Q4 2021 Emerson Electric Co Earnings Call
Green hard to abate sectors. My Kids works this year to drive many greening of bi and with Emerson initiatives.
One notable green Green by example.
In the recent announcement between biotech and Emerson to accelerate production of distribution of low cost low carb low carbon hydrogen and the agreement Emerson will deliver advanced automation technologies software and products in support of biotech building hundreds of fully autonomous hydrogen units to enable hydrogen fuel cell.
Commercial trucking fleet and abatement project in steel and cement.
Another exciting initiative is our $100 million commitment to corporate venture capital Emerson ventures designed to accelerate innovation by providing insights into cutting edge technologies that have the potential to solve real customer challenges the.
The investment commitment will advance the development of disruptive discrete automation solution environmentally sustainable technologies and industrial software in key industry, a formal announcement in more information information will be seen in Tomorrows press release finally, our Investor Conference. Historically has been in February however, due to the recent amounts.
Yet with Aspen Tech, we have decided to move our Investor conference to make it will be located at the New York Stock Exchange on May 17th 2022, I'd like to now turn the presentation over to Emerson, President and CEO law person by for his opening comments.
Colleen and good morning, everyone two.
2021 was a phenomenal year for Emerson.
Developed very differently, obviously than we planned a year ago for one I was named CEO and brought a new value creation agenda to the table, but equally important we operated in an environment, which was both rewarding and challenging for the organization.
Through it all our teams around the world did a fabulous job.
I want to express my sincere gratitude to all the Emerson employees around the world. Thank you.
I would also like to thank Emerson's board of directors and our shareholders for your support and confidence in the management team.
2021 was characterized by strong demand in our residential air conditioning business as well as our hybrid and discrete markets and automation.
Furthermore, we have experienced a recovery in process automation markets.
Automation Kobe three mix for 2021 was up two points to 59% and.
And Emerson September three months trailing orders or plus 16%.
We grew five 3% underlying and leveraged at 38% operationally inclusive of a $140 million swing.
Price cost assumptions from November through to the end of the fiscal year.
The earnings quality of this company continues to be excellent with free cash flow conversion of 129%.
The fourth quarter, However was challenge significantly by supply chain logistics and labor challenges.
And that is not the similar from an anything you've heard before.
This was experienced in the form of material cost inflation, notably steel electronics and resins.
Lead time extensions. In addition, we experienced logistics challenges and availability of wanes and costs and lastly, U S manufacturing labor, which was characterized by higher turnover rates.
CMT is and overtime costs.
In the quarter, we missed sales by $175 million.
Alongside a challenging price cost environment in our climate business. It resulted in a negative <unk> <unk> impact to EPS for the quarter.
And then 19 impact to 2021 EPS.
Having said that the company grew 7% in the fourth quarter and had 19% operating leverage.
Turning to 'twenty, two and some initial thoughts so far.
First half of the year will not look dissimilar from the fourth quarter with slight sequential improvements as we go through Q2.
Price cost of supply chain challenges unwind in the second half of the year.
Against the backdrop of continued strong demand.
The price cost assumption in the year will be a positive $100 million for 2022.
I am very optimistic for 2022, the operating environment has unpredictability, but it is significantly more stable than a year ago and demand is much stronger.
The residential AC cycle would moderate as we go through 2022. However, we expect the automation markets to continue to strengthen driven by digital transformation and modernization replacement and MRO markets and select LNG sustainability, driven Colby one.
Most notably methane emissions reduction projects.
And carbon capture.
I have confidence that we will deliver 30% incrementals on our underlying sales in 2022.
This addresses execution and as you know that's one of the three pillars, we identified that as a management team for accelerated value creation.
We have equally taken significant steps in our journey to modernize our culture and advance ESG initiatives.
The board named Jim surely as the company's independent chair of the board.
We named Mike train is the company's first chief Sustainability Officer, and we hired Elizabeth <unk> as Emerson's first chief people officer.
I'm very proud of the diversity targets, we set for the enterprise the changes to our long term compensation and annual bonus structure to include ESG measures and the commitments, we have made to accelerate green gas greenhouse gas intensity reductions.
Lastly, turning to the portfolio, please turn to slide four.
We recently concluded a comprehensive portfolio review, which culminated in a two day session with our board of directors in early October.
We left the meeting whether the firing portfolio roadmap and pathways.
Key elements were as follows.
Firstly in terms of the portfolio today, and how we are thinking about it.
Diversification is critical we will continue to divest upstream oil and gas hardware assets.
Lee, we will action low growth or Commoditized businesses, and lastly, we will action disconnected assets.
All three of these actions will take place over time with intentionality patients and a keen awareness of cycles and meeting the value creation proposition to our shareholders.
Secondly, we identified four large profitable high growth end markets, each with at least $20 billion of size and projected to grow higher than 4% a year into the future supported by macros.
The four end markets.
We'll be we'll be the hunting ground for our M&A activity.
Lastly, we defined two possible and states for the portfolio and the jewelry that willing barcode and Theyre, having park zone.
One of the four markets is industrial software of $60 billion bulk dollars segment that we identified growing at 9%.
The Aspen Tech transaction is an exciting step for Emerson and a very important transformational step for this corporation.
<unk> is one of the best run industrial software companies in the space with highly differentiated technology and a phenomenal leadership team led by Antonio Pietri for who I have the greatest personal admiration.
The Aspen Tech company will be a highly diversified business with transmission and distribution as its largest served market and its uniquely positioned to enable our energy customers to transition to a lower carbon future.
Im optimistic of the synergy opportunities that exist and believe the new Aspen Tech, which will be 55% owned by Emerson shareholders will be a differentiated platform for future industrial software M&A.
I am very excited about this is I hope you can tell.
We expect to close the transaction in the second quarter of 2022, following the completion completion and approval of the customary regulatory items.
With that I will now turn the call over to Frank Dellaquila, Emerson's Chief Financial Officer.
Thank you Laura and good morning, everyone. Please turn to slide six if you will.
So we're really pleased with the financial results for fiscal 2021 as well as we entered the year with a great deal of uncertainty.
And far exceeded the expectations, we had at the beginning of the year.
The underlying demand environment develops.
We bought it it was continued strength in global discrete and hybrid automation markets and the North America process markets began to gain momentum later in the year.
The global demand in our commercial residential mortgages was strong and broad based particularly in the U S residential air conditioning markets and it's far exceeded the expectations that we had going into the year.
Our operations team successfully worked through labor and supply chain issues.
Particularly towards the end of the year and delivered strong results that we're able to report to you today.
Towards the end of the year, the intensifying combination of rising material cost supply chain challenges and labor constraints in the U S. It would begin to weigh on sales volume and profitability. We've worked through that in the fourth quarter. We will continue to work through that in the first half of fiscal 'twenty two.
Despite these fourth quarter challenges. We're pleased to report that we achieved the key financial targets that we committed to you in August.
Growth adjusted EBIT margin adjusted earnings per share and cash flow you can see all of that in the table.
This was achieved in the face of an unexpected increase in key raw materials, mainly steel and copper that resulted in an unfavorable price cost swing of $140 million during the year versus the expectation in the guidance that we gave you a year ago.
We're very grateful for the extraordinary effort of our operations teams at every level of the manufacturing employees who made.
Hey.
Made this happen under some of the most challenging conditions that we've seen.
Please turn to slide seven.
This slide highlights our strong 2021 results. The continued recovery in our end markets drove strong full year underlying growth with more than 5% net.
Net sales were up 9% year over year, including a one point impact from acquisitions, namely OSI, which closed at the beginning of the fiscal year.
Adjusted segment EBIT benefited from strong leverage in operations.
38% as well I'll, just mention that adjusted EBIT from underlying volume and the benefit of cost reset actions that were begun two years ago.
These cost reductions more than offset price cost headwinds, which as I said were $140 million versus our expectations at the beginning of the year and the supply chain challenges that raise costs and reduced availability.
Cash flow was robust up 18% year over year attributable to the strong earnings growth and working capital efficiency free cash flow conversion of net earnings was 129%.
Adjusted earnings per share was $4 10 exceeding our guidance by <unk> <unk> at the midpoint and up 19% for the year.
Automation solutions underlying growth was flat year over year growth turned positive in the second half driven by strong discrete and hybrid markets. While the later cycle process automation markets delivered sequential improvement as we move through the year.
Adjusted EBIT increased 230 basis points due to the strong leverage driven by cost reset benefits commercial and residential saw exceptional growth of 16% underlying year over year each broad strength.
Across the residential and commercial markets with mid teens growth in all world areas.
Adjusted EBIT increased 20 basis points versus prior year price cost headwinds worsened in the second half, particularly in the fourth quarter as we anticipated on the call in August but were offset for the full year by strong underlying leverage and spending restraint.
Please turn to slide eight.
Operational performance was strong throughout the year, adding 59 cents to adjusted EPS overcoming a 19 headwind from supply chain and $90 million of unfavorable price cost.
Operations leveraged at more than 35% on volume and cost actions.
Non operating items contributed to <unk> net overcoming a significant headwind from the stock comp mark to market accounting.
Share repurchase total to $500 million as we guided and added about <unk>.
In total adjusted EPS was $4 10, as I said, an increase of 19%.
Please turn to slide nine.
Regarding the fourth quarter strong end market demand drove underlying growth of 7% with net sales up 9%.
This growth was achieved despite a $175 million impact from supply chain logistics and labor constraints.
Both platforms in somewhat different ways.
Adjusted segment, EBIT dropped 10 basis points, reflecting a 200 basis point impact from supply chain volume constraints across the company and from the increasingly negative price cost headwinds in commercial and residential.
Free cash flow declined 39%, mainly due to higher working capital to support the growth versus the prior year.
Adjusted earnings per share was $1 21 exceeding the guidance midpoint by <unk>, <unk> and up 10% versus the prior year.
Automation solutions underlying sales were up 3% with strong recovery in the Americas, particularly in the power generation and chemical markets, partially offset by declines in other world areas sale.
Sales were reduced by about $125 million or four points due to the supply chain constraints.
Backlog was up 16% year to date and now sits at $5 4 billion a.
$100 million less than at the end of the third quarter.
Typically our backlog would reduce more in Q4, however, due to strong orders and supply chain constraints backlog remains elevated above these levels, we would otherwise have expected.
Strong leveraging cost reductions drove a 170 basis point improvement in adjusted EBIT.
Commercial and residential underlying sales increased 13% driven by continued strength in North America residential HVAC and home products as well as heat pump demand in Europe.
Sales were reduced by about $50 million or three points due to supply chain constraints, which together with sharply increasing material cost headwinds, which were expected, perhaps a little worse than we expected our August but we're expected drove a 340 basis points decline in adjusted EBIT.
With that I'm going to.
Turn it over to Ron to provide color around price cost and some of the other operational issues that we that we're dealing with thank you Frank.
Please turn to slide 10.
Clearly as you can see the operating environment is a challenge as commodity inflation electronic supply logistics constraints on labor availability continues to impact our global operations net.
Net material inflation headwinds accelerated through fiscal 2021 as you can see on the chart, primarily driven by steel prices with majority of the impact being felt by our climate technologies business North American cold rolled steel pricing increased once again October extending the streak of monthly <unk>.
This increases to 14 months. However, the magnitude of the increases have declined in recent months and more importantly, hot rolled steel prices dropped around $20 a ton in October a positive sign for us.
We do anticipate steel prices to start to flatten out over the next few months and net material inflation to peak in the first half of fiscal 'twenty two.
We continue to stay focused and diligent on our pricing plans by executing on our contractual material pass through agreements surcharges for freight and more aggressive annual general price increases we remain confident that price cost will ton green and will be a strong positive for the second half of fiscal 'twenty two.
Our current plans indicate that price cost will be approximately $100 million tailwind for the fiscal year.
Turning to the next slide on the commodity front, while steel prices are at elevated levels today as I mentioned earlier, they are showing some signs of flattening providing optimism that we will see north American cold rolled steel prices start to decline in the coming months plastic resin prices have remained elevated due to high.
Price elastic demand and weather related supply challenges copper prices have also surged as of late but our hedge positions will dampen the impact to the fiscal year.
While COVID-19 related restrictions are improving in southeast Asia capacity, a key electronic suppliers remains constrained several key component suppliers of extended lead times and pushed out delivery forecast, which is increased shortages and deep commitment to our EMS suppliers. Furthermore, we are closely.
Watching the impact of industrial power outages in China, which have become a common occurrence at manufacturers and has led to an increase in silicon prices for us electronics shortages are impacting multiple business units in both platforms and supply is expected to remain a challenge into fiscal 'twenty two.
Extended logistics lead times, particularly on Ocean freight has had an impact on our global operations port congestion in the U S weather and Covid related disruptions in China being the key drivers. These dynamics are highlighting how critical regionalization is even on lower variation parts and.
<unk> and the work we have done over the past many years to regionalize are clearly proving the importance of this strategy.
This is exemplified by several of our businesses with strong regional supply basis, which performed very well and avoided expensive air freight and significant expediting costs.
Finally, hiring and retention challenges continue in many of our U S plans predominantly in the Midwest as competition for available labor is intense high levels of turnover and absenteeism in these locations have impacted productivity and drove an increased overtime.
Now on slide 12, despite the unprecedented challenges our supply chain and operations teams have worked tirelessly to continue to meet the needs of our global customers. Many creative solutions are being implemented on a real time basis to ensure continuity of material supply to our global plants and availability of freight.
Lines to make our shipment commitments our teams have leveraged strong supplier relationships utilized pre qualified alternate sources leverage contractual agreements and stepped in to assist our suppliers where needed.
Our regional manufacturing footprint and the enhanced resiliency of our supply network to our multi sourcing that we spent years developing has certainly been an advantage for us in these challenging times.
Accelerated actions around hiring and production shifts to plants with stable Workforces has ensured we continue to meet our customers' needs. Many of our global plants are producing at record levels as our disciplined investments in factory automation have allowed us to unlock additional capacity to come back labor availability chat.
Just.
Finally, I want to take this opportunity to sincerely. Thank our global teams for delivering an outstanding operational year with that I'll turn it over to Laura to walk through our fiscal 'twenty two outlook.
Thanks, Rob.
Let's please turn to slide 14, and I'll give the team some color on the current environment and looking forward to 2022 demand continues to be strong across both the platforms.
Trailing three month orders for automation solutions were up 20% versus the prior year driven as I said prior prior I continued automation investments in discrete and hybrid markets and we believe that will continue into 'twenty two and of course, the shrink thinning of the process automation spend.
While <unk> and <unk> drove most of the orders growth in 2021, the new infrastructure bookings for LNG and de Carbonization, which will improve I believe through 2022, providing further upside.
Increased site access will drive increased walk down and shutdown turnaround activity in the business to give you a perspective 2021 walk downs were up 50% year over year with more than 5000 globally with each walk down driving substantial <unk> III.
Pull through.
<unk> downturn around bookings were up four in 'twenty, 110% year over year, driven by strong spring season that extended into the early summer.
2022 shutdown turnaround outage activity spend is expected to be up mid single digits led by chemicals, and refining leading to high single digit bookings growth.
Turning to commercial and residential solutions the U S and Europe order rates continue to be strong heading into 2022, while Asia has begun to moderate overall.
Overall, the trailing three month orders were 9% in September.
And thinking a little bit further into 2022, many of our key climate technologies end markets will continue to have momentum, including aftermarket refrigeration commercial HVA sea food retail and foodservice driven by new store builds and quick service restaurants and residential.
<unk> Keith.
Turning to slide 15.
Looking ahead to 2022, it will be a year characterized by strong underlying demand.
And an improving operating environment.
The late cycle process automation business will continue its recovery with mid single digit annual growth.
Meanwhile, discrete and hybrid momentum will endure with high single digit and mid single digit growth respectively Grill.
Growth will moderate in residential markets as demand stabilizes, but improving commercial and industrial environments will benefit commercial residential solutions.
Carbonization and sustainability projects as noted earlier will provide further growth opportunities as budgets get allocated towards these projects.
Based on this macro landscape. We believe we continue to expect demand to be strong in 2022 <unk>.
Supply chain and price cost headwinds continued through the first half pressuring first quarter leverage return to significant tailwind in the second half.
And positive in the year.
The team has done a significant amount of work progressing our restructuring programs Emerson 2021, adjusted EBITDA of 23, 1% suppressed our previous record.
Over 90% of our restructuring spend communicated in our Investor Conference is complete.
Over 70% of the savings have been realized with remaining longer term facility projects left to be completed.
<unk>.
Turn to slide 16, and talk about guidance.
So given this landscape, we expect underlying sales growth of 6% to 8% in 2022 and net sales growth of 46%.
Underlying sales growth for automation solutions will be 6% to 8%, while commercial and residential solutions will be 6% to 9%.
As Rob discussed, we expect price cost to turning to tailwind for the year of approximately $100 million.
$150 million of restructuring activities includes the minimal remaining spend on our cost reset program and additional programs, including footprint activities that have been identified and are planned in the fiscal year.
Historically, our adjusted EPS excludes restructuring and other items like first youre purchasing accounting in the calculation.
Looking at the 2021 column of the bridge to the right.
Prior adjusted EPS of $4 10.
Increases to $4 51.
When removing the impact of intangibles amortization expense of 41 SaaS.
For 2022, the amortization expense is expected to be approximately 42.
Driven by driven driving excuse me, our adjusted EPS to between $4 82.
And $4 97.
Additional details on the calculation are provided in the appendix as well as accounting tables in the press release.
Please note that old guidance does not include the impact of the Aspen Tech transaction, which is expected to close as I said earlier in the second quarter of calendar year 2022.
Turning to slide 17.
We expect the first quarter 2020 through underlying sales growth of 7% to 9% with broad underlying strength across automation solutions and commercial residential solutions.
Automation solutions, where they will experience the underlying sales growth in the mid to high single digits, while commercial and residential solutions underlying sales growth will be in the high single digits to low double digit range adjust.
Adjusted EPS is expected to be between 98 and it.
Then a dollar and <unk>.
Amortization for the quarter is expected to be roughly 10.
And with that I'll turn the call back over to Colleen Mettler. Thank you.
Thank you Paul we will now turn the call to the operator to start the Q&A portion of our call.
Okay.
We will now begin the question and answer session to ask a question you may plan to seven one telephone keypad.
<unk> your question please.
Yes.
The first question is from Andy Kaplowitz.
Please go ahead.
Hey, good morning, guys.
Good morning, one entity.
Maybe you could give us a little more color into how you're thinking orders play out in FY 'twenty. Two obviously, a nice recovery has continued and automation solutions, but you mentioned that you think it will be one bookings could come in LNG and <unk>. So when do you see those types of projects hitting and could they help maintain bookings growth it kind of levels as comps.
And to get more difficult over the next few months and then in CNR Cnrs.
It's held up obviously very well despite age of moderating a bit so maybe more color into what you expect there.
No I think the environment Ive started with AMD with automation.
The the strength I see the strengthening in the in the process automation business to continue throughout the year very honestly, where we are in an environment where.
$100 oil is not uncertain right now and we're seeing some restraint and in the U S shale and discipline that OPEC and things of that sort that is going to free up significant.
Significant capacity, particularly at <unk> and some of the larger integrated companies to move forward on a lot of the programs that will drive the de carbonization initiatives, we've seen that already with many flaring type of projects in the United States.
And we will continue to see that with carbon capture and Otis accelerating some I'm highly optimistic about that.
On the LNG side, there are two significant programs that we're pursuing which will.
Be awarded.
Likely A&D towards the second half of the year, one is the Baltic LNG.
Investment and of course, the Qatar North field expansion being the two largest those are very significant in terms of capacity additions and investment in automation for us both in pursue.
Turning to commercial residential yes, I see.
The residential air conditioning market moderating as we go through the year.
And but.
<unk> upheld by the commercial.
Strength in the marketplace, which obviously for US is is very relevant so I do see a.
A bit of a mix more of a mixed bag in the commercial residential business driven by that moderation in residential AC.
Well that's helpful. And then obviously one of the main concerns that we've heard from investors post the announcement of your deal is that Emerson instead of diversifying actually doubled down on oil and gas. So I'm sure you anticipated that concerned so maybe you could address it head on now ultimately I know you think industrial software is a different market you just said that in your prepared remarks, but it's.
The view that you believe Aspen Tech gives you the best chance of hitting or exceeding the long term guide you gave us earlier in the year.
I do.
Obviously think that the.
The solutions that Aspen Tech brings to the table are incredibly broad in terms of particularly the sustainability journey.
And what we're seeing is that the the the importance of the software, particularly in terms of design.
And and and optimization of assets will be incredibly relevant as these customers embark on these needs on the new projects and so.
I regard the energy position is important but regarding more importantly from the transition and the share of wallet spend that they will.
That will be undertaken in the energy segment, having said that.
The platform for investment and diversification.
Has been a core.
Core component of the Aspen Board for a long time, and we will continue to be important here as we go forward and the opportunity whether its for M&A and for growth in TD and other segments as is a core part of the synergy value.
Thanks, Rob.
Thanks, Andy.
The next question is from John Walsh with Credit Suisse. Please go ahead.
Hi, good morning, everyone.
Good morning, Good morning, John.
Just wanted to talk a little bit more about kind of the margin bridge here through the year I think in your prepared remarks, you remain confident in the 30% underlying.
Leverage.
<unk> for Q1 implies we are certainly starting I think below that is it all just price cost timing driven or is there something else. There that we should be aware of for our models about the Q1 margin performance. Yes. Good morning. John This is Frank yes. It is primarily price cost driven.
It will be below the 30% assumption for the first half of the year and then as the price rolls through.
Which we have we have firm plans for that to happen and what the margins will the leverage will increase as we go through the year. So that's how we will get there, but we're very confident that we will in fact get there obviously automation solutions. The leverages good as we go throughout the year.
Then.
It's in commercial residential where we have the ramp as the price cost normalizes and then turn positive in the second half of the year.
Okay.
Great and then.
Maybe a question lull around earlier in the call you talked about still some portfolio pruning around some of the upstream oil and gas assets disconnected assets within the portfolio.
Could you size that for US just kind of what is the the revenue.
Size that youre talking about for that bucket.
No John I'm, not I'm, not going to do that but I will tell you that.
The activities are the divestitures will be done over time.
As I have noted earlier.
It'll be done very carefully.
At times.
Timed with incoming assets as well, obviously, we have a large impending transaction and on the horizon here.
So that's what I will tell you.
I do I am a firm believer that.
Share of wallet in the energy segment, we will continue to move to the zeros and ones in a way from from a hardware structure and enhance we are we're going to continue to drive down that path, but in terms of sizing that entire bucket for you I apologize John I'm not going to do that.
Worth a shot thank you very much I appreciate you taking the questions. Thanks John.
The next question is from Andrew <unk> with Bank of America. Please go ahead.
Hey, guys good morning, guys.
Good morning, Andrew Andrew So one question, we got in particular looking at the results from one of your peers yesterday in auto. So how do you guys reconcile 20% year over year orders growth of 16% year over year backlog growth and then 6% to 8% FY 'twenty two organic revenue guidance.
Incorporated.
And to the FY 'twenty two revenue guidance I know you gave us some color, but just the disconnect.
Obviously as we finished as we went into September and into the first quarter. We have some comps that are still favorable in the business. So that's one element of it and then I think normalizing as we go into what it would be I think is still a very strong environment.
And how I felt was important for us to guide in that business, Andrew I think that the.
The opportunities across the three served segments of the market are very strong.
I think the underlying demand is very strong but in terms of guiding with certain in some uncertainties remaining in the supply chain.
Environment I wanted to be somewhat cautious as well, but having said that.
The demand picture is very optimistic.
Mix it makes perfect sense, another question with sort of.
Get a lot of big debate with investors.
Just sort of a sense of inventories in the channel.
And your customers right because one big theme. This earnings season, there's a lot of companies, bringing up even companies with very short cycle businesses, bringing up these very strong backlogs even for companies that don't have backlogs usually.
I think investors are just worried that this may not add while some time midyear next year, what's your sense of inventories in the channel.
And your customers how do we think that plays out throughout your fiscal 'twenty to a calendar 'twenty. Two however, you want to discuss because your team has seen many a cycle and this one seems to be a little bit different that way. Thank you.
Yes, I'll start I'll turn it to run for a couple of comments as well look on the on the automation side I really don't see that as a as a concern.
Most of the high signal part of the business, obviously, 59% and in.
In the year was booked ship <unk>, three and they went directly into not into inventories, but into predominantly application and user application as it turn into into the climate business, Ron perhaps a few comments from yes, I would say across both our Oems and in the wholesale community Andrew I would say inventories are.
Slightly elevated to where they would be in normal times as people anticipate supply chain challenges and have been bringing in more material with that said I.
I think the inventory is getting out into the end customer base through the wholesale channel and through our OEM. So I would say it's not a.
The big issue per se and it may be it would be slightly elevated levels, but it's not something that is on <unk>.
Unreasonable or on a seasonal.
Really appreciate your answer thanks, a lot.
Thanks, Andrew.
The next question is from Tommy Moll with Stephens. Please go ahead.
Good morning, and thanks for taking my questions.
Thanks Tommy.
I wanted to start on your outlook for automation solutions.
Thank you called for 6% to 8% underlying in the 2022 outlook I'm curious what your visibility and assumptions are there for oil and gas customers.
Youre planning your fiscal year here several months in advance of when a lot of them will and I'm, just looking at $80 crude and wondering.
Potentially when those budgets are rolled out yearend or early next year. If there is some substantial upside potential.
It's a great question. Obviously, we are three months ahead of a four months ahead of seeing those budgets.
Capital budgets, where we are seeing and have assumed Tommy is continued strength in the operating budget spend which is as you know where a significant amount of <unk> three and some <unk> falls into.
And that strength picked up in the second half of fiscal 'twenty, one and we assume and believe we will continue to accelerate as we go through.
The 2022, but in terms of the capital environment beyond the two LNG jobs.
That obviously funded and moving through.
Through bidding phases.
We'll see what else comes out of the capital plans, but I would expect timing that there would be sustainable type of investments.
Again, the methane emissions is a big deal I think we saw something from from the U S around those standards.
And and of course carbon capture of which I think will be more and more significant as we go through the year, So we'll see but you're right.
We'll watch that very carefully as we go into Jan.
Thank you for that that's helpful. I wanted to pivot to to OSI can you refresh us on what the topline contribution was in 'twenty. One what's your plan is for 'twenty two and.
I think it's likely going to be fair to say you would realize some revenue synergies since acquiring the asset.
Any anecdotes you could share on how you were able to drive those in such a short timeframe would be helpful. Thanks.
Yes, so a phenomenal first year for the company.
Approximately $190 million in revenue in 2021 growing to approximately 220 in 2022, well ahead of synergy board plans, great execution globally, we want our first transmission distribution project in Europe.
With a very large customer in the Netherlands in Northern Germany, We want our first transmission distribution project in Australia, and Tasmania, again planting critical flags and significant engaged with a large power.
Producers' interest mission companies in the United States, So realizing the synergies and great growth and profitability. So feel really good about.
The acquisition and as it goes into Aspen Tech it.
And with lots of momentum into the business.
I appreciate it and I'll turn it back.
Thanks, Thank you.
The next question is on cash and tax savings <unk> with Morgan Stanley. Please go ahead.
Hi, good morning, guys.
Good morning, Walmart adjusted well.
Just wondering on the auto saw side.
Maybe helping hoping to shore up some of the kind of growth differential that you guys are looking at.
Versus Rockwell yesterday, any observation on kind of the mechanical or say balancing controls type business versus more of the software and automation side like is there a wider spread in that outlook for 'twenty two than usual.
Well.
Not really.
Not really obviously, our systems and software businesses says.
Has.
Outgrown our device business.
Our digital transformation initiatives, which are both software and device based that have outgrown the the remainder of the business, but having said that.
I really don't I Wouldnt note a significant difference as we go through a lot of the Kobe three business is device layer type of business, where you would see perhaps a little bit of a bifurcation to be honest is if you look at the <unk> heavy dependent businesses some of those and final control.
But beyond that I would suggest that we'll see broad portfolio alignment as we go through and it's really.
That delta of a point or so between them.
Got it that's helpful and then just shifting over to Cnrs.
I guess first what is the and I apologize if I missed it what's the price embedded in that outlook and then you mentioned steel is coming down.
Maybe prospectively based on futures I know some of that is sort of contractually set like is that comes down is that go into the the calculation for how prices.
To bind with the RV OEM relationships there.
Thanks, Yeah go ahead go ahead, yes.
Yes. So this is Raj Krishnan on the I'll answer the steel question for Us. So obviously as if steel award it come down in the second half, though we've moderate we've modeled it as a moderate decline in the second half, but any significant delta to that really doesn't impact 'twenty, two but we will.
<unk> laid into our pricing dynamics for 'twenty three so it's not necessarily a concern for us in 'twenty, two and we will watch that carefully obviously, we'd like it to come down which will impact the second half or help us in the second half. So that's on the steel piece on the on the pricing piece I think whatever is there.
Inflation I don't think were going to give out an exact price number, but obviously the inflationary dynamics of 'twenty, one will translate and convert into material price pass through price that we will realize in 'twenty two.
Got public color best of luck guys.
Okay.
Thank you.
The next question is from Deane Dray with RBC capital markets. Please go ahead.
Thank you and good morning, everyone.
I mean, hey, a quick question for Frank if I could a free cash flow was well below your <unk>. Your <unk> average I know you called out.
Working capital pressures, maybe some color there would be helpful. Thanks.
I mean, just the nature of the sales ramp in the comparison versus prior year. When we were taking cash off the balance sheet. I think we have a little bit of a dislocation there in the fourth quarter being that that will normalize. So the year was very very strong, but the cash flow was kind of lumpy just given the.
The way the year played out in particular in the commercial and residential.
Got it and then for a while.
Our expectation focusing M&A on industrial software since it is a new structure for us with Aspen technology. When you say an industrial software acquisition is that an Emerson driven.
Is it a spin would it be folded into Aspen is aspen have.
Are they part of the review process and so forth. Thank you, yes sure sure Andi know industrial software M&A will occur at Aspen Tech.
And.
Dean.
It will occur at Aspen Tech, having said that industrial software is only one of the three large market segments being that will be will be inquisitive in.
And you'll see those as we play those out you, obviously there'll become public knowledge, but.
But no we have.
Got a great platform there are two to transact M&A and softer with what I believe will be a a.
Ah.
Market multiple that will enable the economics to work.
From a transaction perspective and from a value creation perspective.
That's real helpful. Thank you.
Thanks Dean.
Okay.
The next question is from Jeffus fraud, and with the Macroeconomy.
Go ahead.
Hey, Thanks, good morning, everyone.
Good morning.
Good morning.
Just back to the portfolio review.
In about two and states I would suppose that means you do kind of the addition, and subtraction Youre talking about and then continue the March as Emerson is option one that option too as you do that and then perhaps separate.
If there's if there's more that you can share on your thought process, there or what might be kind of the the triggering mechanisms of one over the other that would certainly be interesting.
Yeah I know.
I think we are.
Going to play this out as I've mentioned earlier.
Overtime.
And I think I use the expression when we were in New York.
For the Aspen Tech transaction announcement that this is a marathon.
We're going to be very deliberate and thoughtful as we go through this we're going to be keenly aware of.
The value proposition to the shareholders and impacts to free cash flow and impacts of value creation as we go through the journey.
The end game of course is is to create a portfolio that's more connected a portfolio that.
That has an underlying sales potential that is higher and consequently can deliver through cycles.
Double digit EPS thats, the objective here and for that we need to expose the portfolio to more of those markets.
And.
<unk> strong balance sheet of the company.
The strong balance sheet that Aspen Tech will have as well and the the the.
The divestiture work on this side I think we get there over a number of years, but.
There were meaningful conversations with our board.
Great debates, obviously this was a a body of work over over over a number of months almost four months.
Our partners did alongside management and we have pathways now an optionality and it's why we have two potential.
And states here.
Great and then just as a follow up.
Sort of a bundled question around price cost and margins and the like.
The price cost positive of $100 million does that arithmetic margin neutral on price cost.
And then kind of separate but I guess related just the additional restructuring that you're doing can you elaborate on that a little bit and what sort of.
Savings tailwind you're expecting in 'twenty two from both the actions you took in 'twenty, one and the new actions Youre talking about here in 'twenty two thank you.
Hey, Jeff This is Frank so the I mean, we're thinking about it in terms of delivering the leverage on the business or the <unk>.
The price cost in isolation.
Obviously on the way up it's not necessarily margin accretive okay. So.
Just looking at it holistically in terms of delivering 30% plus operating leverage for the business for the year.
The price cost given the <unk>.
Given the way it's has rolled in we will roll through very lumpy very distortive within the quarter. So we're just very focused on getting to that goal for the year delivering up margins further.
Total enterprise and delivering the operating leverage.
Regarding the restructuring I'll take a quick stab at it around the world.
Come in your question was around the continued restructuring spend.
So as we go through this we identify additional opportunities in both businesses some of it is footprint consolidation.
Cost reduction Mark just kind of a never ending March we identified this as <unk>.
Obviously very significant opportunities that we've executed on for the most part when we talked about driving to previous peak margins.
This quarter due in a complex business, we're continually trying to improve the cost position and frankly much of what we do in terms of Capex and restructuring over the next couple of years will be around capacity expansion for the FERC that we expect to see in both businesses. So we may we may be engaged in some restructuring that's a little bit higher than our historical levels.
But it's all it's all around continuing improving the cost position and putting in the capacity in the right places.
I think you've said it well.
Yes.
Okay Hello.
Your next question.
Yeah.
The next question is from Scott Smith.
Yes.
Please go ahead.
Hey, good morning, everybody.
Good morning, Scott Ernie Scott.
And best of luck for 2022.
Couple of questions here for you guys versus like.
The 30% Incrementals that you referenced flowers that.
Is that more of a baseline or a goal.
Does that include the price of $100 million price tailwind.
Some of that I apologize, but just.
Yes, the color around that.
Yes, or no that is the plan.
That's what the physical plan rolls up in the commitment we're making.
It does include the price obviously, it's all in it's all in of a first half headwinds that we described in second half turning into a tailwind whether thats price.
Price cost or or.
Or supply chain.
But.
As Frank I think.
Said that will be below in the first half as we went in and improve as we get into the second half obviously, but for the year I feel very very good about the three points of Incrementals on the underlying sales.
Okay and then.
The comments that you made around carbon capture methane LNG is there.
Is there a point, where you can start to measure what percentage of your orders.
Those.
Particular types of projects represent where we can get a sense of the materiality of the.
Growth there.
Yeah, No I don't think that's a great question, Scott as well so we identified approximately $1 billion of of Kobe. One project that includes also transmission distribution, but also a whole slew of sustainability and renewable jobs inclusive of hydrogen included including a carbon capture et cetera.
Biofuels and other things so as we go forward.
I mean, we continue to look at our funnel and address our funnel and how we communicate the funnel I think it will be important for us to break those out and give you some visibility too. So I think thats a fair question.
Okay well good luck in 2020, Thank you I'll pass it made yourself. Thank you.
Yes.
The next question is from Julian Mitchell with Barclays. Please go ahead.
Hi, good morning.
Just wanted to.
Just wanted to start with the automation solutions.
Nick gross guide so you're assuming that that business grows you know about 7% this quarter and then the same over the subsequent three quarters, even as the comps get a lot more difficult.
So I just wanted to understand is sort of.
Everything in that segment steady state as you go through the year in terms of hybrid versus process versus discrete or Toby one two and three or is there something changing across either of those axes kind of as you move through the year, but allows the organic growth rate to hold steady even with.
Tougher comps.
Yeah. Good question Julien criteria of voice.
So.
Backlog situation normal if you look at our typical performance in automation Q3, Q4 last year. For example, I believe we've reduced backlog by about 400 million. This year, we reduced debt by 100 million a lot of that was it was.
Reflected in that in that 125 million Miss in the quarter for.
For automation solutions, so the backlog situation coming into the obviously is stronger, but having said that we do expect <unk> three.
To remain strong.
The data that we're seeing in the commitments our customers are making particularly around sto activity is very very robust.
And then secondly, modernization programs and the K will be one that I outlined whether that is sustainability or LNG I think will come in and support the second half of the year, obviously the <unk> for the most part will not turn into revenue with the exception of perhaps some of the earlier feedstock.
<unk>.
In our systems business as you know Julien, but but robust and will pick up as we go through the second half of the year.
That's helpful. Thank you and then just switching to come Reyes.
50% plus of the revenues in that business a residential facing.
You do call out the slowdown that you're embedding in resi through the year, but it doesn't sound as if any major.
Is looming as you see it today.
Maybe discuss sort of how youre thinking about the situation of the Oems in <unk> and how confident you are that you can sustain kind of positive growth through the year in resi, even with tough comps.
Our perspective is that we've got a couple of looming regulatory changes on the environment efficiency, and obviously refrigerant fishing 23, and <unk> and refrigerants in 'twenty five.
It's been it's been an interesting cycle to call.
Sure.
<unk>.
At a time with two of our largest OEM customers this quarter or I went down and Carolina visited with with train and went out of Miami and visited with with carrier.
And we're staying very lock step in terms of understanding their demand and their projections for demand as we go through the fiscal but we do believe that there's a moderation not a cliff as we go through the year.
Great.
Great well Julian Thank you very much and with that I think we're going to close the call.
Thank you all for your time this morning, and I appreciate the questions and thank you for for your support.
Yes.
The conference call has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yeah.