Q2 2024 Emerson Electric Co Earnings Call
Operator: Good day, and welcome to the Emerson second quarter 2024 earnings conference call. All participants will be in a listener-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to our host, Colleen Mettler, Vice President of Investor Relations at Emerson. Please go ahead.
Good day and welcome to the Emerson second quarter 2024 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed.
Zero.
After todays presentation, there ever been opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone.
Withdraw your question. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to your host Colleen Mettler, Vice President of Investor Relations at Emerson.
Colleen Mettler: Go ahead.
Colleen Mettler: Good morning, and thank you for joining us for Emerson's second quarter 2024 earnings conference call. This morning, I am joined by President and Chief Executive Officer Lal Karsanbhai, Chief Financial Officer Mike Baughman, and Chief Operating Officer Ram Krishnan. As always, 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 risk and uncertainty. Please take time to read the Safe Harbor Statement and note on the non-GAAP measures. I will now pass the call over to Emerson's President and CEO, Paul Karsanbhai, for his opening remarks.
Colleen Mettler: Good morning, and thank you for joining us for Emerson's second quarter 2024 earnings Conference call.
Colleen Mettler: This morning, I enjoyed by President and Chief Executive Officer, La Carte Indict, Chief Financial Officer, Mike Bachman, Chief Operating Officer, Brian Krishna.
Colleen Mettler: As always I encourage everyone to follow along with the slide presentation, which is available on our website.
Colleen Mettler: Please join me on slide two.
Colleen Mettler: This presentation may include forward looking statements, which contained a degree of business risk and uncertainty.
Colleen Mettler: Please take time to read the Safe Harbor statement and note on the non-GAAP measures.
Surendralal Lanca Karsanbhai: I will now pass the call over to Emerson's, President and CEO, Paul person by person opening remark. Thank you Colleen and good morning.
Surendralal Lanca Karsanbhai: Thank you, Colleen. Good morning.
Surendralal Lanca Karsanbhai: I'd like to begin by thanking the Emerson global team for yet again delivering very strong operating results. It is a testament to the strength of our people, the culture we are building, the portfolio we have created, and the value of the Emerson management system. I would also like to thank the Emerson Board of Directors for your continued support of the management team and our shareholders for the trust you place in us.
Surendralal Lanca Karsanbhai: I'd like to begin by thanking Emerson's global team for yet again, delivering very strong operating results.
Surendralal Lanca Karsanbhai: It is a testament of the strength of our people.
Surendralal Lanca Karsanbhai: The culture, we are building the portfolio, we have created and the value of the Emerson management system.
Surendralal Lanca Karsanbhai: I would also like to thank the Emerson Board of directors for your continued support of the management team and to our shareholders for the trust you place in us.
Surendralal Lanca Karsanbhai: The second quarter was characterized by strong operating performance that exceeded our expectations. We continue to have confidence in the underlying market conditions driven by demand in the process and hybrid markets aligned with secular macro trends such as Energy Security and Affordability, Sustainability, Nearshoring, and Digital Transformation.
Surendralal Lanca Karsanbhai: The second quarter was characterized by strong operating performance, which exceeded our expectations.
Surendralal Lanca Karsanbhai: We continue to have confidence in the underlying market conditions, driven by demand in the process and hybrid markets aligned with secular macro trends energy security and affordability sustainability near shoring and digital transformation.
Surendralal Lanca Karsanbhai: The P&L execution was nearly flawless in the quarter. Underlying sales grew 8%, operations leveraged at 54%, expanding EBITDA by 140 basis points to 26% and delivering 25% EPS growth and 32% free cash flow growth. 2024 is the year of execution, with no major portfolio moves planned, and through the first half, we feel confident and have raised our outlook for the year. We are energized about the power of our differentiated automation
Surendralal Lanca Karsanbhai: The P&L execution was nearly flawless in the quarter.
Surendralal Lanca Karsanbhai: Underlying sales grew 8% operations leveraged at 54% expanding EBITDA by 140 basis points to 26% and delivering 25% EPS growth and 32% free cash flow growth.
Surendralal Lanca Karsanbhai: 'twenty 'twenty four is the year of execution with no major portfolio moves planned.
Surendralal Lanca Karsanbhai: Through the first half, we feel confident and have raised our outlook for the year.
Surendralal Lanca Karsanbhai: Right.
Surendralal Lanca Karsanbhai: We are energized about the power of our differentiated automation portfolio.
Surendralal Lanca Karsanbhai: Our R&I team, led by Ritu Favre, continues to drive the integration plan and has, again, accelerated cost-out activities in response to a slower-than-anticipated market recovery. We will now deliver $100 million of synergies in 2024. Further, I'm excited about David Baker's appointment as CFO of Aspen Tech. Dave is an experienced global automation CFO and a 27-year veteran of Emerson. He will bring a degree of structure, forecasting accuracy, and work with Antonio Pietri to reinforce a diligent management process.
Surendralal Lanca Karsanbhai: Our team led by Reto fabric continues to drive the integration plan and have again accelerated cost out activities in response to a slower than anticipated market recovery.
Surendralal Lanca Karsanbhai: We will now deliver $100 million of synergies in 2024.
Surendralal Lanca Karsanbhai: Further I'm excited about David Baker's appointment as CFO of Aspen Tech.
Surendralal Lanca Karsanbhai: Dave is an experienced global automation CFO and a 27 year veteran of Emerson.
Surendralal Lanca Karsanbhai: He will bring a degree of structure forecasting accuracy and work with Antonio Pietri to reinforce a diligent management process.
Surendralal Lanca Karsanbhai: Lastly, I remain excited about what we can accomplish at Emerson. Our technology stack, comprised of intelligent devices, control, and software, is highly differentiated in the marketplace, delivering scaled value to our customers. Further, innovation is alive and well at Emerson, and we continue to stretch the boundaries of the possible in automation. Please turn to slide three.
Surendralal Lanca Karsanbhai: Lastly, I remain excited about what we can accomplish that Emerson.
Surendralal Lanca Karsanbhai: Our technology stack comprised of intelligent devices control and software is highly differentiated in the marketplace delivering scaled value to our customers.
Surendralal Lanca Karsanbhai: Further innovation is alive and well at Emerson and we continue to stretch the boundaries of the possible and automation.
Surendralal Lanca Karsanbhai: Please turn to slide three.
Surendralal Lanca Karsanbhai: Okay.
Surendralal Lanca Karsanbhai: Emerson and our board are committed to ongoing board refreshment, and today we have the privilege of announcing the newest member elected to our board of directors. Calvin Butler is the President and Chief Executive Officer of Exelon, the nation's largest utility company by customer account, and a member of its board of directors. As part of Exelon and its operating companies, Calvin has held senior management roles in executive management, operations, corporate affairs, and regulatory and external affairs.
Speaker Change: Emerson and our board are committed to ongoing board refreshment and today, we have the privilege of announcing the newest member elected to our board of directors.
Surendralal Lanca Karsanbhai: Calvin Butler as the President and Chief Executive Officer of Exelon.
Surendralal Lanca Karsanbhai: Nations largest utility company by customer count and a member of its board of directors.
Surendralal Lanca Karsanbhai: As part of Exelon and its operating companies Calvin has held senior management roles and executive management operations, Corporate affairs, and regulatory and external affairs.
Surendralal Lanca Karsanbhai: He is a passionate advocate for community equity, and his unique expertise in reliable, clean, and affordable energy solutions will benefit Emerson as we continue to enable the energy transition and decarbonization for our broad customer base. He also has a local connection, as he was born and raised in St. Louis and graduated with a law degree from Washington University's School of Law.
Surendralal Lanca Karsanbhai: He is a passionate advocate for community equity and its unique expertise and reliable clean and affordable energy solutions will benefit Emerson as we continue to enable the energy transition and de carbonization for our broad customer base.
Surendralal Lanca Karsanbhai: He also has a local connection as he was born and raised in St. Louis and graduated with a law degree from Washington University School of law.
Surendralal Lanca Karsanbhai: Calvin will officially join our board on August 1st, 2024. This will expand Emerson's board to 12 members, half of whom are women or people of color. Having the right skills represented on Emerson's board is critical to our continued success, and we are excited to have Calvin join us. Please turn to slide four.
Surendralal Lanca Karsanbhai: Calvin will officially join our board on August one 2024.
Surendralal Lanca Karsanbhai: This will expand the Emerson's board to 12 members half of whom are women or people of color.
Surendralal Lanca Karsanbhai: Having the right skills represented on Emerson's Board is critical to our continued success and we are excited to have Calvin join us.
Surendralal Lanca Karsanbhai: Please turn to slide four.
Surendralal Lanca Karsanbhai: The second quarter exceeded our expectations, and our strong results highlight our continued focus on execution. Sales, Operating Leverage, and Adjusted Earnings all exceeded Q2 expectations. Stronger volumes were driven by outstanding operational performance and more backlog conversion than expected. Price-cost and business segment mix were also more favorable than expected. Orders in the first half met our low single-digit growth expectations with a book-to-bill greater than one.
Surendralal Lanca Karsanbhai: The second quarter exceeded our expectations and our strong results highlight our continued focus on execution.
Surendralal Lanca Karsanbhai: Sales operating leverage and adjusted earnings all exceeded Q2 expectations.
Surendralal Lanca Karsanbhai: Stronger volumes were driven by outstanding operational performance and more backlog conversion than expected.
Surendralal Lanca Karsanbhai: Price cost and business segment mix were also more favorable than expected.
Surendralal Lanca Karsanbhai: Orders in the first half met our low single digit growth expectations with a book to bill greater than one.
Surendralal Lanca Karsanbhai: For the first half, process and hybrid saw mid-single-digit growth, while, as expected, discrete saw a decline of mid-single-digit. The demand environment for process and hybrid markets remains favorable. Discrete automation orders were down year over year on a tough comparison but were up sequentially in low single digits, and we now expect their orders to turn positive in Q4, a quarter delay from our original expectation. While not impacting underlying revenue, test and measurement orders were softer than anticipated in Q2, down 15%.
Surendralal Lanca Karsanbhai: For the first half process and hybrid saw mid single digit growth, while as expected discrete saw a decline of mid single digit.
Surendralal Lanca Karsanbhai: The demand environment for process and hybrid markets remains favorable.
Surendralal Lanca Karsanbhai: Discrete automation orders were down year over year on a tough comparison.
Surendralal Lanca Karsanbhai: We're up sequentially low single digits, and we now expect their orders to turn positive in Q4, a quarter delayed from our original expectation.
Surendralal Lanca Karsanbhai: While not impacting underlying test and measurement orders were softer than anticipated in Q2.
Surendralal Lanca Karsanbhai: Down 15%.
Surendralal Lanca Karsanbhai: For the second half, we expect mid-single-digit underlying growth. I know orders, and low single-digit to mid-single-digit growth for the full year, led by Process and Hybrid Resilience with Delayed Discrete Improvement. Test and measurement continues to perform and delivered slightly better than expected due to results for both sales and earnings. The turn to positive orders in this business is now expected in the first half of 2025, two quarters delayed than our original expectation.
Surendralal Lanca Karsanbhai: For the second half, we expect mid single digit underlying growth.
Surendralal Lanca Karsanbhai: On the orders.
Surendralal Lanca Karsanbhai: Low single digit to mid single digit growth for the full year.
Surendralal Lanca Karsanbhai: Led by process and hybrid resilience with delayed discrete improvement.
Surendralal Lanca Karsanbhai: Test and measurement continues to perform and delivered slightly better than expected Q2 results for both sales and earnings.
Surendralal Lanca Karsanbhai: That turned to positive orders in this business is now expected in the first half of 'twenty 'twenty five two quarters delayed than our original expectation.
Surendralal Lanca Karsanbhai: We are seeing continued softness in transportation and semiconductor demand driven by a constrained capex environment, while aerospace and defense is expected to be positive due to continued strength in government research and defense spending. This extended downturn enables another acceleration of synergy action.
Surendralal Lanca Karsanbhai: We are seeing continued softness in transportation in semiconductor demand driven by constrained capex environment, while aerospace and defense is expected to be positive due to continued strength in government research and defense spending.
Surendralal Lanca Karsanbhai: This extended downturn enables another acceleration of synergy actions.
Surendralal Lanca Karsanbhai: And we now expect to realize $100 million of synergies in 2024, up from our prior expectation of $80 million, as we pull in additional actions that will begin this quarter that were in the plan for 2025. Our differentiated portfolio is driving value creation for our shareholders. While we remain cautious on the timing of a recovery in discrete end markets, and we're slightly impacted by Aspen Tech's latest guidance revision, and Emerson's first half performance.
Surendralal Lanca Karsanbhai: And we now expect to realize $100 million of synergies in 2024 up from our prior expectation of $80 million as we pull in additional actions that will begin this quarter that were in the plan for 2025.
Surendralal Lanca Karsanbhai: Our differentiated portfolio is driving value creation for our shareholders.
Surendralal Lanca Karsanbhai: While we remain cautious on the timing of a recovery in discrete end markets and were slightly impacted by Aspen Tech's latest guidance revision.
Surendralal Lanca Karsanbhai: <unk> first half performance.
Surendralal Lanca Karsanbhai: Stable process and hybrid demand and additional self-help actions provide confidence to increase our full-year guidance. We are increasing our underlying sales guidance to 5.5% to 6.5% and raising our adjusted EPS expectations to $5.40 to $5.50. We remain focused on execution and integration this year, leveraging our Emerson management system, and we are energized as we look ahead at the strength of our new portfolio to deliver differentiated results, leading technology, and exposure to secular growth markets, pave the way for continued value creation. Please turn to slide 5.
Surendralal Lanca Karsanbhai: Stable processing hybrid demand and additional self help actions provide confidence to increase our full year guidance.
Surendralal Lanca Karsanbhai: We are increasing our underlying sales guidance to five 5% to six 5%.
Surendralal Lanca Karsanbhai: And raising our adjusted EPS expectations to $5 40.
Surendralal Lanca Karsanbhai: To $5 50.
Surendralal Lanca Karsanbhai: We will remain focused on execution and integration this year.
Surendralal Lanca Karsanbhai: Leveraging our Emerson management system, and we are energized as we look ahead at the strength of our new portfolio to deliver differentiated results.
Surendralal Lanca Karsanbhai: Our leading technology and exposure to secular growth markets.
Surendralal Lanca Karsanbhai: Pave the way for continued value creation.
Surendralal Lanca Karsanbhai: Please turn to slide five.
Surendralal Lanca Karsanbhai: Emerson's Q2 exceeded guidance in underlying sales and profitability. Underlying sales for the quarter grew 8%, with our process and hybrid businesses again exceeding expectations and better backlog conversion than initially expected. Energy Security and Affordability and Sustainability Commitments drove strong performance in energy, LNG, chemical, and power. Hybrid and market strength continued, with life sciences project momentum in North America, Europe, and Asia, and robust metals and mining activity. Factory automation demand remains soft, with continued weakness in China.
Surendralal Lanca Karsanbhai: Emerson's Q2 exceeded guidance and exceeded guidance and underlying sales and profitability.
Surendralal Lanca Karsanbhai: Underlying sales for the quarter grew 8% with our process and hybrid businesses again exceeding expectations and better backlog conversion than initially expected.
Surendralal Lanca Karsanbhai: Energy security and affordability and sustainability commitments drove strong performance in energy LNG chemical and power.
Surendralal Lanca Karsanbhai: Hybrid end market strength continued with life Sciences project momentum in North America, Europe, and Asia, and robust metals and mining activity.
Surendralal Lanca Karsanbhai: Factory automation demand remains soft with continued weakness in China.
Surendralal Lanca Karsanbhai: Europe, Asia, and the Middle East were particularly strong in the quarter, with persistent strength in process markets driven by the energy transition and traditional energy markets. One noteworthy example is India, which has seen double-digit growth in five of the last six quarters, including this quarter, driven by broad economic expansion across multiple segments. Our growth platforms also continue to perform strongly, with underlying sales of double-digits in the quarter. Our profitability continues to reflect the strength of our new corporation.
Surendralal Lanca Karsanbhai: Europe Asia, and the Middle East were particularly strong in the quarter with persistent strength in process markets, driven by energy transition and traditional energy markets.
Surendralal Lanca Karsanbhai: One noteworthy example is India, which has seen double digit growth in five of the last six quarters, including this quarter.
Surendralal Lanca Karsanbhai: Driven by broad economic expansion across multiple segments.
Surendralal Lanca Karsanbhai: Our growth platforms also continued to perform strongly with underlying sales up double digit in the quarter.
Surendralal Lanca Karsanbhai: Our profitability continues to reflect the strength of our new portfolio.
Surendralal Lanca Karsanbhai: Gross margin has significantly improved since we started our portfolio journey when I took over as CEO in 2021. Gross margins at that time were in the low 40s, and this fiscal year, we expect to achieve gross margins over 50%, nearly a 1,000 basis point improvement. In Q2, gross margin was 52.2%, a 430 basis point improvement from the prior year.
Surendralal Lanca Karsanbhai: Gross margin has significantly improved since we started our portfolio a journey when I took over as CEO in 2021.
Surendralal Lanca Karsanbhai: Gross margins at that time or in the low 40, <unk> and in this fiscal year, we expect to achieve gross margins over 50%.
Surendralal Lanca Karsanbhai: Nearly a 1000 basis point improvement.
Surendralal Lanca Karsanbhai: In Q2 gross margin was 52, 2%.
Surendralal Lanca Karsanbhai: 430 basis point improvement.
Surendralal Lanca Karsanbhai: The prior year.
Surendralal Lanca Karsanbhai: Operating leverage is 54%, which is stronger than our expected low to mid 40s, again due to stronger volumes and favorable price, cost, and mix. Adjusted EPS also came in ahead of plan at $1.36, $0.10 above the top end of our guide and up 25% from 2023. Emerson generated free cash flow of $675 million, up 32% year over year.
Surendralal Lanca Karsanbhai: Operating leverage was 54% stronger than our expected low to mid forties again, due to stronger volumes and favorable price cost and mix.
Surendralal Lanca Karsanbhai: Adjusted EPS also came in ahead of plan at $1 36, 10 cents above the top end of our guide and up 25% from 2023.
Surendralal Lanca Karsanbhai: Emerson generated free cash flow of $675 million up 32% year over year.
Surendralal Lanca Karsanbhai: Mike Baughman will go through additional details on our results in a few slides. We are pleased with our Q2 performance and the persistent strength in our process and hybrid business, giving us additional confidence as we look to the rest of the year. Please turn to slide set.
Surendralal Lanca Karsanbhai: Mike Parchman will go through additional details on our results in a few slides.
Surendralal Lanca Karsanbhai: We are pleased with our Q2 performance and the persistent strength in our process and hybrid businesses, giving us additional confidence as we look to the rest of the year.
Surendralal Lanca Karsanbhai: Please turn to slide six.
Surendralal Lanca Karsanbhai: Our strategic project funnel continues to grow and now sits at $10.8 billion, up approximately $400 million from Q1, with our growth programs up by $300 million and representing nearly two-thirds of the funnel. The funnel growth is in line with a constructive capex environment for a process and hybrid customer. This also reflects our exposure to robust secular trends, as the increase primarily came from projects supporting sustainability and decarbonization and energy security and affordability.
Surendralal Lanca Karsanbhai: Our strategic project funnel continues to grow and now sits at 10 $8 billion up approximately $400 million from Q1 with our growth programs up by $300 million and representing nearly two thirds of the funnel.
Surendralal Lanca Karsanbhai: The final growth is in line with the constructive capex environment for our process and hybrid customers.
Surendralal Lanca Karsanbhai: This also reflects our exposure to robust secular trends.
Surendralal Lanca Karsanbhai: The increase primarily came from projects supporting sustainability and de Carbonization and energy security and affordability.
Surendralal Lanca Karsanbhai: In the second quarter, Emerson was awarded approximately $350 million of project content, with the increase in traditional energy stemming from the award of several large offshore vessels in Brazil. Our growth programs continue to demonstrate success, and I want to highlight three key project wins.
Surendralal Lanca Karsanbhai: In the second quarter Emerson was awarded approximately $350 million of project content with the increase in traditional energy stemming from the award of several large offshore vessels in Brazil.
Surendralal Lanca Karsanbhai: Our growth programs continued to demonstrate success and I want to highlight three key project wins.
Surendralal Lanca Karsanbhai: First <unk>.
Surendralal Lanca Karsanbhai: Emerson and Aspen Tech were awarded an automation pilot project for a large chemical company in China. This is an important synergy win as the customer is developing a pathway to software-driven, autonomous operations. The multiyear agreement is an integrated solution for Emerson and Aspen Tech software that will provide high-fidelity hybrid models and control automation for optimizing process operations based on real-time production data to increase product yield and reduce energy consumption. This example showcases the unique ability of the integrated Emerson and Aspen Tech portfolio to provide differentiated solutions for our customers.
Surendralal Lanca Karsanbhai: Emerson in Aspen Tech were awarded an automation pilot project for a large chemical company in China.
Surendralal Lanca Karsanbhai: This is an important synergy win as the customer is developing a pathway to software driven autonomous operations.
Surendralal Lanca Karsanbhai: The multiyear agreement is an integrated solution for Emerson and Aspen Tech software that will provide high fidelity hybrid models and control automation for optimizing process operations based on real time production data to increase product yield and reduce energy consumption.
Surendralal Lanca Karsanbhai: Sure.
Surendralal Lanca Karsanbhai: This example, showcases the unique ability of the integrated Emerson and Aspen Tech portfolio to provide differentiated solutions for our customers.
Surendralal Lanca Karsanbhai: In the energy transition space, Emerson was selected to support Shell's proposed Polaris carbon capture project in Canada. Polaris, subject to a final investment decision by Shell, would capture CO2 from the refinery and chemical plant located at the Shell Energy and Chemicals Park in Scottford, Alberta.
Surendralal Lanca Karsanbhai: In the energy transition space Emerson was selected to support Shell's proposed Polaris carbon capture project in Canada.
Surendralal Lanca Karsanbhai: Polaris.
Surendralal Lanca Karsanbhai: Subject to final investment decision by shell.
Surendralal Lanca Karsanbhai: With capture Seo to from the refinery and chemical plant located at the shell energy and chemicals part and Scott for at Alberta.
Surendralal Lanca Karsanbhai: Emerson is providing much of our leading technology, including instruments and valves. And finally, Emerson was chosen to automate a $4 billion manufacturing complex being built in Indiana by a large U.S.-based life science customer. Emerson will provide its leading Delta V control systems and software portfolio, including a five-year subscription agreement for its Delta V MES. Please turn to slide 7.
Surendralal Lanca Karsanbhai: Emerson is providing much of our leading technology, including instruments and valves.
Surendralal Lanca Karsanbhai: And finally.
Surendralal Lanca Karsanbhai: Emerson was chosen to opt in to automate a 4 billion dollar manufacturing complex being built in Indiana by.
Surendralal Lanca Karsanbhai: By a large U S based life science customer.
Surendralal Lanca Karsanbhai: Emerson will provide our leading <unk> control systems and software portfolio, including a five year subscription agreement for our Delta the Mes.
Surendralal Lanca Karsanbhai: Please turn to slide seven.
Surendralal Lanca Karsanbhai: This is a transformative moment for the U.S. power industry as data centers are driving electricity demand increases not seen since the early 2000s. At the same time, power producers are retiring carbon-intensive assets in a drive to decarbonize their operations and investing in the resilience and optimization of the grid. The grid is also experiencing an unprecedented shift from the unidirectional grid of the past to a bidirectional, intelligent grid of the future, which will be increasingly supported by intermittent power sources.
Surendralal Lanca Karsanbhai: This is a transformative moment for the U S power industry as data centers are driving electricity demand increases not seen since the early two thousands.
Surendralal Lanca Karsanbhai: At the same time power producers are retiring carbon intensive assets and a drive to decarbonize their operations and investing in the resilience and optimization of the grid.
Surendralal Lanca Karsanbhai: The grid is also experiencing an unprecedented shift from the unit directional grid of the past to a bi directional intelligent grid of the future, which will be increasingly supported by intermittent power sources.
Surendralal Lanca Karsanbhai: There are multiple factors driving this generational increase in U.S. electricity demand, and data centers alone account for nearly one-third of all new U.S. electrical demand. AI data center racks consume significantly more power than traditional data centers, with a search on ChatGBT consuming 6 to 10 times the power of a traditional search on Google. Hyperscalers are revising CAPEX estimates upward and increasing annual CAPEX significantly in 2024 to build their AI infrastructure. This is expected to continue for multiple years.
Surendralal Lanca Karsanbhai: There are multiple factors driving this generational increase in U S electricity demand and Datacenters alone account for nearly one third of all new U S electrical demand.
Surendralal Lanca Karsanbhai: AI data center racks consume significantly more power than traditional data centers with a search on chat GBT.
Surendralal Lanca Karsanbhai: <unk> six to 10 times.
Surendralal Lanca Karsanbhai: <unk> have a traditional search on Google.
Surendralal Lanca Karsanbhai: Hyperscale or is are revising capex estimates upward and increasing annual capex significantly in 2024 and build their AI infrastructure.
Surendralal Lanca Karsanbhai: This is expected to continue for multiple years.
Surendralal Lanca Karsanbhai: The increase in demand is real, and it is happening today. Utilities in key regions across the U.S. are revising load growth estimates upward materially from recent years. Georgia Power issued a revised assessment in which projected load growth was 17 times greater than previously forecast, resulting in approximately 30% greater total winter peak demand for the 2030 to 2031 winter. Dominion Energy has been a key beneficiary of traditional data center growth and forecasting another tailwind for AI data centers, more than doubling their 10-year average annual summer peak load growth from 2022. The North America Electric Reliability Corporation recently put out their annual nine-year growth forecast, with new demand more than doubling from the prior year forecast.
Surendralal Lanca Karsanbhai: The increase in demand is real and it is happening today.
Surendralal Lanca Karsanbhai: Utilities in key regions across the U S are revising load growth estimates upward materially from recent years estimates.
Surendralal Lanca Karsanbhai: Georgia power issued a revised assessment in which projected loan growth with 17 times greater than previously forecast, resulting in approximately 30% greater total winter peak demand for the 23% to 2031 winter.
Surendralal Lanca Karsanbhai: Dominion energy has been a key beneficiary of traditional data center growth and forecasting another tailwind for AI data centers more than doubling their 10 year average annual summer peak load growth from 2022.
Surendralal Lanca Karsanbhai: The North American Electric reliability Corporation recently put out their annual nine year growth forecast with new demand more than doubling from the prior year forecast.
Surendralal Lanca Karsanbhai: While Emerson does not have material content in data centers, Emerson is a key player in the power industry for generation, transmission, and distribution, all of which are set to benefit. Approximately 9% of Emerson sales are in power, and while we have a strong portfolio across our technology stack, I want to highlight the software and control layer, which is relevant across the power landscape from generation to transmission and distribution. The Ovation Automation Platform and Ovation Green Portfolio of Renewable Solutions are purpose-built for power generation, greenfield build, and plant modernization applications.
Surendralal Lanca Karsanbhai: Why what Emerson does not have material content in data centers Emerson is a key player in the power industry for generation transmission and distribution all of which are set to be beneficiaries.
Surendralal Lanca Karsanbhai: Approximately 9% of Emerson sales earnings power and while we have a strong portfolio across our technology stack.
Surendralal Lanca Karsanbhai: I want to highlight the software and control layer, which is relevant across the power landscape for Janet from generation through transmission and distribution.
Surendralal Lanca Karsanbhai: The ovation automation platform innovation Green portfolio of renewable solutions are purpose built for power generation Greenfield build and plant modernization applications.
Surendralal Lanca Karsanbhai: Together, our Ovation Automation Technology and Green Solutions automate approximately 50% of North America and 20% of global power generation. Emerson's strategic project funnel in power is up 45% year over year, reflecting this emerging potential. And I'd like to mention a key win from the quarter.
Surendralal Lanca Karsanbhai: Together, our ovation automation technology, and Green solutions automate approximately 50% of North America, and 20% of global power generation.
Surendralal Lanca Karsanbhai: Emerson strategic project funnel empower is up 45% year over year, reflecting the emerging potential and I'd like to mention a key win from the quarter.
Surendralal Lanca Karsanbhai: Emerson was selected by a large Midwest utility to modernize nine sites with the latest innovation hardware, software, and cybersecurity solutions. We were awarded based on our demonstrated ability to execute plant modernizations while ensuring safety, quality, and reliability, all vital to the power industry. With the increasing mix of generation sources and rise of distributed resources and microgrids, utilities must now also manage the integration of varying and bidirectional power flows. Aspen Tech's Digital Grid Management, or DGM, software also plays a critical role in managing the ever-increasing complexity of today's grid to maintain stability and control through real-time power management and demand-side management software.
Surendralal Lanca Karsanbhai: Emerson was selected by a large Midwest utility to modernize nine sites with the latest ovation hardware software and cyber security solutions.
Surendralal Lanca Karsanbhai: We were awarded based on our demonstrated ability to execute plant modernizations, while ensuring safety quality and reliability all vital importance in the power industry.
Surendralal Lanca Karsanbhai: With the increasing mix of generation sources and rise of distributed resources and micro grids utilities must now also manage the integration of varying in bi directional power flows.
Surendralal Lanca Karsanbhai: Aspen Tech's group digital grid management or D. G. M. Software also plays a critical role in managing the ever increasing complexity of today's grid to maintain stability and control through real time power management and demand side management software.
Surendralal Lanca Karsanbhai: DGM is a strong participant in these markets with approximately a 40% share in North America and approximately 20% globally. The necessity of grid digitalization is driving investments in the advanced capabilities this software provides, with the market forecasted to grow in the high teens. Emerson's leading products and application expertise across the power landscape make us well positioned to capture the coming investment, both in the U.S. and globally. And we are excited to watch the future of power generation, transmission, and distribution unfold. With that, I will now turn the call over to Michael.
Surendralal Lanca Karsanbhai: D. G. M is a strong participant in these markets with approximately 40% share in North America, and approximately 20% globally.
Michael: The necessity of grid Digitization is driving investments in the advanced capabilities. This software provides with the market forecasted to grow in the high teens.
Michael: Emerson's, leading products and application expertise across the power landscape make us well positioned to capture the coming investments both in the U S and globally and we are excited to watch the future power generation transmission and distribution unfold.
Michael: With that I will now turn the call over to Mike Mike.
Michael J. Baughman: Thanks, all, and good morning, everyone. Please turn to slide 8 to discuss our second quarter financial results. Underlying sales growth was 8%, led by our process and hybrid businesses. Price contributed approximately 3 points of growth, slightly higher than expected due to the mix of our shipments this quarter. Growth was led by Europe, which was up 12%, and Asia, Middle East, and Africa, up 11%.
Michael: Thanks, Laura and good morning, everyone. Please turn to slide eight to discuss our second quarter financial results.
Michael J. Baughman: Underlying sales growth was 8% led by our process and hybrid businesses.
Michael J. Baughman: Price contributed approximately three points of growth slightly higher than expected due to the mix of our shipments this quarter.
Michael J. Baughman: Growth was led by Europe, which was up 12% and Asia Middle East and Africa up 11%.
Michael J. Baughman: The Americas also had solid growth, up 4%. Intelligent devices and software and control grew by 6% and 14%, respectively. Aspen Tech sales increased significantly over the prior year, up 21% on an underlying basis. Discrete automation was down mid-single digits, as expected, due to continued market softness and against a tough prior-year comp.
Michael J. Baughman: The Americas also had solid growth up 4%.
Michael J. Baughman: Intelligent devices and software and control grew by 6% and 14% respectively.
Michael J. Baughman: Aspen Tech sales increased significantly over the prior year up 21% on an underlying basis.
Michael J. Baughman: Discrete automation was down mid single digits as expected due to continued market softness and against a tough prior year comp.
Michael J. Baughman: Test and measurement, which is not included in the underlying measure, contributed $367 million to our net sales, exceeding expectations for the quarter on stronger backlog conversion, while backlog was essentially flat to the prior quarter at $7.55 billion. Adjusted segment EBITDA margin improved 140 basis points to 26 percent, and as Lal mentioned, gross profit margins of 52.2 percent contributed to this margin expansion. Leverage on volume, favorable mix, price, net material deflation, and productivity programs all contributed to the margin improvement. Operating leverage excluding test and measurement was 54%, exceeding expectations.
Michael J. Baughman: Test and measurement, which is not included in the underlying measure.
Michael J. Baughman: <unk> $367 million to our net sales.
Michael J. Baughman: Exceeding expectations for the quarter on stronger backlog conversion.
Michael J. Baughman: Backlog was essentially flat to the prior quarter at 755 billion.
Michael J. Baughman: Adjusted segment EBITA margin improved 140 basis points to 26% and as Laura mentioned gross profit margins of 52, 2% contributed to this margin expansion.
Michael J. Baughman: Leverage on volume favorable mix price net material deflation and productivity programs all contributed to the margin improvement.
Michael J. Baughman: Operating leverage excluding test and measurement was 54% exceeding expectations.
Michael J. Baughman: Test and measurement adjusted segment EBITDA margin was 21.4%, above expectations driven by leverage on slightly higher sales volume, mix, and higher cost actions. Adjusted earnings per share grew 25% to $1.36, and I will discuss additional details on adjusted EPS on the next chart. Lastly, free cash flow improved 32% to $675 million, exceeding expectations, driven by earnings and improved inventory levels. However, acquisition-related costs, integration activities, and higher capex reduced the quarter's free cash flow by approximately $70 million. Please turn to slide 9.
Michael J. Baughman: Test and measurement adjusted segment EBITA margin was 21, 4% above expectations driven by leverage on slightly higher sales volume mix and higher cost actions.
Michael J. Baughman: Adjusted earnings per share grew 25% to $1 36, and I will discuss additional details on adjusted EPS on the next chart.
Michael J. Baughman: Lastly, free cash flow improved 32% to $675 million exceeding expectations, driven by earnings and improved inventory levels.
Michael J. Baughman: Acquisition related costs integration activities and higher capex reduced the quarter's free cash flow by approximately $70 million.
Michael J. Baughman: Please turn to slide nine.
Michael J. Baughman: Adjusted EPS growth of $0.27 was driven entirely by operations, as other non-operating items netted to zero. Software and Control led the growth, contributing $0.18, and Intelligent Devices contributed $0.09. Overall, adjusted EPS grew 25% year-on-year to $1.36. Please turn to slide 10 for details on our updated guidance for Q3 and 2024. Underlying sales are now expected to grow 5.5 to 6.5 percent, which raises the bottom of our February range. Our process and hybrid businesses are performing well and support the outlook for the rest of the year.
Michael J. Baughman: Adjusted EPS growth of 27, <unk> was driven entirely by operations.
Michael J. Baughman: Other nonoperating items netted to zero.
Michael J. Baughman: Software and controls led the growth contributing 18.
Michael J. Baughman: In intelligent devices contributed <unk> <unk>.
Michael J. Baughman: Overall, adjusted EPS grew 25% year on year to $1 36.
Michael J. Baughman: Please turn to slide 10 for details on our updated guidance for Q3 and 2024.
Michael J. Baughman: Underlying sales are now expected to grow five five to six 5%, which raises the bottom of our February range.
Michael J. Baughman: Our process and hybrid businesses are performing well and support the outlook for the rest of the year.
Michael J. Baughman: We still expect underlying sales of our discrete automation segment to turn positive in Q4, and we are watching the order progression, which we believe is now delayed by one quarter. Reported net sales growth is expected to be 15% to 16%, with test and measurement contributing approximately 10 points of growth or approximately $1.5 billion in sales, the low end of the February guide, offset by a half point drag from FX. Incremental margins are held at low to mid 40s, which suggests mid 30s incrementals for the second half. The second half will see a change in mix with higher project-related shipments and changes in segment and geographic mix.
Michael J. Baughman: We still expect underlying sales of our discrete automation segment to turn positive in Q4, and we are watching the orders progression, which we believe is now delayed by one quarter.
Michael J. Baughman: Reported net sales growth is expected to be 15% to 16% with test and measurement contributing approximately 10 points of growth or approximately $1 5 billion in sales the low end of the February guide.
Michael J. Baughman: Offset by a half point drag from FX.
Michael J. Baughman: Incremental margins are held at low to mid forties, which suggest mid thirties incrementals for the second half.
Michael J. Baughman: The second half, we'll see a change in mix with higher project related shipments and changes in segment and geographic mix.
Michael J. Baughman: Adjusted EPS is increased to $5.40 to $5.50. Test and measurement is still expected to contribute $0.40 to $0.45 as we accelerate synergy activities. We now expect to have $100 million of synergies realized this year. Aspen Tech lowered their guidance yesterday afternoon, and we have incorporated the latest revisions into our guidance.
Michael J. Baughman: Adjusted EPS has increased to $5 40.
Michael J. Baughman: To $5 50.
Michael J. Baughman: Test and measurement is still expected to contribute 40 to 45.
Michael J. Baughman: As we accelerate synergy activities.
Michael J. Baughman: We now expect to have $100 million of synergies realized this year.
Michael J. Baughman: Aspen Tech lowered their guidance yesterday afternoon, and we have incorporated the latest revisions into our guide.
Michael J. Baughman: We now expect Aspen Tech to deliver $0.30 to $0.32 for the year versus the $0.32 to $0.34 in our February guidance. Free cash flow performance in the first half of the year and our updated earnings projections support free cash flow for the year of approximately $2.7 billion. Share repurchase, dividend, and tax rate expectations are unchanged from February. For the third quarter, we expect underlying sales growth between 3% and 4.5% and leverage in the mid-30s due to the project and geographic mix I described earlier.
Michael J. Baughman: We now expect <unk> to deliver 30 to 32 for the year versus the 32 to 34 zones in our February guidance.
Michael J. Baughman: Free cash flow performance in the first half of the year and our updated earnings projected projections support free cash flow for the year of approximately $2 7 billion.
Michael J. Baughman: Share repurchase dividend and tax rate expectations are unchanged from February.
Michael J. Baughman: For the third quarter, we expect underlying sales growth between three and four 5% and leverage in the mid thirties due to the project and geographic mix I described earlier.
Michael J. Baughman: Adjusted earnings per share is expected to be between $1.38 and $1.42. And finally, test and measurement sales and earnings per share contribution are expected to be at similar levels we saw in quarter two as we watch orders carefully. Our first-half performance exceeded expectations, and we are excited to continue delivering strong results. Our transformed portfolio is meaningfully improved with higher profitability driven by gross profit margins above 50% and higher organic sales growth driven by secular trends, and our Emerson management system continues to drive operational efficiency. With that, I'll turn it over to the Q&A portion of our call.
Michael J. Baughman: Adjusted earnings per share is expected at $1 38 to $1 42, and finally test and measurement sales and earnings per share contribution is expected to be at similar levels. We saw in quarter two as we watch orders carefully.
Michael J. Baughman: Our first half performance exceeded our expectations and we are excited to continue delivering strong results. Our transform portfolio is meaningfully improved with higher profitability driven by gross profit margins above 50% and higher organic sales growth driven by secular trends.
Michael J. Baughman: And our and our Emerson management system continues to drive operational excellence.
Speaker Change: With that I'll turn it over to the Q&A portion of our call.
Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question is from Davis-Scott Mellios Research. Please go ahead.
Speaker Change: We will now begin the question and answer session.
Operator: To ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
Speaker Change: With any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Operator: Yes.
Operator: Okay.
Operator: Okay.
Speaker Change: The first question is from David Scott.
Speaker Change: Research. Please go ahead.
Scott Reed Davis: Hey, good morning everybody, Lyle, Mike, and Rob, and Colleen.
Speaker Change: Hey, good morning, everybody.
Colleen Mettler: Good morning, Scott.
Speaker Change: Good morning, Scott.
Scott Reed Davis: There's a lot of good detail in the slides, but I wanted to start with just a sense of the synergies that you're seeing and just get a little bit more color on what you're seeing, what you're getting as far as structural cost out, what may have to come back when... When revenues recover, and how we might think about, you know, what that asset really looks like in kind of a more normalized situation from a profit perspective.
Davis-Scott: A lot of good detail in the slides, but I wanted to start with just a sense of the synergies.
Scott Reed Davis: That you are seeing and just get a little bit more color on what you know what.
Scott Reed Davis: What youre seeing what youre getting as far as structural cost out what what may have to come back when.
Scott Reed Davis: When revenues recover.
Scott Reed Davis: How we might think about.
Scott Reed Davis: What really that asset looks like and kind of a more normalized.
Scott Reed Davis: Situation from a profit perspective.
Surendralal Lanca Karsanbhai: Yeah, Scott. I'll say a few words and let Ram add some color to this. First and foremost, we're very excited about the company. It's a far better company than we expected in terms of the quality of the people, the quality of the technology, the loyalty of the customer base, and the opportunity to grow and expand as a leader in the industry. So we're very pleased. We have a great management team in place, and what we're most pleased about is the responsiveness of that management team to market conditions.
Scott Reed Davis: Yes, it's Scott I'll say, a few words on that Rob add some color to this.
Surendralal Lanca Karsanbhai: First and foremost we are very excited about the company.
Surendralal Lanca Karsanbhai: It's a far better company that we expected in terms of the quality of people the quality of the technology.
Surendralal Lanca Karsanbhai: The loyalty of the customer base and the opportunity to grow and expand.
Surendralal Lanca Karsanbhai: As a leader in that in the industry. So we were very pleased we have a great management team in place.
Surendralal Lanca Karsanbhai: And we're most pleased about is the responsiveness of that management team to the market conditions. This is now being run as an Emerson company.
Surendralal Lanca Karsanbhai: This is now being run as an Emerson company, and they've gotten ahead of the activities around cost takeout in a very diligent way. This was all laid out prior to the close with the teams. So we're essentially working out a playbook. We have now moved into some of the actions, as I referenced, that were outlined for 2025 that have been moved forward. But none of these are elements that we believe we necessarily have to add back. This is really driving efficiency in the company and positioning it for the SG&A structure to be more competitive, a little leaner on a go-forward basis. Ram, if you don't mind.
Ram: And they've gotten ahead of the activities around cost take out in a very diligent way. This was all laid out.
Surendralal Lanca Karsanbhai: Prior to close with the with the teams. So we're essentially working down our playbook. We now moved into some of the actions as I referenced that were outlined for 2025 that we didn't move forward, but none of these are elements that we believe we necessarily have to add back this is really driving around efficiency.
Ram: In the company and position it to the SG&A structure.
Ram: To be more competitive a little leaner on a go forward basis raw material, if you don't mind.
Ram R. Krishnan: Yeah, and just to add to that, I think the balanced approach around G&A, the optimization of the go-to-market, optimizing and focusing the R&D efforts on critical growth factors that are going to pay a lot of benefit for us as the market recovers, and that's really what we've been focused on. Obviously, we are seeing opportunities in logistics and supply chain, which is additional to what we had originally planned, but net-net, the $185 million we've committed to is a programmatic approach that is divided across these four segments, and we've been able to accelerate these actions just given the environment we're in, mostly because these were all well-planned out and we are able to pull forward these initiatives given that they've been thought out and the teams are actioning them at a rapid pace.
Ram: And just to add to that I think.
Ram R. Krishnan: The balanced approach around G&A.
Ram R. Krishnan: Optimization of the go to market optimizing and focusing the R&D efforts on critical growth factors that are going to.
Ram R. Krishnan: Pay a lot of benefit for us as the market recovers.
Ram R. Krishnan: That's really what we've been focused on obviously, we are seeing opportunities in logistics and supply chain, which is additional to what we had originally planned but net net $185 million, we've committed to as a as a programmatic approach that is divided across these four segments and we've been able to access.
Ram R. Krishnan: Right. These actions just given the environment. We're in mostly because these were all well planned out and we are able to pull forward. These initiatives given that they've been bought out and the teams are actioning them at a rapid pace.
Scott Reed Davis: That's helpful. Hey guys, I'm looking at slide seven on the DGM and the Ovation.
Ram R. Krishnan: Okay.
Ram R. Krishnan: Paul.
Speaker Change: Hey, guys just.
Speaker Change: I'm looking at slide seven it.
Scott Reed Davis: D G M in the ovation and give us a sense of how this upgrade cycle works.
Scott Reed Davis: Power demand obviously in grid, we I think we're all quite aware of what's going on there but.
Scott Reed Davis: Does it require.
Speaker Change: No I mean, maybe just a little bit more color on how these these too.
Scott Reed Davis: The GM innovation kind of today integrated a sell together is there any way to to kind of.
Scott Reed Davis: Get more benefit I guess from having the two assets versus.
Speaker Change: The one.
Speaker Change: So a little bit of an open ended question I'm, just trying to get a sense of the materiality and the upgrade cycle cycle here, but maybe the best way to start with that is just to understand if those assets actually can integrate.
Scott Reed Davis: Give us a sense of how this upgrade cycle works. The power demand, obviously, and grid, I think we're all quite aware of what's going on there, but does it require, maybe just a little bit more color on how these two, DGM and Ovation, do they integrate? Do they sell together?
Surendralal Lanca Karsanbhai: Is there any way to kind of get more benefit, I guess, from having the two assets versus... It's a little bit of an open-ended question; I'm just trying to get a sense of the materiality and the upgrade cycle here. But maybe the best way to start with that is just to understand if those assets can actually integrate and work together and if that's a benefit. Yeah, I'll certainly be happy to comment. I think there are three very important elements.
Speaker Change: And work together and if that's a benefit to the utility. Thanks, Yeah, well certainly be happy to comment I think theres three three very important elements.
Surendralal Lanca Karsanbhai: I think the element of materiality relates to the high growth in the outlook of projects and activity. We saw that 45% expansion in the funnel. We haven't seen that level of activity in power generation in a long time, with positive growth in North America, again driven by the data center demand that we outlined. Secondly, inside of the generation capacity, there certainly are opportunities for optimization software. That is an area that is really untapped, and that's a synergy opportunity that exists between Ovation and Aspen Tech.
Speaker Change: Element of materiality relates to the high growth in the outlook of projects and activity.
Surendralal Lanca Karsanbhai: So that 45% expansion in the funnel, we haven't seen that level of activity in power generation, a long time with a positive.
Surendralal Lanca Karsanbhai: Growth in North America, again, driven by the data center demand that I that we outlined.
Surendralal Lanca Karsanbhai: Secondly inside of that generation capacity is certainly there are opportunities for optima optimization software.
Surendralal Lanca Karsanbhai: That is an area that really is untapped.
Surendralal Lanca Karsanbhai: And that's a synergy opportunity that exists.
Surendralal Lanca Karsanbhai: Between ovation and Aspen Tech and then thirdly, certainly the leverage of our.
Surendralal Lanca Karsanbhai: And then thirdly, certainly the leverage of a strength in our utilities' customer base takes us outside the walls of the plants into the transmission distribution. And even though there are not technology synergies between DGM and Ovation per se, there certainly are significant customer synergies and credibility that has been built with Ovation that takes us into the transmission distribution software.
Surendralal Lanca Karsanbhai: Our strength in our utilities of the customer base takes us outside the walls of the plants into the transmission distribution and even though there are not technology synergies between D. G. M innovation per se. They certainly are significant customers synergies and and credibility that's been built with ovation that takes us into.
Surendralal Lanca Karsanbhai: The transmission distribution software.
Scott Reed Davis: Very helpful. Thank you. Best of luck this year and the rest of the year.
Speaker Change: Very helpful. Thank you best of luck this year for the rest of the year. Thanks.
Speaker Change: Thanks, Scott Thanks, Scott.
Nigel Edward Coe: The next question is from Co-Nigel Wolf Research; please go ahead.
Scott Reed Davis: The next question is from Nigel of Wolfe Research.
Speaker Change: Please go ahead.
Nigel Edward Coe: Great, thanks for the question guys, good morning.
Speaker Change: Great. Thanks for the question guys. Good morning, Hey, good morning Nigel.
Nigel Edward Coe: So just want to dig into the operating leverage assumptions for the back half of the year. I think you said mid-30s on sort of mix changing. I think we've had this MRO mix now of 65% or so for the last couple of years. Are we starting to see that mix changing notably in the back half, maybe getting towards, maybe, I don't know, 60% MRO? And do you expect this to continue in 2025? It feels like it should be, but do you think 2025 is more like the mid-30s, or do you still think you can maintain 40% plus operating leverage in 2025?
Nigel Edward Coe: Good morning, So just wanted to dig into the operating leverage assumptions in the back half of the year. I think you said mid Thirty's on also the mix changing.
Nigel Edward Coe: I think we've had this MRO mix now 65% or so for the last you know.
Nigel Edward Coe: Couple of years I'll be starting to see that mix changing notably in the back half maybe getting towards maybe I don't know, 60% MRO and does this do you expect this to continue.
Nigel Edward Coe: Feels like it should be but do you think 25 is more like a mid thirties.
Nigel Edward Coe: Do you still think you can maintain food spend plus.
Nigel Edward Coe: Operating leverage in 2020 five.
Michael J. Baughman: Yes, Nigel, it's Mike. So, as we look to the back half of the year, the mixed change is meaningful, and you're correct. We've been at 65% MRO, which is about where we were for the second quarter as well. That is going to drift down on us as we go into the second half. We also benefited this past quarter quite a bit from price. We'll continue to get the roughly 2% price, but it won't be the 3% we don't believe that we saw in the last quarter.
Nigel Edward Coe: Yes, Nigel it's Mike So as we look to the back half of the year. The mix change is meaningful and you're correct. We have been at the 65% MRO, which is which is about where we were for the second quarter as well that is going to.
Michael J. Baughman: Drift down on us as we go into the second half. We also benefited this past quarter quite a bit from price will continue to get the roughly 2% price, but it won't be.
Michael J. Baughman: The 3%, we don't believe that we saw.
Michael J. Baughman: In the last quarter. So those are the big things. There's also a geographic mix element to this with the U S growth moderating relative to two other geographies and then if you start to think about the 54% that we printed this quarter versus what we're expecting in the second quarter.
Michael J. Baughman: So, those are the big things. There's also a geographic mix element to this, with U.S. growth moderating relative to other geographies. And then, if you start to think about the 54% that we printed this quarter versus what we're expecting in the second quarter, there was an uplift this quarter from Aspen Tech, which had a great quarter, that will moderate in the back half of the year. So, you need to put that into your thinking as you go forward as well.
Michael J. Baughman: There was an uplift this quarter from Aspen Tech, which had a great quarter.
Michael J. Baughman: That will moderate in the back half of the year. So you need to put that into your thinking as you go forward as well.
Nigel Edward Coe: Okay, I'm guessing it comes in at 25, but if you do think that continues, I appreciate that comment. But on national instruments, it just feels like, just to paraphrase the way you set this up for the second half, the third quarter looks pretty flat sequentially on sales, call it 360-ish on sales, and then we're picking up towards 400 in the fourth quarter. I just want to verify that the pickup in the fourth quarter is entirely seasonal. I think when you go back in time, we typically see that coming through in that quarter. So it doesn't feel like we're taking a huge cycle.
Michael J. Baughman: Okay, I'm guessing you'll come from 'twenty five, but if you do you think that continues at that I appreciate that that come in so national instruments. It just feels like so just to just to paraphrase the way you're setting this up to the second half third quarter looks pretty flat sequentially on sales call. It $3 60 ish.
Nigel Edward Coe: And then with picking up towards towards 400 in the fourth quarter.
Nigel Edward Coe: I just wanted to verify that pick up in full in the fourth quarter is entirely seasonal I think when you go back in time, we typically see that coming through in the quarter. So it doesn't feel like we're taking a huge cycle cool there and then with the synergies we expect the margins to continue to move higher sequentially through the back up with you.
Nigel Edward Coe: Yes.
Michael J. Baughman: I think you summarized it well, yes, yes, okay, all right, correct, and we have 25 questions. I mean, it's early for us to
Speaker Change: I think you summarized it well.
Michael J. Baughman: Yes.
Speaker Change: Yes, okay.
Michael J. Baughman: Correct.
Michael J. Baughman: So you got 25 question I mean, its so early for us to <unk> 25, but at the end of the day, we don't expect leverage rates in 25 to be materially different from what we're going to deliver in 'twenty four.
Nigel Edward Coe: Okay, that's great. Thanks, guys.
Speaker Change: Okay. That's great. Thanks, guys.
Andrew Alec Kaplowitz: The next question is from Andy Kaplowitz, Citigroup; please go ahead.
Nigel Edward Coe: The next question is from Andy Kaplowitz Citigroup. Please go ahead.
Andrew Alec Kaplowitz: Hey, good morning, everyone.
Andrew Alec Kaplowitz: Hi, Andy.
Andrew Alec Kaplowitz: Well, I know you're still expecting mid-single-digit growth in the second half after the negative one in Q2. So maybe you could discuss how you start off Q3 in April, and give us a little more color on the visibility regarding that mid-single-digit growth in the second half. Do you have visibility into the process in hybrid staying at that mid-single-digit level? And then is the mid-single-digit organic growth kind of weighted to Q4 given the turn in discrete then?
Andrew Alec Kaplowitz: Well I know you're still expecting mid single digit order growth in the second half and that's in the negative one in Q2. So maybe you could discuss how you started off Q3 and April give us a little more color and visibility regarding that mid single digit growth.
Andrew Alec Kaplowitz: In the second half do you have visibility in the process and hybrid staying at that mid single digit level and then in the mid single digit organic growth kind of weighted to Q4, given the turn in discrete.
Surendralal Lanca Karsanbhai: Yeah, certainly, Andy. Look, we're off to a good start in Q3. April over April of last year is up double-digit, 10% on orders. Certainly, and the three-month has turned positive as well. So, we flipped that to the low single digits on a three-month basis, trailing three-month basis. So, feel good about the start. Feel good about the funnel and the conversion, and the markets. And it's, again, driven by the process and hybrid environment across most of the world areas. Discrete, we're watching very carefully.
Speaker Change: Yes, certainly certainly Andy look we were off to a good start in Q3 April over April of last year is up double digit 10% on orders.
Surendralal Lanca Karsanbhai: Certainly in the three months has turned positive as well so we flipped that to the low single digits on a three month basis trailing three month basis. So feel good about the start feel good about the funnel and the conversion and the markets and it's again driven by the process and hybrid environment.
Surendralal Lanca Karsanbhai: Across most of the world areas discrete we're watching very carefully as we said we expect that to turn now a quarter later than originally expected, but we're seeing green shoots.
Surendralal Lanca Karsanbhai: As we said, we expect that to turn now a quarter later than originally expected, but we're seeing green shoots that started developing in March and into April, particularly in Western Europe, in Germany, around machine makers and some of the discrete industries. So, an optimistic start for the quarter. Again, it gave us confidence as we tested our businesses and worked out a process that exiting the year in that mid-single-digit, low single-digit type of range on orders is very, very feasible.
Surendralal Lanca Karsanbhai: Sorry, developing in March and into April, particularly in Western Europe.
Surendralal Lanca Karsanbhai: In Germany our.
Surendralal Lanca Karsanbhai: Around machine makers and some of it the screen dentistry, so optimistic start for the quarter again gave us the confidence.
Surendralal Lanca Karsanbhai: As we tested our businesses and worked out process that are exiting the year in that mid single digit low single digit type of range. On orders is is is very very feasible.
Andrew Alec Kaplowitz: I'll just do a quick follow-up to that last comment. Did you get a couple larger projects in April? Is that kind of what happened this week?
Surendralal Lanca Karsanbhai: Just a quick follow up to that last comment did you just get a couple of larger project in April that kind of what happened to Sweden No no no. There is theres funnel conversion A&D, but nothing exemplary there.
Surendralal Lanca Karsanbhai: No, no, there's funnel conversion, Andy, but nothing exemplary there.
Andrew Alec Kaplowitz: Okay, and then maybe, what are your customers telling you on the NATI side as to why the recovery is so delayed there? And if NATI's still slower to turn than you'd currently expect, do you still have more flexibility to sort of continue to push the envelope on integration costs out? And ultimately, I know Ram says, you know, you're still targeting the 185, but could you do more than that?
Speaker Change: Okay, and then maybe what are your customers telling you on the <unk> side as to why the recoveries. So delayed there and if not is still slower to turn than you. Currently expect do you still have more flexibility to sort of continue to push the envelope on integration cost out and ultimately I know Ron said, you know you're still targeting the 185, but.
Andrew Alec Kaplowitz: Could you do more than that.
Surendralal Lanca Karsanbhai: No, certainly. Look, I think the team has a great set of ideas on their walls in terms of opportunities to drive efficiency and productivity in the business. But we believe that, ultimately, this is a growth business, and while we're doing this, we're driving investments in core technology programs so that we can hit the ground running. We're working on customer demand; both Ram and myself, alongside the management team at National Instruments, are well engaged with the customers.
Andrew Alec Kaplowitz: No certainly look I think the team has a great set of ideas on their on their walls in terms of opportunities to drive efficiency and productivity in the business, but we believe that ultimately this is a growth business.
Surendralal Lanca Karsanbhai: And while we're doing this we're driving investments in core technology programs.
Surendralal Lanca Karsanbhai: So that we hit the ground running we're working on customer demand, both Ron and myself alongside the management team at National instruments, as well engaged with with the customers Rommel actually speak App and I'd connect in a couple of weeks along with <unk>, two which will be a pivotal moment for us and be a very successful event.
Surendralal Lanca Karsanbhai: Ram will actually speak at NI Connect in a couple weeks along with RETU, which will be a pivotal moment for us and be a very successful event in Dallas, I believe, Ram, this year. So, look, we're very excited about the potential in the business and this business turning positive in early 2025. Ram, do you have a few words?
Surendralal Lanca Karsanbhai: Rent in Dallas, I believe that round this year.
Surendralal Lanca Karsanbhai: Look we're very excited about the potential in the business then.
Ram: And this this business turning positive in early 2025 from a few words and I think to answer your specific question as it relates to customer what are we hearing from customer certainly segments like the defense segment of what they called Aerospace Defense and government segment are positive I think we're going to get into.
Ram R. Krishnan: Yeah, and I think to answer your specific question as it relates to customers, what are we hearing from customers, certainly segments like the defense segment or what they call the aerospace defense and government segment are positive. I think we're going to get into easier comparisons.
Ram R. Krishnan: Frankly, April was also a very good month for us, given the expectations for T&M, which was positive for us. And I think really the only two segments we haven't seen the turn, which is why we believe it's at least one to two quarters delayed in T&M are semiconductors and Asia. North America actually turned positive in April, and Europe's turned positive. We feel good about the ADG segment, and we're cautiously optimistic about transportation, but the portfolio segment, particularly driven by Asia and then semiconductors, is where we still have to see recovery. We're watching that very carefully. Appreciate all the
Speaker Change: Easier comparisons frankly April was also a very good month for <unk>.
Ram R. Krishnan: Given the expectations for TNF, which was positive for us.
Ram R. Krishnan: And I think really the only two segments, we haven't seen that turn which is why we believe it's at least one to two quarter delayed in PNM is semiconductors and Asia North America actually turned positive in April Europe Stern positive, we feel good about the AVG segment and what cost.
Ram R. Krishnan: Mostly optimistic about transportation, but the portfolio segment, particularly driven by Asia, and then semiconductors is where we still have to see recovery, we're watching that very carefully.
Andrew Alec Kaplowitz: I appreciate all the color, guys.
Speaker Change: Appreciate all the color guys.
Speaker Change: Thanks, Dan.
Deane Michael Dray: The next question is from Deane Dray of RBC Capital Markets. Please go ahead.
Andrew Alec Kaplowitz: The next question is from Deane Dray RBC capital markets. Please go ahead.
Deane Michael Dray: Thank you. Good morning, everyone. Good morning, Deane.
Deane Michael Dray: Thank you and good morning, everyone.
Surendralal Lanca Karsanbhai: It just came up a couple of times in the prepared remarks, and maybe just if you could walk us through what's different. But you said that there was better backlog conversion than expected. So is this because of a customer request, they want it earlier, that you were able to have better productivity of throughput? Just how did that differ from what the original plan was for the backlog conversion?
Deane Michael Dray: Morning Deane.
Deane Michael Dray: This came up a couple of times in the prepared remarks, and maybe just if you could walk us through what's different but you said that there was better backlog conversion than expected. So is this on.
Surendralal Lanca Karsanbhai: One because of our customer request they want it earlier that you were able to have better productivity of throughput.
Surendralal Lanca Karsanbhai: Just how did that differ from what the original plan was on the backlog conversion.
Surendralal Lanca Karsanbhai: Yes, so Deane, you know, simplistically responsive supply chains. We had, you know, our supply chains continued to improve, our plant output has continued to improve, particularly in our measurement solutions business. There was backlog conversion and test and measurement as well. So the simple answer is we overshipped what we thought we would in the quarter, primarily because our supply chains responded much better, and lead times are down to pre-COVID levels, which is a very good sign for us.
Speaker Change: Yeah, So deane.
Surendralal Lanca Karsanbhai: Simplistically.
Surendralal Lanca Karsanbhai: Sponsor of supply chain as we had in our supply chain is continuing to improve our plant output has continued to improve particularly in our measurement solutions business. There was backlog conversion in test and measurement as well. So the simple answer is we over shipped what we thought we would in the quarter primary.
Surendralal Lanca Karsanbhai: Really because our supply chain has responded much better and lead times are down to pre COVID-19 levels, which is a very good sign for us.
Michael J. Baughman: Sorry, just to build on that a little bit related to that, those being two higher GP businesses helps the profitability in the quarter as well.
Surendralal Lanca Karsanbhai: It tells them.
Surendralal Lanca Karsanbhai: Sorry, just to build on that a little bit of Relatedly, those being to higher GP businesses helps the profitability in the quarter as well.
Deane Michael Dray: It tells you how far we've progressed on supply chain normalization, where that wasn't the first thing I thought that you were able to ship more, so that's all good news. And then just a follow-up on the test and measurement, Natty, on order visibility, is there maybe some color on the demand and whether you missed any orders? Was the demand out there and you missed orders, or was the demand not there? Are you engaged in any more selective? Just some color there would be helpful. No, we did not miss any orders. I think orders should be given.
Michael J. Baughman: It tells you how far we've progressed on supply chain normalization, where that wasn't the first thing I'm thinking that you were able to ship more so.
Deane Michael Dray: That's all good news and then just a follow up on the test and measurement natty on the orders visibility is there.
Deane Michael Dray: Maybe some.
Deane Michael Dray: Color on that demand.
Deane Michael Dray: And weather did you Miss any orders was the demand out there and you missed orders or is the demand not there.
Deane Michael Dray: Are you engaged in any more selectivity on just some color there would be helpful. No. We did not miss any orders I think orders came in ASP, our expectations and I think the way we've actually baked into the plan is even if orders slay flat to slight sequential growth for what we did in Q2 <unk>.
Ram R. Krishnan: No, we did not miss any orders. I think orders came in as per expectations, and I think the way we've actually baked in the plan is even if orders slay flat to slight sequential growth from what we did in Q2, given the easier comparisons, we'll improve in the second half and then go positive into 25. Certainly, as Lowell mentioned, the green shoots in the defense part of their business. We've been very strong.
Ram R. Krishnan: The easier comparisons will improve in the second half and then go positive into 'twenty five.
Ram R. Krishnan: As Laura mentioned, the green shoots and defense part of their business.
Ram R. Krishnan: We're starting to see projects unlocked on the battery testing side from an EV perspective, so we're starting to see activity come through. Again, the one segment which hasn't seen the recovery, which typically, you know, we play in RF and mixed signal in semiconductors, the memory and the logic piece is not a big piece of our business. We expect that to come back first, followed by activity in RF and mixed signal chip testing. So that recovery is really what's pushed out by six months. But outside of that, everything is coming in as expected.
Ram R. Krishnan: Been very strong we are starting to see projects unlock onto battery testing side from an EV perspective, so we're starting to see activity come through again, the one segment, which hasn't seen that recovery, which typically we play in RF and mixed signal in semiconductors, the memory and the logic piece was not a big piece of our business we expect.
Ram R. Krishnan: That to come back first followed by the activity in our RF and mixed signal chip testing. So that recovery is really what's pushed out by six months, but outside of that everything is coming in as expected.
Speaker Change: Thank you.
Charles Stephen Tusa: The next question is from Steve Tusa, JP Morgan. Please go ahead.
Ram R. Krishnan: The next question is from Steve Tusa of Jpmorgan. Please go ahead.
Charles Stephen Tusa: Hi, good morning. Good morning, Steve.
Charles Stephen Tusa: [laughter].
Charles Stephen Tusa: Hi, good morning.
Charles Stephen Tusa: Good morning, Steve.
Charles Stephen Tusa: So, I'm just trying to kind of calibrate the second half a little better. I think you guys typically, from a seasonal perspective, more or less accelerate sequentially as you move through the year. You know, this year seems like it's a bit more, you know, kind of flat just from a quarter-to-quarter sales perspective and then with much less of a ramp from 3Q to 4Q. Getting on the top line seasonally, which is not normal, is a little slower than usual, on the core business outside of Natty and outside of Aspen.
Charles Stephen Tusa: I'm, just trying to kind of calibrate that the second half a little better.
Charles Stephen Tusa: I think you guys typically from a seasonal perspective.
Charles Stephen Tusa: <unk> less accelerate sequentially as you move through the year.
Charles Stephen Tusa: This year it.
Charles Stephen Tusa: It seems like it's a bit more kind of flat.
Charles Stephen Tusa: Just from a quarter to quarter sales perspective, and then with much less of a ramp from <unk> to <unk>.
Charles Stephen Tusa: And anything on the topline seasonally that.
Charles Stephen Tusa: Is not as is not normal is a little slower than usual.
Charles Stephen Tusa: On the cost of the core business outside of Natty and outside Aspen.
Surendralal Lanca Karsanbhai: No, Steve, actually, the way I see it is our second half versus the first half will be up high single digits sequentially from a sales perspective. So it is consistent with the normal seasonality of how our core business minus Natty minus Aspen performs. Now, obviously, Aspen is lumpy, and that's in the underlying number, so that could mask the normal seasonality that we see.
Charles Stephen Tusa: No Steve actually.
Surendralal Lanca Karsanbhai: The way I see it is our second half versus first half will be up high single digits sequentially from a sales perspective. So it is consistent with.
Surendralal Lanca Karsanbhai: The normal.
Surendralal Lanca Karsanbhai: Seasonality of how our core business minus 90 minus Aspen performs not obviously aspen is lumpy and thats from the underlying number so not good mask.
Surendralal Lanca Karsanbhai: The normal seasonality that we see but in the core base hammerson operations. The second half the first half is up high.
Surendralal Lanca Karsanbhai: High single digit sequentially from a sales perspective.
Charles Stephen Tusa: Given the mix of MRO is so high today and the growth really isn't that strong, is the mix really changing that much? How much is the lower margin project stuff going to be up in the second half, more than MRO? Can the mix change that much quarter to quarter? No, Steve, it doesn't.
Surendralal Lanca Karsanbhai: And I guess, given given the mix of MRO is so high today and the growth you know really isn't that strong.
Charles Stephen Tusa: Is the mix really changing that much I mean is the is the how much is the kind of lower margin projects stopped going to be up.
Charles Stephen Tusa: Look and have more than MRO, you know what I mean like he can the mix change that much quarter to quarter no. It doesn't so look we were at 65%.
Surendralal Lanca Karsanbhai: So look, we were at 65% in 2023. In Q2, we were at 64%. So there was a point shift. That may move by yet another point as we go through the year, but no, you're right. And the underlying strength of MRO in our process and hybrid business is still intact.
Surendralal Lanca Karsanbhai: In Q in 2023 in Q2, we were at 64. So there was a point shift that may move yet another point as we go through the year, but you are right in the underlying strength of MRO in our process and how the business is still intact.
Charles Stephen Tusa: And as certainly we go through the summer and approach the fall averages and STOs and turnaround opportunities, we look at that, at least from this point in time, rather positively as well. And then, just one last one on Natty. I haven't done the math on the 3Q guide, but is that down sequentially and then up sequentially in the fourth quarter? It looks to me like, you know, the revenue run right now, at least for the second half, versus 2Q is basically flattish at around 370 or something like that. Is that the right construct for Natty in the second half?
Charles Stephen Tusa: There is certainly we go through the summer and approach the fall outages and S T OS and turnaround opportunities.
Charles Stephen Tusa: We look at we look at that at least from this point in time, rather positively as well. So that's what's going to play into this as we go through the second half enhanced gives us confidence also on that.
Charles Stephen Tusa: On that exit rate on orders for the year.
Charles Stephen Tusa: And then just one last one on <unk>.
Charles Stephen Tusa: I don't I haven't done the math on the <unk> guide, but is.
Charles Stephen Tusa: Is that down sequentially, and then up sequentially in the fourth quarter. It looks to me like you know the revenue run rate now at least for the second half versus <unk> was basically flattish at around $3 70, or something like that is that is that the right construct for <unk> in the second half.
Charles Stephen Tusa: So, flat Q3 sequentially.
Speaker Change: So flat Q3 sequentially up in Q4 mhm, yeah. So it's so it's bottomed the revenues at the bottom there Yep Yep Yep. Thank you.
Charles Stephen Tusa: Yes, so it's so it's bottomed the revenues at the bottom there. Yep. Yep. Thank you.
Speaker Change: Thanks, Steve.
Joe O'dea: The next question is from Joe O'Dea, with Wells Fargo. Please go ahead.
Charles Stephen Tusa: The next question is from Joe O'dea of Wells Fargo. Please go ahead.
Joe O'dea: Hi, good morning.
Joe O'dea: Can you dig in a little bit on the growth trends in measurement and analytical and final control? I mean, measurement and analytical, organic, you know, low double digits, maybe even touch low teens this year, final control, mid single digits, just some of the differences in those growth rates, what you're seeing on the measurement side versus what you're seeing on the final control side.
Joe O'dea: Good morning, Jonathan.
Joe O'dea: Can you dig in a little bit on the growth trends in measurement and analytical and final control I mean, it seems like measurement and analytical organic low double digits, maybe even touch low teens. This year final control mid single digits, just some of the differences in those growth rates, what you're seeing on the measure.
Joe O'dea: <unk> side versus what Youre seeing on the final control side.
Surendralal Lanca Karsanbhai: So, the measurement solutions this year, you're spot on; it's going to grow faster than final control primarily because that was the business that suffered the most from a backlog bill due to lead times, and that backlog's coming down. So the delta in growth rates between final control and measurement solutions from a sales perspective is purely that backlog dynamic. Order rates for both businesses, which is a signal of the underlying demand with both businesses being exposed to process hybrid markets, are relatively the same mid to high single digit.
Joe O'dea: So.
Surendralal Lanca Karsanbhai: Measurement solutions this year, you're spot on there it's going to grow faster than final control, primarily because that was the business that suffered the most from a backlog build due to lead times those that backlog is coming down so the delta in growth rates between final control and measurement solutions from a sales perspective is purely that backlog dynamic.
Surendralal Lanca Karsanbhai: Order rates for both businesses, which is a signal of the underlying demand with both businesses being exposed to process hybrid markets relatively the same mid to high single digits.
Joe O'dea: Got it. And then it looks like on Aspen Tech, the fourth quarter EBITDA is implied down something in the neighborhood of kind of $20 million year over year. Is that more revenue-related, or margin-related, just to understand, kind of line of sight into that, if that's the sort of ballpark what we're looking at? Yeah, so
Speaker Change: Got it and then.
Surendralal Lanca Karsanbhai: It looks like an Aspen tech the fourth quarter EBITA is implied down something in the neighborhood of $20 million year over year is is that more revenue related margin related just to understand kind of line of sight into that if that's sort of ballpark what we're looking at.
Michael J. Baughman: Yeah, so ballpark, that's what we're looking at. It is lumpy given ASC 606 and we'll continue to work on Aspen's fourth quarter. But at this point, yeah, it's forecasted to be down from
Joe O'dea: Yeah.
Joe O'dea: So ballpark, that's what we're looking at it as lumpy given the ASC 606, and we will continue to work the ASP in the fourth quarter, but at this point, yes, it's forecasted to be down from Q3.
Speaker Change: Okay. Thanks, a lot.
Joe O'dea: The next question is from Brett Linzey Mizuho. Please go ahead.
Brett Logan Linzey: The next question is from Brett Linzey Mizuho. Please go ahead.
Brett Logan Linzey: Hey, good morning. Thanks. Hey, I wanted to come back to the power franchise. So I imagine there's an opportunity for the new build, but also the retrofits on the installed basis. Some of these LTSAs expire, you know, with some of your peers out there.
Brett Logan Linzey: Hey, good morning. Thanks.
Speaker Change: Wanted to come back to the power franchise. So I imagine there is an opportunity on the newbuild, but also the retrofits on the installed.
Brett Logan Linzey: Based on some of these <unk> expire.
Speaker Change: With some of your peers out there is there a way to frame the content per unit or megawatt and then any any runway on some of the retrofits.
Brett Logan Linzey: Is there a way to frame the content per unit or megawatt? And then any runway on some of the retrofits? It will.
Surendralal Lanca Karsanbhai: Yeah, we'll give you some perspectives and some guidelines on a 1,200 megawatt combined cycle plant. The project opportunity, or KOV-1 opportunity, is approximately $20 million. It's $5 million in the control system, and approximately $15 million in instrumentation and valves. The lifetime MRO opportunity over a decade is another $20 million of upgrades, and that pays for itself through about a 10-year period. So it's very significant, and you can just calculate that off the megawatts, depending on the size of the plant.
Speaker Change: I mean, we will give you some perspective.
Surendralal Lanca Karsanbhai: Some guidelines on on a 200 megawatt combined cycle plant.
Surendralal Lanca Karsanbhai: The project opportunity or <unk> opportunity is approximately $20 million, it's $5 million in the control system, approximately $15 million of instrumentation and valves.
Surendralal Lanca Karsanbhai: The lifetime MRO opportunity over a decade is another $20 million of upgrades and that lives through about a 10 year period. So it's a very significant and you can just calculate then off the megawatts depending on the size of the plant. So.
Surendralal Lanca Karsanbhai: So certainly, there are upgrade opportunities. That's a lot of what we're seeing in the revamps. We also see, on the nuclear side, an extension of plant life, which is very meaningful for us not just from an innovation perspective with Lessinghaus, but certainly from an instrumentation perspective and valve perspective. So all dynamics in the global power market are pointing very positively.
Surendralal Lanca Karsanbhai: Certainly there are upgrade opportunities that's always a lot of what we're seeing in the revamps.
Surendralal Lanca Karsanbhai: We see also on the nuclear side extension of plant life, which is very meaningful for us not just from an innovation perspective with Westinghouse that certainly from an instrumentation perspective and valve perspective.
Surendralal Lanca Karsanbhai: All dynamics.
Surendralal Lanca Karsanbhai: In the power in the global power market are pointing very positive right now.
Brett Logan Linzey: Great, very helpful. And then just on inventory levels, I know your channel dynamics are a little bit different from peers, but maybe you could just outline where you see inventory in some of those sort of channels. And, you know, specifically at machine builders, inventory levels, I think are a bit elevated, but I was just curious what your assessment characterization is for, you know, the near term here. Yeah, for our discreet business, our discreet...
Speaker Change: Great very helpful. And then just on inventory levels I know your channel dynamics are a little bit different than peers, but maybe you could just frame, where you see inventories and some of those serve channels and.
Brett Logan Linzey: Specifically at machine builders inventory levels, I think are a bit elevated but just curious what your assessment characterization is for.
Brett Logan Linzey: The near term here.
Surendralal Lanca Karsanbhai: Yeah, for our discrete business, our discrete automation business, I think inventory levels are certainly normalized in the channel, so we see no dynamics around that. In the test and measurement business at NI, there are still some elevated levels of inventory in our portfolio business-related channel partners' distribution that should bleed out over the next quarter, which will be helpful for order rates in the portfolio business to turn, but net-net, we don't see any major dynamics around channel inventory that would impact our orders momentum.
Brett Logan Linzey: Yes for our discrete business, our discrete automation business I think inventory levels are certainly normalized in the channel. So we don't we see no dynamics around that.
Surendralal Lanca Karsanbhai: The test and measurement business.
Surendralal Lanca Karsanbhai: There is still some elevated levels of inventory in our portfolio of business related channel partners distribution that should bleed out over the next quarter, which will be helpful for order rates in the portfolio of business to turn but net net we don't see any major dynamics are on channel inventory that would impact our orders will.
Surendralal Lanca Karsanbhai: Now.
Speaker Change: Got it thanks for the color.
Surendralal Lanca Karsanbhai: Okay.
Julian C.H. Mitchell: The next question is from Julian Mitchell, Barclays. Please go ahead.
Surendralal Lanca Karsanbhai: The next question is from Julian Mitchell of Barclays. Please go ahead.
Julian C.H. Mitchell: Yeah.
Julian C.H. Mitchell: Hi, good morning. Maybe I just wanted to start off with the discrete automation business. Ram, you touched on the inventories at some of the customer levels just now being normal. So when we're thinking about your discrete business, is it in the third quarter sort of flattish sales, you know, down a little bit year on year, and in the fourth quarter in discrete, you're up year on year and sequentially, is that the recovery? Yes, sir.
Julian C.H. Mitchell: Hi, good morning.
Speaker Change: Maybe just one good morning good.
Julian C.H. Mitchell: I'm wondering though maybe just wanted to start off with the discrete automation business, Rob you touched on the inventories at some of the customer level is just now being normal.
Julian C.H. Mitchell: So when we're thinking about your discrete business.
Julian C.H. Mitchell: Is it in the third quarter is sort of.
Julian C.H. Mitchell: Flattish sales down a little bit year on year and in the fourth quarter and discrete up year on year and sequentially is that the recovery slope.
Ram R. Krishnan: Yes, sir. Yes, quarter over quarter, flat in Q3, slightly positive in Q4, is kind of how we're looking at orders, so recovery in the fourth quarter. And then for test and measurement, which is also exposed to the discrete markets, but a different type of discrete market exposure, recovery into the first half of 25, primarily because of the heavy play in Semicon and a bigger portfolio business in China. Two of those markets are seeing slower recovery than our broader discrete automation business within the core Emerson.
Ram: Yes, Sir yes quarter over quarter flat in Q3 slightly positive in Q4 is kind of how we're looking at orders.
Ram R. Krishnan: Recovery in the fourth quarter, correct, and then for test and measurement, which is also exposed to the discrete markets, but a different type of discrete market exposure recovery into the first half of 'twenty five primarily because of the heavy play in semicon and a bigger portfolio of business in China two of those markets are seeing slower.
Ram R. Krishnan: Salary than our broader discrete automation business within the cornerstone.
Julian C.H. Mitchell: That's helpful, thank you. And maybe just on the Aspen side of things, Lal, you mentioned the CFO change and reiterated there were no big portfolio actions at Emerson this year. Maybe just, you know, characterize sort of Aspen in general, how you're thinking about your discussions with them on their capital deployment plans. I've seen them continue to do the shared buyback. And when you look a little bit further out beyond this year, you know, the appetite for this kind of software acquisition. No, sure. No, first.
Ram R. Krishnan: That's helpful. Thank you and maybe just on the.
Julian C.H. Mitchell: Aspen side of things now you'd mentioned, the CFO change and reiterated Theres no big portfolio actions at Emerson This year.
Julian C.H. Mitchell: Maybe just characterize sort of been asked but in general how you're thinking about them.
Julian C.H. Mitchell: Discussions with them on their capital deployment plans and we've seen them continue to do the share buybacks.
Julian C.H. Mitchell: When you look a little bit further out beyond this year.
Julian C.H. Mitchell: The appetite on kind of software acquisitions. Please.
Surendralal Lanca Karsanbhai: No, sure. First, I continue to be very excited about the partnership that we have with Aspen Tech. I do believe, Julian, that together we have a highly differentiated tech stack that we bring to the customer base, and I think that's being highly substantiated by the Synergy wins, the level of customer engagements that both Antonio and I have around the world. And we continue to believe in the premise that one plus one equals three here.
Julian C.H. Mitchell: No sure.
Surendralal Lanca Karsanbhai: First <unk>.
Surendralal Lanca Karsanbhai: Very very continue to be very excited about the.
Surendralal Lanca Karsanbhai: The partnership that we have with Aspen Tech I do believe Julian that.
Surendralal Lanca Karsanbhai: Together, we have a highly differentiated tech stack that we bring to the customer base and I think that's being.
Surendralal Lanca Karsanbhai: Highly substantiated by the synergy wins that the level of customer engagements that both Antonio and I have around the world.
Surendralal Lanca Karsanbhai: And we continue to believe in the premise that one.
Surendralal Lanca Karsanbhai: One plus one equals three here.
Surendralal Lanca Karsanbhai: In terms of the CFO, rightfully, you know, I think you said it right. I'm excited from a perspective of the processes and structure that can be brought in. I think there'll be a really good working relationship between Antonio and David Baker, and he brings a lot of the Emerson management system into Aspen Tech with him, which we believe is important from an operating perspective. And then lastly, look, no, no comment on a go forward.
Surendralal Lanca Karsanbhai: In terms of the CFO.
Surendralal Lanca Karsanbhai: Rightfully.
Surendralal Lanca Karsanbhai: You said it right.
Surendralal Lanca Karsanbhai: Im excited from a perspective of the processes and structure that can be brought in.
Surendralal Lanca Karsanbhai: There'll be a really good working relationship between Antonio David Baker, and he brings a lot of the Emerson management system into Aspen Tech with him, which which we believe is important from an operating perspective.
Surendralal Lanca Karsanbhai: Then lastly look no.
Surendralal Lanca Karsanbhai: No comment on a go forward, we're going to operate the structure as is.
Surendralal Lanca Karsanbhai: We're going to operate the structure as is, keeping in mind, Julian, that we're only in the second year of this journey. And we believe that there's value to be created out there in the structure. So for now, no change.
Surendralal Lanca Karsanbhai: Keeping in mind Julian that we're only in the second year of this journey and and we believe that there's value to be created out their infrastructure. So for now no change.
Speaker Change: Perfect. Thank you.
Surendralal Lanca Karsanbhai: Sir.
Julian C.H. Mitchell: And the last question is from Andrew Obin, from Bank of America. Please go ahead.
Speaker Change: And the last question is from Andrew <unk> with bank.
Andrew Burris Obin: <unk> of America. Please go ahead.
David Emerson Ridley: This is David Ridley laying on for Andrew Obin. Just wanted to, you know, circle back. I know that there was some pull forward of orders last quarter. You know, how did that, if you kind of normalized, you know, first quarter and second quarter for that, you know, what did that trend look like? And, you know, just to put a little finer point on it, should we be expecting low single-digit order growth in the third quarter before it steps up in the fourth?
Speaker Change: Hi, This is David Ridley Lane on for Andrew Rubin.
David Emerson Ridley: Just wanted to circle.
David Emerson Ridley: Circle back I know that.
David Emerson Ridley: There was some pull forward of orders last quarter.
David Emerson Ridley: How does that.
David Emerson Ridley: Kind of normalized.
David Emerson Ridley: First quarter and second quarter for that.
David Emerson Ridley: Hum.
David Emerson Ridley: What does that trend look like and.
David Emerson Ridley: Just to put a little finer point on it should we be expecting low single digit orders growth in the third quarter before stepping up in the fourth.
Surendralal Lanca Karsanbhai: Yes, so it's, you know, we were plus 4% in Q1, down 1 in Q2, so low single digits for the first half, greater than one book to build. And then in the second half, you're right, low single digits in the third quarter and, arguably, the fourth quarter, which is, you know, at this point, baked in better than the third quarter. Let's put it that way.
Andrew Burris Obin: Yes, So I'd say, we were plus 4% in Q1 down one in Q2, so low single digits for the first half greater than one book to Bill and then in the second half.
Surendralal Lanca Karsanbhai: Low single digits in the third quarter and arguably the fourth quarter, which is.
Surendralal Lanca Karsanbhai: At this point baked and better than the third quarter, let's put it that way.
David Emerson Ridley: And then on the sustainability and decarbonization project funnel, I know that's nearly doubled over the last 18 months. Are these projects kind of, you know, getting closer and closer to final investment decisions, kind of like the carbon capture when you mentioned it with Shell this quarter? Yes, I mean in certain segments like biofuels and...
Speaker Change: Got it and then on the sustainability and de Carbonization project funnel.
David Emerson Ridley: No that's nearly doubled over the last 18 months are these projects kind of.
David Emerson Ridley: Getting closer and closer to final investment decisions are kind of like the carbon capture when you cited with shell this quarter.
Surendralal Lanca Karsanbhai: Yes, I mean, in certain segments like biofuels and carbon capture, you know, the hydrogen projects which are large are probably slower movements through the funnel, but I think, you know, we see considerable activity globally, certainly big in Europe, here in North America as well, but the pace of progression of these projects through the funnel is varied depending on the sector.
David Emerson Ridley: Yes, I mean in certain segments like Biofuels and carbon capture hydrogen projects, which are large are probably slower movement through the funnel.
Surendralal Lanca Karsanbhai: But I think.
Surendralal Lanca Karsanbhai: We see considerable activity globally, certainly big in Europe here in North America as well.
Surendralal Lanca Karsanbhai: But but the pace of progression of these projects through the funnel is very depending on the segment.
Surendralal Lanca Karsanbhai: Very much.
Surendralal Lanca Karsanbhai: Okay.
Surendralal Lanca Karsanbhai: Okay.
Operator: This concludes our question and answer session. I would like to turn the conference back over to the management for any closing remarks.
Surendralal Lanca Karsanbhai: Okay.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to the management for any closing remarks.
Surendralal Lanca Karsanbhai: Thanks so much for joining the call today, and we look forward to callbacks later this afternoon.
Speaker Change: Thanks, so much for joining the call today, and we look forward to call back later this afternoon.
Surendralal Lanca Karsanbhai: Okay.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Operator: Okay.
Operator: [noise].