Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Special Emerson Conference Call. During today's presentation by Emerson Management, all parties will be in listen only mode. Following the presentation, the conference will be open to questions.
This conference is being recorded today, August 27, 2020. Emerson's commentary and response to your questions may contain forward looking statements, including the company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available at Emma most recent annual report on Form Ten K as filed with the SEC. I would now like to turn the conference over to David Farr, Chairman and CEO. Please go ahead.
Thank you very much. I want to welcome everybody here this morning. I appreciate your time. We're sitting right now live in my conference room and myself and, Mark Belanda here to my left. Katie Corner to me is Bob Yeager, who runs our PWS business.
Jim Nyquist is across from me, who runs all PFS, headquartered in Austin, a lot of cars provide, who runs all of their automation solutions business, And then we have Pete Lillie, who's in charge of investor relations, but also, for many years, worked at the power business. So he knows quite a bit about this acquisition and then myself. And so I want to welcome all the investors, the sell side analysts and also want to welcome the Emerson and the OSI employees, I'm sure also looking listening to this conference call today. For your information and just to clarify things, there were 2 OSI companies being auctioned off at the same time. We had OSI Soft, who I know very well, Pat Kennedy, a longtime friend, Jim and I, new Pat, for at least 25 years, very close friend associated, iconic, person in the process business.
And we did obviously involved in that process at that point in time. And they were bought out, or the process of being bought up by Veeva. And then OSI, Inc, which we refer to internally as OSI Power, And the reason we did that is we had 2 acquisitions underway, and I had to clarify for the management team and also for the board as we talked about OSI power and OSI soft. So there were 2 companies out there in the marketplace talked about them, but they got them intertwined from time to time. This is, as you look at Chart 3, when you think about our acquisition strategy, this is extremely strategic, a company that we've known for many, many years, headquartered up Minneapolis, where we have also a lot of sensor capability in Minneapolis.
We're a very large employer in the Minneapolis region. As you look at this pyramid, as you can see, we've been making strategic acquisitions in our data management services software based companies now for the last several years. We've done 14 in Maison was just recently a joint venture equity investment we're making in Germany. A very nice, acquisition, healthily. From the data management standpoint, we look forward to doing more with that company.
But we've looked at our makeup. We've done a lot of acquisitions of software. And, yeah, we continue to do little bolt ons in the sensors and devices area. But clearly, it brings a lot of power to us, and you're going to see as we go through this presentation, where we have a lot of synergy, both within the power side of the business, but also on the process side of the business. A lot of technology that we're going to be able to share back and forth We're extremely excited about this.
We're really excited about Baumann and his team and his and Al that feel a great company in Minneapolis and we're forward to working with them. This business will report into Jim. Jim Nyquist as we look across the whole PSS business, obviously, has a very close connection to what Bob runs on the power side. And you'll see that very quickly, but there's going to be a lot of sharing of technology across Emerson, but a very unique software acquisition, and we're very, very excited about it. And with that, I want to turn it over to, Lal and Jim to talk and Bob to talk a bit about the slides.
And what we'll do is we'll interject amongst all of us. We'll come in and play and talk about it. We'll do the same thing in
the Q And A area too.
So if you get a perspective from each of us. So, Mark, so go ahead.
So, slide 4, good morning, everyone. We're really excited to have OSI join Emerson and, in our power markets. We have had a strength and built a strength in a generation side with the acquisition Westinghouse back in the 90s and have, really built up that business and it's our power water solutions business and very much focused on the, power generation side, and steam gas turbine, as well as an acquisition we did earlier this year with, American Governor on the hydro side renewable energy. What we're adding into the equation is OSI who is in the control space and, for transmission and distribution, which is a very important area and we view being able to connect across from generation all the way to distribution. So we will cover that entire spectrum in the market.
OSI really helps manage the energy flow and the distribution side with the ADMS product line. That they have. It is a world class product line there as well as EMS. And with the advent of renewable energy and micro grids coming into the power equation, ADMS is becoming more and more adopted to control the two way flow of electricity, as well as restore any kind of outages that occur out in the market as we all, you know, want to have our power working all the time. So OSI has really created a world class platform that, is in this space and allows us also to extend into other spaces.
And if you look on Slide 5, to depict where we are on the different, in the technology stack of devices controls and data management. You can see where Emerson's current capabilities are in generation. And then OSI brings what's, listed in green primarily across the software and control space. But what is really exciting about this, it also gives us a runway into some future opportunities. So, Lyle and Jim will talk about our market expansion with OSI itself of $2,700,000,000 growing very nicely.
But we have opportunities to add, down the road in another 5,000,000,000 market space, over the coming years. So Slide 6 then is OSI of the company.
So I'll take it from here, Mark. Thank you. I would like to second, David's, David's words and congratulate Balman Hakeda and Ron Ingram for really, really establishing a phenomenal company here. And L Elephant for running it for a number of years now, for that team, this is a unique asset and a unique opportunity for us from a market expansion, technology perspective. Chart Sipps is the profile of the company.
Based just outside of Minneapolis in Medina, funded in 92. We add about 1000 employees to the already 2000 employees that we have in the Minneapolis area. Across Emerson. It's a very important regional area for us as David referred to sensor manufacturing. And the key industry here is power transmission and distribution.
Although there are applications on the natural gas grid side and distribution and water distribution as well as many print pools that can be applied to electricity can be leveraged into into other medium here. It's predominantly a U. S. Company today, with 85% of their sales in North America, in U. S.
And Canada, but with tremendous opportunity to be globalized, around the world as well. I'll turn it to Page 7. This is a compelling chart. And one of the key reasons, as Mark highlighted earlier, that the asset was of interest to us. On the left hand side of the chart is our was our current power generation market.
Approximately $2,700,000,000 in size, with the DCS, the distributed control system, representing the bulk of that. Market opportunity. The acquisition of PWS, the Westinghouse business in 1998, Bob,
That's correct.
In 1998, at the time, David was running automation in the process. It was a 13% market participation company. We drove that to about quarter of the global market in power generation and controls. And about 50% in the U. S.
In North America. So tremendous work there on the right hand side of the chart is the market expansion opportunity here. David, excuse me, Mark already talked about the advent of renewables and the implications to the grid. Of renewables entering the grid. But the overall market essentially doubles.
The SandBox doubles as we look at twelve elements now in both transmission and distribution. The traditional, what we call EMS, Energy Management Systems, And then the more advanced and faster growing, driven by the renewable into the grid advanced distribution management systems, the ADMS, and we'll refer to that a number of times. Jim, would you like to talk a little bit about ADMS?
Yes. One of the things that's happening in the distribution, of course, is the two way flow we're now in a lot of the software out there that's controlling a distribution system simply can't handle that. So as that, as those renewables come on, more and more distributed energy resources comes on, having a software that can manage that is so critically important. And these guys really have developed a very, I'd say, modern modular package scalable that they can drive into that space. And so you see on the right hand side there, the adoption.
So this is a new, I'd say, emerging area because there's a real discontinuity in the market here. And so only about 35% of the market today has ADMS. They have a more of a traditional distribution management system. So now about 35 percent penetration today. So a large market here for us to go back in there, modernize those software systems or place what's out there today with something that can handle a renewable portfolio.
And one of the things I
would like to bring in here, Bob, can you the world of renewables today, the U. S. Manufacturers of power are starting to struggle with the renewables. A classic example is California. Correct.
Really, there's going down. But today, as a percentage, renewables of power generation is you want to get where it is and where it's got to go to? And that's where the ADMS really comes place. So all the major utilities really need to move to ADMS to be able to manage this renewables. So, yes,
traditional utilities are getting into commercial micro grids. Right? And, you know, so wind and solar. And, you know, that generation can be disruptive on the grid.
Yeah.
So it's creating, it could create, as you've mentioned, California compared frequency issues and, spinning reserves. So today,
what is the grid U. S. Grid TAVA renewables? 10, 12. It's about 10, 12 percent, right?
And then we're, yeah,
the target is some place.
California is saying they want to go to 100% renewal. Well, mostly
we're looking at 25, 30%.
Something like
that by law. Yeah. So when the renewables generation is coming onto the grid, it's creating this instability, right? It can be, as we're saying, in California, it can be forced outages because there's no generation. There's no spending reserve, but also what's happening is frequency.
And this is why, ADMS and Monarch, their platform is so important to us because, you know, do Volt VAR control and frequency regulation across the grid, you know, together with our software. Mark mentioned that we, we have about, 50% of the S. Generating capacity and about 1,300,000 megawatts around the world. And, if you bring in the T and D, together with our code, we have about 25,000,000 to 30,000,000 lines of code in generation. They have about 15,000,000 to 20,000,000 lines of code in transmission and distribution.
And we believe this can be the next generation for the total power system, certainly in United States and globally.
There's a huge growth opportunity here, both here in the U. S. And around the and we know it's happening live by basically being driven by the renewable drive by the government, the local government, right?
So Jimmy, back to you or Laura? Yes, so just to close out Chart 7, David. We feel very strongly that we can take what the OSI has on a global participation basis today at 5%. And double that plus as we look forward and grow the company.
And I still have a target out there for What's the target for you to get by 'twenty? What's that number
of that 24% to 24% chicken shit? Yes, you went north of 3rd 1, north of 3rd, before I die. Yes. Understood. I'm going to do it too.
Very exciting. Yes.
Okay. Let's turn to Pagehead. I'm going to ask Bob to help me cover this. But this is a compelling chart from us for us. And in points, to the electrical generation distribution landscape across North America.
And we've I forget it here, the market into 3 buckets here. The large utilities, these are large integrated utilities, companies like Duke, Southern company. Exactly. Exactly. There are a group of large and midsize utilities.
That's about 50 companies. We set minute there. And then the smaller midsized munis, on the and co ops down at the bottom. And we've we've taken the Terawatts produced generated by each of these companies and put them in the appropriate buckets. The first message here is that Emerson has a significant presence in terms
Yes, around the top 20. Yes, around the United States, about $450,000 out of a 1,000,000 megawatts in the U.
S. Okay. And 17 out of the 20 companies that we control on a generation or a thigh on the other hand is very strong that at the bottom of the pyramid, they've been able to grow and gain relevance, working with the smaller utilities, the beauties and co ops, etcetera. The opportunity clearly for us is to bring OSI into the large scale utilities up at the top and for us to come down into the smaller side on the generation side. So there's synergies on both ends, you have 100% off.
So if you think about large generators in the U. S, when you look at the top the top 70, we have great presence there. We have great relationships there. And a lot of, a lot of those utilities have standardized on control system Ovation. So it's a great relationship there.
Like you said, Wildman on the 2900 below side of that. So as we what's very exciting is when we join our business development and sales teams together around the world, it'll, you know, we'll go and be able to address these key to really meet their needs, you know, from generation to transmission distribution all the way to the gas. So it's a very, very powerful combination, not only from a technology perspective, which we just love mentioned, there are about 20,000,000 lines of code that will work right into our 30,000,000 lines of code. So we're now 50,000,000 lines of code, right, to cover that is a great support for our customer So
one of the issues for Quebec allow is the things I think that we're starting to see is we've got to know about OSI power and maybe even improving the tech technology movement within the the generation world between the distribution side and the generation design. And we can bring offering more service and capabilities to the power generation companies, which they've never had available to before given that the makeup of these two businesses together. You want to comment
on creating this common platform. Another thing that we're really excited about is we have a digital twin, right? So we've added like 5 to 6,000,000 lines of code. And, they have a digital twin, right? So and an historic, right, call it Kronos.
So we see 2 immediate needs, not only the monarch platform and Ovation coming together, and meeting our key customers needs. But, you know, the, historian will be something that we can drop right in. You know, all we need is some which is not hard to do, develop that code. So that can become the Ovation, default historian. It already is the monarch default historian, and it's Yeah.
So great this, commonality and due date exchange between transmission distribution and generation. So that's step 1. Digital twin, we're really excited about because we have well over 100, maybe 200 digital twins around the world now. So we, you know, very breakthrough technology, because these are the same engineering tools for the digital twin that it does the generations. Right?
And if we can combine their digital twin NRs, we can create this unified virtual system, from end to end across the power the entire power system. So if you think about outage management, you know, we could go to large utilities and say, look, here are all your generating assets. Know, we have the virtual version of this. Here's what your transmission looks like, right? So you can do what if scenarios, if you lose generation, if you lose different grid, you can reconfigure the grid, you can reconfigure the whole power system virtually.
This is the way it is. That is the virtual. This is the way of the future That's all.
So the other thing I'd mention too, Bob, in addition to that, the historian, back on the historian topic, take that and drop it in innovation. Can also play the same game on the process side with our Delta D and our process customers too, because that same thing, a few new connectors and things we really can look at.
It is cloud native historian. So it's a very advanced in terms of technology. Advanced, yes,
so it's a great fit. Low hand food for us
to go. That's a very straightforward integration probably
have our own opportunity to go after some new competitors in basically.
Okay. So on slide, if we turn to slide 9, we've hit a lot of these points, on the page, but just to cover them, that we recover what we didn't. And the upper part on it, it does expand our software portfolio and we'll will show you what the breadth and depth of that is in the next couple of slides. But OSI itself has 50% recurring revenue and has 100% customer rate. So we see that was very exciting to add into our portfolio as we expand our presence in the power market.
We've already talked about the modular technology, we have the ability to take that to other areas of Emerson into other end markets and to other geographies. So a large part of our synergy plan We talked to you about the extension into transmission and distribution. We've been working, on different angles to move into that space for some time now, and it's great to be able to bring OSI into Emerson. We've already mentioned it doubles the served market and then also gives an entree to another 5,000,000,000 of, of expansion. The mega trends clearly environmental sustainability adoption or renewable energy across the grid, across the world, will be with us for some time to come and we'll really drive the adoption of ADMS.
We've had, OSI, hats off to the entire team, through 2020, they marketed their company, they battled COVID and they grew 20%. So phenomenal job, their historical growth rate is around 15% consistently, in the last 5 years. It is margin accretive immediately at mid-30s EBITDA with 25% free cash flow margins, extremely strong backlog running into 2021 and beyond with some significant large customer contracts that are multiple years, So we have a really good background, excuse me, backlog to grow into. I interrupt you here.
A couple of comments here. 1, we firmly believe this business will grow 10 15% for the next several years. And then what we see right now, they have a huge backlog and a huge, basically. What do you guys see right now, Jim and Bob, for the backlog and also for the funnel.
Right now it's about $300,000,000. And we say we think we'll generate another $100,000,000 in backlog 21. So going into 'twenty 2, we should have about $400,000,000 and get close to $400,000,000 backlog.
On the funnel side, they've got about a 1,300,000,000 dollars model worldwide, projects that they're pursuing right now and bidding all the way from, you know, early, early qualification to bidding and closing. A lot of that's international, Dave. So one of the things they, as you see, 85% in North America, but a lot of the opportunity we see right now, and they see is to go international here. That's something I think from our international infrastructure. We can take them as much longer than they have.
We can take them into some of the world areas and be really successful in converting that fund
a lot of the large utilities and reclosely, we have 1,300,000 megawatts to get around the world. We have great presence globally in power generation. We can go into those key accounts now.
Good. Go back to Martin.
So then in terms of the transaction summary, it was a competitive process that was run, the cash price is $1,600,000,000 as we indicated in the press release, with 23.5 next, 12 months EBITDA It is, EPS accretive immediately, excluding amortization and other acquisition accounting charges. We believe this will close very early in our fiscal 2021, so you can think about October. And our pro form a net debt leverage ratio would be 1.6 times. So all well within, you know, our balance sheet capacity. So we really look forward to, working on the integration plan with OSI and look forward to getting past the, customary regulatory approvals to get it part of that machine as soon as possible.
So one
of the things that we had done, if you paid attention back in the April, May time period, in February, April, May time, March time period. Frank Alecila went out and borrowed some money at very low interest rates. Get our balance sheet strong one for the coal dip crisis, but also we knew in this process we were working forward to getting to try to land one of these acquisitions. So we had already funded this at very, very low cost of funds in our balance sheet as a flexibility to do this acquisition at this point in time. And then we also have the flexibility to do more acquisitions the next 12 months as we get forward here and continue to integrate.
But something we are ready for this and our balance sheet is in great shape to handle this one right now.
Okay. Yeah. Why don't we, step back a little bit and look at the overall software portfolio, David, and Mark and I go through the next few charts pitch 10. And, back in February, New York, we, we segmented the software business within automation. And this is an and perspective here on Page 10.
We talked about a $500,000,000 software business. The total software business at the top of this pyramid, which is we're calling standalone software, is sized at $1,100,000,000 today. That is $750,000,000 approximately pro form a with OSI power in it and about $350,000,000 of associated services. Engineering services for implementing in an application of the software. So that's the top of the pyramid.
In addition to that, there is embedded control software and software enabled devices, which are a variety and you can see a few of the brand names that we use across the corporation there from Delta V to PAC systems in commercial residential, renovation, of course, $1,300,000,000 there. So in total, the total the software, innovation is approximately $2,400,000,000 of revenue as we look across the Emerson portfolios.
And we'll start tracking and monitoring this information and reporting to the shareholders so they can see it because we've been making this investment for quite some time. It's not a one time push. We've been doing this on for the last couple of years. Obviously, we have not disclosed it until February, and now I think it's very, very important for
us to continue to disclose it
in particular given the fact we're making a significant investment, the largest investment in software that we've ever done, with the OSI acquisition here. But, we have a great background and a lot of software enabled products across this company at a very strong, powerful situation as we build it in the last couple of years.
Then if you turn to Slide 11, we just give you some examples. We've talked about, a few of these already, but the LSIADMS and Bob talked about the digital twin, clearly, software, at the highest level. And then the control level of Ovation Control System where, you know, again, PWS under Emerson has moved from 25% market share to around 50% in North America. And controlling half of our power in the country. And this is also applies to commercial residential solutions with supermarket control system, which we've actually had for over 15 years in the marketplace, and we continue to add capabilities on the commercial and residential side with the recent acquisition of Verdant for hospitality, energy efficiency thermostats systems that cut across the whole, hotel, for instance.
And then at the device layer, obviously, we've debated how to include the the devices went to include them. So we've taken a very cautious approach in what we include in ensuring that the, the, embedded software enabled devices that we include really need the software side of the equation for them to exist. So we wouldn't have cargo tracking if we didn't have a corresponding software. That is what really creates the value. And so we're taking a pretty strict definition there, to make sure that software is the primary driver of everything on this page.
And everything on the prior then moving to Q And A, really as we look at, the spaces that we can continue to look at, in the software area, we do like our devices So rest assured, we will continue to look for the right devices to help us create a stronger solution for our customer and create value for our shareholders. We are also looking at adjacencies within the software space, for both platforms and for Emerson in total. There's some exciting opportunities. As you all know, these are very high growth areas, high margin areas, expensive to get into but well worth getting into these areas, to create a broader solution in the marketplace and continue to strengthen Emerson for the long term.
With that, we'll move to Q And A and we'll open the phone line up to take on questions. And again, what I'll do is we'll you can either ask specifically an individual or just ask a question and we'll probably pass it around the room based on if you get the various inputs from the various leaders here in the room. With that, the lines open.
Our first question is from Steve Tessa from JPMorgan.
When you think about the technology here, I think you touched on it a bit, but how do we think about this as kind of longer term the growth is in T And D or can you or is there an opportunity to kind of take the platform or the embedded technology and leverage it, kind of across other process disciplines or discrete disciplines as more of kind of an end market neutral type of technology.
So Steve, I'll give you my inputs first and I'll turn it over to the experts and Jim and Bob here. But from my perspective, we see when we went into this process and started looking at OSI, I call OSI power, that we saw a lot of unique technologies, a lot of integration opportunities So we see a lot of opportunity to take this outside what I call the core power and water distribution side into the generic power or process side. We're very excited about it. Clearly, we'll take our time and we'll let Lal and Jim go through this, but there's some unique opportunity here for us to take those a lot broader and to move it way outside the band. It's a band that is today.
And it's the reason why I wanted to report it into Jim Nyquist versus a Bob Yeager as Bob is very much focused on power to water and Jim will take it to a broader perspective. Jim, why don't you allow him, Jim, why don't you give you $0.02?
Yes. David, if that's exactly right. And what we actually found when we began our engagement with the management team in Medina, Steve, was that they had already started to pursue opportunities in a broader segment of the marketplace beyond power. And you saw it very important from their perspective to diversify their business into natural gas distribution networks into water and waste water controls, So there's absolute application. And, Jim, you've seen the funnel and there's a significant amount of process.
There are some opportunities. And I think, you know, you may recall we bought in the ESI a few years ago that really does pipeline, optimization and scheduling applications. And so when you take that kind of capability, it sits in that pipeline area. Combine it with the SCADA and the distribution capabilities here. It's a natural FIM.
So we see those kinds of synergy opportunities on an industry basis. We also see, again, we talked about the the historian, you know, the historian is because we steal that across very horizontally across all industries. And so that's another easy piece. And so we begin to develop that list areas, we think there's a great opportunity to take either technology or applications
and then move them
into some of the other industries. I
think, Steve,
And what and what and what and what and what's so what's what's so special about that technology? Is there something that is, they've worked on, like, kind of, something that you need to meet guys outside the end market? Okay. So let me start with the Monarch platform itself. We believe it's technically or superior to the competition right now because if you think about the T and D space, the competitors right now, when they do a new transmission or distribution system.
They have to write a lot of custom codes. And, they kind of a lot of times go with a lawn off system. The unique thing about Monarch and that Baumann has done over the last 10 years is create a very standard plan, a lot like Ovation, you know, you'll see the same hardware, the same software in a nuclear plant that you own a hydro plant, you own coal plant or a combined cycle plant, you see monarch with this configurable soft modular software, no custom code required. It's a very, very unique feature, and that's why they're so profitable. Okay, if you look at their EBITDA and you, in March, gone through that, that's rather profitable because they don't have to write a lot of custom code for this platform.
Now if you think about changing the dynamics, so they've done it in the T and D side already. Now think about pipelines. Now think about water to distribution, right? If you have a configurable software product that can do that across all those, that's just the apps that are different. So the enormous advantage from just delivering projects and cost, you know, cost reductions and profitability.
And then we merge the platforms together and create, at least in power, the next generation power management system that's configurable that's going to be And I
think, you know, they have the core software as you say modular and then the opportunity for us to put more applications on top of that core system. In the other industries.
And that's why it's so unique, Steve, is because of their approach and the fact that we can use our core software today and embed it right into their into their modules and sell it on. So there's it's a lot easier to take across. It was very specifically written for one industry. This is not written for specific one industry. And I think we can take into other industries and more importantly, we can take it around the world, which they do not have the strength that we have around the world.
So there's a lot of growth opportunity here a very profitable business and allow us to change some of our investment profiles within the company today to not disempower.
Great. Okay. Thanks a lot.
All the best, Steve. Take care.
Our next question is from Andrew Obin from Bank of America. Go ahead.
Hi guys. Can you hear me?
Yes, I
can hear you, Andrew. That's okay.
Good morning. Just as I think about this deal, so it seems a very nice tuck in that fits in, but how should we think about, 2 things? First, M
and A, how much spends on software versus hardware going forward? And the second, just in terms of capital allocation, M and A versus buyback, do you think about achieving these balances?
Yes. So I think that from our perspective, we I would say that we're trying to target more of a fifty-fifty software versus unique software sensors or hardware Andrew. And I think that's very important. There's now a lot of software assets out there. They're very specific to this industry, but we're continuing to look at those.
So it'd be we're looking at a fifty-fifty. If you look at the number of deals the last couple of years, you look at the number of software control and the number of sensors, we were basically fiftyfifty and a number of deals. The dollar wise was more probably deals. With sensors because of the ZNC acquisition. So for capital allocation standpoint, we're still target next year $1,000,000,000 plus type of transactions for acquisitions.
And we'll be looking next year most likely around the $500,000,000 share repurchase. Now, we'll take it down a tad because of this acquisition, as we talked about in February, but we're still going to do share repurchase if we don't do the deals, we'll do more share repurchase. But we want to get our ratios back down a little bit. I think we're it's going to be at 1.6,1.6. 1.6,1.7, EBITDA to debt.
And so what we want to do is get that down to Tad. But that's how we look at it right now. And we're out there working software deals as fast as we can from that perspective. Thanks
a lot.
Andrew, you're still going to ask a question.
Yeah. I know that I'm getting I'm getting incoming messages on that.
Yeah. Okay. Well, if
he has a good question,
he wants to know, is that a good guy or not? Let me know. I'll talk to him about. Okay?
He
has a toy dinosaur called David Farr, so you should. John.
I hope it's my favorite dinosaur is the Tronosaurus rex. You can imagine. I used to eat chips. Yeah.
It is a well, I think that's the reference we were going for, Dave.
T Rex. Okay. Next, next one.
Our next question is from Andy Kaplowitz from Citigroup. Go ahead.
Good afternoon, Andy. Good morning.
Hey, Dave. So look, for the customers at times, I think you know, there's tend to be a little slow at adopting new technology, but it doesn't seem like OSI has had any issues with its growth. So can you give us more color into that 5% market penetration that you talked about with OSI? How likely do you think it will be, for instance, for utility customers to adopt ADMS at an accelerated pace as you mentioned do they have to adopt as they move more to renewable base? And how much does ever some global power gen platform help awareness?
To that penetration?
Yes. So I'll let Bob answer
the question in detail because he'll get into the Michael, but on top line Andrew, they really have no choice. The major utility companies are going to have to go this route. They built this structure off of the old GEs and the Siemens or the ABBs. And it's just not flexible enough to deal with this movement to renewables and it's balanced back and forth. On the short term, why our power business North America is doing so well right now is because The power grid is struggling or the power generation is struggling well.
Renewables in our service business right now is growing more than double digit basically in North America because this but they really have no choice.
So we mentioned about the, it's highly underpenetrated at 35%, right? And we know about the micro grids, the commercial micro grids and the integration of renewable does not going to change. And with, you know, as this continues and this trend will continue, It creates, these instabilities. It creates instabilities on the grid, but bold bar creates, frequency issues. So the distribution level this is definitely, software that's needed.
And as more and more, micro grids come on and the renewables come on, it's gonna create, you know, create more of these issues and they're gonna definitely had a widely adopted, distribution. I mean, I
mean, the hydrocarbon plants right now are running very inefficiently, they're breaking down and that's why our service is doing so well. And as the states and the countries have set renewable goals, I mean, for instance, Europe has set renewable goals. U. S. State to set renewal rules in the state of Missouri right now, the number is 30% and they're sitting probably at 10%.
So they have no choice. They're gonna have to move this way in order to manage this better. They're going to have a very unstable grid like you see in California right now, and that's not going to work for the consumers at all. So I think this This is a very powerful message. We know right now, a Southern company, not mention the name of the company, but a Southern type company is is looking right now to go this way.
They're going to go out and go towards, ADMS versus the old stop.
Yes. So if you look at just CapEx capital spending, traditional generation versus transmission distribution, it's like 10 times the amount of capital spending over the 5 to 5.
In either. So look at
what we see, they're going to say 10 times more.
And it's for 2 reasons, one for the grid stability issues and just for the support of renewables.
If I could just add one thing, the, you know, we're buying the leading technology in ADMS, in our opinion, in OSI's technology coupled Emerson's financial backing and breadth and depth in the power industry provides a lot of credibility for these larger North American power utilities to adopt OSI's technology as part of Emerson as opposed to an independent company. So it is a very strong, value proposition that we can now give to the power industry.
Very helpful guys. And just as a quick follow-up there, like you mentioned the 5% that they have as a percentage of the team de automation market. Who has, I mean, what are the, what's the competitive landscape like then? And is it as simple as, as this renewable ramps up and is part of the Emerson class form, you get that above market growth that gets you much higher penetration, but who you can share from?
Andrew, Andy, let's let Lyle mention it first, and then Bob, comment there too, because we beat it again. So we know who the common the guys in the old technology and ADMS technology. So who the top players and the
older technology? General electrics out there. We've got ABB Hitachi with the other technology established. The ADMS technology that shift is occurring at about a 9% market clip. You noted OSI is growing at a 15% market clip on that.
It's displacing some of those traditional GEs, ABBs that are out there in the grid. Bob?
Right. So it's, again, it's a standard approach. Right? So, and what most customers do not want is a one off. They don't want someone to come in and put a system in and then write a lot of custom code and they're kind of off on their own.
They like to be able to upgrade over time, and they like to take advantage of new features of the software. That is the key difference between the Monarch platform and the competition. So that, that is really what the differentiation is there. ABB is now, the grid system is now part of, Toshi. So there's a lot of dynamics going on there.
So we believe that from a product technology perspective, OSI is a level above the competitors. And, when people are looking to get this new system, they want a standard platform.
Yes. So I think that the key issue issue and is that, With our reach across the world and the power generation, we have a very strong presence. We they know who we are from the top for me on down. And, and so we have capability to really take them into the customers they never have been in before, both on the power side, but going back to another question we had into into the process world, too, where there's this type of distribution going on in the Tempur Industries that we see. So a lot of unique leverage, both in the core, but outside the core.
Thanks guys. Congrats on the deal. Thank you.
Our next question is from Joe Ritchie from Goldman Sachs. Go ahead. Thanks.
Good morning, guys. Interesting deal. Good morning, Joe.
How are you doing, Joe? Thanks.
Hey, can you guys dig in
a little bit into the revenue model So, you know, you guys mentioned 50 plus percent recurring revenue. But then, but then also kind of reference the backlog that was almost two times the size of your of, of trailing 12 months revenue. So like, how does the, how does the revenue model actually work? And is it, is it right to think of the, your backlog is kind of being like a 2 year backlog?
It's not 2 years. So what happens, and I'll give I'll let Jim talk about it. So they just want a huge hydro Quebec project on the TAD side. We won the system side, the generation side that we Siemens have been taken out there. We're putting Ovation in and they want the T and D side.
It is a These typical backlogs will go 5, 10 type of years. So why don't you give him how the model works relative? He's trying to understand this from the standpoint of all of a sudden, we're going to see $500,000,000 of sales in the next 2 years.
So why don't you tell
me how that works?
So that's spread out. So it really is a combination of license and all the engineering software engineering services that go along with it. And so I think if you want to split those up, you could say it's probably about, 40% license, 40% engineering services and then about a 20% ongoing maintenance in recurring revenue specifically on that side. So that's the way it works. And I would say, yes, that backlog is going to run out, over some of
that backlog is going to run out over
4 or 5 years, like a hydroelectric back. You see, there's a little bit of quick turn business here, the subscription or the ongoing recurring revenue. But then you've got the longer term, licensing, which which will run out over multiple years as they ship it out. And so what we'll have to do,
Joe, is when we bring it in. I haven't talked to Frank Delco about this, but we'll we have a very disciplined approach to backlog. And when we report backlog to you guys, it doesn't go 10 years or 5 years. We're, I think, what 18 months 18 months. So we'll So when you report back those Botscott contracts that run out 5 or 6 years too, so how long is your hydro contract run?
The maintenance goes for 15 years. The base contract be done by 2023.
Yes. So we'll bring that into our backlog calculation. But what we want to let you know is that they have a very healthy business model right now running out for many, many years. And then we're going to quickly work on the big project in particular outside the United States to see if we can land those projects given our organization help them land them very quickly. So very healthy background right now in a backlog and helpful from that standpoint.
Yeah. Super helpful. And then I guess just the the follow on is you're thinking about the international opportunities and, you know, still a small portion of the business today. Is it predominantly Europe? You know, how much of it is being driven by, obviously, you know, renewable standards and, and, the eurogreen deal maybe, maybe accelerating some of the, some of those standards.
I'm just curious how you kind of plan to go after the international opportunity.
So the $1,500,000,000 funnel, about $400,000,000 is in Europe, about $400,000,000 in the U. S. And then the rest is split between Middle East and Asia. Yeah. So Europe, you know, Europe is is is approaching the US pursuit list.
Yes. Yes. To
your point, right? Europe's going to be very
which is why we love this because, you know, we were counting on North America where we have a lot of presence there and we talked about the key accounts and the collaboration and the key accounts, but equally exciting, maybe more exciting is the international expansion.
So today, Bob, if you break down PWS in between the three buckets I'd look at, the Americas, Europe to help Joe out here in Asia Pacific, how do you break down roughly today?
So we're about half, half the U. S. Okay. Right. Americas.
Yeah. North America. 50% and then up 35% Asia. And then split between 15.
Okay. That's how we break down PWS. I would say that Europe is going to be probably bigger in this case here because we're extremely strong. We have a largest power generation player in China.
Exactly. We have a little bit of 1000 systems in China. So I think you're
going to see this go I think you're going to see this go over many years go to fifty-fifty. And inside the United States, outside everything. And we can try that, Kevin, our organization. As you know, we have a very powerful organization side. So automation solution today is what is your breakout sound today between, Americas?
So in the Americas today, we're about 45% 4555.
So right around that way. We have a large organization. We can help pull this thing around the world.
Interesting. Great. Appreciate all the color guys.
Take care, John. Thanks.
Our next question is from Julian Mitchell from Barclays. Go ahead.
Good. Thank you. Congratulations on this news. May may
be your first question.
I guess non European companies can buy our software companies. How does that I just
No, no, no. I said congratulations.
So now it's good to see the, the start is getting even done.
I saw no come out at OSI soft and you said you're S. Companies are dead and they're not doing anything to paraphrase. Well,
I suppose
for now, at the end of the title, but that's no, you're right. This is a, this evens out the playing field.
You've got to take cheap shots in the studio until you know, you've given back to me as you all know.
Maybe, Dave, one question around the integration of the business. As you know, it can be difficult, for comp industrial companies sometimes to integrate software, pure plays, That's a common issue across the world. Maybe help us understand how this will be integrated, what happens to the management of the existing management of OSI power.
Okay. I'll let Lal go first with it and then Jim, but
go ahead. Yes, yes. Thanks, Julian. We do have a $1,100,000,000 software business within the corporation already that we're managing. And working through, the cultures in those business, the times and the management processes we use are different.
We integrate them into the overall financial systems, etcetera. We're excited about the management team. It's a very solid management team. We're buying a great group of employees. And I'll let Jim add a few a little more color on how the actually integration is going to go in the 1st 3 to year.
Just for instance, when we bought Westinghouse at that time, it was called Westinghouse power and we bought it and we changed the name to PWS. I didn't want to pay Westinghouse anymore fees after a while. We left it alone. It reported up into, at that point in time, I think it was you, Jim, when I bought it, you were still running the systems business. So we will keep it isolated and we'll try to leverage it because we understand, to what your point drilling, we could destroy That's not what we want to do, because software is way too important to this, into the next generation of growth.
And so we'll keep it isolated as best as we can and use the resources but they have great team today already and they're young from that standpoint.
So I'll just add a couple of things, Julien, that, yes, some of the software acquisitions we've made our, you know, product on extension or a gap filler in a particular business. So we integrated that pretty quickly. And I think one of the examples we bought a company a few years ago for the life sciences, MES layer, it's called syndicated now. And that's very tightly integrated in as part of that group or that business. This one we see really more like what we do with Power Water, as Dave said, it'll be a standalone business, new business unit.
So we'll create a new business unit for T and D here. This will be the cornerstone of that. And it will be really pretty much standalone. We'll run it as its own independent business. It's a standalone today.
We'll look at where those synergy opportunities are. We work very closely with Bob. And then we have some other shared areas that we share across functional areas, across our businesses, and we'll look at how we can leverage those as well, for some efficiencies. But this will really continue to be pretty much a standalone new business unit. And, you know, we have an integration plan now that will first thing will be go out and work with our, with their accounts and their customers and how can we leverage the strength of Emerson to help them close some of those deals.
And the second priority will be where do we find these technology and industry synergies that we already talked about.
Very helpful. Thank you. And maybe just a more prosaic financial question secondly. Maybe help us understand what kind of, you know, cash on cash returns maybe by year 5 you'll you'll get from the deal and and whether that type of return is consistent with what we should expect from future Emerson software acquisitions.
I mean, I'm not going to put a cash on cash return out there, but it's going to be a very good cash on cash return and it will be consistent. I think some of the smaller deals, we'll get better cash on cash deals because they're less competitive from the standpoint of the opportunity here. But this is accretive from a return standpoint and margin standpoint and returns are very good. And, from our software acquisitions, we've done very well over the years. And obviously, we get the smaller ones, we get better returns and that's how we send it, Julian.
Great. Thank you.
Our next question is from Joel Pokrzywinski from Morgan Stanley. Go ahead.
I guess close enough.
I think that's me. Hey there. How are
you doing? You
wanna you wanna pronounce your options? You wanna you wanna try that again, Joe?
We'll we'll go with we'll
go with Josh Bookwoods.
I didn't know if, if, if, if, Joe, Goldman was was No, but he doesn't have that. He doesn't have that.
Yeah, he's he's inherited you and you just set all the bills to Joe Ritchie at Goldman. Okay?
Will do. We've covered a lot of ground, good detail out there. Looks like a good pickup for you guys. I guess, in terms of the selling process, you have a few electrical guys that weren't on the list of some major competitors, for this business. I think if somebody like an Eaton that I think has grid automation and self healing capability.
I guess as you go to market, with OSI or as OSI goes to market, is there some natural attachment selling some of the electrical gear, it's an easier add on.
That's the beauty of, OSI. They're not tied to any specific hardware architecture. So as a result, they're able to go across all the competitors installed base And with, and as we said earlier, with this highly configurable code that doesn't even run off and a lot of custom code, that's really where a lot of their growth has come from competitive displacements. Correct. And, you know, you combine that with this very fast growing ADMS market and, we just really see it taking off.
I mean, there's a lot
of smaller competitors out there, but the big competitors in this space are big global companies. We all know who they are. We talked about them. They're the major players.
It's a lot like our control system when you acquired us in 1998. We didn't have the hardware. We didn't have the turbines. We, you know, we didn't build the turbines. You know, that was all divested.
So as a result, we weren't tied to a specific major equipment or hardware. It makes it
a lot easier for us to sell.
But as Mark highlighted on Chart 5, there are an interesting set of potential future opportunities at the device layer around intelligence sensors. And that, I think it's we're going to continue to work and think about.
Okay. Got it. That's helpful.
And then
I guess the other element, related to kind of the purchase cycle is, are customers really looking to interface as they're adding renewables to the grid, I. E, do they need to be buying stuff to wanna buy this, or at any point along the way, will they just pull the trigger on ADMS?
It's not tied to the original, you know, this is for optimization. You know, so to look at the generation loads, you know, to look what I talked about control frequency regulation, they can add that in using those, not part of the greenfield project, but later on.
Today, if you went out, so how much money is being spent this year in the U. S. Utility industry? What's the number? How
in the grid, for the total T and D architecture, we'll do, for example, spending $10,000,000,000 over the next 5 years.
I think the top 10 are around 90 $90,000,000,000. So they're spending a lot of money on this area right now because the big problem before they really expand the renewables as they got through a lot of stability really brings stability to the network. Unlike California, who doesn't think about things like that. And so the last second, you've got to bring that into us. All the big major utility companies that supply the rest of the country are thinking about how they do that.
And that's why they're going to invest it. And they'll do it look a lot and make those movements and it'll be it'll be made over 5 or 8 years. It won't be a one big bang because they'll try to figure out how to manage that grid. But once they go forward, they move, they don't stop.
And they're going to live with their custom software so long that the ping gets so much. They really got to move to a new architecture here. Got it. Appreciate it. Thank you, guys.
Take care, Josh. Send your bill to Ritchie.
Our next question is from Christopher Glynn from Oppenheimer.
Good. Thanks, Steve. How are you?
I'm doing fantastic. I'm doing fantastic. I'm sitting on look at my window. It's a nice kind of warm humid day, great day for air conditioner breakdown. And so if you guys have an air conditioner breakdown, call us, we'll fix it, replace it.
Today in Boston. I got it off for the first time all summer. So you talked about kind of the 10%, 15% growth outlook. It seems like that's the industry growth, but you've got a nice slide 8 on cross selling. Opportunities and talk about the impact of Emerson's financial backing helping them.
So kind of wondering what are the prospects you could really grow much faster than that growth target because that almost sounds like the market rate, but you've got some real leverage
Yes, the market's growing less than 10%. The market's more like
8% or 9%.
But I would say be honest, Chris, if the key issue for us from our perspective is if we can land some international programs, which they have underway, if we can go out and land 1 or 2 of the big big North America, the top 20 customers in North America, then we really do have a chance to grow this business faster than we just talked about there. But we've got to land those. We've got to bring them on board. But I think that the growth opportunities are enormous out there for us as we get our gets working together on this. But I think From my perspective right now, our plan assumes x percent of share gains around the world that we're looking at, say, just pick the midpoint 12.5% versus the market of 8 or 9.
So we have that built in, but our hope is to obviously beat that going forward. This is so profitable that we can generate a lot more cash and returns for our shareholders.
And one of the limiting factors have been just reach and their infrastructure around the world, be able to do that. And I think when we bring ours in, both from sales, infrastructure, country infrastructure, engineering, service infrastructure, I think we can really create some real synergy there.
What's that? Go out. Another question?
Oh, yeah, I was just going to say, what direction do you see the sit out synergies developing? Faster because synergies to Emerson's platform would probably be displacement versus Emerson pulling OSI would be pulling adoption probably.
Yes. I think our biggest opportunity is really to help them with our international organization. And we're going to work very closely with Baumann and Alan this from that standpoint. We're going to try we'll mobilize their teams and our teams together in international projects that we see in particularly around Europe, which are on the table right now, And then the next I think the next thing is that we'll be able to go out. There will be RFUs coming in the U.
S. And the major and the top 50 utility companies, there are queues coming right now around this change to ADMS. And I guarantee you, we will be right there as one company and OSI will now have a backing obviously of Emerson. Same thing that Bob saw when he was a young engineering guy at Westinghouse when he back in Emerson made a big difference relative to getting these customers.
It was quadrupled, that was
a sense, becoming part of Amazon.
So I think that's where it go. And then the technology stuff will take some time. You're exactly right. But, I think there's some things we can do pretty quickly. And, we're pretty excited about this.
And I'll wrap it up here with you, Chris, but we're extremely excited about a unique opportunity, a unique software company that really fits very, very core to what we offer today. Both on the true process side, the power side, the water side. And I think we see some unique opportunities out there, create some new business models to grow and change the profile of some of our businesses inside automation solutions. So with that, I'm going to wrap it up. I want to thank everybody, if you have any questions, call Pete, He's quite knowledgeable about this space, obviously, be involved in the due diligence, but also coming out on the power side of the process world.
So thank you very much. I appreciate your time today. Bye.
The conference has now concluded. Thank you for attending today's presentation.