Emerson Electric Company

Good day, and welcome to the Emerson Third Quarter 2024 Earnings Conference Call. Our participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference call over to Ms. Colleen Mettler, Vice President of Investor Relations. Ms. Mettler, the floor is yours, ma'am.

Good morning, and thank you for joining us for Emerson's third quarter 2024 earnings conference call. This morning, I am joined by President and Chief Executive Officer Lal Karzambai, Chief Financial Officer Mike Bachman, and Chief Operating Officer Ram Krishna. As always, I encourage everyone to follow along with the slide presentation, which is available on our website. Please join me on slide two. This presentation may include forward-looking statements, which contain a degree of business risk and uncertainty. Please take time to read the Safe Harbor Statement and note on non-GAAP measures. All financial metrics in this presentation are on a continuing operations basis. On June 6th, we announced a definitive agreement to sell our remaining interest in the Copeland Joint Venture. We have included additional information and the accounting treatment of these transactions in the appendix of the presentation. I will now pass the call over to Emerson's President and CEO, Lal Karsanbhai, for his opening remarks.

Lal Karsanbhai Thank you, Colleen. Good morning. Please turn to slide three. I'd like to thank the 65,000 Emerson employees around the world for delivering another solid set of results. Your commitment to our vision and passion for our purpose comes to life every day. I am moved by our customer focus and the deep care you have for each other, and I am proud and honored to work alongside each of you. Thank you to the board of directors for your support of the management team and to our shareholders for your trust in us. Since I became CEO in 2021, we have talked openly about the transformation of Emerson, driven around the three pillars of culture, portfolio, and execution. We have moved rapidly to improve across all three. And before we discuss the quarterly financial results, I want to highlight the results of our latest employee survey to show our employees are with us on this journey as our culture continues to evolve. Our latest company-wide engagement survey, inclusive of test and measurement, had a participation rate of 89%, up 1.4 points from our 2023 survey. We had an engagement score of 79%, a one-point improvement, and only one point from world-class levels of 80%. While this is an evergreen journey and we still have work to do. I am excited about the tangible steps we have taken to create a more inclusive and engaged organization. Now let's jump into the operating results. Q3 was another solid quarter for Emerson. Orders in the quarter returned to growth and are up 3% year over year, driven by strong project activity in our process and hybrid businesses, especially across life sciences, energy, and power. Notably, we won several large life science projects in North America and Europe focused on expanding production capabilities for advanced medicines. The Middle East and Latin America saw exceptional demand, and we were awarded several large projects in each. As we expected, process and hybrid markets remain steady at mid-single-digit growth as we continue to see investment particularly in LNG, life sciences, energy, and sustainability. While capital project investments continued to progress, MRO orders were slightly softer than expected in the quarter. Discrete automation orders were softer than expected, down low single digit both year over year and sequentially, as factory automation and markets remained weak. The green shoots we were beginning to see through April and May took a step back in June, and we are now expecting a slow recovery, though we expect discrete automation orders to be flat to slightly positive in Q4 on a low base of comparison. Excluded from underlying, test and measurement orders remain soft, down 11%. Additionally, for total Emerson, we saw a weaker demand environment in China across most of our business segments. We now expect low single-digit underlying order growth for the second half and for the full year. Emerson delivered strong operating results with margin leverage, adjusted earnings per share, and free cash flow all exceeding expectations. Sales came in at the low end of our guide, and I'll provide additional color on the next slide. Due to weaker orders, Test and measurement sales also came in slightly below expectations. However, profitability met expectations as we are seeing the impact of our synergy realization. Transportation and semiconductor markets remain weak while aerospace and defense performed well and we saw continued government spending and research. The European market was softer than expected amid lingering EV demand concerns. and China remains sluggish across most test and measurement segments. Due to this, we are looking into the second half of 2025 for recovery in this business. With softer orders, we are adjusting our full-year sales to be $1.45 to $1.5 billion, but the accelerated synergy actions we have taken will help protect profitability and position the business well for a return to growth. We continue to be excited by the value creation potential of our differentiated portfolio. Emerson's strong performance through the first nine months and resolute focus driven by our Emerson management system gives us the confidence to execute on our 2024 plan. We expect underlying sales of approximately 6% and are increasing the midpoint of our adjusted EPS guide to $5.45 to $5.50, and we are raising our free cash flow guidance to approximately $2.8 billion. We look forward to a strong finish to 2024 and are energized to deliver continued value creation for our shareholders. Please turn to slide four. Underlying sales growth was 3%. Life sciences and power markets continue to perform well. both up double digit as we executed key projects across North America and Europe. Europe is seeing continued strength in energy, power, and sustainability markets, as well as their MRO business, particularly in Western Europe. In the Americas, broad-based healthy growth across Latin America was slightly offset by slower MRO in North America. Robust performance in the Middle East driven by strong project activity was offset by broad-based weakness in Asia. Continuing the exceptional gross margin performance from last quarter, gross margins were 52.8% in Q3, a 230 basis point improvement from the prior year. Our gross profit percentage year-to-date is 50.6%. even with the acquisition and integration costs incurred in Q1. This gives us confidence in our expectation that this portfolio would deliver greater than 50% gross margins as we look forward. Operating leverage was 67%, significantly stronger than expected due to better performance from Aspen Tech, project mix, and realization of more cost reductions than expected from actions taken throughout the year. Adjusted earnings per share exceeded expectations at $1.43, above the top end of our guide, and up 11% from 2023. Emerson generated robust free cash flow of $975 million, up 27% year over year, and with a free cash flow margin of 22.3% for the quarter. Mike will walk through additional details on our results in a few slides. We are pleased to deliver another strong quarter and are excited to continue demonstrating the value creation potential of our transformed portfolio. Please turn to slide five. We continue to see strong capital project investments with our strategic project funnel now at $11 billion, up approximately $200 million from Q2. The funnel growth demonstrates the strong, sustained capital cycle aligned to our growth programs as the increase predominantly came from projects supporting energy transition, life sciences, sustainability, and decarbonization. In the third quarter, Emerson was awarded approximately $350 million of project content consistent with prior quarters. We had wins in large traditional energy projects, as well as additional awards from offshore vessels in Brazil, as mentioned last quarter. Our growth programs also performed well in the quarter, accounting for a little under half of the awards, and I want to highlight a few key wins. Emerson was selected to automate Namaska Lithium's Wabuchi mine at the Beckencourt Lithium Conversion Facility projects in Quebec, Canada. Based on our proven ability to provide a differentiated solution, including a common control platform across sites. This mine is one of the largest high purity lithium deposits in North America. Fueled by hydroelectric power, the Beckencourt facility will convert the spodumene concentrate to lithium hydroxide. This is the first such conversion in Canada. and the masked lithium projects will play an important role in the North America battery value chain. Emerson will provide much of our leading technology to automate both facilities, including delta V control systems and software, reliability solutions, valves, and instruments. This example highlights the breadth of the Emerson portfolio and demonstrates how we are well suited to serve this emerging market. Next, I'd like to highlight Emerson was selected to support one of the largest renewable energy park projects in India, spearheaded by one of India's largest and most prominent renewable energy companies. Emerson will provide our Ovation Green SCADA solution, including pitch control and park power management for the wind turbines. Emerson was chosen for our scalable automation software and technologies that enhance wind turbine performance as well as our comprehensive local support capabilities, including engineering, fuel support, and production. Finally, Emerson was chosen to automate a key green hydrogen project in Uzbekistan, which will use a 52-megawatt onshore wind farm to produce 3,000 tons of green hydrogen annually, which will be used to manufacture 500,000 tons of ammonia fertilizers. ACWA power, a first mover on green hydrogen, and part of the NEOM green hydrogen project will operate the plant. And HDEC will design and construct the facility. Amerson was selected for our advanced technologies and domain expertise, and will provide several technologies from our hydrogen portfolio, including instruments, control valves, and our ovation green control system. Turning to slide six. we remain focused on driving our strategic priorities, including accelerating innovation for profitable growth and enhancing our position as a global leader in automation. One of our breakthrough innovation priorities is software-defined automation. Our industry-leading Ovation Automation Platform just launched a software-defined, AI-ready platform for the power and water industries. The Ovation Automation Platform 4.0 builds upon our boundless automation vision to bring a unifying data fabric across the organizations to optimize operations from device to enterprise. Ovation 4.0 brings customer-focused innovation, such as secure generative AI models to offer prescriptive operations and maintenance guidance together in a robust solutions portfolio. It also offers integration with our Ovation Green software to improve holistic awareness across traditional and renewable power generation and storage to aid customers who have an increasingly complex mix of generating assets. Customer-focused innovation is a hallmark of Emerson, and I wanted to highlight one of the key methods we have for formal engagements. Our Ovation business recently held their 37th Users Conference in Pittsburgh, Pennsylvania, with 70% of US power utilities participating in a multi-day event focused on the power and water industries. This conference featured interactive technology exhibits, customer case studies, and collaborative industry sessions focused on emerging technical and business topics. Ovation Users Group creates a world-class engagement as users provide direct input for potential product enhancements, which helps inform our strategic product development plans. We also took a key step forward in our transformation and simplification journey in Q3, as we announced a definitive agreement to sell our remaining interest in the Copeland joint venture. Private equity funds managed by Blackstone will purchase the equity stake while Copeland repurchases the seller's note. The transaction involving the Copeland note receivable closed on August 2nd with pre-tax cash proceeds of $1.9 billion, which would be used to pay down debt. We expect the equity portion to close by the end of August. With that, I'll now turn the call over to Mike Bachman to walk through our financial results in more detail.