Emerson Electric Company

Good morning, everyone, and welcome to the strategic announcement of Q4 and full year 2024 earnings conference call. All participants will be in a 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 and then one on a touch-tone telephone. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to our host, Colleen Mettler, Vice President of Investor Relations at Emerson. Please go ahead.

Good morning, and thank you for joining us for Emerson's Strategic Announcement and Fourth Quarter and Full Year 2024 Earnings Conference Call. This morning, I am joined by President and Chief Executive Officer, Lal Karzandai, Chief Financial Officer, Mike Bachman, and Chief Operating Officer Ram Krishnan. As always, I encourage everyone to follow along with both slide presentations we have prepared this morning, which are 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. Please turn to slide three. Today we have two presentations that we will discuss. We will first go through our strategic announcements presentation, and then we will go through our 2024 financial results and guide for fiscal 25. I will now pass the call over to Emerson's President and CEO, Lowell Karzenbay, to discuss the strategic actions we announced to complete our portfolio transformation.

Thank you, Colleen. Good morning, everyone. Please turn to slide four. 2024 was an exciting year where we closed our national instruments acquisition, did excellent work driving synergies and integration, and celebrated 80 years as a company listed on the New York Stock Exchange. Operationally, we performed at a high level, and we'll go through our results in a few minutes. 2025 is a milestone year for Emerson as we commemorate our 135th year as a company. This longevity is only possible due to the talent, dedication, and innovative spirit of our Emerson employees through the decades, and I'm grateful for their continued contributions. Emerson has undergone many transformations during this storied history, and I'm excited to announce our final steps to complete our portfolio transformation, which started three and a half years ago. Our intent has been unwavering in the execution of our vision to create a cohesive industrial technology portfolio. Transformation and evolution have been hallmarks of past Emerson generations. Chuck Persons, Chuck Knight, and David Farr all had visions and reinvented this great company. And now, this is a trademark of this management team that I have the privilege to lead. Please turn to slide five. First, Emerson has made a proposal to acquire the remaining shares of Aspen Tech for $240 per share in cash, which values Aspen Tech at an EBITDA multiple consistent to our original transaction. Given our position as a 57% shareholder of Aspen Tech, our proposal must be made public and filed under our 13D reporting obligations as and when delivered to Aspen Tech. We were prohibited from engaging in any take private discussions with Aspen Tech ahead of such public disclosure. Now that our proposal has been made public, we look forward to engaging privately with a special committee of Aspen Tech's board to reach a definitive agreement that will benefit both Emerson and Aspen Tech shareholders. If we reach an agreement with the Special Committee, Emerson's proposal is that the transaction be affected by a tender offer that would be subject to a non-waivable condition that at least a majority of the Aspen Tech common stock held by minority stockholders be tendered in accordance with the MFW framework. I wish to emphasize that in our capacity as a stockholder of Aspen Tech, we are only interested in acquiring the shares of the company that we do not currently own. And accordingly, we have no interest in a disposition or sale of our holdings in the company. This is an exciting opportunity to bring two exceptional companies fully together. and unlock significant value creation potential for shareholders, employees, and customers. Since completing our initial investment in 2022, our partnership with Aspen Tech has been highly productive and has advanced our capabilities in software-defined automation. The success of our operating partnership with Aspen Tech over the last two years gives us confidence that the time is right to bring Emerson and Aspen Tech together. The combination of Emerson and Aspen Tech would advance key initiatives, create new opportunities through full integration as a single company, and further accelerate Emerson's industrial software strategy. Additionally, as a single company, leveraging the proven Emerson management system we expect there to be immediate additional cost synergies from the transaction. Finally, we believe the transaction and the simplified structure would make it easier for our investors to value and model our company. Second, we have commenced a process to explore strategic alternatives, including a cash sale for our safety and productivity business to maximize shareholder value. This segment, which includes Emerson's legacy tools businesses, is approximately 8% of 2024 revenue and comprises the remaining businesses not related to automation in Emerson's portfolio. This business has industry-leading margins and cash flow but does not fit our automation thematic. We announced that we are increasing our return of capital to shareholders with plans to repurchase approximately $2 billion of common stock in fiscal 2025 and expect to complete $1 billion by the end of the fiscal first quarter. Together with the dividend, we expect to return approximately 100% of our guided free cash flow in 2025 to shareholders. The repurchase underscores Emerson's commitment to driving shareholder returns, as we believe the current multiple does not accurately reflect Emerson's strong outlook, significant free cash flow generation, and benefits of the strategic actions announced today. It's important to note that post-transactions, we expect to maintain our A2A credit rating. Please turn to slide six. Aspen Tech is a leading industrial software company that delivered $1.1 billion in revenue and $941 million in ACV in 2024. Aspen Tech's process simulation and optimization software delivers efficiency and productivity gains in mission critical environments for its global customer base, including top EPC, utilities, chemicals, and energy companies. Aspen Tech's innovative software product capabilities are critical to helping these customers address the dual challenge of maximizing production output while also achieving sustainability goals by enabling digital transformation at scale to optimize asset performance across its lifecycle. Their software portfolio includes their heritage Aspen Tech businesses, as well as the two businesses we contributed to the initial deal, SSE and DGM. Today, Emerson's leading automation solutions and Aspen Tech's industrial software capabilities provide our customers with an unparalleled portfolio of offerings. Our future vision as an integrated company would accelerate innovation to deliver significant value and move the industry forward. Please turn to slide seven. We believe bringing Aspen Tech fully under Emerson's ownership at this time would enable us to combine technology capabilities to rapidly accelerate our vision of moving the control system landscape to a software-defined enterprise automation architecture. In today's typical manufacturing facility, there are clear delineations between different levels of the automation technology stack. Field devices send data through a variety of communication protocols into control hardware and embedded software in a distributed control system that runs the production and safety operations in the facility. This automation loop is the traditional strength of the Emerson portfolio. Aspen Tech's optimization software sits on top of this architecture, providing design, operations, and maintenance suites to improve overall plant performance. Today, even within a single plant, field devices and control hardware typically come from multiple manufacturers with complex web of connections that are designed to provide data up the stack to specific departments. For example, production and maintenance data are separately managed for those departments. This inherently siloed approach limits customers' ability to drive maximum efficiency, uptime, and reliability in their operations. With a fully aligned portfolio and technology roadmap and use of the latest technological developments that Emerson is pioneering, we believe we can move the industry to a software-defined approach in which field devices for mobile manufacturers feed data seamlessly into edge controllers that make use of a unified data fabric democratizing operational data. That data fabric would then be available to a suite of control and optimization software modules that will vary depending on specific customer needs. We call the full suite of software modules Emerson's Enterprise Operations Platform. which will run production and drive safety, reliability, and optimization at the site regionally and eventually at the enterprise level for all our customers. Please turn to slide eight. Our customers continue to evolve their production to improve efficiency and apply the latest technologies to operational footprints. While today they continue to value the traditional benefits of the automation technology stack, including security, reliability, and redundancy, they are increasingly looking to benefit from new technologies that enable step changes in the productivity and longevity of facilities and production assets. Emerson's Enterprise Operations Platform will connect the field, edge, and cloud across manufacturers to provide customers with the flexibility to manage the operations of assets from individual sites to the broad enterprise in whatever way is best for their needs. We will deploy this capability in phases, moving from foundational integration of our various software modules to site level, and then eventually enterprise-wide control and optimization. Fully alignment of technology roadmaps between Emerson and Aspen Tech is crucial to realizing this vision. We believe this approach will move the existing $30 billion control system and optimization software TAM from its current construct of one-third software, two-thirds hardware and services for predominantly software-based market, growing high single digits with a significant proportion of recurring revenue. Please turn to slide nine. The breadth and depth of Emerson's and Aspen Tech's software capabilities across engineering and design, operations, asset performance, and data management is unparalleled in our space, providing a broad set of customers with unique value across the full lifecycle of their assets. Customers use our suite of applications to design and simulate their processes, control and optimize production to maximize throughput and quality, proactively monitor their capital assets and take action before an issue emerges, and more effectively utilize the wide variety of structured and unstructured data that they generate. By fully integrating Aspen Tech within Emerson, we'll be able to align our technology roadmaps more effectively and rapidly, thereby accelerating achievement of our vision of software-defined automation and delivering significant value to our customers. Please turn to slide 10. Across the key capabilities required to offer customers an enterprise operations platform, we believe the combination of Emerson and Aspen Tech would have unique offerings relative to our leading automation competitors, as well as to non-traditional players like ERP and cloud providers. In particular, our extensive experience integrating software modules into our distributed control system suite Our leading approach to zero trust cybersecurity and our insights into native connectivity with field devices enable us to provide compelling value to our customers. For total clarity, Aspen Tech's suite of optimization software solutions would continue to be actively sold on top of third party control systems as they are today. Turning to slide 11. We believe this transaction would create significant value for our shareholders as well. We see meaningful opportunities to leverage Emerson's management system to improve operating margins, cash flow, and innovation productivity, as we have demonstrated with test and measurement. The primary areas for synergy targets include corporate costs and G&A, where we would strive to streamline duplicate functions, leverage a regional best cost model, consolidate facilities, and use Emerson's scale to reduce third-party spend. For R&D, we can enhance the productivity of spend and leverage common capabilities while supporting accelerated investment as we build out the enterprise operations platform. We believe the transaction will meet Emerson's return thresholds, and we expect the impact to adjusted earnings per share to be neutral in fiscal 2025 with synergies. Please turn to slide 12. Now is the right time to acquire all outstanding shares of common stock of Aspen Tech. The combination of Emerson and Aspen Tech would accelerate the achievement of our software-defined automation strategy and provide unparalleled value to customers. As a single company leveraging the proven Emerson management system, there would be immediate additional cost efficiencies from the transaction in addition to opportunities to enhance operational performance at Aspen Tech. Lastly, a single integrated company reduces structural complexity for our investors. We are excited by the opportunity to bring Aspen Tech fully into Emerson. Please turn to slide 13. Our second announcement this morning is that we have commenced the review of strategic alternatives for the safety and productivity business. including a cash sale. This business is a $1.4 billion global manufacturer of professional plumbing and electrical tools, as well as wet, dry, and commercial vacuums with leading gross margins and strong free cash flow generation. Safety and Productivity is a technology-based business with premium brands including Rigid, Clocky, and Greenlee that is exposed to attractive growth drivers such as reshoring and domestic manufacturing, but is not aligned to our strategic roadmap. There is no deadline or definitive timetable set for the completion of the strategic alternatives process or assurance the process will result in any transaction. Please turn to slide 14. We are focused on our value creation roadmap, and at the successful completion of these strategic actions, we will have created a highly attractive $16 billion global industrial technology company with a comprehensive portfolio of software-defined and hardware-advantaged automation solutions. Our cohesive portfolio generates strong profitability and cash, and our growth platforms are aligned to underline secular market trends, which will deliver significant growth going forward. to support our 47% through the cycle organic growth framework. Industrial software is our largest growth platform, and software represents approximately 14% of post-transaction sales, which is well positioned to increase as we drive the software content in our business higher. ACV, which is an operating metric used to gauge the underlying health of software businesses, is $1.4 billion and grew at 10% year over year. We will simplify the reporting segments with these transactions, moving from seven to five, as we intend to consolidate Aspen Tech into control systems and software. We have conviction in the profit and growth potential of this premier collection of industrial technology assets, centered on an automation thematic and we are excited to deliver further growth, margin expansion, and shareholder value creation. The Aspen Tech proposal was made public today pursuant to regulatory obligations, and we have walked you through our plan and why we are pursuing this transaction now. The next steps in both of the portfolio transactions announced today will be done privately. We do not intend to make any further public statements or announcements regarding the proposal or review of the strategic alternatives until such time as a definitive agreement is reached or a further disclosure is appropriate. We will not be taking or answering any questions on the Aspen Tech proposal today or until such time is appropriate. I will now turn the call over to Mike Bachman to review our 2024 results and 2025 guidance.