Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Emerson Electric Co (EMR, Financial) reported a 3% year-over-year increase in orders, driven by strong project activity in Process and Hybrid businesses.
- The company achieved a gross margin of 52.8% in Q3, a 230 basis point improvement from the prior year.
- Adjusted earnings per share exceeded expectations at $1.43, up 11% from 2023.
- Free cash flow was robust at $975 million, up 27% year-over-year, with a free cash flow margin of 22.3% for the quarter.
- Emerson Electric Co (EMR) raised its free cash flow guidance to approximately $2.8 billion for the full year.
Negative Points
- Discrete Automation orders were softer than expected, down low single digits both year-over-year and sequentially.
- Test & Measurement orders remained soft, down 11%, with weaker demand in China across most business segments.
- Sales came in at the low end of guidance due to weaker orders, particularly in Test & Measurement.
- The European market was softer than expected amid lingering EV demand concerns.
- MRO orders were slightly softer than expected in the quarter.
Q & A Highlights
Q: Lal, this idea of kind of software-defined automation and what you're doing with Ovation. I think this is also sort of instrumental to better collaborating, integrating whatever you want to say, between DeltaV and Aspen's offerings. Maybe you could address that, if I'm correct in that assumption and where you're at and sort of kind of propagating that change in technology posture across rest of the portfolio.
A: Lal Karsanbhai, President and Chief Executive Officer: You're absolutely right. As we laid out that vision, it certainly is designed to accomplish a couple of factors. The first being to liberate the data that exists in silos across operations in broad industry. And the second then is to actually use the analytics power to drive productivity, efficiency, higher levels of safety and efficiency with analytic packages inclusive of much of what AspenTech can bring to the table to optimize facilities and production. So that vision certainly exists. We are on the path to bring compute out of centralized siloed data approaches into the edge, which is the first step with products that have already released in the marketplace with DeltaV, and we'll continue to move forward to deliver on the vision. But this step with Ovation was very critical as well because, as you know, that serves the power and water industries exclusively and to be able to bring that capability into those markets was critical.
Q: Kind of the shorter-cycle elements of the portfolio, just your view on when discrete bottoms when NI bottoms, you brought down the order outlook a little bit for the year which is probably tied to those end markets. But maybe just what you see as we start to look into 2025 and the eventual bottoming and turning in those end markets?
A: Lal Karsanbhai, President and Chief Executive Officer: The discrete cycle recovery has been slower than expected. We certainly believe that we can get to close to positive orders in the last quarter of the year here on discrete, but that will be, of course, based on some very weak comparisons. But that will start us on the path to recovery into 2025. Test and Measurement, a little slower. We're watching our customers very carefully there speaking engaging with them. We're watching our peers in the marketplace as well and their performance. And we foresee sales turning positive there in the second half of 2025 with orders turning positive in the first half of 2025. And then lastly, offsetting a lot of that is what continues to be a strong capital cycle formation cycle here with process and hybrid markets and also momentum in what we see at AspenTech. And so those offset a little bit of how we're thinking. Certainly, I believe that as we think about 2025 and start to guide that we will be probably towards the lower end of that range that we've given on our through-the-cycle expectations, but well within that.
Q: The $1.45 billion to $1.5 billion range for Test and Measurement in 4Q is obviously quite wide. I think just given the expectation that we don't get to revenue growth until the second half of the year, it seems that we're tracking towards the lower end of that range. Just wanted to make sure that was correct.
A: Lal Karsanbhai, President and Chief Executive Officer: We guided because we still have confidence that we can hit within that guide. I certainly wouldn't write it up to the low end of the range at this point. This is the best guide that we feel we can commit to as a management team. Obviously, at some point in the midpoint is how you can think about it.
Q: Just a general comment on the environment out there. Obviously, we've seen deterioration in sort of general industrial markets, it feels like some projects are again delayed with some of the uncertainty, maybe higher rates. Just give an overview in terms of what you're seeing out there from customers, maybe a bit more of an end market overview. And just wondering, obviously the funnel remains very vibrant, increased slightly Q-over-Q. But what about this funnel to order kind of conversion process? Are you starting to see longer decision-making?
A: Lal Karsanbhai, President and Chief Executive Officer: The funnel did grow, as you noted. We booked approximately an equal amount that we've been booking historically on a quarterly basis, $350 million in value. The mix changes a little bit depending on end market timing. So I continue to look at this the funnel and the capital formation cycle in a positive manner. I haven't seen degradation of projects or projects being eliminated. I haven't seen any slowdown in the expansion of the sustainability projects or the LNG, particularly as it relates to the Middle East and Africa. So I'm still very optimistic there. Now what we are watching very carefully is that projects that have been booked, the pace at which our customers are willing to accept product whether there are delays that are being implemented around inspections and other areas, we're watching that very carefully, and we have experienced some of that in the quarter, which obviously contributed to our lower sales 3% versus the low end of our guide versus the expectation. But there's some of that going on, which obviously we're watching very carefully.
Q: What do you plan to do on the proceeds from the Copeland sale, but I guess more explicitly is, do you feel like you have the capacity to do M&A? Or are we still digesting this point and want to focus on that?
A: Lal Karsanbhai, President and Chief Executive Officer: I feel great about the balance sheet and what we have to do in terms of maintaining our investment grade. And I think that's very important. We are working very hard to integrate National Instruments and feel really good about the progress that, that team continues to make. It's a set of markets that we like that will drive differentiation and through the cycle growth for our company. And I think that we feel very good. Now having said all that, we will have the capacity, if we wish to put that balance sheet to work. And that's something that, as you know, will continue to evaluate the time and what the right move would be in terms of the majority position that we own in AspenTech.
Q: How big a deal is this Ovation 4.0 upgrade? And is there a way for us to think about like what percentage of your installed base you would expect to upgrade? Or is there some sort of kind of way to tangibly think about the impact of this iteration?
A: Lal Karsanbhai, President and Chief Executive Officer: From an Ovation perspective, we've continued to have significant releases in the capabilities of that technology over time. And this is certainly a significant one, which incorporates a lot of technology from Aspen and fundamentally from an optimization perspective, from an analytics perspective, in terms of copilots provides capability that we've not had innovation before. And I think it is significant given the fact that the investment in the power generation infrastructure in this country
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
