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Text: Today, I'm joined by President and Chief Executive Officer, Lal Karsanbhai; Senior Executive Vice President and Chief Financial Officer, Frank Dellaquila; and Executive Vice President and Chief Operating Officer, Ram Krishnan.
Please join me on Slide two.
Turning to Slide three.
I'd like to briefly highlight that Emerson has been publishing a corporate social responsibility report for many years now.
We have renamed the report The Emerson Environmental, Social and Governance Report and are excited to highlight all of the goals, momentum and global standards that our organization is working toward.
In particular, our environmental sustainability framework, greening of Emerson, by Emerson and with Emerson, captures our internal sustainability efforts, our enablement of our customer sustainability journeys through our products and solutions and our collaboration efforts with various sustainability stakeholders.
I encourage you to review the document next month when it is published.
I'd like to briefly mention our recent Emerson Exchange Virtual Series, which took place from November through March.
Emerson Exchange is a chance for our customer base to interact with other users, industry experts and Emerson technology leaders.
Despite the obvious in-person limitations of the pandemic, Emerson had a tremendously successful virtual engagement with customers, focusing on digital transformation, sustainability, technology and many other topics.
This virtual framework dramatically expanded the reach of this already very popular user event.
Due to the success of the hybrid format, we will likely be adopting such a format going forward.
More details to follow as the time and place for the next Emerson Exchange event is finalized.
Over to you, Lal.
I would like to say a few things before passing it on to Frank.
Firstly, to our global team, three things.
This was one that was delivered based on strong execution, which required agility and creativity as we jumped over a number of hurdles over the last three months.
The result was top-class profit leverage over 40% across our operations, well done by everyone.
Momentum is building, and it's more broadly today and across a large number of our markets than it was three months ago.
This expansion across both platforms, now as the cycle expands, will enable us to make critical technology investments, building on our strong differentiation and customer relevance.
You energize me every day in the journey and on the journey that we're taking together.
Secondly, I would like to recognize David Farr, who stepped -- whose Board service concluded today after more than 20 years.
Jim is a highly qualified independent director who is extremely passionate about people, culture and the future of Emerson.
I look forward to working alongside Jim and our entire Board.
Frank, over to you.
We had a strong quarter, and I'd like to take you through the highlights of that over the next several slides.
The strengthening recovery that Lal referred to in most of our end markets, combined with the benefits from our cost reset actions, drove strong operating performance and strong financial results in the second quarter.
Adjusted earnings per share for the quarter was $0.97, ahead of our guidance midpoint of $0.89 and representing 9% growth versus the prior year.
Demand strengthened significantly with sales ahead of expectations at 2% underlying growth and March orders toward the high end of expectations at 4% underlying growth.
Within that growth number for the orders, significantly, Automation Solutions continues its steady improvement in both orders and sales, while Commercial & Residential Solutions continues to experience robust demand across all its lines of business and in all geographies with 11% sales growth and 21% orders growth for the trailing three months through March.
The cost reset benefits for the program that we implemented almost two years ago are being realized as planned, driving adjusted segment EBIT growth of 15% and 150 basis points of increased margin to 19.1%.
Additionally, cash flow continues to be strong, up 37% year-over-year with free cash flow up nearly 50%.
This represents 125% conversion of net earnings.
We continue to execute on the remaining elements of our cost reset actions.
With the bulk of it behind us at this point, we initiated $21 million of additional restructuring in the quarter.
Please turn to the next slide, if you would, for comments on the EPS, the earnings per share bridge.
Operational performance was very strong in the quarter, adding $0.14 to adjusted EPS.
As we guided in February, stock compensation was a significant headwind in the quarter due to the mark-to-market impact, which was caused by the difference in the share price at the end of last year's second quarter and this year's second quarter.
Of course, you'll recall that last year, share prices in general were all severely depressed with the onset of COVID and we closed last year's second quarter at $48 versus $90 this year.
And that headwind was within $0.01 of the guidance that we gave you in February.
Tax, currency and other miscellaneous items netted to about $0.04 of tailwind and a small impact from share repurchase.
So in total, again, adjusted earnings per share was $0.97 versus the guide of $0.89.
Please go to the next slide for comments on the P&L.
So as I mentioned, underlying sales growth exceeded expectations at 2% and it was 6% on a reported basis, including acquisitions and currency.
Gross profit slipped just a bit, 10 basis points, mainly due to business mix, given the growth in our Commercial & Residential Solutions business.
SG&A increased by 10 basis points, but the real story here is that excluding the stock compensation impact, operationally, it was down 220 basis points, indicative of the magnitude of the cost reduction activity and the flow-through of the benefits.
We had very strong leverage on SG&A, and the spend was actually down year-over-year when you exclude the impact of the stock comp.
Adjusted EBIT margin was 18.2%, and our effective tax rate was within one point of last year.
Share count at 603 million.
And again, adjusted earnings per share at $0.97.
If you please turn to the next slide, we'll talk about earnings and cash flow.
Adjusted segment EBIT increased 15% with the margin increasing 150 basis points to 19.1%, as I said earlier.
Leverage on the volume and cost reset benefits offset the material cost headwinds that we did see in the quarter.
Again, stock comp was nearly a $100 million headwind.
It was partially offset by some other corporate items.
Adjusted pre-tax earnings were down 20 basis points to 17.3%, again, as the impact of the mark-to-market on the stock comp [Indecipherable].
Operating cash flow was very strong, almost a record again at $807 million, up 37%.
Free cash flow at $707 million was up 48%, driven by the strong earnings and favorable balance sheet items.
Lastly, trade working capital was down to 16.8% of sales as the impact and the distortions from the COVID-related volume decline are beginning to normalize and as the businesses do a good job managing inventory as we return to growth.
Please turn to the next slide, we'll go through Automation Solutions.
Orders continue to turn upward here.
We were at negative 5% on a trailing three-month basis, making good progress, and we're on the trajectory that we have been mapping out for several months.
Underlying sales were above expectations at negative 2%, and we're encouraged to see the continued sequential improvement in order rates underpinning the sales.
China was very strong, and they were favorable comps, but also due to good strength in discrete, chemical and energy markets.
Our demand in North America improved sequentially, but it did lag other world areas.
However, there are noteworthy pockets of growth, very encouraging signs in both discrete, life science, food and beverage and power generation.
Importantly, we also continue to see increasing KOB3 activity across our process automation customer base, driven by increased STOs and focused spend on opex and productivity.
Margin in the platform increased 180 basis points of adjusted EBIT, 230 basis points at adjusted EBITDA driven by the cost reset savings.
The OSI integration continues to go well.
The expected synergies are being realized, and we are increasingly encouraged in validating the case that we made for the acquisition when we did it last October.
Backlog is roughly flat sequentially at $5.3 billion, but it is up 14% year-to-date.
Please turn to the next slide, where we review Commercial & Residential Solutions.
The story here is very, very strong growth.
Orders continue to strengthen with the March underlying trailing three-month rate at 21%.
The demand is primarily driven by ongoing strength in residential end markets, but significantly cold chain, professional tools and other commercial and industrial markets are also picking up and contributing to the growth.
All businesses in all regions were positive, indicative of the trend.
Strong growth in China, over 50%, was attributable to commercial HVAC and cold chain demand in addition to the favorable comp.
Europe grew 9% on the strength of continued demand for heat pumps and other energy-efficient sustainable solutions.
Margins improved 40 basis points at the adjusted EBIT level.
Cost reduction benefits were somewhat offset by price/cost headwinds, which we'll discuss a little more when we cover the guidance.
Commercial & Residential backlog has increased almost 60% year-to-date to about $1 billion.
This is about $400 million above what we would consider normal for this business.
Operations are working through the significant challenges to meet strong customer demand across most of the businesses in this platform.
Please go to the next slide, and we'll talk about the updated guidance for the year.
Based on the strength we see in orders, the increasing pace of business, we are very encouraged and we are improving our sales outlook for the year.
We now expect underlying sales in the range of 3% to 6% overall, with Automation Solutions roughly flat and Commercial & Residential up in the 12% to 14% range.
The stronger volume will drive improved profitability.
We now expect 17.5% adjusted EBIT margin for the entire enterprise.
Cash flow was also projected higher at $3.3 billion operating cash flow and $2.7 billion of free cash flow, an increase of $150 million.
Our tax, capital spending, dividend, share repurchase assumptions remain as they were.
We're raising adjusted earnings per share guidance by $0.20 at the midpoint from $3.70 to $3.90, and we're tightening the range to plus or minus $0.05 from plus or minus $0.10.
We're doing this, increasing the guidance in the face of additional headwinds to profitability, because we're very encouraged by the underlying strength of the business and the read-through of the cost reset actions that the business has been working very diligently now for almost two years.
The additional headwinds, you can see in the margin there on the right of the slide, mainly $50 million more of unfavorable price/cost, driven by continuing increases in raw materials costs and about another $20 million of stock comp expense versus what we estimated back in February.
The speed and the magnitude of the price increases in key inputs, steel, copper, plastic resins is unprecedented.
Operations are actively and effectively working to mitigate the margin impact through selected price and cost containment actions, and the good work that they're doing gives us the confidence to raise the guidance despite these increased headwinds.
On the plus side, we expect to retain about $10 million more in the year of the COVID-related savings than we previously estimated as basic activity like travel and everything that goes with it comes back in more slowly than we would have thought a couple of months ago.
If you please go to the next slide, I'll give you an update on orders.
So as I mentioned earlier, our underlying trailing three-month orders turned positive in the month of March at 4%.
This is consistent with the upper range of the guidance that we provided to you in February.
It's driven by ongoing strength in Commercial & Residential Solutions, as you can see, at 21%, and continued significant improvement in Automation Solutions as our global markets recover.
And increasingly, we see improvement in our traditional process industries as well in North America.
We expect general demand to remain strong for the balance of the year.
We expect the Automation Solutions markets to accelerate through the second half and the Commercial & Residential HVAC demand will go up somewhat later in the year, but we would expect to see some of the other end markets, commercial, professional tools and such, recover to partially offset that tapering off in Commercial & Residential.
So all in all, we believe we have a good outlook for the second half of the year.
If you please go to the next slide, the underlying sales growth outlook.
Based on what we see and the pace of the improvement in orders, for the second half, we see growth in the high single-digits range at about 7% to 11%, and that will drive the full year growth of 3% to 6%.
We expect net sales to be just a bit above $18 billion.
I'll just cover a few charts here with the group.
Again, increased momentum turning to -- on Chart 15 here.
First, on Automation Solutions, we are -- we were led through the recovery in the first half by our discrete and early cycle businesses within the platform.
And essentially, what's occurred as we've navigated through the second quarter is a broader recovery in their -- in the mid-cycle elements of this platform.
So we see a return to growth in Q3, which is very positive after five down quarters in this business and continued demand in short cycle as well as the acceleration in the core process automation markets in the back half of the year, yielding a 4% to 8% range in the second half and a flat year guidance on sales.
If you turn to Page 16, I'll give you some color on what's going on in the world areas.
Perhaps, before I do that though, I'll just paint it from a KOB perspective.
KOB3 has been incredibly strong, both in our discrete spaces, but more interestingly, as we navigated the second quarter into our process spaces.
Frank referenced the shutdown turnaround activity, which is up double -- mid-double -- teens for the year and the STO schedules are holding in full, honestly, as we go into the summer, into the fall season, which is very encouraging.
The site walk downs are up almost 50% year-over-year, also very encouraging.
And of course, the long-term service agreements are up almost 40% across the world in the business.
Very encouraging to see and really provides the fuel for the underlying activity we're seeing in the process space.
On a KOB1 basis, things are not completely stopped.
Obviously, we digested a significant LNG wave, but there's more activity on the horizon.
We've entered the feed stage on two very important projects: the Baltic LNG and the Golden Island BASF in China.
Those are important opportunities for us in automation.
And secondly, we were awarded the Sempra Costa Azul LNG project on the Pacific Coast, in the Baja Peninsula of Mexico, which has a significant value for us and was awarded and will be booked here in the third quarter.
So there is some activity.
We continue to engage on the KOB1.
And as that starts to loosen up a little bit, I think we're very well positioned.
The tale of the tape, honestly, for the remainder of the year for this business is going to be the Americas.
It's going to be a significant swing from a down 16% first half to a second half in that 10% midpoint.
And we'll see that, we saw that already as we entered April, and we'll continue to see that recovery, I think, as we go through the latter half of the year into 2022.
Europe, an incredibly strong first half, driven by life sciences, activity around biofuels, the number of KOB2-type project awards, and we continue to see that strength, and I feel confident that, that strength will be there into the second half of the year.
Of course, across all of this, the discrete environment has been very, very good into Asia, Europe and in North America, whether it's automotive, medical or semiconductor, and we expect that strength to remain there.
So overall, feeling much better about the second half here and feeling very good about how North America is shaping up for us in automation.
Turning to Chart 17, some comments on Commercial & Residential.
What a great year this team is having.
And obviously, the beneficiaries of a tremendous residential cycle.
Much of it was driven by pandemic inventory levels -- pre-pandemic inventory levels, a prebuild in the cooling season that then we also benefited from a secular shift into suburbs and high family home construction and renovation.
All of that has led into incredible residential strength through the year.
Obviously, my expectation is that it starts to dampen as we get into the latter parts of the fiscal year.
However, the mid-cycle professional tools, cold chain businesses are accelerating, and that's what we see here in this very balanced perspective for this business throughout 2021, and I'm very encouraged by what we're seeing in the later cycle pieces.
Of course, we -- there's some good underlying technology evolutions as well that will impact the residential, be it the refrigerant changes or the heat pump moves in Europe, which are -- which will continue to drive good growth for the businesses.
And then turning to Page 18.
Again, a very balanced picture here from a world area perspective.
And overall, a strong second half with the commercial industrial segment of this business continuing to improve as the residential market start to taper, as I discussed.
I think all the world areas should grow, again, in the low double-digit to mid-teen range as we go into the second half.
In the Americas, we are seeing residential demand remained strong in the near term and the commercial market is really starting to accelerate.
And the cold chain piece, particularly, which is driven by transport and aftermarket, and then we see the tools momentum building in the professional channel.
So very encouraged by that.
Europe, I mentioned heat pump activity.
We expect that to stay strong.
And of course, a surge in construction should bolster our plumbing and electrical tools business.
And then lastly, in Asia, China is the headline contributor to growth as some of you have already noted, and demand is driven by commercial air conditioning and cold chain solutions.
So with that, Pete, I'll turn it to Page 19, and we'll go to Q&A.

user
compname reports q1 adjusted earnings per share $0.97.
q2 adjusted earnings per share $0.97.
expect overall continued improvement in industrial and commercial demand over remainder of 2021.
q2 net sales of $4.4 billion up 6%.
expect that residential demand will remain robust, but begin to taper in second half of year.
sees fy 2021 net sales growth 6% - 9%.
sees fy adjusted earnings per share $3.90 plus or minus $0.05.
sees fy 2021 gaap earnings per share $3.60 plus or minus $0.05.

assistant