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Fourth Quarter 2008Earnings Conference CallNovember 4, 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 statements 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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Fourth quarter sales up 11% to $6.7 billion with increases in four out of
five business segments
– Strong underlying* sales growth of 7%, led by Process Management,
Network Power and Industrial Automation
– Emerging markets continued to benefit growth
Operating profit margin* improved 70 basis points to 17.5%
Earnings per share from continuing operations of $0.88, up 13%
compared to $0.78 in the prior year quarter
Operating cash flow of $1,295 million and free cash flow* of $1,042
million, up 4% and 6% respectively
Operational efficiency initiatives continue, balance sheet is strong
– Trade Working Capital as a percent of sales to 15.9% from 16.2%
– Net Debt to Net Capital ratio at 23%
– Operating Cash Flow to Total Debt strong at 73%
Fourth Quarter 2008 Highlights
Well-Positioned Going Into an Uncertain 2009
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EmersonFourth Quarter Results($Mil excl. EPS) 2007 2008
Sales $6,028 $6,696
Operating Profit* $1,013 $1,174OP%* 16.8% 17.5%
Earnings - Continuing Ops. $621 $690Earnings% 10.3% 10.3%
Dil. Avg. Shares 800.0 781.4
EPS – Continuing Ops. $0.78 $0.88
Discontinued Ops. - -
EPS $0.78 $0.88
Up 11%• Increases in 4 of 5 business segments
• Process Mgmt. up +13%, Network Power up +19%,
Industrial Automation up +14%
• Underlying* up 7%; FX +2 pts; Acq/Div +2 pts
Up 16%• 70 basis point improvement driven by cost
containment programs, volume leverage and favorable business mix
Up 11%
Repurchased 8.6M shares for $398M in the qtr.
Up 13%
Actively Managing Business Portfolio: Sale of the European
Appliance Motor & Pump Business Closed Sept. 30th, 2008
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United States 1% 3%
Europe 6% 3%
Asia 17% 17%
Latin America 25% 18%
Canada 14% 8%
Middle East/Africa 14% 17%
Total International 13% 10%
Underlying Sales* +7% +7%
Currency +2 pts +4 pts
Acquisitions / Divestitures +2 pts +1 pt
Consolidated Sales +11% +12%
Underlying Sales AnalysisFourth Quarter & Fiscal 2008 Results
Emerging Markets Represented 30% of
Total Sales in 2008
4Q 2008 Fiscal Year 2008
EmersonFourth Quarter Detail
($Mil) 2007 2008
Gross Profit $2,248 $2,474
GP% 37.3% 37.0%
SG&A% 20.5% 19.5%
Operating Profit* $1,013 $1,174
OP%* 16.8% 17.5%
- Other Deductions, Net $60 $133
- Interest Expense, Net $50 $41
Pretax Earnings $903 $1,000Earnings% 15.0% 14.9%
- Taxes $282 $310
- Tax Rate 31.2% 31.0%
Up 10%Improvement from cost
containment programs and volume leverage
Lower incentive share expense
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Up 16%
$22M increase relating to restructuring, $22M charge related to the appliance control business
Up 11%
Full year rate of 31.7% in line with prior guidance
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Emerson’s Restructuring is Pay As We Go –Continuous Process
Emerson restructures continuously throughout the business cycle
Ongoing restructuring efforts support geographic expansion and best cost country programs to improve profitability
Restructuring actions accelerated throughout 2008, as 2009 economy looked tougher
$141$129
$110
$84 $83$98
$0
$20
$40
$60
$80
$100
$120
$140
$160
2003 2004 2005 2006 2007 2008
2007–2008 1
Quarterly Restructuring Expense2003-2008 1
Restructuring Expense
(U.S. $ Millions)
$16
$10
$24
$18$20
$25$23
$45
$0
$10
$20
$30
$40
$50
(U.S. $ Millions)
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2007 2008
1 Includes discontinued operations
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Fourth Quarter Cash Flow & Balance Sheet
($Mil) 2007 2008
Operating Cash Flow $1,242 $1,295
Capital Expenditures ($261) ($253)
Free Cash Flow* $981 $1,042
Cash Flow/Total Debt 79.9% 72.9%
Inventories $2,227 $2,348
Receivables $4,260 $4,618
Payables ($2,501) ($2,699)
Trade WC $3,986 $4,267
TWC % to sales 16.2% 15.9%
Up 4% in 4th Qtr
Up 6% in 4th Qtr151% FCF/Net Earnings* conversion
in Q4
Strong Balance Sheet
Execution on working capital initiatives drives improvement in the ratio
Strong Cash Flow and Strong Balance Sheet
Emerson has had continuous access to the commercial paper markets
High short-term credit rating (A1/P1)
Able to place paper with 30-day duration or longer at normal Emerson
rates
Liquidity
Emerson has a $2.8B backup credit line expiring April 2011 that has never
been drawn against
Cash available throughout world
Liquidity Position Remains Strong and Flexible
$1,777M
Commercial
Paper
$665M
Current
Maturities
$467M
Other $89M
$0
$500
$1,000
$1,500
$2,000
Short-Term Debt Cash
42%
55% 53%
62%
80%73%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2003 2004 2005 2006 2007 2008
Term Debt Maturities
9/30/08
Operating Cash Flow to Debt
(U.S. $ Millions)
(U.S. $ Millions)
$1,221M
S-T Debt vs. Cash
500
250
467
599
30
256 251 251 251 252
407
250
0
250
500
750
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2032
Floating Fixed
9/30/08
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Business Segment EarningsFourth Quarter Results
($Mil) 2007 2008
Business Segment EBIT* $1,023 $1,086Margin 16.6% 15.8%
Diff. In Accounting Methods $54 $60
Corporate & Other ($124) ($105)
Interest Expense, Net ($50) ($41)
Pretax Earnings $903 $1,000
15.0% 14.9%
Up 6%Impacted by $22M restructuring
increase, $22M appliance control business impairment charge and dilutive impact of acquisitions
Up $6 million
Down $19 million
Lower incentive share expense
Down $9 million, lower rates
and strong cash generation
Up 11%
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Process Management Fourth Quarter Results($Mil) 2007 2008Sales $1,665 $1,888
EBIT $341 $416Margin 20.5% 22.0%
Restructuring $7 $4
EBIT Excl. Rest.* $348 $420Margin* 20.9% 22.2%
Up 13%– Underlying* +12%; FX +2 pts; Div/Acq. -1 pt.
• U.S. up 9%, Asia up 23%, Europe up 8%,
Middle East/Africa up 5%
– Strength across the segment
Up 22%– Cost reduction programs and sales volume
leverage drove margin improvement
– Continued investment in new technologies
and global expansion
Longer Cycle Projects Provide Favorable Business
Outlook As We Enter Fiscal Year 2009
Process Management delivered an exceptional year—sales up 17%
to $6.7B and EBIT up 23%
Have not seen increased levels of project cancellations
9/30/08 Backlog increased 14% to $2.9B over 9/30/07
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Industrial Automation Fourth Quarter Results($Mil) 2007 2008Sales $1,123 $1,280
EBIT $187 $199Margin 16.7% 15.6%
Restructuring $3 $8
EBIT Excl. Rest.* $190 $207Margin* 17.0% 16.2%
Up 14%– Underlying* up 9%; FX +5 pts
• U.S. up 11%, Europe up 4%, Asia up 22%
– Strong sales performance in the power
generating alternator, fluid automation and
materials joining businesses
Up 6%– Margin down 110 basis points
– Sales volume leverage and pricing more
than offset by material inflation
– Increased level of restructuring
Fifth consecutive year of double-digit sales increases
Another strong year of underlying* sales growth, up 7% in fiscal year 2008
9/30/08 Backlog increased 27% to $760M over 9/30/07
2009 Demand Expected to Slow Due to Slowing Global
Gross Fixed Investment and Tougher Comparisons
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Network Power Fourth Quarter Results($Mil) 2007 2008Sales $1,438 $1,714
EBIT $204 $215Margin 14.2% 12.6%
Restructuring $9 $12
EBIT Excl. Rest.* $213 $227Margin* 14.8% 13.3%
Up 19%– Underlying* up 9%; Acq +8 pts; FX +2 pts
• U.S. flat, Asia up 19%, Europe up 2%
– Strong growth across the power systems
businesses
Up 6%– Margin down 160 basis points
– Acquisitions had dilutive impact of approx.
150 basis points
Continued expansion of served market through strategic acquisitions
such as Aperture
New Emerson data center will feature the latest breakthrough technologies
in energy efficiency and reliability from Emerson Network Power
9/30/08 Backlog increased 13% to $1.2B over 9/30/07
Moderating Demand Expected as Global Gross Fixed
Investment Weakens as 2009 Progresses
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Climate TechnologiesFourth Quarter Results($Mil) 2007 2008Sales $938 $1,013
EBIT $133 $138Margin 14.2% 13.6%
Restructuring $0 $12
EBIT Excl. Rest.* $133 $150Margin* 14.2% 14.8%
Up 8%– Underlying* up 5%; FX +3 pts
• U.S. up 3%, Europe up 13%, Asia down 3%
– Europe growth driven by the increase in
heat pump compressor sales
Our technology and industry leadership will provide continued
opportunities as the world demands energy responsible solutions
Geographic diversity of business continues to improve in 2008
with 45% of FY2008 sales outside the U.S.
Weak Residential Markets Expected to
Continue Throughout 2009
Up 3%– Margin down 60 basis points
– Price increases more than offset by
material inflation
– Increased restructuring ahead of a
challenging 2009
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Appliance and Tools Fourth Quarter Results ($Mil) 2007 2008Sales $1,013 $975
EBIT $158 $118Margin 15.6% 12.1%
Restructuring $2 $7
EBIT Excl. Rest.* $160 $125
Margin* 15.9% 12.8%
Down 4%– Underlying* down 3%; Divestiture -2 pts; FX +1 pt
• U.S. down 6%, Europe down 4%, Asia up
26%
Down 25%– Margin decrease of 350 basis points
– $22M charge in appliance control business had a
dilutive impact of approx. 230 basis points
– Cost reductions programs and pricing more than
offset by material inflation and volume deleverage
Improved mix of businesses in Appliance and Tools segment through
divestitures and restructuring of businesses
Excluding impact of the charges related to the appliance control
business, EBIT margins expanded in 2008 in a difficult market environment
Market Conditions Will Remain Very Challenging--
No Consumer or Residential Market Recovery
Expected in 2009
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EmersonFiscal Year 2008 Results
($Mil excl. EPS) 2007 2008
Sales $22,131 $24,807
Operating Profit* $3,496 $4,082
OP%* 15.8% 16.5%
EPS – Continuing Ops. $2.65 $3.11
Reported EPS $2.66 $3.06
Dividend per Share $1.05 $1.20
Operating Cash Flow $3,016 $3,293
Return on Total Capital 20.1% 21.8%
Up 12%• Underlying* up 7%, Emerging Markets 30%
of total sales, International 54% of total sales
Up 17%• Volume leverage and cost reductions drive
margin improvement
Up 17%, fifth year of double-digit increase
Up 15%
Up 14%, Dec. dividend increased 10%
Up 9%, $2.1B (63%) of cash flow returned to shareholders via dividends and repurchases
Record high ROTC, target remains 17% -22% depending on acquisition activity
Strongly Positioned to Outperform Core Markets as
We Enter a Challenging 2009
Fiscal Year 2009 Guidance: Very Uncertain and Challenging Global Economics in 2009
Delta
2007-08 2008 2009 Forecast (11/4/08)
Sales +12% $24.8B $23.5 to $25.5B
Operating Margin* +70 basis 16.5% 16.0 – 16.6%points
EPS (continuing operations) +17% $3.11 $2.80 to $3.20
Operating Cash Flow 9% $3.3B $3.3B to $3.5B
Capital Expenditures 5% $714M $680 - $725M
Underlying* sales growth: -4% to +4%
Currency Unfavorable: ~$1.1B (-5%)–Euro to USD$ exchange rate: ~1.28
Assumed future and completed acquisitions +4%
Restructuring: $125 to $150M
Pension Expense: approx. neutral; cash funding up to $200M
Assumptions:
Gross Fixed Investment (GFI)2008-2009
US: Residential (15%) to (20%)
US: Non-residential (3%) to (5%)Europe (1%) to 2%Japan (1%) to 1%China 10% to 12%India 8% to 12%Latin America 5% to 7%
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Emerson delivered an outstanding fiscal year 2008, and our businesses and financial position remain very strong as we finished this record year
Emerson is well positioned as we move into an uncertain fiscal year 2009
– Strong global footprint
– International sales 54% of total business
– Emerging markets 30% of total business
– Good mix of businesses – we have continued to actively manage the portfolio
– Financial strength to invest internally and do acquisitions where appropriate
Summary
The Global Management Team is Prepared for an
Uncertain and Declining Global Economy
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Emerson Business Summary Reconciliation of Non-GAAP Financial Measures
Fiscal 2008
Underlying Sales * 7%
Foreign Currency Translation 4 pts
Acquisitions/Divestitures 1 pt
Net Sales 12%
Forecasted
Fiscal 2009
Underlying Sales * (4) to 4%
Foreign Currency Translation (5) pts
Assumed Future and Completed Acquisitions 4 pts
Net Sales (5) to 3%
Industrial Automation Fiscal 2008
Underlying Sales * 7%
Foreign Currency Translation 7 pts
Net Sales 14%
Forecasted
Fiscal 2009
Operating Profit* ~$3,765-$4,225
% Sales* 16.0%-16.6%
Interest Expense and
Other Deductions, Net ~$ 600
Pretax Earnings ~$3,165-$3,625
% Sales 13.5%-14.2%
Operating Profit FY 2007 FY 2008 % Change
Net Sales 22,131$ 24,807$ 12%
Cost of Sales 14,066 15,668
SG&A Expense 4,569 5,057
Operating Profit * 3,496 4,082 17%
O.P. % * 15.8% 16.5%
Other Deductions, Net 175 303
Interest Expense, Net 228 188
Pretax Earnings 3,093$ 3,591$ 16%
Earnings % 14.0% 14.5%
This information reconciles non-GAAP measures with the most directly comparable
GAAP measure ($M)
4Q 2008 Cash Flow 4Q 2008
Operating Cash Flow 1,295$
Capital Expenditures (253)
Free Cash Flow (Non-GAAP) 1,042
Net Earnings 688
% Net Earnings
Operating Cash Flow 188%
Capital Expenditures (37%)
Free Cash Flow (Non-GAAP) 151%