Emerson Electric's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Emerson Electric (EMR)

Q1 2012 Earnings Call

February 07, 2012 2:00 pm ET

Executives

Patrick Fitzgerald - Director of Investor Relations and Assistant Treasurer

David N. Farr - Chairman of the Board, Chief Executive Officer and Chairman of Executive Committee

Frank J. Dellaquila - Chief Financial Officer and Senior Vice President

Analysts

Jeffrey T. Sprague - Vertical Research Partners Inc.

Mike Wood - Macquarie Research

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Deane M. Dray - Citigroup Inc, Research Division

Julian Mitchell - Crédit Suisse AG, Research Division

Nigel Coe - Morgan Stanley, Research Division

Terry Darling - Goldman Sachs Group Inc., Research Division

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

C. Stephen Tusa - JP Morgan Chase & Co, Research Division

John G. Inch - BofA Merrill Lynch, Research Division

Presentation

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Emerson's Investor Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, February 7, 2012. Emerson's commentary and responses to your question may contain forward-looking statements, including the company's outlook for the remainder of the year. Information on factors that can cause actual results to differ very materially from those discussed today is available at Emerson's most recent annual report on the Form 10-K as filed with the SEC. I would now like to turn the conference over to our host, Patrick Fitzgerald, Director of Investor Relations at Emerson. Please go ahead.

Patrick Fitzgerald

Thank you, Luke. I am joined today by David Farr, Chairman and Chief Executive Officer of Emerson; and Frank Dellaquila, Senior Vice President and Chief Financial Officer. Today's call will summarize Emerson's first quarter 2012 results. A conference call slide presentation will accompany my comments and is available in the Investor Relations section of Emerson's website at emerson.com. A replay of this conference call will be available on the website after the call for the next 3 months. I will start with the highlights of the quarter as shown on Page 2 of the conference call presentation.

Fourth quarter sales were down 4% to $5.3 billion, caused by several near-term challenges. Our supply chain disruption caused by the Thailand flooding impacted results by approximately $300 million. U.S. telecommunications carriers deferred investments, awaiting the outcome of potential industry consolidation. HVAC OEMs in the U.S. and China pushed inventories very low on economic uncertainty, and there was broad European economic weakness.

Operating profit margin declined 220 basis points from the prior year quarter to 13.2%, which is primarily driven by volume deleverage. Earnings per share of $0.50 was down 21% from the prior year quarter. Operating cash flow increased 4% versus the prior year quarter to $334 million. Our balance sheet strength continues to enable us to invest in growth opportunities. Despite the pressure on Q1 from numerous near-term headwinds, our outlook for 2012 remains favorable.

Next slide, the P&L summary. Net and underlying sales were down 4%, with negligible impact from currency, acquisitions and divestitures. Operating profit declined 18% as the magnitude of sales declined and resulting unfavorable mix drove substantial volume deleverage. Net earnings were down 23%. We repurchased 4.8 million shares for $226 million and EPS declined 21% in the quarter.

Next slide, underlying sales by geography. Gross performance was affected by the previously mentioned challenges. Underlying sales in the U.S. decreased 4%; Europe was flat; Asia was down 8%, with China down 13%; Latin America increased 3%; Canada increased 6%; and the Middle East/Africa was down 4%, resulting in underlying and net sales down 4%.

Slide 5, profitability detail. Gross profit margin of 38.7% declined 40 basis points. A favorable price and material inflation relationship partially offset the volume deleverage and unfavorable mix. Operating profit margin of 13.2% decreased 220 basis points. Currency transaction losses of $14 million and higher restructuring of $6 million were partially offset by amortization of $9 million. Pretax margin of 10.4% declined 250 basis points.

Slide 6, cash flow and balance sheet. Operating cash flow increased 4% in the quarter as lower investment in working capital offset the earnings decline. Investment in technology and growth programs continued, as capital expenditures increased $130 million. Free cash flow was down 15%. Trade working capital as a percent to sales increased to 19.1% as inventory performance was affected by the Thailand flooding and sales timing and mix impacted receivables.

Next slide, business segment earnings. Business segment margin of 12.7% dropped 270 basis points as the volume deleverage, unfavorable mix and higher materials costs more than offset price increases and cost reduction actions. Corporate spend was down $23 million as favorable stock compensation expense and acquisition costs in the prior year offset a $19 million charge to eliminate our retiree medical liability.

Moving to Slide 8, Process Management results. Process Management net and underlying sales declined 1% with the U.S. flat; Asia down 8%; Europe up 6%; Latin America down 3%; and Middle East/Africa down 6%. The Thailand flooding supply chain disruption had a broad business and geographic impact. Strong orders growth in the quarter up 15% across all businesses and geographies as oil and gas investment remains robust. Segment margin of 12.4% declined 640 basis points as significant deleverage and unfavorable business mix from the Thailand flooding impact, including costs incurred to resolve the supply chain disruption, affected results. The growth investments were maintained as the business outlook remains positive. $12 million of unfavorable currency transactions also affected earnings. The supply chain disruption has been substantially resolved, and the full year impact should be minimal. Strong backlog in order trends support a favorable outlook for the remainder of 2012.

Next slide, Industrial Automation. Industrial Automation net and underlying sales increased 2% with the U.S. flat; Asia up 2%; Europe up 5%; Latin America up 17%; and Middle East/Africa up 14%. Growth was led by the fluid automation, power generating alternators and electrical distribution businesses. U.S. results were affected by softness in the hermetic motors business. Weakness continues in the solar and wind energy business as governments have reduced renewable energy subsidies. We do not expect recovery in this business in the near-term. Segment margin decreased 50 basis points to 14.8% as a favorable price-cost relationship was more than offset by unfavorable mix and other cost increases. Demand for capital goods should remain stable across most end markets, but we expect increasing weakness in Europe.

Slide 10, Network Power. Network Power net and underlying sales declined 10%, with the U.S. down 17%; Asia down 6%; Europe down 10%; Latin America down 5%; and Middle East/Africa up 4%. Sales volume was affected by several factors, including deferred spending by U.S. telecommunications carriers, difficult prior comparisons and project timing in the global data center business, Thailand flooding impact on broader electronics components channels, and continued aggressive product line rationalization in the embedded computing and power business. Segment margin of 8.2% decreased 270 basis points, driven by volume deleverage, unfavorable mix and higher restructuring, which was partially offset by cost reduction benefits. There were one-time Chloride acquisition costs of $15 million in the prior year. Telecommunications carrier investment is expected to accelerate in 2012, and the order trends in Network Power show signs of improvement.

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