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.