deploy the remaining ~$0.7bn; does the company need a ‘digestion’ period following DRB to de-lever / integrate, or is the company open to integrating multiple acquisitions at once? What is the mechanism by which VNT can buy out the remaining stake in Driivz in 2022? How realistic is this prospect, or are valuations too high? VNT announced it will not exercise the option to purchase Tritium in 2021 (announced August 2021); will VNT retain a stake in Tritium once fully public? What will this ownership look like (equity income vs NCI)? FTV's M&A has moved in a direction quite different from the portfolio when it first emerged from DHR, into software and healthcare; how likely is it that VNT's M&A could also be into business models or end-markets that are very different from its existing portfolio 'core'? VNT has stated that targeted M&A returns would typically be a double-digit ROIC by Year 5 - does this include any software acquisitions the company might make? Would VNT ever issue equity for the right transaction, or is that highly unlikely? How highly levered would VNT be willing to go for the right acquisition? What is the dividend and share buyback philosophy? Diagnostic & Repair Technologies This had flattish sales in recent years pre-Covid…what are the key levers to re-ignite growth? D&RT is growing rapidly as it rebounds post-Covid, but what is the growth outlook like in the 2H21 / the medium-term? How is VNT looking to grow the franchisee base? Is the +2.5% franchisee base CAGR over 2010-2019 a good placeholder for the medium-term? Profitability at Hennessy is only in the high single digits (operating profit margins) what can be done to improve the margins, and how high can they go? Mobility Technologies Gilbarco Veeder-Root What medium-term penetration rate of US outdoor EMV (vs 71%+ at end-2020, and ~85% guided at end-2021) should we assume? 136 Barclays | U.S. Multi-Industry 18 August 2021 18% of sales accrue from High Growth Regions - what has the sales CAGR been in these regions? How fast are these regions expected to grow in 2021 / the medium-term? How quickly should China rebound from its current slump (related to the underground upgrades in recent years)? How large is the India business for VNT / GVR, and what is its market position here? How wide is the operating margin gap between N America and RoW for GVR? How does GVR's market share differ in N America vs RoW? What are the upcoming regulatory changes in the global retail fueling market that could be most impactful for the business? How confident is management that it can handle / take advantage of the long-term transition to EVs? How aggressive will management be in driving GVR's own businesses towards a world that is increasingly EV-centric? How large are the equity stakes in Tritium and Driivz? How quickly are those businesses growing? Are the businesses profitable? Should we think about ChargePoint or EVgo as being a good 'comps' for Tritium and Driivz in terms of growth and valuation? Teletrac Navman The business was still declining in late 2020 and early-mid 2021…what is the turnaround pace here – can it grow in 2022? What medium-term organic sales CAGR should we expect? The business ($150-200m of sales) was described as a high single digit growth business in 2016, but since then sales are flat / down - what has gone wrong here exactly? Has the growth slowdown been more of an issue of the market, or of mis-steps on VNT's part? The installed base has grown by 30K over 2015-2020 (to >480K) but the annual revenues are lower over the same period - why is this? How has subscriber growth trended in recent years (gross and net)? What information can VNT provide on trends in ARPUs and subscriber acquisition costs? What is differentiated about the new TN360 product? The started ARPU growth on it is 30% per unit in Australia - what are the additional services that are driving this higher ARPU? Profitability is close to a break-even level today (having ‘tipped to profitable’ in Q1 21), far below the company average - what is the target medium-term profitability level? What are the paths to push the margins higher? What are the re-investment requirements that might continue to weigh on profitability as the business seeks to regain market share? In which segment (Service vehicle, freight, construction & mining) is VNT's position strongest or weakest? Which area is it looking to retake share in first? How confident is VNT that its technology offering / reinvestment rate is sufficient to stay ahead / abreast of very large competitors (such as Verizon) who have entered this market? 137 Barclays | U.S. Multi-Industry At what point would management say that the turn-around efforts are not gaining traction, and it might be time to exit the business (as DHR did with Dental)? Global Traffic Technologies What is the revenue base here, and how quickly is the business (traffic management systems) growing? What Year 5 returns is VNT making on GTT, since acquiring it in 2016? What is the business model / how does VNT get paid by its customers? What investments is VNT willing to make here in order to grow it aggressively? Who are its main competitors? Is GTT growing market share? Is pricing pressure intense, as it seems a very competitive arena? DRB Systems What kind of financial returns should we expect DRB Systems to generate in Year 3 or 5 post-the deal? How large are the cost / revenue synergies that VNT can extract from this deal? How did DRB Systems perform through the Covid downturn and what are the organic sales growth outlooks for this business over the next 12 months? What tailwinds are supporting the car wash industry presently and where does DRB Systems stand to benefit? 18 August 2021 138 Barclays | U.S. Multi-Industry M&A / CAPITAL DEPLOYMENT SCENARIOS APG-Chubb Deal Analysis See: US Multi-Industry: APG purchases Chubb from CARR; A win-win transaction; July 27, 2021 for more details. FIGURE 3 APG-Chubb Scenario: Financial Estimates (for illustrative purposes only) EPS Analysis Sales % Change Adj. Calc EBIT % Margin EBITDA % Margin 2022 2,481 4% 2023 2,531 2% 2024 2,582 2% 134 5.4% 263 10.6% 165 6.5% 295 11.7% 197 7.6% 328 12.7% 2025 2,633 2% 213 8.1% 346 13.2% Interest -72 -72 -72 -72 Adj. PTP 62 93 125 141 Tax -13 -20 -26 -30 Cash PTP Cash Net Income Adj. EPS impact to APG 143 185 217 114 146 172 $ 0.56 $ 0.71 $ 0.84 $ 235 186 0.90 APG base EPS EPS Accretion (exc-amortization) (%) $ 1.28 $ 1.43 $ 1.58 $ 1.73 43.4% 49.9% 53.1% 52.3% NOSH Share price Equity Issuance (assumed) Dilution (shares) NOSH (assuming equity issuance) 205 $22.50 0 0 205 205 $22.50 0 0 205 205 $22.50 0 0 205 205 $22.50 0 0 205 APG base EPS (assuming dilution) $ 1.28 $ 1.43 $ 1.58 $ Adj. EPS impact to APG (assuming dilution) $ 0.56 $ 0.71 $ 0.84 $ EPS Accretion (exc-amortization; assuming dilution)4(3%.4) % 49.9% 53.1% 1.73 0.90 52.3% APG PF Combined EPS (new NOSH) $ 1.84 $ 2.14 $ 2.41 $ 2.63 Source: Company Data, Barclays Research; Units are in $m, X, Per Share or % unless otherwise stated 18 August 2021 139 Barclays | U.S. Multi-Industry FIGURE 4 APG-Chubb Scenario: ROIC Analysis (for illustrative purposes only) GAAP ROIC GAAP EBIT Taxes NOPAT 2022 79 -1 78 2023 132 -13 119 2024 181 -23 158 2025 213 -30 184 2026 228 -33 195 2027 243 -36 207 2028 258 -39 219 Purchase Price 2,900 2,900 2,900 2,900 2,900 2,900 2,900 ROIC 2.7% 4.1% 5.5% 6.3% 6.7% 7.1% 7.6% Cash ROIC EBITA Tax Rate NOPAT 2022 215 20% 171 2023 257 21% 203 2024 289 21% 229 2025 307 21% 243 2026 322 21% 255 2027 338 21% 267 2028 354 21% 280 Purchase Price 2,900 2,900 2,900 2,900 2,900 2,900 2,900 ROIC (Cash) 5.9% 7.0% 7.9% 8.4% 8.8% 9.2% 9.7% Source: Company Data, Barclays Research; Units are in $m, X, Per Share or % unless otherwise stated FIGURE 5 We estimate APG will have above average leverage following the acquisition 4000 3500 3000 2500 2000 1500 1000 $900m / 2.4X $606m / 1.5X 500 7.0x $2706m / 5.8X 6.0x $2706m / 4.25X 5.0x 4.0x 3.0x 2.0x 1.0x Net Debt ($m) ND / EBITDA (X) 0 2020 Net Debt 0.0x FCF Announced 2021 Base Net Chubb Equity 2021 Net Debt* 2021 PF Net M&A / Warrant Debt Acquisition (Blackstone / Debt** Proceeds / Viking) Other Source: Company Data, Barclays Research, PF ND/EBITDA reflects a FY contribution from Chubb of ~$231m (vs TTM ending March 2021 of $213m) assuming APG adj. EBITDA in-line with the FY21 guide and per management's comments that the company will have pro-forma net leverage of 4.25X at transaction close (per the Q221 earnings call), *Assumes 1Q contribution from Chubb, **Reflects FY contribution from Chubb 18 August 2021 140 Barclays | U.S. Multi-Industry HON M&A Scenario For our full thoughts on Capital Deployment, see Global Multi-Industry: 2021 likely to be a busy year for Portfolio Change, Capital Deployment; Scenario Analysis, January 21, 2021. FIGURE 6 HON M&A Scenario (for illustrative purposes only) Assumptions Interest Rate Tax Rate Base Depreciation PPA step up (% of Deal value / 15yrs) Year 2 (2022) base EPS 1.5% 21% 3.0% 2.0% $9.18 2021 Gross Debt 2021 Cash 2021 Net Debt Cash reserved for Acq. 2021 Net debt exc. acq. Cash 22,384 13,754 8,630 3,000 11,630 2021 EBITDA 7,291 Debt raised Post deal leverage target ($3bn cash & variable debt) Adj. EPS Accretion vs. Deal Multiple and Post Deal Leverage Deal Multiple 25.0X 23.5X 22.0X 20.5X 2.1X 0.9% 1.1% 1.3% 1.6% 2.2X 1.0% 1.2% 1.5% 1.8% 2.4X 1.0% 1.3% 1.7% 2.1% 2.6X 1.1% 1.4% 1.8% 2.3% 2.7X 1.2% 1.6% 2.0% 2.5% 19.0X 1.9% 2.2% 2.5% 2.8% 3.1% Post Deal ND / EBITDA vs. Capital Sources 2,000 Cash on hand / FCF used 2,500 3,000 2,500 4,000 1.9X 2.0X 2.1X 2.0X 5,500 2.1X 2.2X 2.2X 2.2X 7,000 2.3X 2.3X 2.4X 2.3X 8,500 2.5X 2.5X 2.6X 2.5X 10,000 2.6X 2.7X 2.7X 2.7X 3,000 2.1X 2.2X 2.4X 2.6X 2.7X 2021 ND / EBITDA 2021 ND exc. acq. cash / EBITDA 2021 Post deal ND / EBITDA Cash reserved for acq. Additional debt funding Total funds EV/EBITDA Deal Multiple 1.2X 1.6X 2.4X 3,000 7,000 10,000 22.0X $12.00 $10.00 $8.00 $9.18 $0.35 $0.15 $6.00 $4.00 $2.00 $0.00 2022 Base adj. Acquired EBIT Interest step EPS up $0.04 $9.34 Taxes 2022 adj. EPS after accretion Accretion EBITDA Acquired 455 Base D&A (14) PPA Step Up (200) Adj. EBIT 241 Additional Interest (105) Adj. EBT 136 Tax (29) Adj. NI 107 Adj. EPS Accretion $0.15 Adj. EPS Accretion % 1.7% Source: Company Data, Barclays Research Units are in $m, X, per share or % unless otherwise stated Note: We assume a Software type M&A multiple given that HON paid >10x 2021 sales and >25x 2021 EBITDA in its December 2020 acquisition of Sparta Systems 18 August 2021 141 Barclays | U.S. Multi-Industry HON Buyback Scenario For our full thoughts on Capital Deployment, see Global Multi-Industry: 2021 likely to be a busy year for Portfolio Change, Capital Deployment; Scenario Analysis, January 21, 2021. FIGURE 7 HON buyback sensitivities (for illustrative purposes only) HON 2021 Gross debt 2021 Cash 2021 EBITDA 2021 ND/EBITDA 22,384 13,754 7,291 1.2X Additional Leverage 2021 ND/EBITDA 5952 2.0x Share Price $248.00 $238.00 $228.00 $218.00 $208.00 EPS Accretion (2022) 1.50x 1.3% 1.4% Leverage 1.75x 2.00x 2.4% 3.5% 2.5% 3.7% 1.5% 2.7% 3.9% 1.5% 1.6% 2.8% 2.9% 4.1% 4.3% % cash on hand % new debt Share price Shares repurchased 100% 0% $228 26 Year 2 (2022) base EPS $9.18 EPS benefit from repurchases $0.35 EPS headwind from higher interest exp $0.00 Year 2 (2022) EPS after repurchase $9.54 Accretion (%) 4% Source: Company Data, Barclays Research Units are in $m, X, per share or % unless otherwise stated 2.25x 4.7% 4.9% 5.1% 5.4% 5.6% 2.50x 5.8% 6.1% 6.4% 6.7% 7.0% 18 August 2021 142 Barclays | U.S. Multi-Industry IR M&A Scenario For more information, please see our note US Multi-Industry: 6 conclusions from FTV, ROK recent M&A deals; IR, ROP look very attractive; July 13, 2021 FIGURE 8 FIGURE 9 IR Hypothetical M&A Scenario (for illustrative purposes) IR Impacts Assumptions Adj. EPS Accretion vs.ADdej.aEl MPSulAticpclereatniodnPvos.t Deal LMevueltriapgle and Post Deal Leverage Post deal leverage target ($1bn cash & variable debt) Interest Rate Tax Rate Base Depreciation Year 2 (2022) base EPS 2% 22% 6% $2.20 Deal Multiple 16.5X 15.0X 2.5X 7.7% 8.6% 2.7X 8.5% 9.5% 13.5X 9.6% 10.7% 12.0X 10.9% 12.2% 10.5X 12.6% 14.2% 2022 Gross Debt 2022 Cash 2022 Net Debt Cash reserved for Acq. 2022 Net debt exc. acq. Cash 2022 EBITDA 3,464 1,552 1,912 1,200 3,112 1,296 2.8X 9.3% 10.4% 11.8% 13.5% 15.7% 3.0X 10.2% 11.4% 12.9% 14.8% 17.2% 3.1X 11.0% 12.3% 14.0% 16.1% 18.8% Post Deal ND / EBITDA vs. Capital Sources Cash on hand / FCF used 200 450 700 950 500 1.9X 2.1X 2.2X 2.4X 1,200 2.5X Debt raised 2022 ND / EBITDA 2022 ND exc. acq. cash / EBITDA 2022 Post deal ND / EBITDA 1.5X 2.4X 3.1X 750 2.1X 2.2X 2.4X 2.5X 2.7X 1,000 2.2X 2.4X 2.5X 2.7X 2.8X 1,250 2.4X 2.5X 2.7X 2.8X 3.0X Cash reserved for acq. Additional debt funding Total funds EV/EBITDA Deal Multiple 1,200 1,500 2,700 13.5X $3.00 $2.50 $2.00 1,500 2.5X 2.7X 2.8X 3.0X 3.1X $2.20 $0.47 $0.08 $0.09 $2.50 Accretion EBITDA Acquired Base Depreciation Adj. EBITA Additional Interest Adj. EBT Tax Adj. NI Adj. EPS Accretion Adj. EPS Accretion % 200 (13) 187 (30) 157 (35) 122 $0.31 14.0% $1.50 $1.00 $0.50 $0.00 2022 Base adj. EPS Acquired Interest step EBITA up Taxes 2022 adj. EPS after accretion Source: Company Data, Barclays Research; Units are in $m, X, Per Share or % unless otherwise stated; 13.5X multiple is in line with w/ recent industrial transactions and IR’s own transactions (purchase of Seepex) Source: Company Data, Barclays Research; Units are in $m, X, Per Share or % unless otherwise stated 18 August 2021 143 Barclays | U.S. Multi-Industry IR PT Sale Scenario For more information, see our note Ingersoll Rand Inc: Balance sheet optionality in focus; Strong incrementals and FCF, from 23 February, 2021. FIGURE 10 IR PT Sale Scenario (for illustrative purposes) Sale Scenario Power Tools 2022 Revenue ($m) 2022 EBIT Margin 2022 D&A 2022 EBITDA 437 67 15% 40 107 Proceeds (Gross; $m) Proceeds (Net; $m) 1,397 1,267 Gross value per share Net value per share $3.29 $3.18 EPS Impact 2022 EBIT Share of EBIT Corp/elims Attributable to PT 2022 EBIT (Post Corp) Share of Amortization Tax Adj. Net Income EPS NOSH 67 6.1% -7.7 59.7 21.3 20.0% 64.8 $0.15 424 IR Impacts 2022 base EPS $2.20 EPS lost to Sale ($0.15) 2022 EPS after sale $2.04 EPS benefit from repurchases $0.14 Net interest impact $0.00 2022 EPS after repurchase $2.19 EPS Accretion % -0.4% Source: Company Data, Barclays Research; Units are in $m, X, Per Share or % unless otherwise stated. Based on 13X deal multiple, inline w/ recent industrial transactions average FIGURE 11 IR Impacts Share Price EPS Accretion (2021) from Capital Deployment % of proceeds used for buyback - 60% 70% 80% 90% $52.00 ($0.07) ($0.06) ($0.05) ($0.03) $50.00 ($0.07) ($0.06) ($0.04) ($0.03) $48.00 ($0.07) ($0.05) ($0.04) ($0.02) $46.00 ($0.06) ($0.05) ($0.03) ($0.02) $44.00 ($0.06) ($0.04) ($0.03) ($0.01) 100% ($0.02) ($0.01) ($0.01) ($0.00) $0.01 EPS Accretion (2021) from Capital Deployment (90% to buyback) PT Deal Multiple - 12.0X 12.5X 13.0X 13.5X 14.0X $52.00 ($0.03) ($0.02) ($0.02) ($0.01) ($0.01) Share Price $50.00 $48.00 ($0.02) ($0.02) ($0.02) ($0.01) ($0.01) ($0.01) ($0.01) ($0.00) ($0.00) $0.00 $46.00 ($0.01) ($0.01) ($0.00) $0.00 $0.01 $44.00 ($0.01) $0.00 $0.01 $0.01 $0.02 Source: Company Data, Barclays Research; Units are in $m, X, Per Share or % unless otherwise stated FIGURE 12 IR EPS Impacts $2.25 $2.20 $2.20 $2.15 $2.10 $2.05 $2.00 $1.95 2022 base EPS EPS lost to PT Sale Repurchases $2.19 2022 EPS after sale Source: Barclays Research 18 August 2021 144 Barclays | U.S. Multi-Industry IR-FLOW Scenario Analysis See IR-FLOW: News reports of takeover approaches; July 18, 2021 and US Multi-Industry: FLOW rejects IR proposal; Potential next steps for FLOW, IR; July 19, 2021 for more details. FIGURE 13 IR-FLOW Scenario: Financial Estimates (for illustrative purposes only) EPS Analysis Sales % Change Adj. Calc EBIT % Margin EBITDA % Margin 2021 1,563 2022 1,734 11% 2023 1,865 8% 106 6.8% 208 13.3% 182 10.5% 288 16.6% 249 13.4% 357 19.2% 2024 1,902 2% 335 17.6% 444 23.3% 2025 1,940 2% 355 18.3% 465 23.9% Interest -45 -45 -45 -45 -45 Adj. PTP 61 137 204 290 310 Tax -14 -27 -45 -64 -68 Adj. Net Income Adj. EPS impact to IR Cash EPS 47 109 159 226 241 $ 0.12 $ 0.26 $ 0.40 $ 0.57 $ 0.61 $ 0.28 $ 0.42 $ 0.57 $ 0.74 $ 0.78 IR base EPS Non GAAP EPS Accretion (inc-amortization) (%) Cash EPS Accretion (exc-amortization) (%) $1.85 6.2% 15.1% $2.20 11.7% 19.3% $2.54 15.7% 22.6% $2.92 19.4% 25.5% $3.32 18.3% 23.6% Source: Company Data, Barclays Research; Units are in $m, X, Per Share or % unless otherwise stated FIGURE 14 IR-FLOW Scenario: ROIC Analysis (for illustrative purposes only) GAAP ROIC GAAP EBIT Taxes NOPAT 2022 151 -21 130 2023 225 -40 185 2024 323 -61 262 2025 355 -68 287 2026 376 -73 304 2027 400 -78 322 2028 425 -84 342 Purchase Price 3,806 3,806 3,806 3,806 3,806 3,806 3,806 ROIC 3.4% 4.9% 6.9% 7.5% 8.0% 8.5% 9.0% Cash ROIC EBITA Tax Rate NOPAT 2022 270 20% 216 2023 339 22% 264 2024 425 22% 331 2025 445 22% 347 2026 467 22% 364 2027 491 22% 383 2028 517 22% 403 Purchase Price 3,806 3,806 3,806 3,806 3,806 3,806 3,806 ROIC (Cash) 5.7% 6.9% 8.7% 9.1% 9.6% 10.1% 10.6% Source: Company Data, Barclays Research; Units are in $m, X, Per Share or % unless otherwise stated 18 August 2021 145 Barclays | U.S. Multi-Industry IR-Seepex Deal Analysis See IR: Acquisition of Seepex GmbH – Complementary product portfolio at a reasonable price; June 21, 2021 for more details. FIGURE 15 IR-Seepex Analysis: Financial Estimates (for illustrative purposes only) EPS Analysis Sales % Change Adj. Calc EBIT % Margin EBITDA % Margin 2022 206 8% 2023 216 5% 2024 227 5% 30 14.7% 44 21.3% 40 18.6% 54 25.1% 50 22.1% 64 28.3% 2025 238 5% 56 23.5% 70 29.5% Interest 0 0 0 0 Adj. PTP 30 40 50 56 Tax -6 -9 -11 -12 Adj. Net Income Adj. EPS impact to IR Cash EPS 24 31 39 $ 0.06 $ 0.08 $ 0.10 $ $ 0.08 $ 0.10 $ 0.12 $ 44 0.11 0.13 IR base EPS $2.20 $2.54 $2.92 $3.32 Non GAAP EPS Accretion (inc-amortization) (%) 2.6% 3.1% 3.4% 3.3% Cash EPS Accretion (exc-amortization) (%) 3.6% 4.0% 4.2% 4.0% Source: Company Data, Barclays Research; Units are in $m, X, Per Share or % unless otherwise stated FIGURE 16 IR-Seepex Analysis: ROIC Analysis (for illustrative purposes only) GAAP ROIC GAAP EBIT Taxes NOPAT 2022 26 -5 21 2023 37 -8 29 2024 49 -11 38 2025 56 -12 44 2026 62 -14 48 2027 69 -15 53 2028 76 -17 59 Purchase Price 513 513 513 513 513 513 513 ROIC 4.1% 5.7% 7.4% 8.5% 9.4% 10.4% 11.5% Cash ROIC EBITA Tax Rate NOPAT 2022 42 20% 33 2023 52 22% 41 2024 62 22% 48 2025 68 22% 53 2026 74 22% 58 2027 81 22% 63 2028 88 22% 69 Purchase Price 513 513 513 513 513 513 513 ROIC (Cash) 6.5% 7.9% 9.4% 10.3% 11.3% 12.3% 13.3% Source: Company Data, Barclays Research; Units are in $m, X, Per Share or % unless otherwise stated 18 August 2021 146 Barclays | U.S. Multi-Industry NVT-Thermal Sale Scenario Analysis For our detailed thoughts on portfolio change, please see our report Global Multi-Industry: 2021 likely to be a busy year for Portfolio Change, Capital Deployment; Scenario Analysis; January 21, 2021. Sells Thermal, Uses Proceeds for M&A scenario: FIGURE 17 Thermal Management Sale – illustrative purposes only Sale Scenario Thermal Sale 2022 Revenue($m) 597 2022 EBITDA 137 EBITDA Multiple 15.0X Proceeds (Gross; $m) Proceeds (Net; $m) 2,055 1,703 Gross value per share Net value per share $12.12 $10.05 EPS Impact 2022 EBITA Share of EBITA Corp/elims Attributable to Thermal 2022 EBITA (Post Corp) Tax Net Income EPS NOSH 129 23.9% -15.3 113.5 18.0% 93.1 $0.55 169 FIGURE 18 Uses Proceeds for M&A – illustrative purposes only NVT Impacts Proceeds used for M&A 100.0% Addl debt for M&A Proceeds from Thermal Sale Cash used for M&A 2021 end. Gross debt Total Funds used for M&A 2021 Net Debt after addl leverage for M&A 2021 EBITDA (after sale + M&A) 2021 ND/EBITDA Avg NTM EV/EBITDA of recent acquisitions EBITDA Acquired Depn EBITA Additional Interest EBT Tax Net Income from M&A EPS Accretion from M&A EPS Accretion from M&A (%) 300 -1,703 1,703 1,248 2,003 1,018 497 2.0X 15.0X 134 -8 126 -6 120 -22 98 $0.58 27% Source: Barclays Research 2022 base EPS EPS lost to Sale 2022 EPS after sale EPS benefit from M&A EPS headwind from higher interest exp 2022 EPS after sale + M&A EPS Accretion % Source: Barclays Research $2.15 ($0.55) $1.60 $0.58 -$0.03 $2.15 0% 18 August 2021 147 Barclays | U.S. Multi-Industry FIGURE 19 Sells Thermal, Uses Proceeds for M&A Scenario EPS Bridge– illustrative purposes only $2.50 $2.15 $0.58 $2.15 $2.00 $1.60 $0.03 $1.50 $0.55 $1.00 $0.50 $0.00 2022 base EPS EPS lost to Sale 2022 EPS after sale EPS benefit from M&A EPS headwind 2022 EPS after from higher sale + M&A interest exp Source: Barclays Research Sells Thermal, Uses Proceeds for Buybacks scenario: FIGURE 20 Thermal Management Sale – illustrative purposes only Sale Scenario Thermal Sale 2022 Revenue($m) 597 2022 EBITDA 137 EBITDA Multiple 15.0X Proceeds (Gross; $m) Proceeds (Net; $m) 2,055 1,703 Gross value per share Net value per share $12.12 $10.05 EPS Impact 2022 EBITA Share of EBITA Corp/elims Attributable to Thermal 2022 EBITA (Post Corp) Tax Net Income EPS NOSH 129 23.9% -15.3 113.5 18.0% 93.1 $0.55 169 FIGURE 21 Uses Proceeds for Buybacks – illustrative purposes only NVT Impacts Proceeds used for repurchase 100.0% 2021 Cash 2021 Net Debt after addl leverage for share rep. 2021 EBITDA (after sale) 2021 ND/EBITDA Share price Shares repurchased 230 718 364 2.0X $34 51 2022 base EPS EPS lost to Sale 2022 EPS after sale EPS benefit from repurchases EPS headwind from higher interest exp 2022 EPS after sale + repurchase EPS Accretion % $2.15 ($0.55) $1.60 $0.69 $0.00 $2.29 6% Source: Barclays Research Source: Barclays Research 18 August 2021 148 Barclays | U.S. Multi-Industry FIGURE 22 Sells Thermal, Uses Proceeds for Buybacks Scenario EPS Bridge – illustrative purposes only $2.50 $2.00 $2.15 $0.69 $2.29 $1.50 $0.55 $1.00 $0.50 $0.00 2021 base EPS Source: Barclays Research EPS lost to Sale Repurchases 2021 EPS after repurchase 18 August 2021 149 Barclays | U.S. Multi-Industry PH-Meggitt Deal Analysis See US Multi-Industry/Aerospace & Defense: TDG unsolicited bid for Meggitt; Thoughts & Implications; August 11, 2021 and PH: Acquisition of Meggitt; MI, A&D Implications; August 2, 2021 for more details. FIGURE 23 PH-MGGT Scenario: Financial Estimates (for illustrative purposes only) EPS Analysis Sales % Change Adj. Calc EBIT % Margin EBITDA % Margin 2023 2,793 10% 478 17.1% 737 26.4% 2024 3,016 8% 627 20.8% 890 29.5% 2025 3,257 8% 740 22.7% 1,009 31.0% Interest -318 -318 -318 Adj. PTP 160 309 422 Tax -37 -71 -97 Cash Net Income Cash EPS impact to PH 301 418 507 $ 2.29 $ 3.16 $ 3.83 PH base EPS $18.88 $20.14 $21.48 Cash EPS Accretion (exc-amortization) (%) 12.2% 15.7% 17.8% Source: Company Data, Barclays Research; $m unless otherwise stated; Our sales/EBIT/margin estimates of Meggitt are based on our expectations of high-teens EPS accretion in Year 3 and the company’s historical margin profile; Meggitt forecasts reflect Bloomberg consensus average FIGURE 24 PH-MGGT Scenario: ROIC Analysis (for illustrative purposes only) GAAP ROIC GAAP EBIT Taxes NOPAT 2023 162 36 198 2024 587 -62 525 2025 720 -93 628 2026 806 -112 693 2027 909 -136 773 2028 1,027 -163 864 2029 1,152 -192 961 Purchase Price 10,899 10,899 10,899 10,899 10,899 10,899 10,899 ROIC 1.8% 4.8% 5.8% 6.4% 7.1% 7.9% 8.8% Cash ROIC EBITA Tax Rate NOPAT 2023 709 23% 546 2024 860 23% 662 2025 976 23% 752 2026 1,044 23% 804 2027 1,151 23% 886 2028 1,272 23% 979 2029 1,400 23% 1,078 Purchase Price 10,899 10,899 10,899 10,899 10,899 10,899 10,899 ROIC (Cash) 5.0% 6.1% 6.9% 7.4% 8.1% 9.0% 9.9% Source: Company Data, Barclays Research; $m unless otherwise stated; Meggitt forecasts reflect Bloomberg consensus average 18 August 2021 150 Barclays | U.S. Multi-Industry COMPANY ONE PAGERS FIGURE 25 ALLE Revenue by Geography APAC 5% Rest of Europe & MEA 7% Western Europe 13% $2.2bn Revenue Allegion PLC TOTAL COMPANY Revenue by Product Other Doors / Door 6% Frames 5% Door Closers / Controls / Exit Devices 24% Americas 74% Electronic Products / Access Control 22% $2.2bn Revenue Locks/ Locksets / Key Systems 43% Others 72% Global Market Share Assa 12% Allegion 4% $50bn Market Dormakaba 10% HHI 2% 2020 ($mn) Revenues % of sales Operating Profit Operating margin % of Operating Profit EBITDA Margin Brands Business by End Market Mechanical vs. Electronic New Construction vs. Aftermarket Total Market Size ($bn) Market Share Competitors Geographic Split US Other Americas Americas Total Central Europe South Europe Rest of Europe MEA EMEA Total Australia & New Zealand China South Korea Southeast Asia APAC Total Total Americas 2,016.7 74% 586 29.0% 91% 620.3 30.8% SEGMENT EMEA 554.6 20% 47 8.4% 7% 80.6 14.5% Asia Pacific 148.6 5% 9 5.8% 1% 13.8 9.3% Segment Total 2,719.9 100% 641 23.6% 100% 714.7 26.3% Locks/Key Systems: CISA, Falcon, Fusion, Inafer, Kryptonite, Schlage Door closers / Exit Devices: Falcon, LCN, Von Duprin Electronic Products: AptiQ, Schlage, Von Duprin, XceedID Doors / Frames: Falcon, Republic, Steelcraft Other: Brio, Glynn-Johnson, IVES, Zero Intl Locks/Key Systems: AXA, Bricard, Briton, CISA, ITO, Legge, Normbau, PegaSys, Schlage, SimonsVoss, Trelock Door closers / Exit Devices: Bricard, Briton, CISA, Falcon, LCN, Von Duprin Electronic Products: AptiQ, Bricard, CISA, Interflex, PegaSys, Schlage, SimonsVoss Doors / Frames: Bricard Other: Brio, Bricard, Briton, CISA, Legge, Normbau Locks/Key Systems: Briton, CISA, Falcon, FSH, Legge, Milre, Schlage, SimonsVoss, Trelock Door closers / Exit Devices: Briton, Falcon, LCN, Schlage, Von Duprin Electronic Products: AptiQ, CISA, FSH, Interflex, Milre, Schlage, Von Duprin Doors / Frames: Briton, Steelcraft Other: Brio, Briton, Dalco, Dexter, Glynn-Johnson, IVES, Legge, Normbau Institutional (40%), Commercial (30%), Residential (30%) Mechanical (80%), Electronics (20%) New Construction (50%), Aftermarket (50%) $7.3 27% Commercial/Institutional (60%), Residential (20%), Portable (20%) Mechanical (60%), Electronics (40%) New Construction (35%), Aftermarket (65%) $7.6 8% ASSA, Dormakaba, HHI Commercial/Institutional (60%), Residential (40%) Mechanical (70%), Electronics (30%) $4.7 3% Institutional (40%), Commercial (30%), Residential (30%) Mechanical (80%), Electronics (20%) New Construction (50%), Aftermarket (50%) $19.6 14% 94% 6% 100% 35% 30% 25% 10% 100% 60% 20% 10% 10% 100% 70% 4% 74% 7% 6% 5% 2% 20% 3% 1% 1% 1% 5% 100% Source: Company Data, Barclays Research 18 August 2021 151 Barclays | U.S. Multi-Industry FIGURE 26 APG Sales by Destination Canada &… United States 89% Adj. EBITDA by Segment Industrial Services 14% Specialty Services 37% Safety Services 49% APi Group TOTAL COMPANY End-Market Split High Tech Other 5% 6% Healthcare 6% Telecom / Utilities 25% Government / Infrastructure 8% Distribution & Fulfillment Centers 8% Integrity / Transmission 10% Commercial 7% Education 4% Industrial / Manufacturing 14% Entertainment 7% Business Split Inspection Civil 2% Transmission 2% 11% Life Safety 37% Specialty Contracting 11% Fabrication 5% Infrastructure/Utilit y… Mechanical 9% 2020 Sales ($m) % of sales Adj. EBITDA profit ($m) Adj. EBITDA margin % of Adj. EBITDA Business Split (2021E) Service Split Project Split Average Project Sizes Service examples End-Markets Brands / Companies Customers Competitors Employees Operating Companies Locations United States Canada & Europe Total SEGMENT Safety Services Specialty Services Industrial Services Total 1,639 45% 224 13.7% 49% Life Safety (81%), HVAC Services / Mechanical (19%) Service (40%), Contract (60%) Projects over $100,000 (1%), All other work (99%) ~$10,000 1,401 39% 170 12.1% 37% Infrastructure/Utility (57%), Fabrication (12%), Specialty Contracting (31%) Service (40%), Other (60%) Projects over $100,000 (2%), All other work (98%) ~$70,000 563 16% 64 11.3% 14% Transmission (76%), Civil (24%) Service (40%), Other (60%) Projects over $100,000 (5%), All other work (95%) ~$700,000 3,603 100% 458 12.7% 100% See chart above Service (40%), Other (60%) Projects over $100,000 (1%), All other work (99%) Backflow devices; controls technology & entry systems; emergency and exit lighting; emergency fire suppression systems; fire alarm and detection systems; fire pumps; HVAC systems and service and maintenance; plumbing engineering and installation; security & surveillance systems; standby systems Electric & gas utility maintenance, fiber optic and cellular system installation and maintenance including 5G; insulation, ventilation, and temperature control; natural gas line distribution services; plant maintenance & outage services; specialty & industrial ductwork; structural fabrication & erection; underground electrical, transmission line, & fiber optic cable installation; water line & sewer installation Code compliance / inspection service; compression & metering station inspection; gas compressor installation; leak repair & pipeline replacement; oil pumping stations and directional drilling installation; pipeline construction and integrity testing; retrofitting oil & gas pipeline infrastructure; transmission & distribution services Commercial / Education / Entertainment (29%), Industrial Telecom / Utilities (57%), Industrial / Manufacturing / Manufacturing (18%), Distribution & Fulfillment Center s (13%), Government / Infrastructure (10%), Commercial / (13%), Other (13%), High Tech (10%), Healthcare (8%), Education / Entertainment (8%), Healthcare (5%), Government / Infrastructure (5%), Telecom / Utilities Distribution & Fulfillment Centers (4%), High Tech (2%), (4%) Other (1%) Integrity / Transmission (77%), Government / Infrastructure (15%), Industrial / Manufacturing (4%), Healthcare (3%), Telecom/ Utilities (1%) See chart above 3S Incorporated, American Fire Protection Group, APi National Service Group, Davis-Ulmer Fire Protection, Grunau, International Fire Protection, MMC, Security Fire, Tessier's Mechanical Contractors, Texas Sprinkler, Twin City Garage Door, United States Alliance Fire Protection, APi Construction Co, APi Distribution, Classic Industrial Services, ICS, Jamar, J. Fletcher Creamer & Son, LeJeune, Mid-Ohio Pipeline Services, MP, Nyco Jomax Pipeline Construction, Northland, Summit Pipeline Services, United Piping Viking Fire Protection Group, Vipond, Western States Fire Protection Aecom, American Water, Andeavor, Apple, AT&T, Bechtel, Best Buy, Boldt, Cabela's, Calpine, CenterPoint Energy, Coca-Cola, Columbia Gas, Disney, Enbridge, Facebook, FedEx, Google, Honeywell, Intel, Kraus-Anderson, Mayo Clinic, McGough, Microsoft, Mortenson Construction, Nike, NiSource, Pfizer, PSEG, Ryan, Sappi, Shell, Suez, Target, TransCanda, US Department of Veterans Affairs, USS, Verizon, Verso, Walmart, Williams, Xcel Energy Comfort Systems, Emcor, Tyco (JCI) Comfort Systems, Dycom, Emcor, MasTec, Quanta Services MasTec, Quanta Services ~8,000 ~3,000 ~1,000 ~13,000 15+ 10+ 5 30+ 150+ 81% 19% 100% 40+ Geographic sales split (2021E) 100% 0% 100% 10+ 94% 6% 100% 200+ 89% 11% 100% Source: Company Data, Barclays Research 18 August 2021 152 Barclays | U.S. Multi-Industry FIGURE 27 CARR Revenue Split F&S 28% HVAC 53% Carrier TOTAL COMPANY F&S Products 20% F&S SRerevviceensue by End Market 8% Commercial HVAC 30% Products vs. Services Services & Aftermarket 28% Sales by Destination Asia Pacific 15% Refrigeration 19% 2020 Sales ($m) % of sales Adj. Operating profit ($m) Adj. Operating margin % of operating profit Business Split Business Mix Products vs. Services Products sold Major Brands Competitors JV Partners Sales through independent distribution Americas EMEA Asia Pacific Total Commercial Refrigeration 7% Transport Refrigeration 12% HVAC 9,478 53% 1,430.0 15.1% 59% 62% Commercial, 38% Residential Equipment: 60% Services / Digital: 40% Products: 85% Services: 15% HVAC products, controls, services, and solutions EMEA 30% Residential HVAC 23% SEGMENT New Equipment 72% Refrigeration F&S 3,333 19% 375 11.3% 15% 4,985 28% 628 12.6% 26% 65% Transport, 35% Commercial Refrigeration 70% Commercial, 12% Residential, 18% Industrial Equipment: 73% Services / Digital: 27% Products: 90% Products: 74% Services: 10% Services: 26% F&S products (residential and building systems, including fire, flame, gas, smoke and carbon monoxide detection; Transport refrigeration (equipment and monitoring systems for trucks, trailers, shipping containers, intermodal and rail), Commercial refrigeration, Sensitech (solutions and services for supply chain visibility) portable fire extinguishers; fire suppression systems, intruder alarms; access control systems and video management systems; and electronic controls), F&S services (audit, design, installation and system integration, aftermarket maintenance, repair and monitoring services) Automated Logic, Bryant, Carrier, CIAT, Day & Night, Heil, NORESCO, Riello Trane, Daikin, York, Lennox, Gree, Midea, Mitsubishi Carrier Commercial Refrigeration, Transicold, Sensitech Daikin, Panasonic, Mitsubishi, Trane Autronica, Chubb, Det-Tronics, Edwards, Fireye, GST, Interlogix, Kidde, LenelS2, Marioff, Onity, Supra Honeywell, Siemens, DOKA, Assa Abloy, Bosch Group, JCI, Hikvision, Zheijang Dahua Watsco, Inc.; AHI-Carrier; Beijer; Midea Group; Toshiba Carrier Resi 100%, Commercial ~13% (assume in-line with TT) 67% 19% 14% 100% Geographic sales split 45% 47% 9% 100% 40% 40% 20% 100% Source: Company Data, Barclays Research Americas 55% Total 17,796 2,433 13.7% Products: 83% Services: 17% 55% 30% 15% 100% 18 August 2021 153 Barclays | U.S. Multi-Industry FIGURE 28 CFX Medical Technology 33% Adj Income Split Sales Split Medical Technology 36% COLFAX TOTAL COMPANY Total CFX Geo Split RoW 30% North America 45% Healthcare / Orthopedic Solutions 37% End Market Split General Fabrication 19% 2020 Sales ($mn) % of sales Adjusted EBITA ($mn) Adj. EBITA margin % of Adj. EBITA Products sold Equipment vs. Aftermarket Competitors Brands Distribution End Market Split General Fabrication O&G Infrastructure & Construction Automotive & Vehicles Healthcare, Laboratory, & Process Mobile Machinery Renewable Energy Other (Defense, Ship, Rail) Healthcare / Orthopedic Solutions Total Geographic Sales Split North America Western Europe China RoW Total Fabrication Technology 67% China 3% Fabrication Technology 64% Fabrication Technology 1,950.1 64% 282.4 14.5% 67% SEGMENT Western Europe 22% Other (Defense, Ship, Rail) 6% Renewable Energy Mobile 3% Machinery 4% Healthcare, Laboratory, & Process 5% O&G 10% Infrastructure & Construction 8% Automotive & Vehicles… Medical Technology 1,120.8 36% 136.7 12.2% 33% Total 3,070.9 100% 419.1 13.6% 100% Consumable products and equipment for use in the cutting and joining of steels, aluminum and other metals and metal alloys Prevention and Rehabilitation (75%): Bracing & supports, footcare, post procedure recovery and rehabilitation Reconstructive (25%): Surgical products and solutions Equipment (31%), Consumables (69%) Capex (10%), Run-Rate (90%) Lincoln Electric (welding segment), Illinois Tool Works (welding segment), Kobelco, Golden Bridge, Bohler, Air Liquide ESAB, Victor 25% Direct / 75% Distribution Arthrex, Aspen, Bauerfeind, Bort, Breg, DeRoyal, DePuy J&J, Medtronic, Orthofix, Ossur, Smith & Nephew, Stryker, Thuasne, Zimmer Biomet Aircast, DJO Surgical, MotionMD, Chattanooga, Donjoy, CMF, Dr. Comfort, Compex, Procare, Empowr, Altivate 40% Direct / 40% Distribution / 20% through reimbursement 30% 16% 13% 12% 8% 6% 5% 10% 100.0% 100.0% 100.0% 19% 10% 8% 8% 5% 4% 3% 6% 36% 100.0% 25% 25% 5% 45% 100% 73% 20% 7% 100% 45% 22% 3% 30% 100% Source: Company Data, Barclays Research 18 August 2021 154 Barclays | U.S. Multi-Industry FIGURE 29 DOV DOVER TOTAL COMPANY PRumevpesn&ue Split by Segment Processing 20% Refrigeration & Food Equipment 20% Fueling Solutions 22% Imaging & Identification 15% Engineered Products 23% Profit Split by Segment Pumps & Processing 29% Refrigeration & Food Equipment Engineered 9% Products 22% Fueling Solutions 22% Imaging & Identification 18% TransportatioRne, veBnioupehaSrpmlait&by Construction & Medical Infrastructure 2% End Market Other 6% Retail Fueling 18% 5% O&G 5% Plastics & Chemicals 6% Food Retail 14% Waste ManagCemonesnutmer 7% goods, Hospitality & Restaurants Automotive AM Industrial Applications 13% 12% 12% SEGMENT Revenue SSpelrivticbeys &Product Software 8% Consumables 11% Parts 12% Equipment 43% Components 26% Revenue Split by Geography RoW 11% Asia 15% North America 51% Europe 23% 2020 Sales % of sales Operating Profit (bn) % of operating profit Operating Margin (%) Recurring Revenue (2020) Refrigeration & Food Equipment 1,316.1 20% 104.1 9% 7.9% ~15% Engineered Products 1,531.3 23% 249.7 22% 16.3% ~15% Imaging & Identification 1,038.2 16% 199.5 18% 19.2% ~70% Fueling Solutions 1,476.3 22% 243.7 22% 16.5% ~35% Pumps & Processing 1,324.0 20% 318.7 29% 24.1% ~35% Segment Total 6,685.8 100% 1,115.7 100% 16.7% ~30% Sales by Market Refrigeration & Food Equipment: Other (5%), Consumer Engineered Products: General Industrial (16%), Space & Goods (9%), Hospitality & Restaurants (10%), HVAC Defense (7%), Automotive OEM (11%), Waste (11%), Food & General Retail (65%) Management & Muni Gov (33%), Automotive AM (33%) Imaging & Identification: Other (19%), General Industrial (16%), Textile (19%), Consumer Goods (46%) Fueling Solutions: Dispensers (38%), Underground & Hanging Hardware (20%), Systems & Software (14%), Aftermarket Parts & Services (14%), Transportation Components (9%, Vehicle Wash Solutions (5%) Pumps & Processing Solutions: Industrial Applications (31%), Chemical (8%), Biopharma & Hygenic (17%), O&G (21%), Plastic & Polymers (23%) Total: Retail Fueling (18%), Food Retail (14%), Industrial Applications (13%), Automotive AM (12%), Consumer goods, Hospitality & Restaurants (12%), Waste Management (7%), Plastics & Chemicals (6%), O&G (5%), Transportation, Construction & Infrastructure (5%), Biopharma & Medical (2%), Other (6%) Sales by Product Refrigeration & Food Equipment: Services & Other (10%), Parts (9%), Components (17%), Equipment (65%) Engineered Products: Services & Other (7%), Parts (8%), Components (29%), Equipment (56%) Imaging & Identification: Software, Services & Other (11%), Consumables (41%), Parts (14%), Equipment (34%) Fueling Solutions: Software, Services & Other (12%), Consumables (14%), Parts (12%), Components (23%), Equipment (39%) Pumps & Processing Solutions: Services & Other (3%), Consumables (4%), Equipment (14%), Parts (20%), Components (59%) Total: Equipment (43%), Components (26%), Parts (12%), Consumables (11%), Services and Software (8%) Estimated Market Size Brands / businesses Key Competitors Geographic sales split North America Europe Asia RoW Total ~$6.0bn Retail Refrigeration $8.5bn Refuse Handling & Vehicle Service Equipment ~$3.5bn Marking & Coding ~$11.0bn Food Equipment ~$2.5bn Heat Transfer Solutions Refrigeration: Hill-Phoenix, Anthony, SWEP, Unified Brands; Food Equip.: Groen, Randell, Belvac, Tipper Tie Retail Refrigeration: Hussmann (Panasonic), LII Food Equip (UB & Belvac): Middleby, ITW, Welbilt Heat Transfer Solutions (SWEP): Alfa Laval, Danfoss Heil (ESG), Rotary Lift (VSG), DE-STA-CO, Environmental Solutions Group, Microwave Products Group (Space & Defense), OK International (General Industrial), Tulsa Winch Group Refuse collection, compaction & processing equip. (ESG): Oshkosh, Labrie Auto after-market equip (VSG): Snap-on, Car-o-liner, FTV ~$2.0bn Digital Printing Markem-Imaje, DOV Digital Printing Marking & Coding (MI): DHR, Brother Digital Printing (MS & JK): EFI, Konica Minolta, Sensient ~$12bn ($3.5bn Fueling Equipment, $5bn Site-wide Systems, $1bn Fluid Transfer Solutions, $1.5bn Vehicle Wash Solutions, $1bn Alternative Fuels & EV) ~$2.0bn+ Hygenic & Pharma ~$15bn+ Pumps DOV Fueling Solutions, OPW Retail Fueling (OPW): FTV, Franklin Electric Car Washing: WashTec Pumps: PSG, CPC, Hydro; Process Solutions: Colder Products Company, Maag, Cook, Waukesha, Inpro/Seal Pumps & Polymer Equip (PSG & Maag): Idex, SPX FLOW, Nordson, Shimadsu Hygenic & Pharma: IDEX, SPX Flow 48% 24% 16% 12% 100% 76% 9% 9% 6% 100% 21% 47% 17% 15% 100% 45% 22% 17% 16% 100% 56% 21% 19% 5% 100% 51% 23% 15% 11% 100% Source: Company Data, Barclays Research 18 August 2021 155 Barclays | U.S. Multi-Industry FIGURE 30 EMR Automatio n Solutions 61% 2020 Earnings Split Emerson TOTAL COMPANY 2020 End Market Split Chemical 11% Power 10% Cold Chain 8% Discrete 9% Hybrid 6% Residential 15% Other 7% 2020 Geographic Sales Split Americas 53% Europe 18% 2020 Sales ($B) % of sales Operating Profit ($B) Operating Margin % of Operating Profit End-market split Type of Product Business Groups / Product Lines C&RS 39% Commercial 9% Refining 6% Upstream 12% Midstream 7% AMEA 29% SEGMENT Automation Solutions 11,155 66% 1,773 15.9% 60% C&RS 5,643 34% 1,165 20.6% 40% SEGMENT TOTAL 16,798 100% 2,938 17.5% 100% Upstream Oil & Gas (17%), Pipelines & Terminals (10%), Refining (9%), Chemical & Clean Fuels (16%), Power & Renewables (16%), Hybrid (9%), Discrete (13%), Other (10%) Residential (47%), Commercial (25%), Food Retail (9%), Food Service (7%), Industrial (7%), Transport (4%), Healthcare (1%) Commercial (9%), Residential (15%), Cold Chain (8%), Chemical (11%), Power (10%), Discrete (9%), Hybrid (6%), Other (7%), Upstream (12%), Midstream (7%), Refining (6%) KOB1 (New Infrastructure): 20%, KOB2 (Upgrades & Modernizations): 23%, KOB3 (MRO): 57% Industrial Solutions (17%), Measurement & Analytical Instrumentation (32%), Process Control Systems & Solutions (18%), Valves, Actuators, & Regulators (33%) Tools & Home Products (29%), Cold Chain (21%), Heating & Cooling (50%) Competitors Total Segment: ABB, Endress & Hauser, Flowserve, Honeywell, Rockwell Automation, Rotork, Siemens, Resi: Daikin, Danfoss, GMCC, Gree, Hitachi, Honeywell, Landa Yokogawa Final Comm'l: Daikin, Danfoss, Epcos, Hitachi, Honeywell, Schott Control: Flow Control (BKR, FLS), Process Management Cold chain: Bitzer, Carel Industries, Carrier, Danfoss, Embraco, (BHGE, HON), Isolation Valves (Crane, Neway, SLB), GEA, Tyco-York (Frick), Mycom, Tecumseh, Watlow Actuation Technologies (Rotork) Market Size $bn Market Share % Geographic sales split Americas Europe AMEA Total Source: Company Data, Barclays Research 203 5% 45% 21% 34% 100% 38 15% 69% 12% 19% 100% 53% 18% 29% 100% 18 August 2021 156 Barclays | U.S. Multi-Industry FIGURE 31 ETN Vehicle 14% Revenue Split eMobility 2% Aerospace 15% Electrical Americas 39% SegmeeMntoEbiBlitIyTA Split -1% Vehicle 12% EATON TOTAL COMPANY Aerospace 16% Electrical Americas 43% EMEA 28% Geographic Revenue Split Asia Pacific 15% Americas 57% Defense Filtration Other /EenMdoMbiliatyrket 2% SpIlnitdustrial Facilities 8% 3% 13% Commercial Aero 5% Residential 6% Automotive 6% Commercial & Institutional/ Govt 17% 2021E Sales ($B) % of Adj. Operating Profit ($B) % of Adj. Operating Profit Margin (%) Products Sold Major Brands Electrical Global 30% Electrical Global 28% Electrical Americas 7.5 40% 1.6 43.7% 21.3% Electrical Products and Systems in North and South America under NEMA standards Electrical Global 5.6 30% 1.0 28.2% 18.3% Electrical Products and Systems in Europe, Middle East, Africa and Asia Pacific under IEC standards; Includes Global Crouse-Hinds and B-Line Businesses Cooper: Access, Arista, Armafix, BreechLok, Burton, Cam-Lok, Coiltronics, Ametrix, AtLite, Corelite Cooper: Bussman, Crouse-Hinds, Blessing, Capri, CEAG Crompton, Arkite, ArkGard, CYME, Envirotemp, Envirotran Eaton: Eaton, Moeller, Holec,MEM, Eaton: Eaton, Moeller, Holec,MEM, Powerware, Cutler-Hammer, Elec, Tabula Powerware, Cutler-Hammer, Elec, Tabula SEGMENT Aerospace 2.8 15% 0.6 16.0% 24.0% Electrical Aerospace Connectors Power Systems Controls and Sensing Fluid Conveyance Filtration Golf Grip Aeroquip, Argo-Tech, Carter, Centurion, Dynapower, Vickers Vehicle 2.7 14% 0.5 12.8% 17.6% Power Systems Controls and Sensing Fluid Conveyance Filtration Truck: Eaton VORAD, Eaton Fuller, Roadranger, Eaton Solo Advantage, Easy Pedal Advantage Automotive: Detroit Locker, TVS Supercharger Machinery Data 4% Center/IT 10% eMobility 0.4 2% (0.0) -0.7% -7.3% Utility 10% EV Fuses, EV transmissions, inverters & converters, on-board chargers Truck 8% Segment Total* 19.0 100% 3.7 100.0% 19.3% End Markets Data Centers & IT (17%), Commercial & Institutional (29%), Residential Construction Defense (51%), Commercial (32%), (10%), Industrial Facilities (21%), Machinery (7%), Utility (16%) Other & Industrial (17%) Commercial Vehicle (52%), Passenger Car (40%), Other (8%) Commercial & Passenger Vehicle (51%), Off road (49%); Internal combustion (70%), EV (30%) Electrical Exposure (by voltage) Total Electrical / Industrial End Markets Main Competitors Addressable market Market Share Product Mix (Systems) Product Mix (Products) Product Mix (OE) Product Mix (AM) Channel to Market Geographic sales split Americas EMEA Asia Pacific Total 70% low voltage, 30% medium voltage, 0% high voltage Industrial (30%), Commercial Construction (20%), Data Center (15%), Uility (15%), Residential (10%), Institutional / Infrastructure (10%) Utility: ABB, Euromold, GE, Hubbell, Siemens, SPX Corporation Power Quality: ABB, Emerson, Friem, GE, Schneider, Siemens Industrial Automation: GE, Mitsubishi Electric, Omron, Rockwell Automation, Siemens Low Voltage: ABB, GE, Hubbell, Legrand, Leviton, Littelfuse, Mitsubishi, Schneider, Siemens 4% 66% 34% $200bn 45% 55% 75% Distributor, 25% Direct to OEM Commercial Aero (25%), Truck (25%), Light Motor Vehicles (25%), Military Aerospace (20%), Electric Vehicles (5%) Moog, Parker Hannifin, TGI, Woodward $22bn 26% Truck: Allison Transmission, ZF Friedrichshafen AG Automotive: American Axle, BorgWarner, German Schaettler, TRW Automotive $40bn 7% Littelfuse; Aptiv $33bn (2030E) 59% 41% 40% Distributor, 60% Direct to OEM 89% 11% Direct to OEM 100% 100% 66% 34% 100% 60% 35% 5% 100% 50% 20% 30% 100% 67% 21% 12% 100% 57% 28% 15% 100% Source: Company Data, Barclays Research 18 August 2021 157 Barclays | U.S. Multi-Industry FIGURE 32 FLOW Revenue Split Precision Solutions 53% Nutrition & Health 47% 2020 Sales ($B) % of sales Operating profit ($B) Operating margin % of operating profit Customers / end-market split* Addressable market size ($B) Market positioning / share Expected growth Products sold Major Brands Competitors Customers % of Sales that is OE: % of Sales that is AM: % of Sales that is Short Cycle: % of Sales that is Long Cycle: Geographic sales split North America Europe Asia Pacific EEMEA South America Total FLOW EBIT Split Precisio n Solutio ns 48% Nutritio n & Health 52% Nutrition & Health 0.6 47% 0.1 15.0% 52% End MarkPeetrsSopnalilt O&G Care Mining4% 5% 4% Chemicals 8% Marine / Water 4% Air Treatment 10% SEGMENT General Industrial 18% Precision Solutions 0.7 53% 0.1 12.0% 48% EEMEA 5% South Americ a F&B 2% 33% Sales by Destination North America 35% Asia Pacific 28% Dairy 14% Europe 30% SEGMENT TOTAL 1.4 100% 0.2 13.4% 100% Dairy (31%), Food & Beverage (60%), Personal Care and Other (~10%) Mining (7%), Marine/Water (8%), General Industrial (34%), F&B (10%), Chemicals (14%), Air Treatment (19%), O&G (8%) see chart $24 bn >$100 bn >$124 bn 3% 1% 1% 3% 4% Mixing, drying, evaporation and separation systems and components, heat exchangers, and Mixers (27%), Dehydration products (21%), Industrial Process Components (40%), Service / Parts (34%), reciprocating and centrifugal pump technologies; Pumps (20%), Hydraulic Tools (15%), Heat Process Technology (17%), Hydraulic Broad Categories: Systems (33%), Components Exchangers (12%), Other (5%) Technologies (9%) (29%), Aftermarket (38%) Anhydro, APV, Bran+Luebbe, e&e, Gerstenberg Schroeder, LIGHTNIN, Seital, Waukesha CherryBurrell Airpel, APV, Delair, Deltech, Hankison, Jemaco, Johnson Pump, LIGHTNIN, Power Team, Stone - Alfa Laval AB, Fristam Pumps, GEA Group Krones, Südmo, Tetra Pak Ekato, Chemineer, Parker Hannifin, Enerpac, KSB, Xylem, Viking (IDEX), Alfa Laval, Kelvion, Milton Roy, LEWA - Arla, Danone, Nestle, Tine, Colun, Almarai, Dow, BASF, Hyundai Heavy Industries, Kaeser Unilever, Groupe Lactalis, Abbott Nutrition, Bright Compressors, Grainger, Ingersoll-Rand, Wartsila, Dairy Fluor, Wanhua, BP, Lubrizol, Dan Marine Group 60% 62% 61% 40% 38% 39% 70% 30% 29% 26% 40% 2% 3% 100% 41% 33% 18% 7% 1% 100% 35% 30% 28% 5% 2% 100% Source: Company Data, Barclays Research 18 August 2021 158 Barclays | U.S. Multi-Industry FIGURE 33 FTV Fortive Segment Sales Split Advanced Healthcare Solutions 24% Precision Technolo gies 35% Intelligent Operatin g Solutio… Segment Op. Profit Split RoW Sales by Destination Intelligent 5% Advanced Healthcare Solutions Operating Asia Pac Solutions 19% 46% 22% Precision Technologies 32% Europe 18% End Market Split Other Distributors Retail & 10% 6% Consum er O4%&G 5% Medical 26% Fluke Health Sub-SeIgnmveteencth Split Censis 2% 1% Solutions ASP6% 15% A&D 5% PacSci 5% N America Comm, 58% Electronics, & SemiconductGoor vernment 6% 7% Industrial & Utilities & Manufacturing Power 23% 8% Sensing Tech 15% Tektroni x 16% Fluke 26% Industrial Scientific 6% Accruent 5% Gordian 3% 2020 Sales ($bn) % of sales Gross margin (adjusted) Operating profit ($bn) Operating margin % of operating profit Segment Leader Customers / End-market split Addressable market size ($B) Market positioning / share Major Brands Competitors Products vs. services split (%) Recurring Revenue Software Distribution Geographic sales split, by location N America United States Europe Asia Pac China RoW Total Segment Intelligent Operating Solutions 1.9 41% Mid 60% 0.5 26% 46% Electrical engineers, electricians, electronic technicians, EHSQ professionals, network technicians, facility managers, first-responders, maintenance professionals ~$19 bn 10% Precision Technologies 1.7 36% Low 50% 0.3 21% 32% Pat Murphy Design engineers for advanced electronic devices and equipment, process & quality engineers, facility maintenance managers ~$14 bn 12% Advanced Healthcare Solutions 1.1 24% Mid 50% 0.2 22% 22% Barb Hulit Hospitals and other healthcare facilities ~$10 bn 11% Accruent, Fluke, Fluke Networks, Gordian, Industrial Anderson-Negele, Gems, Setra, Hengstler-Dynapar, ASP, Censis, Censitrac, Evotech, Fluke Biomedical, Scientific, Intelex, Pruftechnik Qualitrol, Pacific Scientific, Keithley, Tektronix Invetech, Landauer, Raysafe, Sterrad Fluke: Megger, FLIR, Keysight, Ideal Industries; ISC: MSA, Honeywell, Drager, 3M (Scott); Intelex: Cority, Enablon, Velocity EHS; Gordian: APPA, Sierra West; Accruent: Planon, Archibus, Dude Solutions, IBM Maximo (on-prem) Products (89%), Services (11%) ~30% 15% High 50s% Direct, Low 40s% Distribution Tektronix: Keysight, Rohde & Schwarz, Teledyne, Anritsu; Qualitrol: Doble (Esco), Bentley Nevada (GE / Baker Hughes), Ametek; PacSci: Northrop Grumman, Chemring; Sensing: HON, IMI, ROK Products (88%), Services (12%) High 20% Low 60s% Direct, High 30s% Distribution ASP: Steris, Getinge, Belimed, Cantel, 3M; Fluke HS: Mirion, RTI, Rigel, BC Group; Censis: Microsystems (Steris), T-DOC (Getinge); Invetech: FLEX, Hitachi, Stratec Biomedical Products (76%), Services (24%) Low 70% High 70s% Direct, Low 20s% Distribution 52% 9% 39% 100% 52% 16% 32% 100% 56% 9% 36% 100% Total 4.6 100% 1.1 23% 100% >40 bn 12% Products (85%), Services (15%) 38% ~12-13% Revenue (Majority Subscription) 65% Direct, 35% Through Distribution 58% 53% 16% 23% 12% 3% 100% Source: Company Data, Barclays Research 18 August 2021 159 Barclays | U.S. Multi-Industry FIGURE 34 GE Industrial Revenue Split Renewables 21% Healthcare 25% 2020 Sales ($B) % of Industrial sales Operating profit ($B) Operating margin % of Industrial profit % of GE Total profit Customers / end-market split Products sold Capital -12% Power 24% Power… Renewables -10% Aviation 30% POWER 17.6 24% 0.3 1.6% 7% 9% Gas Power Systems (68%), Power Portfolio (32%) GENERAL ELECTRIC TOTAL COMPANY Total GE Profit Split Aviation 21% End Market Split Datacenter / Power Business Aero Quality 3% 1% Defense 5% Power Grid 5% Healthcare 18% Geographic Sales Split Middle East & Africa 9% Power Gen 39% Americas 7% Asia 20% United States 44% Healthcare 53% SEGMENT Commercial Aero 22% RENEWABLES AVIATION HEALTHCARE 15.7 21% (0.7) -4.6% -19% -23% Onshore Wind (62%), Hydro + Offshore Wind (7%), Grid Solutions (31%) 22.0 30% 1.2 5.6% 32% 39% Commercial Engines & Services (73%), Military (15%), Systems & Others (12%) 18.0 25% 3.1 17.0% 80% 98% Healthcare Systems (71%), Life Sciences (23%), Healthcare IT (6%) CAPITAL 7.2 (0.7) -10.0% -23% GECAS (45%), Energy Finance (15%), Industrial Finance (24%), Other (16%) Europe 20% SEGMENT TOTAL 80.6 100% 3.1 3.9% 100% see chart Equipment (aero derivative gas turbines, heavy duty and combined cycle gas turbines, hydropower and water control, nuclear solar power, steam turbines, wind turbines); Services (AM including equipment upgrades, LT maintenance service agreements, etc) Wind turbines, Hydro generators, Hydroelectric turbines, Grid Solutions Equipment (jet engines, avionics, display systems, electronic components, flight management systems, fuel gauging in military and commercial aircraft); Services (MRO, material and asset management) Diagnostic & clinical eqp (Diagnostic imaging, clinical products, molecular imaging), Information tech and services (clinical and administrative, departmentals, connectivity & knowledge solutions, eqp service solutions) Molecular medicine(bioprocess, protein and cell sciences, contrast media/PET tracers, molecular pathology Industrial Finance (capital and services to industrials served by GE), Energy Financial Services (equity, debt, leasing, partnership financing for capital energy projects), Aviation Services (aircraft financing) Division Head Major Brands Competitors Equipment (% of Sales) Aftermarket (% of Sales) Geographic Sales Estimate United States Europe Asia Americas Middle East & Africa Total Scott Strazik (CEO of GE Gas Power); Dan Janki (CEO of GE Power Portfolio) GE Jerome Pecresse GE, Haliade, LM Wind Siemens, MHPS, Mapna, BHEL, Toshiba, Shanghai Electric, Harbin Electric, Dongfang Electric Siemens, Goldwind, MHI, Mapna, Vestas, Hitachi, Gamesa, Voith 38% 62% 82% 18% John Slattery GE, Genx, LEAP, CFM Kieran Murphy GE Rolls Royce, Raytheon, Honeywell Siemens Healthineers, Epic, Roche, Philips, AGFA, Toshiba, Lilly 39% 61% 55% 45% Jennifer VanBelle EFS, GECAS, GE Capital ILFC, AerCap, Air Lease, Air Castle 34.1% 17.9% 22.8% 10.9% 14.3% 100.0% 47.3% 18.7% 17.5% 6.8% 9.7% 100.0% 51.0% 19.5% 17.8% 4.0% 7.8% 100.0% 42.3% 21.9% 26.2% 4.9% 4.7% 100.0% 49.0% 19.3% 13.8% 8.8% 9.2% 100.0% 51% 49% 44.5% 19.5% 20.3% 6.7% 9.0% 100.0% Source: Company Data, Barclays Research 18 August 2021 160 Barclays | U.S. Multi-Industry FIGURE 35 GTES Revenue Split Fluid Power 36% EBIT Split Fluid Power 30% Power Transmission 64% GATES CORP TOTAL COMPANY Geographic Sales Split RoW 12% East Asia & India 11% Greater China 12% North America 48% Channel Sales Split Power Transmission 70% EMEA 26% Replacement 64% First-Fit 36% End MarketSplit Diversified Industrial, 19% Mobility & Recreation, 3% Down / Midstream, 2% Upstream, 5% Industrial OnHighway Industrial OffHighway, 19% Auto Replacement, 33% Auto OEM, 12% 2020 Sales ($m) % of sales EBITDA ($m) EBITDA margin % of EBITDA Market share Customers Products sold Applications Competitors Channel Split First-Fit Replacement Total Geographic sales split North America EMEA Greater China South America East Asia & India Total SEGMENT Power Transmission 1,800.2 64% 353.0 19.6% 70% Synchronous Drive Systems: $500m (26% share) Asynchronous Drive Systems: $700m (23% share) Metals: $700m (9% share) AGCO, Deere, Kaman, GM, Schaeffler Auto, NAPA, O'Reilly Auto, Daimler, Harley Davidson V-belts, Timing belts, Industrial synch belts, Metals Stationary drives (Ag storage, HVAC, Wastewater) Mobile drives (Agriculture, Construction, Transport) Personal mobility (Scooters, Motorcycles, Bicycles, Rec Vehicles) Engine systems (Auto, Rec Vehicles, Transport) Vertical lift (Mat handling, Elevators, Forklifts) ContiTech, Dayco, Bando, Mitsuboshi Belting, Optibelt 38% 62% 100% 38% 30% 16% 3% 14% 100% Fluid Power 992.8 36% 153.6 15.5% 30% Hydraulics: $600m (10% share) Industrial Hose: $150m (4% share) Engine Hose: $150m (1% share) Vestas, Bobcat, Caterpillar, JCB, Deere, Daimler, Komatsu, Advance auto Parts, Doosan Hydraulics, Engine hose, Industrial hose, Fittings / assemblies Stationary hydraulics (Manufacturing, Mining, Industrial processing) Mobile hydraulics (Ag & Forestry, Construction, Mat Handling) Engine systems (Auto, Transport, Ag & Construction) General Industrial (Manufacturing, Energy, Chemical, F&B) Parker Hannifin, Eaton, Alfagomma, Manuli 39% 61% 100% 67% 18% 7% 3% 6% 100% Segment Total 2,793.0 100% 506.6 18.1% 100% 36% 64% 100% 48% 25% 12% 3% 11% 100% Source: Company Data, Barclays Research 18 August 2021 161 Barclays | U.S. Multi-Industry FIGURE 36 HON Revenue Split PMT 29% Aero 35% PMT 27% HBT 16% 2020 Sales ($B) % of sales Operating profit ($B) Operating margin % of operating profit Target Growth Rate Long Term margin Target Offerings / Sub-Segment Splits Verticals SPS 20% HBT 16% AEROSPACE 11.5 35% 2.9 25.2% 43% 3-4% 25%+ Electronic Solutions (35%) Engines & Power Systems (32%); Mechanical Systems & Components (27%); Services & Connectivity (6%) Commercial OE (22%) (ES 25%, E&PS 21%, MS&C 21%, S&C 19%); Commercial AM (42%) (ES 29%, E&PS 50%, MS&C 44%, S&C 62%); US Defense & Space (27%) (ES 35%, E&PS 20%, MS&C 27%, S&C 12%); Int'l Defense (9%) (ES 11%, E&PS 9%, MS&C 8%, S&C 7%) EBIT Split HONEYWELL TOTAL COMPANY Specialty Chem. End Market Split 8% Aero 43% Defense 13% Oil & Gas / PetChem 15% SPS 14% SPS 6.5 20% 0.9 14.0% 13% ~5% 18-20% SEGMENT Non-Resi 20% BT 5.2 16% 1.1 21.2% 16% ~3% ~20%+ Safety Solutions (36%); Productivity Solutions (23%); Warehouse Automation (27%); Sensing and IoT (14%) Building Products (40%) Building Management Systems (15%) Building Solutions (45%) Aerospace 23% Sales by Destination RoW 11% APAC 15% North America 46% Industrial Productivity 21% EMEA 28% PMT 9.4 29% 1.9 19.6% 27% ~4% 26-27% UOP (27%) Advanced Materials (26%) Honeywell Process Solutions (47%) SEGMENT TOTAL 32.6 100% 6.8 20.7% 100% 3-5% Warehouse / DC (32%); Transport & Logistics (8%); Retail Goods (9%); Industrial & Manufacturing (22%); Other (15%); Utility (8%); Oil & Gas (6%); Transportation and Logistics (8%) Office, Industrial, General Use (44%), Institutional (24%), Infrastructure (12%), Healthcare / Hospitality (10%), Retail (10%) Downstream O&G (19%); Midstream O&G (9%); Utilities (11%); Refrigerants & Foams (15%); Chemicals (4%); Electronic Materials (3%); Thermal Solutions (5%); Upstream O&G (4%); Mining, Pulp & Paper (5%); Petrochemicals (16%); Other (9%) Addressable market size ($B) - selected Connected Passenger ($1.4B), Connected Pilot ($3.3B), Connected Maintainer ($4.4B) Safety Solutions (~$26B), Productivity Solutions (~$14B), Sensing and IoT (~$17B), Intelligrated Solutions (~$29B), Connected Worker (~$6B), (Connected Distribution Center (~$3B), Intelligrated (~$10B+), Global Flux JV ($2B) Building Products and Technologies ($100B) Solstice (~$19B); HPS (~$100B) Products sold Major Brands Competitors Geographic sales split North America EMEA APAC RoW Total Auxiliary power units, propulsion engines, environmental control systems, electric power systems, engine controls, flight safety, communications, navigation, radar and surveillance systems, aircraft lighting, management and technical services, logistics services, advanced systems and instruments, aircraft wheels and brakes, repair and overhaul services, thermal systems Airflow sensors, current sensors, magnetic position sensors, humidity sensors, micro switch, power relays, vacuum switches, pressure sensors, speed senors, thermostats, temperature sensors hearing protection, respiratory protection, eye & face protection, hand/foot/head protection, first aid, fall protection Environmental, Combustion Controls, HVAC & Building Management Systems, Intelligent Buildings; Building Solutions Resins & chemicals, hydrofluoric acid, fluorocarbons, fluorine specialties, nuclear services, research and fine chemicals, performance chemicals, imaging chemicals, chemical processing sealants, advanced fibers & composites, renewable fuels and chemicals, process automation and products and solutions, metering (Legacy BT) Handheld, Metrologic, North, RMG Ademco, Fire-Lite, MK Electric, Notifier, System Sensor Aclar, Enovate, Novar, Spectra, UOP Crane, Esterline, Garmin, L3 Harris, Lockheed Martin, Meggitt, Northrop Grumman, Safran, Thales, Raytheon Safety (Halma, MMM, MSA); Productivity (Cognex, Datalogic, Kion, Rockwell Automation, TE Connectivity, Zebra Technologies) Allegion, Carrier, Emerson, Itron, Tyco, Lennox, Schneider, Core PMT (Albemarle, Ashland, BASF, Chemours, Dow DuPont, Siemens, SWK, TT Emerson, Grace); Smart Energy (Itron, Landis & Gyr) 64% 21% 12% 3% 100% 61% 29% 7% 3% 100% 40% 31% 23% 6% 100% 35% 37% 24% 4% 100% 46% 28% 15% 12% 100% Source: Company Data, Barclays Research 18 August 2021 162 Barclays | U.S. Multi-Industry FIGURE 37 IR Ingersoll Rand TOTAL COMPANY Precision andSales by Segment Science Technologies 18% Precision andEBITDA by Segment Science Technologies 22% Sales by MarkAeutto / Truck Oil & Gas / Upstream production Petrochemical… O&G… 6% Power Gen 6% H'Care / Denta… Other 36% Mining 3% Industrial Technologies and Services 82% Industrial Technologies and Services 78% SEGMENT Fast Moving Consum… Short Cycle Gen Industrial / Capex 28% Sales by Destination Americas 44% APAC 30% EMEA 26% 2021E Industrial Technologies and Services Precision and Science Technologies Segment Total Sales (mn) % of sales Adjusted EBITDA (mn) % of Adjusted EBITDA Adj. EBITDA Margin (%) Customers Products Original Equipment (as % of Sales) Aftermarket (as % of Sales) TAM (mn) Market Share Brands 4,164 82% 1,038 78% 24.9% 930 18% 286 22% 30.7% GE, Sandvik, ElectroMotive, Hyundai, Heidelberg, Danone, PepsiCo Medical: Philips, Wayne Fueling, Siemens, Teijin, ThermoFisher, GE Healthcare, Siemens, Teijin, Pathcom, BioRad, Drager, Chart, Invacare, Peak Scientific, Beckman Coulter; PFS: Water Treatment, Wastewater, A&D, Industrial, Upstream Production Compressors, Blowers, Vacuums, Compact Vehicles, Power Tools, Material Handling, Fluid Management, Couplers, Vacuum Pumps, Engineered Systems. Split: Oil Lube & Oil Free Compressor (60%), Industrial Vacuum & Blower (15%), Pressure & Vacuum Solutions, Power Tools & Lifting (10%) Liquid Pumps, Gas Pumps, Liquid Handling Solutions, Pumps, Mixers, and Systems, Valves, Chemical Injectors, Liquid Sampling; Split: Medical Pumps (26%), General Industrial (28%), Chemicals (8%), Environmental (9%), F&B (5%), Midstream (13%), Other (11%) 60% 85% 40% 15% $28bn (Compression Technologies & Services, $14bn; Industrial Products, $7bn) 7,000 17% 13% Gardner Denver, Robuschi, CompAir, Elmo Rietschl, Drume, Champion, gieffe systems, Todo, Wittig, Emco Wheaton, Nash, Hoffman & Hamson, Hydrovane, Oberdorfer, Garo, Ingersoll-Rand PFS: Haskel, BuTech, Hartell, Williams, Dosatron, YZ Systems LMI, Milton Roy Medical: Thomas, TriContinent, Welch, Innovative Labor Systeme, Zinsser Analytic 5,094 100% 1,324 100% 26.0% 64% 36% 41,000 12% Competitors Geographic sales split Americas EMEIA APAC Total Atlas Copco, Parker Hannifin, Hitachi, VAT Group, Emerson, Stanley Black & Decker, Colfax, Idex, Kaeser, Dover, SVT, TechnipFMC, Flowserve, BuschHolding Circor, DCI, Idex, Watson-Marlow, KNF Neuberger, Thermo Fischer 44% 24% 32% 100% 46% 35% 18% 100% Source: Company Data, Barclays Research 44% 26% 30% 100% 18 August 2021 163 Barclays | U.S. Multi-Industry FIGURE 38 ITW Revenue Split Specialty Products 13% Construction Products 13% Automotive OEM 20% Food Equipment 14% Poly & Fluids 13% Welding 11% 2020 Sales ($B) % of Total Operating income ($B) % of Total Operating margin T&ME 16% Automotive OEM 2.6 20% 0.5 16% 17.8% Segment EBIT Split Specialty Products 15% Construction Products 14% ITW TOTAL COMPANY Automotive OEM 15% Food Equipment 12% Poly & Fluids 14% Food Equipment 1.7 14% 0.3 12% 19.7% Welding 13% T&ME 2.0 16% 0.5 17% 25.8% T&ME 17% SEGMENT Welding 1.4 11% 0.4 13% 27.2% Geographic Revenue Split APAC & Other 20% EMEA 27% Poly & Fluids 1.6 13% 0.4 14% 24.8% Other End Market Split Industrial Capital Good1s0% 3% Energy MRO 3% 4% North America 53% Electronics 4% Consumer Durables 5% Renovation Residential Construction 5% Commercial Construction 6% Construction 4% Food Retail 3% Food & Beverage 4% Automotive OEM/Tiers 19% Automotive Aftermarket 6% General Industrial 12% Food Institutional/Restaurant 6% Food Service 6% Construction Products 1.7 13% 0.4 14% 25.5% Specialty Products 1.7 13% 0.4 15% 26.0% Segment Total 12.6 100% 2.9 100% 23.3% Products Sold Equipment, consumables, and related Plastic and metal components, fasteners, and assemblies for automobiles, light trucks, and other industrial uses Warewashing equipment; cooking equipment, ovens, ranges, & boilers; refrigeration equipment, including refreigerators, freezers, and prep tables; food processing equipment, including slicers, mixers, and scales; kitchen exhaust, ventilation, and pollution control systems; food equipment service, maintenance, and repair software for testing and measure of materials, structures, gases, and fluids; electronic assembly equipment and related consumable solder materials; electronic components and component packaging; static control equipment and consumables used for contamination control in clean room environments; pressure sensitive adhesive and components for electronics, medical, transportation, and telecommunications applications Arc welding equipment, metal arc welding consumables and related accessories, and metal jacking and other insulation products Adhesives for industrial, construction and consumer purposes; chemical fluids which clean or add lubrication to machines; epoxy and resin-based coating products for industrial applications; hand wipes and cleaners for industrial applications; fluids, polymers and other supplies for auto aftermarket maintenance and appearance; fillers and putties for auto body repair; polyester coatings and patch and repair products for the marine industry Fasteners and related fastening tools for wood and metal applications; anchors, fasteners and related tools for concrete applications; metal plate truss components and related equipment and software; packaged hardware, fasteners, anchors and other products for retail Line integration, conveyor systems and line automation for the food and beverage industries; plastic consumables that multipack cans and bottles and related equipment; foil, film and related equipment used to decorate consumer products; product coding and marking equipment and related consumables; plastic and metal closures and components for appliances; airport ground support equipment; components for medical devices Major Brands End Markets Deltar, ITW Drawform, ITW Shakeproof Baxter, Bonnet, Elro, Foster, Hobart, MBM, Stero, Traulsen, Vesta, Vulcan T&M: Avery Weigh-Tronix, Brooks Instrument, Buehler, Loma Systems, Magnaflux, Instron, Wilson; Electronics: ITW EAE, Simco, Stokvis Tapes, Texwipe Bernard, Hobart Filler Metals, Miller, Tregakiss Black Magic, Densit, Devcon, ITW Wind Group, Peratex, Plexus, Rain X, Wynn's Alpine, ITW Buildex, Paslode, Ramset, Red Head, Reid, Spit Filtertek, Hartness, Hi-Cone, Meurer, Zip Pak Automotive OEM (91%), Automotive Aftermarket (2%), Other (7%) Food Institutional/Restaurant (40%), FoodService (33%), Food Retail (14%), Other (13%) General Industrial (15%), Microelectronics (13%), Electronic Assembly (11%), Ground Transportation (11%), Electronic Components (6%), Life Science / HC (5%), Food & Beverage (5%), Aerospace (4%), Manufacturing (4%), O&G (4%), Other 22% General Industrial (35%), Energy (14%), MRO (10%), Commercial Construction (8%), Industrial Capital Goods (5%), Other (28%) Auto Aftermarket (42%), General Industrial (14%), MRO (12%), Commercial Construction (&%), Other (24%) Residential Construction (37%), Renovation Construction (33%), Commercial Construction (27%), Other (3%) Food & Beverage (25%), Consumer Durables (14%), General Industrial (13%), Industrial Capital Goods (6%), Other (42%) Auto OEM (19%), General Industrial (12%), Food Service/Retail (15%), Construction (15%), Auto Aftermarket (6%), Consumer Durables (5%), Other (28%) Revenue by Product Type Consumables (100%) Equipment (65%), Service (35%) Equipment (40%), Consumables (27%), Components (19%), Service (11%), Accessories (3%) Equipment (58%), Consumables (42%) Consumables (98%), Equipment (1%), Service (1%) Consumables (86%), Equipment (12%), Service (2%) Consumables (69%), Equipment (23%), Service (8%) Consumables (63%), Equipment (28%), Service (9%) Main Competitors Geographic sales split North America EMEA APAC & Other Total Enerpac, Allison Transmission, Delphi, & BorgWarner 38% 37% 24% 100% Welbilt, Middleby 58% 35% 7% 100% Ametek, Fortive, Keysight, Mettler Toledo, Renishaw, Spectris, Thermo Fisher Kennametal, Lincoln Electric, Colfax 42% 27% 31% 100% 81% 7% 12% 100% DowDupont, Huntsman, MMM Carlisle, Crane, Ingersoll-Rand, Stanley Black & Decker, 58% 23% 19% 100% 38% 37% 25% 100% Ball, Berry Plastics, Bemis 59% 28% 13% 100% 53% 27% 20% 100% Source: Company Data, Barclays Research 18 August 2021 164 Barclays | U.S. Multi-Industry FIGURE 39 JCI Johnson Controls Global Products 35% Revenue Split % North America 39% Global Products 39% EBITA Split % North America 39% Asia Pacific 11% EMEA/LA 15% Asia Pacific 11% EMEA/LA 11% APAC 25% Geo Split % North America 54% LatAm 4% MEA 3% Europe 14% PerformaEncnd-Market Split % e Contracting 3% Industrial Refrigeratio…Applied HVAC 23% Security 19% Fire 22% ROW Residential HVAC 8% Light Commercial HVAC 9% Controls 8% NA Residential HVAC 4% 2020 Sales (mn) % of total EBITA (mn) % of total EBITA margin (%) Products/ Services Subsegment / End-Market Split North America 8,605 39% 1,168 39% 13.6% F&S - 50% HVAC - 42% Performance Solutions - 8% EMEA/LA Asia Pacific Global Products 3,440 15% 340 11% 9.9% 2,403 11% 326 11% 13.6% Global Products (36%) 7,869 35% 1,186 39% 15.1% Building Management (4%): Controls, Fire Detection. Security HVAC (26%): Chillers, Unitary, Hitachi, HVAC Products, Industrial Refrigeration, Marine Specialty Products (7%): Fire Suppression (Sprinklers / Extinguishers etc) Building Solutions (64%) Maintenance, Install, Service and Monitoring services (NA - 37% / EMEA - 16% / Asia Pac - 11%) (F&S - 29% / HVAC - 34%) F&S - 60% HVAC - 25% Industrial Refrigeration - 15% F&S - 30% HVAC - 70% Building Management - 15% HVAC & Refrigeration Equipment - 72% Specialty - 13% Buildings Total 22,317 100% 3,020 100% 13.5% Institutional (25%), Gov't (10%), Comm'l (25%), Industrial (21%), Resi (16%), Other (3%) Major Brands York, Metasys, Titus. Ruskin, Tyco, Sensormatic, WORMALD Main Competitors Sales Split (%) Products & Systems Services 63% 37% HVAC Equipment: Carrier, Trane, Daikin, Lennox, GC Midea Holding, Gree Electric Fire & Security: Carrier, Stanley B&D, HON, Siemens (collectively have 11% market share) Products (35%), Service (27%), Install (38%; 19% New Construction, 19% Renovation & Retrofit) 47% 53% 56% 44% 100% 0% 73% 27% Sales through independent distribution Commercial HVAC ~13% (in-line with TT); Resi HVAC ~80% Geographic sales split North America Europe MEA LatAm APAC Total 100% 100% 70% 12% 18% 100% 100% 100% 45% 9% 3% 3% 40% 100% 54% 14% 3% 4% 25% 100% Source: Company Data, Barclays Research 18 August 2021 165 Barclays | U.S. Multi-Industry FIGURE 40 KMT Kennametal TOTAL COMPANY Metal Cutting 62% Revenue Split Sales by Destination Infrastructure Asia Pac 38% 21% End Market Split Earthworks 14% Americas 49% Energy 16% EMEA 30% A&D 7% Transportation 17% Gen Engineering 46% Metal Cutting 56% EBIT Split Infrastructure 44% 2021 Sales ($B) % of sales Operating profit ($B) Operating margin % of operating profit Customers / End-market split Addressable market size ($B) Market positioning / share Products sold Infrastructure 0.7 38% 0.1 9.3% 44% SEGMENT Metal Cutting 1.2 62% 0.1 7.1% 56% Construction, Mining, Industrial Applications, Oil & Gas, Processing General Engineering (52%), Transportation (29%), Aerospace (11%), Earthworks (38%), General Engineering (34%), Energy (28%) Energy (8%) 6 22 12% 6% Mining: longwall shearer and continuous miner drums, blocks, conical bits, drills, pinning rods, augers, cladded products, wear pins Construction: carbide-tipped bits for ditching, trenching and road planning, grader blades for site preparation and routine roadbed control and snowplow blades and shoes for winter road plowing Metalworking products: solid end mills, indexable milling, holemaking, turning, tapping, and tooling systems Industrial products: steel tool holder and cutting tools such as index able inserts, indexable drills, solid end drills, thread mills made from cemented tungsten carbides, ceramics, cermets or other hard materials (used for cutting edges, removing metals, holemaking) Total 1.8 100% 0.1 7.9% 100% see chart 28.0 11.0% Major Brands Competitors Geographic sales split Americas EMEA Asia Pac Total Kennametal (90% of sales) and Widia (comprises 10% of the business and is designed to meet a more customized solution for the client) Sandvik, SECO, ISCAR, Betek, OSG, IMC, TaeguTec, DormerPramet 62% 18% 20% 100% 41% 37% 22% 100% 49% 30% 21% 100% Source: Company Data, Barclays Research 18 August 2021 166 Barclays | U.S. Multi-Industry FIGURE 41 LII Revenue Split by Segment Refrigeration 13% Commercial Heating & Cooling… Residentia l Heating & … Revenue Split by Geography Europe 6% Lennox Revenue Split by Customer Commercial 41% Revenue Split by End Market New Construction 25% 2020 Sales (mn) % of total Operating Profit % of total Operating Margin (%) Products / Services Major Brands Main Competitors Customer Detail Replacement New Construction Exclusive LII Brand Allied Brand Geographic sales split Americas Europe Asia Pacific Americas 94% Residentia l 59% Replacement 75% Residential Heating & Cooling 2361.5 65% 428.5 71.6% 18.1% Furnaces, air conditioners, heat pumps, packaged heating and cooling systems, indoor air quality equipment, comfort control products, Lennox, Dave Lennox Signature, Armstrong Air, Ducane, AireFlo, Air-Ease, Concord, Magic-Pak, ADP: Advanced DistriBVtor Products, iComfort and Lennox PartsPlus Carrier, Daikin Industries, Johnson Controls, Nortek, Paloma Industries, Trane Technologies 80% 20% 80% 20% Commercial Heating & Cooling Refrigeration 800.9 471.7 22% 13% 136.9 32.8 22.9% 5.5% 17.1% 7.0% Unitary heating and air conditioning equipment, applied Condensing units, unit coolers, fluid coolers, air, cooled systems, controls, installation and service, of commercial condensers, air handlers, process chillers, controls, heating and cooling equipment compressorized racks, supermarket Lennox, Allied Commercial, Magic-Pak, Raider, Landmark, Heatcraft Worldwide Refrigeration, Bohn, Larkin, Climate Control, Prodigy, Strategos, Energence and Lennox National Account Chandler Refrigeration, Kysor/Warren, Friga-Bohn, HK Services Refrigeration, Hyfra, Kirby AAON, Carrier, Daikin Industries, Johnson Controls, Nortek, Alfa Laval, CARR, EMR, GEA, Guntner, Hill-Phoenix (DOV), Paloma Industries, Trane Technologies Hussmann, Panasonic, Rheem Manufacturing Geographic: North America Refrigeration (58%), Europe HVAC North America HVAC (75%) (25%), Europe Refrigeration (17%) North America Service (25%) End Market: Food Retail (18%), Food Service (22%), Cold Storage (22%), Non-Food (13%), HVAC (25%) 70% 58% 30% 42% 90% 50% 10% 50% Segment Total 3634.1 100% 598.2 100.0% 16.5% Residential (65%), Commercial (35%) 75% 25% 75% 25% 100% 0% 0% 100% 0% 0% 57% 43% 0% 94% 6% 0% Source: Company Data, Barclays Research 18 August 2021 167 Barclays | U.S. Multi-Industry FIGURE 42 MMM Consumer 16% Revenue Split Safety & Industrial 34% Consumer 16% EBIT Split Health Care 24% Transportat ion & Electronics 26% Health Care 23% Transportati on & Electronics 24% Safety & Industrial 37% MMM TOTAL COMPANY Electronics 12% End Mkt Split Other 4% Non-Residential Residential Buildings Buildings 5% 12% Power Grid 3% Short Cycle Gen Industrial / Capex 16% Fast Moving Consumer / Packaging 11% Datacenter / power quality 1% H'Care / Dental 26% Oil & Gas Au2t%o Components 5% Auto Repair 3% APAC Comm'l Aer3o0% (inc Heli) 0% Sales by Destination EMEA 19% LatAm/ Canada 0% United States 51% 2020 Sales ($m) % of sales EBIT ($m) Operating margin % of operating profit Customers / end-market split Products sold Division Head Segment Safety & Industrial Transportation & Electronics Health Care 11,748 8,827 8,344 34% 26% 24% 2,784 1,814 1,790 23.7% 20.6% 21.5% 37% 24% 24% Abrasives (12%), Adhesives & Tapes Advanced Materials (13%), Auto & Aero Medical Solutions (48%), Oral Care (19%), (24%), Auto AM (11%), Closure & (20%), Comm'l Solutions (18%), Health Info Sys. (17%), Food Safety (5%), Masking (10%), Electrical Markets Electronics (39%), Transport Safety (10%) Separation & Purification (11%) (10%), Personal Safety (30%), Roofing Granules (3%) Consumer 5,323 16% 1,203 22.6% 16% Home Care (19%), Stationery & Office (27%), Home Improvement (45%), Consumer Health Care (8%), Other (1%) Personal safety, adhesives and tapes, abrasives, closure and masking systems, electrical markets, automotive aftermarket, and roofing granules. This segment also includes the Communication Markets Division (which was substantially sold in 2018) and the refrigeration filtration product lines (within Other Safety and Industrial). Michael G. Vale Electronics (display materials and systems, electronic materials solutions), automotive and aerospace, commercial solutions, advanced materials, and transportation safety. Ashish Khandpur Skin and wound care, Infection prevention, Patient warming solutions, Oral care solutions, Coding and reimbursement software, Food safety indicator solutions Mojdeh Poul Consumer tapes, Repositionable notes, Home air filtration, Cleaning products for the home, Consumer bandages braces and supports, Retail abrasives Jeffrey R. Lavers Segment Total 34,242 100% 7,591 22.2% 100% Major Brands Competitors Distribution Geographic sales split United States APAC EMEA LatAm/ Canada Total Industrial: Scotch-Weld, Meguiar's, bondo, VHB, Cubitron II, Filtrete Safety: Scotchprint, Thinsulate, Speedglas, Peltor, 3M Diamond Grade, Scotch-Brite, Envision Graphics Vikuiti, Scotch Super, Tartan Industrial: Danaher, Henkel, IDEX, AMETEK, Illinois Tool Works, Donaldson, Pentair Safety: MSA Safety, Honeywell, Illinois Tool Works, Amphenol, Corning Industrial: 50/50% Electronics: 100% Direct 52% 24% 24% 0% 100% 28% 58% 15% 0% 100% Nexcare, Littmann, ClinTrac, Tegaderm Scotch tape, Scotch-Brite, Scotch Gard, PostIt, Command Steris, Johnson & Johnson, Danaher Procter & Gamble, Church & Dwight, Kimberly Clark, Newell Rubbermaid 61% 18% 22% 0% 100% 72% 18% 11% 0% 100% 70% Distribution 51% 30% 19% 0% 100% Source: Company Data, Barclays Research 18 August 2021 168 Barclays | U.S. Multi-Industry FIGURE 43 NVT Revenue Mix By End Market Infrastruc ture 19% Energy 8% Industrial 42% nVent TOTAL COMPANY Revenue Split By Segment Electrical & Fastening 28% Enclosures 48% Revenue Mix By Geography APAC 8% ROW 1% EMEA 26% Operating Profit Electrical & Fastening 38% Enclosures 38% Commercial & Residential 31% 2020 ($m) Revenues % of total Segment Profit (Adj, $m) Margin % of total Other Info Products Brands Competitors OE vs AM Distribution vs Direct TAM ($bn) Implied Market Share Sales By Region Geography NAM EMEA APAC ROW Total Sales by Segment Industrial Commercial & Residential Energy Infrastructure Total Thermal Management 24% NAM 65% Thermal Management 24% Enclosures 953 48% 149 15.6% 37.8% Thermal Management 477 24% 94 19.7% 23.9% Electrical & Fastening 569 28% 150 26.4% 38.3% Enclosures Thermal Management Electrical & Fastening Equipment protection (industrial controls/automation, oil & gas controls, F&B, commercial construction, data centers & networking), Electronics protection (rail signaling and control, test & measurement, A&D, data centers & networking) Building infrastructure solutions (snow melting & de-icing, radiant floor warming, liquid leak detection, life safety power cables), industrial heating solutions (pipe freeze protection, process temperature maintain, pipeline heating, tank & vessel heating) Fastening solutions (electrical installation, seismic & fire protection, data comms, HVAC), electrical solutions (electrical installation & protection, rail & transit, telecom, utility & industrial facilities) Hoffman, Schroff Raychem, Tracer Caddy, ERICO Rittal, Eaton, Hubbell, Schneider Thermon Eaton, Atkore, ABB, Hubbell Almost all OE OE: 66%; AM: 34% Almost all OE ~80% Distribution ~50% Distribution ~90% Distribution Enclosures Thermal Management Electrical & Fastening Segment Total 1,999 100.0% 393 19.6% 100.0% Total 80% OE; 20% AM 65%+ Distribution $60 3% Total 65% 26% 7% 2% 100% 55% 35% 10% 100% 73% 19% 6% 2% 100% 65% 26% 8% 1% 100% 62% 15% 6% 17% 100% 40% 38% 18% 4% 100% 10% 52% 4% 34% 100% 42% 31% 8% 19% 100% Source: Company Data, Barclays Research 18 August 2021 169 Barclays | U.S. Multi-Industry FIGURE 44 OTIS Segment Sales Split Modernization 10% New Equipment 42% Otis Worldwide Corporation Segment Profit Split New Equipment 17% Asia 33% Geographic Split Americas 29% End-market split Other comm'l Infrastructure / 7% Other… Hospitality / Retail 8% Maintenance & Repair 48% 2020 Sales ($bn) % of sales Adj. Operating Profit ($B) Adj. Operating margin % of operating profit Customers / end-market split Products sold Sales Representatives Technicians Market Share (%) TAM Competitors Service 83% Segment Detail New Equipment 5.4 42% 0.3 6% 17% Residential and commercial buildings; real-estate and building developers, general contractors, architects, government agencies; Residential (70%), Office (10%), Hospitality / Retail (10%), Infrastrcture / Other 7%, Other commercial 3% Passenger and freight elevators, escalators, moving walkways ~1,500 ~7,200 16% (Units) KONE, Schindler, ThyssenKrupp, Hitachi, Mitsubishi Americas EMEA Asia Total 28% 26% 46% 100% Geographic Split Source: Company Data, Barclays Research EMEA 38% Office 13% Service 7.4 58% 1.7 22% 83% Building owners, facility managers, housing associations, government agencies that operate buildings; Residential (60%), Office (15%), Hospitality / Retail (10%), Infrastructure / Other (6%), Other Commercial (9%) Performs maintenance & repair (82% of segment revenue) and modernization services (18% of segment revenue) ~2,700 ~33,000 (1,400 branches) 12% (Units) KONE, Schindler, ThyssenKrupp, Hitachi, Mitsubish; Independent service providers / small local competitors 30% 47% 23% 100% Residential 64% Segment Total 12.8 100% 2.0 16% 100% See chart 17% (Revenue) $75bn 29% 38% 33% 100% 18 August 2021 170 Barclays | U.S. Multi-Industry FIGURE 45 PH DI - NA 46% Sales Split DI - NA 48% EBIT Split PARKER HANNIFIN CORPORATION TOTAL COMPANY Technology Platform Split Flow & Process Control 30% Aerospace Systems 16% Sales by Destination APAC 18% LatAM 2% Aerospace Systems 17% 2021 Sales ($B) % of sales Operating profit ($B) Operating margin % of operating profit EBITDA % of sales Sales by Market Segment Sales by Product Type Addressable market size ($B) Market positioning / share Products sold DI - Int'l 37% Aerospace Systems 15% DI - Int'l 37% Filtration & Engineered Mat. 29% Motion Systems 25% SEGMENT Aerospace Systems Diversified Industrial 2.4 17% 0.5 19% 15% 0.5 21% Engines % Power Gen (33%), Commercial Transport (28%), Military Fixed Wing (14%), Business & General Aviation (8%), Helicopters (8%), Regional Transport & Other(9%) NA 6.7 47% 1.5 22% 48% 1.7 26% International 5.3 37% 1.1 21% 37% 1.4 26% Aerospace, Automotive, Military, Heavy Duty, Oil & Gas, Telecommunications, Engine & Mobile, Hydraulic, Industrial Air, Process OEM (68%), MRO (32%) Spares, maintenance, repair and overhaul OEM (46%), MRO (54%) Manufacturing, packaging, processing, transportation, mobile construction, refrigeration and air conditioning, agricultural and military machinery, and equipment industries EMEA 24% N America 56% Total 14.3 100% 3.0 21% 100% 3.6 25% 50% OEM; 50% MRO 130.0 11% Engineered Materials Group: Static and dynamic sealing devices, Thermal management, Vibration dampening, Silicone tubing, Medical device fabrication Filtration Group: Filters, Systems, and Diagnostics Solutions to monitor and remove contaminants from fuel, water, oil, and other liquids and gases Fluid Connectors Group: Connectors which control, transmit, and constrain fluid: Valves, Hoses, Couplings, Tubing, Plastic fittings Instrumentation Group: Critical flow components for process instrumentation Control actuation, Engine systems, Fluid conveyance, Fluid metering, Fuel systems, (Healthcare, HVAC, F&B, Processing, Emissions) Fuel tanks, Hydraulic systems, Lubrication components, Pneumatic controls, Power Motion Control Solutions: conditioning, Thermal management, Wheels & brakes Hydraulic Actuation - units that can generate very high torque in small spaces using hydraulic pressure Pneumatic Actuation - used in industrial, R&D, lab, production and quality inspection applications Hydraulic Braking - coupling systems that are ideal solutions under extreme conditions Flow Control Solutions: Liquid and gas, electronic, manual and thermal mass flow controllers for flow rate applications Major Brands Competitors Geographic sales split, by destination N America International EMEA APAC LatAM Total Airteck, Jet-Pipe, Bayside, Atlas Cylinders, Bayside, Chelsea, Compumotor, CTC, Gold Baldwin Filters, Fuel Manager, Clark Filter, Purolator, PECO Facet, Airguard, Altair, Ring, Pioneer BHA, Clearcurrent, Hastings, United Specialists, Keddeg and Purolator Honeywell, Triumph Group , Moog, Woodward, Raytheon, Safran Emerson, Eaton, Danaher, Gates, Bosch Rexroth, Donaldson SMC Corp., IMI, Trelleborg 60% 40% 25% 10% 5% 100% 100% 0% 0% 0% 0% 100% 0% 100% 53% 45% 2% 100% Source: Company Data, Barclays Research 57% 43% 24% 18% 2% 100% 18 August 2021 171 Barclays | U.S. Multi-Industry FIGURE 46 PNR Revenue Mix By End Market Industrial, 13% Agricultur e, 7% Commerci al, 17% Residential , 62% Pentair TOTAL COMPANY Revenue Split By Segment Revenue Mix By Geography Developing, 14% Industrial & Flow Tech, 42.2% Consumer Solutions, 57.8% W Europe, 14% Other Developed, 7% United States, 64% Operating Profit Split By Sub-Segment Industrial Filtration… Flow Technologies 18% Pool 57% Water Treatment 16% 2020 ($mn) Revenues % of total Operating Profit (Adj) Margin % of total Other Info Business Mix Products End Market Split Brands Competitors % AM / Through Distributors % Direct / OEM % Service Total Geography United States Other Developed W Europe Developing Total Sales by Type Replacement / AM OE Service Total Sales by Segment Residential Commercial Agriculture Industrial Total Consumer Solutions 1,743 57.8% 407 23.4% 73.4% Consumer Solutions Pool (~60%), Water Solutions (~40%; Resi Systems, Comm'l Systems, Components) Pool cleaners, Filters, Heaters & Heat pumps, Above ground systems, Pool maintenance & safety equipment, Sanitizers, Valves, Water features, Replacement parts / aftermarket support; Filtration membranes, Water filtration systems / sanitization systems for residential & commercial use Residential (~80%), Commercial (~20%) Pentair, Kreepy Krauly; X-Flow, Codeline Hayward Pool, Fluidra (Spain);AO Smith, Evoqua, MMM, DHR (Pall) 75% 25% 100% Consumer Solutions 75% 5% 10% 10% 100% 75% 25% 100% 80% 20% 100% Industrial & Flow Tech 1,274 42.2% 148 11.6% 26.6% Industrial & Flow Tech Resi & Irrigation Flow (~40%), Indu'l Filtration (~30%), Comm'l & Infrastructure Flow (~30%) Segment Total 3,017 100.0% 555 18.4% 100.0% Total Energy efficient pumps, valves, process and control for industrial and infrastructure applications; Water supply and disposal, Biogas recovery, Beer membrane filtration, Industrial (~50%), Residential (~35%), Commercial (~15%) Pentair, Sta-Rite, Aurora, Berkeley, Fairbanks Nijhuis, Hyrdomatic, Shurflo, Hypro; Everpure, Haffmans, Sudmo Small pumps - Franklin Electric, Grundfos (Germany), Large pumps - Gorman Rupp, Xylem; SPX Flow, Evoqua, PH (Clarcor) 65% 30% 5% 100% Industrial & Flow Tech Industrial (~23%), Residential (~57%), Commercial (~20%) 71% 27% 2% 100% Total 50% 10% 20% 20% 100% 64% 7% 14% 14% 100% 65% 30% 5% 100% 39% 14% 16% 32% 100% 71% 27% 2% 100% 62% 17% 7% 13% 100% Source: Company Data, Barclays Research 18 August 2021 172 Barclays | U.S. Multi-Industry FIGURE 47 ROK ROCKWELL AUTOMATION Lifecycle Services 27% Revenue Split Software & Control 26% 2020 Sales ($B) % of sales Operating profit ($B) Operating margin % of operating profit Customers / end-market split* Product Available Market ($B) Market positioning / share Products sold Major Brands Competitors Distribution Geographic sales split North America EMEA APAC LatAm Total Lifecycle Services 15% EBIT Split Intelligen ce Devices 47% Software & Control 38% TOTAL COMPANY Process - Pulp & Paper 5% Process Other 5% Process - Chemicals 5% Process - Metals 5% Process - Mining, Aggregates & Cement 5% Process - O&G 11% End Market Split Discrete - Automotive 11%Discrete Semiconductor 6% Discrete - General Industries 6% Discrete - Other 5% Intelligenc e Devices 47% Hybrid - Life Sciences Hybrid - Eco Indu5%strial 5% Hybrid - Tire 5% Hybrid - F&B 21% Intelligence Devices 3.0 47% 0.6 19.9% 47% Software & Control 1.7 27% 0.5 28.2% 38% Lifecycle Services 1.7 27% 0.2 11.6% 16% ~$35bn 8% Heavy Industry: Oil & Gas, Metals & Mining, Pulp and Paper, Semi-conductor, Wastewater Consumer: Food and Beverage, Home and Personal Care, Life Sciences Transportation: Automotive, Tire, Off-road vehicle Other: Marine, Textiles, Entertainment ~$35bn ~$25bn 5% 7% Drives, motion, safety, sensing, industrial components, configured-to-order products Control software & hardware, visualization software & hardware, digital twin & simulation software, information solutions software (MES, data analytics, IoT visualization AR, device / enterprise connectivity), network & security infrastructure Consulting, professional services, connected services (remote monitoring, network & security, safety services, infrastructure-as-a-service), maintenance services (asset management, workforce training, etc.), Sensia business Allen-Bradley, Rockwell Software, FactoryTalk, ICS Triplex Siemens, ABB, Schneider, Emerson, Omron, Mitsubishi Electric, Honeywell, Invensys 75% of sales through independent distributors; largest distributor comprises 10% of sales 62% 18% 13% 7% 100% 60% 19% 14% 6% 100% 49% 26% 17% 8% 100% Source: Company Data, Barclays Research LatAm 7% Sales by Destination APAC 14% EMEA 20% North America 59% SEGMENT TOTAL 6.3 100% 1.3 19.9% 100% ~$95bn 7% 59% 20% 14% 7% 100% 18 August 2021 173 Barclays | U.S. Multi-Industry FIGURE 48 ROP Roper Technologies Total Company Process Revenue Split Technologies 9% Measurement & Analytical Solutions 27% Application Software 33% Network Software & Systems 31% Process Adj. EBITDA Split Technologies 7% Measurement & Analytical Solutions 24% Application Software 35% Network Software & Systems 34% Sales by Destination Rest of the world Midd2le%East 2% Asia 4% Europe 11% Segment Sub-Segment Split (Barclays Est.) Recurring Revenue (AS) 23% Process Tech 9% Services (AS) 7% Perpetual Licenses (AS) 3% North America 81% Industrial Businesses (M&AS) 6% Neptune (M&AS) 7% Total Medical (M&AS) 13% Network Software (NSS) 19% TransCore / Other (NSS) 13% 2020 Sales ($b) % of sales Gross Profit Gross Margin Adj. EBITDA ($b) Adj. EBITDA Margin % of Segment adj. EBITDA Application Software 1.8 33% 1.2 68% 0.8 43% 35% Network Software & Systems 1.7 31% 1.2 67% 0.7 42% 34% Measurement & Analytical Solutions 1.5 27% 0.9 59% 0.5 35% 24% Process Technologies 0.5 9% 0.3 53% 0.2 30% 7% Segment Total 5.5 100% 3.6 64% 2.2 39% 100% Products / Services Business management software, Payment systems, Laboratory and medical software, Enterprise information systems, Food service software, Supply chain management systems, Legal and regulatory analytics, Financial analytics, Project management and other enterprise software Construction management software, Supply chain management systems and databases, Sensor and other wireless technology, Software as a service for food industry, Healthcare management systems, RFID card readers, Traffic management and tolling systems Rubber and polymer laboratory instruments, Laboratory data analysis software, Medical imaging systems, Fluid meter products, Valves and control systems, Medical automation, Monitoring equipment, Leak detection equipment Valves, Pneumatic instrumentation, Control systems, Machinery controls, Measurement systems, Monitoring sensors and systems, Nuclear monitoring systems, Pumps Customer / End Markets Major Brands North America Europe Asia Middle East Rest of the world Total Government, Education, Healthcare, Food service and suppliers, Logistics providers, Professional services firms Government, Healthcare providers (primary and continuing care), Pharmacies, Construction, Trucking Healthcare, Residential / Commercial / Industrial water management, Water, Refrigeration, Utilities, General industrial Oil & Gas, Nuclear energy, O&G pipelines, Power generation, Marine engines, Water + waste water General industrial Aderant, CBORD, CliniSys, Data Innovations, Deltek, Horizon, IntelliTrans, PowerPlan, Strata, Sunquest, Vertafore ConstructConnect, DAT, Foundry, Inovonics, iPipeline, iTradeNetwork, Link Logistics, MHA, RF IDeas, SHP, SoftWriters, TransCore Alpha, CIVCO, Dynisco, FMI, Hansen, Hardy, IPA, Logitech, Neptune, Northern Digital, Struers, Technolog, Uson, Verathon AMOT, CCC, Cornell, FTI, Metrix, PAC, Roper Pump, Viatran, Zetec Geographic Sales Split 86% 11% 0% 0% 2% 100% 92% 4% 1% 2% 1% 100% 70% 17% 8% 1% 3% 100% 49% 20% 17% 7% 7% 100% 80% 11% 4% 2% 2% 100% Source: Company Data, Barclays Research 18 August 2021 174 Barclays | U.S. Multi-Industry FIGURE 49 SWK SecuriRtyevenue Split 13% Industrial 16% 2020 Sales ($b) % of sales Adj. Operating Income ($b) Adj. Operating Margin Operating Income (% of Total) Products / Services Customer / End Markets Served Market Size: Stanley Black & Decker Total Company Tools & Storage 71% SecurityAdj. EBIT Split Indus8t%rial 12% RoWSales by Destination Emerging Market9% Groups 11% Healthcare Sales by End Market 2% Government Auto AM 2% InfraOstthruecr ture 33%% Financial/Bankin g 0% 4% Existing Tools & Storage 80% Europe 19% Auto Production 8% United States 61% Retail Industrial/El4ec%tro nics 13% NonResi/Commercial Construction 17% Residential/Repa ir/DIY 25% New Resi TCootanlsRtreuscidtieonntial 181%% Segment Tools & Storage 10.3 71% 1.9 18% 80% Industrial 2.4 16% 0.3 12% 12% Security 1.9 13% 0.2 10% 8% Professional Power Tools (~59%): Sanding, Drillers, Cutting Tools, Batteries + Chargers; Construction Hand Tools / Industrial+Auto Hand Tools / Accessories (~35%): Mechanics Tools, Saws, Fastening Tools, Laser measures; Outdoor Equipment (~6%): Handhelds, Mowers, Pressure Washers Screws & Bolts, Drive Systems for Fasteners, Surface Finishes & Coatings Video surveillance, access control and monitoring applications, intrusion and fire security systems; Install + manufacture + service sliding, swinging, folding, transit / metro and revolving door systems, sensors, controls, and security options Professional (55%), Consumer & Tradesmen (30%), Industrial (10%), Automotive (5%) Automotive (35%), Industrial (27%), Attachment Tools (17%), A&D (10%), O&G (10%) Retail (24%), Commercial (19%), Healthcare (16%), Government (9%), Residential (6%), Infrastructure (5%), Other (21%) ~$54bn total; ~$40bn Professional Power Tools; ~$14bn ~$59bn total; ~$24bn Automotive; ~$24bn Industrial; Hand Tools / Accessories / Storage ~$3bn Attachment Tools; ~$5bn A&D; ~$3bn O&G Segment Total 14.5 100% 2.4 16% 100% Major Brands Stanley, DeWalt, Bostitch, Craftsman, Irwin, Black+Decker, Proto, Facom, Porter Cable, Lenox, Stanley Fatmax, MAC Tools Pop, Avdel, Tucker, Integra, Optia, Nelson, Paladin, Labounty, Pengo, Dubuis, Assembly Technologies, Helicoil, NPR, Spiralock, CribMaster Stanley Security, Stanley Advanced Technologies Solutions, Sonitrol Competition Geographic Sales Split United States Europe Emerging Market Groups RoW Total End-Market Split Existing Residential/Repair/DIY New Resi Construction Total Residential Non-Resi/Commercial Construction Industrial/Electronics Retail Auto Production Auto AM Healthcare Government Infrastructure Financial/Banking Education Other Total Apex Tools Group, Bosch, TTI, Makita, SnapOn, Hitachi, St. Gobain, Hilti, Matco, Husqvarna, Ingersoll Rand, Ideal, Klein, Wurth Berner, Gedore, ITW Tools & Storage 63% 16% 12% 9% 100% Tools & Storage 35% 26% 0% 21% 11% 1% 0% 5% 0% 1% 0% 0% 0% 0% 100% Fasteners: ITW, Nifco, lisj, A Raymond; Tools: EMR, Lobster; Tools & Fasteners: Penn Engineering, Atlas Copco, Arconic, SFS, Bollhoff Industrial 35% 27% 25% 13% 100% Industrial 0% 0% 0% 0% 30% 0% 52% 0% 0% 1% 17% 0% 0% 0% 100% JCI, Convergint Technologies, Securitas, Assa Abloy, Carrier Security 53% 40% 2% 5% 100% Security 0% 0% 6% 19% 0% 24% 0% 0% 16% 9% 5% 0% 0% 21% 100% Segment Total 61% 19% 11% 9% 100% Segment Total 25% 18% 1% 17% 13% 4% 8% 4% 2% 2% 3% 0% 0% 3% 100% Source: Company Data, Barclays Research 18 August 2021 175 Barclays | U.S. Multi-Industry FIGURE 50 TT EMEA 13% Revenue Split APAC 9% Transport Refrigeration 18% End Market Split Resi Building 20% TraneTech TOTAL COMPANY Non-Res Building, N. America 47% EBIT Split EMEA 12% APAC 10% Sales by Destination Asia Pacific 9% Latin America 5% EMEA 13% Americas 78% Non-Res Building, International 15% Americas 78% North America 73% 2020 Sales ($B) % of sales Operating profit ($B) Operating margin % of operating profit Addressable market size ($B)* Market positioning / share End Market Split Route to Market OE / AM Split Products sold Major Brands Competitors Parts and Services vs Equipment Geographic sales split North America EMEA Latin America Asia Pacific Total Americas 9.7 78% 1.5 15.1% 78% Commercial HVAC (61%) Transport Refrigeration (14%) Residential HVAC (25%) SEGMENT EMEA 1.6 13% 0.2 14.0% 12% Transport Refrigeration (~$10bn) Transport Refrigeration (~25%) Commercial HVAC (52%) Transport Refrigeration (48%) APAC 1.1 9% 0.2 15.6% 9% Commercial HVAC (87%) Transport Refrigeration (13%) Residential HVAC: Air Conditioners, Coils, Furnaces, Heat Pumps, Packaged / Ductless Systems, Thermostats; Comm HVAC: HVAC Building & Industrial Equipment and Systems, Refrigeration & food service equipment; Building Automation & Energy Services; Transport Refrig: Transport Temperature Systems for Trailers, truck bodies, buses, shipboard containers, and rail cars Trane; Thermo King, FrigoBlock; American Standard, Ameristar, Oxbox SEGMENT TOTAL 12.5 100% 1.9 15.0% 100% Commercial HVAC (62%) Transport Refrigeration (18%) Residential HVAC (19%) 60% Direct / 40% Distribution; Comm'l HVAC 87% / 13%; Resi HVAC 50% / 50%; Transport Refrig. 0% / 100% 50% OE / 50% AM Comm: HVAC: York, Carrier, Daikin, Gree, Midea, Haier; Transport Refrig: TransiCold (Carrier); Res HVAC: York, Carrier, Daikin, Rheem, Mitsubishi, Gree, Midea, Haier Comm: HVAC: York, Carrier, Daikin, Gree, Midea, Haier; Transport Refrig: TransiCold (Carrier); Res HVAC: York, Carrier, Daikin, Rheem, Mitsubishi, Gree, Midea, Haier 32% Parts vs 68% Equipment 31% Parts vs 69% Equipment 30% Parts vs 70% Equipment 31% Parts vs 69% Equipment 94% 6% 100% 100% 100% 100% 100% 73% 13% 5% 9% 100% Source: Company Data, Barclays Research 18 August 2021 176 Barclays | U.S. Multi-Industry FIGURE 51 VNT Vontier RGoeWo,g4r%aphic Split Europe, 9% High Growth, 16% TOTAL COMPANY End Market Split Logistics & Supply Chain… Auto AM 20% End Market Split (by Solution) Other SaaS 3% Auto Repair 20% 7% Service & Other Recurring Revenue 18% Smart Cities 1% Environmental 11% 2020 Sales ($B) % of sales Operating profit ($B) Operating margin N America, 70% Mobility Technologies 2.1 77% SEGMENT Retail Fueling 70% Retail Fueling HW 30% Diagnostics and Repair Technologies 0.6 23% Retail SolutionsE-Mobility 10% 0% Total 2.7 100% 0.6 21% End Markets Addressable market size ($B) Annual growth rate Market positioning / share Products sold Retail Fueling, Commercial Fueling, Fleet Management, Smart City Technology $20 bn (Retail / Commercial Fueling $7 bn, Smart City Solutions $8 bn, Telematics $5 bn) MSD (Retail / Commercial Fueling MSD, Smart City Solutions MSD, Telematics HSD) 10% Retail/Commercial Fueling- Monitoring and leak detection systems, fuel dispensers, vapor recovery equipment, PoS payment, inventory planning/supply chain management Telematics- Vehicle tracking, fleet management hardware/software Smart City Solutions- Solutions that connect and communicate with intersections, vehicles / emergency transit operating systems to change traffic flow Vehicle Service & Repair, Automotive AM $7 bn LSD 9% Professional tools- tools, toolboxes, automotive diagnostic equipment Wheel Service Equipment- brake lathes, tire changers, wheel balancers $27 bn GDP+ 10% Major Brands Customers Competitors Distribution Geographic sales split, by location N America High Growth Europe RoW Total Retail/Commercial Fueling - Angi, Doms, Gasboy, Gilbarco, Gilbarco Autotank , VeederRoot Telematics - Navman Wireless, Teletrac Smart City Solutions - Global Traffic Technologies Professional tools - Matco Wheel Service Equipment - Ammco, Bada and Coats Energy Companies, fueling stations, convenience store retailers, fleet operators, municipalities Dover, Franklin Electric, Trimble Navigation ~70% Direct, ~30% Through Distribution Automotive technicians, national automotive aftermarket retailers, technical education students, tire installation and repair shops Snap-On, Stanley ~15% Direct, ~85% Through Distribution 59% 23% 13% 5% 100% 99% 1% 0% 0% 100% ~60% Direct, ~40% Through Distribution 70% 16% 9% 4% 100% Source: Company Data, Barclays Research 18 August 2021 177 Barclays | U.S. Multi-Industry Notes referenced on page 1: US Multi-Industry: 6 conclusions from FTV, ROK recent M&A deals; IR, ROP look very attractive; July 13, 2021 US Multi-Industry: The return of capex? Sector implications; some reasons for caution; June 9, 2021 US Multi-Industry: Q2 21 LfE #3: 14 Learnings from Earnings, bottom-up and top-down takeaways / guides; August 8, 2021 18 August 2021 178 Barclays | U.S. Multi-Industry U.S. Multi-Industry APi Group (APG) Industry View: NEUTRAL Stock Rating: OVERWEIGHT Income statement ($mn) Revenue EBITDA EBIT Pre-tax income Net income (adj) EPS (adj) ($) Diluted shares (mn) DPS ($) 2020A 3,496 131 -166 -184 216 1.22 177 0.00 2021E 3,772 386 164 123 222 1.08 205 0.00 2022E 3,944 449 271 235 263 1.28 205 0.00 2023E 4,117 490 338 298 293 1.43 205 0.00 CAGR 5.6% 55.2% N/A N/A 10.7% 5.4% 5.1% N/A Margin and return data EBITDA margin (%) EBIT margin (%) Pre-tax margin (%) Net margin (%) ROIC (%) ROA (%) ROE (%) Average 3.7 10.2 11.4 11.9 9.3 -4.7 4.4 6.9 8.2 3.7 -5.3 3.3 6.0 7.2 2.8 -4.4 2.2 4.2 5.4 1.9 17.8 20.9 27.7 34.4 25.2 7.6 8.0 9.6 9.7 8.7 12.3 14.2 16.0 16.2 14.7 Balance sheet and cash flow ($mn) Cash and equivalents Total assets Goodwill Short and long-term debt Net debt/(funds) Total liabilities Shareholders' equity Tangible book value Inventories Working capital Cash flow from operations Capital expenditure Free cash flow 515 4,065 1,082 1,415 900 2,507 1,558 -489 64 553 515 -38 517 309 3,759 1,082 915 606 2,117 1,642 -288 53 502 359 -55 284 715 4,057 1,082 915 200 2,249 1,807 -35 55 351 462 -56 386 1,135 4,366 1,082 915 -220 2,338 2,028 248 41 255 477 -56 421 CAGR 30.2% 2.4% 0.0% -13.5% N/A -2.3% 9.2% N/A -13.7% -22.7% -2.5% N/A -6.6% Price (17-Aug-2021) USD 22.46 Price Target USD 24.00 Why Overweight? We view APG as an attractive self- help story as it continues to undertake M&A (potentially helped by warrants-related cash), and enacts margin expansion through more project selectivity. Upside case USD 33.00 Faster than expected recovery in the Non-resi construction market, accretive M&A, and strong FCF execution. Downside case USD 20.00 Non-resi markets remain depressed for some time. Poor M&A execution, margins struggle to reach peer levels, FCF disappoints. Upside/Downside scenarios Valuation and leverage metrics P/E (adj) (x) EV/EBITDA (x) EV/sales (x) FCF yield (%) P/BV (x) Dividend yield (%) Net debt/EBITDA (x) Net debt/capital (%) Average 18.4 20.7 17.5 15.8 18.1 36.7 11.7 9.2 7.5 16.3 1.4 1.2 1.0 0.9 1.1 10.7 6.3 9.4 11.4 9.4 2.6 2.8 2.6 2.3 2.5 0.0 0.0 0.0 0.0 0.0 6.9 1.6 0.4 -0.5 2.1 22.1 16.1 4.9 -5.0 9.5 Selected operating metrics FCF/NI (x) R&D/sales (%) Capex/sales (%) Organic growth (%) Inventory turns (x) Tax rate (%) Incremental margins (%) Average 2.4 1.3 1.5 1.4 1.6 0.0 0.0 0.0 0.0 0.0 1.1 1.5 1.4 1.4 1.3 -9.0 4.9 4.7 4.3 1.2 41.4 54.4 54.3 76.0 56.5 20 20 21 21 21 4.2 9.3 30.4 23.7 16.9 Source: Company data, Bloomberg, Barclays Research Note: FY End Dec 18 August 2021 179 Barclays | U.S. Multi-Industry U.S. Multi-Industry Honeywell International Inc. (HON) Industry View: NEUTRAL Stock Rating: OVERWEIGHT Income statement ($mn) Revenue EBITDA EBIT Pre-tax income Net income (adj) EPS (adj) ($) Diluted shares (mn) DPS ($) 2020A 32,637 6,698 5,696 6,012 5,054 7.10 711.2 3.63 2021E 35,026 7,291 6,270 7,469 5,723 8.16 701.3 3.75 2022E 37,494 8,418 7,394 8,292 6,371 9.18 693.9 3.83 2023E 39,330 8,996 7,972 8,881 6,823 9.93 687.3 4.45 CAGR 6.4% 10.3% 11.9% 13.9% 10.5% 11.8% -1.1% 7.1% Margin and return data EBITDA margin (%) EBIT margin (%) Pre-tax margin (%) Net margin (%) ROIC (%) ROA (%) ROE (%) Average 20.5 20.8 22.5 22.9 21.7 17.5 17.9 19.7 20.3 18.8 18.4 21.3 22.1 22.6 21.1 14.6 16.6 17.0 17.3 16.4 14.7 15.8 18.1 19.1 16.9 7.7 7.6 8.9 9.6 8.4 27.3 32.6 36.1 38.2 33.6 Balance sheet and cash flow ($mn) Cash and equivalents 14,275 Total assets 64,586 Goodwill 16,058 Short and long-term debt 16,342 Net debt/(funds) 8,109 Total liabilities 46,789 Shareholders' equity 17,549 Tangible book value -2,069 Inventories 4,489 Working capital 5,566 Cash flow from operations 6,673 Capital expenditure -906 Free cash flow 5,767 13,754 65,010 16,058 16,342 8,630 47,119 17,643 -1,975 4,553 5,604 6,706 -1,055 5,650 12,995 65,067 16,058 16,342 9,389 46,963 17,856 -1,762 4,499 5,999 7,000 -1,055 5,944 12,887 65,916 16,058 16,342 9,497 47,050 18,618 -1,000 4,720 6,293 7,553 -1,055 6,498 CAGR -3.4% 0.7% 0.0% 0.0% 5.4% 0.2% 2.0% N/A 1.7% 4.2% 4.2% N/A 4.1% Price (17-Aug-2021) USD 231.45 Price Target USD 253.00 Why Overweight? HON should outperform based on its ongoing portfolio upgrade approach, focus on software industrial business models, and relentless execution on cost control / productivity. The unlevered balance sheet offers a potential tailwind. Upside case USD 327.00 Aero & Process Automation recover faster than expected, combined with continuous profit growth and restructuring benefit realization; step up in capital deployment. Downside case USD 169.00 Moderation in margin expansion; minimal capital deployment. Upside/Downside scenarios Valuation and leverage metrics P/E (adj) (x) EV/EBITDA (x) EV/sales (x) FCF yield (%) P/BV (x) Dividend yield (%) Net debt/EBITDA (x) Net debt/capital (%) Average 32.6 28.4 25.2 23.3 27.4 26.7 24.6 21.4 20.1 23.2 5.5 5.1 4.8 4.6 5.0 3.2 3.1 3.3 3.6 3.3 9.4 9.2 9.0 8.5 9.0 1.6 1.6 1.7 1.9 1.7 1.2 1.2 1.1 1.1 1.1 12.6 13.3 14.4 14.4 13.7 Selected operating metrics FCF/NI (x) R&D/sales (%) Capex/sales (%) Organic growth (%) Inventory turns (x) Tax rate (%) Incremental margins (%) Average 1.2 1.0 0.9 1.0 1.0 4.1 5.0 5.0 5.0 4.8 2.8 3.0 2.8 2.7 2.8 -11.0 6.1 7.3 4.9 1.8 4.9 5.2 5.5 5.5 5.3 21 21 22 22 22 28.4 24.0 45.5 31.5 32.4 Source: Company data, Bloomberg, Barclays Research Note: FY End Dec 18 August 2021 180 Barclays | U.S. Multi-Industry U.S. Multi-Industry Ingersoll Rand Inc. (IR) Industry View: NEUTRAL Stock Rating: OVERWEIGHT Income statement ($mn) Revenue EBITDA EBIT Pre-tax income Net income (adj) EPS (adj) ($) Diluted shares (mn) DPS ($) Margin and return data EBITDA margin (%) EBIT margin (%) Pre-tax margin (%) Net margin (%) ROIC (%) ROA (%) ROE (%) 2020A 4,344 403 -63 -168 505 1.25 405 0.00 2021E 5,094 706 297 206 787 1.85 424 0.00 2022E 5,354 812 407 334 875 2.20 398 0.00 2023E 5,606 878 473 407 963 2.54 379 0.00 CAGR 8.9% 29.6% N/A N/A 24.0% 26.7% -2.1% N/A Average 9.3 13.9 15.2 15.7 13.5 -1.5 5.8 7.6 8.4 5.1 -3.9 4.1 6.2 7.3 3.4 -3.6 3.8 5.1 6.0 2.8 2.5 5.7 6.7 7.7 5.6 3.4 4.9 5.8 7.1 5.3 5.8 8.6 10.2 13.5 9.5 Price (17-Aug-2021) USD 50.85 Price Target USD 60.00 Why Overweight? We think IR is well-placed for margin upgrades through the RMT deal synergies, as well as de-levering given strong FCF. We may also see portfolio moves (potentially parts of HPS, SV), in order to reduce the cyclicality of the company’s top-line profile Upside case USD 74.00 Multiple re-rating due to better than expected deal integration Downside case USD 34.00 Multiple contraction due to lower than expected synergy extraction; subdued upstream O&G rebound Upside/Downside scenarios Balance sheet and cash flow ($mn) Cash and equivalents 1,751 Total assets 16,059 Goodwill 6,109 Short and long-term debt 3,900 Net debt/(funds) 2,149 Total liabilities 6,869 Shareholders' equity 9,120 Tangible book value -1,516 Inventories 785 Working capital 1,073 Cash flow from operations 938 Capital expenditure -49 Free cash flow 1,038 2,823 15,135 5,637 3,764 940 6,527 8,539 -663 917 993 995 -74 1,021 1,552 13,490 5,637 3,464 1,912 6,307 7,114 -1,763 857 964 1,030 -73 1,057 1,667 13,252 5,637 3,164 1,497 6,085 7,098 -1,453 841 897 1,151 -72 1,130 CAGR -1.6% -6.2% -2.6% -6.7% -11.4% -4.0% -8.0% N/A 2.3% -5.8% 7.1% N/A 2.9% Valuation and leverage metrics P/E (adj) (x) EV/EBITDA (x) EV/sales (x) FCF yield (%) P/BV (x) Dividend yield (%) Net debt/EBITDA (x) Net debt/capital (%) Average 40.7 27.4 23.2 20.0 27.8 58.7 31.8 28.8 26.2 36.4 5.4 4.4 4.4 4.1 4.6 4.4 4.5 4.5 4.9 4.6 2.3 2.5 2.8 2.7 2.6 0.0 0.0 0.0 0.0 0.0 5.3 1.3 2.4 1.7 2.7 13.4 6.2 14.2 11.3 11.3 Selected operating metrics FCF/NI (x) R&D/sales (%) Capex/sales (%) Organic growth (%) Inventory turns (x) Tax rate (%) Incremental margins (%) Average -6.6 5.3 3.8 3.4 1.5 1.6 1.6 1.6 1.6 1.6 1.1 1.4 1.4 1.3 1.3 -12.9 12.7 5.3 4.7 2.4 3.8 3.6 4.1 4.3 3.9 23 20 22 22 22 18.0 48.4 47.7 37.9 38.0 Source: Company data, Bloomberg, Barclays Research Note: FY End Dec 18 August 2021 181 Barclays | U.S. Multi-Industry U.S. Multi-Industry Kennametal (KMT) Industry View: NEUTRAL Stock Rating: EQUAL WEIGHT Income statement ($mn) Revenue EBITDA EBIT Pre-tax income Net income (adj) EPS (adj) ($) Diluted shares (mn) DPS ($) 2021A 1,841 229 143 65 88 1.04 84.3 0.80 2022E 2,111 428 279 272 192 2.28 84.1 0.84 2023E 2,227 448 323 293 231 2.77 83.5 0.88 2024E 2,292 468 343 313 246 2.96 83.2 0.92 CAGR 7.6% 26.9% 34.0% 69.2% 41.0% 41.7% -0.5% 5.0% Margin and return data EBITDA margin (%) EBIT margin (%) Pre-tax margin (%) Net margin (%) ROIC (%) ROA (%) ROE (%) Average 12.4 20.3 20.1 20.4 18.3 5.5 13.6 13.8 14.3 11.8 3.5 12.9 13.1 13.7 10.8 3.0 9.5 9.7 10.1 8.1 5.3 9.9 11.8 12.6 9.9 3.6 7.7 9.0 9.2 7.4 7.1 14.4 16.6 16.7 13.7 Balance sheet and cash flow ($mn) Cash and equivalents Total assets Goodwill Short and long-term debt Net debt/(funds) Total liabilities Shareholders' equity Tangible book value Inventories Working capital Cash flow from operations Capital expenditure Free cash flow 154 2,666 278 637 483 1,298 1,330 932 476 430 175 -127 113 169 2,721 278 637 468 1,286 1,396 998 528 465 331 -120 211 269 2,828 278 637 368 1,316 1,474 1,076 512 445 367 -120 247 373 2,928 278 637 264 1,326 1,563 1,166 516 436 377 -120 257 CAGR 34.3% 3.2% 0.0% 0.0% -18.2% 0.7% 5.5% 7.7% 2.7% 0.4% 29.1% N/A 31.6% Price (17-Aug-2021) USD 36.00 Price Target USD 37.00 Why Equal Weight? We think KMT offers major earnings recovery potential over 2021, as its top-line reverts to growth, and the modernization savings drop through to the bottom line without much incremental headwind from temporary costs. FCF however may remain subdued, rendering the stock expensive on CF-based metrics. Upside case USD 55.00 Faster than expected top-line recovery, along with an improving medium-term free cash flow profile. Downside case USD 17.00 Limited Short Cycle Industrial recovery, lower than expected Modernization savings. Upside/Downside scenarios Valuation and leverage metrics P/E (adj) (x) EV/EBITDA (x) EV/sales (x) FCF yield (%) P/BV (x) Dividend yield (%) Net debt/EBITDA (x) Net debt/capital (%) Average 34.5 15.8 13.0 12.2 18.9 17.1 9.1 8.8 8.4 10.9 2.1 1.8 1.8 1.7 1.9 2.9 5.4 6.3 6.5 5.3 2.3 2.2 2.0 1.9 2.1 2.2 2.3 2.4 2.6 2.4 2.1 1.1 0.8 0.6 1.1 18.1 17.2 13.0 9.0 14.3 Selected operating metrics FCF/NI (x) R&D/sales (%) Capex/sales (%) Organic growth (%) Inventory turns (x) Tax rate (%) Incremental margins (%) Average 2.1 1.0 1.1 1.1 1.3 2.1 1.8 1.7 1.7 1.8 6.9 5.7 5.4 5.2 5.8 -4.0 14.4 5.5 2.9 4.7 2.7 2.6 2.8 2.9 2.7 24 26 24 24 24 -2.7 50.4 37.9 30.9 29.1 Source: Company data, Bloomberg, Barclays Research Note: FY End Jun 18 August 2021 182 Barclays | U.S. Multi-Industry U.S. Multi-Industry nVent Electric plc (NVT) Industry View: NEUTRAL Stock Rating: OVERWEIGHT Income statement ($mn) Revenue EBITDA EBIT Pre-tax income Net income (adj) EPS (adj) ($) Diluted shares (mn) DPS ($) 2020A 1,999 142 38 -9 256 1.50 169.6 0.70 2021E 2,363 461 352 315 323 1.91 169.5 0.71 2022E 2,533 521 402 369 363 2.15 168.5 0.81 2023E 2,623 547 428 398 386 2.39 161.7 0.90 CAGR 9.5% 56.9% 123.4% N/A 14.7% 16.7% -1.6% 8.8% Margin and return data EBITDA margin (%) EBIT margin (%) Pre-tax margin (%) Net margin (%) ROIC (%) ROA (%) ROE (%) Average 7.1 19.5 20.6 20.9 17.0 1.9 14.9 15.9 16.3 12.3 -0.5 13.3 14.6 15.2 10.6 -2.4 11.3 11.9 12.4 8.3 6.1 7.6 8.5 9.0 7.8 5.4 6.5 7.1 7.5 6.6 10.6 12.6 13.5 14.1 12.7 Balance sheet and cash flow ($mn) Cash and equivalents Total assets Goodwill Short and long-term debt Net debt/(funds) Total liabilities Shareholders' equity Tangible book value Inventories Working capital Cash flow from operations Capital expenditure Free cash flow 123 4,366 2,098 948 826 1,956 2,410 1,304 235 378 353 -40 313 230 4,571 2,098 948 718 1,998 2,573 1,467 274 433 373 -45 319 330 4,709 2,098 948 618 2,013 2,695 1,590 294 464 447 -43 403 357 4,754 2,098 948 591 2,021 2,733 1,627 304 480 485 -45 440 CAGR 42.9% 2.9% 0.0% 0.0% -10.6% 1.1% 4.3% 7.6% 9.0% 8.3% 11.2% N/A 12.1% Price (17-Aug-2021) USD 33.04 Price Target USD 49.00 Why Overweight? The valuation is very inexpensive, and evidence of a top-line recovery could re-ignite investor interest. Portfolio-wise, we could see a slimming down of the Energy Management business. NVT’s pure play status in an environment of rising M&A may render it an appealing partner in any industry consolidation. Upside case USD 75.00 Stronger than expected recovery in Thermal Management, price / cost headwinds are less than expected, and productivity is fully realized through internal operational improvement initiatives. Downside case USD 30.00 Weaker demand in Commercial / Institutional construction markets, continued margin pressure from price / cost headwinds, and productivity initiatives are not fully executed resulting in a short fall in potential cost benefits. Upside/Downside scenarios Valuation and leverage metrics P/E (adj) (x) EV/EBITDA (x) EV/sales (x) FCF yield (%) P/BV (x) Dividend yield (%) Net debt/EBITDA (x) Net debt/capital (%) Average 22.0 17.3 15.4 13.8 17.1 45.4 13.7 11.9 11.3 20.6 3.2 2.7 2.5 2.4 2.7 4.9 5.0 6.5 7.1 5.9 2.3 2.2 2.1 2.0 2.1 2.1 2.1 2.5 2.7 2.4 5.8 1.6 1.2 1.1 2.4 18.9 15.7 13.1 12.4 15.0 Selected operating metrics FCF/NI (x) R&D/sales (%) Capex/sales (%) Organic growth (%) Inventory turns (x) Tax rate (%) Incremental margins (%) Average -6.6 1.2 1.3 1.3 -0.7 2.2 2.1 2.3 2.5 2.3 2.0 1.9 1.7 1.7 1.8 -13.3 13.8 5.4 3.5 2.3 5.3 5.2 5.0 5.0 5.1 17 17 18 18 18 38.7 21.4 27.4 29.3 29.2 Source: Company data, Bloomberg, Barclays Research Note: FY End Dec 18 August 2021 183 Barclays | U.S. Multi-Industry U.S. Multi-Industry Parker-Hannifin Corp (PH) Industry View: NEUTRAL Stock Rating: OVERWEIGHT Income statement ($mn) Revenue EBITDA EBIT Pre-tax income Net income (adj) EPS (adj) ($) Diluted shares (mn) DPS ($) 2021A 14,348 2,880 2,284 2,161 1,968 15.04 130.8 3.67 2022E 15,727 3,308 2,704 2,464 2,274 17.30 131.4 4.11 2023E 16,665 3,623 3,019 2,779 2,495 18.88 132.1 4.72 2024E 17,249 3,802 3,198 2,958 2,632 20.14 130.7 5.04 CAGR 6.3% 9.7% 11.9% 11.0% 10.2% 10.2% 0.0% 11.1% Margin and return data EBITDA margin (%) EBIT margin (%) Pre-tax margin (%) Net margin (%) ROIC (%) ROA (%) ROE (%) Average 20.1 21.0 21.7 22.0 21.2 15.9 17.2 18.1 18.5 17.4 15.1 15.7 16.7 17.1 16.1 12.2 11.5 12.2 12.6 12.1 13.4 15.5 17.1 18.3 16.1 10.9 11.9 12.3 12.4 11.9 23.4 24.2 24.9 25.0 24.4 Balance sheet and cash flow ($mn) Cash and equivalents 733 Total assets 20,341 Goodwill 8,060 Short and long-term debt 6,585 Net debt/(funds) 5,852 Total liabilities 11,928 Shareholders' equity 8,398 Tangible book value 4,879 Inventories 2,091 Working capital 2,606 Cash flow from operations 2,262 Capital expenditure -210 Free cash flow 2,052 2,032 20,975 8,060 6,585 4,553 11,551 9,408 5,889 1,722 2,367 2,647 -225 2,422 2,925 22,159 8,060 6,585 3,660 12,126 10,018 6,498 1,833 2,133 2,872 -225 2,647 3,688 22,979 8,060 6,585 2,897 12,433 10,531 7,011 1,897 1,932 2,976 -225 2,751 CAGR 71.4% 4.1% 0.0% 0.0% -20.9% 1.4% 7.8% 12.8% -3.2% -9.5% 9.6% N/A 10.3% Price (17-Aug-2021) USD 296.34 Price Target USD 340.00 Why Overweight? We think the company should see a rapid top-line recovery spurred by Industrial as well as the Aerospace businesses, while the Win 3.0 approach should yield high operating leverage. There is some risk of multiple compression alongside PMIs, but we think the valuation is at a relatively low level already. Upside case USD 453.00 Aerospace recovers faster than expected, margins surprise to the upside. Downside case USD 220.00 Moderation in short-cycle organic sales growth, production inefficiencies, and no incremental capital allocation. Upside/Downside scenarios Valuation and leverage metrics P/E (adj) (x) EV/EBITDA (x) EV/sales (x) FCF yield (%) P/BV (x) Dividend yield (%) Net debt/EBITDA (x) Net debt/capital (%) Average 19.7 17.1 15.7 14.7 16.8 15.4 13.4 12.3 11.7 13.2 3.1 2.8 2.7 2.6 2.8 4.6 5.4 6.0 6.2 5.6 4.6 4.1 3.9 3.7 4.1 1.2 1.4 1.6 1.7 1.5 1.9 1.3 1.0 0.7 1.2 28.8 21.7 16.5 12.6 19.9 Selected operating metrics FCF/NI (x) R&D/sales (%) Capex/sales (%) Organic growth (%) Inventory turns (x) Tax rate (%) Incremental margins (%) Average 1.2 1.3 1.3 1.3 1.3 -2.0 -2.0 -2.0 -2.0 -2.0 1.5 1.4 1.4 1.3 1.4 0.1 9.5 6.0 3.5 4.8 5.0 6.5 6.4 6.4 6.1 22 23 23 23 23 65.3 29.4 30.6 30.6 39.0 Source: Company data, Bloomberg, Barclays Research Note: FY End Jun 18 August 2021 184 Barclays | U.S. Multi-Industry Valuation Methodology and Risks U.S. Multi-Industry Ingersoll Rand Inc. (IR) Valuation Methodology: Our Overweight rating and $60 target price are predicated upon the following methodology: SoTP; EV/EBITDA (~18X 2022 EBITDA); FCF (~26X 2022 FCF); P/E (~26X 2022 EPS); DCF (7% WACC, 3.5% growth, 16% EBIT Margin) Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: IR's balance sheet leverage is above the sector average. This should decrease as cash flow generation continues to improve, but in the medium term represents a risk in this inflationary environment. nVent Electric plc (NVT) Valuation Methodology: Our Overweight rating and $49 target price are predicated upon the following methodology: DCF (~3% growth, ~19% margin, 7.5% WACC); EV/EBITDA (~18x 2022 EBITDA); P/E (22x 2022 EPS); FCF (~4.5% FCF yield). Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: nVent is highly levered to US construction and infrastructure spending, and therefore would be at risk from any non-residential demand deceleration. The company sources steel, aluminum, copper and other commodities which could pose a threat to profitability during inflationary periods. Source: Barclays Research. 18 August 2021 185 Barclays | U.S. Multi-Industry ANALYST(S) CERTIFICATION(S): I, Julian Mitchell, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. IMPORTANT DISCLOSURES Barclays Research is produced by the Investment Bank of Barclays Bank PLC and its affiliates (collectively and each individually, "Barclays"). All authors contributing to this research report are Research Analysts unless otherwise indicated. The publication date at the top of the report reflects the local time where the report was produced and may differ from the release date provided in GMT. Availability of Disclosures: Where any companies are the subject of this research report, for current important disclosures regarding those companies please refer to https://publicresearch.barclays.com or alternatively send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 13th Floor, New York, NY 10019 or call +1-212-526-1072. 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Recommendations contained in one type of Barclays Research may differ from those contained in other types of Barclays Research, whether as a result of differing time horizons, methodologies, or otherwise. In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer to https://publicresearch.barcap.com/S/RD.htm. In order to access Barclays Research Conflict Management Policy Statement, please refer to: https://publicresearch.barcap.com/S/CM.htm. Primary Stocks (Ticker, Date, Price) APi Group (APG, 17-Aug-2021, USD 22.46), Overweight/Neutral, A/CE/D/J/L Honeywell International Inc. (HON, 17-Aug-2021, USD 231.45), Overweight/Neutral, A/CD/CE/D/J/K/L/M/N Ingersoll Rand Inc. (IR, 17-Aug-2021, USD 50.85), Overweight/Neutral, CE/J/K/M/N Kennametal (KMT, 17-Aug-2021, USD 36.00), Equal Weight/Neutral, CD/J Parker-Hannifin Corp (PH, 17-Aug-2021, USD 296.34), Overweight/Neutral, CD/CE/J/K/M/N nVent Electric plc (NVT, 17-Aug-2021, USD 33.04), Overweight/Neutral, J Materially Mentioned Stocks (Ticker, Date, Price) Allegion plc (ALLE, 17-Aug-2021, USD 140.09), Overweight/Neutral, CD/CE/FA/J Carrier Global Corp. (CARR, 17-Aug-2021, USD 55.15), Overweight/Neutral, CD/CE/D/J/K/L/M/N Colfax Corporation (CFX, 17-Aug-2021, USD 48.30), Underweight/Neutral, CD/CE/J/K/M/N Dover Corporation (DOV, 17-Aug-2021, USD 173.02), Overweight/Neutral, CD/CE/J Eaton Corporation (ETN, 17-Aug-2021, USD 166.90), Equal Weight/Neutral, A/CE/D/J/K/L/M Emerson Electric Co. (EMR, 17-Aug-2021, USD 102.71), Equal Weight/Neutral, A/CD/CE/D/J/K/L/M/N Fortive Corporation (FTV, 17-Aug-2021, USD 74.76), Equal Weight/Neutral, CD/CE/J/K/M Gates Industrial Corp. Plc (GTES, 17-Aug-2021, USD 16.23), Overweight/Neutral, A/CE/D/E/J/L General Electric (GE, 17-Aug-2021, USD 101.62), Overweight/Neutral, CD/CE/D/E/J/K/L/M/N Illinois Tool Works Inc. (ITW, 17-Aug-2021, USD 233.22), Underweight/Neutral, CD/CE/J/K/M Johnson Controls International (JCI, 17-Aug-2021, USD 73.00), Overweight/Neutral, A/CD/CE/D/J/K/L/M/N Lennox International (LII, 17-Aug-2021, USD 334.12), Equal Weight/Neutral, CD/CE/J Otis Worldwide Corp. (OTIS, 17-Aug-2021, USD 90.74), Equal Weight/Neutral, CD/CE/D/J/K/L/M/N Pentair plc (PNR, 17-Aug-2021, USD 78.89), Underweight/Neutral, CE/J/K/N Rockwell Automation Inc. (ROK, 17-Aug-2021, USD 313.25), Equal Weight/Neutral, CD/CE/J Roper Technologies Inc (ROP, 17-Aug-2021, USD 485.93), Overweight/Neutral, CD/CE/J SPX Flow (FLOW, 17-Aug-2021, USD 77.66), Equal Weight/Neutral, CD/J/K/M Stanley Black & Decker Inc. (SWK, 17-Aug-2021, USD 194.50), Overweight/Neutral, A/CD/CE/D/E/J/K/L/M/N The 3M Company (MMM, 17-Aug-2021, USD 199.55), Underweight/Neutral, CD/CE/J/K/M/N 18 August 2021 186 Barclays | U.S. Multi-Industry IMPORTANT DISCLOSURES Trane Technologies plc (TT, 17-Aug-2021, USD 193.63), Overweight/Neutral, CE/J/K/M/N Vontier Corporation (VNT, 17-Aug-2021, USD 33.83), Overweight/Neutral, A/CD/D/E/J/K/L/M Unless otherwise indicated, prices are sourced from Bloomberg and reflect the closing price in the relevant trading market, which may not be the last available price at the time of publication. Disclosure Legend: A: Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of the issuer in the previous 12 months. B: An employee or non-executive director of Barclays PLC is a director of this issuer. CD: Barclays Bank PLC and/or an affiliate is a market-maker in debt securities issued by this issuer. 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Sustainalytics retains ownership and all intellectual property rights in its proprietary information and data that 18 August 2021 187 Barclays | U.S. Multi-Industry IMPORTANT DISCLOSURES may be included in this report. Any Sustainalytics’ information and data included herein may not be copied or redistributed, is intended for informational purposes only, does not constitute investment advice and is not warranted to be complete, timely and accurate. Sustainalytics’ information and data is subject to conditions available at https://www.sustainalytics.com/legal-disclaimers/ Guide to the Barclays Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as Overweight, Equal Weight or Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry (the "industry coverage universe"). In addition to the stock rating, we provide industry views which rate the outlook for the industry coverage universe as Positive, Neutral or Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. Stock Rating Overweight - The stock is expected to outperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the industry coverage universe over a 12month investment horizon. Underweight - The stock is expected to underperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where the Investment Bank of Barclays Bank PLC is acting in an advisory capacity in a merger or strategic transaction involving the company. Industry View Positive - industry coverage universe fundamentals/valuations are improving. Neutral - industry coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. Negative - industry coverage universe fundamentals/valuations are deteriorating. Below is the list of companies that constitute the "industry coverage universe": U.S. Multi-Industry Allegion plc (ALLE) Colfax Corporation (CFX) Emerson Electric Co. (EMR) General Electric (GE) Ingersoll Rand Inc. (IR) Lennox International (LII) Parker-Hannifin Corp (PH) Rexnord (RXN) SPX Flow (FLOW) Trane Technologies plc (TT) APi Group (APG) Dover Corporation (DOV) Fortive Corporation (FTV) Honeywell International Inc. (HON) Johnson Controls International (JCI) nVent Electric plc (NVT) Pentair plc (PNR) Rockwell Automation Inc. (ROK) Stanley Black & Decker Inc. (SWK) Vontier Corporation (VNT) Carrier Global Corp. (CARR) Eaton Corporation (ETN) Gates Industrial Corp. Plc (GTES) Illinois Tool Works Inc. (ITW) Kennametal (KMT) Otis Worldwide Corp. (OTIS) Regal Beloit Corporation (RBC) Roper Technologies Inc (ROP) The 3M Company (MMM) Distribution of Ratings: Barclays Equity Research has 1729 companies under coverage. 49% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 53% of companies with this rating are investment banking clients of the Firm; 73% of the issuers with this rating have received financial services from the Firm. 35% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 43% of companies with this rating are investment banking clients of the Firm; 69% of the issuers with this rating have received financial services from the Firm. 13% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 35% of companies with this rating are investment banking clients of the Firm; 62% of the issuers with this rating have received financial services from the Firm. 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