Good day and welcome to The Emerson Fourth Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note that this event is being recorded. I would like to turn the conference over to Colleen Mettler, please go ahead.

Thank you. Good morning and thank you for joining Emerson's fourth quarter and fiscal year-end Earnings Conference Call. Today, I am joined by President and Chief Executive Officer, Lal Karsanbhai, Chief Financial Officer, Frank Dellaquila, and Chief Operating Officer, Ram Krishnan. I encourage everyone to follow along with the slide presentation, which is available on our website. Please join me on Slide Q. As always, this presentation may include forward-looking statements which contain a degree of business risks and uncertainties. Please take time to read the safe harbor statement and note on non-GAAP measures. As I turn to Slide 3, I would like to highlight 2 areas where Emerson is making a difference. First, Mike Train (ph), our Chief Sustainability Officer, will be attending this year's United Nations Climate Change Conference [Indiscernible] 26 in Glasgow. Mike will be a panelists of the Adjacent Sustainable Innovation forum, participating in 2 notable discussions. The first discussion will be how to support small to medium enterprises to adopt net 0 pathways, and the second on supporting breakthrough innovation to green hard to abate sectors. Mike has worked this year to drive many greening of, buy and with Emerson initiative. One notable greening by example, in the recent announcement between BayoTech and Emerson to accelerate production of distribution of low cost, low carbon hydrogen. In the agreement, Emerson will deliver advanced automation technology, software, and products, and support a BayoTech building hundreds of fully autonomous hydrogen units to enable hydrogen fuel cell, commercial trucking fleet, and abatement projects in steel and cement. Another exciting initiatives is our a $100 million commitment to corporate venture capital, Emerson Ventures, designed to accelerate innovation by providing insights into cutting-edge technology that have the potential to solve real customer challenges. The investment commitment will advance the development of disruptive discrete automation solutions, environmentally sustainable technologies, and industrial software in key industries. A formal announcement and more information will be seen in tomorrow's press release. Finally, our investor conference historically has been in February. However, due to the recent announcement with AspenTech, we have decided to move our investor conference to May. It will be located at the New York Stock Exchange on May 17th 2022. I'd like to now turn the presentation over to Emerson's President and CEO, Lal Karsanbhai for his opening comments.

Thank you Colleen, and good morning, everyone. 2021 was a phenomenal year for Emerson. It developed very differently obviously than we planned a year ago. For one, I was named CEO and brought a new value creation agenda to the table. But equally important, we operated in an environment which was both rewarding and challenging for the organization. Through it all, our teams around the world did a fabulous job. I want to express my sincere gratitude to all the Emerson employees around the world. Thank you. I will also like to thank Emerson's Board of Directors and our shareholders for your support and confidence in the management team. 2021 was characterized by strong demand in our Residential Air Conditioning business, as well as our hybrid and discrete markets in Automation. Furthermore, we have experienced a recovery in Process Automation markets. The automation KOB3 mix for 2021 was up 2 points to 59%. And Emerson September 3-months trailing orders were plus 16%. We grew 5.3% underlying and leveraged at 38% operationally, inclusive of a $140 million swing in our price cost assumptions from November through the end of the fiscal year. The earnings quality of this Company continues to be excellent, with free cash flow conversion of 129%. The fourth quarter however, was challenged significantly by supply chain, logistics, and labor challenges. And that is not dissimilar from anything you've heard before. This was experienced in the form of material cost inflation, notably, steel, electronics, and resins, and lead time extensions. In addition, we experienced logistics challenges, unavailability of wanes and costs, and lastly U.S. manufacturing labor which was characterized by higher turnover rates, absenteeism, and overtime costs. In the quarter, we missed sales by a $175 million and alongside a challenging price cost environment in our climate business. It…

Thank you Lal and good morning, everyone. Please turn to Slide 6, if you would. So we're really pleased with financial results for fiscal 2021. As Lal said, we ended the year with a great deal of uncertainty and far exceeded the expectations we had at the beginning of the year. The underlying demand environment developed, such as much as we thought it would, it was continued strength in global discrete and hybrid automation markets and in North America process markets began to gain momentum later in the year. The global demand and our commercial residential markets were strong and broad-based, particularly in the U.S. residential air conditioning market. And it's far exceeding the expectations that we had going into the year. Our operations teams successfully worked through labeling supply chain issues, particularly towards the end of the year, and deliver the strong results that we're able to report to you today. Towards the end of the year, the intensifying combination of rising material costs, supply chain challenges, and labor constraints of the U.S. did begin to weigh on sales volume and profitability. We've worked through that in the fourth quarter and we will continue to work through that in the first half of fiscal 2022. Despite these fourth-quarter challenges, we're pleased to report, as we see, the key financial targets that we committed to you in August regarding underlying growth, adjusted EBITDA margin, adjusted earnings per share, and cash flow. And you can see all of that in the table. This was achieved in the face of an unexpected increase in key raw materials, mainly steel and copper, that resulted in an unfavorable price cost swing of a $140 million during the year, versus the expectation and the guidance that we gave you a year ago. We're very grateful…

Thank you, Frank. Please turn to Slide 10. Clearly, as you can see, the operating environment is a challenge, as commodity inflation, electronics supply, logistics constraints, and labor availability continues to impact our global operations. Net material inflation headwinds, accelerated through fiscal 2021, as you can see on the chart, primarily driven by steel prices, with majority of the impact being felt by our Climate Technologies business. North American cold roll steel pricing, increased once again in October, extending the streak of monthly price increases to 14 months. However, the magnitude of the increases have declined in recent funds and more importantly, hot-rolled steel prices dropped around $20 a ton in October, a positive sign for us. We do anticipate steel prices to start to flatten out over the next few months and net material inflation to peak in the first half of fiscal '22. We continue to stay focused and diligent on our pricing plans by executing on our contractual material pass-through agreements, surcharges for freight and more aggressive annual general price increases. We remain confident that price cost will turn green and will be a strong positive for the second half of fiscal '22. Our current plans indicate that price cost will be approximately a $100 million tailwind for the fiscal year. Turning to the next slide. On the commodity front, while steel prices are at elevated levels today, as I mentioned earlier, they are showing some signs of flattening, providing optimism that we will see North American cold-rolled steel prices start to decline in the coming months. Plastic resin prices have remained elevated due to high price in elastic demand, and weather-related supply challenges. Copper prices have also surged as of late, but our hedge positions will dampen the impact to the fiscal year. Now, while COVID-related…

Thanks Ram. Let's please turn to Slide 14 and I'll give the team some color on the current environment. In looking forward to 2022 demand continues to be strong across both the platforms. The trailing 3 month orders for automation solutions were up 20% versus the prior year, driven, as I said prior, by continued automation investments in discrete and hybrid markets. And we believe that will continue to '22, and of course the strengthening of the process automation spend. While KOB2 and KOB3 drove most of the orders growth in 2021, the new infrastructure bookings for L&G and de - carbonization will improve I believe through 2022 providing further upside. Increased site access will drive increased walk-down and shutdown turnaround activity in the business. To give you perspective, 2021 walk-downs were up 50% year-over-year with more than 5,000 globally, with each walk-down driving substantial KOB3 pull through. Shutdown turnaround bookings were up for -- in '21 10% year-over-year, driven by strong spring season that extended into the early summer. 2022 shutdown turnaround outage activity span is expected to be up mid single-digits, led by chemicals and refining, leading to high single-digit bookings growth. Turning to Commercial Residential Solutions, the U.S. and Europe order rates continue to be strong heading into 2022, while Asia has began to moderate. Overall, the 23-month orders were 9% in September. In thinking a little bit further into 2022, many of our key Climate Technology then markets, will continue to have momentum, including aftermarket refrigeration, commercial HVAC, food retail and food service, driven by new store builds and quick service restaurants, and residential Keith Comp. Turning to Slide 15, looking ahead to 2022, it will be a year characterized by strong underlying demand and an improving operating environment. The late cycle process automation business will…

Thank you Will. We will now turn the call to the operator to start the Q&A portion of our call.

We will now begin the question-and-answer session. [Operator Instructions]. The first question is from Andy Kaplowitz with Citigroup. Please go ahead.

Hey, good morning, guys.

Good morning, Andy.

Good morning, Andy.

Well, maybe you could give us a little more color into how you're thinking orders play out in FY22. Obviously, a nice recovery is continued in Automation Solutions, but you mentioned that you think KOB1 bookings could come in LNG and Decarbs. When do you see those types of projects hitting? And could they help maintain bookings growth at current levels as comps begin to get more difficult over the next few months? And then in C&RS, it's held up obviously very well despite Asia moderating a bit. So maybe more color into what you expect there.

No, I think the environment -- I'll start with Andy with Automation. The strength -- I see the strength in the Process Automation business to continue throughout the year. Very honestly we're in an environment where a $100 oil is not uncertain right now, and we're seeing some restraint in the U.S. shale and discipline and OPEC and things of that sort. That's going to free up significant capacity, particularly at NLCs, and some of the larger integrated companies to move forward on a lot of the programs that will drive the decarbonization initiatives. We've seen that already with many flaring type of projects in the U.S. And we will continue to see that with carbon caption and others accelerating I'm highly optimistic about that. On the LNG side there's 2 significant programs that we're pursuing which will be awarded likely Andy, towards the second half of the year. One is the Baltic L&G, investment and of course the Qatar North field expansion being the two largest. Those are very significant in terms of capacity additions and investment in automation, or are so both in pursuit. Turning to commercial, residential. Yes, I see the residential air conditioning mark in moderating as we go through the year and but, with upheld by the commercial strength in the marketplace, which obviously for us, is very relevant. So I do see more of a mixed bag in the Commercial Residential business driven by that moderation in the residential AC.

Well that's helpful, man, obviously one of the main concerns that we've heard from investors posting announcement of your deal is that Emerson instead of diversifying actually doubled down on oil and gas. So I'm sure you anticipated that concern. So maybe you could address it head on, Lal. Ultimately, I know you think industrial software as a different market, you just said that in your prepared remarks, but is the view that you believe AspenTech gives you the best chance of hitting or exceeding the long-term guidance you gave us earlier in the year?

I do. I obviously think that the solutions that AspenTech brings to the table are incredibly broad in terms of -- particularly the sustainability journey. And what we're seeing is that the importance of the software in term -- particularly in terms of design and optimization of assets, will be incredibly relevant as these customers embark on these new -- on the new projects. And so, I regard the energy position as important, but I've regarded more importantly from the transition and the share of wallet spend that there will be undertaken in the Energy segment. Having said that, the platform for investments in diversification, which has been a core component of the Aspen board for a long time, will continue to be important here as we go forward. And the opportunity, whether it's for M&A, and for growth in TD, and other segments is a core part of this synergy value.

Thanks, Lal.

Thanks, Andy.

The next question is from John Walsh with Credit Suisse, please go ahead.

Hi. Good morning, everyone.

Good morning.

Good morning. John.

Just wanted to talk a little bit more about the margin bridge here through the year. I think in your prepared remarks, you remain confident in the 30% underlying leverage. Your -- the guide for Q1 implies we're certainly starting I think below that. Is it all just price cost-timing driven, or is there something else there that we should be aware of for our models about the Q1 margin performance.

Yes. Good morning, John. This is Frank. Yes, it is primarily price cost driven. We will be below the 30% assumption for the first half of the year, and then as the price rolls through, which we have -- we had some plans for that to happen. The margins will -- the leverage will increase as we go through the years. So that's how we will get there, but we're very confident that we will in fact in fact get there are obviously, Automation Solutions to leverage is good as we go throughout the year and then, it's in commercial residential where we have the ramp as price cost normalizes and then, turned positive in the second half of the year.

Great. And then maybe a question Lal around earlier in the call, you talked about, still some portfolio pruning around some of the upstream oil and gas assets, disconnected assets, within the portfolio. Could you size that for us? What is the revenue size that you're talking about for that bucket?

No, John, I'm not going to do that, but I will tell you that the activities on the divestitures will be done over time. As I have noted earlier, they'll be done very carefully at times, times with incoming assets as well. Obviously, we have a large impending transaction and on the horizon here. So that's what I will tell you. I do -- I am a firm believer that share of wallet in the energy segment will continue to move to the zeros and ones, and away from hardware structure. And hence, we're going to continue to drive down that path. But in terms of sizing that entire bucket for you. I apologize John, I'm not going to do that.

No. Worth the shot. Thank you very much. Appreciate you taking the questions.

Thanks, John.

The next question is from Andrew Obin with Bank of America. Please go ahead.

Good morning, guys.

Good morning, Andrew.

Good morning, Andrew.

One question we got in particular, looking at the results from one of your peers yesterday in Auto Sol, how do you guys reconcile 20% year-over-year orders growth, 16% year-over-year backlog growth, and then 6% to 8% FY22 organic revenue guidance? What's incorporated into the FY22 revenue guidance? I know you gave us some color, but just the disconnect.

Obviously, as we finished -- as we went into September and into the first quarter, we have some comps that are still favorable in the business. So that's one element of it. And then I think normalizing as we go into what it will be, I think still a very strong environment, and how I felt was important for us to guide in that business. And you're right, I think that the opportunities across the three served segments of the market of there's strong I think the underlying demand is very strong. But in terms of guiding with certain and -- some uncertainties remaining in the supply chain environment, I wanted to be somewhat cautious as well. But having said that, the demand picture is very optimistic.

Makes perfect sense, and other question was sort of get a lot of big to date for investors. Just sort of sense of inventories in the channel. And your customers, right, because one big theme this earning season, there's a lot of companies bringing up, even companies who was very short-cycle businesses, bringing up these very strong backlogs even for companies that don't have backlogs usually. And I think, Investors are just worried that this may not end well, sometime midyear, next year. What's your sense of inventories in the channel and your customers? How do we think that plays out throughout your fiscal '22 or calendar '22, however you want to discuss, because your team has seen many cycle and this one seems to be a little bit different than way? Thank you.

Yeah. And I'll start, I'll turn it to Ram for a couple of comments as well. Look, on the automation side, I really don't see that as a concern. Most of the [Indiscernible] part of the business, obviously 59% in the year was booked to ship KOB3, and they went directly into -- not into inventories, but into predominantly application -- end-user application. As you turn into the Climate Business, Ram, perhaps a few comment from you.

Yeah, I would say across both our OEMs and in the wholesale community, Andrew, I would say inventories are slightly elevated to where they would be in normal times as people anticipate supply chain challenges and have been bringing in more material. With that said, I think the inventory is getting out into the end customer base through the wholesale channel and through our OEM. So I would say it's not a big issue per say and it maybe it'd be slight elevated levels, but it's not something that is unreasonable or unseasonal.

I really appreciate your answer. Thanks a lot.

Thanks, Andrew.

The next question is from Tommy Moll with Stephens. Please go ahead.

Morning and thanks for taking my questions.

Thanks, Tommy.

I wanted to start on your outlook for Automation Solutions. I think you called for 6% to 8% underlying in the 2022 outlook. I'm curious what your visibility and assumptions are there for oil and gas customers. You're planning your fiscal year here, several months in advance of when a lot of them well, and I'm just looking at $80 crude and wondering potentially when those budgets are rolled out at year-end or early next year, if there's some substantial upside potential?

It's a great question. Obviously, we are 3 months [Indiscernible], 4 months ahead of seeing those budgets, their capital budgets. What we are seeing and have assumed, Tommy, is a continued strength in the operating budget spend, which is, as you know, where a significant amount of the KOB3 and some KOB2 falls into. That strength picked up in the second half of fiscal 2021, and we assume and believe it will continue to accelerate as we go through 2022. But in terms of the capital environments beyond the two LNG jobs that I've -- that are obviously funded and moving through bidding phases. We will see what else comes out at the capital plans. But I would expect, Tommy, that there would be sustainable type of investments. Again, the methane emissions is a big deal. I think we saw something from the U.S. around those standards. And of course, carbon capture, of which I think, will be more and more significant as we go through the year. So we'll see. But you're right, we'll watch that very carefully as we go into Jan.

Thank you for that. That's helpful. I wanted to pivot to OSI. Can you refresh us on what the top line contribution was in '21? What's your plan is for '22? And I think, it's likely going to be fair to say you've realized some revenue synergies since acquiring the asset and any anecdotes you could share on how you were able to drive those in such a short timeframe would be helpful. Thanks.

So phenomenal first year for the Company, approximately a $190 million in revenue in 2021, growing to approximately $220 in 2022. Well ahead of Synergy board plans, the great execution globally. We won our first transmission distribution project in Europe, with a very large customer in the Netherlands and Northern Germany. We won our first transmission distribution project in Australia, in Tasmania. Again, planting critical flags. And we're significantly engaged with the large power producers in transmission companies in the U.S.. So realizing the synergies, and great growth and profitability. So I feel really good about the acquisition. And as it goes into AspenTech, it goes in -- with lots of momentum into the business.

I appreciate it, and I'll turn it back.

Thanks, gentleman.

Thank you.

The next question is from Josh Pokrzywinski with Morgan Stanley. Please go ahead.

Hi good morning, guys.

Good morning. Good Morning, Josh.

Well, just wondering on the Auto Sol side, maybe hoping to shore up some of the growth differential you guys are looking at, versus Rockwell yesterday. Any observation on the mechanical or say, balance and controls type business, versus more of the software and automation side? Is there a wider spread in that outlook for 2022 than usual?

Well, not really. Obviously, our systems and software business has outgrown our device business. Our digital transformation initiatives which are both software and device-based, have outgrown the remainder of the business. But having said that, I really don't -- I wouldn't note a significant difference as you go through a lot of the KOB3 business is device layer type of business where you'd see perhaps a little bit of a bifurcation to be honest. Because if you look at the KOB1 heavy dependent businesses, some of those in final control. But, beyond that, I'd suggest that we will see broad portfolio alignment as we go through and it's really delta of a point or so between them.

Got it. That's helpful. And then, just shifting over to CNRS. I guess first, what is the -- and I apologize if I missed it. What's the price embedded in that outlook. And then you mentioned steel is coming down. Maybe prospectively based on futures. I know some of that is sort of contractually set, like, if that comes down, is that going to the calculation for how prices -- it's divined with the OEM relationships there. Thanks.

Yeah. Go ahead. Go ahead.

Yes. So this is Ram Krishnan. On the -- I'll answer the steel question first. So obviously, as steel [Indiscernible] to come down in the second half that we've modeled it as a moderate decline in the second half. But any significant [Indiscernible] to that really doesn't impact '22, but will translate into our pricing dynamics for '23. So it's not necessarily a concern for us in '22 and we'll watch that carefully. Obviously, we'd like it to come down which will impact the second half or help us in the second half. So that's on the steel piece. On the pricing piece, I think whatever is the inflation, I don't think we're going to give out an exact price number, but obviously the inflationary dynamics of '21 will translate and convert into material price plus through price that we will realize in '22

[Indiscernible] color. [Indiscernible]

Thank you.

The next question is from Deane Dray with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Good morning Deane.

Good Morning Deane.

Quick question for Frank, if I could. Free cash flow was well below your 4Q average. I know you called that working capital pressures. Maybe some color there would be helpful. Thanks.

I mean, per the nature of the sales ramp and the comparison versus prior year when we were taking cash off the balance sheet, I think we have a little bit of a dislocation there in the fourth quarter Deane that will normalize. The year was very, very strong, but the cash flow was lumpy, given the way the year played out, and particularly, in commercial and residential.

Got it. And then for Lal, on the expectation, focusing M&A on industrial software, since it is a new structure for us with Aspen Technology, when you say industrials, where I position? Is that an Emerson driven? Is it Aspen? Would it be folded into Aspen? Does Aspen have -- are they part of the review process? And so forth. Thank you.

Yeah, sure. In the -- no. Industrial software M&A will occur at AspenTech. And

Deane, it will occur at AspenTech. Having said that, Industrial Software is only one of the 3 large market segments, Deane, that we will be acquisitive in. And you'll see those as we play those out. Obviously, they will become public knowledge. But no, I -- we've got a great platform there to transact M&A softer with what I believe will be a market multiple, that will enable the economics to work from a transaction perspective, and from a value creation perspective.

That's really helpful. Thank you.

Thank you. Thanks, Deane.

The next question is from Jeff Sprague with Vertical Research. Please go ahead.

Hey, thanks. Good morning, everyone.

Good morning.

Hey Lal, good morning [Indiscernible] to the portfolio review, the comment about two end states. I would suppose that means you do the addition and subtraction you're talking about and then continue to [Indiscernible] as Emerson. There's option one and options two. As you do that, and then perhaps separate. If there's more that you can share on your thought process there or what might be kind of the triggering mechanisms of one over the other that would certainly be interesting?

Yeah, I know. I think we're going to play this [Indiscernible] as I've mentioned earlier over time. And I think I used the expression when we were in New York for the AspenTech transaction announcement, that this is a marathon, that we're going to be very deliberate and thoughtful as we go through this. We're going to be keenly aware of the value proposition to the shareholders and impacts to the cash flow, and impacts to value creation as we go through the journey. The end game, of course, is to create a portfolio that's more connected. A portfolio that has an underlying sales potential, that is higher and consequently can deliver through cycles, double-digit EPS. That's the objective here. And for that, we need to expose the portfolio to more of those markets. And between the strong Balance sheet of the Company, the strong Balance sheet that AspenTech will have as well, and the divestiture work on this side, I think we'll get there over a number of years. But there were meaningful conversations with our Board. There were great debates. Obviously, this was a body of work over a number of months, almost 4 months, that our partners did alongside management, and -- but we have pathways now and optionality. And this is why we have 2 potential end-stage here.

Great. And then just as a follow-up, sort of a bundled question around price cost and margins and the like. The price cost positive of a $100 million, does that arithmetic get you to margin neutral on price cost? And then, kind of separate, but I guess related, just the additional restructuring that you're doing, can you elaborate on that a little bit? And what kind of savings tailwind you're expecting in '22 from both the actions you took in '21 and the new actions you're talking about here in '22? Thank you.

Yeah. Hey, Jeff, this is Frank. So the -- I mean, we're thinking about it in terms of delivering the leverage on the business for the price cost in isolation. Obviously, on the way up is not necessarily margin accretive. So we're just looking at it holistically in terms of delivering 30% plus operating leverage for the business for the year. The price cost, given the way it has rolled and will roll through, very lumpy, very distortive within the quarter. So we're just very focused on getting to that goal for the year, delivering up margins, and for the total enterprise, and delivering the operating leverage. Regarding the restructuring. I'll take a quick stab and then let Ram rollout and can come in. And your question was around the continued restructuring spend. So as we go through this week, we identify additional opportunities in both businesses. Some of it is footprint consolidation. I mean, the cost reduction March is kind of a never-ending [Indiscernible] and [Indiscernible]. Obviously very significant opportunities that we've executed on for the most part, when we talked about driving to previous peak margins. But, there's more to do in a complex business, we're continually trying to improve the cost position. And frankly, much of what we do in terms CapEx and restructuring over the next couple of years will be around capacity expansion for the breadth that we expect to see in both businesses. So we may be engaged in some restructuring that's a little bit higher than our historical levels, but it's all around continuing improving the cost position than putting in the capacity in the right places.

[Indiscernible] you've said it well.

Okay. Hello.

The next question.

The next question is from Scott Davis from Melius Research. Please go ahead.

Thanks. Good morning, everybody.

Good morning, Scott.

Morning, Scott.

Best of luck for 2022. I had a couple of questions here for you guys. First, the 30% incremental that you referenced, Lal, is that more of a baseline or a goal. Does that include the price -- the $100 million price tailwind. If you answered some of that, I apologize, but just looking for more color on that.

No, that is the plan. That's what the fiscal plan rolls up into commitment we're making. It does include the price. Obviously it's all in of first half headwinds that we described in second-half turning into tailwinds, whether that's price cost or supply chain. But as Frank I think said, that will be below in the first half, as we were and improve as we get into the second half, obviously. But for the year, I feel very, very good about the 3 points of incremental on the underlying sales.

Okay, and then the comments that you made around carbon capture, methane, LNG, is there a point where you can start to measure what percentage of your orders those particular types of projects represent, where we can get a sense of the materiality of the future growth there?

I think that's a great question, Scott, as well. We identified approximately a $1 billion of KOB1 projects. Now, that includes also transmission distribution, but also a whole slew of sustainability and renewable jobs, inclusive of hydrogen, including our carbon capture, etc., Biofuels, and other things. So as we go forward, I -- and then we've continued to look at our funnel, and address our funnel and how we communicate the funnel. I think it will be important for us to break those on, and give you some visibility too. So I think that's a fair question.

Okay. Well, good luck in 2022.

Thank you, Scott.

Thank you. I'll pass it.

Thank you, Scott.

Thank you.

The next question is from Julian Mitchell with Barclays. Please go ahead.

Hi, good morning. Just wanted to -- good morning. Just wanted to start with the Automation Solutions organic growth guide. So you're assuming that that business grows about 7% this quarter. And then the same over the subsequent 3 quarters, even as the comps get a lot more difficult. So I just want to understand, is sort of everything in that segment, steady-state as you go through the year in terms of hybrid versus process versus discrete, or KOB1, 2, and 3, or is there something changing across either of those [Indiscernible] kind of as you move through the year, that allows the organic growth rate to hold steady even with tougher comps.

Yes. Great question Julian, good to hear your voice. Yes. So, backlog situation normal if you look at our typical performance in Automation, Q3, Q4 last year, for example, I believe we reduced backlog by about $400 million. This year we reduced it by $100 million. A lot of that was reflected in that $125 million [Indiscernible] in the quarter for Automation Solutions. So the backlog situation coming into the obviously, is stronger. But having said that, we do expect KOB3 to remain strong. I think the data that we're seeing in the commitments our customers are making, particularly around STL activity, is very, very robust. And then secondly, modernization programs and the KOB1 that I outlined, whether that is sustainability or LNG, I think will come in and support the second half of the year. Obviously, KOB1, for the most part, will not turn into revenue, with the exception of perhaps some of the earlier feed stuff that in our systems business, as you know, Julian. But robust, and we will pick up as we go through the second half of the year.

That's helpful. Thank you. And then just switching to Com-Res. 50% plus of the revenues in that business a residential facing. You do call out the slowdown that you're embedding in Resi through the year, but it doesn't sound as if any major cliff is looming as you see it today. Maybe discuss how you're thinking about the situation of the OEMs in Resi, and how confident you are that you can sustain positive growth through the year in Resi with tough comps.

Our perspective is that we've got a couple of looming regulatory changes on the environment. Efficiency and obviously, referred to our new efficient '23 and refrigerants in '25. It's been an interesting cycle to call where I've spent a time with 2 of our largest OEM customers this quarter. I went down to Carolina, visited with Train, and went down in Miami and visited with Carrier. And we're staying very locked step in terms of understanding their demand and their projections for demand as we go through the fiscal. But we do believe that there's a moderation, not a cliff as we go through the year.

Great. Thank you.

Great. Well, Julian, thank you very much and with that, I think we're going to close the call. I thank you all for your time this morning and I appreciate the questions and thank you for your support.

The conference call has now concluded. Thank you for attending today's Business Edition. You may now disconnect.