Emerson's Third Quarter 2023 Earnings Conference Call was opened by Colleen Mettler, Vice President of Investor Relations, who was joined by President and Chief Executive Officer, Lal Karsanbhai; Chief Financial Officer, Mike Baughman and Chief Operating Officer, Ram Krishnan. Lal Karsanbhai expressed his pride in the progress the company has made in the past two and a half years since he became CEO, noting the success of the Emerson management system and the company's differentiated financial results.

Emerson had a successful Q3, with double-digit underlying sales growth, approximately 50% operating leverage, and over 20% adjusted EPS growth expected for 2023. The company is benefiting from its exposure to secular growth trends like energy affordability and security, sustainability and decarbonization, digital transformation, and near-shoring. Orders were up 3%, driven by high single-digit demand growth in the process and hybrid markets. Emerson is innovating for these markets and its portfolio transformation is paying off.

LNG projects are continuing and customers are investing in energy transition and sustainability, particularly in renewables, life sciences, metals and mining, and decarbonization. Orders were down in Q3 due to softening in the US, Europe, and Asia, but mid-single-digit full year order growth is still expected. Sales were up 14% in the quarter, driven by strong performance in Intelligent Devices and software and control, which is attributed to the company's superior technology.

Emerson achieved 19% growth in software and control, due to successful projects in life sciences, metals and mining, and lithium. Intelligent Devices grew 13%. Final Control and measurement and analytical are the standards for traditional energy, transition energy, chemical and power markets. This led to 59% operating leverage and adjusted EPS of $1.29. Free cash flow was up 83% year-over-year. The company also closed the Copeland transaction and expects to have a net debt-to-EBITDA ratio of less than two.

Emerson is well on track to reach their goal of $100 million in annualized cost savings by 2024 and has already surpassed their 20% reduction in greenhouse gas emission intensity target. They are also on track to close the NI acquisition in the first half of their fiscal 2024, and recently released record sales. To capture customer sustainability and digital investments, Emerson is dedicated to innovation and has recently had numerous impactful innovations, such as ASPEN 1-V14, which helps customers on their sustainability journey.

Emerson has launched many new sustainability-focused solutions such as V14, AMS device management software, Ovation Green, and a noncontacting radar device. V14 provides users with sustainability-specific models and artificial intelligence to help them reach optimal production, while AMS allows users to access critical intelligent device data. Ovation Green allows customers to manage their renewables assets and the noncontacting radar device is optimized for ease-of-use and incorporates RADAR technology. Emerson has a strong presence in the United States, with Ovation controls managing approximately 50% of the electricity generated.

Emerson is focusing on organic growth platforms, such as energy transition, life sciences, and metals and mining, to expand its funnel and capture new projects. In the third quarter alone, the company added over 300 projects to the funnel and was awarded content in over 50. This demonstrates the success of their growth strategy and indicates a solid pace of project announcements as near-shoring and sustainability trends spread globally. Emerson expects these organic growth platforms to grow double digits through the cycle.

Emerson has been awarded content in 7 LNG projects in the past two years, demonstrating their leadership in this space. The Port Arthur LNG project is one of these seven, where Emerson is providing their DeltaV control system, final control valves and measurement technology. Emerson's project execution and optimization software also provide key differentiators for these large and complex projects. In the battery value chain, Emerson is also a key automation partner.

Emerson is a leader in the production of electric vehicles, having helped produce over 65% of global electric vehicles in 2022. Recently, they have been selected to automate two strategic projects in mining: a lithium mine in Argentina and a copper mine in Chile. They have also won a contract with one of the largest EV manufacturers to support two facilities in Texas. DeltaV was chosen for both projects due to its software architecture and ability to integrate automation.

Emerson was recently awarded a large project with a German EV manufacturer to help automate the battery cell assembly process, and has a leadership position with many of the largest EV and battery manufacturers in the world. The company's financial results for the third quarter were outstanding, with underlying sales growth exceeding expectations at 14%, and software and control performing better than expected, growing underlying sales 19%.

Intelligent Devices grew 13%, led by process and hybrid exposed businesses. This growth was due to their large installed base and backlog conversion. Emerson adjusted segment EBITDA margin improved 370 basis points to 26.9%. Adjusted EPS grew 40% to $1.29 and free cash flow of $769 million was up 83%. This strong growth was due to the 14% underlying sales growth, 59% segment level operating leverage, reduced share count, and the interest from the Copeland note receivable.

Emerson is well-positioned to support their customers' investments in growth areas such as life sciences, energy transition, and energy security. The company expects adjusted EPS to grow 40% year-over-year to $1.29, and process, hybrid, and discrete sales growth to be in the double-digit, low double-digit, and low single-digit to mid-single-digit ranges respectively. Price cost has been a tailwind in 2023, and Emerson expects to remain diligent on price as a key performance level.

Emerson has had a successful year, with strong operational performance, improved price/cost management and more favorable mix. This has allowed them to increase their expectations and they now expect underlying sales growth to be towards the top end of their 8.5-10% guidance range. They have also increased their expectation for segment operating leverage and adjusted EPS to $4.40-$4.45, and AspenTech is expected to contribute $0.25 for the year.

Michael Baughman and Lal Karsanbhai discussed the strong operating performance of the company in terms of margins, which were 40%, 53%, and 59% in the quarter. They noted that the operating leverage tipped down a bit in the fourth quarter, but they are confident that the underlying work they have done in terms of price and cost management will be sustainable in the future. They will provide more information about their targets for 2021 in the fall.

Emerson is expecting mid-single-digit order growth for the year, despite the discrete market slowdown. They believe they will exit the year with this rate, as process and hybrid orders are in the high single digits. The momentum lies in capital expansion and everyday business activity.

Lal Karsanbhai and Antonio have been working together for over a year and AspenTech announced its FY '24 guidance of low double-digit ACV growth, with no plans to buy Micromine and a big repurchase. Karsanbhai feels good about the plan and is confident in the collaboration between the selling organizations and the technology tie-in that will differentiate their offerings. Backlog was flat sequentially but the funnel of activity is growing, suggesting the conversion rate may pick up.

Lal Karsanbhai and Michael Baughman discussed the expected decrease in backlog in the fourth quarter and the positive effect of supply chain easing. They also discussed the change in project composition, noting that the KOB 3 business performance has been strong and that the project backlog has built up. This will throttle leverage down to mid-30s or high 30s rates in 2024.

Lal Karsanbhai and Ram Krishnan of Emerson discussed the company's long-term trajectory on incrementals and how the mix of business, technology, and geographical mix may affect it. They also discussed the contribution from price and cost in the quarter, with nine points of volume and five points of price, which is expected to moderate to 3.5 or four points of price in the full year. Finally, they answered a question about deflation or disinflation, indicating that there is an opportunity to extract discounts from the supply chain, which could lead to bottom line benefit for the company in the next six to twelve months.

The collaboration and refinement of the go-to-market approach between Aspen and Emerson has improved over the last year, and in certain markets such as China, they are working together more and incentivizing their salespeople to support each other. This is helping them to pursue competitive displacement opportunities and for Aspen to sell on their DeltaV installed base.

Pete Lilly explains that the fourth quarter will see a decline in margins due to lower pricing and mix. Chris Snyder then asks about the pipeline of big process projects in the traditional energy and LNG sectors, to which Lal Karsanbhai responds that the bulk of activity is in gas, but there is also activity in oil related to sustainability, conversions, carbon capture, emissions reduction, and other areas.

Krishnan and Lal discussed the activity in the gas infrastructure and LNG infrastructure, which has seen an acceleration in terms of funding processes. They also mentioned the momentum in the Chemical sector, FPSO activity in Brazil, Guyana, and Asia, metals and mining, life sciences, and nuclear. They then highlighted the battery value chain, which is linked to the reshoring and nearshoring phenomenon, and discussed their win rates in this area as well as the over 50 projects worth more than $1 billion.

Lal Karsanbhai of Delta V spoke about the company's success in the LNG, hydrogen, battery, and life sciences fields, noting that the win rate is higher than 50%. Mike Baughman then discussed the company's focus on working capital, noting that they have seen some improvement in inventory and that DSOs have stayed flat.

Lal Karsanbhai discussed the progress towards regulatory approval of National Instruments and their business performance in the second quarter. They have received HSR approval and all filings have been made. Orders were down 17% due to weakness in semiconductor and discrete, but they expect it to improve over the course of the year. Despite the drop in orders, National Instruments had another record quarter with sales up 5% year-over-year and profitability continuing to improve.

Lal Karsanbhai and Ram Krishnan discussed the execution of their business and their ability to maintain a positive price/cost gap. They noted that there was softening in the discrete side, which was originally seen in Europe, primarily in Germany, but then began to be seen in the U.S. and Asia as well. They are confident in maintaining a green price/cost going into the next year, but the margin point contribution from it will be lower.

Lal Karsanbhai, Emerson's CEO, emphasizes culture as the company's top priority. He is excited about the culture at National Instruments, which is based on learning and curiosity, and is looking to apply some of the lessons learned from National Instruments to the company. He believes that the company is made up of engineers who are curious and think about technology in different ways.

Michael Baughman states that they expect prices to remain positive despite the deflation of certain purchases such as electronics, castings, and machine parts. Joe O'Dea then inquires about the trends of near-shoring, which Lal Karsanbhai describes as being in early innings and broad-based, driven by the EV value chain, life sciences, and semiconductor. Ram adds further color to the discussion.

The presenter reported that there is robust activity in Australia, Europe, and the United States, and that there are still many opportunities for growth in the future. The conference was concluded with a thank you for attending.

This summary was generated with AI and may contain some inaccuracies.