Emerson Electric Company

Hello, welcome to the Emerson Second Quarter 2023 Earnings Call. Please note, today's event is being recorded. I would now like to turn the conference over to your host, Colleen Matler, Vice President of Investor Relations at Emerson. Please go ahead.

Good morning, and thank you for joining us for Emerson's Second Quarter Fiscal 2023 Earnings Conference Call. Today, I am joined by President and Chief Executive Officer, Lal Karzanbhai, Chief Financial Officer, Frank Dellaquilla, and Chief Operating Officer, Ram Krishnan. Also joining us today is Mike Bachman, who was announced earlier this morning as our Chief Financial Officer, effective May 10th. 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 non-GAAP measures. I will now pass the call over to Emerson's President and CEO Lal Karzendai for opening remarks.

Lal Karzendai Thank you, Colleen, and good morning. Please turn to slide three. I'd like to begin by thanking the global Emerson team for a tremendous performance, our board of directors and shareholders for the trust that you place in us. It has been a busy first 26 months as CEO as we reinvented Emerson. The second quarter performance was exceptional. It was a quarter in which we significantly advanced our strategic agenda across the three dimensions of our value creation model. First, culture. In the last two months, we announced two important leadership changes. Vidya Ramnath was named as the company's chief marketing officer, replacing Cathy Buttonbell, who had a distinguished career at Emerson, and put Emerson's brand on the map while working for three different CEOs. Vidya is the right person to accelerate our journey as a pure play automation company. She brings deep technical knowledge and customer exposure, is an engineer, and for the last four years has led Emerson's Middle East and Africa business. We believe this is a highly differentiating move for us as a company. Secondly, This morning we announced Frank's planned retirement and Mike Bachman as Emerson's CFO. I'll say a few more words about this later in the presentation. Lastly, we completed our first digital employee engagement survey. We heard from 85% of our global employee base and received a high quartile net engagement score. This gives us a stake in the ground and now great perspective on the areas of strength and opportunities to better the talent experience at Emerson. Second, the portfolio. We will be finalizing the climate transaction in the current quarter. The CEO for the joint venture has been named, Ross Schuster, and we are excited by what his leadership and experience brings to the business. I'd like to thank Jamie Froge for the work he did in the business and for his contributions over 16 years of service at Emerson. In addition, we signed the definitive agreement to acquire national instruments. We're very excited about the company, the technology, and most importantly, the people. This is an important point. The large portfolio moves are now complete. As an investor, you now have clarity that an investment in a share of Emerson is an investment in the leading global automation company serving a diversified set of end markets with a high growth, high profitability, and cash flow, cohesive and differentiated tech stack made up of intelligent devices, control, and software led by Aspen Tech. Our focus on a go-forward basis as we did this quarter, will be on creating value with this tremendous company. Lastly, our third pillar, execution. None of the work we've done would have been possible without it. The phenomenal results and momentum we have in the business is a testament to the quality of our global teams and to the strength of the Emerson management system. Underlying orders were up 7%. with late cycle process markets continuing to exhibit strong demand. Hybrid also remains robust, driven by reshoring investments globally. From a world area perspective, America's orders led, with China returning to growth as expected. As we look to the remainder of the year, we still feel confident in continued mid-single digit order growth. The strong demand and steadily improving supply chain environment enabled 14% underlying sales growth in the quarter, well above our expectations. All world areas were up double digits, led by the Americas, up 15%. Intelligent devices and software and control were also both up double digits. This strong sales performance and the continued operational execution of our teams led to 53% operating leverage in the quarter, excluding Aspen Tech. Favorable impacts for mix and price cost also drove a 320 basis point improvement in adjusted segment EBITDA to 24.6%. Adjusted EPS was $1.09, beating the midpoint of guidance by 11 cents. Again, driven by the strong sales and operational performance. This is a 25% increase versus Q2 of 2022. Free cash flow is up 64% year over year and up 23% year to date, which is on track to meet our full year expectations. Turning to slide four, our value creation priorities and growth initiatives around innovation and secular growth platforms that we outlined at our investor conference in November 2022 are yielding meaningful results. First, Emerson was recognized by Fortune Magazine as one of America's most innovative companies. The recognition is a testament to our innovation history and dedication from our employees to create leading technology and software for our customers. We are extremely excited to be recognized for this award and are working continuously to accelerate our innovation engine for future growth. Similarly, Emerson continues to differentiate as a leader in growth markets like energy transition, metals and mining, and software. In the second quarter, Emerson was awarded the software and automation contract for Intermountain Power Agency's renewed power plant. The Utah project transforms a retiring coal-fired power plant into a clean energy plant running on hydrogen. At first, the plant will use a mix of 30% hydrogen, 70% natural gas, before transitioning to 100% hydrogen by 2045. The hydrogen will be supplied by the Mitsubishi Power Advanced Clean Energy Production and Storage Hub, another Greenfield project that Emerson was awarded in 2022. When complete, the Intermountain project will supply six western states with carbon-free power, a critical step towards a net zero world. With our integrated end-to-end renewables and power generation platform, Emerson was chosen because of our industry expertise and proven experience in hydrogen and complex projects. Secondly, Emerson and Aspen Tech were jointly selected to automate and optimize the Golden Triangle Polymer Facility on the Texas Gulf Coast. The $8.5 billion project is a sister facility to Qatar Energy and Chevron Phillips Ras Laffan project that we highlighted in the first quarter. Emerson will provide its leading Delta V control system and intelligent devices, and Aspen Tech will provide its leading simulation software. This technology will allow the facility to operate with approximately 25% lower greenhouse gas emissions than similar projects in the US and Canada. This is a great example of the differentiating strength of Emerson and Aspen Tech. Turning to slide five, we remain energized and excited by our recently announced acquisition of National Instruments. National Instruments will expand our leading automation business into the attractive test and measurement space and provide important industry diversification into discrete markets. NI's leading portfolio of technology and software are well positioned to capitalize on secular trends within semiconductor and electric vehicles, and we expect the transaction to be accretive to our long-term underlying growth. Inclusive of $165 million of synergies by the end of year five, the transaction meets the financial criteria we have communicated. We will work to complete the customary regulatory and closing conditions and expect to close in the first half of Emerson's fiscal 2024. We had the opportunity to meet the extended management team and to do a global town hall with NI employees last week while visiting Austin. From that meeting, we came away even more confident in the potential opportunities of our combined company. The technology is differentiated and has ample room to expand, and the talent, well, it's simply exceptional. But most importantly, I was energized by the warm reception we received from the leadership team and all the employees we met. In a way, I am proud to be an NIR now as well. Please turn to slide six. The past 26 months have been fast-paced and an exciting journey for Emerson. We moved from a $17 billion two-platform business to a cohesive, $16 billion automation leader. It took a lot of hard work to transform this business, and we now have an outstanding opportunity to create value for shareholders. It is a portfolio that is exposed to secular growth trends that are expected to drive growth for years to come. It will remain committed to our 47% through this cycle underlying growth target. Our new portfolio is higher margin at approximately 49% gross profit and 23% adjusted segment EBITDA margin. Our industry mix is more diversified than two years ago, focused on automation, and with the discrete markets now our second largest customer and market. While we will continue to pursue bolt-on acquisitions, We're now turning our focus to executing the strategy we laid out at investor conference and delivering the synergies we have committed to for Aspen Tech and NI. Please turn to slide seven. Emerson and our board are committed to ongoing board refreshment, and yesterday we had the privilege of announcing two new board members to our board of directors. Leticia Goncalves is the president of Global Foods for ADM and a member of the company's executive council. As part of ADM, Bayer, and Monsanto, Leticia has held roles in digital solutions, commercial operations, international management, and technology development, and is a longtime advocate and driver of diversity and inclusion. Her experience in these areas and accelerating change make her an excellent addition to our board. Leticia is originally from Brazil. She's a chemical engineer and has a tremendous passion for innovation. Speaking of innovation, Jim McKelvey is a successful entrepreneur who founded Block, Invisibly, and Fintop Capital. He brings a unique innovation-focused perspective to Emerson and will serve as a key collaborator as we continue to accelerate innovation and invest in technology and engineering. Jim has expertise in many areas, including software, cloud, and cybersecurity, which will benefit Emerson as we provide customers with leading digital solutions. They are energized, and so are we, and we are excited to have both Leticia and Jim join our board of directors. Before I turn the call over to Frank, please turn to slide eight. I would like to congratulate Frank for a distinguished career of over 32 years at Emerson and the past 14 years as CFO. Frank, I met you 28 years ago, and it has been an honor to be your colleague. Please know that you created a legacy here at Emerson. We could not have accomplished what we did over the past 26 months without you, and I would not have been able to lead this company without your wisdom, confidence, and support. You made us better. You made me better. Thank you. for the lasting impression you left on me and the impact you made on all of us. I'm also excited to announce Mike Bachman, a CFO of Emerson, effective May 10th. Mike has over 35 years of experience in finance, operations across Baxter, Emerson, of course, and PwC. I'm excited about what Mike brings to the role And please join me in welcoming him. Mike, congratulations.