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The Covid Crisis Taught David Farr the Power and -4-

July was also the beginning of Emerson's fiscal fourth quarter, traditionally its strongest of the year. It hadn't yet reported the third-quarter results, but Mr. Farr said his estimate of a 15% sales drop was accurate. He could see the commercial and residential division, a mix of businesses including tools, heating and air conditioning, started to improve in late June. He expected the automation division, which supplies factories, oil producers and utilities, to lag but follow the same trajectory.

He didn't expect sales growth to return until the second half of 2021, but saw encouraging signs. White-Rodgers, an Emerson unit that makes thermostats and HVAC controls, was seeing higher demand from equipment manufacturers.

Still, nagging problems persisted. The Racine, Wis., Insinkerator division struggled to keep its production lines running as cases spread -- just as home renovations turned out to be a bright spot in the pandemic economy. Mr. Farr offered to send workers from the St. Louis area to help, but local managers declined. They asked salaried workers in Wisconsin to pick up shifts in the factory.

"We're not satisfying our customers, to be frank," said division president Joe Dillon in July. "We're doing our best on a daily basis to satisfy as many customers as we can, but it's challenging."

Mexico had shown signs of improvement, but between 5% and 7% of Emerson's workers there still weren't showing up for work -- down from 15% absent earlier in the pandemic.

The Mexican government had encouraged companies to pay workers 100% of their wages even if they were idled. After a few months, Emerson started cutting back the payments to 75%, then to 50%.

"When we hit that number, it's amazing how many people wanted to come back to work," Mr. Farr said.

Emerson moved some production of critical parts out of Mexico to locations with extra capacity in the U.S. and Southeast Asia, but production still wasn't enough. The headaches spurred a broader assessment of the company's operations in the country.

"Mexico is the only place I've seen that I have to really assess my manufacturing facilities," he said.

Ready for the upswing

In the first week of August, Mr. Farr brought Emerson's top 30 executives to headquarters to talk strategy and expectations for fiscal 2021 and 2022. The discussion centered on how the different businesses would return to growth and when to commit people and capital to take advantage of that upswing. There were also dinners and socializing, the same sort of behavior that he warned against in missives to workers.

"I got to see some of them for the first time in several months. It was pretty exciting, and I drank too much," he said. "I mean, these are things you do all the time and we haven't done it for a while so it's like, 'OK, we've got to make up for everything we missed.' "

The dinners were outside with tables of eight set for three or four people. But mingling was hard to stop. "People were a little closer than 6 feet," Mr. Farr admitted the next day.

Typically Emerson sees fourth-quarter sales growth of 6%-8% from the third quarter, but this year he thought it could be double that rate. As Mr. Farr had stressed in recent months, now was the time when the plants needed to be running well to meet demand.

The surge was mostly coming from the commercial and residential division, which benefited from DIY renovations and from hot weather driving air conditioner demand. Sales in the unit typically drop 5%-10% in the fourth quarter from slowed construction and European vacations. Now it was expected to swing to positive growth of 5%-10%.

Many of Emerson's customers had run down their inventory and needed to replenish as business started coming back.

The company reported its third-quarter financial results on Aug. 4. They were largely in line with Mr. Farr's forecast in April, including a 16% sales drop. Emerson also said its full-year profit would be better than it thought.

Mr. Farr updated investors on cost-cutting efforts and said sales in the first three months of 2021 could begin growing. Keeping factories running safely would be vital, he told investors.

Reconfiguring factories for worker safety was spurring permanent changes. Mr. Farr didn't want to build more floor space to solve the problem. "We're going to have to bring in automation," he said. "We're going to have to take labor out."

While Mr. Farr's attempt to hold an in-person board meeting again failed, he continued to pursue a takeover of Open Systems, the maker of power-grid software, and the much larger potential acquisition of OSIsoft.

On Aug. 25, OSIsoft was bought by a British industrial software company Aveva for $5 billion -- Mr. Farr had dropped out of the bidding when the price went above Emerson's threshold.

Two days later, Emerson announced it was paying $1.6 billion in cash for Open Systems. The deal expanded Emerson's power-station management software into renewable power sources, an increasingly important part of the industry.

Moving forward

Over the summer, Mr. Farr had resumed site reviews around the country, making quick day trips on the company jets to Texas, Wisconsin and New Jersey. He expected planning sessions with business leaders to begin in December or January. Instead of unit leaders having to come to headquarters and present their plans, he would visit them. Trips to visit companies in Europe or Asia would have to wait.

The pandemic didn't slow Mr. Farr's retirement plans. He expected the company to stabilize by the time he planned to step down at the end of 2021. In August, he told Bob Sharp, the head of the commercial and residential business, that he wouldn't be chosen to succeed him, prompting Mr. Sharp to leave Emerson.

Emerson's annual October strategic meeting was held at headquarters. About 110 people traveled to the meeting for two days with 600 others attending over video. The executives spread out in an auditorium for two three-hour sessions.

He was also pushing to get leadership development training back on the schedule. He figured the pandemic cost Emerson a year's worth of time in developing future leaders, something he considered crucial. He didn't want to fall further behind.

And as he had pledged back in the spring, Emerson increased its quarterly dividend in early November by half a penny to 50.5 cents a share, marking 64 years of regular increases.

More than 10 months into the pandemic, Mr. Farr was still as confident in November as he was at the outset that the deadly virus wouldn't permanently change how people live. He saw the crisis as a vindication of his instincts and management methods.

"As soon as you hear someone say 'the new normal,' plug your ears, and say, 'bulls -- ,' " Mr. Farr said. "Since I've been CEO I've seen a lot of new normals."

He described his effort to attack the crisis with a combination of analysis and gusto. "Once we saw that it was going to really impact our business or the communities or the world that we're operating in, [the strategy was] basically to break it down just like any planning process, " he said in November. "If you ran into a wall, like the states trying to shut us down, you ran at the wall and you tried to figure out how you climb that wall."

As of Nov. 30, nearly 2,500 workers at Emerson had fallen ill, and seven had died.

Mr. Farr was adamant that he would get a vaccine once it was available -- and wanted his workers to do so, too. "I just think that the amount of pain we've gone through as a nation and as a world and business world, if you don't get a vaccine, you're a hypocrite," he said. "If you don't worry about this thing, something's wrong with you."

Emerson plans to reconfigure its more than 200 manufacturing facilities around the world over the next year using automation so it can space out workers but maintain production at pre-pandemic levels.

In Mexico, the review led Mr. Farr to determine certain areas weren't suitable for future expansion. Another review produced plans to build more backup systems into its global supply chain.

Mr. Farr's efforts to get the Emerson board to meet in person still haven't succeeded -- the October board meeting was also virtual. But the CEO has been able to travel. In November, he went to the Masters Tournament with his wife at Augusta National Golf Course, where he is a member. And he slipped into Manhattan to meet investors for a face-to-face dinner in a private room. He planned at least one more similar meeting this year.

Demand is rising among Emerson's customers, so it is hiring more staff than usual -- even though it cuts into profits -- to make sure production isn't slowed if workers become sick.

Mr. Farr hasn't stopped coming to the office. There is more traffic on the roads in St. Louis, but the parking lots around town are still mostly empty.

He suspects his industrial rivals aren't back in their offices yet either. "I like competitors that are still sitting at home," he said. "They'll miss the trains when they go by."

Write to Thomas Gryta at thomas.gryta@wsj.com

 

(END) Dow Jones Newswires

December 04, 2020 10:31 ET (15:31 GMT)

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