Emerson Electric Q3 2024 Earnings Call Transcript

Yeah. Good morning, Jeff. Good to hear from you. No, 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 in 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 are 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.

Yeah. No, certainly. So, 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, Jeff, I'll just add that 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 our through the cycle expectations, but well within that.

We got it because we still have confidence that we can hit within that guide, Nigel. I certainly, though, 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, some point in the midpoint is how you can think about it.

Yeah, thanks, Nigel. Yeah, I'll comment. Of course, 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, and we shared that with you as well in the deck.

So, we -- 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 journey -- 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 do -- 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 in 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 that's -- there's some of that going on, which obviously we're watching very carefully.

Yeah. I would just add to that, Nigel, some of that read through in the leverage this quarter, we talked in the comments about some projects that did get pushed out, which was a little addition by subtraction, because those projects are generally lower margin. So, it was part of the 67% in the quarter.

That's a very good point. And, of course, lastly, Nigel, to the question, our process and hybrid orders are still up mid-single-digits, and that's important to recognize.

Thank you, sir.

Yeah. No, certainly, 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's -- that we feel very good.

Having said all that, we will have the capacity, if we wish, to put that balance sheet to work. And that's something that Scott, as you know, we'll continue to evaluate with time and on what the right move would be on in terms of the majority position that we own in AspenTech.

Yeah. 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, from -- in terms of co-pilots, 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 and globally is at a tipping point. And just given the boom in AI and data centers, and we talked about it in the last earnings call, we expect the power generation investments as well as transmission and distribution and renewables to be a very, very important growth factor for us. Innovation 4.0, certainly, positions us very well in that capacity.

And frankly, on greenfield, our modernizations are lifetime extensions of power plants, but also the opportunity to go in and upgrade existing systems with the new capabilities that we have in 4.0. So, that's really what we're very excited about.

And I think the step change here to your question, Scott, lands on the use of the AI models, which will enable planning purposes around maintenance, taking down assets for turnaround activity. It will give a higher probability that you're actually going to work on the maintenance records and elements that are most needed in the plant. And I think that's incrementally new and different in the marketplace.

And then, lastly, Scott, we're highlighting this innovation. But innovation is a core pathway, as we've talked in the past, of how we drive differentiated growth at Emerson. Accelerated innovation across our businesses is critical. And we've seen that. You see that as we report R&D spend as a percent of sales, that we have stepped that up. And this is an element and one of the results of that.

Thank you, Scott.

Good morning, Deane.

Hi. Hey, so in terms of -- I'm not quite sure the reference you made, Deane, can you clarify the mega-projects you referenced?

Yeah. I -- we'll go back and map that. But what I will tell you is, in terms of LNG, in terms of energy, in terms of life sciences, and frankly, also semiconductors and EVs, we have our own map of all the project activity in North America. We'll go back and map it with what you're referencing, but I will tell you that we are certainly participating and every one of those projects are in our funnel with very, very good win rates.

And -- but it's an action we'll take away and work with Colleen and get that map. But our participation in North America on those large projects remains very solid. And we had a very good level of project activity in North America, particularly in life sciences and power and the control systems business in -- even in the current quarter.

Yeah. And as a reminder, that funnel represents our automation content versus what the entirety of a project is out there in the universe. So, that's also to keep in mind.

Hey, Deane, it's Mike. Yeah, buybacks are definitely still in the priority, along with the dividend and return to -- returning capital to shareholders, generally. We will exit the year with the commercial paper paid off and $3.5 billion-plus of cash on the balance sheet. But our capital allocation will remain the same. We will continue to focus on funding our organic growth initiatives. We'll be continued to -- be committed to the dividend and bolt-on M&A that improves the portfolio. And then, of course, there'll be share buyback.

So, yeah, we will continue with share buyback. We'll be in the market this quarter at, we think, roughly $125 million, which gets us back to that roughly $500 million a year pace.

Good morning.

Yeah. So, we took the guide up to $2.8 billion and -- which would imply about $800 million coming through in the fourth quarter, which I think is reasonably consistent, seeing a fourth quarter increase. So, I -- this third quarter was particularly good. And remember that has test and measurement in there, which they had a great quarter and peeled about $50 million off the balance sheet, which did skew the numbers this year. So, we feel good about the $2.8 billion for the year, and looking at the $800 million, it looks pretty in-line with some of the prior years.

Can't think of anything in the, kind of, run the business. But at corporate, I would say, we are looking at a headwind and a tailwind that will largely offset and be a slight headwind. We will have an increase in pension expense, all things equal, just given the way the deferral accounting works. And then, we'll have a lower interest expense because of the Copeland proceeds that come in. Those two should net [Speech Overlap] lower interest expense overall with more cash. Yeah. So, that should net to a pretty small headwind at corporate.

Not in this fiscal, as I said. We'll continue to evaluate, Steve, as we go through time here.

No comment there.

Good morning, Andy.

Yes. Thanks for the question. We believe we can. We have a significantly higher margin portfolio today with a 1,000 basis point move over the transformation of Emerson to plus 50% GP portfolio. And I think our expectation certainly is that next year will be very similar to the leverage rates of this year.

Yeah, go ahead, Ram.

Yeah, so, I mean, obviously, the -- what we're seeing right now is based on the order rates that the second-half of this year will generate, and that points to the low-end of the 4% to 7%. Now, what has to change? Obviously, what the areas we're really focused on is pace of discrete recovery, the amplitude of the recovery, and then China.

And now, the North American KOB3 or the pace of business is something we're watching. We're not really concerned. Our process hybrid business continues to have order rates of mid-single-digits. The capital cycle still remains strong. So, that we feel very good about. It's really the pace and amplitude of discrete recovery in China is going to dictate how we guide into next year as we come off that low-single-digit order growth we've seen in the second half of 2024.

I'd suggest stable, Andy, at this point.

Good morning, Julian.

Yeah. No, I'll answer and let Ram add some color as well from his perspective. Certainly, we continue to see strong capital formation cycle here, particularly as it relates to energy, energy transition, power generation, life sciences, metals and mining. And that is relatively broad from Western Europe through the United States and into Middle East and Latin America.

And I -- so, I haven't -- I don't have a whole lot of concern today around those markets. We -- I highlighted a few specific wins, but there were others in that $350 million bucket that we won. So, mid-single-digit order growth in process and hybrid in the quarter, low-single-digit for the Company impacted by the discrete automation business and the discrete orders, which remains negative through the quarter. Ram?

Yeah, and you've said it. I mean, I think, the cap, for us, energy, power, life sciences is driving a majority of our capital project wins as well as the momentum in our process hybrid business. Certainly, we are not a big player in hybrid markets like food and beverage, which could be the dynamic you're referencing in terms of some slowdown. But our life sciences business continues to be very good. Our metals and mining business continues to be very good.

So, no slowdown. We're not seeing any kind of slowdown in that area. But the area we're watching very carefully, as I referenced, is the pace of discrete recovery, particularly markets like semiconductors and EVs, which impact NI, but also are markets like automotive which impact our broader discrete automation business.

Now, the one segment of test and measurement where we've seen good momentum is aerospace and defense, driven by government spending. It's 25% of their overall mix. So, that's certainly come out strong and that's driven growth in North America. But we are yet to see sustained recoveries in semis and EVs, which our markets will watch it closely.

Yes, we do. That backlog reduction, for us, frankly, about $100 million, it was all in test and measurement. Our backlog in the base Emerson business was held effectively flat. Now, we typically see a backlog reduction in Q4, but it'll be up year-over-year and we feel pretty good about backlog levels as we enter 2025.

And I would add to the earlier comment about the capital formation. Interestingly, in the quarter, the control systems business actually had a book to bill above 1...

Record order levels.

Record order levels.

And for the full year, we expect Emerson at right around 1, book to bill.

Book to bill, yeah.

Yeah, I would say, for our discrete automation business, it'll be right around in the 40s. Certainly, the other business that's exposed to the discrete end markets, test and measurement, given that 75%-plus GPs will be much higher.

Yeah, I mean, I think, our -- so Aspen clearly referenced the capital formation in grid modernization, which is fundamentally transmission and distribution investment. So, our exposure to the T&D side is through OSI at Aspen. On the power generation side, which is the Ovation business, that project funnel continues to build both in North America, Europe, but also we're having a very, very strong year in China interestingly.

So, overall, the generation capacity that is being invested in across the globe continues to be robust. And the innovation that we're driving with the likes of Ovation 4.0, as well as our Ovation Green, that is positioned for renewable investments, the activity there is very robust. Lal referenced that one project in India with a very strategic investment that's happening in India in the renewable space is just an example of the types of activities we're involved in with the Ovation platform.

Yeah, this is Lal. I -- certainly, in totality, MRO didn't really change a whole lot. It remains at 64% of the revenue in the quarter, which is relatively consistent to where we've been and well within my expectation for the year.

Having said that, there were a few ebbs and flows. As I discussed on the call, European MRO was very strong in the quarter. North America MRO was softer in the quarter. We haven't seen anything there that is alarming in any way. We're not a heavy inventory driven company from a distribution or customer level perspective. Our equipment is generally bought and put into operation shortly thereafter. And so, consequently, and nothing alarming on the MRO side. But again, strength in Europe, weakness in North America or softness in North America, characterized the quarter for MRO.

Yeah, just to build on that a little bit. The North American softness, you'll recall in prior quarters, we had talked about how, particularly in the measurement and analytical business, there was some strength, and we saw a little bit of that reverse in the quarter. But as Lal said, nothing concerning.

Good morning.

No, good morning. No, look, we raised the guide a few quarters ago. We'll continue to execute across that pace. So, no change to the synergy guide. But we are maintaining the pace certainly to be able to deliver these results.

Go ahead, Ram.

Yeah, it's a one-half '25. I think orders turn positive in Q4. At this point, we're planning on a first-half '25 recovery in sales for the discrete automation business.

Thank you.