Emerson Electric Q3 2021 Earnings Call Transcript

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Provided by Quartr
August 4, 2021

Key Takeaways

  • Strong Q3 Results: Adjusted EPS rose 36% to $1.09 on 15% underlying sales growth, powered by 9% growth in Automation Solutions and 29% in Commercial & Residential Solutions, with operating cash flow up ~30%.
  • Operational Headwinds: Ongoing commodity inflation (notably steel and plastics), electronic component shortages and U.S. labor constraints drove a $75 million price-cost headwind, expected to peak over the next two quarters.
  • Cost Reset Progress: The comprehensive program—$600 million of spend to deliver $650 million of savings by 2023—is on schedule, delivering 34% operating leverage and enabling reinvestment in new technologies.
  • Strategic Portfolio Review: A completed portfolio study will be presented to the board in October, focusing on bolstering underlying sales growth and diversification through targeted M&A—industrial software remains a key focus—and OSI integration is ahead of plan.
  • ESG Initiatives: Emerson highlighted partnerships for plastic recycling automation with Pure Cycle Technologies (“Greening by Emerson”) and collaboration with the DOE on next-gen HVACR and heat pump efficiency (“Greening with Emerson”).
AI Generated. May Contain Errors.
Earnings Conference Call
Emerson Electric Q3 2021
00:00 / 00:00

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Operator

Good morning, and welcome to the Emerson Third Quarter 2021 Earnings Conference Call. All participants will be listen-only mode. Should you need assistance, please signal a conference specialist. By pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask question. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, that this event is being recorded. I would now like to turn the conference over to Pete Lilly, Investor Relations. Please go ahead.

Pete Lilly
Pete Lilly
Director of Investor Relations at Emerson

Thank you so much. Good morning, everyone, and thank you again for joining us for Emerson's Third Quarter Earnings Conference Call. Today, I am joined by President and Chief Executive Officer, Lal Karsanbhai. Chief Financial Officer, Frank Dellaquila, and Chief Operating Officer, Ram Krishnan. I'd also like to introduce, and welcome the new leader of Emerson Investor Relations. And certainly, an upgrade for the role, Colleen Mettler. Colleen joins us from the Automation Solutions finance organization, and will be your main point of contact going forward. As I transition to a new role in the operating business units. Many thanks to you all for your support, and friendship over the past couple of years. It's been fun. I certainly wish your health, and success. As always, I encourage everyone to follow along, with the accompanying slide presentation. Which is available on our website. Please join me on slide two.

Pete Lilly
Pete Lilly
Director of Investor Relations at Emerson

As always, this presentation may include forward-looking statements. Which contain a degree of business risk, and uncertainty. Please turn to slide three, and I will turn the call over to Colleen. To introduce herself, and cover some exciting developments within Emerson.

Colleen Mettler
Colleen Mettler
VP of Investor Relations at Emerson

Thanks, Pete. I certainly, have big shoes to fill. As Pete mentioned, I'm coming into this role from our Automation Solutions finance organization. And I've been with Emerson for over 13 years. I'm certainly excited, and humbled to be joining the investor relations team. During this dynamic time for our organization. I look forward to speaking with all our investors, and partners very soon. Now, I would like to take a moment, to highlight two areas of real ESG impact within Emerson. First, on slide three, in keeping with environmental sustainability framework, of Greening of, by, and with Emerson. That we introduced in February, our first topic is about Greening by Emerson. It is a great example, of how Emerson Solutions, are relevant in enabling our customers' sustainability initiatives.

Colleen Mettler
Colleen Mettler
VP of Investor Relations at Emerson

Emerson recently, signed a multi-year agreement with PureCycle Technologies. Which has a novel technology, and process. For fully recycling plastic number five, polypropylene, back to a clear pellet. As some of you may know, polypropylene is a common form of plastic. That has not had great recycling options. Emerson is serving, as their born digital Automation partner going forward. With initial plant projects in Ohio, Georgia, and a remote operations center in Florida. Now please join me on slide number four. Our second topic, is a Greening with Emerson example. Leveraging our Helix Innovation Center in Dayton, Ohio. Emerson has collaborated with the Department of Energy, and their Oak Ridge National Laboratory. To advance next generation HVACR technology.

Colleen Mettler
Colleen Mettler
VP of Investor Relations at Emerson

Expanding the applicability of heat pump technologies. Redesigning refrigeration architectures, to maximize efficiency in food retail. And working to minimize energy use, and leaks in commercial HVAC applications. Are just a few of the exciting areas of cooperation. We have a number of collaborations with the Department of Energy, and their labs. We look forward to continuing, to build these relationships. And support the development of novel solutions, and real sustainability roadmaps going forward. Please turn to slide five, and I will turn the call over to our CEO, Lal Karsanbhai.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Thanks, Colleen. Just a few words, before I turn it over to Frank. To go through the financial data. First, Pete, thank you very much. Godspeed. Have good luck in your new opportunity. We're all very excited for you. Thanks for all the hard work. Welcome, Colleen. It's great to have you here. Colleen and I had the opportunity to spend. A couple of years together in Automation Solutions. We're very blessed, to have her join our investor relations team. Welcome. Thank you. I'd like to express my thanks to the leadership teams, and the management, and our employees globally. For what has been a very well-executed quarter. We have a lot of energy, and momentum behind us. Which was very exciting to see as, we executed through the last three months. I'd also like, to express my thank you to our shareholders.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

I had the opportunity, over the last six months to meet many of you. And I look forward, to meeting more of you. As I go through the next part of the year. I appreciate your continued confidence, your challenges, and of course, your investment. A few things just that are non-financially related. That I want to mention to the team here. First of all, our cultural work is well underway. We will be announcing, our new Chief People Officer later this month. We're all very excited about the selection process. It will be an outside hire, and somebody who fundamentally will have the opportunity. To come in here, and really help us. As we navigate some of the challenges, and create many of the pathways. That we have as we evolve, the culture of Emerson into the future. Secondly, our portfolio work is complete.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

We are now getting ready, to review it with the Board. Which will occur at the October Board Meeting. We discussed briefly with the Board yesterday. Essentially, what we have defined is multiple paths. For our business to drive higher underlying sales growth, and diversification of the portfolio. We're all very excited, about the process that we underwent. It was very exhaustive, we have turned over a lot of different stones. Defining broad markets with high growth, and lots of optionality. In terms of M&A, and organic activity. Very exciting there. I'll mention on the M&A side, that industrial software continues to be critical. As we think about share of wallet, and we think about the potential. For underlying growth acceleration, there are many pathways there. Our OSI acquisition is performing incredibly well, and ahead of our internal synergy Board plans. That's been very well done.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

What stands out to me most above all, is the execution by the team. Yes, there were market tailwinds, and we'll talk about those. Particularly, as they accelerated in Automation Solutions. And continued across our Commercial Residential businesses, and they are relevant. The execution was absolutely phenomenal. There were a lot of hurdles, to overcome through the quarter. Material inflation, material availability. We did a lot of expediting. We had to get very creative in qualifying suppliers, logistics, and management of cargo around the world. And of course, labor availability in the United States. The team just did a great job. Lastly, before I turn it over to Frank, the cost reset work is well underway. And we're now in the tail ends of the spend. And we're seeing, despite these operational headwinds. The value of that work, being reflected in the incremental of the company.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

The operating leverage, profit leverage at 34% was very strong. And now, most importantly, has given us the room to accelerate investment. In differentiating technologies, and further, that will further. I think, drive increased relevance at our customer base. Very exciting headroom that's created. We've started those investments. I'll share a number of those with you. We'll talk about that, more as we go through the year. With that, I'll turn it over to Frank, and I'll speak towards the end of the call.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

All right. Thank you, Lal. Good morning, everybody, and thank you for joining us. We're especially, pleased with the results from the quarter. Especially, in light of the operations challenges that Lal just described, and Ram. Will talk about a little later in the call. If you please go to slide six. Continued recovery in our end markets, combined with the benefits of the cost reset actions. And it drove strong operating performance, and financial results in the third quarter. Adjusted EPS was $1.09, up 36% from the prior year. Demand continues to strengthen, with sales coming in ahead of our expectations. With underlying growth at 15%, and June trailing three-month orders were at 26%. Automation Solutions notably turned positive this quarter. In both sales and orders, up 9% in sales, and 17% on an underlying basis.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

Commercial & Residential Solutions continues, to experience robust demand. Across the business and geographies, with 29% sales growth. And 43% orders growth on an underlying basis. The cost reset benefits continue, to be realized as planned. Reading through to the margins, and along with the additional volume, and leverage. They drove adjusted segment EBIT growth of 40%, 280 basis points of increased margin to 19.6%. Cash flow continues to be very strong. With operating, and free cash flow up approximately 30% year-over-year. And free cash flow conversion exceeding 150% of net earnings. We're continuing to implement, the remaining elements of the cost reset program. In this quarter, we initiated $32 million of restructuring actions. The program is on schedule, and delivering the projected savings, as we've planned. Please turn to slide seven. There's a bridge of, the earnings per share increase from the prior year.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

The operational performance was very strong. The noteworthy, thing on this chart is the green bar. Operations added 33%, to adjusted EPS. And it was balanced between the platforms. They both delivered strong profit leverage. On the strength of volume increases, and cost reduction benefits. As Lal mentioned, the leverage was 34% across the enterprise. Tax, currency, pension, stock comp netted to a $0.05 headwind. And there was a minor favorable impact from share repurchase. Again, in total, adjusted EPS was $1.09, up 36%. Please go to the next chart number eight. As I mentioned, underlying sales was up 15%. Gross profit increased 90 basis points to 42.4%. Driven mainly, by the benefits of the cost reduction actions. And then the leverage on the volume across the enterprise.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

We did offset, the impact of price cost headwinds. Which we are beginning to see intensify, and which we will see in the next couple of quarters. And we will talk about a little later in the call. Adjusted EBIT margin was 18.4%, up 310 basis points. Effective tax rate was 19.2%, versus 11% in the prior year. Last year, we had several favorable discrete items. Mostly around R&D credits, that we described at the time. This was a $0.10 headwind year-over-year, that we overcame. Adjusted EPS, as mentioned, was $1.09 versus $0.80 last year. Go to slide nine, please. We'll talk about earnings, and cash flow. Adjusted segment EBIT again increased 40%, margin up 280 basis points. Leverage on volume, and cost reset benefits offset, material cost headwinds in the Climate Technologies business. Adjusted pre-tax earnings increased, 350 basis points to 17.6%.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

Operating cash flow was very strong, up 31% at $1.1 billion. Free cash flow was $977 million, also up a little over 30%. Driven by strong earnings growth, and effective working capital management. Lastly, the trade working capital ratio improved to 15.4% of sales. Turning to slide 10, we'll look at Automation Solutions. Underlying sales turned positive this quarter at 8%. Trailing three-month orders accelerated to 17%. The improvement in the Americas is particularly encouraging, and notable. With continued momentum in life sciences, food, and beverage, and medical markets. And a return to growth more broadly. Across the traditional process Automation markets, and sustainability-related business. We're seeing increasing KOB3 activity, across our process Automation customer base. Mainly, driven by shutdown turnaround, and outage activity, and OpEx spend. MRO spend is returning to pre-pandemic levels. From pent-up demand, and delayed STOs.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

CapEx spending is recovering at a slower rate. With tailwinds from site-based emissions, and optimization projects. The platform continues to implement, the comprehensive restructuring actions. That have been ongoing, and the benefits are flowing through to the financial results. Adjusted EBIT margin increased 320 basis points, and 310 basis points at adjusted EBITDA. Driven mainly, by the flow-through of the cost reset savings, and by the volume leverage. The integration of OSI, continues to go very well. We're very pleased with the acquisition, and the results to date. And we have increasing confidence, in the synergy plan that we have. Backlog increased to $5.5 billion. It is up 17% year-to-date. We'll talk a bit about the project funnel, and other opportunities later in the call. Turning to slide 11, we'll review Commercial & Residential Solutions. Sales were up, on an underlying basis 29% versus the prior year.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

Orders continued to be strong, and very broad-based in their strength. The June trailing three-month, underlying orders were up 43%. And it was very balanced across both Climate Technologies, and Tools & Home Products. All businesses, and geographies showed strong double-digit growth. Residential markets continue to be strong. And growth has accelerated in cold chain, and Professional Tools. The Americas were up 29%, with continued strength across all end markets. Europe was up 37%, driven by continued heat pump demand. And increasing sales of Professional Tools. Asia, Middle East, and Africa was up 25%, driven by cold chain, and various heating technologies. Margins improved by 170 basis points, at adjusted EBIT. And 120 basis points at adjusted EBITDA. Driven by the strong volume leverage, and the cost reset savings. Which more than offset the price cost headwinds. That we are seeing in the business. Please turn to slide 12.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

I'm going to pass this over to Ram. He's going to talk a bit about operations. What we've done in the quarter, to deliver the results. And some of the challenges that we face.

Ram Krishnan
Ram Krishnan
COO at Emerson

Thanks, Frank. Clearly, as you can see, our operating environment remains very challenging. As commodity inflation, electronic supply, and labor availability. Continues to impact our global operations. Steel prices are at record highs, with 11 months of consecutive increases. And in our estimation, have not peaked yet. Plastic resin prices remain elevated, as our global teams have maneuvered expeditiously. To find alternatives to maintain supply. While copper pricing, has receded off record highs. It is still up over $1.40 a pound year-over-year. Our hedge positions lessen the impact to 2021. But the inflation impact in terms of copper, will carry over into most of 2022. Electronic shortages are proliferating, in most of our businesses. Impacting both platforms, and supply is expected to remain constrained well into 2022.

Ram Krishnan
Ram Krishnan
COO at Emerson

Very little component inventory on microprocessors, controllers, linear integrated circuits. Are available in the open market, and the number of shortages. Faced by our EMS suppliers is growing, severely impacting lead times. Finally, labor availability continues to be an issue. Across many industries in the U.S., and our businesses are impacted as well. Our V-shaped demand recovery, in many of our Commercial & Residential Solutions businesses. Local competition driven by tight labor markets in many cities, and rolling labor constraints. As waves of COVID disruptions impact our sites. Has added a new level of complexity, to our operational plans. It is important to note, that price cost remains at an unfavorable $75 million. As we estimated last quarter, no change. But we expect the maximum impact of the commodity inflation, to be felt in the next two quarters.

Ram Krishnan
Ram Krishnan
COO at Emerson

Despite these challenges, turning to slide 13. I'd like to highlight some of the outstanding work. By our global supply chain, and operations teams. To combat these challenges, and help deliver phenomenal operational results to date. As they remain flexible, creative, and nimble in a dynamic environment. To serve the needs of our customers. Our supply chain teams have worked tirelessly. In this environment, to ensure continuity of material supply to our global plants. As you can see on the chart, many creative solutions. Are being implemented on a real-time basis quickly, and effectively. Our regional footprint, both on the manufacturing side. As well as supply chain, that we spent many years developing. Has certainly, been an advantage for us in these challenging times.

Ram Krishnan
Ram Krishnan
COO at Emerson

Many of our global plants, are producing at record levels. While ramping up capacity, to meet surging demand. And in many cases, insourcing critical elements of the supply chain, to address sudden disruptions. I do want to take this opportunity, to sincerely thank our global teams. For delivering an outstanding operational quarter. With that, I'll turn it over to Lal. To walk through our full-year guidance and outlook.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Thank you, Ram. Let's turn now to slide 15. We are improving our sales outlook for the year, based on the continued strength in our orders. The pace of business, and the year-to-date profit performance. We now expect underlying sales growth. To be near the top of our May guidance, approximately 5%-6%. Commercial Residential above their range in May at 15%-16%. And Automation Solutions, closer to the top of their range at 0%-1%. The strong volume, and improved cost base will flow through to margins. Our estimates are now 50 basis points, above the previous guidance. Increasing adjusted EBIT margin, and adjusted EBITDA by 0.5%. To approximately, 18% and 23% respectively. There's no change to the restructuring, tax rate, capital spend or dividend.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Strong profitability, and working capital performance. Enable an increase in our operating cash flow, and free cash flow estimates. Both of which increased by $300 million. We are also raising our adjusted EPS guidance to $4.07, ±$0.01. Our price cost headwind for 2021, currently remains as estimated in Q2. And Ram covered at $75 million, despite the current challenges that were highlighted. We continue to manage this through containment, selective price actions. But the recent market developments that Ram described. Will be a challenge, through the next 2 quarters as we navigate them. Stock compensation impact increases to $125 million. Now we'll go over to chart 16, and I'll just frame the order environment. That we've experienced through the last three months.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Emerson's trailing three-month orders continue to be very strong. And have momentum from the last updat, we gave you in the second quarter. With Commercial & Residential Solutions, continuing to climb higher in their order run rates. And Automation Solutions turned sharply positive, to the high teens in June. Commercial & Residential Solutions continues to see strength in residential, cold chain, and the Professional Tools business. And all three very near to that average band of 43%. Discrete and hybrid markets, and Automation Solutions continue to be very strong. While we see recovery in later cycle process Automation markets, especially in North America. KOB3 and KOB2 are driving most of the recovery. But we are beginning to see some KOB1 activity materialize. Particularly in chemicals, power, and biofuels. The Americas really strengthened, up 29%. As deferred maintenance demand, and site access drove momentum.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Finally, as we have commented in the past quarters. Life sciences momentum continues to be extremely strong. Let's now turn to Chart 17, I'll review the underlying sales growth outlook. Q3 underlying sales were up 15% versus prior year. Exceeding our management expectations, driven by the strength in Commercial & Residential Solutions. As well as the North America recovery just discussed. Full-year expectations, on underlying sales are between 5% and 6%. At the top end of our prior guidance of 3%-6%, and sales of approximately $18.4 billion. The fourth quarter is expected to land, in the high single digits, to low double-digit range. For the remainder of the year, we expect to see the North America business. Continue to recover in Automation Solutions, as well as continued broad strength in Commercial & Residential Solutions. However, the impact of supply chain, and labor issues will be a challenge.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Let's now turn to slide 18, and I'll review our outlook by geography. As Frank mentioned, for the full year. We're expecting Automation Solutions sales to be flat to 1%, and Commercial & Residential Solutions. To be between 15% and 16%, driving us to our overall 5%-6% underlying sales expectations. Starting off in the Americas. Quarter four is expected to be strong in Automation Solutions, at approximately 20% growth. Broad-based recovery across all industries. Led by continued strength in discrete, and increasing strength in hybrid. Process is showing some recovery, although uneven. With some strength, from returning domestic oil demand. Offset by reduced midstream investment, and continued fiscal restraint in upstream.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

For KOB3, we expect to see continued spend for deferred maintenance. And increasing spend for site access, that has been pent up from the pandemic. With an expectation, that we will see a strong fall shutdown turnaround season. In Latin America, strength in mining industries particularly are expected to continue. On the Commercial & Residential side of the business, ongoing momentum. In the residential markets driven by do-it-yourself trends, home starts, and HVAC seasonality. As well as strength in Professional Tools, and cold chain, are expected to continue. Europe will continue to see demand in life sciences, and biofuels on the Automation side. Project wins in power, midstream, downstream, and sustainability. Will drive low to mid-single digit growth in Q4. Commercial & Residential will see robust demand for heat pumps, and Professional Tools. As well as the continuation of the refrigeration market recovery in Q4.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Turning to Asia, Middle East, and Africa. Our Asia Automation business is seeing healthy project activity. In marine, nuclear, life sciences, and semiconductors. And a positive trend for site-level spending in the Middle East. On the Commercial & Residential side, we are seeing the commercial recovery across the region. Specifically, with commercial AC, and cold chain solutions. Ongoing COVID restrictions continue to be a challenge. Across the organization, particularly in this part of the world. Let's now turn to Chart 19, and we'll review the business funnel for Automation Solutions. Back in February, we commented that our traditional large project funnel was $6.4 billion. And this should be something, that is very familiar. To those of you, who watch this carefully. Since February, we have booked approximately $80 million of projects. Some LNG, and one most notably in Mexico.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

New projects added include clean fuels, hydrogen, renewable diesels, lithium mining, and LNG projects. While projects removed from the funnel since February. Were mostly oil and gas, and downstream refining projects. The August 2021 funnel is now valued at $6.3 billion, and approximately 180 projects. Below, in the donut pies, you can see the industry mix of our traditional funnel. We have identified new decarbonization opportunities. Though generally, smaller than our traditional definition of projects. For our funnel classifications, these projects are increasingly relevant to our business. They're being added into this view, because they have the potential to grow in nature over time. Today, as depicted on the chart. These opportunities are worth $400 million, and approximately 120 projects. The combination of our traditional project funnel, and the new sustainability funnel is now valued at $6.7 billion.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Below is a combined industry mix, where we are working to diversify our funnel. On the right side of the chart, we are introducing the business opportunities. With our recent OSI acquisition, which gave us an important foothold. Into the transmission, and distribution Automation space. These opportunities, have slightly different characteristics. From our traditional project funnel definition, and therefore, we are keeping it separate for our discussion purposes today. Generally, these opportunities are smaller, and more numerous. Compared to our large traditional project funnel, but they are clearly strategically important. The value of these opportunities is $1.5 billion, and are made up of 530 projects. To give you some perspective on the scale, and how differentiated it is? Approximately, 15% of that $1.5 billion has a value of greater than $5 million. And 50% of it is between $1 and $5 million.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

The funnel is global, although approximately $1 billion of it. Is in North America, and Europe. Overall, we have strong opportunities ahead, and I'm bullish on overall project outlook. As we diversify, and expand into new spaces. Let's turn to chart 20. This is a very important chart, and as Frank mentioned. In our financial results showcase, our robust cost reset plan. Is being incredibly well executed across the enterprise. As a reminder, this comprehensive plan began in late 2019, and will be fully realized by 2023. It involves over $600 million in spend, and approximately $650 million in savings. In February, we also introduced our mid-range targets of 24% adjusted EBITDA margins, and $4.75-$5 in adjusted EPS. We are very much on track, to reach those targets by 2023.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Importantly, however, the recent outperformance, and momentum. Through the end of 2021, is creating some headroom for critical investments. And I'm particularly, excited about this. Particularly, as I think about key technologies. That will enable our business, to outperform over the long term. As you can see, revenues, margins, and cash flow are all better than February expectations, and are enabling this acceleration in technology investments. I've outlined four examples below. It will come out over the next months, and in-depth in February. As to how we're managing, and thinking about these very significant investments. The examples outlined are the Copeland K7 Scroll. Which is the largest new product investment, in the history of our air conditioning business. This thing drives obviously increased performance, and meets the 2023 efficiency regulations. And is optimized for 2025 refrigerants.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

The Greenlee remote cutter is an award-winning tool, on the right-hand side of the chart. Which enhances safety for cutting underground cables. The Geminox, which is our next-generation pressure, and temperature device. Being developed in our measurement solutions business, which will have next-generation electronics. Unmatched safety, and process insight. Lastly, our Plantweb Optics, our integrated operational performance platform. Which unifies data, people, and systems to drive operational performance. With that, I will turn the call over to the operator, and we'll begin the Q&A. Thank you.

Operator

We will now begin the question-and-answer session. To ask a question you may press start, then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily, to assemble our roster.

Operator

The first question comes from Julian Mitchell with Barclays. Please go ahead.

Julian Mitchell
Julian Mitchell
Equity Research Analyst of US Industrials at Barclays

Hi. Good morning, and look forward to working with you, Colleen. In terms of, I suppose, Lal, the Automation Solutions sort of revenue outlook. A lot of very good color in the slides. It looks like the guidance is embedding. Sort of, mid-single-digit type growth, in the fourth quarter in Automation Solutions organically. When we take your comments together, in terms of a sort of stable funnel. Since February, and maybe an ongoing sort of subdued oil, and gas CapEx backdrop. Should we take that as a good, sort of medium term or into next 12-month sort of placeholder? That mid-single-digit type Automation Solutions growth rate.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Hi, good morning, Julian. Thank you. Thanks for the question. I think that's fair. Look, the recovery has been largely fueled by modernizations, and MRO spend across facilities. There has been, as I indicated, some KOB1. That's not what's going to drive us going forward. What I would expect is that, I think that conversion of those two segments of the business. From orders into sales will continue, and I think the guidance is. I think that's a fair assumption.

Julian Mitchell
Julian Mitchell
Equity Research Analyst of US Industrials at Barclays

Thanks very much. Then maybe switching, to the margin aspect. Maybe clarify, how much of that $75 million price cost headwind? Sort of, falls into the fourth quarter. When we look at Com Res margins in that context? Can that business sustain a sort of 20%+ incremental margin the next six months? Or does it get sort of pushed below that, by the price cost headwinds?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

A great question as well, Julian. Clearly, that's where the challenge is going to be. Is on incremental in Commercial & Residential Solutions over the next six months. The team is working both sides of the equation, Julian. Price and cost. We're getting very creative, in terms of the contact structures. And the negotiations with our major customers. But we also have opportunities, to continue to work. Availability of materials, sourcing from different world areas. Moving a few things around. That's where the biggest challenge is, and I would suggest. That your assertion is correct. That the incrementals in that business, are going to be the most challenged. As we go over the next six months.

Julian Mitchell
Julian Mitchell
Equity Research Analyst of US Industrials at Barclays

Great. Thank you.

Operator

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

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Wow, that got nailed there, Josh.

Josh Pokrzywinski
Josh Pokrzywinski
Executive Director at Morgan Stanley

Yeah. I must have had some CliffsNotes on that. Long to hear voice. A couple questions. I guess first on some of the kind of extra funnel additions. Particularly, on decarbonization, nice to see that tick up. I guess, maybe add some more context there, if you wouldn't mind. I mean, on one hand, your customers have. You know, some of your legacy customers are pretty big emitters. Is there more of a push on those folks? To sort of diagnose, measure, and improve, or is more of the funnel that you're tracking. Sort of, on more green technologies, like you mentioned hydrogen? Which one of those is showing up more? And which one do you think could be kind of, the bigger needle mover here in the medium term?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Yeah, great question. I think, there's a little bit of both in the funnel. I think, if you look at the traditional $6.3 billion funnel. It was already embedded in that a lot of the biofuel conversions, emissions monitoring. Work that's being done downstream, particularly in refining, and other parts. What's in the green bar? What's in the new opportunities? I think, are significantly incremental investments. Those are partially driven by things like green diesel. Which is basically, the manufacturing of diesel. But using a feedstock, that is a sustainable feedstock, or the investments in hydrogen. If you recall, back in February, we talked about a billion-dollar opportunity for hydrogen. That was framed around 2030. However, as we now bring these projects into ours. This is a very defined pursuit process. That we run within the business.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

We now bring those into that pursuit, and we are pursuing those to 2023. That's the view of the $400 million. I expect that, to increase over time. And the number, not just the number. But the scale of those projects, to become more, and more meaningful. Which is, why we're talking about it today? You're absolutely right. I think our core, our core integrated oil customers. Upstream through the midstream, and downstream. They're all spending dollars, incremental dollars on emissions. Sustainability, reliability, productivity, all around those automations to drive their ESG commitments. That can come in the frame, of conversions or of optimizing current processes.

Josh Pokrzywinski
Josh Pokrzywinski
Executive Director at Morgan Stanley

Just on the price cost side, I know some of what you guys have out there? Particularly in Com Res, has some kind of pricing contracts. That reset periodically, maybe annually. I would imagine that puts you, a bit more behind the curve this year. Can you maybe talk about, what just flipping the calendar or flipping the fiscal year? Sort of, sets up in terms of price cost. I know Ram talked about some of the hedges. Postponing things like copper inflation, but I think there's probably, a little pent-up pricing opportunity as well. Could you maybe kind of match up, how those things work together?

Ram Krishnan
Ram Krishnan
COO at Emerson

I'll take that. From a pricing perspective, as Lal mentioned, our Commercial & Residential teams are working that diligently. Many of the pricing, particularly with the large OEMs. Some will happen in October, but many of it will happen in the January timeframe. You'll expect, the pricing to kick in in a big way into our second quarter. And that's all well underway. In terms of the steel, and copper pricing. Certainly, the copper hedges will flow through the year. We've modeled that out. On the steel side, we do expect the next three to six months to be pretty tough. But outside of that, going into the second quarter. We'll start seeing, the better pricing on steel come through as well. I would say, from a pricing perspective. A lot of the pricing from our perspective, is modeled in the January timeframe.

Josh Pokrzywinski
Josh Pokrzywinski
Executive Director at Morgan Stanley

Okay. After that six-month timeframe, it is a bigger step-up. Understood. Appreciate it. Thanks for the color, both. You're welcome.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Thank you.

Operator

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

Andrew Obin
Andrew Obin
Senior Research Analyst of Electrical Equipment and Multi-Industry at Bank of America

Hi, guys. Good morning.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Good morning, Andrew.

Ram Krishnan
Ram Krishnan
COO at Emerson

Hey, Andrew.

Andrew Obin
Andrew Obin
Senior Research Analyst of Electrical Equipment and Multi-Industry at Bank of America

Hey, just was wondering if you can talk about. Sort of internal bottlenecks, and specifically, I'm thinking Com Res. It seems resi HVAC is doing very well. You're talking about V-shaped recovery in tools. Do you need to add capacity at Copeland, and tools to deal with demand? And how are you thinking about it?

Ram Krishnan
Ram Krishnan
COO at Emerson

Yes. We are clearly in a position, where we are adding capacity. And we'll add more capacity, as we go through this plan. Certainly, at this point, we're fighting labor challenges. In terms of short-term capacity, in many of our current U.S. locations. But we are adding capacity both in the U.S., as well as Mexico. For both the Climate Technologies business, as well as the tools business. The answer is yes.

Andrew Obin
Andrew Obin
Senior Research Analyst of Electrical Equipment and Multi-Industry at Bank of America

Excellent. It's not a constraint, right? How much of a constraint, is it to growth, I guess?

Ram Krishnan
Ram Krishnan
COO at Emerson

It is not a constraint at current levels. I mean, outside of the labor challenges we see. As we model out the long-term, growth dynamics of the business. And certainly, the regulation changes that are coming down the pipe. It's important for our longer-term plans.

Andrew Obin
Andrew Obin
Senior Research Analyst of Electrical Equipment and Multi-Industry at Bank of America

Got you. Just a follow-up question. I think you disclosed systems, and software now. Can you just break down, how much, what is organic growth? I mean, clearly the balance would be M&A. And also, specifically hone in on growth trends, that you're seeing at OSI power? The funnel is very impressive there.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

As Frank, and I mentioned in the comments, Andrew. We're very pleased with the performance of OSI power. We were actually up there, for a growth planning session just earlier, late July. The teams are performing incredibly well. We've retained management, and they're executing the plans. What we're seeing, is actually higher than expected ability. To leverage existing relationships that PWS, and Ovation have. Across the large power companies in North America. More importantly, the opportunity to greatly geographically expand this business. At a far higher rate, than we expected at the time of the acquisition. Validating the technology, validating the applicability, and the customer relevance. Has been very important for us, so we're excited.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

There is an opportunity, to build around this business. And there is a vision to continue to transform this, into more of a pure software play. In terms of, the evolution from perpetual into subscription. In terms of outsourcing services, and focusing on software. And looking around measures, that are relevant for software businesses. Such as annual recurring revenues, and things of that sort. We're working that very aggressively within the business. In terms of growth rates, I would suggest high single digits. On the systems, and Solutions business. And I would suggest, that the data management layer grew slightly above that, but on average. I don't have that number in front of me, but that would be based on. What I have seen, and heard? My understanding, Andrew.

Andrew Obin
Andrew Obin
Senior Research Analyst of Electrical Equipment and Multi-Industry at Bank of America

Yeah. Sorry for a lot of the follow-ups, and thank you for answering them.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Thanks, Andrew.

Operator

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

Jeff Sprague
Jeff Sprague
Managing Partner of Electrical Equipment and Multi-Industry at Vertical Research

Hey, thank you. Good day, everyone.

Ram Krishnan
Ram Krishnan
COO at Emerson

Hi, Jeff.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Hey, Jeff.

Jeff Sprague
Jeff Sprague
Managing Partner of Electrical Equipment and Multi-Industry at Vertical Research

Hey. Hey, Lal, thanks for all the transparency, on your thought process here. About strategic review, and everything. It is interesting, I guess, you say. That you've concluded it, and you will review it with the Board in October. I suppose, that suggests any idea of any large-scale strategic change. Or something like, that is not on the Boards, or you wouldn't be sitting on that till October. Instead, we should think about you're cultivating an investment pipeline. And a kind of an M&A pipeline and, as you said. Kind of looking at ways, to create new growth sectors. And potentially diversify a bit. Is that the right read on, what you said in your opening remarks?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

It's an interesting read, Jeff. I'll tell you this. The M&A pipeline is evergreen. We're working a number of opportunities as we speak. Which are related to, and aligned with the strategic portfolio study that we've done. We're very excited about those, and we've been speaking to the Board. About those opportunities through the summer, and we'll continue to do so through this month. Because some may come sooner, rather than later. That's okay. Now, in terms of the overall study, look, this management team. Believes that the path to the higher multiple, and to the total shareholder return performance. Is driving, and increasing the underlying sales growth of the company. We need to fall into this bucket of 4%-6%.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

As we look, at our optionality around the current makeup of the portfolio. And the potential to invest in new areas. That's really, what the study, and the portfolio study focused on? And those are really, where the engagements, and debates with the Board will take place? We're walking, and chewing gum at the same time. We haven't stopped pursuing opportunities as a management team, and as a Board. Simply, because we haven't covered the details. Of the study with the Board, but they're very much aware of it.

Jeff Sprague
Jeff Sprague
Managing Partner of Electrical Equipment and Multi-Industry at Vertical Research

Understood. Thank you. Just thinking about the investments. It would seem like you're certainly, on a pretty good glide path. To kind of hit or beat those 2023 targets. It sounds like you are cautioning us, a little bit that. The investment spending, and the bias to make sure there's growth. Kind of beyond 2023 potentially, tempers the upside of those targets. Is that kind of a correct perspective?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

No, you know, honestly, glide path is generous. There's a lot of hard work to hit those targets, Jeff, by everyone engaged. There are always obstacles in the way, as we have experienced this quarter. With labor, and materials as Ram and Frank described. It's a lot of hard work to get there, and we're not taking our eye off the ball. Having said that, not only do we need to work the portfolio opportunities. That I just mentioned with pluses and minuses. But we need to elevate the organic investment, and the organic sales growth of the company. With that, we have to make those investments for the future. It's both. We have the capacity to do both. We have the opportunity to do both like many businesses, and we're taking full advantage of that.

Jeff Sprague
Jeff Sprague
Managing Partner of Electrical Equipment and Multi-Industry at Vertical Research

Great. Thank you for that awesome color. I appreciate it.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Thanks, Jeff.

Operator

The next question is from Nigel Coe with Wolfe Research. Please go ahead.

Nigel Coe
Nigel Coe
Managing Director at Wolfe Research

Thanks. Good morning, everyone. Thanks for the question. Lal, we're getting close to fiscal 2022. I know you're going through the PAM process. But given that the funnel is building here, and the activity levels in Automation. I'm just curious. Normally, early phases of recovery, we see solid double-digit growth in Automation. Is there anything that's changing, in terms of the profile of the frontlog or backlog? Or anything that suggests, that that's not going to be the case this time? Can we expect double-digit type growth, in 2022 for Automation?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Yeah. Hi, Nigel. Great to hear your voice. A very thoughtful question, actually. If you go back through, the last couple of growth cycles in Automation. There was an important component, which we have to watch very carefully in this sub-cycle. Which is the KOB1 element? We benefited from that in the 2010-2014 run. We surely benefited from that, in the prior run in 2018. In this one, it's been subdued to date, and that's going to be the differentiating. Keep in mind, that we just underwent a significant investment in LNG. That is being absorbed by the market. We have yet one big, large project to go. That would be the, I'd suggest, the differentiator between the high single digits. And the double-digit type of organic opportunity in Automation Solutions, if that makes sense to you.

Nigel Coe
Nigel Coe
Managing Director at Wolfe Research

Oh, it absolutely does. Thanks for the color there. Just coming on top of Jeff's question on portfolio, and the October Board pitch. I guess, heard that loud and clear. Given the emphasis on diversification, is it fair to say. That you're focusing here more on acquisitions, as opposed to disposals. I know you've done a couple of smaller disposals.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Yes.

Nigel Coe
Nigel Coe
Managing Director at Wolfe Research

Material acquisitions versus disposals.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Yes, we announced the divestiture of the Daniel oil, and gas business. What I'm going to tell you is it's both. We're looking at the portfolio, both in terms of opportunities. To acquire, and opportunities to divest. It's a very fluid conversation. We went through it with an element. Of that with the Board yesterday, and got their support. It's both, because to solve whether it's the equation around diversification. From oil and gas, and/or elevate the underlying sales growth of this company. We're going to have, to press both of those buttons.

Nigel Coe
Nigel Coe
Managing Director at Wolfe Research

Okay. Thanks, Lal. Appreciate that.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Okay.

Operator

The next question is from Andy Kaplowitz with Citigroup. Please go ahead.

Andy Kaplowitz
Andy Kaplowitz
Head of Industrial Tech and Mobility Super-Sector at Citigroup

Hey, good morning, guys.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Good morning, Andy.

Ram Krishnan
Ram Krishnan
COO at Emerson

Good morning, Andy.

Andy Kaplowitz
Andy Kaplowitz
Head of Industrial Tech and Mobility Super-Sector at Citigroup

Lal, can you talk about, how you're thinking about the longevity, of the Commercial & Residential Solutions cycle at this point? Obviously, strength in CRS has seemed relatively enduring. I think you were worried a bit. About residential comparisons toward the end of this year. How are you thinking about, enduring residential strength as you go into 2022? As well as the improvements, you've continued to see in commercial construction, cold chain, and tools?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Great. I will bifurcate that into the two pieces. The Climate piece, and the Professional Tools piece. Partly, some of it driven by the similar set of investments. That we're experiencing in Climate, be it the residential growth. The do-it-yourself investments, which impacts our home products side of the tools. The Professional Tools area the RIDGID, and the Greenlee. They're really driven by infrastructure spend, capital cycles. Not dissimilar to what we see in our mid-cycle Automation businesses. Those, I think, have sustained opportunity, as we go well into 2022. The one we're watching very carefully, as I look at Climate. Is the air conditioning residential cycle. We're watching those orders. We're staying very close, to our OEM customers. The trains and carriers of the world. In terms of communicating, understanding their demands.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

For now, I would expect a more subdued quarter, as we go from an order perspective. As we go into the fall season, but we're watching it very carefully. That would make sense in the cycle that it subdues, and comes down. We've seen, you've seen in our trailing already. That Commercial Residential has turned, and that's entirely driven by that residential AC business. Ram, do you have any more color to give?

Ram Krishnan
Ram Krishnan
COO at Emerson

No.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Okay.

Ram Krishnan
Ram Krishnan
COO at Emerson

I think that's spot on.

Andy Kaplowitz
Andy Kaplowitz
Head of Industrial Tech and Mobility Super-Sector at Citigroup

Thanks for that, guys. Lal, you talked about. Being well into your cost-out program. Which has been focused on Automation Solutions, as you know. And incremental margins continue to be strong there. I know we already talked about margin pressure in CRS. As we look at Automation Solutions margin going forward. Given your cost-out program, should continue to drive margin tailwind. Could you continue to generate average or better. Than average incremental margin, for that business in 2022 and beyond?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

I think so, Andy. We printed 41% incrementals, in that platform this quarter. The team has begun their significant investments around their technology, and people there. The business is structurally different, than the business that I took on in 2018 today. In the way it goes about, and the way it manages. And the way it approaches customers. There's a lot of room there. The target I've given the business, is obviously 30% incrementals. But as we ramp up investments, and such. I think we're likely to see higher, than those types of numbers as we go forward.

Andy Kaplowitz
Andy Kaplowitz
Head of Industrial Tech and Mobility Super-Sector at Citigroup

Appreciate it, Lal.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Thanks, Andy.

Andy Kaplowitz
Andy Kaplowitz
Head of Industrial Tech and Mobility Super-Sector at Citigroup

Thank you.

Andy Kaplowitz
Andy Kaplowitz
Head of Industrial Tech and Mobility Super-Sector at Citigroup

[Break]

Pete Lilly
Pete Lilly
Director of Investor Relations at Emerson

I think our next question is from Scott Davis. Scott, are you there?

Analyst

I'm here, yes. Good morning, guys.

Ram Krishnan
Ram Krishnan
COO at Emerson

Hey, Scott.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Hey, Scott.

Analyst

I don't know if we messed up or whatever, but a couple clarification issues, just Lal. When you think about, kind of price cost in your backlog? Do you get to a parity number, kind of a calendar 4Q? I'm just trying to think about, how cadence is in? Or if you still are kind of fighting that headwind, well into the next fiscal year.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Yeah, it does bleed into the next fiscal. Ram described the next two quarters. As being the most challenging, which is right. That parity really arrives in our first-fiscal, first calendar of 2022, our second fiscal of 2022.

Analyst

Okay. Sorry if you said it before, I just didn't hear it.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

No, it's okay.

Analyst

Again, to clarify on the cost reduction actions, and you just had a big board review. Is that largely complete? I guess, do you need to start going the other direction, I suppose. Which I think Andrew asked that question about adding CapEx, and such? But do you need to actually start spending more money, just given the size of the backlog overall.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

No, I think Ram answered that well. I think we're looking, at optionality around capacity increases in the existing footprint. And in the footprint, that we have initiated as part of the cost reset plan. We have operations in construction, of significant size in India, in Mexico, and in Eastern Europe. All those are underway. Some will begin production later this year, others in early 2022. We feel really good. The challenge for us, Scott, which is not systematic or honestly. And not dissimilar from anyone out there, is the labor availability in the United States. To me, that's the biggest single constraint. What we're fighting, on a daily basis across most of our facilities.

Analyst

That makes sense. Thank you for the clarification. Good luck, Lal and team.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Thanks, Scott. Appreciate your voice.

Operator

The next question is from Steve Tusa with JPMorgan. JPMorgan, sorry. Please go ahead.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Steve, you got a new name, and a new company.

Ram Krishnan
Ram Krishnan
COO at Emerson

Steve?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

No. No Steve.

Pete Lilly
Pete Lilly
Director of Investor Relations at Emerson

Looks like we may have lost Steve, so we can move on to the next call. Next question. Looks like our next question is from Deane Dray. Deane, are you with us?

Analyst

Yes, I am. I missed that whole introduction too, so that's the reason for the delay. Sorry about that.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Oh. Hey, Deane.

Analyst

Hey, good morning. Page 16, the whole three-month underlying orders. Can you give us some color on July? It looks like Automation Solutions is pivoting to growth, and just any kind of color on July would be helpful there.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

I don't have a number to share with you, Deane, but I will tell you. Excuse me, somebody came on the line here. That is a fair assumption. We continue to see increased momentum in Automation Solutions. Obviously, we're watching parts of the world carefully, particularly Southeast Asia and India. In our large significant markets, Europe, North America, and China. We continue to see good order momentum driven by KOB2 and KOB3.

Analyst

Got it. And then, second question. There's been really good color on the call here. Especially, in the portion from Ram on the focus on. The cost inputs, labor, commodities, et cetera.

Analyst

Not as much focus on price realization. Can you give us, for the two segments, more color on pricing? I know one of the headwinds on Commercial & Residential Solutions on Copeland, is locked into longer term contracts. Just price realization color, would be helpful here.

Ram Krishnan
Ram Krishnan
COO at Emerson

Yeah. First off, I'll answer the question with as it relates to Automation. Automation has been green on price cost, and has been very disciplined. In getting price this year, and that dynamic will continue into next year. We see no issues as it relates to price or price cost. On the Automation side of the business. On the Commercial & Residential side, particularly in the Climate business. The price realization, which is a function of our long-term OEM contracts. Will start unlocking in the January timeframe of significance. Now, we do have pricing, that'll go into effect in October. But the big impact, we will start to see in the second quarter of fiscal 2022. Which in turn, assuming the commodities start softening. Will turn them, into the green category into the second quarter of next year. That's how we see it.

Ram Krishnan
Ram Krishnan
COO at Emerson

A lot rides on our contracts, which open up in the January timeframe.

Analyst

Got it. You said second quarter fiscal next year, but in answering the earlier question. It sounded like you would be at parity, in the first fiscal quarter. Did I hear that right?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

I corrected myself there, Deane. I did say second quarter.

Ram Krishnan
Ram Krishnan
COO at Emerson

First calendar, second fiscal.

Analyst

Good. Thank you.

Ram Krishnan
Ram Krishnan
COO at Emerson

Yes, sir.

Operator

The next question is from Steve Tusa with JPMorgan. Please go ahead.

Steve Tusa
Steve Tusa
Managing Director at JPMorgan

Morning. Can you hear me now?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Yeah.

Ram Krishnan
Ram Krishnan
COO at Emerson

Yes.

Ram Krishnan
Ram Krishnan
COO at Emerson

Steve.

Steve Tusa
Steve Tusa
Managing Director at JPMorgan

Sorry, you guys usually have the call in the afternoon. I sleep in these days. I fell asleep there for a second during the Q&A. Just to clarify, some of this price cost stuff. What was price cost in the quarter? Just remind us of, what that's been year to date?

Ram Krishnan
Ram Krishnan
COO at Emerson

Frank, you got that.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

Yeah. Price cost in the quarter, total enterprise. Steve, as is Frank, is roughly about -$50 million.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

We were positive in the first half. We'll see that intensify in the fourth, and the first quarter. As both Ram, and Lal have said, and we're going to have to work through. That right through the second quarter of next fiscal year. It was order of magnitude, around $50 million in the third.

Steve Tusa
Steve Tusa
Managing Director at JPMorgan

Of negative?

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

Negative.

Steve Tusa
Steve Tusa
Managing Director at JPMorgan

Negative.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

Negative.

Steve Tusa
Steve Tusa
Managing Director at JPMorgan

Yeah. Right.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

Order it all, which would be Commercial Residential.

Steve Tusa
Steve Tusa
Managing Director at JPMorgan

Right. You're absorbing a pretty decent amount, this quarter already in your ops.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

Yes, we are.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Yes, sir.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

Yeah.

Steve Tusa
Steve Tusa
Managing Director at JPMorgan

Yeah. Okay.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

It's still pretty good represented in that platform.

Steve Tusa
Steve Tusa
Managing Director at JPMorgan

Just trying to make that clear. Lal, just on the go forward incremental margins. You throw out, we need to invest. Every company needs to invest. Nobody under-invests. Some companies do, but it doesn't seem like, that way for you guys over time. What is the normal incremental margin, on that mid-single-digit growth rate? That you can expect out of this business model. That you would expect, and you would be comfortable, with over the intermediate term.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Yeah. Steve, I continue to assert the 30% number, as we go through the long term. You'll see that flux up, and down. But that's the target. As we executed a cost reset plan. That's how we framed that with the businesses? There'll be quarters, as we saw with Automation. Where we'll print higher than 40%, and there'll be quarters as we saw with Commercial Residential. That will print lower than 30%. It'll flux, but 30% is the way I'm thinking about it.

Steve Tusa
Steve Tusa
Managing Director at JPMorgan

Got it. Just one last nitpicky one. Stock comp is obviously up massively this year. I know that, there's historically every few years. There's, I don't know if that's where the reset is, or if it's somewhere else, maybe in corporate? Is $235 kind of a run rate number for stock comp going forward?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

No.

Steve Tusa
Steve Tusa
Managing Director at JPMorgan

The prior two years, were in the low hundreds. Does that reset lower?

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

No, Steve. Definitely not. As you know, it's mark to market driven. It's driven almost entirely, as a function of the change in the stock price. We had the dip in the stock price last year related to COVID. We've had good stock price performance this year, and a big Delta year-over-year. No, that is not a run rate, that should be expected, the 250% range. It's more like a 150%-170% number, give or take, from a run rate perspective.

Steve Tusa
Steve Tusa
Managing Director at JPMorgan

Okay.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

Over time.

Steve Tusa
Steve Tusa
Managing Director at JPMorgan

Got it. Tailwind. Sorry, one last one. The orders conversion, I know there was an earlier question, about mid-single-digit growth in the fourth quarter. You're coming off of a 17% orders comp, and I know that orders don't completely equal revenue.

Steve Tusa
Steve Tusa
Managing Director at JPMorgan

In the immediate term. With that kind of orders projection, and with you guys talking about. Turnarounds being good in the fall, why would organic growth slow in Automation Solutions? It's a tougher comp, but it's only a couple of 100 basis points, whereas the orders are just obviously inflected. Why would that go from 8%-5% at the midpoint of that guidance? Is there something about timing, or is that just conservatism?

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

No.

Steve Tusa
Steve Tusa
Managing Director at JPMorgan

COVID or whatever?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Well, less so COVID, more so the availability of materials. Particularly electronics, Steve, that are a challenge in that business. I think as we guided Automation Solutions within that band. I think, there's momentum on the order side. The question is, can we convert in the plants? It is a hand-to-hand combat, I can't emphasize that enough. In terms of material arriving, and our ability to have the labor to convert it. That is what keeps me a little bit more guarded. In terms of the order, to fill conversion in the fourth quarter.

Steve Tusa
Steve Tusa
Managing Director at JPMorgan

Right. That's kind of, like a couple of hundred million dollars difference. You think, in your ability to fulfill?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Yeah. Well, I really don't know what it is. It's probably around the $75 million-$100 million range.

Steve Tusa
Steve Tusa
Managing Director at JPMorgan

Yeah. Okay. Still doesn't quite bridge the gap, but that's helpful. All right. Thanks, guys. Appreciate it.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Okay.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

Okay.

Ram Krishnan
Ram Krishnan
COO at Emerson

Thank you.

Operator

The next question is from Gautam Khanna with Cowen. Please go ahead.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Hi, Gautam.

Gautam Khanna
Gautam Khanna
Aerospace and Defense Equity Analyst at Cowen

Thank you. Appreciate the question. I had a couple. First, just fiscal 2022, based on your comments on the project funnel at Autosolve. Are you thinking that the KOB3 mix, stays pretty similar? To what it was in fiscal 2021, as a percentage of sales? What is that?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

I think the funnel has shown resiliency, as we've gone through the last six months. Or so at staying at that fixed level. The makeup of it obviously is different. Smaller projects, different types of projects. That we've seen from our customer base. Having said that, it's all about the movement from right to left. The ability to convert the projects to be funded, and then to be actioned. That's what we've got to watch, and could be a differentiating element. As we head into 2022 for Automation Solutions. I have a high degree of confidence, Gautam. That the transmission, and distribution funnel moves forward aggressively. That the renewables or sustainable decarbonization, part of the funnel moves forward successfully. That the conversions, the biofuels, the green diesel investments. The polypropylene plastic renewables, that Colleen described move forward aggressively.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

What I've got to watch very carefully is the larger. Particularly LNG jobs, that one big remaining one, the Qatar North Field expansion. How does that move? And how do those folks think about the funding of that, and as it moves forward? That will be differentiating into 2022.

Ram Krishnan
Ram Krishnan
COO at Emerson

Gautam, if you were asking about the KOB3 mix in addition to the funnel, it's in the high 50%s.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Yep.

Ram Krishnan
Ram Krishnan
COO at Emerson

We expect to operate at that range, for the next several quarters. Probably into the low 60%s into 2022.

Gautam Khanna
Gautam Khanna
Aerospace and Defense Equity Analyst at Cowen

Okay. That's very helpful. As a follow-up to one of the earlier questions at CRS, in aggregate next year. Do you think the business grows organically? Just given kind of the outsize strength, that we've seen this fiscal.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

I believe so, Gautam. What we are going to, and you've seen in the numbers today. Is that the backlog situation across the business is at $1.1 billion. That's the impetus to drive the organic growth, despite what happens in the residential AC cycle. That will support the organic growth in the business for 2022.

Ram Krishnan
Ram Krishnan
COO at Emerson

The longevity of our commercial businesses as well.

Gautam Khanna
Gautam Khanna
Aerospace and Defense Equity Analyst at Cowen

Last question, just your comments on M&A, and portfolio. Any change to how much we should earmark for M&A in our models, over the next couple of years?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

We'll come out with.

Gautam Khanna
Gautam Khanna
Aerospace and Defense Equity Analyst at Cowen

In terms of dollar spent?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Yeah. We'll come out with guidance, as we think about things. Obviously, as I mentioned earlier, Gautam, our funnel is very fluid right now. And there's a number of activities underway. We'll give you some kind of guidance, as we come out in November.

Gautam Khanna
Gautam Khanna
Aerospace and Defense Equity Analyst at Cowen

Said differently, are there any large properties. Bigger than OSI, that you guys are looking at? Thank you.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Yeah. There's a range. I would suggest, that we're looking more in the larger. Than we are in the bolt-ons right now, Gautam.

Gautam Khanna
Gautam Khanna
Aerospace and Defense Equity Analyst at Cowen

Okay. Thank you very much. I appreciate it.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Welcome.

Operator

Our final questioner today is John Walsh with Credit Suisse. Please go ahead.

John Walsh
John Walsh
Director at Credit Suisse

Hi. Good morning, and thanks for taking the questions.

Frank Dellaquila
Frank Dellaquila
CFO at Emerson

Hi, John.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Hey, John.

Ram Krishnan
Ram Krishnan
COO at Emerson

Hey, John.

John Walsh
John Walsh
Director at Credit Suisse

A lot of ground covered, maybe thinking about OSI Power, and your customers there. We picked up that there's some activity in Spain, and a couple of states in the U.S. Are you seeing the customers waiting, for more clarity around stimulus, before they're going ahead with projects? Is there just enough demand there? Given where renewables sit in the grid? That they're moving forward these projects, and there's no kind of delay. Caused by, who's going to pay for it?

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

No, I think it's the latter. Absolutely. Aging infrastructure, advent of renewables onto the grid. Are causing all kinds of challenges. There are just strong underlying drivers. That I think overwhelm, the need for stimulus spend there. Infrastructure bill, particularly in the United States, will help. No doubt about it. It will benefit, but there's incredibly strong underlying demand. As is in the traditional utilities, particularly in Western Europe, and North America.

John Walsh
John Walsh
Director at Credit Suisse

Great. Maybe just circling back to, an earlier question around kind of supply chain, and backlog. Did you grow backlog? Your sequential backlog growth, was that kind of demand-driven? Or do you think there was some supply chain stuff. That you wouldn't have been able to ship, and that's why you were able to grow backlog? Just trying to understand if there's some delayed sales, or deferred sales there because of supply chain.

Ram Krishnan
Ram Krishnan
COO at Emerson

I think the answer is both. Certainly, on many parts of the Automation Solutions business, and some in CRS, the demand side was very strong. On both platforms, we were not able to fully execute elements of the backlog. Given the constraints in labor primarily on the commercial side, and electronic supply on the Automation side. The backlog growth was driven by both fronts, supply and demand.

John Walsh
John Walsh
Director at Credit Suisse

Great. Thanks for taking the questions.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Excellent, John. Thank you.

Ram Krishnan
Ram Krishnan
COO at Emerson

Thank you.

Operator

This concludes.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

All right.

Operator

Our question-and-answer session. I would like to turn the conference back over, to Lal Karsanbhai for any closing remarks.

Lal Karsanbhai
Lal Karsanbhai
President and CEO at Emerson

Well, thank you very much. Thank you everyone for your time, and confidence in us. We're excited about the quarter ahead. I look forward to seeing many of you, as we go through the next three months. Until our next call, stay healthy, and safe, and stay well. Thank you.

Operator

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

Executives
Analysts
    • Andrew Obin
      Senior Research Analyst of Electrical Equipment and Multi-Industry at Bank of America
    • Andy Kaplowitz
      Head of Industrial Tech and Mobility Super-Sector at Citigroup
    • Colleen Mettler
      VP of Investor Relations at Emerson
    • Gautam Khanna
      Aerospace and Defense Equity Analyst at Cowen
    • Jeff Sprague
      Managing Partner of Electrical Equipment and Multi-Industry at Vertical Research
    • John Walsh
      Director at Credit Suisse
    • Josh Pokrzywinski
      Executive Director at Morgan Stanley
    • Julian Mitchell
      Equity Research Analyst of US Industrials at Barclays
    • Lal Karsanbhai
      President and CEO at Emerson
    • Nigel Coe
      Managing Director at Wolfe Research
    • Pete Lilly
      Director of Investor Relations at Emerson
    • Ram Krishnan
      COO at Emerson
    • Steve Tusa
      Managing Director at JPMorgan
    • Analyst
    • Analyst
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