Q1 2023 Emerson Electric Co Earnings Call
Good morning, and welcome to Emerson's first quarter 2023 earnings conference call.
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Please note that today is being recorded.
Like to turn the computer colleague Butler, Vice President of Investor Relations. Please go ahead.
Thank you good morning.
Thanks for joining us for the first quarter fiscal 2023 earnings conference call today, I am joined by President and Chief Executive Officer, Michael Cartwright, Chief Financial Officer, Frank Dell'aquila, Chief Operating Officer, Ryan Krishna.
Holly 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 uncertainty.
These take time to read the Safe Harbor statement and note on the non-GAAP measures.
I will now pass the call over to Kirsten President and CEO for opening remarks.
Colleen good morning, and thank you for joining us.
To begin by thanking the global Emerson family for delivering yet another strong operational quarter.
I'd also like to extend my appreciation to our board of directors and the shareholders of Emerson for your continued confidence in this management team.
Yeah.
We remain confident about the strength of our markets from both a geographic.
And an interesting industry perspective.
This is exemplified by our project funnel that continues to grow exceeding $7 billion at the end of the quarter.
Before I turn.
The call over and discuss the quarter's performance and review of our strong outlook for the second quarter and the year I'd like to say a few words about our headquarters announcement this morning.
We conducted a comprehensive three months review of location options.
St. Louis was selected following this rigorous process and we look forward now to finding an appropriate location in the region.
Please turn to slide three.
Operationally the first quarter was very strong for Emerson.
End market demand, where demand remains strong as first quarter order project trajectory played out largely largely as planned.
5% underlying orders was as expected as broad automation strength was weighed down slightly by a double digit decline in safety and productivity orders against tough comps.
Sequential underlying orders were also up 6% versus the September end quarter.
Sales met our expectations at 6% underlying growth slightly impacted by shutdowns in China.
Our business performed very well operationally displaying the shrink of our Emerson management system.
Operating leverage excluding Aspen Tech was 40%.
Head of our mid to high Thirty's expectation.
Adjusted EPS was <unk> 78 cents for the quarter and was impacted by two main below the line items.
Stock compensation was a nice set of headwind versus 2022.
Driven by a 31% stock price increase throughout the quarter and its subsequent impact on the remaining mark to market plan.
While we expect a slight headwind from the addition of vascular tech stock comp rolling into our financials. The overall stock compensation headwind was 8% worse than anticipated.
Frank will provide more color on this in his section.
Similarly, FX was worse than originally expected.
However, despite these headwinds operations performed above guidance as our business continued to execute.
Lastly, we completed our committed $2 billion of share repurchase in the first quarter.
Turning to slide four I'd like to walk through some exciting successes and the strong momentum we see in the value creation priorities, we laid out on November 29th.
First in late January we visited the middle East and had the opportunity to break ground on our new state of the art innovation and manufacturing hub in Saudi Arabia.
This investment is designed to not only spur innovation for the region focusing on the transition to clean energy segments like hydrogen and clean fuels, but also demonstrates our commitment to our regionalization strategy and best cost manufacturing.
Pillars of our operational excellence.
As an example of the projects our investment will supply Emerson was chosen.
To provide automation for the worlds largest green hydrogen facility by D. R.
The plant will provide 600 tons a day of green hydrogen using Emerson automation technology throughout production processes and renewable power generation.
Emerson's local support and install base in the Middle East were key Differentiators.
Secondly, Emerson in Aspen Tech continue to succeed with our joint customer solutions.
In the first quarter, we were jointly selected to automate the middle East largest ethane facility by Qatar energy and Chevron Phillips Rustler fun.
Emerson will serve as the main automation contractor for the $6 billion facility, providing our leading delta be control system with Aspen Tech engineering and simulation products.
The project is of scale example of a commercial agreement with Aspen Tech and how it successfully provides an expanded differentiated product offering to customers.
Lastly, Emerson continues to diversify through life sciences in metals and mining markets in the first quarter Emerson was awarded the automation contracts with Fuji film diodes since biotechnologies in Europe .
Expansion project will include multiple Bioreactors and processing streams, one of the largest CDM OS in Europe .
These three projects are a clear demonstration of emerson's commitment to the growth platforms. We discussed at our Investor Conference and our continued success differentiating us in automation leader in these markets.
Before I turn the call over to Frank I wanted to briefly.
Briefly discuss our proposal to acquire national instruments for $53 per share in cash.
As you know we've made our offer public on January 17th and our correspondence with Ni since 'twenty 'twenty. Two may is available on Maxim at maximizing value at <unk> Dot com.
Emerson has committed to an acquisition of NII and is participating in the strategic review process.
We believe our premium all cash proposal with no financing conditions or anticipated regulatory concerns.
And in the best interest of Emerson and our shareholders.
We look forward to continued engagement with ni and its advisors and moving swiftly towards an agreed transaction.
That said the focus of this call is our performance for the quarter and we're not going to be commenting further on our proposal for a light this time.
Be assured that we'll continue to execute.
Financial diligence review this opportunity.
With that I will now turn the call over to Fred.
Hello, and good morning, everyone. Please turn to slide five.
As Rob mentioned, we had a very strong operational start to 2023.
Underlying sales were within our expectations for the quarter at 6% driven by 10% growth in software and control and 5% in intelligent devices.
Sales were up 7% with a four point drag from currency and a five point contribution from Aspen.
World area growth was led by the Americas, which was up 13% driven by strong process sales, particularly in energy and chemicals.
With continued energy crisis in Europe affected demand as underlying sales were below prior year by 2%.
However, sales were up 7% after adjusting for the impact of Russia.
Sales in Asia, Middle East and Africa were flat versus prior year our.
The strength in the middle East driven by chemical and energy investments was offset by down sales in China, mainly due to challenging year on year comparisons and sporadic COVID-19 related shutdowns.
By industry, we continue to see strength in later cycle markets like energy and chemical.
Chemical investments and plant modernization and sustainability remained steady in North America, and Asia, but we are keeping a close eye on this market as we assess our outlook for the balance of 2023.
Overall first quarter process industry sales were up high single digits.
Similarly hybrid sales were up high single digits led by continued investments in life Sciences, reassuring and metals and mining.
Discrete sales were up mid single digits as this earlier cycle business starts to lap more difficult comps.
The growth in discrete was offset by weakness in our commercial business in safety and productivity, which was down 10% for the quarter.
But the early signs that we are bottoming out.
Overall, we feel confident about the health of our end markets and our conversations with customers indicate continued growth investments during 2023.
Price during the quarter contributed four points as our pricing actions from 2022 and additional actions taken at the beginning of 'twenty three are driving strong price realization.
Backlog grew approximately $700 million during the quarter to $6 6 billion.
Giving us ample opportunity to execute on the rest of the fiscal year plan.
Adjusted segment EBITDA margin improved by 130 basis points and leverage was 40% excluding Aspen Tech.
North American mix contributed to the margin expansion and price was accretive to margin in the quarter.
Software and control margins were up 200 basis points led by Aspen Tech.
Intelligent devices performance was strong with 110 basis points of adjusted EBITDA expansion.
Adjusted EPS was <unk> 78, and I'll discuss the details when we move to the next chart.
Lastly on this chart free cash flow of 243 million.
20% year over year.
Mainly due to trade working capital, including the impact of supply chain performance, which is improving but it's still challenged.
We are focused on improving trade working capital as we progress through the year and we reiterate our expectation of a 100% free cash flow conversion for the full year.
Turning to slide six this is our adjusted EPS bridge versus the prior year first I wanted to say that we had very strong operational results again, reflecting low forty's leverage on incremental sales, which delivered 15 two.
Adjusted EPS in the quarter.
There was an unfavorable impact due to stock compensation as well outside of <unk> and an additional nine due to currency.
The stock comp impact was primarily due to our legacy long term incentive plans.
Which required mark to market treatment on recording the expense of the 31% increase in our stock price during the quarter.
The last of these plants will run off in 2023, and the new plans do not require mark to market accounting, so going forward the variability from stock comp will be dramatically reduced in 2024 and beyond from what it has been historically.
Currency in the quarter was primarily driven by the accounting treatment of our long term contracts. In addition to customary translation and transaction impacts.
Other non operating items and share repurchase contributed <unk> two four.
Please turn to slide seven.
Turning to our 2023 outlook, we continue to see strength across our end markets.
As we communicated in October .
Process hybrid and discrete markets are all expected to grow mid to high single digits in 2023.
The long term secular trends, we discussed in November continued to be relevant for our business and are driving growth and successes in 2023.
Energy transition spend continues to be strong as evidenced by the successes wild highlighted a few minutes ago.
Energy security investments, including LNG continues to accelerate especially in North America and the Middle East.
And hybrid life Sciences investments due to re shoring continue to move forward and metals and mining spend is centered around electric vehicles and electrification value chains.
Those value change are also benefiting discrete markets, especially in the U S.
The one weakness we see in the business today is our commercial exposure within the safety and productivity segment, which was down 10% in the first quarter we.
We expect these sales to improve to improve as we move throughout the year as we face easier comparisons and we see early signs of a turn in demand.
Please turn to slide eight.
We're maintaining our full year guidance based on the underlying strength in our end markets and robust backlog.
The guide for underlying sales growth remains at six five to eight 5%.
We now expect currency to be less of a headwind at two points in Aspen Tech is expected to contribute three and a half points. Therefore, we are increasing our net sales expectations to 8% to 10% up a point from the previous guidance.
We are holding operating leverage adjusted EPS and free cash flow conversion for the year at the previous Guy.
Within that guide, we intend to cover the unexpected stock comp headwind that we had in the first quarter with excellent operational performance.
For the second quarter, we expect underlying sales growth of 8% to 10%.
Currency continues to be a headwind reducing sales growth by approximately by approximately three points.
Aspen Tech will contribute approximately five five points and net sales are expected to be 10, five to 12, 5%.
Leverage expectations again are in the mid to high <unk> adjusted earnings per share is expected to be between 95, and $1, which is a 13% increase at the midpoint of the guide.
We have included quarterly data for 2022 on a continuing ops basis in our press release and in the 8-K that was filed this morning.
Thank you for your attention.
Now I'll turn it over to the operator for Q&A.
We will now begin the question and answer session.
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Pause momentarily to some of our roster.
Yeah.
Our first question will come from Scott Davis with Melius Research you May now go ahead.
Hey, good morning.
Blough in Frank and from Colleen.
Hey, Scott good morning.
A couple of little cleanup items since I think the slides are pretty clear, but was price predominantly you can think about the total growth in the quarter, a 6% was price.
Does price make up most of that.
As Scott has already last year.
Quarter price accounted for four points.
Approximately out of this six two points of volume.
And did that cover costs well.
Yes, Sir.
Okay and just.
A quick follow up here on life Sciences, I know some of your peers have seen some weakness in life Sciences, but you guys made some pretty positive comments relating to that end market can you be.
Just give us a little bit more color on what what's.
What your customers are spending money on it you mentioned localization, but perhaps a little bit more color there would be helpful. Thanks.
Every active quarter in life Sciences globally.
Asia Southeast Asia, United States East Coast and in Europe .
There are a variety of projects, we chose one to highlight with you today, it's predominantly around automation.
Expansion of capacity.
Driven by the trends that we discussed at our Investor Conference, whether it's personalized medicine.
Ill or capacity de risking in the world areas, we have yet.
Got to expand with a full offering of Aspen tech into the space. That's in development that will be released here shortly and that will give us another avenue as we bring optimization software into that space.
Okay helpful. Best of luck. This year guys. Thank you thanks, Scott here.
Our next question will come from Josh bunkers, Wenski with Morgan Stanley .
May now go ahead.
Hi, good morning, everybody.
The market.
Just a quick couple of questions both relating to kind of the orders pipeline backlog and the conversion there.
While backlog has not had kind of this enormous surge that you've seen maybe in some other names that had a tougher time on supply chain, but how do you think about backlog conversion in your guidance is the expectation that.
Orders start to moderate versus accelerate where would you be pleased to see backlog over the next 12 months and then sort of a second related question. How do you feel about kind of the pipeline of projects today and the pace at which things are walking out of those.
Yeah, no backlog did increase in the quarter.
As as we went through look I do feel very confident with the with the order pacing in the businesses with the with the.
The weakness only in the safety productivity segment that we described throughout the call.
Beyond that.
Anil is very robust it actually grew almost $500 million in in terms of size as we went through the quarter.
About seven 3 billion.
Globally.
Large number of sustainability projects large number of energy transition projects and we're executing very well in that capital formation cycle. So feel very good about that so look I think from an orders perspective my expectation is.
And we continue to see a very positive environment as we go through the year.
Our job here and I think that's embedded in our second quarter guidance to convert the backlog that we have in the business.
Great if I could just get one little follow up on there.
Do you feel about kind of the margin that you guys are seeing on some of these larger projects I know people think about mega projects in margin erosion aggressive bidding has that been your experience with this wave.
No you see the leverage that we gained in the quarter about 40 points. There was there was there a.
Project shipments within the quarter embedded in it.
We feel very.
Very good about our differentiating capabilities without a technology stack, yes, theres competitive beating bidding, but it's nothing out of the ordinary that we've seen and nothing that we can't manage within our pricing models correct.
Great I appreciate the color best of luck.
Our next question will come from Andy Kaplowitz with Citigroup.
May now go ahead.
Good morning, everyone.
<unk>.
No I just wanted to follow up on the last question in terms of you know when I look at the orders have you seen any bigger signs of deceleration activity anywhere outside of safety and productivity. I know you mentioned youre watching chemicals I think Antonio also mentioned that you know would you expect orders to hold in chemicals or Andy.
The other process markets and we're just continuing to be focused in the Americas as he said in the past.
Yeah No great question, we had a really good Americas quarter and strong momentum there.
Very strong western Europe quarter with great momentum there of course, eastern Europe is relative weakness because of Russia of course, as we walked away from that market. So the comparable they are were pretty tough.
And then Asia.
And the Middle East very strong of course, China was down for us in the quarter, but we see that coming back here in the second quarter and expect high single digits as we finish out the year. So generally Andy based on what we're seeing beyond the safety productivity segment.
I feel very confident about not just the the the second quarter guide, we put out there, but the full year at this point.
Any color there I think.
I think western Europe being resilient is very positive for us and then the <unk> business, which is now close to 65% of our total sales mix in the new company has been very strong. So that's that's a good sign and Andy The project funnel is building. So at this point in the core business outside of safety and pro.
Activity no signs of weaknesses.
Very helpful guys, and then you talked about this a little bit that you delivered incrementals of 40% you mentioned the major reason is that positive mix from strength in the Americas is there any reason why that would change as you go throughout the year and I know you talked a bit about price, but the price versus cost come in a little bit better than you would've thought.
For Q1 and could that continue for the year.
I think we're going to see strong price cost through the year, and frankly with fundamentally price holding at high levels and like we saw in the first quarter, but also coupled with commodity softening as we go into the second half as we see both commodities as well as logistics.
Favorable so I think really the margin performance in Q1 is yes, Americas mix, but also strong price cost, which should continue through the year and we don't expect North America.
Sales to soften through the year. So the dynamics, we saw in Q1 should continue through the year.
I appreciate it guys.
Thanks, Andy.
Our next question will come from Deane Dray with RBC capital markets. You May now go ahead.
Good morning, everyone. Good morning, Deane, Hey, look I know, it's a happy day and St. Louis Emerson has had such an important presence in the community for so many years. So I'm sure. That's that's great news for everybody.
Thanks, Deane I think we're all pretty excited about the decision and the process that we went through.
And it also avoids the.
Logistics and disruptions and so forth so that's great to hear.
My question it would be for Frank.
For reaffirming the free cash flow conversion at 100% for the year what has to change in working capital were still seeing such across the industrials.
The buffer inventory required with supply chains are still chewing up enough of working capital that you're seeing lots of under performance on free cash flow and so how do you see this playing out yeah. Good morning Deane.
Mainly it's an inventory story it has to be around.
Getting the backlog out in order to get the inventory down in the supply chain is adjusting and improving but in ways that aren't always helpful. In terms of difficulty in timing.
Seats of materials. So that's the fundamental thing that needs to change is that we need to.
We need to get the inventory out over the next three quarters and a big part of that will be shipping the backlog that we have and we certainly have a robust backlog levels. So it's about execution now going forward rather than I.
Discuss that in detail with our businesses when we had our quarterly ops reviews sure Ron.
Could come in a little further on the supply chain implications.
Yeah, Frank you said it I mean at the end of the day I think.
Right now we were somewhat positively surprised at the pace at which the supply chain delivered in the first quarter. So I think that was one of the reasons inventory built but that's in some ways. Good news that positions us to execute on the backlog and the remainder of the three quarters and that remains the focus on obviously will make slight adjustments and all.
Optimizing how we drive material in from our supply chain given that they are performing better, but ultimately it will come down to execution of the backlog, which we're poised to do.
Great and then just as a follow up and I know theres not been any specifics provided yet is what is the potential for other portfolio moves more in the way of clean up.
We could point to some businesses that would be less core under the new automation.
Automation pure play framework is just maybe you can just comment on the willingness of the board to look at this and potential timing in terms of monetization of those businesses.
Great question.
We voiced.
Our November 2019, Investor conference that we're going to be active managers of the portfolio.
And that is inclusive of both.
The opportunities to build on the cohesive automation company, but also to continue to prune where and when necessary at this point.
We don't we don't have an impetus to do so.
Uh huh.
We will continue to pursue critical bolt on acquisitions of course, DNI pursuit today that youre aware of but we're also continuing to look at the existing portfolio, but I would not expect anything of scale. There after a very busy 2022.
Got it thank you.
Thank you.
Our next question will come from Julian Mitchell with Barclays. You May now go ahead.
Hi, good morning.
I think we've had sort of good talked down Carlos So may be trying to look at some of the segment pieces, a little bit maybe on safety and productivity just starting there realize its quite a small bit.
<unk> for you, but I guess two questions on it one was just tokens.
Talk a little bit about how you see the slope of the organic sales clearing out the balance of the year.
And then secondly.
Margins were up I think a 100 points in that business year on year. Despite.
A weak revenue performance.
So maybe help us understand how you delivered that and is it sustainable.
Yeah.
Julian wrong here in terms of the buildup of the sales I think Q2 will be negative, but we anticipate it.
Going positive in the second half for close to a flat year for the full year, that's kind of how we're looking at safety and productivity the margin improvement clearly driven by we had some focused restructuring that we executed in that business anticipating the slowdown second half of last year, and then favorable price cost.
Performance certainly strong price in the business close to nine points of price in Q1, obviously the cost savings flowing through and then softening materials or material costs as we as we get into the second half should drive continued strong margin performance in the business through the year.
That's very helpful. Thank you, Rob and then secondly, just on the discrete business.
You grew I think six points in the quarter.
Maybe remind us kind of what your main areas of strength.
In discrete whether it's by vertical and I assume as you know there's a lot of domestic business and also European there.
And also I think you mentioned briefly some.
Early cycle elements softening, so maybe expand on that a little bit.
And where do you see the discrete business kind of holding that 6% growth rate through the balance of the year.
Yeah, we have a very balanced business from a global perspective Julian.
We saw broad strength in the United States.
Both into direct OEM business as well as through our distribution networks that continues to be very robust.
No signs of weakness there, although we're watching that very carefully in terms of stocking levels and other elements.
Western European business, which I cited earlier was very strong in the quarter heavily driven by within the discrete business as well.
It's particularly in places like France, and Germany, which are critical markets for US and then lastly in Asia outside of China, very strong market and now with China recovering we feel that we have.
Well positioned there.
From a technology perspective, again very good growth on the automation on the control side with plc, and industrial Pcs and of course with the various devices around material movement.
In the plants from any color for Julien No I think I mean.
Segment perspective, you know, we broadly have factory automation and industrial automation segments within the business. So both of those continue to do very well and frankly I think.
We anticipate mid to high single digit growth for the year in.
In that business overall, the 6% was somewhat impacted by shutdowns in China, which that business experience. So frankly, we expect that to improve as we go through the year.
That's great. Thank you.
Our next question will come from Jeff Sprague with vertical research you May now go ahead.
Hey, Thanks, good morning, everyone.
Good morning, Good morning, maybe you maybe a housekeeping one for me first and then I wanted to come back to some of the projects, but just can we put a finer point on comp and FX. So the <unk> headwind. It seems like you expected a penny headwind.
Can we just clarify what.
What was what was assumed for the entire year.
And how that's changed versus your original expectations and then on on FX. So you are saying in addition to just kind of.
Normal translation headwinds there was some contract or other backlog adjustments could you just elaborate on that a little bit.
Yes, good morning, Jeff It's shrink yes, so on FX I mean, we originally had.
You know.
Low double digit impact.
On current media from currency for the year in the guide back in October .
Moderated as probably in the.
Five to 10 range now so are we.
We have a little bit of improvement there based on the turn in the dollar.
And then.
And you asked again, if that stock comp as well.
So yes, there we had built in a little bit of an increasingly efficient with Aspen Tech.
And more or less flattish for the quarter four for Emerson and then we had the mark to market impact.
And that was driven by 39% increase in the stock price on the legacy plants that was entirely incremental to what we had in the guide nine cents year over year, and seven or eight cents versus the guide.
So that's the that's the big headwind, we had there, which we are which is now kind of embedded in the year.
And we will just absorbed that and overcome it within the year guidance.
And just on the on the projects La.
Interesting couple you call out here.
Could you just maybe give us a sense of.
Kind of the dollar scope of some of these.
Large benchmark product.
Projects like this you know maybe the green hydrogen project.
You know what your content looks life on the front end and maybe what the tail of a project looks like.
Yeah, I know these fall very much within the parameters Jeff.
That we that we laid out in terms of automation dollars per gigawatt.
As you think about hydrogen for example, $600 I think its I believe its 600000 per gigawatt is what we laid out.
If I'm not mistaken Ron.
But on the petrochemicals and for example, ethylene again <unk>, one very significant they're in the $20 million to $30 million type of scale and then of course, there's other downstream and the instrumentation business to come. So some of these are very sizable.
The specific ones that we highlighted of course about $50 million in the first purchase which is the delta of the system and then there is this further instrumentation. It comes so theyre very sizable in terms of of scale, but in line with with how we think about a.
Dollars of automation for capacity, depending on the market there.
Got it thank you.
Okay.
Our next question will come from Steve Tusa with Jpmorgan you May now go ahead.
Hi, good morning.
Good morning.
Can you just talk about.
Maybe I didn't.
In particular.
Especially the cash flow coming in the next couple of quarters. How confident you are in that and where you see that coming in.
Yes, Steve you cut out a little bit of that this is Frank you cut out a little bit at the beginning of your question.
I mean again, we know spin now it's been free cash flow and free cash flow outlook.
I think probably down here I didn't hear.
Yes.
I mean.
Steve I think.
On plan, yes unplanned.
Very seasonal.
So theyre fourth quarter or third quarter will be big.
At quarter end, and we see and we based on the plan, we think they'll deliver it as they have.
In the past so it will be heavily in that in that quarter on Guy who got it Steve.
And third quarter for them will be for our third quarter will be the corner, yes, I mean, obviously they can provide the color on the background on that but I think that is that is the seasonal pattern for their cash flow and we would expect that to maintain.
Yes. It does it influence your cash or did it just curious if you guys.
The owners have a have a view on that when it comes to natty.
How coveted is this asset for you guys I mean.
It doesn't seem like theyre going to take anything below 60 box.
Is.
Are you guys are really willing to kind of go to work for them.
It can be very clear with you then we're not going to be the purchaser of the asset.
[laughter].
That is a that is a definitive answer. Thank you very much I appreciate it so [laughter].
Yeah.
Our next question will come from Nigel Coe with Wolfe Research you May now go ahead.
Okay. Thanks, good morning, I won't be asking questions on the <unk> purchase price move on from that.
Just want to go back to FX, if I can I.
I think you mentioned long term contract marks.
No nothing of I've heard from from Amazon before so I know we've had some backlog revaluation. So just maybe talk about what caused that so that mark on FX and.
And maybe just.
On the Blue line stuff what is the normalized still comp beyond this year you know once we wrote off this plan how should we how should we size that.
Okay. So.
Nigel Hi, this is Frank so.
Yes, we had a significant of the currency that was in the quarter a significant portion of it was due to the.
The impact of the accounting on long term contracts. So you have to mark to market long term contracts. Typically these are certain Pcs and they tend to be in places like Korea, and other markets, where we typically arent talking about currency.
As opposed to translation currency, when you talk about Europe and China.
And the accounting basically brings those marks two zero when the contract closes out but during the life of the contract you mark to market up and down and depending on where you are in the lifecycle of a contract and what the backfill is for those contracts.
You will get you'll get a mark most quarters its not big enough to matter of this quarter. It was four or five so it was big enough to matter.
And that's what drives it.
We try not to talk about it the word it's embedded derivatives, we don't talk about embedded derivatives.
It's just not helpful. But that's specifically the accounting that drives that mark on long term contracts.
Okay, Yeah embedded derivatives above my pay grade so, let's just move on from that but we'll follow up offline but.
On the just on the guide so.
There are some moving pieces here so it feels like FX is pretty neutral.
The weak dollar.
But some of these marks probably got some share buyback benefits relative to plan what Sidney visit model and then we have to still comp offset is that sort of the major moving pieces anything else you'd highlight and then maybe just talk about the <unk>.
Sales acceleration, we've got some China noise in the back half of the year with the Lockdowns in the prior year, but what kind of macro.
Environment, you plentiful, especially in second quarter fiscal some of your short cycle peers.
And I think some inventory corrections et cetera, what are you seeing in discrete markets and some of the other other other markets.
Yes, so I'll take a crack wrong here on this on our sales from a sales perspective, obviously, we have acceleration built in to the year fundamentally with orders holding in the mid single digits on us shipping shipping backlog that we described with improving supply chain. So certainly Q2 Q3 and into Q4, we'll expect that ramp up.
Up in absolute sales as we execute on the backlog in terms of distributor Destocking, we haven't seen it in any of our businesses certainly a lot of our discrete businesses go through distributors. Some of our process businesses go through distributors, we haven't seen it and nor do we anticipated just given the dynamics of what we are.
Seeing and then and then to top it off price will remain strong through the year that will contribute to growth as well.
Thank you.
Our next question will come from Joe Ritchie with Goldman Sachs. You May now go ahead.
Hi, Thanks, good morning, everyone.
Good morning, Joe.
Hey, guys can you just touch on Aspen Tech a little bit I know.
I know, while you mentioned some of the wins that rasp upon when it was interesting but like how is how is that going thus far and then I noticed that the adjusted EBITDA margin was a touch lighter than what you guys expect for my full year basis, maybe just provide some color around seasonality in that business as well.
Yeah. So ashwin attack I think for us from a synergy perspective, I'll call going according to plan and frankly, a lot of the early synergies. We've built in is on projects like Cross Levonne, where Aspen won some very very good content I think the sales channels and the engagement of our sales channel and selling their.
<unk> continues as planned now really what we're driving there is in terms of perpetual licenses and bundling them on projects a lot of success converting our wins into ACB type of revenue for Aspen Tech is a work in process and should pick up momentum as we go into the second half of the year. So we.
Feel pretty good about the synergies, we certainly feel pretty good about the sales forecast we built in for Aspen Tech obviously the plan. They presented in the plan we've built in into the consolidated Emerson numbers and then no concerns on the margin performance the EBITDA performance seasonally the third quarter.
Fourth quarter, our third quarter is the biggest quarter than it was last year and it will again be this year.
Super Helpful. And then maybe my follow on question.
While it at the Investor Day, you guys highlighted all of these big opportunities in any in automation technology and you talked about your pipeline extending I'm just wondering.
Have you seen the most movement recently in terms of your pipeline in those opportunities.
No. It's a good question of course, we did have a very active quarter in terms of the project funnel.
And particularly not just in projects that were booked and.
<unk> exited the front, but also on the buildup.
What we saw in terms of activity I would suggest that the <unk>.
Predominant element of growth came in two areas. One is life sciences, which grew significantly in the funnel in the quarter and secondly, the energy transition, which continues to be very robust.
Both here in the U S and in the Middle East predominantly and became additive to the to the funnel and that funnel grew not just in terms of dollars by about a half a billion, but also in terms of number of projects, but only by eight projects, which tells you that.
The average size of projects are getting larger.
Which is also a dimension here.
The only thing I would add is the LNG size of the funnel remains large meaningful and what we saw in the last quarter was a good momentum on the E.
Progress associated with many many LNG projects in the U S, where we're very very well positioned a lot of these are going to in fact, Tao in Texas, and Louisiana and our expectation is we will ramp up Bob order booking activity in Dallas in the <unk>.
On those projects as we go through the second half of the year.
Great nice to hear thank you.
Great.
Our next question will come from Joe <unk> with Wells Fargo. You May now go ahead.
Hi, Thanks for taking my questions.
Just wanted to start on sort of price and price cost on the <unk>.
This cost side of things can you size the margin impact in the quarter and then what youre thinking about for the cadence of that impact over the course of the year and then I think you also noted some price increases to start 2023 is that broad based or are those more concentrated in parts of the business.
Let's talk about the pricing yes.
I'll I'll take a crack at the price increases I mean, we did have a good price increase in October we typically do as we enter the fiscal year select product lines had price increases that we have a few more product lines slated for mid year price increases.
Around the April timeframe in general, though I think pricing was 4% realized price in the first quarter, we expect it to stay.
At those levels as we as we go through the year, so pricing will remain strong.
Yeah.
As we go through the year.
We expect those price increases as they roll through will continue to be accretive to margin.
Through the entire year it was bigger than the first quarter that wont be as we go through the year.
Again, then we'll see what incremental price increases would be right between net material inflation also should become a tailwind in the back half of the year.
So all in all accretive.
Somewhere between a half point and a point it really depends on how it rolls through but certainly.
Good story from a margin standpoint, as we go through the year.
Got it and then I wanted to circle back on some of the discrete questions and just kind of bigger picture macro and I think the industry outlook for discrete up mid single digits I assume that's sort of a combination of kind of low single digit price low single digit volume would expect areas like batteries and semiconductors are growing.
Faster than that.
But when we think about what we're seeing on the PMI side of things and then thinking about sort of discrete just growing through a PMI slowdown I mean can you touch on is the expectation sort of outside of some of the structural growth areas that we just continue to see some kind of low single digit volume growth.
And sort of no kind of connection there between some short cycle macro indicators are slowing but not really seeing it in your end markets.
Yes.
You said most of it I think the plan really is the low single digit price low single digit volume the growth vectors semi.
Semiconductors battery manufacturing frankly from a sector that we're cautious on automotive is something we're going to have to carefully watch we have had.
<unk> had good performance, so far but automotive is an area that we have to watch very carefully and then our stocking levels in terms of distribution again, we haven't seen any slowdown yet, but certainly to your point based on the PMI forecasts and what is anticipated there could be slowing in that sector. So if you put all that together.
I think we feel pretty good about our mid single digit forecast.
Got it thanks very much.
Our next question will come from Christopher Glynn with Oppenheimer. You May now go ahead.
Thanks, Good morning, everybody.
Just wanted to tie a little bit the organic outlook versus backlog growth up $700 million.
Suggests the one two book to Bill.
Which seems a little incongruous with 5% orders growth, but I suppose that's a function of the prior year book to Bill.
Just wondering if you could comment on that.
Book to Bill interpretation, and how do you characterize backlog size versus what you might consider normal and a moderate moderately expanding.
Net end market mix.
Yeah. So.
Seven seven.
$700 million is a GAAP number the 5% is an underlying sales number but net net you are right. If you. If you looked at the first quarter of last year and calibrated versus orders and sales I think the 5% makes sense with the with the $700 million build in backlog.
I think our.
Our expectation for a normalized level of <unk>.
Backlog in this business, we're probably at least close to $800 million to $1 billion to high in terms of where we could normally be.
The supply chain, where optimal and thats what were going to have to execute through the year as the supply chain continues to improve that's the normalized level of backlog for this level of sales. So it's so to answer your question directly it's about $800 billion to $1 billion higher than what we would've anticipated great. Thank you.
Our next question will come from Gautam Khanna with Cowen you May now go ahead.
<unk>.
Yes. Thank you good morning, guys good morning Lana.
Was wondering if you could talk a little bit about you know the.
Market the Kobe three stuff I think you said it was 65% of sales in the quarter, but.
Where do you see that trending over the next year or year and a half because it seems like it's been on full tilt for quite a while just what do you think the new normal is yeah. No I think we've had a concerted effort across our business to maximize the value of the $130 billion plus installed base.
And those are programs that were put in place that drive service MRO and replacement opportunities we're sitting at <unk>.
Right around 65% I expect that to remain.
Within that range and it's supported by the business programs that we have and in the operating companies.
And I would add that's the segment of the business, where the pricing flows through.
Higher level so obviously.
That will remain robust through the year.
I appreciate it and then just to follow up.
Any change the timing of the divestment.
Out there on climate attack anything noteworthy there.
No.
We're still thinking about the first half of this calendar year.
And.
Everything is on track in terms of the regulatory approvals and standing up the business.
So that's all well underway. So we'd expect April may of shifts.
Deadline there.
Thanks, guys.
Yes, Sir.
Our next question comes from Tommy Moll with Stephens you May now go ahead.
Good morning, and thanks for taking my questions.
Good morning.
I wanted to start on the industry outlook, you provided across process hybrid discrete.
Little variation across the three but essentially all growing nicely in the single digit range.
There are others in some of these markets have.
Double digit outlooks.
Versus the singles that you provide.
I'm, well aware, there's often apple and orange impacts here in making comparisons but I was just curious is there any conservatism embedded in these outlet outlook. You provided is there anything you would do to help us reconcile some of what we've heard elsewhere.
In terms of the market outlooks, Tommy we feel that we've given a very balanced view of what's out there.
The blend of the different types of businesses that would cover in terms of capital.
Modernizations and replacement.
We've also taken into account that the various geographic.
Trends.
I feel that when we put their ties into the.
The guide for the quarter and of course, our expectations for the year as well and again within each of the segments as you recognize there are there.
There are big pluses and smaller pluses clearly in the discrete space, which we've been speaking about to a significant amount today.
<unk> semiconductor elements like that of course has a significantly higher growth than some others, but overall I feel that the the indications we've given.
Our fair based on what we've seen this in the marketplace today.
Thank you that's helpful Al.
Also wanted to ask about the repurchase activity.
Is it fair to say that the the.
Deployment of the full $2 billion in the quarter was an acceleration versus the original plan and if so was there.
Should we view that more as an opportunistic decision where you're your stock was under pressure for a period of time, you decided to lean in to.
To the extent that.
Yes, Im sorry, Tony This is Frank no not really.
When we when we communicated the $2 billion, our intent was to get it done as quickly as possible and we were able to get it done in the quarter. So it was not really driven by market events. So much as the desire to just make good on the commitment to do it quickly.
And any possibility that you might revisit the potential for more later in the year or should we think about 2023 is pretty well spoken for it because there's really no current intent to do any more share repurchase we've got another other irons in the fire right now so you know obviously.
Circumstances change, we can always revisit but we have no current plans to revisit it right now we said, we'd do $2 billion and we've done that.
Great. Thank you I'll turn it back.
Thank you.
Our last question will come from Chris Snyder with UBS you May now go ahead.
Thank you I wanted to follow up on safety and productivity.
As mentioned that you are seeing early signs of things bottoming out I understand comps get easier, but it sounds like Youre also starting to see demand turning so just hoping for more color on what youre seeing to give you confidence that demand is turning there.
Yeah. So first off I think a majority of what we've baked into the plan as comps getting easier so absolute levels stay the same with where they sit today price comes through and comps get easier.
We'll have a better read of it as we go through the current quarter and I think we will have a better expectation of the second half if demand were to improve which is not baked into the plan, we should get better numbers in safety and productivity, but at this point, it's staying at the current levels and comps getting easier.
I appreciate that and then just a follow up on China.
The presentation called out.
A headwind from China shutdowns on organic growth in the quarter could you just provide some more color on how China performed in the quarter and then maybe how it's exiting.
Into the fiscal second quarter with the reopening thank you.
Yes, so it's China was down mid single digits, both incoming orders as well as sales performance in the quarter and we expect China to be mid single to high single digits for the full year with high single digits in the second half.
Thank you.
Okay.
Okay.
This concludes our question and answer session on.
On the conference. Thank you for attending today's presentation you may now disconnect.