Emerson Electric Co. (EMR) 2024 Q3 Earnings Call Summary

Optimistic Highlights

• Solid Quarterly Performance: Emerson reported a solid quarter with 3% year-over-year order growth, driven by strong project activity in Process and Hybrid businesses, particularly in life sciences, energy, and power sectors.
• Gross Margin Improvement: Gross margins improved to 52.8% in Q3, a 230 basis point increase from the previous year, showcasing exceptional gross margin performance.
• Strong Free Cash Flow: Emerson generated robust free cash flow of $975 million, up 27% year-over-year, with a free cash flow margin of 22.3% for the quarter.
• Strategic Project Wins: Emerson secured several large projects, including in life sciences in North America and Europe, and energy projects in the Middle East and Latin America, with a strategic project funnel now at $11 billion.
• Software-Defined Automation Innovation: The launch of Ovation Automation Platform 4.0, a software-defined AI-ready platform for the power and water industries, highlights Emerson's focus on accelerating innovation for profitable growth.

Pessimistic Highlights

• Discrete Automation Weakness: Discrete Automation orders were down, reflecting continued weakness in factory automation end markets, with a slower recovery expected.
• Test & Measurement Softness: Test & Measurement orders remained soft, down 11%, with weaker demand in China across most business segments.
• European Market Softness: The European market was softer than expected amid lingering EV demand concerns.
• Adjustment of Full Year Sales Outlook: Due to softer orders, Emerson adjusted its full-year sales outlook to $1.45 billion to $1.5 billion for the Test & Measurement segment.

Company Outlook

• Underlying Sales Growth: Emerson expects underlying sales growth of approximately 6% for 2024, with an increased adjusted EPS guide to $5.45 to $5.50 and raised free cash flow guidance to approximately $2.8 billion.
• Recovery Expectations: A slower recovery is anticipated in Discrete Automation and Test & Measurement segments, with sales turning positive in the second half of 2025 for Test & Measurement.
• Strategic Focus: Emerson remains focused on driving strategic priorities, including accelerating innovation and enhancing its position as a global leader in automation.

Q & A Highlights

• Q: Can you discuss the impact of software-defined automation and integration between DeltaV and Aspen's offerings? (Jeff Sprague, Vertical Research)

  A: Lal Karsanbhai highlighted the vision to liberate data across operations and use analytics to drive productivity and efficiency. The step with Ovation was critical for serving the power and water industries.

• Q: What's your view on the eventual bottoming and turning of shorter-cycle elements of the portfolio? (Jeff Sprague, Vertical Research)

  A: Lal Karsanbhai expects a discrete cycle recovery to be slower than expected, with a potential positive turn in orders by Q4 and sales turning positive in the second half of 2025 for Test & Measurement.

• Q: Could you clarify the guidance range for Test and Measurement in 4Q? (Nigel Coe, Wolfe Research)

  A: Lal Karsanbhai expressed confidence in hitting within the guided range for Test and Measurement, suggesting a midpoint expectation rather than the lower end.

• Q: Can you provide an overview of the current environment and funnel to order conversion process? (Nigel Coe, Wolfe Research)

  A: Lal Karsanbhai remains optimistic about the strong capital project investments and has not seen a slowdown in project bookings or expansions, despite some delays in product acceptance by customers.

• Q: Do you have the capacity for M&A, or are you still digesting National Instruments? (Scott Davis, Melius Research)

  A: Lal Karsanbhai feels good about the balance sheet and the integration progress of National Instruments, indicating capacity for M&A if deemed appropriate.

• Q: Can you discuss the significance of the Ovation 4.0 upgrade? (Scott Davis, Melius Research)

  A: Lal Karsanbhai and Mike Baughman discussed the significance of Ovation 4.0, highlighting its AI models and the ability to optimize operations, which is critical given the investment boom in power generation infrastructure.