The operator welcomes participants to the Emerson Third Quarter 2024 Earnings Conference Call and introduces the speakers. The speakers include the Vice President of Investor Relations, President and CEO, Chief Financial Officer, and Chief Operating Officer. The presentation may include forward-looking statements and all financial metrics are on a continuing operations basis. The President and CEO thanks the employees for their hard work and dedication to the company's vision and purpose.

The CEO expresses gratitude to the Board of Directors and shareholders for their support. They have made progress in transforming the company through culture, portfolio, and execution, as shown by positive results in the latest employee survey. Q3 saw a return to growth in orders, driven by strong project activity in Process and Hybrid businesses, particularly in life sciences, energy, and power. However, MRO orders were slightly weaker than expected and Discrete Automation orders were down due to weak factory automation markets.

Emerson experienced slower growth in June, with a weaker demand environment in China and soft Test & Measurement orders. However, the company still delivered strong operating results and exceeded expectations in terms of margin, earnings per share, and free cash flow. Sales were at the lower end of expectations, and the company expects low single-digit underlying order growth for the second half and full year. Despite challenges in certain markets, Emerson remains confident in its differentiated portfolio and is focused on executing its 2024 plan.

In the fourth quarter of 2024, Emerson expects a 6% increase in underlying sales and has raised its adjusted EPS and free cash flow guidance. The company has seen double-digit growth in the life sciences and power markets in North America and Europe, with strong performance in the Middle East offset by weakness in Asia. Gross margins have improved and operating leverage was stronger than expected. Adjusted earnings per share exceeded expectations and free cash flow increased by 27%. Emerson is confident in the value creation potential of its transformed portfolio.

Emerson continues to see strong investments in capital projects, with a project funnel of $11 billion. The growth in the funnel is largely due to projects supporting energy transition, life sciences, sustainability, and decarbonization. In the third quarter, Emerson was awarded $350 million in project content, with wins in traditional energy projects and offshore vessels in Brazil. Their growth programs also performed well, with key wins including automating a lithium mine and supporting a renewable energy park in India. This showcases the breadth of Emerson's portfolio and their ability to serve emerging markets.

Emerson has been chosen to provide their Ovation Green SCADA solution for a wind turbine project in Uzbekistan, as well as for a green hydrogen project in the same country. They were selected for their scalable automation software, local support capabilities, and expertise in the hydrogen industry. Emerson's focus remains on driving strategic priorities, including accelerating innovation and enhancing their position as a global leader in automation. Their latest innovation, the Ovation Automation Platform 4.0, offers customer-focused solutions and integrates with their Ovation Green software to optimize operations for both traditional and renewable energy sources.

Emerson's customer-focused innovation was showcased at their 37th Users Conference, where 70% of U.S. power utilities participated. The conference featured interactive exhibits, customer case studies, and collaborative sessions focused on emerging technical and business topics. This engagement allows for direct input from users to inform product development plans. In the third quarter, Emerson announced the sale of their remaining interest in the Copeland joint venture, with expected pretax cash proceeds of $1.9 billion to be used for debt repayment. Underlying sales grew by 3%, with Process and Hybrid businesses leading the way and continued weakness in discrete. Intelligent Devices grew by 2%, while software and control grew by 7%. Discrete Automation was down due to slower market recovery.

In the third quarter, Test and Measurement contributed $355 million to net sales, slightly below expectations. However, adjusted segment EBITDA margin improved to a record high of 27.1% due to strong gross margin performance and cost reductions. Adjusted earnings per share grew 11% to $1.43, and free cash flow was $975 million, up 27% from the previous year. This was driven by improvements in working capital. To date, $210 million of the anticipated $250 million headwind has been incurred.

The company had a strong performance in operations, with software and control businesses contributing $0.16. However, corporate had a $0.02 drag due to a higher income tax rate. AspenTech contributed $0.03 more than expected due to outperformance in GACV and higher revenue. Test and Measurement contributed $0.09, slightly below expectations. The company's updated guidance for fiscal year 2024 includes expected growth in underlying sales and reported net sales, as well as increased operating leverage expectations. The midpoint of adjusted EPS guidance has been raised and Test and Measurement is expected to contribute $0.42 to $0.44. AspenTech is also expected to contribute $0.32 to $0.34 due to strong results in Q3.

Emerson is raising their free cash flow expectations for the year to $2.8 billion and their dividend and tax rate expectations remain unchanged. They have focused on debt pay down and retired €500 million of term debt. The company's performance has exceeded expectations and their transformed portfolio has improved with higher profitability and organic growth. The Emerson management system is driving operational excellence. During the Q&A portion of the call, Lal Karsanbhai addresses the idea of software-defined automation and how it is being used to better collaborate and integrate between DeltaV and Aspen's offerings. This technology is also being propagated across the rest of the portfolio to liberate data that exists in silos across operations in various industries.

The company's second goal is to use analytics to increase productivity and efficiency, with the help of AspenTech. They are also working towards bringing compute to the edge and have recently acquired Ovation to expand into the power and water industries. In the near term, the company expects the discrete market to recover slowly, with the potential for positive orders in the last quarter of the year. Test and Measurement may take longer to recover, with sales potentially turning positive in the second half of 2025 and orders in the first half.

The speaker discusses offsetting factors such as a strong capital cycle formation and momentum in certain markets, but expects to be towards the lower end of the given range for 2025. They also address concerns about the wide range for Test and Measurement revenue in the fourth quarter, stating confidence in hitting within the range. The speaker then provides a general overview of the industrial market and mentions potential delays and longer decision-making processes. They also mention a slightly increased funnel to order conversion rate.

The speaker, Lal Karsanbhai, responds to a question about the company's funnel growth and capital formation cycle. He notes that the funnel has grown and they have booked $350 million in value, with a mix that varies by end market and timing. He remains optimistic about the sustainability and LNG projects, but is monitoring potential delays in product acceptance from customers. CFO Mike Baughman adds that some lower-margin projects being pushed out may have contributed to the lower sales in the quarter. Lal Karsanbhai also mentions that process and hybrid orders are up mid-single digits. The next caller, Scott Davis, congratulates the company on navigating through the choppiness and asks about their cash on hand.

The speaker is asked about the company's leverage and plans for the proceeds from the Copeland deal. They feel good about their balance sheet and are working on integrating National Instruments. They have the capacity for M&A if they choose to use it. The speaker also addresses the Ovation product line and its potential impact, stating that 70% of attendees at an event were interested in it and it could lead to a significant upgrade in their installed base.

The company, Ovation, has had significant releases in technology capabilities, including a recent one that incorporates technology from Aspen and provides new capabilities for optimization, analytics, and copilots. This is important as the investment in power generation infrastructure is growing due to the rise of AI and data centers. The company's Innovation 4.0 positions them well for this growth and also allows for upgrades to existing systems. The use of AI models is a new and different feature in the market, and innovation is a core pathway for the company's growth. R&D spending has increased to support this innovation.

Deane Dray of RBC Capital asks about the overlap between ABB's global funnel and the 440 North American non-residential construction projects over $1 billion. Lal Karsanbhai explains that ABB is participating in these projects with good win rates, particularly in the areas of LNG, energy, life sciences, semiconductors, and EVs. They will work with Colleen to map the funnel with the mega projects. ABB has a strong level of project activity in North America, especially in the control systems business.

The speaker, Colleen Mettler, reminds the audience that the funnel represents automation content in comparison to the entirety of a project. Deane Dray asks about the decrease in buybacks and the company's capital allocation priorities for 2025. Mike Baughman responds that buybacks are still a priority, along with dividends and returning capital to shareholders. The company plans to exit the year with the commercial paper paid off and $3.5 billion in cash on the balance sheet. They will continue to focus on funding organic growth initiatives, dividends, and bolt-on M&A, as well as share buybacks. The company expects to see an increase in cash flow in the fourth quarter, which is consistent with previous years.

Emerson had a particularly good third quarter, driven by a strong performance in their Test and Measurement segment and a reduction in their balance sheet. The company is confident in their full-year guidance and expects their operating leverage to be in line with previous years. They anticipate a small headwind at the corporate level due to increased pension expenses, but this will be offset by lower interest expenses. The company has not yet made any decisions about their plans for Aspen in fiscal year 2025. Overall, Emerson's operating leverage has been impressive and they have raised their guidance for this year to mid-40s, which is higher than their previous Investor Day algorithm.

In response to a question about sustaining incrementals in FY '25, Mike Baughman, Emerson's CFO, believes they can achieve a similar leverage rate as this year due to their higher margin portfolio. Lal Karsanbhai, Emerson's CEO, mentioned they have decent visibility towards the low end of their 4% to 7% revenue growth target for FY '25, but the pace and amplitude of discrete recovery and China will play a role in achieving this. They believe China is currently stable.

Lal Karsanbhai and Ram Krishnan discuss the company's performance in different end market verticals, with a focus on the energy, power, and life sciences sectors driving the majority of capital project wins. They note that the process and hybrid business saw mid-single-digit order growth, but the discrete automation business remained negative. They also mention that they have not seen any slowdown in their life sciences and metals and mining businesses.

The speaker discusses the areas of the company that they are closely monitoring, including the pace of recovery in markets such as semiconductors, electric vehicles, and automotive. They note that the aerospace and defense segment has shown strong growth due to government spending, but they have yet to see sustained recoveries in other markets. They also mention a slight decrease in backlog, but express confidence in future backlog growth.

The speaker, Mike Baughman, discusses the company's operating leverage for their discrete automation business, which will be around 40%. He also mentions the momentum in the power generation business and the strong project funnel in both North America and China. He references a specific project in India and the company's involvement in renewable investments with their Ovation platform. A question is then asked about the performance of the MRO (maintenance, repair, and operations) business in the quarter.

The company is seeing changes in their MRO business, with strong performance in Europe and softer performance in North America. However, they do not see anything concerning in terms of inventory levels. In the T&M business, synergy progress is going better than expected, but the company is not raising their guidance and continues to execute at the current pace.

The synergy guide will not be changed, and the company is working at a good pace to achieve results. The discrete automation comps will be easier in the fourth quarter, but it is unlikely that organic revenue will turn positive. The company is planning for a 25% recovery in sales for the discrete automation business in the first half of the year. The Q&A session has ended and the management team thanks everyone for attending.

This summary was generated with AI and may contain some inaccuracies.