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    Emerson Electric Co (EMR)

    Business Description

    Emerson Electric Co. is a global technology and software company that delivers innovative solutions across various end markets, including process, hybrid, and discrete industries . The company operates through two main business groups: Intelligent Devices and Software and Control, offering a wide range of products such as control valves, intelligent instrumentation, solenoid valves, and asset optimization software . Emerson's fiscal 2024 sales reached $17.5 billion, with significant growth driven by its Test & Measurement acquisition and strong performance in its Intelligent Devices and Software and Control segments .

    1. Intelligent Devices

      • Encompasses several segments including Final Control, Measurement & Analytical, Discrete Automation, and Safety & Productivity.
      • Final Control - Provides control valves and regulators, crucial for process and hybrid industries.
      • Measurement & Analytical - Offers intelligent instrumentation for measuring physical properties of liquids or gases.
      • Discrete Automation - Includes solenoid valves and pneumatic equipment primarily for discrete industries.
      • Safety & Productivity - Delivers tools for infrastructure and safety.

    2. Software and Control

      • Comprises Control Systems & Software, Test & Measurement, and AspenTech segments.
      • Control Systems & Software - Provides systems that control plant processes.
      • Test & Measurement - Offers automated test and measurement systems, enhanced by the acquisition of National Instruments.
      • AspenTech - Specializes in asset optimization software for industrial manufacturers.

    Q4 2024 Summary

    Initial Price$111.06June 30, 2024
    Final Price$109.37September 30, 2024
    Price Change$-1.69
    % Change-1.52%

    What went well

    • Emerson is evolving towards software-defined automation with a three-phase approach over a 3 to 5-year journey, applicable to both brownfield and greenfield environments, opening significant growth opportunities.
    • Power generation represents approximately 9% of Emerson's revenue, experiencing order acceleration into the mid to high single digits, driven by investments in data centers, grid infrastructure, and rejuvenation of nuclear facilities, with expectations for continued growth in 2025.
    • Emerson's backlog remains strong at $7.2 billion, providing a healthy level to support next year's guidance, indicating confidence in the order and sales environment going into 2025.

    What went wrong

    • The transition to software-defined automation is a multi-phase journey that could take 3 to 5 years per phase, depending on customer adoption rates, introducing uncertainty and potential delays in achieving strategic objectives.
    • Test & Measurement sales growth is expected to ramp in the second half of 2025 after consuming backlog this year, indicating potential near-term weakness in demand and reliance on future orders growth.
    • The shift towards software-defined automation may face challenges in brownfield environments, as implementing new systems in existing facilities can be complex, potentially hindering adoption rates.

    Q&A Summary

    1. AspenTech Acquisition Impact
      Q: Will AspenTech be EPS neutral in FY '25?
      A: Management expects the acquisition of AspenTech to be EPS neutral in fiscal 2025, considering synergies and the seasonality of AspenTech's business, which is weighted toward the back half of the year.

    2. Discrete Recovery Outlook
      Q: Are you confident in discrete recovery in FY '25?
      A: Discrete automation orders turned positive in Q4, indicating a bottoming out and setting up for recovery in 2025. Test & Measurement orders were down 7% last quarter but showed sequential improvement. Management sees early signs of market recovery, giving confidence for the second half of 2025.

    3. China Growth Expectations
      Q: What are your assumptions for China's recovery?
      A: The power segment in China is performing well. Management anticipates low to mid-single-digit growth in China next year, expecting chemical recovery in the first half and discrete recovery in the second half of 2025, aided by economic stimulus and green shoots in the chemical space.

    4. Power Business Growth
      Q: Can you provide details on power business outlook?
      A: Power generation represents approximately 9% of company revenue. They've seen order acceleration into the mid- to high single digits over the year. Growth is driven by data center power demands, extending life of existing facilities, reactivating mothballed nuclear plants, and building new combined cycle facilities. Nuclear constitutes about 20% of the power business.

    5. Test & Measurement Guidance
      Q: What is embedded for Test & Measurement in FY '25?
      A: Test & Measurement sales are expected to grow mid-single digits in 2025, with orders growing at a higher rate. The plan includes high single-digit order growth and sales ramping in the second half, following backlog consumption this year.

    6. Customer Delays and Project Approvals
      Q: Have you seen any customer delays or hesitancy?
      A: Management has not observed any delays or hesitancy from customers in the Middle East, North America, or Europe. All project shipments planned for Q4 were shipped, and the capital cycle remains strong in energy, energy transition, power, and LNG sectors.

    7. Backlog and Book-to-Bill
      Q: How are you thinking about backlog and book-to-bill for '25?
      A: The backlog decreased from Q3 due to seasonality but remains at a healthy level of $7.2 billion, supporting the guidance for next year. Management expects book-to-bill to remain stable going into 2025.

    8. Software-Defined Automation Evolution
      Q: What's the timeline for software-defined automation?
      A: Management outlines a three-phase, multi-year journey toward software-defined automation, starting at the site level and progressing to enterprise-wide implementation. Each phase may take 3 to 5 years, depending on adoption rates. Solutions will be applicable to both brownfield and greenfield environments.

    9. Safety & Productivity Exit Options
      Q: Any updates on exploring exit options for Safety & Productivity?
      A: Management is considering all opportunities, including a cash sale and other creative options, but won't comment further on the structure at this time.

    10. Megaprojects and Chemical Sector
      Q: Any acceleration in large project starts, especially in chemicals?
      A: Chemical activity is strong in the Middle East and expected to return in North America post-elections. While China is watched cautiously, economic stimulus may boost chemical activity there and in Southeast Asia. The current plan doesn't heavily rely on chemical recovery but would benefit if it materializes, particularly in Europe and China.

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    S. L. KarsanbhaiPresident and Chief Executive OfficerFebruary 5, 2021Surendralal (Lal) L. Karsanbhai has been serving as the President and CEO of Emerson Electric Co. since February 5, 2021. He was previously Executive President of Automation Solutions .
    R. R. KrishnanExecutive Vice President and Chief Operating OfficerFebruary 2021Ram R. Krishnan is the Executive Vice President and COO at Emerson Electric Co. since February 2021. He was previously President of Final Control .
    M. J. BaughmanExecutive Vice President, Chief Financial Officer, and Chief Accounting OfficerMay 10, 2023Michael J. Baughman was appointed as Executive Vice President and CFO on May 10, 2023, and has served as Chief Accounting Officer since February 2018 .
    M. H. TrainSenior Vice President and Chief Sustainability OfficerMarch 2021Michael H. Train was appointed as Senior Vice President and Chief Sustainability Officer in March 2021. He previously served as President from October 2018 to March 2021 .
    L. A. FlavinSenior Vice President, Chief Transformation and Chief Compliance OfficerMarch 2021Lisa A. Flavin is the Senior Vice President, Chief Transformation and Chief Compliance Officer. She was appointed as Senior Vice President and Chief Compliance Officer in March 2021 .
    P. ZornioSenior Vice President and Chief Technology OfficerDecember 2022Peter Zornio was appointed as Senior Vice President and Chief Technology Officer in December 2022. He was previously the CTO for the Automation Solutions Group .
    V. RamnathSenior Vice President and Chief Marketing OfficerJune 2023Vidya Ramnath was appointed as Senior Vice President and Chief Marketing Officer in June 2023. She previously served as President of Middle East & Africa .
    N. PiazzaSenior Vice President and Chief People OfficerAugust 2023Nick Piazza was appointed as Senior Vice President and Chief People Officer in August 2023. He was previously Vice President of Global Talent and Human Resource Operations .
    M. TangSenior Vice President, Secretary, and Chief Legal OfficerJanuary 2024Michael Tang was appointed as Senior Vice President, Secretary, and Chief Legal Officer in January 2024. He previously served as Senior Vice President, General Counsel, and Secretary at Agilent Technologies, Inc. .

    Questions to Ask Management

    1. With the announcement to fully acquire AspenTech and your expectation of immediate cost efficiencies and enhanced operational performance, what are the specific risks and challenges you anticipate in integrating AspenTech into Emerson, and how do you plan to mitigate potential disruptions to AspenTech's existing customer relationships?

    2. Given that nuclear represents about 20% of your overall power business, can you elaborate on any regulatory or technological challenges you face in the nuclear sector, especially as you participate globally, and how might these challenges impact your growth projections in power generation for 2025?

    3. You are expecting a recovery in discrete markets in the first half of 2025 leading to mid-single-digit sales growth, but with automotive markets, particularly EV, remaining weak, how confident are you in this forecast, and what strategies do you have in place if the recovery in discrete markets does not materialize as expected?

    4. Considering you have not baked in a significant chemical recovery in your plan and are watching China cautiously due to slowdown, how would prolonged weakness in the chemical sector and China impact your 3% to 5% growth guidance, and what contingency plans do you have in place?

    5. While you plan to repurchase approximately $2 billion of common stock and return about 100% of guided free cash flow to shareholders in 2025, at the same time pursuing significant acquisitions and divestitures, how do you reconcile these substantial capital allocations with maintaining your A2A credit rating, and are there risks to your balance sheet or credit metrics?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateMarch 2020
    End Date/DurationOngoing
    Total additional amount60 million shares
    Remaining authorization28.9 million shares
    DetailsAims to return capital to shareholders, with a plan to repurchase approximately $2 billion of common stock in fiscal 2025.

    Past Guidance

    Q4 2024 Earnings Call

    • Issued Period: Q4 2024
    • Guided Period: FY 2025 and Q1 2025
    • Guidance:
      1. Underlying Sales Growth: 3% to 5% for FY 2025 .
      2. Operating Leverage: Mid-40s for FY 2025 .
      3. Adjusted EPS: $5.85 to $6.05 for FY 2025 .
      4. AspenTech Contribution: $0.44 to $0.46 for FY 2025 .
      5. Safety & Productivity Contribution: Approximately $0.48 for FY 2025 .
      6. Free Cash Flow: $3.2 billion to $3.3 billion for FY 2025 .
      7. First Quarter Underlying Sales Increase: 2% to 3% for Q1 2025 .
      8. First Quarter Adjusted EPS: $1.25 to $1.30 for Q1 2025 .
      9. Share Repurchase: Approximately $2 billion for FY 2025 .
      10. Dividend Payments: Approximately $1.2 billion for FY 2025 .
      11. Tax Rate: Approximately 22% for FY 2025 .

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Net Sales Growth: Approximately 15% for FY 2024 .
      2. Adjusted EPS: $5.45 to $5.50 for FY 2024 .
      3. Test & Measurement Contribution: $0.42 to $0.44 to EPS for FY 2024 .
      4. AspenTech Contribution: $0.32 to $0.34 to EPS for FY 2024 .
      5. Free Cash Flow: Approximately $2.8 billion for FY 2024 .
      6. Share Repurchase: Approximately $300 million for FY 2024 .
      7. Adjusted Segment EBITDA Margin for Test & Measurement: Approximately 23% for FY 2024 .
      8. Underlying Sales Growth: Approximately 6% for FY 2024 .
      9. Operating Leverage: Mid- to high 40s for FY 2024 .
      10. Test & Measurement Sales: $1.45 billion to $1.5 billion for FY 2024 .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      1. Underlying Sales Growth: 5.5% to 6.5% for FY 2024 .
      2. Reported Net Sales Growth: 15% to 16% for FY 2024 .
      3. Adjusted EPS: $5.40 to $5.50 for FY 2024 .
      4. Test & Measurement Contribution to EPS: $0.40 to $0.45 for FY 2024 .
      5. AspenTech Contribution to EPS: $0.30 to $0.32 for FY 2024 .
      6. Free Cash Flow: Approximately $2.7 billion for FY 2024 .
      7. Incremental Margins: Low to mid-40s for FY 2024 .
      8. Synergies Realized: $100 million for FY 2024 .
      9. Discrete Automation Segment: Positive in Q4 2024 .
      10. Test & Measurement Orders: Positive in H1 2025 .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024
    • Guidance:
      1. Adjusted EPS: $5.30 to $5.45 for FY 2024 .
      2. Sales: Underlying sales growth of 4.5% to 6.5% for FY 2024 .
      3. Discrete Automation Sales: Down in low single-digit range for FY 2024 .
      4. FX Impact: Approximately flat versus 2023 for FY 2024 .
      5. Operating Leverage: Low to mid-40s for FY 2024 .
      6. Free Cash Flow: $2.6 billion to $2.7 billion for FY 2024 .
      7. Share Repurchase: Approximately $500 million for FY 2024 .
      8. Second Quarter Underlying Sales Growth: 3.5% to 5.5% for Q2 2024 .
      9. Second Quarter Adjusted EPS: $1.22 to $1.26 for Q2 2024 .
      10. Test and Measurement Segment Full Year Sales: $1.5 billion to $1.6 billion for FY 2024 .
      11. AspenTech Contribution: $0.32 to $0.34 to adjusted EPS for FY 2024 .

    Latest news

    Recent developments and announcements about EMR.

    Financial Reporting

      Earnings Call

      ·
      Nov 5, 2024, 1:01 PM

      Emerson Electric Co. (EMR) recently held its earnings call, where they discussed their financial performance for 2024 and provided guidance for 2025. Here are the key points from the earnings call:

      • Financial Performance: Emerson reported stronger-than-expected free cash flow of $2.9 billion for 2024, a 23% increase year-over-year, despite acquisition-related costs and higher capital expenditures. The company's gross margins reached a record 50.8%, and adjusted segment EBITDA was at a record high of 26% .

      • Revenue and Profit: Underlying sales grew by 6%, led by high single-digit growth in process and hybrid businesses. Adjusted earnings per share (EPS) was $5.49, up 24% from the previous year .

      • Forward Guidance: For 2025, Emerson expects underlying sales to grow by 3% to 5%, with adjusted EPS projected between $5.85 and $6.05. Free cash flow is expected to be between $3.2 billion and $3.3 billion .

      • Strategic Initiatives: Emerson announced plans to acquire the remaining shares of AspenTech, which they believe will accelerate their software-defined automation strategy and provide additional cost efficiencies . They are also exploring strategic alternatives for their Safety & Productivity business, including a potential cash sale .

      • Market Conditions: Emerson highlighted strong project activity in LNG, life sciences, and sustainability sectors. They expect continued growth in these areas, driven by investments in energy transition and decarbonization .

      • Analyst Questions: Analysts inquired about the company's power business, particularly nuclear exposure, and the timeline for software-defined automation. Emerson's executives noted that nuclear represents about 20% of their power business and discussed a phased approach to implementing software-defined automation .

      • Shareholder Returns: Emerson plans to repurchase approximately $2 billion of common stock in fiscal 2025 and expects to return about 100% of their guided free cash flow to shareholders through dividends and share repurchases .

      Overall, Emerson is focused on completing its portfolio transformation and driving shareholder value through strategic acquisitions and operational efficiencies.