Emerson Electric Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 11 speakers on the call.

Operator

Good day, and welcome to the Emerson 4th Quarter 2023 Earnings Conference Call. After today's presentation, Please note this event is being recorded. I would now like to turn the conference over to Colleen Mettler, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good morning, and thank you for joining us for Emerson's 4th Quarter and Full Year 2023 Earnings Conference Call. Today, I am joined by President and Chief Executive Officer, Lal Karzenby

Speaker 2

to the

Speaker 1

Q3, Chief Financial Officer, Mike Fachman and Chief Operating Officer, Ram Krishnan. As always, I encourage everyone to follow along with a slide presentation, which is available on our website. Please join me on Slide 2. This presentation and may include forward looking statements, which contain a degree of business risk and uncertainty. Please take time to read the Safe Harbor statement and note on the non GAAP measures.

Speaker 1

I will now pass the call over to Emerson's President and CEO, Walt Karstenbeis, for his opening remarks.

Speaker 3

Thank you, Colleen. Good morning. 2023 was an exceptional year for Emerson. The management team alongside the Board of Directors to the 3 dimensions of our value creation strategy. Firstly, culture.

Speaker 3

Our management team just completed a trip around the world where we have the opportunity to engage with our customers and our teams. It was an energizing trip and it was evident to me that the changes we are driving in the culture of Emerson We made significant progress across multiple dimensions of culture. We rolled out an employee value proposition, in listen to our diversity and inclusion metrics and made significant strides in our sustainability targets as well as launching a differentiated talent engine program. 2nd, our portfolio transformation is largely complete. The Copeland divestiture and more importantly, the acquisition of NI have enabled us to create an Emerson focused on automation aligned to the critical macro secular drivers, energy security and affordability, near shoring, in listen to the Sustainability and De Carbonization and Digital Transformation.

Speaker 3

I would like to welcome Ritu Favre and the NI family to Emerson. This is an exciting time. With NI, our technology stack Thirdly, execution. The Emerson management system is delivering differentiated results. Underlying sales for 2023 grew 10%.

Speaker 3

GP expanded 330 basis points to 49%. And adjusted segment EBITDA expanded 2 20 basis points to 25% after delivering yet another year of over 50% leverage. Adjusted earnings per share in 2023 grew 22% to $4.44 and free cash flow was $2,400,000,000 Orders growth exited the year at 5% and we grew across all world areas. We had strong price realization in the business at 4% for the year and MRO represents and we exited the year with $6,600,000,000 of backlog, up 12% year over year. We delivered on innovation in 2023.

Speaker 3

It was a year of significant releases in our Delta V platform, Aspen models and intelligent devices. Our R and D spend as a percent of sales rose to 7% in 2023. Cost management is the way of life at Emerson. The differentiated leverage of 53% We also delivered on commitments of no stranded costs related to the Copeland transaction and we'll be delivering on the $100,000,000 corporate cost takeout by the end of 2024 I am humbled by the exactness of our performance and I'm certainly optimistic about the future of our company. I'd like to express my appreciation to our customers who increasingly place their trust in Emerson to solve the world's most challenging problems.

Speaker 3

Listen. And lastly, in my opening remarks, I would like to say I am but one of over 70,000 Emerson team members around the world. I'd like to thank our global employees for your passion, hard work and energy that you bring to Emerson every single day. Please turn to Slide 3. As I said earlier and it bears repeating, 2023 was an exceptional year.

Speaker 3

We are excited to run this cohesive high growth and diversified portfolio. The financial performance was differentiated with double digit underlying sales growth, 53% operating leverage and 22% adjusted EPS growth. As we look ahead, 2024 is expected to be another strong year. Operating leverage excluding NI is expected to be in the mid to high 40s and adjusted EPS is expected to be $5.15 to $5.35 including roughly $0.35 to $0.40 contribution from NI. We hit the ground running on October 11 as soon as we close the transaction to begin executing the synergy plan and we expect it to provide early benefits in 2024.

Speaker 3

We are expecting 4% to 6% underlying sales growth, driven by our focus and commitment to winning in our growth platforms and leveraging our innovation. Energy transition, industrial software, life sciences and metals and mining are expected to remain resilient parts of our portfolio and we are utilizing our leading technology, customer relationships, installed base and expertise to capture investments in these markets. While discrete markets are down in both our factory automation business and test and measurement, We are expecting recovery in the second half of the year. Turning to Slide 4 for some additional details on how we finished the year. 2023 was a remarkable operational year for Emerson.

Speaker 3

Starting with the orders performance, to our teams executed exceptionally throughout the year. We won in the marketplace. We won in markets like LNG, hydrogen, renewables, life sciences and metals and mining, resulting in 5% orders growth for the year. Percent in Q4, led by double digit order growth in China and the rest of Asia. Underlying sales were up double digits for the year, exceeding our initial expectation of 6.5% to 8.5% last November and in line with our August guidance.

Speaker 3

The strength was widespread across the organization with all world areas growing 9% to 10% In both business groups growing 10%. I am most proud of our performance around operating leverage this year. 53% which drove strong performance. Adjusted EPS ended the year at $4.44 in the midpoint of our original November guidance by $0.37 and near the top of our August guidance. Lastly, free cash flow of $2,400,000,000 was up 35% year over year and above our August guidance.

Speaker 3

Turning to Slide 5. Our 2023 performance caps 3 strong years of execution, demonstrating the power of our Emerson management system and its ability to create value for our shareholders. We embarked on a transformational journey of Emerson in 2021 and remain focused on execution. Underlying sales growth of 7% 10% in 20222023 respectively shows the leadership position of our automation technology and our world class to the sales organization. It is also indicative of our market share expansion within the $160,000,000,000 served listen to the Automation Market.

Speaker 3

Our ability to both leverage our $150,000,000,000 installed base as evidenced by our MRO sales in 2023 of 65% and win new projects, our strengths of this company critical to the long term success of this business. As we invest more in digital technology and software, We are also seeing the benefits to gross margins, which have expanded 4 70 basis points to 49% since 2021. Strong price discipline and differentiated technology have also provided positive contributions and the addition of NI will further expand our gross margins. This enabled strong operational leverage across the business, over 50% leverage for 20222023 is distinguished amongst industrials. Cost discipline remains part of the DNA at Emerson, driving further cost productivity and margin expansion.

Speaker 3

Put all this together and Emerson has delivered back to back years of 20 plus percent EPS growth. Please turn to Slide 6. I want to provide a couple strategic updates on our business. Control systems and software technology and highlighted our integration with AspenTech throughout different solutions and industries. Discussing the exciting roadmap of our Delta V, Ovation and AspenTech products and working with customers to solve their toughest challenges.

Speaker 3

This was all reflected in our keynote presentations from 3 important customers. Sysgy, a provider of electric catalyst reactor technology, Biogen and Tesla, who discuss their automation challenges and partnership with Emerson. These types of engagements not only help our users' understanding of of current products, but also provide important inputs into our next generation products and innovation. To the call. Throughout this event, we highlighted our boundless automation vision, the next generation automation architecture listen.

Speaker 3

This vision empowers our customers to unlock and access all their operational data, enabling better decisions through analytics and optimization. It also enables customers to balance their production and sustainability goals through enterprise management and a unified software platform. On Slide 7, as part of this vision, we continue to accelerate innovation across 4 priority domains: in our sustainability portfolio. Each of these areas provide stepping stones to enable the boundless automation vision. At Immerse, we introduced many significant new products to our leading Delta V portfolio.

Speaker 3

1st, Delta V Version 15 Feature Pack 1 is one of our biggest rollouts in recent history. The package includes enhancements to software like Delta V Live, the most advanced Delta V HMI It also includes the Delta V Edge environment, a first of its kind edge solution allowing users to securely move data in listen to their enterprise environments. As we look at the next generation of software solutions and automation platforms, Throughout the rest of the organization, we are also making focused investments in strategic areas. This includes next generation intelligent devices to our sustainability portfolio. At AspenTech, many of the new releases are focused on enabling the Sustainability and Energy Transition segments.

Speaker 3

In addition to further building our capabilities like AI and DataWorks to enable self optimizing asset management. Please turn to Slide 8. On October 11, we closed the acquisition of NI and announced we will report the business as a new listen to the Test and Measurement segment in 2024. We are very pleased with the progress already in the 1st month with NI and are excited about the opportunities in this business. We remain committed to the 100 and in listen to the call when moving stock comp to corporate.

Speaker 3

As we have openly stated, NI completes the significant portion of our portfolio transformation, listen These will be prioritized in 4 segments we introduced a year ago, industrial software, test and measurement, to factory automation and smart grid solutions. In the Q4, we completed 2 of these bolt on acquisitions. FlexSim is a global leader for clamp on ultrasonic technology measuring liquids, gases and steam. The business is highly complementary to our existing leading flow portfolio consisting of Coriolis, DP Flow, MAG and Vortex and we will also serve attractive growth markets in the energy transition. We also completed the acquisition of AFOG in the 4th quarter, a highly strategic asset in the factory automation market.

Speaker 3

Affon's electric linear motion solutions, to the Q1 of 2019. This is a leading motion portfolio for discrete industries in a $9,000,000,000 TAM. Please turn to Slide 9. As I mentioned, to the large pieces of our portfolio transformation are behind us. And this slide shows that we were able to accomplish what we were able to accomplish over the last few years.

Speaker 3

We have 3 main objectives that I communicated when we started this journey. 1st, cohesiveness, which we now have with an unmatched technology stack. 2nd, diversification. Discrete Our growth is aligned to secular growth drivers. Disalignment to energy security and affordability, to the Sustainability and Decarbonization, Near Shoring and Digital Transformation will allow Emerson to move to a more a secular and less cyclical business profile, dollars 36,000,000,000 worth of transactions, disposing of assets with low single digit growth profiles and adding businesses we expect to grow cumulatively in the high single digits to low double digits.

Speaker 3

The profitability improvement is also remarkable. Trading 30% GP businesses for those that operate 70% plus gross profits, which are already seeing we are seeing the benefits of today. We are all energized by the opportunity we have with this new Emerson. Please turn to Slide 10. Our current strategic funnel is now over $10,000,000,000 in opportunity with nearly 2 thirds residing in our growth platforms.

Speaker 3

Listen. We're also encouraged by the activity of projects already in the funnel, considering the interest rate environment and global uncertainty. In the Q4, Emerson was awarded over $500,000,000 of project content with over 60% of those in our growth platforms. This includes strategic wins in LNG, carbon capture, hydrogen, life sciences and metals and mining. Listen.

Speaker 3

These successes are indicative of our team's focus and our technology's relevance within these markets. As we look at further diversifying our portfolio into hybrid and energy transition markets, 2023 was a a fundamental foundational year. Specifically, there were 3 highly strategic projects to highlight. First, Emerson was selected to automate 5 different plants for Samsung Biologics as it standardizes on our Delta V automation platform. The Emerson solution provides control for both production skids and for plant wide operations.

Speaker 3

We are also currently engaging with the customer on the potential to leverage AspenTech Software for future expansion.

Speaker 2

Listen. Secondly,

Speaker 3

in the Q3, we highlighted Emerson's selection for the Port Arthur LNG project with Bechtel Energy and Sempra. To this quarter, we are pleased to announce we were also selected for another large scale world class LNG facility in the United States. The Rio Grande LNG project from Bechtel Energy and NextDecade located in Texas will be capable of producing 17,600,000 metric tons per annum of LNG across 3 liquefaction trains. Listen. Emerson is providing much of our leading technology, including analytical and measurement technology and control, in pressure relief and isolation valves.

Speaker 3

And finally, AspenTech was awarded a synergy win in the most recent quarter with the world leading pulp and paper producer. Emerson's Delta V system is already installed at in listen to the site and through this relationship with the customer, Emerson was able to bring AspenTech to the table. Through this engagement, to the customer chose to displace the current incumbent provider of adaptive process control software and instead move to AspenTech. In listen utilizing our global sales channel. These wins and the continued evolution of the funnel to provide a strong foundation as we head into 2024.

Speaker 3

With that, I will now turn the call over to Mike Bachman.

Speaker 2

Thanks, Lal, and good morning, everyone. Please turn to Slide 11 that summarizes our 4th quarter financial results, which were in line with our expectations. Underlying sales growth was 5%, growing off a tough comp in 2022 when sales shifted from the Q3 into the Q4 due to China shutdowns and electronic component shortages. Price contributed approximately 4 points of growth. As expected with our typical seasonality, to the call.

Speaker 2

Backlog declined sequentially about $300,000,000 to $6,600,000,000 up 12% versus where we entered 2023. Software and control sales grew 2% on an underlying basis, which now includes AspenTech as we lapped a year of ownership. The Control Systems and Software business came in largely as expected and it was comparing against a very strong prior year Q4. AspenTech tends to see lower sales volume in our fiscal Q4 due to the timing of renewals and its sales can be more variable due to ASC 606 to the sales were on forecast and importantly ACV showed strong growth at 10.9% year over year. Intelligent devices grew 6% led by process and hybrid exposed businesses, mainly measurement and analytical and final control.

Speaker 2

Our discrete automation business was down in the quarter with softer than expected demand and Europe and China weakness impacting this business. To the margin improvement. Adjusted EPS grew 21% to $1.29 Lastly, Free cash flow for the quarter of $838,000,000 was up 17% versus the prior year. To the slide 12. As Lal summarized, 2023 was an exceptional year for Emerson.

Speaker 2

Underlying sales growth was 10% with 4 points of price contribution. Software and Control and Intelligent Devices both finished with underlying sales growth of 10%. All geographies reported strong sales growth with Americas up 10%, Europe up 10%, and Asia, Middle East and Africa up 9%. Listen. Emerson adjusted segment EBITDA margin improved 220 basis points to 25%.

Speaker 2

Operating leverage excluding AspenTech was 53%. As we've talked about throughout the year, to

Speaker 4

the call.

Speaker 2

This was driven by leverage on double digit sales growth, strong execution by our operations teams, margin accretive price cost and favorable product and project mix. Adjusted EPS grew 22 percent to 4 point with $0.27 of contribution from AspenTech. Lastly, free cash flow of $2,400,000,000 was up 35% versus the prior year. This includes approximately $100,000,000 from the interest on undeployed proceeds from the Copeland transaction. For the year, free cash flow conversion of adjusted earnings was 88%, slightly ahead of our expectations.

Speaker 2

This also represents a 15.6 percent free cash flow margin, a metric we plan to utilize moving forward. Slide 13 details the drivers of adjusted EPS growth from the prior year. Operational performance was exceptional. 10% underlying sales growth and 53 percent segment level operating leverage contributed $0.77 of year over year EPS growth. To FX was a $0.12 headwind.

Speaker 2

Stock comp was a $0.16 headwind versus the prior year due primarily to the mark to market accounting for the company's old stock compensation plan, which was mostly offset by pension and other corporate items. The reduced share count resulting from the to the Q1 of 2019. $2,000,000,000 share repurchase contributed $0.14 and the Copeland note receivable interest contributed $0.05 to adjusted EPS for the year. Overall, adjusted EPS grew 22% year over year to $4.44 Please turn to Slide 14. We believe 2024 is shaping up to be another good year of financial performance.

Speaker 2

Our end markets remain generally resilient evidenced by 5% underlying orders growth in Q4 and for all of 2023. Into 2024 sales. We also have good visibility through our MRO business, which was 65% of 2023 sales. This day to day replacement business gives us good perspective on pace of business and remains constructive. Lastly, we are entering 2024 with a $10,000,000,000 plus funnel, up $3,000,000,000 from where we entered 2023.

Speaker 2

This all feeds our 2024 outlook. Process and hybrid end markets remain strong driven by secular trends like energy security, hybrid sales growth of mid to high single digits in 2024. We continue to see investments to the next question and answer session. Please go ahead. Thanks, Steve.

Speaker 2

Thanks, Steve. Thanks, Steve. Good morning, everyone. To the near shoring investments here in the U. S.

Speaker 2

And around the world in life sciences and metals and mining, especially midstream metals processing in refining, which is being expanded to the United States and Europe. These secular trends in process and hybrid end markets in listen and our ability to help customers be successful give us confidence in our 2024 outlook. Discrete markets are obviously in a different part of the cycle, which in the second half of twenty twenty four. We expect underlying sales to be flat to up low single digits in 2024 for our discrete businesses for our discrete business. From a world areas perspective, it should continue to be a balance and we expect each World Area to grow in the mid single digit range.

Speaker 2

Please turn to Slide 15, where we have outlined our 2024 guidance. Our later cycle exposure, robust backlog and continued orders resiliency support our 2024 guidance for underlying sales growth of 4% to 6%. We expect both Intelligent Devices and Software and Control to be within this guidance range for underlying sales. Test and Measurement is excluded from 2024 underlying sales and is expected to add another 10 to 10.5 listen to reported growth or approximately $1,600,000,000 of sales. FX is expected to be a 1 point tailwind.

Speaker 2

We remain committed to driving differentiated incremental margins through our operational execution. Operating leverage, to the call, which includes cost savings from our corporate and platform rightsizing. Price cost will continue to be margin accretive in 2024 from $4.44 in 2023 to between $5.15 $5.35 in 2024, an 18% increase at the midpoint. This includes approximately $0.35 to $0.40 from NI in list of stock compensation and approximately $0.32 to $0.34 from AspenTech. There is some movement below the line in to stock compensation, pension and other corporate items, which roughly offset year over year.

Speaker 2

This detail can be found in the appendix. To the call. As a reminder, stock compensation from NI is now reported in our corporate stock compensation line item. To the call. Net interest expense is expected to be approximately $105,000,000 Lastly, free cash flow is expected to be $2,600,000,000 to 2.7 in listen to the call, which we will discuss in more detail on the next slide.

Speaker 2

For the Q1, we expect underlying sales to increase to 6.5% to 8.5% with leverage in the mid-30s. Adjusted EPS is expected to be between $1.01.05 a 31% increase at the midpoint. NI is expected to contribute approximately a nettle. As I mentioned, we will discuss some additional details on Slide 16 regarding our free cash flow. We ended 2023 with free cash flow of 2 point $4,000,000,000 or 15.6 percent of sales.

Speaker 2

This included just over $100,000,000 of after tax cash from interest on the undeployed proceeds from the Copeland transaction, which will not repeat in 2024. Taking this into consideration and starting from a foundation of approximately $2,300,000,000 of free cash flow, we expect approximately $300,000,000 of contribution from NI operations and another $350,000,000 increase from base operations. This would have resulted in free cash flow margin of approximately 16.8 percent or 2 $900,000,000 of free cash flow. However, we have 2 headwinds in 2024. First, we expect to approximately $200,000,000 of acquisition related cash payments associated with the NI and bolt on acquisitions.

Speaker 2

Up from our historical and future expected rate of approximately 2% of sales. Including these two headwinds in listen to our guidance of $2,600,000,000 to $2,700,000,000 of free cash flow or 15.2% to 15.4% free cash flow margin. Before we turn the call over to Q and A, I will quickly discuss capital allocation on Slide 17. We remain committed to disciplined capital allocation. Internal development and organic growth investments remain a high priority.

Speaker 2

This accelerated in 2023 with R and D spend now representing 7% of revenue and NI will further mix this up in 2024. This increase was driven by increased innovation in our 4 priority breakthrough domains, disruptive technologies and measurement, sustainability, listen to the dividend and announced today, we are beginning our 68th year of consecutive increased dividends with our $0.525 per share declared dividend quarter. The right side of this chart is where we have flexibility. We will continue to be active in pursuit of strategic bolt on acquisitions to strengthen our portfolio in targeted areas and we will remain committed to strong returns on these investments. Finally, we plan to have approximately $500,000,000 of share repurchases in 2024.

Speaker 2

We are energized as we enter the new fiscal year and we are focused on the execution of our plans. Thanks for your attention. I will turn it back to the operator to open the call for questions.

Operator

We will now begin the question and answer session. Our first question comes from Jeff Sprague with Vertical Research. Please go ahead.

Speaker 2

Thank you. Good morning, everyone. Hey, just a couple specific natty questions if I could. Some noise with the bolt on. So could you just be clear listen for natty revenues in 2024?

Speaker 2

And also if you could provide any color on how their orders progressed in the Q4. And finally, maybe a little bit of color on how much of that synergy target happens in the 1st year?

Speaker 3

Yes. Hi, Jeff. Lal here. Good morning. So on the revenue, as Mike stated, dollars 1,600,000,000 is the assumption.

Speaker 3

It's not in the underlying sales listen are still challenging in the business, exiting the quarter at down 16%, in which is very much aligned to the plan that we had in place. And we do expect much like in our core discrete markets orders listen to flatten out as we get into the second half of the year. So feel very much out there in plan in listen from an orders perspective, although still in a challenging environment. And then lastly on synergies, look, we got off to a really good start, day 1. The team is executing very, very well.

Speaker 3

We haven't given guidance on year 1. What I did I will say is that about half the delivered in the 1st 2 years.

Speaker 2

Great. And just as an unrelated question, maybe it's for Mike, but Just thinking about the organic guide for 2024, you're exiting here at 4% price with 5% order growth, right. Feels like there's a little bit of room in those organic numbers. Maybe just share how much prices embedded in that 4% to 6% for 2024? Yes.

Speaker 2

Jeff, the 2024 price assumption is 2%.

Operator

Our next question comes from Steve L'Espitussa with JPMorgan. Please go ahead.

Speaker 5

Hi, good morning.

Speaker 3

Good morning, Steve.

Speaker 5

Can you just talk about within the cash guidance, what you're assuming on working capital? And then that $250,000,000 that's kind of running through this year, How does all that trend kind of into 2025?

Speaker 2

Yes. I'll start with the second half or the second part of the question first. The $250,000,000 is really one time and in the year related to the acquisitions and some of the higher CapEx with Scott.

Speaker 5

Great. And then just working capital?

Speaker 2

Working capital for the year. Yes, we exited working capital, trade capital at about 20.5%, and we're expecting about 50 basis points coming off, 20.5% of revenue. So we do expect to have a little bit of balance sheet in 2024.

Speaker 5

Great. And then just one last one, just on orders. How do you guys kind of see the funnel stepped up a bit, the backlog You get into backlog seasonally, but how do you guys kind of see orders and backlog trending over the course of the year here?

Speaker 3

I'll comment, Steve. Obviously, we exit at 5%, so we have optimism and we have momentum out there. Obviously, we have some Challenge is indiscreet as we talked about in the business. I think as we think about the start of the year, My expectations are flat to low single digits. But as we get into the second half of the year, my expectation is exiting at in the mid single digit range and for the full year somewhere in the low single to mid single digit orders.

Speaker 3

Great. And thanks a lot.

Speaker 2

And then Steve, just on backlog, there if that pattern holds, there shouldn't be a meaningful change in backlog as we exit 2024. So the backlog should remain healthy.

Speaker 3

Great. Thank you.

Operator

The next question comes from Julian Mitchell with Barclays. Please go ahead. Hi, good morning.

Speaker 6

Maybe first off, just looking at Slide 15. So wanted to understand why the operating leverage steps up after listen to Q1 when the organic sales growth steps down. Is there any one segment or sub segment or something happening with mix that's driving that. And should we assume that that organic sales growth just steadily decelerates through the year.

Speaker 2

Hey, Julian. Yes, there is a little bit of mix and I would say the Automation softness that we are expecting in the first half of the year plays in on that. There's we've been ramping up listen to our spend around growth platforms and innovation. And so as you come into the Q1, there's a little bit of a year over year comparable that plays into that Q1 leverage as well.

Speaker 6

I see. So it's really discrete sort of getting better and that pushes up the op leverage? That's

Speaker 3

correct. Yes. Again, obviously, we're

Speaker 2

driving restructuring in the discrete business given the trend in the orders and you will see that margin expansion come through in the second half, which would to drive up the leverage rates.

Speaker 6

That's helpful. Thank you. And then just a quick follow-up would be around, I suppose, historically, process cycles in automation followed discrete by around 12 months and we see discrete as soft now. Are there any sort of specific reasons why the process should hold up differently this time versus history instead of following discrete lower later this year.

Speaker 3

It's a good question, Julien, one that we've thought a lot about and been watching very carefully. The fact of the matter is that we have some very unusual to secular trends going on in the world right now. I think a lot of our process activity is driven by 2 by 3 critical areas. The near shoring activity, which impacts life sciences and the metals and mining value chain, the energy affordability and security, which is impacting significant continued investment in liquefied natural gas and nuclear. And thirdly, equally important sustainability.

Speaker 3

I think We're past the tipping point in terms of the our customers' commitment around sustainability And we're seeing continued investments there. So whether we believe those will transcend certain economic cycles and that will impact How we should think about the strength of process as we go through 2024. Ram, you have something to add?

Speaker 2

Yes. And the other point I'd make, Julian, is the Capital spend in the process, hybrid industries has been pretty disciplined. There hasn't been a boom in capital to cause a correction as we move forward as opposed to the prior cycles we saw. So I think that disciplined capital spend plus listen. Obviously, the trends that Lal identified where the sustainability investments provide that tailwind, we expect process I see.

Speaker 3

So you And hybrid.

Speaker 6

Got it.

Speaker 3

So the

Speaker 6

process on hybrid orders growth should stay fairly steady through 2024.

Speaker 3

That is our expectation. Yes, sir. Fantastic.

Speaker 6

Thanks for the help.

Speaker 3

Listen.

Operator

The next question comes from Nigel Coe with Wolfe Research. Please go ahead. Nigel, your line is now live.

Speaker 4

Okay. The line is live, but I'm not, so sorry to that. So, National Instruments, I think that the 4Q 4 key fiscal sales are down, I think, high single digit organic. Is that the right number? Is my math correct?

Speaker 4

And it looks like listen. The guide implies flattish to maybe slightly down organic. I'm just wondering what the profile is on that and anything on orders there would be helpful.

Speaker 2

Yes. So, Ram here, Nigel. From an orders perspective, as Lal indicated, in the last quarter, Which is our 4th quarter, down 16% in orders. We expect orders to remain down for the first half and in listen to the second half and you are right, the $1,600,000,000 that we're guiding will translate to down 5% to 6 for the year from a sales perspective. And sales should turn positive in the 4th quarter.

Speaker 2

So we'll have down Sales for the 1st 3 quarters and positive in the 4th quarter.

Speaker 4

Okay, great. I'm sorry, I missed the order number. Thanks for clarifying that. And then on the backlog, backlog down from 6.9 to 6.6 Q over Q. Maybe just clarify, I don't think that's unusual from a seasonal perspective.

Speaker 4

I think it's normal to see 4Q Backlog consumption. Was there any FX revaluation impacts there? Just want to make sure that I understand the organic movement there.

Speaker 2

No, that's on a consistent GAAP basis.

Speaker 4

Okay, great. Thank you.

Operator

Next question comes from Scott Davis with Melius Research. Please go ahead.

Speaker 3

Good morning, everybody. Congrats

Speaker 2

on

Speaker 3

all the stuff done. Good

Speaker 7

morning, Scott.

Speaker 3

Lyle, it sounds like you were just in China, if you were around the world, It seems pretty topical to get an update from what maybe you saw there. I'll just leave it there. Yes. Actually, on this Particular trip did not hit China. We'll do that later in the year.

Speaker 3

I was there in May. But having said that, look, we had a Very good year in China. We exited orders at 11% in China. So feel good about the momentum there again. There The investments there really around energy security and near shoring are very significant.

Speaker 3

Sales were in the mid single digits for the year And but we continue to see robustness in our core process and hybrid spaces and not unlike Europe and the United States struggling on the discrete side. But certainly, the process hybrid strength will continue as we expect into 2024. And then the discrete in China is negative, I'd assume, this quarter? Yes, it is negative in the quarter. Yes, sir.

Speaker 3

Okay. I'll pass it on. Thank you, guys. Thanks, Scott.

Operator

The next question comes from Joe O'Dea with Wells Fargo. Please go ahead.

Speaker 8

Hi, good morning. Thanks for taking my questions. One just on the NI sort of earnings contribution for the year, listen. $0.05 in the Q1, it would be kind of running, I guess, dollars 0.10 a quarter or a little better for the rest of the year. But Any more detail on that cadence, anything that's sort of cost heavy upfront and then the progression through the course of the year as you're thinking about that earnings

Speaker 3

No, I don't have anything else to add, Joe. I mean, obviously, there's a as Ram expressed, a volume expansion as we get to the second for the year that will drive leverage and incremental profits, but that's really what the tail of the tape there is.

Speaker 8

Okay. And then on the R and D side and the step up to 7%, it sounds like it goes even higher in 24%. Any context on that? And then sort of additional insight on sort of the products and verticals that are getting outsized investments, As well as what your returns focus is on R and D, the prioritization around share gain or to the revenue dollars that you want, returns on R and D investment, any sort of context around that?

Speaker 2

From a dollars Perspective, yes, we get the benefit of Aspen coming in and that mixes us up. And then NI comes in and that also in listen. So you'll continue to see that commitment to growth innovation accelerate and increase as we move on. In terms of where the investment is going, a lot of the investment really is across the 4 technology areas We've consistently showed you guys, it's disruptive measurement, which is the sensing technology in our measurement technologies business, our automation system, the next generation automation system that Lal referenced in the presentation and also listen to the world type innovation that we can drive as an automation company and that's where the investment is going.

Speaker 4

Thank you.

Operator

Next question comes from Christopher Glynn with Oppenheimer. Please go ahead.

Speaker 3

Thank you. Good morning.

Speaker 7

I was curious about the funnel conversion comments. I think last quarter, You indicated that the conversion rates of those are picking up as the size of the projects ramps, and some of the newer technologies and applications. So Just curious, trend line, if you see further acceleration and how much of that notion is baked into the to fiscal 'twenty four guidance or could that be an opportunity?

Speaker 3

No. Hey, Chris, Walt here. No, look, we continue to see the funnel in listen to the to begin with. So it did grow from quarter to over quarter, which is why we thought it was important to show you. What's most interesting, it's growing in the right spots for us.

Speaker 3

It's growing along the growth platforms that where we have the focus of the organization. So that It comprises about $6,600,000,000 of the funnel today, of which energy security transition is a big part of that in listen to the sustainability and decarbonization, a large part of it. If you look at the wins, they are very much aligned in the same way as the funnel, winning at about 60% aligned on the growth platforms ish with energy transition a big part in listen of what we are converting here. So feel really good about it. We're watching it carefully, of course, in terms of movement through FID and other elements, but at this point in time, continue to have optimism, particularly products that are purely connected to national security near shoring or energy affordability elements.

Speaker 3

So Feel pretty good about what we see in front of us.

Speaker 7

Thanks. And if I could ask another on discrete, What kind of impacts are you seeing in terms of channel versus end demand?

Speaker 2

From a channel perspective, I mean, if you're referencing destocking, we're not seeing that. I think The discrete slowness is purely market driven, certainly European Machine Builders, China as an end market and an overall slowdown in the factory automation segment in North America and you see that with obviously a lot of our peers that have a lot more exposure and discrete, frankly versus Our peers were holding our own in terms of the order rate decline in discrete and we do expect to see a second half twenty twenty four positive orders for listen.

Speaker 7

Great. Thank you.

Operator

The next question comes from Andy with Citigroup. Please go ahead.

Speaker 9

In the mid-thirty percent range, but you're guiding to mid- to high 40% ex test and measurements. So could you give us a little more color into the assumptions? I know you get price listen for 24% and you're starting off a little lower, but it seems like you're still getting supply chain tailwind benefits. Andrew, how would you assess your performance versus your longer term algorithm of 35%. Is it possible that, that algorithm could be a bit conservative?

Speaker 3

It's possible. Yes, Andy. We've been operating in the mid-50s over the last couple of years. There's a significant amount of momentum around cost in the business. As I mentioned, we have tailwinds that will be delivered through the actions we're taking, not just within the segments, but also at corporate as we go through 2024.

Speaker 3

Now having said that, On the supply chain side, we're on the positive side of most of the measures. Obviously, logistics, Environment is flipped. And on material flow, generally significantly better. Of course, we fight spot shortages as you'd expect in any business, but generally, we are in a very different world on the supply chain. So that's all very positive.

Speaker 3

So it's really around execution. Look, we have a the gross margins of the business are 49% in 2023. They'll expand further as Mike described in 2024. And with that comes an expectation of high leverage and a higher incremental for the business. So at this point, feel very comfortable with the guide we put out there for the year in that mid to high 40s, which

Speaker 2

$100,000,000 of corporate platform cost takeout, which has been reading through in the businesses and will read through in the business in 24 as well, which is an uplift for the year.

Speaker 9

It's great to hear. And then I know you want to retire the KOB 1, 2, 3 names, but when we think about 'twenty four, I think you've been averaging something like 5% KOB 3. Would you expect that to hold up at around that level? And what are you given that tends to be higher margin work.

Speaker 3

Yes. No, we certainly expect MRO in the 60% range For 2024, Andy, you're absolutely right. It's the most priced inelastic portion of our business. It's typically replaced like for like within processes. And so we feel we have a great understanding of where the installed the $150,000,000,000 of installed base is located and we have specific programs across our service organizations and selling organizations to ensure that we mine that and we keep that product evergreen.

Speaker 3

So feel good about that. But in that 60 range, I think, would be the right expectation.

Operator

Listen. The next question comes from Tommy Moll with Stephens. Please go ahead.

Speaker 10

Good morning and thank you for taking my questions.

Speaker 3

Hi Tommy.

Speaker 10

Well, I wanted to start with a follow-up on discrete. You've called out the weakness there previously. Obviously, it's been front and center today. So I'm just curious, were there incremental pockets of weakness you picked up A comps issue or are there some green shoots in terms of the real underlying demand that you can call out at this point?

Speaker 3

No. So a couple of things. What we are experiencing through the quarter, we have experienced through the quarter is demand driven weakness. In listen as Ram accurately portrayed. It's not a destocking element.

Speaker 3

As a matter of fact, a very small percentage of our business runs through stocking distributors in the discrete side. But nevertheless, it's demand that we really focus on and it's global, Global weakness across the key markets. Now having said that, the comparables do get easier as we get into the second half. We're not counting on underlying demand conditions in the discrete market significantly improving in the second half. What we're benefiting from is obviously the comparators for us.

Speaker 10

Makes sense. And then if I look at the listen. Consolidated outlook you've provided for the Q1 and then the full year. You're starting the year in the high single digit range, Full year in the mid single digit range, so there's some deceleration implied there. Is there some conservatism around there just given the issues you've called out on the discrete side?

Speaker 10

Are there comp items that you would point out for us?

Speaker 3

There's nothing extraordinary other than we got to be cautious on the discrete cycle.

Speaker 10

Great. We appreciate the insight and I'll turn it back.

Speaker 3

Thanks, Tommy.

Operator

This concludes our question and answer session.

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Earnings Conference Call
Emerson Electric Q4 2023
00:00 / 00:00