Emerson Electric Company

Good day and welcome to the Emerson first quarter 2021 earnings conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing star and then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on a touch tone phone. To withdraw your question, please press star and then two. Please note that this event is being recorded. I would now like to turn the conference over to Pete Lilly, Investor Relations Director. Please go ahead.

Good afternoon. Thank you so much. And welcome everyone to Emerson's first quarter 2021 earnings conference call. I hope everyone is staying safe and healthy. Today I'm joined by David Farr, Chairman and Chief Executive Officer of Frank Dellaquilla, Senior Executive Vice President and Chief Financial Officer. Jamie Froge, Executive President of Emerson Commercial and Residential Solutions. And congratulations to Lal Carson-Bai, current Executive President of Emerson Automation Solutions, who was recently announced as Emerson's next Chief Executive Officer, effective on February 5th. As usual, I encourage everyone to follow along with the slide presentation, which is available on our website. Starting on slide three, I'd like to briefly highlight two examples of the great work our global teams are doing and some recent recognition from customers and the marketplace. First, Emerson's PlantWebOptics analytics software recently received the 2021 IoT Breakthrough Award. Emerson's PlantWebOptics platform helps customers collect OT data from a variety of sources, and apply practical and customized visualization and analytics, delivering key operational insights to the right people at the right time. Next, turning to slide four, Emerson recently received the 2021 Control Reader's Choice Award for our industry-leading automation control and instrumentation solutions. Emerson continues to receive positive feedback from customers and users of our products based on a relentless focus on technology, unmatched customer service, and critical domain expertise in our customers' industries. Turning to slide five, we will review the highlights of a very strong quarter. First, Emerson remains steadfast in our commitment to health and safety for our employees, customers, and communities. Serving our customers in critical industries, disciplined cost control, and positioning to outperform as we emerge from COVID-19 remain our key thematic priorities. And we are starting to see the benefits of this focus flow through. Next, our regionalized operations remain sturdy and stable, and we will continue to build upon our firmly rooted strategy of business localization. Turning to performance, Emerson delivered a very strong quarter in a challenging but stabilizing and improving demand environment. The organization delivered adjusted EPS of 83 cents in the quarter, which was up 24% from the prior year and well above expectations. We continued our execution of the broad cost reset plan with an additional 69 million of newer structuring actions. Cash flow was a new first quarter record for the company, with operating cash flow of over 800 million and free cash flow of 686 million up 90% and 121% respectively. It is important to emphasize that the balance, the end market diversity, and the stability of our two-platform business strategy was critical to enabling the strong operational and cash flow outcome. Even on down 2% organic revenue, segment margins grew by 230 basis points to 17.7%. This margin improvement is a strong testament to the consistent operational execution of the global organization throughout the pandemic. Despite lingering uncertainty and demand challenges in many key markets, sales and orders finished ahead of previous guidance. Commercial and residential solutions' underlying orders remained quite strong, finishing up 15% on a trailing three-month basis. Importantly, our automation solutions business is showing signs of stabilization and improvement. Given the orders, sales, and profitability improvement, we are updating full-year guidance to reflect this stronger outlook. Please turn to slide 7, which offers details on the results of the quarter. Both underlying orders and sales came in ahead of expectations, at down 4.5% and down 2%, respectively. Commercial residential solutions underlying sales was up 12%, while automation solutions was down 9%, but improving. Adjusted EPS, which excludes restructuring and first-year purchase accounting and fees, was up 24% to 83 cents, well ahead of expectations. As previously mentioned, the organization achieved a new Q1 cash flow record driven by increased earnings and strong working capital management. Operating cash flow increased 90% to $808 million, and free cash flow increased 121% to $686 million. Turning to slide eight, we will briefly bridge adjusted EPS in the quarter. Starting with adjusted EPS in Q1 of 2020 of 68.67 cents, non-operating elements including tax, interest, FX, and other items were combined non-factor, adding a penny in total. The most important element was operations, which drove the vast majority of the EPS outperformance, contributing 13 cents. Share repurchase added 2 cents for a total of 83 cents in the quarter. Moving to slide 9, we will review the P&I. Net sales were flat, and we saw a slight reduction in GP margin, which was driven by volume to leverage and mix. Meanwhile, SG&A as a percentage of sales declined by 310 basis points to 24% as aggressive cost control actions took effect. EBIT and adjusted EBIT margins, which exclude restructuring and first-year purchase accounting and fees, increased 350 basis points and 260 basis points, respectively, also reflecting the cost containment actions flowing through. Lastly, the effective tax rate came in at just below 20%, slightly lower than expectations. Turning to slide 10, we will review underlying sales by world area. For the quarter, The Americas continued to show the steepest declines, down 7%, but importantly, they started to improve. In North America, we saw strength in residential, cold chain, life sciences, medical, food and beverage, and some discrete markets, more than offset by weakness in many other automation end markets. Europe grew 4%, while Asia, Middle East, and Africa grew by 3%, fueled by strength in China at 7%. All commercial and residential solutions world areas turn to growth. Please turn to slide 11, and we will discuss the business segment performance. Total segment adjusted EBIT margin increased 230 basis points to 17.7%, reflecting aggressive cost control measures and strong operational execution, even with slightly down underlying sales. Adjusted pre-tax earnings increased by a similar magnitude, 240 basis points to 15.2%. As previously highlighted, Q1 cash flow performance was record setting with operating cash flow and free cash flow increasing 90% and 121% respectively. Free cash flow represented 152% conversion of net earnings. Importantly, trade working capital dropped to 17.8% sales driven by strong execution by operations. Turning to slide 13, we will discuss the business platforms. Automation Solutions' underlying sales finished down 9% for the quarter. The Americas remained the most challenged, down 20%, but showed signs of stabilization and early improvement. Overall, we saw continued momentum in life sciences, food and beverage, and semiconductor markets, as well as some early signs of improvement in upstream energy markets. Meanwhile, Europe, and Asia, Middle East, and Africa both turned to low single-digit growth, driven by strength in Eastern Europe and China, respectively. Trailing three-month underlying orders were down 13%, again reflecting stabilizing and early improvement trends. Geographically, the Americas continued to be the most challenged, down 27%. Asia, Middle East, and Africa declined modestly by 1%, supported by China orders growing 6%. Europe declined by 3% due to weakness in energy markets somewhat offset by chemical, power, and life science projects. Restructuring actions totaled $64 million across the platform as we continued execution of the return to peak profitability. The platform delivered robust positive profitability improvement despite the drop in revenue. Adjusted EBIT and adjusted EBITDA margins increased 200 basis points and 290 basis points, respectively, as the effects of the ongoing cost actions took hold. Lastly, the platform increased backlog by $600 million, of which $300 million was due to the acquisition of OSI. The ending balance was $5.3 billion. Turning to slide 14. Commercial and residential solutions underlying sales were up 12% in the quarter. All core world areas were solidly positive, with the Americas showing the strongest growth at 14%, driven by strong residential, cold chain, and home products demand. This growth points to share penetration gains in many of our end markets. Europe was up 8% as heat pump demand was driven by sustainability regulations and customer technology preferences. Finally, Asia, Middle East, and Africa was up 7%, driven by China, up 10%. As mentioned, trailing three-month underlying orders remained robust, up 15%, with all business units growing. North America increased by 16%, and robust HVAC and home products demand, while China was up 17%. Restructuring actions totaled $3 million in the platform, and were primarily focused on facility rationalization and optimization programs. Adjusted EBIT and adjusted EBITDA margins were up 230 basis points and up 210 basis points, respectively, reflecting leverage on the increased volume and improved cost base. Finally, backlog in the business increased by approximately $200 million, ending the quarter at nearly $800 million, which is well above normal levels. Please turn to slide 16 and we will introduce second quarter guidance. We now expect the underlying sales will be roughly flat year over year with a range of down 1% to up 1%. This potential for the company to return to positive growth is earlier than previously forecasted. The top line outlook is driven by continued momentum in residential, life science, medical, discreet, and food and beverage markets, and ongoing stabilization and improvement in other automation markets. GAAP EPS and adjusted EPS are expected to be 83 cents and 89 cents respectively, plus or minus 2 cents. We expect adjusted EBIT margin to be 17.0 to 17.5%, with adjusted EBITDA margin in the range of 22.2 to 22.8%. Lastly, It is important to note that this guidance embeds an 11-cent change in stock price costs due to movement in the stock price. Slide 17 introduces our updated full-year 2021 guidance framework. Management assumes that demand will continue to be challenging, but stabilizing and steadily improving as global vaccine efforts mature. We also assume there are no major operational or supply chain disruptions, and that oil prices remain in the $45 to $55 range. Given that context, we expect underlying sales growth this year with a range of flat to plus 4%. Automation Solutions is expected to be in the range of down 3% to up 1% underlying sales, while Commercial and Residential Solutions is expected to grow between 8% and 10%. As you can see, both of these platform outlooks are improvements from November. We expect a slight decrease in effective tax rate, as well as increases in operating cash flow and free cash flow to $3.15 billion and $2.55 billion, respectively. There is no other change to the capital allocation outlook. GAAP EPS is expected to be $3.39 plus or minus $0.10, while adjusted EPS is expected to be $3.70 plus or minus $0.10. We have also updated our outlook for profitability headwinds and tailwinds in the year. Since last quarter, we expect that COVID-related savings will now only be down $40 million this year, up from the previous estimate of $70 million. However, we now expect that price-cost dynamics will be slightly negative as raw material costs and availability become more of a short-term challenge. Operations are working diligently to mitigate this issue. Lastly, stock price will be more of a headwind. And now please turn to slide 18, and we will briefly cover the changes to the reset restructuring and COVID-related savings plan. Total company planned restructuring spend remains $200 million for the full fiscal year. As mentioned, we now expect only $40 million of the $150 million COVID-related savings from 2020 to return as business conditions start to normalize in the back half of the year. Accordingly, incremental 2021 savings have improved to $220 million. Total long-term annualized savings of the overall reset restructuring program are expected to exceed $650 million. Please turn to slide 20, and I will now hand the call over to Mr. David Farr. Thank you, Pete.

First, I want to welcome everyone to the first quarter earnings call. I want to thank you very much for the interest in this great company and I'm clearly a little bit biased on that, but it is a great company. Second, I want to thank the global leadership team, the executive leadership team, and all the employees around the world executing and delivering a fantastic first quarter for all of our investors. The last 19 months have been hard, with the cost reset for peak margins, downturn in late 2019, COVID-19 pandemic and a resulting global recession, and now the return to growth. My recognition and applauding to all of you is powerful and thankful. I want to thank all of you from my heart for what you've done over the last 19 months. But now we have a new threshold of execution for the second quarter and total fiscal year. I believe this team will make it happen. They are good. Third, I want to recognize and congratulate Lyle Karzabai. as the new CEO of Emerson. I'm so proud of you and so excited for you and how you and your new OCE team will take Emerson to new heights, as I and we have done the last 20 years. When Chuck Knight turned over the reins to me in late 2020, I took a deep breath, I paused, I smiled, and then I moved forward. You're ready. and have what it takes to lead Emerson. You have the right stuff, as does all the OCE and global leaders. I'll be your best cheerleader, your supporter, and my phone line is always open to you and your team. Now. Why now? I'm healthy, folks. I'm not sick. Nothing is wrong with me other than my right knee, which is definitely gone. No golf. So the knee replacement is on the way. I've already talked to my doctor. The board succession plan and process ran its course with many great candidates over the last five years. I want to thank all of them. They all know who they are. A couple could be in this room. I also want to thank Bob Sharp, who's a close friend and really wanted to be CEO of Emerson. But as he and I talked, someone was not going to happen, so we decided to figure out how to make it happen somewhere else. I wish them the best of luck. As we went through the first quarter, it was clear to me, the board, that we clearly had one strong, obvious candidate, Lau. The others are great leaders. They're great individuals. They're great friends. They've done great things at Emerson. But Lau is the next leader. So we decided. But that's not the only issue. There are other things going on across the company. The company is in great shape. The P&L, the balance sheet, and the cash flow, as the finance committee told Lau this morning, don't blank it up. We had a very good final quarter in fiscal 2020, as you all know. Orders have been turning up strongly. The V-shaped recovery has been taking hold and is really firm at this point in time. We've had strong, exceptional execution around the massive cost reset that we embarked upon back in 2019. A cost reset costing us over $600 million when it's all said and done. The progress is enormous. You've seen it in the margins in the fourth fiscal quarter. You've seen it in the margins in the first quarter. We're going to deliver over $650 million of savings for the company when it's all said and done. The global teams led by these two individuals, these three individuals in this room, Lau, Jamie, and Frank, are getting the job done. They don't need my help. We are going to continue to deliver. I guarantee you that's one commitment that I made to the board when I said, yes, Lau's the guy. The first quarter was strong on all fronts. Gap sales were flat. Underlying sales only down 2%. And I believe... In the second quarter, our gap sales will clearly be up, and I think our underlying sales will be up also. Maybe not a lot, but I think they'll be positive. Possibility was very good. With improving volume and cost out in the first quarter, great incremental margins on both sides. Strong margins, EPS momentum, and yes, record first quarter cash flow of $800 million and free cash flow of $700 million. Extremely strong execution around earnings and the balance sheet. And we see a solid fiscal core in both platforms across fiscal 21. Sales will grow this year, both in GAAP and our line growth standpoint. We'll have increased margins, stronger EPS, potentially even $3.70, which was our 2019 EPS with much higher sales in 2019. Plus strong cash flow. In my opinion, the number will bust to 3.2, but I'm not the CEO, so he has to live with that number. With order and sales momentum in the second half of 2021, and going into 2022, we, the OCE, believe we'll finally deliver the $4-plus EPS in 2022, based on global economic recovery, the momentum we see, and the cost out. It looks very good, and we'll talk about that on the 16th. Cost reset, the drive to new peak margins in 22-23, they're firmly in place. The entire next generation team is ready to take the reins and lead Emerson forward. Clearly, even with the COVID-19 vaccine rolling out, we continue to be restrictive in what we can do. We have to operate in a safe environment. The normal Emerson management process is somewhat turned, not quite the same. Global travel, live customer engagement, our face-to-face planning conference, which is known to be a combat sport at times. Organization planning process, leadership planning process are all restricted and delayed. We're doing them, but they're not the same. So as I thought about what I can do as a CEO in this environment is basically take my experience, my maturity, which many of you know I'm mature, in this environment, and help the next team. Name the new team, put it in place, get out of their way, and help. That's what I'm going to do. I've talked to the board about this. It makes the most sense. Yes, I said 2021. Yes, I even said maybe most likely later in 2021. But the new facts and issues, and I always like to surprise, with our annual investor conference coming up this month in the 2016th, I think the time is right for the new CEO to stand up, present, and not have the day far game, which many of you have had for over 20 years, and in some cases more than that as I work with Mr. Knight. The February 16th time, the February 16th presentation with the Next Generation team is very important. I'll be there to help. I'll be there to advise. I care about this company. I'm a big shareholder of this company. It's been my life for 40 years. leading it for over 20 years. The time is right. As you know, I've never believed in long, drawn-out successions. Chuck and I had three days. He hit me with the keys in the chest. He took off for a year for six months. I had to track him down to try to break the quarter strength on earnings. The team, the law are ready. Let's move on. As I talk to the board, we all said the same thing. So again, my congrats to Lyle and the OCE. And if anyone wants to start a yelling match with me, you'll quickly see I'm not sick. Let's go to chart 20. I do have my stand-usual bat, my rally monkey, and my rally squirrel, which is really a rally ferret sitting here today helping us out, making sure I don't lose my train of thought. We have Pretty good momentum in orders. We laid out boxes. You know, we started this box game as we put our forecast out in, I think, April of 2020 with Frank, at that time Bob, and myself. We delivered, actually beat it. We laid out the box in the first quarter. You could see we came in better. The blue dot is where we thought it would be. We're above that, obviously. It's upper right-hand corner. Jamie's business has been very strong. He's executing. He's building backlog. That's one of his issues. He's got to get that backlog down. Lyle's business has turned. It's not going to be quite as sharp as Jamie. Clearly, he's a different business model, but he's turned. As you look at the next forecast next quarter, we now have a blue dot sitting pretty much on orders above the line with a minus 4 to plus 6. We're seeing good momentum in Europe. We're seeing good momentum in Asia. We see good momentum in Jamie's business in North America, and we're seeing some improvement in Lyle's business, which I'm sure he'll talk about. So, again, very good momentum in orders. As we lay this out, that's how we see it. You know, Jamie's business will flatten out. It will turn down a little bit. He's running at high levels at this point in time. Clearly, some unique opportunity of growth there. With all his markets, as he'll tell you, going the right way, which is great to see. So if you look at chart 21, what we're looking at right now for the growth this year, as we presented to the board, We're looking at somewhere around the plus one, minus one for the second quarter. Depends what kind of execution Jimmy can get on the backlog. He clearly has issues relative to capacity, COVID, materials, which we'll talk about. I think Lyle's short-term business is starting to turn up, and we'll talk about that in his discrete business. Even some of the onesie-twosie orders are starting to happen. We have a broad second half. It's hard. You know, the third quarter will be a spike, as we all know, is a spike down. But the key issue for us is to look at good growth in the second half. Obviously, the ratios will look really good in the third quarter. But we're looking at the second half and the overall business pace in that second half going into the fiscal 22. What I want to do is turn it over to Lyle now so he can talk a little bit about his forecast and what he sees, some insights into the marketplace, and then we'll turn it over to Jamie and let him do the same thing. So, Lyle, the floor is yours.