Q3 2022 Emerson Electric Co Earnings Call
Good morning, and welcome to the Emerson third quarter 2022 earnings Conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays 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 like to turn the conference over to Colleen Mettler. Please go ahead.
Yeah.
Thank you and good morning.
Thank you for joining emerson's third quarter fiscal 2022 earnings conference call today, I am joined by President and Chief Executive Officer Kirsten Gray.
<unk> Financial Officer, Frank <unk>, and Chief operating Officer Ram Krishnan.
As always I encourage 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 contained a degree of business risks and uncertainties. Please take time to read the safe Harbor statement and note on the non-GAAP measures I will now pass the call over to Emerson's, President and CEO low curtains for opening remarks.
Thank you Colleen and good morning, everyone.
To begin by thanking the nearly 90000 Emerson employees around the world for their tremendous effort passion and commitment to deliver the solid results, we will speak about today.
Over the past four months I've had the opportunity to travel to several U S sites, including Houston, Chicago, Elyria, Ohio in Pittsburgh, as well as visiting investors customers and our teams in Germany, Denmark, Brazil and Mexico.
To be honest there is no substitute for being with our teams in person.
I'm looking forward to this month's strips to India, and Singapore and I would also like to thank our board of directors for their support and our shareholders for your trust in us.
As an organization, we continue to make significant progress on all of our strategic imperatives aimed to accelerate value creation culture portfolio and execution.
Yeah.
Our cultural evolution continues in earnest.
Launching our efforts with new.
Listening tools, a modernized employee value proposition and the new refrigerated talent engine.
To this end on August 1st we hired our first Vice President of Culture, Kelly Clark, who joins our company at a crucial point in time and brings unparalleled experience and cultural transformation.
Turning to slide three.
Emerson's portfolio transformation is well underway and in the quarter, we made significant progress to create a higher growth more diversified cohesive portfolio.
We took five important step.
Number one.
On may 16th we closed the Aspen Tech transaction.
We are very excited about the synergy opportunities, which are sized at $160 million in the funnel and the projects won to date.
Number two.
<unk> announced an agreement to acquire micro Mike the first transaction under the new structure.
Micro mined as an Australian based exploration to optimization software offering well positioned to benefit from the minerals required to fuel the renewable revolution.
Number three we announced and closed the acquisition of flux.
A critical life science process knowledge business highly synergistic with our industry, leading Delta V system.
Number four.
On May 31, we closed the T O D sale in last five yesterday, we announced the sale of incinerator to Whirlpool Corporation for $3 billion or $18, one multiple of adjusted EBITDA.
Prior to turning to slide four allow me to say a few words about our execution. This was a solid quarter and I feel.
Credibly positive as we go into the fourth and into 2023.
June trailing three month underlying orders were plus 10% driven.
Driven by automation solutions at plus 13%.
Third quarter underlying sales grew 7% driven by the Americas, which grew 14%.
This performance occurred despite lockdowns in Shanghai, which impacted six plants for two months and continued challenges with electronics availability.
Together the two factors resulted in a $180 million sales impact in the quarter or five points to the automation solutions segment sales.
Adjusted EBITDA improved 20 basis points with improvement in both platforms.
Operating leverage in the quarter was 27% and we are well on track to exceed our 30% target for 2022.
Adjusted EPS was $1 38, including eight cents.
Contribution from Aspen Tech.
Although free cash flow conversion in the quarter was 100% adjusted for non operating and one time items.
Operating cash flow was down driven by working capital investments in inventory and receivables.
Let's now turn to slide four please.
In addition to the portfolio Emerson has also made tangible steps in our ESG journey.
Recently, we have established a target to reach next year of greenhouse gas emissions across our value chain by 2045.
The near term our objective is to reach net zero in our operations and reduce our scope three emissions, 25% by 2030.
Our 2021, ESG report, which can be found on Emerson Dot com includes more detail on our target, which is aligned with the net zero standards set by the science based target initiative.
Our goals are bold.
Haven't accretable credible Roadmaps that include many of the solutions technologies and expertise we offer our customers in the critical industries, we serve.
Please turn to slide five.
I am, particularly excited about the opportunities in the renewable space as I said, our portfolio is broadly relevant as an enabling technology across a broad segment of the world's economy.
This includes the electrification efforts such as heat pumps as well as sustainability, our strong sustainability funnel in automation solutions that has grown to $1 $5 billion.
<unk> of de Carbonization energy efficiency emissions management, and new energy investments in wind and hydro.
Solar and hydrogen.
I'll share a few examples on this slide.
First starting on the left Emerson was recently selected by Mitsubishi power to automate the worlds largest green hydrogen production and storage facility.
The advanced clean energy system hub will convert renewable energy storable hydrogen, which can subsequently be dispatched and converted to electricity when required.
Emerson automation and software solutions were selected based on industry expertise and a leading digital portfolio.
This is the first in kind facility and it will be capable of producing 100 tons of green hydrogen per day with storage capacity for 300 gigawatt hours of energy that's.
That's equivalent to 150 times, the current lithium battery storage in the United States.
Next in the middle along with Neste Engineering solutions, we were chosen to provide automation technologies in software to find oil.
For the worlds third largest tall oil by a refinery.
The advanced biofuel and biochemical facility will refine a byproduct of the wood pulping process to produce sustainable feedstock for Biofuels chemicals and pharmaceuticals.
The expected annual capacity of 200000 tons will create a 400000 ton reduction in carbon emissions.
Presents roughly 1% of Finland's total initiatives.
Lastly, Emerson was selected by <unk>, a French energy provider to enable the transition of its flagship coal fired guac luge plant to 100% renewable energy.
Emerson's automation system and software will help convert the existing coal fired power plant controls to utilize biomass feedstock.
In doing so this project will result in a 640000 ton reduction in carbon emissions part of I'll be almost plan to reach almost 100% renewable energy by 2030.
These projects and our net zero targets represent our continued progress in our greening of and Greening by framework that Mike train has introduced.
And lastly, before I turn it over to Frank.
On slide six I'd like to highlight a few exciting investments we've made in operations around the world.
Our regionalization strategy and operational excellence served us well through the pandemic and in the current challenging supply chain environment.
We continue to drive operational excellence with investments like the three shown here star.
Starting on the left earlier this month Emerson officially opened our new professional tools facility in Ash flat, Arkansas.
This is a 277000 square foot facility, which will be used mainly for our greenlee tool for electrical applications across North America.
It currently implies a 150 employees and we will double the employment over the next four years.
Really excited about this investment and we were honored to have government Asa Hutchinson join us for the ribbon cutting.
Next in the Middle Emerson recently recently opened its my interest City, Chennai, India facility for fluid control pneumatic.
This is a 145000 square foot facility, which will help serve process hybrid and discrete customers in India and surrounding Asian countries.
And then last week, we introduced a new south Teal, Mexico manufacturing facility for our specialty valve technologies assemblies, and actuators using life sciences metals and mining and other key industries.
As with all these facilities Sato will use state of the art factory automation capabilities.
<unk> mental designs and include our own Emerson technology.
As we close out 2022, I feel extremely positive about where we are as a business and where we're going.
Our goal is accelerated value creation, and we are executing on all the critical dimensions.
With that I will now pass the call over to Frank Dellaquila, who go through our detailed financial results in the third quarter. Thank you al and good morning, everyone. If you would please turn to slide eight.
Before I comment on the third quarter I'd like to take a minute to ground everyone on three significant events.
The reported results.
First on May 16th Emerson completed its transaction with Aspen.
We contributed our two software businesses.
Si and GSS to Aspen check in addition to $6 billion in cash in exchange for a 55% ownership ownership position in the new Aspen Tech. Please.
Please note that GSS has been renamed to subsurface science and engineering or SFC for short.
OSI and SFC, which were previously reported in our automation solutions platform have now been moved to a newly created reporting segment within Emerson called Aspen Tech.
For accounting purposes are contributed businesses the acquiring entity. Therefore, our third quarter is the sum of all contributed businesses for the entire quarter.
Heritage has been tech results from the May 16th closing date.
Stated simply our third quarter results include a full quarter of our contributed businesses at approximately 45 days of heritage Aspen Tech.
As a result year over year comparisons are not meaningful as the prior year includes only our contributed businesses.
Encourage you to review the slides choline and their team is included in the appendix, which shows the details of the sales by quarter at map, the Aspen Tech financial results into our financials.
As a reminder, Aspen Tech's results are fully consolidated with MSR one by line with the 45% Noncontrolling interest deducted from earnings used to calculate earnings per share and reflecting in a single line in the equity section of the balance sheet and.
And finally on that subject our contributed businesses are no longer included in our usual metrics for automation solutions.
The second significant significant items is the thermal divestiture, which was previously reported in commercial and residential solutions.
The transaction closed on May 31, and.
And the business is no longer included in underlying orders underlying sales or backlog calculations, we recorded a $428 million after tax gain equivalent to 72.
And finally, we announced on the May call our decision to exit Russia.
At that time, we absorbed several sense operationally within the guidance that we gave.
This quarter, we are reporting a $162 million charge, which is a 29% earnings per share impact.
Our deep booking $132 million of orders that will not be converted to sales the.
The impact of the <unk> gain and the Russia related charge will be removed from adjusted earnings.
So with that background. If you would please turn to slide nine and we'll talk about the quarter.
So all said, we believe we had a very good quarter.
Core operations challenges, we could not anticipate or built into the guide, but looking through them. We are very pleased with the underlying operational performance and we believe we can deliver results for 2022 that are in the range of what we told you in may with the exception of cash flow.
Demand continued to be strong and broad based and consistent with our previous comments around our key end markets.
We missed the underlying sales guidance entirely due to the extended lockdown in Shanghai and some continued challenges around electronic components, neither of which we expected when we guided in may.
Together, we estimate these two headwinds reduced sales by about $180 million in the quarter, which equates to four points of growth for total Emerson and we estimate that the leverage on those sales was about 40%.
Our guide for the balance of the year incorporates our expectation that our manufacturing capability in China, and our component availability and will support our sales plan for the remainder of the year.
Rob will talk about both of these subjects in more detail in a few minutes.
As a result underlying sales were 7% falling short of our third quarter guidance by three points at the midpoint.
There is a lot of good news within these numbers the business has implemented the planned pricing actions realizing six points of price overall and price less net material inflation significantly improved versus our prior quarters. According to the plan.
Adjusted segment EBITDA improved 170 basis points, driven mainly by the addition of Aspen Tech, which added 150 basis points.
Operations improved 20 basis points as Rob mentioned, despite the $180 million of missed sales in the deleverage on them as price realization and ongoing cost containment measures more than offset elevated inflationary pressures from wages and freight.
Adjusted earnings per share was $1 38 up 16% versus prior year and that includes <unk> <unk> from the Aspen Tech segment.
Slide details in a moment.
Free cash flow was down 36% versus prior year, mainly due to higher working capital from increased sales and continued supply chain constraints that caused more investment in inventory than we would have expected.
In may we reduced our cash flow guidance modestly with the expectation that the balance sheet release of working capital would occur during this fiscal year, but the continued operational challenges pushed this release and our estimation into 2023.
Nonetheless free cash flow conversion was 90% in the third quarter, excluding the non operating items specific from net income specifically the gain and adding back the impact to net earnings of the Russia exit write offs.
Turning to the business results automation.
Automation solutions underlying sales were up 4% and is well set up significantly more another five points of growth if we were to occur.
Just for the the loss of the sales in China, and due to the supply chain disruptions.
Process hybrid and discrete sales were all up led by energy chemical and power and renewables segments sale.
Sales in the Americas were up double digits, while Europe , namely due to Russia, and Asia, mainly due to the Shanghai Lockdowns were down year over year.
Price realized in the third quarter was 3% driven by programs instituted earlier in the year and accelerated last quarter to address sustained electronics inflation and continued wage and freight increases.
Backlog increased by $100 million in the quarter to $6 $2 billion.
This elevated level of backlog will support our sales plan for the fourth quarter and into 2023.
As I said at the beginning backlog has been revised to reflect the $132 million booking in Russia and removal of the businesses contributed to the Aspen Tech.
Automation solutions, adjusted EBITDA improved 70 basis points versus the prior year due to price leverage favorable mix and cost controls despite the lower than anticipated sales volume.
Okay.
Turning to commercial and residential solutions business continues to grow strongly up double digits underlying sales increased 13%, including 12 points of price realization.
Sales were up in all world areas, except China due to the COVID-19, Lockdowns and softening demand.
As we expected climate technologies aftermarket and commercial strength offset moderating demand in the residential portion of the business.
In tools <unk> home products non residential project activity remains strong however, weakness in the retail segments continues.
Backlog was flat in the quarter at $1 3 billion after removing the impact of the divested thermal disc business.
Adjusted EBITDA for the platform was down 50 basis points consistent with our expectations for the quarter within that climate Tech was approximately flat.
It's nine points of price realization and ongoing cost reductions drove a significant improvement in sequential leverage and profit margin for that segment.
The Aspen Tech segment contributed $239 million of sales at nearly 54% adjusted EBITDA.
Once again these sales represent a full quarter of results for membership contributed businesses. In addition to heritage Aspen Tech from the May 16th closing date through the end of the quarter.
The heritage Aspen Tech sales for the period covered the second half of Aspen Tech's fourth fiscal quarter.
And reflect strong revenue growth based on normal seasonality in the business and the applicable revenue recognition rules for software sales.
Together, we're off to a great start and we look forward to driving the synergies we identified and the diversification that we envisioned for our combined businesses.
If you would please turn to page 10 for the.
EPS walk.
As I said adjusted EPS was $1 38 up 16%.
There are several non operating balance sheet items that net out to <unk>, notably stock compensation. We still have two plants that are on a mark to market and they were a significant favorable item in the quarter.
So automation solutions and commercial residential operations leveraged at nearly 30% and contributed <unk> <unk> to adjusted earnings per share versus prior year.
<unk> contributed <unk> <unk> driven by the strong fourth quarter in the heritage business net of <unk> interest expense attributable to the transaction.
We continue to deal with various operational challenges returning to supply chain logistics and labor I'm going to hand off drawn to comment on these issues as they affected the quarter and how we think we can navigate them for the balance of the year.
Thank you Frank.
Please turn to slide 11.
<unk> with previous quarters, the operating environment remains challenging in the third quarter, especially in terms of electronic component availability and the impact of the China, COVID-19, lockdowns, which lasted much longer than we anticipated going into the quarter.
Starting with the positives freight and labor costs and commodity prices are all trending in the right direction and provided some relief to the overall environment labor, which is primarily an issue for us in our Midwestern U S plants was improved from the winter months and the Covid related challenges, we have experienced and commodity prices mainly steel.
<unk> copper and plastic resins have all continued to decline as we had anticipated however.
However, the two most impactful items in the quarter with the extended China, Lockdowns and the electronic component shortages.
As we discussed in May our expectation was China would begin reopening in the middle of May with full operation at the end of the month as it played out reopening was delayed until the end of May with full operation not until early June . During this time, we did not expect our employees to work in closed loop opera.
<unk>, which would have required extended overnight stays in our factories. Therefore, we had little to no operation during the Lockdowns. This delay in reopening represented roughly $100 million in lost sales in the quarter, primarily from our sixth manufacturing plants in the Shanghai area. We expect most of these sales to be.
Made up in the fourth quarter.
But China Lockdowns and other supply constraints contributed to further electronic component availability issues, while lead times remain stable at elevated levels capacity challenges at our critical suppliers led to more deep commenced in the quarter and we were forced to go to the open market to procure components more than <unk>.
Anticipated this drove elevated purchase price variances and challenges in converting our backlog to sales leading to an $80 million sales Miss in the quarter, primarily in automation solutions.
Six critical suppliers for us account for about 90% of the component shortages, we experienced in the quarter.
Our supply chain teams have stabilized the situation going into the fourth quarter using a structured approach to expedites participating in supply assurance programs are driving for principal executive engagement with these critical supply of shoring up what is necessary for the end of the year.
Finally, our global operations and supply chain teams continue to do an outstanding job of effectively managing the ever changing landscape, allowing us to execute successfully for our customers I will now turn the call back over to Frank to take us through the 'twenty two outlook. Okay. Thank you Ron if you would please turn to slide 13.
As we look toward the rest of the year and into 2023 demand continues to be strong with enriched in trailing three month underlying orders up double digits versus prior year.
June trailing three month orders for automation solutions were up 13% versus prior year indicative of the broad continued strength across the business sustain.
Sustainability de Carbonization factory automation, Modernizations and reassuring secular trends continue to drive investment decisions in key industries.
We expect growth to continue in key process end markets like energy chemicals, and power and renewables and also expect favorable conditions in the life Sciences, and metals and mining markets, all of which will support growth into 2023.
In commercial and residential solutions June trailing three month orders were up 5% led by climate technologies, which was up 9%.
Commercial industrial food retail and other nonresidential end markets remained strong as project activity continues.
<unk> climate business is showing some signs of moderation as we've expected and communicated while our residential tools and home products business continues to soften as we first mentioned during the May call.
This can be seen in the retail data.
Inflation weakened demand in the housing related and home improvement markets.
Aftermarket sales remained strong due to record high temperatures globally globally, and the European heat pump market is propelled by energy efficiency.
Imperatives as well as the unusually warm weather as well in Europe .
Please turn to slide 14, we'll talk about the guidance update.
So the revised guidance considers the continued robust underlying demand.
And balances with the impact of the third quarter headwinds that we experienced.
Emerson's underlying sales guidance has been named to the low end of the range updated to remove thermo desk and to remove the businesses that we contributed to Aspen Tech is required as part of the transaction as well as the continued supply chain constraints that Rob mentioned.
Automation solutions 2022 underlying sales growth is now expected to be between 6% 7%.
We reduced the range modestly again to remove the businesses contribute to Aspen Tech and to recognize the third quarter impact of the ongoing challenge of the supply chain constraints principally in electronics.
As Rob said, the China sales mix is expected to be recovered, but the challenges with electronics will extend beyond the end of this fiscal year.
The recalibration of the sales outlook is based on our projected ability to convert orders along with the strong underlying demand backdrop, both of which should be supportive of going into 2023.
In commercial and residential solutions, we've raised the bottom end of the guide to reflect our confidence in the outlook for the balance of the year.
<unk> reflects continued strong price realization across the platform.
The fourth quarter is expected to be strong for both platforms automation solutions and commercial and residential solutions supported by the solid demand and a record backlog.
Inflationary pressures remain but our pricing actions are expected to more than offset net material and other inflation.
The guidance assumes no further impact on production of COVID-19 related Lockdowns in China and as Rob described we believe we have secured adequate electronics supply to deliver the sales guide for the year.
Regarding the Aspen Tech impact on the guide.
Heritage Aspen Tech's fiscal fourth quarter, which was included in our fiscal third quarter is its seasonally strongest quarter due to the timing of contract renewals and the revenue recognition rules that apply.
Therefore, we expect <unk> contribution to revenue and earnings to be a bit lower.
Our Q4.
The business continues to drive the synergy plan and there is active joint project engagement between the two companies.
Aspen Tech solutions simultaneously help customers meet sustainability operational excellence targets, which our top investment priorities for both their customers and emissions traditional customers.
Our combined product portfolio is well positioned to be the digital partner for process and hybrid end users.
We've updated the net sales guidance to account for the Aspen Tech transaction by one to two points and the incremental FX impact, which is now with 2% to three point headwind as well as the affirmative divestiture.
In simulator transaction will close after the fiscal year. It has no impact on the 2022 got it.
Share repurchase is expected to be $500 million, there's no change the tax rate and dividend assumptions that we gave him. The may guide we have reduced the operating cash flow guide to $3 billion, reflecting all the.
<unk> balance sheet impact of the operational issues that we're seeing.
Capex was reduced to approximately 525 million free cash flow has been updated to $2 5 billion accordingly.
After removing the impact of the three significant non operating items, the former disc divestiture gain with Russia exited the third quarter and a significant further gain that we had in the first quarter, our free cash flow conversion for the year will be nearly 100%.
We still expect total segment operating leverage to be in the 30% range as we have said all year.
As we have said in previous calls.
GAAP EPS is expected to be between $5 25, and $5 35 in adjusted EPS is now expected to be 505 to $5 15.
Please turn to slide 15 for the EPS walk.
Starting on the upper left the May guide for GAAP, EPS was $4 77 to $4 90 to.
Due to the revised sales look for automation solutions in the TMT divestiture, we're lowering the top end of the guide by <unk> <unk>.
The $428 million after tax gain on the <unk> divestiture and the Russia charge are now incorporated into the guide.
The revised EPS guide on a comparable basis today is $5 20 to $5 30, Aspen tickets, 13th operationally, partially offset by <unk> <unk> of net intangibles amortization that results from the purchase accounting on the transaction.
So the resulting revised GAAP guide for EPS is $5 25 to $5 35.
The right side of the chart walks that May adjusted EPS Guide to the current guide. The guide was $4 95 to slide 10, we have the same <unk> operational related reduction Aspen Tech operations at 13 <unk>.
In this case offset by <unk> <unk> of interest expense on debt that is attributable to the transaction. So the new guide is 505 to $5 15.
For your reference I won't go through but on the next slide there is a bridge from GAAP to adjusted EPS for the fiscal year. The customary adjustment items are there along with the three unique items that I've discussed.
So before turning to the Q&A again, I would encourage you to review the slides in the appendix that we've included that explain some of the accounting details of the transaction.
With that thank you for your attention and we will open it up for Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
This time, we will pause momentarily to assemble our roster.
Okay.
The first question comes from Andrew <unk> with Bank of America. Please go ahead with your question.
Yeah, Good morning, Wow, I'm, Frank Colleen and good morning to all of you.
Good morning.
Just I guess my first question is going to be about Aspen.
One of the things that enhances this incredible rolodex of clients.
Can you just talk about if.
If you have had any interaction with some of their customers on the hardware and systems side.
And if you could talk about any sort of early success in terms of engaging.
Some of aspen's customers.
On the Amazon side. Thanks.
Andrew. Thank you this is all <unk>.
Sure look we have a very active project funnel to begin with that we worked very closely in conjunction with all world areas selling organization and the Aspen Tech channel. It is sized at $160 million today, and it's balanced in three ways by world area by industry and <unk>.
The technology.
We've won to date slightly over $6 million of synergy projects that Aspen tech into.
Traditional emerson customers and Emerson into traditional Aspen Tech customer. So it's growing and there is line of sight for another hour suggests $10 million or so this fiscal year, depending on how things move over the next quarter.
We have been awarded but not booked a very large project as well that size that $40 million with a full automation suite and Aspen Tech. In addition, so theres a lot of commercial activity.
Have.
Individuals' saw at both Aspen Tech Emerson that are responsible for delivering the synergy value and a lot of engagement.
Just one last anecdote Andrew last week I met with the CEO of ascend chemical who is not just a very strong delta V customer, but a very a very loyal Aspen tech customer and again spent time with Phil Mcdevitt simply to lay out the opportunities that we have as an organization is.
They digitize their plants and move to a top quartile performance. So a lot of great activity looking at many different levels across the organization and very excited about the synergies.
And just a follow up I think before you sort of talked about a potential visibility.
<unk> ability on capacity coming I think particularly in North America, but maybe some.
Worldwide as well I'm talking specifically about semiconductors, because we know that sort of talking to brokers industrial chips is still in very very shortly.
How has visibility evolved over the past quarter has been moved out to the right or there are delays in terms of this capacity coming on or do you still feel confident that this capacity started to come online late this calendar year early next year. Thanks a lot.
Yes, Andrew wrong here.
In terms of capacity coming online, we've really worked with our top six suppliers and we have a very good understanding of how this capacity will come online late 'twenty three and enter 2004 <unk> as an example.
Two particular facilities, one in Lehigh, Utah and the other in Richardson, Texas, where we buy a lot of our components from that capacity expansion is expected to come online.
Somewhere in the next six to 12 months.
At this point on track, but frankly the challenges that.
Most of our suppliers are seeing is equipment that they will need to bring this capacity online is getting delayed but at this point at least as it relates to capacity specific to Emerson.
Think we feel pretty good that this capacity will come online late 'twenty $3 into 24, which was the plan.
Thanks, Rob maybe an opportunity to put Emerson discrete business. Thanks a lot.
You.
The next question comes from John Walsh with Credit Suisse. Please go ahead with your question.
Hi, good morning, everyone.
Good morning, John .
Hi, just wanted to follow up on kind of how we should think about the incremental leverage.
Here in the fourth quarter.
I mean, I know, you've kind of talked about that 30% target.
But I guess the first half of the year August calls was running much higher.
You had the China disruptions in this quarter those reverse kind of any more granularity you can give us there.
We expect that business to leverage in the fourth fiscal quarter.
Look I think John Good question embedded in our guide is an assumption for if you just back into it about 32% operating leverage in Q4 for Emerson as a whole.
That's all.
<unk> 27 in Q3.
Up to 30.
<unk> 32, I believe in Q4, a little higher perhaps.
So we.
We feel really good about how.
Their businesses are executing and the conversion, obviously working off a very attractive cost structure, and automation, which should which should benefit us as we go through the quarter go ahead, Yes, hi, John Yeah just.
To add just a little bit more than that.
Automation solutions leverage in the first half as you said it was very strong we said it would normalize in the second half of the year and it will.
But it will be very strong for the full year of kind of a normalized level in the fourth quarter and then in commercial residential solution that leverages accelerating as the price actions kick in which is what we said second half would be stronger sequentially, both from a margin and leverage standpoint, and thats exactly what were seeing and just to think corrected the 32 levels you'd be the full year.
<unk> 35, approximately Q4, sorry John .
Great.
Super Helpful. And then obviously congrats on announcing.
The transaction around incinerator.
Curious if you can give us any more granularity on the timing.
If it might be able to get done by the calendar year.
Just based on some things Whirlpool said and then Jeff.
Any more color on.
When that business will either go disc ops or if it will just get taken out of the business. So thank you.
Yeah, and John This is Frank in terms of the timing.
We and whirlpool, both hopefully we will close as soon as possibly can but it's subject to normal regulatory approvals. So I would expect it will be sometime early in 2023, but we just don't know at this point.
In terms of the disc ops, we're looking at that.
We may we may not at that point clear the bar for disc ops.
Although it's a very significant business to us may not be big enough to qualify for disc ops treatment. So at this point I would expect not we're going to revisit that.
Great. Thanks for taking the question I appreciate it.
Hey, John .
Our next question comes from Andy Kaplowitz with Citigroup. Please go ahead with your question.
Good morning, guys.
Good morning, Andy.
So several of your peers saw a relatively big step back in growth in China towards the end of their quarter did you see anything like that and could you update us on what youre seeing on the ground now in China, how much electronic related or lockdown related headwind. If any are you baking into Q4, and then just sticking with the regional focus how are you thinking about the resiliency of your European business.
Sure. Good question, Yes, obviously the quarter was challenging in China.
For us the Lockdowns are.
A significant impact in both demand and execution.
And and.
And that was that was reflected in the sales results that we shared with you having said that we rebounded very aggressively in the month of June in terms of economic activity.
And that has continued through early part of this quarter as well.
And relatively optimistic about particularly the automation segment, which had been on a very significant run in China that that continues as we go through Q4, there is a very attractive funnel of projects in China, driven by availability of <unk>.
For lack of a better term cheap Russian oil and gas coming into the country and investments into sustainability and renewables.
We are also being driven including I think John the largest electrolyze a project in the world is actually in China.
In terms of Europe look a western European performance was actually quite positive.
Through the quarter, we obviously had it was offset by by Russia.
In parts of.
The.
Our former Soviet Union were impacted obviously during the war, but the western European climate continues to be relatively resilient with growth in in the quarter and expect the growth as we go into Q4.
Can you give us some more color into how you're thinking about commercial and residential solutions going forward I know order growth actually improved a bit in June which I assume is easier comps the comps do continue to get easier. So could you continue to see steady or even improving order growth in the business and then I know you've been relatively cautious on residential HVAC and I think Frank mentioned some.
Continued cooling in that market forget it upon but has that market continues to be a little better than your expectations.
There is no doubt the doctor has been better than expectations. John I think if you went back to when we first talked at the beginning of the year, we expected that orders to moderate significantly in climate that hasnt occurred to the pace that we expected. So that's a pleasant surprise theres a lot of resiliency with upcoming changes in.
<unk> that are driving now investments in this space as well so I feel I feel better than I did at the beginning of the year and it is a proven resiliency there across all segments of the business of course watching the residential demand very very carefully.
I appreciate it.
Take care.
Our next question comes from Steve Tusa with Jpmorgan. Please go ahead with your question.
Hey, good morning, guys.
Good morning, Steve.
Can you just give us an update on where you stand on price cost and then how that plays through for the year.
Just in your updated guidance.
Yes, good morning, Steve This is Frank so.
Last call.
Talked about broadening the definition of price cost to include.
Material and wage I'm sorry. In addition to net material inflation to exceed wage and freight and we said that we would basically implemented price in the third quarter to cover.
Everything that we're seeing and we did we covered and then some in the third so we turned that returned favorable and we expect to be more favorable in the fourth quarter. As we worked through those pricing actions are being delivered as planned and we're seeing some moderation in the NII and net material inflation.
As well as kind of a leveling off in the wage and freight inflation as well at somewhat elevated levels, but it's not continuing to accelerate so the overall.
Price less material wage freight inflation equation is improving as we go through the year.
Great and then just one kind of nitpicky one on corporate.
It was a lot lower than we were expecting what's the guidance on corporate for the year I guess, there's some stock comp influence in there.
That you have is there any carryover in.
Into next year or is there something going on there with regards to the Aspen reporting I don't think it's Aspen, maybe it's the stock comp stuff.
It's not I mean, it's.
There were some one timers in there last year, but I mean, it's essentially the significant move in the stock comp in the quarter, but we still have two of the three outstanding LTI programs that are mark to market.
That when the stock price went down temporarily there was a significant mark to market on that so no. There's nothing unusual going on in corporate other than the.
The volatility because introduced by that mark to market.
Okay, great. Thanks, a lot.
Our next question comes from Josh <unk>.
Good Winski with Morgan Stanley . Please go ahead.
Maybe on mute Josh.
Oh.
There we go.
Yes can you hear me.
Hi, Josh.
Hi, sorry about that.
So maybe just to start us off while on Canada. The totality of the funnel, obviously, a lot of things have changed from especially the process world over the past call. It six months subject to while the book some of that stuff out.
Yes.
Yes.
<unk> that you would use on funnel size and what youre seeing the most activity build maybe over the last three to six months.
Europe sort of comes to mind first and foremost I talked about that but maybe more broadly as well.
Yes, no I'd be happy to so the total project funnel.
Its size at $6 $8 billion.
That consists of about 440 projects between now and 2020 at the end of 2024, so that's kind of the visibility that we have today.
You are absolutely right. There was a lot of movement within the funnel as we went through the quarter.
Including projects that were booked.
Projects that were added and then almost half a billion of projects valley that we move from the funnel by 13 projects the majority of which.
We're impacted in Russia.
Our fault a chemical complex in the Baltic LNG project debt.
So those are the big the big removals.
But in terms of the project basically funnel size essentially flat, but what did get relatively larger within it was the renewables value of the funnel, which grew from one to approximately $1 five today, so very encouraging to see in our activity continues to increase significantly in that segment.
Got it that's helpful. And then just following up on on Capex pretty decent sized cut, especially on a percentage basis.
I understand the free cash flow was sort of impacted for yourself and for all your peers early around the working capital situation just trying to gauge how much of the Capex cut is just sort of protecting the cash plan versus more of a slowdown.
Lot of the talk around growth has been pretty constructive so I'm just trying to marry those those two phenomena.
Josh no slowdown of any kind and key investments that we're making for both growth and.
To improve our cost position there is always room in sustaining capex and given the.
Given the challenges in the operating cash flow line.
<unk> down the sustaining capex, but I can assure you everything that needs to get done is getting done.
Got it appreciate it that's all I got.
Our next question comes from Scott Davis with <unk> Research. Please go ahead with your question.
When.
We talked a little bit about this Mitsubishi contract that you want on slide five I'm, just trying to get a sense of the scope of these types of things and materiality and I guess it's.
So when you say when our automation contract you mean, winning the control side as include.
Things like flow meters and stuff like that or perhaps you can kind of address that.
Yes, Hi, Scott good morning lull here.
No absolutely not this similar.
Automation, so that we would discuss relative to a traditional car.
Carbon based projects so that would include control.
It includes now the opportunity for Aspen Tech on the analytics and optimization, but of course at the core we have our final control elements, which are relevant very relevant here and our sensor elements sell flow meters pressure transmitters level.
It's the full automation scope that we bring to bear a project like this can be a sizable is as high as over $50 million potentially as we executed that.
It has that type of an opportunity.
Okay. That's helpful and then just on the on the.
The conversation of FX I mean big changes here in the last few months in.
You guys are obviously global but are we just still mostly talking just translation impacts here and no real competitive <unk>.
Dynamics for as some competitors using currency is a bit of an advantage et cetera.
Yeah, Scott, Yes, correct, we are really talking about the impact on sales growth and translated profit.
We typically don't have a lot of competitive issues around currency our businesses positioned themselves.
<unk> around currency and then they're very conservatively hedged cash flows where it makes sense to do that so no. We're not hearing anything from the businesses about being at a competitive disadvantage relative to somebody elses cost base being in a weaker currency.
Super helpful. Thank you good luck guys I appreciate it.
Thank you.
Our next question comes from Jeff as spreads with vertical research. Please go ahead with your question.
Thank you good morning, everyone.
Morning, Jeff.
Morning.
<unk> been pretty busy.
As the illuminated in this line item you started with the start the call.
Wonder if you could just give us.
A little bit more.
Of the thought process here now and where we're at in the transformation and maybe specifically just thinking about.
What you would call disconnected assets.
Not expecting the named segments of businesses by name, but how far along are we in.
That process.
Taking action on disconnected assets.
Much longer should this process.
Jeff Good to hear from you.
No I think it's a good question.
We are we are on a journey and across all three of the strategic imperatives that I described.
And our long haul three of them.
I think we've made significant progress and I appreciate you recognizing that in terms of the portfolio.
And my commitment to our shareholders has been that.
By delayed us.
On November 29 at our Investor Conference, we will.
Portray.
The future state of the business and what we envision to be the end state of this of this journey in the meantime, we will continue to look at opportunities and execute.
Along a few dimensions, which I am not really free to speak about at the moment.
And then just maybe on price and I was just thinking automation in particular.
I think you said, 3% price there.
With 12, and CRF buyback into two of the question isn't really is what happens if it's two or three but.
The question is more.
Just about the ability to get additional price in that business and certainly understand Crs is where you need it most and it sounds like you've gotten it.
Pretty actively but is there more positive price momentum coming through the system.
And automation solutions may be a comment.
On price and orders relative to price and revenues could give us some context there.
Yes, I'll give you I'll give you some I'll ask Ron to add some color as well I.
I feel.
Really really positive about the price realization in automation solutions and as you know Jeff that this is a almost a decade now within that business segment that we've had positive price.
The products and solutions continue to be highly differentiated.
From a.
From a customer perspective, the installed base that over 120 billion is very relevant in that replacement market has significant pricing elasticity unit and drives our ability to take price forward, having said that obviously, we have been in an incredibly inflationary environment.
We will continue to drive price.
Where we can across the product families, but we also have to drive operational improvements.
Customers can realize value from improved activity, but I feel good about the environment, we're in and ability to capture the value of desktop their ramp.
And I would add that in terms of price cost, which includes the wage and freight inflation that business is always remain green and the magnitude of price, we get in that 2% to 3% range.
Our list price increases obviously are a lot higher we realize the percent of the list as we go into the market and execute that will continue to remain positive in Q4, and certainly into 2023 and well ahead of the net material inflation as well as wage and freight.
Great Thanks for that color.
Thank you Jeff.
Our next question comes from Julian Mitchell with Barclays. Please go ahead with your question.
Hi, good morning, and thank you.
Maybe just a first question around the free cash flow.
So I think with your guidance around sort of 80%.
Conversion to adjusted net income this year.
Maybe help us understand sort of how quickly they get back to a 100%.
In fiscal 'twenty three.
And as you worked down the inventory.
Often that can carry some margin headwind in the P&L. So.
So just wondered kind of any thoughts.
Around that dynamic and also what the contribution of Aspen is to the free cash flow in the current year.
Okay. Good morning, Julien This is Frank.
We would expect the balance sheet to normalize I would hope in the first half of fiscal 'twenty three I mean, we have a big sales quarter in the fourth quarter, we would expect growth.
Do we start to talk about 'twenty three I think we have pretty good robust growth expectations for 'twenty three the inventory is actually in good shape I have no concerns about what it is we have on the books, it's just simply a matter of throughput.
Given the all the operational challenges I would expect to be in better shape on the conversion.
Aspect of it by the middle of fiscal 2023.
Margin headwinds I take your point.
In terms of.
Having some absorption issues, but I mean, the businesses consider those and I believe those are manageable. So even inside the guide that we have for the balance of this year. There is some of that but it's it's it's it's more it's well considered within the guide in terms of that it's just something we have to manage as we go through the adjustment on the balance sheet.
Aspen Tech for this year, the 2022 cash flow there was basically zero contribution to cash flow.
In the third quarter, and it'll be minimal as well as in the fourth quarter and that is a function of some.
Some specific items, having to do with the transaction they had a final short period return.
As part of the transaction and they accelerated a significant tax payment, which basically <unk>.
<unk> the free cash flow that that they were.
Would have had in their fiscal fourth quarter and their fiscal first quarter is there appears to be their lowest quarter of the year on that score and also is the normal timing for their incentive comp payments, which basically absorbed much of the free cash flow. So inside of our number is minimal impact from <unk>.
On free cash flow.
That's very helpful. Thank you Frank and then maybe just following up on on Aspen specifically.
So it looks like it's your point because of some of these one timers.
Aspen itself is not really earnings accretive.
In the fourth quarter, when we leave aside OSI and SFC earnings. So just wanted to add.
If you could confirm that that's the case, how should we think about that.
Yes.
Im sorry, Im sorry, Julien interrupt no. It is in fact earnings accretive I mean, it was eight cents accretive in the third quarter, we filled time.
Integrating into the guide for the year, which obviously implies at least <unk> <unk> accretive.
In the fourth quarter. So yes, it will be it will in fact be accretive I point you to on slide 15, We've got Aspen Tech operations contributing 13.
For the year Alright, so is any of that.
Yes.
And then we deduct the.
The interest expense attributable to the debt and we get to 10 set net contribution for the year eight of which we had in the third.
That's helpful. Thank you.
Maybe Frank just on that point.
When we're trying to think about the sort of noncontrolling interests that was a big number in Q3, how do we think about that for Q4, just with that sort of jumping off point for next year.
Mike.
Okay.
Okay.
Yes.
Okay.
I'll follow up with you let me just follow up on that one Julian Okay perfect. Thanks very much.
Thanks Lloyd.
Okay.
Our next question comes from Nicole <unk> with Deutsche Bank. Please go ahead with your question.
Thanks, Good morning, guys.
Good morning, Nicole.
Can I just start with a couple of clarification item on the corner and the guidance first with the the China impact of 100 million is that completely incremental versus what you guys had expected for <unk> or had you expected any impact and then in the fight.
A reduction in core operations, plus thermo desk for the full year, how much of a thermo that comparison with core operation.
Yes.
So yes. It was incremental those are sales we expect it to have in the third quarter. When we guided in May that we lost tayo.
<unk> is a function of the extended lockdown.
And that <unk> is.
<unk> is mainly the.
The.
Operational issues around the.
Around supply chain thermal desk is may be a penny or two.
Okay got it that's clear and then can you talk a little bit about what you guys are seeing with <unk>.
The oil and gas customary KN <unk> KN <unk>.
Protect activity given all the movement, we've seen in the oil price recently.
Yes, sure Nick calls so <unk> three quarters set at 62% of automation. So it's been it's been relatively consistent in that 60 range. We expect it to be writing that 60 range as we go through the year.
Project activity is very robust and continues to be we have active engagements across epc's, particularly bechtel, who has taken a significant number of the new LNG jobs in Texas, and Louisiana and those are in.
And in the design phase and engineering phase right now.
But again it is it is combined with our significant investment in our sustainability efforts as well.
Missions.
Carbon carbon capture and energy efficiency and then the last point is the North America shale environment is improving and thats driven by gas demand.
And she is very positive and that's both for U S capacity and chemicals and for Mexico as well.
Thanks, I'll pass it on.
Thank you Nicole.
This concludes our question and answer session and conference. Thank you for attending today's presentation. You may now disconnect.
Good job.