Emerson Electric Company

Good morning and welcome to the Emerson second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists 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. And 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 Brian Joe. Please go ahead, sir.

Good morning, and thank you for joining us for Emerson's second quarter fiscal 2022 earnings conference call. Today, I am joined by President and Chief Executive Officer Lal Karsambhai, Chief Financial Officer Frank Delaquilla, and Chief Operating Officer Ram Krishna. 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, as noted in our press release, Emerson officially announced the date and location of our 2022 investor conference. The conference will be held in person November 29th in New York City. More details will be distributed as we approach the conference later this year. I'll now turn the presentation over to Emerson's president and CEO, Wal Carson-Bai, for his opening remarks.

Thanks, Brian. Good morning, everyone. I'd like to begin by thanking the global Emerson team, who, again, delivered very strong results amid challenging operating conditions. I'd also like to thank and extend my appreciation to Emerson's board of directors for their energy and support of management, and lastly, to all our shareholders who believe in our value creation proposition. Thank you. A lot has changed since our call three months ago. Operating conditions clearly worsened. A war in Ukraine, COVID lockdowns in China resulted in a return to inflationary commodity environment, lead time extensions and shortages in electronics and logistics challenges. All this resulted in challenging variances across our businesses. But in spite of this, our business performance was strong. and we delivered differentiated results in our ability to execute. Orders grew 13% on a March-ending three-month underlying basis, led by 17% growth in automation solutions and 7% growth in commercial residential. Our underlying sales accelerated to 10% growth, with conversion in automation solutions improving sequentially to 7%, and commercial residential very strong at 14% growth. we have broad world area strength across our business. Price activity was very robust in the quarter, and it is sticking, but it is largely offsetting inflationary impact of materials, labor, and freight costs. We delivered incremental profitability of 24% in the quarter and remain committed to our guideline of 30% for the year. Earnings per share on an adjusted basis grew 21% to $1.29, $1.21, excluding an $0.08 impact that came in the quarter. Bottom line, yes, it is challenging, but our operating diligence, our management process enabled this performance. I'm very proud of the team. Going forward, we see a robust industrial environment led by energy investments in North America and the Middle East. The war in Ukraine and sanctions on Russia has brought North America gas back to life. Reshoring, which many of us have talked about, which at this point has been largely discussed in relation to discrete manufacturing, can and should be now fully valued as it relates to energy, specifically LNG. And Emerson is uniquely positioned to capitalize on this trend. However, I should state that our perspective on energy remains unchanged. We'll continue to divest commoditized upstream oil and gas businesses. We have two processes currently in the market. Sustainability investments are core to our customer success. And the unprecedented gas wave will serve both to shore up gas as a transitionary energy source and eliminate European dependence on Russian gas. Lastly, the technology stack that we can now bring to market the best-in-class intelligent devices, a highly differentiated control system topology, and the industry's leading software offering with Aspen Tech placed Emerson in a unique position to succeed. Our KOB1 funnel grew to nearly $7 billion in the quarter, up almost half a billion dollars, with sustainability projects reaching a billion dollars in value within that funnel. Demand in our climate business remains strong across most segments in the mid single digit range. We continue to work closely with our HVAC OEM customers as we navigate through challenging inflationary environments and I appreciate the efforts that Carrier and Trane in particular have made to enable us to pass along price actions. The future of this business is bright. We will watch the current residential cycle carefully But over the medium term, we're well positioned to capitalize on our ESG trends through more efficient systems, new refrigerant standards, and the acceleration of heat pump adoption in Europe. Our professional tools and home products business continue to benefit from strong commercial demand, although residential demand has weakened in the quarter. And we attribute much of that to the fact that household disposal income cannot readily be applied to other activities in lieu of home improvements. And we're watching that carefully. Nevertheless, we have strong backlog positions in that business, which will enable us to deliver strong results for the year. Our confidence enables the raising guide we gave today of five cents on the bottom, which is at 495 or 10% growth, and the top, to $5.10 or 13% growth over 2021. Regarding cash flow, we remain committed to 100% conversion in 2022. Within this guide is the operational impact from our decision to exit our Russia business, which we announced today. This includes the sale of our MedTrans subsidiary. We will also continue to make progress on our portfolio journey, With the TOD divestiture expected to close in this current quarter, an Aspen shareholder meeting scheduled for May 16th would close expected the same day. We're very excited and I remain excited about working with Antonio to build a unique, highly differentiated industrial software company. Lastly, I would like to say a few words about our people. Our cultured work is underway and we are developing a talent philosophy which will be highly differentiated and enable Emerson to attract and retain the best. A lot of great work underway by the team on this front as well. With that, please turn to slide five. We continue to see strong levels of demand across both platforms, as I indicated. I'll start with a few comments on commercial residential solutions, whose trailing three-month orders were up 7%. We are still seeing broad strength across both climate and tools and home products as we hit both comparable results versus hit strong comparable results versus a year ago. Within climate tech, European resi and commercial heating markets continue to be strong, and Asian decarbonization trends are gaining momentum from government support. As expected, U.S. resi demand began to moderate, and as we went through the quarter, but remains positive in the Americas as we enter the peak cooling season. For the tools business, as I mentioned, commercial and industrial momentum continues, while residential began to slow. And we'll watch that very, very carefully, particularly the DIY rates as we go through this quarter. The trailing three-month orders for automation solutions were up 17% from the prior year, and that's indicative of the continued strength across process, hybrid, and discrete. Within hybrid, life science investments remain strong globally, while metals and mining investments are resurging, particularly in the southern cone of Latin America and in Africa. In the discrete space, supply chain-driven segments like semiconductor and electronics are on track for 20-plus percent year-over-year growth, while factory and machine automation maintain strong momentum. Process markets continue to gain momentum, with chemical utilization improving and power market strength through renewables and grid modernization. We also see continued oil and gas spend, as I mentioned, led by U.S. shale investments. Upstream CapEx is up double-digit year over year, despite reinvestment rates near record lows at 40 percent. We're in the beginning of a strong growth cycle, and I expect to see continued investments in key regions and in decarbonization initiatives. As oil prices rose, we saw more activity around key energy segments, such as LNG, clean fuels, and renewables. And I will share a little more color with you on these markets on the next slide, page six. Just to give perspective on what we're seeing in terms of LNG, which we highlight here, the U.S. opportunity on the left side of the chart. If you think about the LNG wave from 2000 to 2010, which is predominantly driven by the Middle East, we saw 125 MPTAs of investment, million tons per annum capacity, come online during that wave. In the 2011 to 2021 wave, which had a U.S. component, a Russia component, and an Australia component predominantly, another 125 MPTAs came online. We currently expect a 2022-plus forward wave that we're now entering and is being funded to result in 250 MPTAs of investment, of which 150 are already underway with an incremental 100 coming online over the next few years. So a very exciting period of time here as we think about gas, not just liquefaction, which will impact Middle East and U.S. predominantly, but then the regasification and tanker investments that are required to get the gas into Europe through this segment. On the right-hand side of this chart, Emerson continues to play a pivotal role as traditional energy players and new entrants begin to focus on new energy segments such as clean fuels and renewables. Our decarbonization and sustainability funnel grew to $1 billion in the quarter, as energy companies are dedicating roughly 15% of their CapEx budgets to these projects. In clean fuels, Emerson was recently chosen as the main automation partner for the world's largest renewable diesel facility and will supply key digital offerings as part of this project. Emerson also expanded its role in renewable energy through its acquisition of Media Technique and American Governor Acquisitions, which also have and also through some technology investments in the core portfolio. In the second quarter, Emerson geological simulation software was selected to provide its geological and reservoir modeling software to Haida, a geothermal energy company in Belgium, to increase the safety and reliability of geothermal energy sources. This is an exciting example of a traditional Emerson application designed for the oil and gas field now expanding to to a diversified sustainability application. And then lastly, Emerson was selected as a software and controls provider for the world's largest battery storage facility, another high-growth area where Emerson brings immediate relevance. And with that, I'm going to turn it over to Frank to go through the second quarter results.