Sign in

    Emerson Electric Co (EMR)

    Q2 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$96.52December 31, 2023
    Final Price$113.42March 31, 2024
    Price Change$16.90
    % Change+17.51%

    What went well

    • Emerson experienced better-than-expected backlog conversion due to improved supply chains and plant output, particularly in their Measurement Solutions and Test & Measurement businesses, leading to higher profitability since these are higher gross profit businesses.
    • Emerson is accelerating cost synergies, expecting to realize $185 million in committed cost-outs ahead of schedule, improving efficiency and competitiveness without needing to add back costs when revenues recover.
    • Emerson anticipates recovery in key businesses, such as Discrete Automation turning positive in Q4 and Test & Measurement recovery into first half of 2025, with strength in the defense sector and battery testing projects, positioning the company for future growth.

    What went wrong

    • Emerson's operating leverage is expected to decrease in the second half due to a mix change, with the Maintenance, Repair, and Operations (MRO) mix drifting down from 65% in the second quarter. Prices contributed to growth earlier in the year but are expected to be lower in the back half, and there is an expected moderation in contribution from AspenTech.
    • Recovery in the Discrete Automation and Test & Measurement segments is delayed, with positive orders in Test & Measurement now expected in the first half of 2025, two quarters later than originally anticipated, due to continued softness in transportation and semiconductor demand and slower recovery in China.
    • AspenTech lowered its guidance, impacting Emerson's earnings expectations, with AspenTech now expected to contribute $0.30 to $0.32 for the year versus the $0.32 to $0.34 in prior guidance.

    Q&A Summary

    1. Order Growth Outlook
      Q: How is order growth shaping up for the second half?
      A: Order growth is starting strong in Q3, with April orders up 10% year-over-year. The trailing three-month orders have turned positive to low single digits. We expect mid-single-digit order growth in the second half, driven by the process and hybrid markets, and are optimistic about the developing opportunities in discrete automation.

    2. National Instruments Integration and Recovery
      Q: When will National Instruments' business recover, and can you push cost savings further?
      A: The recovery in National Instruments (NI) is delayed by six months, primarily due to softness in semiconductors and Asia. Despite this, we're seeing positive signs in defense and battery testing for electric vehicles. North America and Europe have turned positive, and we're cautiously optimistic about transportation. We're committed to our $185 million cost savings target and continue to invest in growth initiatives.

    3. Operating Leverage and Margins
      Q: Can you maintain over 40% operating leverage amid changing mix?
      A: In the back half of the year, our operating leverage will be in the mid-30% range due to a meaningful mix change. The MRO mix is expected to drift down from 65% as we progress, and we're also seeing a geographic shift with U.S. growth moderating. Price benefits will normalize, and while AspenTech contributed significantly this quarter, its impact will moderate in the second half. We don't expect leverage rates in 2025 to be materially different from 2024.

    4. Supply Chain Improvements and Backlog Conversion
      Q: How did supply chain improvements affect backlog conversion?
      A: Our supply chains responded better than expected, leading to higher-than-planned shipments. Plant output improved, especially in our Measurement Solutions business, and lead times are down to pre-COVID levels. This improved backlog conversion contributed to higher profitability, particularly in our high gross profit businesses.

    5. Discrete Automation Recovery
      Q: When will the Discrete Automation business recover?
      A: We expect the Discrete Automation orders to be flat in Q3 and turn slightly positive in Q4. Green shoots are emerging, especially in Western Europe and Germany among machine makers. Recovery is anticipated into the first half of 2025, considering our exposure to semiconductors and China.

    6. AspenTech's Fourth Quarter Outlook
      Q: Why is AspenTech's Q4 EBITDA expected to decline?
      A: AspenTech's performance is inherently lumpy due to ASC 606 accounting. We anticipate EBITDA to be down approximately $20 million year-over-year in Q4, and forecast it to be lower than Q3.

    7. Measurement & Analytical vs. Final Control Growth
      Q: Why is Measurement & Analytical growing faster than Final Control?
      A: Measurement Solutions is expected to grow in the low double digits this year because it was most impacted by backlog builds due to extended lead times. As the backlog reduces, sales accelerate. Final Control grows at mid-single digits, and both have similar order rates in the mid- to high single digits.

    8. Power Franchise Opportunities
      Q: What are the revenue opportunities in the power business?
      A: For a 1,200-megawatt combined cycle plant, there's approximately $20 million in project opportunities—$5 million in control systems and $15 million in instrumentation and valves. An additional $20 million over a decade is expected from MRO upgrades. We see significant potential in both new builds and retrofits, including nuclear plant life extensions.

    9. Sustainability and Decarbonization Projects
      Q: Are decarbonization projects nearing final investment decisions?
      A: We're seeing considerable global activity in segments like biofuels and carbon capture. While large hydrogen projects are progressing slower, the pace varies by segment. We continue to engage in these opportunities, especially in Europe and North America.

    10. Channel Inventory Levels
      Q: How are inventory levels in your distribution channels?
      A: Inventory levels have normalized in our Discrete Automation channel. In the Test & Measurement business at NI, elevated inventory levels among channel partners are expected to normalize over the next quarter. Overall, we don't see any major inventory dynamics affecting our order momentum.

    11. Impact of MRO Mix on Margins
      Q: Is the high MRO mix affecting margins significantly?
      A: The MRO mix remains strong at 64%, slightly down from 65% in 2023. We anticipate it may shift by another point this year. The strength in MRO supports our process and hybrid businesses, and we're positive about upcoming maintenance opportunities.

    12. National Instruments Demand and Orders
      Q: Did you miss any orders in the NI business due to demand issues?
      A: We did not miss any orders; they came in as expected. Even with flat orders, we anticipate improvement in the second half and a positive turn in 2025. We're encouraged by growth in defense and EV battery testing projects.

    13. AspenTech Capital Deployment Plans
      Q: Any changes expected in AspenTech's capital plans or acquisitions?
      A: We remain excited about our partnership with AspenTech and believe in the value of our combined technology offerings. Currently, there are no changes to their capital deployment plans, and we're focused on operating within the existing structure.

    14. Order Pull-Forward Effects
      Q: How did order pull-forwards impact recent quarters?
      A: Orders were up 4% in Q1 and down 1% in Q2, resulting in low single-digit growth for the first half. We anticipate low single-digit order growth in Q3, with a stronger fourth quarter.

    15. Cost Synergies and Profit Potential
      Q: How are cost synergies affecting future profitability?
      A: We're ahead on our cost-takeout initiatives and have accelerated actions planned for 2025 into this year. We've identified $185 million in cost savings without needing to add back expenses later. This positions us to be more efficient and competitive going forward.

    16. Integration of DGM and Ovation
      Q: Do DGM and Ovation integrate, and what are the benefits?
      A: While there are no direct technology synergies between DGM and Ovation, there are significant customer synergies. Our credibility with utilities through Ovation helps us expand into transmission and distribution software markets. Additionally, optimization software opportunities between Ovation and AspenTech present untapped potential.

    Related Publications