Emerson Electric Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2023

There are 17 speakers on the call.

Operator

Good morning, and welcome to the Emerson First Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. 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

Thank you. Good morning. Thanks for joining us for Emerson's Q1 fiscal 2023 earnings conference call. Today, I am joined by President and Chief Executive Officer, Lal Cartenbeis Chief Financial Officer, Frank Delinquilla And Chief Operating Officer, Ram Krishnan. As always, I encourage everyone to follow along with the slide presentation, which is available on our website.

Speaker 1

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 the Safe Harbor statement and note on the non GAAP measures. I will now pass the call over to Emerson President and CEO, Saul Cardenbein, for opening remarks.

Speaker 2

Thank you, Colleen. Good morning, and thank you for joining us. I'd like to begin by thanking the global Emerson family for delivering yet another strong I'd also like to extend my appreciation to our Board of Directors and the shareholders of Emerson for your continued confidence And this management team. We remain confident about the strength of our markets from both a geographic And an industry perspective, this is exemplified by our project funnel that continues to grow exceeding $7,000,000,000 at the end of the quarter. Before I turn the call over and discuss the quarter's performance In review of our strong outlook for the Q2 and the year, I'd like to say a few words about our headquarters announcement this morning.

Speaker 2

We conducted a comprehensive 3 month review of location options. St. Louis was selected following this rigorous process, And we look forward now to finding an appropriate location in the region. Please turn to Slide 3. Operationally, the Q1 was very strong for Emerson.

Speaker 2

End market demand remains strong As first quarter order trajectory played out largely as planned. 5% underlying orders Was as expected as broad automation strength was weighed down slightly by a double digit decline in safety and productivity orders against tough comps. Sequential underlying orders were also up 6% versus the September end quarter. Sales met our expectations at 6% underlying growth, slightly impacted by shutdowns in China. Our business performed very well operationally, displaying the strength of our Emerson management system.

Speaker 2

Operating leverage, excluding AspenTech, was 40%, ahead of our mid to high 30s expectation. Adjusted EPS was $0.78 for the quarter was a $0.09 headwind versus 2022, driven by a 31% stock price increase throughout the quarter And its subsequent impact on the remaining mark to market plan. While we expect a slight headwind from the addition of AspenTech Stock comp rolling into our financials, the overall stock compensation headwind was 8% worse than anticipated. Frank will provide more color on this in his section. Similarly, FX was worse than originally expected.

Speaker 2

However, despite these headwinds, operations performed above guidance as our business continued to execute. Lastly, we completed our committed $2,000,000,000 of share repurchase in the Q1. Turning to Slide 4, I'd like to walk through some exciting successes and the strong momentum we see in the value creation priorities we laid out on November 29. 1st, in late January, we visited the Middle East and had the opportunity to break ground on our new state of the art innovation and manufacturing hub in Saudi Arabia. This investment It's designed to not only spur innovation for the region, focusing on the transition to clean energy segments like hydrogen and clean fuels, but also demonstrates our commitment to our regionalization strategy and best cost manufacturing, pillars of our operational excellence.

Speaker 2

As an example of the projects our investment will supply, Emerson was chosen to provide automation for the world's largest Green Hydrogen Facility by Neon. The plant will provide 600 tons a day of green hydrogen Using Emerson Automation Technology throughout production processes and renewable power generation. Emerson's local support and installed base in the Middle East were key differentiators. Secondly, Emerson and AspenTech continue to With our joint customer solutions, in the Q1, we were jointly selected to automate the Middle East's largest ethane facility by Qatar Energy and Chevron Phillips, Ras Lathan. Emerson will serve as the main automation contractor for the 6,000,000,000 providing our leading Delta D control system with AspenTech engineering and simulation products.

Speaker 2

The project is a scale example of our commercial agreement with AspenTech and how it successfully provides an expanded, Differentiated product offering to customers. Lastly, Emerson continues to diversify through life sciences and metals and mining markets. In the Q1, Emerson was awarded the automation contract for Fujifilm Diosynth Biotechnologies in Europe. The expansion project will include multiple bioreactors and processing streams, one of the largest CDMOs in Europe. These three projects are a clear demonstration of Emerson's commitment to the growth platforms we discussed at our investor conference And our continued success differentiating as an automation leader in these markets.

Speaker 2

Before I turn the call over to Frank, I wanted to briefly discuss our proposal to acquire National Instruments for $53 Per share in cash. As you know, we made our offer public on January 17, and our correspondence with NI since 2022 May is available on maximizingvalueni.com. Emerson is committed to an acquisition of NI and is participating in the strategic review process. We believe our premium all cash proposal with no financing conditions or anticipated regulatory concerns It's compelling and in the best interest of Emerson and NI shareholders. We look forward to continued engagement with NI and its advisers and moving swiftly towards an agreed transaction.

Speaker 2

That said, the focus of this call is our performance for the quarter, And we're not going to be commenting further on our proposal for ANI at this time. Be assured that we'll continue to execute Financial diligence as we review this opportunity. With that, I will now turn the call over to Fred.

Speaker 3

Thank you, Lal, and good morning, everyone. Please turn to Slide 5. As Lal mentioned, we had a very strong operational start to 2023. Underlying sales were within our expectations for the quarter at 6%, driven by 10% growth in software and control and 5% in Intelligent Devices. Net sales were up 7% with a 4 point drag from currency and a 5 point contribution from Aspen World area growth was led by the Americas, which was up 13%, driven by strong process sales, particularly in Energy and Chemical.

Speaker 3

The continued energy crisis in Europe affected demand as underlying sales were below prior year by 2%. However, sales were up 7% after adjusting for the impact of Russia.

Speaker 2

Sales in Asia, Middle East

Speaker 3

and Africa were flat versus prior year The strength in the Middle East driven by chemical and energy investments was offset by down sales in China, mainly due to challenging year on year comparisons And sporadic COVID related shutdowns. By industry, we continue to see strength in later cycle markets like energy and chemical. Chemical investments and plant modernization and sustainability remain steady in North America and Asia, but we are keeping a close eye on this market as we assess our outlook for the balance of 2023. Overall, 1st quarter process industry sales were up high single digits. Similarly, hybrid sales were up high single digits led by continued investments in life sciences, reshoring and metals and mining.

Speaker 3

Discrete sales were up mid single digits as this earlier cycle business starts to lap more difficult comps. The growth in discrete was offset by weakness in our commercial business in safety and productivity, which was down 10% for the quarter, but with early signs that we are bottoming out. Overall, we feel confident about the health of our end markets and our conversations with customers indicate Continued growth in investments during 2023. Price during the quarter contributed 4 points as our pricing actions From 2022 and additional actions taken at the beginning of 2023 are driving strong price realization. Backlog grew approximately $700,000,000 during the quarter to $6,600,000,000 giving us ample opportunity to on the rest of the fiscal year plan.

Speaker 3

Adjusted segment EBITDA margin improved by 130 basis points And leverage was 40% excluding AspenTech. North America mix contributed to the margin expansion and price It was accretive to margin in the quarter. Software and control margins were up 200 basis points led by AspenTech. Intelligent Devices performance was strong with 110 basis points of adjusted EBITDA expansion. Adjusted EPS was $0.78 and I'll discuss the details when we move to the next chart.

Speaker 3

Lastly, on this chart, free cash flow of $243,000,000 was down 20% year over year, mainly due to trade working capital, including the impact of supply chain performance, which is improving, but is still challenged. We are focused on prudent trade working capital as we progress through the year and we reiterate our expectation of 100% free cash flow conversion for the full year. Turning to slide 6. This is our adjusted EPS bridge versus the prior year. First, I There was an unfavorable impact due to stock compensation as Lal said of $0.09 and an additional $0.09 due to currency.

Speaker 3

The stock comp impact was primarily due to our legacy long term incentive plans, which required mark to market treatment On recorded expense of the 31% increase in our stock price during the quarter. The last of these plans will run off in 2023 Other non operating items and share repurchase contributed $0.02 to the quarter. Please turn to Slide 7. Turning to our 2023 outlook, we continue to see strength across our end markets. As we communicated in October, Process, hybrid and discrete markets are all expected to grow mid to high single digits in 2023.

Speaker 3

The long term secular trends we discussed in November continue to be relevant for our business and are driving growth and successes in 2023. Energy transition spend continues to be strong as evidenced by the successes Lal highlighted a few minutes ago. Energy security investments, Continue to move forward and metals and mining spend is centered around electric vehicles and electrification value chains. Those value chains are also benefiting discrete markets, especially in the U. S.

Speaker 3

The one weakness we see in the business today is our commercial Exposure within the Safety and Productivity segment, which was down 10% in the Q1. We expect these sales to improve as we move throughout the year, as we face easier comparisons and we see early signs of returns in demand. Please turn to Slide 8. We're maintaining our full year guidance based on the underlying strength in our end markets and robust backlog. The guide for underlying sales growth remains at 6.5% to 8.5%.

Speaker 3

We now expect currency to be less of a headwind at 2 points and Aspen Tech This is expected to contribute 3.5 points. Therefore, we are increasing our net sales expectations to 8% to 10%, of a point from the previous guide. We are holding operating leverage, adjusted EPS and free cash flow conversion for the year at the previous guide. Within that guide, we intend to cover the unexpected stock comp headwind that we had in the Q1 with excellent operational performance. For the Q2, we expect underlying sales growth of 8% to 10%.

Speaker 3

Currency continues to be a headwind, reducing sales growth by Approximately 3 points. AspenTech will contribute approximately 5.5 points and net sales are expected to be 10.5% to 12.5% up. Leverage expectations again are in the mid to high 30s. Adjusted earnings per share is expected to be between $0.95 $1 which is a 13% increase at the midpoint of the guide. We've included quarterly data for 2022 on a early mode.

Speaker 3

Thank you for your attention, and we'll now turn it over to the operator for Q and A.

Operator

Our first question will come from Scott Davis with Melius Research. You may now go ahead.

Speaker 4

Hey, good morning, Blau and Frank and Ram and Colleen.

Operator

Good

Speaker 5

morning, Mark. Hey, Scott. Good morning.

Speaker 1

Couple of

Speaker 4

little cleanup items, because I think the slides are pretty clear, but was price predominantly, think about the total growth in the quarter, 6% was price. Does price make up most of that?

Speaker 2

Hey, Scott. Good morning, Walt here. In the quarter, price accounted for 4 points approximately out of the 6, Two points of volume.

Speaker 3

And did that cover costs, Lal?

Speaker 5

Yes, sir.

Speaker 4

Okay. And just a quick follow-up here on Life Sciences. I know some of your peers have seen some weakness in Life Sciences, but you guys Made some pretty positive comments relating to that end market. Can you be or just give us a little bit more color on What your customers are spending money on? You mentioned localization, but perhaps a little bit more color there would be helpful.

Speaker 4

Thanks.

Speaker 2

Yes. No, a very active quarter in life Globally, Asia, Southeast Asia, United States, East Coast and Europe. A variety of projects, which shows one to highlight with you today. It's predominantly around automation. It's expansion of capacity.

Speaker 2

It's driven by the trends that we discussed at our investor conference, whether it's personalized medicine or capacity derisking In the world areas. We have yet, Scott, to expand with a full offering of AspenTech into the space that's in development and will be released here shortly, but that will give us another avenue as we bring optimization software into that space.

Speaker 4

Okay, helpful. Best of luck this year, guys. Thank you.

Speaker 5

Thank you.

Operator

Our next question will come from Josh Pokrzywinski with Morgan Stanley. You may now go ahead.

Speaker 6

Hi, good morning everybody.

Speaker 5

Good morning.

Speaker 7

Just a couple of questions, Both relating to kind of orders pipeline backlog and the conversions there. I guess while backlog has not had kind of this Enormous surge that you've seen maybe in some other names that have had a tougher time on supply chain. But how do you think about backlog conversion In your guidance, is the expectation that orders start to moderate versus accelerate? Where would you be pleased to see backlog over the next 12 months? And then sort of second related question, how do you feel about The pipeline of projects today and the pace at which things are looking out of those?

Speaker 2

Yes. No, backlog did increase in the quarter As we went through, look, I do feel very confident with the order pacing in the businesses, With the weakness only in the safety productivity segment that we described throughout the call. Beyond that, the funnel is very robust. It actually grew almost $500,000,000 in terms of size As we went through the quarter, to about $7,300,000,000 globally, Large number of sustainability projects, large number of energy transition projects, and we're executing very well in that capital formation cycle. So I feel very good about that.

Speaker 2

So look, I think from an orders perspective, my expectation is And we continue to see a very positive environment as we go through the year. And our job here, and I think it's embedded in our Q2 guidance, to Convert the backlog that we have in the business.

Speaker 7

Great. If I could just get one little follow-up on there. How do you feel about kind of the margin that you guys are seeing on some of these larger projects? I know people think about mega projects and Margin erosion, aggressive bidding, has that been your experience with this wave?

Speaker 2

No. You see the leverage that we gained in the quarter, about 40 points. There were project shipments within the quarter embedded in it. We feel very good Our differentiating capabilities with our technology stack, yes, there's competitive bidding, but it's nothing out of the ordinary But we've seen and nothing that we can't manage within our pricing models. Correct.

Speaker 3

Great. Appreciate the color. Best of luck.

Operator

Our next question will come from Andy Kaplowitz with Citigroup. You may now go ahead.

Speaker 8

Good morning, everyone.

Speaker 3

Good morning.

Speaker 8

Well, I just want to follow-up on the last Question in terms of when I look at orders, have you seen any bigger signs of deceleration activity anywhere outside of safety and productivity? I know you mentioned you're watching chemicals. I think Antonio also mentioned that. Would you expect orders to hold in chemicals or any of the other process markets? And Orders continue to be focused in the Americas as you said in the past?

Speaker 2

Yes. Great question. We had a really good Americas Quarter and strong momentum there. A very strong Western Europe quarter with great momentum there. Of course, Eastern Europe is Relative weakness because of Russia, of course, as we walked away from that market.

Speaker 2

So the comparables there are were pretty tough. And then Asia and the Middle East, very strong. Of course, China was down for us in the quarter, But we see that coming back here in the Q2 and expect high single digits as we finish out the year. So generally, Andy, based on what we're seeing beyond the Safety Productivity segment, I feel very confident about not just The Q2 guide we put out there, but the full year at this point. Ram, any color?

Speaker 5

I think Western Europe being resilient is very positive for us. And then the KOB 3 business, which is now Close to 65% of our total sales mix in the new company has been very strong. So that's a good sign and indeed the project funnel It's building. So at this point in the core business outside of safety and productivity, no signs of weaknesses.

Speaker 8

Very helpful guys. And then you talked about this a little bit, but you delivered incrementals of 40%. You mentioned the major Reason is that positive mix from strength in the Americas. Is there any reason why that would change as you go throughout the year? And I know you talked a bit about price, But did price versus cost come in a little bit better than you would have thought for Q1 and could that continue for the year?

Speaker 5

Yes. I think we're going to see strong price cost through the year. And frankly, with fundamentally price holding at High levels and like we saw in the Q1, but also coupled with commodities softening as we go into the second half as we see Both commodities as well as logistics turned favorable. So I think really the margin performance in Q1 is, yes, America's mix, but also strong price cost, which should continue through the year. And we don't expect North America sales to soften through the year.

Speaker 5

So the dynamics we saw in Q1 should continue through the year.

Speaker 8

Appreciate it guys.

Speaker 2

Thanks Andy.

Operator

Our next question will come from Deane Dray with RBC Capital Markets. You may now go ahead.

Speaker 6

Thank you. Good morning, everyone.

Speaker 2

Good morning, Dean.

Speaker 9

Hey, look, I know it's a happy day in St. Louis. Emerson has had Such an important presence in the community for so many years. So I'm sure that's great news for everybody.

Speaker 2

Thanks, Dean. I think we're all pretty excited about the decision and the process that we went through.

Speaker 9

Yes. And it also avoids the Logistics and disruptions and so forth. So that's great to hear. My question would be for Frank. For reaffirming the free cash flow conversion 100% for the year, what has to change in working Capital, we're still seeing such across the industrials.

Speaker 9

The buffer inventory required with supply chains are still Chewing up enough of working capital that you're seeing lots of underperformance on free cash flow. And so how do you see this playing out?

Speaker 3

Yes. Good morning, Dean. Mainly, it's an inventory story. It has to be around getting the backlog out in order to get the inventory down and Supply chain is adjusting and improving, but in ways that aren't always helpful in terms of difficulty in timing, receipts Of materials. So that's the fundamental thing that needs to change is that we need to get the inventory out over the next three quarters.

Speaker 3

And a big part of that will be shipping the backlog that we have and we certainly have a robust backlog level. So it's about execution now going forward. Ram and I discussed that in detail with our businesses when we had our quarterly ops reviews and I'm sure Ram can comment a little further on the supply chain implications.

Speaker 5

Yes. Frank, you said it. I mean, at the end of the day, I think right now we were Somewhat positively surprised at the pace in which the supply chain delivered in the Q1. So I think that was one of the reasons inventory built, but that's In some ways, good news that positions us to execute on the backlog in the remainder of the 3 quarters and that remains the focus. And Obviously, we'll make slight adjustments in optimizing how we drive material in from our supply chains given that they're performing better.

Speaker 5

Ultimately, it will come down to execution of the backlog, which we're poised to do.

Speaker 9

Great. And then just as a follow-up, and I know there's not been any specifics Provided yet is what's the potential for other portfolio moves more in the way of cleanup? We could point to some businesses that would be Last quarter under the new automation pure play framework is just maybe you just comment on the willingness of the Board to look at this And potential timing in terms of monetization of those businesses?

Speaker 2

No, it's a great question. We voiced in our November 29 investor conference that we're going to be active managers of the portfolio. And that is inclusive of both The opportunities to build on the cohesive automation company, but also to continue to prune where and when Necessary. At this point, we don't have an impetus to do so, but we'll continue to pursue Critical bolt on acquisitions, of course, DNI Pursuit that I that you're aware of. And we'll also continue to look at the existing portfolio.

Speaker 2

But I would not expect Anything of scale there after very busy 2022.

Speaker 4

Got it. Thank you.

Speaker 2

Thank you.

Operator

Our next question will come from Julian Mitchell with Barclays. You may now go ahead.

Speaker 10

Hi, good morning. I think we've had sort of good top down color, so maybe trying to look Some of the segment pieces a little bit. Maybe on safety and productivity just starting there, realize it's quite a small Business for you, but I guess two questions on it. One was just talk a little bit about how you see the slope of the organic Sales playing out the balance of the year. And then secondly, the margins were up, I think, 100 points in that business year on year By a weak revenue performance.

Speaker 10

So maybe help us understand how you delivered that and is

Speaker 8

it sustainable?

Speaker 5

Yes. Julian, Ron here. In terms of the buildup of the sales, I think Q2 will be negative, but we anticipate it going positive in the second half or Close to a flat year for the full year. That's kind of how we're looking at safety and productivity. The margin improvement clearly driven by we had some Focused restructuring that we executed in that business, anticipating the slowdown second half of last year and then favorable price cost performance.

Speaker 5

Certainly, Strong price in the business, close to 9 points of price in Q1. Obviously, the cost savings flowing through and then softening materials Our material costs as we get into the second half should drive continued strong margin performance in the business through the year.

Speaker 10

That's very helpful. Thank you, Ram. And then secondly, just on the discrete business, You grew I think 6 points in the quarter. Maybe remind us kind of what your main areas of Strengths are in discrete, whether it's by vertical and I assume there's a lot of domestic business and also Europe in there. And also I think you mentioned briefly some early cycle elements softening.

Speaker 10

So maybe expand on that a little bit And where do you see the discrete business kind of holding that 6% growth rate through the balance of the year?

Speaker 2

Yes. We have a very balanced Does this come from a global perspective, Julian? We saw broad strength in the United States, Both into direct OEM business as well as through our distribution networks. That continues to be very robust. No signs of weakness there, although we're watching out very carefully in terms of stocking levels and other elements.

Speaker 2

Our Western European business, which I cited earlier, was very Strong in the quarter, heavily driven by within the discrete business as well, particularly in places like France and Germany, Which are critical markets for us. And then lastly, in Asia, outside of China, very strong market. And now with China recovering, we feel that we are well positioned there. From a technology perspective, again, very good growth on the automation, on the control side with PLCs and industrial PCs And of course, with the various devices around material movement in the plants. Ram, any color there for Julian?

Speaker 5

No. I think, I mean, from a Segment perspective, we broadly have factory automation and industrial automation segments within the business. So both those continue to Do very well. And frankly, I think we anticipate mid to high single digit growth for the year In that business overall, the 6% was somewhat impacted by shutdowns in China, which that business experienced. So Frankly, we expect that to improve as we go through the year.

Speaker 4

That's great. Thank you.

Operator

Our next question will come from Jeff Sprague with Vertical Research. You may now go ahead.

Speaker 11

Hey, thanks. Good morning, everyone. Good morning, everyone. Good morning. Maybe a housekeeping one for me first and then I want to come back to some of the projects.

Speaker 11

But just Can we put a finer point on comp and FX? So the $0.09 headwind, it seems like you expected a $0.01 headwind. Can we just clarify what was assumed for the entire year And how that's changed versus your original expectations? And then on FX, so you're saying in addition to just kind of normal translation When there was some contract or other backlog adjustments, could you just elaborate on that a little bit? Yes.

Speaker 3

Good morning, Jeff. It's Frank. Yes. So on FX, I mean, we originally had low double digit impact on Current on the from currency for the year in the guide back in October, that's moderated. It's probably in the 0 point $0.10 range now.

Speaker 3

So I mean, we have a little bit of an improvement there based on the turn in the dollar. And then you asked again about stock comp as well, Jeff. So, yes, there we had built in A little bit of an increase from the addition of AspenTech and more or less flattish for the quarter for Emerson and then we had the mark to market That was driven by the 30 odd percent increase in the stock price on the legacy plans. So that was entirely Incremental to what we had in the guide, dollars 0.09 year over year and kind of $0.07 or $0.08 versus the guide. So that's the big headwind we had there, which is now kind of embedded in the year.

Speaker 3

And we We'll just absorb that and overcome it within the year guide.

Speaker 11

And just on the projects, Lal, Interesting couple you call out here. Could you just maybe give us a sense of kind of the dollar scope of some of these A large benchmark product project like this, maybe the green hydrogen project, What your content looks like on the front end and maybe what the tail of a project looks like?

Speaker 2

Yes. No, these fall very much within the parameters, Jeff, that we laid out in terms of automation dollars per gigawatt, As we think about hydrogen, for example, 600,000 I think it's I believe it's 600,000 per gigawatt It's what we laid out, if I'm not mistaken, Ram. But on the petrochemicals and for example, ethylene, again, KOB1 very significant there in the $20,000,000 to $30,000,000 type of scale. And then of course, there's all the downstream And the instrumentation business to come. So some of these are very sizable.

Speaker 2

The specific one that we highlighted, of course, About $50,000,000 in first purchase, which is the Delta D system. And then there's further instrumentation to come. So they're very sizable in terms Of scale, but in line with how we think about dollars of automation per capacity depending on the market they're in.

Speaker 11

Got it. Thank you.

Operator

Our next question will come from Steve Tusa with JPMorgan. You may now go ahead.

Speaker 6

Hi, good morning.

Speaker 5

Good morning.

Speaker 6

Can you talk about maybe some guidance for Radbourne in particular, especially the cash flow coming in the next couple of quarters? How confident you are in that and where you see that coming in?

Speaker 3

Yes. Steve, you cut out a little bit. This is Frank. You cut out a little bit at get into your question, I mean again

Speaker 6

Aspen free cash flow. Yes, aspen free cash flow, I'm confident in moving parts. I didn't hear.

Speaker 5

Yes. I mean, Steve, I think go ahead. On plan.

Speaker 3

Yes, on plan, Very seasonal. So their Q4, our Q3 will be a big Q4. And we see then we based on the plan, We think they'll deliver it as they have in the past. So it will be heavily in that quarter.

Speaker 5

Yes. On guidance, Steve, I mean, I think and Q3 for them will be or our Q3 will be the big quarter.

Speaker 3

Yes. I mean, obviously, they can provide the color and

Speaker 2

the background on that.

Speaker 3

But I mean, that is the seasonal pattern for their

Speaker 6

cash flow we would expect that to maintain. Right. Yes, it does influence your cash. So just curious if you guys as the owners Have a view on that. When it comes to natty, how coveted is this asset I mean, it doesn't seem like they're going to take anything below $60 is are you guys really willing to kind of go to the wall

Speaker 2

for this? I can be very clear with you then we're not going to be the purchaser of the assets.

Speaker 6

That is a definitive answer. Thank you very much.

Speaker 3

I appreciate it. You're welcome.

Operator

Our next question will come from Nigel Coe with Wolfe Research. You may now go ahead.

Speaker 12

Okay, thanks. Good morning. Okay, I won't be some questions on the natty purchase price, so move on from that. Just want to go back to FX, if I can. I think you mentioned long term contract marks, and it's Not something I've heard from Emerson before.

Speaker 12

So I know we've had some backlog revaluations. So just maybe Talk about what caused that so that mark on FX. And maybe just on the below line stuff, what is a normalized Stock comp beyond this year, once we roll off this plan, how should we size that?

Speaker 3

Okay. So Nigel, hi, this is Frank. So we had a significant of the currency that was in the quarter, a significant portion of Due to the impact of the accounting on long term contracts. So you have to mark to market long term contracts. Typically, these are through UPCs and they tend to be in places like Korea and other markets where we typically aren't talking about currency as opposed to translation currency, what we talk about Europe and China.

Speaker 3

And the accounting basically brings those marks to 0 when the contract closes out, but during the life of Contract you mark to market up and down. And depending on where you are in the lifecycle of a contract and what the backfill is for those contracts, You will get a mark most quarters. It's not big enough to matter. This quarter it was $0.04 or $0.05 so it was big enough to matter. And that's what drives it.

Speaker 3

And we try not to talk about it. The word it's embedded derivatives. We don't talk about embedded derivatives because It's just not helpful, but that's specifically the accounting that drives that mark on long term contracts.

Speaker 12

Okay. Yes. Embedded derivatives above my pay grade. So let's move on from that. But we'll follow-up offline.

Speaker 12

But on the just on the guide, so there's some moving pieces here. So it feels like FX is very neutral. The weaker dollar offset by some of these marks probably got some share buyback benefits relative to plan, well, certainly versus our model. And then we have the stock comp offset. Is that sort of the major moving pieces, anything else you'd highlight?

Speaker 12

And then maybe just talk about The sales acceleration, we've got some China noise in the back half of the year with the lockdowns in the prior year. But what kind of macro Environment you planning for, especially in Q2 fiscal, some of your short cycle peers are highlighting some Inventory corrections, etcetera, what do you see in discrete markets and some of the other relevant markets?

Speaker 5

Yes. So I'll take a crack round here on the Sales, from a sales perspective, obviously, we have acceleration built in to the year fundamentally with orders holding in the mid single digits and us shipping Shipping backlog that we described with improving supply chain. So certainly Q2, Q3 and into Q4, we'll expect the ramp up In absolute sales as we execute on the backlog. In terms of distributor destocking, we haven't Seen it in any of our businesses, certainly a lot of our discrete businesses go through distributors, some of our process businesses go through distributors. We haven't Seen it and nor do we anticipate it just given the dynamics of what we're seeing.

Speaker 5

And then to top it off, Our price will remain strong through the year. That will contribute to growth as well.

Speaker 6

Thank you.

Operator

Our next question will come from Joe Ritchie with Goldman Sachs. You may now go ahead.

Speaker 13

Thanks. Good morning, everyone.

Speaker 2

Good morning, Joe.

Speaker 13

Hey, guys. Can you just touch on AspenTech a little bit? I know, Lal, you mentioned some of the wins, that Ross Laffan win was interesting. But like how is that going thus Far. And then I noticed that the adjusted EBITDA margin was a touch lighter than what you guys expect from a full year basis.

Speaker 13

Maybe just provide some color around seasonality on that business as well?

Speaker 5

Yes. So AspenTech, I think for us from a synergy perspective, Going according to plan and frankly a lot of the early synergies we've built in is on projects like Cross Lofan where Aspen won some very, very good content. I think the sales channels and the engagement of our sales channel and selling their capabilities continues as planned. Now Really what we're driving there is in terms of perpetual licenses and bundling them on projects, a lot of success Converting our wins into ACV type of revenue for AspenTech is a work in process and should pick up momentum as we go into the second half of the year. So We feel pretty good about the synergies.

Speaker 5

We certainly feel pretty good about the sales forecast we've built in for AspenTech. Obviously, the plan they presented and the plan we've built in into the consolidated Emerson numbers and then no concerns on the margin performance, the EBITDA performance seasonally date their Q3 or their Q4, our Q3 is the biggest quarter and It was last year and it will again be this year.

Speaker 13

Super helpful, Ram. And then maybe my follow on question. Lal, at the Investor Day, you guys highlighted all of these big opportunities in automation technology. And you talked about your pipeline extending. I'm just wondering, where have you seen the most movement recently in terms of your pipeline and those opportunities?

Speaker 2

Yes. No, it's a good question. Of course, we did have a very active quarter in terms of the project funnel, And particularly not just in projects that were booked and hence exited the funnel, but also in the buildup What we saw in terms of activity. I would suggest that the predominant element of growth Came in 2 areas. 1 is life sciences, which grew significantly in the funnel in the quarter and secondly, the energy transition, Which continues to

Speaker 3

be very robust, both here in the U.

Speaker 2

S. And in the Middle East predominantly and became additive To the funnel. And that funnel grew not just in terms of dollars by about $500,000,000 but also in terms of number of projects, but only by 8 projects, Which tells you that the average size of projects are getting larger, which is also a dimension here.

Speaker 5

And then the only thing I would add is the LNG size of the funnel remains large, meaningful. And what we saw in the last Quarter was a good momentum on the FID progress associated with many LNG projects In the U. S. Where we're very, very well positioned, a lot of these are going through Bechtel in Texas and Louisiana. And our expectation is We will ramp up order booking activity in those on those projects as we go through the second half of the year.

Speaker 13

Great. Nice to hear. Thank you.

Speaker 5

Great.

Operator

Our next question will come from Joe O'Dea with Wells Fargo. You may now go ahead.

Speaker 14

Hi, thanks for taking my questions.

Speaker 2

Of course.

Speaker 14

I wanted to start on sort of price and price cost. On the price cost side of things, can you size the margin impact in the quarter? And then what you're About for the cadence of that impact over the course of the year. And then I think you also noted some price increases to start 2023. Is that broad based or Those more concentrated in parts of the business?

Speaker 3

You want to talk about the price

Speaker 5

Yes. So from a I'll take a crack at the price increases. I mean, we did have a good price increase in October. We typically do as we enter the fiscal year. Select product lines had price increases in Jan.

Speaker 5

We have a few more product lines slated for mid year price increases Around the April timeframe. In general though, I think pricing was 4% realized price in the Q1. We expect it to stay At those levels as we go through the year, so pricing will remain strong.

Speaker 3

As we go through the year, we expect Those price increases as they roll through will continue to be accretive to margin. Through the entire year, it was bigger in the Q1 than it will be as we go through the year. Again, then we'll see what incremental price increases we might put through. Net material inflation also should become a tailwind in the back half of the year. So all in all accretive somewhere between half point and a point, it really depends on how it rolls through, but certainly A good story from a margin standpoint as we go through the year.

Speaker 14

Got it. And then I wanted to circle back on some of the discrete And just kind of bigger picture macro, I think that the industry outlook for discrete up mid single digits, I assume that's sort of a Combination of kind of low single digit price, low single digit volume, would expect areas like batteries and semiconductors are growing faster than that. But when we think about what we're seeing on sort of the PMI side of things and then thinking about sort of discrete just growing through a PMI slowdown. I mean, can you touch on the expectation sort of outside of some of these structural growth areas that we just continue to see Some kind of low single digit volume growth and sort of no kind of connection there between some short cycle macro indicators of slowing, But not really seeing it in your end markets?

Speaker 5

Yes. So you said most of it. I think the plan really is LSD, The low single digit price, low single digit volume, the growth vectors, semiconductors, battery manufacturing, Frankly, from a sector that we're cautious on, automotive is something we're going to have to carefully watch. We have Had good performance so far, but automotive is an area that we have to watch very carefully. And then our Stocking levels in terms of distribution, again, we haven't seen any slowdown yet.

Speaker 5

But certainly to your point based on the PMI forecast and what is anticipated, There could be slowing in that sector. So if you put all that together, I think we feel pretty good about our mid single digit forecast.

Speaker 14

Got it. Thanks very much.

Operator

Our next question will come from Christopher Glynn with Oppenheimer. You may now go ahead.

Speaker 15

Thanks. Good morning, everybody. Just wanted to tie a little bit the organic outlook versus backlog Growth up $700,000,000 suggests the 1.2 book to bill, which seems a little Congruous with 5% orders growth, but I suppose that's a function of the prior year book to bill. So just wondering if you could comment on that Book to bill interpretation. And how do you characterize backlog size versus what you might consider normal In a moderately expanding net end market mix?

Speaker 5

So I think The $700,000,000 is a GAAP number. The 5% is an underlying sales number. But net net, you are right. If you looked at the Q1 of last year and calibrated versus orders and sales, I think the 5% makes sense with the $700,000,000 build In backlog? I think our expectation for a normalized level of Backlog in this business were probably at least close to $800,000,000 to $1,000,000,000 too high in terms of where we could normally We have if the supply chain were optimal and that's what we're going to have to execute through the year and as the supply chain continues to improve, that's The normalized level of backlog for this level of sales.

Speaker 5

So to answer your question directly, it's about $800,000,000 to $1,000,000,000 higher than what we would have anticipated.

Speaker 15

Great. Thank you.

Operator

Our next question will come from Gautam Khanna with Kelvin, you may now go ahead. Yes.

Speaker 3

Thank you. Good morning, guys. Good morning. Good morning.

Operator

I was wondering if you could talk a

Speaker 3

little bit about the aftermarket, the KOB 3 stuff. I think you said it was 65% of sales in the quarter. But Where do you see that trending over the next year or year and a half? Because it seems like it's been on full tilt for quite a while. Just what do you

Speaker 11

think the new normal is?

Speaker 2

Yes. No, I think we've had a conservative effort across our business to maximize the value of the $130,000,000,000 plus Install base. And those are programs that we'll put in place that drive service MRO And replacement opportunities, we're sitting at you're right, right around 65%. I expect that to remain within that range. And it's supported by the business programs that we have in the operating companies.

Speaker 5

And I would add that's the segment of the business where the pricing flows through at higher levels. So obviously That will remain robust through the year.

Speaker 3

Appreciate it. And then just to follow-up, any change Timing of the divestment out there in Climate Tech, anything noteworthy there?

Speaker 2

No. We're still thinking about the first Half of this calendar year and everything is on track in terms of the regulatory approvals and standing up the business. So that's all well underway. So we'd expect April, May shift as a guideline there. Thanks guys.

Speaker 2

Yes, sir.

Operator

Our next question will come from Tommy Moll with Stephens. You may now go ahead.

Speaker 16

Good morning and thanks for taking my questions.

Speaker 5

Good morning, Ben. Good morning.

Speaker 16

I wanted to start on the industry outlook you provided across process, hybrid, discrete, Little variation across the 3, but essentially all growing nicely in the single digit range. There are others in some of these markets that have double digit outlooks versus the singles that you provide. I I'm well aware there's often apple and orange impacts here and making comparisons. But I was just curious, is there any conservatism Embedded in these outlooks you provided, is there anything you would do to help us reconcile some of what we've heard elsewhere? Thanks.

Speaker 2

In terms of the market outlooks, Tommy, we feel that we've given a very balanced view of what's out there. The blend of the different types of businesses that we cover in terms of capital, modernizations and replacement. We've also taken into account the various geographic trends. But no, I feel that what we put there Ties into the guide for the quarter and of course our expectations for the year as well. And again, within each of the segments, as you recognize, there are big pluses and smaller pluses.

Speaker 2

Clearly, in the discrete space, which we've been speaking about to a significant amount today, EV, semiconductor elements like that, of course, have a significantly higher growth than some others. But overall, I feel that the indications we've given Are fair based on what we see in the marketplace today.

Speaker 16

Thank you. That's helpful. I also wanted to ask about the repurchase activity. Is it fair to say that the deployment of the full $2,000,000,000 in the quarter was an acceleration versus the original plan? And if so, Was that should we view that more as an opportunistic decision where your stock was under pressure for a period of time, you decided to lean in?

Speaker 16

And to the extent that

Speaker 3

Yes, I'm sorry, Tanya. This is Frank. No, not really. When we communicated the $2,000,000,000 our intent was to get it done quickly as possible. And we were able to get it done in the quarter.

Speaker 3

So it was not really driven by market events so much as the desire to just make good on

Speaker 6

the commitment Do it quickly.

Speaker 16

And any possibility that you might revisit the potential for more later in the year or should we think about 2023 is pretty well spoken for at this point.

Speaker 3

There is really no current intent to do any more share repurchase. We've got other irons in the fire right now. Obviously, circumstances change, you can always revisit, but we have no current plans to revisit it right now. We said we do $2,000,000,000 and we've done that.

Speaker 16

Great. Thank you. I'll turn it back.

Operator

Thank you. Our last question will come from Chris Snyder with UBS. You may now go ahead.

Speaker 7

Thank you. I wanted to follow-up on safety and productivity. You guys mentioned that you're seeing early signs of things bottoming out. I understand comps get easier, but it sounds like you're also starting to see Demand turning? So just hoping for more color on what you're seeing to give you confidence that demand is turning there?

Speaker 5

Yes. So first off, I think a majority of what we've baked into the plan is comps getting easier. So absolute levels stay Same with where they sit today, price comes through and comps get easier. We'll have a better read of it as we go through the current quarter. And I think we'll have a better expectation of the second half.

Speaker 5

If demand were to improve, which is not baked into the plan, we should get Better numbers in safety and productivity, but at this point, it's staying at the current levels and comps getting easier.

Speaker 7

I appreciate that. And then just a follow-up on China. The presentation called out a headwind from China shutdowns on organic growth in the quarter. Could you provide some more color on how China performed in the quarter and then maybe how it's exiting into the fiscal second quarter with the reopening? Thank you.

Speaker 5

Yes. So China was down mid single digits both incoming orders as well as sales performance in the quarter. And we expect China to be mid single to high single digits for the full year with high single digits in the second half.

Speaker 11

Thank you.

Operator

This concludes your question and answer session in the conference. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Emerson Electric Q1 2023
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