Q1 2021 Emerson Electric Co Earnings Call

[music].

Good day and welcome to the Emerson first quarter 'twenty 'twenty, One earnings conference call on it.

Participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing star and then zero.

After todays presentation, there will be an opportunity to ask questions.

To ask a question you May press Star and then one on a touchtone phone to withdraw your question. Please press Star and then two.

Please note that this event is being recorded.

I would now like to turn the conference over to Pete Lilly Investor Relations Director. Please go ahead.

Good afternoon, and thank you so much and welcome everyone to Emerson's first quarter 2021 on your earnings Conference call I Hope, everyone is staying safe and healthy.

Today, I'm joined by David Farr, Chairman, and Chief Executive Officer, Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer.

Jamie Froedge executive President Emerson commercial and residential solutions and congratulations to La Carson by current executive President Emerson Automation solutions, who was recently announced as Emerson's next Chief Executive Officer.

Effective on February 5th.

As usual I encourage everyone to follow along with the slide presentation, which is available on our website.

Starting on slide three.

To briefly highlight two examples of the great work, our global teams are doing and some recent recognition from customers and the marketplace.

First Emerson plant web optics analytics software recently received the 2021 Iot Breakthrough award.

Emerson plant web optics platform helps customers collect ot data from a variety of sources and apply practical and customize the visualization and analytics delivering key operational insights to the right people at the right time.

Next turning to slide four.

Emerson recently received the 2021 control Readers' Choice award for our industry, leading automation control and instrumentation solutions.

We're seeing continues to receive positive feedback from customers and users of our products based on a relentless focus on technology on.

Matched customer service and critical domain expertise and our customers' industries.

Turning to slide five we will review the highlights of a very strong quarter.

First.

Emerson remains steadfast in our commitment to health and safety for our employees customers and communities.

Serving our customers in critical industries.

When cost control and positioning to outperform as we emerge from COVID-19 remain our key thematic priorities.

And we are starting to see the benefits of this focus flow through.

Next our regionalized operations remained steady and stable and we will continue to build upon our firmly rooted strategy of business localization.

Turning to performance Emerson delivered a very strong quarter in a challenging but stable, but stabilizing and improving demand environment.

The organization delivered adjusted EPS of <unk> 83 in the quarter.

Which was up 24% from the prior year and well above expectations.

We continued our execution of the broad cost reset plan with an additional $69 million of new restructuring actions.

Cash flow was a new first quarter record for the company with operating cash flow of over $800 million and free cash flow of $686 million up 90% and 121% respectively.

It is important to emphasize that the balance the end market diversity and stability of our two platform business strategy was critical to enabling the strong operational and cash flow outcome.

Even on down 2% organic revenue segment margins grew by 230 basis points to 17, 7%.

This margin improvement is a strong testament to the consistent operational execution of the global organization throughout the pandemic.

Despite lingering uncertainty and demand challenges in many key markets sales and orders finished ahead of previous guidance.

Commercial and residential solutions underlying orders remained quite strong, finishing up 15% on a trailing three month basis.

Importantly, our automation solutions business is showing signs of stabilization and improvement.

Given the orders sales and profitability improvement, we are updating full year guidance to reflect the stronger outlook.

Please turn to slide seven which offers details on the results of the quarter.

Both underlying orders and sales came in ahead of expectations at down four 5% and down 2% respectively.

Commercial residential solutions underlying sales was up 12%, while automation solutions was down 9%, but improving.

Adjusted EPS, which excludes restructuring and first year purchase accounting and fees was up 28, 24% to 83.

Well ahead of expectations.

As previously mentioned the organization achieved a new Q1 cash flow record driven by increased earnings and strong working capital management.

Operating cash flow increased 90% to $808 million and free cash flow increased 121% to $686 million.

Turning to slide eight we will briefly bridge adjusted EPS in the quarter.

Starting with adjusted EPS in Q1 of 2020 of $68 67.

Non operating elements, including tax interest FX and other items were a combined non factor, adding a penny in total.

Most important element was operations, which drove the vast majority of the EPS outperformance contributing 13.

Share repurchase added <unk> for a total of 83 in the quarter.

Moving to slide nine we will review the P&L.

Net sales were flat and we saw a slight reduction in GP margin, which was driven by volume deleverage and mix.

Meanwhile, SG&A as a percentage of sales declined by 310 basis points to 24%.

As aggressive cost control actions took effect.

EBIT and adjusted EBIT margins, which exclude restructuring and first year purchase accounting fees increased 350 basis points and 260 basis points respectively.

Also reflecting the cost containment actions flowing through.

Lastly, the effective tax rate came in at just below 20% slightly lower than expectations.

Turning to slide 10, we will review underlying sales by World area.

For the quarter, the Americas continued to show the steepest declines down 7%, but importantly, they started to improve.

In North America, we saw strength in residential cold chain life Sciences medical food and beverage and some discrete markets more than offset by weakness in many other automation end markets.

Europe grew 4%, while Asia Middle Eastern Africa grew by 3% fueled by strength in China at 7%.

All commercial and residential solutions world areas turned to growth.

Please turn to slide 11, and we will discuss our business segment performance.

Total segment adjusted EBIT margin increased 230 basis points to 17, 7%, reflecting aggressive cost control measures and strong operational execution, even was slightly down underlying sales.

Adjusted pretax earnings increased by a similar magnitude.

240 basis points to 15, 2%.

As previously highlighted.

Q1 cash flow performance was record setting with operating cash flow and free cash flow, increasing 90% on 121% respectively.

Free cash flow represented 152% conversion of net earnings.

Importantly, trade working capital dropped to 17, 8% of sales driven by strong execution by operations.

Turning to slide 13, we'll discuss the business platforms.

Automation solutions underlying sales finished down 9% for the quarter.

The Americas remain the most challenged down 20%, but showed signs of stabilization in early improvement.

Overall, we saw continued momentum in life sciences, food and beverage and semiconductor markets as well as some early signs of improvement in upstream energy markets.

Meanwhile, Europe, and Asia, Middle East and Africa, both turned to low single digit growth driven by strength in eastern Europe, and China, respectively.

Trailing three months underlying orders were down 13% again, reflecting stabilizing in early improvement trends.

Geographically the Americas continued to be the most challenged down 27%.

Asia Middle East and Africa declined modestly by 1% supported by China orders growing 6%.

Europe declined by 3% due to weakness in energy markets somewhat offset by chemical power and life science projects.

Restructuring actions totaled $64 million across the platform as we continued execution of the return to peak profitability.

The platform delivered robust positive profitability improvement despite the drop in revenue.

Adjusted EBIT and adjusted EBITDA margins increased 200 basis points, and 290 basis points, respectively as.

As the effects of the ongoing cost actions took hold.

Lastly, the platform increased backlog by $600 million.

Of which $300 million was due to the acquisition of OSI, the ending balance was $5 3 billion.

Turning to slide 14.

Commercial and residential solutions underlying sales were up 12% in the quarter.

All core world areas were solidly positive with the America is showing the strongest growth at 14% driven by strong residential cold chain and home products demand.

This growth this growth points to share penetration gains in many of our end markets.

Europe was up 8% as heat pump demand was driven by sustainability regulations and customer technology preferences.

Finally, Asia Middle East and Africa was up 7% driven by China up 10%.

As mentioned trailing three month underlying orders remained robust up 15% with all business units growing.

North America increased by 16% and robust HV AC and home products demand, while China was up 17%.

Restructuring actions totaled $3 million on the platform and we're primarily focused on facility rationalization and optimization programs.

Adjusted EBIT and adjusted EBITDA margins were up 230 basis points and up 210 basis points respectively.

Reflecting leverage on the increased volume and improved cost base.

Finally backlog in the business increased by approximately $200 million.

In the quarter at nearly $800 million, which is well above normal levels.

Please turn to slide 16, and we will introduce second quarter guidance.

Okay.

We now expect the underlying sales will be roughly flat year over year with a range of down 1% to up 1%.

This potential for the company to return to positive growth is earlier than previously forecasted.

The top line outlook is driven by continued momentum in residential life science medical discrete and food and beverage markets and ongoing stabilization and improvement in other automation markets.

GAAP EPS and adjusted EPS are expected to be 83, and 89, respectively, plus or minus two.

We expect adjusted EBIT margin to be 17 point out to 17, 5% with adjusted EBITDA margin in the range of 22 to 22, 8%.

Lastly, it is important to note that this guidance Embeds, an 11 cent change in stock price costs due to movement in the stock price.

Slide 17 introduces our updated full year 2021 guidance framework.

Management assumes that demand will continue to be challenging, but stabilizing stabilizing and steadily improving as global vaccine efforts mature.

We also assume there are no major operational or supply chain disruptions and that oil prices remain in the 45 to $55 range.

Given that context, we expect underlying sales growth this year with a range of flat to plus 4%.

Automation solutions is expected to be in the range of down three to up 1% underlying sales while commercial residential solutions is expected to grow between 8% to 10%.

As you can see both of these platforms platform outlooks are improvements from November.

We expect a slight decrease in effective tax rate as well as increases in operating cash flow and free cash flow to $3 5 billion and $2 $55 billion respectively.

There is no other change to the capital allocation outlook.

GAAP EPS is expected to be $3, 39, plus or minus 10.

While adjusted EPS is expected to be $3 70.

Plus or minus 10.

We have also updated our outlook for profitability headwinds and tailwind in the year.

Since last quarter, we expect that Covid related savings will now only be down $40 million. This year up from the previous estimate of $70 million.

However, we now expect that price cost dynamics will be slightly negative as raw material costs and available and availability become more of a short term challenge.

Operations are working diligently to mitigate this issue.

Lastly, stock price will be more of a headwind.

And now please turn to slide 18, and we will briefly cover the changes to the reset restructuring and Covid related savings plan.

Total company planned restructuring spend remains $200 million for the full fiscal year.

As mentioned, we now expect only $40 million of the $150 million of Covid related savings from 2020 to return as business conditions start to normalize in the back half of the year.

Accordingly, incremental 2021 savings have improved to $220 million.

Total long term annualized savings of the overall reset restructuring program are expected to exceed $650 million.

Please turn to slide 20 on I'll now hand, the call over to Mr. David Farr.

Thank you Pete first I want to welcome everyone to the first quarter earnings call on thank you very much for the interest in this great company.

Clearly a little bit biased on that is a great company.

Second I want to thank the global leadership team the executive leadership team and all of the employees around the world executing and delivering a fantastic first quarter for all of our investors.

The last 19 months had been hard with a cost reset for peak margins.

Downturn in late 2019.

COVID-19, pandemic and the resulting global recession.

And now the returned to growth.

My recognition recognition and planning to all of you is powerful and thankful.

Want to thank all of you for Mike Hart for what you've done over the last 19 months.

But now.

We have a new threshold of execution for the second quarter.

Total fiscal year.

I believe this team will make it happen theyre good.

Third.

I want to recognize and congratulate lawn carts volume as.

As the new CEO of Emerson.

So proud of you and so excited for you and how you and your new Oce team will take Emerson to new Heights.

As I and we have done the last 20 years on Chuck and I turn over the reins to me in late 2020.

Look a deep breath.

I paused on.

Smiled.

And then I move forward.

You are ready.

And have what it takes to lead Emerson.

On the right stop.

It does all the oce and global leaders.

I will be your best cheerleader Youre supporter.

And my follow on is always open to you and your team.

Foster.

Now.

Why now.

I'm healthy folks on that.

Got sick.

Nothing is wrong with me other than my right knee, which has definitely gone no golf. So the knee replacement is on the way Ive already talked on my Doctor.

The board succession planning process ran its course with many great candidates over the last five years on and thank all of them. They all know who they are.

Couple of could be in this room.

I also want to thank Bob sharp.

He was a close friend and really wanted to be CEO of Emerson.

But as Eni talk so on was not going to happen. So we decided to figure out how to make it happen somewhere else I wish him the best of luck.

As we went through the first quarter. It was clear to me the board.

That we clearly have one strong obvious candidate.

No.

The others are great leaders, great individuals, they're great trends they've done great things at Emerson.

Allow us the next leader so we decided.

But that's not the only issue there are other things going on across the company.

Company is in great shape, the P&L the balance sheet and the cash flow as a finance committee to allow this morning, John blanket up.

We had a very good final quarter in fiscal 2020 as you all know.

Orders have been turning up strongly the V shape recovery has been taken hold and really firm at this point in time.

We've had strong exceptional execution.

Around the massive cost reset that we embarked upon back in 2019.

Our cost reset costing us over $600 million when its all said and done the progress is enormous you've seen at the margin in the Port report fiscal quarter, you see on the margins in the first quarter.

We're going to deliver over $650 million of savings for the company. When it's all said and done the global teams led by these two individuals. These three individuals in this room low.

Jamie and Frank on the job done.

They don't need my help.

We are going to continue to deliver I.

I guarantee you.

Thats, one commitment that I made to the board.

Said, yes allows about.

The first quarter was strong on all fronts GAAP sales were flat underlying sales only down 2%.

And I believe.

In the second quarter, our GAAP sales will clearly be up.

And I think our underlying sales will be up also.

Maybe not a lot, but I think it will be positive.

Profitability was very good and with improving volume and cost out in the first quarter, great incremental margins on both sides.

Strong margins.

<unk> momentum.

And yes record first quarter cash flow of $800 million and free cash flow of $700 million.

Extremely strong execution around earnings and the balance sheet.

And we see a solid fiscal corp. Both in both platforms across fiscal 'twenty one.

Sales will grow this year, both on GAAP on our line growth standpoint, well have increased margins stronger EPS potentially even debt $3 70, which was our 2019 EPS with.

We're much much.

Much higher sales in 2019.

Plus strong cash flow in my opinion, the number well above the three point too, but I'm not the CEO. So he has to deliver that number.

With order and sales momentum in the second half of 2021 and going into 2022, we the oce believe will finally deliver the four plus dollars EPS of <unk> 22 based.

Based on our global economy recovery the momentum we see in the cost out it looks very good and we will talk about debt on the 16th.

Cost reset the drive the new peak margins in 'twenty two 'twenty three there are firmly in place.

The tire next the entire next generation team is ready to take the reins and lead Emerson forward.

Clearly, even with the COVID-19 vaccine rolling out we continue to restricted on what we can do.

We have to operate in a safe environment.

The normal Europe Emerson management process is somewhat.

<unk> not quite the same global travel live customer engagement, our face to face planning conference, which is known to be a compound sport at times.

Our organization planning process leadership planning process are all restricted and delayed.

We're doing them, but they're not the same.

So as I thought about what I can do as the CEO in this environment.

It's basically take my experience my maturity with many of you know on mature.

In this environment and help the next team.

Named the new team put in place get either way and health net.

Where I'm going to do.

I've talked a board about this it makes them it makes the most sense.

Yes, I said 2021, yes, I, even said maybe most likely later in 2021.

But the new facts and issues and I always like to surprise.

With our annual Investor Conference coming up this month on the 2016 I think the time is right on the new CLO standup present.

And not have the day Farr game, which many of you have had for over 20 years in some cases more than that because I work for Mr. <unk>.

The February 16th time, the pharmacist <unk> presentation with the next generation team is very important I'll be there to help I'll be there to advise.

I care about this company on a big shareholder of this company. It has been my life for 40 years.

Leading it for over 20 years.

The time is right.

As you know I've never believed in long long drawn out successes successions, Chuck and I had three days.

Hit me with the case on the chest. It took off per year for six months on a track them down because we try to break the quarter strength on earnings.

The team.

While already.

So let's move on.

Because I talked to the board, we all said the same thing.

So again, my congrats to low and the oce.

And then probably won't start to yelling match with me you'll quickly see on not sick.

So let's go to chart 20.

Yes.

I do have my stay unusual bad My rally Monkey My rally squirrel, which is really a rally ferret sitting here today, helping us out making sure I don't.

Lose my train of thought.

We have pretty good momentum in orders, we laid out boxes. We've started this box game as we put a forecast out.

I think April of 2009 2020.

With Frank at that time, Bob and myself, we delivered actually beat it we will.

Laid out the box on the first quarter you can see we came in better than the Blue dogs, where we thought it would be we're above that obviously at the upper right hand corner.

Jamie's business has been very strong he is executing he's building backlog that is one of those issues. He's got to get that backlog down allows business has turned.

It's it's not going to be quite as sharp as Jamie clearly has a different business model, but he's turn if you look at the next forecast next quarter. We now have a blue dot sitting pretty much on orders above the line.

With a minus four to plus six.

We're seeing good momentum in Europe, we're seeing good momentum in Asia.

See good momentum on Jamie's business, North America, and we're seeing some improvement and allows business, which I'm sure we'll talk about.

So again there.

Very good momentum on orders.

As we lay this out that's how we see it.

Jamie's business will flatten out.

For now, but he is running at high levels at this point in time, clearly some unique opportunity of growth there with all of these markets as he'll tell you go on the right way, which is great to see.

So if you look at 'twenty 'twenty, one what we're looking at right now for the growth this year as we presented the board.

We're looking at somewhere around the plus one minus one for the second quarter depends on what kind of execution, Jamie can get on this on the backlog. He clearly has issues relative to capacity COVID-19.

<unk>, which we'll talk about I think low short term business is starting to turn up and we'll talk about that and as discrete business. Even some of the onesie <unk> orders are starting to happen.

We have abroad second half it's hard on the third quarter will be a spike as we all know is a spike down.

But the key issue for US is to look at good growth in second half obviously the ratios will look really good in the third quarter.

Looking at the second half in the overall business based on that second half going into the fiscal 'twenty two.

What I want to do is turn it over to low now so he can talk a little bit about his forecast on what he sees some insights into the marketplace and then we'll turn it over to Jamie and let him do the same thing so allow the floor is yours.

Thanks, David I'm sorry.

It's been an emotional time.

A lot of us, leaving you worried O'connor.

Very special.

Yes.

I'm very proud of the team and the team has accomplished in the quarter.

John.

It's <unk>.

Phenomenal execution of our plan that we laid out for our investors last February.

We committed to do and we're now seeing it reflected in the P&L of the company.

We're generating some some of our own tailwind, which I'll talk to you about in the market is starting to recover broadly across many geographies as well which encountered encouraging.

This page 22.

Yeah.

Nothing really changed appreciably in our orders because we went through the summer months. However, as we got into the into the late fall we started to see an increase in activity, particularly driven by Europe.

And.

By Europe and Asia.

I'll flip to the next chart and give you some perspectives on how we see the outlook right now.

The industries that drove.

Growth dramatically or the discrete industries.

Driven by Germany, specifically, which had turned its economic engine on and start to accelerate both in the process space for internal consumption.

Its vast export market engine. So we started to see that improve in automotive and semiconductor packaging OEM.

As well as fraud activity across Europe around power and specialty chemicals segment.

In Asia, driven by China, as Pete highlighted growth of 6%, we feel very good about what we've seen there and expect that growth to accelerate into Q2, as we will talk about in a moment.

But the big the big.

Often in the room is North America, and what we what we experienced in North America was a stabilization of the oil and gas markets, albeit at lower levels Forecastable level.

With the business what has driven the business on the continent has been power generation mining in the southern cone and life Sciences throughout which has been a great story for us.

As a result of that.

We're seeing a recovery and expect to see sequential improvement in order pacing at or in sales pacing in the second quarter and in the second half of the year as indicated backwards for 'twenty two.

I May turn Dan Pete.

Sharp 24, and will give a perspective of how we see the world areas first half to second half.

Across most of the world and I can pick out one or two pockets here, we will see that improvement reflected any environment debt.

Discrete.

Entered through that discrete momentum that we built in Europe and Asia.

In the Americas, and North America, particularly and we've seen as David noted early signs of distribution based business recovery as we've navigated through December into January so that's very encouraging to see almost in Odessa, Texas, a few weeks ago I saw.

Within the.

Teams and talked about the plans for $3 $8 million a barrel.

Sales of day production for the year, which is a stable level.

It was a year ago. So we'll see maintenance of that increased drilling to maintain those levels in.

In those fields. So some encouragement there, but obviously demand will ultimately drive that.

Does that that market in Europe, I've talked about it's really been a German story on discrete business is up over 30% our process business is up over 10% in Germany alone in that and then there is there is increased momentum throughout the continent very pleased with the positive first quarter and expect that to continue and in Asia.

On a bounce back was important that was discrete driven and process driven as well and we feel very good about the funnel of activity that we see as we look out right now so I feel much better than I did in October David and team but.

And I look forward to a much.

Much of an outlook and executing in a better credit environment. As we go forward you did feel better until you got the CEO ring [laughter].

Even better because on Jamie Jamie's rolling.

I just want to Jeff for a very tough second quarter.

Yes, I think so I mean very interest in <unk>.

It's too early to talk about January but see the analogue analyzer on January because I think we are feeling the distribution. We are feeling some semblance of optimism and even the Americas and you've been you've obviously see some very good international orders so.

I think that things are setting up it doesn't mean, it's going be a perfect straight up you're going to be go on here that you go sideways step it but I feel very good about it Jamie.

Do you have like you said you are you can't you can't be the the.

The slowest antelope on the pack and that's really on the Tigers out there right now youre not the slowest antelope, but you've got a tiger out there running around so how do you see happening to your business.

<unk> has some kind of combination between growth.

Folks I've never seen before and kind of a material situation that we're all dealing with around the world and customers before I before I jump into that I just want to say a couple of words. Because this is this is on special moment on time here, it's not going to coming in.

I want to say, thank you and congratulations to.

David on just really an unprecedented career, what you've done in this space. There is no comparison to it.

I know, there's thousands of families and employees around the world that you've touched that wish they could be here to say this I'll speak for them as well to say thank you for all you've done youre part of on the fabric of this company forever and you've been a great leader and mentor for me, but you've also got you already great for him. So.

Thank you all I want to say congratulations to you we've known each other pretty much on.

I joined the company we are on a similar leadership class together and worked at corporate together, we worked on the businesses got work for you and automation now.

Business leaders on how I get to see you.

On the overall and I'm very proud of you I know that the leadership team has a great deal of confidence in and we're very excited about this next chapter together. So congratulations to you and your wonderful family, who have gotten to know over the years. So congratulations thank you Jamie.

So with that said, let's jump into the first chart. Their chart 25 and shows the updated outlook for underlying sales for the year as you can see heard throughout the call. The outlook for the year has improved since we last spoke in November we were out looking 4% to 7% underlying growth for the year. It was going to be about 5% to 6% in Q1, two to four in Q2 and $5 eight in the second half.

And growth in orders and sales, but really accelerated in Q1 as they've talked about and we saw greater than expected strength in North America residential markets, along with accelerated improvement really in all other businesses and rural areas and so from a Q1 order standpoint, we saw double digit trailing three months underlying orders for all of our businesses with the exception of professor.

<unk> tools, which came in at 2% after delivering 8% orders growth in the month of December. So it was improving as the quarter went on the broad product line of world areas of strength that we saw on Q1 orders the backlog we built what we continue to see on our business trends in January supports increased our outlook for the remainder of the year. So if it goes next chart chart 26.

These tools. These next two charts look at the business from a product line and then a geographic perspective first from a product perspective, we see underlying sales growth in the heating and AC business in the 9% to 12% range for the year extremely strong first half driven by residential market on a more moderate second half is by the fourth quarter inventory restocking should stabilize.

As demand may settle into a pattern closer historic cycles. However, we do see pause on the medium long term trends on the residential market driven by home ownership remodeling and a focus on efficiency and environmental concerns are cold chain business has exhibited a quicker growth recovery than anticipated in November we expect to culture.

On to grow more in the three to six range for the year now six to nine supported by a stronger Q1 unexpected which was really driven by a 20 plus percent Q1 sales and global transport positive growth in U S. Foodservice on December Cigna Foodservice is a tough market coming back slower we had positive growth in December double digit growth in U S food retail the second half of <unk>.

And double digit aftermarket growth.

Kinda delivered double digit Q1, cold chain sales growth of transport up more than 40%.

We anticipate solid stable growth on the cold chain as the year evolves.

Foodservice will continue to lag other segments.

But improvement in vaccine rollout could drive upside in that space in the back half of the year in November our outlook for tools <unk> home products was also on the three to six range is now six to nine our home product business and tools, we are impacted by residential demand.

We'll see extremely strong growth on the first half.

Just to put some of the home on contractor growth on perspective in Q1, our wet dry bag business posted 38% trailing three months fixed rate orders in our <unk> business saw 20% plus trailing three month fixed rate orders.

Growth again on the residential markets will settle into a more moderate growth rates as the year progresses, but very strong growth first half good overall fundamentals on the medium long term.

Leader of our professional tools product, we will see a return to quarterly sales growth in Q2, followed by double digit growth. The second half of the year aided by comparable in Q3, but also on general improvement in market conditions globally, which we already started to see as David mentioned for example, EMEA Asia, both turned positive in Q1 and general industrial.

And steadily improving overall commercial building construction globally will continue to lag the recovery of most of our other served markets Alright Net chart chart 27, our heating and AC compression business on 24% plus trailing three months Q1 orders growth.

With exponentially higher growth in residential our Q1 U S residential heating and AC compression business net sales grew 69% in the quarter with growth accelerating as the corner on hold and we do expect the U S residential markets have settled into lower growth on the second half of the first half as we've seen unique near term growth dynamics and the rebuild of inventory in the channel.

However, as I mentioned earlier, we do see some longer term positive residential trends persisting North America industrial continues to improve with commercial building construction lagging Asia climate trailing three months fixed rate orders through December were up 11% Europe climate was up 12%.

Sorted by continued strength in the heat pump space in Europe, along with weather conditions, improving market conditions overall in China.

Her all Europe Q1 climate fixed sales growth was 8% with heating growth up 40% overall Asia fixed rate climb in sales were up a little more than 6%.

Climate part was up 15% in the heating piece inside of that was up 30%. So we see pretty strong growth dynamics. The remainder of the year, North America, Europe, China, and the middle East and several smaller markets, but a slow recovery in parts of North and South East Asia. The Covid situations dynamic we're watching it closely around the world.

Now if we start to see any changes to reflect our current view of how the year's going to unfold and just to wrap up on what to say thank you to the entire commercial residential solutions team the whole Emerson team for tremendous quarter. All responded to unprecedented demand increases worked long hours to make sure we meet our customer needs, while working hard to keep our employees safe and we saw a historic increases in.

Demand in several businesses our team did a great job responding and what we all can't forget is the middle of a pandemic and so I want to I want you to know how much the entire leadership team appreciates all of your efforts so with that I'll pass it back to day of you David Thank you very much Jamie.

The key issue here is low need you to come through again in second quarter year on year I know you got a lot of issues.

Obviously keep the plants up and running as we told the board yesterday and again today, we are making investments for capacity for productivity for you now.

<unk> clearly got plenty of capacity, but he's moving new facilities out. So we will have capacity when it comes into 'twenty. Two 'twenty. Three so you really have a lot of moving parts I think your teams really great shape and I know the team here at corporate we'll try and support the best kind of as you go through this process because we are banking on your strong execution to deliver this year.

So the people on the phone I have been very busy last two days, if you can imagine board meetings.

Shareholder meeting.

I received over 500 e-mails in Texas.

I will get back to everybody it.

It takes time.

I'm not ignoring you.

Change my email address and I didn't block all the crazy ones out there that people sent me emails too it's wide open.

And I will have a webcast or on a morning with low and then I'll I'll start the process and work my way up you all I mean, a lot to me.

On my friend.

We debate, we don't always agree but youre on my friends and I will get back to every single person that has sent me emails in Texas or the over the last two days I. Appreciate that we're that we're going to open the floor for Q&A.

Again look forward to listen to this webex and webcast. The next time.

I guess that will be may and so are you guys going to have fun, but today, we have low fund one more time, so open the floor, but who is going to hit me first.

Well now begin the question and answer session to ask a question you May Press Star and then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys.

If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star and then two at this time, we will pause momentarily to assemble our roster.

Okay.

Okay.

Yeah.

Our first question comes from Andy Kaplowitz with Citigroup. Please go ahead good afternoon.

Good afternoon guys.

Randy.

Dave.

I know I speak for all of US you've been a great help to the entire investment community keep it real he keeps a light at the same time, which we appreciate congrats Lal I think youre going to need some sort of rally animal to fill those shoes.

Okay.

Taking my rally monkey on why rallies ferret that sector as those grow on home with me.

Yeah.

So David maybe a first question is one of the things you've talked about in the past is that youre hopeful that Ceos would begin to spend on capex again as the year unfolds and that's seen distribution begins to ramp up. So you order suggest maybe that youre seeing a little bit of that in automation solutions, but maybe you could step back and tell us if you can.

Mercedes has with customers are changing yet to the point, where they're starting to open up the capex spigots.

So I wouldn't use the word spigot, but I would use I think that the conversation is with Ceos. My fellow Ceos is that in the capital industrial they are opening up and we're talking about spending money around bringing lines back up Andy.

On getting some incremental capacity, we have a situation right now in the supply chain for Jamie side of the business. There is a huge capacity.

Tissue, rather is not on capacity and we know theyre going to have to there are going to start spending money around steel iron ore mining.

Copper plastics all of these things so what wows guys are hearing and we've been hearing on quite a bit.

The United States, even now and even in Europe, there are starting to talk about small projects and spending so.

Those conversations will continue I think youll start seeing capital, we're going to spend more capital this year I bet you.

If we had the time, if I even spend more but the time is not a big issue for us. So I think that we're feeling it and were low seen it we're on.

Really really really want to see it as the USA and I guarantee you jamie's customers his facilities all need capital and allows the ones going to make it for them. So that's what we see but we will see how that unfolds.

I think our discrete business in U S. Probably had a good month, we don't know yet totally but I think we had a very good month and that will tell me that the projects are coming at the distributors of the channel they're talking they're ordering product I think the professional tools with the same way.

Jamie shaking his head, yes, so that means the channels coming Andy So I think that.

I feel good about it now the question is the momentum we will see how much but they've got to spend some money here they've got to get things go on productivity wise.

So I feel good about right now.

It's good to hear David and then at the risk of front running on I'll stay a little bit when you think about automation solutions coming out of a downturn on the margin progression. When we look at Q1, you obviously improved adjusted EBIT by 200 basis points. Despite a decline on revenue. So it's a segment improves should be should you be capable of delivering over that you know mid 30%.

On Incrementals, you've talked about on the past given your restructuring efforts and do you see a path back to the high teens adjusted margin here over the next couple of years.

Well I'll answer that I have my opinions I'll, let him answer first because he's on his got deliver absolutely absolutely we're well on path handy to simply look at our peak margin plan in 2023, we want to stay that course.

If we do get that tailwind we have investments that we will need to make in this business. This is a technology business.

Built around phenomenal products that differentiate us in the marketplace in Atlanta and allow those participation games that we have enjoyed and benefited from so we will invest back in the businesses will stay measured.

I think we have opportunities, obviously and we are on a phenomenal momentum right now in terms of margin execution. So if you think about the next two or three quarters away allows business won't vote. He's going to have as earlier cycle businesses. Those are all is higher margin business and so if you think about DNI you think about measurement instrumentation you think.

About those businesses is a flow business as those are better margin business, that's what's going to come back for him first so he should have pretty good incrementals.

He does he doesn't have the same cost price pressure it has a little bit of it but not as much as Jamie does and I don't see a lot of <unk> type projects coming in for 12 to 18 months long answer, but I think that as he goes into 'twenty two.

My gut tells me he's going to have strong double digit orders going into 'twenty. Two in the fourth quarter question will be is the execution is as plants ready because you've got the moved on and I think he set up for a very good first half of 'twenty two margin flow through not every quarter is going to be perfect. Like this one but I think overall his team is really <unk>.

<unk> on this and I think they've got they're ready to have a good execution on our margin and they will reach those new peak margins.

Congrats again guys. Good luck, David Andy Thank you very much.

The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.

Thanks, Good afternoon everybody.

Their job.

Dave you're going to be missed hope you get that music soon go hit the lengths enjoy retirement, but yes.

Yeah. Thanks, Thanks, everything throughout the years my neighbor does not sound too excited about me retiring.

[laughter] he called it.

All I can do it.

Akepiro earlier, they've already came up to the truck. He says what are you going to do in the neighborhood.

Golar knocking on doors and ask them to help you do things like fixed air conditioning.

Concrete works, so lal by neighborhood Youre thinking about I need to move.

Okay, John let's get back to you.

Alright.

Well congratulations as well.

We've already been working with you're closer.

Maybe my first question Michael.

Yes, I know youre getting youre going to tell us more at the Investor day in a couple of weeks.

Maybe talk to us a little bit about how youre thinking about looking at things maybe from like a clean slate and maybe that's the portfolio maybe that's the margin trajectory, maybe thats the cost structure.

Any initial thoughts you have on on the transition and then making thinking very bright lines organization.

But I certainly appreciate the question on I was waiting to hear on who is the first one on app.

Congrats on that.

There are a lot of things that I've thought about.

But I need to internalize and discuss with the team.

Allow me a little bit of time I'd like to really focus today on what's been on just a phenomenal quarter for us for our organization.

Any guidance that we've put out for the year.

On the 16th of February it will be shortly upon us you'll hear our voices youll hear some of our thoughts.

And if you allow me that I truly appreciate it.

Okay fair enough.

Maybe turning it over to Jamie for a second you gave me when you take a look at that slide 25.

And you take a look at like the growth outlook for the second half and compare it to what we saw in 2020 clearly like you have your easiest comp in the third quarter.

And I recognize that things have been kind of like white Hot for you guys.

In the first half of this fiscal year, but how do I reconcile those two things.

Hi.

<unk> growth is going to step down in the second half just given given what seems like a really easy comp in Q3.

Yes, we will see I mean, I think Q4 is the big question Mark right now on the model.

What we one scenario is that a dramatic portion of pent up demand plus inventory that had to be restocked got pulled into the first two.

Two quarters, and possibly a little bit on the third quarter and so by the time you get to the fourth which you've got a tougher comp we started to see growth come back towards the end of last fourth quarter.

So it's a different comp youre chasing and could the residential markets go flat or even slightly down slightly positive in that range. So.

I think if we see the professional tools.

<unk> is doing very well in the second half both in terms of comps, but also just demands improving cold chain is going to be steady throughout the year. So it's really a residential story if residential has another wave here and stay strong and you have a you have a hot summer you have a very strong volume market in the housing market I think there's a lot of folks that didn't participate in the last week.

Dave of this this housing remodeling and purchasing that may be on the sidelines ready to go then it could extend we could have upside, but it's too early to tell and and so.

But that's going to be the key thing.

Got it thank you guys. Thank.

Thank you John <unk> CFO.

The next question comes from Steve Tusa with Jpmorgan. Please go ahead.

Good afternoon.

Good afternoon, Steve.

Congrats to you both Dave Thanks for.

All of the really fun times over the last I don't know 15 years or so it's been a lot of fun.

Thank you very much David hopefully, we will see each other at least one more time.

Maybe hope I'm I'm I'm definitely hoping for that.

But on to the results which were pretty good.

The second quarter guidance I think for E&S.

Reported revenue.

It looks like flat sequentially.

Do I kind of have that right and can you kind of explain.

Why that would be I mean looking back other than in 2020.

It seems like that that business is always kind of up sequentially comfortably.

And then I have just a quick follow up on the margins.

I would say.

Initial look at it.

You are right its probably flat because of FX foreign exchange Delta there and the question is also just some mix of business as Lal get the does he get the U S business coming in.

Yes.

So we see that really as we know that U S businesses, we're trying to be cautious on Laos business. He's done well the last two quarters beat the numbers Steve.

But right now it's just a function we got to get on that early term cycle business and so we did see that happening in January you should be able to do well on that second quarter, So probably a little cautious more than anything else and the currency impact from that perspective, Steve but you are right. Your analysis is always on.

We will see hopefully has a better quarter.

Yeah.

Alright go ahead sorry.

Yeah, just very quickly we're watching our later cycle businesses very carefully those will lag funnel control, which means they are the project based businesses, which had good and lag coming into this down cycle, So ramos who experienced <unk>.

Solid growth at this point last year, and having weakened and.

And so we will see him come in a little bit later, so that's going against us as well.

And how much revenue will will OSI contribute this year.

The Board plan I can tell you what that is it's around $180 million in sales hopefully get the 200, we havent whenever roof sharp maybe you had a good strong quarter. The first quarter see the on the questions got kind of Covid momentum Gartner Theyre really taking hold right now with our channel and obviously this whole renewable push is helping these guys a lot too, but it's a question of how much they can execute on.

Around the various customers, but the orders right now are easily hit the $200 million run rate, yes. So we booked nearly 95 million in the first quarter. Yeah. So on and then and then one last one for you I mean I guess.

Despite kind of this quarter, which was well above prior year margins on.

On a decline you're basically guiding I think to flat adjusted segment margins year over year.

For <unk> I mean is there any reason is there a mixed dynamic there or is there something some going on that we have two is it price cost like what's the what's the driver of.

Kind of a flattish margin year over year, I think did we give the individual margins out for the guidance now so let's see what Youre seeing is allows business will have a good second quarter second quarter margins. The big issue that Jamie is now going to override as the price cost is it material inflation's coming in yes, He's got leverage from volume as that levers from the reset.

But the material cost numbers are starting to hit him right between the eyes at this point in time, we had good coverage in the first quarter and now his team is working scrambling hard to figure out how to offset that so if.

If we get good news there then he'll be better than the margin in the second quarter, but he is the one that's going to be struggling when it comes to margin because the material costs and low I think Lal will have a good second quarter I don't I don't see are the automation business love a good second quarter.

And then one last 111 last one for you Dave.

I know you had kind of a tough ride in your first year as CEO, you had to kind of like break.

Break the streak and cut guidance I mean.

Do you have enough visibility to kind of.

You know make us feel comfortable that we're not going to be kind of sitting here on the same shoes six months from now.

Yes, I mean, the other problem is the gamestop things going on out there. We did have the dot com. That's the dotcom bust came in March.

That year.

We would have had problems with 911 issue to that year. So yeah. I did break this spring I did go see Chuck on say Chuck robots to break the 44 year quarters I knew what's going on to do on eventually but not my second quarter end.

You are right, Steve I think we I think we have a better feel for what's going on right now and I don't see a dotcom bust so on.

Feel comfortable I don't think that we're on.

On a sudden low up for that famous phone call to you guys no spec.

Gross back levels.

Notes back levels, Steve you said that optimists. Thank you.

Hey, Paul.

Did you break your leg playing hockey last week.

[laughter].

One thing I wanted to follow up on David you're absolutely right.

Based on but I did want to for all those on the call.

We've seen these cycles before I think the bounce back in volume is faster than we've seen before some of the materials issues are greater than the markets have experienced however, we're confident that throughout this year as we go into early part of next year and our relationships with our customers. The contracts we have our customers in regards to price and I'm on it all works itself out so on.

Our focus right now is on partnering with those customers getting the supply we need making sure we meet their needs.

We also are very much on focus how this tends to play out in regards to the price and demand situations. So moving there'll be months, where its a little rocky as we as we change things all the other months that are fantastic.

Or so.

Okay. Thanks, a lot thanks, Mr Tusa.

Okay.

The next question comes from Andrew <unk> with Bank of America. Please go ahead.

Yes, Hi, how are you guys.

Hello, Andrew.

Hi, Dave.

Thank you, Dave and Wow congratulations.

Thanks, Andrew.

So the question on sort of maybe goes a little bit into what are you guys going to talk at the analyst day, but.

With Delek either control of the Senate has the tone of the conversations with your customers.

Regarding green opportunities has changed and I think I'm, specifically talking about things related to the grid.

As it relates to ovation and maybe anything you're seeing on mining in terms of change in tone as it relates to evs and batteries.

So before these two guys. Tom we spent two hours of the board today on this very topic, because we've been working on it the board the board knows we've been working on it. So we made a decision to bring in the organization to talk about this today, so and so I'll, let lal and Jamie talked because both sides of these got our businesses are very much involved in this whole ESG around their sustainability.

Renewable stuff and I, just let Lal go first and then I'll, let Jamie go on this one because that's a very relevant question that we are really relevant in the space. Andrew go ahead, and you're right. Andrew This is Tim medical for US on what we'll talk about in the <unk>.

February meeting and we're very excited to share that with the investors and talking about the opportunities we have as Emerson, we're going on that debt.

A dedicated section on it Andrew.

No.

The dimensions that will speak about are within Emerson, the greening of Emerson, it's the greening by Emerson as we ate our customers are on various elements and Andrew and I have spoken about the carbonization in energy efficiency and emissions management and it's the greening with Emerson. So it's the partnering around solutions and organizations.

Around the world.

We have.

We are on a unique position as an automation and as a commercial residential business.

We fulfill what is a global demand.

<unk>.

Our global need here, so I'm pretty excited about where we sit.

It's a growing business there very various facets to it we'll try to walk you guys through it.

But over the last moving two years David.

We've had a number of individuals around the world working to specifically I'm excited to share that with you on the 16th essence, Jamie I think around alternative energies, Andrew I mean, we have a tremendous.

Start in sight I think we had the core technology as I told the board, we're going to have to create some new technology solutions, both internally and externally.

But we have the credibility with our customer basis on some of these areas. Here. This is gonna be a lot of work that happens in the marketplace over the next five to 10 to 15 years and I think we have a pretty good start Jamie and I will let Jimmy talked but we've been working on this for quite some time, we've been involved with the whole thing around refrigerants efficiencies, you think of the changing technologies and stuff.

Going on we've been living that with the governments around the world now for well over 10 years and if there's some big moves happening right now so that's why jamie's business in Europe is still strong. So once you know it is.

Great point look I think in general.

It's a product political topic around regulations on going to get into that if you just look at how it could impact our markets. When there is a clear regulation that gets put in place it gives clarity and certainty and decision making around what people should purchase what they have to purchase what they need to do in order to meet whether it's efficiency targets or its emissions targets et cetera. So.

Generally speaking it's good for our business because we're we're delivering compression solutions that have better efficiency that use lower DWP refrigerants, when a leaner on waste disposal capabilities globally.

And we got a lot of other markets that we're talking about here.

On the Investor day, and just in general terms.

It's a very positive trend for our business because it gives certainty to folks around how they need to deploy their capital or where they need to spend their money and as David said look our engineers our business leaders are on all the major committees around the world have been for many many years that are driving these these policies.

And driving the technical requirements around them and we're ready for it and a lot of cases on the technology is already being developed is getting ready to launch here in the next 18 months because we've seen this next transition coming for example on efficiency and low GWB refrigerant, So I would say.

<unk> automation business, our European team really pushes because theyre not big oil refining business. We saw some push out of Asia when Jamie is over in Asia, but the Europeans and so they got started about two years ago and now with the sort of acceleration on what's going on around the world. We have a very good running start.

From the standpoint of the opportunity and Thats, what we want to share with you.

We are a combination of doing ourselves, but also working with our customers and helping everyone reached these goals, but I'm pretty excited about this automation in the commercial and we have a unique situation for the next 510 15 years in this space. So I feel good about it.

Thanks, It sounds like you guys have quite a bit to say about it at analyst day, a final question on software.

Yeah.

Sort of multiple definitions of software but.

On the stand alone soft pricing.

I think it's like $1 1 billion.

That's one of the market I'm, referring to what kind of growth rates have you guys seen last quarter on what are you expecting for the business to grow at this year. Thank you.

Yes, we continue to see in that high single digit range, Andrew as we spoke about I think in the past that seems to be consistent through Q1, and what we expect for the year.

Yeah.

Again, we are.

It's driven by a lot of work in life Sciences as opportunities in the electrification grid you talked about.

But in core discrete and process is growth.

I think there'll be some years is really strong some years less but.

We're making good momentum there and we're going to continue to invest in startups in ventures around this area because it's both internally as you know Andy Andrew Sharp, Andrew and then also through <unk>.

Honestly, you're trying to look at acquisitions, but yes.

We have a good foothold in this right now on its really a covenant, it's going to be a key corridors.

What we're doing around the sustainability to it because it's not only do as a compression but use of electronics and software same thing with.

A lot of software for allows business too as we know I mean, Dave we were to somehow the other day when you start rolling out into all refrigerants low to you of any refrigerants day, they are going to require it'll be legal requirements around what the sensing you'd have to have correct. How often you have to monitor how you have to remediate. It. If there is if there's a leak or there's an issue so as the world moves more and more in that direction.

And it's just going to require more insight real time to two data and it's a huge opportunity for our business Andrew.

Andrew we have to launch, but we only have so much time, because unless they eliminate the former chairman.

We will run on time.

So they'll probably give me one chart Hello and goodbye.

We will see David.

Thank you David and congrats.

Congrats again.

Thanks, Andrew I'll give you another half chart.

[laughter] epilepsy.

Yeah.

The next question comes from Jeff Sprague with vertical research. Please go ahead.

So is that John.

<unk> broad sponger.

Sponger debt you called <unk> Squeaky on what are you John.

Before but I like that do nicknamed reviews. So we're gonna call your sponge.

How are you doing Jeff.

I'm doing well David Congrats so we're really going to Miss you you like the last of the Mohicans you know that right I mean, I know on the latter mohican truly volume.

Covid probably wouldn't.

But that's okay, you guys can't handle on many more and more he comes around here.

That's right.

That law will do a great great job Congrats law.

John.

Dave I was wondering if you could.

The address for US again is all of the succession wars, culminating.

To what degree if any did kind of a discussion about hey, maybe naming two Ceos and splitting Emerson at this particular juncture in its history and clearly where the decision.

That is clear based on the discussion today, but kind of what if any was the debate around that and kind of the pros and cons in your mind well so.

Not that it's a replay history, we went through that process back in 2019, So as we took the board through.

June through the end of say November time period, and we looked at the analysis of the two platforms on the strategic rationale around the two platforms that was obviously on the table at that point in time and the board hired outside help relative to these two issues.

And their opinion and worked with outside help it was very clear that we.

I believe there is more value in the combined basis net separating the two businesses.

And so the logic was around that.

The investments, we see going relative to this whole around the ESG or on sustainability around software, what we see happening on a global world right now as you look at the different cycles of classic is what's going on right now on the two different cycles on how they how they leverage each other that work was done back in the mid to late 2009. The board made a decision and as we went through this last 18.

Months gives us not quite 18, but close to 18 say 12 or 14 months. The board did not think about that at this point in time, they made that decision a while back on that that's where it sits on obviously clearly for a while standpoint. The board will continue to evaluate that and our strategy sessions with our board and his strategy sessions on the board and I fundamentally believe that we'll constantly on the table.

As we look at the mix of the businesses. If we look at where we want to go next and when we may want to get out of this company has been in and out of businesses. We get out of this business will go here and that's what's made Emerson unique for for the 40 years I've been around if you look at the 40 years on how we transform this company let alone the 20 years I did when we don't sit still.

So I mean I guarantee before low retires the company will look different than it is today now how are we going to look differently.

Net course will play its a handout with him and his team and the board. So that's how we look at it Jeff We don't look at trying to status quo. That's not our words status quo is not a word around here Juno.

Yes, no doubt.

And I was also wondering you've obviously worked extraordinarily hard to get costs out through this restructuring we think about these COVID-19 related.

Barry you know savings only $40 million on which are coming back how much of that kind of total 150 do you think does come back it sounds like you.

You know you're working hard to really mitigate that even looking into 2022.

Youre going on.

Really hard to measure because you're going to kind of get to 'twenty. Two the business is growing again.

So I would say obviously, what we've learned through this process. Some things will change so certain things will be different from our meeting standpoint travel standpoint, but at the same time, you're going to be looking at a company. That's growing as you get into 'twenty two is going to be a solid growth year for 2022, but I mean, clearly it's not a dollar for dollar coming back, but youre going to be seeing growth investments happening at that point in time.

We're growing but I would say it's been hard for us to get exact number, but we know it's not 100% coming back but we also know it is not only 50. So I've always felt that you would probably be somewhere around the 80, 80% would probably have to come back over time in 'twenty, we've learned from a different process, but it's really what happens what businesses grow Jeff.

But I guarantee we've learned a lot of different things here in the last not always a lot of fun things, let's put that way, but we learned a lot.

Great I'll leave it there. Thanks again, thanks, Chad around obviously, if it gets fun.

The next question comes from John Walsh with Credit Suisse. Please go ahead.

Hi, good afternoon.

Afternoon John.

Hey, Thank you to you David congratulations to all.

Thanks, John.

One of them on to those.

Got it.

So that's the goal.

[laughter] well you said that it was just your knees, so not yet luckily.

So.

I noticed some new disclosure here in the back around software I was just curious if this is just shuffling some things around for financial reporting or if you're changing the way some of the software actually goes.

Through channel to your customers.

It's a fundamental way as we've talked about we're talking about trying to start to report on our software sales.

There were the early stages of what how we measure it because one thing you want to do once you start going out with management World accounting World. The counts are going to sit there auto is going to look there and theyre going to say Frank shaking his head no.

So we've got to make sure we understand it exactly so we can measure a lot of companies on worry about those things, but Emerson does worry about the integrity around the numbers. So this is our first step as we start talking about it we want to make sure that we have really grounded numbers. So when we tell you what that is you know what it is and you can measure it so that it's a first step process.

So no change to channel no John No air to reporting.

Just from that start, giving some more insights around software at all.

Okay, great looking forward to that and then.

I guess just on the free cash flow guidance.

I guess is there some working capital associated with the higher sales. It just seems like you took the <unk>.

The earnings up higher than the free cash flow I, just wanted to understand the dynamic there a little bit okay. So yes.

What we see happening in this third and fourth quarters growth will be pretty strong now and someone said earlier, Jamie it's got a unique situation as.

This compares to the third quarter is really easy so he could spike and he doesn't know what it's going to be like in the fourth force. So we're trying to be cautious the other issue that we face right now on one of the reasons, we had very very strong operating cash on the first quarter, yes, low execution was very good jamie's execution was very good but we are in a situation with jamie's business that we haven't.

Seen before of this magnitude where all sudden these shipping using all of the inventory can and from the standpoint of getting inventory out getting paid and maybe not paying on suppliers on the payable side standpoint. He is in a situation right now where his trade working capital as a percentage of sale is extremely low this way that's based out and we know some on that well.

The reverse <unk> business starts slowing down in certain area. So I think we wanted to be very cautious as they try to estimate how much was that cash pull in because of the.

The working capital, but it was a very good quarter on earnings and execution and I think Frank and his team as you talk to the financial officers out there on a little bit more cautious I think as we get a better feel on the second quarter on the cash comes in I think I wouldn't be surprised if we don't tweak it back a little higher John to be all lines, but we're just being careful right now.

But I think that.

Earnings and cash flow excuse me on that was very good and we definitely will have cash burning as we get into that fourth quarter because of our growth rates.

Great. Thank you very much. Thank you very much John C zone.

The next question comes from Gautam Khanna with Cowen. Please go ahead.

Thank you guys and I don't.

Congratulations.

I am well thanks, Congrats on the Great run day then.

Congrats to lull and best of luck.

Thank you Gautam, how are you going to have to be entertaining on these calls too.

[laughter].

Net stuffed animals.

Thought we were tied on the backhaul, that's my Stan Musial bat and even take it home with you I'm going to take all of them.

I got on all having on whether you're going to be there, but I got other baseball got them I got baseball bats, I got a cricket bat up here guys, sorry, I got it I got a six day, it's PAE Fred the monkey in the fare, but hey.

Bass.

These guys are very encouraging people.

Between these guys on my neighborhood.

Olivia the ditch digging I believe that the garbage business software hurdles. So okay got it on one side have you gotten on have you gotten back into real life. Yet are you still hanging out on Jackson hole.

Yeah, no not yet so low.

It's possible.

Oh, no I was going to ask me.

Maybe maybe you'll address this in a couple of weeks, but you hear the HVAC Oems talk a lot about indoor air quality.

And that being a potential driver, especially in the commercial market commercial HVAC market I was wondering.

Does that person really play on that is there any specific.

Vic product solutions, you guys are offering that might add another leg of growth.

To your commercial HVAC sales.

Yes, we do I mean, some of its direct and some of its indirect right indirectly as the Oems work with different folks and they may put a broader air quality solution in place. It will also include an upgrade or a change out to the core compression solution I think the other piece around air quality is that tight humidity control competitive.

But the component of that and we found that a lot of air quality solutions work better in a tighter humidity band or <unk> business that we just bought we invested in early stage than we bought it out and now we're commercializing it.

As a business that is 30% to 35% more energy efficient and providing very tight humidity bands for they are handling space for initially commercial.

Buildings for example, and we will do some of that directly and we will also sell some of that through some of our large OEM partners.

So theres multiple ways, we play in and.

And I think we'll continue to invest in that space as we go forward in both solutions with Oems and maybe some that we sell direct to the end user base, but already we see a lift from it today, yes, I think the key issue here.

Is that.

What.

Jamie highlighted earlier in the conversation is that we see the states as we go through this current efficiency and refrigeration change, we see the states putting in some controls and monitoring and some.

Justification of where things sit which will be censoring software base and I think that's why we're gonna be playing around with this whole area, because they're going to want to know that systems, especially the commercial on our operating so I think there I think that Eric net will unfold here, that's something Jamie is going to talk about and we're investing in right now, but I think that I think that efficiency.

Are quality efficiency comfort does play for us and so I think that's going to continue to build on what I'd like I like that game for us.

Total automation, we worked on that business closed on a closed loop between control system on our if I can funnel controllable elements of our bedroom and element. If you think about the air quality space fundamentally it's moving in a direction you've got to close the loop you got to close the loop between the monitoring the electronics the controls <unk>, particularly management.

So for example, if you have a large commercial or residential thermostat business thats tied to key diagnostics on electronics, then you've got a big part of the puzzle there.

Theres partnerships. So you can have around those other pieces to close the loop and build a full solution. So we'll talk more about it on a couple of weeks, but we're very active in that space on I think we'll do more there going forward.

What else went on Ocado and.

Yes.

A second question maybe at automation solutions. So obviously the order comparisons get a lot easier to come May and June.

When you're Comping down 13 down 19.

And orders and what is the right expectation I mean, I know you gave the second half guidance for the range that automation, but are we going to see a bigger snapback in the absence of K O B one kicking in.

We could see a double digit month over two or three.

Get to the third quarter the fourth quarter.

Got it.

I think your assumption is right we should not expect that came on would be one activity for the Armstrong for 18 months I don't foresee that.

More significantly it will be too and obviously, what we've been living on <unk> certainly what I would tell you is that snapback is fully dependent on what happens in North America USA period on this story.

And that's really the that's really the debt.

Measured the dimension on how quickly it comes back home.

That snapback.

So I think we're trying to be cautious.

But I think you'll watch the order pattern that these guys will put out because we're not going to stop that on assuming loss.

While it's not going to start there he may make that decision but.

So just watch and see what happens from that standpoint at time for one more question out there for the next person.

Thank you John let me take care of and I hope to see in a real city one of these days.

Yeah Likewise reported.

Yeah.

The final question comes from Josh Poker's Lupinski with Morgan Stanley. Please go ahead.

That one right good way John Josh.

Close enough David it's been a pleasure.

Hey, Mike.

Are they just sponge so.

He deserves it.

Oh, that's fine Okay, that's that draws on lines okay.

Okay Josh.

David John on retirement, getting a few more dogs taken a few more cardinals game. So I'll certainly Miss you on Laguna, while congratulations and good luck you don't need it for sure.

Thank you.

But on to answer the question side of things.

If I look at auto saw kind of similar angle as was brought up before on Cnrs.

It looks like for the second half.

On the range got little wider and maybe a little bit lower.

I know the Wow wall and Dave you guys, both talked about <unk> and kind of the process centers energy complex is being guidance parameters are drivers of the high end versus the low end last quarter.

How do you see those evolving what are the drivers of that range today.

And how important is kind of that that Kobe three process bucket.

So I'll give my answer and I'll give I don't I mean, I know how these guys are thinking right now they've had a couple of good quarters. There is still negative Josh as you clearly see.

They have been very cautious relative to take on the back end up so I think they've been as youre right as it got a little bit better in the second and third day, probably get a little bit on the floor.

Look at the quarter end.

And so I think they are just I think these guys are being cautious because we have not seen the pure white on the eye relative debt U S recovery and I think the.

If we get a month or two where we see that consistent.

<unk> three <unk> type of ordering in the USA like we've been seeing in Asia like Youre seeing in Europe. I think these guys will get a little more comfortable relative to.

Net volume and net profit coming in so I think that's my impression on these guys they've gone through a tough market here, our cost reset and no one wants to say hey, this things <unk> over <unk>.

I mean, it looks like Jamie Jamie was cautious couple of quarters go on now.

As you run through it it's hard for them to hide so I think thats my feelings John anything you want to say there no.

I would add I think that's well said, David obviously, we're watching things like site access very carefully in terms of our engagements with customers. The spring outage schedules, which are holding right now which is very important as well those are all positive signs.

The short dated May order pattern, So Warner Parkway to day, what was your day to day order. This month, where do you think is going to be in the month of January we will land somewhere between 40 and $43 million somewhere in there day. So that's a good number revenue number that means he is coming back. So I think he is gaining these gains on everything is holding that we talk about from the standpoint.

Josh and now he just wants to see a couple of months of that continue on the you saw the early signs in December if January gets a detailed do you want to analyze the details that'd be good early at first half of February gets a divestiture conference then I think he's going to say, okay. It's definitely taken hold firm Mike just like we said.

Three or four months ago with Jamie's business. So I think that's what it is but all the signs are doing the right things.

Got it that's helpful and then going to the longer cycle into the equation.

The longer projects net got shelved with Covid.

Guys think that those come back off the shelf do we wipe the slate clean start over just giving you. The world has changed so much what are you hearing what are you talking about with your customers today.

We have a scenario where those come off plus we have post COVID-19 kind of new projects and in Europe on a scenario.

We're just happy to weigh in on all fronts, there would be great.

Yeah, I'll give you a quick color.

The funnel that's at about $6 $5 million appreciably have not changed for the last three months, what's happening within that funnel do on number of cancellations.

On dual replaced by <unk>.

A high number of smaller jobs, so quicker paybacks on those types of things. In addition to that what's been interesting is we now have about a $1 6 billion dollar of electrification.

Project funnel, which OSI brought to us. So thats. In addition to the $6 4 billion dollar K will be one funnel that we've been talking about traditionally will talk about this a little bit more in detail.

On a few weeks, but.

Overall fueled by those projects are going to eventually move.

Forward, it's just a matter of time here around demand yeah, I think from my perspective as I hear from our customers I think they can allow those projects will absorb the recut differently. The pressures on the pressures on the Ceos relative to capital and things like that so I think that the.

I think the projects there are good projects they will move forward, but it might be smaller they might be cut a little bit differently.

I think theres been a lot of discipline on our customer base.

Round spending capital that had been her learn the old fashion way through a lot of pain like broken legs broken arms couple of nice on the back.

And so I think that I feel good theyre going to be good there'll be obviously, some leaves on new but overall I think it is going because I think rob's got Walmart, but just one more thing to your point, David you're exactly right. If you were.

Your project was a quote unquote bottom of the barrel type of refinery project desktop scrapped fewer project as a conversion to a biofuel.

Finally on those projects are moving forward there are many active in the United States and Europe and were very engaged in those processes.

It's going to be there.

It'd be a good that'd be more late 'twenty, one early 'twenty two Josh as I see it right now.

So he's got.

<unk> team has got a lot of work that got to get done and they've got a lot of repositioning work on facilities underway right now in Europe, and he's got to get that done because his business is coming back and he can use capacity around the world right now to cover it but when he starts getting all the Waterbury market is going on you've gotta get he's got to get that there was on those new facilities up and running.

And with that I want to thank everybody and again I will get back to people on the E. Mails that it's going to take me a while and.

I truly appreciate what people set sent to me and Texas and emails and I look forward.

Why don't I will try to get in before.

They go out to pasture.

We will try to get into New York and have some sessions.

Trying to help while on most likely appropriate Jamie long distance. So he can learn too.

But we want to do that that's part of my my learnings that I can pass on to these guys. These gentlemen, and I have been doing this a long time as you know not only have 20 years of CEO, but I was when I came back from Asia I became the spokesperson for Emerson for those three years and I was investor relations Guy for multiple years.

Months, but I look forward to seeing all of you and Mike.

Truly appreciate everything you've done for me over the years and keep me straight keep me honest and challenge me in.

Disagree with me I love that take care bye.

Okay.

The conference has now concluded.

Thank you for attending today's presentation you may now disconnect.

Okay.

Okay.

[music].