Q2 2022 Emerson Electric Co Earnings Call
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[music].
Good morning, and welcome to the Emerson's second quarter 2022 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
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 Brian Jo. Please go ahead Sir.
Good morning, and thank you for joining us for Emerson's second quarter fiscal 2022 earnings conference call today, I'm joined by President and Chief Executive Officer, La Carson by Chief Financial Officer, Frank Dellaquila, and Chief operating Officer Raj Krishnan.
I encourage everyone to follow along with the slide presentation, which is available on our website.
Please join me on slide two.
This presentation may include forward looking statements, which contain a degree of business risks and uncertainties. Please take time to read the safe Harbor statement and note on the non-GAAP measures.
Turning to slide three as noted in our press release Emerson officially announced the date and location of our 2022 Investor Conference the.
The conference will be held in person November 29 in New York City.
More details will be distributed as we approach the conference later this year.
I'll now turn the presentation over to Emerson's, President and CEO Wildcards somebody for his opening remarks, thanks, Brian and good morning, everyone I'd like to.
Again by thanking the global Emerson team, who again delivered very strong results amid challenging operating conditions.
I'd also like to thank and extend my appreciation to Emerson's board of directors for their energy and support of management and lastly to all our shareholders, who believe in our value creation proposition. Thank you.
A lot has changed since all I'll call three months ago operating conditions, clearly worsen a war in Ukraine, Covid Lockdowns in China.
<unk> in a in a return to inflationary commodity environment lead time extensions and shortages in electronics and logistics challenges.
All this resulted in challenging variances across our businesses.
But in spite of this our business performance was strong and we delivered differentiated results in our ability to execute.
Orders grew 13% on a march ending three months underlying basis led by 17% growth in automation solutions and 7% growth in commercial residential.
Underlying sales accelerated to 10% growth with conversion and automation solutions, improving sequentially to 7% and commercial residential with very strong at 14% growth.
<unk> broad world area of strength across our business.
Price activity was very robust in the quarter and it is sticking.
But it is largely offsetting inflationary impact of materials labor and freight costs.
We delivered incremental profitability of 24% in the quarter and remain committed to our guideline of 30% for the year.
Earnings per share on an adjusted basis grew 21% to $1 $29 21, excluding <unk> impact that.
Yeah. It came in the quarter.
Bottom line, yes, it is challenging.
Our operating due diligence a management process enabled this performance I'm very proud of the team.
Going forward, we see a robust industrial environment led by energy investments in North America, and the Middle East.
The war in Ukraine, and sanctions on Russia has brought North America gas back to life.
We shoring, which many of us have talked about which at this point has been largely discussed in relation to discrete manufacturing can and should be now fully valued as it relates to energy specifically LNG.
Emerson is uniquely positioned to capitalize on the on this trend.
However, I should state that our perspective on energy remains unchanged.
We will continue to digest commoditized upstream oil and gas businesses, we have two processes currently in the market.
Sustainability investments are core to our customer success.
And the unprecedented gas wave will serve both to shore up gas as a transition area energy source.
And eliminate European dependent on Russian gas.
Lastly, the technology stack that we can now bring to market. The best in class intelligent devices are highly differentiate our control system topology, and the industry's leading software offering with Aspen Tech placed Emerson in a unique position to succeed.
Okay Ob one funnel grew to nearly $7 billion in the quarter up almost half a billion dollars with sustainability projects.
Reaching $1 billion in value within that funnel.
Demand in our climate business remains strong across most segments in the mid single digit range. We continue to work closely with our HVAC OEM customers as we navigate through challenging inflationary environment and I. Appreciate the efforts that carrier and trane in particular have made to enable us to.
Pass along price actions.
The future of this business is bright we will watch the current residential cycle carefully but over the medium term, we're well positioned to capitalize on our ESG trends.
Through more efficient systems.
New refrigerant standards and the acceleration of heat pump adoption in Europe .
Our professional tools <unk> home products business continued to benefit from strong commercial demand, although residential demand has weakened in the quarter.
And we attribute much of that to the fact that household disposable income cannot readily be applied to other activities in lieu of home improvements and we're watching that carefully.
Nevertheless, we have a strong backlog positions in that business, which will enable us to deliver strong results for the year.
Our confidence enabled the raising guide we gave today of five on the bottom, which is at 495% or 10% growth and the top $5 10, a 13% growth over 2021.
Regarding cash flow, we remain committed to a 100% conversion in 2022.
Within this guide is the operational impact from our decision to exit our Russia business, which we announced today. This includes the sale of our <unk> subsidiary.
We will also continue to make progress on our portfolio journey with a T O D divestiture expected to close in this current quarter and Aspen shareholder meeting scheduled for May 16, with close expected the same day.
We're very excited and I remain excited about working with Antonio to build a unique highly differentiated industrial software company.
Lastly, I would like to say a few words about our people.
Our cultured work is underway.
And we are developing a talent philosophy, which will be highly differentiated and enable emerson to attract and retain the best a lot of great work underway by the team on this front as well with that please turn to slide five.
We continue to see strong levels of demand across both platforms as I indicated I'll start with a few comments on commercial residential solutions was trailing three month orders were up 7%.
We are still seeing broad strength across across both climate and tools and home products as we hit both comparable results versus hit strong comparable results versus a year ago.
Within climate Tech European Ramsey and commercial heating markets continued to be strong and Asian de carbonization trends are gaining momentum from government support.
As expected U S resi demand began to moderate and as we went through the quarter, but remains positive in the Americas as we entered the peak cooling season.
For the tools business as I mentioned commercial and industrial momentum continues while residential began to slow and we'll watch that very very carefully, particularly the DIY rates as.
As we go through this quarter.
The trailing three month orders for automation solutions were up 17% from the prior year and that's indicative of the continued strength across process hybrid and discrete within hybrid life science investments remain strong globally, while metals and mining investments and resurgent a resurging.
Particularly in the southern cone of America of Latin America and in Africa.
In the discrete space supply chain driven segments like semiconductor and electronics are on track for 20 plus percent year over year growth, while factory machine automation maintained strong momentum.
Process markets continued to gain momentum with chemical utilization, improving empower market strength through renewables and grid modernization.
We also see continued oil and gas spend as I mentioned led by U S shale investments.
Upstream Capex is up double digit year over year, despite reinvestment rates near record lows at 40%.
We're in the beginning of a strong growth cycle and I expect to see continued investments in key regions.
And in the carbonization initiatives.
As oil prices rose, we saw more activity around key energy segments, such as LNG clean fuels in renewables and then share a little more color with you on these markets on the next slide page six.
Just to give perspective on on what we're seeing in terms of LNG, which we highlight here the U S.
Opportunity on the left side of the chart. If you think about the LNG wave from 2000 to 2010, which is predominantly driven by the middle East.
We saw a 125 M. P T A's of invest 1 million tonnes per annum capacity come online during that wave.
In the 2011 to 2021 wave, which had a U S component, a Russia component and in Australia component predominantly another 125 M. Ptas came online.
We currently expect a 2022 plus Ford a wave that we're now entering and it is being funded to result in 250 <unk> of investment of which 150 already underway with an incremental 100 coming online over the next few years.
So a very exciting period of time here as we think about gas.
Not just liquefaction, which will impact middle Eastern U S predominantly within the re gasification in tanker investments that are required to get the gas into Europe through this segment.
On the right hand side of this chart Emerson continues to play a pivotal role as traditional energy players and new entrants begin to focus on new energy segments, such as clean fuels and renewables.
De carbonization of sustainability funnel grew to $1 billion in the quarter as energy companies are dedicating roughly 15% of their capex budgets to these projects.
In clean fuels Emerson was recently chosen as the main automation partner for the world's largest renewable diesel facility and will supply key digital offerings as part of this project.
Emerson also expanded its role in renewable energy through its acquisition of media technique.
And American Governor acquisitions, which also have to and also through some technology investments in the core portfolio and.
In the second quarter Emerson Geological simulation software was selected to provide its geological and reservoir modeling software to hydro geothermal energy company in Belgium to.
To increase the safety and reliability of geothermal energy sources.
This is an exciting example of a traditional Emerson application designed for the oil and gas field now expanding to a diversify sustainability application.
And then lastly, Emerson was selected as a software and controls provider for the world's largest battery storage facility. Another high growth area with Emerson brings immediate relevance and.
And with that I'm going to turn it over to Frank to go through the second quarter results.
Thank you Leila and good morning, everyone. Thanks for joining us if you would please turn to slide seven and I'll review the quarter.
As Ralph said, we had a very strong quarter I want to also extend my thanks to everyone in operations for the for the execution.
They turned in in the face of some very real operational challenges.
Demand continues to be robust across most key end markets.
Driving second quarter underlying growth of 10% ahead of the guidance that we provided in February .
The higher sales were partially driven by price actions and realization that were implemented to offset continued inflation and we will talk a little bit more about the price inflation dynamic when we when we address the guidance.
For the quarter, we realized four points of price overall, and we did turn positive with respect to net material inflation as we said we would.
Adjusted segment EBITDA increased 20 basis points as we more than offset additional material cost and other inflation, which was significant with increased price and effective cost management.
G&A performance was excellent.
We leveraged and was essentially flat in dollars in Q2 versus last year and it was leveraged two points across the enterprise, reflecting previous restructuring actions and spending restraint in the businesses.
Adjusted earnings per share was $1 29 of 21% versus prior year exceeding the February guide of $1 15 to $1 20, as Laura mentioned it includes an <unk> <unk> tax benefit in the quarter that benefit was included in the 22% tax rate guide for the year, but the timing of when we would see it in the year.
Was uncertain, we added actually realized in the second quarter.
Free cash flow was down 50% versus prior year. This was mainly due to higher inventory as a result of the expense of stocking due to supply chain constraints finished goods awaiting shipment and of course higher expected sales in the second half of the year. Nonetheless, we have a challenge.
And while we believe this is timing related and we will get on top of it over the course of the year.
<unk> conversion to improve significantly in the second half.
Turning to the platform results both businesses executed extremely well automation solutions underlying sales were up 7% led by the Americas and China price realized in the quarter was 2%.
All key end market showed strength in KOB three activity continues to be strong remaining at 60% of sales.
Backlog increased by $400 million in the quarter to six 4 billion due to the strong pace of orders, which gives us confidence in the year end and positions us very well into 2023.
Operations have adjusted to longer lead times for critical production inputs and they continue to effectively mitigate logistics constraints and other challenges.
We expect our ability to execute orders in backlog to improve throughout the balance of the fiscal year.
Automation solutions, adjusted EBITDA improved to 170 basis points versus prior year on leverage price realization and cost control, despite higher general inflation and significant cost increases for electronic components in the quarter.
We experienced a sharp cost increase in the second quarter with respect to electronics that has been addressed by price actions and that will be recovered over the balance of the year.
The strong operational performance and the platform is reflected in 55% leverage for the quarter, another very very strong operational quarter.
Commercial and residential solutions also performed well operationally under a similar but somewhat different set of challenges underlying sales increased 14%, including nine points of price realization in the quarter.
Rice less net material inflation did turned slightly positive in the second quarter as we said it would and it is on the trajectory that we said we would be on when we described this in the last call.
Sales were up double digits in all world areas, except China, where they declined slightly in part due to the lockdowns across the country.
Commercial and industrial markets remained strong North American resi grew well in the quarter. We are beginning to see some signs of moderation there in tools <unk> home products service industrial and online channels sales remains strong there are some indications of slowing in the retail channel is do it yourself projects begin to be impacted.
By the inflationary environment and the diversion of People's attention to other things as the economy opens up.
Backlog increased to $100 million in the quarter, mainly in climate technologies.
Adjusted EBITDA was down 230 basis points, consistent with our expectations going into the quarter.
And as I said price less net material inflation was slightly positive in the quarter remained margin dilutive and additional price was realized but was offset by freight inflation and above normal wage costs.
Let's turn to page eight.
For the EPS walk.
Adjusted EPS was $1 29 up 21% and exceeding the top end of the guidance range by <unk> <unk>, including a <unk> <unk> tailwind from discrete tax items.
Adjusted EPS was also negatively impacted by four cents due to prior year, one time gains.
Delta that is was impacted.
Again, as a reminder, adjusted EPS excludes intangibles amortization restructuring.
Transaction costs related to the Aspen Tech transaction and first year purchase accounting charges.
Operations in total leveraged at nearly 25% and contributed 11, two adjusted EPS versus the prior year.
So before we go to the guidance I'm going to turn this over to Rob. So he can provide an update on the on the operational and supply chain challenges that these businesses continue to face.
Thank you Frank.
Please turn to slide 10.
Clearly delight the like the last few quarters. The operating environment has remained challenging as electronics supply commodity inflation and logistics constraints continue to impact our operations globally. Additionally, geopolitical uncertainty and Covid Lockdowns in China introduced new challenges as we exited Q2.
And began the third quarter.
On the commodities front the current geopolitical environment.
Led to rising steel nonferrous commodities and oil prices, causing incremental inflation on a large portion of our material purchases. This has been a significant reversal of course for some commodities such as steel.
Due to the magnitude of the increases additional material inflation will be incurred as we progress through the second half price actions already in place and the additional ones underway, we will keep our price less material inflation positive for the second half of the fiscal year, but will constrain margins in our climate.
Business.
Higher oil prices have also led to increased logistics costs. This again reiterate the importance of our regionalization strategy, which allows us to leverage our strong regional supply basis, and largely avoid expensive intercontinental logistics.
On the electronics side component availability remains a concern, especially within automation solutions, while we see stabilization of lead times. The market is expected to remain tight well into 2023 as capacity additions are not able to keep up with demand.
<unk> purchase price variances are also impacting profitability, although our proactive price increases helped ease the impact our global teams continue to do outstanding work to qualify additional suppliers and redesign products to utilize available components and we're clearly seeing the benefit of this effort come through.
Lastly, the China Covid Lockdowns continue to be a fluid situation the impact to our second quarter were minimal, but these lockdowns are expected to have a bigger impact heading into Q3. The current issues are contained to our plant operations in Shanghai, but we are beginning to see constraints to our plant operations across.
Ross the country due to supplier shutdowns or keeping a close eye on the situation and we will adapt as necessary.
While we expect to face headwinds in many of these areas for the rest of the year, we're confident very confident that our global teams will deliver differentiated operational execution in a challenging environment as evidenced by our strong first half performance I will now turn the call back over to Frank.
Thank you Rob if you would please turn to slide 11, and we will go through the outlook for the for the year.
So as well mentioned at the top of the call. We continue to see very strong demand across nearly all businesses in world areas. The challenges our operational challenges they are not challenges around the basic demand across the enterprise.
Automation solutions is strengthening across process hybrid and discrete markets and process markets recent events will drive incremental investments across the energy value chain.
This strengthening demand will spur growth in transmission markets like LNG and emerging markets like clean fuels battery storage and renewables as well as in traditional oil and gas markets as well discussed.
Together with continued robust demand in chemicals power Gen. In grid modernization, we are increasing our outlook for the process market growth from 2022 to high single digits.
We also expect hybrid demand to remain strong at mid to high single digits, including continued life science investments and high commodity prices.
Prices boosting metals and mining Capex.
Screet markets remained strong in the 10% range with semiconductor electronics and factory automation investments all strong.
So while we are encouraged by the underlying demand situations. There are constraints as Rob outlined remaining regarding supply chain.
Logistics and potentially Covid in China, which is which is an evolving situation. It's already had somewhat of an impact in the quarter and there is uncertainty as to how that will unfold.
In particular, we expect challenges to continue around electronics availability and we expect that to continue into 2023.
Continued strength in our core markets, our backlog level and orders momentum provide the underpinning for strong second half sales growth.
And we will have to deal with those challenges as they evolve.
Overall, we have confidence in our fiscal year sales guide for automation solutions. Despite these challenges and we also have included in the guide the reduction in volume related to the exit from our Russia business is well described.
At the top of the call.
In commercial and residential solutions, we expect continued double digit sales growth for the third quarter and full year demand continues to be strong against the resi and commercial businesses.
And climate Tech residential growth is supported by European heating markets and by new product launches currently underway for the 2023 U S regulation changes.
Climate commercial and industrial growth is also supported by the European and Asian heating markets.
Tools <unk> home products retail sales are expected to moderate due to the effect of consumer inflation as I said earlier, however continued industrial momentum will benefit the professional tools business.
Please turn to slide 12 for the outlook.
We are increasing our underlying sales range by two points to 9% to 11% driven by the demand outlook and by incremental price versus the prior guide.
Automation solutions guide will remain at 7% to 9%.
As discussed on the previous slide we're increasing our underlying sales expectation for commercial and residential to 12% to 14% and this was substantially attributable to incremental price being realized in the business.
We continue to expect to see tailwind for price less net material inflation in the second half as we previously communicated. This is the traditional price cost relationship that we have always discussed in the context of this business.
This year is different we are seeing significant inflation and other cost areas and we are implementing significant additional mitigating price actions to protect profits. These actions, however, constrained or dilute margins for.
For this reason, we're going to talk a price less net material generally.
Price cost as we have described in the past doesn't really capture the breadth of the inflation challenge.
I want to point out that we are realizing more than a 100% of the material driven price that was in our previous guide and we are rippling implementing actions to offset resurgent material costs as well as the other elements of inflation.
We're achieving substantial price realization for 2022, but that overall inflation dynamic pressures incremental margins in commercial and residential.
We will continue to drive for 30% Incrementals for the year for total operations, but we'll probably get there differently than we thought we would even three months ago with stronger leverage in automation solutions and pressure on the leverage in commercial residential due to the price inflation equation.
The other elements of the guide tax dividend and share repurchase remain the same as they were in February .
Operating cash flow is now expected to be $3 6 billion.
Mainly to the increased inventory, resulting from supply chain constraints as well as some other balance sheet timing issues.
Our absorbing within this guide as well $100 million of cash.
Tax payments associated with the <unk> gain that we booked in the first quarter under GAAP. These run through operating cash flow, although they really are related to the <unk>.
Financing cash flow that we realized when we when we booked the gain in the first quarter.
Free cash flow is now $3 billion and represents approximately 100% conversion for 2022 after converting at 130% last year.
The GAAP EPS guide is updated for our improved sales outlook and as a reminder includes two items related to the Aspen Tech transaction, both estimated transaction fees and interest expense on the $3 billion of term debt we issued in December in anticipation of the closing.
The adjusted EPS Guide moves up <unk> at the bottom at the top two $4 95 to $5 10.
Inside this guide we are absorbing the estimated impact to operating profits related to the reduction of our Russia business, but we have not included any other potential cost or charging result, or charges, partly resulting from the exit which are not yet known with any precision.
Also to be clear no estimate of the operational impact of Aspen Tech is included in these guidance numbers, nor is the future gain our tax impact of the divestiture, which is expected to close this quarter.
Turning to slide 13, I'll cover the third quarter.
Q3, 2022, net sales growth is expected to be 7% to 9% underlying sales growth between 9%, 11%. We expect automation solutions underlying sales in the range of seven to nine commercial and residential between 13% to 15% gap.
GAAP EPS is expected to be between $1 and $1 five and adjusted EPS between $1 25, and $1 30 on the same basis I described for the year I want to point out that this guide considers the current environment and challenges that businesses are navigating including the COVID-19 shutdown and the continued electron.
On X shortages, we're one month into the quarter and these are very real impacts on the quarter, we intend to work through them and assuming that the critical uncontrollable variables like the stabilize or improve we will be well positioned to deliver a very good third quarter, and then a very strong fourth quarter to close out the year.
And with that we will open it up for Q&A.
Thank you. Thank you well 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.
And the first question will come from Joe Ritchie with Goldman Sachs. Please go ahead.
Thanks, Good morning, everyone.
Good morning, Joe.
Hey, I wanted to maybe start off with China.
Today like I saw that.
Double digit growth in automation solutions I'm, just curious how did how did that trend through the quarter and then what are you kind of factoring in for.
For the lockdown and the impact associated with that in your in your guidance.
Yes, I'll speak to the business activity, Joe and just focusing on your question around auto saw very strong quarter.
And both in sales conversion, but also in the orders and you look at the destination business. Both in the mid teens high to mid teens, so feel very strong about.
The activity.
So.
The commercial residential activity is somewhat more muted driven.
Driven by the climate <unk> cycle.
Those orders were softer as we went through the quarter, but when I look at the the project activity when I looked at the installed base momentum we have.
In China.
The outlook I continue to feel very strong about the outlook for the year Joe for us in terms of sales conversion Rami. If you were to speak to yes. So Joe I think obviously, we've got <unk>.
Plants across China, and we have a few around Shanghai, where we have experienced constraints in the last four weeks.
Hopefully as we go into the month of May we're starting to see those open up we partially opened up in the Shanghai area. This week clearly we have supply chain across China that supplies us that have been impacted we are expecting that situation to improve as we go through the quarter April was a tough month for us, but we do believe that.
The Sichuan, we built an improving situations through the quarter and that's kind of baked into the guidance.
Yes.
Okay, Great Thats helpful.
If I could ask a follow on question and apologies if.
If I missed it earlier, but the Cnrs I know that there was an original assumption that.
We could potentially see flat to slightly up margins in 2022.
Just help us understand how that how you expect the margins in that business to you.
Band in the second half of the year, and then any commentary on price cost and Cnrs would be helpful.
Yes, Joe Good morning. This is Frank so the margins will improve sequentially in the second half as we've expected all along based on the price cost.
Mental price that.
That will come through the prices backend loaded for.
For the year.
In climate Tech.
Year over year.
We are struggling to get to a push.
Because of the incremental inflation in the business.
Yes.
The business will deliver EBIT dollar strong increase in EBIT dollars year over year and consistent with what we thought we would do at the beginning of the year, but the incremental inflation and the price for the business going out to cover it dilutes margins.
That makes sense. Thank.
Thank you I'll get back in queue.
Thanks, Joe.
The next question will come from Steve Tusa with Jpmorgan. Please go ahead.
Okay.
Hey, guys good morning.
Good morning, Steve.
Sorry, I was on speaker there.
Sure.
Just on the orders you noted.
Some signs of moderation in residential on the CRM side any any other part of the of the orders trends where there was.
Bit of a bit of a standout in terms of.
Either slowing or accelerating any any real kind of standouts on the on the order front.
Kind of a sequential monthly basis.
Yes, Steve Denault.
Good question.
Beyond <unk>, we're watching the resi very carefully obviously.
Not just the climate side, but on the home tools side.
Watching for traffic through our hour.
Big box partners, there, but beyond that look the strength in automation continues I think we're energized by our seeing the capital project funnel grow.
And the opportunities there <unk> continues to be very strong 60%.
In the quarter for automation solutions, that's been the engine in that business, but now with a <unk> one in two wave coming at us.
I feel very robust about the outlook there beyond that.
Thing else to comment no.
Steve I think the European heat pump business remains strong very very strong and actually our north American <unk>.
<unk> residential business also remained strong.
Okay. So it's more on kind of the resi side of tools, if you will correct.
Yeah, Okay, great. Thanks, a lot guys appreciate it.
Yes.
The next question will come from Scott Davis with <unk> Research. Please go ahead.
Good good morning, everybody.
Yes.
Yes.
A couple of things I mean, just if we want to go back to chip availability.
You guys were a little bit more confident I think last quarter in supply and demand matching up.
Perhaps by the back half of the year is this just shifted to the right.
No.
I guess another way to ask it is are you less confident today than you were three months ago.
Well I will let Ron give his perspective, but my perspective is it's gotten tougher.
We've had two torque harder get more creative.
Qualified different suppliers go into the open market, which all of that creates variability variances in the P&L and challenges.
But.
So that's versus where we were essentially three months ago.
But having said that we will have to watch China carefully as we go through here through the month of April and May.
And watch what happens in the supply chain there.
But that's how I feel about it I certainly didn't get better between the China, Covid Lockdowns and obviously the war in Ukraine.
And particularly on the electronics, so the chip shortages lead times have stabilized, but theyre running at three extra pre COVID-19 levels and so we're managing in that environment. The piece that we thought would improve was component shortages, but the but we continue to fight shortages on a weekly basis that are.
Impacting our businesses and hopefully we'll start to see that improve over the next several weeks, but at this point, we had hoped to see improvement in the shortages and we haven't.
Okay.
Super helpful and then other skus or is.
Is it a different list of stuff. This quarter is it the same list of stuff Thats hard to get a different list is it changing.
Or is there more stability there across the board.
I would say, it's similar I mean, the similar type of components that we use primarily in our automation solutions business on some parts of our commercial and residential business. So I wouldn't say it's changing.
I would say I think the shortages are not improving.
Okay.
Okay. Thank you I'll pass it on I appreciate it.
Thanks Scott.
The next question will come from Andrew <unk> with Bank of America. Please go ahead, Hey, guys. How are you.
Andrew.
Just based on the relative increase on revenue and EPS. It seems like this is our math I apologize. This is like two thirds additional price they.
Just toss us high inflation, but there seems to be a third of the increase which is real volume growth was normal and crime impulse. So first is that characterization right and second where was the stronger volume.
So Andrew I don't know if it's exactly two thirds one third I think generally be characterization is right that most of the increase.
And the revenue forecast is price.
Which pressures margins, but there is some underlying volume increase as well it comes through at very strong underlying leverage actually when you were.
When you factor out the.
The inflation items.
But.
What end market specifically.
Okay and automation, yes.
Yes, automotive solutions and residential it's I would say almost entirely price driven at this point.
Gotcha.
A follow up just going back to chip availability. There is a lot of talk about <unk>.
<unk> trailing edge capacity coming on in the U S. Maybe in six months at all.
Places like Texas instruments and Tao.
What kind of conversations are you having.
With those guys and when do you think.
Are you actually able incentive going through brokers and redesign I'm sort of struggling with the supply chain. How long do you think it takes for real incremental sort of lower end capacity become available in North America from core manufacturers is it six months or is it more like 18 months to two years. Thank you.
Yes, So Andrew Great question Al first off to answer the first part we are in really good dialogue.
With suppliers like Texas instruments.
You are very important NXP ti are important suppliers to us on this exact same discussion.
We believe that particularly for our types of chips that go into.
Our automation solutions product offering it's nine to 12 months is the timeline for when we expect that capacity to come online or at least that's really been the discussions we've been having with the likes of Ti. So that's really what's being planned we expect the constraints.
The last at least until then but hopefully in nine to 12 months, we'll see that capacity impact lead times. So early calendar 'twenty three.
Thanks, so much.
Thank you thank you Andrew.
The next question will come from Andy Kaplowitz with Citigroup. Please go ahead.
Good morning, everyone.
Good morning morning.
Maybe can you talk about how youre automation solution customers are thinking about large projects at this point, obviously commodity prices are more supportive you talked about energy independence in LNG, but there is also a higher inflation higher rates. So how do you think the capex cycle plays out here on what are your customers, saying about moving forward with these bigger <unk> investments.
Good question Andy.
So twofold, one there continues to be strong support both inside the boardroom and in actual spend around sustainability investments.
Those continue to be funded.
There's a lot of creativity in terms of what they are and how they are being implemented and that's reflected in our funnel itself growing now too.
About a seventh of the total Kate will be funnel, so very relevant there and I feel confident and how those continue to move forward on.
On the other Capex, what we've seen and the biggest change we've seen as we went through the quarter with gas and the conversation around gas really were 71 days into the war and that's only accelerated.
And the opportunities in particularly in three places in Qatar in Louisiana and in Texas.
We had a significant amount of work engineering work that was done pre pandemic around investments in LNG in Louisiana in <unk>.
Texas a lot of those was shelved.
The good news is a lot of that engineering has been completed and we're seeing a number of those coming back into play now with activities across a lot of a lot of those so.
That would be the biggest change in acceleration in the funnel and I think that plays very well, obviously gas for US is a very significant opportunity as we go forward from anything that yeah. I would just add we are seeing more ethylene methanol projects being talked through and frankly globally. Some refining.
City coming online entering our $7 billion project funnel. So I think good good activity across the board.
Thanks for that and maybe just following up on LNG. Then you mentioned the 150 <unk> PPA is already under way and it could be in 100 more but how much of the work is actually in your backlog at this point are burning through your revenue right now how long do you think the cycle will play out and when do you think will be the peak impact on emerson's businesses.
Yes look the opportunity, let's say sized it at about $1 billion. If you sized it in total and you can divide that over.
Five years, I think it's fair to say into Emerson revenue.
Andy.
As you know that.
The cycle on construction is four to five years for each of these.
These jobs. So you take the $1 billion automation number that I essentially laid out for the 100.
And any divided by five now what that doesn't include in my opinion is that we gasification opportunities, which we'll see in Europe .
And Germany in places like Italy, and Poland.
And the tankers and freighters. So that's in addition to this but about a fair. If you just do the math at $80 million per five LPTA.
That's how we size that.
I appreciate it guys.
Thank you thanks.
The next question will come from Josh <unk> with Morgan Stanley . Please go ahead.
Hi, good morning, guys.
Hi, John Hi, Josh.
So just to follow up on Andy's question, there just kind of wondering with.
This new project up cycle, and what's changing in the industry and your business in the way the customers are sort of approaching these things.
Lot more digital is there less of anything as you guys think about the bill of materials on the project is there something where maybe like a digital asset is replacing a physical one.
Because it seems like the opportunity or kind of the build materials should be higher I'm just kind of wondering like if there is anything to get smaller as we answered. This <unk> cycle, yes, no. It's a great question I'll, let Rob give his thoughts as well, but look when we do see is an increase in use of analytics and software on top of it.
Stack and <unk>.
Think about the capabilities that an asset optimization software capability like Aspen Tech brings to the table, that's increasingly more relevant as far as the build materials for these customers. So that would be the biggest change you still got to use.
Final control elements, he still have sense.
Goes through pipes, youre talking about very strenuous conditions of pressure and temperature.
Ultimately you still have to control the recipe with a control system, but the.
The analytics layer and optimizing the performance of the of the process I think is where we see increasing more spend from spot on I think all right.
Obviously, the LNG wave is just going to be from a content perspective, just as attractive as the prior ways for us with additional software that <unk> mentioned and then if you look at the sustainability wave or on Biofuels hydrogen et cetera. The content. There is just.
Just as rich as what you would get in a chemical facility. So net net we don't see.
Anywhere the content getting smaller in general it will just get augmented with more software data and analytics. In addition to the mechanical and the instrumentation content that we typically have.
Got it Thats helpful. And then just a quick follow up.
Because these projects are sort of longer cycle, you guys have anything in terms of price escalators or indexing that youre putting in the.
The contracts to sort of protect yourself on the inflation side. Thanks.
Yes, no look these are these are very very detailed commercial agreements that we ultimately enter in and most do have some kind of inflation protection elements. There are material, but keep in mind, obviously on an elements of control and software there is very little material to speak of.
So we'd be more on the final control side that we really work those very very hard.
Perfect. Thanks.
Thanks.
The next question will come from Deane Dray with RBC capital markets. Please go ahead.
Thank you and good morning, everyone. Good morning, <unk> morning.
No what Aspen close is coming up soon what are the plans right out of the gate.
100 day goals that you could share.
Yeah. So Deane this is Ron here yeah.
Great question, obviously, we've been planning we've had plenty of time to plan for day, one, particularly as it relates to <unk>.
Gration and channel plans that have been thought through in great detail. So a lot of it day, one will really focus on getting the sales organization going on the sales synergies, which on a global basis is a significant part of the pizza. So yes. The answer is yes, secondly, I mean, obviously there.
There is lots of opportunities on the technology front and a lot of dialogue underway there as well on the technology collaboration which will be longer term as it plays out but certainly on the sales integration front, we're ready day one two.
Get going.
That's great to hear and then any comments on April anything specific that you could share.
Look I think the trends we've talked about that impacted us in March the Covid Lockdowns in China, we continue to work through those.
But beyond that.
We are positive on the on the demand side of the equation through April very very positive.
Great. Thank you.
Mhm.
The next question will come from Nigel Coe with Wolfe Research. Please go ahead.
Yeah.
Thanks, Good morning, everyone.
Hey, good morning, Nigel Nigel Nigel can you hear me, yes, yes, okay.
Yes.
Thank you.
Yeah, So look as margin incremental margins extremely strong I think 57% if my calculations are correct.
And came in better than you expected I think you are pointing towards maybe some sequential moderation from <unk>. So just curious what's driving the upside and the strength in the incremental margins in <unk>.
How do you see that over the balance of the year.
Yes, So hi, Nigel this is Frank what we're seeing here is a little hard.
Coming to fruition all the hard work that was done in this business over two years or three years, we don't talk about peak margin anymore, but I mean this is the result of that that effort. So despite incremental other kinds of inflation. Despite even some NII, which is unusual in the business to this extent, they're printing very very strong incrementals because of the.
Basic cost structure of that business has been reset.
So the Incrementals were extremely strong in Q1 and again as you say mid <unk> in Q2.
And we expect they'll continue to be strong and the balance of the year.
Okay.
And then obviously the dollars moving around a fair bit here, sometimes we have seen some FX impact.
Moving around the margins is that a factor at all here.
No not really.
That significantly okay.
Not a material impact.
And then my follow ons for now on the portfolio, obviously, you've been very vocal about diversifying away from upstream oil and gas.
Do you feel that the change in tone around and just acuity.
The U S administration stance towards.
Engie Capex natural gas et cetera, do you feel that you have more headroom and maybe some more time to define the portfolio diversification.
No look.
As I said at the offset Nigel.
I remain committed to diversification in the company.
We're working actively on the portfolio management, and obviously, we'll talk at length.
In our November Investor Conference about the subject in terms of vision and hopefully some very meaningful steps.
The commoditized element of oil and gas upstream oil and gas assets.
We're continuing to work that very aggressively in the market.
But in terms of the differentiated technology that is applicable not just in gas, but in life Sciences.
In many of our other markets, we remain committed to and we will remain committed to the investments around gas because I do believe if you just look at that energy equation.
Additionally, fuel over time, that's going to be required for the world to meet its needs.
Okay, great. Thanks.
Thank you Sir.
The next question will come from Tommy Moll with Stephens. Please go ahead.
Morning, and thanks for taking my questions core earnings economy.
Sticking on the topic of auto so incrementals I wanted to talk about pricing dynamics for oil and gas business.
Potentially you have been able to pass through some inflationary items.
We really think about net price my assumption would be you started the year from a pretty low base just given the.
The downturn in the recent past.
But as we think through to.
Back half of this year or really even next year.
Is there not an embedded call option on price here I mean, you've got a commodity environment thats got to be a tailwind.
You've got record cash balances margins profitability et cetera across your customer base.
Should we be fairly bullish on that front.
Look you're speaking specifically about automation solutions Tommy we continue we have a long history of positive price activity in that market and that comes from a basis of.
That's just a market structure, but the relevance of our technology in this space and our ability to differentiate and.
And drive price, obviously is meaningful there so look.
Some cases were up to four price increases across that space.
We're working very actively through our selling organizations and with our end users, but I remain confident in that business of ability not just to continue to implement price as needed.
But also to be realized into the P&L.
Frank anything Tommy that business that business captures price here and in Europe .
It's a very it's a very strong business with respect to its ability to capture value through pricing the.
The commodity situation with the exception of this unusual electronics situation, it's not nearly as impactful in that business as it is in the other side of the business. So I mean, typically even with these kinds of broad commodity swings while yes. They have a P&L impact it's not determinative right now, let's be electronics that really is the incremental.
Variable that we are dealing with in terms of pricing but.
There is no significant embedded.
Price to come as a result of what's going on now the pricing pricing power in that business is very steady we're stepping it up this year because we have an unusual situation, yes, just to add to that commodities is a makeup of the cost structure of that business is there is not a big element of the cost structure, so, but as Frank said, we've traditionally been.
<unk> price cost and we will continue to be green.
Green price cost as we get into the second half of the year.
Thank you that's helpful and then shifting gears I wanted to circle back to the.
The outlook for resin HVA C U.
You gave some context.
The trend may be slowing there and theres certainly been a lot of focus at least in terms of the North America trends.
Year to date and for the back half so what additional insight could you give us there in terms of what youre seeing on underlying demand, yes look.
<unk> as a whole, particularly reflected in our home products businesses.
And as we went through the quarter.
And we've seen that in just the order run rates.
Our climate business has remained strong.
To date.
As we get into the season, we will watch how that translates but feel pretty good upon the climate sites still Tommy.
Thank you I'll turn it back.
The next question will come from Brendan leukemia with Alliance Bernstein. Please go ahead.
Good morning, all thanks for taking my question good morning, Brian morning.
Certainly Russia question.
Can you offer some color on the size of that business, what the impact is pulling out the guide on the year and automation solutions.
Sure. So we have said that that business represented on a full year basis about 1% to call. It one 5% of sales.
I'd say good.
The.
Average profitability relative to the total company.
We had half of a normal year this year until the until the conflict began and we've been scaling back the business significantly since now we intend to exited it'll be it'll be a slow ramp as we exited as we figure out exactly what those details are but.
With that context, I mean, you can kind of determine what the full year contribution of the businesses and we've covered.
The piece that we expect to be without through the balance of the year within the guide.
Fantastic and then one quick follow up on KOB three within automation solutions just struck by the fact that was again the biggest growth driver here.
Can you speak a little bit to I guess, the dynamics, there and how youre driving that improvement how much of that is price.
And how often do you find yourself in competitive situations for those revenues.
Yes look 60% of the revenue in the quarter in automation solutions was <unk>, which is a replacement MRO business.
This is the least price sensitive excuse me at least.
Our margins since Super Bowl of the businesses into one where we with prices the most sticky so.
That was reflected in the results of automation solutions as we went through.
We went through the end of March.
Okay. Thank you.
Thanks, Okay. Thanks.
This concludes our question and answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.
Okay.
[music].
Yeah.