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spk15: 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.
spk11: 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.
spk14: 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.
spk13: Thank you, Lyle, and good morning, everyone. Thanks for joining us. If you would, please turn to slide seven, and I'll review the quarter. As Lyle said, we had a very strong quarter. I want to also extend my thanks to everyone in operations for the execution that they turned in in the face of some very real operational challenges. Demand continues to be robust across most key end markets, driving second quarter underlying growth of 10% ahead of the guidance that we provided in February. The higher sales were partially driven by price actions and realization that were implemented to offset continued inflation. And we'll talk a little bit more about the price inflation dynamic when we address the guidance. For the quarter, we realized four points of price overall, and we did turn positive with respect to net material inflation as we said we would. Adjusted segment EBITDA increased 20 basis points as we more than offset additional material costs and other inflation, which was significant. with increased price and effective cost management. SG&A performance was excellent. We leveraged it. It was essentially flat in dollars in Q2 versus last year, and it was leveraged two points across the enterprise, reflecting previous restructuring actions and spending restraint in the businesses. Adjusted earnings per share was $1.29, up 21 percent versus prior year, exceeding the February guide of 115 to 120, As Lal mentioned, it includes an $0.08 tax benefit in the quarter. That benefit was included in the 22% tax rate guide for the year, but the timing of when we would see it in the year was uncertain. We actually realized it in the second quarter. Free cash flow was down 50% versus prior year. This is mainly due to higher inventory as a result of defensive stocking due to supply chain constraints, finished goods awaiting shipment, and, of course, higher expected sales in the second half of the year. Nonetheless, we have a challenge, and while we believe this is timing-related and we will get on top of it over the course of the year, we expect conversion to improve significantly in the second half. Turning to the platform results, both businesses executed extremely well. Automation solution underlying sales were up 7%, led by the Americas and China. Price realized in the quarter was 2%. All key end markets showed strength, and KOB3 activity continues to be strong, remaining at 60 percent of sales. Backlog increased by $400 million in the quarter to $6.4 billion due to the strong pace of orders, which gives us confidence in the year end and positions us very well into 2023. Operations have adjusted to longer lead times for critical production inputs, and they continue to effectively mitigate logistics constraints and other challenges. We expect our ability to execute orders in backlog to improve throughout the balance of the fiscal year. Automation Solutions adjusted EBITDA improved to 170 basis points versus prior year on leverage, price realization, and cost control, despite higher general inflation and significant cost increases for electronic components in the quarter. We experienced a sharp cost increase in the second quarter with respect to electronics, that has been addressed by price actions and that will be recovered over the balance of the year. The strong operational performance in the platform is reflected in 55 percent leverage for the quarter, another very, very strong operational quarter. Commercial and residential solutions also performed well operationally under a similar but somewhat different set of challenges. Underlying sales increased 14 percent, including nine points of price realization in the quarter. Price-less net material inflation did turn slightly positive in the second quarter, as we said it would, and it is on the trajectory that we said we would be on when we described this in the last call. Sales rubbed double digits in all world areas except China, where they declined slightly, in part due to the lockdowns across the country. Commercial and industrial markets remained strong. North American resi grew well in the quarter. we are beginning to see some signs of moderation there. In tools and home products, service, industrial, and online channel sales remain strong. There are some indications of slowing in the retail channel, as do-it-yourself projects begin to be impacted by the inflationary environment and the diversion of people's attentions to other things as the economy opens up. Backlog increased $100 million in the quarter, mainly in climate technologies. Adjusted EBITDA was down 230 basis points, consistent with our expectations going into the quarter. As I said, price-less net material inflation was slightly positive in the quarter, remained margin-dilutive, and additional price was realized, but was offset by freight inflation and above-normal wage costs. Please turn to page 8 for the EPS walk. Adjusted EPS was 129. up 21% and exceeding the top end of the guidance range by $0.09, including an $0.08 tailwind from a discrete tax item. Adjusted EPS was also negatively impacted by $0.04 due to prior year one-time gains. The delta, that is, was impacted. Again, as a reminder, adjusted EPS excludes intangibles amortization, restructuring, transaction costs related to the Aspen Tech transaction, and first-year purchase accounting charges. Operations in total leveraged at nearly 25% and contributed 11 cents to adjusted EPS versus the prior year. So before we go to the guidance, I'm going to turn this over to Ram so he can provide an update on the operational and supply chain challenges that the businesses continue to face.
spk10: Thank you, Frank. Please turn to slide 10. Clearly, like the last few quarters, the operating environment has remained challenging as electronic supply, commodity inflation, and logistics constraints continue to impact our operations globally. Additionally, geopolitical uncertainty and COVID lockdowns in China introduced new challenges as we exited Q2 and began the third quarter. On the commodities front, the current geopolitical environment has led to rising steel, non-ferrous commodities, and oil prices causing incremental inflation on a large portion of our material purchases. This has been a significant reversal in course for some commodities such as steel. Due to the magnitude of the increases, additional material inflation will be incurred as we progress through the second half. Price actions already in place and the additional ones underway will keep our price less material inflation positive for the second half of the fiscal year, but will constrain margins in our climate business. Higher oil prices have also led to increased logistics costs. This again reiterates the importance of our regionalization strategy, which allows us to leverage our strong regional supply bases and largely avoid expensive intercontinental logistics. On the electronic side, component availability remains a concern, especially within automation solutions. While we see stabilization of lead times, the market is expected to remain tight well into 2023 as capacity additions are not able to keep up with demand. Continued purchase price variances are also impacting profitability, although our proactive price increases help ease the impact. Our global teams continue to do outstanding work to qualify additional suppliers and redesign products to utilize available components, and we're clearly seeing the benefit of this effort come through. Lastly, the China COVID lockdowns continue to be a fluid situation. The impacts to our second quarter were minimal, but these lockdowns are expected to have a bigger impact heading into Q3. The current issues are contained to our plant operations in Shanghai, but we are beginning to see constraints to our plant operations across the country due to supplier shutdowns. We're keeping a close eye on the situation and will adapt as necessary. While we expect to face headwinds in many of these areas for the rest of the year, we're confident, very confident, that our global teams will deliver differentiated operational execution in a challenging environment as evidenced by our strong first half performance. I will now turn the call back over to Frank.
spk13: Thank you, Ram. If you would, please turn to slide 11, and we'll go through the outlook for the year. So as Ram mentioned at the top of the call, we continue to see very strong demand across nearly all businesses and world areas. The challenges are operational challenges. They're not challenges around the basic demand across the enterprise. Automation solutions is strengthening across process, hybrid, and discrete markets. In process markets, recent events will drive incremental investments across the energy value chain. This strengthening demand will spur growth in transition markets like LNG and emerging markets like clean fuels, battery storage, and renewables, as well as in traditional oil and gas markets, as Lyle discussed. Together with continued robust demand in chemicals, power gen, and grid modernization, we are increasing our outlook for the process market growth in 2022 to high single digits. We also expect hybrid demand to remain strong at mid to high single digits, including continued life science investments and high commodity prices, boosting metals and mining capex. Discrete markets remain strong in the 10% range with semiconductor electronics and factory automation investments all strong. So while we're encouraged by the underlying demand situation, there are constraints, as Rahm outlined, regarding supply chain, logistics, and potentially COVID in China, which is an evolving situation. It's already had somewhat of an impact in the quarter, and there's uncertainty as to how that will unfold. In particular, we expect challenges to continue around electronics availability, and we expect that to continue into 2023. continued strength in our core markets, our backlog level, and orders momentum provide the underpinning for strong second-half sales growth, and we will have to deal with those challenges as they evolve. Overall, we have confidence in our fiscal year sales guide for automation solutions despite these challenges, and we also have included in the guide the reduction in volume related to the exit from our Russian business, as Lyle described at the top of the call. In commercial and residential solutions, we expect continued double-digit sales growth for the third quarter and full year. Demand continues to be strong against resi and commercial businesses. In climate tech, residential growth is supported by European heating markets and by new product launches currently underway for the 2023 U.S. regulation changes. Climate, commercial, and industrial growth is also supported by the European and Asian heating markets. Tools and home products retail sales are expected to moderate due to the effect of consumer inflation, as I said earlier. However, continued industrial momentum will benefit the professional tools business. Please turn to slide 12 for the outlook. We are increasing our underlying sales range by two points, to 9% to 11%, driven by the demand outlook and by incremental price versus the prior guide. Automation solutions guide will remain at 7% to 9%. As discussed on the previous slide, we're increasing our underlying sales expectation for commercial and residential to 12% to 14%, and this is substantially attributable to incremental price being realized in the business. We continue to expect to see tailwinds for price-less net material inflation in the second half, as we previously communicated. This is the traditional price-cost relationship that we have always discussed in the context of this business. This year is different. We are seeing significant inflation in other cost areas, and we are implementing significant additional mitigating price actions to protect profits. These actions, however, constrain or dilute margins. For this reason, we're going to talk about price-less net material generally, as price-cost, as we have described in the past, doesn't really capture the breadth of the inflation challenge. I want to point out that we are realizing more than 100 percent of the material-driven price that was in our previous guide, and we are implementing actions to offset resurgent material costs as well as the other elements of inflation. We're achieving substantial price realization for 2022, but that overall inflation dynamic pressures incremental margins in commercial and residential. We will continue to drive for 30 percent incrementals for the year for total operations, but we'll probably get there differently than we thought we would even three months ago with stronger leverage in automation solutions and pressure on the leverage in commercial residential due to the price inflation equation. The other elements of the guide, tax, dividend, and share repurchase remain the same as they were in February. Operating cash flow is now expected to be $3.6 billion, due mainly to the increased inventory resulting from supply chain constraints, as well as some other balance sheet timing issues. We are absorbing within this guide as well $100 million of tax payments associated with the vert of gain that we booked in the first quarter. Under GAP, these run through operating cash flow, although they really are related to the financing cash flow that we realized when we booked the gain in the first quarter. Free cash flow is now $3 billion and represents approximately 100% conversion for 2022 after converting at 130% last year. The GAAP EPS Guide is updated for our improved sales outlook, and as a reminder, includes two items related to the Aspen Tech transaction, both estimated transaction fees and interest expense on the $3 billion of term debt we issued in December in anticipation of the closing. The adjusted EPS guide moves up 5 cents at the bottom and the top to $4.95 to $5.10. Inside this guide, we're absorbing the estimated impact to operating profits related to the reduction of our Russian business, but we have not included any other potential costs or charges resulting from the exit, which are not yet known with any precision. Also, to be clear, No estimate of the operational impact of Aspen Tech is included in these guidance numbers, nor is the future gain or tax impact of the TOD divestiture, which is expected to close this quarter. Turning to slide 13, I'll cover the third quarter. Q3 2022 net sales growth is expected to be 7% to 9%. Underlying sales growth between 9% and 11%. We expect automation solutions. Underlying sales in the range of 7% to 9%. commercial and residential between 13% to 15%. GAAP EPS is expected to be between $1 and $1.05, and adjusted EPS between $1.25 and $1.30 on the same basis I described for the year. I want to point out that this guide considers the current environment and challenges that businesses are navigating, including the COVID shutdown, the continued electronic shortages. We're one month into the quarter, and these are very real impacts on the quarter. We intend to work through them. And assuming that the critical uncontrollable variables like these stabilize or improve, we will be well positioned to deliver a very good third quarter and then a very strong fourth quarter to close out the year. And with that, we will open it up for Q&A. Thank you.
spk15: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Joe Ritchie with Goldman Sachs. Please go ahead.
spk03: Thanks. Good morning, everyone.
spk15: Good morning, Joe. Good morning, Joe.
spk03: Hey, I want to maybe start off with China today. Like I saw that you saw double-digit growth in automation solutions. I'm just curious, how did that trend through the quarter, and then what are you kind of factoring in for the lockdowns and the impacts associated with that in your guidance?
spk14: Yeah, I'll speak to the business activity, Joe, and just focusing on your question around autosol. Very strong quarter. and both in sales conversion, but also in orders. And you look at the destination business, both in the mid-teens, high to mid-teens. So I feel very strong about the activity for Autosol. The commercial residential activity is somewhat more muted, driven by the climate resi cycle, and those orders were softer. as we went through the quarter. But when I look at the project activity, when I look at the install base momentum we have in China, I see the outlook. I continue to feel very strong about the outlook for the year, Joe, for us. In terms of sales conversion, Ram, if you want to speak to it.
spk10: Yeah, so, Joe, I think obviously we've got – 20 plants across China, and we have a few around Shanghai where we have experienced constraints in the last four weeks. Hopefully, as we go into the month of May, we're starting to see those open up. We partially opened up in the Shanghai area this week. Clearly, we have supply chain across China that supplies us that have been impacted. We are expecting that situation to improve as we go through the quarter. April was a tough month for us, but we do believe that we've built in improving situations through the quarter, and that's kind of baked into the guidance.
spk04: Okay, great. That's helpful.
spk03: If I could ask a follow-on question, and apologies if I missed it earlier, but in CNRS, I know that there was an original assumption that we could potentially see flat to slightly up margins in 2022. Just help us understand how you expect the margins in that business to expand in the second half of the year. And then any commentary on price cost in CNRS would be helpful.
spk13: Yeah, Joe, good morning. This is Frank. So the margins will improve sequentially in the second half, as we've expected all along, based on the price cost, the incremental price that will come through. The price is back and loaded for the year in climate tech. Year over year, you know, we are struggling to get to a push. because of the incremental inflation in the business. So the business will deliver EBIT dollars, strong increase in EBIT dollars year over year, and consistent with what we thought we would do at the beginning of the year, but the incremental inflation and the price that the business is going out to cover dilutes margins.
spk03: That makes sense, Frank. Thank you. I'll get back to you. Thanks, Joe.
spk15: The next question will come from Steve Tusa with JP Morgan. Please go ahead.
spk05: Hey, guys. Good morning. Hey, Steve. Morning, Steve. Sorry, I was on speaker there. Just on the orders, you noted some signs of moderation in residential on the CRNS side. Any other part of the orders trends where there was a you know, um, bit of a, bit of a standout in terms of, um, uh, either slowing or accelerating any, any real kind of standouts on the, on the order front, um, on kind of a sequential monthly basis.
spk14: Yeah. No, good question. And, um, no, beyond the, we're watching the resi very carefully, obviously, uh, not just the climate side, but on the home tools side and, uh, watching for traffic through our, our, um, big box partners there. But beyond that, look, the strength in automation continues. I think we're energized by seeing the capital project funnel grow and the opportunities there. KOB3 continues to be very strong, 60% in the quarter for automation solutions. That's been the engine in that business. But now with a KOB1 and 2 wave coming at us, Feel very robust about the outlook there. Beyond that, nothing else to comment, Ron?
spk10: No, and Steve, I think the European heat pump business remains strong, very, very strong. And actually, our North American HVAC residential business also remains strong. Okay, so it's more on kind of the resi side of tools, if you will.
spk05: Correct. Yeah. Okay, great. Thanks a lot, guys. Appreciate it.
spk15: Thanks. The next question will come from Scott Davis with Malayas Research. Please go ahead.
spk02: Good morning, everybody. Good morning, Scott. A couple things. I mean, just if we want to go back to chip availability, I mean, you guys were a little bit more confident, I think, last quarter in supply and demand matching up, perhaps by the back half of the year. Has this just shifted to the right and back? And I guess another way to ask it is, are you less confident today than you were three months ago?
spk14: Well, you know, I'll let Ram give his perspectives. But, you know, my perspective is it's gotten tougher. We've had to work harder, get more creative, qualify different suppliers, go into the open market, which all of that creates variability, variances in the P&L, and challenges. So that's versus where we were essentially three months ago. But having said that, we'll have to watch China carefully as we go through here through the month of April and May and watch what happens in the supply chain there. But that's how I feel about it. It certainly didn't get better between the China COVID lockdowns and obviously the war in Ukraine.
spk10: Rob? Yeah, and particularly on the electronics or the chip shortages, you know, lead times have stabilized, but they're running at 3x of pre-COVID levels, and so we're managing in that environment. The piece that we thought would improve was component shortages, but we continue to fight shortages on a weekly basis that, you know, are impacting our businesses, and hopefully we'll start to see that improve over the next several weeks, but at this point, We had hoped to see improvement in the shortages, and we haven't.
spk02: That's super helpful. And then other SKUs, is it a different list of stuff this quarter? Is it the same list of stuff that's hard to get or a different list? Is it changing, or is there more stability there across the board?
spk10: I would say it's similar. I mean, the similar type of components that we use primarily in our automation solutions business and some parts of our commercial and residential business. So I wouldn't say it's changing, but I would say I think the shortages are not improving. Okay.
spk02: Okay. Thank you. I'll pass it on. I appreciate it.
spk15: Thanks, guys. The next question will come from Andrew Obin for the Bank of America. Please go ahead.
spk09: Hey, guys. How are you? Hey, Andrew.
spk15: Andrew, hi.
spk09: Just based on the relative increase in revenue in EPS, it seems like, and this is our math, I apologize, this is like two-thirds additional price that just offsets high inflation. But there seems to be a third of the increase, which is real volume growth, with normal incrementals. So first, is that characterization right? And second, where was the stronger volumes?
spk13: So, Andrew, I don't know if it's exactly two-thirds, one-third. I think generally the characterization is right that most of the increase in the revenue forecast is price, which pressures margins, but there is some underlying volume increase as well. It comes through at very strong underlying leverage, actually, when you factor out the inflation items.
spk09: But what end market specifically?
spk13: Yeah, automation. Yeah, automation solutions. And residential, it's, I would say, almost entirely price-driven at this point.
spk09: Gotcha. And a follow-up, just going back to chip availability, you know, there's a lot of talk about, you know, capacity, trailing-edge capacity coming on in the U.S., maybe in six months at, you know, places like Texas Instruments, Intel. What kind of conversations are you having with with those guys. And when do you think, you know, you're actually able, you know, instead of going through brokers and redesign and sort of struggling with the supply chain, how long do you think it takes for real incremental sort of lower end capacity to become available in North America from core manufacturers? Is it six months or is it more like 18 months to two years? Thank you.
spk10: Yeah, so, Andrew, great question. First off, to answer the first part, we are in really good dialogue with suppliers like Texas Instruments, which are very important, NXP, TI are important suppliers to us on this exact same discussion. We believe that particularly for our types of chips that go into you know, our automation solutions product offering, it's nine to 12 months is the timeline for when we expect the capacity to come online, or at least that's really been the discussions we've been having with the likes of TI. So that's really what's being planned. We expect the constraints to last at least until then, but hopefully in nine to 12 months, we'll see that capacity impact lead times.
spk09: So early calendar 23. Yep. Thanks so much. Thank you, Andrew.
spk15: The next question will come from Andy Kaplowitz with Citigroup. Please go ahead.
spk01: Good morning, everyone. Good morning. Maybe can you talk about how your automation solution customers are thinking about large projects at this point? Obviously, commodity prices are more supportive. You talked about energy independence and LNG, but there's also higher inflation, higher rates. So how do you think the CapEx cycle plays out here, and what are your customers saying about moving forward with these bigger KOB-1 investments?
spk14: Yeah, good question, Andy. So twofold. One, there continues to be strong support both inside the boardroom and in actual spend around sustainability investments. Those continue to be funded. There's a lot of creativity in terms of what they are and how they're being implemented, and that's reflected in our funnel itself growing now, too. to about a seventh of the total KOB funnel. So very relevant there. And I feel confident in how those continue to move forward. On other CapEx, what we've seen and the biggest change we've seen as we went through the quarter was gas. And the conversation around gas really were 71 days into the war and that's only accelerated. And the opportunities particularly in three places, in Qatar, in Louisiana, and in Texas. We had a significant amount of work, engineering work, that was done pre-pandemic around investments in LNG in Louisiana, in Texas. A lot of those were shelved. The good news is a lot of that engineering had been completed, and we're seeing a number of those coming back into play now with FID activities across a lot of those. that would be the biggest change in acceleration in the funnel, and I think that plays very well. Obviously, gas for us is a very significant opportunity as we go forward. Ram, anything to add?
spk10: Yeah, I would just add, you know, we are seeing more ethylene, methanol projects being talked through, and frankly, globally, some refining capacity coming online, entering our $7 billion project funnel. So I think good activity across the board.
spk01: Thanks for that. And maybe just following up on LNG then, you know, you mentioned the 150 MNPA is already underway and there could be 100 more, but how much of the work is actually in your backlog at this point or burning through your revenue right now? You know, how long, how do you think the cycle will play out and when do you think will be the peak impact on Emerson's businesses?
spk14: Yeah, look, the opportunity, let's say it's sized at about a billion dollars. If you size it in total and you can divide that over, you know, five years, I think it's fair to say, into Emerson revenue, Andy. As you know, the cycle on construction is four to five years for each of these jobs. So you take the billion-dollar automation number that I essentially laid out for the 100 and you divide it by five. Now, what that doesn't include, in my opinion, is the regasification opportunities, which we'll see in Europe. in Germany, in places like Italy and Poland, and the tankers and freighters. So that's in addition to this. But about a fair, if you just do the math, at $80 million per five NPTAs, that's how we'd size that. Appreciate it, Gus. Thank you.
spk15: Thanks. The next question will come from Josh Poker-Zawinski with Morgan Stanley. Please go ahead. Good morning, guys.
spk12: Hi, Josh. Hi, Josh. So just to follow up on Andy's question there, just kind of wondering with this new project upcycle and a lot's changed in the industry and your business and the way the customers are sort of approaching these things, a lot more digital, is there less of anything as you guys think about the bill of materials on the project? Is there something where maybe like a digital asset is replacing a physical one? because it seems like the opportunity or kind of the bill material should be higher. I'm just kind of wondering, like, if there's anything that gets smaller, you know, as we enter this, like, KOB 1-2 up cycle.
spk14: Yeah, no, it's a great question. I'll let Ram give his thoughts as well. But, look, what we do see is an increase in use of analytics and software on top of the stack. And if you think about the capabilities that an asset optimization software capability like Aspen Tech has, brings to the table. That's increasingly more relevant as far as the mill materials for these customers. So that would be the biggest change. You still got to use final control elements. You still have to sense what goes through pipes. You're talking about very strenuous conditions of pressure and temperature. And ultimately, you still have to control the recipe with a control system. But the analytics layer and optimizing the performance of the of the process, I think, is where we see increasing more spend. Ram?
spk10: Yes, spot on. I think, you know, obviously the LNG wave is just going to be, from a content perspective, just as attractive as the prior waves for us with additional software that Lal mentioned. And then if you look at the sustainability wave around biofuels, hydrogen, et cetera, the content there is just as rich as what you would get in a chemical facility. So net-net, we don't see, you know, anywhere the content getting smaller. In general, it'll just get augmented with more software data and analytics in addition to the mechanical and the instrumentation content that we typically have.
spk12: Got it. That's helpful. Then just a quick follow-up. Because these projects are sort of longer cycle projects, Do you guys have anything in terms of price escalators or indexing that you're putting in the contracts to sort of protect yourself on the inflation side?
spk14: Thanks. Yeah, no. Look, these are very detailed commercial agreements that we ultimately enter, and most do have some kind of inflation protection elements there on material. But keep in mind, obviously, on elements like control and software, there's very little material to speak of. So it would be more on the final control side that we really worked very, very hard.
spk15: Perfect. Thanks.
spk04: Thanks.
spk15: The next question will come from Dean Dre with RBC Capital Markets. Please go ahead.
spk04: Thank you. Good morning, everyone. Morning, Dean.
spk14: Morning, Dean.
spk04: Hey, I know Aspen Close is coming up soon. What are the plans right out of the gates? Do you have any 100-day goals that you could share?
spk10: Yes, Dean. This is Ron here. Yeah, great question. Obviously, we've been planning. We've had plenty of time to plan for day one, particularly as it relates to integration and channel plans that have been thought through in great detail. So a lot of it, day one, will really focus on getting the sales organization going on the sales synergies, which on a global basis is a significant part of the thesis. So yes, the answer is yes. Secondly, I mean, obviously, there's lots of opportunities on the technology front and a lot of dialogue underway there as well. on the technology collaboration, which will be longer term as it plays out, but certainly on the sales integration front, we're ready day one to get going.
spk04: That's great to hear. And then any comments on April, anything specific that you could share?
spk14: No, look, I think the trends we talked about that impacted us in March, the COVID lockdowns in China, we continue to work through those. But beyond that, we're positive on the demand side of the equation through April. Very positive.
spk04: Great. Thank you.
spk15: The next question will come from Nigel Coe with Wolf Research. Please go ahead.
spk07: Thanks. Good morning, everyone. Hey, good morning, Nigel. Hi, Nigel. Hi, Nigel. Can you hear me? Yeah. Great. Thank you. Yeah, so look, AS margin, incremental margins, extremely strong. I think 57% of my calculations are correct. And came in better than you expected. I think you were pointing towards maybe some sequential moderation from one cue. So just curious, you know, what's driving the upside and the strength in the incremental margins? How do you see that over the balance of the year?
spk13: Yeah, so hi, Nigel. This is Frank. What we're seeing here is all the hard, you know, the coming to fruition, all the hard work that was done in this business over two or three years. We don't talk about peak margin anymore, but, I mean, this is the result of that effort. So despite incremental other kinds of inflation, despite even some NMI, which is unusual in the business to this extent, they're printing very, very strong incrementals because the basic cost structure of that business has been reset. So the incrementals were extremely strong in Q1, and again, as you say, mid-50s in Q2, and we expect they'll continue to be strong in the balance of the year.
spk07: And then, you know, obviously the dollar's moving around a fair bit here, and sometimes we have seen some FX impact, you know, moving around the AS margins. Is that a factor at all here?
spk13: No, not really. No, not significantly. Not a material impact.
spk07: And then my follow-on is for Bilal. On the portfolio, obviously you've been very vocal about diversifying away from upstream oil and gas. Do you feel that the change in tone around energy security, the U.S. administration's stance towards energy, CapEx, natural gas, et cetera, do you feel that you have more headroom and maybe some more time to define the portfolio diversification moves?
spk14: No, look, as I said at the offset, Nigel, I remain committed to diversification in the company. We're working actively on the portfolio management, and obviously we'll talk at length in our November investment conference about the subject in terms of vision and hopefully some very meaningful steps. The commoditized element of oil and gas, upstream oil and gas assets – We'll continue to work that very aggressively in the market. But in terms of the differentiated technology that is applicable not just in gas but in life sciences and in many of our other markets, we'll remain committed to. And we'll remain committed to the investments around gas because I do believe if you just look at that energy equation as a transitionary fuel, over time that's going to be required for the world to meet its needs.
spk15: Okay, great. Thanks. Thank you, sir. The next question will come from Tommy Maul with Stevens.
spk00: Please go ahead. Morning, and thanks for taking my question.
spk14: Good morning, Tommy.
spk00: Digging on the topic of auto sale incrementals, I wanted to talk about pricing dynamics for your oil and gas business. Potentially, you've been able to pass through some inflationary items, but if we really think about net price, my assumption would be you started the year from a pretty low base, just given the severe downturn in the recent past. But as we think through to back half of this year, really even next year, is there not an embedded call option on price here? I mean, you've got a commodity environment that's got to be a tailwind. You've got record cash balances, margins, profitability, et cetera, across your customer base. Should we be fairly bullish on that front?
spk14: Look, you're speaking specifically about automation solutions, Tommy. We have a long history of positive price activity in that market, and that comes from a basis of not just the market structure, but the relevance of our technology in the space and our ability to differentiate and drive price obviously is meaningful there. So, look, In some cases, we're up to four price increases across that space. We're working very actively through our selling organizations and with our end users. But I remain confident in that business of ability not just to continue to implement price as needed, but for it also to be realized into the P&L. Frank, anything?
spk13: Yeah, Tommy, that business captures price year in and year out. It's a very strong business with respect to its ability to capture value through pricing. The commodity situation, with the exception of this unusual electronics situation, it's not nearly as impactful in that business as it is on the other side of the business. So, I mean, typically, even with these kinds of broad commodity swings, while, yes, they have a P&L impact, it's not determinative. Right now, it's the electronics that really is the incremental decision variable that we are dealing with in terms of pricing, but there's no significant embedded price to come as a result of what's going on now. The pricing power in that business is very steady. We're stepping it up this year because we have an unusual situation.
spk10: Yeah. And just to add to that, commodities as a makeup of the cost structure of that business is not a big element of the cost structure. So, but as Frank said, you know, we've traditionally been green price cost and we'll continue to be green price cost as we get into the second half of the year.
spk00: Thank you. That's helpful. And then shifting gears, I wanted to circle back to the outlook for Resi HVAC. You gave some context that that the trends may be slowing there, and there's certainly been a lot of focus, at least in terms of the North America trends, year to date and for the back half. So what additional insight could you give us there in terms of what you're seeing on underlying demand?
spk14: Yeah, look, residential as a whole, particularly reflected in our home products businesses, has weakened as we went through the quarter. And we've seen that in just the order run rates. Our climate business has remained strong to date, and as we get into the season, we'll watch how that translates, but feel pretty good about on the climate side still, Tommy.
spk15: Thank you. I'll turn it back. The next question will come from Brendan Lukey with Alliance Bernstein. Please go ahead.
spk06: Morning, all. Thanks for taking my question. Morning, Brendan. Morning. Rush, a question. Can you offer some color on the size of that business, what the impact is of pulling out for the guide on the year and automation solutions?
spk13: Sure. So we have said that that business represented on a four-year basis about one to two, call it one and a half percent of sales. I'd say the average profitability relative to the total company, you know, we had half of a normal year. this year until the conflict began, and we've been scaling back the business significantly since, and now we intend to exit it. It'll be a slow ramp as we exit it, as we figure out exactly what those details are. But, I mean, with that context, I mean, you can kind of determine what the full year contribution of the business is, and we've covered the piece that we expect to be without for the balance of the year within the guidance.
spk06: Fantastic. And then one quick follow-up on Cobb 3 within Automation Solutions. Just struck by the fact that it was, again, the biggest growth driver here. Can you speak a little bit to, I guess, the dynamics there and how you're driving that improvement? How much of that is price? And how often do you find yourself in competitive situations for those revenues?
spk14: Yeah, look, 60% of the revenue in the quarter is Automation Solutions was KOB3, which is a replacement MRO business. That business is the least price sensitive, excuse me, the least margin sensitive of all the businesses and the one where price is the most sticky. So that was reflected in the results of Automation Solutions as we went through the end of March.
spk06: Thank you.
spk15: Thanks. Okay. Thanks. This concludes our question and answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.
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