Good day, and welcome to the Emerson First Quarter 2021 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Pete Lilly, Investor Relations Director.
Please go ahead.
Good afternoon. Thank you so much, and welcome everyone to Emerson's Q1 2021 earnings conference call. I hope everyone is staying safe and healthy. Today, I'm joined by David Farr, Chairman and Chief Executive Officer Frank Della Cola, Senior Executive Vice President and Chief Financial Officer Jamie Froge, Executive President of Emerson Commercial and Residential Solutions and congratulations to Lal Carstenby, Current Executive President of Emerson Automation Solutions, who was recently announced as Emerson's next Chief Executive Officer, effective on February 5. As usual, I encourage everyone to follow along with the slide presentation, which is available on our website.
Starting on Slide 3, I'd like to briefly highlight two examples of the great work our global teams are doing and through recent recognition from customers and marketplace. First, Emerson's PlantwebOptics Analytics Software recently received The 2021 IoT Breakthrough Award. Emerson's PlantwebOptics platform helps customers collect OT data from a variety of sources and apply practical and customized visualization and analytics, delivering key operational insights to the right people at the right time. Next, turning to Slide 4. Emerson recently received the 2021 Control Readers' Choice Award for our industry leading automation control and instrumentation solutions.
Emerson continues to receive positive feedback from customers and users of our products based on a relentless focus on technology, unmatched customer service and critical domain expertise in our customers' industries. Turning to Slide 5, we will review the highlights of a very strong quarter. First, Emerson remains steadfast in our commitment to health and safety for our employees, customers and communities. Serving our customers in critical industries, Disciplined cost control and positioning to outperform as we emerge from COVID-nineteen remain our key thematic priorities. And we are starting to see the benefits of this focus flow through.
Next, our regionalized operations remain sturdy and stable, And we will continue to build upon our firmly rooted strategy of business localization. Turning to performance, Emerson delivered a very strong quarter in a challenging but stabilizing and improving demand environment. The organization delivered adjusted EPS of $0.83 in the quarter, which was up 24% from the prior year and well above expectations. We continued our execution of the broad cost reset plan with an additional $69,000,000 of new restructuring actions. Cash flow was a new first quarter record for the company with operating cash flow of over $800,000,000 and free cash flow of $686,000,000 up 90% and 121%, respectively.
Was critical to enabling the strong operational and cash flow outcome. Even on down 2% organic revenue, Segment margins grew by 2 30 basis points to 17.7%. This margin improvement is a strong In many key markets, sales and orders finished ahead of previous guidance. Commercial and Residential Solutions underlying orders remained quite strong, Finishing up 15% on a trailing 3 month basis. Importantly, our Automation Solutions business is showing signs of stabilization and improvement.
Given the orders, sales and profitability improvement, we are updating full year guidance to reflect the stronger outlook. Please turn to Slide 7, which offers details on the results of the quarter. Both underlying orders and sales came in ahead of expectations Down 4.5% and down 2% respectively. Commercial and Residential Solutions underlying sales was up 12%, while Automation Solutions was down 9%, but improving. Adjusted EPS, which excludes restructuring and 1st year purchase Accounting and fees was up 24 percent to $0.83 well ahead of expectations.
As previously mentioned, the organization achieved a new Q1 cash flow record, driven by increased earnings and strong working capital management. Operating cash flow increased 90 percent to $808,000,000 and free cash flow increased 121 percent to 686,000,000 Turning to Slide 8, we will briefly bridge adjusted EPS in the quarter. Starting with adjusted EPS in Q1 of 2020 Of $0.67 non operating elements, including tax, interest, FX and other items were a combined non factor, Adding a penny in total. The most important element was operations, which drove the vast majority of the EPS outperformance contributing $0.13 Share repurchase added $0.02 for a total of $0.83 in the quarter. Moving to Slide 9, we will review the P and L.
Net sales were flat and we saw a slight reduction in GP margin, which was driven by volume deleverage and mix. Meanwhile, SG and A as a percentage of sales declined by 3 10 basis points to 24% as aggressive cost control actions took effect. EBIT and adjusted EBIT margins, which exclude restructuring and 1st year purchase accounting and fees, increased 350 basis points and 260 basis points respectively, also reflecting the cost containment actions flowing through. Lastly, the effective tax rate came in at just below 20%, slightly lower than expectations. Turning to Slide 10, we will review underlying sales by world area.
For the quarter, The Americas continued to show the steepest declines down 7%, but importantly, they started to improve. In North America, we saw strength in residential, cold chain, life sciences, medical, food and beverage and some discrete markets more than offset by weakness in many other automation end markets. Europe grew 4%, While Asia, Middle East and Africa grew by 3%, fueled by strength in China at 7%. All Commercial and Residential Solutions world areas turn to growth. Please turn to Slide 11, and we will discuss the business segment performance.
Total segment adjusted EBIT margin increased 230 basis points to 17.7%, reflecting aggressive cost control measures and strong operational execution, even with slightly down underlying sales. Adjusted pre tax earnings increased by a similar magnitude, 240 basis points to 15.2%. As previously highlighted, Q1 cash flow performance was record setting with operating cash flow and free cash flow increasing 90% and 121 respectively. Free cash flow represented 152 percent conversion of net earnings. Importantly, trade working capital dropped to 17.8% sales, driven by strong execution by operations.
Turning to Slide 13, we will discuss the business platforms. Automation Solutions' underlying sales finished down 9% for the quarter. The Americas remained the most challenged, down 20%, which showed signs of stabilization and early improvement. Overall, we saw continued momentum in life sciences, food and beverage and semiconductor markets, as well as some early signs of improvement in upstream energy markets. Meanwhile, Europe and Asia, Middle East and Africa both turned to low single digit growth,
driven by
strength in Eastern Europe and China, respectively. Trailing 3 months underlying orders were down 13%, again reflecting stabilizing and early improvement trends. Geographically, the Americas continue to be the most challenged, down 27%. Asia, Middle East and Africa declined modestly by 1%, supported by China orders growing 6%. Europe declined by 3% due to weakness in energy markets, somewhat offset by chemical, power and life science projects.
Restructuring actions totaled $64,000,000 across the platform as we continued execution of the return to peak profitability. The platform delivered robust positive profitability improvement despite the drop in revenue. Adjusted EBIT and adjusted EBITDA Increased 200 basis points and 2.90 basis points respectively, as the effects of the ongoing cost actions took hold. Lastly, the platform increased backlog by $600,000,000 of which $300,000,000 was due to the acquisition of OSI. The ending balance was $5,300,000,000 Turning to Slide 14.
Commercial and Residential Solutions underlying sales were up 12% in the quarter. All core world areas were solidly positive, With the Americas showing the strongest growth at 14%, driven by strong residential, whole chain and home products demand. This growth points to share penetration gains in many of our end markets. Europe was up 8% as Heat pump demand was driven by sustainability regulations and customer technology preferences. Finally, Asia, Middle East and Africa was up 7%, driven by China, up 10%.
As mentioned, trailing 3 month underlying orders remained robust, up 15% with all business units growing. North America increased by 16% and robust HVAC and home products demand, while China was up 17%. Restructuring actions totaled $3,000,000 in the platform and were primarily focused on facility rationalization and optimization programs. Adjusted EBIT and adjusted EBITDA margins were up 2 30 basis points and up 2 10 basis points respectively, reflecting leverage on the increased volume and improved cost base. Finally, backlog This increased by approximately $200,000,000 ending the quarter at nearly $800,000,000 which is well above normal levels.
Please turn to Slide 16 and we will introduce 2nd quarter guidance. We now expect the underlying sales will be roughly flat year over year with a range of down 1% to up 1%. This potential for the company to return to positive growth is earlier than previously forecasted. The top line outlook is driven by continued momentum in residential, life science, medical, discrete and food and beverage markets and ongoing stabilization and improvement in other automation markets. GAAP We expect adjusted EBIT margin to be 17.0 percent to 17.5 percent with adjusted EBITDA margin in the range of 22.2% to 22.8%.
Lastly, it is important to note that this guidance embeds an $0.11 change in stock price costs due to movement in the stock price. Slide 17 introduces our updated full year 2021 guidance framework. Management assumes that demand will continue to be challenging, but stabilizing and steadily improving as global vaccine efforts mature. We also assume there are no major operational or supply chain disruptions and that oil prices remain in the $45 to $55 range. Given that context, we expect underlying sales growth this year with a range of flat to plus 4%.
Automation Solutions is expected to be in the range of down 3% to up 1% underlying sales, while Commercial and Residential Solutions is expected to grow between 8% As you can see, both of these platforms platform outlooks are improvements from November. We expect a slight decrease in effective tax rate as well as increases in operating cash flow and free cash flow to $3,150,000,000 $2,550,000,000 There is no other change to the capital allocation outlook. GAAP EPS is expected to be $3.39 plus or minus 0.10 dollars While adjusted EPS is expected to be $3.70 plus or minus 0 point Since last quarter, we expect that COVID related savings will now only be down $40,000,000 this year, up from the previous estimate of $70,000,000 However, we now expect that price cost dynamics will be slightly negative As raw material costs and availability become more of a short term challenge, operations are working diligently to mitigate this issue. Lastly, stock price will be more of a headwind. And now please turn to Slide 18 and we will briefly cover the changes to the reset As mentioned, we now expect only $40,000,000 of the $150,000,000 COVID related savings from 2020 to return as business conditions start to normalize in the back half of the year.
Accordingly, incremental 2021 savings have improved to 220,000,000 Total long term annualized savings of the overall RESET restructuring program are expected to exceed $650,000,000 Please turn to Slide 20, and I will now hand the call over to Mr. David Farr.
Thank you, Pete. First, I
want to welcome everyone to the Q1 earnings call.
I want to thank you very much for the interest in this great company. I'm clearly a little bit biased on that, but it is a great company. 2nd, I want to thank the global leadership team, the executive leadership team and all the employees around the world executing and delivering A fantastic Q1 for all of our investors. The last 19 months have been hard with a cost reset for peak margins, Downturn in late 2019, COVID-nineteen pandemic and a resulting global recession, and now the return to growth. My recognition and plotting to all of you is powerful and thankful.
I want to thank all of you for my heart for what you've done over the last 19 months. But now we have a new threshold of execution for the 2nd quarter And total fiscal year, I believe this team will make it happen. They are good. 3rd, I want to recognize and congratulate Lal Karzabakh as the new CEO of Emerson. I'm so proud of you I'm so excited for you and how you and your new OCE team will take Emerson to new heights, As I and we have done the last 20 years, when Chuck Knight turned over the reins to me in late 2020, I took a deep breath, I paused, I smiled and then I moved forward.
You are ready And have what it takes to lead Emerson. You have the right stuff as does all the OCE and global leaders. I will be your best cheerleader, your supporter and my phone line is always open to you and your team, Now, why now? I'm healthy folks. I'm not sick.
Nothing is wrong with me other than my right knee, which is definitely gone, no golf, so the knee replacement is on the way. I've already talked to my doctor. The Board succession plan and process ran its course with many great candidates over the last 5 years. I want to thank all of them. They all know who they are.
A couple could be in this room. I also want to thank Bob Sharp, who is a close friend We really wanted to be CEO of Emerson, but as he and I talked, told him it was not going to happen, so we decided to figure out how to make it happen somewhere I wish them the best of luck. As we went through the Q1, it was clear to me, the Board We clearly had one strong obvious candidate, Lal. The others are great leaders. They're great individuals.
They're great friends. They've done great things in Emerson, but Lal is the next leader. So we decided, But that's not the only issue. There are other things going on across the company. The company is in great shape.
The P and L, the balance sheet and the cash flow, as the Finance Committee to allow this morning, don't blanket up. We had a very good final quarter in fiscal 2020, as you all know. Orders have been turning up strongly. The V shape recovery has been taking hold And really firm at this point in time. We've had strong exceptional execution around the massive cost reset that we embarked upon back in 2019.
A cost reset costing us over $600,000,000 when it's all said and done, the progress is enormous. You've seen it in the margins in The 4th fiscal quarter, you've seen the margins in the Q1. We're going to deliver over $650,000,000 of savings For the company when it's all said and done, the global teams led by these 2 individuals, these 3 individuals in this room, Lal, Jamie and Frank are getting the job done. They don't need my help. The Q1 was strong on all fronts.
GAAP sales were flat, underlying sales only down 2%. And I believe In the Q2, our GAAP sales will clearly be up and I think our underlying sales will be up also. Maybe not a lot, but I think it will be positive. Profitability was very good and with improving volume and cost out in the 1st quarter, Great incremental margins on both sides. Strong margins, EPS momentum and yes, record first quarter cash flow of $800,000,000 and free cash flow of $700,000,000 Extremely strong execution around earnings and the balance sheet.
And we see a solid fiscal quarter in both platforms across fiscal 2021. Sales will grow this year, Both a GAAP and underlying growth standpoint, we will have increased margins, stronger EPS, potentially even $3.70 which was our 2019 EPS with much higher sales in 2019, plus strong cash flow. In my opinion, the number will bust the 3.2, but I'm not the CEO, so he has to live with that number. With order and sales momentum in the second half of twenty twenty one and going into 2022, we, the OCE, believe we'll finally deliver The $4 plus EPS in 'twenty two. Based on global economy recovery, the momentum we see and the cost out, it looks very good and we'll talk about that on 16th.
Cost reset, the drive to new peak margins in 'twenty two, 'twenty three, they are firmly in place. The entire next generation team is ready to take the reign and lead Emerson forward. Clearly, even with the COVID-nineteen vaccine rolling out, we continue to be restrictive in what we can do. We have to operate in a safe environment. The normal Europe Emerson management process is somewhat termed, Not quite the same, global travel, live customer engagement, our face to place planning conference, which is known to be It compounds 4 at times.
Organization planning process, leadership planning process are all restricted and delayed. We're doing them, but they're not the same. So as I thought about what I can do as a CEO in this environment It's basically take my experience, my maturity, which many of you know I am mature, in this environment and help the next team. Name the new team, put it in place, get out of their way and help. That's what I am going to do.
I talked to the Board about this. It makes the most sense. Yes, I said 2021. Yes, I even said maybe most likely later in 2021. But the new facts and issues and I always like to surprise With our annual investor conference coming up this month 2016, I think the time is right for the new CEO to stand up, Present and not have the Dave Farr game, which many of you have had for over 20 years, in some cases more than that as I work with Mr.
Knight. The February 16th time, the February 16th presentation with the Next Generation team is very important.
I will be there to help.
I will be there to advise. I care about this company. I'm a big shareholder of this company. It's been my life for 40 years, Leading it for over 20 years, the time is right. As you know, I've never believed in long drawn out Chuck and I had 3 days.
He hit me with the keys in the chest. He took off for a year for 6 months. I had to track him down to try to break The quarter's strength on earnings. The team, the Lal are ready. Let's move on.
As I talked to the Board, we all said the same thing. So again, my congrats to Lal and the OCE. And if I want to start the yelling match with me, you'll quickly see I'm not sick. Let's go to Chart 20. I do have my Stan Musial bat, my Rally Monkey and my Rally Squirrel, which is really a Rally ferret We have pretty good momentum in orders.
We laid out boxes. We started this box game as we put our forecast out in, I think, April of 2020 With Frank, at that time Bob and myself, we delivered actually beat it we've laid out the box in the Q1. You could see we came in better. The blue dial is where we thought it would be. We're above that, obviously, it's upper right hand corner.
Jamie's business has been very strong. He's executing. He's building backlog. That's He's got to get that backlog down. Lal's business has turned.
It's not going to be quite as sharp as Jamie. Clearly, he's a different business model, Tony's turn. If you look at the next forecast next quarter, we now have a blue dot sitting pretty much on orders above the line with a minus 4 to plus 6. We are seeing good momentum in Europe. We are seeing good momentum in Asia.
We see good momentum in Jamie's business in North America We are seeing some improvement in Lal's business, which I am sure he will talk about. So again, very good momentum in orders. As we lay this out, that's how we see it. Jamie's business will flatten out. It will turn down a little bit.
He's running High levels at this point in time. Clearly, some unique opportunity of growth there with all his markets, as he'll tell you, going the right way, which is great to see. So if you look at 'twenty sorry, 'twenty one, what we're looking at right now for the growth this year as we present to the Board, We're looking at somewhere around the plus 1, minus 1 for the 2nd quarter. Depends what kind of execution Jamie can get on the backlog. He clearly has issues relative to capacity, COVID, materials, which we'll talk about.
I think Lal's short term business is starting to turn up, We'll talk about that in this discrete business. Even some of the 1P2Z orders are starting to happen. We have a broad second half. It's hard. The Q3 will be a spike, as we all know, is a spike down, but the key issue for us is to look at good growth in second half.
Obviously, the ratios will look really good in the Q3, but we're looking at the second half and the overall business pace in that second half going into to fiscal 'twenty two. What I want to do is turn over to Lal now so he can talk a little bit about his forecast and what he sees, Some insights into the marketplace and then we'll turn it over to Jamie and let him do the same thing. So Lal, the floor is yours.
Thanks. Thanks, David. I'm sorry. It's been an emotional time for a lot of us, David. Your words are very special.
I'm very proud of the team and what the team has accomplished in the quarter. It's a phenomenal execution of a execution of a plan that we laid out for our investors last February, we committed to do and we're now seeing it reflected in the P and L of the company. We're generating some of our own tailwinds, which I'll talk to you about and the market is starting to recover broadly Across many geographies as well, which is how we encourage it. This page 22, Nothing really changed appreciably in our orders as we went through the summer months. However, as we got Into the late fall, we started to see an increase in activity, particularly driven by Europe and Asia.
I'll flip to the next chart and give you some perspectives on how we see the outlook right now. The industries that drove growth dramatically were the discrete industries, driven by Germany specifically, which had turned its economic engine on and started to accelerate both in the process space for internal consumption and in its vast export market Engine, so we started to see that improve in automotive and semiconductor packaging OEMs, as well as broad activity across Europe around Power and the Specialty Chemicals segment. In Asia, driven by China, as Pete highlighted, growth of 6%. We feel very good about what we're And expect that growth to accelerate into Q2 as we'll talk about in a moment. But The big elephant in the room is North America.
And what we experienced in North America was a stabilization of the oil and gas markets, albeit at lower levels, but a forecastable level of business. With the business, what has driven the business On the continent has been power generation, mining in the Southern Cone and life sciences throughout, which has been a great story for us. As a result of that, we are seeing a recovery and expect to see sequential improvement in order pacing In sales spacing in the second quarter and in the second half of the year as indicated back on chart 22. I may turn then, Pete, to Chart 24 and we'll give a perspective of how we see the world areas 1st half to second half. And across most of the world and I can pick out 1 or 2 pockets here, we will see that improvement reflected And the environment.
That discrete entered into that discrete momentum that we've built in Europe and Asia will begin in The Americas and North America's particularly, and we've seen, as David noted, early size of distribution based business As we've navigated through December into January, so that's very encouraging to see. I was in Odessa, Texas a few weeks ago. I saw I met with teams and talked about the plans for $3,800,000 a barrel It's barrels a day production for the year, which is a stable level from where it was a year ago. So we'll see maintenance of that, increased drilling to maintain those levels in those fields. So some encouragement there, but obviously demand will ultimately drive those that market.
In Europe, I've talked about it's really been a German story of discrete business is up over 30%. Our process business is up over 10% in Germany alone. And then there's increased momentum throughout the continent, very pleased with a positive Q1 and expect that to continue. And then Asia, the China bounce back was important that was discrete driven and process driven as well. And we feel very good about the So I feel much better than I did in October, David and team, but And I look forward to a much better outlook and executing in a much better environment as we go forward.
You did feel better until you got the CEO ring.
Well, I feel even better because I've got Jamie.
Yes, Jamie is rolling.
Yes, well, I just met you up for a very Tough second quarter. So now I think so. I mean, very interesting to see it's too early to talk about January, but to see the analyzing around January, because I think we are feeling the distribution, we are feeling some semblance of optimism in even the Americas And you have obviously seen some very good international orders. So I think that things are setting up. It doesn't mean it's going to be a perfect straight up.
You are going to be going here that, you go sideways step it, but I feel very good about it. Jamie, I mean, you have a like you said, you can't be the slowest antelope in the pack And the Tiger is out there. Right now, you're not the slowest animal, but you've got a Tiger out there running around. So what do you see happening to your business?
The Tiger is some kind of combination between growth that folks have never seen before and kind of a material situation that we're all dealing with around the world And customers. Before I jump into that, I just want to say a couple of words because this is a special moment in time here. It's not going to come again. I want to say thank you and congratulations to David on just really an unprecedented career, what you've done in this space. There's no comparison to it.
I know there's thousands of families and employees around the world that you've touched that wish they could be here to say this. I'll speak for them as well to say thank you All you've done, you're part of the fabric of this company forever. And you've been a great leader and mentor for me, but you've also been you are a great friend. So congratulations. Thank you.
Lal, I
want to say congratulations to you. We've known each other pretty much since I joined the company. We were in a similar leadership class together and Worked at corporate together, we worked in the businesses, we got work for you in automation. Now as business leaders now I get to see you in the CEO role and I'm very proud of you. I know that the leadership team has a great deal of confidence in you and we're very excited about this next chapter together.
So congratulations to you And your wonderful family who we've gotten to know over the years. So congratulations. Thank you, Jamie. So with that said, let's jump into the first chart there, Chart 25, it shows the updated outlook for underlying sales for the year. As you can see, you've heard throughout the call, the outlook for the year has improved since we last In November, we were out looking 4% to 7% underlying growth for the year.
It was going to be about 5% to 6% in Q1, 2% to 4% in Q2 and 5% to 8% in the second half. And growth in orders and sales really accelerated in Q1 as Dave talked about and we saw greater than expected strength in North America residential markets along with Accelerated improvement really in all other businesses and world areas. And so from a Q1 order standpoint, we saw double digit trailing 3 months underlying orders for all of our businesses With the exception of Professional Tools, which came in at 2% after delivering 8% orders growth in the month of December, so it was improving as The broad product line of World Area strength that we saw in Q1 orders, the backlog we built, what we continue to see in our business trends in January support to increase our outlook for So if you go to the next chart, Chart 26. These next two charts look at the business from And then a geographic perspective. 1st, from a product perspective, we see underlying sales growth in the heating and AC business in the 9% to 12% Range for the year, extremely strong first half driven by residential market and a more moderate second half is by the 4th quarter inventory restocking should Stabilized demand may settle into a pattern closer to historic cycles.
However, we do see positive and medium long term trends in the residential market driven by homeownership, Remodeling and a focus on efficiency and environmental concerns, our cold chain business has exhibited a quicker growth recovery than anticipated. In November, we expected Colchaine to grow more in the 3% to 6% range for the year, now at 6% to 9%, supported by a stronger Q1 than expected, which was really driven by a 20 plus percent Q1 sales in Global Transport, positive growth in U. S. Foodservice So even though foodservice is a tough market, it's coming back slower, we had positive growth in December, double digit growth in U. S.
Food Retail in the second half And double digit aftermarket growth. China delivered double digit Q1 cold chain sales growth with transport up more than 40%. We anticipate solid stable growth in the cold chain as the year evolves. Food service will continue to lag other segments, But improvement in vaccine rollout could drive upside in that space in the back half of the year. In November, our outlook for tools and home products Was also in the 3% to 6% range, it's now 6% to 9%.
Our home products business and tools we have impacted by residential demand, we will see extremely strong growth in the first half. Just to put some of the home and contractor growth in perspective, in Q1, our wet dry vac business posted 38% trailing 3 month fixed rate orders and our in sync orator business saw 20 percent plus trailing 3 month fixed rate orders growth. Again, the residential markets will settle in to a more moderate growth rate as the year progresses, but very strong growth first half, Good overall fundamentals in the medium and long term. For the remainder of our professional tools products, we will see a return to quarterly sales growth in Q2, followed by double digit growth in the second half Aided by comparables in Q3, but also a general improvement in market conditions globally, which we already started to see, as David mentioned. For example, EMEA and Asia both turned positive in Q1 and general industrial has been steadily improving.
Overall commercial building Sales grew 69% in the quarter with growth accelerating as the quarter unfolded. We do expect the U. S. Residential markets to settle into lower growth in the second The first half as we've seen unique near term growth dynamics and the rebuild of inventory in the channel. However, as I mentioned earlier, we do see some longer term positive Residential trends persisting.
North America industrial continues to improve with commercial building construction lagging. Asia Climate 3 month fixed rate orders through December were up 11%, Europe Climate was up 12%, supported by continued strength in the heat pump space in Europe, Along with weather conditions, improving market conditions overall
in China. Overall,
Europe Q1 climate fixed sales growth was 8% with heating growth up 40%. Overall, Asia fixed rate climate sales were up a little more than 6%. The climate part was up 15% and the heating piece inside of that was up 30%. So we see pretty solid growth dynamics the remainder of the year in North America, Europe, China and the Middle East and several smaller markets with a slower recovery in parts of North Southeast Asia. The COVID situation is dynamic.
We're watching it closely around the world.
We'll let you know if
we start to see any changes that reflect our current view of how The year is going to unfold. And just to wrap up, I want to say thank you to the entire Commercial and Residential Solutions team, the whole Emerson team for This quarter, you all responded to unprecedented demand increases, worked long hours to make sure we meet our customer needs, while working hard to keep our employees safe. And We saw historic increases in demand in several businesses. Our team did a great job responding. And what we all can't forget is the middle of a pandemic.
So I want you to know how much the entire leadership team appreciates all of your efforts. So with that, I'll pass it back to you, Dave, you and all.
Thank you very much, Jamie. Key issue here is Lal will need you to come through again in the Q2, you and your team up. I know you got a lot of issues with obviously keeping the plants up and running. As we told the Board yesterday and again today, we are making investments for capacity, for productivity for you. Lal's I clearly got plenty of capacity, but he's moving new facilities out, so he'll have capacity when it comes to the 'twenty two, 'twenty three.
So you really have a lot of moving parts. I think your team is in really great shape. And I know the team here at corporate will try to support you the best, Ken, as you go through this process, because we are banking on your strong execution to deliver this year. Yes. For the people on the phone, I've been very busy the last 2 days, as you can imagine.
Board meetings, shareholder meeting, I received over 500 emails and texts. I will get back to everybody. It takes time. I'm not ignoring you. I didn't change my e mail address And I didn't block all the crazy ones out there that people sent me emails to.
It's wide open and I will. I have a webcast tomorrow morning with Lal and then I'll start the process You all mean a lot to me. You're my friend. We debate, we don't always agree, but you're my friend and I will get back to every single person that has sent And the emails and texts over the last 2 days. I appreciate that.
With that, we're going to open the floor for Q and A. I again look forward to listening to this WebEx, the webcast the next time. I guess that will be May, and so you guys are going to have fun. But today, we have a little fun one more time. So open the floor up, but who's going to hit me first?
Our first question comes from Andy Kaplowitz with Citigroup. Please go ahead.
Good afternoon, guys.
Good afternoon, Andy. Good afternoon.
Dave, I know I think for all of us, you've been a great help to the entire investment community. You keep it real. You keep it light at the same time, which we appreciate. Congrats, Lal. I think you're going to need some sort of rally animal to fill those shoes, So Dave, maybe the first question is one of the things you've talked about in the past is that you're hopeful that CEOs would begin to spend on CapEx again as the New Year unfolds and vaccine distribution begins to ramp up.
So your order suggests maybe that you're seeing a little bit of that in Automation Solutions, but maybe Step back and tell us if your conversations with customers are changing yet to the point where they're starting to open up their CapEx spigots?
So I wouldn't use the word spigot, but I would use I think that the conversation is with CEOs, my fellow CEOs, Is that in the capital industrial world, they are opening up. They're talking about spending money around bringing lines back up, Andy, Getting some incremental capacity, we have a situation right now in the supply chain for Jamie's side of the business. There's a huge capacity Issue, there's not enough capacity and we know they're going to have to they're going to start spending money around steel, iron ore, mining, Copper, plastics, all these things. So what Wow! Guys are hearing and we've been hearing it quite a bit across the United States even now and even in Europe, They are starting to talk about small projects and spending.
So I think those conversations will continue. I think you'll start seeing capital. We're going to spend more capital this year. I bet you, if we had the time, we'd probably even spend more, but the time is not a big issue for us. So I think that we're feeling it And we're seeing it.
Where I really, really, really want to see it is the USA. And but I guarantee it, Jamie's customers, his facilities All need capital and Lal is the one who's going to make it for them. So that's what we see, but we'll see how that unfolds this year. I think our discrete business in the U.
S. Probably had a
good month. We don't know yet totally, but I think they had a very good month. And that will tell me that the projects are coming at the distributors of the channel. They're talking. The ordering product, I think the professional tools will be the same way.
If I turn to Jamie, he's shaking his head. So that means that the channel is coming, Andy. So I think that I feel good about it. Now the question is the momentum, but we'll see how much, but they've got to spend some money here. They've got to get things going productivity wise, and so I feel good about it right now.
It's good to hear Dave. And then at the risk of from running your Analyst Day a little bit, when you think about Automation Solutions coming out of the downturn and the margin progression, when we look Q1, you obviously improved adjusted EBIT by 200 basis points despite a decline in revenue. So as the segment improves, should you be capable of delivering Over that mid-thirty percent incrementals you've talked about in the past given your restructuring efforts and do you see a path back to the high teens adjusted margin here over the next couple of years?
I'll let Lal answer that. I have my opinion, but I'll let him answer it first because he's the one who's got to deliver it.
Absolutely, absolutely. We're well on path, Andy, to deliver that peak margin plan in 2023, we want to stay that course. If we do get that tailwind, We have investments that we will need to make in this business. This is a technology business that's built around phenomenal products that differentiate in the marketplace and allow those participation gains that we have enjoyed and benefited from. So we will invest back in the business and we'll stay measured.
But I think
we have opportunities obviously and we are in a phenomenal momentum right now in terms of margin execution.
So if you think about The next 2 or 3 quarters, the way Lal's business will unfold, he's going to have his earlier cycle businesses, those are all his higher margin business. And so if you think about D and I, you think about measurement and instrumentation, you think about those businesses, the flow businesses, those are better margin business. That's what's going to come back for him first. He should have pretty good incrementals. He doesn't have the same cost price pressure.
He has
a little bit of it,
but not as much as Jamie does. And I don't see a lot of KOB-one type projects coming in for, what, 12, 18 months off?
That's right.
So I think that as he goes into 'twenty two, My gut tells me he's going to have strong double digit orders going into 'twenty two in the Q4. Question will be is The execution is, the plant is ready, has he got the moves done, and I think he's set up for a very good first half of 'twenty two margin flow through. Not every quarter is going to be perfect like this one, But I think overall, his team is really focused on this and I think they got they're ready to have a good execution around margin and they will reach those new peak margins.
The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.
Thanks. Good afternoon, everybody.
Good afternoon, John. Dave, you're going to
be missed. Hope you get
that knee fixed soon. Go hit the links, enjoy retirement. But, yes, thanks for everything throughout the years.
My neighbor does not sound too excited about me retiring. He called me he told me about walking dude and rocket there earlier in the morning he came up in his truck. He says, What are you going to do in the neighborhood? I'm going to go knocking on doors and ask them to help you out do things like fix the air conditioning, Concrete works, so a lot of my neighborhood to think about, I need to move. Okay, Joe, let's get back to you.
All right. Well, congratulations as well and look forward to working with you closer. But maybe my first question, Mal, I know you're going to tell us more at the Investor Day in a couple of weeks. But maybe talk to us a little bit about how you're thinking about looking at things maybe With from like a clean slate, you know, and maybe that's the portfolio, maybe that's the margin trajectory, maybe that's the cost structure. Just any initial thoughts that you have on the transition and then making your imprint on those decisions?
I surely appreciate the question and I was waiting to hear who is the first one to ask. So congrats on that.
There are a lot
of things that I've thought about that I need to internalize and discuss with the team. Allow me a little bit of time. I'd like to really focus today on what's been just a phenomenal quarter for us, for our organization, Any guidance that we put out for the year, 16th February will be shortly upon us. You'll hear our voices. You'll hear some of our thoughts.
And if you allow me that, I truly appreciate it.
Okay. Fair enough. Maybe turning it over to Jamie for a second. Jamie, when you take a look at that, Slide 25, and you take a look at like the growth outlook for the And compare it to what we saw in 2020, clearly, like you have your easiest comp in the 3rd quarter. And I recognize that things have been kind of like white hot for you guys in the first half of this fiscal year.
How do I reconcile those two things in that growth is going to step down in the second half, just given what seems like a really easy comp in Q3?
Yes, we'll see. I mean, I think Q4 is the big question mark right now in the model. And what we one scenario is that a dramatic Portion of pent up demand plus inventory that had to be restocked got pulled into the first two quarters and possibly a little bit of the 3rd quarter. And so then by the time you get to the 4th, which you got a tougher comp, we just started to see growth come back towards the end of last 4th quarter. So it's a different comp you're chasing.
And could the residential markets go flat, slightly down, slightly positive in that range? I think we see the professional tools businesses doing very well in the second half, Both in terms of comps, but also just demands improving. Coal chain is going to be steady throughout the year. So it's really a residential story. If residential Has another wave here and stay strong and you have a hot summer, you have a very strong buying market in the housing market.
I think There's a lot of folks that didn't participate in the last wave of this housing remodeling and purchasing that may be on the sidelines ready to go. Then it could extend, we But it's too early to tell and so but that's going to be the key thing.
Got it. Thank you, guys.
Thank you, Joe. All the best to you.
The next question comes from Steve Tusa with JPMorgan. Please go ahead.
Good afternoon.
Good afternoon, Steve. Congrats
to you both, Dave. Thanks for all the really fun times over the last, I don't know, 15 Years or so. It's been a lot of fun.
Thank you very much, Steve. Hopefully, we'll see each other at least one more time.
Maybe, Hope, I'm definitely hoping for that. But on to the results, which were pretty good. The Q2 guidance, I think for A and S reported revenue, Looks like flat sequentially. Do I kind of have that right? And can you kind of explain why that would be?
I mean, looking Back, other than in 2020, it seems like that business is always kind of up Sequentially, comfortably. And then I have just a quick follow-up on the margins.
Okay. I would say, we're initial look at You're right. It's probably flat because of FX, foreign exchange, delta there. And the question is also, is this a mix of Business, does Lal get the does he get the U. S.
Business coming in? Until we see that really, as we know that U. S. Business is we're trying to be Cautious on Lal's business. He's done well the last two quarters, beat the numbers, Steve.
But right now, it's just a function. We've got to get some of that early turn cycle business. So if you did see that happening in January, you should be able to do well in that Q2. So probably a little cautious more than anything else and the currency impact From that perspective, Steve. But you're right, your analysis as always and we'll see.
Hopefully, it has a better quarter.
All right, Steve.
Go ahead, sorry.
Yes, just very quickly, we're watching our later cycle businesses very carefully. Those will lag, Federal Control, which was they are the Project based businesses, which had good and lagged coming into the down cycle. So, ROM was still experiencing Solid growth at this point last year and having weakened and so we'll see him come in a little bit later. That's going against us as well.
And how much revenue will OSI contribute this year?
The Board plan, I can tell you what that is. It's around $180,000,000 in sales, hopefully get to $200,000,000 We have a real shot.
You had a good strong quarter in
the Q1. Steve, the question is kind of keep the momentum going there. They're really taking a hold right now with our channel. And obviously, this whole renewable push is helping these guys a lot too, but it's a question of how much they can execute around the various customers. But the orders right now easily hit the $200,000,000 Run rate, yes.
So we booked nearly $95,000,000 in the Q1.
Right. And then one last one for you. I mean, I guess, Despite kind of this quarter, which was well above prior year margins on a decline, You're basically guiding, I think, to flat adjusted segment margins year over year for 2Q. I mean, is there any reason is there a mix dynamic there? Is there Some going on that we have to, is it price cost like what's the driver of a kind of a flattish margin year over year?
Yes. I think that did we give
the individual margins out for the guys? No. So Steve, what you're seeing is Lal's business will have a good Q2 margins. The big issue that Jamie has now got to override is the price cost, as the material inflation is coming in. Yes, he's got leverage from volume, he's got leverage from the reset, But the material cost numbers are starting to hit him right between the eyes at this point in time.
We had good coverage in the Q1 and now his team is working Scrambling hard to figure out how to offset that. So I mean, if we get good news there, then he'll be better in the margins in the Q2. But he's the one that's going to be struggling When it comes to margins because of material costs and Lal I think Lal will have a good second quarter. I don't see or the automation business will have a good second quarter.
And then one last one. One last one for you, Dave. I know you had kind of a tough ride in your 1st year as CEO. You had to kind of like Break the streak and cut guidance. I mean, do you have enough visibility to kind of make us feel comfortable that we're not going to be kind
of sitting here in the
same shoes Yes, 6 months from now?
Yes. I mean, the only problem is the GameStop thing is going on out there. We did have the dotcom. The dotcom bus came in March For me that year, we would have had problems with the 9.11 issue too that year. So we yes, I did break the string.
I did go see Chuck and say, Chuck, we're about to break the 44 year I knew I was going to have to do it eventually, but not my 2nd quarter end. You're right, Steve. I think we have better feel for what's going on right now, and I don't see a dotcom bus. So I feel comfortable. I don't think that we're I don't set Nyle up for that famous phone call to you guys.
No SPAC bubbles. Okay.
No SPAC bubbles. No SPAC bubble. Steve, you're such an optimist. Thank you. You break your legs playing hockey last week.
One thing I want
to follow-up with Dave is you're absolutely right what we're facing, but I did want to for all those on the call, this is we've Seeing these cycles before, I think the bounce back in volume is faster than we've seen before. Some of the materials issues are greater than the markets As experienced. However, we're confident that throughout this year as we go into early part of next year, the relationships we have our customers, the contracts we have our customers in regards It all works itself out. So our focus right now is on partnering with those customers, getting the supply we need, making sure we meet their needs. But we also are have very much in focus how this tends to play out in regards to the price in demand situation.
So There'll be months where it's a little rocky as we change things, there'll be other months that are fantastic as it flows through. So,
thanks. Okay. Thanks, Mr. Tusa.
The next question comes from Andrew Obin with Bank of America. Please go
ahead. Yes. Hi. How are you guys?
Hello, Andrew. Hello, Andrew.
Hi, Dave. So Thank you, Dave, and wow, congratulations.
Thank you. Thank you, Andrew.
So the question is sort of maybe goes a little bit into what you guys are going to talk at the It's Dave, but with dark credit control of the Senate, has the tone of the conversations with your customers Regarding green opportunities has changed. And I think I'm specifically talking about things related to the grid as it relates to Ovation And maybe anything you're seeing on mining in terms of change in tone as it relates to EVs and batteries?
Okay. So before these two guys talk, We spent 2 hours with the Board today and it's very topic because we've been working on it. The Board knows we've been working on it. So we made a decision to bring in the organization to talk about this today. And so I'll let Lal and Jamie talk because both sides of these guys our businesses are very much involved in this whole ESG Around the sustainability and renewable stuff.
And I just let Lal go first and then we'll let Jamie go on this one because that's a very relevant question. We are really relevant in the space, Andrew.
And you're right, Andrew. This is thematic for us of what we'll talk about in the February meeting, and we're very excited to Share that with the investors and talk about the opportunities we have with Emerson. We're going to
have a dedicated section on it, Andrew.
Now, the dimensions that we'll speak about are within Emerson, the greening of Emerson. It's the greening by Emerson As we aid our customers around various elements and Andrew, you and I have spoken about decarbonization and energy efficiency and emissions management And it's agreeing with Emerson. So it's partnering around solutions and organizations around the world. We have we are in a unique position As an automation and as a commercial residential business to really fulfill what is a global demand and a global need here. So I'm pretty excited about where we sit.
It's a growing business. There are various facets to it. We'll try to walk you guys Through it, but over the last really 2 years, David, we've had a number of individuals around the world working So I'm excited to share that with you on the 16th as is Jamie.
I think around alternative energies, Andrew, I mean we have a tremendous Start and Sight, I think we have the core technology, as I told the Board, we're going to have to create some new technology solutions, both internally and externally. But we have the credibility with our customer base in some of these areas here. There's going to be a lot of work that happens in the marketplace over the next 5 to 10 to 15 years and I think we have a pretty good start. Jamie's and I'll let Jamie talk, but we've been working on this for quite some time. We've been involved with the whole thing around Refrigerants, efficiencies, you think of the changing technologies and stuff that's going on, we've been living that with the governments around the world now for well over 10 years, And there's some big moves happening right now.
So that's why Jamie's business in Europe is still strong. So why don't
you No, it's a great point. Look, I think in general, It's a broader political topic around regulations, I'm going to get into that. If you just look at how it could impact our markets, when there is a clear regulation that gets put in It gives clarity and certainty in decision making around what people should purchase, what they have to purchase, what they need to do in order to meet whether it's efficiency targets It's emissions targets, etcetera. So generally speaking, it's good for our business because we're delivering compression solutions that have better efficiency They use lower GWP refrigerants. We're the leader in waste disposal capabilities globally.
And we got a lot of other markets that we'll talk to you about here as we go to the Investor Day. But just in general terms, it's a very positive trend for our business because it gives certainty to folks around how they need to deploy their capital or where they need to spend their money. And as Dave said, look, our engineers, our business leaders are on all the major committees around the world have been for many, many years that are driving these policies and driving the technical requirements around them and we're ready for it. And in a lot of cases, the technology is already being developed and is getting ready to launch here in the next 18 months because we've seen this next transition coming, for example, on efficiency and
I would say in Lal's Automation business, our European team really pushes because they're not a big oil refining business. We saw some push out of Asia when Jamie was over in Asia, but the European and so they got started about 2 years ago. And now with the So acceleration of what's going on around the world. We have a very good running start from the standpoint of the opportunity, and that's what we want to share with We're a combination of doing ourselves, but also working with our customers and helping everyone reach these goals. But I'm pretty excited about Automation and the commercial, and we have a unique situation for the next 5, 10, 15 years in the space.
So I feel good about
Thank you. It sounds like you guys are going to have quite a bit to say about at Analyst Day. A follow-up question on software. I think you have Sort of there are multiple definitions of software, but the standalone software, I think it's like what 1,100,000,000 That's sort of the market I'm referring to. What kind of growth rates have you guys seen last quarter and what are you expecting for the business to grow at this year?
Thank you.
Yes. We continue to see in that high single digit range, Andrew, as we spoke about I think in the past that seems to be consistent through Q1 and what we And again, we it's driven by a lot of work in life Sciences, there's opportunities in the electrification grid you talked about, but in core discrete and process
as well. Yes, I think there will be some years it's really strong, some years less, but we're making good momentum there. And we're going to continue to invest in Startups and ventures around this area, because it's both internal, as you know, Andrew, sorry, Andrew and then also through obviously trying to look at acquisitions. But We have a good foothold in this right now. It's really having a it's going to be a key part of what we're doing around the sustainability too because it's not only doing the compression, but using electronics and software, Same thing with a lot of software for Lal's business too as we Yes,
I mean Dave, we were just talking about the other day, when you start rolling out A2L refrigerants, lower deodorant, They're going to require it will be legal requirements around what the sensing you have to have. Correct. How often you have to monitor it, how you have to remediate If there's a leak or there's an issue. So as the world moves more and more in that direction, it's just going to require more insight real time to data It's a huge opportunity for our business.
Andrew, so we have to allow today, but we don't have so much time because unless they eliminate the former Chairman, We won't run out of time, but until they'll probably give me one chart, hello and goodbye. So we'll see.
The next question comes from Jeff Sproage with Vertical Research. Please go ahead.
Is that Jeff Sponge or Jeff? Sponge. Sponge? Is that what you call it?
I've never done it
before, but I like
that nickname of you, so we're going
to call you sponge.
How are
you doing, Jeff?
I'm doing well. Dave, congrats. We're really going to miss you. You're like the last of the Mohicans. You know that, right?
I mean I
know I'm the last of Mohicans, truly, the last of the Mohicans. Probably what but that's okay. You guys can't handle many more Mohicans around here.
That's right. And no doubt Lal will do a great job. Congrats, Lal. Thank you, John. Dave, I was wondering if you could address for Again, as all the succession was culminating, to what degree, if Benny did kind of the discussion about, hey, maybe naming 2 CEOs and splitting Emerson at this particular juncture in its history.
And Clearly, where the decision landed is clear based on the discussion today, but kind of what, if any, was the debate around that and kind of the pros and Tom's in your mind.
Well, so not to sort of replay history. We went through that process back in 2019. So as we took the Board through for the June through the end of, say, November time period and we looked at the analysis of the 2 platforms, the Strategic rationale around the 2 platforms and that was obviously on the table at that point in time. And the Board hired outside help relative to these two issues. In their opinion and working outside of it, it's very clear that we fundamentally believe there's more value in the combined basis than separating the two businesses.
And so the logic was around the investments we see going relative to this whole around the ESG, around sustainability, around software, We see happening on the global world right now. As you look at the different cycles, the Classic is what's going on right now and the 2 different cycles and how they leverage each other. That work was done back in the mid to late 'twenty nine. The Board made a decision. And as we went through this last 18 months, guess it's not quite 'eighteen, but close to 'eighteen, say 12 or 14 months.
The Board never did not think about that at this point in time. They made that decision a while back, and That's where it sits tonight. Obviously, clearly, for Lal's standpoint, the Board will continue to evaluate that in our strategy sessions with the Board in his strategy sessions with the Board, I fundamentally believe that will constantly be in the table as we look at the mix of the businesses, if we look at where we want to go next and where we may want to get out of. This company has been in and out of businesses. We get out of this business.
We'll go here. And that's what's made Emerson unique for the 40 years I have been around, if you look at the 40 years in how we transformed this company, let alone the 20 years I did, we don't sit still. So I mean, I guarantee before Lal retires, the company will look different than it is today. Now how we're going to look differently? That course will play as a handout with him and his team The Board.
So that's how we look at it, Jeff. We don't look at trying to status quo. It's not a word. Status quo is not a word around here, as you know.
Yes, no doubt. And I was also wondering, you've obviously worked extraordinarily hard to get costs out through this When we think about these COVID related temporary savings, only $40,000,000 of which are coming back, How much of that kind of total 150 do you think does come back? It sounds like you're working hard to really mitigate that even looking into 2020 2.
I don't know. You're going to have it's going to be really hard to make it because you're going to by the time you get to 'twenty two, the business is growing again. So I would say, obviously, what we've learned through this process, some things will change. So certain things will be different from a meeting standpoint, travel standpoint, But at the same time, you're going to be looking at a company that's growing. As you get into 'twenty two, you're going to be a solid growth year for 2022.
But I mean, clearly, it's not A dollar for dollar coming back, but you're going to be seeing growth investments happen at that point in time because we're growing. But I would say it's been hard for us to get But we know it's not 100% coming back, but we also know it's not only 50%. So I mean I've always felt that you're probably somewhere around the 80% would probably have to come back over time and 20% would we've learned from a different process. But it's really what happens, what businesses grow, Jeff. But I guarantee we've learned a lot of different things here in the last not always a lot of fun things, let's put it that way, but we learned a lot.
Great. I'll leave it there. Thanks again. Congrats around. I'll see you guys.
Take care.
The next question comes from John Walsh with Credit Suisse. Please go ahead.
Hi, good afternoon.
Good afternoon, John.
A thank you to you, Dave, and a
And I said, don't we someone else's condolences. Well, you said that
it was just So, not yet luckily. So, I noticed Some new disclosure here in the back around software. I was just curious if this is just shuffling some things around for financial reporting or If you're changing the way some of this software actually goes through channel to your customers?
It's fundamentally, as we talked about, we're talking about trying to start to report on our software sales. We're in the early stages of How we measure it, because one thing you want to do, once you start going out with a measurement world and accounting world, the accountants are going to sit there, auditor is going to look there Frank is shaking his head. No, he's going to do that. So we've got to make sure we understand it exactly so we can measure it. A lot of companies don't worry about those things, Emerson does worry about the integrity around the numbers.
So this is our first step. As we start talking about it, we want to make sure that we have Really grounded numbers. So when we tell you what it is, you know what it is and you can measure it. So that is a first step process.
No change The channel, no change there to reporting, just from that perspective. We're going
to start giving some more insights around software. That's all.
Okay, great. I look forward to that. And then, I guess just on the free cash flow guidance, I guess, is there some working capital associated with the higher sales? It just seems like you took the earnings up higher than the free cash flow. Just Yes.
Just wanted
to understand the dynamic there a little bit.
Okay. So yes, what we see happening in this 3rd and 4th quarter is growth will be pretty strong. Now As someone said earlier, Jamie has got a unique situation. His comparison to the Q3 is really easy, so he gets spiked He doesn't know what it's going to be like in the Q4, so we're trying to be cautious. The other issue that we face right now and one of the reasons we had very, very Strong operating cash flow in the Q1.
Yes, Lal execution was very good. Yes, Jamie's execution was very good. But we're in a situation with Jamie's that we haven't seen before of this magnitude where all of a sudden he's shipping using all the inventory he can And from the standpoint of getting the inventory out, getting paid and maybe not paying all expires from the payable side standpoint, he's in a situation right now where his trade working capital percent of sales is extremely low, this way that it's based out. And we know some of that will reverse as this business starts slowing down in certain areas. So I think we want to be very cautious as we try to estimate how much was that cash pull in because of the working capital.
But it was a very good quarter on earnings and And I think Frank and his team as we talk to the financial officers out there want to be a little bit more cautious.
I think if we get
a better feel in the second quarter how
the cash comes in, think I wouldn't be surprised if we don't tweak it back a little higher, John, to be all honest. But we're just being careful right now. But I think that earnings and cash flow execution right now And we definitely will have cash burning as we get into that 4th quarter, just our growth rate.
Great. Thank you very much.
Thank you very much, John. See you soon.
The next question comes from Gautam Khanna with Cowen. Please go ahead.
Yes. Thank you, guys.
How are you doing, Jonathan?
Congratulations. I am well. Thanks. Congrats on the great run, Dave, and congrats to Lal and best of luck.
Thank you, Catherine.
Now you're going
to have to be entertaining on these calls too. That's all.
Retirement. I got to find lab,
Stuffed animal. I thought
we retired the bat, Lal.
Yes. That's my stand usual bat. You take it home with you. I've been taking it home with you. I'm not alone.
I'm having it with I got other baseballs. Got them, I got baseball bats. I got a cricket bat up here. I got a sword. I got a 6 inches pipe wrench over here.
You see the monkey These guys are such very encouraging people. Between these guys and my neighbor, I don't know if Elvis is in the ditch digging. I'll be in the garbage business somewhere here.
Okay, got it.
I'm going to tell you, have you gotten back into real life yet? Are you hanging out in Jackson Hole?
Yes, no, not yet.
So I will write this as long as possible. But
I was going to ask you maybe you'll address this in a couple of weeks, but you hear the HVAC OEMs talk a lot about indoor air quality And that being a potential driver, especially in the commercial market, commercial HVAC market. I was wondering, does Emerson really play in that? Is there any Specific products or solutions you guys are offering that might add another leg of growth to your commercial HVAC sales?
Yes, we do. I mean, some of it's direct and some of it's indirect, right? Indirectly, as the OEMs work with different folks and they may A broader air quality solution in place. It will also include an upgrade or a change out to the core compression solution. I think the other piece around air quality is that High humidity control component of that.
And we found that a lot of the air quality solutions work better in a tighter humidity band. Our 7 AC business that we just bought, we invested in early stage, then we bought it out and now we're commercializing it, is a business that has 30%, 35% more energy efficient at providing very tight humidity bands for the air handling space for initially commercial buildings, for example. And We'll do some of that directly and we'll also sell some of that through some of our large OEM partners. So there's multiple ways we play And I think we'll continue to invest in that space as we go forward in both solutions with OEMs and maybe some that we sell direct to the end user base, but Already, we see a lift from it today.
Yes. I think the key issue here, Gautam, is that what Jamie highlighted earlier in the conversation is that we see the states as we go through this current efficiency and Refrigeration change, we see the states putting in some controls and monitoring and some justification of where things sit, Which will be Sensoring Software based. And I think that's where we're going to be playing around this whole area because they're going to want to know that systems, especially the commercial operator, operating. So I think that will unfold here. That's something Jamie is going to talk about and we're investing in right now.
But I think that efficiency does or Air quality, Air Efficiency Comfort does play for us. And so I think it's going to continue to build that way. I like that game for us.
We always thought about automation, We work in that business closing we have closed loop between control system and our final control element from Benjamin element. If you think about the air quality space, fundamentally, it's moving out of direction. You Got to close the loop between the monitoring, the electronics, the controls, humidification, particulate management. And so if you for example, if you have a large commercial or residential thermostat business that's tied to key diagnostics and electronics, then you've got a big part of the puzzle there. And There's partnerships that you can have around those other pieces to close the loop and build a full solution.
So we'll talk more about it in a couple of weeks, but we're very active in that I think we'll do more there going forward.
Just a second question maybe at automation solutions. So Obviously, the order comparisons get a lot easier come May June when you're comping down 13, down 19 And orders, and what is the right expectation? I mean, I know you gave the second half guidance for the range At automation, but are we going to see a bigger snapback in the absence of KOB 1 kicking in where we could see a double digit month or 2 or 3 As we get to the Q3, the Q4.
Got it.
I think your assumption is right. We should not expect the KOB1 Activity for the downstream team, I don't foresee that. More significant KOB 2 and obviously what we've been living on KOB 3 certainly. What I will tell you is that snapback is fully dependent on what happens in North America, period end of story. And that's really the that's really that will measure the dimension of how quickly it comes back, how hard that snapback is.
I think we're trying to be
cautious, but I think you'll watch the order pattern that these guys will put out because we're not going to stop that. I'm assuming Lal is not going to stop that. He may make that decision, but Just watch and see what happens from that standpoint. I have time for one more question out there for the next person. Thank you, Guy.
You take care and I hope to see you in a real city one of these days.
Yes, likewise. Look forward to it.
The final question comes from Josh Pokrzywinski with Morgan Stanley. Please go ahead.
You got that one right. Good way, Josh.
Close enough. Dave, it's been a pleasure. Enjoy your time. Dave, closer
to Jeff's sponge. So
He deserves it.
Dave, enjoy your retirement.
Get a few more dogs, take in a few more Cardinals games. I'll certainly miss you in Laguna. Lal, congratulations and good luck. You don't need it for sure. But onto the question side of things, if I look at AutoSol, kind of Similar angle is what was brought up before on C and RS.
It looks like for the second half, Yes, the range got a little wider and maybe a little bit lower. I know that Lal and Dave, you guys both talked about KOB 3 and kind of the process Energy complexes being guidance parameters or drivers of the high end versus the low end last quarter. How do you see those evolving? What are the drivers of that range today? And how important is kind of that KOB 3 process bucket?
So I'll give my answer and I'll give I mean, I know how these guys are thinking right now. They've had a couple of good quarters. They're still negative, Josh, as you clearly see. They've been very cautious relative to taking the back end up. So I think they've been as you're right, as they got a little bit better in the 2nd and third, they probably get a little bit on the 4th as they look at the quarter.
And so I think these guys are being cautious because We have not seen the pure whites of the eye relative to that U. S. Recovery. I think if we get a month or 2 where we see that consistent KOB 3, KOB 2 type of ordering in the USA like we've been seeing in Asia, like you're seeing in Europe, I think these guys will get a little more comfortable relative to that volume and that profit coming in. So I think they're just that's my impression of these guys.
They've gone through a tough market here, A cost reset and no one wants to say, hey, this thing is over, let's just go. I mean, it's just like Jamie. Jamie was cautious Couple of quarters ago now, as you run through, it's hard for him to hide. So I think that's my feeling. Anything you want to say there?
No. I would add, I think it's well said, David. Obviously, we're watching things like site access very carefully in terms of our engagements with customers. The spring outage schedules, which are holding right now, which is very important as well, those are all positive signs.
The short dated I mean your order pattern so what was your day to day order this month? What do
you think it's going to be? In the month of January, it will land somewhere between $40,000,000 $43,000,000 somewhere in there a day.
So that's a good number. That means he's coming back. So I think he's gaining everything's holding that we talk about From the standpoint, Josh, and now he just wants to see a couple of months of that continue. I mean, he saw the early signs in December. If January gets the details, he wants to analyze the details, that would be good.
Early first half of February gets into investor conference, then I think he's going to say, okay, It's definitely taken hold firmly. Just like we said 3 or 4 months ago with Jamie's business. So I think that's what it is. But all the signs are doing the right thing. Got it.
That's helpful. Then going
to the longer cycle end of the equation, the longer projects that got shelved with COVID, Do you guys think that those come back off the shelves? Do we wipe the slate clean, start over, just given the world has changed so much? What are you hearing? What are you talking about with your customers today? Do we have a scenario where those come off, plus we have post COVID You kind of new projects in Nirvana scenario, just happy to weigh in on all fronts there would be great.
Yes, I'll give you a quick color. The funnel sits at about $6,500,000,000 It really appreciably has not changed for the last 3 months. What happened within that funnel, there were a number of cancellations, but they were replaced by a high number of smaller jobs. So quicker paybacks, those types of things. In addition to that, what's been interesting is we now have about a $1,600,000,000 electrification project funnel, which OSI brought to us.
So that's in addition to the $6,400,000,000 KOB1 funnel that we've been talking about traditionally. We'll talk about this a little bit more in detail in a few weeks. But overall, feel that those projects are going to eventually move Ford, it's just a matter of time here around demand.
Yes. I think from my perspective, as I hear from the customers, I think a lot of The pressures on the CEOs relative to capital and things like that. So I think the projects, they are good projects. They will move forward, but they might be smaller. They might be cut a little bit differently.
I think there's been a lot of discipline in our customer base Around spending capital that's been hurt learned the whole fast way through a lot of pain like broken legs, broken arms, a couple of nights in the back. And so I think that I feel good they're going to be good. There'll be obviously some new. But overall, I think it's going to be good. And I think Lal has got one more thing.
Yes. Just one
more thing to your point, David. You're exactly right. If your project was a bottom of the barrel type of refinery project, that's got scrapped. If your project is a conversion to a biofuel in a refinery, those projects are moving forward. There are many active in the United States and Europe, And we're very engaged in those processes.
It's going to be a it will be a good that will be more late 'twenty one, Early 'twenty two, Josh, as I see it right now. So Lal's team has got a lot of work they've got to get done. They've got a lot of repositioning work in the facilities Under way right now in Europe, and he's got to get that done because his business is coming back, and he can use capacity around the world right now to cover it. But when he starts getting all the water area markets going, he's got to get that those new facilities up and running. And with that, I want to thank everybody.
And again, I will get back to people on the e mails. It's going to take me a while, and I truly appreciate what people sent to me in texts and e mails, and I look forward. Lal and I will try to get in before I fully go out to pasture. We will try to get into New York and have some sessions I'm trying to help Lal. I most likely probably bring Jamie along just so he can learn too.
But we want to do that. That's part of my learnings That I could pass on to these guys, these gentlemen. And I have been doing this a long time, as you know, not only 20 years as CEO, but I was when I came back I became the spokesperson for Emerson for those 3 years and I was Investor Relations guy for multiple years, 18 months. But I look forward to seeing all of you and I truly appreciate everything you've done for me over the years and keep me straight, keep me honest and challenge me and
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.