Emerson Electric Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2023

There are 15 speakers on the call.

Operator

Welcome to

Speaker 1

the Emerson Second Quarter 2023 Earnings Call. Please note, today's event is being recorded.

Speaker 2

I would

Speaker 1

now like to turn the conference over to your host, Colleen Mettler, Vice President of Investor Relations at Emerson. Please go ahead.

Speaker 3

Good morning, and thank you for joining us for Emerson's Q2 fiscal 2023 earnings conference call. Today, I am joined by President and Chief Executive Officer, Lal Karstenvai Chief Financial Officer, Frank Del Aquila and Chief Operating Officer, Ram Krishnan. Vice President. Also joining us today is Mike Bachman, who was announced earlier this morning as our Chief Financial Officer effective May 10. Vice President.

Speaker 3

As always, I encourage everyone to follow along with the slide presentation, which is available on our website. Please join me on Slide 2. This presentation may include forward looking statements, which contain a degree of business risk and uncertainty. Please take time to read Safe Harbor statement and note on non GAAP measures. I will now pass the call over to Emerson's President and CEO, Lal Karstenbeis, for opening remarks.

Operator

Thank you, Colleen, and good morning. Please turn to Slide 3. I'd like to begin by thanking Vice President of the Global Emerson team for a tremendous performance, our Board of Directors and shareholders for the trust that you place in us. President. It has been a busy 1st 26 months as CEO as we reinvented Emerson.

Operator

The 2nd quarter performance was exceptional. It was a quarter in which we significantly advanced our strategic agenda across the three dimensions of our value creation model. Vice President of Investor Relations. In the last two months, we announced 2 important leadership changes. Vice President and CEO of the company's Chief Marketing Officer, replacing Kathy Buttonbell, who had a distinguished career at Emerson Vice

Speaker 2

President and CEO

Operator

of the Vice President of the United States of America. She brings deep technical knowledge and customer exposure, is an engineer Vice President for the last 4 years has led Emerson's Middle East and Africa business. We believe this is highly differentiating move for us as a company. Secondly, this morning, we announced Frank's planned retirement and Mike Bachman as Emerson's CFO. I'll say a few more words about this later in the presentation.

Operator

Lastly, we completed our 1st digital employee engagement survey. We heard from 85% of our global employee base and received a high quartile net engagement score. This gives us a stake in the ground and our great perspective on the areas of strength and opportunities to better the talent experience at Emerson. 2nd, the portfolio. We will be finalizing the Climate transaction in the current quarter.

Operator

The CEO for the joint venture has been named Ross Shuster, Vice President and CEO, and we are excited by what his leadership and experience brings to the business. I'd like to thank Vice President

Speaker 2

and CEO of the Company. Thank Jamie Froge for the work he did

Operator

in the business and for his contributions over 16 years of service at Emerson. In addition, we signed the definitive agreement to acquire National Instruments. We're very excited about the company, the technology and most importantly, the people. This is an important point. The large portfolio moves are now complete.

Operator

As an investor, you now have clarity that an investment in a share of Emerson is an investment in the leading global automation Vice President and CEO, serving a diversified set of end markets with a high growth, high profitability and cash flow, Vice President of the Company. Cohesive and differentiated tech stack made up of intelligent devices, control and software led by AspenTech. President. Our focus on a go forward basis as we did this quarter will be on creating value with this tremendous company. Lastly, our 3rd pillar, execution.

Operator

None of the work we've done would have been possible without it. Metler. The phenomenal results and momentum we have in the business is a testament to the quality of our global teams Vice President and CEO of the Emerson Management System. Underlying orders were up 7% With late cycle process markets continuing to exhibit strong demand. Hybrid also remains robust, driven by reshoring investments globally.

Operator

From a world area perspective, Americas orders led with China returning to growth as expected. As we look to the remainder of the year, we still feel confident in continued mid single digit order growth. The strong demand and steadily improving supply chain environment enabled 14% underlying sales growth in the quarter, Vice President and CEO, our Chief Financial Officer,

Speaker 4

our Chief Financial Officer, our

Operator

Chief Financial Officer, our Chief Financial Officer, of Vice President and Chief Executive Officer and Control were also both up double digits. This strong sales performance Vice President and CEO,

Speaker 2

and the continued operational execution

Operator

of our teams led to 53% operating leverage in the quarter, excluding AspenTech. Favorable impacts from mix and price cost also drove a 320 basis point improvement in adjusted segment EBITDA to of 24.6%. Adjusted EPS was $1.09 beating the midpoint of guidance by $0.11 again, driven by the strong sales and operational performance. This is a 25% increase Vice President of the Investor Relations Officer of President of the Company's Investor Relations Officer, which is on track to meet our full year expectations. Turning to Slide 4.

Operator

Our value creation priorities and growth initiatives around innovation and secular growth platforms Vice President and CEO, that we outlined at our Investor Conference in November 2022 are yielding meaningful results. First, Emerson was recognized by Fortune Magazine as one of America's Most Innovative Companies. The recognition is a testament to our innovation history and dedication from our employees to create leading technology and software Vice President

Speaker 2

and CEO for our customers.

Operator

We are extremely excited to be recognized for this award and are working continuously to accelerate our innovation engine Vice President for future growth. Similarly, Emerson continues to differentiate as a leader in growth markets like energy transition, Metler, Vice President of the United States of America. In the Q2, Emerson was awarded the software Vice President and CEO of the United States. The Utah project transforms a retiring coal fired power plant into a clean energy plant running on hydrogen. At first, the plant will use a mix of 30% hydrogen, 70% natural gas before transitioning to 100% hydrogen Vice President of the United States by 2,045.

Operator

The hydrogen will be supplied by the Mitsubishi Power Advanced Clean Energy Production and Storage Hub, Vice President

Speaker 4

of the United States.

Operator

Another greenfield project that Emerson was awarded in 2022. When complete, the Intermountain project Vice President of the United States with carbon free power, a critical step towards a net zero world. With our integrated end to end renewables and power generation platform, Emerson was chosen because of our industry expertise Improvement experience in hydrogen and complex projects. Secondly, Emerson and AspenTech We're jointly selected to automate and optimize the Golden Triangle Polymers facility on the Texas Gulf Coast. The $8,500,000,000 project is a sister facility to Qatar Energy and Chevron Phillips Rosslofan project that we highlighted in the Q1.

Operator

Emerson will lead its will provide its leading Delta V control system and Intelligent Devices and AspenTech will provide its leading simulation software. This technology will allow the President of the United States of America Merrill Lynch. Please go ahead. Thank you, Colleen. Our next question comes from the line of in the U.

Operator

S. And Canada. This is a great example of the differentiating strength of Emerson and AspenTech. Turning to Slide 5. We remain energized and excited by our recently announced acquisition of National Instruments.

Operator

National Instruments will expand our leading automation business into the attractive test and measurement space and provide important Vice President of the United States. NI's leading portfolio of technology and software We are well positioned to capitalize on secular trends within semiconductor and electric vehicles, and we expect the transaction to be accretive Vice President and CEO, our long term underlying growth. Inclusive of $165,000,000 of synergies by the end of year 5, Metler. The transaction meets the financial criteria we have communicated. We will work to complete the customary regulatory and closing conditions and expect to close in the first half of Emerson's fiscal twenty twenty four.

Operator

We have the opportunity to meet the extended management team Vice President and CEO of Global Town Hall with NI employees last week while visiting Austin. From that meeting, We came away even more confident in the potential opportunities of our combined company. The technology is differentiated Metler. And has ample room to expand and the talent, well, it's simply exceptional. But most importantly, I was energized by the warm reception we received from the leadership team and all the employees we met.

Operator

In a way, I am proud to be an NIR now as well. Please turn to Slide 6. The past 26 months have been fast paced and an exciting journey for Emerson. We moved from a $17,000,000,000 Vice President of the United States. We are now going to be a leading company to a cohesive $16,000,000,000 automation leader.

Operator

It took a lot of hard work to transform this business Vice President and CEO, our Chief Executive Officer and Chief Executive Officer. We now have an outstanding opportunity to create value for shareholders. It is a portfolio that is exposed Vice President of the SECURITIES SECURITIES SECURITIES THAT ARE EXPECTED TO DRIVE GROWTH FOR YEARS TO COME. And WE REMAIN COMMITTED TO OUR 4% TO 7% Sumitly 49% gross profit and 23% adjusted segment EBITDA margin. Our industry mix is more diversified than 2 years ago, focused on automation and with the discrete markets now our 2nd largest customer Vice President and CEO of the Investor Relations.

Operator

While we will continue to pursue bolt on acquisitions, we're now turning our focus to executing the strategy we laid out at investor conference in delivering the synergies we have committed to for AspenTech and NI. Please turn to Slide 7. Emerson and our Board are committed to ongoing Board refreshment. And yesterday, we had the privilege of announcing 2 new Board members to our Board of Directors. Vice President.

Operator

Leticia Goncalves is the President of Global Foods for ADM and a member of the company's Executive Council. President. As part of ADM, Bayer and Monsanto, Leticia has held roles in Digital Solutions, Commercial Operations, Vice President of the United States of America and the United States of America. Her experience in these areas and accelerating change make her an excellent addition to our Board. Leticia is originally from Brazil.

Operator

She is a chemical engineer and has a tremendous passion for innovation. Speaking of innovation, Jim McKelvey is a successful entrepreneur who founded Block, Vice President of the Investor Relations Officer of Investor Relations Officer of Investor Relations Officer of Investor Relations Officer of Investor Relations Officer of Investor Relations Officer of Investor Relations and will serve as a key collaborator as we continue to accelerate innovation and invest in technology and engineering. Jim has expertise in many areas, including software, cloud and cybersecurity, which will benefit Emerson as we provide customers with leading digital solutions. They are energized and so are we Vice President and CEO, and we are excited to have both Leticia and Jim join our Board of Directors. Before I turn the call over to Frank, please turn to Slide 8.

Operator

I would like to congratulate Frank for a distinguished career Vice President of over 32 years at Emerson and the past 14 years as CFO. Frank, I met you 28 years ago, Vice President and CEO of Investor Relations. Please know that you created a legacy here at Emerson. We could not have accomplished what we did over the past 26 months without you, And I would not have been able to lead this company without your wisdom, confidence and support. You made us better.

Speaker 2

Vice President. You made

Operator

me better. Thank you for the lasting impression you left on me and the impact you made on all of us. I'm also excited to announce Mike Bachman as CFO of Emerson effective May 10. Mike has over 35 years of experience in finance, operations across Baxter, Emerson, of course, and PwC. I'm excited about what Mike brings to the role, Vice President and CEO, and please join me in welcoming him.

Operator

Mike, congratulations.

Speaker 5

Thanks, Lal, and thanks to you and the Board for President and CEO of the Investor Relations Officer. I'm very excited to get into the role. Good morning, everyone. I've had the opportunity to meet several of our investors and analysts, and I'm looking forward to meeting more of you and working with you in the future. Vice President and CEO, and to my Emerson colleagues listening in, thank you for a fantastic quarter.

Speaker 5

As Lal just talked about, President. It's been a productive 26 months with respect to reshaping our portfolio and we're on track to achieve what we set out to do.

Speaker 2

Vice President. The impressive result is a more

Speaker 5

cohesive $16,000,000,000 automation company expected to grow 4% to 7% through the cycle with Vice President and CEO of Investor Relations. I think of the portfolio transformation as a great start Vice President. And now we get to operate in this new environment. Execution has always been a hallmark of Emerson and we're building on that to focus on President and CEO of the Investor Relations team. I'm very pleased to announce that we are in the position of accelerating our cash flows as the supply chain normalizes.

Speaker 5

I certainly expect successful execution in these areas to result in increased shareholder value. President. While I'm excited about our future, transitioning to the CFO role is a little bittersweet for me personally. Frank was a major reason I joined Emerson a little over 5 years ago. And during that time, I've come to know Frank as a great finance professional and more importantly, a wonderful person.

Speaker 5

I'm confident we'll have a smooth transition over the coming months. Thanks, Mike. And now I'll turn the call over to Frank.

Speaker 6

Well, Mike, thank you so much for the kind words. When I showed up here 32 years ago, I never didn't really know what to expect and I never could have imagined Vice President of the Company. The opportunities that I would have, the things I would get to do and above all the people I would have the privilege to work with. The last 13 years have truly been a privilege. Leading a world class finance organization, who I respect I trust implicitly, they never let me down and I thank them from the bottom of my heart.

Speaker 6

The last 2 years working with Lal and Ram and the people in this room and our extended team on the portfolio transformation have been truly special Vice President and CEO of Investor Relations. And just a wonderful capstone to my career and I will always be grateful for that opportunity. Thank you, Lo. I'm truly grateful for that. It's been a heck of a run.

Speaker 6

Emerson is well positioned for the future. This is a perfect time to turn it over to Mike, who I have come to know well Vice President of the United States. As a leader over the last 5 years, I am confident he's going to provide the right leadership for the challenges we have again. Matler. The future is very, very bright and I'm so happy to have been a small part of it.

Speaker 6

I've enjoyed working with all of you over the last 2 years on the phone with our analysts and other Investors. And I couldn't think of a better way to go out and I'm very grateful and I just am so thankful for that. Thanks everybody and there is no crying on earnings calls. So

Speaker 2

we're going

Operator

to get off of it. Thanks Frank.

Speaker 6

Here we go. Good morning again, everyone. Please turn to Slide 9. Our Q2 financial results were outstanding, reflecting our strong end markets and operating execution. Well, I'll summarize the results for you, so I'll provide a bit more color.

Speaker 6

Additional details are in the press release and in the slides Vice President and CEO, in the appendix to this presentation. Underlying sales growth exceeded our expectations at 14%. All world areas and both business groups were up double digits, reflecting the strength in our end markets, our positioning in them and our geographic presence. Demand was broad based with later cycle process markets up high teens and hybrid markets also up double digits in the quarter. Discrete demand has begun to moderate after several quarters of strong growth, but sales were still strong in the quarter, up high single digits.

Speaker 6

Safety and productivity returned to growth, up 3% in the quarter. Net sales also were up 14% for the quarter Vice President of the Company with a 3 point drag from currency, which was essentially offset by acquisitions and divestitures. We did close our Russia divestiture in March and we now report the business we had on the divestiture line of our net sales bridge. Vice President. Our businesses continue to realize significant price.

Speaker 6

In the quarter, price contributed approximately $150,000,000 and 5 points Vice President of the Board of Directors. Backlog also grew $300,000,000 reflecting the strong orders, backlog of approximately $6,900,000,000 to end the quarter. AspenTech revenue was below expectations for reasons they explained on their call, and I'll briefly summarize those here. Vice President. Please keep in mind that AspenTech reports revenue under ASC 606, so the factors affecting GAAP revenue are complex Vice President and CEO of the company.

Speaker 6

As explained on AspenTech's earnings call, there were 3 factors in play. The first was longer than planned

Speaker 2

President and CEO of the OSI business,

Speaker 6

which pushed out the recognition of project revenue milestones. This is mainly a timing related dynamic And we continue to see strong demand trends from the power transmission and distribution market. AspenTech also experienced shorter term contract lengths President of the SSE business. Overall, the shift from perpetual to term contracts is progressing well, And lastly, AspenTech is seeing some weakness in OpEx spend in the bulk chemical market, which is impacting Heritage AspenTech. Vice President.

Speaker 6

For further clarification, Emerson's chemical exposure is more diversified across both bulk and specialty chemical and both OpEx and President. Adjusted segment EBITDA margin improved 320 basis points. Leveraging excluding AspenTech exceeded 50%. Strong sales growth, favorable business and world area mix Vice President and CEO, and margin accretive price cost all reflect exceptional execution by operations and contributed to the margin improvement. Adjusted EPS grew 25 percent to $1.09 and we'll discuss that on the next chart.

Speaker 6

Lastly, free cash flow was up 64% versus the prior year quarter and up 23% year to date. The strong earnings growth and a slight improvement in working capital contributed to that growth. Aspen SunTek contributed $129,000,000 to free cash flow. Please turn to Slide 10. Most importantly, 14% underlying sales growth and 53% segment level operating leverage contributed 26% Vice President of our EPA's growth quarter over quarter.

Speaker 6

Of that, AspenTech contributed $0.04 Currency was a $0.03 headwind and other items, mainly income tax because we had favorable discrete items last year or a net $0.05 headwind. The reduced share count resulting from the $2,000,000,000 share repurchase that we completed in the Q1 contributed $0.04 to earnings per share. So again, overall adjusted EPS grew 25% year over year. Please turn to Slide 11. Vice President and CEO, will talk about our revised 2023 market outlook.

Speaker 6

We continue to see broad based strength in most key end markets. In particular, we've updated our expectations for both process and hybrid markets. We have increased our expectation for And chemical market momentum. This market was strong in the Q2 and our customers continue to signal Vice President and CEO of the Investor Relations Officer of Financial Services. Within chemicals, we continue to see strong CapEx spending, Vice President and CEO, particularly in the U.

Speaker 6

S, the Middle East and Asia. Within the hybrid space, life sciences President and Chief Financial Officer of Finance and Mining. And we expect this market to grow high single digits in 2023. Re shoring continues to be a prevalent topic among our customers and we expect near and longer term benefits from this trend. As I mentioned, discrete demand is beginning to moderate as these earlier cycle markets have been strong for the last 2 years.

Speaker 6

We are seeing this first in Europe as industrial production is affected by rising input costs. Still, We continue to hear optimism about spend on factory automation and productivity improvements from our customers. President. Please turn to Slide 10, and we'll talk about our revised guidance. Based on the market strength I described President and CEO, our continued expectation of mid single digit orders growth.

Speaker 6

We are increasing our sales and earnings guidance for the year. Vice President. For 2023, underlying sales growth has been increased to 8.5% to 10% year on year and net sales to 9% to 10.5%. We expect Intelligent Devices to be near the top of this range and software control nearer to the lower end. We are also increasing our expectation for segment operating leverage based on the strong first half achievement and our second half outlook.

Speaker 6

Continued sales strength, favorable price cost and continued operational performance give us confidence in increasing this guide. We now expect segment operating leverage to be in the low to mid 40% range excluding AspenTech. Vice President. Adjusted EPS guidance has been raised to a range of $4.15 to $4.25 up $0.15 at the bottom of the range and advising us $0.12 at the midpoint. AspenTech is expected to contribute approximately $0.25 to this improved guidance.

Speaker 6

Vice President. The strength in core Emerson operations is more than offsetting the reduced AspenTech expectation, which is incorporated into our guidance. Free cash flow is expected to be approximately $2,200,000,000 for the year of which AspenTech contributes approximately 300,000,000 This is consistent with our prior guidance of approximately 100% free cash flow conversion on GAAP net earnings Vice President and CEO, and is equivalent to approximately 85% on an adjusted net earnings basis. In the future, We will express free cash flow conversion on an adjusted net earnings basis consistent with our other key non GAAP metrics, adjusted EBITDA Vice President and CEO of Investor Relations and Investor Relations

Speaker 2

and Adjusted Earnings Per Share.

Speaker 6

The business we have today has strong cash conversion characteristics We now expect AspenTech's adjusted segment EBITDA to be slightly below 40% for the year. As a reminder, Emerson's 3rd quarter is AspenTech's Vice President and CEO of the company's business. We believe the operating items that affected AspenTech's 3rd quarter results Chief Executive Officer, Vice President and Chief Executive Officer, Vice President and Chief Executive Officer, Vice President and Chief Executive Officer. Vice President and CEO of the President and CEO of Climate Technologies operations, interest income and the financial impact of the sale, which we expect to close, Vice President and CEO. We hope to make 31.

Speaker 6

In the appendix, we have provided information on the post closing financial reporting treatment President of Climate Technologies. Briefly, to turn to the Q3, that guide also reflects the strong outlook for the year. We President and CEO, our Chief Financial Officer, our Chief

Speaker 2

Financial Officer, our Chief Financial Officer, our

Speaker 6

Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, Vice President and CEO, and adjusted EPS to be between $1.07 $1.11 This represents an 18% increase at the midpoint Vice President and CEO of the Investor Relations Officer of Investor Relations Officer of Investor Relations Officer of Investor Relations Officer of Investor Relations Officer of Investor Relations Officer of Investor Relations Officer of Vice President and CEO of the company's business and CEO of Electronics, which at the time we estimated reduced Q3 sales by approximately $150,000,000 with the China impact Vice President

Speaker 2

and CEO of Investor Relations.

Speaker 6

Thank you for your attention. I'll turn it back now to the operator to open the call for questions. Vice

Speaker 1

President. Metler. And this morning's first question comes from Andrew Obin with Bank of America.

Speaker 7

Yes. Good morning.

Operator

Good morning, Andrew.

Speaker 7

So Frank, congratulations and thank you and Mike welcome. So I guess my first question is a lot of debate with investors about the impact of improving lead times

Operator

Vice President of Bank of America. On orders,

Speaker 7

backlog and free cash flows, clearly, you're starting releasing working capital, But if you're releasing a working capital, perhaps you're ordering less stuff. And if you're ordering less stuff, maybe somebody else is ordering less stuff. How do you think this dynamic will play out over the next 6 to 12 months?

Operator

Well, I'll start off with some comments just on the underlying environment, which We're still optimistic about, as you heard on the call, Andrew. Mid single digit order run rates, we Came out of the quarter at 7% and expect that range to continue through the remainder of the year. So the demand environment based on our seat is strong. And as Frank outlined correctly, I think there's some puts and takes out there. We're watching those carefully.

Operator

But as a whole, we feel very good about that. Having said that, we have

Speaker 2

Vice President. A very robust backlog as well.

Operator

We did build backlog in the quarter, and we continue to work through that, which gives me further confidence, obviously, Vice President of the Company for the second half. Naturally, with supply chain challenges largely alleviated, of course, there There's still a few issues out there, but largely alleviated. Lead times have started to come down. And but we haven't seen that reflected in any Slow in orders and very much as you saw quarter over quarter and sequentially, our order pace continued to be very consistent there. Ram, anything to add?

Speaker 4

Yes. I would say again, Andrew, I think from a lead time perspective, distribution, for example, is Vice President of

Speaker 2

Investor Relations.

Speaker 4

Less than 20% of our overall sales. So we and frankly, even with distributors, as our lead times have come down, we haven't seen any change in ordering patterns. Our KOB 3 business, which is the other piece that is lead time dependent continues to be strong. So no fundamental change for us Vice President. As it relates to ordering patterns from our customers as lead times across all categories of products for us have come down.

Speaker 4

I know others have mentioned that, but to date, we haven't seen the impact.

Speaker 7

Great answer. Thank you. And just maybe a follow-up question on aligning Aspen and Emerson sales channel. You guys clearly highlighted Golden President of the Triangle success of going to market together. You reaffirmed the synergies.

Speaker 7

But I guess the question I have, as you work closer with Aspen, One of the opportunities to improve visibility Vice President. At Emerson, right, because you have access now to a lot of CIOs, but also what are the opportunities at Aspen to benefit from deep Vice President and Board relationships that Emerson has with their key clients, for example, in the chemical space, right? You said our relationships are much broader. What can you do to improve visibility at Aspen in key verticals? Thank you.

Operator

Well, no, it's a great question. And it goes back to the Part of the commercial agreement that the very robust commercial agreement that we have with AspenTech, there is world area alignment Vice President of the Board of Directors. And very honestly, joint pursuit in 2 areas, capital projects, which was the example that I shared with you and then a very robust analysis on an industry by industry basis of the white Vice President and CEO of the company's business, particularly for our control system and for AspenTech. And that's more of a systematic approach by the selling organizations, But one that will prove to be and is proving to be quite a large opportunity as well. Ram?

Speaker 4

Yes. And just to add, I think the customer landscape is really the way we really want to drive more C for AspenTech. Certainly, The momentum on projects is there early, but as we shared with you before, 70% of the control systems that we have, Delta V Innovation, don't have Vice President of the The AMS systems that we have where we can bring Aspen, that's the approach we're taking through our commercial agreement. They are very, very geographically focused as well where we look at markets where Aspen doesn't have the strength and That's really where a lot of the effort is being put. So we'll see that benefit come through.

Speaker 4

It's 3 quarters in obviously in the relationship. The momentum is early on projects, But more will come as it relates to the white space that I described over time.

Speaker 7

Thanks so much.

Speaker 1

Thank you. And the next question comes from Deane Dray with RBC Capital Markets.

Speaker 8

Thank you. Good morning, everyone.

Speaker 9

Good morning, Dean.

Speaker 8

I also want to wish Frank all the best. It's been great working with you and congrats to Mike. So my first question is maybe take us through the what you're seeing on the discrete side with some of the demand moderating. How did it progress through the quarter? Is it isolated to some specific verticals or geographies?

Speaker 8

Yes, we are hearing elsewhere slowing in Europe, especially on

Speaker 10

the chemical side, but We appreciate

Speaker 8

to hear the color there, please.

Speaker 4

Yes. So Deane, Ram here. From a discrete Order activity, now the discrete business from a sales perspective, we had good strong growth in the quarter, 9.5%, close to 10% growth in the quarter from a sales perspective, which was driven by backlog reduction. Orders did go slightly negative this year, Vice President. This quarter, I should say, primarily driven by slowdown in Europe.

Speaker 4

Frankly, we haven't seen much of a slowdown Vice President of the United States. In North America, but a slight slowdown in Europe, particularly in Germany and the segment around machine builders. We do Serve the Machine Builder segment in Germany, which is both domestic German market as well as these Machine Builders export. So that's really probably the one segment a little bit Slow down in the UK. Frankly, Asia is holding up and China remains good.

Speaker 4

So that's the color. We do expect discrete to get into Stuffer comparisons as we get through the second half of the year and we expect orders to remain negative before they turn positive into 2024.

Speaker 8

Got it. Thank you. And then just a follow-up and I also just want to hear Frank one more time here.

Speaker 2

On the

Speaker 8

free cash flow difference between GAAP and adjusted this year, that difference, how much of that is either working capital needs Given kind of supply chain or is it more from climate? Thanks.

Speaker 6

No, I mean, there is none of the difference. The difference is simply the calculation, the denominator. I mean, we're just talking about the 2,200,000,000 guide of free cash flow and whether we use GAAP earnings or we use adjusted earnings as a denominator and that's the difference between the conversion ratio, there's no difference at all in the calculation of the cash flow itself.

Speaker 11

Great. Thank you.

Speaker 6

Yes, sir.

Speaker 1

Thank you. And the next question comes from Scott Davis of Melius Research.

Speaker 12

Good morning, everybody. Vice President and CEO of the Board of Directors. And I'm sure others will say and congrats to both Frank and Mike on the changes here. So I don't want to fixate on AspenTech. We can do that later perhaps, but I will anyways.

Speaker 12

The bulk chemical OpEx, is it typically that Volatile, is this something that they've experienced in the past and perhaps you might see in the future? Or is this kind of an unusual circumstance?

Speaker 4

No, I think the bulk chemical dynamic, because I mean you see many of the chemical customers say at the end of the day with a little bit of slowing demand there And the utilization rates being optimized, the portion of the AspenTech business, which typically gets impacted as their manufacturing and supply chain software suite. So in terms of President of the Company. So in terms of new purchases or new contracts around that, which we have built into the forecast, that's where we're seeing slowdown. So that's pretty normal. Obviously, refining for them continues to We remain strong, upstream and midstream continues to remain good.

Speaker 4

It's really the manufacturing and supply chain sweetened bulk chemicals where we have We've seen the slowdown and we've seen that in the past when the large chemical customers slow down spending on the OpEx side.

Speaker 12

Okay. That's helpful. And guys, assuming your stock price works, and I know AspenTech is down quite a bit from its highs, but Is there any interest in and I know there's some restrictions, but those things can always be Vice President and CEO of Investor Relations. And taking an even larger stake in the entity and perhaps over time Vice President of Integrating AFFOI into Emerson.

Operator

No, Scott, this is Lal. Good morning. No, look, we're still very committed Vice President of the Model that we set forward a year closed nearly a year ago now. It works. We're seeing the commercial value.

Operator

We're working the technology piece as well. And like I've said in the past, if at a point in time that changes and we have impetus to then Address that through the change in the ownership structure of the vehicle, we'll think about it then, but not at this point. And then furthermore, as you know and you noted, we are in a standstill period for another calendar year from now.

Speaker 12

Vice President. You got me so excited. I spilled and dumped my coffee, Lau. So I'll pass it on to the next guy. Thank you.

Speaker 2

Vice President.

Speaker 1

Thank you. And the next question comes from Andy Kaplowitz with Citigroup.

Speaker 13

Hey, good morning, everyone. Congratulations, Frank and Mike.

Speaker 6

Hello. Could you give us

Speaker 13

a little more color into your incremental margin performance both for Q2 and 2023? I know the new Emerson is supposed to record higher incrementals well into 30s, but what's changed for Emerson in 'twenty three that's allowing you to low to mid-40s over 50% in Q2. Is it mostly the 5% price that Frank mentioned and much improved supply chain environment? Metler. Is maybe underlying Emerson able to sustain incrementals in the 40% plus ex Aspen over the longer term?

Speaker 13

And how are you thinking about price versus cost moving forward?

Operator

Yes, we certainly I'll let Ram add some operating color as we went through the quarter. But we certainly Metler. I believe in the strong guide that we put together on the forty leverage for the full year given the early President and CEO of the Company's performance in the 1st

Speaker 2

6 months.

Operator

Look, there were a lot of things that were positive. Obviously, the execution was exceptional. I think the operating executives in the businesses performed very, very well and exact. The volume was important as we noted, growing the underlying sales at 14%. But furthermore, mix and price cost were beneficial as well in the quarter.

Operator

So a lot of things went our way there, but Honestly, working within the management system that we've designed is a very important parameter

Speaker 2

President of the Company. That enables our businesses

Operator

to perform at a very high level here.

Speaker 4

Ram? Yes. I mean, other dynamics that certainly went our way is strong North America Vice President of Investor Relations. Strong performance in our instrumentation and final control businesses and the leverage we got there. So dynamics are on mix.

Speaker 4

Certainly, the price cost Vice President of the United States and the U. S. Government that Lal mentioned, but fundamentally the 14% sales growth in the quarter does help leverage. So All of those dynamics went in our favor.

Speaker 13

It's helpful guys. And then maybe you can give us a little more color into what you're seeing by region. I think China was Relatively weak for you in Q1. It seems like it's better in Q2. I think, Lal, you mentioned easy comparisons in Q3.

Speaker 13

So how are you thinking about regional demand moving forward for the rest of the year.

Operator

Feels really good. It was a very robust quarter globally for us in terms of Vice President of Steel's performance and very honestly orders, as Ram and excuse me, Frank outlined. China flip for us, it was down Vice President. In the mid single digits, a quarter ago, it was up both in orders, high single digits and in sales in the mid single digits. We feel very good and we feel good about what we see in China for the remainder of the year as well.

Operator

So that's a positive. Look, North America, Very robust growth, brought strength, a lot of it driven by the near shoring elements and core strength in hybrid in process with growth of 15 ish percent in sales. Europe, That's been very honestly, Andy, the biggest surprise of the year. It continues to be very strong for us with growth in the Metler. Mid teens, 14% in the quarter in sales and orders that are very strong and very honestly Vice President, highlighted by Energy, Sustainability and Life Science Investments.

Operator

And then The rest of Asia, driven by India, Southeast Asia and then an incredibly strong Middle East and Africa region as well with significant investments in sustainability and LNG across the region. So At this point in time, with the exception of the discrete weaknesses that we've already talked through, continue to see very strong global Vice President and CEO, our Chief Executive Officer, our Chief Executive Officer, our Chief

Speaker 2

Executive Officer,

Operator

our Chief Executive Officer, our Chief Executive Officer, our Chief Executive

Speaker 8

Officer,

Operator

Thanks, Andy.

Speaker 1

Thank you. And the next question comes from Steve Tusa with JPMorgan.

Speaker 9

Hey, guys. Good morning.

Operator

Good morning, Steve.

Speaker 9

Congratulations again to both CFOs, outgoing and incoming.

Speaker 6

Thank you, Steve.

Operator

Thank you, Steve.

Speaker 9

What was price capture in the quarter and what do you expect it to be for the year?

Operator

5%. Yes,

Speaker 6

it was 5 points in the quarter and

Operator

we expect it to be 3%

Speaker 6

to 4% for the year.

Speaker 9

Okay, great. And then, Lal, I'm just curious from like a governance perspective. The Aspen results, there is a lot going on there. I guess, I get a high level. Some of it sounds like execution on some of these contracts perhaps Vice President of Investor Relations.

Speaker 9

In the, I guess, I call it integration phase of what they're doing, even though it's not really an acquisition by them, I guess. It seems like that there were a couple of things that surprised them about the assets that you guys are contributing. How does that conversation work Vice President. In the Board room there, because those are like assets that you guys knew, I'm not sure how surprising That was to you, but it was clearly surprising to the market the way this has played out. So I'm just curious like a little more color from your perspective on the integration that's going on there and perhaps how that kind of discussion and how to move forward plays out when that type of thing happens.

Operator

Yes. No, absolutely, Steve. I'll give you some color here. Let me and maybe there's 3 or 4 here critical points. Let me first begin by saying that I continue to be and we collectively continue to be very optimistic about the business And the differentiation that it provides as a technology solution across a diverse customer base.

Operator

That's very important. Secondly, The execution of both the commercial and the technology synergies is progressing ahead of pace. We have alignment across our selling organizations, the technology teams, and I highlighted a capital project win that Vice President. We worked on and we're working on many across the world and we have a joint funnel of pursuits. So what happened in the queue?

Operator

And I think there are Important dimensions here to talk about. The first, the company continues to perform extremely strongly. It's a rule of 50 software business With ACV growth exceeding 11% and strong cash flow. But there were 3 challenges in the quarter. And these were challenges that Vice President.

Operator

We have a robust communication process, not just at the Board level, but at an operating level. And we speak with Vice President and CEO and Shantel, who is the CFO, on a regular basis. The first is shorter term contracts On subscriptions at FSE, which is obviously was one of the assets that we contributed The assumption in the plan was on a 3 to 4 year basis of subscriptions that was we converted or Assentech converted those from perpetual license The reality is that they came in more in the 1 year level. So that had an impact on revenue recognition, Just the nature of that conversion journey and the challenge as those customers in that market space Accept subscription contracts over the perpetual traditional licenses. The second you also referenced is OSI.

Operator

We do it is a differentiated business in a high growth segment, as you know, but the integration has been slower. It's a business that came with a heavy service component to it. And very honestly, that migration and conversion ultimately from PERC to SUB on the software It's taking longer than expected, but we continue to be jointly very optimistic about the business. The orders in the business are strong, Vice President and CEO of the Company. And we will work through the next few quarters to execute there.

Operator

And then lastly, as Ram described earlier, The Heritage AspenTech business and the slowdown related to the bulk chemical segment there. Having said all of that, Vice President. Look, the plan has been reset. It's embedded in our results here. It's embedded in the outlook that we provided in the guide.

Operator

And the investment is I still believe there's a tremendous amount of value creation opportunity here for Emerson shareholders, and we continue to be very committed. And I think we have the processes both operating, which is CEO to CEO, CFOs Vice President. And through the Emerson management process as best we can here and through the Board of Directors in which to manage And to be part of the conversations and discussions with that team.

Speaker 9

Are you assuming a bounce back in your Q4 in those results?

Speaker 6

Thanks for all the color too.

Operator

Yes, of course. No, look, I think we've embedded their perspective, which they shared with their investors on their call into our guide.

Speaker 11

Okay, great.

Speaker 9

Thanks a lot

Speaker 11

for the color.

Speaker 6

Thank you.

Speaker 1

Thank you. And the next question comes from Nigel Coe with Wolfe Research.

Speaker 11

Thanks. Good morning. And Frank, it's hard to believe you've been CFO of 14 years. So Good one. Congratulations and good luck in retirement and Mike, congratulations.

Speaker 2

Thank you very much.

Speaker 4

Thank you.

Speaker 11

Yes, thanks. Just on the just maybe picking up on Steve's question there, maybe just maybe this is a question to you Frank. Maybe just talk about some of the moving pieces In the guide, I mean, clearly, the bulk of the uplift is driven by much better revenue conversion, margin conversion. Maybe some of the moving pieces, AspenTech, how has that changed in the guide, maybe stock comp, any of the sort of major discrete lumps would be helpful.

Speaker 6

Well, I mean, the main driver is obviously the improved outlook for operations, the uplift in the sales as well as Vice President of Investor Relations. The operational execution, the strong price realization, all the things that drove the strong leverage in the second quarter we expect to have in the Q3 and throughout the rest of the year. So that I mean that is mainly the story and that is strong enough to overcome the reduced aspen Vice President of the United States. I mean, as Lal said, we essentially incorporate their guide into our numbers. And they took the guide down for the year, so we've overcome That headwind as we move from the February to the current guidance and those are the main pieces.

Speaker 11

And that's what, dollars 0.06 dollars 0.07 dollars mark to market on AspenTech?

Speaker 6

For the year, roughly, yes, Vice

Speaker 11

President of the full base of DCS. You said 70% don't have Level 3 software capability. Does that Precipitate an upgrade cycle, I know we've talked about this in the past, but are we at the threshold now where we might see an installed base upgrade cycle? Was it more just patching around that with some of the capabilities around software?

Speaker 4

I mean, I don't know if We're planning for a major upgrade wave. I think it's more a disciplined approach with each one of our customers Vice President. Address the optimization benefits and the APM benefits and some of the capabilities that Aspen brings to improve the performance of the overall Vice President of the Automation System that is installed in many of these customers and we're going across the board, across industries, Power and Life Sciences The focus area, everybody is very interested in visually transforming their assets and we're seeing more and more interest from our customers Vice President of the Automation stack where Level 3 Software has an important role to play, Vice President. Primarily around optimization on the manufacturing suite and then more the asset performance management and the reliability software on uptime of assets Vice President of Investor Relations. That's the journey.

Speaker 4

I think you're going to see more and more of that. Sustainability is another area where software will get deployed. President. But I don't think it's a big wave. I think it's more a disciplined wave over time and we have the opportunity to drive it.

Speaker 11

That's great. Thanks very much.

Speaker 1

Thank you. And the next question comes from Jeff Sprague with Vertical Research.

Speaker 10

Hey, thank you. Good morning. Congrats to Frank and Mike. President. Frank, I think it's hard to believe you've been CFO for 14 years because until we got a new CEO, we didn't have many opportunities to get to know you.

Speaker 10

The new structure is better, so congrats all around.

Speaker 6

Thank you, Jeff.

Speaker 10

Yes. Hey, a lot of ground covered. I just wanted to touch Vice President and Paul, as you said, the big moves are done and that certainly makes sense. But you did indicate that you're working bolt ons and it looks like you also maybe have a 6 month gap or so between the Climate proceeds and National Instruments closing. Just wonder how that might play out over that timeframe.

Speaker 10

Is there room for some more share repurchase? Are there actionable bolt ons that could be happening kind of over the same period or just what we should expect there?

Operator

Yes, I'll let Frank comment as well here. But no, look, we obviously work towards the closing of National Instruments over those Vice President of Finance and Company. It may come sooner, we'll see. It depends on the regulatory approvals. That's going to be the key pacing items, as you know, Jeff.

Operator

The bolt ons, we work them aggressively within the businesses. And some are competitive President and CEO of the Board of Directors and Company. And we have 2 or 3 of those that we're looking at any given point in time. It will continue to do so. These are sub of $1,000,000,000 purchase price type of deals.

Operator

And we have a low a small number we're looking at right now and evaluating. And Dan, look, we're continuing to be very committed to return cash to our shareholders, whether that's through the dividend or share repurchase. And as we go into 2024, We'll lay out what the appropriate plan there is and communicate that. Frank, anything to add?

Speaker 6

Yes. Jeff, I wouldn't view share repurchase decisions in the context of kind of the gap between closing Climate and closing NI. I would view it more broadly as part of the capital allocation strategy. I mean, when we After we close NI, we'll have a balance sheet that's well below 2 debt to EBITDA and a tremendous amount of financial President of

Speaker 2

the Investor Relations Act.

Speaker 10

Great. And then just back to chem and I do understand you have a more diverse business than Aspen. But why shouldn't we kind of view this as an early warning sign Vice President. I know there's no pressure in the core business in chem and maybe just a little bit more color what you're seeing there because there are Obviously, CapEx and profitability issues kind of across a lot of that industry right now.

Speaker 4

Yes. So for us, the capital cycle in chemical, particularly specialty chemical is as good as we have seen it, particularly in Middle East, Asia Pacific and ethylene and methanol investments in North America. So Vice President. For us, we haven't seen the capital cycle slow. However, what Aspen is referencing is the OpEx spend in chemical customers as they throttle their production in response to slowing demand And therefore that translates to MSC purchases, the manufacturing supply chain suite purchases is really the dynamic that's Metler.

Speaker 4

It's a small impact to them at this point, but given it's 18% of their sales mix, I think they've referenced that. But to be honest, we haven't really seen any KOB 3 slowdown or KOB 2 in chemical and then certainly many of our major project wins to date that we have been sharing with you have been in the Chemical, Petrochemical Space, particularly in the emerging markets. So at this point, we don't see that as an inflection point or a slowdown in the industry despite the higher feedstock costs.

Speaker 10

Got it. Thank you.

Speaker 1

Thank you. And the next question comes from Joe O'Dea with Wells Fargo.

Speaker 14

Hi, good morning and congrats to Frank and Mike. I wonder just on the discrete, if you could elaborate a little bit on North America and the interplay between some of the structural and it sounds like continued strength that you're seeing in of cyclical standpoint, whether the macro uncertainty is having any impact or whether it's more just kind of like natural digestion of what's been ordered over the last few years.

Speaker 4

Yes. I mean, in North America, to be honest, on the discrete side, we haven't seen I mean, we obviously don't play in a big way in Semiconductors and Batteries. Yes, we play in a smaller fashion with our Delta V business, but obviously We'll get a lot more exposure to that dynamic with National Instruments. In the core machine automation business that we play in North America, we We haven't seen a significant slowdown to date, but it is obviously slower than the momentum we're seeing in the process markets.

Speaker 14

Got it. And then also just wanted to ask about Natyen integration planning and sort of what efforts are currently underway that that you're standing up, say, over the next 6 months to ensure a successful launch of the integration process there.

Operator

Yes, sure. This is Lal. We kicked that off last week in Austin over a day and a half with the management team. We've assembled a team, a steering committee And then we have functional integration leadership across the eight value drivers or so that have been identified. Obviously, on a steering committee basis, I participate as Eric Starkloff and we've each named Vice President of the Board of Directors.

Operator

A leader on the integration team, in our case, Vincent Cervelo. So that's often been running. Meetings are taking place. We'll have an in person kickoff with a large group here in St. Louis coming up, and then we'll be off and running on all the full integrations.

Operator

But Really good start. Great organizational discussions already have taken place. Vice President. And now we are excited about this work ahead of us as we head to close.

Speaker 4

Thanks a lot.

Operator

President. Thank

Speaker 1

you. Thank you. And this concludes both the question and answer session as well as the event itself. Thank you so much for attending today's presentation. You may now disconnect your lines.

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Earnings Conference Call
Emerson Electric Q2 2023
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