Emerson Electric Company

Good day and welcome to the Emerson first quarter 2021 earnings conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing star and then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on a touch tone phone. To withdraw your question, please press star and then two. Please note that this event is being recorded. I would now like to turn the conference over to Pete Lilly, Investor Relations Director. Please go ahead.

Good afternoon. Thank you so much. And welcome everyone to Emerson's first quarter 2021 earnings conference call. I hope everyone is staying safe and healthy. Today I'm joined by David Farr, Chairman and Chief Executive Officer of Frank Dellaquilla, Senior Executive Vice President and Chief Financial Officer. Jamie Froge, Executive President of Emerson Commercial and Residential Solutions. And congratulations to Lal Carson-Bai, current Executive President of Emerson Automation Solutions, who was recently announced as Emerson's next Chief Executive Officer, effective on February 5th. As usual, I encourage everyone to follow along with the slide presentation, which is available on our website. Starting on slide three, I'd like to briefly highlight two examples of the great work our global teams are doing and some recent recognition from customers and the marketplace. First, Emerson's PlantWebOptics analytics software recently received the 2021 IoT Breakthrough Award. Emerson's PlantWebOptics platform helps customers collect OT data from a variety of sources, and apply practical and customized visualization and analytics, delivering key operational insights to the right people at the right time. Next, turning to slide four, Emerson recently received the 2021 Control Reader's Choice Award for our industry-leading automation control and instrumentation solutions. Emerson continues to receive positive feedback from customers and users of our products based on a relentless focus on technology, unmatched customer service, and critical domain expertise in our customers' industries. Turning to slide five, we will review the highlights of a very strong quarter. First, Emerson remains steadfast in our commitment to health and safety for our employees, customers, and communities. Serving our customers in critical industries, disciplined cost control, and positioning to outperform as we emerge from COVID-19 remain our key thematic priorities. And we are starting to see the benefits of this focus flow through. Next, our regionalized operations remain sturdy and stable, and we will continue to build upon our firmly rooted strategy of business localization. Turning to performance, Emerson delivered a very strong quarter in a challenging but stabilizing and improving demand environment. The organization delivered adjusted EPS of 83 cents in the quarter, which was up 24% from the prior year and well above expectations. We continued our execution of the broad cost reset plan with an additional 69 million of newer structuring actions. Cash flow was a new first quarter record for the company, with operating cash flow of over 800 million and free cash flow of 686 million up 90% and 121% respectively. It is important to emphasize that the balance, the end market diversity, and the stability of our two-platform business strategy was critical to enabling the strong operational and cash flow outcome. Even on down 2% organic revenue, segment margins grew by 230 basis points to 17.7%. This margin improvement is a strong testament to the consistent operational execution of the global organization throughout the pandemic. Despite lingering uncertainty and demand challenges in many key markets, sales and orders finished ahead of previous guidance. Commercial and residential solutions' underlying orders remained quite strong, finishing up 15% on a trailing three-month basis. Importantly, our automation solutions business is showing signs of stabilization and improvement. Given the orders, sales, and profitability improvement, we are updating full-year guidance to reflect this stronger outlook. Please turn to slide 7, which offers details on the results of the quarter. Both underlying orders and sales came in ahead of expectations, at down 4.5% and down 2%, respectively. Commercial residential solutions underlying sales was up 12%, while automation solutions was down 9%, but improving. Adjusted EPS, which excludes restructuring and first-year purchase accounting and fees, was up 24% to 83 cents, well ahead of expectations. As previously mentioned, the organization achieved a new Q1 cash flow record driven by increased earnings and strong working capital management. Operating cash flow increased 90% to $808 million, and free cash flow increased 121% to $686 million. Turning to slide eight, we will briefly bridge adjusted EPS in the quarter. Starting with adjusted EPS in Q1 of 2020 of 68.67 cents, non-operating elements including tax, interest, FX, and other items were combined non-factor, adding a penny in total. The most important element was operations, which drove the vast majority of the EPS outperformance, contributing 13 cents. Share repurchase added 2 cents for a total of 83 cents in the quarter. Moving to slide 9, we will review the P&I. Net sales were flat, and we saw a slight reduction in GP margin, which was driven by volume to leverage and mix. Meanwhile, SG&A as a percentage of sales declined by 310 basis points to 24% as aggressive cost control actions took effect. EBIT and adjusted EBIT margins, which exclude restructuring and first-year purchase accounting and fees, increased 350 basis points and 260 basis points, respectively, also reflecting the cost containment actions flowing through. Lastly, the effective tax rate came in at just below 20%, slightly lower than expectations. Turning to slide 10, we will review underlying sales by world area. For the quarter, The Americas continued to show the steepest declines, down 7%, but importantly, they started to improve. In North America, we saw strength in residential, cold chain, life sciences, medical, food and beverage, and some discrete markets, more than offset by weakness in many other automation end markets. Europe grew 4%, while Asia, Middle East, and Africa grew by 3%, fueled by strength in China at 7%. All commercial and residential solutions world areas turn to growth. Please turn to slide 11, and we will discuss the business segment performance. Total segment adjusted EBIT margin increased 230 basis points to 17.7%, reflecting aggressive cost control measures and strong operational execution, even with slightly down underlying sales. Adjusted pre-tax earnings increased by a similar magnitude, 240 basis points to 15.2%. As previously highlighted, Q1 cash flow performance was record setting with operating cash flow and free cash flow increasing 90% and 121% respectively. Free cash flow represented 152% conversion of net earnings. Importantly, trade working capital dropped to 17.8% sales driven by strong execution by operations. Turning to slide 13, we will discuss the business platforms. Automation Solutions' underlying sales finished down 9% for the quarter. The Americas remained the most challenged, down 20%, but showed signs of stabilization and early improvement. Overall, we saw continued momentum in life sciences, food and beverage, and semiconductor markets, as well as some early signs of improvement in upstream energy markets. Meanwhile, Europe, and Asia, Middle East, and Africa both turned to low single-digit growth, driven by strength in Eastern Europe and China, respectively. Trailing three-month underlying orders were down 13%, again reflecting stabilizing and early improvement trends. Geographically, the Americas continued to be the most challenged, down 27%. Asia, Middle East, and Africa declined modestly by 1%, supported by China orders growing 6%. Europe declined by 3% due to weakness in energy markets somewhat offset by chemical, power, and life science projects. Restructuring actions totaled $64 million across the platform as we continued execution of the return to peak profitability. The platform delivered robust positive profitability improvement despite the drop in revenue. Adjusted EBIT and adjusted EBITDA margins increased 200 basis points and 290 basis points, respectively, as the effects of the ongoing cost actions took hold. Lastly, the platform increased backlog by $600 million, of which $300 million was due to the acquisition of OSI. The ending balance was $5.3 billion. Turning to slide 14. Commercial and residential solutions underlying sales were up 12% in the quarter. All core world areas were solidly positive, with the Americas showing the strongest growth at 14%, driven by strong residential, cold chain, and home products demand. This growth points to share penetration gains in many of our end markets. Europe was up 8% as heat pump demand was driven by sustainability regulations and customer technology preferences. Finally, Asia, Middle East, and Africa was up 7%, driven by China, up 10%. As mentioned, trailing three-month underlying orders remained robust, up 15%, with all business units growing. North America increased by 16%, and robust HVAC and home products demand, while China was up 17%. Restructuring actions totaled $3 million in the platform, and were primarily focused on facility rationalization and optimization programs. Adjusted EBIT and adjusted EBITDA margins were up 230 basis points and up 210 basis points, respectively, reflecting leverage on the increased volume and improved cost base. Finally, backlog in the business increased by approximately $200 million, ending the quarter at nearly $800 million, which is well above normal levels. Please turn to slide 16 and we will introduce second quarter guidance. We now expect the underlying sales will be roughly flat year over year with a range of down 1% to up 1%. This potential for the company to return to positive growth is earlier than previously forecasted. The top line outlook is driven by continued momentum in residential, life science, medical, discreet, and food and beverage markets, and ongoing stabilization and improvement in other automation markets. GAAP EPS and adjusted EPS are expected to be 83 cents and 89 cents respectively, plus or minus 2 cents. We expect adjusted EBIT margin to be 17.0 to 17.5%, with adjusted EBITDA margin in the range of 22.2 to 22.8%. Lastly, It is important to note that this guidance embeds an 11-cent change in stock price costs due to movement in the stock price. Slide 17 introduces our updated full-year 2021 guidance framework. Management assumes that demand will continue to be challenging, but stabilizing and steadily improving as global vaccine efforts mature. We also assume there are no major operational or supply chain disruptions, and that oil prices remain in the $45 to $55 range. Given that context, we expect underlying sales growth this year with a range of flat to plus 4%. Automation Solutions is expected to be in the range of down 3% to up 1% underlying sales, while Commercial and Residential Solutions is expected to grow between 8% and 10%. As you can see, both of these platform outlooks are improvements from November. We expect a slight decrease in effective tax rate, as well as increases in operating cash flow and free cash flow to $3.15 billion and $2.55 billion, respectively. There is no other change to the capital allocation outlook. GAAP EPS is expected to be $3.39 plus or minus $0.10, while adjusted EPS is expected to be $3.70 plus or minus $0.10. We have also updated our outlook for profitability headwinds and tailwinds in the year. Since last quarter, we expect that COVID-related savings will now only be down $40 million this year, up from the previous estimate of $70 million. However, we now expect that price-cost dynamics will be slightly negative as raw material costs and availability become more of a short-term challenge. Operations are working diligently to mitigate this issue. Lastly, stock price will be more of a headwind. And now please turn to slide 18, and we will briefly cover the changes to the reset restructuring and COVID-related savings plan. Total company planned restructuring spend remains $200 million for the full fiscal year. As mentioned, we now expect only $40 million of the $150 million COVID-related savings from 2020 to return as business conditions start to normalize in the back half of the year. Accordingly, incremental 2021 savings have improved to $220 million. Total long-term annualized savings of the overall reset restructuring program are expected to exceed $650 million. Please turn to slide 20, and I will now hand the call over to Mr. David Farr. Thank you, Pete.

First, I want to welcome everyone to the first quarter earnings call. I want to thank you very much for the interest in this great company and I'm clearly a little bit biased on that, but it is a great company. Second, I want to thank the global leadership team, the executive leadership team, and all the employees around the world executing and delivering a fantastic first quarter for all of our investors. The last 19 months have been hard, with the cost reset for peak margins, downturn in late 2019, COVID-19 pandemic and a resulting global recession, and now the return to growth. My recognition and applauding to all of you is powerful and thankful. I want to thank all of you from my heart for what you've done over the last 19 months. But now we have a new threshold of execution for the second quarter and total fiscal year. I believe this team will make it happen. They are good. Third, I want to recognize and congratulate Lyle Karzabai. as the new CEO of Emerson. I'm so proud of you and so excited for you and how you and your new OCE team will take Emerson to new heights, as I and we have done the last 20 years. When Chuck Knight turned over the reins to me in late 2020, I took a deep breath, I paused, I smiled, and then I moved forward. You're ready. and have what it takes to lead Emerson. You have the right stuff, as does all the OCE and global leaders. I'll be your best cheerleader, your supporter, and my phone line is always open to you and your team. Now. Why now? I'm healthy, folks. I'm not sick. Nothing is wrong with me other than my right knee, which is definitely gone. No golf. So the knee replacement is on the way. I've already talked to my doctor. The board succession plan and process ran its course with many great candidates over the last five years. I want to thank all of them. They all know who they are. A couple could be in this room. I also want to thank Bob Sharp, who's a close friend and really wanted to be CEO of Emerson. But as he and I talked, someone was not going to happen, so we decided to figure out how to make it happen somewhere else. I wish them the best of luck. As we went through the first quarter, it was clear to me, the board, that we clearly had one strong, obvious candidate, Lau. The others are great leaders. They're great individuals. They're great friends. They've done great things at Emerson. But Lau is the next leader. So we decided. But that's not the only issue. There are other things going on across the company. The company is in great shape. The P&L, the balance sheet, and the cash flow, as the finance committee told Lau this morning, don't blank it up. We had a very good final quarter in fiscal 2020, as you all know. Orders have been turning up strongly. The V-shaped recovery has been taking hold and is really firm at this point in time. We've had strong, exceptional execution around the massive cost reset that we embarked upon back in 2019. A cost reset costing us over $600 million when it's all said and done. The progress is enormous. You've seen it in the margins in the fourth fiscal quarter. You've seen it in the margins in the first quarter. We're going to deliver over $650 million of savings for the company when it's all said and done. The global teams led by these two individuals, these three individuals in this room, Lau, Jamie, and Frank, are getting the job done. They don't need my help. We are going to continue to deliver. I guarantee you that's one commitment that I made to the board when I said, yes, Lau's the guy. The first quarter was strong on all fronts. Gap sales were flat. Underlying sales only down 2%. And I believe... In the second quarter, our gap sales will clearly be up, and I think our underlying sales will be up also. Maybe not a lot, but I think they'll be positive. Possibility was very good. With improving volume and cost out in the first quarter, great incremental margins on both sides. Strong margins, EPS momentum, and yes, record first quarter cash flow of $800 million and free cash flow of $700 million. Extremely strong execution around earnings and the balance sheet. And we see a solid fiscal core in both platforms across fiscal 21. Sales will grow this year, both in GAAP and our line growth standpoint. We'll have increased margins, stronger EPS, potentially even $3.70, which was our 2019 EPS with much higher sales in 2019. Plus strong cash flow. In my opinion, the number will bust to 3.2, but I'm not the CEO, so he has to live with that number. With order and sales momentum in the second half of 2021, and going into 2022, we, the OCE, believe we'll finally deliver the $4-plus EPS in 2022, based on global economic recovery, the momentum we see, and the cost out. It looks very good, and we'll talk about that on the 16th. Cost reset, the drive to new peak margins in 22-23, they're firmly in place. The entire next generation team is ready to take the reins and lead Emerson forward. Clearly, even with the COVID-19 vaccine rolling out, we continue to be restrictive in what we can do. We have to operate in a safe environment. The normal Emerson management process is somewhat turned, not quite the same. Global travel, live customer engagement, our face-to-face planning conference, which is known to be a combat sport at times. Organization planning process, leadership planning process are all restricted and delayed. We're doing them, but they're not the same. So as I thought about what I can do as a CEO in this environment is basically take my experience, my maturity, which many of you know I'm mature, in this environment, and help the next team. Name the new team, put it in place, get out of their way, and help. That's what I'm going to do. I've talked to the board about this. It makes the most sense. Yes, I said 2021. Yes, I even said maybe most likely later in 2021. But the new facts and issues, and I always like to surprise, with our annual investor conference coming up this month in the 2016th, I think the time is right for the new CEO to stand up, present, and not have the day far game, which many of you have had for over 20 years, and in some cases more than that as I work with Mr. Knight. The February 16th time, the February 16th presentation with the Next Generation team is very important. I'll be there to help. I'll be there to advise. I care about this company. I'm a big shareholder of this company. It's been my life for 40 years. leading it for over 20 years. The time is right. As you know, I've never believed in long, drawn-out successions. Chuck and I had three days. He hit me with the keys in the chest. He took off for a year for six months. I had to track him down to try to break the quarter strength on earnings. The team, the law are ready. Let's move on. As I talk to the board, we all said the same thing. So again, my congrats to Lyle and the OCE. And if anyone wants to start a yelling match with me, you'll quickly see I'm not sick. Let's go to chart 20. I do have my stand-usual bat, my rally monkey, and my rally squirrel, which is really a rally ferret sitting here today helping us out, making sure I don't lose my train of thought. We have Pretty good momentum in orders. We laid out boxes. You know, we started this box game as we put our forecast out in, I think, April of 2020 with Frank, at that time Bob, and myself. We delivered, actually beat it. We laid out the box in the first quarter. You could see we came in better. The blue dot is where we thought it would be. We're above that, obviously. It's upper right-hand corner. Jamie's business has been very strong. He's executing. He's building backlog. That's one of his issues. He's got to get that backlog down. Lyle's business has turned. It's not going to be quite as sharp as Jamie. Clearly, he's a different business model, but he's turned. As you look at the next forecast next quarter, we now have a blue dot sitting pretty much on orders above the line with a minus 4 to plus 6. We're seeing good momentum in Europe. We're seeing good momentum in Asia. We see good momentum in Jamie's business in North America, and we're seeing some improvement in Lyle's business, which I'm sure he'll talk about. So, again, very good momentum in orders. As we lay this out, that's how we see it. You know, Jamie's business will flatten out. It will turn down a little bit. He's running at high levels at this point in time. Clearly, some unique opportunity of growth there. With all his markets, as he'll tell you, going the right way, which is great to see. So if you look at chart 21, what we're looking at right now for the growth this year, as we presented to the board, We're looking at somewhere around the plus one, minus one for the second quarter. Depends what kind of execution Jimmy can get on the backlog. He clearly has issues relative to capacity, COVID, materials, which we'll talk about. I think Lyle's short-term business is starting to turn up, and we'll talk about that in his discrete business. Even some of the onesie-twosie orders are starting to happen. We have a broad second half. It's hard. You know, the third quarter will be a spike, as we all know, is a spike down. But the key issue for us is to look at good growth in the second half. Obviously, the ratios will look really good in the third quarter. But we're looking at the second half and the overall business pace in that second half going into the fiscal 22. What I want to do is turn it over to Lyle now so he can talk a little bit about his forecast and what he sees, some insights into the marketplace, and then we'll turn it over to Jamie and let him do the same thing. So, Lyle, the floor is yours.

Thanks. Thanks, David. I'm sorry. It's been an emotional time for a lot of us, David, and your words are very special. I'm very proud of the team and what the team has accomplished in the quarter. It's a phenomenal execution of a plan that we laid out for our investors last February that we committed to do, and we're now seeing it reflected in the P&L of the company. We're generating some of our own tailwinds, which I'll talk to you about, and the market is starting to recover broadly across many geographies as well, which is highly encouraging. There's page 22. Nothing really changed appreciably in our orders as we went through the summer months. However, as we got into the late fall, we started to see an increase in activity, particularly driven by Europe and Asia. I'll flip to the next chart and give you some perspectives on how we see the outlook right now. The industries that drove growth dramatically were the discrete industries, driven by Germany specifically, which had turned its economic engine on and started to accelerate both in the process space for internal consumption and in its vast export market engine. So we started to see that improve in automotive and semiconductor packaging OEM, as well as fraud activity across Europe around power and the specialty chemical segments. In Asia, driven by China, it's been highlighted growth of 6%. We feel very good about what we've seen there and expect that growth to accelerate into Q2, as we'll talk about in a moment. But the big elephant in the room is North America. And what we experienced in North America was a stabilization of the oil and gas markets, albeit at lower levels, but a forecastable level of business. What has driven the business on the continent has been power generation, mining in the Southern Cone, and life sciences throughout, which has been a great story for us. As a result of that, we are seeing a recovery and expect to see sequential improvement in order pacing and sales pacing in the second quarter and in the second half of the year, as indicated back on chart 22. Let me turn then, Pete, to chart 24, and we'll give a perspective of how we see the world areas first half to second half. And across most of the world, and I can pick out one or two pockets here, we will see that improvement reflected in the environment. That discrete momentum that we've built in Europe and Asia will begin in the Americas, in North America particularly. And we've seen, as David noted, early signs of distribution-based business recovery as we've navigated through December into January. So that's very encouraging to see. I was in Odessa, Texas a few weeks ago. I met with teams and talked about the plans for $3.8 million a barrel, barrels a day production for the year, which is a stable level of where it was a year ago. So we'll see maintenance of that, increased drilling to maintain those levels in those fields. So some encouragement there. But obviously demand will ultimately drive that market. In Europe, I've talked about it's really been a German story. Our discrete business is up over 30%. Our process business is up over 10% in Germany alone. And then there's increased momentum throughout the continent, very pleased with a positive trend. first quarter and expect that to continue. And then Asia, the China bounce back was important. That was discrete-driven and process-driven as well. And we feel very good about the funnel of activity that we see as we look out right now. So I feel much better than I did in October, David and team, and I look forward to a much better outlook in executing in a much better environment as we go forward.

You did feel better until you got the CEO ring.

Well, I feel even better because I've got Jamie, and Jamie's rolling.

Yeah, well, I just met you up for a very tough second quarter. So now I think so. I mean, very interesting to see. It's too early to talk about January, but to see the analyzing around January, because I think we are feeling the distribution. We are feeling some semblance of optimism in even the Americas, and you've obviously seen some very good international orders, so. I think that things are setting up. It doesn't mean it's going to be a perfect straight up. You're going to be going here, that. You go sideways, step it, but I feel very good about it. Jamie, I mean, you have a – like you said, you can't be the – the slowest antelope in the pack when the tiger's out there. Right now you're not the slowest antelope, but you've got a tiger out there running around. So what do you see happening to your business?

The tiger is some kind of combination between growth that folks have never seen before and kind of a material situation that we're all dealing with around the world. And customers. Before I jump into that, I just want to say a couple words because this is a special moment in time here. It's not going to come again. I want to say thank you and congratulations. to David on just really an unprecedented career, what you've done in this space. There's no comparison to it. I know there's thousands of families and employees around the world that you've touched that wish they could be here to say this. I'll speak to them as well to say thank you for all you've done. You're part of the fabric of this company forever. And you've been a great leader and mentor for me, but you are a great friend. So congratulations. Thank you. Law, I want to say congratulations to you. We've known each other pretty much since I joined the company. We were in a similar leadership class together and worked at corporate together. We worked in the businesses. We got to work for you in automation. Now, as business leaders, now I get to see you in the CEO role, and I'm very proud of you. I know that the leadership team has a great deal of confidence in you, and we're very excited about this next chapter together. So congratulations to you and your wonderful family, who we've gotten to know over the years. So congratulations. Thank you, Jamie. With that said, let's jump into the first chart there, chart 25. It shows the updated outlook for underlying sales for the year. As you can see, you've heard throughout the call, the outlook for the year has improved since we last spoke. In November, we were outlooking 4% to 7% underlying growth for the year. It was going to be about 5% to 6% in Q1, 2% to 4% in Q2, and 5% to 8% in the second half. Growth in orders and sales really accelerated in Q1, as Dave talked about, and we saw greater than expected strength in North America residential markets, along with accelerated improvement really in all other businesses in world areas. And so from a Q1 order standpoint, we saw double-digit trailing three-month underlying orders for all of our businesses, with the exception of professional tools, which came in at 2%, after delivering 8% orders growth in the month of December. So it was improving as the quarter went on. The broad product line of world area strength that we saw in Q1 orders, the backlog we built, what we continue to see in our business trends in January support the increase in our outlook for the remainder of the year. So if we go to the next chart, chart 26, These next two charts look at a business from a product line and then a geographic perspective. First, from a product perspective, we see underlying sales growth in the heating and AC business in the 9% to 12% range for the year. Extremely strong first half driven by residential market and a more moderate second half. By the fourth quarter, inventory restocking should stabilize. Demand may settle into a pattern closer to historic cycles. However, we do see positive and medium long-term trends in the residential market driven by homeownership. remodeling, and a focus on efficiency and environmental concerns, our cold chain business has exhibited a quicker growth recovery than anticipated. In November, we expected cold chain to grow more in the three to six range for the year. Now it's six to nine, supported by a stronger Q1 than expected, which was really driven by a 20-plus percent Q1 sales in global transport, positive growth in U.S. food service in December. So even though food service is a tough market, it's coming back slower, we had positive growth in December in Double-digit growth in U.S. food retail the second half of the quarter and double-digit aftermarket growth. China delivered double-digit Q1 cold chain sales growth with transport up more than 40%. We anticipate solid, stable growth in the cold chain as the year evolves. Food service will continue to lag other segments, but improvement in vaccine rollout could drive upside in that space in the back half of the year. In November, our outlook for tools and home products was also in the 3 to 6 range. It's now 6 to 9. Our home products, business, and tools we have impacted by residential demand, we will see extremely strong growth in the first half. Just to put some of the home and contractor growth in perspective, in Q1, our wet-drive-back business posted 38% trailing three-month fixed-rate orders, and our incinerator business saw 20%-plus trailing three-month fixed-rate orders growth. Again, the residential markets will settle in to a more moderate growth rate as the year progresses, but very strong growth the first half, good overall fundamentals in the medium-long term. For the remainder of our professional tools products, we will see a return to quarterly sales growth in Q2, followed by double-digit growth the second half of the year, aided by comparables in Q3, but also a general improvement in market conditions globally, which we already started to see, as David mentioned. For example, EMEA and Asia both turned positive in Q1, and general industrial has been steadily improving. Overall, commercial building construction globally will continue to lag the recovery of most of our other served markets. All right, next chart, chart 27. Our heating and AC compression business saw 24% plus trailing three-month Q1 orders growth with exponentially higher growth than residential. Our Q1 U.S. residential heating and AC compression business sales grew 69% in the quarter with growth accelerating as the quarter unfolded. We do expect the U.S. residential markets to settle into lower growth in the second half or the first half as we've seen unique near-term growth dynamics increase. and the rebuild of inventory in the channel. However, as I mentioned earlier, we do see some longer-term positive residential trends persisting. North America industrial continues to improve with commercial building construction lagging. Asia climate trailing three-month fixed rate orders through December were up 11%. Europe climate was up 12%, supported by continued strength in the heat pump space in Europe, along with weather conditions improving market conditions overall in China. Overall, Europe Q1 climate fixed sales growth was 8%, with heating growth up 40%. Overall, Asia fixed rate climate sales were up a little more than 6%. The climate part was up 15%, and the heating piece inside of that was up 30%. So we see pretty solid growth dynamics the remainder of the year in North America, Europe, China, and the Middle East, and several smaller markets, but a slow recovery in parts of North and Southeast Asia. The COVID situation is dynamic. We're watching it closely around the world. We'll let you know if we start to see any changes that will affect our current view of how the year is going to unfold. And just to wrap up, I want to say thank you to the entire Commercial Residential Solutions team, the whole Emerson team, for tremendous work. You all responded to unprecedented demand increases, worked long hours to make sure we meet our customer needs while working hard to keep our employees safe. And we saw historic increases in demand in several businesses. Our team did a great job responding. And what we all can't forget is the middle of a pandemic. And so I want you to know how much the entire leadership team appreciates all of your efforts. So with that, I'll pass it back to Dave. Dave, you and Walt.

Thank you very much, Jamie. Key issue here is a lot will need you to come through again in the second quarter, you and your team. I know you've got a lot of issues with obviously keeping the plants up and running. As we told the board yesterday and again today, we are making investments for capacity, for productivity for you. Lyle's clearly got plenty of capacity, but he's moving new facilities out, so he'll have capacity when it comes to the 22-23. So you really have a lot of moving parts. I think your team's in really great shape, and I know the team here at corporate will try to support you the best they can as you go through this process because we're banking on your strong execution to deliver this year. For the people on the phone, I've been very busy the last two days, if you can imagine. board meetings, shareholder meeting. I received over 500 emails and texts. I will get back to everybody. It takes time. I'm not ignoring you. I didn't change my email address, and I didn't block all the crazy ones out there that people send me emails to. It's wide open, and I will. I have a webcast tomorrow morning with Lau, and then I'll start the process and work my way up. You all mean a lot to me. You're my friend. We debate. We don't always agree, but you're my friend, and I will get back to every single person that has sent me e-mails and texts over the last two days. I appreciate that. With that, we're going to open the floor for Q&A. I, again, look forward to listening to this WebEx, the webcast, the next time. I guess that will be May, and so you guys are going to have fun. But today we have a little fun one more time. So open the floor up. Who's going to hit me first?

We will now begin the question and answer session. To ask a question, you may press star and then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Andy Kaplowitz with Citigroup. Please go ahead.

Good afternoon. Good afternoon, guys. Good afternoon, Andy. Dave, I know I speak for all of us. You've been a great help to the entire investment community. You keep it real. You keep it light at the same time, which we appreciate. Congrats, Lal. I think you're going to need some sort of rally animal to fill those shoes, Dave.

He ain't taking my rally monkey or my rally parrot. That sucker is those going home with me.

So, Dave, maybe the first question is, one of the things you've talked about in the past is that you were hopeful that CEOs would begin to spend on CapEx again as the new year unfolds and vaccine distribution begins to ramp up. So, Your order suggests maybe that you're seeing a little bit of that in automation solutions, but maybe you could step back and tell us if your conversations with customers aren't changing yet to the point where they're starting to open up their CapEx spigots.

I wouldn't use the word spigot, but I think that the conversation is with CEOs, my fellow CEOs, is that in the capital industrial world, they are opening up and they're talking about spending money around bringing lines back up, Andy. getting some incremental capacity. You know, we have a situation right now in the supply chain for Jamie's side of the business. There's a huge capacity issue where there's not enough capacity, and we know they're going to start spending money around steel, iron ore, mining, copper, plastics, all these things. So what WoW's guys are hearing, and we've been hearing it quite a bit across the United States even now and even in Europe, they are starting to talk about small projects and spending. So I think those conversations will continue. I think you'll start seeing capital. We're going to spend more capital this year. I bet you if we had the time, we'd probably even spend more, but the time is not a big issue for us. So I think that we're feeling it and we're seeing it. Where I really, really, really want to see it is the USA. But I guarantee you, Jamie's customers, his facilities, all need capital, and Lyle's the one that's going to make it for them. So that's what we see, but we'll see how it unfolds this year. I think our discrete business in the U.S. probably had a good month. We don't know yet totally, but I think they had a very good month. And that will tell me that the projects are coming at the distributors of the channel. They're talking. They're ordering products. I think the professional tools will be the same way. If I turn to Jamie, he's shaking his head. Yes. So that means the channel's coming, Andy. So I think that I feel good about it. Now the question is the momentum, but we'll see how much. But they've got to spend some money here. They've got to get things going productivity-wise.

And so I feel good about it right now. It's good to hear, Dave. And then at the risk of front-running your analyst a little bit, when you think about automation solutions coming out of the downturn and the margin progression, when we look at Q1, you obviously improved adjusted EBIT by 200 basis points despite a decline in revenue. So As the segment improves, should you be capable of delivering over that, you know, mid-30% incremental as you've talked about in the past, given your restructuring efforts? And do you see a path back to the high teens adjusted margin here over the next couple of years? I'll answer that. I have my opinion, but I'll let him answer it first because he's the one who's got to deliver it.

Absolutely, absolutely. We're well on path, Andy, to deliver that peak margin plan in 2023. We want to stay that course. If we do get that tailwind – We have investments that we will need to make in this business. This is a technology business that's built around phenomenal products that differentiate us in the marketplace and allow those participation gains that we have enjoyed and benefited from. So we will invest back in the businesses. We'll stay measured. But I think we have opportunities, obviously, and we are on a phenomenal path. momentum right now in terms of margin execution.

So if you think about the next two or three quarters, the way Lyle's business will unfold, he's going to have his earlier cycle businesses, those are all his higher margin business. And so if you think about D&I, you think about measurement and instrumentation, you think about those businesses, the flow businesses, those are better margin business. That's what's going to come back for him first. So he should have pretty good incrementals. He doesn't have the same cost-price pressure. He has a little bit of it, but not as much as Jamie does. And I don't see a lot of KOB1-type projects coming in for, what, 12, 18 months now. So I think that as he goes into 22, my gut tells me he's going to have strong double-digit orders going into 22 in the fourth quarter. The question will be is the execution, is the plant ready, has he got the moves done? And I think he's set up for a very good first half of 22 margin flow through. Not every quarter is going to be perfect like this one. But I think overall his team is really focused on this, and I think they're ready to have a good execution around margin, and they will reach those new peak margins.

Congrats again, guys.

Good luck, Dave. Andy, thank you very much.

The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.

Thanks. Good afternoon, everybody.

Good afternoon, John.

Dave, you're going to be missed. Hope you get that knee fix soon. Go hit the links. Enjoy retirement. But, yeah, thanks for everything throughout the years.

My neighbor does not sound too excited about me retiring. He called me.

He saw me out walking, dude, and rocketed earlier in the morning. He came up in his truck. He said, what are you going to do in the neighborhood?

I said, well, I'm going to go knock on doors and ask them to help you out do things like, you know, fix air conditioning and concrete work. So, you know, a lot of my neighborhoods are thinking about I need to move.

Okay, Joe, let's get back to you. All right.

Well, Lyle, congratulations as well. And I look forward to working with you closer. But maybe my first question, Lyle, I know you're going to tell us more at the investor day in a couple of weeks. But maybe talk to us a little bit about how you're thinking about looking at things maybe from like a clean slate. And maybe that's the portfolio. Maybe that's the margin trajectory. Maybe that's the cost structure. Just any initial thoughts that you have on the transition and then making your imprint on the organization.

I surely appreciate the question, and I was waiting to hear who was the first one to ask. So congrats on that. There are a lot of things that I've thought about that I need to internalize and discuss with the team. Allow me a little bit of time. I'd like to really focus today on what's been just a phenomenal quarter for us, for our organization, and the guidance that we've put out for the year. The 16th of February will be shortly upon us. You'll hear our voices. You'll hear some of our thoughts. And if you allow me that, I truly appreciate it.

Okay, fair enough. Maybe turning it over to Jamie for a second. Jamie, when you take a look at that slide 25 and you take a look at like the growth outlook for the second half and compare it to, you know, what we saw in 2020, clearly like you have your easiest comp in the third quarter. And I recognize that things have been kind of like white hot for you guys in the first half of this fiscal year. But how do I reconcile those two things? in that, you know, growth is going to step down in the second half, just given what seems like a really easy comp in Q3.

Yeah, we'll see. I mean, I think Q4 is the big question mark right now in the model. And, you know, one scenario is that a dramatic portion of pent-up demand plus inventory that had to be restocked got pulled into the first two quarters and possibly a little bit of the third quarter. And so then by the time you get to the fourth, which you got a tougher comp, we started to see growth come back towards the end of last fourth quarter. So it's a different comp you're chasing. And could the residential markets, you know, go flat, you know, even slightly down, slightly positive in that range. So, you know, I think we see the professional tools. businesses doing very well in the second half, both in terms of comps but also just demands improving. Coal chain is going to be steady throughout the year. So it's really a residential story. If residential has another wave here and stays strong and you have a hot summer, you have a very strong buying market in the housing market, I think that there's a lot of folks that didn't participate in the last wave of this housing remodeling and purchasing that may be on the sidelines ready to go, then it could extend. We could have upside. But it's too early to tell and And so that's going to be the key thing.

Thank you, guys.

Thank you, John.

All the best to you.

The next question comes from Steve Tusa with J.P. Morgan. Please go ahead.

Good afternoon. Good afternoon, Steve. Congrats to you both, Dave. Thanks for coming. all the really fun times over the last, I don't know, 15 years or so. It's been a lot of fun. Thank you very much, Steve. Hopefully we'll see each other at least one more time. Maybe. I'm definitely hoping for that. But on to the results, which were pretty good. The second quarter guidance, I think for – A&S reported revenue looks like flat sequentially. Do I kind of have that right? And can you kind of explain, you know, why that would be? I mean, looking back, other than in 2020, you know, it seems like that, you know, business is always, you know, kind of up sequentially comfortably. And then I have just a quick follow-up on the margins.

Okay. I would say, you know, the initial look at it is, You're right, it's probably flat because of FX, foreign exchange, Delta there. And the question is also, is this a mix of business? Does Lau get the – does he get the U.S. business coming in? You know, until we see the – you know, it really is. We know that U.S. businesses, we're trying to be cautious on Lyle's business. He's done well the last two quarters, beat the numbers, Steve. But right now it's just a function. We've got to get some of that early turn cycle business. And so if he did see that happening in January, he should be able to do well in that second quarter. So probably a little cautious more than anything else, and the currency impact from that perspective, Steve. But you're right, your analysis is always – and, you know, we'll see. Hopefully he has a better quarter.

What's –

Sorry, Steve.

Go ahead. Sorry. Yeah, just very quickly. We're watching our later cycle businesses very carefully. Those will lag. Federal Control, you know which ones they are. They're project-based businesses which had good and lag coming into the down cycle. So Ron was still experiencing solid growth at this point last year and hadn't weakened. And so we'll see him come in a little bit later. So that's going against us as well.

And how much revenue will OSI contribute this year?

The board plan, I can tell you what that is. It's around $180 million in sales.

Hopefully get to $200 million. We have a real shot. We had a good strong quarter the first quarter. Steve, the question has got to kind of keep the momentum going. They're really taking a hold right now with our channel. And obviously this whole renewable push is helping these guys a lot too. But it's a question of how much they can execute around OSI. the various customers. But the orders right now easily hit the $200 million run rate, yes.

So we booked nearly $95 million in the first quarter.

Right. And then one last one for you. I mean, I guess, you know, despite kind of this quarter, which was well above prior year margins on, you know, a decline, you're basically guiding, I think, to flat adjusted segment margins year over year. for 2Q? I mean, is there any reason? Is there a mixed dynamic there? Is there something going on that we have to – is it price-cost? Like, what's the driver of kind of a flattish margin year over year?

Yeah, I think that – did we give the individual margins out for the guys? No. So, Steve, what you're seeing is Lyle's business will have a good second quarter margins. The big issue that Jamie's now got to override is the price-cost. His material inflation is coming in. Yes, he's got leverage from volume. He's got leverage from the reset. But the material cost numbers are starting to hit him right between the eyes at this point in time. We had good coverage in the first quarter, and now his team is working scrambling hard to figure out how to offset that. I mean, if we get good news there, then he'll be better in the margins of the second quarter. But he's the one that's going to be struggling when it comes to margins because of the material costs. And I think Lau will have a good second quarter. I don't see it. Or the automation business will have a good second quarter.

And then one last one for you, Dave. I know you had kind of a tough ride in your first year as CEO. You had to kind of like, you know, break the streak and cut guidance. I mean – Do you have enough visibility to kind of, you know, make us feel comfortable that we're not going to be kind of sitting here in the same shoes, you know, six months from now?

Yes. I mean, the other problem is the GameStop thing is going on out there. We did have the dot-com. The dot-com bust came in March for me that year. We would have had problems with the 9-11 issue, too, that year. So, yeah, I did break the string. I did go see Chuck and say, Chuck, we're about to break the 44-year quarters. I knew I was going to have to do it eventually, but not my second quarter in. You're right, Steve. I think we have better feel for what's going on right now, and I don't see a dot-com bust. So I feel comfortable. I don't think that we're – I'm not setting Lyle up for that famous phone call to you guys.

No SPAC bubbles.

Okay. No SPAC bubbles. No SPAC bubbles. Steve, you're such an optimist. Thank you.

Did you break your leg playing hockey last week?

One thing I want to follow up with, Dave, is you're absolutely right, what we're facing. But I did want to, for all those on the call, you know, we've seen these cycles before. I think the bounce back in volume is faster than we've seen before. Some of the materials issues are greater than the markets have experienced. However, we're confident that, you know, throughout this year, as we go into the early part of next year, the relationships we have with our customers, the contracts we have with our customers in regards to pricing and mine, it all works itself out. So we're Our focus right now is on partnering with those customers, getting the supply we need, making sure we meet their needs. But we also are very much in focus how this tends to play out in regards to the price and demand situation. So there will be months where it's a little rocky as we change things. There will be other months that are fantastic as it flows through.

Thanks.

Okay, next question.

Thanks, Mr. Tussauds.

The next question comes from Andrew Obin with Bank of America. Please go ahead.

Yes. Hi, how are you guys?

Hello, Andrew.

Hi, Dave. So thank you, Dave, and wow, congratulations.

Thank you. Thanks, Andrew.

So the question that sort of maybe goes a little bit into what you guys are going to talk at the analyst day, but, you know, with Democratic control of the Senate, has the tone of the conversations with your customers changed? regarding green opportunities has changed, and I think I'm specifically talking about things related to the grid as it relates to ovation and maybe anything you're seeing on mining in terms of change in tone as it relates to EVs and batteries.

Okay, so before these two guys talk, we spent two hours with the board today on this very topic because we've been working on it. The board knows we've been working on it, so we made a decision to bring in the organization to talk about this today, so... And so I'll let Lau and Jamie talk because both sides of these businesses are very much involved in this whole ESG around the sustainability and renewable stuff. And I just let Lau go first, and then we'll let Jamie go on this one because that's a very relevant question. We are really relevant in this space, Andrew.

Go ahead. And you're right, Andrew. This is thematical for us and what we'll talk about in the February meeting, and we're very excited to do it. share that with the investors and talk about the opportunities we have with Emerson. We're going to have a dedicated section on it, Andrew. Now, some of the dimensions that we'll speak about are within Emerson, the greening of Emerson. It's the greening by Emerson as we aid our customers around various elements. And, Andrew, you and I have spoken about decarbonization and energy efficiency and emissions management, and it's the greening with Emerson. So it's the partnering around solutions and organizations around the world. We are in a unique position as an automation and as a commercial residential business to really fulfill what is a global demand and a global need here. So I'm pretty excited about where we sit. It's a growing business. There are various facets to it. We'll try to walk you guys through it. But over the last, really, two years, David, we've had a number of individuals around the world working this specifically. So I'm excited to share that with you on the 16th, as is Jamie.

I think around alternative energies, Andrew, I mean, we have a tremendous start in sight. I think we have the core technology, as I told the board. We're going to have to create some new technology solutions, both internally and externally. But we have the credibility with our customer base in some of these areas here. There's going to be a lot of work that happens in the marketplace over the next 5 to 10 to 15 years. And I think we have a pretty good start. You know, Jamie's – and I'll let Jamie talk, but we've been working on this for quite some time. We've been involved with the whole thing around refrigerants, efficiencies. You think of the changing technologies and stuff that's going on. You know, we've been living that with the governments around the world now for well over 10 years, and there's some big moves happening right now. So that's why Jamie's business in Europe is so strong.

So why don't you – No, it's a great point. Look, I think in general, you know, it's a broader political topic around regulations. I'm not going to get into that. If you just look at how it could impact our markets – When there is a clear regulation that gets put in place, it gives clarity and certainty in decision-making around what people should purchase, what they have to purchase, what they need to do in order to meet whether it's efficiency targets or it's emissions targets, et cetera. So generally speaking, you know, it's good for our business because we're delivering compression solutions that have better efficiency, that use lower GWP refrigerants. We're the leader in waste disposal capabilities globally. And we've got a lot of other markets that we'll talk to you about here as we go to the investor day. But just in general terms, it's a very positive trend for our business because it gives certainty to folks around how they need to deploy their capital or where they need to spend their money. And as Dave said, look, our engineers, our business leaders are on all the major committees around the world, have been for many, many years, that are driving these policies and driving the technical requirements around them. And we're ready for it. And in a lot of cases, the technology is already being developed and is getting ready to launch here in the next 18 months because we've seen this next transition coming, for example, on efficiency and low GWP refrigerants.

I would say in Lyle's automation business, our European team really pushes because they're not a big oil refining business. We saw some push out of Asia when Jamie was over in Asia. But the Europeans, so they got it started about two years ago. And now with the acceleration of what's going on around the world, we have a very good running start. from the standpoint of the opportunity. And that's what we want to share with you. You know, we're a combination of doing it ourselves but also working with our customers and helping everyone reach these goals. But I'm pretty excited about this and automation and the commercial. And we have a unique situation for the next, you know, 5, 10, 15 years in this space. So I feel good about it.

Thank you. Sounds like you guys are going to have quite a bit to say about Danil's day. Final question on software. You know, I think you have You know, sort of there are multiple definitions of software, but the standalone software, I think it's, you know, I think it's like, what, 1.1 billion. That's sort of the market I'm referring to. What kind of growth rates have you guys seen last quarter, and what are you expecting for the business to grow at this year? Thank you.

Yeah, we continue to see in that high single-digit range, Andrew, as we spoke about, I think, in the past. That seems to be consistent with Q1 and what we expect for the year. And, again, it's driven by a lot of work in life sciences. There's opportunities in the electrification grid you talked about, but in core discrete and process as well.

I think some years it's really strong, some years less, but we're making good momentum there. And we're going to continue to invest in startups and ventures around this area because it's both internal, as you know, Andrew, and then also through Obviously, trying to look at acquisitions. But, you know, we have a good foothold in this right now, and it's really having a – it's going to be a key part of what we're doing around the sustainability, too, because it's not only doing the compression, but you use electronics and software. Same thing with a lot of software for a lot of business, too.

I mean, Dave, we were just talking about it the other day. When you start rolling out, you know, A2L refrigerants, low-duty refrigerants, they're going to require – it'll be legal requirements around what the sensing you have to have, how often you have to monitor it, how you have to remediate it if there's a leak or there's an issue. So as the world moves more and more in that direction, it's just going to require more insight real-time to data, and it's a huge opportunity for our business.

Andrew? We have a lot to say, but we don't have so much time, because unless they eliminate the former chairman, we will run out of time. And so they'll probably give me one chart, hello and goodbye. Okay. So we'll see.

Thank you, Dave, and I want to congratulate you.

Thanks, Andrew. I'll give you another half chart. I'll give you another half chart. Don't let the door hit you the other way out.

The next question comes from Jeff Sprogg with Vertical Research. Please go ahead.

Is that Jeff Sponge or Jeff Scratch? Sponge? Are you called Sponge, you know? What are you, Jeff? I've never been Scratch before. I like that new nickname of yours, so we're going to call you Sponge. How are you doing, Jeff?

I'm doing well. Dave, congrats. We're really going to miss you. You're like the last of the Mohicans. You know that, right?

I know I'm the last of the Mohicans, truly, the last of the Mohicans. But that's okay. You guys can't handle many more Mohicans around here.

Uh, that's right. And, uh, no doubt law will do a great, great job. Congrats law. Um, Dave, I was wondering if you could, uh, you know, address for us again, you know, as, as all the succession was, uh, culminating, um, you know, to what degree, if any, did kind of the discussion about, uh, Hey, maybe naming two CEOs and splitting Emerson at this particular juncture in its history. And, uh, Clearly where the decision, you know, landed is clear based on the discussion today. But kind of what, if any, was the debate around that and kind of the pros and cons in your mind?

Well, so not to sort of replay history, we went through that process back in 2019. So as we took the board through from, you know, June through October, the end of, say, November time period, and we looked at the analysis of the two platforms, the strategic rationale around the two platforms, and that was obviously on the table at that point in time. And the board hired outside help relative to these two issues. You know, in their opinion, in working with outside help, it was very clear that we fundamentally believe there's more value in the combined basis than separating the two businesses. And so the logic was around, you know, the investments we see going relative to this whole around the ESG, around sustainability, around software, what we see happening in the global world right now. As you look at the different cycles, the classic is what's going on right now in the two different cycles and how they leverage each other. That work was done back in the mid to late 29. The board made the decision. And as we went through this last 18 months, I guess it's not quite 18, but close to 18, say 12 or 14 months, the board did not think about that at this point in time. They made that decision a while back, and that's where it sits. Obviously, clearly, from Lyle's standpoint, the board will continue to evaluate that in his strategy sessions with the board, and I fundamentally believe that will constantly be on the table as we look at the mix of the businesses, if we look at where we want to go next and where we may want to get out of. You know, this company has been in and out of businesses. We get out of this business, we'll go here, and that's what's made Emerson unique. For the 40 years I've been around, if you look at the 40 years and how we transformed this company, let alone the 20 years I did, We don't sit still. So, I mean, I guarantee before Lau retires, the company will look different than it is today. Now, how are we going to look differently? That course will play. It's a handout with him and his team and the board. So that's how we look at it, Jeff. We don't look at trying to status quo. It's not a word. Status quo is not a word around here, as you know.

Yeah, no doubt. And I was also wondering, you've obviously worked extraordinarily hard to get costs out through this restructuring. And we think about these COVID-related issues. temporary, you know, savings, only $40 million of which are coming back. How much of that kind of total $150 do you think does come back? It sounds like, you know, you're working hard to really mitigate that, even looking into 2022.

You know, it's going to be really hard to manage because by the time you get to 2022, the business is growing again. So I would say, obviously, what we've learned through this process, some things will change. So certain things will be different from a meeting standpoint, travel standpoint. But at the same time, you're going to be looking at a company that's growing as you get into 2022. You're going to be a solid growth year for 2022. But, I mean, clearly it's not a dollar for dollar coming back, but you're going to be seeing growth investments happen at that point in time because we're growing. But I would say it's been hard for us to get exact numbers, but we know it's not 100% coming back, but we also know it's not only 50%. So, I mean, I've always felt that you're going to probably be somewhere around the 80%. 80% would probably have to come back over time, and 20% we've learned from a different process. But it's really what happens and what businesses grow, Jeff. But I guarantee we've learned a lot of different things here in the last – not always a lot of fun things, let's put it that way, but we've learned a lot.

Great. I'll leave it there. Thanks again.

Thank you, Jeff.

I'll see you.

Take care. Bye.

The next question comes from John Walsh with Credit Suisse. Please go ahead.

Hi. Good afternoon.

Good afternoon, John.

A thank you to you, Dave, and a congratulations to all.

Thanks, John.

Wanted to – oh, go ahead. I said don't leave someone knowing that's condolences.

Well, you said that it was just your knee, so not yet, luckily. So I noticed some new disclosure here in the back around software. I was just curious if this is just shuffling some things around for financial reporting or if you're changing the way some of this software actually goes through channel to your customers.

It's fundamentally, as we've talked about, we're talking about trying to start a report on our software sales. It's, you know, we're in the early stages of what, you know, how we measure it. Because, you know, one thing you want to do once you start going out with a measurement world and accounting world, you know, the accountants are going to sit there, auditors are going to look there, and they're going to say, Frank's shaking his head. No, he's going to go da-da-da-da. So we've got to make sure we understand it exactly so we can measure it. A lot of companies don't worry about those things, but Emerson does worry about the integrity around the numbers. So this is our first step. As we start talking about it, we want to make sure that we have really grounded numbers so when we tell you what it is, you know what it is and you can measure it. So it's a first-step process.

No change to channel, no change there to reporting. Just from that perspective.

We're going to start giving some more insights around software, that's all.

Okay, great. I'll look forward to that. And then I guess just on the free cash flow guidance thing, You know, I guess is there some working capital associated with the higher sales? It just seems like you took the earnings up higher than the free cash flow. Just wanted to understand the dynamic there a little bit.

Okay, so, yes. What we see happening in this third and fourth quarter is growth will be pretty strong. Now, as someone said earlier, Jamie's got a unique situation. His comparison to the third quarter is really easy, so he could spike, and he doesn't know what it's going to be like in the fourth quarter. So we're trying to be cautious. The other issue that we face right now and one of the reasons we had very, very strong operating cash flow in the first quarter, yes, Lau's execution was very good. Yes, Jamie's execution was very good. But we're in a situation with Jamie's business that we haven't seen before of this magnitude where all of a sudden he's shipping using all the inventory he can. And from the standpoint of getting the inventory out, getting paid, and maybe not paying all the suppliers from a payable standpoint, he's in a situation right now where his trade working capital as a percentage scale is extremely low, just the way that it's based out. And we know some of that will reverse as his business starts slowing down in certain areas. So I think we want to be very cautious as we try to estimate how much will that cash pull in because of the working capital. But with a very good quarter on earnings and execution, And I think Frank and his team, as he talked to the financial officers out there, wanted to be a little bit more cautious. I think if we get a better feel in the second quarter how the cash comes in, I think I wouldn't be surprised if we don't tweak it back a little higher, John, to be all honest. But we're just being careful right now. But I think that earnings and cash flow execution right now is very good, and we definitely will have cash burning as we get into that fourth quarter, just our growth rate.

Great. Thank you very much. Thank you very much, John. See you soon.

The next question comes from Gautam Khanna with Cohen. Please go ahead.

Yeah, thank you, guys. How are you doing, Gautam? Congratulations. I am well, thanks. Congrats on the great run, Dave, and congrats to Lal, and best of luck.

Thank you, Gautam.

Now you're going to have to be entertaining on these calls, too. That's all.

I got a fine bat. Stuffed animal. I thought we were tired of the bat.

That's my Stan Musial bat.

You can take it home with you.

I've been taking it home. I've got a baseball bat. I've got a cricket bat up here. I've got a sword. I've got a 60-inch pipe wrench.

You'll be the monkey in the fair, but take the swords, bats, and everything with you.

These guys are such very encouraging people. Between these guys and my neighbor, I don't know. I'll be in the ditch digging. I'll be in the garbage business somewhere here real soon.

Okay, God, have you gotten back into real life yet, or are you still hanging out in Jackson Hole?

Yeah, no, not yet. I'll ride this as long as possible. I was going to ask you, maybe you'll address this in a couple weeks, but You hear the HVAC OEMs talk a lot about indoor air quality and that being a potential driver, especially in the commercial market, commercial HVAC market. I was wondering, does Emerson really play in that? Is there any specific products or solutions you guys are offering that might add another leg of growth to your commercial HVAC sales?

Yeah, we do. I mean, some of it's direct and some of it's indirect, right? Indirectly, As the OEMs work with different folks and they may put a broader air quality solution in place, it will often include an upgrade or a change out to the core compression solution. I think the other piece around air quality is that tight humidity control can be a big component of that. And we found that a lot of the air quality solutions work better in a tighter humidity band. Our 7AC business that we just bought, we invested in early stage, then we bought it out, and now we're commercializing it. is a business that has 30%, 35% more energy efficient at providing very tight humidity bands for the air handling space for initially commercial buildings, for example. And we'll do some of that directly, and we'll also sell some of that through some of our large OEM partners. So there's multiple ways we play, and I think we'll continue to invest in that space as we go forward in both solutions with OEMs and maybe some that we sell direct to the end user base. But Already we see a lift from it today.

Yeah, I think the key issue here, Gautam, is that what Jamie highlighted earlier in the conversation is that we see the states, as we go through this current efficiency and refrigeration change, we see the states putting in some controls and monitoring and some justification of where things sit, which will be censoring software-based. And I think that's where we're going to be playing around this whole area because they're going to want to know that systems, especially the commercial area, are operating. So I think that will unfold here. That's something Jamie's going to talk about and we're investing in right now. But I think that air quality, air efficiency, comfort does play for us. And so I think it's going to continue to build that way. I like that game for us.

We always talk about automation. We work in that business. We have a closed loop between control system and our final control element or measurement element. If you think about the air quality space, fundamentally it's moving in that direction. You've got to close the loop. You've got to close the loop between the monitoring, the electronics, the controls, humidification, particulate management. For example, if you have a large commercial or residential thermostat business that's tied to key diagnostics and electronics, then you've got a big part of the puzzle there and You know, there's partnerships that you can have around those other pieces to close the loop and build a full solution. So we'll talk more about it, you know, in a couple weeks. But we're very active in that space, and I think we'll do more there going forward. Good. What else do you want to know, Conor?

Yeah. Just a second question maybe at automation solutions. So obviously the order comparisons get a lot easier come May and June when you're comping down $13, down $19. in orders. And what is the right expectation? I mean, I know you gave the second half guidance for the range at automation, but are we going to see a bigger snapback in the absence of KOB1 kicking in where we could see a double-digit month or two or three as we get to the third quarter, the fourth quarter?

I think your assumption is right. We should not expect a KOB1 activity for the next 12, 18 months. I don't foresee that. More significantly, it will be two, and obviously what we've been living on, it will be three, certainly. What I will tell you is that snapback is fully dependent on what happens in North America, period, end of story. And that's really the – that will measure the dimension of how quickly it comes back, how hard that snapback is.

So I think we're trying to be cautious. Fair enough. But I think you'll watch the order pattern that these guys will put out because we're not going to stop that. I'm assuming Lyle's not going to stop that. He may make that decision. But just watch it and see what happens from that standpoint. We have time for one more question out there for the next person. Thank you. Thank you, Guy. You take care, and I hope to see you in a real city one of these days.

Yeah, likewise. Looking forward to it. Yeah.

The final question comes from Josh Pokrzwinski with Morgan Stanley. Please go ahead.

You got that one right. Good way, Josh. Close enough.

Dave, it's been a pleasure.

Enjoy your time. Dave, that's closer than Jeff's sponge.

He deserves it.

Oh, oh, oh, oh. That's fire, Chuck. Okay, let's start throwing some muds out here. Let's go. Okay, Josh.

Dave, enjoy retirement. Get a few more dogs. Take in a few more Cardinals games. I'll certainly miss you in Laguna. Well, congratulations and good luck. You don't need it for sure. I do. But on to the question side of things, if I look at Autosol, kind of a similar angle as what was brought up before on CNRS, it looks like for the second half, you know, the range got a little wider and maybe a little bit lower for I know that, you know, while and Dave, you guys both talked about KOB3 and kind of the process energy complexes being, you know, guidance parameters or drivers of the high end versus the low end last quarter. How do you see those evolving? What are the drivers of that range today? And how important is kind of that KOB3 process bucket?

So I'll give my answer, and I'll give – I mean, I know how these guys are thinking right now. They've had a couple good quarters. You know, they're still negative, Josh, as you clearly see. They've been very cautious relative to taking the back end up. So I think they've been – you're right. As they got a little bit better in the second and third, they probably did a little bit on the fourth as they look at the quarter. And so I think these guys are being cautious because we have not seen the pure whites of the eye relative to that U.S. recovery. And I think if we get a month or two where we see that consistent, KOB3, KOB2 type of ordering in the USA like we've been seeing in Asia, like you're seeing in Europe. I think these guys will get a little more comfortable relative to that volume and that profit coming in. So I think that's my impression of these guys. They've gone through a tough market here, a cost reset, and no one wants to say, hey, this thing's over, let's just go. I mean, it's just like Jamie. Jamie was cautious a couple quarters ago, and now as he's running through, it's hard for him to hide. So I think that's my feeling. Anything you want to say there?

No. I would add, I think it's well said, David. Obviously, we're watching things like site access very carefully in terms of our engagements with customers, the spring outage schedules, which are holding right now, which is very important as well. Those are all positive signs. The short day-to-day, I mean, your order pattern.

So what was your day-to-day order this month? What do you think it's going to be?

In the month of January, it'll land somewhere between $40 million and $43 million, somewhere in there a day. So that's a good number.

That means he's coming back. So I think he's gaining. Everything's holding that we talk about from the standpoint, Josh. And now he just wants to see a couple months of that continue. I mean, you saw the early signs in December. If January gets the details, he wants to analyze the details, that would be good. Early at first half of February, he gets into investor confidence. Then I think he's going to say, okay, it's definitely taking hold firmly. Just like we said three or four months ago with Jamie's business. So I think that's what it is. But all the signs are doing the right thing.

Got it. That's helpful. Then going to the longer cycle end of the equation, the longer projects that got shelved with COVID, Do you guys think that those come back off the shelf? Do we wipe the slate clean, start over, just given the world has changed so much? What are you hearing? What are you talking about with your customers today? Do we have a scenario where those come off, plus we have post-COVID kind of new projects and a nirvana scenario? Just happy to weigh in on all fronts there would be great.

Yeah, I'll give you a quick color. The funnel sits at about $6.5 billion. It really appreciably has not changed for the last three months. What happened within that funnel, there were a number of cancellations, but they were replaced by a high number of smaller jobs. So quicker paybacks, those types of things. In addition to that, what's been interesting is we now have about a $1.6 billion electrification facility. uh, project funnel, which OSI brought to us. So that's in addition to the $6.4 billion, uh, KOB one funnel that we've been talking about traditionally. We'll talk about this a little bit more in detail in, in a, in a few weeks, but, uh, overall feel that those projects are going to eventually move forward.

It's just a matter of time here around demand. Yeah, I think from my perspective, as I hear from the customers, I think a lot of those projects will sort of be recut differently. The pressure is on the CEOs relative to capital and things like that. So I think that I think the projects, they're good projects. They will move forward, but they might be smaller. They might be cut a little bit differently. I think there's been a lot of discipline in our customer base around spending capital that's been learned the old fast way through a lot of pain, like broken legs, broken arms, a couple of knives in the back. And so I think that I feel good they're going to be good. There'll be obviously some that leave, some new. But overall, I think it's going to be good. And I think Lyle's got one more thing.

Yeah, just one more thing to your point, David. You're exactly right. If your project was a quote-unquote bottom-of-the-barrel type of refinery project, that's got scrapped. If your project is a conversion to a biofuel in a refinery, those projects are moving forward. There are many active in the United States and Europe, and we're very engaged in those processes.

It's going to be a – That will be more late 21, early 22, Josh, as I see it right now. So Lyle's team has got a lot of work they've got to get done. They've got a lot of repositioning work and facilities underway right now in Europe, and he's got to get that done because his business is coming back, and he can use capacity around the world right now to cover it. But when he starts getting all the water area markets going, he's got to get those new facilities up and running. With that, I want to thank everybody. And, again, I will get back to people on the emails. It's going to take me a while. And I truly appreciate what, you know, people sent to me in Texas and emails, and I look forward. You know, Lyle and I will try to get in before I totally go out to pasture. We will try to get into New York and have some sessions. I'm trying to help Lau. I'm most likely to probably bring Jamie along just so he can learn too. But, you know, we want to do that. That's part of my learnings that I could pass on to these guys, these gentlemen. And I have been doing this a long time, as you know. Not only 20 years as CEO, but I was, when I came back from Asia, I became the spokesperson for Emerson for those three years. And I was investor relations guy for multiple years, 18 months. But I look forward to seeing all of you, and I truly appreciate everything you've done for me over the years. And keep me straight, keep me honest, and challenge me and disagree with me. I love that. Take care. Bye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.