Emerson Electric Company

Good morning and welcome to the Emerson First Quarter 2023 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 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 Mettler, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning. Thanks for joining us for Emerson's first quarter fiscal 2023 earnings conference call. Today, I am joined by President and Chief Executive Officer Lal Karsanbhai, 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. I will now pass the call over to Emerson President and CEO, Lal Karzanbai, for opening remarks.

Thank you, Colleen. Good morning and thank you for joining us. I'd like to begin by thanking the global Emerson family for delivering yet another strong operational quarter. I'd also like to extend my appreciation to our board of directors and the shareholders of Emerson for your continued confidence in this management team. We remain confident about the strength of our markets from both a geographic and an industry perspective. This is exemplified by our project funnel that continues to grow, exceeding $7 billion at the end of the quarter. Before I turn... to call over and discuss the quarter's performance in review of our strong outlook for the second quarter in the year, I'd like to say a few words about our headquarters announcement this morning. We conducted a comprehensive three-month review of location options. St. Louis was selected following this rigorous process, and we look forward now to finding an appropriate location in the region. Please turn to slide three. Operationally, the first quarter was very strong for Emerson. End market demand remained strong as first quarter order trajectory played out largely as planned. 5% underlying orders was as expected as broad automation strength was weighed down slightly by a double digit decline in safety and productivity orders against tough comps. Sequential underlying orders were also up 6% versus the September end quarter. Sales met our expectations at 6% underlying growth, slightly impacted by shutdowns in China. Our business performed very well operationally, displaying the strength of our Emerson management system. Operating leverage, excluding Aspen Tech, was 40%. of our mid to high 30s expectation. Adjusted EPS was 78 cents for the quarter and was impacted by two main below the line items. Stock compensation was a nine cent headwind versus 2022, driven by a 31% stock price increase throughout the quarter and its subsequent impact on the remaining mark to market plan. While we expect a slight headwind from the addition of Asmotech stock comp rolling into our financials, the overall stock compensation headwind was 8% worse than anticipated. Frank will provide more color on this in his section. Similarly, FX was worse than originally expected. However, despite these headwinds, operations performed above guidance as our business continued to execute. Lastly, We completed our committed $2 billion of share repurchase in the first quarter. Turning to slide four, I'd like to walk through some exciting successes and the strong momentum we see in the value creation priorities we laid out on November 29th. First, in late January, we visited the Middle East and had the opportunity to break ground on our new state-of-the-art innovation and manufacturing hub in Saudi Arabia. This investment is designed to not only spur innovation for the region, focusing on the transition to clean energy segments like hydrogen and clean fuels, but also demonstrates our commitment to our regionalization strategy and best cost manufacturing, pillars of our operational excellence. As an example of the projects our investment will supply, Emerson was chosen to provide automation for the world's largest green hydrogen facility by NEOM. The plant will provide 600 tons a day of green hydrogen using Emerson automation technology throughout production processes and renewable power generation. Emerson's local support and install base in the Middle East were key differentiators. Secondly, Emerson and Aspen Tech continue to succeed with our joint customer solutions. In the first quarter, we were jointly selected to automate the Middle East's largest ethane facility by Qatar Energy and Chevron Phillips, Ras Laffan. Emerson will serve as the main automation contractor for the $6 billion facility, providing our leading Delta V control system with Aspen Tech engineering and simulation products. The project is a scale example of our commercial agreement with Aspen Tech and how it successfully provides an expanded, differentiated product offering to customers. Lastly, Emerson continues to diversify through life sciences and metals and mining markets. In the first quarter, Emerson was awarded the Automation Contract for Fujifilm DioSynth Biotechnologies in Europe. The expansion project will include multiple bioreactors and processing streams, one of the largest CDMOs in Europe. These three projects are a clear demonstration of Emerson's commitment to the growth platforms we discussed at our investor conference and our continued success differentiating as an automation leader in these markets. Before I turn the call over to Frank, I wanted to... to briefly discuss our proposal to acquire national instruments for $53 per share in cash. As you know, we made our offer public on January 17th, and our correspondence with NI since 2022 May is available on maximizingvalueatni.com. Emerson is committed to an acquisition of NI and is participating in the strategic review process. We believe our premium all-cash proposal with no financing conditions or anticipated regulatory concerns is compelling and in the best interest of Emerson and NI shareholders. We look forward to continued engagement with NI and its advisors in moving swiftly towards an agreed transaction. That said, the focus of this call is our performance for the quarter we're not going to be commenting further on our proposal for an eye at this time be assured that we'll continue to execute financial diligence as we review this opportunity with that i will now turn the call over to frank thank you lol and good morning everyone please turn to slide five as well mentioned we had a very strong operational start to 2023. Underlying sales were within our expectations for the quarter at 6%, driven by 10% growth in software and control and 5% in intelligent devices. Net sales were up 7%, with a four-point drag from currency and a five-point contribution from Aspen Tech. World area growth was led by the Americas, which was up 13%, driven by strong process sales, particularly in energy and chemicals. The continued energy crisis in Europe affected demand as underlying sales were below prior year by 2%. However, sales were up 7% after adjusting for the impact of Russia. Sales in Asia, Middle East, and Africa were flat versus prior year. As strength in the Middle East, driven by chemical and energy investments, was offset by down sales in China, mainly due to challenging year-on-year comparisons and sporadic COVID-related shutdowns. By industry, we continue to see strength in later cycle markets like energy and chemical. Chemical investments in plant modernization and sustainability remain steady in North America and Asia, but we are keeping a close eye on this market as we assess our outlook for the balance of 2023. Overall, first quarter process industry sales were up high single digits. Similarly, hybrid sales were up high single digits, led by continued investments in life sciences reshoring and metals and mining. Discrete sales were up mid-single digits as this earlier cycle business starts to lap more difficult comps. The growth in discrete was offset by weakness in our commercial business in safety and productivity, which was down 10% for the quarter, but with early signs that we are bottoming out. Overall, we feel confident about the health of our end markets, and our conversations with customers indicate continued growth in investments during 2023. Price during quarter contributed four points as our pricing actions from 2022 and additional actions taken at the beginning of 23 are driving strong price realization. Backlog grew approximately $700 million during the quarter to $6.6 billion, giving us ample opportunity to execute on the rest of the fiscal year plan. Adjusted segment EBITDA margin improved by 130 basis points, and leverage was 40%, excluding Aspen Tech. North America mix contributed to the margin expansion, and price was accretive to margin in the quarter. Software and control margins were up 200 basis points, led by Aspen Tech. Intelligent devices performance was strong, with 110 basis points of adjusted EBITDA expansion. Adjusted EPS was 78 cents, and I'll discuss the details when we move to the next chart. Lastly, on this chart, free cash flow of $243 million is down 20% year over year, mainly due to trade working capital, including the impact of supply chain performance, which is improving, but is still challenged. We are focused on improving trade working capital as we progress through the year, and we reiterate our expectation of 100% free cash flow conversion for the full year. Turning to slide six, this is our adjusted EPS bridge versus the prior year. First, I wanted to say that we had very strong operational results, again, reflecting low 40s leverage on incremental sales, which delivered 15 cents to adjusted EPS in the quarter. There was an unfavorable impact due to stock compensation, as Lyle said, of $0.09 and an additional $0.09 due to currency. The stock comp impact was primarily due to our legacy long-term incentive plans, which required mark-to-market treatment on recorded expense of the 31% increase in our stock price during the quarter. The last of these plans will run off in 2023, and the new plans do not require mark-to-market accounting. So going forward, the variability from stock comp will be dramatically reduced in 2024 and beyond from what it has been historically. Currency in the quarter was primarily driven by the accounting treatment of our long-term contracts in addition to customary translation and transaction impacts. Other non-operating items and share repurchase contributed two cents to the quarter. Please turn to slide seven. Turning to our 2023 outlook, we continue to see strength across our end markets. As we communicated in October, process, hybrid, and discrete markets are all expected to grow mid to high single digits in 2023. The long-term secular trends we discussed in November continue to be relevant for our business and are driving growth and successes in 2023. Energy transition spend continues to be strong as evidenced by the successes Lyle highlighted a few minutes ago. Energy security investments, including LNG, continue to accelerate, especially in North America and the Middle East. In hybrid, life sciences investments due to reshoring continue to move forward, and metals and mining spend is centered around electric vehicles and electrification value chains. Those value chains are also benefiting discrete markets, especially in the U.S. The one weakness we see in the business today is our commercial exposure within the safety and productivity segment, which was down 10% in the first quarter. We expect these sales to improve as we move throughout the year as we face easier comparisons and we see early signs of a turn in demand. Please turn to slide eight. We're maintaining our full-year guidance based on the underlying strength in our end markets and robust backlogs. The guide for underlying sales growth remains at 6.5% to 8.5%. We now expect currency to be less of a headwind at two points, and Aspen Tech is expected to contribute 3.5 points. Therefore, we are increasing our net sales expectations to 8% to 10% of a point from the previous guide. We are holding operating leverage, adjusted EPS, and free cash flow conversion for the year at the previous guide. Within that guide, we intend to cover the unexpected stock comp headwind that we had in the first quarter with excellent operational performance. For the second quarter, we expect underlying sales growth of 8% to 10%. Currency continues to be a headwind, reducing sales growth by approximately three points. Aspen Tech will contribute approximately 5.5 points, and net sales are expected to be 10.5% to 12.5% up. Leverage expectations, again, are in the mid to high 30s. Adjusted earnings per share is expected to be between $0.95 and $1, which is a 13% increase at the midpoint of the guide. We've included quarterly data for 2022 on a continuing ops basis in our press release and in the 8K that was filed this morning. Thank you for your attention, and we'll now turn it over to the operator for Q&A.

We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Scott Davis with Milius Research. You may now go ahead.

Hey, good morning, Lau and Frank and Ram and Colleen.

Good morning. Hey, Scott. Good morning.

A couple little cleanup items, because I think the slides are pretty clear. But was price predominantly, you think about the total growth in the quarter, 6%. Was price, does price make up most of that?

Hey, Scott. Good morning, all here. Yeah, in the quarter, price accounted for four points. Approximately out of the six, two points of volume.

And did that cover costs well?

Yes, sir.

Okay. And just a quick follow-up here on life sciences. I know some of your peers have seen some weakness in life sciences, but you guys made some pretty positive comments relating to that end market. Can you just give us a little bit more color on what your customers are spending money on? You mentioned localization, but Perhaps a little bit more color there would be helpful. Thanks.

Yeah, no, very active quarter in life sciences globally, Asia, Southeast Asia, United States, East Coast, and Europe. A variety of projects, we chose one to highlight with you today. It's predominantly around automation. It's expansion of capacity. It's driven by the trends that we discussed at our investor conference, whether it's personalized medicine or or capacity de-risking in the world areas. We have yet, Scott, to expand with a full offering of Aspen Tech into the space that's in development and will be released here shortly. But that will give us another avenue as we bring optimization software into that space.

Okay. Helpful. Best of luck this year, guys. Thank you.

Thanks, Scott. Thank you.

Our next question will come from Josh with Morgan Stanley. You may now go ahead.

Hi, good morning everybody. Just a couple of questions, both relating to kind of orders pipeline backlog and the conversions there. Um, I guess while backlog has not had, you know, kind of this enormous surge that you've seen maybe in some other names that had a tougher time on supply chain. But how do you think about backlog conversion in your guidance? Is the expectation that, you know, orders start to, you know, moderate versus accelerate? You know, where would you be pleased to see backlog over the next 12 months? And then sort of second related question, how do you feel about kind of the pipeline of projects today and the pace at which things are looking out of this?

Yeah, I know backlog did increase in the quarter. as we went through. Look, I do feel very confident with the order pacing in the businesses, with the weakness only in the safety productivity segment that we described throughout the call. Beyond that, the funnel is very robust. It actually grew almost $500 million in terms of size as we went through the quarter to about $7.3 billion globally. Large number of sustainability projects, large number of energy transition projects, and we're executing very well in that capital formation cycle, so feel very good about that. So, look, I think from an orders perspective, my expectation is that we continue to see a very positive environment as we go through the year. And our job here, and I think it's embedded in our second quarter guide, is to convert the backlog that we have in the business.

Great. If I could just get one little follow-up on there. How do you feel about kind of the margin that you guys are seeing on some of these larger projects? I know people think about mega projects and margin erosion, aggressive bidding. Has that been your experience with this wave?

No. You see the leverage that we gained in the quarter, about 40 points. There were project shipments within the quarter embedded in it. We feel very, very good about our differentiating capabilities with our technology stack. Yes, there's competitive bidding, but it's nothing out of the ordinary that we've seen and nothing that we can't manage within our pricing models. Correct.

Great. Appreciate the color. Best of luck.

Our next question will come from Andy Kaplowitz with the Citi Group. You may now go ahead.

Good morning, everyone. Morning. Well, I just wanted to follow up on the last question in terms of, you know, when I look at orders, Have you seen any bigger signs of deceleration activity anywhere outside of safety and productivity? I know you mentioned you're watching chemicals. I think Antonio also mentioned that. Would you expect orders to hold in chemicals or any of the other process markets? And will orders continue to be focused in the Americas, as you've said in the past?

Yeah, great question. We had a really good Americas quarter and strong momentum there. A very strong Western Europe quarter with great momentum there. Of course, Eastern Europe is relative weakness because of Russia, of course, as we walked away from that market. So the comparables there were pretty tough. And then Asia and the Middle East, very strong. Of course, China was down for us in the quarter. but we see that coming back here in the second quarter and expect high single digits as we finish out the year. So generally, Andy, based on what we're seeing beyond the safety productivity segment, I feel very confident about not just the second quarter guide we put out there, but the full year at this point. Rom, any color?

Yeah, I think Western Europe being resilient is very positive for us. And then the KOB3 business, which is now close to 65% of our total sales mix in the new company, has been very strong. So that's a good sign, and indeed a project funnel is building. So at this point, in the core business outside of safety and productivity, no signs of weaknesses.

Very helpful, guys. And then you talked about this a little bit, but you delivered incrementals of 40%. You mentioned a major reason is that positive mix from Strength in the Americas. Is there any reason why that would change as you go throughout the year? And I know you talked a bit about price, but did price versus cost come in a little bit better than you would have thought for Q1? And could that continue for the year?

Yeah, I think we're going to see strong price costs through the year, and frankly, with fundamentally price holding at high levels, and like we saw in the first quarter, but also coupled with commodities softening as we go into the second half, as we see both commodities as well as logistics turn favorable. So I think really the margin performance in Q1 is, yes, America's mixed, but also strong price costs, which should continue through the year, and we don't expect North America sales to soften through the year. So the dynamics we saw in Q1 should continue through the year.

Appreciate it, Gus. Thanks, Andy.

Our next question will come from Dean Dre with RBC Capital Markets. You may now go ahead.

Thank you. Good morning, everyone.

Good morning, Dean.

Hey, look, I know it's a happy day in St. Louis. Emerson has had such an important presence in the community for so many years, so I'm sure that's great news for everybody.

Thanks, Dean. I think we're all pretty excited about the decision and the process that we went through.

Yep, and it also avoids the logistics and disruptions and so forth, so that's great to hear. My question, it would be for Frank. For reaffirming the free cash flow conversion 100% for the year, what has to change in working capital? We're still seeing such across the industrials. The buffer inventory required with supply chains are still chewing up enough of working capital that you're seeing lots of underperformance on free cash flow. So how do you see this playing out?

Good morning, Dean. Mainly, it's an inventory story. It has to be around getting the backlog out in order to get the inventory down. The supply chain is adjusting and improving, but in ways that aren't always helpful in terms of difficulty in timing receipts of materials. That's the fundamental thing that needs to change, is that we need to get the inventory out over the next three quarters. A big part of that will be shipping the backlog that we have, and we certainly have a robust backlog level. So it's about execution now going forward. Ram and I discussed that in detail with our businesses when we had our quarterly ops reviews, and I'm sure Ram can comment a little further on the supply chain implications.

Yeah, Frank, you said it. I mean, at the end of the day, I think right now we were somewhat positively surprised at the pace in which the supply chain delivered in the first quarter. So I think that was one of the reasons inventory built, but that's in some ways good news that positions us to execute on the backlog in the remainder of the three quarters, and that remains the focus. And obviously we'll make slight adjustments in – optimizing how we drive material in from our supply chains, given that they're performing better, but ultimately it'll come down to execution of the backlog, which we're poised to do.

Great. And then just as a follow-up, and I know there's not been any specifics provided yet, is what's the potential for other portfolio moves more in the way of cleanup? You know, we could point to some businesses that would be less core under the new automation pure play framework. It's just Maybe you just comment on the willingness of the board to look at this and potential timing in terms of monetization of those businesses.

No, that's a great question. We voiced in our November 2019 investor conference that we're going to be active managers of the portfolio, and that is inclusive of both. the opportunities to build on the cohesive automation company, but also to continue to prune where and when necessary. At this point, we don't have an impetus to do so, but we'll continue to pursue critical bolt-on acquisitions. Of course, the NI pursuit that you're aware of, but we'll also continue to look at the existing portfolio, but I would not expect anything of scale there after a very busy Got it.

Thank you.

Thank you.

Our next question will come from Julian Mitchell with Barclays. You may now go ahead.

Hi. Good morning. I think we've had sort of good top-down color, so maybe trying to look at some of the segment pieces a little bit. Maybe on safety and productivity, just starting there, realize it's quite a small business for you, but I guess two questions on it. One was just talk a little bit about how you see the slope of the organic sales playing out, the balance of the year. And then secondly, the margins were up I think 100 points in that business year on year despite a weak revenue performance. So maybe help us understand how you delivered that and is it sustainable?

Yeah, Julian Ron here. In terms of the buildup of the sales, I think Q2 will be negative, but we anticipate it going positive in the second half or close to a flat year for the full year. That's kind of how we're looking at safety and productivity. The margin improvement clearly driven by we had – some focused restructuring that we executed in that business, anticipating the slowdown second half of last year, and then favorable price-cost performance, certainly strong price in the business, close to nine points of price in Q1. Obviously, the cost savings flowing through and then softening materials or material costs as we get into the second half should drive continued strong margin performance in the business through the year.

That's very helpful. Thank you, Ram. And then secondly, just on the discrete business, you know, you grew, I think, six points in the quarter. Maybe remind us kind of what your main areas of strength are in discrete, you know, whether it's by vertical. And I assume there's a lot of domestic business and also Europe in there. And also, I think you mentioned briefly some early cycle elements softening, so maybe expand on that a little bit, and whether you see the discrete business kind of holding that 6% growth rate through the balance of the year.

Yeah, we have a very balanced business from a global perspective, Julian. We saw broad strength in the United States. both into direct OEM business as well as through our distribution networks. That continues to be very robust. No signs of weakness there, although we're watching that very carefully in terms of stocking levels and other elements. Our Western European business, which I cited earlier, was very strong in the quarter, heavily driven by within the discrete business as well, particularly in places like France and Germany, which are critical markets for us. And then lastly in Asia, outside of China, very strong market. And now with China, recoverings feel that we're well positioned there. From a technology perspective, again, very good growth on the automation and control side with PLCs and industrial PCs. And of course, with the various devices around material movement. in the plants. Ram, any color there for Julian?

No, I think, I mean, from a segment perspective, you know, we broadly have factory automation and industrial automation segments within the business. So both those continue to do very well. And frankly, I think we anticipate mid to high single digit growth for the year. in that business overall, the 6% was somewhat impacted by shutdowns in China, which that business experienced. So frankly, we expect that to improve as we go through the year.

That's great. Thank you.

Our next question will come from Jeff Sprague with Vertical Research. You may now go ahead.

Hey, thanks. Good morning, everyone. Good morning. Maybe if maybe a housekeeping one for me first, and then the one to come back to some of the projects. But just can we put a finer point on comp and FX? So the nine cent headwind, it seems like you expected a penny headwind. Can we just clarify what was assumed for the entire year and how that's changed versus your original expectations? And then on FX, So you're saying in addition to just kind of normal translation headwinds, there was some contract or other backlog adjustments. Could you just elaborate on that a little bit?

Yeah, good morning, Jeff. It's Frank. Yeah, so on FX, I mean, we originally had, you know, low double-digit impact, you know, from currency for the year in the guide back in October. You know, that's moderated.

It's probably in the $0.05 to $0.10 range now.

So, I mean, we have a little bit of an improvement there based on the turn in the dollar. And then you asked again about stock comp as well, Jeff. So, yeah, there we had built in a little bit of an increase in the addition of Aspen Tech and more or less flattish for the quarter for Emerson. And then we had the mark-to-market impact. That was driven by the 30-odd percent increase in the stock price on the legacy plan, so that was entirely incremental to what we had in the guide, $0.09 year over year and kind of $0.07 or $0.08 versus the guide. So that's the big headwind we had there, which is now kind of embedded in the year, and we will just absorb that and overcome it within the year guide.

And just on the projects law, you know, interesting couple you call out here. Could you just maybe give us a sense of, you know, kind of the dollar scope of some of these, you know, a large benchmark project like this, you know, maybe the green hydrogen project, you know, what your content looks like on the front end and maybe what the tail of a project looks like?

Yeah, no, these fall very much within the parameters, Jeff, that we laid out in terms of automation dollars per gigawatt. As you think about hydrogen, for example, I believe it's 600,000 per gigawatt is what we laid out, if I'm not mistaken, Ram. But on the petrochemicals and, for example, ethylene, again, KOB1, very significant there in the $20 to $30 million type of scale. And then, of course, there's all the downstream and the instrumentation business to come. So some of these are very sizable. The specific one that we highlighted, of course, about $50 million in first purchase, which is the Delta D system. And then there's further instrumentation to come. So they're very sizable in terms of scale, but in line with how we think about dollars of automation per capacity, depending on the market they're in.

Got it. Thank you.

Our next question will come from Steve Tusa with J.P. Morgan. You may now go ahead.

Hi. Good morning. Good morning. Can you talk about maybe some guidance for admin in particular, especially the cash flow coming in the next couple quarters, how confident you are in that and where you see that coming in?

Yeah, Steve, you cut out a little bit. This is Frank. You cut out a little bit at the beginning of your question.

I mean, again, we – Aspen free cash flow. Yeah, Aspen free cash flow, that one, confidence and moving parts. I didn't hear. Yeah.

Yeah. I mean, Steve, I think – go ahead. On plan.

Yeah, on plan. Very seasonal. So their fourth quarter, our third quarter, will be Big Ten's fourth quarter. And we see – and we, based on the plan, we think they'll deliver it as they have in the past. So it will be heavily in that quarter.

Yeah, on guide, Steve, I think. And third quarter for them will be – or our third quarter will be the big quarter.

Yeah, I mean, obviously they can provide the color and the background on that, but, I mean, that is the seasonal pattern for their cash flow, and we would expect that to maintain.

Right, yeah, it does influence your cash. So just curious if, you know, you guys, as the owners, have a view on that. When it comes to Natty, you know, how coveted is this asset for you guys? I mean, you know, it doesn't seem like they're going to take anything below $60. Exactly. You know, are you guys really willing to kind of go to the wall for this?

I can be very clear with you, then we're not going to be the purchaser of the asset.

That is a definitive answer. Thank you very much. I appreciate it.

You're welcome.

Our next question will come from Nigel Coe with Wolf Research. You may now go ahead.

Okay, thanks. Good morning. Okay, I won't be asking questions on the NADI purchase price, so we'll move on from that. I just want to go back to FX, if I can. I think you mentioned long-term contract marks, and it's not something I've heard from Emerson before, so I know we've had some backlog revaluations, so just maybe talk about what caused that mark on FX. And maybe just on the below-line stuff, what is a normalized stock comp beyond this year once we roll off this plan? How should we size that?

Okay. So, Nigel, hi. This is Frank. So, yeah, we had a significant – of the currency that was in the quarter, a significant portion of it was due to the impact of the accounting on long-term contracts. So you have to mark-to-market long-term contracts. Typically, these are through UPCs, and they tend to be in places like Korea and other markets where we typically aren't talking about currency, as opposed to translation currency where we talk about Europe and China. And the accounting basically brings those marks to zero when the contract closes out, but during the life of the contract, you mark the market up and down. And depending on where you are in the life cycle of a contract and what the backfill is for those contracts, you know, you'll get a mark most quarters. It's not big enough to matter. This quarter it was four or five cents, so it was big enough to matter. And that's what drives it. And we try not to talk about it. The word, it's embedded derivatives. We don't talk about embedded derivatives because it's just not helpful. But that's specifically the accounting that drives that mark on long-term contracts.

Okay. Yeah, embedded derivatives is about my pay grade, so let's move on from that. We'll stop offline, but... Just on the guide, so there's some moving pieces here. So it feels like FX is very neutral. The weaker dollar offset by some of these marks probably got some share buyback benefits relative to plan, well, certainly versus our model. And then we have the stock comp offset. Is that sort of the major moving piece? Is there anything else you'd highlight? And then maybe just talk about the sales acceleration. We've got some China noise in the back half of the year with the lockdowns in the prior year. But what kind of macro environment are you planning for, especially in second quarter fiscal? Some of your short cycle peers are highlighting some inventory corrections, et cetera. What do you see in discrete markets and some of the other relevant markets?

Yes, so I'll take a crack round here on the sales. You know, from a sales perspective, obviously we have acceleration built in to the year, fundamentally with orders holding in the mid-single digits and us shipping backlog that we described with improving supply chain. So certainly Q2, Q3, and into Q4, we'll expect a ramp-up in absolute sales as we execute on the backlog. In terms of distributor destocking, we haven't seen it in any of our businesses. Certainly a lot of our discrete businesses go through distributors. Some of our process businesses go through distributors. We haven't seen it, and nor do we anticipate it, just given the dynamics of what we're seeing. And then to top it off, price will remain strong through the year. That will contribute to growth as well.

Thank you.

Our next question will come from Joe Ritchie with Goldman Sachs. You may now go ahead.

Thanks. Good morning, everyone.

Good morning, Joe.

Hey, guys. Can you just touch on Aspen Tech a little bit? I know... I know, Lal, you mentioned some of the wins, you know, that Roz Lafon win was interesting. But, like, how is that going thus far? And then I noticed that the adjusted EBITDA margin was a touch lighter than, you know, what you guys expect from a full year basis. Maybe just provide some color around seasonality on that business as well.

Yeah, so Aspen Tech, you know, I think for us, from a synergy perspective, going according to plan, and frankly, a lot of the early synergies we've built in is on projects like Cross La Fon, where Aspen won some very, very good content. I think the sales channels and the engagement of our sales channel and selling their capabilities continues as planned. Really what we're driving there is in terms of perpetual licenses and bundling them on projects, a lot of success. Converting our wins into ACV type of revenue for Aspen Tech is a work in process and should pick up momentum as we go into the second half of the year. So we feel pretty good about the synergies. We certainly feel pretty good about the sales forecast we've built in for Aspen Tech. Obviously, the plan they presented and the plan we've built in into the consolidated Emerson numbers, and then no concerns on the margin performance, the EBITDA performance. Seasonally, their third quarter or their fourth quarter, our third quarter is the biggest quarter, and it was last year, and it will again be this year.

Super helpful, Ram. And then maybe my follow-on question is, While at the Investor Day you guys highlighted all of these big opportunities in automation technology and you talked about your pipeline extending, I'm just wondering where have you seen the most movement recently in terms of your pipeline and those opportunities?

Yeah, no, it's a good question. Of course, we did have a very active quarter in terms of the project funnel, and particularly not just in projects that were booked. and hence exited the funnel, but also in the buildup of what we saw in terms of activity. I would suggest that the predominant element of growth came in two areas. One is life sciences, which grew significantly in the funnel in the quarter, and secondly, the energy transition, which continues to be very robust, both here in the U.S. and in the Middle East predominantly, and became additive to the funnel. That funnel grew not just in terms of dollars by about a half a billion, but also in terms of number of projects, but only by eight projects, which tells you that the average size of projects are getting larger, which is also a dimension here.

The only thing I would add is the LNG size of the funnel remains large, meaningful, and what we saw in the last quarter was good momentum on the FID progress associated with many LNG projects in the U.S. where we're very, very well positioned. A lot of these are going through Pectel in Texas and Louisiana, and our expectation is We will ramp up order booking activity on those projects as we go through the second half of the year.

Great. Nice to hear. Thank you.

Great.

Our next question will come from Joe Odea with Wells Fargo. You may now go ahead.

Hi. Thanks for taking my questions. I wanted to start on sort of price and price-cost. On the price-cost side of things, can you size the margin impact in the quarter and then what you're thinking about for the cadence of that impact over the course of the year? And I think you also noted some price increases to start 2023. Is that broad-based? Are those more concentrated in parts of the business?

Let's talk about the price increases.

Yeah, so I'll take a crack at the price increases. I mean, we did have a good price increase in October. We typically do as we enter the fiscal year. Select product lines had price increases in Jan. We have a few more product lines slated for mid-year price increases around the April timeframe. In general, though, I think pricing was 4% realized price in the first quarter. We expect it to stay 4%. at those levels as we go through the year, so pricing will remain strong.

You know, as we go through the year, you know, we expect those price increases as they roll through will continue to be accretive to margin through the entire year. It was bigger in the first quarter than it will be as we go through the year. Again, then we'll see what incremental price increases we might put through. Net material inflation also should become a tailwind in the back half of the year. So, uh, all in all accretive, you know, somewhere between half point and a point. It really depends on, on how it rolls through, but certainly a, uh, a good story from a margin standpoint, as we go through the year.

Got it. And then I wanted to circle back on some of the discrete questions and just kind of bigger picture macro. And I think that the industry outlook for discrete up mid single digits, I assume that's sort of a combination of kind of low single digit price, low single digit volume. would expect areas like batteries and semiconductors are growing faster than that. But when we think about what we're seeing on sort of the PMI side of things and then thinking about sort of discrete just growing through a PMI slowdown, I mean, can you touch on, you know, is the expectation sort of outside of some of these structural growth areas that we just continue to see some kind of low single-digit volume growth and sort of no kind of connection there between some short cycle macro indicators of slowing? but not really seeing it in your end markets.

Yeah, so you said most of it. I think that the plan really is LSD, low single-digit price, low single-digit volume. The growth vectors, semiconductors, battery manufacturing, frankly, from a sector that we're cautious on, automotive, is something we're going to have to carefully watch. We have, you know, had good performance so far, but automotive is an area that we have to watch very carefully. And then our stocking levels in terms of distribution, again, we haven't seen any slowdown yet, but certainly to your point, based on the PMI forecast and what is anticipated, there could be slowing in that sector. So if you put all that together, I think we feel pretty good about our mid-single-digit forecast.

Got it. Thanks very much.

Our next question will come from Christopher Glynn with Oppenheimer. You may now go ahead.

Thanks. Good morning, everybody. Just wanted to tie a little bit the organic outlook versus backlog growth up 700 million. Suggest the 1.2 book to bill. which seems a little incongruous with 5% orders growth, but I suppose that's a function of the prior year book-to-bill. So just wondering if you could comment on that book-to-bill interpretation, and how do you characterize backlog size versus what you might consider normal in a moderately expanding net and market mix?

So, you know, I think the $700 million is a gap number. The 5% is an underlying sales number. But net-net, you are right. If you looked at the first quarter of last year and calibrated versus orders and sales, I think the 5% makes sense with the $700 million build in backlog. I think our – Our expectation for a normalized level of backlog in this business were probably at least close to $800 million to $1 billion too high in terms of where we could normally be if the supply chain were optimal. What we're going to have to execute through the year as the supply chain continues to improve, that's the normalized level of backlog for this level of sales. So to answer your question directly, it's about $800 to $1 billion higher than what we would have anticipated. Great. Thank you.

Our next question will come from Gautam Khanna with Cohen. You may now go ahead.

Yeah, thank you. Good morning, guys. Good morning. Good morning. I was wondering if you could talk a little bit about, you know, the aftermarket, the KOB3 stuff. I think you said it was 65% of sales in the quarter, but, you know, where do you see that trending over the next year or year and a half? Because it seems like it's been on full tilt for quite a while. Just what do you think the new normal is?

Yeah, I know. I think we've had a concerted effort across our business to to maximize the value of the $130 billion plus installed base. And those are programs that we'll put in place that drive service, MRO, and replacement opportunities. We're sitting at, you're right, right around 65%. I expect that to remain within that range. And it's supported by the business programs that we have in the operating companies.

And I would add that's the segment of the business where the pricing flows through at higher levels. So obviously that will remain robust through the year.

I appreciate it. And then just to follow up, any change to the timing of the divestment out there in climate tech? Anything noteworthy there?

No. We're still thinking about the first half of this calendar year. And everything's on track in terms of the regulatory approvals and standing up the business. So that's all well underway. So we'd expect April, May-ish as a guideline there.

Thanks, guys.

Yes, sir.

Our next question will come from Tommy Moll with Stevens. You may now go ahead.

Good morning, and thanks for taking my questions.

Good morning.

I wanted to start on the industry outlook you provided across process hybrid discrete. A little variation across the three, but essentially all growing nicely in the single-digit range. There are others in some of these markets that have double-digit outlooks versus the singles that you provide. I'm well aware there's often apple and orange impacts here in making comparisons, but I was just curious, is there any conservatism embedded in these outlooks you've provided? Is there anything you would do to help us reconcile some of what we've heard elsewhere? Thanks.

In terms of the market outlooks, Tommy, we feel that we've given a very balanced view of what's out there. the blend of the different types of businesses that we cover in terms of capital modernizations and replacement. We've also taken into account the various geographic trends. But, no, I feel that what we put there ties into the guide for the quarter and, of course, our expectations for the year as well. And, again, within each of the segments, as you recognize, there are, There are big pluses and smaller pluses. Clearly in the discrete space, which we've been speaking about to a significant amount today, EV, semiconductor, elements like that, of course, have a significantly higher growth than some others. But overall, I feel that the indications we've given are fair based on what we've seen in the marketplace today.

Thank you. That's helpful. I also wanted to ask about the repurchase activity. Is it fair to say that the deployment of the full $2 billion in the quarter was an acceleration versus the original plan? And if so, should we view that more as an opportunistic decision where your stock was under pressure for a period of time, you decided to lean in? And to the extent that

Yeah, I'm sorry, Tommy. This is Frank. No, not really. When we communicated the $2 billion, our intent was to get it done as quickly as possible, and we were able to get it done in the quarter, so it was not really driven by market events so much as a desire to just make good on the commitment and do it quickly.

And any possibility that you might revisit the potential for more later in the year, or should we think about 2023 is pretty well spoken for at this point.

There's really no current intent to do any more share repurchase. We've got other irons in the fire right now. So, you know, obviously circumstances change. You can always revisit, but we have no current plans to revisit it right now. We said we'd do $2 billion, and we've done that.

Great. Thank you. I'll turn it back.

Thank you. Our last question will come from Chris Snyder with UBS. You may now go ahead.

Thank you. I wanted to follow up on safety and productivity. You guys mentioned that you're seeing early signs of things bottoming out. I understand comps get easier, but it sounds like you're also starting to see demand turning. So just hoping for more color on what you're seeing to give you confidence that demand is turning there.

Yeah, so first off, I think a majority of what we've baked into the plan is comps getting easier. So absolute levels stay the same with where they sit today. Price comes through and comps get easier. We'll have a better read of it as we go through the current quarter. And I think we'll have a better expectation of the second half. If demand were to improve, which is not baked into the plan, we should get better numbers in safety and productivity. But at this point, it's staying at the current levels and comps getting easier.

I appreciate that. And then just to follow up on China, the presentation called out a headwind from China shutdowns on organic growth in the quarter. Could you provide some more color on how China performed in the quarter and then maybe how it's exiting into the fiscal second quarter with the reopening? Thank you.

Yeah, so China was down mid-single digits both incoming orders as well as sales performance in the quarter, and we expect China to be mid-single to high single digits for the full year with high single digits in the second half.

Thank you.

This concludes our question and answer session and the conference. Thank you for attending today's presentation. You may now disconnect.