Q2 2023 Emerson Electric Co Earnings Call
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Speaker 2: Emerson's second quarter 2023 earnings call. Please note today's event is being recorded. I would now like to turn the conference over to your host, Colleen Matler, Vice President of Professor Relations at Emerson. Please go ahead.
Speaker 3: Good morning and thank you for joining us for Emerson's second quarter fiscal 2023 earnings conference call. Today I am joined by President and Chief Executive Officer, L Baughman, who was announced earlier this morning as our Chief Financial Officer effective May 10.
Speaker 3: As always, I encourage everyone to follow along with the slide presentation, which is available on our website. Please join me on slide 2. This presentation may include forward-looking statements which contain a degree of business risk and uncertainty. Please take time to read the Safe Harbor Statement and note on non-GAAP measures. I will now pass the call over to Emerson's President and CEO ,
Speaker 4: Lal Karzendaj for opening remarks. Thank you, Colleen, and good morning. Please turn to slide three.
Speaker 4: I'd like to begin by thanking the global Emerson team for a tremendous performance, our board of directors and shareholders for the trust that you place in us. It has been a busy first 26 months as CEO as we reinvented Emerson. The second quarter performance was exceptional. It was a quarter in which we significantly advanced our strategic agenda.
Speaker 4: across the three dimensions of our value creation model.
Speaker 4: First, culture.
Speaker 4: In the last two months, we announced two important leadership changes.
Speaker 4: Vidya Ramnas was named as the company's chief marketing officer, replacing Kathy Button Bell, who had a distinguished career at Emerson and put Emerson's brand on the map while working for three different CEOs.
Speaker 4: Vidia is the right person to accelerate our journey as a pure play automation company. She brings deep technical knowledge and customer exposure is an engineer. And for the last four years has led Emerson's Middle Eastern Africa business.
Speaker 4: We believe this is highly differentiating move for us as a company.
Speaker 4: Secondly, this morning we announced Frank's planned retirement and Mike Bachman as Emerson CFO . I'll say a few more words about this later in the presentation.
Speaker 4: Lastly, we completed a first digital employee engagement survey.
Speaker 4: We heard from 85% of our global employee base and received a high quartile net engagement score.
Speaker 4: This gives us a stake in the ground and our great perspective on the areas of strength and opportunities to better the talent experience at Emerson.
Speaker 4: of the state in the ground and now great perspective on the areas of strength and opportunities to better the talent experience at Emerson. Second, the portfolio.
Speaker 4: We will be finalizing the climate transaction in the current quarter.
Speaker 4: The CEO for the Jordan Venture has been named Ross Schuster and we are excited by what his leadership and experience brings to the business.
Speaker 4: I'd like to thank Jamie Froge for the work he did in the business and for his contributions over 16 years of service at Emerson.
Speaker 4: In addition, we signed the definitive agreement to acquire national instruments. We're very excited about the company, the technology, and most importantly, the people. This is an important point. The large portfolio moves are now complete. As an investor, you now have clarity that an investment in a share of Emerson is an investment in the leading global automation company.
Speaker 4: serving at diversified set of end markets with a high growth, high profitability and cash flow cohesive and differentiated check back
Speaker 4: made up of intelligent devices, control, and software led by Aspen Tech.
Speaker 4: Our focus on a go-forward basis as we did this quarter will be on creating value with this tremendous company.
Speaker 4: Lastly, our third pillar, execution. None of the work we've done would have been possible without it. The phenomenal results and momentum we have in the business is a testament to the quality of our global teams and to the strength of the Emerson Management System. Underwater orders were up 7 percent with late cycle process markets continuing to exhibit a strong demand.
Speaker 4: Hybrid also remains robust during by reshoring investments globally.
Speaker 4: From a world-aerie perspective, America's orders led with China returning to growth as expected. As we look to the remainder of the year, we still feel confident in continued, mid-single digit order growth. The strong demand and steadily improving supply chain environment enable 14 percent underlying sales growth in the quarter, well above our expectations. All world areas or up double digits led by the Americas up 15 percent.
Speaker 4: Intelligent devices and software and control were also both up double digits. This strong sales performance and a continued operational execution of our teams led to 53 percent operating leverage in the quarter, excluding Aspen Tech.
Speaker 4: A Jocety PS was a dollar and nine cents, beating the midpoint of guidance by 11 cents. Again, driven by the strong sales and operational performance. This is a 25% increase versus Q2 of 2022. Free cash flow is up 64% year over year, and up 23% year today, which is on track to meet our full year expectations.
Speaker 4: was a dollar and nine cents, being the midpoint of guidance by 11 cents. Again, driven by the strong sales and operational performance. This is a 25% increase versus Q2 of 2022. Free cash flow is up 64% year over year, and up 23% year to date, which is on track to meet our full year expectations. Turning to slide four.
Speaker 4: Our value creation priorities and growth initiatives are on innovation and secular growth platforms.
Speaker 4: that we outline at our investor conference in November 2022 are yielding meaningful results.
Speaker 4: First, Amazon was recognized by Fortune Magazine as one of America's most innovative companies.
Speaker 4: We are extremely excited to be recognized for this award and are working continuously to accelerate our innovation engine for future growth. Similarly, Emerson continues to differentiate as a leader in growth markets like energy transition, metals and mining and software. In the second quarter, Emerson was awarded the software and automation contract for Intermountain Power Agency's renewed power plant.
Speaker 4: The Utah project transforms a retiring coal-fired power plant into a clean energy plant running on hydrogen. At first, the plant will use a mix of 30% hydrogen, 70% natural gas, before transitioning to 100% hydrogen by 2045.
Speaker 4: The hydrogen will be supplied by the Mitsubishi Power Advance Clean Energy Production and storage hub. Another Greenfield project that Emerson was awarded in 2022.
Speaker 4: a critical step towards a net zero world. With our integrated end-to-end renewables and power generation platform, Amerson was chosen because of our industry expertise, improvement experience in hydrogen and complex projects. Secondly, Amerson and Aspen Tech were jointly selected to automate and optimize the golden triangle polymer facility on the Texas Gulf Coast. The 8.5 billion dollar project is a sister facility to Qatar Energy and Chevron Phillips Rathla Fum project that we highlighted in the first quarter.
Speaker 4: Amerson will lead, it will provide its leading Delta V control system and intelligent devices and ASPENTAX will provide its leading simulation software.
Speaker 4: This technology will allow the facility to operate with approximately 25% lower greenhouse gas emissions than similar projects in the U.S. and Canada.
Speaker 4: This is a great example of the differentiating strength of Emerson and Aspen Tech.
Speaker 4: Turning to slide five, we remain energized and excited by our recently announced acquisition of national instruments.
Speaker 4: National instruments will expand our leading automation business into the attractive test and measurement space and provide important industry diversification into discrete markets.
Speaker 4: Inclusive of $165 million of synergies by the end of year five, the transaction meets the financial criteria we have communicated. We will work to complete the customary regulatory and closing conditions and expect the close in the first half of Emerson's fiscal 2024. We have the opportunity to meet the extended management team and to do a global townfall with NI employees last week of visiting Austin. From that meeting...
Speaker 4: We came away even more confident in the potential opportunities of our combined company. The technology is differentiated and has ample room to expand and the talent, well it's simply exceptional. But most importantly, I was energized by the warm reception we received.
Speaker 4: from the leadership team and all the employees we met.
Speaker 4: In a way, I am proud to be an N-Ir now as well.
Speaker 4: In a way, I am proud to be an NI or NI as well. Please turn to slide six.
Speaker 4: It took a lot of hard work to transform this business, and we now have an outstanding opportunity to create value for shareholders. It is a portfolio that is exposed to secular growth trends that I expected to drive growth for years to come, and will remain committed to our 47% through this cycle underlying growth target. Our new portfolio is higher margin at approximately 49% growth profit, and 23% adjusted segment EVA time margin.
Speaker 4: Our industry mix is more diversified than two years ago, focused on automation and with the discrete markets now our second largest customer and market.
Speaker 4: While we will continue to pursue bolt-on acquisitions, we are now turning our focus to executing the strategy we laid out at investor conference. In delivering the synergies, we have committed to for ASP and NI.
Speaker 4: Please turn to slide 7.
Speaker 4: The TCA Gorsalvich is the president of global foods for ADM and a member of the company's executive council. As part of ADM, Bayer, M. Enzanto, the TCA has helped roles in digital solutions, commercial operations, international management, and technology development. It is a long time advocate and driver of diversity and inclusion. Her experience in these areas and accelerating change make her an excellent addition to our board.
Speaker 4: Speaking of innovation, Jim McKelvie is a successful entrepreneur who founded Block Invisibly and FENTOP capital. He brings a unique innovation focus perspective to Emerson and will serve as a key collaborator as we continue to accelerate innovation and invest in technology and engineering. Jim has expertise in many areas, including software, cloud, and cybersecurity, which will benefit Emerson as we provide customers with leading digital solutions.
Speaker 4: to have both with TCR and Jim drawing out the word of the recorders. Before I turn the call over to Frank, please turn to slide 8.
Speaker 4: I would like to congratulate Frank for distinguished career over 32 years at Emerson in the past 14 years of CFL.
Speaker 4: Frank, I met you 28 years ago and he has been an author to be your colleague.
Speaker 4: Please, though, that you created a legacy at Emerson.
Speaker 4: not ever accomplish what we did over the past 26 months.
Speaker 4: without you and that would not have been able to lead this company without you wisdom confidence and support
Speaker 4: You made it better. You made me better. Thank you. For the last thing, the question you left on me and the impact you made on all of us.
Speaker 4: I'm also excited to announce my Bachman as CFO of Emerson, effective May 10th.
Speaker 4: Mike has over 35 years of experience in finance, operations across Baxter, Amerson of course, and PWC.
Speaker 4: I'm excited about what Mike brings to the role and please join me in welcoming him. Mike, congratulations. Thanks, Lawles. And thanks to you in the board for giving me the opportunity to serve as Emerson's next Chief Financial Officer. I'm very excited to get into the role. I'm excited to get into the role.
Speaker 5: Good morning everyone. I've had the opportunity to meet several of our investors and analysts. I'm looking forward to meeting more of you and working with you in the future.
Speaker 5: And to my Emerson colleagues listening in, thank you for a fantastic quarter.
Speaker 5: As Lull just talked about, it's been a productive 26 months with respect to reshaping our portfolio and we're on track to achieve what we set out to do.
Speaker 5: The impressive result is a more cohesive $16 billion automation company expected to grow 4% to 7% through the cycle with peer leading margins and a more diversified end market exposure.
Speaker 5: I think of the portfolio transformation as a great start.
Speaker 5: I think that the portfolio transformation is a great start, and now we get to operate in this new environment.
Speaker 5: Execution has always been a home arc of Emerson, and we're building on that to focus on accelerating profitable growth, integrating in I, and growing our cash flows as the supply chain normalizes.
Speaker 5: I certainly expect successful execution in these areas to result in increased shareholder value.
Speaker 5: While I'm excited about our future, transitioning to the CFO role is a little bittersweet for me personally.
Speaker 5: Frank was a major reason I joined Emerson a little over five years ago and during that time I've come to know Frank is a great finance professional and more importantly a wonderful person.
Speaker 5: I'm confident we'll have a smooth transition over the coming months. Thanks, Mike. And I'll turn the call over to Frank.
Speaker 4: And, Flaw, Mike, thank you so much for the kind words. When I showed up here 32 years ago, I never didn't really know what to expect, and I never could have imagined. I do my very last depiction of the Tik Tok series, which we have reses. Thank you, Mr. Flaw, nothing wanted to mess with you.
Speaker 4: the opportunities that I would have, the things I would get to do in a bubble all the people I would have the privilege to work with. The last 13 years have truly been a privilege.
Speaker 4: leading a world-class finance organization who I respect and I trust implicitly, never let me down.
Speaker 6: And I thank them from the bottom of my heart.
Speaker 6: On the portfolio transformation have been truly special and just a wonderful capstone to my career and I will always be grateful for that opportunity. Thank you. Well, I'm truly grateful for that. It's been a heck of a one. Emerson is well positioned for the future. This is a perfect time to turn it over to Mike who I've come to know well as a person respect as a leader over the last five years. I am confident he's going to provide the right leadership for the challenges we have again. The future is very very bright and I'm so happy to have been a small part of it. I've enjoyed working with all of you over the last two years on the phone with our analysts and other investors and.
Speaker 6: I couldn't think of a better way to go out and I'm very grateful when I just so thankful for that.
Speaker 6: Thanks, everybody. And there is no crying on earnings calls. So we can get on. Thanks, Frank.
Speaker 4: into you on chart now. Okay.
Speaker 6: Here we go. Good morning again, everyone. Please turn to slide 9. Our second quarter financial results were outstanding.
Speaker 6: reflecting our strong end markets and operating execution.
Speaker 6: Allow to summarize the results for you, so I'll provide a bit more color. Additional details are in the press release and in the slides and the appendix to this presentation.
Speaker 6: Underlying sales growth exceeded our expectations at 14%.
Speaker 6: The man was broad-based with later cycle process markets up high teens and hybrid markets also up double digits in the quarter. Discrete demand has begun to moderate after several quarters of strong growth, but sales were still strong in the quarter up high single digits. Safety and productivity returned to growth, up to 3% in the quarter. Net sales also were up 14% for the quarter, with a 3.3% drag from currency, which was essentially offset by acquisitions and investors.
Speaker 6: We did close our Russia-Devastator in March and we now report the business we had on the Devastator line of our net sales bridge. Our business has continued to realize significant price.
Speaker 6: In the quarter, price contributed approximately $150 million and five points of growth. Fact log also grew $300 million reflecting the strong orders. Fact log of approximately $6.9 billion to end the quarter. Aspen Tech revenue was the low expectations for reasons they explained on their call, and I'll briefly summarize those here. Please keep in mind that Aspen Tech reports revenue under ASC 606. So the factors affecting gap revenue are complex as explained on Aspen Tech's earnings call. There were three factors in play.
Speaker 6: The first was longer than planned project execution in the OSI business.
Speaker 6: which pushed out the recognition of Project Revenue Milestones. This is mainly a timing-related dynamic, and we continue to see strong demand trends from the power transmission and distribution market.
Speaker 6: Aspentech also experienced shorter term contract links within the SSE business.
Speaker 6: Overall, the shift from perpetual to term contracts is progressing well, but some customers are choosing shorter contract lengths than we expected, and that has a direct impact on upfront revenue recognition.
Speaker 6: And lastly, AspenTech is seeing some weakness and op-expend in the bulk chemical market, which is impacting heritage AspenTech. For further clarification, Emerson's chemical exposure is more diversified across both bulk and specialty chemical and both op-ex and cap-expend. And lastly, AspenTech is seeing some weakness and op-expend.
Speaker 6: Adjusted segment EBIT A margin improved 320 basis points, leveraging excluding Ascontact exceeded 50%. Strong sales growth, favorable business and world area mixed, and margin accretive price cost all reflect exceptional execution by operations and contributed to the margin improvement.
Speaker 6: Adjusted EPS grew 25% to $1.09, and we'll discuss that on the next chart. Lastly, free cash flow was up 64% versus the prior year quarter and up 23% year to date.
Speaker 6: The strong earnings growth and slight improvement in working capital contributed to that growth. Aspen Tech contributed $129 million to free cash flow. Please turn to slide 10.
Speaker 6: Most importantly, 14% underlying sales growth and 53% segment level operating leverage contributed 26%.
Speaker 6: of our EPA square of quarter over quarter. Of that, Aspen Tech contributed four cents.
Speaker 6: Currently, was a 3 cent headwind and other items mainly in compacts because we had favorable discrete items last year or a net 5 cent headwind. The reduced share count resulting from the $2 billion share repurchase that we completed in the first quarter contributed 4 cents to earnings per share.
Speaker 6: So again, overall adjusted EPS grew 25% year-over-year. Please turn to slide 11. I will talk about a revised 2020 very market outlook.
Speaker 6: We continue to see broad-based strength in most key end markets. In particular, we've updated our expectations for both process and hybrid markets.
Speaker 6: We have increased our expectations for process sales to a high single digit to low double digit growth range on the back of continued energy, energy transition, and chemical market momentum.
This market was strong in the second quarter and our customers continue to signal favorable spending plans for the rest of the year.
Within chemicals, we continue to see strong cap expending, particularly in the U.S., in the Middle East and Asia.
Within the hybrid space, life sciences and metals and mining continue to be strong, and we expect this market to grow high single digits in 2023.
Resurring continues to be a prevalent topic among our customers and we expect near and longer-term benefits from this trend.
As I mentioned, discrete demand is beginning to moderate as these earlier cycle markets have been strong for the last two years. We are seeing this first in Europe as industrial production is affected by rising input costs.
Still, we continue to hear optimism about spend on fat re-automation and productivity improvements from our customers.
we continue to hear optimism about spend on factory automation and productivity improvements from our customers.
Please turn to slide 10 and we'll talk about our revised guidance.
Based on the market's trend, I described in our continued expectation of the mid-single Susan Porter's growth.
We are increasing our sales and earnings guidance for the year. For 2023 underlying sales growth has been increased to 8.5 to 10% year on year and net sales to 9 to 10.5%. We expect intelligent devices to be near the top of this range and software control nearer to the lower end.
We are also increasing our expectation for segment operating leverage based on the strong first half achievement and our second half outlook. Continued sales strength, favorable price cost, and continued operational performance give us confidence in increasing this guide.
We now expect segment operating leverage to be in the low to mid 40% range, excluding Aspen Tech. Adjusted EPS guidance has been raised to a range of 415 to 425, up 15 cents at the bottom of the range and 12 cents at the midpoint. Aspen Tech is expected to contribute approximately 25 cents.
to approximately 300 million.
This is consistent with our prior guidance of approximately 100% free cash flow conversion on GAP net earnings and is equivalent to approximately 85% on an adjusted net earnings basis.
In the future, we will express free cash flow conversion on an adjusted mid-earnings basis consistent with our other key non-gat metrics adjusted either day and adjusted earnings per share. But business we have today has strong cash conversion characteristics.
that we expect to convert over time at an average of 100% on an adjusted basis.
We now expect Astentech's adjusted segment E-to-A to be slightly below 40% for the year.
As a reminder, Emerson's third quarter is Aspen Tech's seasonally strongest quarter due to the timing of contract renewals.
We believe the operating items that affected Aspen Tech's third quarter results reflect transitory, operating, and market challenges. We are as confident as ever about the long-term strategic opportunity afforded by our ownership of Aspen Tech and in the $110 million year-five synergy commitment that we made. As a reminder,
All of this guidance excludes the impact of climate technology's operations.
interest income, and the financial impact of the sale, which we expect to close.
and the financial impact of the sale, which we expect to close. We hope May 31.
In the appendix, we have provided information on the post-closing financial reporting treatment of climate technologies. Briefly to turn to the third quarter, that guy also reflects the strung outlook for the year. We expect underlying sales growth of 10 to 12 percent. We expect leverage to be in the mid to high 40s in the quarter.
and adjusted EPS to be between $1.7 and $1.11.
So my first question is maybe take us through the what you're seeing on the discrete side with some of the demand moderating.
How did it progress through the quarter or is it isolated to solve specific verticals or geographies.
Yes, we are hearing elsewhere slowing in Europe .
Especially on the chemical side, but.
We appreciate the color there please.
Yeah, So deane Rob here.
Discrete order activity now the discrete business from a sales perspective, we had good strong growth in the quarter nine 5% close to 10% growth on a quarter from a sales perspective, which was driven by backlog reduction orders did go slightly negative this year.
This quarter I should say, primarily driven by a slowdown in Europe , frankly, we haven't seen much of a slowdown in North America, but a slight slowdown in Europe , particularly in Germany, and the segment around machine builders, we do serve the machine builder segment in Germany, which is both domestic germ.
<unk> market as well as these machine builders export so that's really probably the one segment a little bit of slowdown in the U K Fran.
Frankly Asia is holding up.
In China remains good so thats the color, we do expect discrete to get into tougher comparisons as we get through the second half of the year and we expect orders to remain negative before they turned positive into 'twenty four.
Got it. Thank you and then just as a follow up and I also I would just want to hear Frank one more time here.
Free cash flow difference between GAAP and adjusted this year that difference how much of that is either working capital needs.
Given kind of supply chain or is it more from a climate.
No I mean, there is none of it none of the difference the difference is simply that calculation that denominator I mean.
We're just talking about the $2 2 billion guide to free cash flow and whether we use GAAP earnings or we use adjusted earnings have been nominated and Thats. The difference between the conversion ratio. There's no difference at all in the calculation of the cash flow itself, yes.
Great. Thank you.
Thank you and the next question comes from Scott Davis of Melius Research.
Good morning, everybody and I'll Echo what the other fellows and I'm sure others will say and congrats to both Frank and Mike on.
The changes here.
So.
I don't want to fixate on Aspen Tech, we can do that later, perhaps but I will anyways. The bulk chemical opex is it typically that are volatile as something that they've experienced in the past.
Perhaps you might see in the future or is this kind of an unusual circumstance.
No I think the bulk chemical dynamic because I mean, you see many of the chemical customers say at the end of the day with a little bit of slowing demand there and their utilization rates being optimized the portion of the Aspen Tech business, which typically gets impacted as they are manufacturing and supply chain software suite.
In terms of new purchases are new contracts around that which we have built into the forecast that's where we're seeing slowdown so that's putting normal obviously.
Finding for them continues to remain strong upstream and midstream continues to remain good it's really the manufacturing and supply chain suite in bulk chemicals, where we have seen the slowdown and we've seen that in the past when the large chemical customers slow down spending on the Opex side.
Okay. That's that's helpful and.
Assuming your stock price works and I know Aspen Tech is down quite a bit from it's from its highs but is there a <unk>.
The interest in it.
There's some restrictions, but those things can always be.
Discussed.
And taking a even larger stake in the entity.
Perhaps over time integrating it fully into Emerson.
No Scott this is all good morning.
No look we're still very committed to the to the model that we.
That we set forward a year a closed nearly a year ago now.
It works, we're seeing the commercial value.
Working with the technology piece.
Piece as well.
I've said in the past.
<unk> had appointed time that that changes and we have impetus to then address that through.
Two.
The change in the ownership structure of the vehicle.
We'll think about it then but not at this point and then Furthermore, as you know.
And you noted.
We are in the stand still period for another another calendar year from now.
You got me, so excited I spilled and dumped my coffee allow so.
I'll pass it onto the next guy Thank you.
Thank you and then next question comes from Andy capitalist with Citigroup.
Hey, good morning, everyone, Congratulations Frank and Mike.
It was into businesses performed very very well and exact.
The the volume was important as as we noted growing the underlying sales of 14 per cent, but Furthermore, mix and price cost.
Or beneficial as well and a quarter. So a lot of things on our way there, but honestly working within the management system that we've designed is is a.
Very important parameter that enables all businesses to perform at a very high level yeah.
<unk>, Yeah, I mean, I I other.
Other dynamics that certainly went our way of strong North America and in the quarter strong performance in our instrumentation and final control businesses and the leverage we got there. So dynamics are on it makes certainly the price calls element that law mentioned, but you know fundamentally the 14% sales growth in the quarter does does help leverage.
So all of those dynamics went in our favor.
It's helpful guys and then maybe you can give us a little more color until what you've seen by region I think China was relatively weak for you in queue. One it seems like it's better in Q2, I think while you mentioned you know easy comparisons in Q3. So how do you think about regional demand moving forward for the rest of the year.
He was really good it was a very robust quarter globally for us confirms Ah sales performance and very honestly orders as well I'm in excuse me Frank outlines.
China's slip for us it was down.
In the mid single digits a quarter go is up both in orders high single digits in in sales in the mid single digits.
Feel very good and we feel good about what we see in China for the remainder of the year as well. So that's a positive look North America very robust growth strength brought strength a lot of it driven by the near showing the elements and core strength and hybrid and processed with with growth of of the fifth.
<unk> per cent in in sales Europe , that's been very honestly, Andy the biggest surprise of the year. It continues to be very strong for us with growth in the.
Mid teens, 14% in the quarter and sales and and and orders that are that.
That are very strong and very honestly highlighted by energy.
Sustainability and life Science investments and then the rest of Asia, driven by India Southeast Asia, and then an incredibly strong middle Eastern Africa region, as well with significant investments in sustainability and LNG across the region. So at this point.
Time with the exception of the discrete weaknesses that we've already talked through continue to see very very strong global.
Momentum.
As we go through the quarter here into the rest of the year.
I appreciate all the color.
Thanks Sandy.
Thank you and the next question comes from Steve Tucson, with J P. Morgan.
He got good morning good.
Good morning.
Congratulations again to to both Cfo's outgoing and incoming.
Thank you thank you Steve.
What was the price capture in the quarter and what do you expect it to be for the year.
[noise] five five.
5% with a slide points and the border, we expect it to be 3% to 4% for the year.
Okay, Great and then well I'm just curious from like Ah from like a governance perspective, the the aspin results.
There's a lot going on there I guess I I get a high level some of it sounds like execution on some of these contracts.
Perhaps.
In the I guess I I called integration phase of of what they're doing even though it's not really an acquisition by them I guess it seems like that there were a couple of things that that surprised them about the assets that you guys are contributing how how does that conversation work you know.
In in the boardroom there because those are like assets that you guys knew I'm not sure how surprising.
That was to you, but it was clearly surprised at the market. The way. This is played out so I'm just curious like a little more color from your perspective on the integration that's going on there and you know perhaps you know.
How that kind of discussion and how to move forward plays out when that type of thing happens yeah, no absolutely Steve I'll give you some color here, let me. It made me this three or four here critical points.
Let me first begin by saying that I continue to be and we will collectively continuing to be very optimistic about the business and the differentiation that it provides is a technology solution across the diverse customer base. That's that's very important.
Secondly, the execution of both the commercial and the technology synergies is progressing ahead of pace we.
We have alignment across all selling organizations. The technology teams and you know I highlighted a capital project when that we we worked on and we're working on a.
Many across the world and we have enjoying fundable pursuits.
So what happened in in the queue and I think they are.
Important dimensions here to talk about the first the company continues to perform extremely strongly it's a rule of 50 software business.
With a C V growth exceeding 11% and strong cash flow.
But there were three challenges in the quarter and these are challenges that we we have a robust communication process not just at the board level, but at the operating level and we we speak with the.
Tonio, an inch and tell who's the CFO on a regular basis, but first is shorter term contracts on on subscriptions at FFC, which is obviously was one of the one of the assets that we've contributed to the assumption in the plan was for three to four year basis, Oh subscriptions or as we can.
Voted last <unk> converted those from perpetual license to subscription the reality is that it came in more than one year Ah level. So that had an impact on revenue recognition.
Just the nature of the conversion journey, and and and a challenge as those customers in that market space.
Except subscription contracts over the perpetual traditional licenses.
<unk> you also reference is OSI, if we do it as a differentiated business in a high growth segment cause you know, but the integration has been slower it's a <unk>.
Business that came with a heavy service component to it and very honestly that migration.
And conversion ultimately from perfect to sub on the softer it's taking longer than expected, but we can we continue to be jointly very optimistic about the business. The orders into business are strong and we will work through the next few quarters to to to to execute there and then lastly is wrong.
Described earlier.
[noise] Heritage Aspirin aspirin tech business and the slowdown related to the bulk chemicals segment, there, but having said all of that.
The plan has been reset it is embedded in our results here. It is embedded in the outlook that we provided in the guides and the the the the investment is Ah Ah.
Still believe there's a tremendous amount of value creation opportunity here for amerson shareholders and we continue to be very committed and I think we have the processes, both operating which is C. E O C E O cfo's and through the Emerson management process as best we can hear and through the board of directors in which.
To manage into and to be part of the conversations and discussions with that team.
Are you assuming a bounce back in your fourth quarter in those results.
The only color too.
Yeah of course, no look I I I think we will be embedded there perspective.
Which they shared with their investors on their call into our guide.
Okay, great. Thanks, a lot for the caller.
Thank you and last question for some nausea at home with more research.
Thanks, Good morning, and and frankly totally if you'd been CFO 14 years. So good one congratulations and good luck in retirement and my congratulations.
Yeah. Thanks, just only just maybe it's picking up speed. The question maybe just maybe this question do you think maybe just talk about some of the moving pieces and the Guy had been clearly you know the bulk of the uplift is driven by.
Much better revenue conversion Martin version, but maybe some of the moving pieces and your last Aspentech has that changed in the guide.
Maybe saw combat any of this as a major discreet bumps would be helpful.
Yeah, well I mean, the main driver is obviously the improved outlook for operations, the the uplifting and the sales as well as the the operational execution strong price realisation all the things that drove the.
Strong leverage in the second quarter, we expect to have in the third quarter and throughout the rest of the year. So that I mean that is mainly.
Story and that is strong enough to overcome the reduced Aspentech guide I mean, as well said, we essentially incorporate their guide into our numbers.
And you know they took the guide down for the year. So we've overcome that headwind as we move from the February to the current guidance and you know.
Those are the main pieces.
And that's more <unk>.
For the year roughly yeah in that range yeah. Okay.
Okay, Great and then it just on the maybe maybe picking up off of Rams come into on the on the <unk>. The the info base of of these.
P. C. S. You said Cindy per cent don't have level three software capability.
Is that precipitate an upgrade cycle I know, we feel properties rather than the thoughts, but I'll be at the threshold now where we might seem installed base upgrade cycle was it more just patching around that with some of the capabilities around so far.
You know I mean I.
I don't know if we're planning for a major upgrade wave I think it's more a disciplined approach with each one of our customers do you know address the optimization benefits from the a T M benefits and some of the capabilities that aspirin brings to improve the performance of the overall automation system that is installed in many of these.
Customers and we're going across the board across industries power and life Sciences being the focus area. You know everybody is very interested in additionally, transforming their assets and we're seeing more and more interest from our customers to launch visual transformation programs across the automation stack, where a level three software has an important role.
Primarily around optimization on the manufacturing Sweet and then more of the acid performance management and the reliability software on uptime of assets and their infrastructure such that's the journey I think you're gonna see more and more of that Ah sustainability is another area, where software will get deployed but I don't think it's a big wave I think it's.
More disciplined wave over time, and we have the opportunity to drive it.
That's great. Thank you very much.
Thank you and then.
Just spray with vertical research.
Hey, Thank you good morning, congrats to Frank and Mike.
Frankly, I think it's hard to believe even seat CFO for 14 years, because until we got a new CEO . We didn't have many opportunities to get to know your the new structure is better so congrats all around.
Yeah pay a lot of ground covered I just wanted to touch back on capital deployment. In law has just said you know the big moves are done in that that certainly makes sense when you did.
Indicate that your work and bolt ons and.
It looks like you're also maybe have a six month gap or so between the climate proceeds and national instruments closing.
Just wonder how that might play out over that timeframe is there room for some more share repurchase are there actionable bolt on so that could be happening you know kind of over the sunroom period or you know.
<unk>, what we should expect there.
Yeah, I'll have friends comment as well here, but no look we obviously work towards the closing of natural instruments over those six months aggressively they may come sooner will say depends under regulatory approvals, that's going to be the key pacing items as as you know Jeff the bolt ons, when we walk we walk them aggressively within the businesses.
And some are competitive processes, others, not and we have two or three of those so we're looking at any given point in time it.
It will continue to do so these are some billion dollar purchase price type of type of deals with.
Low a small number we're looking at right now in evaluating and then look what continues to be very committed to return Castro shareholders, whether that's through the dividend or share repurchase and as we go into 2024, who lay out what the appropriate plan, there is and and communicate that Frank anything Jeff.
Jeff I wouldn't view share repurchase decisions in the context, that's kind of the gap between closing climate in closing and I would.
Would you be with more broadly as part of the capital allocation strategy I mean, when we after we close and I will have a balance sheet, that's well below to get to EBITDA in a tremendous amount of financial flexibility. So we'll just continue to make those decisions in.
In that context.
Right and then just back to camp and I do understand you have a more diverse business then aspen, but.
Why shouldn't we kind of view this as an early warning sign of Idaho.
Pressure in the core business and come.
Maybe just a little bit more color, what you're seeing there because there are obviously capex and profitability issues kind of across in a lot of that industry right now.
Yeah. So you know farce, the capital cycle, and chemical, particularly specialty chemical is as good as we have seen it particularly in middle East Asia Pacific and ethylene and alcohol investments in North America. So for US we haven't seen the Capitol cycles slow however.
What what aspirin is referencing is b R X men and chemical customers estate throttle bear production in response to slowing demand and therefore that translates to MSC purchases manufacturing supply chain sweet purchases, just really the dynamic that's impacting down <unk>.
Mall impact to them at this point, but given its 18 per cent of their sales makes I think they've reference that but to be honest, we haven't really seen any kobe three slowdown or kill me too and chemical and then suddenly many of our major project wounds to date, but we had been sharing with you have been in the chemical petrochemicals space, particularly in the emerging.
Markets. So at this point, we don't we don't see that as an inflection point or a slowdown in the industry. Despite the higher feedstock costs.
Got it thank you.
Thank you and the next question comes from Joe Day with Wells Fargo.
Hi, good morning, and congrats to Frank and Mike.
I Wonder just on on the discreet if you could elaborate a little bit on North America, and the interplay between some of the structural and it sounds like continued strength that you're seeing and sort of battery electric.
Semiconductors, but then the flip side of that anything that you're just seeing some sort of a general industrial cyclical standpoint, whether the the macro uncertainty.
Is having any impact or whether it's more just kind of like natural digestion of what's been ordered over the last few years.
Yeah, I mean on on in North America to be honest on the discreet side, we haven't seen I mean, we obviously don't play in a big way in semiconductors and battery <unk>, we play in a in a <unk> in a smaller fashion with our Delta V business, but obviously, we'll we'll get a lot more exposure to the dynamics with national instruments in the core machine.
On a nation business that we play in North America, we haven't seen a significant slowdown to date, but it is obviously slower than the momentum we're seeing in the process markets.
Got it and then I also just wanted to ask about natty and integration planning and sort of what efforts are currently underway that you're standing up saying over the next six months to to ensure a successful launch of of the integration process there.
Sure. This is all we kicked off last week in Austin over a day and a half with the management team. We have assembled a team with steering Committee and then we have functional integration leadership across the eighth Valerie drivers are so that been identified obviously in a on a steering committee basis I participate as Eric.
Dark cloth.
And and we've of each named it a leader on the integration team in all cases are available. So that's all things and running meetings are taking place.
Have a in person kick off with a large group here in Saint Louis coming up and there will be off and running on all the full integration is but a really good start great organizational discussions already have taken place.
And and now we are excited about this work ahead of us as we had to close.
Thanks, a lot.
Thank you.
Thank you and this concludes the question and answer session as well as the event itself. Thank you. So much for attending today's presentation you may notice sent your lines.