Emerson Electric's CEO Discusses F3Q12 Results - Earnings Call Transcript

Emerson Electric Co. (EMR)

F3Q12 Earnings Call

August 07, 2012 02:00 pm ET

Executives

Patrick Fitzgerald - Director, IR

David Farr - Chairman & CEO

Frank Dellaquila - SVP & CFO

Analysts

Christopher Glynn - Oppenheimer

Scott Davis - Barclays

Mike Wood - Macquarie Capital

Jeff Sprague - Vertical Research Partners

Steven Winoker - Sanford Bernstein

Shannon O'Callaghan - Nomura

Julian Mitchell - Credit Suisse

Dean Dary - Citi Research

Steve Tusa - JPMorgan

Brian Langenberg - Langenberg & Company

Presentation

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to Emerson's Investor Conference Call. (Operator Instructions) Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, August 7, 2012.

Emerson's commentary and responses to your questions may contain forward-looking statements, including the company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson's most recent annual report on Form 10-K as filed with the SEC.

It is now my pleasure to introduce our host for today Mr. Patrick Fitzgerald, Director of Investor Relations at Emerson. Please go ahead, sir.

Patrick Fitzgerald

Thank you, Diana. I'm joined today by David Farr, Chairman and Chief Executive Officer at Emerson; and Frank Dellaquila, Senior Vice President and Chief Financial Officer. Today's call will summarize Emerson's third quarter 2012 results. A conference call slide presentation will accompany my comments and is available in Emerson's website, at emerson.com. A replay of this conference call and slide presentation will be available on the web after the call for the next three months.

I'll start with the highlights of the quarter as shown on Page two of the conference call slide presentation. Third quarter sales increased 3% to $6.5 billion underlying sales growing 6% as robust growth in process management was driven by strong energy in markets in recovery of sales deferred from the Thailand flooding and supply chain disruption.

The strong US dollar particularly against the euro reduced growth by 3%. Gross profit margin improved 80 basis points from the prior year to a record of 40.5%. Operating profit margin of 19.9% increased 180 basis points from the prior year, benefiting from strong sequential operating profit leverage of 55%. Earnings per share of $1.04 increased 16% from the prior year achieving a record for the third quarter.

Today Emerson’s Board of Directors approved a fourth quarter dividend payment completing 56 consecutive years of dividend increases. The third quarter reflected solid results with strong operational execution despite slowing of the global economy.

Next slide, P&L summary. Again net sales increased 3% and underlying sales grew 6% with mixed demand among end markets and regions. Operating profit margin of 19.9% improved to 180 basis points to prior year benefiting from a strong volume leverage, cost reduction benefit and recovery of process management of sales and profit from the Thailand flooding..

Earnings growth of 13% along with the repurchase of 4.4 million shares drove an EPS increase of 16%.

Next slide undergoing sales by geography. Underlying sales in the US grew 6%, Europe was flat, Asia grew 9%, Latin America grew 19%, Canada grew 10% and Middle East and Africa grew 5%. Total underlying sales grew 6%, currency translation deducted 3% with net sales increasing 3%.

Moving to slide 5, profitability detail. Gross profit margin of 40.5% improved 80 basis points and achieved a record level. Lower SG&A as a percent of sales drove further margin improvement as operating profit margin expanded a 180 basis points.

Other deductions was essentially flat as higher restructuring of $14 million and currency transaction losses of $11 million were offset by the payments received related to dumping duties of $37 million under the US Continued Dumping and Subsidy Offset Act. Pretax margin reflected an increase of 200 basis points.

Next slide, cash flow. Operating cash flow decreased 6% as strong earnings were offset by higher receivables related to sales timing. Free cash flow was essentially flat to prior year with strong conversion from earnings at 90%. Trade working capital as a percent of sales was even to prior year benefiting from strong inventory performance.

Moving to slide 7, business segment earnings. Business segment margin of 18.5% improved 160 basis points reflecting strong volume leverage and cost production benefit as well as the dumping duty payments received as mentioned earlier.

Corporate expense declined $14 million, primarily due to lower stock compensation expense and interest expense decreased 8%.

Moving to slide eight, Process Management results. Process management net sales grew 19% and underlying sales grew 23% as currency translation deducted 4%. By region, the US was up 29%, Asia up 25%, Europe up 14%, Latin America up 33% and Middle East and Africa up 13%.

Robust investment in oil and gas, chemical and power industries drove growth in all businesses and geographies. Sales benefited from approximately $130 million of converted backlog related to the Thailand flooding supply chain disruption. Segment margin of 23.1% improved 270 basis points, primarily driven by volume leverage and cost reduction benefits.

Year-to-date underlying orders have grown 17%, with the US up over 20% which has driven backlog of 15% from the prior year. Continued energy in market strength and the high backlog supported strong outlook for the next several quarters.

Next slide, Industrial Automation. Industrial automation net sales decreased 1%, but excluding currency translation grew to 3%, with the US up 12%, Asia flat, Europe down 4%, Latin America up 9% and Middle East and Africa down 1%.

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