Good day, and welcome to the Emerson Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference 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 Second Quarter 2024 Earnings Conference Call. This morning, I am joined by: President and Chief Executive Officer, Lal Karsanbhai; Chief Financial Officer, Mike Baughman; and Chief Operating Officer, Ram Krishnan. As always, I encourage everyone to follow along with the slide presentation, which is available on our website. Please join me on Slide 2. This presentation may include forward-looking statements, which contain a degree of business risk and uncertainty. Please take time to read the safe harbor statement and note on the non-GAAP measures. I will now pass the call over to Emerson's President and CEO, Lal Karsanbhai, for his opening remarks.

Thank you, Colleen. Good morning. I'd like to begin by thanking the Emerson's global team for yet again delivering very strong operating results. It is a testament of the strength of our people, the culture we are building, the portfolio we have created and the value of the Emerson Management System. I would also like to thank the Emerson Board of Directors for your continued support of the management team and to our shareholders for the trust you place in us. The second quarter was characterized by strong operating performance, which exceeded our expectations. We continue to have confidence in the underlying market conditions, driven by demand in the process and hybrid markets, aligned with secular macro trends: energy security and affordability, sustainability, nearshoring and digital transformation. The P&L execution was nearly flawless in the quarter. Underlying sales grew 8%, operations leveraged at 54%, expanding EBITDA by 140 basis points to 26% and delivering 25% EPS growth and 32% free cash flow growth. 2024 is the year of execution with no major portfolio moves planned. And through the first half, we feel confident and have raised our outlook for the year. We are energized about the power of our differentiated automation portfolio. Our NI team, led by Ritu Favre, continues to drive the integration plan and have again accelerated cost-out activities in response to a slower-than-anticipated market recovery. We will now deliver $100 million of synergies in 2024. Further, I'm excited about David Baker's appointment as CFO of AspenTech. Dave is an experienced global automation CFO and a 27-year veteran of Emerson. He will bring a degree of structure, forecasting accuracy and work with Antonio Pietri to reinforce a diligent management process. Lastly, I remain excited about what we can accomplish at Emerson. Our technology stack, comprised of intelligent devices,…

Thanks, Lal, and good morning, everyone. Please turn to Slide 8 to discuss our second quarter financial results. Underlying sales growth was 8%, led by our process and hybrid businesses. Price contributed approximately 3 points of growth, slightly higher than expected due to the mix of our shipments this quarter. Growth was led by Europe, which was up 12%, and Asia, Middle East and Africa, up 11%. The Americas also had solid growth, up 4%. Intelligent Devices and Software and Control grew by 6% and 14%, respectively. AspenTech sales increased significantly over the prior year, up 21% on an underlying basis. Discrete Automation was down mid-single digits as expected due to continued market softness and against a tough prior year comp. Test & Measurement, which is not included in the underlying measure, contributed $367 million to our net sales, exceeding expectations for the quarter on stronger backlog conversion. Backlog was essentially flat to the prior quarter at $7.55 billion. Adjusted segment EBITDA margin improved 140 basis points to 26%. And as Lal mentioned, gross profit margins of 52.2% contributed to this margin expansion. Leverage on volume, favorable mix, price, net material deflation and productivity programs all contributed to the margin improvement. Operating leverage, excluding Test & Measurement, was 54%, exceeding expectations. Test & Measurement adjusted segment EBITDA margin was 21.4%, above expectations, driven by leverage on slightly higher sales volume, mix and higher cost actions. Adjusted earnings per share grew 25% to $1.36. And I will discuss additional details on adjusted EPS on the next chart. Lastly, free cash flow improved 32% to $675 million, exceeding expectations, driven by earnings and improved inventory levels. Acquisition-related costs, integration activities and higher CapEx reduced the quarter's free cash flow by approximately $70 million. Please turn to Slide 9. Adjusted EPS growth of…

[Operator Instructions] The first question is from Davis, Scott, Melius Research.

A lot of good detail in the slides. But I wanted to start with just a sense of the synergies that you're seeing and just get a little bit more color on what you're getting as far as structural cost-out, what may have to come back when revenues recover and how we might think about what really that asset looks like in kind of a more normalized situation from a profit perspective.

Yes, Scott. I'll say a few words and let Ram add some color to this. First and foremost, we're very excited about the company. It's a far better company than we expected in terms of the quality of people, the quality of the technology, the loyalty of the customer base and the opportunity to grow and expand as a leader in the industry. So we're very pleased. We have a great management team in place. And we're most pleased about is the responsiveness of that management team to the market conditions. This is now being run as an Emerson company. And they've gotten ahead of the activities around cost takeout in a very diligent way, this was all laid out prior to close with the teams. So we're essentially working down a playbook. We've now moved into some of the actions, as I referenced, that were outlined for 2025 that have been moved forward. But none of these are elements that we believe we necessarily have to add back. This is really driving around efficiency in the company and position it to the SG&A structure to be more competitive, a little leaner on a go-forward basis. Ram, if you don't mind?

Yes. And just to add to that, I think the balanced approach around G&A, the optimization of the go-to-market, optimizing and focusing the R&D efforts on critical growth vectors that are going to pay a lot of benefit for us as the market recovers. And that's really what we've been focused on. Obviously, we are seeing opportunities in logistics and supply chain, which is additional to what we had originally planned. But net-net, the $185 million we've committed to is a programmatic approach that is divided across these 4 segments. And we've been able to accelerate these actions just given the environment we're in, mostly because they were all well planned out and we are able to pull forward these initiatives, given that they've been thought out and the teams are actioning them at a rapid pace.

That's helpful. Guys, I'm looking at Slide 7 at the DGM and the Ovation. And give us a sense of how this upgrade cycle works. The power demand, obviously, and grid, I think we're all quite aware of what's going there. But does it require -- and I mean, maybe just a little bit more color on how these two, DGM and Ovation, kind of -- do they integrate? Do they sell together? Is there any way to kind of get more benefit, I guess, from having the two assets versus the one? And it's a little bit of an open-ended question. I'm just trying to get a sense of the materiality in the upgrade cycle here. But maybe the best way to start with that is just to understand if those assets actually can integrate and work together and if that's a benefit to the utility.

Yes. No, certainly would be happy to comment. I think there's three very important elements. I think element of materiality relates to the high growth in the outlook of projects and activity. We saw that 45% expansion in the funnel. We haven't seen that level of activity in power generation in a long time with a positive growth in North America again driven by the data center demand that we outlined. Secondly, inside of the generation capacity, there certainly are opportunities for optimization software. That is an area that really is untapped. And that's a synergy opportunity that exists between Ovation and AspenTech. And then thirdly, certainly, the leverage of a strength in our utilities, the customer base, takes us outside the walls of the plants into the transmission and distribution. And even though there are not technology synergies between DGM and Ovation per se, there certainly are significant customer synergies and credibility that has been built with Ovation that takes us into the transmission/distribution software.

The next question is from Coe, Nigel of Wolfe Research.

So just wanted to dig into the operating leverage assumptions in the back half of the year. I think you said mid-30s on sort of mix changing. And I think we've had this MRO mix now of 65% or so for the last couple of years. Are we starting to see that mix changing notably in the back half, maybe getting towards maybe, I don't know, 60% MRO? And does this -- do you expect this to continue in 2025? It feels like it should be. But do you think 2025 is more like a mid-30s? Or do you still think you can maintain 40%-plus operating leverage in 2025?

Yes. Nigel, it's Mike. So as we look to the back half of the year, the mix change is meaningful. And you're correct, we've been at the 65% MRO, which is about where we were for the second quarter as well. That is going to drift down on us as we go into the second half. We also benefited this past quarter quite a bit from price. We'll continue to get the roughly 2% price, but it won't be the 3%, we don't believe, that we saw in the last quarter. So those are the big things. There's also a geographic mix element to this with the U.S. growth moderating relative to other geographies. And then if you start to think about the 54% that we printed this quarter versus what we're expecting in the second quarter, there was an uplift this quarter from AspenTech, which had a great quarter, that will moderate in the back half of the year. So you need to put that into your thinking as you go forward as well.

Okay. I'm guessing no comments on '25. But if you do think that continues, I'd appreciate that comment. But on National Instruments, it just feels like -- so just to paraphrase the way you've set this up for the second half, third quarter looks pretty flat sequentially on sales, call it, $360-ish million of sales and then we're picking up towards $400 million in the fourth quarter. I just want to verify that, that pickup in the fourth quarter is entirely seasonal. I think when you go back in time, we typically see that coming through in that quarter. So it doesn't feel like we're taking a huge cycle call there. And then with the synergies, do we expect the margins to continue to move higher sequentially through the back half of the year?

Yes. I think you summarized it well. Yes, sequentially, margins would be up, correct. And to your '25 question, I mean, it's early for us to plan '25. But at the end of the day, we don't expect leverage rates in '25 to be materially different from what we're going to deliver in '24.

The next question is from Andy Kaplowitz, Citigroup.

Well, I know you're still expecting mid-single-digit order growth in the second half after the negative 1% in Q2. So maybe you could discuss how you start off Q3 in April. Give us a little more color into visibility regarding that mid-single-digit growth in the second half. Do you have visibility in the process and hybrid staying at that mid-single-digit level? And then is the mid-single-digit organic growth kind of weighted to Q4, given the turn in discrete then?

Yes. Certainly, Andy. Look, we're off to a good start in Q3. April over April of last year is up double digit, 10%, on orders. Certainly -- and the 3 months has turned positive as well. So we flipped that to the low single digits on a 3-month basis, trailing 3-month basis. So feel good about the start, feel good about the funnel and the conversion and the markets. And it's again driven by the process and hybrid environment across most of the world areas. Discrete, we're watching very carefully. As we said, we expect that to turn now a quarter later than originally expected. But we're seeing green shoots that started developing in March and into April, particularly in Western Europe, in Germany around machine makers and some of the discrete industries. So optimistic start for the quarter, again gave us the confidence as we tested our businesses and worked out process that exiting the year in that mid-single digit, low single-digit type of range on orders is very, very feasible.

Lal, just a quick follow-up to that last comment. Did you just get a couple of larger projects in April? Is that kind of what happened to swing that?

No, no, no. There's funnel conversion, Andy, but nothing exemplary there.

Okay. And then maybe what are your customers telling you on the NATI side as to sort of why the recovery is still delayed there? And if NATI is still slower to turn than you currently expect, do you still have more flexibility to sort of continue to push the envelope on integration cost-out? And then ultimately, I know Ram said you're still targeting the $185 million. But could you do more than that?

No, certainly. Look, I think the team has a great set of ideas on their walls in terms of opportunities to drive efficiency and productivity in the business. But we believe that ultimately, this is a growth business. And while we're doing this, we're driving investments in core technology programs so that we hit the ground running. We're working on customer demand, both Ram and myself, alongside the management team at National Instruments is well engaged with the customers. Ram will actually speak at NI Connect in a couple of weeks, along with Ritu, which will be a pivotal moment for us. And we have a very successful event in Dallas, I believe, with Ram this year. So look, we're very excited about the potential in the business and this business turning positive in early 2025. Ram, a few words?

Yes. And I think to answer your specific question as it relates to customer, what we're hearing from customers, certainly segments like the defense segment, or what they call aerospace, defense and government segment, are positive. I think we're going to get into easier comparisons. Frankly, April was also a very good month for -- given the expectations for T&M, which was positive for us. And I think really the only two segments we haven't seen the turn, which is why we believe it's at least 1 to 2 quarter delayed in T&M, is semiconductors and Asia. North America actually turned positive in April. Europe has turned positive. We feel good about the ADG segment. And we're cautiously optimistic about transportation. But the portfolio segment, particularly driven by Asia, and then semiconductors is where we still have to see recovery. We're watching that very carefully.

The next question is from Deane Dray, RBC Capital Markets.

This came up a couple of times in the prepared remarks, and maybe just if you could walk us through what's different. But you said that there was better backlog conversion than expected. So is this on -- because of a customer request, they want it earlier, that you were able to have better productivity or throughput? Just how did that differ from what the original plan was on the backlog conversion?

Yes. So Deane, simplistically, responsive supply chains. We had -- our supply chains continued to improve, our plant output has continued to improve, particularly in our measurement solutions business. There was backlog conversion in Test & Measurement as well. So the simple answer is we overshipped what we thought we would in the quarter primarily because our supply chains responded much better and lead times are down to pre-COVID levels, which is a very good sign for us.

Sorry, Deane, just to build on that a little bit, relatedly, those being two higher GP businesses helps the profitability in the quarter as well.

Yes, it tells you how far we've progressed on supply chain normalization, where that wasn't the first thing I'm thinking that you were able to ship more. So that's all good news. And then just a follow-up on the Test & Measurement, NATI, on the orders visibility, is there maybe some color on the demand and whether -- did you miss any orders? Was the demand out there and you missed orders? Or is the demand not there? Are you engaged in any more selectivity? Just some color there would be helpful.

No, we did not miss any orders. I think orders came in as per expectations. And I think the way we've actually baked in the plan is even if orders stayed flat to slight sequential growth from what we did in Q2, given the easier comparisons, will improve in the second half and then go positive into '25. Certainly, as Lal mentioned, the green shoots in the defense part of their business, we've been very strong. We're starting to see projects unlock on the battery testing side from an EV perspective. So we're starting to see activity come through. Again, the one segment which hasn't seen the recovery, which typically we play in, RF and mixed signal in semiconductors. The memory and the logic piece is not a big piece of our business. We expect that to come back first followed by the activity in RF and mixed signal chip testing. So that recovery is really what's pushed out by 6 months. But outside of that, everything is coming in as expected.

The next question is from Steve Tusa, JPMorgan.

So I'm just trying to kind of calibrate the second half a little better. I think you guys, typically from a seasonal perspective, more or less accelerate sequentially as you move through the year. This year seems like it's a bit more kind of flat just from a quarter-to-quarter sales perspective and then with much less of a ramp from 3Q to 4Q. Anything on the top line seasonally that is not as -- is not normal, is a little slower than usual on the core business, outside of NATI and outside of Aspen?

No, actually -- and the way I see it is our second half versus first half will be up high single digits sequentially from a sales perspective. So it is consistent with the normal seasonality of how our core business minus NATI, minus Aspen performs. Now obviously, Aspen is lumpy and that's in the underlying number. So that could mask the normal seasonality that we see. But in the core base Emerson operations, the second half to first half is up high single digits sequentially from a sales perspective.

And I guess, given the mix of MRO is so high today and the growth really isn't that strong, is the mix really changing that much? I mean, is the -- how much is the kind of lower-margin project stuff going to be up in the second half more than MRO, you know what I mean? Like can this change that much quarter-to-quarter?

No, Steve, it doesn't. So look, we were at 65% in 2023. In Q2, we're at 64%. So there was 1 point shift. That may move yet another point as we go through the year. But no, you're right. And the underlying strength of MRO in our process and hybrid business is still intact. And as certainly we go through the summer and approach the fall outages and STOs and turnaround opportunities, we look at, at least from this point in time, rather positively as well. So that's what's going to play into this as we go through the second half and, hence, gives us confidence also on that exit rate on orders for the year.

And then just one last one on NATI, I don't -- I haven't done the math on this 3Q guide. But is that down sequentially and then up sequentially in the fourth quarter? It looks to me like the revenue run rate now, at least for the second half versus 2Q, is basically flattish at around $370 million or something like that. Is that the right construct for NATI in the second half?

So flat Q3, sequentially up in Q4.

Yes. So it's bottomed, the revenues have bottomed there?

Yes.

The next question is from Joe O'Dea, Wells Fargo.

Can you dig in a little bit on the growth trends in Measurement & Analytical and Final Control? I mean, it seems like Measurement & Analytical organic, low double digits, maybe even touch low-teens this year, Final Control, mid-single digits. Just some of the differences in those growth rates, what you're seeing on the measurement side versus what you're seeing on the Final Control side.

So measurement solutions this year, you're spot on there, it's going to grow faster than Final Control primarily because that was the business that suffered the most from our backlog build due to lead times. Those -- that backlog is coming down. So the delta in growth rates between Final Control and measurement solutions from a sales perspective is purely that backlog dynamic. Order rates for both businesses, which is a signal of the underlying demand with both businesses being exposed to process and hybrid markets, relatively the same, mid- to high single digits.

Got it. And then it looks like on AspenTech, the fourth quarter EBITDA is implied down something in the neighborhood of kind of $20 million year-over-year. Is that more revenue-related, margin-related, just to understand kind of line of sight into that if that's sort of ballpark what we're looking at?

Yes. So ballpark, that's what we're looking at. It is lumpy, given the ASC 606. And we'll continue to work the Aspen fourth quarter. But at this point, yes, it's forecasted to be down from Q3.

The next question is from Brett Linzey, Mizuho.

Wanted to come back to the power franchise. So I imagine there's an opportunity on the newbuild but also the retrofits on the installed base as some of these LTSAs expire with some of your peers out there. Is there a way to frame the content per unit or megawatt? And then any runway on some of the retrofits?

Yes, we'll give you some perspectives and some guidelines. On a 1,200-megawatt combined cycle plant, the project opportunity, or KOB1 opportunity, is approximately $20 million. It's $5 million in the control system, approximately $15 million of instrumentation and valves. The lifetime MRO opportunity over a decade is another $20 million of upgrades. And that lives through about a 10-year period. So it's very significant. And you can just calculate then off the megawatts, depending on the size of the plant. So certainly, there are upgrade opportunities. That's what -- a lot of what we're seeing in the revamps. We see also on the nuclear side, extension of plant life, which is very meaningful for us, not just from an Ovation perspective with Westinghouse but certainly from an instrumentation perspective and valve perspective. So all dynamics in the global power market are pointing very positive right now.

Very helpful. And then just on inventory levels, I know your channel dynamics are a little bit different than peers, but maybe you could just frame where you see inventories in some of those sort of channels. And specifically at machine builders, inventory levels, I think, are a bit elevated. But just curious what your assessment and characterization is for the near term here.

Yes. For our discrete business, our Discrete Automation business, I think inventory levels have certainly normalized in the channel. So we see no dynamics around that. The Test & Measurement business at NI, there is still some elevated levels of inventory in our portfolio business-related channel partners' distribution that should bleed out over the next quarter, which will be helpful for order rates in the portfolio business to turn. But net-net, we don't see any major dynamics around channel inventory that would impact our orders momentum.

The next question is from Julian Mitchell, Barclays.

Maybe just wanted to start off with the Discrete Automation business. Ram, you touched on the inventories at some of the customer levels just now being normal. So when we think about your discrete business, is it in the third quarter sort of flattish sales, down a little bit year-on-year and in the fourth quarter in discrete, you're up year-on-year and sequentially? Is that the recovery slope?

Yes, sir. Yes, quarter-over-quarter, flat in Q3, slightly positive in Q4 is kind of how we're looking at orders. We saw a recovery in the fourth quarter, correct. And then for Test & Measurement, which is also exposed to the discrete markets but a different type of discrete market exposure, recovery into the first half of '25 primarily because of the heavy play in semicon and a bigger portfolio of business in China. Two of those markets are seeing slower recovery than our broader Discrete Automation business within the core Emerson.

That's helpful. And maybe just on the Aspen side of things, Lal, you'd mentioned the CFO change and reiterated there's no big portfolio actions at Emerson this year. Maybe just characterize sort of with Aspen in general, how you're thinking about your discussions with them on their capital deployment plans. I've seen they've continued to do the share buybacks. And when you look a little bit further out beyond this year, the appetite on kind of software acquisitions, please?

No, sure. No, first, very -- continue to be very excited about the partnership that we have with AspenTech. I do believe, Julian, that together, we have a highly differentiated tech stack that we bring to the customer base. And I think that's been highly substantiated by the synergy wins, the level of customer engagements that both Antonio and I have around the world. And we continue to believe in the premise that 1 plus 1 equals 3 here. In terms of the CFO, rightfully, I think you said it right, I'm excited from a perspective of the processes and structure that can be brought in. I think there will be a really good working relationship between Antonio and David Baker. And he brings a lot of the Emerson Management System into AspenTech with him, which we believe is important from an operating perspective. And then lastly, look, no, no comment on the go-forward. We're going to operate the structure as is, keeping in mind, Julian, that we're only in the second year of this journey. And we believe that there's value to be created out there in the structure. So for now, no change.

And the last question is from Andrew Obin, Bank of America.

This is David Ridley-Lane on for Andrew Obin. Just wanted to circle back, I know that there was some pull-forward of orders last quarter. How does that -- if you kind of normalized your first quarter and second quarter for that, what did that trend look like? And just to put a little finer point on it, should we be expecting low single-digit orders growth in the third quarter before stepping up in the fourth?

Yes. So we were plus 4% in Q1, down 1% in Q2. So low single digits for the first half, greater than 1 book-to-bill. And then in the second half, you are right, low single digits in the third quarter and arguably, the fourth quarter which is, at this point, baked in better than the third quarter. Let's put it that way.

Got it. And then on the sustainability and decarbonization project funnel, I know that's nearly doubled over the last 18 months. Are these projects kind of getting closer and closer to final investment decisions, kind of like the carbon capture when you cited with Shell this quarter?

Yes. I mean, in certain segments like biofuels and carbon capture, the hydrogen projects, which are large, are probably slower movement through the funnel. But I think we see considerable activity globally, certainly big in Europe, here in North America as well. But the pace of progression of these projects through the funnel is varied depending on the segment.

This concludes our question-and-answer session. I would like to turn the conference back over to the management for any closing remarks.

Thanks so much for joining the call today, and we look forward to callbacks later this afternoon.

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