Good morning and welcome to the Emerson Fourth Quarter and Full Year 2022 Earnings and Climate Technologies Announcement Conference Call. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Colleen Mettler. Please go ahead.

Good morning, everyone and thank you for joining us to discuss our Q4 and full year 2022 earnings and an exciting milestone in our portfolio transformation. Today, I am joined by President and Chief Executive Officer, Lal Karsanbhai; and Chief Financial Officer, Frank Dellaquila for the presentation. Also here with us is our Chief Operating Officer, Ram Krishnan. I encourage everyone to follow along with the slide presentation which is available on the Investor page of our website. This presentation and responses to questions may include forward-looking statements, including the company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those disclosed today, is available on Emerson's most recent annual report on Form 10-K as filed with the SEC and subsequent SEC filings. After our remarks, we will hold the Q&A and appreciate you limiting your questions to one. With that, I will now turn the call over to Emerson's President and Chief Executive Officer, Lal Karsanbhai.

Thank you, Colleen. Good morning and thank you for joining us today. Please turn to Slide 4. Allow me to begin by saying that I'm very proud of Emerson's global team for the results delivered in 2022. Thank you. We had a strong finish to the results in 2022, with underlying sales growth of 9%, operational leverage of 36%, an adjusted EPS of $5.25, representing a 16% increase over prior year. As we will discuss during today's call, most importantly, we have a strong outlook for 2023, supported by end market growth and excellent operational execution. Shortly after becoming CEO in February of 2021, we embarked on an ambitious journey to accelerate value creation for Emerson shareholders. This required a bold transformational agenda, inclusive of culture, portfolio and execution. Alongside our Board of Directors, we underwent a comprehensive assessment of Emerson's portfolio and identified potential new market segments for investment. We designed the path forward based on a vision to create a pure-play automation company. Today, we achieved a significant milestone in this portfolio transformation by announcing the sale of a majority interest of the Climate Technologies business to Blackstone. Emerson, going forward, will be a unique automation company with a cohesive higher-growth portfolio exposed to diverse end markets and aligned to the world's secular trends, including digital transformation, sustainability, energy security and near-shoring. We have ample room to invest both organically and through disciplined capital deployment in M&A to build automation capabilities along our technology stack which is industry-leading and is composed of intelligent devices, control and software, serving leading customers in process, hybrid and discrete industries. We will do this while maintaining our commitment to return cash to our shareholders through share repurchase and the dividend. In 2023, we enter our 67th consecutive year of increased dividends per share. I’m excited and cannot think of a better time during my 27 years at Emerson to be optimistic about our future. To provide more details on our results, I’ll now turn the call over to Frank.

Thank you, Lal and good morning, everyone. Please turn to Slide 5. As Lal mentioned, the fourth quarter was a strong finish to a very good year. Underlying sales grew 12% with Automation Solutions at 13% and Commercial & Residential at 10%. Segment EBITDA margins improved by 260 basis points on 54% adjusted EBITDA leverage, excluding AspenTech. Within the total segment margin improvement, Automation Solutions improved 190 basis points year-over-year and commercial residential improved 250 basis points. Operational performance was exceptional with incremental margins exceeding 50% in both platforms. Price realization accelerated in the second half of the year, peaking in the fourth quarter as both businesses delivered on the price plans we communicated on previous calls. In particular, Commercial Residential realized more than 10 points of price in the second half, driving sequential improvement in leverage and margin. Adjusted earnings per share of $1.53 grew 16%, including a $0.04 contribution from AspenTech and despite a significant currency headwind, $0.05 in the quarter that will continue into 2023. Orders continue to be solid, up 6% in Automation Solutions and 7% in Commercial Residential on a 3-month roll. Automation Solutions backlog was reduced by $400 million in the quarter but remains robust at $5.8 billion and supports our sales outlook for 2023. AspenTech contributed $251 million of sales in the quarter at nearly 33% adjusted EBITDA in what is typically a seasonally low quarter for the business. Please turn to Slide 6 and we'll review the full year in more detail. We believe we delivered excellent financial performance in 2022 despite widely known operational and geopolitical challenges. Underlying sales were up 9%, meeting our full year guidance. Adjusted segment EBITDA improved 140 basis points for the year with incremental margins of 36%, well ahead of our 30% target. This performance was…

Thank you, Frank. Please join me on Slide 9. Our portfolio journey has been guided by a clear road map to transform Emerson into a pure-play automation company. And today marks a significant and definitive step on that journey. Our announcement to divest the majority interest in Climate Technologies to Blackstone is a milestone transaction for Emerson with compelling financial benefits. Emerson will monetize the majority of our Climate Technologies business and an attractive valuation of 12.7x 2022 EBITDA, providing approximately $9.5 billion of upfront pretax cash proceeds to invest in growth. The transaction structure also enables additional cash proceeds from the future exit of our noncontrolling ownership. With the exit of Climate Technologies, we are creating a company with a cohesive portfolio, higher growth and profitability. Our leading technology and software will be positioned to capture secular growth trends in digital transformation, sustainability, decarbonization and near-shoring. The proceeds from the divestiture will focus on strategic automation acquisitions that will strengthen our business and diversify our end market exposure and to return capital to shareholders. We are excited about the long-term value creation opportunity this transaction unlocks which we will have -- we will spend time discussing in a moment. Before that, I'll have Frank go over the details of the transaction and timing.

Thanks, Lal. Please turn to Slide 10. Before I walk through the highlights of the transaction structure, I'd like to provide some background on the decision process that brought us to this point. When management and our Board made the decision to transform Emerson into a pure-play automation company, we began a rigorous analytical process with our external advisers to determine how to divest Climate Technologies in the most efficient and value-creating way for our shareholders. We explored the full range of alternative transaction structures to accomplish a separation, weighing all the relevant factors, including valuation, complexity of execution, timing and where we are in the market cycle for both the business and for public equities. We are confident the sale to Blackstone under the terms I will describe in a moment, provides the best execution for our shareholders, achieving an attractive multiple with certainty in an unsettled financial market environment. The upfront proceeds enable opportunistic capital deployment in the near term while retaining meaningful upside in the potential of the business under Blackstone's control, together with our sale of InSinkErator, at a multiple of 18x EBITDA which is expected to close today, we can assure you that we are intently focused on maximizing the value of these world-class businesses most efficiently in the current market environment. With that as background, I will go through the headline elements of the transaction. Emerson will sell a majority stake in its Climate Tech business to Blackstone valuing the business at $14 billion, representing a 12.7x multiple on 2022 EBITDA. In addition to the pretax cash proceeds of approximately $9.5 billion, Emerson will also receive a note of $2.25 billion at closing and will retain a 45% common equity noncontrolling interest in a new joint venture that will own Climate Technologies. The upfront…

Thank you, Frank. Please turn to Slide 11. Climate Technologies is a leading $5 billion global manufacturer of HVACR compression products related solutions and controls. The business has leading positions in its segments and upside potential but is not aligned with our strategic vision for Emerson as a cohesive automation portfolio serving higher growth markets. Blackstone has a strong track record of growing businesses and we are confident Climate Technologies will continue to thrive under their ownership. Please turn to Slide 12. Today's announcement is certainly our largest step, as I mentioned previously but there were many others along the way. The work required creativity. And I am proud of what we have achieved in a very short time. We've invested approximately $9 billion in intelligent automation technology and software. This includes our recent acquisitions of Fluxa and Mita-Teknik and our 55% ownership of AspenTech and its announced acquisition of Micromine. These companies accelerate Emerson's growth profile, profitability and end market diversification into areas like renewable power, life sciences and metals and mining. We've also realized approximately $18 billion in gross proceeds from divesting noncore and slower growth assets at attractive valuations, like Climate Technologies, InSinkErator and Therm-O-Disc. Turning to Slide 13. This transformation positions Emerson as a $14 billion automation leader with an attractive growth profile, diverse end markets and leading technology. Emerson has the most complete portfolio of intelligent devices, control systems and software in the industry. This includes 13% of our sales from software inclusive of AspenTech, representing a leading percentage among industrial peers. These differentiated solutions and our expertise help customers solve their most complex challenges, including optimizing operations, protecting personnel, reducing emissions and achieving sustainability goals. Emerson is able to do this across a broad and diverse set of end markets within process hybrid and discrete and on a global scale. Turning to Slide 14. These end markets are experiencing key secular growth trends, as I mentioned earlier and these are aligned with many of the world's most pressing challenges. First, through digital transformation programs, customers are spending more on sensing and data, software, digital twins and other intelligent solutions to gain more visibility into their operations. As we discussed during our AspenTech transaction announcement, we continue to see our customer share of wallet shift towards software and digital solutions. Next, as the world pushes to net zero, sustainability and decarbonization investments are growing at a rapid pace. This includes the decarbonization of existing infrastructure through optimization, energy efficiency and emission reductions projects. It also includes the introduction of new energy sources like clean fuels and hydrogen. Lastly, near-shoring trends around the world have widespread effects on many industries. Underpinning each of these secular growth drivers is the need for increased automation, creating an incremental prolonged investment period for the solutions that Emerson provides. We look forward to discussing these organic growth programs at our investor conference in November. I'll now turn the call back over to Frank for more details on Emerson moving forward.

Thank you, Lal. Please turn to Slide 15. This slide highlights Emerson's enhanced financial profile on several key metrics as we become a focused automation business. The transformation Lal discussed will position Emerson to increase its through-the-cycle growth rate to mid- to high single digits from historical low single-digit levels. Benefits from the pervasive secular growth trends that Lal mentioned and an emphasis on innovation will be important factors in this transformation. Our more concentrated exposure to these growth trends, our management process and wide-sized fixed cost structure will drive higher levels of profitability, reflected an expected incremental margins in the 35% range. Structurally, Emerson's new portfolio will have higher margins based on increasing software content and high-margin recurring aftermarket and subscription revenues. Emerson will be less capital intensive at approximately 2% of sales and cash conversion will continue to be strong at approximately 100% of net income. Please turn to Slide 16. We want to reiterate our commitment to a disciplined capital allocation strategy that balances growth with return of capital to our shareholders. The proceeds received from the Climate Tech and InSinkErator divestitures will enhance our ability to drive internal growth programs and expand our portfolio while continuing to provide robust cash returns to our shareholders. Driving organic growth will be a priority as we invest to accelerate innovation through new processes and higher R&D spend focusing on breakthrough technologies. Our balance sheet capacity will enable us to pursue strategic acquisitions in defined automation verticals to accelerate growth and enhance end market diversity. And we remain committed to providing meaningful cash returns to our shareholders through our dividend and share repurchases. We announced this morning that in 2023, we will increase our dividend for the 67th consecutive year. And we intend to repurchase $2 billion of our stock…

Thank you, Frank. We hope you share our excitement about the future of Emerson and the tremendous value creation opportunities ahead. The Climate Technologies transaction marks the biggest step in our portfolio transformation to a cohesive high-growth company. The $9.5 billion upfront cash proceeds from the transaction provides financial optionality as we look to strategically build out our leading automation portfolio. We are a great company and we will never rest on trying to be better. I'm excited about the future of Emerson. We look forward to speaking with all of you again at our investor conference in November, where we will share more about our ongoing value creation strategy. Thank you for joining us today.

Thank you, Lal. We will now turn it to Q&A. As mentioned at the top of the call, we will ask that you limit your questions to just one. With that, I will turn the call over to the operator.

[Operator Instructions] Our first question comes from Andy Kaplowitz from Citigroup.

Congrats on the deal. Lal, so I know it’s early but maybe you can give us a little more color into you’ll use the $10 billion of cash you’ll have post the transaction. You talked about spending $2 billion on share repurchases but can you talk a little bit more about the priorities for spending the cash? Is Aspen is spending number one on that list? And any more color you could give us on the new growth pillars that you’ll talk about in a month.

Yes. I know, Andy. Certainly, obviously, the $2 billion share repurchase is very important. But equally important is our discipline that we put in place around M&A. The work that I described alongside our Board to identify 4 priority industry segments is very important. We'll go into a lot of detail when we meet in November at investor conference on each of those 4 segments. But I will say that work continues -- is underway -- as we speak in potential activity in these segments. So we'll -- what I can tell you about each and every one of those is they're consistent with the automation stack. They are consistent with our perspective that we need a higher growth and end market diversification within our business. And I think we'll have a good discussion about that when we meet.

The next question comes from Andrew Obin from Bank of America.

I know you guys are going to have an analyst meeting but I’m still going to probe on use of proceeds. You sort of stated that – well, not stated but my understanding was that you would have a plan for deploying the capital if you were to monetize the assets and you have been very active monetizing the assets. So I just want to understand the visibility on the funnel that you have because you have plenty of capital. If I think what’s available, there is a private company that doesn’t want to sell. There was a target that didn’t want to sell that was public. So I’m just wondering sort of – it seems like you’re looking for a sizable target in automation space. And just what does the funnel look like?

Thanks, Andrew. Obviously, I know you want me to start listing names of the companies. I can't do that.

I would love it.

As I've said, Andy. So a couple of things. Number one, clearly, we're looking for sizable opportunities in large markets. There has to be relative strength in market position for it to be relevant and impactful to the Emerson shareholder. We're looking for exposure in higher growth. We're looking for profitability and differentiated technology. And we certainly are going to be very diligent on the alignment to the technology stack and automation solutions. So those are the guiding principles. And I will tell you, the funnel is robust. It's very active. And our team in M&A led by Ram and Vincent Servello is doing a great job with it.

The next question comes from Steve Tusa from JPMorgan.

Congratulations.

Thank you, Steve.

Yes. Busy start for you, Lal congrats on that. First of all, can you just walk us to the $14 billion valuation? It’s like not quite clear to me how you guys are getting to that just based on the numbers you’ve given, like what kind of leverage the JV will have? And did the structure was just a tad bit, not 100% crystal clear.

Sure. Steve, this is Frank. So there is a -- if you get to the $14 billion, basically, you've got about $4 billion, $4.3 billion being contributed by Blackstone in the form of common equity and the convertible preferred. That $5.5 billion of third-party senior debt, basically bank debt and debt from other parties. So if you add that up, you get to the -- including our PIK note, $2.25 billion PIK note and our retained contribution, our retained equity, you get to $14 billion and we can walk you through the exact numbers but that's how you get there.

Okay. And then just the tax implications on an after-tax basis? And then just one quick follow-up.

Sure. So the upfront proceeds on an after-tax basis, we expect will be around $7.8 billion; [indiscernible] pretax, about $7.8 after tax on the upfront proceeds.

And then one last one on the guide. The underlying orders are up about 6%, I guess, for the core kind of A&S business. You're trending at about that number exiting the year but you're guiding to something higher than that? I mean, what's giving you the confidence that, that actually accelerates? Is that just backlog conversion going forward? And how do you expect these orders to trend as that lead time kind of normalizes?

Yes, Steve, Ram here. Yes, you’re spot on, I think, underlying orders are around 6% and then we’ve got $5.8 billion plus of backlog in the automation business that will convert into next year. So we’re pretty comfortable with the sales guide.

The next question comes from Josh Pokrzywinski from Morgan Stanley.

Congrats on the deal. Just maybe a follow-up on the ‘23 outlook and with Steve’s question, how should we think about that volumetrically? Because I would imagine of that 6 point of order growth that you had that you got a lot of price in that. You said you got about 6 points of price, I think, in the core business this quarter. Just wondering how we should think about kind of the different pieces of the volume equation for ‘23? And then how much of that backlog draw you’re baking into the guidance?

Yes. So from a price perspective, 2, 3 points of price, the rest will be volume. And I think we've got the $5.8 billion of backlog is high for the automation business. So we'll have backlog conversion baked into the plant. So I would say 3% to 4% volume growth, rest price plus the backlog drawdown.

Got it. That’s helpful. And then this might be hard to pin down but because Russia, Ukraine is so recent and it takes a while for your customers to move their feet on this, does that have any appreciable uptick from these new energy investments or LNG that would be specifically done as a result of Ukraine? Or is that still premature?

No, I think it's very active, Josh. The activity, particularly in Louisiana, Texas and Mexico is incredibly robust. The number of projects that have been engineered and are going through funding and we're very engaged in through engineering contractor such as Bechtel [ph] are significant. And they're vastly in response to the energy security of Europe. And so we're pretty excited about what we're seeing right now.

The next question comes from Nigel Coe from Wolfe Research.

You guys are really busy. So congratulations on the deal. I just want a quick clarification. First of all, the [indiscernible] adjustments to continue operations. I’m guessing about $0.10 or so I was trying to call it if you just maybe just confirm that. And then just dictate on the crack of the proceeds. When you think about automation, I mean, how you define that? Is that more software-centric automation companies? Or are you looking at more installed base type of opportunities? And within the mix, it’s buying in the minority of AspenTech a possibility in the minimum options, is that even the possibility?

So I'll take Parts B and C and I'll turn it to Frank for the first part of your question, Nigel. So on AspenTech, we are in a 2-year standstill which we announced at the time of that transaction. So from that perspective, we are going to continue to operate under the current ownership structure that we have which we feel very comfortable with how that's working. Secondly, in terms of future automation investments and M&A, it's consistent across the stack. We'll continue to look at intelligent devices. We'll probe around the control system area. And then obviously, you're absolutely right. There are opportunities around software as that market continues to move aggressively. Those investments will occur predominantly within the AspenTech structure. But we look across the entire stack with an eye towards growth and diversification. Frank?

Nigel, this is Frank. On Part A, I'm going to need you to help me out again with that question. I'm not sure I got it.

Yes. Okay. So let me take to correct this. So you just did – continuing EPS is about 3.64, I think it is which is about adjustments. So I’m getting about 1/3 contribution from some PP, about contribution from InSinkErator and then [indiscernible] that’s trying to cost.

In the ballpark, I mean, we'll have to come back to you on that. I don't have the pieces exactly on that right now but it's close, roughly in the mid-130s as you walk across from -- as we are to continuing ops for Emerald and $0.25 give or take between InSinkErator and Therm-O-Disc.

The next question comes from Jeff Sprague from Vertical Research Partners.

Congrats. Lal, just wondering on tools. I guess I heard it kind of framed as part of productivity solutions which I guess maybe that could be an adjacency to automation of sorts? Or how should we think about that particular piece of the portfolio?

Yes, we did rebrand the tools business as safety productivity. So you have that right. It is, as you know, what we're talking about here is a technology-driven industrial and commercial application business at this point. So that's the way to think about it. There's a significant safety element around it and leverage within Automation Solutions, be it voltage detection, gas detection which we do across that entire platform. Having said that, as you think broadly about the portfolio, we have accomplished a lot in a short amount of time. Our belief and our board's belief was that Climate was the most significant move to unlock the potential. But look, portfolio management will continue to be active for -- across this company. And -- but we're very excited about the progress that we've made to date.

And then maybe just a follow-up, if I could, just again on the deal structure and the economics. At this EV and you guys pulling so much out upfront, I’m just trying to think about with the note being a PIK note and you got 45% of a highly leveraged entity, just how you expect that back end to actually ultimately play out?

Jeff, this is Frank. Actually, we're very optimistic about the back end. The $2.25 billion PIK note is senior in the cap structure. So we feel very confident that we're going to get paid out on that on the accreted value at the appropriate time. So we have no concerns about that. And we think the prospects for the business are very good. So at the time that the monetization event occurs, we think that our common equity interest as well is going to be very good for us. So -- and there's a cap on the leverage as well. So we feel good about where we are on the PIK debt and the cap structure and about the overall leverage and cap structure for the business is 4x leverage is what we have going in and that is as high as it's going to go.

The next question comes from John Walsh from Credit Suisse.

Congratulations.

Thank you, John.

It’s come out in a couple of different ways, looking at the guidance for next year but maybe can you talk a little bit about the inflation side of the equation and maybe tie it all together on kind of price cost expectation for us as we go through next year, first half, second half? Or you going to talk about it?

Well, I think for us, as we were green in the fourth quarter and we expect to be green on a price cost basis as we go into next year. Certainly, the automation business was green throughout last year and '22. And so the expectation will be to expect to continue. And we're not going to give you exact numbers right yet, possibly as we go into the year, we will. But I think you can bake in positive price cost for the automation business or Emerson continuing ops going into next year.

The next question comes from Chris Snyder from UBS.

I wanted to follow up with a quick one on capital deployment. So the company has spoken a lot about further M&A on the automation side to build out the portfolio. Will the company look at deals over the near term? Or should we assume that further M&A will come after deal close and the liquidity injection?

No. Look, these deals take time. Things take time to consummate. We're always working and building relationships and thinking about markets and studying markets. So it's an ongoing process for us. And whether it comes well aligned with close prior or shortly after there may be some activity but I can't predict timing to be honest with you.

The next question comes from Joe Ritchie from Goldman Sachs.

My first question, Slide 13, just a clarification question. So software and control systems, intelligent devices, this is how you guys are going to be segmenting going forward. And then I guess within that, the old like tools and Home Products business is like roughly, what, like $1.5 billion, $1.6 billion in revenues, excluding InSinkErator?

Yes, correct. That's correct, Joe.

Okay, great. That's helpful. And then secondly, just AspenTech, I'd be curious, I think the implied, I guess, the EBITDA from this quarter was roughly, call it, $80 million, $85 million. It's a little bit lighter than our expectations. I'm just -- I'm curious, like what's embedded in your guidance for 2023 for AspenTech EBITDA?

First off, I think the -- as Frank mentioned, this quarter is seasonally low for AspenTech. So I think the 33% EBITDA on the $251 million is consistent with our overall plan. Frank, I'll let you comment on what we have baked in from an overall...

Yes. I would expect, Joe, this is Frank. I would expect it’ll be in the mid-40s, 50s, EBITDA percent over the full year for AspenTech. It’s very seasonal. And as Ram said, this is a low quarter but the business is very profitable when it leverages.

The next question comes from Brett Linzey from Mizuho.

Congratulations. Just want to come back to the operating leverage. So you’re guiding mid- to high 30s for the continuing ops in ‘23. Could you maybe just unbundle that in terms of how we should think about the volume incrementals versus price cost and other maybe any efficiencies that are getting ironed out for next year.

No, I think Ram had voiced this correctly earlier. We expect somewhere around 2 to 3 points of price, the remainder of this coming from volume and then that mid- to high 30s on the leverage. That's a significant move up from our historical guidance which has been at 30% on that operating leverage and we feel comfortable with this new portfolio to guide significantly higher.

Okay, great. And just a quick follow-up. I wanted to come back to the sales outlook, too. So it looks like you're guiding Q1 at 7%, full year, 7.5% at the midpoint. So that does suggest you expect that rate of growth to build despite the comps getting a little bit difficult in the second half. Is this just backlog timing or something about mix we should be thinking about in the model?

No, it’s primarily the timing of the backlog and how it comes through the conversion process, so we do expect some moderate acceleration as we go through the year.

The next question comes from Joe O'Dea from Wells Fargo.

I wanted to ask on the pipeline of reshoring activity. And if you could go into a more detail across the end markets, maybe where you see the strongest opportunities there, things outside of batteries and semiconductors and also just vis-à-vis kind of elevated macro uncertainty, whether you’re seeing any pause in some of that planning and how you’re thinking about the sort of timeline around that pipeline?

No, great question. Thank you. In terms of nearshoring, I think you mentioned 2 very important ones, battery manufacturing and semiconductor. But the third that I would ask you to consider it will be life sciences, particularly around drug reshoring personalized medicine. We're seeing significant investments, not just in the United States but in Europe, that development and manufacturing comes in from Asia. In terms of the macro environment, I think the one caution I would express is Europe and that is really around energy costs in Europe and the challenges, particularly to energy-intensive industries such as discrete or in the chemical industry as examples.

The next question comes from Nicole DeBlase from Deutsche Bank.

Congratulations, guys. Just a quick one on AS end market trends. So orders did fall a little bit this quarter. I’m sure comps is a big part of that. But – if you could talk a little bit Lal or anyone about what you’re seeing in the business with the key end markets, definitely oil and gas, too.

Yes. No, good question. Yes, comps have gotten more challenging, clearly but we have tremendous momentum in the business in terms of orders as we go into the year, particularly in North America. And that's really the big driver which gives us even more confidence, Nicole to guide aggressively as we go into 2023. The North America growth is driven by energy investments that I talked about earlier, particularly LNG is driven by sustainability in new energy sources, conversions, refineries into clean fuels, new hydrogen investments and overall decarbonization work that's been done across multiple industries on the continent. And then secondly, the second category would be the near-shoring industries we just mentioned, semiconductor investments, life science investments, battery EV investments drive a significant amount of that growth.

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