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Third Quarter 2008Earnings Conference CallAugust 5, 2008Safe Harbor Statement
Our commentary and responses to your questions may contain forward-looking statements, including our outlook for the remainder of the year, and Emerson undertakes no obligation to update any such statement to reflect later developments. Information on factors that could cause actual results to vary materially from those discussed today is available in our most recent Annual Report on Form 10-K as filed with the SEC.
Non-GAAP Measures
In this call we will discuss some non-GAAP measures (denoted with *) in talking about our company’s performance, and the reconciliation of those measures to the most comparable GAAP measures is contained within this presentation or available at our website www.emerson.com under investor relations.
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Third quarter sales up 14% to $6.6 billion with increases in 4 of 5 business
segments
– Underlying sales* growth of 7%, led by strong international growth, and solid U.S.
sales
Operating profit margin* improved 30 basis points to 16.6%
Earnings Per Share from continuing operations of $0.82, up 15% compared to
$0.71 in the prior year quarter
Operating cash flow of $827 million and free cash flow* of $672 million
Order growth of +10% to +15% in the quarter, with approx. +5% currency
impact
Balance sheet remains strong
– Average Days-In-The-Cash-Cycle decreased to 65 days from 67 days
– Trade Working Capital as a % of sales sequentially improves from 18.7% in second
quarter to 17.7% in third quarter
– Operating Cash Flow to Total Debt solid at 64%
Third Quarter 2008 Highlights
First Half Momentum Continues Into Third Quarter
Strong Nine Month Performance
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EmersonThird Quarter Results($Mil excl. EPS) 2007 2008
Sales $5,772 $6,568
Operating Profit* $941 $1,092OP%* 16.3% 16.6%
Earnings - Continuing Ops. $573 $647Earnings% 9.9% 9.8%
Dil. Avg. Shares 802.1 787.8
EPS – Continuing Ops. $0.71 $0.82
Discontinued Ops. $0.01 ($0.04)
EPS $0.72 $0.78
Up 14%• Increases in 4 of 5 business segments
• Process Mgmt. up +18%, Network Power up +26%,
Industrial Automation up +16%
• Underlying* up 7%; FX +5 pts; Acq/Div +2 pts
Up 16%• 30 basis point improvement driven by cost
containment programs and volume leverage
Up 13%
Repurchased 4.6M shares for $249M in the qtr. -Returning strong cash flow to shareholders
Up 15%
($36M) impairment charge relating to the
European appliance motor & pump business• Entered a definitive agreement to sell business
Sale of the European Appliance Motor & Pump
Business Expected to Close in Fiscal Year 2008
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United States 4%
Europe 3%
Asia 16%
Latin America 16%
Canada 11%
Middle East/Africa 15%
Total International 10%
Underlying Sales* +7%
Currency 5 pts
Acquisitions/Divestitures 2 pts
Consolidated Sales +14%
Underlying Sales AnalysisThird Quarter Results
Emerging Market Growth Led International
Sales Expansion – up 17%
Emerging Markets
were up 17%
EmersonThird Quarter Detail
($Mil) 2007 2008
Gross Profit $2,095 $2,413
GP% 36.3% 36.7%
SG&A% 20.0% 20.1%
Operating Profit* $941 $1,092
OP%* 16.3% 16.6%
- Other Deductions, Net $58 $100
- Interest Expense, Net $61 $46
Pretax Earnings $822 $946Earnings% 14.2% 14.4%
- Taxes $249 $299
- Tax Rate 30.3% 31.7%
Up 15%
Improvement driven by cost
containment programs and
volume leverage
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Up 16%
$18M increase relating to fx transactions, $9M charge related to the appliance control business, as we evaluate potential sale
Up 15%
Full Year rate expected to be approx. 32%
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Third Quarter Cash Flow & Balance Sheet
($Mil) 2007 2008
Operating Cash Flow $899 $827
Capital Expenditures ($144) ($155)
Free Cash Flow* $755 $672
Cash Flow/Total Debt 61.1% 64.4%
Inventories $2,309 $2,562
Receivables $4,083 $4,663
Payables ($2,247) ($2,563)
Trade WC $4,145 $4,662
TWC % to sales 17.6% 17.7%
Down 8% in Q3, versus an extremely strong Q3 2007
Up 13% year-to-date
Down 11% in Q3
Up 14% year-to-date104% FCF/Net Earnings cont.ops.*
conversion in Q3
Over 70% of Operating Cash Flow Returned to
Shareholders Year-to-Date
Sequential improvement in ratio from 18.7% in 2nd Qtr.
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Business Segment EarningsThird Quarter Results
($Mil) 2007 2008
Business Segment EBIT* $925 $1,051Margin* 15.6% 15.5%
Diff. In Accounting Methods $56 $62
Corporate & Other ($98) ($121)
Interest Expense, Net ($61) ($46)
Pretax Earnings $822 $946
14.2% 14.4%
Up 14%
Up $6 million
Up $23 million$11M commodity hedging mark-
to-market$12M environmental costs and
other items
Down $15 million, driven by lower interest rates
Up 15%
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Process Management Third Quarter Results($Mil) 2007 2008Sales $ 1,471 $1,731
EBIT $269 $346Margin 18.3% 20.0%
Restructuring $2 $4
EBIT Excl. Rest.* $271 $350Margin* 18.5% 20.2%
Up 18%– Underlying* +13%; FX +6 pts; Div/Acq. -1 pt.
• U.S. up 12%, Asia up 21%, Europe up 5%,
Middle East/Africa up 14%
– Strength across all parts of this business –
systems, valves and measurement
Up 29%– Leverage on higher sales volumes
– $11M litigation charge in Q3 2007
Continued Strong Investments Made in Technology and
Global Infrastructure—For Future Benefits
Order growth continues to be strong at +15% in the quarter
TopWorx business acquired in July --Provides valve control
and positioning sensing solutions (~ $40M Annual Sales)
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Industrial Automation Third Quarter Results($Mil) 2007 2008
Sales $1,095 $1,271
EBIT $161 $186Margin 14.7% 14.6%
Restructuring $5 $5
EBIT Excl. Rest.* $166 $191Margin* 15.1% 15.1%
Up 16%– Underlying* up 8%; FX +8 pts
• U.S. up 11%, Asia up 16%, Europe up 4%
Up 15%– Margin down 10 basis points
– Price actions offset higher material inflation
Strong growth in power generating alternator, fluid automation
and industrial equipment businesses
Order growth of +20% during the quarter – fundamentals remain strong
Global Demand for Power and Strength in the Oil and
Gas Market Drive Growth in Alternators
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Network Power Third Quarter Results($Mil) 2007 2008Sales $1,322 $1,672
EBIT $178 $212Margin 13.4% 12.7%
Restructuring $5 $8
EBIT Excl. Rest.* $183 $220Margin* 13.7% 13.1%
Up 26%– Underlying* up 10%; Acq +12 pts; FX +4 pts
• U.S. up 10%, Asia up 13%, Europe up 3%
– Strength across power systems, precision
cooling and telecommunications businesses
– Order trend is on target for normal cycle
Up 19%– Sales volume leverage and cost reductions
drive margin improvement in core business
– Acquisitions had dilutive impact of approx.
150 basis points
“Central Office In A Box” concept debuted at industry trade event --
provides modular approach allowing telecom companies to provide
wireless and broadband services quickly and economically
Strong Global Footprint and Market-Leading
Technologies Provide Momentum for Growth
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Climate TechnologiesThird Quarter Results($Mil) 2007 2008Sales $1,043 $1,087
EBIT $174 $169Margin 16.6% 15.5%
Restructuring $2 $5
EBIT Excl. Rest.* $176 $174Margin* 16.9% 15.9%
Up 4%– Underlying* up 1%; FX +3 pts
• U.S. down 1%, Europe down 6%, Asia up 14%
– Continued penetration gains in the U.S.
water-heater controls business
– Current U.S. orders have increased due to
hot / humid weather
Upcoming regulation changes provide good growth opportunities
Order trends of +5% to +10% in the quarter, warmer weather across U.S.
Demand for Energy Responsible Products Will
Continue to Benefit Climate Technologies Products and
Services
Down 3%– Margin down 110 basis points
– Significant commodity inflation more than
offset pricing increases (issue being
worked), higher restructuring costs
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Appliance and Tools Third Quarter Results($Mil) 2007 2008Sales $1,005 $998
EBIT $143 $138Margin 14.3% 13.8%
Restructuring $4 $2
EBIT Excl. Rest.* $147 $140
Margin* 14.7% 14.0%
Down 1%– Underlying* down 1%; Divestiture -1 pt;
FX +1 pt
• U.S. down 3%, Europe down 4%, Asia up 41%
Tough market conditions continued in consumer-related businesses
Professional tools and hermetic motors showed strong growth
Exploring Alternatives Relative to the
Appliance Control Business
Down 4%– $9M charge relating to the appliance control
business as we evaluate potential sale
– Benefits from cost reduction efforts were
offset by volume deleverage
– Pricing actions offset by significant material
inflation
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Strong third quarter
– Underlying sales* growth of 7%
– Operating profit margin* improvement of 30 basis points
– Strong year-to-date cash flow performance
– Order trends continue to show strength, +10% to +15% in the quarter
Solid results for the first 9 months of fiscal 2008 provide strong foundation for another great year for Emerson
Expect Full Year Underlying Sales Growth* of approximately 6% and Reported Sales Growth of 11% to 13%
Excellent Operating Margin* improvement driven by new products, aggressive restructuring and emerging market growth—expect Fiscal Year 2008 Operating Margin* of 16.2% to 16.4%
Expect Full Year Earnings per Share from continuing operations in the range of $3.05 to $3.10, 15 to 17 percent growth over 2007
Targeting Full Year Operating Cash Flow of $3.3 billion, Capital Expenditures of $0.8 billion and Free Cash Flow* of $2.5 billion – 100+% coverage
Expect 2008 Return on Total Capital of 21%
Summary and Outlook
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Emerson Business Summary Reconciliation of Non-GAAP Financial Measures
This information reconciles non-GAAP measures with the most
directly comparable GAAP measure ($M)
Expected FY 2008 Sales Growth %
Underlying Sales * ~ 6%
Currency / Acq. / Div. ~ 6 pts
Total Sales ~ 11 to 13%
Q3 2008
Operating Cash Flow $827
Capital Expenditures (155)
Free Cash Flow* $672
Net Earnings Cont. Ops. $647
% of Net Earnings Cont. Ops.
Operating Cash Flow 128%
Capital Expenditures (24%)
Free Cash Flow* 104%
2008E
Operating Profit * ~$ 4,000 -$4,060
% Sales * 16.2%-16.4%
Interest Expense and
Other Deductions, Net ~(470)
Pretax Earnings ~$3,530 – 3,590
% Sales 14.2% - 14.4%