Emerson Electric Co. (EMR) on Q2 2021 Results - Earnings Call Transcript

Operator: Good day. And welcome to the Emerson Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Pete Lilly, Head of Investor Relations. Please go ahead, sir. Pete Lilly: Good morning. And thank you for joining us for Emerson’s second quarter earnings and conference call. Today, I’m joined by President and Chief Executive Officer, Lal Karsanbhai; Senior Executive Vice President and Chief Financial Officer, Frank Dellaquila; and Executive Vice President and Chief Operating Officer, Ram Krishnan. I encourage you to follow along the discussion with the accompanying slide presentation, which is available on our website. Please join me on slide two. As always, this present may include some forward-looking statements, which continued a degree of business risk and uncertainty. Turning to slide three, I’d like to briefly highlight that Emerson has been publishing a Corporate Social Responsibility report for many years now. We have renamed the report the Emerson Environmental Social and Governance Report and are excited to highlight all of the goals, momentum and global standards that our organization is working towards. In particular, our environmental sustainability framework, greening of Emerson, by Emerson and with Emerson, captures our internal sustainability efforts, our enablement of our customers’ sustainability journeys through our products and solutions, and our collaboration efforts with various sustainability stakeholders. I encourage you to review the document next month when it is published. As always, I am available for questions. Please turn to slide four. I’d like to briefly mention our recent Emerson Exchange virtual series, which took place from November through March. Emerson Exchange is a chance for our customer base to interact with other users, industry experts and Emerson technology leaders. Despite the obvious in-person limitations of the pandemic, Emerson had a tremendously successful virtual engagement with customers, focusing on digital transformation, sustainability, technology and many other topics. This virtual framework dramatically expanded the reach of this already very popular user event. Due to the success of the hybrid format, we will likely be adopting such a format going forward. More details to follow as the time and place for the next Emerson Exchange event is finalized. Please turn to slide five and I will now turn the call over to Lal Karsanbhai for opening remarks. Over to you, Lal. Lal Karsanbhai: Thank you, Pete, and good morning, everyone. I would like to say a few things before passing it on to Frank. Firstly, to our global team, three things. Thank you for a tremendous quarter. This was one that was delivered based on strong execution, which required agility and creativity as we jumped over a number of hurdles over the last three months. The result was top class profit leverage over 40% across our operations. Well done by everyone. Frank Dellaquila: Thank you, Lal. Good morning, everybody, and thank you for joining us today. We had a strong quarter and I’d like to take you through the highlights of that over the next several slides. The strengthening recovery that Lal referred to in most of our end markets combined with the benefits from our cost reset actions drove strong operating performance and strong financial results in the second quarter. Adjusted EPS for the quarter was $0.97, ahead of our guidance midpoint of $0.89 and representing 9% growth versus the prior year. Demand strengthened and significantly with sales ahead of expectations at 2% underlying growth and March orders towards the high end of expectations at 4% underlying growth. Within that growth number for the orders, significantly Automation Solutions continues its steady improvement in both orders and sales, while Commercial & Residential Solutions continues to experience robust demand across all its lines of business and in all geographies with 11% sales growth and 21% orders growth for the trailing three-months through March. The cost reset benefits for the program that we implemented almost two years ago are being realized as planned, driving adjusted segment EBIT growth of 15% and 150 basis points of increased margin at 19.1%. Additionally, cash flow continues to be strong, up 37% year-over-year with free cash flow up nearly 50%. This represents 125% conversion of net earnings. We continue to execute on the remaining elements of our cost reset actions, with the bulk of it behind us at this point, we initiated $21 million of additional restructuring in the quarter. Lal Karsanbhai: Thank you, Frank. I’ll just cover a few charts here with the group. Again, increased momentum -- turning to on chart 15 here. First on Automation Solutions, we are -- we were lagged through the recovering the first half by our discrete and early cycle businesses within the platform and essentially what’s occurred as we’ve navigated through the second quarter is a broader recovery in there mid -- in the mid-cycle elements of this platform. So we see a return to growth in Q3, which is very positive, after five down quarters in this business and a continued demand in short cycle, as well as that acceleration in the core profits automation markets in the back half of the year, yielding a 4% to 8% range in the second half and the flat year guidance on sales. If we turn to page 16, I’ll give you some color on what’s going on in the world areas. Perhaps before I do that though, I’ll just paint it from a KOB perspective. KOB3 has been incredibly strong, both in our discrete spaces, but more interestingly as we navigated this second quarter into our process basis. Frank referenced the shutdown turnaround activity, which is up double-digit -- mid double teens for the year and industrial schedules are holding and full honestly as we go into the summer into the fall season which is very encouraging. The site walk downs are up almost 50% year-over-year, also very encouraging, and of course, the long-term service agreements are up almost 40% across the world in the business. Very encouraging to see and really provides the fuel for the underlying activity we’re seeing in the process space. On our KOB1 basis, things are not completely soft. There’s less activity. Obviously, we digested a significant LNG weight but there’s more activity on the horizon. We’ve entered the feat stage on two very important projects, the Baltic LNG and the Golden Island BASF in China. Those are important opportunities for us in Automation. And secondly, we were awarded the Sempra Costa Azul LNG project on the Pacific Coast in the Baja Peninsula of Mexico, which has a significant value for us and was awarded and will be booked here in the third quarter. So there is some activity. We continue to engage on the KOB1 and as that starts to loosen up a little bit I think we’re very well-positioned. The till of the tape, honestly, for the remainder of the year for this business is going to be the Americas. And it’s going to be a significant swing from a down 16% first half to a second half in that 10% midpoint. And we’ll see that, we saw that already as we entered April. We will continue to see that recovery, I think, as we go through the latter half of the year into 2022. Europe, an incredibly strong first half, driven by life sciences, activity around biofuels, the number of KOB2-type project awards and we continue to see that strength and I feel confident that that strength will be there into the second half of the year. Of course, across all of this the discrete environment has been very, very good into Asia, Europe and in North America, whether it’s automotive, medical or semiconductor, and we expect that strength to remain here. So, overall, feeling much better about the second half here and feeling very good about how North America is shaping us for us in Automation. Turning to chart 17, some comments on Commercial & Residential. What a great year this team is having, and obviously, the beneficiaries of a tremendous residential cycle, much of which was driven by pandemic inventory levels, pre-pandemic inventory levels, a pre-build in the cooling season that then we also benefited from a secular shift into suburbs and high-family home construction and renovation. All of that has led into incredible residential strength through the year. Obviously, my expectation is that first to dampen as we get into the latter parts of the fiscal year. However, the mid-cycle professional tools, cold chain businesses are accelerating and that’s where we see here in this very balanced perspective for this business throughout 2021 and very encouraged by what we’re seeing in the later cycle pieces. Of course, we -- there’s some good underlying technology evolutions as well that will impact the residential, be it the refrigerant changes or the heat pump moves in Europe, which are -- which will continue to drive good growth for the businesses. And then turning to page 18, again, a very balanced picture here from a world area perspective. And overall, a strong second half with the Commercial Industrial segment of this business continue to improve as the residential markets starts to taper, as I discussed. I think all the world areas should grow, again, in the low double-digit to mid-teen range as we go into the second half. In the Americas, we are seeing residential demand remain strong in the near-term and the commercial markets really starting to accelerate. And the cold chain piece particularly, which is driven by transport and aftermarket and then we see the tools momentum building in the professional channel. So very encouraged by that. Europe, I mentioned heat pump activity. We expect that to say strong, and, of course, a surge in construction should bolster our plumbing and electrical tools business. And then lastly in Asia, China is the headline contributor to growth as some of you’ve already noted and demand is driven by commercial air conditioning and cold chain solutions. So, with that, Pete, I’ll turn it to page 19 and we’ll go to Q&A. Operator: And the first question will come from John Walsh with Crédit Suisse. Please go ahead. John Walsh: Hi. Good morning, everyone. Lal Karsanbhai: Hi, John. Frank Dellaquila: Good morning. Ram Krishnan: Good morning. John Walsh: Hi. So, obviously, a lot of focus will probably be on the Americas recovery, just wanted to get your perspective in Auto Sols kind of how much of this is driven by kind of just run rating the trends you’re seeing in process against an easy compare versus kind of the growth you expect to see in those discrete and hybrid markets there? Lal Karsanbhai: Well, we’re seeing, John, good acceleration in underlying process. We went through a period of time, as you recall, of rate fix environment with limited site access, with limited FDL type of activity. That slipped. Obviously, the inoculation rates in this country have helped the confident that customers have and having others on-site and having their own folks, very honestly on-site. That’s driven now a level of activity that is incredibly encouraging and is, I think, above and beyond just the simple comparisons that we have. The discrete strength, to your point, will remain. I don’t foresee that to wane, at least as we go through the year in North America, but the real fuel there will be increased activity. And we’re seeing that in the PO rates and we’re seeing that in quotation activity and in the daily booking activity in our short- to medium-cycle automation businesses. John Walsh: Great. Thank you. And then, obviously, you updated your view here on inflationary pressure. Just as we think about the balance of the year, could you talk a little bit about the price/cost equation and if there’s kind of any noticeable difference kind of Q3 versus Q4 and any timing of price related to that? Thank you. Lal Karsanbhai: Yeah. I’ll comment. We -- as Frank noted, we adjusted our guide there from the $25 million headwind to $75 million. Again, within the construct of what we believe we can guide the overall EPS. The teams are doing a fabulous job in particularly around the headwinds of classic resins, copper and steel, which is been challenging for us. I would expect as capacity comes online, John, that the -- that there is a little bit of relief on price/cost. But, again, that’s a wait and see, so we took a more conservative approach there based on what we’re seeing in the market and as we’ve discussed with the team. Ram, any comments there? Ram Krishnan: Yeah. I think and we do expect the bulk of the impact, frankly, in Q3 and Q4. We didn’t see much of an impact in the first half as we worked down inventory. But the impact of steel and copper and resin we’ll see in the second half. But as Lal mentioned, we do expect particularly in steel, capacity to come back online. Certainly, our pricing on steel in China is better than what we see in North America. So, hopefully, as we get into the later part of the year, we’ll start that -- seeing that steel pricing soften a little bit. So that’s kind of what’s built into the plan. John Walsh: Great. I’ll pass it along. Thank you. Lal Karsanbhai: Thanks, John. Operator: The next question will come from Nicole DeBlase with Deutsche Bank. Please go ahead. Nicole DeBlase: Yeah. Thanks. Good morning, guys. Lal Karsanbhai: Hi, Nicole. Frank Dellaquila: Good morning. Ram Krishnan: Hi, Nicole. Nicole DeBlase: Hi, there. And so maybe we could talk a little bit about what’s going on with respect to supply chain, obviously, a really hot issue this quarter. So if you guys could talk about what you’re seeing and to what extent that could be, I guess, a cap to upside to revenues in the second half? Lal Karsanbhai: Yeah. So, certainly, a lot of press on supply chain, obviously, in terms of inflation, but also availability and shortage challenge. For example, you’ve probably heard the electronics challenges on chip shortages. Frankly, our global teams, I would say, at this point, have done a remarkable job from an availability standpoint, whether its availability of steel, plastic, resin, where we’ve been able to move to alternatives. Certainly, on the electronics front, we’ve managed through our supply in terms of electronics supply from Asia pretty well. The inflation side, we’re managing through that. I think that is something through price and productivity programs, we’re addressing. But to this point we haven’t seen any availability challenges. And similarly on the logistics front, whether its ground, ocean freight or airfreight, our teams have done a really good job locking in the needed capacity to bring in material from our overseas supply chains, and frankly, at preferred rates. We haven’t had to go out into the spot market yet, which is where we’re seeing a lot of that inflation. So so far, I would say, we’re managing through pretty well. And the other piece I would want to point out is our regionalization strategy, where we really have regional supply chains supporting our business has been a significant benefit where we haven’t had to rely significantly on overseas supply chains to feed our plants. Nicole DeBlase: Got it. Thanks. That’s really helpful. And then, I guess, thinking about the cadence of EPS revenue margins in the third quarter versus the fourth quarter, anything you guys want to highlight there. I think usually you give us kind of a sense of what the next quarter’s earnings will look like. So just anything you want to provide on 3Q versus 4Q. Frank Dellaquila: Well, Nicole. Hi. This is Frank. I think we’re looking in a very, very strong third quarter coming at us just based on the orders that we see and the backlog that we have available to us. So I would say, at this point, as I look at second half, third quarter will be very strong, the fourth quarter will be good but a little less visibility into the fourth. So that’s kind of how we see it right now, maybe it’s a tad frontloaded towards the third quarter. Operator: The next question will come from Nigel Coe with Wolfe Research. Nigel Coe: Thanks. Good morning. Lal Karsanbhai: Hi, Nigel. Nigel Coe: Very different feel to the call today. Good to hear Frank’s voice. Hi. Can you hear me okay? Frank Dellaquila: Thank you. Thank you, Nigel. Nigel Coe: So, Com Res. Good. So on Com Res, $0.11 growth, nothing to phase out very strong orders. But the growth rates come in a little bit lighter than some of your OEM customers and there’s a deceleration from Q-to-Q. It looks like we’ve got some nice acceleration coming into the back half of the year. But just curious how inventory levels look in the channels and whether you saw some destocking happening during Q2, just curious on that? Frank Dellaquila: Yeah. And -- thanks, Nigel. Good to hear your voice as well. I think there’s a dynamic here between residential and commercial in Com Res across the broad business, beyond climate into the tools as well, which has an impact there in terms of growth rates. We’re seeing many of our OEM customers have reported with strong residential growth. Now, although, we have that, we have a balance in our business between cold chain and NAC. So I think that’s where you probably see that difference. Nigel Coe: Great. And just a bit of a random question here, Lal. But the instant Exchange of the virtual this year, I mean, how does that play out going forward? I mean, how do you judge sort of the engagement of customers virtually versus in-person and how do you think that evolves… Lal Karsanbhai: Yeah. Nigel Coe: … going forward? Lal Karsanbhai: Yeah. No. Great question, Nigel. And I know you’ve the attended the Exchange. It’s a very special event for us in Automation, as you know, and we get great customer engagement throughout. We learned a lot, and, obviously, we didn’t have a choice as we went through an Exchange season in the Americas and Europe this year. But I think what we learned is that there’s got to be a balance. I think there’s going to be a way to engage with folks on the ground and we don’t want to get away from that if we have the opportunity to do so. But we can also reach a much broader base of engagement with customers through the virtual platform, customers who may not be able to devote a day or night of travel, who may be interested in a singular subject or a keynote. They now have the opportunity to dial in and listen in or see that presentation in a form that works for them. So I think it’s going to be a balance. I think some of that engagement is still going to be important, because as you know, as you saw when you were there with us in Nashville, there is a lot of customer engagement where the value really comes in from those discussions. So we don’t want to lose that. It’s -- I think we, in this new construct, I think, can reach a broader base of folks while not losing the original intent of the meetings. So I’m excited about Exchange. I hope we can hold it in the fall. The guys are talking about the fall versus spring right now. We’ll see where we land. Nigel Coe: Thanks, Lal. Best of luck. Lal Karsanbhai: Thanks, Nigel. Operator: The next question will come from Julian Mitchell with Barclays. Please go ahead. Julian Mitchell: Hi. Good morning. Lal Karsanbhai: Good morning Julian Mitchell: Maybe -- good morning. Maybe a first question on the margin outlook, you raised the EBIT margin guide to that 17.5% number for the year as a whole. I just wanted to double check as we think about the second half specifically. It seems to imply maybe a sort of mid-20%s incremental on the segment level and maybe a little bit lower than that sort of all in because of the corporate aspect and so on. Just wanted to confirm if that’s roughly the right math and any difference in incremental margins in the second half for the two divisions, AS versus Com Res. Frank Dellaquila: Yeah. I mean, I think, that’s in the -- you’re talking about the incrementals the leverage. I think that’s in the ballpark, Julian. Hi. This is Frank. It’s in the ballpark. I mean the incrementals I would expect to be higher in Automation Solutions. We will have to digest the price cost headwinds in Commercial & Residential and that will be a headwind for certain on the incrementals. Nonetheless, we’re going to deliver good incremental profits in the business and we will have leverage on those sales. But not doubt it’ll hold those incremental down at least for the next couple of quarters. So I think you’d expect to see to be higher in Automation Solutions than in Com Res. Julian Mitchell: Thanks very much, Frank. And then maybe a broader question around Automation Solutions, sort of topline outlook in the end market backdrop there. So we saw that the backlog was sort of flattish sequentially up I think mid-single digits year-on-year. How do we think about that Auto Sol backlog trending from here? Understood that maybe big projects are relatively sparse, but maybe the KOB2 stuff picks up. How do we think about that AS backlog the pace of the pickup from here? Frank Dellaquila: Yeah. Good question, Julian. So year-over-year backlog in Automation is up 14% I believe is the number. Obviously, we went through a significant, through the first two quarters I’d suggest that in terms of shifting KOB1 activity, we have particularly in our final control and systems businesses, and the fuel of the revenue growth going forward becomes more mid-cycle measurements solutions and systems and discrete business. So consequently, that’s more what we call book to ship within quarter or within quarter and a half. And I wouldn’t necessarily expect a significant growth in the backlog but within the parameters that we’re in today. So in that I suggest 10% to 15% backlog growth. So without the vast KOB1 activity, I don’t expect that to grow beyond the rate we’re in today. Julian Mitchell: That’s great. Thank you. Operator: The next question will come from Scott Davis with Melius Research. Please go ahead. Scott Davis: Hi. Good morning, guys. Lal Karsanbhai: Good morning. Frank Dellaquila: Good morning. Scott Davis: Encouraging -- good morning. Comments -- encouraging comments you made on April. It must’ve been a pretty darn good month. But I had a couple kind of completely different questions since, Lal, you’re relatively new. I mean your compensation structure is a little bit complex for your management team. Is that one of the things you’re working on kind of adjusting early in your tenure here? Lal Karsanbhai: Yeah. So, yeah, good to hear from you and thanks. April, I did make the comment April from an Automation perspective and Commercial Residential perspective continues to be on trend to what we have experienced and have expectations around. So I’m encouraged by that. In terms of the comp structure, yeah, I’ve spoken openly about the journey we’re on in our culture and what we’re undertaking here as an organization. There’s a lot of energy around that across the enterprise. Compensation is absolutely something that we’re looking at and we actually -- we have a task force in place today led by Lisa Flavin and she is looking through how we compensate the executive structure and others. And I think there’s a lot of opportunity there for us. And we’ll be -- we will take our time. We’ll work very closely with the Board on that as we go through the summer and to the fall, and hope we have an evolution there as well. Scott Davis: Okay. Good. As an unrelated follow up, the heat pump market in Europe you guys have been talking about for a couple of quarters now. Is your product had technological differentiation? I mean, perhaps, you can maybe talk through kind of why you guys think you’ll win in the heat pump market? Lal Karsanbhai: I think there -- I think we’re very well-positioned, obviously, with a strong customer base we’ve had for a long time. But I think the technology differentiated is really around sound attenuation in the heat pumps and the efficiency. And I think that’s where we stand out versus what the marketplace offers and has been a big part of the growth in what fuels the European opportunity going forward. So we’re excited about where the product investments have been and where we can grow going forward. Scott Davis: Sounds good. Good luck, guys. Thank you. Lal Karsanbhai: Thank you. Operator: The next question will come from Steve Tusa with JPMorgan. Please go ahead. Steve Tusa: Hey, guys. Good morning. Frank Dellaquila: Hey, Steve. Lal Karsanbhai: Good morning. Ram Krishnan: Good morning, Steve. Steve Tusa: Strange to be on an Emerson call in the morning, used to have to wait all day for this. So thanks for that. The -- just looking at your comparison versus 2019. So your sales in the first half are down relative to 2019. Your EPS is up very comfortably, like, $0.20 plus. If I just take the back half of 2019 on EPS and add it to what you just did in the first half of 2021, you’re already kind of at the high end of your guidance range. The sales comps year-over-year should be pretty similar to down moderately versus 2019 still. What’s kind of the big headwind in the second half? I know price cost maybe is like a nickel or something like that. I don’t know it, but it seems like you’re growing very strongly over 2019 without the benefit of revenue already. But in the back half you really don’t show any material improvement whatsoever versus 2019, maybe could just like help us with the moving parts there. Frank Dellaquila: Yeah. So, Steve, this is Frank. I mean, the obvious thing in the second half that were not headwinds in 2019 are both the price cost in the stock comp, so between the two of those you’ve got $70 million, $75 million of headwind to make the $0.10. I take your point. But we’re waiting to get better visibility into the fourth quarter. At this point, we understand that when you make the comparisons to 2019, it’s not a big increase over the second half of 2019. But we do have some uncertainty to work through as we go through the second half here and we’re going to see how that plays out. We think the guidance raise at this point is prudent and we’re confident we’ll get there and then some as we work our way through this. Steve Tusa: And then just on the HVAC side, different players putting up different types of results all very strong from a customer perspective. I know you guys have like kind of a big end to calendar year last year. What did you see in your kind of U.S. resi kind of core compressor business this quarter roughly? Lal Karsanbhai: So, Steve, this is Lal. Yeah. So, we had a strong -- we had a very strong quarter in the climate business in the United States. We continue to see orders accelerate. Backlog conversion grew in the mid-single digits, excuse me, sales grew in the mid-single digits, with the acceleration really occurring, as Frank pointed out, into Q3 for us. And that’s where you’ll see this really from a U.S., purely U.S. perspective in HVAC top for us. Steve Tusa: Right. And then just one quick one, how big is that business now as a percentage of CR&S. Historically, everybody kind of thought of you as a U.S. resi play. I mean, given you smashed these businesses together and China remains a big driver and Europe is growing fast. I mean, how big is that kind of core U.S. compressor business now for you guys as a percentage of CR&S? Lal Karsanbhai: Yeah. It’s a sizable business. We haven’t disclosed the size of it relative to the entire platform. But you can assume it’s a sizable portion of the entire climate and CR&S platform. Steve Tusa: Okay. Great. Thanks a lot. Appreciate it. Lal Karsanbhai: Thanks, Steve. Operator: The next question will come from Andrew Obin with Bank of America. Please go ahead. Andrew Obin: Yes. Good morning. Lal Karsanbhai: Good morning, Andrew. Frank Dellaquila: Good morning, Andrew. Andrew Obin: Just sort of a big picture question, as you talk to your customers in the energy industry, how much -- how set are the budgets into the year and is there anything that can change them? Is there any sort of reason to think that there could be potential upside given massively increasing economic activity, given high oil price or do we need to wait until next year to sort of see them change their mind? Lal Karsanbhai: Good question, Andrew. I think budgets have been set on assumptions around demand and oil price. Having said that, there are significant skews toward sustainability efforts, they’re skewed towards efficiency in operating elements of the business and that gives us a good baseline of confidence in the recovery in the market. Having said that, if we do see more planes in the air, more trucks on the road, broader economic activity, I think we’ll see expansions in the budget area as we go through the second half of the calendar year, into the second half of the calendar year and that will prove to be advantageous to the Automation business, above and beyond where we are set today. Andrew Obin: Great. And then another question on Commercial & Residential, as we think about the heat pump business in Europe. You certainly guys have been talking a lot about it. How much visibility -- it seems as part of a sort of longer term regulatory trends. But how much visibility do have in this business over the next 12 months to 24 months? And is it accretive to the mix, neutral to the mix, how should we think about that? Thank you. Lal Karsanbhai: Yeah. Go ahead, Ram. Ram Krishnan: Yeah. I would say we have very good visibility in Europe, as well as the heat pump opportunities in China. But in Europe, our engagement with the OEMs, which play in the space, has been very good. These have been traditional customers of ours. So as it relates to the new technology that Lal referenced in terms of efficiency and sound, our scroll product line and our complete solutions position for that market, we’re in deep engagement with the OEMs. So I would say the visibility is good. And then your question was margin accretive, is that -- what your question was? Andrew Obin: Yeah. Is it good for the margin or is it bad for margin? It’s very simple. Ram Krishnan: It’s -- I would say it’s neutral to slightly accretive to the margins. Andrew Obin: Fantastic. Thank you so much. Lal Karsanbhai: Thank you. Operator: The next question will come from Tommy Moll with Stephens. Please go ahead. Tommy Moll: Good morning and thanks for taking my question. Lal Karsanbhai: Hi, Tommy. Frank Dellaquila: Hey, Tommy. Ram Krishnan: Hi, Tommy. Tommy Moll: Well, I wanted to talk about the pathway to record margins you referenced in the release and on the call. Comparing to where we were a quarter go? I’m thinking through the factors that may have changed. But clearly, price/cost, even if the temporary factor worked against you in the last 90 days, so maybe flow-through on some of the cost of execution is at least as good as, maybe a little bit better than expected. But if you just step back and think about versus a quarter ago, the pathway and the timing endpoint for that record margin progression, what would you highlight for us as the most important things that have shifted? Lal Karsanbhai: Yeah. I’ll say a couple of words and I’ll let, Frank, who actually presented on this subject to the Board yesterday. I feel really good about the path, Tommy. We have a potential acceleration on the path in Automation Solutions with tremendous performance and on the cost. The price/cost that you referenced is predominantly in our -- the challenges are predominately in our Commercial & Residential business. But what I’ll say is that they’re on track to deliver that endpoint peak margins work. So I feel very, very positive. Slightly ahead in one platform, on track on the second platform. Frank? Frank Dellaquila: Yeah. Tommy, Lal summarized it well. I mean, we did have this conversation yesterday and we feel very good about timing that we laid out in February regarding the achievement of the margin targets in 2023. The pickup in the pace of volume in Automation Solutions and the flow-through of the cost reset actions that have been taken in that business basically put us a year ahead of schedule, we even throughout the margin improvement there, which really derisked that plan. And in Commercial & Residential, very significant mitigation actions are being taken to offset the trench in this temporary price/cost headwind that we’re going to have for the next couple, three, four quarters and we are -- we believe strongly that we’ll be right back on track to hit those targets as well. So, as Lal said, we feel very good based on the leverage that we have even in the face of the unexpected price/cost that we’re going to get to the finish line in 2023 as we hit it. Tommy Moll: That’s very helpful. Thank you, both. And if I could follow up with a question on culture. Lal, you are now a few months in. Cultural modernization is clearly a theme that’s important to you? But also one that you’ve made clear is tied to value creation and execution. Lal Karsanbhai: Yeah. Tommy Moll: So what can you provide us for an update there about division, now the you’ve had a little bit of time to think through how you’re going to approach it? Lal Karsanbhai: Yeah. So I appreciate the question, Tommy. The first thing -- one of the first things we’re doing is we need to measure where we sit today and where we want to go. So we’re working with an outside firm to do a cultural assessment of the 58,000 employees, salaried employees of Emerson. We’ve done a pilot to understand how the tool works. We feel comfortable that we understand the tool and like the tool. So were going to broaden this out here in the month of May. And what that’s going to give us is a very important set of data, understanding where we are and where the population of the company wants to go in terms of the culture. I would suggest that, in addition to that, Tommy, we’ve taken care of some of the low hanging fruit, some modernization of work practices. We’re working with McKinsey & Company on a diversity inclusion target and goals, which we’ll publish as part of the ESU report and after conversations with our Board in June. So there’s a lot of activity going on. We’re all a very energized about the opportunity and we do believe honestly, Tommy, at the end of the day that if we look more like the world where we live and work inside of Emerson, we’ll be a better company. We’ll perform at a higher rate and we’ll create more value. Tommy Moll: Thank you, Lal. I’ll turn it back. Lal Karsanbhai: Thanks, Tommy. Frank Dellaquila: Thanks, Tommy. Operator: The next question will come from Markus Mittermaier with UBS. Please go ahead. Markus Mittermaier: Hi. Good morning, everyone. Lal Karsanbhai: Good morning. Frank Dellaquila: Good morning. Markus Mittermaier: We’ve covered a lot of ground already. But maybe -- hey. Good morning. But maybe a finer question on price cost in Com Res, if I could. So the way understood you is that basically Q1, Q2 you were protected from essentially using inventory. So how should I read the guide to $75 million unfavorable price cost given? Is that inclusive of future price trends that you might be planning or is that based on what you’ve done so far and your best view on inflation to-date? Maybe you can start there. Lal Karsanbhai: So, Markus, I mean, that incremental $50 in price cost that we’ve guided to is predominantly in Commercial & Residential, obviously, factored into the guidance. And it’s a complicated subject, but I mean with the major OEMs, we have material pass-through clauses, but they’re all different and they all operate with varying degrees of lag. So while we’re confident the price comes back in, it comes back in over time. Across the rest of the platform, we will take deliberate pricing actions and mitigation actions as well to offset that inside of the guide that we’ve provided. So that’s how we think about it and that’s how it will play out. That’s how it’s played out historically. This is just a more pronounced increase than we’ve seen in anybody’s memory here. Markus Mittermaier: Okay. Got it. And then maybe a broader question on China, obviously, easy comps in the past quarter here. How do you see the momentum in both short- and long-cycle there on the ground? Maybe you could take us on a tour through the various verdicts to stay on China, specifically given that is quite sizable for you guys. Thank you. Lal Karsanbhai: Yeah. Thanks. Thanks, Markus. I feel good about what’s we’re seeing in China. Obviously, the past quarter was very, very strong across all platforms. We’re seeing good activity on the Automation side, KOB3-driven, but also project-drive, particularly in the Chemicals segment, which should continue through the second half of the year. And then the easier comps obviously come on the climate side, but again, encouraging trends there as well. Infrastructure, commercial construction-driven and cold chain around transport, particularly. So I feel really good about China for the remainder of the year. Teams are very engaged and I feel positive about what we’ll see throughout the fiscal. Operator: The next question will come from Deane Dray with RBC Capital. Please go ahead. Unidentified Analyst: Hi. Good morning. This is Jeffrey on for Deane. My question is I think in your prior guidance based in WTI prices of $45 a barrel to $55 a barrel. So I think we’re sitting above that level pretty comfortably now. Maybe how has that changed your thinking? How is that factored into the new guidance and maybe what are you hearing from customers? Frank Dellaquila: Yeah. Thanks, Jeffrey. Yeah. Obviously, it’s embedded in our thinking and levels of activity that we’ve baked into Automation Solutions and the increase in the guidance there. We’re seeing that being reflected in the spend rate and the activity in the segment, more closer to that $60 number now. But as you can imagine, customers are still relatively skittish as they forecast and we talked about budgets in the past in one of the past questions here. So they’re watching it closely. But clearly, as reflected in the increased guidance, I feel a little bit stronger about where the WTI ultimately will land for the year. Unidentified Analyst: Got it. Thanks. And then maybe just another one, can you talk about the Chairman transition? Was it a conscious decision to separate the Chairman role from the CEO role? And maybe you have any update on the timing of a potential CFO transition? Lal Karsanbhai: Well, Jeffrey, the CFO is sitting right here with me. I’m very happy that he’s here with me and... Frank Dellaquila: Did Dean tell you to ask that? Lal Karsanbhai: No CFO transition in the foreseeable future here. I’m very happy that I have Frank and very blessed to have Frank very honestly and his experience, which will be incredibly important for this management team. So nothing there to report. In terms of the Chairman, honestly, it was not -- it was highly researched, debated and discussed with the Board. Obviously, felt very comfortable with the separation of role to enable me to operate the company, to learn the governance piece over time, to have mentorship from the Board of Directors, very important. And again, as you think about the early stages of my CEO-ship, so that was the right decision. I’m glad the Board supported it and I think we landed in a really good place. Unidentified Analyst: Very helpful. Thanks a lot. Lal Karsanbhai: Frank, you are in your retirement, stop... Operator: The next question will come from Andy Kaplowitz with Citigroup. Please go ahead. Andy Kaplowitz: Good morning, guys. Frank, I’m still very happy you’re around, so. Frank Dellaquila: Thank you, Andy. I appreciate that. Andy Kaplowitz: All right. So last quarter in C&RS (sic) , I think, you were still wondering how your Q4 would look, given tougher comparisons in residential on how the professional tools recovery would shake out. Obviously, you’ve refined your guide for second half revenue growth and you sound good about your visibility in Q4 at this stage. But could you give us more color into how you were thinking about the Q4 growth against the more difficult comps and how that might translate into FY 2022 growth and the longer term revenue growth guidance that you gave at the Analyst Day for C&RS (sic) of 5% to 7%? Lal Karsanbhai: I’ll comment on it. I feel good because of the cross section in the cycles, right? The early cycle residential, I think, we’ll all agree is going to taper off whether that tapers in Q4 or into Q1, but it will taper off, it’s been incredibly hot now for a number of quarters. But the good news is the balance that that platform has, in terms of not just in the climate side with cold chain, which is accelerating, as we’ll go into Q3 and Q4, but also on the professional tools side, which will balance off the consumer tool businesses, which have benefited from do it yourself and big star growth. So the balance is incredibly strong. It gives me, at this point, at least confidence heading into the latter half of this year and honestly into a balanced perspective into 2022. Andy Kaplowitz: That’s helpful. And I’m sure you guys don’t want to update us in the funnel every quarter. But let me ask you about in the sense, so you had mentioned $6.5 billion in your funnel that you had mentioned $1.6 for electrification funnel. So maybe it’s a good time to talk to us about an update on OSI. But also in terms of the funnel, obviously, KOB1 actually perking up a little bit. Are you seeing new projects enter the funnel or is it really some of these old projects maybe starting to move a little bit? Lal Karsanbhai: A little bit of both. Obviously, the 2-feet stages on Baltic and Golden Island are things have been talked about and debated and discussed for a long time and so those are starting to move forward. So that’s that elements. But something like a temporary is, obviously in terms of, its relatively new, we didn’t know whether it was going to move forward as part of that significant eighth job LNG wave. Now this is the ninth job. So very important to see that. In terms of what’s new in the funnel, it’s still in that $6.4 billion range. The hydrogen-related element, in addition to that, would be about $1 billion. The electrification piece, as you said about $1.5, $1.6. There’s some newer stuff in there, but it’s relatively smaller. Biofuels conversions of existing facilities are modernizations that fall into the funnel. So it’s relatively static, although it is encouraging as you point out to see some things moving to the left. Now, in terms of OSI, phenomenal first six months with us ahead of plan that we put together internally and to -- and present it to our Board. I feel great about the management team and what they’re accomplishing. And more interestingly, I feel really good about the opportunity to continue to invest in the business and expand the sandbox. I think it’s a very unique opportunity for us in terms of both technology and end market diversification. We want to do both, but we want to do more, both organically and if available inorganically. Andy Kaplowitz: Appreciate it, guys. Lal Karsanbhai: Thanks. Operator: The next question will come from Gautam Khanna with Cowen. Please go ahead. Lal Karsanbhai: Hey, Gautam. How are you doing? Gautam Khanna: Hey. Thank you very much. Lal Karsanbhai: Gautam, you’re not the only one who gets your name… Gautam Khanna: Thank you. Lal Karsanbhai: You’re not the only one who gets your name massacred. I’m there with you. Gautam Khanna: No. Not at all. Yeah. I know we understand each other. I still remember being called Quantum when I was in Little League baseball. Lal Karsanbhai: Gosh. Gautam Khanna: So, hey, a couple questions. First, in the quarter, what was the mix of KOB3 at Auto Sol and what are you guys expecting in the second half with respect to KOB3 versus the other two? Lal Karsanbhai: So, first, second quarter first half stayed relatively consistent at 59% on KOB3. And very honestly, I expect that to stay within that 59% to 60% range as we go through the second half of the year. It’s a very strong mix obviously for us. But that’s kind of where I see it, Gautam, as we go through the second half. Gautam Khanna: Okay. And in your opening remarks you talked about turnaround backlog being pretty strong, visibility there being strong. Anything you’re seeing with respect to scope of turnaround that’s different than you would normally see in a cyclical recovery? Any sort of change in customer buying behavior that’s noteworthy? Lal Karsanbhai: Yeah. No. Interestingly enough. So what we saw particularly in the upgrade turnaround environment as we went through COVID, was that the systems upgrades for the most part continued. And the reason they continued is because of the ability to perform a lot of that work virtually and remotely. We have tremendous capabilities in our Delta V business to do that, in our Ovation business to do that. And that activity continued as system upgrades were performed around the world. What was mostly impacted was the stuff that hangs on pipes or on vessels, the valves, the transmitters, the flow equipment and which we’re now seeing the acceleration. And honestly, there is just no two ways to do that remotely. You’ve got have people on-site and you’ve got to have a lot of people that are not necessarily familiar with your site there. What we’re seeing and we’ll watch whether this is a trend or not, there are two things, Gautam, to your question. Number one, the scale of the turnaround, they may be doing one or two units versus the entire facility. And secondly, the rate or the cycle at which the turnarounds are performed, many of these facilities have now gone over 18 months, almost 24 months, without a turnaround. They may question, whether they can expand the cycle on turnaround and the frequency at turnarounds based on this experience. We haven’t necessarily gotten that message yet, but we’re watching it very carefully as we go through this cycle, particularly this season over the summer and into the fall. Hey, Ram, I don’t know if you’ve got comments there. Ram Krishnan: No. Lal Karsanbhai: Okay. Gautam Khanna: Thank you. Very helpful. Lal Karsanbhai: Yeah. Sure. Okay. Well, I want to thank everyone for your questions and your engagement today. It was a -- I felt phenomenal about my first quarter as CEO. I thank the teams, a lot of hard work and a lot of energy. And I feel really good about the momentum that we have as an organization for the second half of the year and into 2022. So thank you, everyone, for your time and talk soon. Frank Dellaquila: Thank you. Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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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.