Operator:

Good day, and welcome to the Emerson Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Colleen Mettler, Vice President of Investor Relations at. Ms. Mettler, the floor is yours, ma'am.

Lal Karsanbhai:

Thank you, Colleen. Good morning. Please turn to Slide 3. I'd like to thank the 65,000 Emerson employees around the world for delivering another solid set of results. Your commitment to our vision and passion for our purpose comes to life every day. I am moved by our customer focus and the deep care you have for each other, and I am proud and honored to work alongside each of you. Thank you to the Board of Directors for your support of the management team and to our shareholders for your trust in us. Since I became CEO in 2021, we have talked openly about the transformation of Emerson driven around the three pillars of culture, portfolio and execution. We have moved rapidly to improve across all three. And before we discuss the quarterly financial results, I want to highlight the results of our latest employee survey to show our employees are with us on this journey as our culture continues to evolve. Our latest company-wide engagement survey, inclusive of Test & Measurement had a participation rate of 89%, up 1.4 points from our 2023 survey. We had an engagement score of 79%, a 1-point improvement and only 1 point from world-class levels of 80%. While this is an evergreen journey, and we still have work to do, I am excited about the tangible steps we have taken to create a more inclusive and engaged organization. Now let's jump into the operating results. Q3 was another solid quarter for Emerson. Orders in the quarter returned to growth and were up 3% year-over-year, driven by strong project activity in our Process and Hybrid businesses, especially across life sciences, energy and power. Notably, we won several large life science projects in North America and Europe focused on expanding production capabilities for advanced medicines. The Middle East and Latin America saw exceptional demand, and we were awarded several large projects in each. As we expected, Process and Hybrid markets remained steady at mid-single-digit growth as we continue to see investments, particularly in LNG, life sciences, energy and sustainability. While capital project investments continue to progress, MRO orders were slightly softer than expected in the quarter. Discrete Automation orders were softer than expected, down low single digits both year-over-year and sequentially as factory automation end markets remained weak. The green shoots we were beginning to see through April and May took a step back in June, and we are now expecting a slower recovery, though we expect Discrete Automation orders to be flat to slightly positive in Q4 on a low base of comparison. Excluded from underlying, Test & Measurement orders remained soft, down 11%. Additionally, for total Emerson, we saw a weaker demand environment in China across most of our business segments. We now expect low single-digit underlying order growth for the second half and for the full year. Emerson delivered strong operating results with margin leverage, adjusted earnings per share and free cash flow all exceeding expectations. Sales came in at the low end of our guide, and I'll provide additional color on the next slide. Due to weaker orders, Test & Measurement sales also came in slightly below expectations. However, profitability met expectations as we are seeing the impact of our synergy realization. Transportation and semiconductor markets remain weak, while aerospace and defense performed well, and we saw continued government spending and research. The European market was softer than expected amid lingering EV demand concerns, and China remains sluggish across most Test & Measurement segments. Due to this, we are looking into second half of 2025 for recovery in this business. With softer orders, we are adjusting our full year sales to be $1.45 billion to $1.5 billion, but the accelerated synergy actions we have taken will help protect profitability and position the business well for a return to growth. We continue to be excited about the value creation potential of our differentiated portfolio. Emerson's strong performance through the first 9 months and resolute focus driven by our Emerson management system gives us the confidence to execute on our 2024 plan. We expect underlying sales of approximately 6% and are increasing the midpoint of our adjusted EPS guide to $5.45 to $5.50 and we are raising our free cash flow guidance to approximately $2.8 billion. We look forward to a strong finish to 2024 and are energized to deliver continued value creation for our shareholders. Please turn to Slide 4. Underlying sales growth was 3%. Life sciences and power markets continue to perform well, both up double digit as we executed key projects across North America and Europe. Europe is seeing continued strength in energy, power and sustainability markets as well as our MRO business, particularly in Western Europe. In the Americas, broad-based healthy growth across Latin America was slightly offset by slower MRO in North America. Robust performance in the Middle East, driven by strong project activity was offset by broad-based weakness in Asia. Continuing the exceptional gross margin performance from last quarter, gross margins were 52.8% in Q3, a 230 basis point improvement from the prior year. Our gross profit percentage year-to-date is 50.6%, even with the acquisition and integration costs incurred in Q1. This gives us confidence in our expectation that this portfolio will deliver greater than 50% gross margins as we look forward. Operating leverage was 67%, significantly stronger than expected due to better performance from AspenTech, project mix and realization of more cost reductions than expected from actions taken throughout the year. Adjusted earnings per share exceeded expectations at $1.43, above the top end of our guide and up 11% from 2023. Emerson generated robust free cash flow of $975 million, up 27% year-over-year and with a free cash flow margin of 22.3% for the quarter. Mike will walk through additional details on our results in a few slides. We are pleased to deliver another strong quarter and are excited to continue demonstrating the value creation potential of our transformed portfolio. Please turn to Slide 5. We continue to see strong capital project investments with our strategic project funnel now at $11 billion, up approximately $200 million from Q2. The funnel growth demonstrates the strong sustained capital cycle aligned to our growth programs. As the increase predominantly came from projects supporting energy transition, life sciences, sustainability and decarbonization. In the third quarter, Emerson was awarded approximately $350 million of project content, consistent with prior quarters. We had wins in large traditional energy projects as well as additional awards from offshore vessels in Brazil, as mentioned last quarter. Our growth programs also performed well in the quarter, accounting for a little under half of the awards, and I want to highlight a few key wins. Emerson was selected to automate Nemaska Lithium Whabouchi Mine at the Bécancour lithium conversion facility projects in Quebec, Canada. Based on our proven ability to provide a differentiated solution, including a common control platform across sites. This mine is one of the largest high-purity lithium deposits in North America. Fueled by hydroelectric power, the Bécancour facility will convert to spodumene concentrate to lithium hydroxide. This is the first such conversion in Canada and Nemaska Lithium projects will play an important role in the North America battery value chain. Emerson will provide much of our leading technology to automate both facilities, including DeltaV control systems and software, reliability solutions, valves and instruments. This example highlights the breadth of the Emerson portfolio and demonstrates how we are well suited to serve this emerging market. Next, I'd like to highlight Emerson was selected to support one of the largest renewable energy park projects in India, spearheaded by one of India's largest and most prominent renewable energy companies. Emerson will provide our Ovation Green SCADA solution, including pitch control and park power management for the wind turbines. Emerson was chosen for our scalable automation software and technologies that enhance wind turbine performance as well as our comprehensive local support capabilities, including engineering, fuel support and production. Finally, Emerson was chosen to automate a key green hydrogen project in Uzbekistan, which will use a 52-megawatt onshore wind farm to produce 3,000 tons of green hydrogen annually, which will be used to manufacture 500,000 tons of ammonia fertilizer. ACWA Power, a first mover on green hydrogen and part of the NEOM Green Hydrogen project will operate the plant and H-TEC [ph] will design and construct the facility. Emerson was selected for our advanced technologies and domain expertise and will provide several technologies from our hydrogen portfolio, including instruments, control valves and our Ovation Green control system. Turning to Slide 6. We remain focused on driving our strategic priorities, including accelerating innovation for profitable growth and enhancing our position as a global leader in automation. One of our breakthrough innovation priorities is software-defined automation. Our industry-leading Ovation Automation platform just launched a software-defined AI-ready platform for the power and water industries. The Ovation Automation Platform 4.0 builds upon our boundless automation vision to bring a unifying data fabric across the organizations to optimize operations from device to enterprise. Ovation 4.0 brings customer-focused innovation, such as secure generative AI models to offer prescriptive operations and maintenance guidance together in a robust solutions portfolio. It also offers integration with our Ovation Green software to improve holistic awareness across traditional and renewable power generation and storage to aid customers who have an increasingly complex mix of generating assets. Customer-focused innovation is a hallmark of Emerson, and I wanted to highlight one of the key methods we have for formal engagements. Our Ovation business recently held their 37th Users Conference in Pittsburgh, Pennsylvania, with 70% of U.S. power utilities participating in a multi-day event focused on the power and water industries. This conference featured interactive technology exhibits, customer case studies and collaborative industry sessions focused on emerging technical and business topics. Ovation Users Group creates a world-class engagement as users provide direct input for potential product enhancements, which helps inform our strategic product development plans. We also took a key step forward in our transformation and simplification journey in Q3 as we announced a definitive agreement to sell our remaining interest in the Copeland joint venture. Private equity funds managed by Blackstone will purchase the equity stake, while Copeland repurchased the sellers note. The transaction involving the Copeland note receivable closed on August 2, with pretax cash proceeds of $1.9 billion, which will be used to pay down debt. We expect the equity portion to close by the end of August. With that, I'll now turn the call over to Mike Baughman to walk through our financial results in more detail.

Operator:

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] And the first question we have will come from Jeff Sprague with Vertical Research. Please go ahead.

Lal Karsanbhai:

Yeah. Good morning, Jeff, good to hear from you. No, you're absolutely right. As we laid out that vision, it certainly is designed to accomplish a couple of factors. The first being to liberate the data that exists in silos across operations in broad industry. And the second then is to actually use the analytics power to drive productivity, efficiency, higher levels of safety and efficiency with analytic packages inclusive of much of what AspenTech can bring to the table to optimize facilities and production. So that vision certainly exists. We are on the path to bring compute out of centralized siloed data approaches into the edge, which is the first step with products that have already released in the marketplace with DeltaV, and we'll continue to move forward to deliver on the vision. But this step with Ovation was very critical as well because, as you know, that serves the power and water industries exclusively and to be able to bring that capability into those markets was critical.

Lal Karsanbhai:

Yes. No, certainly. So the discrete cycle recovery has been slower than expected. We certainly believe that we can get to close to positive orders in the last quarter of the year here on discrete, but that will be, of course, based on some very weak comparisons. But that will start us on the path to recovery into 2025. Test and Measurement, a little slower. We're watching our customers very carefully there, speaking, engaging with them. We're watching our peers in the marketplace as well and their performance. And we foresee sales turning positive there in the second half of 2025 with orders turning positive in the first half of 2025. And then lastly, Jeff, I'll just add that offsetting a lot of that is what continues to be a strong capital cycle formation cycle here with process and hybrid markets and also momentum in what we see at AspenTech. And so those offset a little bit of how we're thinking. Certainly, I believe that as we think about 2025 and start to guide that we will be probably towards the lower end of that range that we've given on our through-the-cycle expectations, but well within that.

Operator:

And next, we have Nigel Coe with Wolfe Research.

Lal Karsanbhai:

We guided because we still have confidence that we can hit within that guide, Nigel, I certainly don't -- wouldn't write it up to the low end of the range at this point. This is the best guide that we feel we can commit to as a management team. Obviously, at some point in the midpoint is how you can think about it.

Lal Karsanbhai:

Yes. Thanks, Nigel. Yes, I'll comment. Of course, the funnel did grow, as you noted. We booked approximately an equal amount that we've been booking historically on a quarterly basis, $350 million in value. The mix changes a little bit depending on end market timing, and we shared that with you as well in the deck. So I continue to look at this the funnel and the capital formation cycle in a positive manner. I haven't seen degradation of projects or projects being eliminated. I haven't seen any slowdown in the expansion of the journey -- the sustainability projects or the LNG, particularly as it relates to the Middle East and Africa. So I'm still very optimistic there. Now what we do -- we are watching very carefully is that projects that have been booked, the pace at which our customers are willing to accept product whether there are delays that are being implemented around inspections and other areas, we're watching that very carefully, and we have experienced some of that in the quarter, which obviously contributed to our lower sales 3% versus the low end of our guide versus the expectation. But that -- there's some of that going on, which obviously we're watching very carefully.

Lal Karsanbhai:

That's a very good point. And of course, lastly, Nigel, to the question. Our process and hybrid orders are still up mid-single digits, and that's important to recognize.

Lal Karsanbhai:

Thank you, sir.

Scott Davis:

Hey, good morning, everybody. And congrats on navigating through the choppiness here. I kind of curious, I mean you're going to have a fair amount of cash on hand. Once you get this Copeland thing done, seem kind of in a good spot from a leverage. Do you feel like you -- I mean, I guess my question really is, what do you plan to do on the proceeds, but I guess more explicitly is, do you feel like you have the capacity to do M&A? Or are we still digesting NATI [ph] this point and want to focus on that?

Scott Davis:

Okay. Fair enough. And then I wanted to follow up on Jeff's question on Ovation because I think it's -- you put it on a slide, and it's not a product line. I think historically, you guys have talked about it a lot, but it is a pretty powerful installed base that you have. I mean how big a deal is this 4.0 upgrade? And is there a way for us to think about like what percentage of your installed base you would expect to upgrade? Or is there some sort of kind of way to tangibly think about the impact of this iteration? And is iteration even the right word to use? Is it a step change, a meaningful step change where you kind of hit that tipping point where people -- like you said 70% of the people came to your event, where people just generally hit the bid on that more so than maybe they did in the past. Any color there would be helpful?

Mike Baughman:

And I think the step change here to your question, Scott, lands on the use of the AI models, which will enable planning purposes around maintenance, taking down assets for turnaround activity. It will give a higher probability that you're actually going to work on the maintenance records and elements that are -- that most needed in the plant. And I think that's incrementally new and different in the marketplace. And then lastly, Scott, we're highlighting this innovation, but innovation is a core pathway as we've talked in the past, of how we drive differentiated growth at Emerson. Accelerated innovation across our businesses is critical. And we've seen that. You see that as we report R&D spend as a percent of sales, then we have stepped that up, and this is an element in one of the results of that.

Mike Baughman:

Thank you, Scott.

Deane Dray:

Thank you. Good morning, everyone.

Deane Dray:

I'd like to go back to Page 5 and ask whether you're seeing much demand or overlap with the mega projects. I guess the latest count is 440 projects over $1 billion. If -- how much does this funnel overlay to those? And what kind of visibility do you have?

Deane Dray:

Yes. This has been a big focus across the industrials for the past year, looking at North America, non-res construction projects over $1 billion, and it encompasses everything from software to batteries. But it's just -- it's a way for us to look at all these secular drivers and how are they translating actually into projects. So it's become this benchmark indicator that we're using now. And so that's the reason I'm asking. You're looking at this funnel, it's a global funnel, I get it, but within -- for North America, how much overlap do you have with these so-called mega projects or maybe you have that information.

Colleen Mettler:

Yes. And as a reminder, that funnel represents our automation content versus what the entirety of a project is out there in the universe. So that's also to keep in mind.

Mike Baughman:

Deane, it's Mike. Yes, buybacks are definitely still in the priority along with the dividend and returning capital to shareholders generally. We will exit the year with the commercial paper paid off and 3.5 - $3.5-plus billion [ph] of cash on the balance sheet. But our capital allocation will remain the same. We will continue to focus on funding our organic growth initiatives, we'll be continue to be committed to the dividend and bolt-on M&A that improves the portfolio. And then, of course, there'll be share buybacks. So yes, we will continue with share buyback. We'll be in the market this quarter at, we think, roughly $125 million, which gets us back to that roughly $500 million a year pace.

Operator:

Next, we have Steve Tusa of JPMorgan.

Lal Karsanbhai:

Good morning.

Mike Baughman:

Yes. So we took the guide up to 2.8 and -- which would imply about $800 million coming through in the fourth quarter, which I think is reasonably consistent seeing a fourth quarter increase. So this third quarter was particularly good. And remember, that has Test and Measurement in there, which they had a great quarter and peeled [ph] about $50 million off the balance sheet, which did skew the numbers this year. So we feel good about the 2.8 for the year and looking at the 800, it looks pretty in line with some of the prior years.

Mike Baughman:

I can't think of anything in the kind of run the business. But at corporate, I would say we are looking at a headwind and a tailwind that will largely offset and be a slight headwind. And we will have an increase in pension expense, all things equal, just given the way the deferral accounting works. And then we'll have a lower interest expense because of the Copeland proceeds that come in. Lower interest expense overall with more cash yes. So that should net to a pretty small headwind at corporate.

Lal Karsanbhai:

Not in this fiscal, as I said, we'll continue to evaluate Steve as we go through time here.

Lal Karsanbhai:

And forward-looking...

Steve Tusa:

Okay, thanks.

Andy Kaplowitz:

Hey, good morning, everyone.

Andy Kaplowitz:

Well, operating leverage for Emerson has continued to be impressive. And obviously, you raised your guidance for this year to mid-40s, which is higher than the algorithm you gave us at your last Investor Day. We know price maybe is fading a bit as a help, maybe supply chain wins are less likely to help in FY '25. I think you just answered Steve's question about sort of other puts and takes, but can you sustain incrementals in the 40s in '25 from what you see today?

Andy Kaplowitz:

Great. And then, Lal, you mentioned you have decent visibility towards, I think, the low end of your 4% to 7% due to cycle revenue growth as an initial read into FY '25. I guess what do you need to see to achieve that kind of growth for instance?

Ram Krishnan:

Yes. So I mean, obviously, what we're seeing right now is based on the order rates that the second half of this year will generate and that points to the low end of the 4% to 7%. Now what has to change, obviously, at the areas we're really focused on is pace of discrete recovery, the amplitude of the recovery and then China. And now the North American KOB3 or the pace of business is something we're watching. We're not really concerned. Our process hybrid business continues to have order rates of mid-single digits. The capital cycle still remains strong. So that we feel very good about. It's really the pace and amplitude of discrete recovery in China is going to dictate how we guide into next year as we come off that low single-digit order growth we've seen in the second half of 2024.

Lal Karsanbhai:

I'd suggest stable, Andy, at this point.

Operator:

Next, we have Julian Mitchell of Barclays.

Lal Karsanbhai:

Good morning, Julian.

Lal Karsanbhai:

Yes. No, I'll answer and let Ram add some color as well from his perspective. Certainly, we continue to see strong capital formation cycle here, particularly as it relates to energy, energy transition, power generation, life sciences, metals and mining. And that is relatively broad from Western Europe through the United States and into Middle East and Latin America. And I -- so I haven't -- I don't have a whole lot of concern today around those markets. We -- I highlighted a few specific wins, but there are others in that $350 million bucket that we won. So mid-single-digit order growth in process and hybrid in the quarter, low single digit for the company impacted by the discrete automation business in the discrete orders, which remains negative to the quarter. Ram?

Julian Mitchell:

Thanks very much. And then just my follow-up, somewhat related. But if I look at your backlog, I think that was $7.4 billion at the end of June, so sort of down a little bit sequentially and down a little bit from where it was in December as well. When you think about that backlog, it's moving around entry-year [ph] on seasonal factors as much as anything else. Do you still feel confident about sort of decent backlog growth as you enter fiscal '25?

Lal Karsanbhai:

And I would add to the earlier comment about the capital formation, Interestingly, in the quarter, the control systems business actually had a book-to-bill above 1 record order...

Lal Karsanbhai:

Book-to-bill.

Julian Mitchell:

That's great. Thank you.

Brett Linzey:

Hi. Good morning. Thank you. Just wanted to come back to the discrete comments around pace and the amplitude of the recovery. As that business comes back, should we think about the operating leverage above the 45% framework given some of the cost containment and some of the actions you've taken there?

Brett Linzey:

Okay. Got it. And then just on power generation. So you've talked about some of the momentum there in that business. I think the grid results at Aspen look pretty encouraging. Any update on the strategic funnel and how that tracked through the quarter and some of the activity you're working on there?

Brett Linzey:

Okay, great. Appreciate the color.

Christopher Glynn:

Thanks. Good morning. I had a question on the MRO. Curious if -- how that performed specifically in the quarter, sorry if I didn't catch it. But wondering if there's an impact of some customer inventory rebalancing, if you're seeing any of that from maybe accelerated lot sizes in prior years? Or if end markets are mainly what you're seeing on the MRO side?

Mike Baughman:

Yes. And just to build on that a little bit. The North American softness, you'll recall in prior quarters, we had talked about how, particularly in the measurement and analytical business, there was some strength, and we saw a little bit of that reverse in the quarter. But as Lal said, nothing concerning.

Operator:

Next, we have Nicole Deblase of Deutsche Bank.

Colleen Mettler:

Morning.

Lal Karsanbhai:

Good morning. No, look, we raised the guide a few quarters ago. We continue to execute across that pace. So no change to the synergy guide, but we are maintaining the pace certainly to be able to deliver these results.

Lal Karsanbhai:

Go ahead, Ram.

Nicole Deblase:

Thank you. I'll pass it on.

Operator:

Well, this concludes our question-and-answer session and today's event. I would like to thank the management team for their time today, and thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you, and have a great day, everyone.

Operator:

Good day, and welcome to the Emerson Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

Colleen Mettler:

Good morning, and thank you for joining us for Emerson's Second Quarter 2024 Earnings Conference Call. This morning, I am joined by

The second quarter was characterized by strong operating performance, which exceeded our expectations. We continue to have confidence in the underlying market conditions, driven by demand in the process and hybrid markets, aligned with secular macro trends:

energy security and affordability, sustainability, nearshoring and digital transformation.

Michael Baughman:

Thanks, Lal, and good morning, everyone. Please turn to Slide 8 to discuss our second quarter financial results. Underlying sales growth was 8%, led by our process and hybrid businesses. Price contributed approximately 3 points of growth, slightly higher than expected due to the mix of our shipments this quarter. Growth was led by Europe, which was up 12%, and Asia, Middle East and Africa, up 11%. The Americas also had solid growth, up 4%.

Operator:

[Operator Instructions] The first question is from Davis, Scott, Melius Research.

Surendralal Karsanbhai:

Yes, Scott. I'll say a few words and let Ram add some color to this. First and foremost, we're very excited about the company. It's a far better company than we expected in terms of the quality of people, the quality of the technology, the loyalty of the customer base and the opportunity to grow and expand as a leader in the industry. So we're very pleased. We have a great management team in place. And we're most pleased about is the responsiveness of that management team to the market conditions.

Ram Krishnan:

Yes. And just to add to that, I think the balanced approach around G&A, the optimization of the go-to-market, optimizing and focusing the R&D efforts on critical growth vectors that are going to pay a lot of benefit for us as the market recovers. And that's really what we've been focused on. Obviously, we are seeing opportunities in logistics and supply chain, which is additional to what we had originally planned.

Scott Davis:

That's helpful. Guys, I'm looking at Slide 7 at the DGM and the Ovation. And give us a sense of how this upgrade cycle works. The power demand, obviously, and grid, I think we're all quite aware of what's going there. But does it require -- and I mean, maybe just a little bit more color on how these two, DGM and Ovation, kind of -- do they integrate? Do they sell together?

Surendralal Karsanbhai:

Yes. No, certainly would be happy to comment. I think there's three very important elements. I think element of materiality relates to the high growth in the outlook of projects and activity. We saw that 45% expansion in the funnel. We haven't seen that level of activity in power generation in a long time with a positive growth in North America again driven by the data center demand that we outlined. Secondly, inside of the generation capacity, there certainly are opportunities for optimization software. That is an area that really is untapped. And that's a synergy opportunity that exists between Ovation and AspenTech.

Operator:

The next question is from Coe, Nigel of Wolfe Research.

Michael Baughman:

Yes. Nigel, it's Mike. So as we look to the back half of the year, the mix change is meaningful. And you're correct, we've been at the 65% MRO, which is about where we were for the second quarter as well. That is going to drift down on us as we go into the second half. We also benefited this past quarter quite a bit from price. We'll continue to get the roughly 2% price, but it won't be the 3%, we don't believe, that we saw in the last quarter. So those are the big things.

Nigel Coe:

Okay. I'm guessing no comments on '25. But if you do think that continues, I'd appreciate that comment. But on National Instruments, it just feels like -- so just to paraphrase the way you've set this up for the second half, third quarter looks pretty flat sequentially on sales, call it, $360-ish million of sales and then we're picking up towards $400 million in the fourth quarter.

Ram Krishnan:

Yes. I think you summarized it well. Yes, sequentially, margins would be up, correct. And to your '25 question, I mean, it's early for us to plan '25. But at the end of the day, we don't expect leverage rates in '25 to be materially different from what we're going to deliver in '24.

Andrew Kaplowitz:

Well, I know you're still expecting mid-single-digit order growth in the second half after the negative 1% in Q2. So maybe you could discuss how you start off Q3 in April. Give us a little more color into visibility regarding that mid-single-digit growth in the second half. Do you have visibility in the process and hybrid staying at that mid-single-digit level? And then is the mid-single-digit organic growth kind of weighted to Q4, given the turn in discrete then?

Surendralal Karsanbhai:

No, no, no. There's funnel conversion, Andy, but nothing exemplary there.

Surendralal Karsanbhai:

No, certainly. Look, I think the team has a great set of ideas on their walls in terms of opportunities to drive efficiency and productivity in the business. But we believe that ultimately, this is a growth business. And while we're doing this, we're driving investments in core technology programs so that we hit the ground running.

Ram Krishnan:

Yes. And I think to answer your specific question as it relates to customer, what we're hearing from customers, certainly segments like the defense segment, or what they call aerospace, defense and government segment, are positive. I think we're going to get into easier comparisons. Frankly, April was also a very good month for -- given the expectations for T&M, which was positive for us.

Operator:

The next question is from Deane Dray, RBC Capital Markets.

Ram Krishnan:

Yes. So Deane, simplistically, responsive supply chains. We had -- our supply chains continued to improve, our plant output has continued to improve, particularly in our measurement solutions business. There was backlog conversion in Test & Measurement as well. So the simple answer is we overshipped what we thought we would in the quarter primarily because our supply chains responded much better and lead times are down to pre-COVID levels, which is a very good sign for us.

Deane Dray:

Yes, it tells you how far we've progressed on supply chain normalization, where that wasn't the first thing I'm thinking that you were able to ship more. So that's all good news.

Ram Krishnan:

No, we did not miss any orders. I think orders came in as per expectations. And I think the way we've actually baked in the plan is even if orders stayed flat to slight sequential growth from what we did in Q2, given the easier comparisons, will improve in the second half and then go positive into '25. Certainly, as Lal mentioned, the green shoots in the defense part of their business, we've been very strong. We're starting to see projects unlock on the battery testing side from an EV perspective.

Operator:

The next question is from Steve Tusa, JPMorgan.

Ram Krishnan:

No, actually -- and the way I see it is our second half versus first half will be up high single digits sequentially from a sales perspective. So it is consistent with the normal seasonality of how our core business minus NATI, minus Aspen performs. Now obviously, Aspen is lumpy and that's in the underlying number. So that could mask the normal seasonality that we see. But in the core base Emerson operations, the second half to first half is up high single digits sequentially from a sales perspective.

Surendralal Karsanbhai:

No, Steve, it doesn't. So look, we were at 65% in 2023. In Q2, we're at 64%. So there was 1 point shift. That may move yet another point as we go through the year. But no, you're right. And the underlying strength of MRO in our process and hybrid business is still intact. And as certainly we go through the summer and approach the fall outages and STOs and turnaround opportunities, we look at, at least from this point in time, rather positively as well. So that's what's going to play into this as we go through the second half and, hence, gives us confidence also on that exit rate on orders for the year.

Ram Krishnan:

So flat Q3, sequentially up in Q4.

Ram Krishnan:

Yes.

Joseph O'Dea:

Can you dig in a little bit on the growth trends in Measurement & Analytical and Final Control? I mean, it seems like Measurement & Analytical organic, low double digits, maybe even touch low-teens this year, Final Control, mid-single digits. Just some of the differences in those growth rates, what you're seeing on the measurement side versus what you're seeing on the Final Control side.

Joseph O'Dea:

Got it. And then it looks like on AspenTech, the fourth quarter EBITDA is implied down something in the neighborhood of kind of $20 million year-over-year. Is that more revenue-related, margin-related, just to understand kind of line of sight into that if that's sort of ballpark what we're looking at?

Operator:

The next question is from Brett Linzey, Mizuho.

Surendralal Karsanbhai:

Yes, we'll give you some perspectives and some guidelines. On a 1,200-megawatt combined cycle plant, the project opportunity, or KOB1 opportunity, is approximately $20 million. It's $5 million in the control system, approximately $15 million of instrumentation and valves. The lifetime MRO opportunity over a decade is another $20 million of upgrades. And that lives through about a 10-year period. So it's very significant. And you can just calculate then off the megawatts, depending on the size of the plant.

Brett Linzey:

Very helpful. And then just on inventory levels, I know your channel dynamics are a little bit different than peers, but maybe you could just frame where you see inventories in some of those sort of channels. And specifically at machine builders, inventory levels, I think, are a bit elevated. But just curious what your assessment and characterization is for the near term here.

Operator:

The next question is from Julian Mitchell, Barclays.

Ram Krishnan:

Yes, sir. Yes, quarter-over-quarter, flat in Q3, slightly positive in Q4 is kind of how we're looking at orders. We saw a recovery in the fourth quarter, correct. And then for Test & Measurement, which is also exposed to the discrete markets but a different type of discrete market exposure, recovery into the first half of '25 primarily because of the heavy play in semicon and a bigger portfolio of business in China. Two of those markets are seeing slower recovery than our broader Discrete Automation business within the core Emerson.

Surendralal Karsanbhai:

No, sure. No, first, very -- continue to be very excited about the partnership that we have with AspenTech. I do believe, Julian, that together, we have a highly differentiated tech stack that we bring to the customer base. And I think that's been highly substantiated by the synergy wins, the level of customer engagements that both Antonio and I have around the world. And we continue to believe in the premise that 1 plus 1 equals 3 here.

David Ridley-Lane:

This is David Ridley-Lane on for Andrew Obin. Just wanted to circle back, I know that there was some pull-forward of orders last quarter. How does that -- if you kind of normalized your first quarter and second quarter for that, what did that trend look like? And just to put a little finer point on it, should we be expecting low single-digit orders growth in the third quarter before stepping up in the fourth?

David Ridley-Lane:

Got it. And then on the sustainability and decarbonization project funnel, I know that's nearly doubled over the last 18 months. Are these projects kind of getting closer and closer to final investment decisions, kind of like the carbon capture when you cited with Shell this quarter?

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to the management for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good morning and welcome to the Emerson First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to our host, Colleen Mettler, Vice President of Investor Relations at Emerson. Please go ahead.

Lal Karsanbhai:

Thank you, Colleen and good morning. I'd like to begin by thanking the Emerson team for delivering a strong start to 2024. I'd also like to extend my appreciation to the Emerson Board of Directors and to our customers for your continued confidence in us. Our first quarter results demonstrate, the underlying strength of the markets we serve, the meaningfulness of our differentiated technology and the relentless execution of our global teams. Please turn to Slide 3. Q1 was a strong start for Emerson. As we continued our focus on executing and driving value creation for our shareholders. The demand environment remains healthy for process and hybrid markets. We continue to see projects moving forward at a healthy pace in markets like chemical, LNG, life sciences, metals and mining and sustainability and decarbonization. Even in the face of higher interest rates, ongoing geopolitical challenges, and upcoming elections in key global markets, including the U.S. Our customers 2024 CapEx budgets are shaping up constructively, and are largely supportive of the demand environment we are experiencing. This robust environment, along with continued execution by our teams is a key contributor to the Q1 performance. Q1 orders, sales, operating leverage and adjusted earnings, all exceeded expectations, providing confidence to increase our full year guidance. This performance reflects our ability to win with a focused approach to our growth platforms and through continued investments in innovation. It is also a testament to our new differentiated portfolio with leading technology, strong profit margins, and exposure to the important global secular growth markets. This is exhibited by our gross margin and adjusted EBITDA expansion since 2021. Our business is well positioned to capture investments in areas like energy security and affordability, sustainability and decarbonization, digital transformation, and nearshoring. Regarding our portfolio, we continue to reiterate that the large parts of our portfolio transformation are complete, and we do not expect any sizable transactions in 2024. This is a portfolio we designed from the beginning, and we are excited to be executing with this set of businesses. On that note, test and measurement is executing well and had a strong first quarter ahead of our expectations. The quarter performance and an acceleration of synergies provide more confidence, for our full year expectations from the business. Please turn to Slide 4. Emerson's Q1 exceeded all expectations. Underlying orders continued to grow in the mid-single digit range, with 4% growth in Q1. Processing hybrid markets were strong and discrete orders remain down as expected. Multiple LNG projects booked in the quarter, specifically in Europe and the Middle East. Life sciences activity was also strong across the globe, with large project wins in the U.S., Canada, Europe and Asia. The Q1 growth was also supported by some project activity shifting from Q2 to Q1. As you all know, orders can move around quarter to quarter, but we still expect low single digit order growth in the first half of 2024 and mid-single digit order growth for the full year, as discrete demand improves in the second half. Underlying sales for the quarter grew 10%. Again, led by process and hybrid markets, exceeding our expectations. Energy transition markets and metals and mining will both bright spots in the quarter, as we executed numerous projects across Europe, Latin America and Australia. This volume combined with favorable price cost and a strong operational execution resulted in 41% operating leverage in Q1, ahead of our mid 30s expectations. Adjusted EPS was $1.22 up 56% versus 2023. And free cash flow was $367 million, up 51%. Mike Baughman, will go through this specific shortly, but we are excited about our first quarter performance. On Slide 5, our current strategic project funnel grew by approximately $200 million to $10.4 billion, and our growth programs continue to represent nearly two-thirds of this funnel. The continued expansion of the funnel is promising, with existing customers and new entrants continuing to plan and budget for capital projects in the coming years. In the first quarter, Emerson was awarded approximately $400 million of project content, with a little more than half from our growth programs, including three noteworthy deals in energy transition. First, Emerson was selected by DG Fuels in Louisiana, to provide our comprehensive automated automation portfolio, including advanced sensing, control systems, and optimization software for the production of sustainable aviation fuels. These fuels can be used in existing aviation and vehicle engines, and DG Fuels has previously announced agreements with aviation leaders, including Air France, KLM, Delta, and Airbus. Next, Emerson was chosen to automate a lithium ion recycling process based on our metals and mining expertise and experience throughout the lithium value chain. Emerson will provide SungEel HiTech, a specialist in lithium battery recycling in Korea, with advanced automation solutions, for safe and reliable operations at its newest facility that is capable of supplying materials for approximately 400,000 electrical vehicle -- electric vehicles each year. Lastly, Emerson and AspenTech were jointly selected for a large scale LNG liquefaction facility in the Middle East. The project will win represents Emerson's strong presence in the region, including an already sizable LNG installed base. The win is also recognition of the collaboration in synergies between Emerson and AspenTech. As Emerson's DeltaV was selected, along with AspenTech's high simulation, showing the power and differentiation of our combined portfolio. As we look at the continued needs of Europe, and its reliance on gas imports, the Middle East and Africa will play a pivotal role in gas exports. Emerson is uniquely positioned with our local expertise, manufacturing and installed base to serve the region in its LNG growth. These are just three examples of Emerson's continued leadership position in energy transition markets, spanning from established markets like LNG to newer markets, like sustainable aviation fuels. Turning to Slide 6. We remain focused on accelerating innovation for profitable growth. Our recent innovations and our continued technology leadership were recognized by IoT Breakthrough, who named Emerson its 2024 Industrial IoT Company of the Year. IoT Breakthrough received over 4,300 nominations for the 2024 competition, and Emerson was selected based on our unique ability to effectively leverage decades of expertise in digitalization and automation to help the industry transform operations. Among the innovations recognized were Emerson's Ovation green portfolio for manning renewable power assets, Florida cloud solutions to continuously monitor critical production and energy efficiency data in factories, one-click transfer software capable of accelerating the life sciences drug development process, and numerous releases focused on enabling the boundless automation vision, including the DeltaV edge environment. As you recall, boundless automation is Emerson's vision for a cohesive automation ecosystem from device to enterprise. Integrating operations with a flexible automation architecture allows users to have access to all their data, enabling analytics and performance improvements across numerous domains like production, safety, reliability and sustainability. All these innovations will be on display at Emerson's upcoming Users Exchange at the end of February. Emerson Exchange in Dusseldorf, Germany will feature customer case studies, industry sessions and a technology exhibit demonstrating Emerson's leading automation portfolio for process and hybrid industries. New this year are industry-focused exhibits showcasing Emerson's complete solutions for emerging industries like hydrogen, biofuels and carbon capture in addition to growth markets like life sciences and metals and mining. Please turn to Slide 7 for an update on our synergy progress in test and measurement. We effectively use the time between signing and closing to plan all integration and synergy activities, utilizing a world-class M&A methodology as part of our Emerson Management System. Given the strong team collaboration in current market environment, we have accelerated those synergy activities. In the first quarter, we worked closely with the new test and measurement leadership team to aggressively address public company and corporate costs while rapidly implementing Phase 1 of our sales and marketing and research and development transformations. We are also leveraging our Emerson Management System and best practices to progress operational execution and commercial excellence at test and measurement. This includes trade working capital, price realization and procurement efficiencies in logistics and direct materials. These efforts put test and measurement ahead of schedule and give us the confidence to increase the cost synergy target to $185 million, which we now expect to achieve by the end of 2026, two years faster than originally expected. This includes approximately $80 million expected to be realized in 2024. Our planned cost to achieve these synergies increases slightly to $165 million with the majority of the spend expected in the first two years. We still expect adjusted segment EBITDA to reach approximately 31% by year five, as sales grow on the reset cost base. I'll now turn the call over to Mike Baughman to go through more detail on the quarter performance, including test and measurement and our updated 2024 guide.

Operator:

[Operator Instructions] The first question comes from Andy Kaplowitz of Citigroup. Please go ahead.

Lal Karsanbhai:

Hi, Andy, no, happy to give you some color on the orders. So obviously, as you know about our business, orders can fluctuate on a quarter-to-quarter basis, which is why we guided in that lower single-digit range in the first half of the year, but finishing the year in the mid-single-digit range, as we are now. We have a high degree of confidence about that based on two factors, Andy, the first being our MRO business continues to be relatively strong. It represented approximately 65% of the revenue in Q1, and we expect that to remain robust as we go through the remainder of the year. And that provides us a strong base of order activity. Secondly, the conversion in the funnel. We booked approximately $400 million that represented almost a little over 90 projects that we won out of the funnel in the first quarter. The funnel grew despite that. And we continue to see activity, particularly in energy transition driven by the Middle East and Africa, in the sustainability area, life sciences, and of course, a tremendous amount of activity in metals and mining. So from an underlying Emerson perspective, the focus really is process and hybrid to continue to provide that underlying strength through the year. Now what we will see is a recovery in discrete in the second half, and that's what we've got baked in here. We are still in the lower single digits negative right now in our discrete markets. It's really demand-driven, as we've been talking about for the last couple of quarters. We do expect a recovery in orders into the second half, of course, between comps and obviously some demand elements there. As far as NI is concerned, it's very much on plan to what we expect in terms of orders. We do also believe that there's a second half positive return on the order activity. And we're starting to see early signs in markets, particularly like semiconductor, as you see these companies come out and report. So very much on plan on both ends and which gives us confidence in the underlying strength of the order activity, Andy.

Mike Baughman:

Andy, it's Mike. I'll take that one. Yes, the guide was maintained at $2.6 billion to $2.7 billion. And with respect to the $250 million that we called out in November, that's tracking right on plan. About $100 million in the quarter plus the cap, that's on the operating cash flow items, mostly integration-related. And then we did see a little bit elevated CapEx, again, very much in line with expectations. We thought a lot about the guide, obviously. And just to go through a little bit of the math, we -- while we took up the earnings, we took up the sales, the net of that is about $50 million in cash flow, still within the $2.6 billion to $2.7 billion. So we elected not to take it up given where we set first quarter. But certainly sitting here today, I can tell you we feel better about the cash flow guide than we did three months ago, and it's all going to plan.

Operator:

The next question comes from Steve Tusa of JPMorgan. Please go ahead.

Mike Baughman:

Yes. Steve, it's Mike. I'll talk a little bit about the test and measurement performance and the EPS performance in the quarter. We talked a little bit about this stub dynamic, which really was simply the early 11-day period that we didn't own them the first part of the quarter. The sales were much lower than we expected. We expected something more ratable. They were not ratable. And that drove about $0.02 of improvement from what we expected. And the business leverages, as you know, really nicely. So pushing those sales out into the quarter drove part of that $0.13 performance. Now of that, there was also some Q1 sales that we were expecting in Q2. And so when we thought about the guide, we took that $0.08 beat and we rolled $0.05 forward, and that's where we landed. So great performance on test and measurement, and we're really off to a great start there. Ram, do you want to talk about the...

Steve Tusa:

Right. And just one last one, just on the discrete. You guys have been a little more steady on that discrete performance. So you're -- relative to some of your peers who had a very strong backlog liquidation in the second half of last year, you guys kind of started to see some of that weakness. So the comps start getting easier in the fourth quarter, correct, the year-over-year comps?

Mike Baughman:

And orders.

Steve Tusa:

Right. On an easier comp.

Steve Tusa:

Yes. Okay, great. Thanks a lot. Appreciated.

Jeff Sprague:

Hello. Good morning, everyone. Lal, two for me. First one, just on LNG. Obviously, it's a global business, and you talked about the Middle East. But just give us your perspective on what the administration has done on approvals in the U.S. and how that might impact your business, the funnels and anything related on your mind.

Jeff Sprague:

And then just to be totally clear, Lal, the project funnel that you illustrate for us quarterly, does some of the non -- I guess, pending approval U.S. projects, are they in that funnel?

Jeff Sprague:

Right. And then just shifting on NATI real quick. Certainly suspect that your synergies initially laid out were somewhat conservative. But I wonder if you could address the 3-year versus the 5-year. So kind of the underlying cost synergies, I'm not surprised they're going up. I think part of the reason that you talked about 5 years was really treading carefully on salesforce, R&D organization and that sort of thing. So just give us your thoughts on where that is and maybe the cultural side of the integration, I guess, is the heart of the question.

Ram Krishnan:

Yes, you said it. I think the team, as we both reviewed the plans, felt very, very good in the quality of the opportunities that we had identified, and there is a shared vision around, trying to get this done faster and moving the business along. And that's where we've been very pleasantly surprised, the cultural similarity between how we both think, the customer-centricity and how we apply the rules to do the synergy actions. I think there -- we feel very confident that we could move faster. And that's the reason we raised it, and we also believe we can get it done by the end of year 3.

Operator:

The next question comes from Nigel Coe of Wolfe Research. Please go ahead.

Mike Baughman:

All right. Nigel, it's Mike. No, there's really on plan. And remember, that's five years out that we were talking about, 31%. We are on track. I think the important thing for the near term is that our expectation around that adjusted EBITDA margin will be that it's a little bit up year-over-year on down sales, reflecting the synergy actions. And moving forward, no, there's really no change to our longer-term expectation around the profitability of test and measurement.

Mike Baughman:

There isn't. I mean at the...

Ram Krishnan:

No, there isn't. There isn't necessarily anything we've identified to offset the $20 million. I mean the 31% margin targets 5 years out. I mean, obviously, what we are finding is good investment opportunities. And right now, we're focused on executing the synergies by year 3. If we find good investment opportunities, we'll make that because I think 31% is the target we've set, and we feel pretty comfortable getting there. But if the $185 million comes through with no additional investment opportunities, maybe the number goes up, but that applies your outnumber.

Lal Karsanbhai:

Yes, happy to, Nigel. I've been speaking and been asked about this for the last three quarters or so. And again, what we experienced in the quarter continues to be very consistent with our initial commentary. The drivers around process and hybrid are being supported by the secular macros that we've been discussing, whether it's energy security, affordability, nearshoring, sustainability to digital transformation. And I think those macro secular drivers are robust enough and secular in nature that they will go through a different type of cycle than we've seen historically. Secondly, we did not experience a boom and bust environment in the process space in over the last cycle. This is a much more moderated capital cycle that we experienced. So we don't have the overcapacity situations and the overbuild situations that we have typically experienced. There was much more discipline in the capital layouts by our customers. And that's a benefit as well. So our business continues to be very robust, obviously. We continue to have confidence in the order runs and in the execution through the year.

Nigel Coe:

Right. That’s perfect. Thanks.

Scott Davis:

Hey, good morning, everybody. Congrats on a good start. I wanted to back up a little bit when you talk about R&D transformation at test and measurement. What do you mean? Is it like an 80-20 type thing that you're going to refocusing? Or just -- I know they're -- those good folks at NATI always spend a lot of money. But was it generally unfocused, do you think? Or how do you guys think about it?

Lal Karsanbhai:

And I will just add, Scott, to that. I think a company like NI with the market position it has in the space and the legitimacy of its technology will always have a role in the research element of innovation. That's always going to be a responsibility that we have in the space to continue to move that needle forward. And we will, by all means, as we do in all our businesses, continue that. But having viable commercial programs is important. And that's where parking some cars and investing heavily in the ones that we believe and management believes will ultimately result in customer success is really important. So really good work and thoughtful work being done by the team here led by Ram, of course, and Ritu.

Lal Karsanbhai:

Yes. No, this was a -- if you think about our -- the automation stack, this was pretty much across the entire stack, the final control elements, the muscle in the plant, the sensing elements that we use both flow, pressure level and temperature, the DeltaV control system and then the analytics packages alongside it. So this was a holistic full package, 100% Emerson win, which really proved out the value of the portfolio and how it all comes together at a customer site.

Operator:

The next question comes from Julian Mitchell of Barclays. Please go ahead.

Lal Karsanbhai:

Yes. It's a great question, Julian. I just returned from the Middle East where our team spent -- India and the Middle East, so our team spent time with significant customers in Saudi Arabia, Abu Dhabi, Qatar. And I can tell you that the environment is very robust, predominantly around sustainability and energy transition, those 2 elements. And I think there's enough demand-driven activity that will give us confidence in the sustained mid-single-digit kind of exit rate on process on the total company orders at the end of the year. So at this point, we've been thinking and analyzing this now for about three quarters or so. But we haven't seen any kind of deceleration in the process, particularly in the spaces that you're asking about. As a matter of fact, we continue to see very disciplined spending, very intentional around core elements of automation that can differentiate production around reliability, efficiency, productivity, of course, and safety. And that hasn't waned yet. And I don't -- we don't foresee that as we go through the year.

Mike Baughman:

No, you hit it right with the test and measurement comment. And the leverage in the low to mid-40s coming through reflects no big change in mix or trajectory. So no, really nothing there on the Q2 guide.

Operator:

The next question comes from Chris Snyder of UBS. Please go ahead.

Colleen Mettler:

Yes. Chris, if you go back to November guide, that range has remained consistent. I think it was just a round in $1.6 billion that was being spoken about.

Mike Baughman:

Yes. Chris, the -- in the comments, we talked about the effect of foreign exchange. We changed assumption there, and it had a 1-point increase on FX, which comes into the leverage number with a much lower profitability attached to it. The drivers around leverage remain the same with volume and leverage and price/cost, and then we continue to drive the Emerson management process with cost reductions to offset inflation, so yes. But to answer your question specifically, the change in the guide was really solely attributed to that FX element.

Operator:

The next question comes from Deane Dray of RBC Capital Markets. Please go ahead.

Lal Karsanbhai:

I'll let Ram add a little bit of color. But certainly, it's something that we're keenly working on. Obviously, the focus was on the commitment on cost. And we do believe alongside management that, that is a -- had been and is an evident opportunity. Having said that, we are -- I'm not going to suggest that we're 3 or maybe even 6 months away to come out publicly with some sales ideas, but we're certainly working on customer-specific ideas on sales synergies. Ram and I and Ritu have held a number of customer meetings jointly and thinking through opportunities that we have across the Emerson portfolio as it comes in with NI. Ram?

Deane Dray:

Great. And then just second question, I joined a bit late, so I apologize if you've covered this, on China. A lot of anxiety about the macro there. It doesn't look like you're positioned in the areas that -- like real estate that are having the most pressure. But just what are the expectations? What are the opportunities over the near term?

Ram Krishnan:

Yes. No, you said it. I think in our core process hybrid business, power and chemical will drive the growth. I mean, obviously, what's not in the underlying numbers is test and measurement. Test and measurement is consistent with discrete. Off to a tougher start in China, but expecting a second half recovery, consistent with what we're seeing with the discrete business.

Operator:

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

Lal Karsanbhai:

No. We remain Joe, very positive on the environment. Obviously, we couple that with the strong execution by our teams. But in terms of the organic outlook, no change really.

Ram Krishnan:

Yes, the supply chains have normalized. So in terms of our ability to procure electronics and load factories and drive production out of factories, we feel that's normalized. Now certainly, in the measurement and analytical business, there is some overdue backlog that will ship through Q2. The easier comparisons and our ability to ship that backlog is what drove the 28% in Q1. You'll see that in the measurement and analytical business. That's the last business normalizing from a supply chain perspective. But the demand environment for that business still remains very healthy with orders up in the high single digits.

Operator:

And the next question comes from Brett Linzey of Mizuho. Please go ahead.

Lal Karsanbhai:

No, nothing really different. Look, the profitability certainly varies between MRO and project activity, but that's well known. I think you know that well. But in terms of the mix within the funnel, there's not really a significant difference between a growth platform and traditional project work there. Of course, we have a $150 billion installed base around the world. And with that, some of that is obtained through and managed through service contracts, a large portion of it, where we have commitments for replacement and maintenance with many of our global customers. And others are upgrades, activities and things of that sort.

Ram Krishnan:

No, price is 2 points in the quarter, 2 points for the year. We feel good, no change there. In terms of our net material inflation, I think we're seeing continued opportunities that we're driving on the direct material side. The logistics costs have come down. We don't see any impact in terms of inflation or it's de minimis from the dynamics around what's going on with -- in the Red Sea or the Panama Canal. So we see NMI or net material inflation continuing to improve as we go through the year.

Operator:

This concludes our question-and-answer session, and the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good day and welcome to the Emerson Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.

Lal Karsanbhai:

Thank you, Colleen. Good morning. 2023 was an exceptional year for Emerson. The management team, alongside the Board of Directors, boldly delivered across the three dimensions of our value creation strategy. Firstly, culture. Our management team just completed a trip around the world where we had the opportunity to engage with our customers and our teams. It was an energizing trip and it was evident to me that the changes we are driving in the culture of Emerson are embraced as evidenced by our engagement survey. 2023 was an important year. We made significant progress across multiple dimensions of culture. We rolled out an employee value proposition, advanced our diversity and inclusion metrics, and made significant strides in our sustainability targets as well as launching a differentiated talent engine program. Second, our portfolio transformation is largely complete. The Copeland divestiture and more importantly, the acquisition of NI have enabled us to create an Emerson focused on automation with a cohesive, higher growth, higher profit margin, diversified portfolio aligned to the critical macro secular drivers, energy security and affordability, near assuring, sustainability and decarbonization, and digital transformation. I would like to welcome Ritu Favre and the NI family to Emerson. This is an exciting time. With NI, our technology stack is unequaled, and we are in position to continue to push the boundaries of automation to meet our customers' needs. Thirdly, execution. The Emerson management system is delivering differentiated results. Underlying sales for 2023 grew 10%. GPE expanded 330 basis points to 49%. And adjusted Segment EBITDA expanded 220 basis points to 25% after delivering yet another year of over 50% leverage. Adjusted earnings per share in 2023 grew 22% to $4.44 and free cash flow was $2.4 billion. Orders growth exited the year at 5% and we grew across all world areas. We had strong price realization in the business at 4% for the year. And MRO represents 65% of our revenue with now a $150 billion installed base around the world. And we exited the year with $6.6 billion of backlog, up 12% year-over-year. We delivered on innovation in 2023. It was a year of significant releases in our DeltaV platform, Aspen models, and intelligent devices. Our R&D spend as a percent of sales rose to 7% in 2023. Cost management is the way of life at Emerson. The differentiated leverage of 53% is reflective of aggressive cost actions across our business. We also delivered on commitments of no stranded costs related to the Copeland transaction, and will be delivering on the $100 million corporate cost takeout by the end of 2024 through significant transformational activities driving certain functional activities to centralization and best cost locations. I am humbled by the exactness of our performance And I'm certainly optimistic about the future of our company. I'd like to express my appreciation to our customers who increasingly place their trust in Emerson to solve the world's most challenging problems. And lastly, in my opening remarks, I'd like to say I am but one of over 70,000 Emerson team members around the world. I'd like to thank our global employees for your passion, hard work, and energy that you bring to Emerson every single day. Please turn to Slide 3. As I said earlier, and it bears repeating, 2023 was an exceptional year. We are excited to run this cohesive high growth and diversified portfolio. The financial performance was differentiated with double-digit underlying sales growth, 53% operating leverage, and 22% adjusted EPS growth. As we look ahead, 2024 is expected to be another strong year. Operating leverage, excluding NI, is expected to be in the mid to high 40s, and adjusted EPS is expected to be $5.15 to $5.35, including roughly $0.35 to $0.40 contribution from NI. We hit the ground running on October 11, as soon as we closed the transaction, to begin executing the synergy plan and we expect it to provide early benefits in 2024. We are expecting 4% to 6% underlying sales growth, driven by our focus and commitment to winning in our growth platforms, and leveraging our innovation. Energy transition, industrial software, life sciences and metals and mining are expected to remain resilient parts of our portfolio and we are utilizing our leading technology, customer relationships, installed base and expertise to capture investments in these markets. While discrete markets are down in both our factory automation business and test and measurement, we are expecting recovery in the second half of the year. Turning to Slide 4 for some additional details on how we finished the year. 2023 was a remarkable operational year for Emerson. Starting with the orders performance, our teams executed exceptionally throughout the year. We won in the marketplace. We won in markets like LNG, hydrogen, renewables, life sciences, and metals and mining, resulting in 5% orders growth for the year. This shows our portfolio relevance and leadership position for our customers. Orders were also up 5% in Q4, led by double-digit order growth in China and the rest of Asia. Underlying sales were up double digits for the year, exceeding our initial expectation of 6.5% to 8.5% last November and in line with our August guidance. The strength was widespread across the organization with all world areas growing 9% to 10% and both business groups growing 10%. I am most proud of our performance around operating leverage this year. 53% is differentiated. It is a testament to our Emerson management system and our operational talent, which drove strong performance. Adjusted EPS ended the year at $4.44, beating the midpoint of our original November guidance by $0.37 and near the top of our August guidance. Lastly, free cash flow of $2.4 billion was up 35% year-over-year and above our August guidance. Turning to Slide 5. Our 2023 performance caps three strong years of execution, demonstrating the power of our Emerson management system and its ability to create value for our shareholders. We embarked on a transformational journey of Emerson in 2021 and remained focused on execution. Underlying sales growth of 7% and 10% in 2022 and 2023, respectively, shows the leadership position of our automation technology and our world-class sales organization. It is also indicative of our market share expansion within the $160 billion served automation market. Our ability to both leverage our $150 billion installed base as evidenced by our MRO sales in 2023 of 65%, and win new projects are strengths of this company and critical to the long-term success of this business. As we invest more in digital technology and software, we are also seeing the benefits to gross margins, which have expanded 470 basis points to 49% since 2021. Strong price discipline and differentiated technology have also provided positive contributions, and the addition of NI will further expand our gross margins. This enabled strong operational leverage across the business. Over 50% leverage for 2022 and 2023 is distinguished amongst industrials. Cost discipline remains part of the DNA at Emerson, driving further cost productivity and margin expansion. Put all this together and Emerson has delivered back-to-back years of 20-plus-percent EPS growth. Please turn to Slide 6. I want to provide a couple strategic updates on our business. In October, we hosted Emerson Exchange Immerse in Anaheim, California. The event showcased our control systems and software technology and highlighted our integration with AspenTech throughout different solutions and industries. Featuring over 1,400 attendees and over 100 customer presentations, the week was spent discussing the exciting roadmap of our Delta V, Ovation, and AspenTech products and working with customers to solve their toughest challenges. This was all reflected in our keynote presentations from three important customers, Syzygy, a provider of electric catalyst reactor technology, Biogen, and Tesla, who discussed their automation challenges in partnership with Emerson. These types of engagements not only help our users understanding of our current products, but also provide important inputs into our next generation products and innovation. Throughout this event, we highlighted our boundless automation vision, the next generation automation architecture that Emerson is uniquely positioned to deliver based on our leadership position in intelligent devices, control systems, and software. This vision empowers our customers to unlock and access all their operational data, enabling better decisions through analytics and optimization. It also enables customers to balance their production and sustainability goals through enterprise management and a unified software platform. On Slide 7, as part of this vision, we continue to accelerate innovation across four priority domains, disruptive measurement technologies, software defined automation systems, self-optimizing asset software, and our sustainability portfolio. Each of these areas provide stepping stones to enable the boundless automation vision. At Immerse, we introduced many significant new products to our leading DeltaV portfolio. First, DeltaV Version 15 Feature Pack 1 is one of our biggest rollouts in recent history. The package includes enhancements to software like DeltaV Live, the most advanced DeltaV HMI ever developed, and the introduction of a subscription controller, PK Flex. It also includes the DeltaV Edge Environment, a first-of-its-kind edge solution, allowing users to securely move data into their enterprise environments. As we look at the next generation of software solutions and automation platforms, this is a key enabler to unlocking data that users previously discarded. Throughout the rest of the organization, we are also making focused investments in strategic areas. This includes next-generation intelligent devices to further cement our leadership position in our measurement and analytical portfolio, and relevant additions to our sustainability portfolio. At AspenTech, many of the new releases are focused on enabling sustainability and energy transition segments, in addition to further building out capabilities like AI and DataWorks to enable self-optimizing asset management. Please turn to Slide 8. On October 11, we closed the acquisition of NI and announced we will report the business as a new test and measurement segment in 2024. We are very pleased with the progress already in the first month with NI and are excited about the opportunities in this business. We remain committed to the $165 million of synergies by the end of year five, resulting in approximately 31% adjusted segment EBITDA when moving stock comp to corporate. As we have openly stated, NI completes the significant portion of our portfolio transformation, and we are excited to execute as a new company. We will, however, continue to be active with bolt-on acquisitions that fill technology gaps in our business, and we have the balance sheet flexibility to do so. These will be prioritized in four segments we introduced a year ago, industrial software, test and measurement, factory automation, and smart grid solutions. In the fourth quarter, we completed two of these bolt-on acquisitions. Flexim is a global leader for clamp-on ultrasonic technology measuring liquids, gases, and steam. The business is highly complementary to our existing leading flow portfolio consisting of Coriolis, DP Flow, Mag & Vortex, and will also serve attractive growth markets in the energy transition. We also completed the acquisition of Afag in the fourth quarter, a highly strategic asset in the factory automation market. Afag’s electric linear motion solutions, combined with our existing pneumatic motion offering creates a leading motion portfolio for discrete industries in a $9 billion TAM. Please turn to Slide 9. As I mentioned, the large pieces of our portfolio transformation are behind us. And this slide shows that we were able to accomplish what we were able to accomplish over the last few years. We have three main objectives that I communicated when we started this journey. First, cohesiveness, which we now have with an unmatched technology stack. Second, diversification. Discrete is now our second largest end market with further opportunities to expand into attractive diversified industries. And third, our growth is aligned to secular growth drivers. This alignment to energy security and affordability, sustainability and decarbonization, near-shoring, and digital transformation will allow Emerson to move to a more secular and less cyclical business profile. $36 billion worth of transactions. Disposing of assets with low single digit growth profiles and adding businesses we expect to grow cumulatively in the high single-digits to low double-digits. The profitability improvement is also remarkable. Trading 30% GP businesses for those that operate 70% plus gross profits, which are already seeing -- which we are seeing the benefits of today. We are all energized by the opportunity we have with this new Emerson. Please turn to Slide 10. Our current strategic funnel is now over $10 billion in opportunity, with nearly two-thirds residing in our growth platforms. We're also encouraged by the activity of projects already in the funnel, considering the interest rate environment and global uncertainty. In the fourth quarter, Emerson was awarded over $500 million of project content, with over 60% of those in our growth platforms. This includes strategic wins in LNG, carbon capture, hydrogen, life sciences, and metals and mining. These successes are indicative of our team's focus and our technology's relevance within these markets. As we look at further diversifying our portfolio into hybrid and energy transition markets, 2023 was a fundamental foundational year. Specifically, there were three highly strategic projects to highlight. First, Emerson was selected to automate five different plants for Samsung Biologics as it standardizes on our DeltaV automation platform. The Emerson solution provides control for both production skids and for plant-wide operations. We are also currently engaging with a customer on the potential to leverage AspenTech software for future expansion. Secondly, in the third quarter, we highlighted Emerson's selection for the Port Arthur LNG project with Bechtel Energy and Sempra. This quarter, we are pleased to announce we were also selected for another large-scale world-class LNG facility in the United States. The Rio Grande LNG project from Bechtel Energy and NextDecade, located in Texas, will be capable of producing 17.6 million metric tons per annum of LNG across three liquefaction trains. Emerson is providing much of our leading technology, including analytical and measurement technology, and control, pressure relief, and isolation valves. And finally, AspenTech was awarded a Synergy win in the most recent quarter with a world-leading pulp and paper producer. Emerson's DeltaV system is already installed at the site, and through this relationship with the customer, Emerson was able to bring AspenTech to the table. Through this engagement, the customer chose to displace the current incumbent provider of adaptive process control software and instead move to AspenTech. This example demonstrates the power of our Emerson AspenTech integrated solutions and the opportunity to expand AspenTech utilizing our global sales channel. These wins and the continued evolution of the funnel provide a strong foundation as we head into 2024. With that, I will now turn the call over to Mike Baughman.

Operator:

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

Lal Karsanbhai:

Yeah. Hi, Jeff. Lal here. Good morning. So on the revenue, as Mike stated, $1.6 billion is the assumption. It's not in the underlying sales as we reported. Orders in the environment, as I expressed in my presentation, are still challenging in the business, exiting the quarter at down 16% NI which is very much aligned to the plan that we had in place. And we do expect much like in our core discrete markets, orders to flatten out as we get into the second half of the year. So feel very much that they're under in plan from an orders perspective, although still in a challenging environment. And then lastly on synergies. Look, we got off to a really good start, day one. The team's executing very, very well. We haven't given guidance on year one. What I did, I will say is that about half the synergies will be delivered in the first two years.

Mike Baughman:

Yeah. Jeff, the 2024 price assumption is 2%.

Operator:

Our next question comes from Steve Tusa with JPMorgan. Please go ahead.

Lal Karsanbhai:

Good morning, Steve.

Mike Baughman:

Yeah, I'll start with the second half -- or the second part of the question first. The $250 million is really one-time and in the year related to the acquisitions and some of the higher CapEx that we've got.

Mike Baughman:

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

Lal Karsanbhai:

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

Mike Baughman:

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

Operator:

The next question comes from Julian Mitchell with Barclays. Please go ahead.

Mike Baughman:

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

Mike Baughman:

That's correct. Again, obviously we're driving restructuring in the discrete business given the trend in the orders and you will see that margin expansion come through in the second half which would drive up the leverage rates.

Lal Karsanbhai:

It's a good question, Julian. One that we've thought a lot about and been watching very carefully. The fact of the matter is that we have some very unusual secular trends going on in the world right now. I think a lot of our process activity is driven by two -- three critical areas. The near-shoring activity, which impacts life sciences and the metals and mining value chain. The energy affordability and security, which is impacting significant continued investment in liquefied natural gas and nuclear. And thirdly, equally important, sustainability. I think we're past the tipping point in terms of the -- our customers' commitment around sustainability, and we're seeing continued investments there. So whether we believe those will transcend certain economic cycles and that will impact how we should think about the strength of process as we go through 2024. Ram, you have something to add?

Julian Mitchell:

I see, so you…

Julian Mitchell:

Got it. So the process and hybrid orders growth should stay fairly steady through 2024.

Julian Mitchell:

Fantastic. Thanks for the help.

Operator:

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

Ram Krishnan:

Yeah. So, Ram here, Nigel. From an orders perspective, as Lal indicated, the last quarter, which is our fourth quarter, down 16% in orders, we expect orders to remain down for the first half and turn positive in the second half. And you are right, the $1.6 billion that we're guiding will translate to down 5% to 6% for the year from a sales perspective. And sales should turn positive in the fourth quarter. So we'll have down sales for the first three quarters and positive in the fourth quarter.

Mike Baughman:

No, that's on a consistent GAAP basis.

Operator:

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

Lal Karsanbhai:

Good morning, Scott. Lal, it sounds like you were just in China, if you were around the world, and it seems pretty topical to get an update from what maybe you saw there. I'll just leave it there.

Scott Davis:

And then the discrete in China is negative I'd assume this quarter?

Scott Davis:

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

Operator:

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

Lal Karsanbhai:

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

Mike Baughman:

From a dollars perspective, yeah, we get the benefit of Aspen coming in, that mixes us up, and then NI comes in, and that also mixes us up. So you'll continue to see that commitment to growth, innovation, accelerate and increase as we move on. And in terms of where the investment is going, a lot of the investment really is across the four technology areas we've consistently showed you guys. It's disruptive measurement which is the sensing technology in our measurement technologies business, our automation system, the next generation automation system that Lal referenced in the presentation, and also collaborative technology development with Aspen around asset performance management. So those are the areas where we see lots of opportunity in terms of new-to-the-world type innovation that we can drive as an automation company and that's where the investment is going.

Operator:

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

Lal Karsanbhai:

No. Hey, Chris, Lal here. No, look, we continue to see the funnel expand organically to begin with. So it did grow from quarter over quarter, which is why we thought it was important to show you. But what's most interesting, it's growing in the right spots for us. It's growing along the growth platforms that were -- where we have the focus of the organization. So that comprises about $6.6 billion of the funnel today, of which energy security and transition is a big part of that. Sustainability and decarbonization is a large part of it. If you look at the wins, they are very much aligned in the same way as the funnel, winning at about 60% aligned on the growth platforms-ish with energy transition a big part of what we are converting here. So feel really good about it. I -- we're watching it carefully, of course, in terms of movement through FID and other elements, but at this point in time, continue to have optimism, particularly products that are purely connected to national security, nearshoring, or energy affordability elements. So, feel pretty good about what we see in front of us.

Ram Krishnan:

From a channel perspective, I mean, if you're referencing destocking, we're not seeing that. The discrete slowness is purely market driven, certainly European machine builders, China is an end market, and an overall slowdown in the factory automation segment in North America. And you see that with obviously a lot of our peers that have a lot more exposure and discreet. Frankly, versus our peers, we're holding our own in terms of the order rate decline in discreet, and we do expect to see a second half ‘24 positive orders for the business.

Operator:

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

Lal Karsanbhai:

It's possible. Yes, Andy. We've been operating in the mid-50s over the last couple of years. There's a significant amount of momentum around cost in the business. As I mentioned, we have tailwinds that will be delivered through the actions we're taking, not just within the segments, but also at corporate as we go through 2024. Now having said that, on the supply chain side, we're on the positive side of most of the measures. Obviously, logistics environment is flipped. And on material flow, generally significantly better. Of course, we fight spot shortages as you'd expect in any business. But generally, we are in a very different world on the supply chain. So that's all very positive. So it's really around execution. Look, we have a -- the gross margins of the business are 49% in 2023. They'll expand further, as Mike described, in 2024. And with that comes an expectation of a higher leverage and a higher incremental for the business. So at this point, feel very comfortable with the guide we put out there for the year in that mid to high 40s which is, I think, differentiated. And we'll really think through what we talk about and guide on a longer-term basis from a financial plan perspective as we go through the year.

Andy Kaplowitz:

It's great to hear. And then I know you want to retire the KOB 1, 2, 3 names, but when we think about ‘24, I think you've been averaging something like 65% KOB3. Would you expect that to hold up at around that level? And what are you seeing on the KOB3 side? Is there just a lot more activity that could also help with margins given that tends to be higher margin work?

Andy Kaplowitz:

Appreciate it guys.

Operator:

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

Lal Karsanbhai:

Hi, Tommy.

Lal Karsanbhai:

No. So a couple of things. What we're experiencing through the quarter or we have experienced through the quarter is demand-driven weakness. As Ram accurately portrayed, it's not as the stocking element. As a matter of fact, a very small percentage of our business runs through stocking distributors in the discrete side. But nevertheless, it's demand that we really focus on, and it's global weakness across the key markets. Now having said that, the comparables do get easier as we get into the second half. We're not counting on underlying demand conditions in the discrete market significantly improving in the second half. What we're benefiting from is obviously the [competitors] (ph) for us.

Lal Karsanbhai:

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

Lal Karsanbhai:

Thanks, Tommy.

Operator:

Good morning and welcome to Emerson Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note that this event is being recorded. Now I'd like to turn the conference over to Colleen Mettler, Vice President of Investor Relations. Please go ahead.

Lal Karsanbhai:

Thank you, Colleen, and good morning. This quarter's results are a testament to the tremendous people of Emerson. I am humbled by what you do every day. Thank you for the passion and energy and the effort you bring to our great company every single day. Two and a half years ago when I became CEO, we expressed our vision for accelerated value creation, culture, portfolio and execution. I am proud today more than ever before of the progress we have made. The Emerson management system has empowered our leaders and open the world of possibilities for our company in the field of innovation and commercial excellence with a higher growth, more cohesive portfolio. But above all, the Emerson management system is the tool that enables our team to continue to deliver differentiated financial results. The work never ends, but I am proud of how far we have journeyed and a clear road ahead. Please turn to Slide three. Q3 was an exceptional quarter, and our teams continue to perform well and deliver for our shareholders. We made tremendous progress on our strategic priorities, closing the climate -- the Copeland transaction, launching new-to-the-world products and winning several key projects in our organic growth platforms; energy transition, industrial software and priority discrete and hybrid markets. We have once again increased our expectations for the year based on our continued operational execution. We now expect double-digit underlying sales growth, approximately 50% operating leverage and over 20% adjusted EPS growth for 2023, top quartile performance. As we look ahead, we are energized by our value creation opportunities. Emerson is and will continue to benefit from our significant exposure to secular growth trends like energy affordability and security, sustainability and decarbonization, digital transformation and near-shoring. Over 30% of our sales are directly aligned to these trends, as we discussed at our investor conference in November. Our technology and solutions are highly differentiated in these spaces, positioning our business for growth. We are also innovating for these markets, helping customers solve their toughest challenges with disruptive technology and solutions. Our portfolio transformation is paying off as we have aligned our cohesive portfolio to these secular trends. And our favorable value drivers combined with our Emerson management system, provide the road map for future success at Emerson. Turning to Slide four; this quarter exceeded expectations across the board. Underlying orders were up 3%, led by high single-digit process and hybrid demand growth. We continue to see secular trends driving the demand strength. As an example, LNG projects continue to move forward and customers' energy transition and sustainability budgets are growing, improving resilience, both for greenfield projects in hydrogen, clean fuels and renewables and for brownfield, decarbonization opportunities like emissions reductions and carbon capture. Renewables is a particular area of strength we are winning based on our superior technology and breadth of capabilities, which we'll discuss shortly. Nearshoring is also driving incremental investments around the globe in areas like life sciences and metals and mining. It is still early stages of global stimulus for programs like the United States IRA, chips and IIJA are driving additional conversations with our customers, which we expect to turn to funded projects down the road. Our strong performance in process and hybrid was partially offset by demand in discrete, which continues to slow. Orders were down in Q3 against tougher comparisons for this piece of the business. As we mentioned previously, Europe, especially Germany, continues to slow and we have seen some softening in the U.S. and Asia. Looking at the overall business and given continued robust demand and strong underlying growth drivers, we still expect mid-single-digit full year order growth. The continued demand and improving supply chain environment, which includes improved availability of electronic components, enabled 14% underlying sales growth in the quarter, above our expectations. The Americas and Europe were up 11% and 13%, respectively, while Asia, Middle East and Africa were up 20%, strong performance of last year's impact of the Shanghai COVID shutdowns. Intelligent Devices and software and control were both up double digits. It is clear when we speak to customers and compete for projects that our technology is winning in the marketplace. We are proud of what we have built and confident this will continue. Software and control growth of 19% is a testament to our leading control systems, DeltaV innovation, which are well positioned where our customers are spending, areas like life sciences, metals and mining, hydrogen, clean fuels and renewables. Within the quarter, we won large projects in life sciences, metals and mining, including lithium and LNG. Intelligent Devices grew 13%. Final Control and measurement and analytical are the de facto standards for traditional energy, transition energy, chemical and power markets across the globe. This later cycle exposure and the business's continued technology leadership in areas like control valves, actuators, regulators, pressure, temperature, flow level and wireless; our differentiators for Emerson and are leading to strong financial returns. This strong sales performance and the continued operational execution of our teams led to 59% operating leverage in the quarter, excluding AspenTech. Favorable impacts from price cost and mix also drove accretive margin performance. Adjusted EPS was $1.29, beating our guidance, again driven by the strong sales and operational performance. Free cash flow was up 83% year-over-year and is up 47% year-to-date. Please turn to Slide 5. We continue to accelerate progress on our strategic priorities. On May 31, we closed the Copeland transaction. Emerson received $9.7 billion in upfront cash or approximately $8 billion after tax for the transaction. We also have the future proceeds from the $2.25 billion Copeland note receivable and our 40% common equity ownership with a transaction value of $1.7 billion. Post closing, Emerson has a net cash position and taking into consideration the NI acquisition, Emerson expects to have a net debt-to-EBITDA ratio of less than two. I also want to provide a quick update on our corporate and platform rightsizing activities we announced at the beginning of the year. As planned, we did not have any stranded costs due to the Copeland sale and are well on track to achieve our $100 million annualized cost savings by 2024. We also released our ESG report in June, highlighting a 42% reduction in greenhouse gas emission intensity from our 2018 baseline. This achievement surpasses our 20% target six years ahead of schedule. In the report, we also highlight numerous examples of how Emerson is helping customers navigate the energy transition and the application of our technology to reducing emissions and energy usage. Lastly, before moving on to some exciting innovation and customer wins, I wanted to provide a quick update on the NI acquisition. We remain on track to close the acquisition in the first half of our fiscal 2024, and the teams are actively working on integration planning as we're prepared to be ready for day 1. In late June, NI shareholders voted in favor of our acquisition. HSR was once again approved and all necessary regulatory filings have been made. And I released their earnings last week with another record sales quarter, up 5% year-on-year and strong margin performance. They, too, are seeing supply chain constraints easy, which helped drive their sales performance by converting backlog despite the negative orders environment, which was down 17%. The demand environment for the business is playing out largely as we expected with discrete and semiconductor weakness expected to improve as the calendar year goes on. Please turn to Slide 6. As the rate of our customer sustainability and digital investments continue to accelerate, Emerson is ensuring that we are positioned to capture this spend. Part of this is through our strong dedication to innovation, and new-to-the-world products. Recently, Emerson has had numerous impactful innovations. First, ASPEN 1-V14 is the next step in helping customers on the sustainability journey. Not only does V14 offer more than 100 sustainability-specific models, it also provides solutions to help customers manage emissions and design new hydrogen processes. V14 also further incorporates artificial intelligence, which, when combined with first principle models, helps users reach optimal production, increasing profitability while reducing emissions. Emerson also recently launched enhancements to our AMS device management software platform, now aligned for more seamless integration with AspenTech solutions like Mtell. This allows users to have more access to critical intelligent device data for use in advanced analytics and models. This example shows the differentiation of the Emerson plus AspenTech portfolio and technology synergy opportunities together. Emerson has long been a trusted partner of utilities around the globe, as evidenced by the fact that Ovation controls approximately 50% of the electricity generated in the United States. This leadership uniquely positions Emerson to support our customers' transition to renewables. And we are doing so through our new integrated renewable energy control solution, Ovation Green. Ovation Green allows customers to manage their renewables assets like solar, wind, hydro and hydrogen, all in one platform, and we are already seeing early success with some of the largest utilities in the United States. Lastly, our measurement and analytical business recently launched a new-to-the-world noncontacting radar device that is ideally suited for a range of applications in chemical, life sciences and food and beverage. With advanced capabilities like Bluetooth and a built-in historian to store process data and insights, the transmitter is optimized for ease-of-use and simplicity. This device incorporates RADAR technology, a fast-growing technology in the measurement space. As we look at continued growth in our measurement business, this innovation will serve as a foundation to building LEVEL as the next technology pillar, accompanying our leadership in pressure, temperature and flow. As one of our key drivers -- growth drivers, Emerson is committed to accelerating innovation and meeting the rapidly evolving needs of our customers, like the ones highlighted here. Turning to Slide 7. At our November investor conference, we outlined our through-the-cycle growth strategy, which includes our strategic focus on organic growth platforms. These markets, including life sciences, metals and mining, factory automation, industrial software and energy transition are areas closely aligned to the secular growth trends that are driving incremental customer investment. This is demonstrated in the evolution of our funnel over the past nine months. Not only have we successfully expanded our funnel to $9.7 billion, over this time frame, up from $7.1 billion, but nearly all of this growth can be attributed to our growth markets, namely energy transition, life sciences and metals and mining. Our energy transition funnel is now nearly $5 billion, up from $3.5 billion in November. This expanded funnel is driven by new project announcements in hydrogen, clean fuels, carbon capture and EV batteries, all where we are actively engaged in our technologies well suited. We have also continued to expand our metals and mining and life science funnel, and we are now capturing additional strategic projects in our funnel as we dedicate more time and resources towards pursuing these engagements. In the third quarter alone, we added over 300 projects to the funnel and were awarded a content in over 50. This indicates a solid pace of project announcements as near-shoring and sustainability trends spread globally. We expect these organic growth platforms will grow double digits through the cycle, and we are off to an excellent start in 2023. Please turn to Slide 8, where we'll highlight a few key wins across these segments, which underscore the power of Emerson's highly differentiated portfolio of solutions and the opportunity ahead for Emerson. The LNG wave continues to progress, and Emerson is winning our share of opportunities. Of the projects that have moved forward over the past two years, Emerson has been awarded content in 7, demonstrating our continued leadership in this space. These are large projects with ample automation opportunity. On average, approximately $10 million of automation opportunity per million ton per annum of liquefaction. Our unmatched portfolio of measurement devices, valves, control systems and now optimization software, differentiates Emerson as the only automation company capable of providing a holistic solution. Emerson's leading project execution is also a key differentiator for these large and complex projects. Through our project certainty approach, Emerson helps customers expedite project time lines and reduce project costs, key measures to reaching profitability faster. One of these seven projects was the Port Arthur LNG project. Emerson is excited to announce it will be supporting Bechtel Energy and Sempra Infrastructure in the automation of the Port Arthur LNG Phase 1 project. This liquefaction and export terminal in Southeast Texas is a premier LNG project designed for safe, reliable and efficient operations, delivering LNG to global markets through two trains capable of producing up to 13.5 million metric tons per annum. Emerson was chosen as a key automation partner for Bechtel Energy, providing our leading DeltaV control system, final control valves and measurement technology. Further, on Slide 9, the next market we'd like to highlight is the battery value chain. This is an area where we are winning projects based on the breadth, depth and strength of Emerson's end-to-end capabilities from the mining of lithium and copper through refining and processing and finally, to EV battery manufacturing, assembly and recycling. In 2022, Emerson technology helped produce over 65% of global electric vehicles. We are excited to continue supporting companies around the world as production expands across each of these high-growth segments. Recently, Emerson was selected to automate two very strategic projects in mining. First, the Ganfeng Lithium project in Argentina. Emerson's DeltaV control system was selected to automate the large-scale lithium mine, a strategic win in the lithium triangle between Argentina, Chile and Bolivia that holds much of the world's lithium reserves. DeltaV was selected because of its differentiated and flexible architecture and commissioning savings with Charms. The next project success was for CODELCO in the Andina copper mine in Chile. CODELCO is the world's largest producer of copper, and Andina site will represent over 10% of CODELCO's overall output. Emerson's DeltaV and control software were selected to help automate the treatment of water on the site, allowing CODELCO to accurately control water quality, efficiency and recycling. Emerson recently won a contract with one of the largest EV manufacturers because of our unique ability to support production across multiple processes in the value chain. With this project, Emerson will be the trusted automation partner to support two facilities

Operator:

[Operator Instructions] First question will be from Nigel Coe, Wolfe Research. Please go ahead.

Michael Baughman:

Nigel, yes, we're very excited about the leverage that we've had with 40%, 53% and then 59% in the quarter. You do see that operating leverage tipped down a little bit in the fourth quarter, and we're going to exit the year around 50%. So yes, we feel good about the operating leverage, and we're not really in a position to talk about '24 at this point. But we certainly are pleased with the current year performance.

Nigel Coe:

That's great. And then my follow-up question is on the Control Systems organic growth in the high teens, that's a longer cycle business. And I don't really think about that as necessarily cycling up big or down big. So mean how much of that is coming from sort of created backlog conversion with lead times, maybe some chip lead times coming down? And sort of how do we think about that going forward? Do you think you can maintain above-average growth rates in control systems and software?

Operator:

Next question will be from Andy Kaplowitz of Citigroup. Please go ahead.

Lal Karsanbhai:

Yes. Certainly, Andy, we feel confident in that mid-single-digit guide that we laid out a quarter ago and believe we'll exit the year in that rate. The process in hybrid orders are in the high single digits as we exited the quarter, and that's where a significant amount of the momentum lies not just in the capital expansion but related to just everyday business activity. Of course, offset by the discrete markets that we talked about through the quarter. We still feel very confident that we'll inch up from where we ended the quarter here slightly.

Lal Karsanbhai:

No. Look, we continue to deliver on the synergy plan. I think that's point number one, not just in terms of pursuit of business collaboration between the selling organizations. But most importantly, as I highlighted in the presentation around technology. And it's that technology tie-in that ultimately will differentiate our offerings in the marketplace. Number two. Look, over the quarter, we did a lot of work together. I think I feel really good about the plan that AspenTech laid out, the way it was communicated yesterday. I thought it was very succinct and clear. And I think they'll execute very well as we go through the quarter. There's a lot of collaboration ongoing between our joint teams and momentum continues to build a year into a little over a year into this.

Operator:

Thank you. Next question will be from Josh Pokrzywinski of Morgan Stanley. Please go ahead.

Lal Karsanbhai:

Josh, yes, we certainly expect the backlog to come down a few hundred million to the fourth quarter. And it's important to note that its year-over-year at the end of the year, we expect that to be up a little over double digits. So yes, the supply chain easing has certainly helped. But as we look ahead, we see that backlog coming down a little bit in the fourth quarter.

Michael Baughman:

Yes. I think first off, I think just to add to what we said related to Nigel, the KOB 3 business performance has been very strong. Right now, we're running at 65% plus KOB 3 rates with strong performance in North America. So that has really contributed to the outsized leverage we saw in the first three quarters. And we don't expect that to materially change in the next two quarters. But you are right, as our project backlog has built up, and we see project shipments go into '24, that will throttle leverage down to the mid-30s or high 30s rates we've guided to you in the past. So that's really a dynamic you should look for in 2024.

Operator:

Next question will be from Steve Tusa of JPMorgan. Please go ahead.

Lal Karsanbhai:

Yes. Look, we guided in November, Steve, at 35% through the cycle. Obviously, we're in a very positive point in the cycle at this moment in time. And look, as we look at our mix of business, our tech, geographical mix, as we go into November, we may assess that, but that's the guide that we put out last November. Obviously, we're outperforming that number today.

Lal Karsanbhai:

Yes. Well, on price in the quarter, we have nine points of volume and five points of price. Price will moderate as we go into the fourth, I think, for the year to 3.5, approaching four points of price in the full year guide of 10% underlying sales.

Andrew Obin:

I guess the KOB terminology just refuses to die.

Andrew Obin:

I'm aware of that. So just a question on supply chain. Are you guys -- some of your competitors are talking about deflation or disinflation, are you seeing an opportunity to extract discounts from your supply chain? Just trying to understand, right, people are talking about inflation subsiding. Are we going to see bottom line benefit for a company like Emerson over the next six to 12 months?

Andrew Obin:

Excellent. And just a question on Aspen and Emerson. Can you just talk a little bit more about channel integration, because we're hearing that you guys are driving Aspen and Emerson closer together and the relationship is evolving. Just trying to understand how much upside you think or how much margin of safety there is, given that historically, Emerson sales force has been very, very commercial. By incentivizing the salespeople seems like the relationship is going outside the initial channel. Just talk a little bit more about the opportunity.

Operator:

Next question will be from Chris Snyder from UBS. Please go ahead.

Pete Lilly:

Yes. We will see a decline in margin in the fourth quarter. And if you think about the third quarter that was driven by price and leverage, both of those things will be a little bit lower in the fourth quarter. As we mentioned, the pricing for the full year will be about 4% relative to the five in the fourth quarter or in the third quarter rather, and the mix will also have an effect there as we close out the year.

Lal Karsanbhai:

Yes. I'll make a couple of comments, and if Rob wants to add color here. Look, the bulk of what we're seeing is gas. It's not oil where we do see activity in the oils around sustainability, conversions, carbon capture, et cetera, and emissions reduction. But it's the gas activity that I think is very relevant. And that is entirely tied to Europe, to energy security and affordability. And we have not seen any slowdown in the activity, as a matter of fact, an acceleration through the quarter in terms of funding processes. There are seven projects currently out of nine funded and moving forward aggressively and we've booked seven of the nine -- in seven of the nine already. So I haven't seen any evidence, and we have not felt within the business any evidence of any potential pullback in the gas infrastructure build-out or LNG infrastructure build-out. Ram?

Operator:

Next question will be from Deane Dray, RBC Capital Markets. Please go ahead.

Lal Karsanbhai:

Yes. No, I'm happy to. So I'll start with LNG, which has been very important, we're winning at a rate higher than 50% so far. We feel really good about continued differentiation in the marketplace and really becoming a de facto automation supplier there. In the hydrogen space at 50% right now, in terms of win rate to the funnel. And across the battery ecosystem, feel very, very strong that very, very confident that, that sits in the 45% to 55% range as well. in fields like life sciences, it's much higher. And that is due to the very strong position of Delta V and the various instrumentation technologies that we bring to bear. So overall, I feel really good about the execution to the projects in the funnel. The pursuits are funded by internal teams. There's multi-vary calling points between engineering companies, end users and contractors. And it occurs at all levels within our organization from Ram and I, down into the card pairing salespeople.

Michael Baughman:

Yes, Dean, we have been really focused on inventory with the supply chain challenges, and we've seen some improvement, and we expect to see some continued improvement as we move into the fourth quarter around inventory. On receivables, with 14% growth, there's going to be a growth in receivables, and I'll tell you that DSOs have stayed flat, and the execution there has been really, really good. If we look ahead, we're expecting for the fourth quarter operating cash flow around $800 million to $900 million and CapEx around $150 million, which should put us in around $2.2 billion to $2.3 billion for the year. So I feel good about the actions that we're taking. There's been a strong focus on inventory with the backdrop of the supply chain moving around and settling, which is good, but that's been our focus. The past new performance has continued to come down on the receivables side, which has been really helpful as well.

Michael Baughman:

That's true.

Jeff Sprague:

I apologize if this was addressed. I was on a little late. But Will, can you just give us I thought your updated thoughts on how we're progressing towards regulatory approvals on national instruments and I know your view on 2024 was more subdued than what -- the Street consensus was, but they did post some soft orders here in Q2. So just any thoughts on maybe the trajectory of that business as you work towards close.

Jeff Sprague:

Great. And then a few things I did here on the Q&A. It was a lot of discussion here on margin leverage, mix and et cetera, just kind of drilling in on price costs specifically. I would imagine we're maybe at or near kind of peak positive gap on that metric. I just wondered if you had opine on that. And maybe more importantly, though, my question is your ability to kind of maintain a poling pricing cost as we kind of look forward here the next several quarters?

Ram Krishnan:

I think we're very confident in maintaining price cost green going into next year. However, price/cost in terms of margin point contribution or the spread will be lower as we go forward. I mean we've had an exceptionally good year here in terms of price performance and obviously, NMI coming down in the second half. That will continue. I mean we will be green price cost, but the margin point contribution from it will be lower in '24, which will have an impact on leverage rates.

Tommy Moll :

Good morning and thanks for taking my questions. Well, I think it was a quarter ago maybe before you called out some of the softening on the discrete side. That was originally, I think, in Europe, primarily Germany, but then you highlighted some evolving trends in the U.S. and Asia as well. Can you give us any more insight there?

Tommy Moll :

I appreciate it. Well, I also wanted to ask about culture. It's something that you've highlighted throughout your entire tenure as CEO. At the same time, pro forma for NATI, you'll have a much larger organization including pieces that had their own cultures before they were folded into Emerson. So situate us on that journey and give us some insight into what the consolidated approach will be once your portfolio is more mature?

Tommy Moll :

Thank you. I'll turn it back.

Joe O'Dea:

Hi. Thanks for taking my questions. I guess one more just related to the price cost dynamic, I think, pretty clear in terms of what you're seeing on the cost opportunity side. But just overall, how you think that filters through on the price side. So I appreciate that still a positive margin spread even if narrowing. But in conversations you're having, are you seeing a little bit more discussion around that? Are you seeing areas where price is actually moving down?

Joe O'Dea:

Got it. And then also wanted to circle back, a couple of comments on near-shoring and I think kind of a broadening out maybe of the trends there. And so if you could expand on that a little bit and just touch on sort of the evolution of what you've seen, maybe kind of led in North America, but just sort of what inning you think we're on? Are you seeing any kind of stabilization in those trends in the U.S., but you're seeing kind of growth budding in other regions. And so if you can touch on those regions and verticals a little bit more?

Operator:

Thank you. This concludes our conference today. Thank you for attending this presentation. You may now disconnect.

Operator:

Welcome to the Emerson Second Quarter 2023 Earnings Conference Call. Please note today's event is being recorded. I would now like to turn the conference to your host, Colleen Mettler, Vice President of Investor Relations at Emerson. Please go ahead.

Lal Karsanbhai:

Thank you, Colleen. And good morning. Please turn to slide 3. I'd like to begin by thanking the global Emerson team for a tremendous performance, our board of directors and shareholders for the trust that you place in us. It has been a busy first 26 months as CEO as we reinvented Emerson. The second 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. First, culture. In the last two months, we announced two important leadership changes. Vidya Ramnath was named as the company's chief marketing officer, replacing Kathy Button Bell, who had a distinguished career at Emerson and put Emerson's brand on the map while working for three different CEOs. Vidya is the right person to accelerate our journey as a pure play automation company. She brings deep technical knowledge and customer exposure, is an engineer, and for the last four years, has led Emerson's Middle East and Africa business. We believe this is a highly differentiating move for us as a company. Secondly, this morning, we announced Frank's planned retirement and Mike Baughman as Emerson's CFO. I'll say a few more words about this later in the presentation. Lastly, we completed our first 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 now great perspective on the areas of strength and opportunities to better the talent experience at Emerson. Second, the portfolio. We will be finalizing the Climate transaction in the current quarter. The CEO for the joint venture has been named, Ross Shuster, and we are excited by what his leadership and experience brings to the business. I'd like to thank Jamie Froedge for the work he did in the business and for his contributions, over 16 years of service at Emerson. In addition, we signed a 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. As an investor, you now have clarity that an investment in a share of Emerson is an investment in the leading global automation company serving a diversified set of end markets with a high growth, high profitability and cash flow, cohesive and differentiated tech stack made up of intelligent devices, control and software, led by AspenTech. Our focus on a go-forward basis, as we did this quarter, will be on creating value with this tremendous company. Lastly, our third pillar – execution. None of the work we've done would have been possible without it. The phenomenal results and momentum we have in the business is a testament to the quality of our global teams and to the strength of the Emerson management system. Underlying order were up 7% with late cycle process markets continuing to exhibit strong demand. Hybrid also remains robust, driven by reshoring investments globally. From 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 quarter growth. The strong demand and steadily improving supply chain environment enabled 14% underlying sales growth in the quarter, well above our expectations. All world areas were up double-digits, led by the Americas up 15%. Intelligent devices and software and control were also both up double-digits. This strong sales performance and the continued operational execution of our teams led to 53% operating leverage in the quarter, excluding AspenTech. Favorable impacts from mix and price costs also drove a 320 basis point improvement in adjusted segment EBITDA to 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 versus Q2 of 2022. Free cash flow was up 64% year-over-year and up 23% year-to-date, which is on track to meet our full year expectations. Turning to slide 4. Our value creation priorities and growth initiatives around innovation and secular growth platforms 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 for our customers. We are extremely excited to be recognized for this award and are working continuously to accelerate our innovation engine for future growth. Similarly, Emerson continues to differentiate as a leader in growth markets, like energy transition, metals and mining, and software. In the second quarter, Emerson was awarded the software and automation contract for Intermountain Power Agency's renewed power plant. 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 by 2045. The hydrogen will be supplied by the Mitsubishi Power Advanced Clean Energy production and storage hub, another greenfield project that Emerson was awarded in 2022. When complete, the Intermountain project will supply six Western 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 and proven experience in hydrogen and complex projects. Secondly, Emerson and AspenTech were jointly selected to automate and optimize the Golden Triangle Polymers facility on the Texas Gulf Coast. The $8.5 billion project is a sister facility to QatarEnergy and Chevron Phillips Ras Laffan project that we highlighted in the first quarter Emerson will provide its leading DeltaV control system and intelligent devices, and AspenTech will provide its leading simulation software. This technology will allow the facility to operate with approximately 25% lower greenhouse gas emissions than similar projects in the US 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. National Instruments will expand our leading automation business into the attractive test and measurement space and provide important industry diversification into discrete markets. NI's leading portfolio of technology and software are well positioned to capitalize on secular trends within semiconductor and electric vehicles, and we expect the transaction to be accretive to our long-term underlying growth. Inclusive of $165 million of synergies by the end of year five, that 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 2024. We had the opportunity to meet the extended management team and to do a 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 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. In a way, I am proud to be an NI-er 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 billion two platform business to a cohesive $16 billion automation leader. It took a lot of hard work to transform this business, and we now have an outstanding opportunity to create value for shareholders. It is a portfolio that is exposed to secular growth trends that are expected to drive growth for years to come and we'll remain committed to our 47% through-the-cycle underlying growth target. Our new portfolio is higher margin at approximately 49% gross profit and 23% adjusted segment EBITDA margin. Our industry mix is more diversified than two years ago, focused on automation and with the discrete markets now our second largest customer end market. 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 refreshments, and yesterday, we had the privilege of announcing two new board members to our board of directors. Leticia Gonçalves is the President of Global Foods for ADM, and a member of the company's Executive Council. As part of ADM, Bayer and Monsanto, Leticia has held roles in digital solutions, commercial operations, international management, and technology development, and is a longtime advocate and driver of diversity and inclusion. Her experience in these areas and accelerating change make her an excellent addition to our board. Leticia is originally from Brazil. She's a chemical engineer, and has a tremendous passion for innovation. Speaking of innovation, Jim McKelvey is a successful entrepreneur who founded Block, Invisibly and Fintop Capital. He brings a unique, innovation-focused perspective to Emerson, 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, 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. I would like to congratulate Frank for a distinguished career of over 32 years at Emerson and the past 14 years as CFO. Frank, I met you 28 years ago, and it has been an honor to be your colleague. 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. You made 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 Baughman 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. And please join me in welcoming him. Mike, congratulations.

Lal Karsanbhai :

Thanks, Mike. And now, I'll turn the call over to Frank.

Lal Karsanbhai :

Thanks, Frank. And to you on chart 9.

Operator:

[Operator Instructions]. And this morning's first question comes from Andrew Obin with Bank of America.

Lal Karsanbhai:

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 that range to continue through the remainder of the year. So the demand environment based on our see is strong. And as Frank outlined correctly, and there's some puts and takes out there, and we're watching those carefully, but as a whole, we feel very good about that. Having said that, we have a very robust backlog as well. We did build backlog in the quarter, and we continue to work through that which gives me further confidence, obviously, in the performance of the company for the second half. Naturally, with supply chain challenges largely alleviated, of course, there's still a few issues out there, but largely alleviated. Lead times have started to come down. 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. Ram, anything to add?

Andrew Obin:

Just maybe a follow-up question on aligning Aspen and Emerson sales channel. You guys clearly highlighted Golden Triangle's success of going to market together, you've affirmed the synergies. But I guess the question I have, as you work closer with Aspen, one of the opportunities to improve visibility at Emerson because you have access now to a lot of CIOs, but also what are the opportunities at Aspen to benefit from deep and broad relationships that Emerson has? Was there 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?

Ram Krishnan:

Just to add, I think the customer landscape is really the way we really want to drive more seat 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, DeltaV innovation, don't have level three software capability at many of our customers. 9,000 of those are in markets like life sciences and metals and mining. So those are the unique type of opportunities, the AMS systems that we have where we can bring Aspen, that's the approach we're taking through our commercial agreement. We 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. It's three quarters in, obviously, in the relationship. The momentum is early on projects, but more will come as it relates to the whitespace that I described over time.

Deane Dray:

My first question is maybe take us through 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? Because we are hearing elsewhere slowing in Europe, especially on the chemical side, but appreciate the color there, please.

Deane Dray:

Just a follow up. And also, I just want to hear Frank one more time here. 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?

Operator:

And the next question comes from Scott Davis with Melius Research.

Ram Krishnan:

No, I think the bulk chemical dynamic because 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, but the portion of the AspenTech business which typically gets impacted is their manufacturing and supply chain software suite. 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 remain strong, upstream and midstream continues to remain good. It's really the manufacturing and supply chain suite in bulk chemicals where we have seen the slowdown, and we've seen that in the past when the large chemical customers slow down spending on the OpEx side.

Lal Karsanbhai:

No, look, we're still very committed to the model that we set forward a year – closed it nearly a year ago now. It works. We're seeing the commercial value. We're working the technology piece as well. And like I've said in the past, it's 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.

Andy Kaplowitz:

Lal, could you give us 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 in the 30s, but what's changed for Emerson in 2022 that's allowing you to record low to mid 40s, over 50% in Q2, is it mostly the 5% price that Frank mentioned and much improved supply chain environment? Is maybe underlying Emerson able to sustain incrementals in the 40% plus excess over the longer term and how you're thinking about price versus cost moving forward?

Ram Krishnan:

Other dynamics that certainly went our way is strong North America in the quarter, strong performance in our instrumentation and final control businesses and the leverage we got there. So dynamics are on mix, certainly the price-cost element that Lal mentioned, but, fundamentally, the 14% sales growth in the quarter does help leverage. So all of those dynamics went in our favor.

Lal Karsanbhai:

Really good. It was a very robust quarter globally for us in terms of sales performance, and very honestly orders, as Frank outlined. China flipped for us. It was down in the mid-single digits a quarter goes. It's up high single digits, and in sales in the mid-single digits. So we feel very good. And we feel good about what we see in China for the remainder of the year as well. So that's a positive. Look, North America, very robust growth, broad strength, a lot of it driven by the nearshoring elements and core strength in hybrid and processed, 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 mid-teens, 14% in the quarter in sales, and orders that are very strong. And very honestly, highlighted by energy, sustainability and life science investments. 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 momentum as we go through the quarter here into the rest of the year.

Steve Tusa:

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

Steve Tusa:

Lal, I'm just curious from a governance perspective, the Aspen results, there's a lot going on there. I guess, I get a high level, some of it sounds like execution on some of these contracts. Perhaps in the, I guess, I call it, the 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 things that surprised them about the assets that you guys are contributing. How does that conversation work in the boardroom 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.

Steve Tusa:

Are you assuming a bounce back in your fourth quarter in those results?

Operator:

The next question comes from Nigel Coe with Wolfe Research.

Frank Dellaquila:

The main driver is obviously the improved outlook for operations. The uplift in the sales as well as the operational execution with strong price realization, all the things that drove the strong leverage in the second quarter, we expect to have in the third quarter and throughout the rest of the year. So, that is mainly the story. And that is strong enough to overcome the reduced AspenTech guide. 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 those are the main pieces.

Frank Dellaquila:

For the year roughly, yeah, in that range.

Ram Krishnan:

I don't know if we're planning for a major upgrade wave. But I think it's more a disciplined approach with each one of our customers to address the optimization benefits and the APM benefits and some of the capabilities that Aspen brings to improve the performance of the overall automation system that is installed in many of these customers. And we're going across the board, across industries, power and life sciences being the focus area. Everybody is very interested in digitally transforming their assets. And we're seeing more and more interest from our customers to launch digital transformation programs across the automation stack where level three software has an important role to play, primarily around optimization on the manufacturing suite, and then more the asset performance management and the reliability software on uptime of assets in their infrastructure. So that's the journey. I think you're going to see more and more of that. Sustainability is another area where software gets deployed. 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.

Jeff Sprague:

A lot of ground covered. I just wanted to touch back on capital deployment. And Lal has just 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 six month gap or so between the Climate proceeds and National Instruments closing. Just wonder how that might play out over that timeframe? Is there room for some more share repurchase? Are there actionable bolt-ons that could be happening kind of over the summer period? Or just what we should expect there?

Frank Dellaquila:

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

Ram Krishnan:

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, 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 impacting them. 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 KOB3 slowdown or KOB2 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.

Joe O'Dea:

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 sort of battery electric and semiconductors. But then the flip side of that, anything that you're just seeing from sort of a general industrial cyclical standpoint, whether the macro uncertainty is having any impact or whether it's more just kind of natural digestion of what's been ordered over the last few years?

Joe O'Dea:

Also, just wanted to ask about Natty and integration planning and sort of what efforts are currently underway that you're standing up, say, over the next six months to ensure a successful launch of the integration process there.

Operator:

Thank you. 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.

Operator:

Good morning, and welcome to the Emerson First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Colleen Mettler, Vice President Investor Relations. Please go ahead.

Lal Karsanbhai:

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 operational quarter. I'd also like to extend my appreciation to our Board of Directors and the shareholders of Emerson for your continued confidence in 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 billion 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 second quarter and the year, I'd like to say a few words about our headquarters announcement this morning. We conducted a comprehensive three-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 first quarter was very strong for Emerson. 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. Operating leverage, excluding AspenTech was 40% and ahead of our mid to high 30s expectation. Adjusted EPS was $0.78 for the quarter and was impacted by two main below-the-line items. Stock compensation 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's 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. However, despite these headwinds, operations performed above guidance as our business continued to execute. Lastly, we completed our committed $2 billion of share repurchase in the first quarter. 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. First, 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 is 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. 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 NEOM. 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 succeed with our joint customer solutions. In the first quarter, we were jointly selected to automate the Middle East's largest ethane facility by QatarEnergy and Chevron Phillips, Ras Laffan. Emerson will serve as the main automation contractor for the $6 billion facility, providing our leading DeltaV control system with AspenTech engineering and simulation products. 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 first quarter, 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. 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 maximizing value at ni.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 is 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. 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 NI at this time. Be assured that we'll continue to execute financial diligence as we review these opportunities. With that, I will now turn the call over to Frank.

Operator:

We’ll now begin the question-and-answer session. [Operator Instructions] Our first question will come from Scott Davis with Melius Research. You may now go ahead.

Lal Karsanbhai:

Hey Scott.

Colleen Mettler:

Good morning.

Lal Karsanbhai:

Hey Scott, good morning. Lal here. Yes, in the quarter, price accounted for 4 points approximately out of the 6, 2 points of volume.

Lal Karsanbhai:

Yes, sir.

Lal Karsanbhai:

Yes. No, a very active quarter in life sciences globally, Asia, Southeast Asia, United States, East Coast and Europe, a variety of projects we chose one to highlight with you today. It’s predominantly around automation. It’s expansion of capacity. 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 to you shortly, but that will give us another avenue as we bring optimization software into that space.

Lal Karsanbhai:

Thanks, Scott.

Operator:

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

Lal Karsanbhai:

Good morning.

Lal Karsanbhai:

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 million in terms of size, as we went through the quarter to about $7.3 billion globally, a large number of sustainability projects, large number of energy transition projects. And we’re executing very well in that capital formation cycle. So feel very good about that. So look, I think from an orders perspective, my expectation is 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 second quarter guidance to convert the backlog that we have in the business.

Lal Karsanbhai:

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, very good about our differentiating capabilities with our technology stack. Yes, there’s competitive bidding, but it’s nothing out of the ordinary that we’ve seen and nothing that we can’t manage within our pricing models.

Operator:

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

Lal Karsanbhai:

Good morning.

Lal Karsanbhai:

Yes, good 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. So the comparables there 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 second quarter 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 second quarter guide we put out there, but the full year at this point. Ram, any color?

Andy Kaplowitz:

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 costs come in a little bit better than you would have thought for Q1? And could that continue for the year?

Andy Kaplowitz:

Appreciate it guys.

Operator:

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

Lal Karsanbhai:

Good morning, Deane.

Lal Karsanbhai:

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

Frank Dellaquila:

Yes, good morning, Deane. 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 and 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. 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 discuss 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.

Deane Dray:

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 less core under the new automation pure-play framework. It’s just – maybe you can just comment on the willingness of the Board to look at this and potential timing in terms of monetization of those businesses.

Deane Dray:

Got it. Thank you.

Operator:

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

Ram Krishnan:

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

Lal Karsanbhai:

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

Julian Mitchell:

That’s great, thank you.

Jeff Sprague:

Hey, thanks. Good morning, everyone.

Frank Dellaquila:

Good morning.

Frank Dellaquila:

Yes. 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 $0.05 to $0.10 range now. 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. So yes, there, we had built in a little bit of an increase in the addition of AspenTech and more or less flattish for the quarter for Emerson, and then we had the mark-to-market impact that was driven by the 30%-odd increase in the stock price on the legacy plans. So that was entirely incremental to what we had in the guide, $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 we are – which is now kind of embedded in the year, and we will just absorb that and overcome it within the year guide.

Lal Karsanbhai:

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 is 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 million to $30 million 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. The specific one that we highlighted, of course, about $50 million in first purchase, which is the DeltaV 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.

Operator:

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

Ram Krishnan:

Good morning.

Frank Dellaquila:

Yes. Steve, you cut out a little bit – this is Frank. You cut out a little bit at the beginning of your question. I mean, again...

Frank Dellaquila:

We didn’t hear or I didn’t hear.

Frank Dellaquila:

Yes, on plan, very seasonal. So their fourth quarter, our third quarter will be a big cash flow quarter. And we see and 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.

Frank Dellaquila:

Yes. I mean, obviously, they can provide the color and the background on that. But I mean, that is the seasonal pattern for their cash flow, and we would expect that to maintain.

Lal Karsanbhai:

I can be very clear with you, then we’re not going to be the purchaser of the asset.

Operator:

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

Frank Dellaquila:

Okay. So Nigel, hi. This is Frank. So the – yes, we had a significant – of the currency that was in the quarter, a significant portion of it was due to the impact of the accounting on long-term contracts. So you have to mark-to-market long-term contracts. Typically, these are to EPCs, and they tend to be in places like Korea and other markets where we typically are in talking about currency as opposed to translation currency when we talk about Europe and China. And the accounting basically brings those marks to zero when the contract closes out, but during the life of the contract, you mark-to-market up and down. And depending on where you are in the life cycle of a contract and what the backfill is for those contracts, you’ll 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. 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.

Ram Krishnan:

Yes. So I’ll take a crack, Ram 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 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. And then to top it off, price will remain strong through the year that will contribute to growth as well.

Operator:

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

Lal Karsanbhai:

Good morning, Joe.

Ram Krishnan:

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 Ras Laffan 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. 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, their third quarter or their fourth quarter, our third quarter is the biggest quarter. It was last year, and it will again be this year.

Lal Karsanbhai:

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 build-up what we saw in terms of activity. I would suggest that the predominant element of growth came in two areas

Joe Ritchie:

Great. Nice to hear. Thank you.

Joe O’Dea:

Hi. Thanks for taking my questions. 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 thinking about for the cadence of that impact over the course of the year? And I think you also noted some price increases to start 2023. Is that broad-based? Are those more concentrated in parts of the business?

Ram Krishnan:

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. We have a few more product lines slated for midyear price increases around the April time frame. In general, though, I think pricing was 4% realized price in the first quarter. We expect it to stay at those levels as we go through the year. So pricing will remain strong.

Joe O’Dea:

Got it. And then I wanted to circle back on some of the Discrete questions and just kind of bigger picture macro. And 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 as the expectations 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?

Joe O’Dea:

Got it. Thanks very much.

Christopher Glynn:

Thanks. Good morning, everybody. Just wanted to tie a little bit the organic outlook versus backlog growth up $700 million suggests the 1.2 book-to-bill which seems a little incongruous 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?

Christopher Glynn:

Great. Thank you.

Gautam Khanna:

Yes. Thank you. Good morning, guys.

Lal Karsanbhai:

Good morning.

Frank Dellaquila:

Yes. No, I think we’ve had a concerted effort across our business to maximize the value of the $130 billion plus installed 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.

Gautam Khanna:

I appreciate it. And then just to follow up, any change the timing of the divestment out there on Climate Tech, anything noteworthy?

Gautam Khanna:

Thanks, guys.

Operator:

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

Lal Karsanbhai:

Good morning.

Tommy Moll:

I wanted to start on the industry outlook you provided across process, hybrid, discrete, little variation across the three, 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 am well aware there’s often apple and orange impacts here in making comparisons. But I was just curious, is there any conservatism embedded in these outlooks you’ve provided? Is there anything you would do to help us reconcile some of what we’ve heard elsewhere? Thanks.

Tommy Moll:

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 billion 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 and to the extent that…

Tommy Moll:

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?

Tommy Moll:

Great. Thank you. I’ll turn it back.

Operator:

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

Ram Krishnan:

Yes, so I – first off, I think a majority of what we’ve baked into the plan is comps getting easier. So, absolute levels stay the 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 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.

Ram Krishnan:

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.

Operator:

This concludes our question-and-answer session and the conference. Thank you for attending today’s presentation. You may now disconnect.

Operator:

Good morning and welcome to the Emerson Fourth Quarter and Full Year 2022 Earnings and Climate Technologies Announcement Conference Call. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Colleen Mettler. Please go ahead.

Lal Karsanbhai:

Thank you, Colleen. Good morning and thank you for joining us today. Please turn to Slide 4. Allow me to begin by saying that I'm very proud of Emerson's global team for the results delivered in 2022. Thank you. We had a strong finish to the results in 2022, with underlying sales growth of 9%, operational leverage of 36%, an adjusted EPS of $5.25, representing a 16% increase over prior year. As we will discuss during today's call, most importantly, we have a strong outlook for 2023, supported by end market growth and excellent operational execution. Shortly after becoming CEO in February of 2021, we embarked on an ambitious journey to accelerate value creation for Emerson shareholders. This required a bold transformational agenda, inclusive of culture, portfolio and execution. Alongside our Board of Directors, we underwent a comprehensive assessment of Emerson's portfolio and identified potential new market segments for investment. We designed the path forward based on a vision to create a pure-play automation company. Today, we achieved a significant milestone in this portfolio transformation by announcing the sale of a majority interest of the Climate Technologies business to Blackstone. Emerson, going forward, will be a unique automation company with a cohesive higher-growth portfolio exposed to diverse end markets and aligned to the world's secular trends, including digital transformation, sustainability, energy security and near-shoring. We have ample room to invest both organically and through disciplined capital deployment in M&A to build automation capabilities along our technology stack which is industry-leading and is composed of intelligent devices, control and software, serving leading customers in process, hybrid and discrete industries. We will do this while maintaining our commitment to return cash to our shareholders through share repurchase and the dividend. In 2023, we enter our 67th consecutive year of increased dividends per share. I’m excited and cannot think of a better time during my 27 years at Emerson to be optimistic about our future. To provide more details on our results, I’ll now turn the call over to Frank.

Lal Karsanbhai:

Thank you, Frank. Please join me on Slide 9. Our portfolio journey has been guided by a clear road map to transform Emerson into a pure-play automation company. And today marks a significant and definitive step on that journey. Our announcement to divest the majority interest in Climate Technologies to Blackstone is a milestone transaction for Emerson with compelling financial benefits. Emerson will monetize the majority of our Climate Technologies business and an attractive valuation of 12.7x 2022 EBITDA, providing approximately $9.5 billion of upfront pretax cash proceeds to invest in growth. The transaction structure also enables additional cash proceeds from the future exit of our noncontrolling ownership. With the exit of Climate Technologies, we are creating a company with a cohesive portfolio, higher growth and profitability. Our leading technology and software will be positioned to capture secular growth trends in digital transformation, sustainability, decarbonization and near-shoring. The proceeds from the divestiture will focus on strategic automation acquisitions that will strengthen our business and diversify our end market exposure and to return capital to shareholders. We are excited about the long-term value creation opportunity this transaction unlocks which we will have -- we will spend time discussing in a moment. Before that, I'll have Frank go over the details of the transaction and timing.

Lal Karsanbhai:

Thank you, Frank. Please turn to Slide 11. Climate Technologies is a leading $5 billion global manufacturer of HVACR compression products related solutions and controls. The business has leading positions in its segments and upside potential but is not aligned with our strategic vision for Emerson as a cohesive automation portfolio serving higher growth markets. Blackstone has a strong track record of growing businesses and we are confident Climate Technologies will continue to thrive under their ownership. Please turn to Slide 12. Today's announcement is certainly our largest step, as I mentioned previously but there were many others along the way. The work required creativity. And I am proud of what we have achieved in a very short time. We've invested approximately $9 billion in intelligent automation technology and software. This includes our recent acquisitions of Fluxa and Mita-Teknik and our 55% ownership of AspenTech and its announced acquisition of Micromine. These companies accelerate Emerson's growth profile, profitability and end market diversification into areas like renewable power, life sciences and metals and mining. We've also realized approximately $18 billion in gross proceeds from divesting noncore and slower growth assets at attractive valuations, like Climate Technologies, InSinkErator and Therm-O-Disc. Turning to Slide 13. This transformation positions Emerson as a $14 billion automation leader with an attractive growth profile, diverse end markets and leading technology. Emerson has the most complete portfolio of intelligent devices, control systems and software in the industry. This includes 13% of our sales from software inclusive of AspenTech, representing a leading percentage among industrial peers. These differentiated solutions and our expertise help customers solve their most complex challenges, including optimizing operations, protecting personnel, reducing emissions and achieving sustainability goals. Emerson is able to do this across a broad and diverse set of end markets within process hybrid and discrete and on a global scale. Turning to Slide 14. These end markets are experiencing key secular growth trends, as I mentioned earlier and these are aligned with many of the world's most pressing challenges. First, through digital transformation programs, customers are spending more on sensing and data, software, digital twins and other intelligent solutions to gain more visibility into their operations. As we discussed during our AspenTech transaction announcement, we continue to see our customer share of wallet shift towards software and digital solutions. Next, as the world pushes to net zero, sustainability and decarbonization investments are growing at a rapid pace. This includes the decarbonization of existing infrastructure through optimization, energy efficiency and emission reductions projects. It also includes the introduction of new energy sources like clean fuels and hydrogen. Lastly, near-shoring trends around the world have widespread effects on many industries. Underpinning each of these secular growth drivers is the need for increased automation, creating an incremental prolonged investment period for the solutions that Emerson provides. We look forward to discussing these organic growth programs at our investor conference in November. I'll now turn the call back over to Frank for more details on Emerson moving forward.

Lal Karsanbhai:

Thank you, Frank. We hope you share our excitement about the future of Emerson and the tremendous value creation opportunities ahead. The Climate Technologies transaction marks the biggest step in our portfolio transformation to a cohesive high-growth company. The $9.5 billion upfront cash proceeds from the transaction provides financial optionality as we look to strategically build out our leading automation portfolio. We are a great company and we will never rest on trying to be better. I'm excited about the future of Emerson. We look forward to speaking with all of you again at our investor conference in November, where we will share more about our ongoing value creation strategy. Thank you for joining us today.

Operator:

[Operator Instructions] Our first question comes from Andy Kaplowitz from Citigroup.

Lal Karsanbhai:

Yes. I know, Andy. Certainly, obviously, the $2 billion share repurchase is very important. But equally important is our discipline that we put in place around M&A. The work that I described alongside our Board to identify 4 priority industry segments is very important. We'll go into a lot of detail when we meet in November at investor conference on each of those 4 segments. But I will say that work continues -- is underway -- as we speak in potential activity in these segments. So we'll -- what I can tell you about each and every one of those is they're consistent with the automation stack. They are consistent with our perspective that we need a higher growth and end market diversification within our business. And I think we'll have a good discussion about that when we meet.

Andrew Obin:

I know you guys are going to have an analyst meeting but I’m still going to probe on use of proceeds. You sort of stated that – well, not stated but my understanding was that you would have a plan for deploying the capital if you were to monetize the assets and you have been very active monetizing the assets. So I just want to understand the visibility on the funnel that you have because you have plenty of capital. If I think what’s available, there is a private company that doesn’t want to sell. There was a target that didn’t want to sell that was public. So I’m just wondering sort of – it seems like you’re looking for a sizable target in automation space. And just what does the funnel look like?

Andrew Obin:

I would love it.

Operator:

The next question comes from Steve Tusa from JPMorgan.

Lal Karsanbhai:

Thank you, Steve.

Frank Dellaquila:

Sure. Steve, this is Frank. So there is a -- if you get to the $14 billion, basically, you've got about $4 billion, $4.3 billion being contributed by Blackstone in the form of common equity and the convertible preferred. That $5.5 billion of third-party senior debt, basically bank debt and debt from other parties. So if you add that up, you get to the -- including our PIK note, $2.25 billion PIK note and our retained contribution, our retained equity, you get to $14 billion and we can walk you through the exact numbers but that's how you get there.

Frank Dellaquila:

Sure. So the upfront proceeds on an after-tax basis, we expect will be around $7.8 billion; [indiscernible] pretax, about $7.8 after tax on the upfront proceeds.

Ram Krishnan:

Yes, Steve, Ram here. Yes, you’re spot on, I think, underlying orders are around 6% and then we’ve got $5.8 billion plus of backlog in the automation business that will convert into next year. So we’re pretty comfortable with the sales guide.

Josh Pokrzywinski:

Congrats on the deal. Just maybe a follow-up on the ‘23 outlook and with Steve’s question, how should we think about that volumetrically? Because I would imagine of that 6 point of order growth that you had that you got a lot of price in that. You said you got about 6 points of price, I think, in the core business this quarter. Just wondering how we should think about kind of the different pieces of the volume equation for ‘23? And then how much of that backlog draw you’re baking into the guidance?