Emerson Electric Company (EMR) — Q3 2024 Earnings Call Transcript

Good morning, and thank you for joining us for Emerson's third 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 non-GAAP measures. All financial metrics in this presentation are on a continuing operations basis. On June 6, we announced a definitive agreement to sell our remaining interest in the Copeland joint venture. We have included additional information and the accounting treatment of these transactions in the appendix of the presentation. I will now pass the call over to Emerson's President and CEO, Lal Karsanbhai, for his opening remarks.

Thank you, Colleen. Good morning. Please turn to Slide 3. I'd like to thank the 65,000 Emerson employees around the world for delivering another solid set of results. Your commitment to our vision and passion for our purpose comes to life every day. I am moved by our customer focus and the deep care you have for each other, and I am proud and honored to work alongside each of you. Thank you to the Board of Directors for your support of the management team and to our shareholders for your trust in us. Since I became CEO in 2021, we have talked openly about the transformation of Emerson driven around the three pillars of culture, portfolio, and execution. We have moved rapidly to improve across all three. Before we discuss the quarterly financial results, I want to highlight the results of our latest employee survey to show our employees are with us on this journey as our culture continues to evolve. Our latest company-wide engagement survey, inclusive of Test & Measurement, had a participation rate of 89%, up 1.4 points from our 2023 survey. We had an engagement score of 79%, a 1-point improvement and only 1 point from world-class levels of 80%. While this is an evergreen journey, and we still have work to do, I am excited about the tangible steps we have taken to create a more inclusive and engaged organization. Now let's jump into the operating results. Q3 was another solid quarter for Emerson. Orders in the quarter returned to growth and were up 3% year-over-year, driven by strong project activity in our Process and Hybrid businesses, especially across life sciences, energy, and power. Notably, we won several large life science projects in North America and Europe focused on expanding production capabilities for advanced medicines. The Middle East and Latin America saw exceptional demand, and we were awarded several large projects in each. As we expected, Process and Hybrid markets remained steady at mid-single-digit growth as we continue to see investments, particularly in LNG, life sciences, energy, and sustainability. While capital project investments continue to progress, MRO orders were slightly softer than expected in the quarter. Discrete Automation orders were softer than expected, down low single digits both year-over-year and sequentially as factory automation end markets remained weak. The green shoots we were beginning to see through April and May took a step back in June, and we are now expecting a slower recovery, though we expect Discrete Automation orders to be flat to slightly positive in Q4 on a low base of comparison. Excluded from underlying, Test & Measurement orders remained soft, down 11%. Additionally, for total Emerson, we saw a weaker demand environment in China across most of our business segments. We now expect low single-digit underlying order growth for the second half and for the full year. Emerson delivered strong operating results with margin leverage, adjusted earnings per share, and free cash flow all exceeding expectations. Sales came in at the low end of our guide, and I'll provide additional color on the next slide. Due to weaker orders, Test & Measurement sales also came in slightly below expectations. However, profitability met expectations as we are seeing the impact of our synergy realization. Transportation and semiconductor markets remain weak, while aerospace and defense performed well, and we saw continued government spending and research. The European market was softer than expected amid lingering EV demand concerns, and China remains sluggish across most Test & Measurement segments. Due to this, we are looking into the second half of 2025 for recovery in this business. With softer orders, we are adjusting our full-year sales to be $1.45 billion to $1.5 billion, but the accelerated synergy actions we have taken will help protect profitability and position the business well for a return to growth. We continue to be excited about the value creation potential of our differentiated portfolio. Emerson's strong performance through the first 9 months and resolute focus driven by our Emerson management system gives us the confidence to execute on our 2024 plan. We expect underlying sales of approximately 6% and are increasing the midpoint of our adjusted EPS guide to $5.45 to $5.50, and we are raising our free cash flow guidance to approximately $2.8 billion. We look forward to a strong finish to 2024 and are energized to deliver continued value creation for our shareholders. Please turn to Slide 4. Underlying sales growth was 3%. Life sciences and power markets continue to perform well, both up double digit as we executed key projects across North America and Europe. Europe is seeing continued strength in energy, power, and sustainability markets as well as our MRO business, particularly in Western Europe. In the Americas, broad-based healthy growth across Latin America was slightly offset by slower MRO in North America. Robust performance in the Middle East, driven by strong project activity, was offset by broad-based weakness in Asia. Continuing the exceptional gross margin performance from last quarter, gross margins were 52.8% in Q3, a 230 basis point improvement from the prior year. Our gross profit percentage year-to-date is 50.6%, even with the acquisition and integration costs incurred in Q1. This gives us confidence in our expectation that this portfolio will deliver greater than 50% gross margins as we look forward. Operating leverage was 67%, significantly stronger than expected due to better performance from AspenTech, project mix, and the realization of more cost reductions than expected from actions taken throughout the year. Adjusted earnings per share exceeded expectations at $1.43, above the top end of our guide and up 11% from 2023. Emerson generated robust free cash flow of $975 million, up 27% year-over-year with a free cash flow margin of 22.3% for the quarter. Mike will walk through additional details on our results in a few slides. We are pleased to deliver another strong quarter and are excited to continue demonstrating the value creation potential of our transformed portfolio. Please turn to Slide 5. We continue to see strong capital project investments with our strategic project funnel now at $11 billion, up approximately $200 million from Q2. The funnel growth demonstrates the strong sustained capital cycle aligned to our growth programs. As the increase predominantly came from projects supporting energy transition, life sciences, sustainability, and decarbonization. In the third quarter, Emerson was awarded approximately $350 million of project content, consistent with prior quarters. We had wins in large traditional energy projects as well as additional awards from offshore vessels in Brazil, as mentioned last quarter. Our growth programs also performed well in the quarter, accounting for a little under half of the awards, and I want to highlight a few key wins. Emerson was selected to automate Nemaska Lithium Whabouchi Mine at the Bécancour lithium conversion facility projects in Quebec, Canada, based on our proven ability to provide a differentiated solution, including a common control platform across sites. This mine is one of the largest high-purity lithium deposits in North America. Fueled by hydroelectric power, the Bécancour facility will convert spodumene concentrate to lithium hydroxide. This is the first such conversion in Canada, and Nemaska Lithium projects will play an important role in the North America battery value chain. Emerson will provide much of our leading technology to automate both facilities, including DeltaV control systems and software, reliability solutions, valves, and instruments. This example highlights the breadth of the Emerson portfolio and demonstrates how we are well suited to serve this emerging market. Next, I'd like to highlight Emerson was selected to support one of the largest renewable energy park projects in India, spearheaded by one of India's largest and most prominent renewable energy companies. Emerson will provide our Ovation Green SCADA solution, including pitch control and park power management for the wind turbines. Emerson was chosen for our scalable automation software and technologies that enhance wind turbine performance as well as our comprehensive local support capabilities, including engineering, fuel support, and production. Finally, Emerson was chosen to automate a key green hydrogen project in Uzbekistan, which will use a 52-megawatt onshore wind farm to produce 3,000 tons of green hydrogen annually, which will be used to manufacture 500,000 tons of ammonia fertilizer. ACWA Power, a first mover on green hydrogen and part of the NEOM Green Hydrogen project will operate the plant, and H-TEC will design and construct the facility. Emerson was selected for our advanced technologies and domain expertise and will provide several technologies from our hydrogen portfolio, including instruments, control valves, and our Ovation Green control system. Turning to Slide 6. We remain focused on driving our strategic priorities, including accelerating innovation for profitable growth and enhancing our position as a global leader in automation. One of our breakthrough innovation priorities is software-defined automation. Our industry-leading Ovation Automation platform just launched a software-defined AI-ready platform for the power and water industries. The Ovation Automation Platform 4.0 builds upon our boundless automation vision to bring a unifying data fabric across the organizations to optimize operations from device to enterprise. Ovation 4.0 brings customer-focused innovation, such as secure generative AI models to offer prescriptive operations and maintenance guidance together in a robust solutions portfolio. It also offers integration with our Ovation Green software to improve holistic awareness across traditional and renewable power generation and storage to aid customers who have an increasingly complex mix of generating assets. Customer-focused innovation is a hallmark of Emerson, and I wanted to highlight one of the key methods we have for formal engagements. Our Ovation business recently held their 37th Users Conference in Pittsburgh, Pennsylvania, with 70% of U.S. power utilities participating in a multi-day event focused on the power and water industries. This conference featured interactive technology exhibits, customer case studies, and collaborative industry sessions focused on emerging technical and business topics. The Ovation Users Group creates a world-class engagement as users provide direct input for potential product enhancements, which helps inform our strategic product development plans. We also took a key step forward in our transformation and simplification journey in Q3 as we announced a definitive agreement to sell our remaining interest in the Copeland joint venture. Private equity funds managed by Blackstone will purchase the equity stake, while Copeland repurchased the seller's note. The transaction involving the Copeland note receivable closed on August 2, with pretax cash proceeds of $1.9 billion, which will be used to pay down debt. We expect the equity portion to close by the end of August. With that, I'll now turn the call over to Mike Baughman to walk through our financial results in more detail.

Thanks, Lal, and good morning, everyone. Please turn to Slide 7 to discuss our third quarter financial results. Underlying sales growth was 3%, led by our Process and Hybrid businesses and partially offset by continued softness in discrete. Price contributed 2 points of growth. Underlying growth was similar across regions, with Europe up 4%, the Americas, up 3%, and Asia and the Middle East, up 2%. Intelligent Devices grew 2%, while software and control grew 7%. AspenTech sales were stronger than expected, growing at 7%. Discrete Automation was down mid-single digits, lower than expected due to a slower pace of recovery amidst continued market weakness. Test and Measurement, which is not included in the underlying metric, contributed $355 million to our net sales, slightly below expectations for the quarter. As expected, backlog decreased slightly from Q2 and exited Q3 at $7.4 billion. Adjusted segment EBITDA margin improved 20 basis points to 27.1% due to strong gross margin performance, favorable price cost, and the benefit of cost reductions. This quarter's adjusted segment EBITDA margin of 27.1% is a record high compared to 26.9% last year in Q3, which was the previous record high. Test and Measurement adjusted segment EBITDA margin was 21.4%, sequentially flat on slightly lower volume as we continue to see the benefit of our synergy actions. Operating leverage, excluding Test and Measurement, was 67%, exceeding expectations. This outperformance was driven by a higher portion of software revenue and fewer lower margin project shipments than expected, offset by negative geographic mix. Strong quarters from AspenTech and Control Systems and Software benefited leverage. Discrete Automation had sequential margin improvement from cost actions we took as we saw market conditions continue to decline. The operating leverage from our measurement and analytical business was dilutive in the quarter, primarily due to geographic mix and slower MRO. Adjusted earnings per share grew 11% to $1.43, and I will discuss that in more depth on the next chart. Finally, free cash flow was $975 million, up 27% versus the prior year and above expectations. This was driven by earnings and improvements in working capital, especially in inventory and receivables. Free cash flow margin in the quarter was 22.3%, inclusive of $40 million of cash outflow for acquisition-related costs, integration activities, and elevated capital expenditures. To date, we have incurred $210 million of the anticipated $250 million headwind we discussed last November. Please turn to Slide 8. Our adjusted earnings per share increased $0.14 from the prior year. Strong performance from operations, especially in our software and control businesses contributed $0.16. Corporate was a $0.02 drag due to a higher income tax rate caused by an earnings mix skewed toward higher rate jurisdictions. AspenTech contributed an incremental $0.03 versus the prior year, higher than expected due to outperformance in GACV and higher revenue. Test and Measurement contributed $0.09, slightly below expectations driven by lower volume. We also had a $0.01 headwind to expectations in Q3 as we stopped accruing interest income from the Copeland note receivable when we reached a definitive agreement to sell it on June 6. Please turn to the next slide for details on our updated guidance for 2024. Fiscal year 2024 underlying sales are now expected to grow approximately 6%, in line with the midpoint of our May guidance, which is supported by our process and hybrid businesses, which continue to perform well amid a delayed discrete recovery and a weaker China. Reported net sales growth is expected to be approximately 15%, with Test and Measurement contributing approximately 9.5 points of growth, offset by a 0.5 point drag from FX. We are increasing our operating leverage expectations to the mid- to high 40s, driven by the strong leverage performance through the first 9 months and strong leverage expected in Q4. We are raising the midpoint of adjusted EPS guidance and expect $5.45 to $5.50. Test and Measurement is now expected to contribute $0.42 to $0.44. Test and Measurement is a business with very strong leverage, so the impact of our synergy actions is helping maintain profitability despite a weaker volume environment than initially planned. For the full year, we expect Test and Measurement's adjusted segment EBITDA margin to be approximately 23%, a couple of points above the prior year benefiting from the synergy realization. With AspenTech's strong results in Q3, we are bringing their expected EPS contribution back up to $0.32 to $0.34. We are also raising our free cash flow expectations for the year to approximately $2.8 billion, driven by the working capital improvements and Q3's performance. Dividend and tax rate expectations are unchanged, and we now expect approximately $300 million of share repurchase. We have been focused on debt pay down, particularly with short-term interest rates staying higher for longer, and we retired €500 million of term debt that came due in Q3. Our performance through the first 9 months has exceeded expectations, and we are excited to continue delivering strong results. Our transformed portfolio has meaningfully improved with higher profitability driven by gross profit margins above 50% and higher organic growth driven by secular trends, and our Emerson management system is driving operational excellence.

Hey, thank you. Good morning, everyone. Two questions, one big picture and one smaller picture, I guess. First off, kind of the big picture stuff. Lal, this idea of kind of software-defined automation and what you're doing with Ovation. I think this is also sort of instrumental to better collaborating, integrating whatever you want to say, between DeltaV and Aspen's offerings. Maybe you could kind of address that, if I'm correct in that assumption and where you're at and sort of kind of propagating that change in technology posture across the rest of the portfolio.

Yeah. Good morning, Jeff, good to hear from you. No, you're absolutely right. As we laid out that vision, it certainly is designed to accomplish a couple of factors. The first being to liberate the data that exists in silos across operations in broad industry. And the second then is to actually use the analytics power to drive productivity, efficiency, higher levels of safety and efficiency with analytic packages inclusive of much of what AspenTech can bring to the table to optimize facilities and production. So that vision certainly exists. We are on the path to bring compute out of centralized siloed data approaches into the edge, which is the first step with products that have already released in the marketplace with DeltaV, and we'll continue to move forward to deliver on the vision. But this step with Ovation was very critical as well because, as you know, that serves the power and water industries exclusively and to be able to bring that capability into those markets was critical.

Great. And then kind of more near term, and I may have missed it. I was on 5 or 10 minutes late. But kind of the shorter-cycle elements of the portfolio, just your view on when discrete bottoms when NI bottoms, you brought down the order outlook a little bit for the year, which is probably tied to those end markets. But maybe just what you see as we start to look into 2025 and the eventual bottoming and turning in those end markets?

Yes. No, certainly. So the discrete cycle recovery has been slower than expected. We certainly believe that we can get to close to positive orders in the last quarter of the year here on discrete, but that will be, of course, based on some very weak comparisons. But that will start us on the path to recovery into 2025. Test and Measurement, a little slower. We're watching our customers very carefully there, speaking, engaging with them. We're watching our peers in the marketplace as well and their performance. We foresee sales turning positive there in the second half of 2025 with orders turning positive in the first half of 2025. And then lastly, Jeff, I'll just add that offsetting a lot of that is what continues to be a strong capital cycle formation cycle here with process and hybrid markets and also momentum in what we see at AspenTech. And so those offset a little bit of how we're thinking. Certainly, I believe that as we think about 2025 and start to guide that we will be probably towards the lower end of that range that we've given on our through-the-cycle expectations, but well within that.

Thanks. Good morning, everyone. Thanks for the question. Just want to pick up on the last question from Jeff there. The $1.45 billion to $1.5 billion range for Test and Measurement in 4Q is obviously quite wide. I think just given the expectation that we don't get to revenue growth until the second half of the year, it seems that we're tracking towards the lower end of that range. Just wanted to make sure that was correct.

We guided because we still have confidence that we can meet that guidance, Nigel. I certainly wouldn't expect it to be at the low end of the range at this time. This is the best guidance that we believe we can commit to as a management team. You can think of it as relating to the midpoint at some point.

Okay. Great. And just to kind of zooming out on a sort of a general comment on the environment out there. Obviously, we've seen deterioration in sort of general industrial markets, it feels like some projects are again delayed with some of the uncertainty, maybe higher rates. Just give an overview in terms of what you're seeing out there from customers, maybe a bit more of an end market overview. And just wondering, obviously, the funnel remains very vibrant, increased slightly Q-over-Q. But what about this funnel to order kind of conversion process? Are you starting to see longer decision-making?

Yes, thanks, Nigel. I'll provide a comment. The funnel has indeed grown, as you mentioned. We booked about the same amount we have historically on a quarterly basis, around $350 million in value. The mix can vary slightly depending on market timing, which we shared in our presentation. I still view the funnel and the capital formation cycle positively. I haven't observed any degradation in projects or their cancellation. There hasn't been a slowdown in the expansion of sustainability projects or LNG, especially concerning the Middle East and Africa, so I'm optimistic about that. What we are monitoring closely is the progression of booked projects and how quickly our customers are accepting products, especially with potential delays related to inspections and other factors. We've noticed some of these issues this quarter, contributing to our lower sales, which were down 3% compared to the low end of our guidance and expectations. We're paying close attention to these developments.

I would just add to that, Nigel, some of that read through in the leverage this quarter. We talked in the comments about some projects that did get pushed out, which was a little addition by subtraction because those projects are generally lower margin. So it was part of the 67% in the quarter.

That's a very good point. And of course, lastly, Nigel, to the question. Our process and hybrid orders are still up mid-single digits, and that's important to recognize.

Good morning, everyone. Congratulations on managing through the challenges. I’m interested to know that with the completion of the Copeland acquisition, you will have a considerable amount of cash available. It seems like you are in a strong position regarding leverage. What do you intend to do with the proceeds? More specifically, do you believe you can pursue mergers and acquisitions, or are you still focused on integrating National Instruments at this stage?

Yes, I feel confident about our balance sheet and our commitment to maintaining our investment grade, which is very important. We are working diligently to integrate National Instruments and are pleased with the progress the team is making. It’s a market segment we believe in that will foster differentiation and consistent growth for our company. Overall, we are optimistic. That said, we do have the capacity to strategically utilize our balance sheet if we choose to do so. Scott, as you know, we will continue to assess the timing and the appropriate move regarding our majority position in AspenTech.

I wanted to follow up on Jeff's question regarding Ovation because it's been mentioned in a slide, and it's not specifically categorized as a product line. Historically, your team has discussed it quite frequently, and it represents a significant installed base. How important is this 4.0 upgrade? Can we estimate what percentage of your installed base might upgrade? Is there a way to concretely assess the effects of this update? Is "iteration" the correct term, or would you describe it as a meaningful step change that could lead to more customers engaging, similar to the 70% attendance at your event? Any additional insights would be appreciated.

From an Ovation perspective, we have consistently released significant enhancements in our technology over time. This latest release is particularly important as it integrates a lot of technology from Aspen and fundamentally improves optimization, analytics, and introduces new copilot capabilities that we have not previously seen. This is crucial given that investments in power generation infrastructure, both domestically and globally, are reaching a turning point. With the surge in AI and data centers, as mentioned in our last earnings call, we anticipate that investments in power generation, transmission, distribution, and renewables will become a major growth opportunity for us. Innovation 4.0 positions us effectively in this regard. Additionally, our modernizations not only extend the lifespan of power plants but also allow us to upgrade existing systems with our new capabilities in 4.0. We are very enthusiastic about this development.

I believe the key change in response to your question, Scott, revolves around the implementation of AI models, which will facilitate better planning for maintenance and the scheduling of asset turnarounds. This approach increases the likelihood that we will focus on the maintenance tasks that are most critical in the plant. This is something new and distinct in the market. Additionally, while we are emphasizing this innovation, it is important to note that innovation remains a central component of how we achieve unique growth at Emerson. Rapid innovation across our various business segments is essential. We have observed this in our increased R&D spending relative to sales, which is a direct outcome of these efforts.

Okay. Appreciate the color. Thank you, guys.

Thank you. Good morning, everyone.

Good morning, Deane.

I'd like to return to Page 5 and inquire if you're experiencing significant demand or overlap with the mega projects. I believe the current count is 440 projects valued over $1 billion. How much does this funnel align with those projects? And what level of visibility do you have on this?

I'm not sure I understand the reference you made, Deane. Can you clarify the mega projects you mentioned?

Yes. This has been a significant focus across the industrials for the past year, particularly regarding non-residential construction projects in North America over $1 billion, which includes everything from software to batteries. It's a method for us to assess all these long-term trends and how they are translating into actual projects. It has become a benchmark indicator that we're now utilizing. That's why I’m asking about the funnel; I understand it's a global perspective, but specifically for North America, how much overlap is there with these mega projects, or do you have that information?

Yes, we'll go back and map that, but what I will tell you is in terms of LNG, energy, life sciences, and frankly, also semiconductors and EVs, we have our own map of all the project activity in North America. We'll go back and map it with what you're referencing, but I will tell you that we are certainly participating and every one of those projects are in our funnel with very, very good win rates. But it's an action we'll take away and work with Colleen and get that map. But our participation in North America on those large projects remains very solid. And we had a very good level of project activity in North America, particularly in life sciences and power in the control systems business even in the current quarter.

Yes. And as a reminder, that funnel represents our automation content versus what the entirety of a project is out there in the universe. So that's also to keep in mind.

Certainly. We'll be looking forward to that. The second question is a follow-up regarding the balance sheet and cash. Can you explain the reduction in buybacks? I understand you mentioned that capital was directed towards buying back the Copeland note, but since all cash is interchangeable, it seems there is a shift away from buybacks. Although it may be early to discuss 2025, how do buybacks fit into your priorities?

Deane, it's Mike. Yes, buybacks are definitely still in the priority along with the dividend and returning capital to shareholders generally. We will exit the year with the commercial paper paid off and $3.5 billion plus of cash on the balance sheet. But our capital allocation will remain the same. We will continue to focus on funding our organic growth initiatives, we will continue to be committed to the dividend and bolt-on M&A that improves the portfolio. And then, of course, there'll be share buybacks. So yes, we will continue with share buyback. We'll be in the market this quarter, we think roughly $125 million, which gets us back to that roughly $500 million a year pace.

Thank you.

Good morning.

Good morning.

Could you just talk about the seasonality of your underlying cash flow putting Aspen aside? Typically, I think you have a pretty strong Q4 historically. And you're raising it this year. I guess, how do we think about cash in the fourth quarter and then into next year?

Yes. So we took the guide up to $2.8 billion, which would imply about $800 million coming through in the fourth quarter, which I think is reasonably consistent with seeing a fourth-quarter increase. So this third quarter was particularly good. And remember, that has Test and Measurement in there, which they had a great quarter and peeled about $50 million off the balance sheet, which did skew the numbers this year. So we feel good about the $2.8 for the year and looking at the $800, it looks pretty in line with some of the prior years.

And then just looking out to next year, anything in the bridge that's more mechanical that you know of today, whether it's merit increases, bonus payments or anything that's kind of outside the normal operating leverage dynamics that we should be aware of?

I can't think of anything in the kind of run the business. But at corporate, I would say we are looking at a headwind and a tailwind that will largely offset and be a slight headwind. And we will have an increase in pension expense, all things equal, just given the way the deferral accounting works. And then we'll have a lower interest expense because of the Copeland proceeds that come in. Lower interest expense overall with more cash yes. So that should net to a pretty small headwind at corporate.

Okay. And then one last quick one for you guys. What are the plans for Aspen? Are you guys planning to move on that this year?

Not in this fiscal, as I said, we'll continue to evaluate Steve as we go through time here.

Sorry, sorry, I'm already on the 25. I meant fiscal '25. That's I'm already thinking about next year. Sorry about that...

And forward-looking...

No comment there.

Okay, thanks.

Hey, good morning, everyone.

Good morning, Andy.

Well, operating leverage for Emerson has continued to be impressive. And obviously, you raised your guidance for this year to mid-40s, which is higher than the algorithm you gave us at your last Investor Day. We know price may be fading a bit as a help, maybe supply chain wins are less likely to help in FY '25. I think you just answered Steve's question about sort of other puts and takes, but can you sustain incrementals in the 40s in '25 from what you see today?

Yes. Thanks for the question. We believe we can. We have a significantly higher margin portfolio today with a 1,000 basis point move over the transformation of Emerson to plus 50% GP portfolio. And I think our expectation certainly is that next year will be very similar to the leverage rate of this year.

Great. And then, Lal, you mentioned you have decent visibility towards, I think, the low end of your 4% to 7% due to cycle revenue growth as an initial read into FY '25. I guess what do you need to see to achieve that kind of growth for instance?

Yes, go ahead, Ram.

Yes. So I mean, obviously, what we're seeing right now is based on the order rates that the second half of this year will generate, and that points to the low end of the 4% to 7%. Now what has to change, obviously, at the areas we're really focused on is pace of discrete recovery, the amplitude of the recovery, and then China. And now the North American KOB3 or the pace of business is something we're watching. We're not really concerned. Our process hybrid business continues to have order rates of mid-single digits. The capital cycle still remains strong. So that we feel very good about. It's really the pace and amplitude of discrete recovery in China is going to dictate how we guide into next year as we come off that low single-digit order growth we've seen in the second half of 2024.

Lal, you've seen China stable at low levels? Or is it getting worse? What's China...

I'd suggest stable, Andy, at this point.

Excellent. Thank you.

Hi, good morning.

Good morning, Julian.

Maybe where I wanted to start was just around the different end market verticals because I suppose the lowered orders guide and the slight miss on sales in Q3. Was that solely tied to discrete automation? Because I suppose listening to an automation peer half an hour ago, they do talk about weaker energy transition CapEx, weaker chemicals and mining spend, and Aspen last night referred to some weakness in those types of process verticals as well. So just trying to understand that element of sort of process versus discrete the outlook there?

Yes, I'll provide my answer and then let Ram share his insights as well. We continue to observe a strong cycle of capital formation, especially regarding energy, energy transition, power generation, life sciences, metals, and mining. This trend is quite broad, spanning from Western Europe to the United States and into the Middle East and Latin America. Currently, I don't have significant concerns about these markets. I've mentioned a few specific successes, but there are additional wins within that $350 million range. We saw mid-single-digit order growth in process and hybrid sectors this quarter, while the overall company experienced low single-digit growth due to the challenges in the discrete automation sector, which remains negative for the quarter.

Yes, you said it. I mean I think the cap for us, energy, power, life sciences is driving a majority of our capital project wins as well as the momentum in our process hybrid business. Certainly, we are not a big player in hybrid markets like food and beverage, which could be the dynamic you're referencing in terms of some slowdown. But our life sciences business continues to be very good. Our metals and mining business continues to be very good. So no slowdown, we're not seeing any kind of slowdown in that area. But the area we're watching very carefully, as I referenced, is the pace of discrete recovery, particularly markets like semiconductors and EVs which impact NI, but also our markets like automotive, which impact our broader discrete automation business. Now the one segment of Test and Measurement, where we've seen good momentum is aerospace and defense, driven by government spending. It's 25% of their overall mix. So that certainly come out strong, and that's driven growth in North America, but we are yet to see sustained recoveries in semis and EVs, which are markets we're watching closely.

Thanks very much. And then just my follow-up, somewhat related. But if I look at your backlog, I think that was $7.4 billion at the end of June, so sort of down a little bit sequentially and down a little bit from where it was in December as well. When you think about that backlog, it's moving around entry-year on seasonal factors as much as anything else. Do you still feel confident about sort of decent backlog growth as you enter fiscal '25?

Yes. Yes, we do. That backlog reduction for us, frankly, about $100 million, it was all in Test and Measurement. Our backlog in the base Emerson business held effectively flat. Now we typically see a backlog reduction in Q4, but it will be up year-over-year, and we feel pretty good about backlog levels as we enter 2025.

And I would add to the earlier comment about the capital formation. Interestingly, in the quarter, the control systems business actually had a book-to-bill above 1 record order...

Record levels. And for the full year, we expect Emerson at right around 1...

That's great. Thank you.

Hi. Good morning. Thank you. Just wanted to come back to the discrete comments around pace and the amplitude of the recovery. As that business comes back, should we think about the operating leverage above the 45% framework given some of the cost containment and some of the actions you've taken there?

Yes. I would say for our discrete automation business, it will be right around in the 40s. Certainly, the other business that's exposed to the discrete end markets, Test and Measurement, given that 75-plus percent GPs will be much higher.

Okay. Got it. And then just on power generation. So you've talked about some of the momentum there in that business. I think the grid results at Aspen look pretty encouraging. Any update on the strategic funnel and how that tracked through the quarter and some of the activity you're working on there?

Yes, I believe our exposure to the transmission and distribution side comes through OSI at Aspen, which has been highlighted in relation to capital formation in grid modernization. On the power generation front, particularly in the Aviation business, we're seeing increased project opportunities both in North America and Europe, and notably, we are experiencing a very strong year in China. Overall, global investments in generation capacity remain strong, alongside the innovation we are advancing, such as Ovation 4.0 and our Ovation Green aimed at renewable investments. The activity in this area is quite vigorous. Lal mentioned a significant project in India, showcasing our involvement in strategic investments in the renewable sector using the Ovation platform.

Okay, great. Appreciate the color.

Thanks. Good morning. I have a question about the MRO. I’m interested in how it performed specifically in the quarter. I’m wondering if there’s an impact from customer inventory rebalancing or if you’re mainly seeing effects from end markets on the MRO side.

Yes. This is Lal. Overall, MRO didn't change significantly. It accounted for 64% of the revenue this quarter, which is consistent with our previous performance and aligns with our expectations for the year. However, there were some fluctuations; European MRO performed very well, while North American MRO was a bit weaker. We didn't observe anything concerning. We are not heavily reliant on inventory from a distribution or customer perspective. Our equipment is usually acquired and utilized shortly after purchase. Therefore, there is nothing alarming on the MRO front. In summary, the quarter was characterized by strong performance in Europe and softer outcomes in North America.

Yes. And just to build on that a little bit. The North American softness, you'll recall in prior quarters, we had talked about how, particularly in the measurement and analytical business, there was some strength, and we saw a little bit of that reverse in the quarter. But as Lal said, nothing concerning.

Yeah, thanks. Good morning, guys.

Morning.

Maybe just starting with the T&M business. It sounds like the synergy progress is going a bit better than planned. Are you guys actually raising the synergy guidance there? Or is it more about timing like coming through faster than expected? And maybe any updated thoughts on synergies in fiscal '24?

Good morning. No, look, we raised the guide a few quarters ago. We continue to execute across that pace. So no change to the synergy guide, but we are maintaining the pace certainly to be able to deliver these results.

Okay. Thanks, Lal. I have a more detailed question. The comps for discrete automation become much easier in the fourth quarter. Is it possible for organic revenue to turn positive? Or do you think that's more likely to happen in 2025 at this point?

Go ahead, Ram.

Yes, it's a 1.25. I think orders turned positive in Q4. At this point, we're planning on a first half 25% recovery in sales for the discrete automation business.

Thank you. I'll pass it on.

Thank you.