Q3 2023 Emerson Electric Co Earnings Call
Good morning, and welcome to Emerson's third quarter 2020 Free earnings Conference call, all participants will be in listen only mode.
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Good morning, and thank you for joining us for Emerson's third quarter fiscal 2023 earnings conference call today, I am joined by President and Chief Executive Officer, La Carte by Chief Financial Officer, Mike Bachmann, and Chief operating Officer, Ron Krishna.
I encourage everyone to follow along with the slide presentation, which is available on our website. Please join me on slide two.
This presentation may include forward looking statements, which contain a degree of business risks and uncertainties. Please take time to read the safe Harbor statement and note on non-GAAP measures I will now comment I will now pass the call over to Emerson, President and CEO small curtain value for his opening remarks, Thank you Colin and good morning.
This quarter's results are a testament to the tremendous people of Emerson.
I am humbled by what you do every day.
Thank you for the passion and energy and the effort your brain. So a great company every single day.
Two and a half years ago, when I became CEO , we express our vision for accelerated value creation culture portfolio and execution.
I am proud today more than ever before of the progress we have made.
The Emerson management system has empowered our leaders and opened a world of possibilities for our company in the field of innovation and commercial excellence with a higher growth more cohesive portfolio.
But above all.
The Emerson management system is the tool that enables our team to continue to deliver differentiated financial results.
The work never ends, but I am proud of how far we have journeyed into clear road ahead.
Please turn to slide three.
Q3 was an exceptional quarter and our teams continue to perform well and deliver for our shareholders.
We made tremendous progress on our strategic priorities closing the climate trends, the Copeland transaction launching new to the world products and winning several key projects in organic growth platforms, and as you transition industrial software and priority discrete and hybrid markets.
We have once again increased our expectations for the year based on our continued operational execution.
We now expect double digit underlying sales growth.
Proximately, 50% operating leverage and over 20% adjusted EPS growth for 2023.
Top quartile performance.
As we look ahead, we are energized by our value creation opportunities.
Emerson is and will continue to benefit from our significant exposure to secular growth trends like energy affordability and security sustainability, the carbonization digital transformation and near shoring.
Over 30% of our sales are directly aligned to the strengths as we discussed at our Investor Conference in November our technology and solutions are highly differentiated in these spaces positioning our business for growth.
We're also innovating for these markets, helping customers solve their toughest challenges with disruptive technology and solutions.
Portfolio transformation is paying off as we have aligned our cohesive portfolio to these secular trends.
And how favorable value drivers combined with our Emerson management system provides a roadmap for future success at Emerson.
Turning to slide four this quarter exceeded expectations across the board.
Underlying orders were up 3% led by high single digit process and hybrid demand growth.
We continue to see secular trends driving the demand strength.
As an example, LNG projects continue to move forward.
Customers image energy transition and sustainability budgets are growing and proving resilient both for greenfield projects and hydrogen clean fuels in renewables and for brownfield de carbonization opportunities like emissions reductions in carbon capture.
Renewables is a particular area of strength, we are winning based on our superior technology and breadth of capabilities, which we'll discuss shortly.
We're shoring is also driving incremental investments around the globe in areas like life Sciences, and metals and mining.
It is still early stages of global stimulus for programs like the United States I R E ships and J E R driving additional conversations with our customers, which we expected turning to funded projects down the road.
Our strong performance in process and hybrid was partially offset by demand indiscreet, which continues to slow.
Orders were down in Q3 against tougher comparisons for this.
<unk> of the business.
As we mentioned previously Europe , especially Germany continues to slow and we have seen some softening in the U S and Asia.
Looking at the overall business and given continued robust demand and strong underlying growth drivers, we still expect mid single digit full year order growth.
The continued demand and improving supply chain environment, which includes improved availability of electronic components enabled 14% underlying sales growth in the quarter above our expectations.
The Americas, and Europe were up 11% and 13%, respectively, While Asia Middle East and Africa were up 20% strong performance off last year's impact of the Shanghai Covid shutdowns.
Intelligent devices and software and control were both up double digits.
It is clear when we speak to customers and compete for projects that our technology is winning in the marketplace.
We are proud of what we have built and confident this will continue.
Software and controlled growth of 19% is a testament to our leading control systems Delta V innovation, which are well positioned where our customers are spending areas like life sciences metals and mining hydrogen clean fuels and renewables.
Within the quarter, we won large projects in life sciences metals, and mining, including lithium and LNG.
Intelligent devices grew 13% final control and measurement and analytical are the de facto standards for traditional energy transition energy chemical and power markets across the globe.
This later cycle exposure into businesses continued technology leadership in areas like control valves actuators regulators pressure temperature flow level and wireless are differentiators for Emerson and our leading to strong financial returns.
This strong sales performance and the continued operational execution of our teams led to 59% operating leverage in the quarter, excluding Aspen Tech.
Favorable impacts from price cost and mix also drove accretive margin performance.
Adjusted EPS was $1 29, beating our guidance again, driven by the strong sales and operational performance free.
Free cash flow was up 83% year over year.
Up 47% year to date.
Please turn to slide five.
We continue to accelerate progress on our strategic priorities.
On May 31, we closed the Copeland transaction.
Emerson received $9 $7 billion in upfront cash or approximately $8 billion after tax for the transaction.
We also have the future proceeds from the 225 billion dollar Copeland note receivable and a 40% common equity ownership with a transaction value of $1 7 billion.
Post closing Emerson has a net cash position and taking to consideration the NII acquisition Emerson expects to have a net debt to EBITDA ratio of less than two.
I also want to provide a quick update on our corporate and platform right sizing activities, we announced at the beginning of the year as.
As planned we did not have any stranded cost due to the Copeland sale and are well on track to achieve our $100 million annualized.
Annualized cost savings by 2024.
We also released our ESG report in June highlighting a 42% reduction in greenhouse gas emission intensity from our 2018 baseline.
This achievement surpasses, our 20% target six years ahead of schedule.
In the report we also highlight numerous examples of our Emerson is helping customers navigate the energy transition and the application of our technology to reducing emissions and energy usage.
Lastly, before moving on to some exciting innovation in customer wins I wanted to provide a quick update on the NII acquisition.
We remain on track to close the acquisition in the first half of our fiscal 2024 and the teams are actively working on integration planning as we prepare to be ready for day one.
June ni shareholders voted in favor of our acquisition.
HSR was once again approved and all necessary regulatory filings have been made.
And I released their earnings last week with another record sales quarter up 5% year on year and strong margin performance.
They too are seeing supply chain constraints easing, which helped drive their sales performance by converting backlog, despite the negative orders environment, which was down 17%.
The demand environment for the business is playing out largely as we expected with discrete and semiconductor weakness expected to improve as the calendar year goes on.
Please turn to slide six.
As the rate of our customer sustainability and digital investments continued to accelerate Emerson is ensuring that we are positioned to capture this spend.
Part of this is through our strong dedication to innovation and new to the world products.
Recently Emerson has had numerous impactful innovations.
First Aspen <unk> is the next step in helping customers on their sustainability journey.
Not only does <unk> offer more than 100 sustainability specific models. It also provides solutions to help customers manage emissions and design new hydrogen processes.
314 also further incorporates artificial intelligence, which when combined with first principle models helps users reach optimal production.
Increasing profitability, while reducing emissions.
Emerson also recently launched enhancements to our Ams device management software platform now, allowing for a more seamless integration with Aspen Tech solutions like <unk>.
This allows users to have more access to critical intelligent device data for use in advanced analytics and models.
This example shows the differentiation of the Emerson, plus Aspen Tech portfolio and technology synergy opportunities together.
Emerson has long been a trusted partner of utilities around the globe as evidenced by the fact that ovation controls approximately 50% of the electricity generated in the United States.
This leadership uniquely positions Emerson to support our customers' transition to renewables and we are doing so through our new integrated renewable energy control solution ovation Green.
Ovation Green allows customers to manage their renewables assets like solar wind hydro and hydrogen all in one platform and we are already seeing early success with some of the largest utilities in the United States.
Lastly, our measurement and analytical business recently launched a new to the world non contacting radar device that is ideally suited for a range of applications and chemical life Sciences, and food and beverage.
With advanced capabilities like Bluetooth and a built in historian to store process data and insights that transmitter is optimized for ease of use and simplicity.
This device incorporates radar technology, a fast growing technology in the measurement space.
As we look at continued growth in our measurement business. This innovation will serve as a foundation to building level as the next technology pillar accompanying our leadership in pressure temperature and flow.
As one of our key drivers growth drivers Emerson is committed to accelerating innovation and meeting the rapidly evolving needs of our customers like the ones highlighted here.
Turning to slide seven.
At our November Investor Conference, we outlined our through the cycle growth strategy, which includes our strategic focus on organic growth platforms.
These markets, including life Sciences metals, and mining factory automation industrial software and energy transition our areas closely aligned to the secular growth trends that are driving incremental customer investment.
This is demonstrated in the evolution of our funnel over the past nine months.
Not only have we successfully expanded our funnel to $9 $7 billion over this timeframe up from $7 $1 billion, but nearly all of this growth can be attributed to our growth markets, namely energy transition life sciences in metals and mining.
Our energy transition funnel is now nearly $5 billion up from $3 $5 billion in November .
This expanded funnel is driven by new project announcements and hydrogen clean fuels carbon capture and EV batteries.
<unk>, where we are actively engaged and our technology is well suited.
We have also continued to expand our metals and mining and life science funnel.
And we are now capturing additional strategic projects in our funnel as we dedicate more time and resources towards pursuing these engagements.
In the third quarter alone we added over 300 projects through the funnel and we're awarded a content in over 50.
This indicates a solid pace of project announcements as near shoring of sustainability trends spread globally.
We expect these organic growth platforms will grow double digits through the cycle and we are off to an excellent start in 2023.
Please turn to slide eight where we will highlight a few key wins across these segments, which underscore the power of emerson's highly differentiated portfolio of solutions and the opportunity ahead for Emerson.
The LNG wave continues to progress and Emerson is winning our share of opportunities.
Of the projects that have moved forward over the past two years Emerson has been awarded content in seven.
Demonstrating our continued leadership in this space.
These are large projects with ample automation opportunity on average approximately $10 million of automation opportunity per million ton per annum liquefaction.
Our unmatched portfolio of measurement devices valves control systems, and now optimization software differentiates Emerson as the only automation company capable of providing a holistic solution.
Emerson's leading project execution is also a key differentiator for these large and complex projects.
Our projects certainty T approach Emerson helps customers expedite project timelines and reduce project costs key measures to reaching profitability faster.
One of the seven projects was the Port Arthur LNG project.
Emerson is excited to announce it will be supporting <unk> energy and <unk> infrastructure.
The automation of the Port Arthur LNG Phase one project.
This liquefaction and export terminal in South East, Texas is a premier LNG project designed for safe reliable and efficient operations delivering LNG to global markets through two trains capable of producing up to 13 5 million metric tons per year.
Anna.
Emerson was chosen as a key automation partner for Bechtel energy, providing our leading Delta V control system final control valves and measurement technology.
Further on slide nine the next market, we'd like to highlight is the battery the battery value chain.
This is an area, where we are winning projects based on the breadth depth and strength of Emerson's end to end capabilities from the mining of lithium in copper to refining and processing and finally to EV battery manufacturing Assembly and recycling.
In 2020 to Emerson technology helped produce over 65% of global electric vehicles.
We are excited to continue supporting companies around the world as production expands across each of these high growth segments.
Recently Emerson was selected to automate two very strategic projects and mining first that Gan Gan Fang lithium project in Argentina.
Emerson's Delta V control system was selected to automate the large scale lithium mine a strategic win in the lithium triangle between Argentina, Chile, and Bolivia that holds much of the world's lithium reserves delta.
Delta V was selected because of its differentiated and flexible architecture and commissioning savings with charms.
The next project success.
Codelco and the Andina copper mine in Chile.
Codelco is the world's largest producer of copper and Andina site will represent over 10% of <unk> overall output.
Emerson's Delta V and control software were selected to help automate the treatment of water on the site.
Allowing codelco to accurately control water quality efficiency and recycling.
Emerson recently won a contract with one of the largest EV manufacturers because of our unique ability to support production across multiple processes in the value chain.
With this project Emerson will be the trusted automation partner to support two facilities, our lithium refining project and capsule production facility in Texas.
Delta V was chosen for both projects due to its robust software architecture and ability to bring together previous islands of automation.
As the customer continues to grow operations globally with numerous expansions and new operations.
<unk> is well positioned to be the supplier of choice given the unique nature and value of the capabilities that we can deliver.
Emerson was also recently awarded a large project with a leading German EV manufacturer.
<unk> automate the battery cell assembly process as.
As we look at future opportunities.
<unk> has a leadership position with many of the largest EV and battery manufacturers in the world.
<unk> differentiated hardware and software solutions help customers with the R&D testing and validation of batteries in vehicles, and we look forward to leveraging those relationships to expand our current factory automation business and build upon our recent successes.
As you can tell we are energized by these projects and our relevance with customers.
We'll share our progress on Emerson continues to partner with leading EV manufacturers around the world and benefit from the strength and differentiation of our portfolio of assets.
I'll now turn the call over to Mike Bachman.
Thanks, <unk> and good morning, everyone. Please turn to slide 11.
Our third quarter financial results were outstanding and before talking about that I want to thank our global teams for their hard work and execution.
Our Emerson management system is driving value as evidenced by our continued sales growth margin expansion earnings growth.
And free cash flow performance.
Turning to the results underlying sales growth exceeded our expectations at 14%.
GAAP sales were also up 14% for the quarter and price contributed approximately five points of growth.
Backlog of $6 9 billion remained flat quarter over quarter.
Software and control performed better than we expected growing underlying sales 19%.
Due to increased availability of electronic components, and our ability to convert more of the backlog in this business Intel.
Intelligent devices grew 13% led by process and hybrid exposed businesses, mainly measurement and analytical and final control.
These two businesses are leaders in later cycle markets and have a large installed base, which along with the continued backlog conversion contributed to strong growth in the quarter.
From an industry perspective process and hybrid remain healthy with double digit growth in the quarter.
As Walt mentioned discrete activity has continued to slow but still exhibited mid single digit sales growth due to backlog conversion.
Emerson adjusted segment EBITA margin improved 370 basis points to 26, 9%.
Leverage excluding Aspen Tech was 59%.
Strong sales growth margin accretive price cost and favorable product and project mix all reflect the excellent execution by our operations teams and contributed to the margin improvement.
Adjusted EPS grew 40% to $1 29.
We'll discuss the details of that growth on the next chart.
Lastly, free cash flow of $769 million was up 83% versus the prior year quarter.
For the quarter free cash flow conversion of adjusted earnings was 97%.
The strong earnings growth and working capital improvement helped contribute to the free cash flow growth.
Please turn to slide 11 for the details of adjusted EPS and bridge from the prior year.
Most importantly, the strong 14% underlying sales growth and 59% segment level operating leverage contributed 29 29 of EPS growth year over year.
Stock compensation was a <unk> <unk> headwind due to lower stock comp expense in the prior year, but that was more than offset by other corporate items and tax which we're in eight cent tailwind.
The reduced share count, resulting from the $2 billion share repurchase completed in the first quarter contributed <unk> <unk> to adjusted EPS.
Lastly, now that the Copeland transaction is closed we are including the interest from the Copeland note receivable and adjusted results and guidance moving forward.
Copeland note interest contributed <unk> <unk> to adjusted EPS in the third quarter and it is important to note. This was not included in our May guidance.
Overall, adjusted EPS grew 40% year over year to $1 29.
Yeah.
Turning to slide 12, and as we look ahead to the rest of the year I'd like to highlight a few key things in general and markets remain resilient and we have increased our expectations for process to double digit sales growth with meaningful contribution from secular growth segments energy transition and energy security.
With continued strength in life Sciences, and metal metals and mining, we now expect hybrid to grow low double digits in 2023.
We are discussing nearshoring your initiatives with more and more customers. This is not just the trend in the United States and we see near and long term benefits around the globe.
For example, our team recently visited Australia, and China, where we spoke to customers about their plans to make investments in new markets like life Sciences as a global leader for providing automation for this market. These customers are tapping emerson to support their investments.
Discrete demand is continuing to slow, especially in Europe , and we are beginning to see the impacts in the United States and Asia.
Sales growth expectations, when combined with our safety and productivity commercial exposure are in the low single digit to mid single digit range as we have worked through backlog.
The supply chain environment has continued to improve allowing us to work through our backlog as we head into Q4.
Price cost has been a significant tailwind in 2023, a reflection of our commercial excellence, we expect price for the year to approach four points and we will remain diligent on prices of key performance lever.
As we look to the future. We are excited by our growth opportunities Emerson is uniquely positioned to support our customers' investments in key areas, we expect to grow double digits through the cycle.
We've demonstrated our leadership in energy transition markets like LNG nuclear hydrogen clean fuels carbon capture and renewables.
We are well positioned to capture the long term investments driven by near shoring and finally, we have a leading and differentiated software portfolio that is expected to have double digit CV growth through the cycle.
These are all trends, we expect to continue to augment emerson's growth for the pursuit for the foreseeable future.
Please turn to slide 13.
As this chart shows our performance this year has been exceptional.
We have successfully executed on our portfolio transformation, while continuing to drive strong results across the business and exceed on our commitments.
<unk> operational performance improved price cost management and more favorable mix as we went through the year gave us the ability to increase our expectations throughout the year for.
For 2023 underlying sales growth is now expected to be towards the top end of our previous 8.5% to 10% guidance range, we expect both intelligent devices and software and control to be on par with this overall updated guidance.
As a reminder, Aspen tech will begin rolling into our underlying sales in Q4, as we lap a year of ownership.
We are also increasing our expectation for segment operating leverage based on our strong Q3 result sales strength favorable price cost and continued strong operational performance.
We now expect segment operating leverage to be approximately 50% excluding Aspen Tech.
Adjusted EPS has been raised to $4 40 to $4 45.
A 22% year over year increase at the midpoint.
Please note. This includes <unk> <unk> of interest from the Copeland note receivable that we are now including in our adjusted.
Results two cents from Q3 and approximately <unk> <unk> in Q4.
Aspen Tech is still expected to contribute approximately <unk> 25 for the year.
Post Copeland transaction close. Please note. We have now included an estimate for the Copeland equity loss in our GAAP guidance numbers, which in addition to the unemployed proceeds is being removed from our adjusted results and guidance.
We have also adjusted our expected tax rate to approximately 22% for the year.
Free cash flow is expected to be $2 two to $2 3 billion for the year of which Aspen Tech is contributing approximately $300 million.
Thanks for your attention I will now turn back to Nick to open the call for questions.
Thank you Rob.
I will begin the question and answer session.
I'll ask a question you May press Star then one on your Touchtone phone excuse me a speaker phone. Please pickup your handset before pressing the keys.
Your question. Please press Star then two.
We will pause momentarily to assemble the roster.
First question from Nigel Coe.
Research. Please go ahead.
Oh, Thanks, good morning, Thanks for the question.
Good morning morning.
Joe.
Good morning.
Just I thought maybe just to start off on the obviously very strong operating performance, but margins were the real.
Standouts.
Wondering as we go into 'twenty four I mean is anything we should think about in terms of maybe some headwinds to margins.
I'm thinking here about.
Analytics very strong sequentially up to 27%.
Are you confident that you can grow off these margins going forward.
Hey, Nigel.
Yes, we're very excited.
We're excited about the leverage that we've had with 40%, 53% and 59% in the quarter you do see that operating leverage ticked down a little bit in the fourth quarter, and we're going to exit the year around 50%.
So yes, we feel good about the operating leverage and.
We're not really in a position to talk about 24 at this point, but.
We certainly are pleased with the current year performance and I'll, just add a little bit of color. Thanks, Mike I.
I do believe that the underlying work that we've been doing around price cost management thinking about how we bring our differentiated technology to market will be sustainable into it through this cycle as we talked about and we look at the the the leverage targets as we go to 'twenty four and we'll talk about that later in the.
In the fall, but I feel very good about the momentum in the business and the execution of all elements that are that are going to impact our ability to deliver differentiated margins on a go forward basis.
That's great. Thanks, and then my follow up question is on the control systems organic growth in the high teens.
A longer cycle business and we.
So when you think about that as necessarily cycling uptick or downtick. So I mean, how much of that is coming from.
Backlog conversion with lead times, maybe some chip lead times coming down.
And sort of how do we think about that going forward do you think you can maintain above average growth rates and control systems and software.
Yes.
Rob here.
Yes, I think.
This particular quarter and this year I think in the second half the lead times catching up and better supply chain and shipping backlog is what is driving that.
The significant growth in our systems business, but with that said the project funnel is very good. The <unk> three is very good. So our expectations are the momentum in that business should continue into 2024.
Great. Thanks, Ron.
Thank you next question will be from Andy Kaplowitz of Citigroup. Please go ahead.
Hey, good morning, everyone.
Andy.
So you reiterated your mid single digit order growth forecast for this year and you came in at 3% this quarter. Despite the discrete market slowdown you you, obviously gave us the new funnel of opportunities.
Mid 20% organic growth. So does that mean that emerson's orders could reaccelerate from here or how do you think about that.
The market that you laid out.
Certainly Andy we feel confident in that in that mid single digit guidance that we laid out a quarter ago and believe we will exit the year in that rate.
The process and hybrid orders are in the high single digits as we exited the quarter and Thats, where a significant amount of the momentum lies not just in the capital expansion, but related to just everyday business activity.
Of course, offset by the discrete markets that we've talked about through the quarter, who still feel very confident that we will inch up from where we ended the quarter here slightly.
And then maybe I could ask you a more philosophical question on Aspen Tech Guy now.
At this point and announcements guidance for FY 'twenty four.
Double digit EC the grille with an agreed not to buy micro mined and announced a big repurchase are there any lessons learned as you and Antonio worked together now for a little over a year and given asset.
Do you see a nice uptick in <unk> contribution to your EPS in 'twenty four.
No look we continue to.
We continue to deliver on the synergy plan I think that's point number one not just in terms of pursuit of business.
Collaboration between our selling organizations, but most importantly, as I highlighted in the presentation around technology and it's a technology tie in that ultimately will differentiate our offerings in the marketplace number two.
Look over the quarter, we did a lot of work together.
I think I.
Feel really good about the plan that Aspen Tech laid out the way it was communicated yesterday I thought was very succinct and clear and.
And I think they will execute very well as we go through the quarter. There was a lot of collaboration ongoing between our joint teams and our momentum continues to build a year into a little over a year into this.
Thanks, a lot appreciate it.
Thanks, Andy.
Thank you next question will be from John .
<unk> Oh Morgan Stanley . Please go ahead.
Hi, good morning, guys.
Hi, Josh.
So while I'd love to kind of digging a little bit on backlog here. So flat sequentially you highlighted the funnel of activity growing pretty materially here. So presumably the conversion rate starts to pick up a little bit here do you think we're sort of in this backlog zoned for a while I think a lot of your other peers out there in multis are starting to dip into.
Backlog with lead time normalization, just wondering where you guys sit on that or anything you'd want to call out for the next few quarters.
Hey, Josh Yes, we certainly expect the backlog to come down a few hundred million dollars to the fourth quarter and it is important to note that year over year.
At the end of the year, we expect that to be up a little over double double digits. So yes. The supply chain easing has certainly helped.
But as we look ahead, we see that backlog coming down a little bit in the fourth quarter.
Got it that's helpful and then.
Just kind of going back to Nigel question, maybe thinking about some of the factors, whether its 24 or maybe more broadly than that on mix.
It seems like with a lot of these large projects, we're going to see more <unk>, one, which I think maybe in the older days of Emerson was a bigger mix headwind, but how do you guys think about that now given the change in project competition et cetera.
Yeah I think.
First off I think just to add to what we relayed to Nigel.
<unk> business performance has been very strong right now we're running at 65% plus Kobe three rates with strong performance in North America. So that has really contributed to the outsized leverage we saw in the first three quarters and we don't expect that to materially change in the next two to three quarters, but you are right.
As our project backlog has built up and we see project shipments go into 24 that will throttle leverage down to the mid thirty's or high Thirty's range. We've guided to you in the past. So that's really a dynamic you should look for in 2024.
Yes, I think you're absolutely right I think.
Theres a fixed handle on the on the MRO and replacement business. We don't expect that I think you're absolutely right to change as we go through the year. There's a lot of positive activity. There so feel good about that mix.
Despite a very robust capital project funnel.
Got it appreciate it best of luck.
Thank you next question will be from Steve Tusa of Jpmorgan. Please go ahead.
Hello.
Hi, Steve.
Hi.
The incrementals getting back to Nigel his question.
I guess.
Given what happened this year is there any view on how you view kind of the long term trajectory on those on those incrementals.
Can you just remind us of what your long term view on that is and and and how that kind of plays out and maybe how the mix may impact that over the next couple of years.
Perhaps the MRO stuff slows in the project stuff comes on.
Look we guided in November Steve at 35% through the cycle obviously.
We're in a very positive point in the cycle.
At this moment in time.
And look as we look at our mix of business our Tac.
Geographical mix.
As we go into November we may assess that.
But that's the guide that we put out last November obviously, we're outperforming that number today and then what is the contribution from kind of price cost this year just roughly.
Well on price in the quarter, we have nine points of volume and five points of price price will moderate as we go into the fourth I think for the year of three to three and a half approaching four points of price in the full year guide of 10% underlying sales.
Yeah, Okay, great. Thanks, a lot.
Thank you.
Thank you next question will be from Andrew <unk> Bank of America. Please go ahead.
Hi, guys good morning.
Good morning, Andrew.
I guess, they can be terminology agents refuses to die.
I'm trying to kill it [laughter] I'm aware of that.
So just a question on.
Our supply chain are you guys.
Some of your competitors are talking about a deflation.
Or disinflation are you seeing an opportunity to extract discounts from your supply chain just trying to understand why people are talking about inflation, subsiding or where you're going to see a bottom line benefit for a company like Emerson over the next six to 12 months.
Simple answer is yes, Andrew and we looked at obviously direct material indirect material and logistics.
So we are going to see deflation or positive <unk> favorable NOI, we are seeing that already in the second half of this year and should see that continue into next year. So it will be favorable for us what I will say, though is if you go back to pre COVID-19 levels logistics costs for example are already.
They're so we've seen a lot of the logistics benefit already come through on the direct material from particularly castings machine parts electronics, we will see deflation in <unk> 24 versus 23, but still not back to pre COVID-19 levels. So maybe the opportunity there for US is continued deflation over the <unk>.
Several quarters as the market eases.
Excellent and just a question on Aspen and Emerson.
Just talk a little bit more about channel integration.
Because you know what are you hearing that you guys are driving asps.
It's been an Emerson closer together and that relationship is evolving.
Just trying to understand how much upside do you think or how much margin of safety there is.
Given that you know historically Emerson our sales force has been very very commercial client centralizing. The salespeople seems like the relationship is going outside the initial channel just talk a little bit more about the opportunity. Thank you.
Yes. So you are spot on I think over the last year and certainly in the last six months the collaboration and the refinement of our go to market. Our joint go to market approach, whether its a project or the white spaces.
Has certainly improved.
Yes, you are correct in certain markets China for example were collaborating.
A lot more in terms of having the channels work together incentive plans for both channels to support each other has been put in place and Thats really stimulating the right behavior. If you will as both teams go out and pursue competitive displacement opportunities or Aspen for example, selling on our Delta V installed base.
So yes, I think we will continue to evolve and progress that we are being very careful and we're taking it market by market and doing what makes sense. I don't think there is a one size fits all approach to every market, but certainly the collaboration and the incentives for our sales organizations to.
Right.
Improved over the last six months.
Thanks, so much.
Thank you next question will be from Chris Snyder UBS. Please go ahead.
Thank you and congrats on a strong quarter.
Just wanted to follow up on some of the prior conversation and communication on margins.
If our math right. The guide seems to imply a pretty material sequential decline in margins into the fourth quarter. Despite a step up in revenue I guess is that right and what's driving that thank you.
Yes.
We'll see a decline in margin.
The fourth quarter, and if you think about.
The third quarter that was driven by by price and leverage both of those things will be a little bit lower in the fourth quarter as we mentioned the pricing for the full year will be about four relative to the five.
In the fourth quarter.
In the third quarter, rather and the mix will also have an effect there as we close out the year.
Thank you I appreciate that.
And then just maybe looking for some more color on the pipeline of big process projects.
Concerning the market that.
Oil and gas kind of commodities down pretty well off high and that includes LNG that there could be some slowdown or pressure on these projects.
Seem to have really good momentum on there. So can you just maybe talk about what youre seeing there and particularly on the traditional energy in the LNG side. Thank you.
Yes.
Ill make a couple of comments and.
We're all months add color here look.
The bulk of what we're seeing is as gas it's not it's not oil where we do see activity in the oil it's around sustainability conversions carbon capture et cetera, and emissions reduction, but it's the gas activity that I think is very relevant and that is entirely tied to Europe .
Two energy security and affordability.
And we have not seen any slowdown in the activity as a matter of fact in acceleration through the quarter in terms of funding processes. There are seven projects currently out of nine funded and moving forward aggressively and we booked seven of the nine in seven of the nine already so I haven't seen any.
Evidence and we have not felt within the business any evidence of any potential pullback in the gas infrastructure build out or LNG infrastructure, Buildout ROM, yeah, and just to add to that as it relates to our traditional markets outside of LNG as Laura mentioned.
Chemical is another area, where we see continued momentum on projects certainly in markets like the middle East U S and China.
In terms of our true traditional energy business F BSO activity in Brazil, Guyana in Asia still continues to be good and moving forward and then obviously as we've said activities in metals and mining life Sciences nuclear continue to progress. So the funnel is diversified.
That's what we like about the funnel and it's not really dependent outside of LNG not really dependent on one large market and we feel very confident that on the LNG side, particularly in Qatar and in the U S and East Africa those projects will move forward.
Thank you for all that color I appreciate it.
Okay.
Thank you next question will be from Deane Dray RBC capital markets. Please go ahead.
Thank you and good morning, everyone.
Good morning Deane.
Hey, I appreciate all the spotlight you put on the battery value chain and we see this is linked to the whole array of these powerful mega projects that are going on now in fact batteries one of one of the biggest there, but just can you give us and it's all tied to the REIT shoring near shoring phenomenon.
Give us a sense of what kind of win rates, you're seeing there within the battery, but also on other projects. There is more than 50 different projects over $1 billion. Just if you can cut across those where else are you winning like in the semiconductor side other automation project.
And so forth.
Yeah, No Dean I'll be happy to.
I'll start with LNG, which has been very important we're winning at a rate higher than 50%.
So far I feel really good about continued differentiation in the marketplace and really becoming a de facto automation supplier there.
In the hydrogen space at 50% right now in terms of win rate to the funnel and across the battery ecosystem.
Feel very very strong debt.
Very very confident that that sits in the in the 45% to 55% range as well.
In fields like life Sciences, it's much higher and that is due to the very strong position of Delta V F.
And the various instrumentation technologies that we bring to bear so overall.
Feel really good about the execution to the projects in the funnel. The pursuits are funded by internal teams.
Multi very calling points between engineering companies and users and an end.
And any peace and contractors and it occurs at all levels within our organization from from Robyn I down into the card carrying salespeople.
Good to hear and then.
Second question would be for Mike just can you.
Sure, where there's some of the actions on the working capital side. There was really good free cash flow in the quarter.
I would imagine youre still in this sort of interim period prior to natty.
Where theres only so much you can do on the working capital side, but just give us a sense of what.
What actions near term how that translates into free cash flow for the year and then into early 'twenty four.
Yes.
We have been really focused on inventory with the supply chain challenges and we've seen some improvement and we expect to see some continued improvement.
As we move into the fourth quarter around inventory on receivables.
With 14% growth, there's going to be a growth in receivables and I'll tell you that dsos have stayed flat in the execution. There has been really really good.
If we look ahead.
We're expecting for the fourth quarter.
Operating cash flow of around eight to 900 million and Capex around 150, which should put us in around two two to two three for the year. So I feel good about.
The actions that we're taking there has been a strong focus on inventory with a backdrop of the supply chain moving around and subtle language is good but that.
That's been our focus.
Absolutely.
In the past do performance is continuing to come down on the receivables side, which has been really helpful as well.
Yeah, but just let's be clear a growth in accounts receivable is that high quality problem.
[laughter] that's true.
Thank you.
Okay.
Thank you next week next question will be from Jeff Sprague vertical research. Please go ahead.
Hey, good morning, everyone.
And I apologize if this was addressed I was on a little late but.
Can you just give us.
No.
Your updated thoughts on how we're progressing towards regulatory approvals on national instruments, and I know your view on 2024 was more subdued than where the street consensus was but they did post some soft orders here in Q2, so just.
Any thoughts on it.
Maybe the trajectory of that business as you work towards close.
Yes, Jeff, Yes, I did cover in my script, but I'd be happy to repeat the key points. So on the regulatory we have HSR approval and all the filings have been made.
Some already obviously obtained so.
So we feel very confident on the timeline to close in the first half of our fiscal 2024.
In terms of the business performance look it's it's largely playing out as we built into our model.
Orders are down 17% ended the Q, that's largely driven by weakness in semiconductor and discrete that we expect that to improve as the calendar year goes on and that's how we built into the business into the business case, having said that Geoff.
They had another record quarter their sales were up 5% year over year. The profitability continued to improve and is very strong, particularly with gpus at very high levels. So we feel excellent about the execution in the business and we will continue to stay close on our collaboration to be in our integration planning. So that we can hit the ground running.
On day one.
Great and then a few things that did here on the Q&A was a lot of discussion here on.
Margin leverage mix and et cetera, just just kind of drilling in on price costs specifically.
I would imagine we're maybe at or near kind of peak positive gap on you know on that metric and just wonder if you could.
Pine on that and maybe more importantly, though my question is.
Your ability to kind of maintain a positive spread between price and cost as we kind of look forward here. The next several quarters, yeah, Yeah, Ron once you give them.
<unk>.
We're very confident in maintaining price cost green going into next year. However price cost in terms of margin point contribution or the spread will be lower as we go forward I mean, we've had an exceptionally good year here in terms of price performance and obviously <unk> coming down in the second half.
That will continue I mean, we will be green price cost, but the margin point contribution from it will be lower in 'twenty, four which will have an impact on leverage rates.
Great understand thank you.
Okay.
Thank you next question will be from Tommy Moll Stephens Inc. Please go ahead.
Good morning, and thanks for taking my questions.
Hi, Tommy.
Well I think it was a quarter ago, maybe before you called out some of the softening on the discrete side that was originally I think in Europe , primarily Germany, but then you highlighted some evolving trends in the U S and Asia as well can you give us any more insight there.
Yeah, we saw that developed through the quarter, Tommy you're absolutely right a quarter ago, we talked about weakness that we began to see particularly in automotive and in packaging Oems, which as you know in Germany, not only serve the German market, but export throughout the world.
That did spread into the United States and into parts of Asia.
And that developed through the quarter that drove more weakness in that discrete business, which again makes sense from a cycle perspective for us.
That really developed over the last three months.
Thank you I appreciate it.
I also wanted to ask about <unk>.
Sure, it's something that you've highlighted throughout your entire tenure as CEO at the same time.
Pro forma for <unk>, you'll have a much.
Our organization.
Including pieces that had their own cultures.
Before they were folded into Emerson, so situate us on that journey and give us some insight into what the consolidated approach will be.
Once your portfolio is more mature.
Yeah No I appreciate the question timing as you know that's pillar number one and continues to be pillar number one floor organization. We're very excited about the journey. We're on is you know culture is not something that you change.
Immediately, but as you have to journey.
There's been a lot done in across Emerson.
What I, particularly I'm excited about is.
The culture that exists today at National instruments. It is something that is familiar to us. It is at a very attractive place to work culture based around learning <unk> City and that is felt in every engagement that we've had with that team. They have moved ahead in many of the <unk>.
I mentioned that we are looking to do here at Emerson and we're gonna be learning from Eni and applying a lot of there are lessons to while we implement here in our company. So I think theres, an accretion there and an accelerator there from what they've done and but at the end of the day. It's a company of engineers, who are curious who lean forward and you think.
<unk> Tec in differentiated ways, and that's essentially who we are today.
Thank you I'll turn it back.
Thank you next question will be from Joe O'dea of Wells Fargo. Please go ahead.
Hi, Thanks for taking my questions.
I guess, one more just related to the price cost dynamic I think pretty clear in terms of what youre seeing on the cost opportunity side.
But just overall, how you think that filters through on the price side. So I appreciate that it's still a positive margin spread narrowing.
And conversations you are having or are you seeing a little bit more discussion around that are you seeing areas, where price is actually moving down.
Yeah.
No we expect price to remain positive the magnitude of.
The price will be obviously, it's not as part of what the increases won't be as positive as we saw in the inflationary times over the last couple of years, but.
Our automation business, we have a leadership position in all the markets, we play and we bring a lot of technology to our customers. Obviously <unk> three which is the replacement cycle is 65% of our sales. So we will be positive price going into 2024, even as we execute on the favor.
Deflation that we will see on purchases like electronics castings machine parts.
Got it and then also.
Wanted to circle back a couple of comments on near shoring and I think kind of a broadening out maybe of the trends there and so if you could expand on that a little bit and just touch on sort of the evolution of what you've seen maybe kind of led in North America, but but just sort of what what inning. You think we're on I mean.
Are you seeing any kind of stabilization in those trends in the U S, but you're seeing kind of growth butting in other regions and so if you can touch on those regions and verticals a little bit more.
I'll say, a few comments and have grown to add a little color as well look I think we're in early innings and it's certainly early innings in terms of the infrastructure chips near.
Near shoring activities and it's broad based it's it's driven clearly in the in the in the.
EV battery value chain that described in life Sciences, semiconductor, which will benefit us and national instruments significantly as well, but it's Australia. It's it's Europe , it's in the United States with very robust activity across all world areas, but I have to say based on just the pace of <unk>.
<unk> I do believe there are many innings yet to be played here.
Yes.
Got it thank you.
Thank you.
Thank you.
Foods our conference today. Thank you for attending this presentation you may now disconnect.