Q2 2021 Emerson Electric Co Earnings Call
[music] on overall in the center on the prepared with FBR.
Good day and welcome to the Emerson second quarter 2021 earnings Conference call, all participants will be in a listen only mode.
Do you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Pete Lilly head of Investor Relations. Please go ahead Sir.
Good morning, and thank you for joining us for Emerson second quarter earnings Conference call.
Today I'm joined by my President and Chief Executive Officer, La Carson by Senior Executive Vice President and Chief Financial Officer, Frank Dellaquila, Executive Vice President and Chief Operating Officer, Ron Christian on.
I encourage you to follow along the discussion with the accompanying slide presentation, which is available on our website.
Please join me on slide two.
As always this presentation may include some forward looking statements, which contain a degree of business risks and uncertainty.
Turning to slide three I'd like to briefly highlight that Emerson has been publishing a corporate social responsibility report for many years now.
We have renamed the report the Emerson environmental Social and governance report and are excited to highlight all the goals momentum in global standards that our organization is working towards.
In particular, our environmental sustainability framework greening of Emerson by Emerson and with Emerson.
Captures our internal sustainability efforts.
Our enablement enablement of our customer sustainability journeys through our products and solutions.
Our collaboration efforts with various sustainability stakeholders I.
I encourage you to review the document next month when it is published.
As always I'm available for questions.
Please turn to slide four.
I'd like to briefly mentioned, our recent Emerson exchange virtual series, which took place from November through March.
Emerson exchange is a chance for our customers customer base to interact with other users industry experts and Emerson technology leaders.
Despite the obvious in person limitations of the pandemic.
<unk> had a tremendously successful virtual engagement with customers focusing on digital transformation sustainability technology and many other topics.
This virtual framework dramatically expanded the reach of this already very popular user event.
Due to the success of the hybrid format, we will likely be adopting such a format going forward.
More details to fall at the time and place for the next Emerson exchange event is finalized.
Please turn to slide five and I will now turn the call over to La Carson buy for opening remarks over to you well. Thank you Pete and good morning, everyone I would like to say a few things before passing it on to Frank.
Firstly to our global team three things.
Thank you for a tremendous quarter.
This was one that was delivered based on strong execution, which required agility and creativity as we jumped over a number of hurdles over the last three months. The result was top class profit leverage over 40% across our operations well done by everyone.
Momentum is building and it's more broadly today on across a large number of our markets than it was three months ago.
This expansion across both platforms now as the cycle expands will enable us to make critical technology investments.
Building on our strong differentiation and customer relevance.
Lastly to the teams. Thank you for welcoming me during my first 90 days.
Thank you for your energy and passion.
You Energize me every day and the journey and on the journey that were taking together.
Secondly, I would like to recognize David Farr, who stepped whose board service concluded.
After more than 20 years.
Thank you David for your many contributions.
And last but not least I would like to extend a warm welcome to Jim totally elected by the board of directors yesterday to be Emerson, new non executive chair.
Jim is a highly qualified independent director, who is extremely passionate about people culture and the future of Emerson.
I look forward to working alongside Jim and our entire board.
Frank over to you. Thank.
Thank you well good morning, everybody and thank you for joining US today, we had a strong quarter and I'd like to take you through the highlights of that over the next several slides.
The strengthening recovery that law referred to in most of our end markets combined with the benefits from our cost reset actions drove strong operating performance and strong financial results in the second quarter adjusted.
Adjusted EPS for the quarter was 97 cents per head of our guidance midpoint of <unk> 89.
And representing 9% growth versus the prior year day.
Demand strengthened significantly with sales ahead of expectations at 2% underlying growth.
On March orders towards the high end of expectations at 4% underlying growth.
Within that growth number for the orders significantly automation solutions continues its steady improvement in both orders and sales while commercial and residential solutions continues to experienced robust demand across all lines of business and in all geographies with 11% sales growth and 21% orders growth.
Trailing three months through March.
The cost reset benefits for the program that we implemented almost two years ago are being realized as planned driving adjusted segment EBIT growth of 15% and 150 basis points of increased margin to 19, 1%.
Additionally, cash flow continues to be strong up 37% year over year with free cash flow up nearly 50%. This represents a 125% conversion of net earnings.
We continue to execute on the remaining elements of our cost reset actions with the bulk of it behind us at this point, we initiated $21 billion of additional restructuring in the quarter.
Please turn to the next slide if you would force.
John.
On the EPS.
The EPS bridge.
Operational performance was very strong in the quarter, adding 2014.
To adjusted EPS as we got it in February stock compensation was a significant headwind in the quarter due to the mark to market impact, which was caused by the difference in the share price at the end of last year's second quarter and this year's second quarter of course, you'll recall that last year.
Share prices in general we're all severely depressed.
The onset of COVID-19, and we closed last year's second quarter at $48 versus $90. This year.
And net headwind was within a penny of the guidance that we gave you in February.
Tax currency and other miscellaneous items netted to about <unk>, <unk> tailwind and a small impact from share repurchase. So in total again adjusted EPS was <unk> 97 versus the guide of 89.
Please go to the next slide for comments on the P&L.
So as I mentioned.
Underlying sales growth exceeded expectations, and 2% and it was 6% on a reported basis, including acquisition acquisitions and currency Chris.
Gross profit slipped just a bit 10 basis points, mainly due to business mix given the growth in our commercial and residential solutions business.
SG&A increased by 10 basis points, but the real story here is that excluding the stock compensation impact operationally. It was down 220 basis points indicative of the magnitude of the cost reduction activity and the flow through the benefits. We had very strong leverage on SG&A and the spend was actually down year over year.
When you exclude the impact of the stock comp.
Adjusted EBIT margin was 18, 2% our effective tax rate was within a point of last year.
Share count at $603 million and again adjusted EPS of <unk> 97.
If you please turn to the next slide.
We'll talk about.
Earnings and cash flow.
Adjusted segment, EBIT increased 15% with margin, increasing 150 basis points to $19, one as I said earlier.
Leverage on the volume and cost reset benefits offset the material cost headwinds that we did see in the quarter.
Again stock comp was nearly $100 million headwind it was partially offset by some other corporate items.
Adjusted pre tax earnings were down 20 basis points to 17, 3% again as the impact of the mark to market on stock comp flows through.
The operating cash flow was very strong on almost a record again at $807 million up 37% free cash flow at $707 million was up 48% driven by strong earnings and favorable balance sheet items.
Lastly, trade working capital was down to 16, 8% of sales as the impact of the distortions from the COVID-19 related volume decline are beginning to normalize and as the businesses do a good job managing inventory as we returned to growth.
Please turn to the next slide.
We will go through automation solutions.
Orders continue to turn upwards here.
We were negative 5% on a trailing three month basis, making good progress and we're on the trajectory that we could mapping out for several months.
Underlying sales were above expectations at negative, 2% and were encouraged to see the continued sequential improvement in order rates underpinning the sales.
China was very strong and they were favorable comps, but also due to good strength in discrete chemical and energy markets.
Our demand in North America improved sequentially, but it did lag other world areas. However, there are noteworthy pockets of growth very encouraging signs in both discrete life science food and beverage and power generation importantly.
Importantly, we also continued to see increasing <unk> three activity across our process automation customer base, driven by increased <unk> and focus spend on opex and productivity.
Margin in the platform increased 180 basis points of adjusted EBIT 230 basis points of adjusted EBITDA, driven by the cost reset savings.
On the OSI integration continues to go well, we expected synergies being realized and we are increasingly encouraged and validating the case that we made for the acquisition when we did it last October.
Backlog is roughly flat sequentially at $5 $3 billion, but it is up 14% year to date.
Please turn to the next slide to review commercial and residential solutions.
The story here is very very strong growth.
Orders continue to strengthen with the March underlying trailing three month rate at 21%.
The demand is primarily driven by ongoing strength in residential end markets, but significantly cold chain professional tools and other commercial industrial markets are also picking up and contributing to the growth.
All businesses in all regions were positive indicative of the trend.
Strong growth in China over 50% was attributable to commercial HVAC and cold chain demand. In addition to the favorable comp.
Europe grew 9% on the strength of continued demand for heat pumps and other energy efficient sustainable solutions.
Margins improved 40 basis points at the adjusted EBIT level cost reduction.
Benefits were somewhat offset by price cost headwinds, which we will discuss a little more when we cover the guidance.
Commercial and residential backlog has increased almost 60% year to date to about $1 billion.
This is about $400 million above what we would consider normal for this business operations on working through the significant challenges to meet strong customer demand across most of the businesses on this platform.
Please go to the next slide and we'll talk about the updated guidance for the year.
Okay.
Based on the strength, we see in orders the increasing pace of business. We are very encouraged and we are improving our sales outlook for the year. We now expect underlying sales in the range of 3% to 6%.
Overall with automation solutions, roughly flat and commercial and residential up in the 12% to 14% range.
The stronger volume will drive improved profitability, we now expect 17, 5% adjusted EBIT margin for the entire enterprise.
Cash flow is also projected higher at $3 3 billion operating cash flow and $2 7 billion of free cash flow an increase of $150 million.
Our tax capital spending dividend share repurchase assumptions remain as they were.
We are raising adjusted EPS guidance by <unk> <unk> at the midpoint from $3 70 to $3 90, and we're tightening the range to plus or minus five.
Plus or minus 10 cents.
We're doing this increasing the guidance in the face of additional headwinds to profitability. Because we are very encouraged by the underlying strength of the business and the read through of the cost reset actions that the business has been working very diligently now for almost two years.
The additional headwind. So you can see on the margin there on the right on the slide mainly 50 million more of unfavorable price cost driven by continuing increases in raw materials cost and another $20 million of stock comp expense versus what we estimated back in February.
The speed and the magnitude of the price increases in key inputs steel copper plastic resins is unprecedented opt.
Operations are actively and effectively working to mitigate the margin impact through selective price and cost containment actions and the good work that theyre doing gives us the confidence to raise the guidance. Despite these increased headwinds.
On the plus side, we expect to retain about $10 million more in the year of the COVID-19 related savings that we previously previously estimated as basic activity like travel and everything that goes with it comes back in more slowly than we would have thought a couple of months ago.
Please go to the next slide on update on orders.
So as I mentioned earlier, our underlying trailing three month orders turned positive in the month of March at 4%. This was consistent with the upper range of the guidance that we provided to you in February it's driven by ongoing strength in commercial residential solutions as you can see a 21% and continued.
Significant improvement in automation solutions as our global markets recover and increasingly we see we see improvement on our traditional process industries as well in North America.
We expect general demand to remain strong for the balance of the year.
We expect the automation solutions markets to accelerate through the second half and the commercial residential HVAC demand will taper off somewhat later in the year, but we would expect to see some of the other end markets.
Commercial professional tools and such recovery, partially offset that tapering off in commercial residential so all in all.
We have a good outlook for the second half of the year. Please go to the next slide the underlying sales growth outlook.
Based on what we see in the pace of the improvement in orders for the second half we see growth in the high single digits range and about 7% to 11% and that will drive the full year growth of 3% to 6%. We expect net sales to be just a bit about $18 billion.
And with that I'll turn the call back over to law, we can talk about our business on end market outlook in more detail. Thank you Frank I'll just cover a few charts here with the group again increased momentum turning because on chart 15 here.
On automation solutions.
We are we.
We were lag through the recovery in the first half by our discrete on early cycle businesses within the platform and essentially whats occurred as we've navigated through the second quarter is a broader recovery in their midst in the mid cycle elements of this platform.
So we see a return to growth in Q3, which is which is very positive after five down quarters in this business.
And continued demand in short cycle as well as that acceleration in the core process automation markets in the back half of the year, yielding a four to eight range in the second half and a flat year guidance on sales. If we turn to page 16, I'll give you some color on what's going on in the world there.
He is.
Perhaps I did before I do that though I'll just.
Paint it from an income Colby perspective.
<unk> three has been incredibly strong.
Both in our discrete spaces, but more interestingly as we navigated the second quarter into.
Two our process spaces free.
<unk> referenced shutdown turnaround activity, which is up double digit mid double as the teens for the year ended sto schedules are holding and full honestly as we go into the summer into the fall season, which is very encouraging the sidewalk downs on are up almost 50% year over year on.
Also very encouraging.
Of course, the long term service agreements are up almost 40% across the world in the business very encouraging to see and really provides the fuel for the underlying activity, we're seeing in the process space.
On a <unk> one basis things are not completely stopped theres less activity, obviously, we digested a significant LNG wave, but theres more activity on the horizon.
We've entered the feed stage on two very important projects, the Baltic LNG and the Golden Island be ASF in China those are important.
Opportunities for four for us in automation and secondly, we were awarded the Sanford Costa Zone LNG project on the Pacific Coast in the Baja Peninsula of Mexico.
Each has a significant value for us and was awarded and will be booked here in the third quarter. So there is some activity we continue to engage on the <unk> one.
And as that starts to loosen up a little bit I think we're very well positioned.
On the tape honestly for the remainder of the year for this business is going to be the Americas, it's going to be a significant swing from a down 16% first half to a second half.
In that 10% midpoint.
And we will see that we saw that already as we entered April and will continue to see that recovery I think that as we go through the latter half of the year into 2022, Europe and incredibly strong first half driven by life sciences activity of our bio fuels the number of Kobe.
<unk> type project awards, and we continue to see that strength that I feel confident that that strength will be there.
Into the second half of the year of course across all of this the discrete environment has been very very good.
Into Asia, Europe, and in North America, whether it's automotive medical.
On our semiconductor and it.
We expect that strength to remain here so overall feeling.
Much better about the second half here and feeling very good about how North America is shaping up for us in automation.
Turning to chart 17 for comments on commercial residential.
What a great year. This team is having and obviously the beneficiaries of a tremendous residential cycle.
Much of it was driven by.
The pandemic.
Pandemic inventory levels pre pandemic inventory levels.
On a pre build in the the cooling season that then.
We also benefited from a secular shift into suburbs and high family home construction and renovation all of that has led into incredible residential strength through the year. Obviously my expectation is that starts to dampen as we get into the latter parts of the fiscal year. However.
On the mid cycle professional tools cold chain businesses are accelerating and Thats, what we see here in this very balanced perspective for this business throughout 2021 and on.
Very encouraged by what we're seeing on the latest cycle pieces of course.
There's some good underlying technology evolutions as well that will impact the residential be it the refrigerant changes or the heat pump moves in Europe, which are which will continue to drive good growth for those businesses and then turning to page 18, again, a very balanced picture here from a world area perspective.
And overall, a strong second half with the commercial industrial segment of this business continuing to improve as the residential market start to taper as have discussed I think all the various should grow again in the low double digit to mid teen range as we go into the second half in the Americas, we are.
<unk> residential demand remained strong in the near term and the commercial markets really starting to accelerate and the cold chain piece, particularly which is driven by transport and aftermarket and then we see the tools momentum building in the professional channel. So very encouraged by that Europe, I mentioned heat pump activity.
Expect that to stay strong and of course, a certain construction should bolster our plumbing and electrical tools business and then lastly in Asia, China is the headline contributed to growth as some of you have already noted and demand is driven by commercial air conditioning and cold chain solutions.
So with that Pete I will turn it to page 19, and we'll go to Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
Yes.
Yeah.
And the first question will come from John Walsh with Credit Suisse. Please go ahead.
Hi, good morning, everyone.
Hi, John John.
Hi, good morning, Hi.
Hi, So obviously a lot of focus will be on the Americas recovery just wanted to get your perspective in auto solves kind of how much of this is driven by kind of just run rating that.
Trends youre seeing in process against an easy compare versus kind of the growth you expect to see in those discrete and hybrid markets there.
Well, we're seeing John.
Good acceleration in underlying process, we went through a period of time as you recall of break fix environment with limited side access with limited STL type of activity. That's flipped obviously the inoculation rates in this country have helped.
The confidence that customers have and having others on site and having their own focus very honestly on site. That's driven now a level of activity that is incredibly encouraging and as I think above and beyond just the simple comparisons that we have.
The discrete strength to your point will remain I don't foresee that to wane at least as we go through the year.
In North America, but the real fuel there will be increased activity and we're seeing that in the in the in the rates that we're seeing that in quotation activity and in the daily booking activity in our shorts in our short to medium cycle automation businesses.
Great. Thank you and then.
Obviously, you updated your view here on inflationary pressure just as we think about the balance of the year could you talk a little bit about the price cost equation and if there's kind of any noticeable difference kind of Q3 versus Q4.
And any timing of price related to that thank you.
Yeah I'll comment we are.
<unk> noted we adjusted our guide there from the 25 million headwind to $75 million again.
Within.
The construct of what we believe we can guide the overall EPS. The teams are doing a fabulous job.
And particularly around the headwinds of plastic resins, copper and steel which have been challenging for us.
I would expect as capacity comes online channel that the that there is a little bit of relief on.
On price cost.
But again Thats, a wait and see so we took a more conservative approach there based on what we're seeing in the market and as we've discussed with the teams Rob any comments there yeah I think when we do expect the bulk of the impact frankly in Q3 and Q4, we didn't see much of an impact in the first half as you work down inventory, but the impact of steel and copper.
And rather than we'll see in the second half, but as Laura mentioned, we do expect particularly in steel capacity to come back online certainly our pricing on steel in China is better than what we see in North America. So hopefully as we get into the later part of the year, we will start that.
Seeing that steel pricing soften a little bit so that's kind of what's built into the plan.
Great I'll pass it along thank you.
Thanks, John.
The next question will come from Nicole <unk> with Deutsche Bank. Please go ahead.
Yeah. Thanks, good morning, guys.
Hi, Nicole clinical.
And so maybe we could talk a little bit about what's going on with respect to supply chain, obviously, a really hot issue. This quarter. So if you guys could talk about what you're seeing on to what extent that could be I got the cap to upside to revenues in the second half.
Yeah, So certainly.
A lot of price on supply chain, obviously in terms of inflation, but also availability on shortage challenges for example, you've probably heard it would be electronics challenges on chip shortages frankly, our global teams I would say at this point have done a remarkable job you know from an availability standpoint, whether it's availability of steel.
Plastic resin, where we've been able to move to alternatives on certainly on the electronics front, we've managed through our supply in terms of electronic supply from Asia pretty well the inflation side.
We're managing through that I think that theres, something now through price and productivity programs, we're addressing but to this point.
We haven't seen any availability challenges and similarly on the logistics front, whether it's ground Ocean trade our airfreight. Our teams have done a really good job blocking and the needed capacity to bring in material from our overseas supply chains, and frankly preferred range. We haven't had to go out into the spot market, yet, which is where we're seeing.
A lot of that inflation. So so far I would say, we're managing through it pretty well.
And the other piece I would want to point out is our regionalization strategy, where we really have regional supply chains supporting our business has been a significant benefit where we haven't had to rely significantly on overseas supply change to feed our plants.
Yeah.
Got it. Thanks, that's really helpful. And then I guess, you know thinking about the cadence of EPS revenue margin in the third quarter versus the fourth quarter anything you guys are on a highlight there I think usually you give us kind of a sense of what the next quarter's earnings will look like suggest you know anything you want to provide on <unk> versus <unk>.
Hi, This is Frank I think I think we're looking at a very very strong third quarter coming at US just based on the on the orders that we see in the backlog that we have available to us. So I would say at this point.
As I look at the second half.
Third quarter will be very strong in the fourth quarter will be good good little less visibility into the fourth so.
So that's kind of how we see it right now maybe it's a tad front loaded towards the third quarter.
Yeah.
The next question will come from Nigel Coe with Wolfe research.
Thanks, Good morning.
Sure.
Sales to the call today are good to hear Frank Lloyd.
And your interest.
So Congress.
[laughter] so on income rents.
The lengthened growth nothing to sneeze at very strong orders.
On the growth rate coming in at.
Likewise on some of your OEM customers then there is a deceleration from Q.
It looks like we got some nice acceleration come into the back half of the year, but just curious you know.
How inventory levels look in the channels on whether you saw some destocking happening.
During Q2, just as curious on that.
Okay.
Yeah.
Thanks, Nigel good to hear your voice as well.
I think there's a dynamic here between residential and commercial income rise across the broad business that'd be on climate into the tools as well, which has an impact there.
In terms of growth rates, we're seeing many of our OEM customers have reported with strong residential growth.
Although we have that we have a balance in our business between cold chain and NAC. So I think thats, where you probably see that difference.
Great.
This is Ben.
Random question here Lal, but on the Internet exchange.
Obviously virtual this year I mean, how does that play out going forward I mean, how would you see sort of the engaging with customers virtually.
We'll see you in person and how do you think that both going forward.
Yeah on a great question, John I know you've attended the exchange, it's a very special event.
For us in automation as you know and we get great customer engagement throughout and we learned a lot and obviously, we didn't have a choice as we went through an exchange season in the Americas and Europe. This year, but I think what we learned is that there is going to be a balance I think theres going to be a way to engage with folks on the ground.
Don't Wanna get away from that if we have the opportunity to do so but we can also reach a much broader base.
They are engaged with customers with through the virtual platform customers, who may not be able to devote a day or night of travel who may be interested in a singular subject.
He knows they now have the opportunity to dial in and listen in or see that presentation in a in a in a in a in a form that works for them. So I think it's going to be a balance side I think some of that engagement is still going to be important because as you know as you saw when you were in.
When you were there with us.
In Nashville, there is a lot of customer to customer engagement, where the value really comes in for those discussions. So we don't want to lose that.
But I think we in this new construct that you can reach a broader base of folks while not losing the the originally counted the meeting so.
I am excited about exchange I hope, we can hold it in the fall that guys are talking about the fall versus spring right now.
We'll see where we land.
Thanks, Bill best of luck.
Thanks, Mike.
The next question will come from Julian Mitchell with Barclays. Please go ahead.
Hi, Good morning, maybe good morning, maybe a first question on the the margin outlook you raised your EBIT margin guide to that 17, five number for the year as a whole.
Just wanted to double check sort of as we think about the second half specifically.
It seems to imply maybe a sort of mid twenties incremental on the segment level and maybe a little bit lower than that sort of all in <unk> because of the corporate aspects and so on just wanted to confirm if that's roughly the right math.
And any difference in incremental margins in the second half for the two divisions as vessels come race.
Yeah, I mean, I think thats and Im talking about now the Incrementals deleveraging I think thats in the ballpark.
Julien Hi, this is Frank.
It's in the ballpark I mean, the Incrementals I would expect to be higher in automation solutions, we will have to digest.
The price cost headwinds in commercial residential and that will be that.
Will be a headwind for certain on the Incrementals. Nonetheless, I mean, we're going to deliver good incrementals.
Profits in the business and we will have the leverage on those sales, but no doubt.
It'll hold those incrementals down at least for the next couple of quarters. So I think you would expect to see it to be higher in automation solutions.
And Congress.
Thanks, very much Frank and then.
Maybe a broader question around automation solutions.
The sort of top line outlook on the bed market backdrop. There. So we saw that the backlog was sort of flattish sequentially up I think mid single digits.
On yeah.
How should we think about that also installed backlog.
<unk>.
From here understood that may be big projects.
Relatively sparse that maybe the Kobe two stuff picks up.
How do we think about that as backlog the pace of the pick up from here.
Yeah. Good question good question Julien.
On.
Year over year backlog and automation is up 14% I believe is the number.
Obviously, we went through a significant.
Kent.
Through the first two quarters that suggest.
In terms of shipping K Obi Wan activity, we had particularly on our final control on systems businesses.
And the fuel of the revenue growth going forward. It becomes more mid cycle measurement solutions and end to end and systems and discrete business. So consequently, that's more what we would call book to ship within a quarter or within quarter on a half.
And I wouldn't necessarily expect a significant growth in the backlog, but within the parameters that we're in today, so and that would suggest 10% to 15% backlog growth, but without the basket will be one activity.
I don't expect that to grow beyond beyond the rate we're on today.
That's great. Thank you.
The next question will come from Scott Davis with Melius Research. Please go ahead. Please go ahead.
Hi, good morning, guys.
Good morning, good morning.
<unk> got it.
Comment encouraging comments you made on.
On April must have been a pretty darn good month, but I had a couple of kind of completely different questions. Since since Lal you you're relatively new I mean.
Our compensation structure is a little bit complex for your management team is there.
Is that one of the things you're working on kind of adjusting.
Early in your tenure here.
Yeah, so yeah.
Good to hear from you.
And Thanks, you know April April I did make the comment in April from an automation perspective, and commercial residential perspective continues to be on trend to what we do we have experienced and have expectations around so I'm encouraged by that now in terms of the construction, yes, I've spoken openly about the journey we're on in it.
And our culture and what we are undertaking here as an organization that theres a lot of energy around that across the enterprise.
Compensation is absolutely something that we're looking at and we actually we have a task force in place.
Today lead by Lisa flatten and she's looking through how we compensate.
On the executive structure, and others and I think theres a lot of opportunity there for us and we'll be we'll take our time, we worked very closely with the board on that as we go through the summer into the fall in and hope you have an evolution there as well.
Okay, good and as an unrelated follow up the heat pump market in Europe, you guys have been talking about for a couple of quarters now.
Is your product.
Technological differentiation I mean, perhaps you could maybe talk through kind of why you guys think you'll win in the heat pump market.
I think that I think we're very well positioned obviously with a strong customer base. We've had for a long time, but I think that the the the technology differentiator is really around style and deterioration in the heat pumps and efficiency.
And I think that's where we stand out versus what the marketplace offers.
And it has been a big part of the growth and what fuels the European opportunity going forward. So we're excited about where the product investments have been.
And where we can go going forward.
Sounds good good luck guys. Thank you.
Yes.
The next question will come from Steve Tusa with Jpmorgan. Please go ahead.
Hey, guys good morning.
Good morning, Good morning, Steve.
Strange to be on Emerson call it in the morning.
You still have to wait all day for that so thanks, thanks for that.
On the just looking at your comparison versus 2019. So your sales in the first half are down relative to 19. Your EPS is up very comfortably like.
20, plus.
If I just take the back half of 19 on EPS and add it to what you just did in the first half of 'twenty one.
Already kind of you know at the high end of your guidance range.
On the.
The sales comp year over year should be pretty similar just down moderately versus versus 19 still what's kind of the the big headwind in the second half I know price cost, maybe as like a nickel or something like that I I don't know, but it seems like you are growing very strongly over 19 without the benefit of revenue are.
But in the back half you really don't show any material improvement whatsoever versus 19, maybe you could just like help us with the moving parts there.
So Steve this is Frank I mean, the obvious things in the second half that we're not headwinds in 19 or both the price cost and stock comps. So between the two of those you've got 70 $75 million of headwind day to 10.
I take your point.
But we are waiting to get better visibility into the fourth quarter at this point, we understand that.
You know when you make the comparisons to 19, it's not a big increase over the second half of 19, but we do have some uncertainty to work through as we go through the second half year.
We're going to see how that plays out.
The guide we think the guidance range at this point is.
It's prudent and we're confident we'll get there and then some as we as we work our way through this.
And then just on the on the HVAC side, you know different players putting up different types of results all very strong from a customer perspective.
I know you guys have like kind of a big and to calendar year last year. What did you see on your kind of U S. Razee kind of core compressor business this quarter roughly.
Okay.
Okay.
So Steve this is Paul.
We had a strong we had a very strong quarter in India.
Climate business in the United States, we continue to see.
Orders accelerate.
Backlog conversion grew in the mid single digits excuse me sales grew in the mid single digits with the acceleration really occurring as Frank pointed out into Q3 for us and Thats, where youll see this really from a U S per purely U S perspective, and <unk> pop for us.
Right and then just one quick one how big is that business now as a percentage of of CR and ethylene historically, everybody kind of thought of you as a as a U S. Razee play I mean, given you've smashed these businesses together and you know.
China remains a big driver in Europe's growing fast I mean, how big is that kind of core U S. Compressor business now for you guys as a percentage of the rns.
It's a sizable business, we haven't disclosed the size of it relative to the entire platform, but you can assume it's a sizable portion of the tie in the entire climate than Crs.
Yes.
Okay, great. Thanks, a lot I appreciate it.
The next day.
Next question will come from Andrew <unk> with Bank of America. Please go ahead.
Yes, good morning.
Good morning, Andrew.
Oh, just sort of a big picture question.
If you talk to your customers.
The energy industry.
How much how fast are the budgets.
For the year and is there anything that can change them.
Is there any sort of reason to think that there could be potential upside given massively increasing economic activity given higher oil price or do we need to wait until next year to sort of see them change their mind.
Good question, Andrew I think budgets have been set on on our assumptions.
Around demand and are on.
Price, having said that there are significant skewed towards sustainability efforts, they are skewed towards efficiency and operating.
Elements of <unk>.
On the business.
And that gives us a good baseline of confidence in the recovery in the market, having said that if we do see.
More planes in the air more trucks on the road broader economic activity I think you'll see expansions.
In the in the budgetary as we go through the second half of the calendar year and into the second half of the calendar year and that will prove to be advantageous to the automation business above and beyond where we are we are we are set today.
Right and then another question on commercial and residential.
We think about the heat pump business in Europe.
Sure Hi, guys been talking a lot about it how much visibility it seems as part of sort of longer term regulatory trend, but how much visibility do you have on this business over the next 12 months to 24 months and is it accretive to the mix neutral to the next how should we think about that thank you.
Yes go ahead.
I would say we have very good visibility in Europe, as well as the heat pump opportunities in China, but in Europe, our engagement with the Oems, which play in this space has been very good. These are been traditional customers of ours. So as it relates to the new technology that <unk> referenced in terms of efficiency on sound, our strong product line and.
Our complete solutions position for that market more in deep engagement with the OEM. So I would say the visibility is good and then your question was margin accretive is that what your question was is it good for the margin on the bad for the margin, it's very simple I.
I would say, it's neutral neutral to slightly accretive to the margins are fantastic. Thank you so much.
Andrew.
The next question will come from Tommy Moll with Stephens. Please go ahead.
Good morning, and thanks for taking my questions.
Hey, John.
Mike.
Well I wanted to talk about the pathway to a record margin you referenced in the release and on the call.
Pairing to to where we were a quarter ago I'm thinking through the factors that may have changed so clearly price cost even if the temporary factors working against you in the last 90 days.
Flow through on some of the cross sell execution is at least as good as maybe a little bit better than expected, but if you just step back and think about.
Versus a quarter ago.
Pathway.
On the timing and the endpoint for that record margin progression.
What would you highlight for US is the most important thing is that a shift.
Yeah, I would say a couple of words.
Frank who actually presented on this subject to the board yesterday.
I feel really good about the path Tommy.
We have a potential acceleration on the path in automation solutions with tremendous performance in index.
On the cost.
The price cost that you referenced is predominantly in our day challenges are predominantly in our commercial residential business, but what I'll say is that they are on track to deliver adapt endpoint peak margin.
Work, so I feel very very positive.
Slightly ahead on in one platform on track on the second platform, Frank Yes, Tommy well summarized it well I mean, we did have this conversation yesterday and.
We feel very good about the timing that we laid out in February regarding the achievement of the margin targets in 2023.
The pickup in the pace of volume in automation solutions and the flow through of the cost reset actions that have been taken in that business basically put us on a year ahead of schedule. We believe in terms of margin improvement, there, which really derisked that plan.
And in commercial residential are very significant mitigation actions are being taken to offset the transient this temporary price cost headwind that we're gonna have for the next couple of three or four quarters and we are we believe strongly that we'll be right back on track to hit those targets as well so.
Thats well said, we feel we feel very good based on the levers that we have EBIT in the face of the unexpected price costs that we're going to get to the finish line in 'twenty three as we committed.
That's very helpful. Thank you, both and if I could follow up with.
With a question on culture Lal you know.
A few months in our.
Cultural modernization is clearly a theme that's important to you, but also one that that you've made clear is tied to value creation and execution.
So what can you provide us for for an update there about division now that you've had a little bit of time to think through how you're going to approach it.
Yeah No I appreciate the question Tommy the first thing one of the first things we're doing.
We need to measure, where we sit today and where we want it to go so we're working with and our strength firm to do a cultural assessment of the 58000 employees.
Salary employees of Emerson, but we've done a pilot to understand how the two works.
We feel comfortable that we understand their tool and we liked the tool. So we're going to broaden this out here in the month of May and what that's going to give us is a very important set of data and understanding where we are and where the population a company wants to go in terms of in terms of the culture.
I would suggest that in addition to that Tommy we've done we've taken care of some of the low hanging fruits some modernization of work practices.
Working with Mckinsey <unk> company on a diversity inclusion targets and goals, which will publish as part of the ESG report and after conversations with our board in June So theres a lot of activity going on we're all very energized about the opportunity and we do believe honestly economy at the end of the day that.
If we look more like the world, where we live and work inside of Emerson will be a better company will perform at a higher rate and will create more value.
Thank you I'll turn it back.
Thanks, Tommy the net.
Question will come from markets mid or Mike Mittermeier with UBS. Please go ahead.
Hi, good morning, everyone.
Good morning, Tim.
A lot of from the ready, but hey.
Hey, good morning.
Maybe a final question on price cost income rate if I could.
On the good news.
Basically Q1, Q2 EBIT protected from from.
It essentially using inventory.
So how should I read the guide to 75 million unfavorable price cost.
Given that sort of.
Don't lose sight of the future price wrong that you might be planning or is that based on what you've done so far in your best view on.
Inflation to date, maybe maybe we can start there.
Okay, Submarkets I mean that that incremental 50, if price cost that we've guided to is predominantly in commercial residential.
Obviously factored into the guidance and and you know it's a it's a complicated subject, but I mean with the with the major Oems.
We have material pass through clauses, but they are all different and they all operate with varying degrees of lag. So while we're confident the price comes back in it comes back in over time across the rest of the platform.
You can take deliberate pricing actions and mitigation actions as well to offset that inside of the inside.
Inside of the guide that we've provided so.
That's how we think about it and that's how it will play out that's how it has played out historically this just because of more pronounced increase than we have been we have seen in anybody's memory here.
Yeah.
Okay got it and then maybe a broader question on China, obviously easy comps in the past quarter here, how do you see the momentum in both short and long cycle. There on the ground, maybe you could take us on a tour.
We worked through the various funding to stay on China, specifically given that it's quite sizable for you guys.
Yeah. Thanks.
Thanks, Mike.
I feel good about what we're seeing in China, obviously, the past quarter was very very strong across both platforms.
Seeing good activity on the automation side <unk>.
<unk> three driven but also project driven particularly in the chemical segment, which is which is should should continue through the second half of the year and then the easier comps obviously come on the climate side.
But again encouraging trends there as well infrastructure commercial construction driven in cold chain around transport, particularly so feel really good about China for the remainder of the year.
Teams are very engaged.
And I feel positive about what we'll see throughout the fiscal year.
Yeah.
Okay.
The next question will come from Deane Dray with RBC capital. Please go ahead.
Hi, Good morning. This is Jeff Reive on for Deane. My question is I think in your prior guidance.
In WTS prices of 45 to $55 a barrel. So I think we're sitting above that level pretty comfortably now maybe how has that changed your thinking how is that factored into the new guidance and then what are you hearing from customers.
Yeah. Thanks Jeffrey.
Yeah, you know obviously, it's embedded in our thinking on that level of activity that we've baked into automation solutions in the up and the increase in the guidance. There, we're seeing that being reflected in the spend rates in the activity in the segment.
More on closer to that $60 number now, but as you can imagine customers that still relatively skittish as they forecast that we've talked about budgets in the past and one of the past questions. Here. So we're watching that closely but clearly as reflected in the improved increased guidance.
No.
I feel a little bit stronger about where tw ti ultimately will land for the year.
Got it thanks, and then maybe just another one can you talk about the just the chairman transition was it a conscious decision to separate the chairman role in the CEO role and then maybe do you have any update on the timing of a potential C CFO transition.
Well, you know Jefferies as CFO sitting right here with me to share them.
Very happy that he is here with me and on target.
Sorry to ask that.
[laughter] no CFO transition in the foreseeable future here Frank.
I'm very happy that I have Frank and very Blessed Sir Frank very honestly and his experience, which will be incredibly important for this management team. So nothing there to report in terms of the chairman I honestly.
It was it was it was not it was highly researched debated and discussed with the board.
Obviously, we feel very comfortable with the separation of role to enable me to to operate the company.
To learn the governance piece over time to have Mentorship from the board of directors are very important and again as you think about the early stages of my CEO ship.
I felt that that was the right decision I'm glad the board supported it and I think were landed in a really good place.
Very helpful. Thanks, Thanks, a lot.
Frank you are there.
Your retirement stop.
The next question will come from Andy Kaplowitz with Citigroup. Please go ahead.
Good morning, guys, Frank I'm still very happy around so.
Thank you Andy I appreciate that [laughter] alright.
So last quarter in Crs I think he was still wondering how your Q4 would look given tougher comparisons in residential on how the professional tools recovery would shake out obviously, you've refined your guide for the second half revenue growth and you sound. Good about your visibility into Q4 at this stage, but could you give us more color into how you were thinking about the Q4 growth against the more difficult comps.
How that might translate into FY 'twenty two grilles in the longer term revenue growth guidance that you gave at the analyst day foreseen on rest of five to seven per cent.
I will comment on it I I will natural growth because of the the cross section in the in the in the cycles throughout the early cycle residential I think we'll all agree it's going to taper off whether that tapers in Q4 or into Q1, but it will taper off it's been incredibly hot now for a number of quarters, but the good news is the.
Balance at that platform has in terms of not just in the climate side with cold chain, which is accelerating as we go into Q3 and Q4, but also on the professional tools side, which will balance off the consumer tool businesses, which have benefited from the do it yourself and in big store growth.
So the balance is incredibly strong Disney.
This point at least confidence heading into the latter half of this year and honestly into a balance perspective into 'twenty two.
That's helpful Al and I'm sure you guys don't want to update us on the funnel every quarter, but let me ask you about in the sense. So and you had mentioned $6 5 billion in your funnel I think you had mentioned one six for electrification funnel. So maybe it's a good time to talk to us about an update on the OSI, but also you know in terms of the funnel, obviously killed one actually perking up a lot.
Are you seeing new projects entered the funnel or is it really some of these old projects, maybe starting to move a little bit.
A little bit of both on.
Obviously, the two feed stages on Baltic and Golden Island, our things have been talked about on debated and discussed for a long time and so those are starting to move forward. So that's that element, but something like a stamp per ounce. Obviously in terms of need its relatively new we didn't know whether it was going to move forward as part of that significant a job early on.
G wave now this is the ninth job.
So very important to see that.
In terms of what's new in the funnel, it's still in that $6 $4 billion range the hydrogen related element.
Addition to that would be about $1 billion.
The electrification piece as you said about 11516.
There are some newer stuff in there, but it's relatively smaller biofuels.
On conversions.
<unk> of existing facilities on Modernizations that fall into the funnel so.
It's relatively static although it is encouraging as you pointed out to see some things moving to the left now.
In terms of resi.
Phenomenal first six months with US ahead of plan that we put together internally and two and presented to our board I feel great about the management team.
And what they are accomplishing.
And more interestingly I feel really good about the opportunity to continue to invest in the business and expand.
The sandbox I think it's a very unique opportunity for us in terms of both technology and end market diversification, we wanted to do both but we only do more both organically.
And if available Inorganically.
I appreciate it guys.
Thanks.
Yeah.
The next question will come from.
Tom Khanna with Cowen. Please go ahead.
Hey, Gautam how are you doing thank you very much.
Gotcha.
Youre not the only on them.
You're not the only one who gets you name Mastercard.
There would be.
No not at all.
Yeah, no we understand each day.
So remember John called quantum on when I was on.
Well on Little League baseball.
Oh gosh.
[laughter].
So.
A couple of questions first.
On the quarter, what was the mix of cash.
<unk> three at auto saw and what are you guys expecting in the second half with respect again it'll be three versus the other two.
So first for.
<unk> second quarter first half stayed relatively consistent at 59% on Kobe, three and on and very honestly I expect that to stay within that 59 to 60 range as we go through the second half of the year, It's a very strong mix, obviously for us but.
But that's kind of where I see it got them as we go as we go into the second half.
Okay and on your opening remarks, you talked about turnarounds.
Backlog being pretty strong visibility there being anything youre seeing with respect to scope of turnaround that's different.
Than you would normally see in a cyclical recovery any sort of change in customer buying behavior. That's noteworthy.
Yeah, no interestingly enough. So what we saw particularly in the upgrade turnaround environment. As we went through COVID-19 was that D systems upgrades for the most part continued and the reason they continue just because of the ability to perform a lot of that work virtually every monthly we have tremendous capabilities in our delta.
The business can do that in our ovation business to do that and that activity continued as as a system upgrades oh or performed around the world. What we're most what was mostly impacted on whats the stuff that hangs on pipe so on vessels.
<unk> net.
<unk> the flow equipment.
We're now seeing the acceleration and honestly, there's just no two ways to do that remotely you've got to have people on site and you've got to have a lot of people are not necessarily familiar with your site per what we're seeing and we'll watch whether this is a trend or not our two things Scott to your question number one the scale of the turnaround they may be doing one or two.
Two units versus the entire facility and secondly.
The the rate or the cycle, which the turnarounds outperformed many of these facilities have now gone over 18, almost 24 months without a turnaround. They may question, whether it can extend the cycle on turnarounds on the frequency of turnarounds based on this experience, we haven't necessarily gotten that net.
So just yet, but we're watching it very carefully.
We go through this cycle, particularly this season over the summer into the fall.
Yeah, well I'm not sure if you've got comments, though okay. Thank you very helpful.
That's fair.
Yeah.
Yeah.
Okay, Okay, well I want to thank everyone for your questions and your engagement today.
I felt phenomenon, Bob My first quarter as CEO I think the teams a lot of.
A lot of hard work and a lot of energy and.
And.
I feel really good about the momentum that we have as an organization for the second half of the year on into 2022. So thank you everyone for your time and talk soon.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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