Release Date: May 08, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Strong operating performance with underlying sales growth of 8% and operations leverage at 54%, leading to a 140 basis point expansion in EBITDA to 26%.
- Achieved 25% EPS growth and 32% free cash flow growth, with raised outlook for the year based on robust first half performance.
- Successful integration and accelerated cost-out activities in the NI team, leading to $100 million of synergies in 2024, up from the initial $80 million expectation.
- Appointment of experienced CFO for AspenTech and the election of a new board member, enhancing leadership and governance.
- Continued strength in process and hybrid markets, with favorable demand environment and significant project wins in energy transition and decarbonization.
Negative Points
- Softness in transportation and semiconductor demand due to constrained CapEx environment, impacting discrete automation orders.
- Delayed recovery in Test & Measurement orders, now expected in the first half of 2025, indicating ongoing challenges in this segment.
- AspenTech's latest guidance revision slightly impacted Emerson's financial projections, necessitating adjustments to the full year guidance.
- Potential risks associated with the integration of large acquisitions and achieving the projected synergies.
- Uncertainties in global economic conditions that could affect customer spending and investment in Emerson's key markets.
Q & A Highlights
Q: Can you provide more color on the synergies you're seeing and what may have to come back when revenues recover?
A: Surendralal Lanca Karsanbhai, President, CEO & Director of Emerson Electric Co., highlighted the company's excitement about the quality of its acquisitions, including the technology and customer loyalty. He emphasized that the cost takeout initiatives are part of a pre-planned playbook aimed at improving efficiency without necessarily needing to add back costs in the future. Ram R. Krishnan, Executive VP & COO, added that the focus has been on optimizing G&A and R&D to support growth as the market recovers.
Q: How do the DGM and Ovation systems integrate, and can they sell together to provide more benefits to utilities?
A: Karsanbhai explained that while DGM and Ovation do not have direct technology synergies, they offer significant customer synergies. These systems are part of a strategy to leverage Emerson's strong presence in utilities to expand beyond plant operations into transmission and distribution, capitalizing on the credibility built with Ovation.
Q: What are the assumptions behind the operating leverage expectations for the latter half of the year?
A: Michael J. Baughman, Executive VP, CAO & CFO, noted that the expected shift in mix, particularly with a lower percentage of MRO, and geographic changes, are key factors. He also mentioned that the exceptional quarter from AspenTech would not likely repeat in the latter half, affecting overall leverage.
Q: Could you discuss the visibility into achieving mid-single-digit order growth in the second half of the year?
A: Karsanbhai confirmed a strong start to Q3, with orders in April up by double digits year-over-year. He expressed confidence in the process and hybrid markets driving this growth, though discrete markets are expected to turn positive later than initially anticipated.
Q: What is driving the better-than-expected backlog conversion?
A: Krishnan attributed the strong backlog conversion to responsive supply chains and improved output from their plants, particularly in measurement solutions and Test & Measurement, which also positively impacted profitability due to higher gross profit businesses.
Q: How are inventory levels at machine builders and within your channels?
A: Krishnan reported that inventory levels in discrete automation channels have normalized. However, in the Test & Measurement business at National Instruments, some channel partners still have elevated inventory levels, which are expected to normalize in the coming quarter.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
