Emerson Electric Co. (EMR) on Q1 2023 Results - Earnings Call Transcript

Operator: Good morning, and welcome to the Emerson First Quarter 2023 Earnings Conference Call. All participants will be in 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 Colleen Mettler, Vice President Investor Relations. Please go ahead. Colleen Mettler: Thank you. Good morning. Thanks for joining us for Emerson's first quarter fiscal 2023 earnings conference call. Today, I'm joined by President and Chief Executive Officer, Lal Karsanbhai; Chief Financial Officer, Frank Dellaquila; and Chief Operating Officer, Ram Krishnan. 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 risks and uncertainties. Please take time to read the safe harbor statement and note on the non-GAAP measures. I will now pass the call over to Emerson President and CEO, Lal Karsanbhai, for opening remarks. Lal Karsanbhai: Thank you, Colleen. Good morning, and thank you for joining us. I'd like to begin by thanking the global Emerson family for delivering yet another strong operational quarter. I'd also like to extend my appreciation to our Board of Directors and the shareholders of Emerson for your continued confidence in this management team. We remain confident about the strength of our markets from both a geographic and an industry perspective. This is exemplified by our project funnel that continues to grow, exceeding $7 billion at the end of the quarter. Before I turn the call over and discuss the quarter's performance, in review of our strong outlook for the second quarter and the year, I'd like to say a few words about our headquarters announcement this morning. We conducted a comprehensive three-month review of location options. St. Louis was selected following this rigorous process, and we look forward now to finding an appropriate location in the region. Please turn to Slide 3. Operationally, the first quarter was very strong for Emerson. End market demand remains strong as first quarter order trajectory played out largely as planned. 5% underlying orders was as expected as broad automation strength was weighed down slightly by a double-digit decline in safety and productivity orders against tough comps. Sequential underlying orders were also up 6% versus the September end quarter. Sales met our expectations at 6% underlying growth, slightly impacted by shutdowns in China. Our business performed very well operationally, displaying the strength of our Emerson management system. Operating leverage, excluding AspenTech was 40% and ahead of our mid to high 30s expectation. Adjusted EPS was $0.78 for the quarter and was impacted by two main below-the-line items. Stock compensation was a $0.09 headwind versus 2022, driven by a 31% stock price increase throughout the quarter and its subsequent impact on the remaining mark-to-market plan. While we expect a slight headwind from the addition of AspenTech's stock comp rolling into our financials, the overall stock compensation headwind was 8% worse than anticipated. Frank will provide more color on this in his section. Similarly, FX was worse than originally expected. However, despite these headwinds, operations performed above guidance as our business continued to execute. Lastly, we completed our committed $2 billion of share repurchase in the first quarter. Turning to Slide 4. I'd like to walk through some exciting successes and the strong momentum we see in the value creation priorities we laid out on November 29. First, in late January, we visited the Middle East and had the opportunity to break ground on our new state-of-the-art innovation and manufacturing hub in Saudi Arabia. This investment is designed to not only spur innovation for the region, focusing on the transition to clean energy segments like hydrogen and clean fuels, but also demonstrates our commitment to our regionalization strategy and best cost manufacturing. Pillars of our operational excellence. As an example of the projects our investment will supply, Emerson was chosen to provide automation for the world's largest green hydrogen facility by NEOM. The plant will provide 600 tons a day of green hydrogen using Emerson Automation technology throughout production processes and renewable power generation. Emerson's local support and installed base in the Middle East were key differentiators. Secondly, Emerson and AspenTech continue to succeed with our joint customer solutions. In the first quarter, we were jointly selected to automate the Middle East's largest ethane facility by QatarEnergy and Chevron Phillips, Ras Laffan. Emerson will serve as the main automation contractor for the $6 billion facility, providing our leading DeltaV control system with AspenTech engineering and simulation products. The project is a scale example of our commercial agreement with AspenTech and how it successfully provides an expanded differentiated product offering to customers. Lastly, Emerson continues to diversify through life sciences and metals and mining markets. In the first quarter, Emerson was awarded the automation contract for FUJIFILM Diosynth Biotechnologies in Europe. The expansion project will include multiple bioreactors and processing streams, one of the largest CDMOs in Europe. These three projects are a clear demonstration of Emerson's commitment to the growth platforms we discussed at our investor conference, and our continued success differentiating as an automation leader in these markets. Before I turn the call over to Frank, I wanted to briefly discuss our proposal to acquire National Instruments for $53 per share in cash. As you know, we made our offer public on January 17 and our correspondence with NI since 2022, May, is available on maximizing value at ni.com. Emerson is committed to an acquisition of NI and is participating in the strategic review process. We believe our premium all-cash proposal with no financing conditions or anticipated regulatory concerns is compelling and in the best interest of Emerson and NI shareholders. We look forward to continued engagement with NI and its advisers and moving swiftly towards an agreed transaction. That said, the focus of this call is our performance for the quarter, and we're not going to be commenting further on our proposal for NI at this time. Be assured that we'll continue to execute financial diligence as we review these opportunities. With that, I will now turn the call over to Frank. Frank Dellaquila: Thank you, Lal, and good morning, everyone. Please turn to Slide 5. As Lal mentioned, we had a very strong operational start to 2023. Underlying sales were within our expectations for the quarter at 6%, driven by 10% growth in software and control and 5% in Intelligent Devices. Net sales were up 7% with a four-point drag from currency and a five-point contribution from AspenTech. World area growth was led by the Americas, which was up 13%, driven by strong process sales, particularly in energy and chemical. The continued energy crisis in Europe, affected demand as underlying sales were below prior year by 2%. However, sales were up 7% after adjusting for the impact of Russia. Sales in Asia, Middle East and Africa were flat versus prior year, as strength in the Middle East, driven by chemical and energy investments was offset by dam sales in China, mainly due to challenging year-on-year comparisons and sporadic code-related shutdowns. By industry, we continue to see strength in later cycle markets like energy and chemical. Chemical investments and plant modernization and sustainability remains steady in North America and Asia, but we are keeping a close eye on this market as we assess our outlook for the balance of 2023. Overall, first quarter process industry sales were up high single-digits. Similarly, hybrid sales were up high single-digits, led by continued investments in life sciences reshoring and metals and mining. Discrete sales were up mid single-digits as this earlier cycle business starts to lap more difficult comps. The growth in discrete was offset by weakness in our commercial business in safety and productivity, which was down 10% for the quarter, but with early signs that we are bottoming out. Overall, we feel confident about the health of our end markets and our conversations with customers indicate continued growth in investments during 2023. Price during the quarter contributed four points as our pricing actions from 2022 and additional actions taken at the beginning of 2023, are driving strong price realization. Backlog grew approximately $700 million during the quarter to $6.6 billion, giving us ample opportunity to execute on the rest of the fiscal year plan. Adjusted segment EBITDA margin improved by 130 basis points and leverage was 40%, excluding AspenTech. North America mix contributed to the margin expansion and price was accretive to margin in the quarter. Software and control margins were up 200 basis points, led by AspenTech. Intelligent Devices performance was strong with 110 basis points of adjusted EBITDA expansion. Adjusted EPS was $0.78, and I'll discuss the details when we move to the next chart. Lastly, on this chart, free cash flow of $243 million was down 20% year-over-year, mainly due to trade working capital, including the impact of supply chain performance, which is improving, but is still challenged. We are focused on improving trade working capital as we progress through the year, and we reiterate our expectation of 100% free cash flow conversion for the full year. Turning to Slide 6. This is our adjusted EPS bridge versus the prior year. First, I wanted to say that we had very strong operational results, again, reflecting low-40s leverage on incremental sales, which delivered $0.15 to adjusted EPS in the quarter. There was an unfavorable impact due to stock compensation as Lal said of $0.09 and an additional $0.09 due to currency. The stock comp impact was primarily due to our legacy long-term incentive plans, which required mark-to-market treatment on recorded expense of the 31% increase in our stock price during the quarter. The last of these plans will run off in 2023 and the new plans do not require mark-to-market accounting. So going forward, the variability from stock comp will be dramatically reduced in 2024 and beyond from what it has been historically. Currency in the quarter was primarily driven by the accounting treatment of our long-term contracts in addition to customary translation and transaction impacts. Other non-operating items and share repurchase contributed $0.02 through the quarter. Please turn to Slide 7. Turning to our 2023 outlook. We continue to see strength across our end markets. As we communicated in October, process, hybrid and discrete markets are all expected to grow mid to high-single digits in 2023. The long-term secular trends we discussed in November continue to be relevant for our business and are driving growth and successes in 2023. Energy transition spend continues to be strong as evidenced by the successes Lal highlighted a few minutes ago. Energy security investments, including LNG continue to accelerate especially in North America and the Middle East. In hybrid, life sciences investments due to reshoring continue to move forward and metals and mining spend is centered around electric vehicles and electrification value chains. Those value chains are also benefiting discrete markets, especially in the U.S. The one weakness we see in the business today is our commercial exposure within the Safety and Productivity segment, which was down 10% in the first quarter. We expect these sales to improve as we move throughout the year as we face easier comparisons and we see early signs of a turn in demand. Please turn to Slide 8. We’re maintaining our full year guidance based on the underlying strength in our end markets and robust backlog. The guide for underlying sales growth remains at 6.5% to 8.5%. We now expect currency to be less of a headwind at 2 points, and AspenTech is expected to contribute 3.5 points. Therefore, we are increasing our net sales expectations to 8% to 10% of a point from the previous guide. We are holding operating leverage, adjusted EPS and free cash flow conversion for the year at the previous guide. Within that guide, we intend to cover the unexpected stock comp headwind that we had in the first quarter with excellent operational performance. For the second quarter, we expect underlying sales growth of 8% to 10%. Currency continues to be a headwind, reducing sales growth by approximately 3 points. AspenTech will contribute approximately 5.5 points and net sales are expected to be 10.5% to 12.5% up. Leverage expectations again are in the mid to high-30s. Adjusted earnings per share is expected to be between $0.95 and $1, which is a 13% increase at the mid-point of the guide. We’ve included quarterly data for 2022 on a continuing ops basis in our press release and in the 8-K that was filed this morning. Thank you for your attention, and we’ll now turn it over to the operator for Q&A. Operator: We’ll now begin the question-and-answer session. Our first question will come from Scott Davis with Melius Research. You may now go ahead. Scott Davis: Hey, good morning, Lal and Frank and Ram and Colleen. Lal Karsanbhai: Hey Scott. Frank Dellaquila: Good morning. Colleen Mettler: Good morning. Scott Davis: Couple little clean up items since I think these slides are pretty clear, but was price predominantly – you think about the total growth in the quarter, 6% was price. Does price make up most of that? Lal Karsanbhai: Hey Scott, good morning. Lal here. Yes, in the quarter, price accounted for 4 points approximately out of the 6, 2 points of volume. Scott Davis: And did that cover costs, Lal? Lal Karsanbhai: Yes, sir. Scott Davis: Okay. And just a quick follow-up here on life sciences. I know some of your peers have seen some weakness in life sciences, but you guys made some pretty positive comments relating to that end market. Can you be – or just give us a little bit more color on what your customers are spending money on. You mentioned localization, but perhaps a little bit more color there would be helpful. Thanks. Lal Karsanbhai: Yes. No, a very active quarter in life sciences globally, Asia, Southeast Asia, United States, East Coast and Europe, a variety of projects we chose one to highlight with you today. It’s predominantly around automation. It’s expansion of capacity. It’s driven by the trends that we discussed at our investor conference, whether it’s personalized medicine, or capacity derisking in the world areas. We have yet, Scott, to expand with a full offering of AspenTech into the space that’s in development and will be released to you shortly, but that will give us another avenue as we bring optimization software into that space. Scott Davis: Okay. Helpful. Best of luck this year guys. Thank you. Lal Karsanbhai: Thanks, Scott. Frank Dellaquila: Thank you. Operator: Our next question will come from Josh Pokrzywinski with Morgan Stanley. You may now go ahead. Josh Pokrzywinski: Hi, good morning, everybody. Lal Karsanbhai: Good morning. Josh Pokrzywinski: Just a couple of questions, both relating to kind of orders pipeline backlog and the conversions there. I guess while backlog has not had kind of this enormous surge that you’ve seen maybe in some other names that had a tougher time on supply chain, but how do you think about backlog conversion in your guidance? Is the expectation that orders start to moderate versus accelerate? Where would you be pleased to see backlog over the next 12 months? And then sort of a second related question, how do you feel about kind of the pipeline of projects today and the pace at which things are looking out of those? Lal Karsanbhai: Yes. No, backlog did increase in the quarter as we went through. Look, I do feel very confident with the order pacing in the businesses with the weakness only in the Safety Productivity segment that we described throughout the call. Beyond that, the funnel is very robust. It actually grew almost $500 million in terms of size, as we went through the quarter to about $7.3 billion globally, a large number of sustainability projects, large number of energy transition projects. And we’re executing very well in that capital formation cycle. So feel very good about that. So look, I think from an orders perspective, my expectation is we continue to see a very positive environment as we go through the year. And our job here, and I think it’s embedded in our second quarter guidance to convert the backlog that we have in the business. Josh Pokrzywinski: Great. If I could just get one little follow-up on there. How do you feel about kind of the margin that you guys are seeing on some of these larger projects? I know people think about mega projects and margin erosion aggressive bidding. Has that been your experience with this wave? Lal Karsanbhai: No. You see the leverage that we gained in the quarter, about 40 points. There were project shipments within the quarter embedded in it. We feel very, very good about our differentiating capabilities with our technology stack. Yes, there’s competitive bidding, but it’s nothing out of the ordinary that we’ve seen and nothing that we can’t manage within our pricing models. Josh Pokrzywinski: Correct. Great. Appreciate the color. Best of luck. Operator: Our next question will come from Andy Kaplowitz with Citigroup. You may now go ahead. Andy Kaplowitz: Good morning, everyone. Lal Karsanbhai: Good morning. Andy Kaplowitz: Lal, I just want to follow-up on the last question in terms of when I look at orders, have you seen any bigger signs of deceleration activity anywhere outside of Safety and Productivity? I know you mentioned you’re watching chemicals. I think Antonio also mentioned that. Would you expect orders to hold in chemicals? Or any of the other process markets? And orders continue to be focused in the Americas, as you’ve said in the past. Lal Karsanbhai: Yes, good question. We had a really good Americas quarter and strong momentum there, a very strong Western Europe quarter with great momentum there. Of course, Eastern Europe is relative weakness because of Russia, of course, as we walked away from that market. So the comparables there were pretty tough. And then Asia and the Middle East, very strong. Of course, China was down for us in the quarter, but we see that coming back here in the second quarter and expect high-single digits as we finish out the year. So generally, Andy, based on what we’re seeing beyond the Safety Productivity segment, I feel very confident about not just the second quarter guide we put out there, but the full year at this point. Ram, any color? Ram Krishnan: Yes. I think Western Europe being resilient is very positive for us. And then the KOB3 business, which is now close to 65% of our total sales mix in the new company has been very strong. So that’s a good sign and Andy, the project funnel is building. So at this point, in the core business outside of Safety and Productivity, no signs of weaknesses. Andy Kaplowitz: Very helpful, guys. And then you talked about this a little bit, but you delivered incrementals of 40%. You mentioned the major reason is that positive mix from strength in the Americas. Is there any reason why that would change as you go throughout the year? And I know you talked a bit about price, but did price versus costs come in a little bit better than you would have thought for Q1? And could that continue for the year? Ram Krishnan: Yes. I think we’re going to see strong price cost through the year. And frankly, with fundamentally price holding at high levels and like we saw in the first quarter, but also coupled with commodities softening as we go into the second half as we see both commodities as well as logistics turn favorable. So I think really, the margin performance in Q1 is, yes, Americas mix, but also strong price cost, which should continue through the year. And we don’t expect North America sales to soften through the year. So the dynamics we saw in Q1 should continue through the year. Andy Kaplowitz: Appreciate it guys. Lal Karsanbhai: Thanks, Andy. Operator: Our next question will come from Deane Dray with RBC Capital Markets. You may now go ahead. Deane Dray: Thank you. Good morning, everyone. Lal Karsanbhai: Good morning, Deane. Deane Dray: Look, I know it’s a happy day in St. Louis. Emerson has had such an important presence in the community for so many years. So I’m sure that’s great news for everybody. Lal Karsanbhai: Thanks, Deane. I think we’re all pretty excited about the decision and the process that we went through. Deane Dray: And it also avoids the logistics and disruptions and so forth. So that’s great to hear. My question, it would be for Frank. For reaffirming the free cash flow conversion, 100% for the year, what has to change in working capital? We’re still seeing such across the industrials. The buffer inventory required with supply chains are still chewing up enough of working capital that you’re seeing lots of underperformance on free cash flow. So how do you see this playing out? Frank Dellaquila: Yes, good morning, Deane. Mainly, it’s an inventory story. It has to be around getting the backlog out in order to get the inventory down and supply chain is adjusting and improving but in ways that aren’t always helpful in terms of difficulty and timing, receipts of materials. So that’s the fundamental thing that needs to change is that we need to get the inventory out over the next three quarters. And a big part of that will be shipping the backlog that we have, and we certainly have a robust backlog level. So it’s about execution now going forward. Ram and I discuss that in detail with our businesses when we had our quarterly ops reviews and I’m sure Ram can comment a little further on the supply chain implications. Ram Krishnan: Yes. Frank, you said it. I mean at the end of the day, I think right now, we were somewhat positively surprised at the pace in which the supply chain delivered in the first quarter. So I think that was one of the reasons inventory built, but that’s, in some ways, good news that positions us to execute on the backlog in the remainder of the three quarters and that remains the focus. And obviously, we’ll make slight adjustments in optimizing how we drive material in from our supply chains, given that they’re performing better. But ultimately, it will come down to execution of the backlog, which we’re poised to do. Deane Dray: Great. And then just as a follow-up, and I know there’s not been any specifics provided yet is what’s the potential for other portfolio moves more in the way of cleanup we could point to some businesses that would be less core under the new automation pure-play framework. It’s just – maybe you can just comment on the willingness of the Board to look at this and potential timing in terms of monetization of those businesses. Lal Karsanbhai: That’s great question. We’re – we voiced in our November 2019 Investor Conference that we’re going to be active managers of the portfolio, and that is inclusive of both the opportunities to build on the cohesive automation company, but also to continue to prune where and when necessary. At this point, we don’t have an impetus to do so, but we’ll continue to pursue critical bolt-on acquisitions. Of course, the NII pursuit that I – that you’re aware of. But we’re also continuing to look at the existing portfolio. But I would not expect anything of scale there after a very busy 2022. Deane Dray: Got it. Thank you. Lal Karsanbhai: Thank you. Operator: Our next question will come from Julian Mitchell with Barclays. You may now go ahead. Julian Mitchell: Hi, good morning. I think we’ve had sort of good top-down color. So maybe trying to look at some of the segment pieces a little bit. Maybe on safety and productivity, just starting there. I realize it’s quite a small business for you, but I guess two questions on it. One was just talk a little bit about how you see the slope of the organic sales playing out the balance of the year? And then secondly, the margins were up, I think, 100 points in that business year-on-year despite a weak revenue performance. So maybe help us understand how you delivered that and is it sustainable? Ram Krishnan: Yes. Julian, Ram here. In terms of the buildup of the sales, I think Q2 will be negative, but we anticipate it going positive in the second half or close to a flat year for the full year. That’s kind of how we’re looking at safety and productivity. The margin improvement clearly driven by – we had some focused restructuring that we executed in that business, anticipating the slowdown second half of last year and then favorable price cost performance, certainly strong price in the business close to 9 points of price in Q1. Obviously, the cost savings flowing through and then softening materials or material costs as we get into the second half should drive continued strong margin performance in the business through the year. Julian Mitchell: That’s very helpful. Thank you, Ram. And then secondly, just on the discrete business. You grew, I think, 6 points in the quarter. Maybe remind us kind of what your main areas of strength are in discrete, whether it’s by vertical? And I assume there’s a lot of domestic business and also Europe in there. And also, I think you mentioned briefly some early cycle elements softening. So maybe expand on that a little bit and whether you see the discrete business kind of holding that 6% growth rate through the balance of the year? Lal Karsanbhai: Yes. We have a very balanced business from a global perspective, Julian. We saw a broad strength in the United States, both into direct OEM business as well as through our distribution networks. That continues to be very robust. No signs of weakness there, although we’re watching that very carefully in terms of stocking levels and other elements. Our Western European business, which I cited earlier, was very strong in the quarter, heavily driven by – within the discrete business as well. It’s particularly in places like France and Germany, which are critical markets for us. And then lastly, in Asia, outside of China, a very strong market. And now with China recovering feel that we are well positioned there. From a technology perspective, again, very good growth on the automation on the control side, PLCs and industrial PCs, and of course, with the various devices around material movement in the plants. Ram, any color for Julian? Ram Krishnan: No. I think – I mean, from a segment perspective, we broadly have factory automation and industrial automation segments within the business. So both those continue to do very well. And frankly, I think we anticipate mid to high single-digit growth for the year in that business overall. The 6% was somewhat impacted by shutdowns in China, which that business experienced. So frankly, we expect that to improve as we go through the year. Julian Mitchell: That’s great, thank you. Operator: Our next question will come from Jeff Sprague with Vertical Research. You may now go ahead. Jeff Sprague: Hey, thanks. Good morning, everyone. Lal Karsanbhai: Good morning. Frank Dellaquila: Good morning. Jeff Sprague: Maybe a housekeeping one for me first and then I want to come back to some of the projects, but just can we put a finer point on comp and FX? So the $0.09 headwind, it seems like you expected the $0.01 headwind. Can we just clarify what was – what is assumed for the entire year and how that’s changed versus your original expectations? And then on FX, so you’re saying in addition to just kind of normal translation headwinds, there was some contract or other backlog adjustments. Could you just elaborate on that a little bit? Frank Dellaquila: Yes. Good morning, Jeff. It’s Frank. Yes. So on FX, I mean, we originally had low double-digit impact on current – on the – from currency for the year in the guide back in October. That’s moderated. It’s probably in the $0.05 to $0.10 range now. So I mean, we have a little bit of an improvement there based on the turn in the dollar. And then you asked again about stock comp as well. So yes, there, we had built in a little bit of an increase in the addition of AspenTech and more or less flattish for the quarter for Emerson, and then we had the mark-to-market impact that was driven by the 30%-odd increase in the stock price on the legacy plans. So that was entirely incremental to what we had in the guide, $0.09 year-over-year and kind of $0.07 or $0.08 versus the guide. So that’s the big headwind we had there, which we are – which is now kind of embedded in the year, and we will just absorb that and overcome it within the year guide. Jeff Sprague: And just on the projects law, interesting couple you call out here. Could you just maybe give us a sense of kind of the dollar scope of some of these large benchmark product – project like this, maybe the green hydrogen project, what your content looks like on the front end and maybe what the tail of a project looks like? Lal Karsanbhai: Yes. No, these fall very much within the parameters, Jeff, that we laid out in terms of automation dollars per gigawatt as we think about hydrogen, for example. 600,000 – I think it’s – I believe it’s 600,000 per gigawatt is what we laid out, if I’m not mistaken, Ram? But on the petrochemicals – and for example, ethylene, again, KOB1, very significant there in the $20 million to $30 million type of scale. And then, of course, there’s all the downstream and the instrumentation business to come. So, some of these are very sizable. The specific one that we highlighted, of course, about $50 million in first purchase, which is the DeltaV system and then there’s further instrumentation to come. So they’re very sizable in terms of scale, but in line with how we think about dollars of automation per capacity, depending on the market they’re in. Jeff Sprague: Got it. Thank you. Operator: Our next question will come from Steve Tusa with JPMorgan. You may now go ahead. Steve Tusa: Hi. Good morning. Ram Krishnan: Good morning. Steve Tusa: Can you guys just talk about maybe some guidance for Aspen in particular, especially the cash flow coming in the next couple of quarters? How confident you are in that? And where you see that coming in? Frank Dellaquila: Yes. Steve, you cut out a little bit – this is Frank. You cut out a little bit at the beginning of your question. I mean, again... Steve Tusa: Aspen free cash flow. Yes, Aspen free cash flow and how confident in moving forward… Frank Dellaquila: We didn’t hear or I didn’t hear. Ram Krishnan: Yes. I mean, Steve, I think – go ahead. On plan. Frank Dellaquila: Yes, on plan, very seasonal. So their fourth quarter, our third quarter will be a big cash flow quarter. And we see and we – based on the plan, we think they’ll deliver it as they have in the past, so it will be heavily in that quarter. Ram Krishnan: Yes. On guide, Steve, I think – and third quarter for them will be – or our third quarter will be the big quarter. Frank Dellaquila: Yes. I mean, obviously, they can provide the color and the background on that. But I mean, that is the seasonal pattern for their cash flow, and we would expect that to maintain. Steve Tusa: Right. Yes, it does influence your cash. So just curious if you guys – the owners have a view on that. When it comes to NATI, how coveted is this asset for you guys? I mean it doesn’t seem like they’re going to take anything below $60. Is – are you guys really willing kind of go to the wall for this? Lal Karsanbhai: I can be very clear with you, then we’re not going to be the purchaser of the asset. Steve Tusa: That is a definitive answer. Thank you very much. Appreciate it. Thanks, guys. Operator: Our next question will come from Nigel Coe with Wolfe Research. You may now go ahead. Nigel Coe: Okay. Thanks. Good morning. Okay. I won’t be asking questions on the NATI purchase price, so I’ll move on from that. Just want to go back to FX, if I can. I think you mentioned long-term contract marks, and it’s not something I’ve heard from Emerson before. So I know we’ve had some backlog revaluation. So just maybe talk about what caused that to that mark on FX? And maybe just on the below line stuff, what is the normalized stock comp beyond this year once we roll off this plan? How should we size that? Frank Dellaquila: Okay. So Nigel, hi. This is Frank. So the – yes, we had a significant – of the currency that was in the quarter, a significant portion of it was due to the impact of the accounting on long-term contracts. So you have to mark-to-market long-term contracts. Typically, these are to EPCs, and they tend to be in places like Korea and other markets where we typically are in talking about currency as opposed to translation currency when we talk about Europe and China. And the accounting basically brings those marks to zero when the contract closes out, but during the life of the contract, you mark-to-market up and down. And depending on where you are in the life cycle of a contract and what the backfill is for those contracts, you’ll get a mark most quarters, it’s not big enough to matter. This quarter, it was $0.04 or $0.05, so it was big enough to matter and that’s what drives it. And we try not to talk about it, the word – it’s embedded derivatives. We don’t talk about embedded derivatives because it’s just not helpful, but that’s specifically the accounting that drives that mark on long-term contracts. Nigel Coe: Okay. Yes, embedded derivatives, above my pay grade. So let’s move on from that, but we’ll follow up offline. But on the – just on the guide, so there’s some moving pieces here. So it feels like FX is very neutral. The weaker dollar offset by some of these marks probably got some share buyback benefits relative to plan, well, certainly versus our model and then we have the stock comp offset. Is that sort of the major moving piece? Is there anything else you’d highlight? And then maybe just talk about the sales acceleration. We’ve got some China noise in the back half of the year with the lockdowns in the prior year. But what kind of macro environment you’re planning for, especially in second quarter fiscal, some of your short-cycle peers are highlighting some inventory corrections, et cetera. What do you see in discrete markets and some of the other relevant markets? Ram Krishnan: Yes. So I’ll take a crack, Ram here, on the sales. From a sales perspective, obviously, we have acceleration built in to the year, fundamentally with orders holding in the mid-single digits and us shipping backlog that we described with improving supply chain. So certainly, Q2, Q3 and into Q4 we’ll expect the ramp-up in absolute sales as we execute on the backlog. In terms of distributor destocking, we haven’t seen it in any of our businesses. Certainly, a lot of our discrete businesses go through distributors. Some of our process businesses go through distributors. We haven’t seen it and nor do we anticipate it just given the dynamics of what we’re seeing. And then to top it off, price will remain strong through the year that will contribute to growth as well. Nigel Coe: Thank you. Operator: Our next question will come from Joe Ritchie with Goldman Sachs. You may now go ahead. Joe Ritchie: Thanks. Good morning, everyone. Lal Karsanbhai: Good morning, Joe. Joe Ritchie: Hey guys. Can you just touch on AspenTech a little bit? I know, Lal, you mentioned some of the wins that was interesting. But like how is that going thus far? And then I noticed that the adjusted EBITDA margin was a tough lighter than what you guys expect for a full year basis. Maybe just provide some color around seasonality in that business as well. Ram Krishnan: Yes. So AspenTech, I think for us, from a synergy perspective, going according to plan. And frankly, a lot of the early synergies we’ve built in is on projects like Ras Laffan where Aspen won some very, very good content. I think the sales channels and the engagement of our sales channel and selling their capabilities continues as planned. Now really what we’re driving there is in terms of perpetual licenses and bundling them on projects, a lot of success converting our wins into ACV type of revenue for AspenTech is a work in process and should pick up momentum as we go into the second half of the year. So we feel pretty good about the synergies. We certainly feel pretty good about the sales forecast we’ve built in for AspenTech. Obviously, the plan they presented and the plan we’ve built in into the consolidated Emerson numbers, and then no concerns on the margin performance, the EBITDA performance. Seasonally, their third quarter or their fourth quarter, our third quarter is the biggest quarter. It was last year, and it will again be this year. Joe Ritchie: Super helpful, Ram. And then maybe my follow-on question. While, at the Investor Day, you guys highlighted all of these big opportunities in automation technology and you talked about your pipeline extending. I’m just wondering where have you seen the most movement recently in terms of your pipeline and those opportunities? Lal Karsanbhai: Yes. No, it’s a good question. Of course, we did have a very active quarter in terms of the project funnel and particularly not just in projects that were booked and hence exited the funnel, but also in the build-up what we saw in terms of activity. I would suggest that the predominant element of growth came in two areas: One is life sciences, which grew significantly in the funnel in the quarter; and secondly, the energy transition, which continues to be very robust, both here in the U.S. and in the Middle East predominantly and became additive to the funnel. And that funnel grew not just in terms of dollars by about $0.5 billion, but also in terms of number of projects, but only by eight projects, which tells you that the average size of projects are getting larger, which is also a dimension here. Ram Krishnan: And the only thing I would add is the LNG size of the funnel remains large, meaningful. And what we saw in the last quarter was a good momentum on the FID progress associated with many LNG projects in the U.S. where we’re very, very well positioned. A lot of these are going through Bechtel, in Texas and Louisiana. And our expectation is, we will ramp up order booking activity in those – on those projects as we go through the second half of the year. Joe Ritchie: Great. Nice to hear. Thank you. Operator: Our next question will come from Joe O’Dea with Wells Fargo. You may now go ahead. Joe O’Dea: Hi. Thanks for taking my questions. I wanted to start on sort of price and price cost. On the price cost side of things, can you size the margin impact in the quarter? And then what you’re thinking about for the cadence of that impact over the course of the year? And I think you also noted some price increases to start 2023. Is that broad-based? Are those more concentrated in parts of the business? Frank Dellaquila: You want to talk about the price increases? Ram Krishnan: Yes. So from a – I’ll take a crack at the price increases. I mean, we did have a good price increase in October, we typically do as we enter the fiscal year. Select product lines had price increases in Jan. We have a few more product lines slated for midyear price increases around the April time frame. In general, though, I think pricing was 4% realized price in the first quarter. We expect it to stay at those levels as we go through the year. So pricing will remain strong. Frank Dellaquila: As we go through the year, we expect those price increases as they roll through will continue to be accretive to margin. Through the entire year, it was bigger in the first quarter than it will be as we go through the year. Again, then we’ll see what incremental price increases we might put through. Net material inflation also should become a tailwind in the back half of the year. So all in all accretive, somewhere between half point and the point, it really depends on how it rolls through, but certainly a good story from a margin standpoint as we go through the year. Joe O’Dea: Got it. And then I wanted to circle back on some of the Discrete questions and just kind of bigger picture macro. And I think that the industry outlook for Discrete up mid-single digits. I assume that’s sort of a combination of kind of low-single digit price, low-single digit volume would expect areas like batteries and semiconductors are growing faster than that. But when we think about what we’re seeing on sort of the PMI side of things and then thinking about sort of Discrete just growing through a PMI slowdown. I mean, can you touch on as the expectations sort of outside of some of these structural growth areas that we just continue to see some kind of low-single digit volume growth and sort of no kind of connection there between some short cycle macro indicators of slowing, but not really seeing it in your end markets? Ram Krishnan: Yes. So you said most of it. I think that the plan really is LSD, low-single digit price, low-single digit volume, the growth vectors – semiconductors, battery manufacturing, frankly from a sector that we are cautious on automotive is something we’re going to have to carefully watch. We have had good performance so far. But automotive is an area that we have to watch very carefully. And then our stocking levels in terms of distribution, again, we haven’t seen any slowdown yet. But certainly to your point, based on the PMI forecast and what is anticipated there could be slowing in that sector. So if you put all that together, I think we feel pretty good about our mid-single digit forecast. Joe O’Dea: Got it. Thanks very much. Operator: Our next question will come from Christopher Glynn with Oppenheimer. You may now go ahead. Christopher Glynn: Thanks. Good morning, everybody. Just wanted to tie a little bit the organic outlook versus backlog growth up $700 million suggests the 1.2 book-to-bill which seems a little incongruous with 5% orders growth. But I suppose that’s a function of the prior year book-to-bill. So just wondering if you could comment on that book-to-bill interpretation and how do you characterize backlog size versus what you might consider normal in a moderately expanding net end market mix? Ram Krishnan: Yes. So I think the $700 million is a GAAP number. The 5% is an underlying sales number. But net-net, you are right. If you looked at the first quarter of last year and calibrated versus orders and sales, I think the 5% makes sense with the $700 million build in backlog. I think our expectation for a normalized level of backlog in this business. We’re probably at least close to $800 million to $1 billion too high in terms of where we could normally be – if the supply chain were optimal. And that’s what we’re going to have to execute through the year. And as the supply chain continues to improve, that’s the normalized level of backlog for this level of sales. So to answer your question directly, it’s about $800 million to $1 billion higher than what we would’ve anticipated. Christopher Glynn: Great. Thank you. Operator: Our next question will come from Gautam Khanna with Cowen. You may now go ahead. Gautam Khanna: Yes. Thank you. Good morning, guys. Ram Krishnan: Good morning. Lal Karsanbhai: Good morning. Gautam Khanna: I was wondering if you could talk a little bit about the aftermarket, the KOB 3 stuff. I think you said it was 65% of sales in the quarter. But where do you see that trending over the next year or year and a half because it seems like it’s been on full tilt for quite a while? Just what do you think the new normal is? Frank Dellaquila: Yes. No, I think we’ve had a concerted effort across our business to maximize the value of the $130 billion plus installed base. And those are programs that we’ll put in place that drive service MRO and replacement opportunities. We’re sitting at, you’re right, right around 65%. I expect that to remain within that range. And it’s supported by the business programs that we have in the operating companies. Ram Krishnan: And I would add that’s the segment of the business where the pricing flows through at higher levels. So obviously that will remain robust through the year. Gautam Khanna: I appreciate it. And then just to follow up, any change the timing of the divestment out there on Climate Tech, anything noteworthy? Lal Karsanbhai: No, we’re still thinking about the first half of this calendar year and everything’s on track in terms of the regulatory approvals and standing up the business. So that’s all well underway, so we’d expect April may shifts as a guideline there. Gautam Khanna: Thanks, guys. Lal Karsanbhai: Yes, sir. Operator: Our next question will come from Tommy Moll with Stephens. You may now go ahead. Tommy Moll: Good morning, and thanks for taking my questions. Lal Karsanbhai: Good morning. Ram Krishnan: Good morning. Tommy Moll: I wanted to start on the industry outlook you provided across process, hybrid, discrete, little variation across the three, but essentially all growing nicely in the single digit range. There are others in some of these markets that have double digit outlooks versus the singles that you provide, I am well aware there’s often apple and orange impacts here in making comparisons. But I was just curious, is there any conservatism embedded in these outlooks you’ve provided? Is there anything you would do to help us reconcile some of what we’ve heard elsewhere? Thanks. Lal Karsanbhai: In terms of the market outlooks, Tommy, we feel that we’ve given a very balanced view of what’s out there. The blend of the different types of businesses that we cover in terms of capital modernizations and replacement. We’ve also taken into account that the various geographic trends. But no, I feel that what we’ve put there ties into the guide for the quarter and of course our expectations for the year as well. And again, within each of the segments, as you recognize, there are big pluses and smaller pluses clearly in the Discrete space, which we’ve been speaking about to a significant amount today. EV semiconductor elements like that, of course have a significantly higher growth than some others. But overall, I feel that the indications we’ve given are fair based on what we’ve seen this in the marketplace today. Tommy Moll: Thank you. That’s helpful. I also wanted to ask about the repurchase activity. Is it fair to say that the deployment of the full 2 billion in the quarter was an acceleration versus the original plan? And if so was that – should we view that more as an opportunistic decision where your stock was under pressure for a period of time? You decided to lean in and to the extent that… Frank Dellaquila: Yes. I’m sorry, Tommy, this is Frank. No, not really. When we communicated the 2 billion, our intent was to get it done as quickly as possible. And we were able to get it done in the quarter. So it was not really driven by market events so much as a desire to just make good on the commitment and do it quickly. Tommy Moll: And any possibility that you might revisit the potential for more later in the year, or should we think about 2023 is pretty well spoken for at this point? Frank Dellaquila: There’s really no current intent to do any more share repurchase. We’ve got another, other irons in the fire right now. So, obviously circumstances change. We can always revisit, but we have no current plans to revisit it right now. We said we do 2 billion and we’ve done that. Tommy Moll: Great. Thank you. I’ll turn it back. Frank Dellaquila: Thank you. Operator: Our last question will come from Chris Snyder with UBS. You may now go ahead. Chris Snyder: Thank you. I wanted to follow up on safety and productivity. You guys mentioned that you’re seeing early signs of things bottoming out. I understand comps get easier, but it sounds like you’re also starting to see demand turning, so just hoping for more color on what you’re seeing to give you confidence that demand is turning there? Ram Krishnan: Yes, so I – first off, I think a majority of what we’ve baked into the plan is comps getting easier. So, absolute levels stay the same with where they sit today. Price comes through and comps get easier. We’ll have a better read of it as we go through the current quarter. And I think we’ll have a better expectation of the second half if demand were to improve, which is not baked into the plan, we should get better numbers in safety and productivity. But at this point, it’s staying at the current levels and comps getting easier. Chris Snyder: I appreciate that. And then just to follow up on China, the presentation called out a headwind from China shutdowns on organic growth in the quarter. Could you provide some more color on how China performed in the quarter? And then maybe how it’s exiting into the fiscal second quarter with the reopening? Thank you. Ram Krishnan: Yes, so China was down mid-single digits, both incoming orders as well as sales performance in the quarter. And we expect China to be mid-single to high-single digits for the full year with high-single digits in the second half. Chris Snyder: Thank you. Operator: This concludes our question-and-answer session and the conference. Thank you for attending today’s presentation. You may now disconnect.
EMR Ratings Summary
EMR Quant Ranking
Related Analysis

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.