Emerson Electric Company

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Emerson's fourth quarter and full investor conference call. During today's presentation by Emerson Management, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. If you require operator assistance, please press star then zero. This conference is being recorded today, November 3, 2020. Emerson's commentary and responses to your questions may contain forward-looking statements including the company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson's most recent annual report on Form 10-K, as filled with the SEZ. I would now like to turn the conference over to our host, Pete Lilly, Director of Investor Relations at Emerson. Please go ahead.

Thank you, and welcome, everyone, to Emerson's fourth quarter and full year 2020 earnings conference call. I hope everyone is staying safe and healthy. Today I am joined by David Farr, Chairman and Chief Executive Officer, Frank Dellaquilla, Senior Executive Vice President and Chief Financial Officer, Lowell Carson Bayh, Executive President of Emerson Automation Solutions, and welcoming Jamie Roge, our new Executive President of Emerson Commercial and Residential Solutions. As usual, I encourage everyone to follow along in the slide presentation, which is available on our website. Starting with the cover slide. Despite the overarching challenges of COVID-19, Emerson has continued to invest in key technologies and solutions for future growth and value creation. We are excited to welcome OSI, Inc. to the Emerson family, a leading provider of software-based technology for advanced grid management. Additionally, we also welcome Pergea Group to Emerson, a leader in software-based HMI, SCADA, and analytics solutions. We will also review other important strategic 2020 acquisitions later in the call. Now, please turn to slide three. Similar to last quarter, I'd like to briefly highlight the Emerson Corporate Social Responsibility Report, which is available on our website, emerson.com. This document reviews in detail many of Emerson's aspirations and accomplishments within the environmental, social, and governance realms. Many of these important topics remain at the forefront of the national and international conversation. As problem solvers at our core, Emerson strives to advance the discussion, share our own progress and strategies, and also be a valued resource for our customers as they embark on their own individual sustainability journey. Emerson takes very seriously our role as a critical enabler and partner for digital monitoring, measurement, control, optimization, and efficiency management across our broad customer base. Fundamentally, we believe that this role and responsibility aligns very well with the broader purpose and goals of the sustainability movement. I encourage everyone to read the CSR report if you have not yet had a chance to do so. Please turn with me to slide four and we will review some highlights of the quarter and the fiscal year. Emerson remains steadfast in our commitment to health and safety for our employees, customers, and communities. Business continuity, serving our customers in critical industries, disciplined cost control, and positioning to outperform as we emerge from COVID-19 remain our key thematic priorities. Next, we continue to work hard to ensure that our localized supply chains and operations remain stable, safe, and productive. Turning to performance, Emerson executed well in a challenging but stabilizing demand environment. The organization was able to deliver adjusted earnings per share of $1.10 in the quarter and $3.46 for the full year, a strong finish driven by our ongoing aggressive cost reset actions, which totaled $73 million of restructuring actions in the quarter and over $300 million for the full year. Cash flow in the quarter was very strong, representing 128% conversion of net earnings and 6% growth year over year. It is important to highlight that the balance and market diversity and stability of our two-platform business portfolio was critical to enabling the strong operational and cash flow outcome. Savings for the year on both restructuring and COVID-related cost actions totaled approximately $370 million, which and we were able to manage decremental margins to 21% at adjusted EBITDA. Despite all the uncertainty and demand challenges, sales and orders finished squarely in line with guidance given in August. Commercial and residential solutions orders turned sharply in the quarter, ending up 6% on a trailing three-month basis. We now expect this business platform will turn positive to sales growth earlier than previously expected. Overall, as we look towards 2021, management has adopted a conservative view given the uncertainty in the marketplace, but continues to expect sales to turn positive in Q3. Now please turn to slide six, which summarizes results of the year. Both net and underlying sales growth finished towards the higher end of their guidance ranges at down 9% and 8% respectively. Commercial and residential solutions came in slightly ahead of expectations at down 7% underlying. Adjusted EPS of $3.46 was above the guidance range of $3.20 to $3.35, and restructuring actions finished slightly above guidance of $300 million. Despite lower sales, both platforms executed well on profitability due to COVID-19-related cost control measures in addition to the ongoing aggressive restructuring reset actions. Finally, cash flow performance for the year was strong, with both operating and free cash flow finishing above guidance. Turning to slide seven, we will briefly bridge full-year adjusted earnings per share. Starting with adjusted EPS in 2019 at $3.69, we subtract 13 cents for foreign exchange, pension, and other items. Tax, share repurchase, and interest added 17 cents, which partially offset operational headwinds totaling 27 cents. The operational headwinds from COVID-19 were broadly mitigated by restructuring and cost containment efforts. This left adjusted EPS for the year at $3.46. Turning to slide eight, we will review the results of the quarter. Gap EPS of $1.20 was up 3%, while adjusted EPS of $1.10 was down 4%. Total net sales were down 8%, with underlying sales finishing down 9%. Importantly, both underlying sales and orders for the consolidated company showed improvement from last quarter. Automation Solutions' underlying sales were down 11%, and trailing three-month underlying orders were down 19%. Commercial and residential solutions' underlying sales were down 3%, while trailing three-month orders were up 6%. Cash flow performance was strong in the quarter, with operating cash flow of $1.23 billion and free cash flow of $1.02 billion. Full year operating cash flow and free cash flow of $3.08 billion and $2.55 billion were up 3% and 6% over prior year, respectively. Lastly, the company continued and built upon its aggressive cost reset plan, initiating a total of $73 million of restructuring actions in the quarter. Turning to slide 9, we will bridge adjusted EPS. Beginning with fourth quarter of 2019, adjusted EPS of $1.14, you can see that non-operational items of foreign exchange effects, pension, tax, and other items detracted a total of $0.07. This was somewhat offset by $0.03 from share repurchase and interest. Most importantly, operational deleverage was fully mitigated via cost control actions. Overall, we finished the quarter at $1.10, 15 cents above consensus estimates. Moving to slide 10, we will review the P&L in the quarter. Starting with gross margin, we saw a reduction of 150 basis points to 41.3%, as deleverage and unfavorable mix were partially offset by favorable price cost. Importantly, SG&A as a percent of sales declined by 150 basis points as aggressive cost control actions took effect. Adjusted EBIT and adjusted EBITDA margins, which exclude restructuring and related costs, increased 80 basis points and 140 basis points, respectively, also reflecting the cost containment actions flowing through. Lastly, Our effective tax rate dropped this quarter, driven by foreign subsidiary reorganization efforts. Of note, the adjusted EPS decline of approximately 4% was ahead of overall revenue decline of approximately 8%. Turning to slide 11, we will look at underlying sales by geography. For the quarter, the Americas continued to show the steepest declines, down 13%, with the North American market also down 13%. Here we saw strength in residential, life sciences, medical, and food and beverage markets more than offset by weakness in most other end markets. Europe was down 5%, and Asia, Middle East, and Africa was down slightly, driven by growth in Southeast Asia. For the year, the Americas finished down 11%, with the other two world areas each down a more modest 4%. Please join me on slide 12, and we will discuss total business segment performance. Total segment adjusted EBIT margin decreased 30 basis points to 19.9%, reflecting aggressive cost control measures and strong operational execution as sales declined. Total segment adjusted EBIT value leverage was limited to 21% in the quarter. Meanwhile, adjusted pre-tax earnings increased 70 basis points to 18.4%. As previously highlighted, Q4 cash flow performance was strong given the challenging environment. Operating cash flow of $1.23 billion and free cash flow of $1.02 billion both increased year-over-year by 2%. Free cash flow represented 140% conversion of net earnings. Turning to slide 14, we will review the business platforms. Automation Solutions' underlying sales finished down 11% for the quarter, as broad-based declines in most end markets were slightly offset by life sciences, medical, and food and beverage markets. North America again saw the steepest declines, down by over 20%. Meanwhile, Asia, Middle East, and Africa were slightly positive, driven by India and Southeast Asia. Trailing three-month underlying orders were down 19%, again reflecting stagnant but stabilizing demand trends. Restructuring actions totaled $52 million across the platform, which brought the total to $244 million for the full year. The platform delivered on profitability in a very challenging demand environment. Adjusted EBIT and adjusted EBITDA margins were limited to down 80 basis points and down 20 basis points respectively, reflecting the aggressive cost actions taking effect. Decremental margins were held to 26% at adjusted EBITDA. Lastly, the platform converted approximately $400 million of backlog, leaving an ending balance of $4.7 billion. Turning to slide 15. Commercial and residential solutions underlying sales were down 3% in the quarter. The Americas and Europe each had modest declines of 1%, while Asia, Middle East, and Africa was more challenged at down 13%. As previously mentioned, trailing three-month orders turned sharply in the quarter, finishing up 6%, driven by residential and big box retail market demand. For the quarter, restructuring actions totaled $21 million, which brought the total figure to $52 million for the year. Adjusted EBIT and adjusted EBITDA margins were up 50 basis points and up 120 basis points, respectively. reflecting continued effective focus on profitability. Please turn to slide 17, and we will introduce the first quarter guidance. We expect that underlying sales will be in the down 7 to down 6% underlying range, as residential, life sciences, medical, and food and beverage market growth is more than offset by challenging but stabilizing other process, discrete, and commercial markets. DAP EPS and adjusted EPS are expected to be $0.52 and $0.67 respectively, plus or minus $0.02. We expect adjusted EBIT margin to be 15.5% to 16%, with adjusted EBITDA margin in the range of 21.2% to 21.8%. Slide 18 introduces our full year 2021 guidance framework. First, Management has a conservative outlook for the macroeconomic environment in 2021, given the ongoing COVID uncertainty. We assume that demand will continue to be challenging, but stabilizing and gradually improving as companies, communities, and governments continue to learn and operate and live with the virus as the year progresses. We also assume that there will be steady progress with regard to vaccine development and distribution during the fiscal year. Lastly, we assume there are no major operational or supply chain disruptions, and that oil prices remain in the $35 to $50 range. With those assumptions in mind, we expect a flat underlying sales year with a range of down 1 to plus 2%. Automation Solutions is expected to be in the range of down 4 to down 1%, while Commercial and Residential Solutions is expected to grow between 4 and 7%. Expected total restructuring in 2021 now totals over $200 million, with approximately $160 million coming from automation solutions, $30 million coming from commercial and residential solutions, and the balance coming from corporate. We expect operating cash flow to come in at approximately $3.1 billion, capital spending of $600 million, resulting in free cash flow target of approximately $2.5 billion. Emerson intends to resume share repurchases in fiscal year 2021 in the amount of $500 million to $1 billion, while concurrently maintaining optionality for further acquisitions should the opportunity arise. This allocation excludes the funding of the previously announced acquisition of Open Systems International, which closed on October 1, 2020. Additionally, we remain fully committed to our dividend program and plan to increase our dividend per share for a 65th consecutive year. Within this framework, as management forecasted in April of 2020, we expect overall revenue to return to growth in the third quarter of 2021. Commercial and residential solutions is expected to return to growth earlier than originally expected, while automation solutions is expected to return to growth later in the year. Gap EPS is expected to be $3.11, plus or minus 5 cents, while adjusted EPS is expected to be $3.45, plus or minus 5 cents. Lastly, we do expect to encounter some profitability headwinds in the year. These include the return of some COVID related costs as business conditions slowly normalize, stock price changes, and amortization costs from the OSI acquisition. Also of note, we expect price costs to be less positive in 2021 and pension costs to be a tailwind for the year. And now please turn to slide 19 and we will review the updated reset restructuring and COVID-related savings summary. Due to the delayed recovery in many automation markets, we are increasing restructuring spend within automation solutions in 2021, resulting in a total company restructuring spend of over $200 million, up from the $125 million shown last quarter. This increase in restructuring spend yields higher incremental savings in 2021 of approximately $245 million, We still expect that approximately $70 million of the $150 million COVID-related savings from 2020 will come back in 2021 as business conditions start to normalize in the back half. Total long-term annualized savings of the overall Reset Restructuring Program are now expected to exceed $650 million. Please turn to slide 21, and I will now hand the call over to Mr. David Farr.

Thank you very much. Thank you very much, Pete. And Jamie, welcome to the group here. Thanks, David. And Frank. And obviously, Lau. But chart 21 is clearly the underlying orders forecast. I'll talk about that in a second. But first, I do want to welcome everybody from the investor world, the shareholder world, our employees. Thanks for joining us today. And thank you for your continued support and engagement over this quarter and the total fiscal year. And as we all know, it's been a truly unusual fiscal year for this company, but I think this team has risen to the challenge. I want to make a special call out to the Global Emerson employees, the leadership team, and our new members from acquisitions this year, and thank them for their commitment to safety, our customers, our fellow employees, and shareholders and community as we return to work starting in March and throughout the years we continue to reengage and be successful as a company. I want to appreciate everything you've done. I want to thank you for the job you did, and thank you for everything you did over the last eight months. As we got back into our offices, as we got back to the manufacturing plant, and we opened and produced product for our customers, I want to thank all of you very, very much. I know that this was not easy to do, but you all did it. You rose to the challenge, and you delivered for our customers, our shareholders, and the communities and the fellow employees. As we know, 2020 was an exceptional year in sales, profit margins, earnings, and cash flow. Our free cash flow to earnings, our conversion was close to 140% this year. It's our 64th year dividend increase. Our dividend free cash flow came in at 47.5%. As many of you know, we did not cut our dividend when we did the major repossession back in 2016, and we've worked our way back into under 50% in free cash flow to dividend ratio. We returned over $2.1 billion to our shareholders this year in 2020. We kept our dividend going like many companies did not do, and we returned capital to our shareholders to share repurchase. And given what I see right now in underlying market improvement, strong cash flow generation, growth returning in the commercial and residential solutions business, and I think that a business and automation solutions that will return in the second half year, we are going to increase our capital allocation back to the shareholders to get to $2 billion this year, as Pete talked about. This is something we feel strongly about, confidence in the company, how we position the company from a cost standpoint, the new products, the investments we've made in acquisitions. Clearly, we've got a very uncertain political environment right now, but the investments we've made, we have a lot of confidence in that we'll be able to grow and outperform this marketplace and do well. At the same time, make an investment internally by returning more cash back to our shareholders. And I think that's very, very important to show that confidence to our shareholders that we will get our way through this. As you know, We sat here in April, gave a forecast for quarters of the year in the first half of 2021. Very few companies did that. We delivered. We actually beat them as we went up to that quarter. We are two quarters ahead in commercial residential return to growth. Tremendous performance by the commercial and residential solutions group, and the market's coming back. Great to see. They're leveraging. Their margins are really doing well based on all the restructuring that went on from 2019 throughout 2020, and they're ready to grow and expand those margins. We also believe that auto solutions, the cycle that we laid out back in August, We're probably one and a half quarters behind that cycle, still some tough things ahead of us, but we feel quite strongly that business will return to growth in the second half of the year. But Lyle and his team that have confidence in delivering improved profitability and improved cash flow in 2021 has made the decision to increase increase the restructuring in the first half of this year and all, and mostly for the second half of the year, but most importantly, in the first half of the year, to drive higher margins, even though sales are going to continue to be down the first half of the year. That is not easy to do when you look at all the things they've been doing over the last 12 to 18 months. But I feel quite strongly that they will deliver. The company's stronger. The balance sheet's stronger. I believe the underlying growth momentum will return. Our aggressive cost actions, our self-help, we're on track to deliver the peak margin plan we laid out in February of 2020, despite sales being approximately $2 billion lower than we said back then, before the pandemic, before, obviously, the recession we've had to go through. But the hard work on cost actions, the hard work in restructuring, the hard work in new product investments, and the things we had to do to make this company stronger for our shareholders and for our customers, we have done. We have confidence in 2021. Yes, we still have problems ahead of us. Yes, we have an election going on today. Who knows what's going to happen? Yes, COVID virus is still out there, but we have confidence we'll have a vaccine. We have confidence that we'll move back into a more normal business environment as we go into the middle of 2021. We feel good that we can return more cash to our shareholders as we go into 2021. But again, before I go to the charts, I want to make a very special call out to our Emerson employees around the world, the Emerson leadership team, the corporate employees, the employees that stood by me and the OCE live in St. Louis, not live from Saturday Night Live, but live in St. Louis to get through this COVID pandemic environment. Live together, I want to thank them for making that happen. Clearly, we got some challenges, but clearly, I feel the company today is in a much stronger position than it was back in April, When we talk, and I feel very good about what's going to happen as we go into the 2021 time period. As we laid out in chart 21, chart you saw in 21, a lot of people said, how are you going to get back to the top of that line as we're coming down? Well, we did, upper right-hand corner. Obviously, commercial residential came back strong. Lyle's business is going sideways right now as we continue to wait for America, KLB 3 and some KLB 2. He'll be talking about that. We've laid out some dots here. As we go forward into this quarter and how we think orders will trend in the first quarter, how orders will trend in the second quarter, this is a trend line we see we have to be on as a total company. How the various pieces move around, that will change depending on what happens each month. But this is a trend line we have to be on to return to total growth for the total company by the second half of 2021. Again, As we sit here today, as we talked about in April of 2020, in the midst of COVID, the forecast we laid out is pretty well in line, except we're a little bit ahead for commercial residential, and Lyle's a little bit behind just from a recovery standpoint. He didn't go any deeper than we thought, but he has not recovered yet, primarily because of KOB3 and the turnaround business in North America. But we're seeing other parts of the world doing pretty well for Lyle. If you go forward to chart 22... Here's the forecast we laid out right now. On the first quarter, after delivering down 8.6% underlying growth in the fourth quarter this year, we're looking to be down somewhere in the 6% to 7%. I hope it will be closer to 6%. As we look at October, I hope Jamie will comment on how he saw October, and I hope Lau will comment on how they saw October. But I think that we'll be down somewhere in the 6% to 7%. We'll get a little bit better as we move into the second quarter, and then we'll get better and go positives as we go into the third and fourth quarter. This is the same lines that we drew out last year in April. The only difference is right now, We clearly have the uncertainty of the election. We clearly have the uncertainty of how the COVID will continue to move and impact the rest of the world. But we feel confident that we can control some of our own destiny for underlying growth and also improvement in profitability and cash flow as we go into 21. As I look at the auto solutions business, and I'm going to turn it over to Lal right now to talk about what he sees, but it's very important to see that – I think the momentum will start shifting for you, Val, as we go through this quarter. And I want to take the hats off to you and your whole team in the restructuring. Many people on this phone don't know how hard it is to restructure and do what you're doing. And my hat's off to what you've got done. I know how proud you guys are of the team, but this is not easy work. So it's your mic.