Fourth Quarter 2014 Earnings Conference Call November 4, 2014

Fourth Quarter 2014
Earnings Conference Call
November 4, 2014
Safe 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 and subsequent reports 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.
Fourth Quarter 2014
Highlights




Net sales were unchanged at $6.8 billion, with underlying sales* up 4%
– Underlying sales increased in all segments, with Climate Technologies
strongest
– Strong growth in North America, Asia up modestly, Europe flat
– Emerging markets improved to 5% growth from 2% in the third quarter,
remaining mixed across regions
Continued profitability improvement
– Gross profit margin of 42.4% expanded 120 basis points
– Segment margin up 70 basis points to 20.2%*
Impairment charge of $508 million related to Chloride business
– Protracted economic weakness since its acquisition and deteriorating outlook
in Europe and Middle/East Africa
Earnings per share of $1.30 increased 10 percent excluding charges in
both years*
Strong close to fiscal 2014, with margin, earnings and
cash generation exceeding expectations
2
Fourth Quarter 2014
P&L Summary
Sales
2013
$6,812
2014
$6,807
Chg.
‒
Gross profit
% of sales
$2,804
41.2%
$2,889
42.4%
3%
120 bps
SG&A expense
($1,432)
Goodwill impairment
($25)
Other deductions, net
($110)
($1,453)
($508)
($65)
($M excl. EPS)
EBIT*
% of sales*
Excl. impairment*
Shares
EPS excl. impairment*
Impairment
EPS reported
3
$1,237
18.2%
18.5%
$863
(30%)
12.7% (550) bps
20.1% 160 bps
717.3
699.6
$1.18
($0.08)
$1.10
$1.30
($0.72)
$0.58
10%
(47%)

Underlying sales* up 4%

Margin expansion from
improved business and
technology mix

GP growth funded strategic
investments

Currency comparisons $43M
favorable

Strong contribution from
segment margins and
favorable stock comp

Share repurchase $267M
Fourth Quarter and Fiscal 2014
Underlying Sales Change
United States
Europe
Asia
China
Latin America
Canada
Middle East/Africa
Q4
8%
‒
2%
‒
3%
10%
5%
FY
4%
1%
4%
7%
2%
1%
(1%)
Underlying sales*
Acquisitions
Divestitures
FX
Net sales
4%
2 pts
(5) pts
(1) pt
‒
3%
1 pt
(5) pts
‒
(1%)
Strong market conditions in the U.S. and improvement in emerging
markets drove higher growth in the fourth quarter
4
Fourth Quarter 2014
Business Segment Earnings & Cash Flow
Business segment EBIT*
% of sales*
2013
$1,358
19.5%
2014
$1,412
20.2%
Accounting methods
Corporate & other
Goodwill impairment
Interest expense, net
$61
($157)
($25)
($56)
$72
($113)
($508)
($47)
Pretax earnings
% of sales
$1,181
17.3%
$816
(31%)
12.0% (530) bps
Operating cash flow
Capital expenditures
Free cash flow*
$1,446
($241)
$1,205
$1,408
($194)
$1,214
Trade working capital
% of sales
$4,173
15.3%
$4,125
15.2%
($M)
5
Chg.
4%
70 bps
(3%)

Margin expansion led by
Process Management and
Industrial Automation

Stock comp comparisons
favorable by $54M

Cash generation exceeded
expectations, with strong
conversion and working
capital management

Trade working capital
improved by 10 bps
1%
(10) bps
Fourth Quarter 2014
Process Management
Sales % Chg. vs. PY
NA
13%
Asia
1%
China
(3%)
Europe
‒
LAM
3%
MEA
5%
Underlying*
5%






6
($M)
Sales
Acquisitions
FX
EBIT
% of sales
Segment Results
2013
2014
$2,512 $2,723
$603
24.0%
$689
25.3%
Chg.
8%
+4 pts
(1) pt
14%
130 bps
Continued momentum in global energy and chemical industries
Growth was strongest in North America, with robust investment in oil and gas
production and processing projects
Asia was slow, up 1%, as strength in Southeast Asia and India was offset by
challenging comparisons in China and Australia
Flat sales in Europe reflected improvement in Russia offset by lumpy project timing in
the North Sea region
Market conditions in Latin America and Middle East/Africa were mixed
Margin remained strong, up 130 bps in Q4 driving 20.9% margin for the fiscal year
Robust order trends have resulted in double-digit year-end backlog
growth, providing strong momentum in 2015
Fourth Quarter 2014
Industrial Automation
Sales % Chg. vs. PY
NA
12%
Asia
5%
China
7%
Europe
(2%)
LAM
(2%)
MEA
(9%)
Underlying*
5%





7
($M)
Sales
EBIT
% of sales
Segment Results
2013
2014
$1,258 $1,320
$221
17.5%
$239
18.1%
Chg.
5%
8%
60 bps
Demand for capital goods continued to improve, with mixed trends across markets
and geographies
All businesses grew except for motors and drives, reflecting short-cycle economic
weakness in Europe
Strength in North America led by over 20% growth in hermetic motors business
Asia benefited from continued strength in China, particularly in the power transmission
and electrical distribution businesses
Strong interest received in the power transmission business, with decision expected
by end of calendar year
Varied market conditions expected in the near term, with favorable
momentum in North America and Asia, and soft demand in Europe
Fourth Quarter 2014
Network Power
Sales % Chg. vs. PY
NA
1%
Asia
(3%)
China
(2%)
Europe
7%
LAM
(2%)
MEA
9%
Underlying*
1%




8
Segment Results
($M)
2013
2014
Sales
$1,709 $1,362
Artesyn divestiture
FX
EBIT
% of sales
$216
12.7%
$173
12.7%
Chg.
(20%)
(20) pts
(1) pt
(20%)
‒
Gradual improvement in data center markets globally
–
Strong growth in Europe benefited from large project in Sweden
–
Better market conditions in North America and modest growth in Asia
Telecommunications infrastructure business slowed in all geographies, declining at a
double-digit rate after strong growth in Q3, reflecting timing of large projects
Solid finish to the year on margin, up 400 bps sequentially
Cautious macroeconomic outlook in Europe and Middle East/Africa for the next 2 to 3
years – $508M impairment related to Chloride not reflected in segment results
Business conditions expected to remain mixed, with gradual
improvement in the data center business and inconsistent demand in
telecommunications markets in the near term
Fourth Quarter 2014
Climate Technologies
Sales % Chg. vs. PY
NA
7%
Asia
8%
China
7%
Europe
(3%)
LAM
17%
MEA
25%
Underlying*
7%





9
($M)
Sales
EBIT
% of sales
Segment Results
2013
2014
$1,017 $1,091
$205
20.2%
$194
17.8%
Chg.
7%
(5%)
(240) bps
Strong growth globally in the air conditioning business, led by strength in the U.S.
–
U.S. residential up over 20%, benefiting from upcoming regulatory changes
–
Strong improvement in U.S. commercial
International air conditioning demand was mixed, with strength in Asia, Middle
East/Africa and Latin America, partially offset by declines in Europe
Moderate growth in refrigeration, led by continued strength in transportation
Demand for sensors and controls declined moderately
Margin decline reflects unfavorable mix, higher investment spending, and customer
accommodation expense related to a manufacturing process improvement
Market conditions expected to remain favorable, with growth momentum in
North America and Asia, while regulatory-related demand will slow
Fourth Quarter 2014
Commercial & Residential Solutions
Sales % Chg. vs. PY
NA
7%
Asia
3%
China
(11%)
Europe
(2%)
LAM
(5%)
MEA
(22%)
Underlying*
5%




10
($M)
Sales
EBIT
% of sales
Segment Results
2013
2014
$483
$506
$113
23.4%
$117
23.2%
Chg.
5%
4%
(20) bps
Strong demand in North America more than offset slight decline in international
markets
Growth led by professional tools, wet/dry vacuums and food waste disposers
businesses
Slight sales increase in storage businesses
Segment margin remained strong at 23.2%
Solid trends in residential and commercial construction markets in
North America expected to continue, supporting a moderate growth
outlook for next year
Fiscal Year 2014
Highlights
2013
$24,669
2014
$24,537
Chg.
(1%)
Gross Profit
% of Sales
$9,952
40.3%
$10,158
41.4%
2%
110 bps
EBIT Excl. Charges*
% of Sales*
$3,942
16.0%
$4,050
16.5%
3%
50 bps
EPS Reported
Excl. Charges*
$2.76
$3.54
$3.03
$3.75
10%
6%
Dividend per Share
$1.64
$1.72
Operating Cash Flow
$3,649
ROTC
Excl. Charges*
16.4%
19.6%
($M excl. EPS)
Sales
11

Emerging markets up 4%,
mature markets up 3%

Record GP margin

Strong segment margin
expansion and lower
corporate expense

Higher than midpoint of
guidance
5%

58 years of consecutive
increases
$3,692
1%

17.5%
20.2%
110 bps
60 bps
Record operating cash flow,
with payout ratio over 60% for
fourth consecutive year
Fiscal Year 2014
Actual vs. Plan
12
Margin/Earnings/Cash Flow
Plan
Actual
GP%
~41.3%
41.4%
EBIT%* ex. impairment
~16.5%
16.5%
OCF
~$3.4B
$3.7B
EPS ex. impairment
$3.68-3.80
$3.75*
Share repurchase
$800-900M
$971M
Capex
$750-800M
$767M






Underlying Sales % Chg.
Plan
United States
3-5%
Europe
0-2%
China
6-8%
Other Asia
6-8%
LAM
6-8%
MEA
8-10%
Underlying*
3-5%






‒
Actual
4%
1%
7%
1%
2%
(1%)
3%
Fiscal Year 2015
Outlook



13
Underlying orders growth of 9% in fourth quarter drove year-end backlog
to a record $6.7 billion, with global macroeconomic trends mixed but
gradually improving
– Solid momentum in the NAFTA region and China
– Increasing uncertainty in Europe and some emerging markets
– Planning cautiously for global gross fixed investment of 3 to 4% growth
Based on current business conditions, the following is expected in 2015:
– Underlying sales* growth 4 to 5%
– Reported sales change 0 to 1%, reflecting 2% deduction from currency
translation and 2% deduction from the potential power transmission
divestiture
– Modest profitability improvement expected
– Business segment and other financial metric forecasts to be provided at
annual investor conference in February 2015
First quarter 2015 dividend increased 9% to $0.47, equivalent to an annual
rate of $1.88 and representing 44% of 2014 free cash flow
Reconciliation of Non-GAAP Measures & Other
This information reconciles non-GAAP measures (denoted with a *) with the most directly comparable GAAP measure ($M except per share
amounts).
Process
Mgmt
Industrial
Auto
Network
Power
Climate
Tech
Q4 2014 sales growth
Underlying*
Acq/Div
FX
Reported
5%
4%
(1%)
8%
5%
—
—
5%
1%
(20%)
(1%)
(20%)
7%
—
—
7%
5%
—
—
5%
4%
(3%)
(1%)
—
FY 2014 sales growth
Underlying*
Acq/Div
FX
Reported
4%
4%
(1%)
7%
2%
—
—
2%
2%
(19%)
(1%)
(18%)
6%
—
—
6%
3%
—
—
3%
3%
(4%)
—
(1%)
Q4 2013
Q4 2014
Q4 Chg.
FY 2013
FY 2014
FY Chg.
EBIT excl. charges*
% of sales*
$1,262
18.5%
$1,371
20.1%
9%
160 bps
$3,942
16.0%
$4,050
16.5%
3%
50 bps
Goodwill impairment
(25)
(508)
(528)
(508)
1,237
18.2%
863
12.7%
3,414
13.8%
3,542
14.4%
(56)
(47)
(218)
(194)
$1,181
17.3%
$816
12.0%
(31%)
(530) bps
$3,196
13.0%
$3,348
13.6%
Q4 2013
Q4 2014
Q4 Chg.
2013
2014
$1.18
($0.08)
$1.10
$1.30
($0.72)
$0.58
10%
(57%)
(47%)
$3.54
($0.78)
$2.76
$3.75
($0.72)
$3.03
Profit margin
EBIT*
% of sales*
Interest expense, net
Pretax earnings
% of sales
Earnings per share
Excluding charges*
Impairment/tax charges
Reported
14
(30%)
(550) bps
Comm &
Res Solns
Total
Cash flow
2014
Operating cash flow
Capital expenditures
Free cash flow*
$3,692
(767)
$2,925
Sales growth
2015E
Underlying*
Div.
FX
Reported
% 2015E
Dividend
35%
44%
4-5%
(2%)
(2%)
0-1%
ROTC
2013
2014
Excl. charges*
Impairment/tax charges
Reported
19.6%
(3.2%)
16.4%
20.2%
(2.7%)
17.5%
4%
60 bps
5%
60 bps
FY Chg.
6%
4%
10%
Note: Underlying sales and orders exclude the impact of acquisitions, divestitures and currency translation.
Chg.
60 bps
50 bps
110 bps
`