Emerson Electric Company (EMR) — Q2 2020 Earnings Call Transcript

Good morning, and thank you, and welcome, everyone, to Emerson's Second Quarter 2020 Earnings Conference Call. I hope everyone is staying safe and healthy. Today, I am joined by David Farr, Chairman and Chief Executive Officer; Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer; Mike Train, Emerson President; Lal Karsanbhai, Executive President of Automation Solutions; Bob Sharp, Executive President of Commercial and Residential Solutions; and we are also joined by a special guest, President of Professional Tool Business in Europe. Mr. Tim Reeves is who is unfortunately still stuck in the United States. And before we begin, I’ll turn it over to Mr. David Farr for some opening remarks.

Thank you very much, Pete. I want to welcome everyone here. For your information, we are sitting in my conference room, properly spread out and we have been operating, Emerson has been open throughout this whole process. We made the decision as OCE on March 10th when I came back from a conference in New York when I was presenting at J.P. Morgan as always you all showed up. And so, I made the decision with the OCE to stay open. We have the OCE here every day. We are properly spread out. As you guys know this office complex. We also have about 15 other executives throughout this floor. We get together on an ongoing basis to make sure we are making decisions, constantly making decisions. We shut the rest of the salaried workforce down and sent them home and they are working from home. But I felt it was important with this crisis that we were here, arrive and we can make quick decisions and deal with the issues very quickly both from a structural standpoint, but also from a competitive standpoint and look at opportunities to keep winning as a company. The opening slide I want to share with you, Honeywell has been involved with making masks that are quite running up in Rhode Island. That’s a slight new plant coming up in Arizona. We work very closely with Honeywell with Darius and I actually talked several times on this issue to make sure they got equipment where we allocated Branson makes welding equipment that makes the masks around the world and testing equipment. And so, this is currently the facility in Rhode Island, which is the picture up with our equipment and the Honeywell mask and this is where CEOs around the world what I call frenemies work very closely together to get things done for the nation, for the world and I just want to comment on that because this is a situation where Honeywell and I are working together to do something right for America and not necessarily speaking up as something out. So, I want to turn it back over to Pete. But again, here we are sitting here. We are properly spread out. Tim is holding my Raleigh monkey and making sure that it doesn’t get Coronavirus. So with that, Pete it’s all yours.

Thanks, Dave. As usual, I encourage everyone to please follow along the slide presentation, which is available on our website. Moving to Slide 4 with the results of the quarter. Underlying sales growth was well below expectations, down 7% driven by the dramatic drop in global demand as the Covid-19 pandemic quickly spread in March. Trailing three month orders were down 3% also reflected by the decaying demand environment, but indicating some modest backlog build-up. GAAP earnings per share were flat and adjusted earnings per share were up 7% to $0.89, driven primarily by lower stock compensation cost due to a lower stock price and aggressive restructuring actions starting in Q3 of last year starting to take effect. Despite lower sales, both platforms executed well on profitability exceeding their adjusted EBIT and adjusted EBITDA peak margin plans for the quarter due to previously initiated and ongoing restructuring actions. Automation Solutions’ underlying sales were down 8% and trailing three month orders were down 1%, also well below initial expectations due to the pandemic demand environment taken shape in March. Commercial and Residential Solutions’ underlying sales and orders were both down 5%. Cash flow performance was solid in the quarter with operating cash flow of $588 million and free cash flow of $477 million, up 10% and 15% respectively. The business returned over $1.1 billion to shareholders including over $800 million in share repurchases and over $300 million in dividends. Lastly, the company continued and built upon its aggressive cost reset plans initiating $40 million of restructuring actions in the quarter.

Thank you, Pete. I want to elaborate further on the numbers shared. It's clear that while the environment has been challenging, we stepped up our initiatives to protect our liquidity and profitability during this downturn. As we navigate through these turbulent times, my focus remains on maintaining our operational efficiency, ensuring that we respond swiftly to market changes and capitalize on any opportunities that may arise. Our strategic alliances, especially highlighted by our collaboration with Honeywell amidst the crisis, showcase our commitment to serving the greater good alongside maintaining our operational resilience. I want to stress again, the safety of our employees and the communities we serve is paramount and we're dedicated to upholding those standards as we move forward.

Turning to Slide 5, we’ll cover the P&L. Second quarter gross margin was flat at 42.1%, that’s favorable price costs and cost containment actions offset the declining revenues. SG&A as a percent of sales decreased 130 basis points reflective of the drop in stock compensation costs due to a lower share price. Adjusted EBIT and adjusted EBITDA margins, which exclude restructuring and related costs increased 240 basis points and 300 basis points respectively. These improvements primarily reflect the lower stock compensation costs combined with aggressive cost containment actions taking effect. Overall, the company continued to execute on peak margin plans which were laid out at our February investor conference. In addition to responding quickly with additional actions, as sales deteriorated in March and the economic outlook for the remainder of the year became increasingly challenging.

I would like to share some insights regarding our global operations. As we analyzed performance, it is evident that the industrial markets are responding to the pandemic with a range of challenges. However, our proactive measures in response to the crisis have positioned us better than many. While we anticipate some delays in recovery, our strong fundamentals will enable us to navigate these headwinds effectively. We continue exploring avenues for growth, emphasizing innovation while managing costs rigorously to maintain our competitive edge.

Good morning, everybody. We wanted to spend just a few minutes here on liquidity, to spell any concerns anyone has. We are in really good shape. We believe we never take this for granted. We are never complacent, but we believe we are in a very, very strong position as we enter the downturn here. We have the capacity to fund all of our internal needs and our dividends despite the fact that we – as you just saw, we expect reduced operating cash flow over the next several quarters. We have a modest amount of leverage even in downturn in less than two times debt-to-EBITDA at year-end on this plan. 65% of our total debt is term debt and as a result we have very good liquidity in our capital structure and we will begin at Slide 17, just walk you down those points.

Thank you. I asked Frank to talk to shareholders this morning about this issue. Frank and his team, I have to give tremendous kudos for accomplishing what they’ve done. They came to us in early February long, and basically say and we need to start take an action. Frank also worked very closely with the finance committee, the Chairman, and several of the members of the finance committee who are very knowledgeable of what’s going on in the marketplace and they instructed us very well of the time.

Let’s go to chart 21. We’d obviously recall last time we were together it was our Investor Meeting on February 13. Our China operations were just getting restarted after a government mandate we closed for two weeks. And then the days were a bit rugged as suppliers took some time to get clear to restart and there was quite a challenge on intra-province and international logistics. This has significantly improved in the past month as we’ve seen our China business starting to come back in a stronger way. And I know Lal and Bob will provide some insights on that in a moment. As the Coronavirus again made its way around the world, we saw challenges to our operational capability imposed by governments as they implemented various forms of stay home, shelter in place and lockdown orders. Emerson provides critical infrastructure products and essential services and with great effort, we’ve been able to gain government recognition and designation. China led to the South Korea, Italy impacts, which then moved along to France and Russia, Middle East and the Americas. It’s been a highly dynamic environment and I must give our global Emerson team who are likely listening to today’s call a big thank you for their collective efforts in working with customers, suppliers, and governments to keep these critical industries running, running when it’s needed most.

Well, Mike, I want to thank you very much for this issue. This is not easy to the 24 hours a day, seven days a week, day in and day out over the weekend you and I were talking a lot. You are talking to various people, dealing with political leaders at all levels to make sure they understand the importance of this and then working very close with hands-in-hands with operation.

Thanks, Lal. Like Lal did, I want to start by recognizing the team out there. Q2 ended very differently than what we thought starting with the China downturn in February coming out of – a delayed coming out of Chinese New Year and then going into March as we’ll talk about, despite that we had a very strong quarter gross profit drove the nine tenths of adjusted EBITDA improvement. We held SG&A in line with sales even though again that sales drop by about 5% just in the last weeks and that was certainly a strong effort.

Thank you, David, and good morning. I’d like to begin by acknowledging the global automation solutions team for a tremendous close to Q2, particularly as we faced rapidly deteriorating market conditions. This team has momentum in executing our peak margin plan and is focused on the additional challenges we now face. So turning to chart 28. This is how the plan works from an orders and sales perspective in what is a significant demand-driven cycle. Orders were down eight tenths of a point in Q2 versus a 2.3% plan and weakening trough in Q3 and stay negative for five consecutive quarters as we have modeled the next four quarters.

So, we are in a very, very strong position as we enter the downturn here. We have the capacity to fund all of our internal needs and our dividends despite the fact that we – as you just saw, we expect reduced operating cash flow over the next several quarters.

So, in summary, we are continuously adapting and making necessary adjustments to our operational strategies in response to ongoing market conditions. While there are challenges ahead, our commitment to delivering value to our stakeholders remains unwavering. Together with the global Emerson team, we are equipped to emerge from this downturn even stronger than before.