Emerson Electric Co. (EMR) on Q2 2023 Results - Earnings Call Transcript

Operator: Welcome to the Emerson Second Quarter 2023 Earnings Conference Call. Please note today's event is being recorded. I would now like to turn the conference to your host, Colleen Mettler, Vice President of Investor Relations at Emerson. Please go ahead. Colleen Mettler: Good morning. And thank you for joining us for Emerson's second quarter fiscal 2023 earnings conference call. Today, I'm joined by President and Chief Executive Officer, Lal Karsanbhai; Chief Financial Officer, Frank Dellaquila; and Chief Operating Officer, Ram Krishnan. Also joining us today is Mike Baughman, who was announced earlier this morning as our chief financial officer effective May 10. As always, I encourage everyone to follow along with the slide presentation, which is available on our website. Please join me on slide 2. This presentation may include forward-looking statements, which contain a degree of business risk and uncertainties. Please take time to read the safe harbor statement and note on the non-GAAP measures. I will now pass the call over to Emerson's President and CEO, Lal Karsanbhai, for opening remarks. Lal Karsanbhai: Thank you, Colleen. And good morning. Please turn to slide 3. I'd like to begin by thanking the global Emerson team for a tremendous performance, our board of directors and shareholders for the trust that you place in us. It has been a busy first 26 months as CEO as we reinvented Emerson. The second quarter performance was exceptional. It was a quarter in which we significantly advanced our strategic agenda across the three dimensions of our value creation model. First, culture. In the last two months, we announced two important leadership changes. Vidya Ramnath was named as the company's chief marketing officer, replacing Kathy Button Bell, who had a distinguished career at Emerson and put Emerson's brand on the map while working for three different CEOs. Vidya is the right person to accelerate our journey as a pure play automation company. She brings deep technical knowledge and customer exposure, is an engineer, and for the last four years, has led Emerson's Middle East and Africa business. We believe this is a highly differentiating move for us as a company. Secondly, this morning, we announced Frank's planned retirement and Mike Baughman as Emerson's CFO. I'll say a few more words about this later in the presentation. Lastly, we completed our first digital employee engagement survey. We heard from 85% of our global employee base and received a high quartile net engagement score. This gives us a stake in the ground and now great perspective on the areas of strength and opportunities to better the talent experience at Emerson. Second, the portfolio. We will be finalizing the Climate transaction in the current quarter. The CEO for the joint venture has been named, Ross Shuster, and we are excited by what his leadership and experience brings to the business. I'd like to thank Jamie Froedge for the work he did in the business and for his contributions, over 16 years of service at Emerson. In addition, we signed a definitive agreement to acquire National Instruments. We're very excited about the company, the technology and, most importantly, the people. This is an important point. The large portfolio moves are now complete. As an investor, you now have clarity that an investment in a share of Emerson is an investment in the leading global automation company serving a diversified set of end markets with a high growth, high profitability and cash flow, cohesive and differentiated tech stack made up of intelligent devices, control and software, led by AspenTech. Our focus on a go-forward basis, as we did this quarter, will be on creating value with this tremendous company. Lastly, our third pillar – execution. None of the work we've done would have been possible without it. The phenomenal results and momentum we have in the business is a testament to the quality of our global teams and to the strength of the Emerson management system. Underlying order were up 7% with late cycle process markets continuing to exhibit strong demand. Hybrid also remains robust, driven by reshoring investments globally. From world area perspective, Americas orders led, with China returning to growth as expected. As we look to the remainder of the year, we still feel confident in continued mid-single digit quarter growth. The strong demand and steadily improving supply chain environment enabled 14% underlying sales growth in the quarter, well above our expectations. All world areas were up double-digits, led by the Americas up 15%. Intelligent devices and software and control were also both up double-digits. This strong sales performance and the continued operational execution of our teams led to 53% operating leverage in the quarter, excluding AspenTech. Favorable impacts from mix and price costs also drove a 320 basis point improvement in adjusted segment EBITDA to 24.6%. Adjusted EPS was $1.09, beating the midpoint of guidance by $0.11, again, driven by the strong sales and operational performance. This is a 25% increase versus Q2 of 2022. Free cash flow was up 64% year-over-year and up 23% year-to-date, which is on track to meet our full year expectations. Turning to slide 4. Our value creation priorities and growth initiatives around innovation and secular growth platforms that we outlined at our investor conference in November 2022 are yielding meaningful results. First, Emerson was recognized by Fortune magazine as one of America's most innovative companies. The recognition is a testament to our innovation history and dedication from our employees to create leading technology and software for our customers. We are extremely excited to be recognized for this award and are working continuously to accelerate our innovation engine for future growth. Similarly, Emerson continues to differentiate as a leader in growth markets, like energy transition, metals and mining, and software. In the second quarter, Emerson was awarded the software and automation contract for Intermountain Power Agency's renewed power plant. The Utah project transforms a retiring coal-fired power plant into a clean energy plant running on hydrogen. At first, the plant will use a mix of 30% hydrogen, 70% natural gas before transitioning to 100% hydrogen by 2045. The hydrogen will be supplied by the Mitsubishi Power Advanced Clean Energy production and storage hub, another greenfield project that Emerson was awarded in 2022. When complete, the Intermountain project will supply six Western states with carbon free power, a critical step towards a net zero world. With our integrated end-to-end renewables and power generation platform, Emerson was chosen because of our industry expertise and proven experience in hydrogen and complex projects. Secondly, Emerson and AspenTech were jointly selected to automate and optimize the Golden Triangle Polymers facility on the Texas Gulf Coast. The $8.5 billion project is a sister facility to QatarEnergy and Chevron Phillips Ras Laffan project that we highlighted in the first quarter Emerson will provide its leading DeltaV control system and intelligent devices, and AspenTech will provide its leading simulation software. This technology will allow the facility to operate with approximately 25% lower greenhouse gas emissions than similar projects in the US and Canada. This is a great example of the differentiating strength of Emerson and AspenTech. Turning to slide 5, we remain energized and excited by our recently announced acquisition of National Instruments. National Instruments will expand our leading automation business into the attractive test and measurement space and provide important industry diversification into discrete markets. NI's leading portfolio of technology and software are well positioned to capitalize on secular trends within semiconductor and electric vehicles, and we expect the transaction to be accretive to our long-term underlying growth. Inclusive of $165 million of synergies by the end of year five, that transaction meets the financial criteria we have communicated. We will work to complete the customary regulatory and closing conditions and expect to close in the first half of Emerson's fiscal 2024. We had the opportunity to meet the extended management team and to do a global town hall with NI employees last week while visiting Austin. From that meeting, we came away even more confident in the potential opportunities of our combined company. The technology is differentiated and has ample room to expand and the talent – well, it's simply exceptional. But most importantly, I was energized by the warm reception we received from the leadership team and all the employees we met. In a way, I am proud to be an NI-er now as well. Please turn to slide 6. The past 26 months have been fast paced and an exciting journey for Emerson. We moved from a $17 billion two platform business to a cohesive $16 billion automation leader. It took a lot of hard work to transform this business, and we now have an outstanding opportunity to create value for shareholders. It is a portfolio that is exposed to secular growth trends that are expected to drive growth for years to come and we'll remain committed to our 47% through-the-cycle underlying growth target. Our new portfolio is higher margin at approximately 49% gross profit and 23% adjusted segment EBITDA margin. Our industry mix is more diversified than two years ago, focused on automation and with the discrete markets now our second largest customer end market. While we will continue to pursue bolt-on acquisitions, we're now turning our focus to executing the strategy we laid out at investor conference in delivering the synergies we have committed to for AspenTech and NI. Please turn to slide 7. Emerson and our board are committed to ongoing board refreshments, and yesterday, we had the privilege of announcing two new board members to our board of directors. Leticia Gonçalves is the President of Global Foods for ADM, and a member of the company's Executive Council. As part of ADM, Bayer and Monsanto, Leticia has held roles in digital solutions, commercial operations, international management, and technology development, and is a longtime advocate and driver of diversity and inclusion. Her experience in these areas and accelerating change make her an excellent addition to our board. Leticia is originally from Brazil. She's a chemical engineer, and has a tremendous passion for innovation. Speaking of innovation, Jim McKelvey is a successful entrepreneur who founded Block, Invisibly and Fintop Capital. He brings a unique, innovation-focused perspective to Emerson, and will serve as a key collaborator as we continue to accelerate innovation and invest in technology and engineering. Jim has expertise in many areas, including software, cloud and cybersecurity, which will benefit Emerson as we provide customers with leading digital solutions. They are energized and so are we, and we are excited to have both Leticia and Jim join our board of directors. Before I turn the call over to Frank, please turn to slide 8. I would like to congratulate Frank for a distinguished career of over 32 years at Emerson and the past 14 years as CFO. Frank, I met you 28 years ago, and it has been an honor to be your colleague. Please know that you created a legacy here at Emerson. We could not have accomplished what we did over the past 26 months without you. And I would not have been able to lead this company without your wisdom, confidence and support. You made us better. You made me better. Thank you for the lasting impression you left on me and the impact you made on all of us. I'm also excited to announce Mike Baughman as CFO of Emerson, effective May 10. Mike has over 35 years of experience in finance, operations across Baxter, Emerson, of course, and PwC. I'm excited about what Mike brings to the role. And please join me in welcoming him. Mike, congratulations. Michael Baughman : Thanks, Lal. And thanks to you and the board for giving me the opportunity to serve as Emerson's next chief financial officer. I'm very excited to get into the role. Good morning, everyone. I've had the opportunity to meet several of our investors and analysts, and I'm looking forward to meeting more of you and working with you in the future. And to my Emerson colleagues listening in, thank you for a fantastic quarter. As Lal just talked about, it's been a productive 26 months with respect to reshaping our portfolio and we're on track to achieve what we set out to do. The impressive result is a more cohesive $16 billion automation company expected to grow 4% to 7% through the cycle, with peer-leading margins and a more diversified end market exposure. I think of the portfolio transformation as a great start. And now we get to operate in this new environment. Execution has always been a hallmark of Emerson. And we're building on that to focus on accelerating profitable growth, integrating NI, and growing our cash flows as the supply chain normalizes. I certainly expect successful execution in these areas to result in increased shareholder value. While I'm excited about our future, transitioning to the CFO role is a little bittersweet for me personally. Frank was a major reason I joined Emerson a little over five years ago. And during that time, I've come to know Frank as a great finance professional, and more importantly, a wonderful person. I'm confident we'll have a smooth transition over the coming months. Lal Karsanbhai : Thanks, Mike. And now, I'll turn the call over to Frank. Frank Dellaquila : Mike, thank you so much for the kind words. When I showed up here 32 years ago, I never – didn't really know what to expect and I never could have imagined the opportunities that I would have, the things I would get to do, and above all, the people I would have the privilege to work with. The last 13 years have truly been a privilege, leading a world class finance organization, who I respect, I trust implicitly, never let me down. And I thank them from the bottom of my heart. The last two years working with Lal and Ram and the people in this room and our extended team on the portfolio transformation have been truly special, and just a wonderful capstone to my career. And I will always be grateful for that opportunity. Thank you, Lal. I'm truly grateful for that. It's been a heck of a run. Emerson is well positioned for the future. This is a perfect time to turn it over to Mike who I've come to know well as a person, respect as a leader over the last five years. I am confident he's going to provide the right leadership for the challenges we have again. The future is very, very bright, and I'm so happy to have been a small part of it. I've enjoyed working with all of you over the last two years on the phone with our analysts and our investors, and I couldn't think of a better way to go out and I'm very grateful and I just am so thankful for that. Thanks everybody. And there is no crying on earnings calls. Lal Karsanbhai : Thanks, Frank. And to you on chart 9. Frank Dellaquila : Okay. Here we go. Good morning again, everyone. Please turn to slide 9. Our second quarter financial results were outstanding, reflecting our strong end markets and operating execution. Lal summarized the results for you, so I'll provide a bit more color. Additional details are in the press release and in the slides and in the appendix to this presentation. Underlying sales growth exceeded our expectations at 14%. All world areas in both business groups were up double digits, reflecting the strength in our end markets, our positioning in them and our geographic presence. Demand was broad based, with later cycle process markets up high teens and hybrid markets also up double digits in the quarter. Discrete demand has begun to moderate after several quarters of strong growth, but sales were still strong in the quarter, up high-single digits. Safety and productivity returned to growth, up 3% in the quarter. Net sales also up 14% for the quarter, with a 3 point drag from currency which was essentially offset by acquisitions and divestitures. We did close our Russia divestiture in March and we now report the business we had on the divestiture line of our net sales bridge. Our businesses continue to realize significant price. In the quarter, price contributed approximately $150 million and 5 points of growth. Backlog also grew $300 million, reflecting the strong orders backlog of approximately $6.9 billion to end the quarter. AspenTech revenue was below expectations for reasons they explained on their call and I'll briefly summarize those here. Please keep in mind that AspenTech reports revenue under ASC 606. So the factors affecting GAAP revenue are complex, as explained on AspenTech's earnings call. There were three factors in play. The first was longer-than-planned project execution in the OSI business, which pushed out the recognition of project revenue milestones. This is mainly a timing-related dynamic, and we continue to see strong demand trends from the power transmission and distribution market. AspenTech also experienced shorter term contract lengths within the SSE business. Overall, the shift from perpetual to term contracts is progressing well, but some customers are choosing shorter contract lengths than we expected, and that has a direct impact on upfront revenue recognition. And lastly, AspenTech is seeing some weakness in OpEx then in the bulk chemical market, which is impacting heritage AspenTech. For further clarification, Emerson's chemical exposure is more diversified across both bulk and specialty chemical and both OpEx and CapEx spend. Adjusted segment EBITA margin improved 320 basis points. Leverage excluding AspenTech exceeded 50%. Strong sales growth, favorable business and world area mix and margin accretive price cost all reflect exceptional execution by operations and contributed to the margin improvement Adjusted EPS grew 25% to $1.09, and we'll discuss that on the next chart. Lastly, free cash flow was up 64% versus the prior year quarter and up 23% year-to-date. The strong earnings growth and slight improvement in working capital contributed to that growth. AspenTech contributed $129 million to free cash flow. Please turn to slide 10. Most importantly, 14% underlying sales growth and 53% segment level operating leverage contributed 26% of our EPS growth quarter-over-quarter. Of that, AspenTech contributed $0.04. Currency was a $0.03 headwind and other items, mainly income tax because we had favorable discrete items last year, were a net $0.05 headwind. The reduced share count, resulting from the $2 billion share repurchase that we completed in the first quarter, contributed $0.04 to earnings per share. So again, overall adjusted EPS grew 25% year-over-year. Please turn to slide 11, and we'll talk about our revised 2023 market outlook. We continue to see broad-based strength in most key end markets. In particular, we've updated our expectations for both process and hybrid markets. We have increased our expectation for process sales to a high-single digit to low-double digit growth range on the back of continued energy, energy transition and chemical market momentum. This market was strong in the second quarter and our customers continued to signal favorable spending plans for the rest of the year. Within chemicals, we continue to see strong CapEx spending, particularly in the US, the Middle East and Asia. Within the hybrid space, life sciences and metals and mining continued to be strong. And we expect this market to grow high-single digits in 2023. Reshoring continues to be a prevalent topic among our customers and we expect near and longer term benefits from this trend. As I mentioned, discrete demand is beginning to moderate as these earlier cycle markets have been strong for the last few years. We are seeing this first in Europe as industrial production is affected by rising input costs. Still, we continue to hear optimism about spend on factory automation and productivity improvements from our customers. Please turn to slide 10 and we'll talk about our revised guidance. Based on the market strengths I described and our continued expectation of mid-single digit orders growth, we are increasing our sales and earnings guidance for the year. For 2023, underlying sales growth has been increased to 8.5% to 10% year-on-year and net sales to 9% to 10.5%. We expect Intelligent Devices to be near the top of this range and Software Control nearer to the lower end. We are also increasing our expectation for segment operating leverage based on the strong first half achievement and our second half outlook. Continued sales strength, favorable price cost and continued operational performance give us confidence in increasing this guide. We now expect segment operating leverage to be in the low to mid 40% range excluding AspenTech. Adjusted EPS guidance has been raised to a range of $4.15 to $4.25, up to $0.15 at the bottom of the range and $0.12 at the midpoint. AspenTech is expected to contribute approximately $0.25 to this improved guidance. The strength in core Emerson operations is more than offsetting the reduced AspenTech expectation, which is incorporated into our guidance. Free cash flow is expected to be approximately $2.2 billion for the year, of which AspenTech contributes approximately $300 million. This is consistent with our prior guidance of approximately 100% free cash flow conversion on GAAP net earnings and is equivalent to approximately 85% on an adjusted net earnings basis. In the future, we will express free cash flow conversion on an adjusted net earnings basis, consistent with our other key non-GAAP metrics, adjusted EBITA and adjusted earnings per share. The business we have today has strong cash conversion characteristics that we expect to convert over time at an average of 100% on an adjusted basis. We now expect AspenTech adjusted segment EBITA to be slightly below 40% for the year. As a reminder, Emerson's third quarter is AspenTech's seasonally strongest quarter due to the timing of contract renewals. We believe the operating items that affected AspenTech's third quarter results reflects transitory operating and market challenges. We are as confident as ever, about the long term strategic opportunity afforded by our ownership of AspenTech and in the $110 million year five synergy commitment that we made. As a reminder, all of this guidance excludes the impact of Climate Technologies operations, interest income, and the financial impact of the sale, which we expect to close, we hope, May 31. In the appendix, we have provided information on the post-closing financial reporting treatment of Climate Technologies. Briefly, to turn to the third quarter, that guide also reflects the strong outlook for the year. We expect underlying sales growth of 10% to 12%. We expect leverage to be in the mid to high 40s in the quarter, and adjusted EPS to be between $1.07 and $1.11. This represents an 18% increase at the midpoint versus prior year. We should point out, for context, that last year's third quarter was negatively impacted by China shutdowns and serious supply chain challenges around electronics, which at the time, we estimated reduced third quarter sales by approximately $150 million, with the China impact being pushed into the fourth quarter. Thank you for your attention. I'll turn it back now to the operator to open the call for questions. Operator: . And this morning's first question comes from Andrew Obin with Bank of America. Andrew Obin: I guess my first question is a lot of debate with investors about the impact of improving lead times on orders, backlog, and free cash flows. Clearly, you're starting releasing working capital. But if you're releasing working capital, perhaps you're ordering less stuff. And if you're ordering less stuff, maybe somebody else is ordering less stuff. How do you think this dynamic will play out over the next 6 to 12 months? Lal Karsanbhai: Well, I'll start off with some comments just on the underlying environment, which we're still optimistic about, as you heard on the call, Andrew. Mid-single digit order run rates, we came out of the quarter at 7%, and expect that that range to continue through the remainder of the year. So the demand environment based on our see is strong. And as Frank outlined correctly, and there's some puts and takes out there, and we're watching those carefully, but as a whole, we feel very good about that. Having said that, we have a very robust backlog as well. We did build backlog in the quarter, and we continue to work through that which gives me further confidence, obviously, in the performance of the company for the second half. Naturally, with supply chain challenges largely alleviated, of course, there's still a few issues out there, but largely alleviated. Lead times have started to come down. But we haven't seen that reflected in any slow in orders. And very much, as you saw quarter-over-quarter and sequentially, our order pace continued to be very consistent. Ram, anything to add? Ram Krishnan: I would say again, Andrew, I think from a lead time perspective, distribution, for example, is less than 20% of our overall sales. So, we can – frankly, even with distributors, as our lead times have come down, we haven't seen any change in ordering patterns. Our KOB3 business, which is the other piece that is lead time dependent, continues to be strong. So no fundamental change for us as it relates to ordering patterns from our customers, as lead times across all categories of products for us have come down. Now, I know others have mentioned that. But to date, we haven't seen the impact. Andrew Obin: Just maybe a follow-up question on aligning Aspen and Emerson sales channel. You guys clearly highlighted Golden Triangle's success of going to market together, you've affirmed the synergies. But I guess the question I have, as you work closer with Aspen, one of the opportunities to improve visibility at Emerson because you have access now to a lot of CIOs, but also what are the opportunities at Aspen to benefit from deep and broad relationships that Emerson has? Was there key clients, for example, in the chemical space, right? You said our relationships are much broader. What can you do to improve visibility at Aspen in key verticals? Lal Karsanbhai: It's a great question. And it goes back to the heart of the very robust commercial agreement that we have with AspenTech. There is world area alignment in leadership, there is sales force alignment and incentives, and very honestly joined pursuit in two areas, capital projects, which was the example that I shared with you and then a very robust analysis on an industry by industry basis of the whitespace opportunities that exist, particularly for our control system and for AspenTech. And that's more of a systematic approach by the selling organizations, but one that will prove to be – and is proving to be quite a large opportunity as well. Ram? Ram Krishnan: Just to add, I think the customer landscape is really the way we really want to drive more seat for AspenTech. Certainly, the momentum on projects is there early. But as we shared with you before, 70% of the control systems that we have, DeltaV innovation, don't have level three software capability at many of our customers. 9,000 of those are in markets like life sciences and metals and mining. So those are the unique type of opportunities, the AMS systems that we have where we can bring Aspen, that's the approach we're taking through our commercial agreement. We are very, very geographically focused as well, where we look at markets where Aspen doesn't have the strength, and that's really where a lot of the effort is being put. So we'll see that benefit come through. It's three quarters in, obviously, in the relationship. The momentum is early on projects, but more will come as it relates to the whitespace that I described over time. Operator: And the next question comes from Deane Dray with RBC Capital Markets. Deane Dray: My first question is maybe take us through what you're seeing on the discrete side with some of the demand moderating? How did it progress through the quarter? Is it isolated to some specific verticals or geographies? Because we are hearing elsewhere slowing in Europe, especially on the chemical side, but appreciate the color there, please. Ram Krishnan: Deane, Ram here. From a discrete order activity – now the discrete business from a sales perspective, we had good strong growth in the quarter, 9.5%, close to 10% growth in the quarter from a sales perspective, which was driven by backlog reduction. Orders did go slightly negative this quarter, primarily driven by slowdown in Europe. Frankly, we haven't seen much of a slowdown in North America, but a slight slowdown in Europe, particularly in Germany and the segment around machine builders. We do serve the machine builder segment in Germany, which is both domestic German market as well as these machine builders export. So that's really probably the one segment, a little bit of slowdown in the UK. Frankly, Asia is holding up, and China remains good. So that's the color. We do expect discrete to get into tougher comparisons as we get through the second half of the year, and we expect orders to remain negative before they turn positive into 2024. Deane Dray: Just a follow up. And also, I just want to hear Frank one more time here. Free cash flow difference between GAAP and adjusted this year, that difference, how much of that is either working capital needs given kind of supply chain? Or is it more from climate? Frank Dellaquila: No, none of these differences – the difference is simply the calculation, the denominator. Deane, we're just talking about the $2.2 billion guide of free cash flow and whether we use GAAP earnings or we use adjusted earnings as the denominator and that's the difference between the conversion ratio, there's no difference at all in the calculation of the cash flow itself. Operator: And the next question comes from Scott Davis with Melius Research. Scott Davis: I don't want to fixate on AspenTech, we can do that later, perhaps, but I will anyways. The bulk chemical OpEx, is it typically that? Volatile? Is it something that they've experienced in the past and perhaps you might see in the future? Or is this a kind of an unusual circumstance? Ram Krishnan: No, I think the bulk chemical dynamic because you see many of the chemical customers say, at the end of the day, with a little bit of slowing demand there and the utilization rates being optimized, but the portion of the AspenTech business which typically gets impacted is their manufacturing and supply chain software suite. So in terms of new purchases or new contracts around that, which we have built into the forecast, that's where we're seeing slowdown. So that's pretty normal. Obviously, refining for them continues to remain strong, upstream and midstream continues to remain good. It's really the manufacturing and supply chain suite in bulk chemicals where we have seen the slowdown, and we've seen that in the past when the large chemical customers slow down spending on the OpEx side. Scott Davis: Guys, it's assuming your stock price works and I know AspenTech is down quite a bit from its highs, but is there any interest in – I know there's some restrictions, but those things can always be discussed in taking an even larger stake in the entity and perhaps, over time, integrating it fully into Emerson. Lal Karsanbhai: No, look, we're still very committed to the model that we set forward a year – closed it nearly a year ago now. It works. We're seeing the commercial value. We're working the technology piece as well. And like I've said in the past, it's at a point in time that changes and we have impetus to then address that through the change in the ownership structure of the vehicle. We'll think about it then, but not at this point. And then furthermore, as you know, and you noted, we are in a standstill period for another calendar year from now. Operator: And the next question comes from Andy Kaplowitz with Citigroup. Andy Kaplowitz: Lal, could you give us a little more color into your incremental margin performance both for Q2 and 2023? I know the new Emerson is supposed to record higher incrementals well in the 30s, but what's changed for Emerson in 2022 that's allowing you to record low to mid 40s, over 50% in Q2, is it mostly the 5% price that Frank mentioned and much improved supply chain environment? Is maybe underlying Emerson able to sustain incrementals in the 40% plus excess over the longer term and how you're thinking about price versus cost moving forward? Lal Karsanbhai: I'll let Ram add some operating color. As we went through the quarter, we certainly believe in the strong guide that we put together on the 40 leverage for the full year given the early performance in the first six months. Look, there were a lot of things that were positive. Obviously, the execution was exceptional. I think the operating executives in the businesses performed very, very well and exact. The volume was important, as we noted, growing the underlying sales at 14%. But furthermore, mix and price cost were beneficial as well in the quarter. So a lot of things went our way there. But honestly, working within the management system that we've designed is a very important parameter that enables our businesses to perform at a very high level. Ram? Ram Krishnan: Other dynamics that certainly went our way is strong North America in the quarter, strong performance in our instrumentation and final control businesses and the leverage we got there. So dynamics are on mix, certainly the price-cost element that Lal mentioned, but, fundamentally, the 14% sales growth in the quarter does help leverage. So all of those dynamics went in our favor. Andy Kaplowitz: Maybe you can give us a little more color into what you're seeing by region. I think China was relatively weak for you in Q1. It seems like it's better in Q2. I think, Lal, you mentioned easy comparisons in Q3. So how do you think about regional demand moving forward for the rest of the year. Lal Karsanbhai: Really good. It was a very robust quarter globally for us in terms of sales performance, and very honestly orders, as Frank outlined. China flipped for us. It was down in the mid-single digits a quarter goes. It's up high single digits, and in sales in the mid-single digits. So we feel very good. And we feel good about what we see in China for the remainder of the year as well. So that's a positive. Look, North America, very robust growth, broad strength, a lot of it driven by the nearshoring elements and core strength in hybrid and processed, with growth of 15-ish percent in sales. Europe, that's been very honestly, Andy, the biggest surprise of the year. It continues to be very strong for us with growth in the mid-teens, 14% in the quarter in sales, and orders that are very strong. And very honestly, highlighted by energy, sustainability and life science investments. And then the rest of Asia, driven by India, Southeast Asia, and then an incredibly strong Middle East and Africa region as well, with significant investments in sustainability and LNG across the region. So at this point in time, with the exception of the discrete weaknesses that we've already talked through, continue to see very strong global momentum as we go through the quarter here into the rest of the year. Operator: And the next question comes from Steve Tusa with J.P. Morgan. Steve Tusa: What was price capture in the quarter? And what do you expect it to be for the year? Frank Dellaquila: It was 5 points in the quarter and we expect to be 3% to 4% for the year. Steve Tusa: Lal, I'm just curious from a governance perspective, the Aspen results, there's a lot going on there. I guess, I get a high level, some of it sounds like execution on some of these contracts. Perhaps in the, I guess, I call it, the integration phase of what they're doing, even though it's not really an acquisition by them, I guess, it seems like that there were a couple things that surprised them about the assets that you guys are contributing. How does that conversation work in the boardroom there because those are like assets that you guys knew. I'm not sure how surprising that was to you. But it was clearly surprising to the market the way this has played out. So, I'm just curious. Like, a little more color from your perspective on the integration that's going on there and perhaps how that kind of discussion and how to move forward plays out when that type of thing happens. Lal Karsanbhai: Yeah, no. Absolutely, Steve. I'll give you some color here. Maybe there's three or four here critical points. Let me first begin by saying that I continue to be and we collectively continue to be very optimistic about the business and the differentiation that it provides as a technology solution across a diverse customer base. That's very important. Secondly, the execution of both the commercial and the technology synergies is progressing ahead of pace. We have alignment across our selling organizations, the technology teams, and I highlighted a capital project that we worked on and we're working on many across the world, and we have a joint funnel of pursuits. So what happened in the Q? And I think they're important dimensions here to talk about. The first, the company continues to perform extremely strongly. It's a rule of 50 software business, with ACV growth exceeding 11% and strong cash flow. But there were three challenges in the quarter. And these are challenges that we have a robust communication process, not just at the board level, but at an operating level. And we speak with Antonio and Chantelle who's the CFO on a regular basis. The first is shorter term contracts on subscriptions at SSE, which obviously was one of the one of the assets that we contributed to. The assumption in the plan was on a three to four year basis of subscriptions, that was we converted – AspenTech converted those from perpetual license to subscription. The reality is that they came in more in the one year level. So that had an impact on revenue recognition, just the nature of that conversion journey and as those customers in that market space accept subscription contracts over the perpetual traditional licenses. The second, you also referenced is OSI. It is a differentiated business in a high growth segments, as you know, but the integration has been slower. It's a business that came with a heavy service component to it. And very honestly, that migration and conversion, ultimately, from perp to sub on the software is taking longer than expected. But we continue to be jointly very optimistic about the business. The orders in the business are strong. And we will work through the next few quarters to execute there. And then lastly, as Ram described earlier, the heritage AspenTech business in the slowdown related to the bulk chemical segment there. But having said all of that, look, the plan has been reset. It's embedded in our results here. It's embedded in the outlook that we provided in the guide. And the investment is – I still believe there's a tremendous amount of value creation opportunity here for Emerson shareholders. And we continue to be very committed. And I think we have the processes, both operating which is CEO to CEO, CFOs and through the Emerson management process as best we can here and through the board of directors in which to manage and to be part of the conversations and discussions with that team. Steve Tusa: Are you assuming a bounce back in your fourth quarter in those results? Lal Karsanbhai: Of course. No, look, I think we've embedded their perspective, which they shared with their investors on their call into our guide. Operator: The next question comes from Nigel Coe with Wolfe Research. Nigel Coe: Maybe just picking up off Steve's question there. Maybe this is a question to you, Frank. Maybe just talk about some of the moving pieces in the guide. Clearly, the bulk of the uplift is driven by much better revenue conversion, margin conversion, but maybe some of the moving pieces. AspenTech, how's that changed in the guide? Maybe stock comp. Any of the sort of major discrete lumps would be helpful. Frank Dellaquila: The main driver is obviously the improved outlook for operations. The uplift in the sales as well as the operational execution with strong price realization, all the things that drove the strong leverage in the second quarter, we expect to have in the third quarter and throughout the rest of the year. So, that is mainly the story. And that is strong enough to overcome the reduced AspenTech guide. As Lal said, we essentially incorporate their guide into our numbers. And they took the guide down for the year. So we've overcome that headwind as we move from the February to the current guidance and those are those are the main pieces. Nigel Coe: And that's what, $0.06, $0.07, mark-to-market on AspenTech? Frank Dellaquila: For the year roughly, yeah, in that range. Nigel Coe: Maybe picking up off Ram's comment on the sort of installed base of DCS. You said 70% don't have level three software capability. Does that precipitate in an upgrade cycle? I know we've talked about upgrade cycles in the past, but are we at the threshold now where we might see an install base upgrade cycle? Was it more just patching around that with some of the capabilities around software? Ram Krishnan: I don't know if we're planning for a major upgrade wave. But I think it's more a disciplined approach with each one of our customers to address the optimization benefits and the APM benefits and some of the capabilities that Aspen brings to improve the performance of the overall automation system that is installed in many of these customers. And we're going across the board, across industries, power and life sciences being the focus area. Everybody is very interested in digitally transforming their assets. And we're seeing more and more interest from our customers to launch digital transformation programs across the automation stack where level three software has an important role to play, primarily around optimization on the manufacturing suite, and then more the asset performance management and the reliability software on uptime of assets in their infrastructure. So that's the journey. I think you're going to see more and more of that. Sustainability is another area where software gets deployed. But I don't think it's a big wave. I think it's more a disciplined wave over time, and we have the opportunity to drive it. Operator: And the next question comes from Jeff Sprague with Vertical Research. Jeff Sprague: A lot of ground covered. I just wanted to touch back on capital deployment. And Lal has just said the big moves are done and that certainly makes sense. But you did indicate that you're working bolt-ons and it looks like you also maybe have a six month gap or so between the Climate proceeds and National Instruments closing. Just wonder how that might play out over that timeframe? Is there room for some more share repurchase? Are there actionable bolt-ons that could be happening kind of over the summer period? Or just what we should expect there? Lal Karsanbhai: I'll let Frank comment as well here. But, no, look, we obviously work towards the closing of National Instruments over those six months aggressively. It may come sooner. We'll see. Depends on the regulatory approvals. That's going to be the key pacing items, as you know, Jeff. The bolt-ons, we work them aggressively within the businesses. And some are competitive processes, others not. And we have two or three of those that we're looking at at any given point in time. It will continue to do so. These are sub billion dollar purchase price type of deals, and we have a small number we're looking at right now and evaluating. Look, we will continue to be very committed to return cash to our shareholders, whether that's through the dividends or share repurchase. And as we go into 2024, we'll lay out what the appropriate plan there is, and communicate that. Frank, anything to add? Frank Dellaquila: Jeff, I wouldn't view share repurchase decisions in the context of kind of the gaps between closing Climate and closing NI. I would view it more broadly as part of the capital allocation strategy. After we close NI, we'll have a balance sheet that's well below 2 debt to EBITDA and a tremendous amount of financial flexibility. So we'll just continue to make those decisions in that context. Jeff Sprague: Just back to chem and I do understand you have a more diverse business than Aspen, but why shouldn't we kind of view this as an early warning sign of pressure in the core business in chem. And maybe just a little bit more color what you're seeing there because there are. obviously, CapEx and profitability issues kind of across a lot of that industry right now. Ram Krishnan: For us, the capital cycle in chemical, particularly specialty chemical, is as good as we have seen it, particularly in Middle East, Asia Pacific and ethylene and methanol investments in North America. So, for us, we haven't seen the capital cycle slow. However, what Aspen is referencing is the OpEx spend in chemical customers as they throttle their production in response to slowing demand, and therefore that translates to MSC purchases, the manufacturing supply chain suite purchases, is really the dynamic that's impacting them. It's a small impact to them at this point, but given it's 18% of their sales mix, I think they've referenced that. But to be honest, we haven't really seen any KOB3 slowdown or KOB2 in chemical. And then certainly many of our major project wins to date that we have been sharing with you have been in the chemical/petrochemical space, particularly in the emerging markets. So at this point, we don't see that as an inflection point or a slowdown in the industry, despite the higher feedstock costs. Operator: The next question comes from Joe O'Dea with Wells Fargo. Joe O'Dea: I wonder just on the discrete, if you could elaborate a little bit on North America and the interplay between some of the structural and it sounds like continued strength that you're seeing in sort of battery electric and semiconductors. But then the flip side of that, anything that you're just seeing from sort of a general industrial cyclical standpoint, whether the macro uncertainty is having any impact or whether it's more just kind of natural digestion of what's been ordered over the last few years? Ram Krishnan: In North America, to be honest, on the discrete side, we haven't seen – we obviously don't play in a big way in semiconductors and batteries yet. We play in a smaller fashion with our DeltaV business. But obviously, we'll get a lot more exposure to that dynamic with National Instruments. In the core machine automation business that we play in North America, we haven't seen a significant slowdown to date, but it is obviously slower than the momentum we're seeing in the process markets. Joe O'Dea: Also, just wanted to ask about Natty and integration planning and sort of what efforts are currently underway that you're standing up, say, over the next six months to ensure a successful launch of the integration process there. Lal Karsanbhai: This is Lal. We kicked that off last week in Austin over a day and a half with the management team. We've assembled a team with steering committee. And then we have functional integration leadership across the eight value drivers or so that have been identified. Obviously, on the steering committee basis, I participate as does Eric Starkoff and we've each named a leader on the integration team. In our case, Vincent Cervello . So that's off and running. Meetings are taking place. We will have a in-person kickoff with a large group here in St. Louis coming up, and then we'll be off and running on all the full integrations. But really good start. Great organizational discussions already have taken place. And now we are excited about this work ahead of us as we head to close. Operator: Thank you. This concludes both the question-and-answer session as well as the event itself. Thank you so much for attending today's presentation. You may now disconnect your lines.
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Emerson Electric Co. (NYSE:EMR) Sees Strong Performance and Sets New Highs

  • Ken Newman from KeyBanc sets a price target of $140 for Emerson Electric Co. (NYSE:EMR), indicating a potential upside of 19.38%.
  • Emerson's stock price surged by 7%, making it one of the top performers in the S&P 500 following strong fiscal fourth-quarter sales and profit figures.
  • The company's market capitalization stands at approximately $73 billion, with a recent bold buyout bid for AspenTech highlighting its strategic market positioning.

On November 6, 2024, Ken Newman from KeyBanc set a price target of $140 for Emerson Electric Co. (NYSE:EMR). At the time, the stock was trading at $117.27, suggesting a potential upside of about 19.38%. Emerson Electric is a global leader in automation equipment, industrial software, and engineering products. It competes with companies like Honeywell and Siemens.

Recently, Emerson's stock price surged by 7%, making it one of the top performers in the S&P 500. This increase followed the company's announcement of strong sales and profit figures for its fiscal fourth quarter. The stock is now priced at $127.52, reflecting an 8.37% increase with a change of $9.85.

The stock's price has fluctuated between $123.35 and $127.74 today, with $127.74 marking its highest price over the past year. The lowest price for the stock in the past year was $84.61. Emerson's market capitalization stands at approximately $73 billion, indicating its significant presence in the market.

Emerson also made headlines with a bold buyout bid for AspenTech, which could further enhance its market position. The trading volume for the day is 4,323,472 shares on the New York Stock Exchange, showing strong investor interest.

Emerson Electric Co. (NYSE: EMR) Surpasses Earnings Estimates

  • Emerson Electric Co. (NYSE:EMR) reported an EPS of $1.48, beating the Zacks Consensus Estimate.
  • The company's revenue reached $4.62 billion, indicating a 13% year-over-year increase.
  • Valuation metrics such as a P/E ratio of 39.22 and a price-to-sales ratio of 3.97 reflect investor confidence in Emerson's growth prospects.

Emerson Electric Co. (NYSE:EMR) is a global technology and engineering company providing innovative solutions for customers in industrial, commercial, and residential markets. The company operates through various segments, with Intelligent Devices being a key driver of growth. Emerson competes with other industrial giants like Honeywell and General Electric in delivering automation solutions and services.

On November 5, 2024, Emerson reported earnings per share (EPS) of $1.48, surpassing the Zacks Consensus Estimate of $1.47. This marks an improvement from the $1.29 EPS reported in the same quarter last year. The company's revenue reached approximately $4.62 billion, exceeding the estimated $4.57 billion. This growth reflects a 13% year-over-year increase in sales, primarily driven by the strong performance of its Intelligent Devices segment.

Emerson's financial health is further highlighted by its valuation metrics. The company has a price-to-earnings (P/E) ratio of 39.22, indicating that investors are willing to pay $39.22 for every dollar of earnings. The price-to-sales ratio stands at 3.97, suggesting that investors are paying $3.97 for every dollar of sales. These figures reflect investor confidence in Emerson's growth prospects.

The company's enterprise value to sales ratio is 4.47, and its enterprise value to operating cash flow ratio is 47.26. These metrics provide insight into Emerson's valuation in relation to its sales and cash flow from operations. Additionally, the earnings yield of 2.55% offers a perspective on the return on investment for shareholders.

Emerson maintains a moderate debt-to-equity ratio of 0.49, indicating a balanced approach to leveraging debt. The current ratio of 1.16 suggests that the company has a reasonable level of liquidity to cover its short-term liabilities. Furthermore, Emerson has announced an increase in its quarterly cash dividend to $0.5275 per share, payable on December 10, 2024, as highlighted by PR Newswire.

Emerson’s Price Target Cut at Baird Following Q2 Results

Baird analysts reduced the price target on Emerson (NYSE:EMR) to $116 from $120, maintaining a Neutral rating on the stock. The analysts noted that Emerson's Q2 results surpassed expectations due to broad-based gains. Despite a slight 1% year-over-year decrease in organic orders, the project funnel remains strong, bolstered by a healthy mix of growth initiatives in energy transition, sustainability, decarbonization, and traditional chemical and power projects.

The analysts highlighted that portfolio improvements are unfolding positively and that there is additional potential as network integration (NI) synergies are realized and the fundamentals in discrete manufacturing and test & measurement sectors inevitably strengthen. They also praised the company's execution and viewed the appointment of the new CFO from AspenTech as a positive, citing the benefits of bringing Emerson-style processes, discipline, and oversight to the role.

While the outlook for Emerson remains directionally positive, the analysts advised patience, suggesting a cautious approach until more pronounced positive trends materialize.

Mizuho Securities Raises Emerson’s Rating to Buy

Analyst at Mizuho Securities raised their rating on Emerson (NYSE:EMR) from Neutral to Buy, with an increased price target of $118.00. This upgrade comes in response to rising market multiples and the prospects of a re-rating following Emerson's transformational portfolio actions. These actions are expected to drive growth and improve margins, particularly from 2024 onwards.

Despite the understanding of bearish arguments, Emerson's shares have underperformed due to drastic changes in its portfolio. However, there's a sense that investor concerns may start to diminish, leading to increased engagement in 2024. Emerson is positioned as a "barbell" investment, where its long-cycle process/hybrid segment provides a stable growth source, complemented by the recovery of the "short-cycle" divisional orders/sales expected to start around mid-year.

This short-cycle end, including discrete automation, T&M, and productivity, The analysts also raised the 2024 earnings per share (EPS) estimate to $5.20 from $5.10, citing potential for additional upside. Additionally, they set a new 2025 EPS estimate at $5.80, based on mid-single-digit growth expectations.

Emerson Electric’s Analyst Meeting Review

RBC Capital raised its price target on Emerson Electric Co. (NYSE:EMR) following the company’s annual analyst meeting, where CEO Lal Karsanbhai and team outlined the company’s new automation pure-play roadmap.

Fiscal 2023 guidance was reiterated. The analysts said they liked hearing that 30% of the portfolio is levered to double-digit growth secular tailwinds and that the company is focused on expanding in four key adjacencies (industrial software, test & measurement, factory automation, and smart grid solutions).

Investors remain most focused on where Emerson will redeploy its balance sheet following the Climate Technologies and InSinkErator deals, but RBC Capital analysts remain confident that management will continue to pursue diligent capital deployment and strategic fit.

What to Expect From Emerson Electric’s Upcoming Investor Day

RBC Capital analysts provided their views on Emerson Electric Co. (NYSE:EMR) upcoming NYC Investor Day, scheduled on Nov 29. With the $14 billion Climate Tech divestiture announced on Oct 31, the analysts expect the focus of the Investor Day to be on the long-term positioning of the pure-play automation company and some perspective/timeline on how the 25% “earnings hole” will be filled.

The analysts expect the company to elaborate on the drivers of its through-the-cycle metrics provided last quarter, namely its 4%-7% organic growth, 23% adjusted segment EBITDA margins, and 100% free cash flow conversion. Recall that the automation segment underwent a sizable restructuring in 2019-2021, driving out $520 million in cost savings.

Emerson Electric Reports Q2 Beat, Provides Outlook

Emerson Electric Co. (NYSE:EMR) reported its Q2 results last week, with EPS of $1.29 coming in better than the consensus estimate of $1.18. Revenue was $4.79 billion, compared to the consensus estimate of $4.71 billion.

Automation Solutions orders grew 17% to $6.4 billion and backlog grew $0.4 billion sequentially and approximately $0.9 billion year-to-date after rising 16% in 2021.

The pipeline for LNG investment is pulling forward nicely, with 250 million tons per annum of capacity this decade, compared to 125 million each of the past two decades.

The company provided its full 2022-year outlook, expecting EPS to range from $4.95 to $5.10, compared to the consensus estimate of $5.01.

Analysts at Oppenheimer provided their views following the results, adjusting their 2022 EPS estimate to $5.10 from $5.00 and 2023 EPS estimate to $5.55 from $5.45. The analysts lowered their price target to $110 from $115, while reiterating their outperform rating.