Emerson Electric Company

Good morning and welcome to the Emerson First Quarter 2022 Earnings Conference Call. All participants will be in listen-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 your telephone keypad. 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 Colleen Nettler. Please go ahead.

Thank you. Good morning, and thank you for joining Emerson's first quarter fiscal 2022 earnings conference call. Today, I am joined by President and Chief Executive Officer Lal Karnabai, Chief Financial Officer Frank Delaquilla, 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. Turning to slide three, I would like to highlight a few exciting accomplishments for Emerson this quarter. First, in December, Emerson announced the acquisition of META Technique, a leader in wind power control automation. META Technique brings specific control design expertise complementing our existing Emerson Ovation and Power portfolio. We are very excited to welcome the META Technique team to Emerson and its ability to expand our renewable power generation capabilities. Secondly, Emerson was recently named the 2022 Industrial IoT Company of the Year Award by IoT Breakthrough. Emerson was acknowledged for advanced digital technologies, software, and analytics, that help customers across a range of critical industries optimize their operations and deliver on environmental sustainability goals. Finally, last week Emerson was recognized as a 2022 Best Place to Work for the LGBTQ Plus Equality and earned a score of 100% on the Human Rights Campaign Foundation's 2022 Corporate Equality Index. Before I turn it over to Lal, I wanted to provide a brief update regarding one of our previously communicated investor events. We are now planning to host a half-day in-person investor conference in the second half of this calendar year, where we will provide an overview of our business strategy, portfolio direction, and long-term financial outlook. We look forward to sharing additional information as we finalize details for this event. I'll turn the presentation over to Emerson's President and CEO, Lal Karzanbai for his opening remarks.

Thank you, Colleen. I'd like to begin by recognizing the exceptional work that nearly 90,000 Emerson employees did to deliver our first quarter results. I'd also like to express my gratitude to the OCE and the Board of Directors for their continued support. And last, but certainly not least, to our shareholders for your trust and investment in our company. Saturday, February 5th marks my first year anniversary as CEO of Emerson. And although I do not intend this to be a holistic reflection of my first year, I would like to share five important learnings. One, build good teams and empower them to lead. We have a very strong new OCE. We hired our first Chief People Officer, our first Chief Sustainability Officer, named a new Chief Operating Officer, and named our Chief Compliance Officer to the OCE. And we have an independent chair of the board in Jim Turley, a great partner for the shareholders and the management of this company. Number two, diversity makes us better. It is my goal to continue to create a workplace where people feel like they belong, have a place, and can be themselves. I am very proud of the diversity targets we established to double representation of women and U.S. minorities in leadership by 2030. Number three, strengthening any business starts with strengthening its culture. Culture transformation is well underway at Emerson, and it includes a redesign of the Emerson management process into a new, modern, cohesive system. Number four, think boldly. Emerson is a storied company going back to 1890, but we cannot be afraid of change and must always be keenly aware of the value creation levers at our disposal. Number five, tomorrow starts with us. We will live our purpose. We will drive innovation that makes the world healthier, safer, smarter, and more sustainable. We will create accelerated value through culture, portfolio, and execution. Allow me now to turn to the quarter. It is a very positive quarter, significant from a number of dimensions, as we delivered $1.05 of adjusted EPS, an increase of 13% over 2021 Q1. Demand is accelerating in automation solutions and continues to be very strong in commercial and residential solutions. The trailing three-month underlying orders were up 17% for the enterprise as a whole. Our relevance with our customers continues to be a differentiator across all of our businesses. whether it is the energy customer undergoing a critical transformation to a carbon-free or lower carbon future, or a new energy economy startup customer in hydrogen or biogas. Our KOB funnel continues to be very robust, valued at approximately $6.5 billion at the end of the quarter, and KOB 3 hit 60% of total automation revenues in the quarter. Interestingly as well, the sustainability and decarbonization element of the funnel is now valued at over $800 million, up over $100 million over this time last quarter, very positive. Our HVAC OEM customers who rely on our compression and electronics know-how to make their systems more efficient, to meet new regulatory standards, and also the tradesmen, the utility workers, the plumbers, many of whom, as I continue to learn, have rich tattoos and who trust our gear to get the job done. Over the past 100 days or so, I had the opportunity, along with many members of management, to meet these customers representing a broad cross-section of our markets and feel great about the role that we continue to play in making them successful. Our execution in the quarter was excellent. We improved adjusted EBIT margins, 140 EBITDA margins, 140 basis points to 19.6%, delivering incrementals of 32% across the enterprise. The automation business is operating at historical levels of profitability, with adjusted EBITDA margins increasing 320 basis points to 21.5%. Our commercial and residential business was faced with planned but unprecedented price cost challenges, and the team performed exceptionally well. We have confidence in the price and cost management actions that are in place as we go through 2022. We will speak about the operating challenges that continue to be prevalent, and most importantly, what we are doing to address them. These include electronics, both lead time extensions and purchase price variances, and shortages particularly that impacted automation solution sales in the quarter, logistics and freight cost escalations, and labor wage inflation and availability that are concerns, particularly in North America. In most of these cases, we feel better today than we did three months ago, but they do remain challenging. And we have been aggressive and implemented further price plans to offset these additional costs. Lastly, overall, I have and we as management have increased confidence in our 2022 financial plan. We have increased our underlying sales growth estimates for the year to 7% to 9%, up by a point, and the adjusted EPS target to $4.90 to $5.05, about 10% increase over last year at the midpoint. I've often said to the management team that sometimes growth isn't a lot of fun because we are working so hard. But I'll tell you that there's no other team I'd rather do it with than this team here at Emerson. Let's now turn to chart five, please. We continue to see increasingly strong levels of demand across both platforms and all world areas. In commercial and residential solutions, trailing three-month orders were up 13 percent, continuing an extraordinary level of demand. The European heat pump market continues to benefit from ongoing electrification trends in Europe. For our tools business, we see long-term cycle demand related to the housing market to remain strong with favorable macro trends and fundamentals, including DIY trends. At the same time, I believe commercial and industrial segments are seeing considerable strength with project starts in the US and Europe. The trailing three-month orders for automation solutions were up 19% versus prior year, and there is broad strength across discrete, hybrid, and process markets across all world areas. China orders were up 34% on a destination basis and continues to be an important growth region. Sustainability-related investments, as I referenced earlier, continue to be a key driver for our business, including renewable and grid investments, which benefit our power and OSI businesses. We are also seeing continued recovery in our energy markets, with capital spending budgets up significantly year over year, in part due to LNG and Middle East investments. Portions of these budgets are being dedicated to decarbonization, emissions, and energy efficiency projects, which are accelerating as our customers take tangible steps in pursuit of their ESG targets. To provide a little color on this, I'll highlight a few of our recent project wins related to this growth sector on slide six. Excuse me. First, let's start on the left of the chart. Emerson was recently awarded two sizable projects in the Middle East with our measurement solutions business to help customers reduce emissions. These solutions provide continuous monitoring systems, allowing customers to take preventive actions against emissions and releases. The main driver behind these projects was the customer's commitment to emissions reductions as part of net zero targets. Both projects were supported by environmental regulations in the Middle East to minimize emissions, protecting the environment and community. Next, in the middle, a refining customer in Europe has chosen Emerson to implement a full-scale automation and control modernization of one of their compressor units. You upgraded systems utilizing Delta V PK controller and control software solutions will provide greater control and load sharing of their system. This greater degree of automation, control, and advanced compressor application is uniquely provided by Emerson and will allow the customer to optimize their operations, thereby increasing their efficiency and reducing energy and load requirements. Solutions like this can help customers use up to 30% less energy in their operations. That's a very critical number. And that's a critical piece of what many customers' net zero journeys. And then finally, on the right, last month, Emerson announced participation in the Poseidon project in the Netherlands. Poseidon will be the world's first offshore hydrogen generation project, basing an electrolyzer on an offshore platform with nearby offshore wind power generation. Offshore wind will power the electrolysis of demineralized seawater to produce hydrogen, which will then be transported to shore for integration with natural gas in the national gas grid. Working as one of the key consortium partners with Neptune Energy, Emerson will deploy Delta-B software and systems to manage desalination, electrolysis, gas transportation, and the associated infrastructure. Learnings from this project should help provide a broader pathway to large-scale offshore green hydrogen production. We're very excited with this partnership. These are just three examples of how Emerson is assisting our current and new customers on their net zero and sustainability journey. And with that, I'll pass the call over to Frank Dellaquilla, who will go through our financial results for the first quarter.