Emerson Electric FY 3Q15 Earnings Call Notes

Continued pressure from lower oil prices pressuring industrial spending

“The continued pressure from lower oil prices has resulted in further capital spending reductions by global oil and gas customers, particularly those in upstream markets. Industrial spending remains sluggish on a global basis, but most significantly, in energy related and commodity markets.”

Order rates were under pressure by sustained headwinds

“Order rates were under pressure by the sustained headwinds from lower oil prices and gas prices, capital spending weakness, across many of our global manufacturers, weakness in data center and global telecommunications infrastructure investment and the effect of the U.S. residential air conditioning customer pre-build.”

Consumer spending has been lackluster

“U.S. consumer spending has been lackluster as recovery has been muted. Modest growth is expected in the fourth quarter, as favorable trends in U.S. construction markets are expected to continue.”

Not expecting things to get much better for the remainder of the year

“Turn to slide 12 for the 2015 outlook. Little change is expected in market conditions for the remainder of our fiscal year. Underlying sales will continue to be affected by reduced levels of capital spending in oil and gas markets, most significantly in upstream project activity, a continued broad slowdown in industrial spending, particularly energy related and commodity markets, a general weakness in capital spending by global manufacturers and sluggish growth in certain emerging and mature markets.””

The negative surprise for us was the weakness in China

“Clearly, extremely tough quarter and it got tougher as the quarter went on as we got into June. The big negative surprise for us in the month of June was the extreme weakness in China. We saw China drop over $100 million from prior year, down 14%-plus versus prior year. The bottom fell out in many of the core markets in China and we do not see that recovering anytime soon.”

Oil and gas continues to weaken and we’re concerned about the pace of the recovery

“Our oil and gas investments continued to weaken, as the price of oil, the price of gas has continued to slide. We now expect pretty weak orders in this space for at least the next 12 months to 15 months. And we’re a bit concerned about the pace of recovery.”

Next quarter is going to be equally challenging

“Fourth quarter’s going to be equally as challenging as we’ve had sessions with the operating leaders here in the last couple of weeks, and again, we’re going to be meeting with them again on Thursday, Friday this week. It’s all about getting the actions necessary to get the cost down, to get the production down, and deal with the marketplace that we’re dealing with right now.”

State owned enterprises have cut back on spending very suddenly

“In China, we don’t firmly believe we’re losing business at this point in time. I mean we don’t see any indication of that. But we’re – in China, we have very strong markets relative to the strategic owned enterprises, the state owned enterprises, which have really cut back on spending here in the last three months or four months as that government has ratcheted back some of the issues they’re dealing with.

So if you look at our Process business, as you look at our Enterprise business in China and if you look at some of the other Climate businesses, we’re seeing these where the state run enterprises have really curtailed, stopped spending and they did it very suddenly.”

Telcos in China and North America have cut back spending

“our telco space in China and North America telco have really cut back in spending. So that’s why you see those numbers are a little bit more drastic than our competitors.”

Foreign competitors have a cost advantage

“we have Japanese and European competitors across most of our businesses, both on the – Process side, Industrial side and Climate side. And clearly, with the weaker currencies, they have the opportunity to price, to drive that business their way. We’re working extremely hard. And one of the reasons we’re working so hard on the costs is because we do not want to lose any position in this situation where we are at a huge disadvantage with a stronger dollar against our European and Japanese competitors.”

The one advantage is that we will feel the benefits of weaker commodity prices into 2016

“The one advantage we do have is we get into the 2016 environment is with the weaker commodity environment, the weaker material environment, we will start getting benefit from that as we get into the first half of next year. And that’s a big advantage for us and will help us offset this price cost.'”

Power and chemical segments have held up well

“The downstream, in particular the Power, has held up extremely well, and certain chemical segments held up extremely well.”

I don’t know if there are any bright spots here

“I owe you a glass of wine for that one. I don’t know if there are any bright spots here, but…”

I don’t see another step down at this point in time

“At this point in time, we do not see it stepping down on the order pace. We look at the trend lines, we look at the various businesses; it looks like it’s bouncing around this bottom. The question is, is there anything that’s going to pull it back up? We know what the comparisons are like for the next couple of quarters, but I mean I don’t think – I don’t see it as a step-down at this point in time. I mean it looks like it’s trying to bottom here. And I mean I’ve called this before and I’ve got my ass kicked, to be honest, and that’s not a swear word, Steve, you know. It’s kickboxing here. I’ve been kicked around the ring a couple of times here this year. And it looks like it’s forming; I don’t see another step-down at this point in time”

If you saw a sudden break in commodity prices, that would create a problem

“Unless you saw a sudden break in oil or – I mean you saw another sudden break in commodities down, say, into the $30s or below, then that would create another problem.”

Eventually the oil companies will start to cut MRO spend

“We’ve not seen the MRO come off yet, but I’ve gone through enough these cycles, as you guys well know, I’m a little bit older than you. And when I see the oil companies really under the pressure right now, they cut capital even more from their shareholder base. I know eventually what that means is they’ll cut into the core MRO.”

There’s a leadership problem at SOEs in China

“The major state owned enterprises, there has been a lot of continued crackdown on the ethical issues, the arresting and replacement of management team. A lot of people are afraid to make decisions. They’re going to make bad decisions. So we’ve seen this on a broad base and a lot of our customer base across China where there’s been a curtailment of spending as they figure out what’s going to go on relative to the leadership.”

Up till now oil companies have just been cutting project spending

“up till now they’ve been cutting the project spending – the capital spending, and now, my concern is with the most recent two weeks of all the announcements coming out of the major oil and gas customer base out there, they’re cutting capital again, they’re cutting project again, and my concern is they’re going to start cutting into the MRO base which has held up until now. I’m just giving you my gut feel for this thing, that’s what I was telling people, that is they continue to get pushed by their shareholder base to cut their capital spending and protect their free cash flow, they’re going to start going into MRO here in the Process world. We’ve seen it in the past.”

Would expect incremental improvement to come from Europe or North America, not China

“From our perspective, the stability will come in from Europe. I think there’s not been a robust recovery in Europe. I think Europe has sort of muddled along at a low pace. But that’s where I would see some improvement versus our – China. I would expect us to see some improvement in North America, as we come into this time period. And that’s where I’m seeing it right now and that’s where I’ll see it. And we’re not going to see it in China.”

Have to bring inventories down in a way that wont shock the supply base

“Across the board. Across the board. I mean, obviously, Process and Network Power are the biggest dollars of inventory, but it’s across the board and no one’s really out of line. It’s just that where we see the pace of business going which is going to be weak for several quarters now, we need to get that inventory back down. So we’ll do it very systematically, one, not to shock the heck of our supply base, but also work it down over a six-month, seven-month time period. We’ve been working on it for the last couple months. Clearly, the orders have been weaker here in the last several months, which creates a situation where we have to lower that water even further. So we do it very systematically.”