Emerson Electric Co. (EMR) on Q4 2023 Results - Earnings Call Transcript

Operator: Good day and welcome to the Emerson Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Colleen Mettler, Vice President of Investor Relations. Please go ahead. Colleen Mettler: Good morning, and thank you for joining us for Emerson's fourth quarter and full year 2023 earnings conference call. Today I am joined by President and Chief Executive Officer, Lal Karsanbhai; Chief Financial Officer, Mike Baughman; and Chief Operating Officer, Ram Krishnan. 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 uncertainty. 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 his opening remarks. Lal Karsanbhai: Thank you, Colleen. Good morning. 2023 was an exceptional year for Emerson. The management team, alongside the Board of Directors, boldly delivered across the three dimensions of our value creation strategy. Firstly, culture. Our management team just completed a trip around the world where we had the opportunity to engage with our customers and our teams. It was an energizing trip and it was evident to me that the changes we are driving in the culture of Emerson are embraced as evidenced by our engagement survey. 2023 was an important year. We made significant progress across multiple dimensions of culture. We rolled out an employee value proposition, advanced our diversity and inclusion metrics, and made significant strides in our sustainability targets as well as launching a differentiated talent engine program. Second, our portfolio transformation is largely complete. The Copeland divestiture and more importantly, the acquisition of NI have enabled us to create an Emerson focused on automation with a cohesive, higher growth, higher profit margin, diversified portfolio aligned to the critical macro secular drivers, energy security and affordability, near assuring, sustainability and decarbonization, and digital transformation. I would like to welcome Ritu Favre and the NI family to Emerson. This is an exciting time. With NI, our technology stack is unequaled, and we are in position to continue to push the boundaries of automation to meet our customers' needs. Thirdly, execution. The Emerson management system is delivering differentiated results. Underlying sales for 2023 grew 10%. GPE expanded 330 basis points to 49%. And adjusted Segment EBITDA expanded 220 basis points to 25% after delivering yet another year of over 50% leverage. Adjusted earnings per share in 2023 grew 22% to $4.44 and free cash flow was $2.4 billion. Orders growth exited the year at 5% and we grew across all world areas. We had strong price realization in the business at 4% for the year. And MRO represents 65% of our revenue with now a $150 billion installed base around the world. And we exited the year with $6.6 billion of backlog, up 12% year-over-year. We delivered on innovation in 2023. It was a year of significant releases in our DeltaV platform, Aspen models, and intelligent devices. Our R&D spend as a percent of sales rose to 7% in 2023. Cost management is the way of life at Emerson. The differentiated leverage of 53% is reflective of aggressive cost actions across our business. We also delivered on commitments of no stranded costs related to the Copeland transaction, and will be delivering on the $100 million corporate cost takeout by the end of 2024 through significant transformational activities driving certain functional activities to centralization and best cost locations. I am humbled by the exactness of our performance And I'm certainly optimistic about the future of our company. I'd like to express my appreciation to our customers who increasingly place their trust in Emerson to solve the world's most challenging problems. And lastly, in my opening remarks, I'd like to say I am but one of over 70,000 Emerson team members around the world. I'd like to thank our global employees for your passion, hard work, and energy that you bring to Emerson every single day. Please turn to Slide 3. As I said earlier, and it bears repeating, 2023 was an exceptional year. We are excited to run this cohesive high growth and diversified portfolio. The financial performance was differentiated with double-digit underlying sales growth, 53% operating leverage, and 22% adjusted EPS growth. As we look ahead, 2024 is expected to be another strong year. Operating leverage, excluding NI, is expected to be in the mid to high 40s, and adjusted EPS is expected to be $5.15 to $5.35, including roughly $0.35 to $0.40 contribution from NI. We hit the ground running on October 11, as soon as we closed the transaction, to begin executing the synergy plan and we expect it to provide early benefits in 2024. We are expecting 4% to 6% underlying sales growth, driven by our focus and commitment to winning in our growth platforms, and leveraging our innovation. Energy transition, industrial software, life sciences and metals and mining are expected to remain resilient parts of our portfolio and we are utilizing our leading technology, customer relationships, installed base and expertise to capture investments in these markets. While discrete markets are down in both our factory automation business and test and measurement, we are expecting recovery in the second half of the year. Turning to Slide 4 for some additional details on how we finished the year. 2023 was a remarkable operational year for Emerson. Starting with the orders performance, our teams executed exceptionally throughout the year. We won in the marketplace. We won in markets like LNG, hydrogen, renewables, life sciences, and metals and mining, resulting in 5% orders growth for the year. This shows our portfolio relevance and leadership position for our customers. Orders were also up 5% in Q4, led by double-digit order growth in China and the rest of Asia. Underlying sales were up double digits for the year, exceeding our initial expectation of 6.5% to 8.5% last November and in line with our August guidance. The strength was widespread across the organization with all world areas growing 9% to 10% and both business groups growing 10%. I am most proud of our performance around operating leverage this year. 53% is differentiated. It is a testament to our Emerson management system and our operational talent, which drove strong performance. Adjusted EPS ended the year at $4.44, beating the midpoint of our original November guidance by $0.37 and near the top of our August guidance. Lastly, free cash flow of $2.4 billion was up 35% year-over-year and above our August guidance. Turning to Slide 5. Our 2023 performance caps three strong years of execution, demonstrating the power of our Emerson management system and its ability to create value for our shareholders. We embarked on a transformational journey of Emerson in 2021 and remained focused on execution. Underlying sales growth of 7% and 10% in 2022 and 2023, respectively, shows the leadership position of our automation technology and our world-class sales organization. It is also indicative of our market share expansion within the $160 billion served automation market. Our ability to both leverage our $150 billion installed base as evidenced by our MRO sales in 2023 of 65%, and win new projects are strengths of this company and critical to the long-term success of this business. As we invest more in digital technology and software, we are also seeing the benefits to gross margins, which have expanded 470 basis points to 49% since 2021. Strong price discipline and differentiated technology have also provided positive contributions, and the addition of NI will further expand our gross margins. This enabled strong operational leverage across the business. Over 50% leverage for 2022 and 2023 is distinguished amongst industrials. Cost discipline remains part of the DNA at Emerson, driving further cost productivity and margin expansion. Put all this together and Emerson has delivered back-to-back years of 20-plus-percent EPS growth. Please turn to Slide 6. I want to provide a couple strategic updates on our business. In October, we hosted Emerson Exchange Immerse in Anaheim, California. The event showcased our control systems and software technology and highlighted our integration with AspenTech throughout different solutions and industries. Featuring over 1,400 attendees and over 100 customer presentations, the week was spent discussing the exciting roadmap of our Delta V, Ovation, and AspenTech products and working with customers to solve their toughest challenges. This was all reflected in our keynote presentations from three important customers, Syzygy, a provider of electric catalyst reactor technology, Biogen, and Tesla, who discussed their automation challenges in partnership with Emerson. These types of engagements not only help our users understanding of our current products, but also provide important inputs into our next generation products and innovation. Throughout this event, we highlighted our boundless automation vision, the next generation automation architecture that Emerson is uniquely positioned to deliver based on our leadership position in intelligent devices, control systems, and software. This vision empowers our customers to unlock and access all their operational data, enabling better decisions through analytics and optimization. It also enables customers to balance their production and sustainability goals through enterprise management and a unified software platform. On Slide 7, as part of this vision, we continue to accelerate innovation across four priority domains, disruptive measurement technologies, software defined automation systems, self-optimizing asset software, and our sustainability portfolio. Each of these areas provide stepping stones to enable the boundless automation vision. At Immerse, we introduced many significant new products to our leading DeltaV portfolio. First, DeltaV Version 15 Feature Pack 1 is one of our biggest rollouts in recent history. The package includes enhancements to software like DeltaV Live, the most advanced DeltaV HMI ever developed, and the introduction of a subscription controller, PK Flex. It also includes the DeltaV Edge Environment, a first-of-its-kind edge solution, allowing users to securely move data into their enterprise environments. As we look at the next generation of software solutions and automation platforms, this is a key enabler to unlocking data that users previously discarded. Throughout the rest of the organization, we are also making focused investments in strategic areas. This includes next-generation intelligent devices to further cement our leadership position in our measurement and analytical portfolio, and relevant additions to our sustainability portfolio. At AspenTech, many of the new releases are focused on enabling sustainability and energy transition segments, in addition to further building out capabilities like AI and DataWorks to enable self-optimizing asset management. Please turn to Slide 8. On October 11, we closed the acquisition of NI and announced we will report the business as a new test and measurement segment in 2024. We are very pleased with the progress already in the first month with NI and are excited about the opportunities in this business. We remain committed to the $165 million of synergies by the end of year five, resulting in approximately 31% adjusted segment EBITDA when moving stock comp to corporate. As we have openly stated, NI completes the significant portion of our portfolio transformation, and we are excited to execute as a new company. We will, however, continue to be active with bolt-on acquisitions that fill technology gaps in our business, and we have the balance sheet flexibility to do so. These will be prioritized in four segments we introduced a year ago, industrial software, test and measurement, factory automation, and smart grid solutions. In the fourth quarter, we completed two of these bolt-on acquisitions. Flexim is a global leader for clamp-on ultrasonic technology measuring liquids, gases, and steam. The business is highly complementary to our existing leading flow portfolio consisting of Coriolis, DP Flow, Mag & Vortex, and will also serve attractive growth markets in the energy transition. We also completed the acquisition of Afag in the fourth quarter, a highly strategic asset in the factory automation market. Afag’s electric linear motion solutions, combined with our existing pneumatic motion offering creates a leading motion portfolio for discrete industries in a $9 billion TAM. Please turn to Slide 9. As I mentioned, the large pieces of our portfolio transformation are behind us. And this slide shows that we were able to accomplish what we were able to accomplish over the last few years. We have three main objectives that I communicated when we started this journey. First, cohesiveness, which we now have with an unmatched technology stack. Second, diversification. Discrete is now our second largest end market with further opportunities to expand into attractive diversified industries. And third, our growth is aligned to secular growth drivers. This alignment to energy security and affordability, sustainability and decarbonization, near-shoring, and digital transformation will allow Emerson to move to a more secular and less cyclical business profile. $36 billion worth of transactions. Disposing of assets with low single digit growth profiles and adding businesses we expect to grow cumulatively in the high single-digits to low double-digits. The profitability improvement is also remarkable. Trading 30% GP businesses for those that operate 70% plus gross profits, which are already seeing -- which we are seeing the benefits of today. We are all energized by the opportunity we have with this new Emerson. Please turn to Slide 10. Our current strategic funnel is now over $10 billion in opportunity, with nearly two-thirds residing in our growth platforms. We're also encouraged by the activity of projects already in the funnel, considering the interest rate environment and global uncertainty. In the fourth quarter, Emerson was awarded over $500 million of project content, with over 60% of those in our growth platforms. This includes strategic wins in LNG, carbon capture, hydrogen, life sciences, and metals and mining. These successes are indicative of our team's focus and our technology's relevance within these markets. As we look at further diversifying our portfolio into hybrid and energy transition markets, 2023 was a fundamental foundational year. Specifically, there were three highly strategic projects to highlight. First, Emerson was selected to automate five different plants for Samsung Biologics as it standardizes on our DeltaV automation platform. The Emerson solution provides control for both production skids and for plant-wide operations. We are also currently engaging with a customer on the potential to leverage AspenTech software for future expansion. Secondly, in the third quarter, we highlighted Emerson's selection for the Port Arthur LNG project with Bechtel Energy and Sempra. This quarter, we are pleased to announce we were also selected for another large-scale world-class LNG facility in the United States. The Rio Grande LNG project from Bechtel Energy and NextDecade, located in Texas, will be capable of producing 17.6 million metric tons per annum of LNG across three liquefaction trains. Emerson is providing much of our leading technology, including analytical and measurement technology, and control, pressure relief, and isolation valves. And finally, AspenTech was awarded a Synergy win in the most recent quarter with a world-leading pulp and paper producer. Emerson's DeltaV system is already installed at the site, and through this relationship with the customer, Emerson was able to bring AspenTech to the table. Through this engagement, the customer chose to displace the current incumbent provider of adaptive process control software and instead move to AspenTech. This example demonstrates the power of our Emerson AspenTech integrated solutions and the opportunity to expand AspenTech utilizing our global sales channel. These wins and the continued evolution of the funnel provide a strong foundation as we head into 2024. With that, I will now turn the call over to Mike Baughman. Mike Baughman: Thanks, Lal, and good morning, everyone. Please turn to Slide 11 that summarizes our fourth quarter financial results, which were in line with our expectations. Underlying sales growth was 5%, growing off a tough comp in 2022 when sales shifted from the third quarter into the fourth quarter due to China shutdowns and electronic component shortages. Price contributed approximately 4 points of growth. As expected with our typical seasonality, backlog declined sequentially about $300 million to $6.6 billion, up 12% versus where we entered 2023. Software and control sales grew 2% on an underlying basis, which now includes AspenTech as we lapped a year of ownership. The control systems and software business came in largely as expected and it was comparing against a very strong prior year Q4. AspenTech tends to see lower sales volume in our fiscal Q4 due to the timing of renewals and its sales can be more variable due to ASC 606 accounting. The sales were on forecast and importantly ACV showed strong growth at 10.9% year-over-year. Intelligent devices grew 6%, led by process and hybrid exposed businesses, mainly measurement and analytical and final control. Our discrete automation business was down in the quarter with softer-than-expected demand and Europe and China weakness impacting this business. Emerson adjusted segment EBITDA margin improved 80 basis points to 25.5%. Operating leverage excluding AspenTech was 45%. Volume, margin accretive price cost, which included net material deflation and ongoing productivity programs contributed to the margin improvement. Adjusted EPS grew 21% to $1.29. Lastly, free cash flow for the quarter of $838 million was up 17% versus the prior year. Please turn to Slide 12. As Lal summarized, 2023 was an exceptional year for Emerson. Underlying sales growth was 10% with 4 points of price contribution. Software and control and intelligent devices both finished with underlying sales growth of 10%. All geographies reported strong sales growth with Americas up 10%, Europe up 10%, and Asia, Middle East, and Africa up 9%. Emerson adjusted segment EBITDA margin improved 220 basis points to 25%. Operating leverage excluding AspenTech was 53%. As we've talked about throughout the year, this was driven by leverage on double-digit sales growth, strong execution by our operations teams, margin accretive price cost, and favorable product and project mix. Adjusted EPS grew 22% to $4.44 with $0.27 of contribution from AspenTech. Lastly, free cash flow of $2.4 billion was up 35% versus the prior year. This includes approximately $100 million from the interest on undeployed proceeds from the Copeland transaction. For the year, free cash flow conversion of adjusted earnings was 88%, slightly ahead of our expectations. This also represents a 15.6% free cash flow margin, a metric we plan to utilize moving forward. Slide 13 details the drivers of adjusted EPS growth from the prior year. Operational performance was exceptional. 10% underlying sales growth and 53% segment level operating leverage contributed $0.77 of year-over-year EPS growth. FX was a $0.12 headwind. Stock comp was a $0.16 headwind versus the prior year, due primarily to the mark-to-market accounting for the company's old stock compensation plan, which was mostly offset by pension and other corporate items. The reduced share count resulting from the $2 billion share repurchase contributed $0.14, and the Copeland note receivable interest contributed $0.05 to adjusted EPS for the year. Overall, adjusted EPS grew 22% year-over-year to $4.44. Please turn to Slide 14. We believe 2024 is shaping up to be another good year of financial performance. Our end markets remain generally resilient, evidenced by 5% underlying orders growth in Q4 and for all of 2023. This has resulted in healthy backlog levels, which were up 12% versus where we entered 2023, giving us good visibility into 2024 sales. We also have good visibility through our MRO business, which was 65% of 2023 sales. This day-to-day replacement business gives us good perspective on pace of business and remains constructive. Lastly, we are entering 2024 with a $10 billion-plus funnel, up $3 billion from where we entered 2023. This all feeds our 2024 outlook. Process and hybrid end markets remain strong, driven by secular trends like energy security, sustainability and decarbonization, nearshoring and digital transformation. We expect process and hybrid sales growth of mid to high single-digits in 2024. We continue to see investments moving forward in energy transition markets like LNG, nuclear, hydrogen, carbon capture and renewables. We continue to see nearshoring investments here in the US and around the world in life sciences and metals and mining, especially midstream metals processing and refining, which is being expanded to the United States and Europe. These secular trends in process hybrid end markets and our ability to help customers be successful give us confidence in our 2024 outlook. Discrete markets are obviously in a different part of the cycle, which impacts both our discrete automation and test and measurement businesses. Orders have been negative for two to three quarters but we expect this to begin to turn positive in the second half of 2024. We expect underlying sales to be flat to up low single-digits in 2024 for our discrete businesses -- for our discrete business. From a world areas perspective, it should continue to be a balance, and we expect each world area to grow in the mid-single-digit range. Please turn to Slide 15, where we have outlined our 2024 guidance. Our later cycle exposure, robust backlog and continued orders resiliency support our 2024 guidance for underlying sales growth of 4% to 6%. We expect both intelligent devices and software and control to be within this guidance range for underlying sales. Test and measurement is excluded from 2024 underlying sales and is expected to add another 10 to 10.5 points to reported growth or approximately $1.6 billion of sales. FX is expected to be a 1 point tailwind. We remain committed to driving differentiated incremental margins through our operational execution. Operating leverage, which now includes AspenTech, but excludes test and measurement, is expected to be in the mid to high 40s in 2024, which includes cost savings from our corporate and platform rightsizing. Price/cost will continue to be margin accretive in 2024 and ongoing productivity and cost savings will drive further benefits. We expect adjusted EPS to increase from $4.44 in 2023 to between $5.15 and $5.35 in 2024, an 18% increase at the midpoint. This includes approximately $0.35 to $0.40 from NI, inclusive of stock compensation and approximately $0.32 to $0.34 from AspenTech. There are some movements below the line in stock compensation, pension and other corporate items, which roughly offset year-over-year. This detail can be found in the appendix. As a reminder, stock compensation from NI is now reported in our corporate stock compensation line item. Net interest expense is expected to be approximately $105 million. Lastly, free cash flow is expected to be $2.6 billion to $2.7 billion, which we will discuss in more detail on the next slide. For the first quarter, we expect underlying sales to increase 6.5% to 8.5% with leverage in the mid-30s. Adjusted EPS is expected to be between $1 and $1.05, a 31% increase at the midpoint. NI is expected to contribute approximately $0.05. As I mentioned, we will discuss some additional details on Slide 16 regarding our free cash flow. We ended 2023 with free cash flow of $2.4 billion or 15.6% of sales. This included just over $100 million of after-tax cash from interest on the undeployed proceeds from the Copeland transaction, which will not repeat in 2024. Taking this into consideration and starting from a foundation of approximately $2.3 billion of free cash flow, we expect approximately $300 million of contribution from NI operations and another $350 million increase from base operations. This would have resulted in a free cash flow margin of approximately 16.8% or $2.9 billion of free cash flow. However, we have two headwinds in 2024. First, we expect approximately $200 million of acquisition-related cash payments associated with the NI and bolt-on acquisitions. Second, we are expecting an elevated CapEx spend related to facility expansions, which will increase our CapEx to approximately 2.5% of sales, up from our historical and future expected rate of approximately 2% of sales. Including these two headwinds bring us to our guidance of $2.6 billion to $2.7 billion of free cash flow or 15.2% to 15.4% free cash flow margin. Before we turn the call over to Q&A, I will quickly discuss capital allocation on Slide 17. We remain committed to disciplined capital allocation. Internal development and organic growth investments remain a high priority. This accelerated in 2023 with R&D spend now representing 7% of revenue and NI will further mix this up in 2024. This increase was driven by increased innovation in our four priority breakthrough domains, disruptive technologies and measurement, sustainability, software-defined automation systems, and self-optimizing asset software. We also remain committed to the dividend and announced today, we are beginning our 68th year of consecutive increased dividends with our $0.525 per share declared dividend this quarter. The right side of this chart is where we have flexibility. We will continue to be active in pursuit of strategic bolt-on acquisitions to strengthen our portfolio in targeted areas and we will remain committed to strong returns on these investments. Finally, we plan to have approximately $500 million of share repurchases in 2024. We are energized as we enter the new fiscal year, and we are focused on the execution of our plans. Thanks for your attention. I will turn it back to the operator to open the call for questions. Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jeff Sprague with Vertical Research. Please go ahead. Jeff Sprague: Thank you. Good morning, everyone. Just a couple specific NATI questions if I could. Some noise with the bolt-ons. So could you just be clear for NATI revenues in 2024? And also, if you could provide any color on how their orders progressed in the fourth quarter? And finally, maybe a little bit of around how much of that synergy target happens in the first year. Lal Karsanbhai: Yeah. Hi, Jeff. Lal here. Good morning. So on the revenue, as Mike stated, $1.6 billion is the assumption. It's not in the underlying sales as we reported. Orders in the environment, as I expressed in my presentation, are still challenging in the business, exiting the quarter at down 16% NI which is very much aligned to the plan that we had in place. And we do expect much like in our core discrete markets, orders to flatten out as we get into the second half of the year. So feel very much that they're under in plan from an orders perspective, although still in a challenging environment. And then lastly on synergies. Look, we got off to a really good start, day one. The team's executing very, very well. We haven't given guidance on year one. What I did, I will say is that about half the synergies will be delivered in the first two years. Jeff Sprague: Right. And just as an unrelated question, maybe it's for Mike. But just thinking about the organic guide for 2024, you're exiting here at 4% price with 5% order growth, right? It feels like there's a little bit of room in those organic numbers. Maybe just share how much price is embedded in that 4% to 6% for 2024? Mike Baughman: Yeah. Jeff, the 2024 price assumption is 2%. Jeff Sprague: Great. Thank you. Operator: Our next question comes from Steve Tusa with JPMorgan. Please go ahead. Steve Tusa: Hi, good morning. Lal Karsanbhai: Good morning, Steve. Steve Tusa: Can you just talk about within the cash guidance, what you're assuming on working capital. And then that $250 million that's kind of running through this year, how does all that trend kind of into '25? Mike Baughman: Yeah, I'll start with the second half -- or the second part of the question first. The $250 million is really one-time and in the year related to the acquisitions and some of the higher CapEx that we've got. Steve Tusa: Great. And then just working capital? Mike Baughman: Working capital for the year. Yeah, we exited working capital, trade working capital at about 20.5%, and we're expecting about 50 basis points coming off -- 20.5% of revenue. So we do expect to have a little bit of balance sheet goodness in 2024. Steve Tusa: Great. And then just one last one, just on orders. How do you guys kind of see the funnel stepped up a bit, the backlog, [you had in the] (ph) backlog seasonally, but how do you guys going to see orders and backlog trending over the course of the year here? Lal Karsanbhai: Yeah, I'll comment, Steve. Obviously, we exit at 5%. So we have optimism, and we have momentum out there. Obviously, we have some challenges in discrete, as we talked about in the business. I think as you think about the start of the year, my expectations are flat to low single digits. But as we get into the second half of the year, my expectation is exiting at -- in the mid-single-digit range. And for the full year, somewhere in the low single to mid-single-digit orders. Steve Tusa: Great. And, thanks a lot. Mike Baughman: And then Steve, just on backlog. There -- that pattern holds, there shouldn't be a meaningful change in backlog as we exit 2024. So the backlog should remain healthy. Steve Tusa: Great. Thank you. Operator: The next question comes from Julian Mitchell with Barclays. Please go ahead. Julian Mitchell: Hi, good morning. Maybe first off, just looking at Slide 15, so I wanted to understand why the operating leverage steps up after Q1 when the organic sales growth steps down? Is there any one segment or subsegment or something happening with mix that's driving that? And should we assume that that organic sales growth just steadily decelerates through the year? Mike Baughman: Hey, Julian, yeah there is a little bit of mix and I would say the discrete automation softness that we are expecting in the first half of the year plays in on that. There's -- we've been ramping up our spend around growth platforms and innovation. And so as you come into the first quarter, there's a little bit of a year-over-year comparable that plays into that first quarter leverage as well. Julian Mitchell: I see. So it's really discrete, sort of getting better, and that pushes up the op leverage balance of the year. Mike Baughman: That's correct. Again, obviously we're driving restructuring in the discrete business given the trend in the orders and you will see that margin expansion come through in the second half which would drive up the leverage rates. Julian Mitchell: That's helpful, thank you. And then just a quick follow-up would be around, I suppose, historically process cycles in automation followed discrete by around 12 months, and we see discrete is soft now. Are there any sort of specific reasons why process should hold up differently this time versus history instead of following discrete lower later this year? Lal Karsanbhai: It's a good question, Julian. One that we've thought a lot about and been watching very carefully. The fact of the matter is that we have some very unusual secular trends going on in the world right now. I think a lot of our process activity is driven by two -- three critical areas. The near-shoring activity, which impacts life sciences and the metals and mining value chain. The energy affordability and security, which is impacting significant continued investment in liquefied natural gas and nuclear. And thirdly, equally important, sustainability. I think we're past the tipping point in terms of the -- our customers' commitment around sustainability, and we're seeing continued investments there. So whether we believe those will transcend certain economic cycles and that will impact how we should think about the strength of process as we go through 2024. Ram, you have something to add? Ram Krishnan: Yeah, and the other point I'd make, Julian, is the capital spend in the process hybrid industries has been pretty disciplined. There hasn't been a boom in capital to cause a correction as we move forward as opposed to the prior cycles we saw. So I think that disciplined capital spend plus obviously the trends that Lal identified where the sustainability investments provide that tailwind, we expect process to continue to run for a lot longer. Julian Mitchell: I see, so you… Lal Karsanbhai: Process and hybrid -- and hybrid, yeah. Julian Mitchell: Got it. So the process and hybrid orders growth should stay fairly steady through 2024. Lal Karsanbhai: That is our expectation, yes sir. Julian Mitchell: Fantastic. Thanks for the help. Lal Karsanbhai: Thanks, Julian. Operator: The next question comes from Nigel Coe with Wolfe Research. Please go ahead. Nigel, your line is now live. Nigel Coe: Okay. The line is live, but I'm not, so sorry for that. So National Instruments, I think that the 4Q fiscal sales were down, I think, high single-digit, organic. Is that the right number? Is my math correct? And it looks like the guide implies flattish to maybe slightly down organic. Just wondering what the profile is on that and anything on orders there would be helpful. Ram Krishnan: Yeah. So, Ram here, Nigel. From an orders perspective, as Lal indicated, the last quarter, which is our fourth quarter, down 16% in orders, we expect orders to remain down for the first half and turn positive in the second half. And you are right, the $1.6 billion that we're guiding will translate to down 5% to 6% for the year from a sales perspective. And sales should turn positive in the fourth quarter. So we'll have down sales for the first three quarters and positive in the fourth quarter. Nigel Coe: Okay, great. I'm sorry I missed the order number. Thanks for clarifying that. And then on the backlog, backlog down from $6.9 billion to $6.6 billion QoverQ, maybe just clarify, I don't think that's unusual from a seasonal perspective. I think it's normal to see 4Q backlog consumption. Was there any FX revaluation impacts there? I just want to make sure that I understand the organic movement there. Mike Baughman: No, that's on a consistent GAAP basis. Nigel Coe: Okay, great. Thank you. Operator: The next question comes from Scott Davis with Melius Research. Please go ahead. Scott Davis: Hey, good morning, everybody. Congrats on all the stuff done. Lal Karsanbhai: Good morning, Scott. Lal, it sounds like you were just in China, if you were around the world, and it seems pretty topical to get an update from what maybe you saw there. I'll just leave it there. Lal Karsanbhai: Yeah, I actually, on this particular trip, did not hit China. We'll do that later in the year. I was there in May. But having said that, look, we had a very good year in China. We exited orders at 11% in China. So feel good about the momentum there again. The investments there really around energy security and nearshoring are very significant. Sales were in the mid-single-digits for the year, and -- but we continue to see robustness in our core process and hybrid spaces. And not unlike what Europe and the United States struggling on the discrete side, but certainly the process hybrid strength will continue as we expect into 2024. Scott Davis: And then the discrete in China is negative I'd assume this quarter? Lal Karsanbhai: Yes, it is negative in the quarter. Yes, sir. Scott Davis: Okay. I'll pass it on. Thank you, guys. Lal Karsanbhai: Thanks, Scott. Operator: The next question comes from Joe O’Dea with Wells Fargo. Please go ahead. Joe O’Dea: Hi, good morning. Thanks for taking my questions. One, just on the NI earnings contribution for the year, $0.05 in the first quarter would be kind of running, I guess, $0.10 a quarter or a little better for the rest of the year. But any more detail on that cadence? Anything that's sort of cost heavy up front and then the progression through the course of the year as you're thinking about that earnings contribution? Lal Karsanbhai: No, I don't have anything else to add, Joe. I mean, obviously, there's a -- as Ram expressed, a volume expansion as we get to the second half of the year that will drive leverage and incremental profits, but that's really what the tale of the tape there is. Joe O’Dea: Okay, and then on the R&D side and the step up to 7%, it sounds like it goes even higher in ‘24. Any context on that? And then sort of an additional insight on sort of the products and verticals that are getting outsized investments, as well as what your returns focus is on R&D, the prioritization around share gain or sort of the revenue dollars that you want, returns on R&D investment, any sort of context around that? Mike Baughman: From a dollars perspective, yeah, we get the benefit of Aspen coming in, that mixes us up, and then NI comes in, and that also mixes us up. So you'll continue to see that commitment to growth, innovation, accelerate and increase as we move on. And in terms of where the investment is going, a lot of the investment really is across the four technology areas we've consistently showed you guys. It's disruptive measurement which is the sensing technology in our measurement technologies business, our automation system, the next generation automation system that Lal referenced in the presentation, and also collaborative technology development with Aspen around asset performance management. So those are the areas where we see lots of opportunity in terms of new-to-the-world type innovation that we can drive as an automation company and that's where the investment is going. Joe O’Dea: Thank you. Operator: Next question comes from Christopher Glynn with Oppenheimer. Please go ahead. Christopher Glynn: Thank you. Good morning. I was curious about the funnel conversion comments. I think last quarter you indicated that the conversion rates of those are picking up as the size of the projects ramps and some of the newer technologies and applications. So, just curious, trend line if you see in further acceleration and how much of that notion is baked into the fiscal ‘24 guidance or could that be an opportunity? Lal Karsanbhai: No. Hey, Chris, Lal here. No, look, we continue to see the funnel expand organically to begin with. So it did grow from quarter over quarter, which is why we thought it was important to show you. But what's most interesting, it's growing in the right spots for us. It's growing along the growth platforms that were -- where we have the focus of the organization. So that comprises about $6.6 billion of the funnel today, of which energy security and transition is a big part of that. Sustainability and decarbonization is a large part of it. If you look at the wins, they are very much aligned in the same way as the funnel, winning at about 60% aligned on the growth platforms-ish with energy transition a big part of what we are converting here. So feel really good about it. I -- we're watching it carefully, of course, in terms of movement through FID and other elements, but at this point in time, continue to have optimism, particularly products that are purely connected to national security, nearshoring, or energy affordability elements. So, feel pretty good about what we see in front of us. Christopher Glynn: Thanks. And if I could ask another on discrete, what kind of impacts are you seeing in terms of channel versus end demand? Ram Krishnan: From a channel perspective, I mean, if you're referencing destocking, we're not seeing that. The discrete slowness is purely market driven, certainly European machine builders, China is an end market, and an overall slowdown in the factory automation segment in North America. And you see that with obviously a lot of our peers that have a lot more exposure and discreet. Frankly, versus our peers, we're holding our own in terms of the order rate decline in discreet, and we do expect to see a second half ‘24 positive orders for the business. Christopher Glynn: Great. Thank you. Operator: The next question comes from Andy Kaplowitz with Citigroup. Please go ahead. Andy Kaplowitz: Well, I think last quarter when you began to talk about FY ‘24, you mentioned more normalized incrementals in the mid 30% range, but you're guiding to mid to high 40% ex-test and measurement. So could you give us a little more color into the assumptions? I know you get price for ‘24 and you're starting off a little lower, but it seems like you're still getting supply chain tailwind benefits. Andrew, how would you assess your performance versus your longer term algorithm of 35%? Is it possible that that algorithm could be a bit conservative? Lal Karsanbhai: It's possible. Yes, Andy. We've been operating in the mid-50s over the last couple of years. There's a significant amount of momentum around cost in the business. As I mentioned, we have tailwinds that will be delivered through the actions we're taking, not just within the segments, but also at corporate as we go through 2024. Now having said that, on the supply chain side, we're on the positive side of most of the measures. Obviously, logistics environment is flipped. And on material flow, generally significantly better. Of course, we fight spot shortages as you'd expect in any business. But generally, we are in a very different world on the supply chain. So that's all very positive. So it's really around execution. Look, we have a -- the gross margins of the business are 49% in 2023. They'll expand further, as Mike described, in 2024. And with that comes an expectation of a higher leverage and a higher incremental for the business. So at this point, feel very comfortable with the guide we put out there for the year in that mid to high 40s which is, I think, differentiated. And we'll really think through what we talk about and guide on a longer-term basis from a financial plan perspective as we go through the year. Mike Baughman: Just to amplify that a little bit, Andy, we've also been talking about this $100 million of corporate platform cost takeout, which has been reading through in the businesses, and we'll read through in the business in '24 as well, which is an uplift for the year. Andy Kaplowitz: It's great to hear. And then I know you want to retire the KOB 1, 2, 3 names, but when we think about ‘24, I think you've been averaging something like 65% KOB3. Would you expect that to hold up at around that level? And what are you seeing on the KOB3 side? Is there just a lot more activity that could also help with margins given that tends to be higher margin work? Lal Karsanbhai: Yeah, no, we certainly expect MRO in the 60% range for 2024, Andy. You're absolutely right. It's the most pricing elastic portion of our business. It's typically replaced like for like within processes. And so we feel we have a great understanding of where the $150 billion of install base is located and we have specific programs across our service organizations and selling organizations to ensure that we mine that and that we keep that product evergreen. So I feel good about that, but in that 60% range, I think would be the right expectation. Andy Kaplowitz: Appreciate it guys. Lal Karsanbhai: Thanks, Andy. Operator: The next question comes from Tommy Moll with Stephens. Please go ahead. Tommy Moll: Good morning and thank you for taking my questions. Lal Karsanbhai: Hi, Tommy. Tommy Moll: Well I wanted to start with a follow-up on discrete. You've called out the weakness there previously. Obviously it's been front and center today. So I'm just curious, were there incremental pockets of weakness you picked up through the last quarter and then as you look through to the second half of the coming fiscal year where you expect a return to growth, is the visibility there more just a comps issue or are there some green shoots in terms of the real underlying demand that you can call out at this point? Lal Karsanbhai: No. So a couple of things. What we're experiencing through the quarter or we have experienced through the quarter is demand-driven weakness. As Ram accurately portrayed, it's not as the stocking element. As a matter of fact, a very small percentage of our business runs through stocking distributors in the discrete side. But nevertheless, it's demand that we really focus on, and it's global weakness across the key markets. Now having said that, the comparables do get easier as we get into the second half. We're not counting on underlying demand conditions in the discrete market significantly improving in the second half. What we're benefiting from is obviously the [competitors] (ph) for us. Tommy Moll: Makes sense. And then if I look at the consolidated outlook you've provided for the first quarter and then the full year, you're starting the year in the high single-digit range, full year in the mid-single-digit range. So there's some deceleration implied there. Is there some conservatism around there, just given the issues you've called out on the discrete side? Are there comp items that you would point out for us? Lal Karsanbhai: There's nothing extraordinary other than we've got to be cautious on the discrete cycle. Tommy Moll: Great. We appreciate the insight, and I'll turn it back. Lal Karsanbhai: Thanks, Tommy. Operator: This concludes our question-and-answer session. The conference has 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.