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emerson electricl Q4 2008 Earnings Presentation

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  • 1. Fourth Quarter 2008 Earnings Conference Call November 4, 2008 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 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.
  • 2. Fourth Quarter 2008 Highlights 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 $1,042  million, up 4% and 6% respectively Operational efficiency initiatives continue, balance sheet is strong  Trade Working Capital as a percent of sales to 15.9% from 16.2% – Net Debt to Net Capital ratio at 23% – Operating Cash Flow to Total Debt strong at 73% – Well-Positioned Going Into an Uncertain 2009 2
  • 3. Emerson Fourth Quarter Results 2007 2008 ($Mil excl. EPS) Up 11%  Sales $6,028 $6,696 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%  Operating Profit* $1,013 $1,174 70 basis point improvement driven by cost • OP%* 16.8% 17.5% containment programs, volume leverage and favorable business mix Up 11% Earnings - Continuing Ops. $621 $690  Earnings% 10.3% 10.3% Repurchased 8.6M shares for $398M in the qtr.  Dil. Avg. Shares 800.0 781.4 EPS – Continuing Ops. Up 13% $0.78 $0.88  Discontinued Ops. - - EPS $0.78 $0.88 Actively Managing Business Portfolio: Sale of the European Appliance Motor & Pump Business Closed Sept. 30th, 2008 3
  • 4. Underlying Sales Analysis Fourth Quarter & Fiscal 2008 Results Fiscal Year 2008 4Q 2008 United States 1% 3% Europe 6% 3% Asia 17% 17% Latin America 25% 18% Canada 14% 8% Middle East/Africa 14% 17% Total International 13% 10% Underlying Sales* +7% +7% Currency +2 pts +4 pts Acquisitions / Divestitures +2 pts +1 pt Consolidated Sales +11% +12% Emerging Markets Represented 30% of Total Sales in 2008 4
  • 5. Emerson Fourth Quarter Detail ($Mil) 2007 2008 Up 10%  Gross Profit $2,248 $2,474 from cost Improvement GP% 37.3% 37.0% containment programs and volume leverage SG&A% 20.5% 19.5% Lower incentive share expense Up 16% Operating Profit* $1,013 $1,174  OP%* 16.8% 17.5% $22M increase relating to - Other Deductions, Net $60 $133  restructuring, $22M charge related to the appliance control business - Interest Expense, Net $50 $41 Up 11% Pretax Earnings $903 $1,000  Earnings% 15.0% 14.9% - Taxes $282 $310 Full year rate of 31.7% in - Tax Rate 31.2% 31.0%  line with prior guidance 5
  • 6. 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 2007–2008 1 2003-2008 1 Quarterly Restructuring Expense Restructuring Expense (U.S. $ Millions) $50 (U.S. $ Millions) $45 $160 $141 $40 $129 $140 $110 $120 $98 $30 $25 $100 $84 $83 $24 $23 $20 $80 $18 $20 $16 $60 $10 $40 $10 $20 $0 $0 2003 2004 2005 2006 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2007 2008 1 Includes discontinued operations 6
  • 7. Fourth Quarter Cash Flow & Balance Sheet ($Mil) 2007 2008 Up 4% in 4th Qtr  Operating Cash Flow $1,242 $1,295 Capital Expenditures ($261) ($253) Up 6% in 4th Qtr  Free Cash Flow* $981 $1,042 151% FCF/Net Earnings* conversion  in Q4 Strong Balance Sheet Cash Flow/Total Debt 79.9% 72.9%  Inventories $2,227 $2,348 Execution on working Receivables $4,260 $4,618  capital initiatives drives Payables ($2,501) ($2,699) improvement in the ratio Trade WC $3,986 $4,267 TWC % to sales 16.2% 15.9% Strong Cash Flow and Strong Balance Sheet 7
  • 8. Liquidity Position Remains Strong and Flexible 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 (U.S. $ Millions) 9/30/08 (U.S. $ Millions) $2,000 9/30/08 $1,777M 750 Floating Fixed 90% 80% 599 $1,500 73% 80% $1,221M 467 500 500 70% 62% Other $89M 407 55% 53% 60% $1,000 Current Maturities 50% 42% 256 250 251 252 251 251 250 $467M 250 40% 30% $500 Commercial 20% 30 Paper 0 $665M 10% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2032 0% $0 Short-Term Debt Cash 2003 2004 2005 2006 2007 2008 Term Debt Maturities Operating Cash Flow to Debt S-T Debt vs. Cash 8
  • 9. Business Segment Earnings Fourth Quarter Results ($Mil) 2007 2008 Up 6%  Business Segment EBIT* $1,023 $1,086 by $22M restructuring Impacted Margin 16.6% 15.8% increase, $22M appliance control business impairment charge and dilutive impact of acquisitions Up $6 million Diff. In Accounting Methods $54 $60  Down $19 million Corporate & Other ($124) ($105)  Lower incentive share expense  Down $9 million, lower rates  Interest Expense, Net ($50) ($41) and strong cash generation Up 11%  Pretax Earnings $903 $1,000 15.0% 14.9% 9
  • 10. Process Management Fourth Quarter Results ($Mil) 2007 2008 Sales $1,665 $1,888 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 – EBIT $341 $416 Up 22%  Margin 20.5% 22.0% Cost reduction programs and sales volume – leverage drove margin improvement Restructuring $7 $4 Continued investment in new technologies – EBIT Excl. Rest.* $348 $420 and global expansion Margin* 20.9% 22.2% 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 $2.9B over 9/30/07 Longer Cycle Projects Provide Favorable Business Outlook As We Enter Fiscal Year 2009 10
  • 11. Industrial Automation Fourth Quarter Results ($Mil) 2007 2008 Up 14% Sales $1,123 $1,280  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%  EBIT $187 $199 Margin 16.7% 15.6% Margin down 110 basis points – Sales volume leverage and pricing more – Restructuring $3 $8 than offset by material inflation EBIT Excl. Rest.* $190 $207 Increased level of restructuring – Margin* 17.0% 16.2% 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 $760M over 9/30/07 2009 Demand Expected to Slow Due to Slowing Global Gross Fixed Investment and Tougher Comparisons 11
  • 12. Network Power Fourth Quarter Results ($Mil) 2007 2008 Up 19%  Sales $1,438 $1,714 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%  EBIT $204 $215 Margin 14.2% 12.6% Margin down 160 basis points – Acquisitions had dilutive impact of approx. – Restructuring $9 $12 150 basis points EBIT Excl. Rest.* $213 $227 Margin* 14.8% 13.3% 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 $1.2B over 9/30/07 Moderating Demand Expected as Global Gross Fixed Investment Weakens as 2009 Progresses 12
  • 13. Climate Technologies Fourth Quarter Results ($Mil) 2007 2008 Up 8%  Sales $938 $1,013 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 Up 3% EBIT $133 $138  Margin 14.2% 13.6% Margin down 60 basis points – Price increases more than offset by – Restructuring $0 $12 material inflation EBIT Excl. Rest.* $133 $150 Increased restructuring ahead of a – Margin* 14.2% 14.8% challenging 2009 Our technology and industry leadership will provide continued opportunities as the world demands energy responsible solutions Geographic diversity of business continues to improve in 2008 with 45% of FY2008 sales outside the U.S. Weak Residential Markets Expected to Continue Throughout 2009 13
  • 14. Appliance and Tools Fourth Quarter Results ($Mil) 2007 2008 Down 4% Sales $1,013 $975  Underlying* down 3%; Divestiture -2 pts; FX +1 pt – • U.S. down 6%, Europe down 4%, Asia up 26% Down 25%  EBIT $158 $118 Margin 15.6% 12.1% Margin decrease of 350 basis points – $22M charge in appliance control business had a – Restructuring $2 $7 dilutive impact of approx. 230 basis points EBIT Excl. Rest.* $160 $125 Cost reductions programs and pricing more than – offset by material inflation and volume deleverage Margin* 15.9% 12.8% Improved mix of businesses in Appliance and Tools segment through divestitures and restructuring of businesses Excluding impact of the charges related to the appliance control business, EBIT margins expanded in 2008 in a difficult market environment Market Conditions Will Remain Very Challenging-- No Consumer or Residential Market Recovery Expected in 2009 14
  • 15. Emerson Fiscal Year 2008 Results 2007 2008 ($Mil excl. EPS) Up 12%  Sales $22,131 $24,807 Underlying* up 7%, Emerging Markets 30% • of total sales, International 54% of total sales Up 17%  Operating Profit* $3,496 $4,082 Volume leverage and cost reductions drive • OP%* 15.8% 16.5% margin improvement Up 17%, fifth year of double-digit EPS – Continuing Ops.  $2.65 $3.11 increase Up 15%  Reported EPS $2.66 $3.06 Up 14%, Dec. dividend increased 10%  Dividend per Share $1.05 $1.20 Up 9%, $2.1B (63%) of cash flow returned to  Operating Cash Flow $3,016 $3,293 shareholders via dividends and repurchases Record high ROTC, target remains 17% -  Return on Total Capital 20.1% 21.8% 22% depending on acquisition activity Strongly Positioned to Outperform Core Markets as We Enter a Challenging 2009 15
  • 16. 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 16.0 – 16.6% Operating Margin* +70 basis 16.5% 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 Assumptions: Underlying* sales growth: -4% to +4%   Gross Fixed Investment (GFI) Currency Unfavorable: ~$1.1B (-5%)  2008-2009 to USD$ exchange rate: ~1.28 –Euro US: Residential (15%) to (20%) Assumed future and completed  US: Non-residential (3%) to (5%) acquisitions +4% Europe (1%) to 2% Japan (1%) to 1% Restructuring: $125 to $150M  China 10% to 12% India 8% to 12% Pension Expense: approx. neutral;  Latin America 5% to 7% cash funding up to $200M 16
  • 17. Summary 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 The Global Management Team is Prepared for an Uncertain and Declining Global Economy 17
  • 18. Emerson Business Summary Reconciliation of Non-GAAP Financial Measures Fiscal 2008 Operating Profit FY 2007 FY 2008 % Change Underlying Sales * 7% Net Sales $ 22,131 $ 24,807 12% Foreign Currency Translation 4 pts Cost of Sales 14,066 15,668 Acquisitions/Divestitures 1 pt SG&A Expense 4,569 5,057 Net Sales 12% Operating Profit * 3,496 4,082 17% O.P. % * 15.8% 16.5% Forecasted Fiscal 2009 Other Deductions, Net 175 303 Underlying Sales * (4) to 4% Interest Expense, Net 228 188 Foreign Currency Translation (5) pts Pretax Earnings $ 3,093 $ 3,591 16% Assumed Future and Completed Acquisitions 4 pts Earnings % 14.0% 14.5% Net Sales (5) to 3% 4Q 2008 Cash Flow 4Q 2008 Industrial Automation Fiscal 2008 Operating Cash Flow $ 1,295 Underlying Sales * 7% Capital Expenditures (253) Foreign Currency Translation 7 pts Free Cash Flow (Non-GAAP) 1,042 Net Sales 14% Net Earnings 688 Forecasted % Net Earnings Fiscal 2009 Operating Cash Flow 188% Operating Profit* ~$3,765-$4,225 Capital Expenditures (37%) % Sales* 16.0%-16.6% Free Cash Flow (Non-GAAP) 151% Interest Expense and Other Deductions, Net ~$ 600 Pretax Earnings ~$3,165-$3,625 % Sales 13.5%-14.2% This information reconciles non-GAAP measures with the most directly comparable GAAP measure ($M) 18