Q3 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- Emerson has raised its adjusted EPS guidance to $5.45 to $5.50 and expects free cash flow to be approximately $2.8 billion, demonstrating strong financial performance.
- The company achieved operating leverage of 67%, significantly stronger than expected, and plans to sustain incremental margins in the 40% range into 2025 due to higher profitability and operational excellence.
- Emerson maintains a healthy backlog of $7.4 billion, with continued strength in process and hybrid markets, driven by robust capital project investments and strong order levels.
- Delayed recovery in the discrete automation business, with sales not expected to improve until the first half of 2025. This indicates prolonged weakness in this segment and could impact overall revenue growth.
- Uncertainty in China and discrete markets may limit revenue growth to the low end of the company's 4% to 7% guidance. The company is closely watching the pace of discrete recovery and the situation in China, which are critical for achieving higher growth rates.
- Potential revenue headwinds in the Test & Measurement business, with revenue growth not anticipated until the second half of next year. There is a risk that the company may only achieve the lower end of its revenue guidance range for T&M in Q4, indicating continued softness in key markets like semiconductors and EVs.
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Discrete Automation Recovery
Q: When will discrete automation and Test & Measurement recover?
A: The discrete automation recovery has been slower than expected, but Emerson expects orders to turn positive in the last quarter of the year, leading to a sales recovery in the first half of 2025. For Test & Measurement, sales are anticipated to turn positive in the second half of 2025, with orders improving in the first half. The company is monitoring customer activity closely, especially in markets like semiconductors and EVs. -
Operating Leverage Sustainability
Q: Can you sustain operating leverage in the 40% range in FY'25?
A: Emerson believes it can maintain operating leverage in the 40% range next year, similar to this year. This confidence stems from a significantly higher margin portfolio, with a 1,000 basis point improvement due to the transformation to a 50%+ gross profit portfolio. -
Capital Allocation and M&A Capacity
Q: Do you have capacity for M&A while integrating National Instruments?
A: Emerson feels great about its balance sheet and maintains its investment-grade rating. While focusing on integrating National Instruments, the company has the capacity for M&A and will evaluate opportunities, including its majority position in AspenTech. Share buybacks remain a priority, targeting about $500 million per year. -
Process vs. Discrete Market Outlook
Q: Is weakness confined to discrete automation, or is process also affected?
A: Weakness is primarily in discrete automation, particularly in semiconductors and EVs. Process and hybrid markets, such as energy, power generation, life sciences, and metals and mining, continue to show strong capital formation with mid-single-digit order growth. No slowdown is observed in these areas. -
Cash Flow Guidance
Q: How should we think about cash flow in Q4 and next year?
A: Emerson raised its cash flow guidance to $2.8 billion for the year, implying about $800 million in the fourth quarter, consistent with prior years. The strong third quarter included a $50 million benefit from Test & Measurement. For next year, no significant changes are expected outside normal operating dynamics. -
Plans for AspenTech
Q: Are there plans to act on your AspenTech position in FY'25?
A: Emerson is continuing to evaluate its position in AspenTech but has no specific comments regarding actions in fiscal 2025. -
Impact of Mega Projects
Q: How does your funnel overlap with North American mega projects?
A: Emerson is actively participating in large North American projects in LNG, energy, life sciences, semiconductors, and EVs, with very good win rates. The company's funnel reflects automation content within these projects. -
Ovation 4.0 Upgrade
Q: How significant is the Ovation 4.0 upgrade?
A: Ovation 4.0 is a significant step change, incorporating technology from AspenTech, including AI models for optimization and predictive maintenance. It positions Emerson well to capture growth in power generation, transmission, distribution, and renewables. -
Backlog Levels Entering FY'25
Q: Are you confident about backlog growth entering fiscal 2025?
A: Yes, Emerson feels confident about backlog levels entering 2025. Despite a small reduction in backlog due to Test & Measurement, the base Emerson business backlog held flat. The company expects a book-to-bill ratio around 1 for the full year. -
Synergy Progress with T&M
Q: Is synergy progress in Test & Measurement ahead of plan?
A: Emerson continues to execute on synergy plans with Test & Measurement but is not raising the synergy guidance at this time. Progress is on pace to deliver the expected results. -
MRO Trends
Q: How did MRO sales perform, and are there any concerns?
A: MRO sales remained consistent at 64% of revenue. Europe showed strong MRO performance, while North America was softer. There are no alarming trends, and the company is not heavily affected by customer inventory rebalancing.