Emerson Electric FY 3Q16 Earnings Call Notes

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Emerson Electric (EMR) David N. Farr on Q3 2016 Results

A very tough third quarter

“Now the third quarter. Yes, it was a tough quarter, a very tough quarter. June was a very challenging industrial marketplace for us, especially on process. Given the recent announcements of the GDP numbers, it shouldn’t surprise any of us. The numbers announced last week from business investment for the last nine months were negative and declining. Restatements for the last couple of years made it worse.”

Customers are being cautious, careful with how they are spending

“But we have to face the reality of what we see today. It’s a tough market. We did see a bounce back in July in our process orders, which is a good sign. But in reality, we are look at a marketplace right now where people are being very cautious, they are being very careful with what they’re spending money on and they are very uncertain relative to what’s going on around the world from a political standpoint relative to just a business environment standpoint and where things are heading. So we’re staying very focused on trying to drive the necessary actions to protect the short-term profitability, at the same time, staying very focused on making the right, relevant, long-term investments to drive the necessary change that we’ll see in this business, this industry when we come out. We will come out. This industry will come out. But clearly, a challenging marketplace right now and one that we fully understand that we have to deal with and we will deal with it.”

I thought we may have flat or up sales in FY 4Q but that’s not going to happen

“Fourth quarter is going to be tough too. Wasn’t long ago I thought that maybe we’d actually have flat or up sales in the fourth quarter. That’s not going to happen. So we’re having to deal with that. And from our perspective, as we continue to restructure and get ready for a challenging 2017, it will be more favorable coming through a very difficult last 18 months, but still a challenging environment for us. But we are well positioned and will continue to be well positioned to derive levels of profitability that will generate great cash flow and returns and over time will continue to return to the growth mode that we know with inside Emerson.”

Did have some inventory liquidation that should help going forward

“We are also seeing, on a positive standpoint, we are seeing – we had a lot – we had some inventory liquidation in some of our channel in the month of June and – May and June in some of the Commercial and Residential. We expect that that – some of that will return in the fourth quarter. We also expect some of our compressor-type of business, which is the heat and the refrigeration markets, we expect a little bit of lift in that, which will help us as we go into the fourth quarter.”

Not really seen and improvement in MRO

“We’ve seen very weak – and North America has been the real challenge for us. It would be Canada, U.S. and Mexico. The MRO business and the – what we call the transactional business had a very, very weak June, as people really – some of our customers curtailed spending, they’re doing the turnarounds of the facilities and changes, for the facilities and maintenance, but they’re doing it very, very carefully and really cutting back on the extent of how much money is being spent. So that has not seen an improvement. We expected that to stabilize, but it’s not yet. That will be a key sign for us. And I think that is also a reflection that you see in the GDP. When you deconstruct the GDP in the United States the last three quarters, you’ll see that business investment continues to deteriorate. ”

Going to be a tough environment until customers start investing in next gen capacity

” until I see our customer base willing to invest more for productivity, invest for next-generation capacity or whatever it takes, that it’s going to be a tough environment.”

I don’t have confidence

“I don’t have confidence. I mean, from our perspective, just go read the transcripts from any of the oil and gas companies reported, all we do is we look at our businesses, we look at what’s going on in transaction, look at the day-to-day order book and what comes in. We have good systems, we can see that. The fact that I look at the stability and the flattening of certain things and we make a call. So that’s the type of confidence level I have. And I know of no customer out there saying, oh, things are great, we’re looking at increasing spending. But we have a very broad and diverse business, global business, a lot of industries. And so that’s how we make that call. And I was just – I am encouraged by the fact that we did see a bounce back in July because June was a very – I mean a knock-you-over-the-head type of month for our Process business, so that’s where I’m coming from.”

The deeper we go the faster we snap back

“My opinion is the deeper we go, the longer we stay down here, the faster the snap back. I’ve been here once before. I saw it. And so, the more pain you have, the better in the end. No fun having the pain upfront, but the better a snap back. So right now it’s a deeper pain going down; it’s a longer pain going down. And that tells me one thing, that spending will have to bounce back at a faster rate.”