Good morning. I would like to turn the conference over to our host, Colleen Mettler, Vice President of Investor Relations at Emerson. Please go ahead.
Thank you and Good morning. Thank you for joining us to discuss our agreement to acquire NI, an exciting step in our portfolio transformation. Today, I am joined by President and Chief Executive Officer, Lal Karsanbhai, Chief Operating Officer, Ram Krishnan, and Chief Financial Officer, Frank Dellaquila. I encourage everyone to follow along with the slide presentation, which is available on the investor page of our website. I will now pass the call over to Lal.
Thank you, Colleen and good morning, everyone. We would also like to welcome members of the NI team, as well as Emerson employees joining us on the call this morning. NI is a company that we have long admired. We are confident in the cultural fit of our two companies and the opportunities ahead. I'd also like to extend my appreciation to the Emerson Board of Directors for their unanimous support of our transaction, as well as to the National Instruments board. I'd also like to note that we had very close collaboration and work with Eric Starkloff, the CEO of NI. Thank you. Turning to slide 2. We're very excited to be with everyone today to announce our acquisition of NI. As you know, this transaction is the culmination of a very competitive process.
NI is highly profitable, high-growth industrial technology company that has a great position in its markets. It is not surprising that other top companies viewed it as a very attractive target. We were focused from the start on a great execution of this deal. It is exactly aligned with our strategic objectives and our financial objectives as well. We had to be patient and disciplined to get this done. Ultimately, we prevailed, staying within the bounds we set on purchase price and also delivering a certain deal for NI shareholders. We spent the last eight weeks engaged in extensive due diligence and synergy planning. Based on that work, we've identified significant opportunities to create value beyond the strong base plan of the business. Most importantly, this transaction meets all of our previously communicated thresholds. It is accretive to growth, accretive to margins, and meets our financial return criteria.
When we began communicating our portfolio vision more than two years ago, we discussed three key objectives: higher growth, cohesiveness, and end market diversification. This transaction furthers all three of these elements, adding to our portfolio a high growth automation asset with exposure to key discrete end markets like semiconductor, electronics, EVs, and aerospace and defense. We will detail the unique capabilities NI's portfolio provides Emerson in the discrete space, which will become our second-largest end market. NI's leading portfolio of test and measurement technology is poised to capitalize on the same secular trends as our core business today. Reshoring, digital transformation, sustainability, and electrification trends are driving the test and measurement market forward, and NI's fit in these markets is expected to be accretive to our underlying through-the-cycle growth. Lastly, the value creation opportunities from this transaction are significant, and Ram will discuss our plans to execute.
In addition to being accretive to underlying growth, NI also expands our gross margins and is expected to be accretive to adjusted EPS in year one. We expect to realize $165 million of synergies by end of year five, leveraging our experience in similar acquisitions like valves and controls and our Emerson Management System, which will yield a return that meets the acquisition criteria we outlined at our November investor conference. We are energized by this unique opportunity and the value it creates for our shareholders. Turning to page 3, please. As we mentioned, this is an $8.2 billion transaction, representing $60 per share and approximately 15x fiscal 2023 consensus EBITDA, including synergies.
Of note, we already own 2.3 million shares of NI, representing roughly 2% of the company, which we acquired at a weighted average purchase price of $36.84 per share. This results in an effective per share price of $59.61. As we note on slide 3, this all-cash transaction is not subject to any financing conditions. Emerson intends to use the cash proceeds from the Climate Technologies transaction, which we expect to close in the second quarter of calendar year 2023. At closing, our net leverage will be less than 2x EBITDA and will reduce over time from strong cash generation. We're planning to achieve $165 million of synergies by end of year five, which we expect will require $155 million of cost to achieve.
I will be accretive to our financial performance, and we'll go into more detail in the coming slides. We do not anticipate any regulatory risks or delays due to the complementary nature of our two portfolios. As we discussed in January, we already received Hart-Scott-Rodino approval related to our equity investment in NI, and the transaction has been approved by the boards of directors of both Emerson and NI. Finally, we expect the transaction to close in the first half of Emerson's fiscal 2024. Turning to page 4. Many of you will recognize this chart from our November investor conference. As we discussed then, Test and Measurement is aligned with our vision for Emerson's automation portfolio. As you think about this portfolio, we have three leading cohesive cores, process and hybrid automation, discrete automation, and safety and productivity.
Test and Measurement cohesively fits with automation and our technology stack of intelligent devices, control systems, and software, and drives value for our customers. This transaction enables us to enter an attractive adjacency at scale. We also believe this adjacency fits seamlessly with our automation portfolio, providing the automation of test and measurement for discrete customers. Turning to slide 5. With a total addressable market of $35 billion and a mid-single digits growth rate, we are excited to bring NI's leading electronic test and measurement capabilities to Emerson. Sustainability and decarbonization macro trends are driving investments in electrification, leading to funding for electrical vehicles and battery technology. Digital transformation is increasing demand for semiconductor and electronics. Nearshoring is also increasing investments in areas like semiconductors and battery manufacturing. These long-term growth drivers all translate into the increased demand for automated test and measurement systems within these markets.
As we look at continuing to diversify Emerson towards discrete industries, Test and Measurement provides key exposure. Turning to page 6. NI is a very attractive business, with 2022 sales of $1.7 billion and 68% gross profit with room to expand. NI's gross margins show the strength of their products and the technology differentiation in the marketplace. As seen on this page, NI has approximately 35,000 customers with limited concentration, and we especially like the customer profile. This mirrors Emerson today and provides ample opportunity to segment these customers for efficient selling. As we mentioned, we like the end market exposure with approximately 80% of sales into discrete markets. This is led by NI semiconductor and electronics exposure and aerospace and defense, each approximately 25% of NI sales.
We previously discussed the key secular trends. Together with NI, Emerson can capitalize on these opportunities. Very significant demand and investment across the semiconductor, transportation, and aerospace and defense markets, which NI is well-positioned to support with its innovative solutions. This includes its semiconductor test systems, EV and battery test systems, and its open and modular platforms. I'll now turn the call over to Ram.
Thank you all. NI clearly has best-in-class technology and software in the test and measurement space. Slide 7, as you can see, shows how NI's technology stack of intelligent devices, control, and software within test and measurement complements Emerson's automation stack within core production and manufacturing. We clearly understand this technology stack and have effectively managed businesses within this construct for decades. We know what it means to deliver best-in-class intelligent devices, control systems, and software and more importantly, we know what it means to deliver best-in-class solutions, integrating all three layers of the technology stack. Today, we run these businesses at leading profit margins and execute at a high level, and we expect to do the same with the NI portfolio moving forward.
Importantly, we also understand the R&D and go-to-market needs of product lines across this technology stack, which provides confidence as we assess the opportunities that we have in front of us to drive value creation. Turning to slide 8. As Emerson looks to expand into discrete end markets, we have focused on acquiring differentiated technology and capabilities in the space. This was evident in our recent acquisitions of GE Intelligent Platforms, Aventics, and Progea, all of which provided factory automation capabilities for production and manufacturing. These acquisitions have contributed to our $1.6 billion revenue business in discrete end markets today, representing 11% of our sales. NI provides further exposure into these same discrete end markets while expanding Emerson into the design and validation phase of the product's lifecycle, providing critical early access to customers, as well as offering incremental capabilities in the automation of production testing.
As we look at continuing to gain relevance with our discrete customers, test and measurement is a unique opportunity to further our relationships and gain additional share of wallet. Post-acquisition, Emerson's discrete sales will expand to approximately $2.9 billion or 18% of our overall sales. NI also provides a unique and industry-leading software capability that helps customers automate test and measurement processes and analyze the results, improving product designs and production yields. NI's LabVIEW software continues to be the industry's leading product for engineers developing automated research, validation, and production test systems. Similarly, NI's PXI control technology provides the modular backbone for customers to enhance testing uptime, speed, and overall performance. Turning to slide 9. This compelling combination contributes meaningfully to a highly attractive $16 billion industrial technology company.
The accretive growth rate of NI is a key element of Emerson achieving our targeted 4%-7% through the cycle underlying growth rate we highlighted at our investor conference. NI is also accretive to Emerson's gross profit margin, there are clear and significant opportunities to expand EBITDA margins through cost synergies. This continues Emerson's progress towards a higher gross margin, pure-play automation portfolio. As you recall, the Climate Technologies in InSinkErator and Therm-O-Disc businesses that we have or are divesting have mid-thirties gross profit margins. With 20% of sales in software, NI also accelerates our push into higher value, higher growth, and recurring revenue industrial software segments, increasing Emerson's software sales to more than $2.1 billion. On slide 10, as we discussed in January, there are three main areas of synergies for this transaction: research and development, sales and marketing, and corporate G&A.
Within R&D, we're focused on two key opportunities. The first is to enhance R&D productivity through improved prioritization and execution of projects and utilization of best cost engineering centers for sustaining engineering activities. These actions will allow us to maintain the current product offering cost-effectively while investing for the future with innovative new products and technologies. The second opportunity here is around accelerating innovation. Emerson's legacy of innovation and revamped innovation processes will assist NI in identifying, executing, and launching the right products with the right time to market. Our customer-focused approach will help NI become more efficient and effective with resources when it comes to R&D. On the go-to-market strategy, as we mentioned earlier, NI and Emerson share similar customer segmentation profiles. Over the last 10 years, Emerson has effectively segmented our customer base and optimized our go-to-market approach.
For large, loyal customers, we utilize strategic account selling, site teams, and other approaches to maximize value. Whereas, w ith small customers, we have shifted towards distribution and digital selling avenues. This allows Emerson to drive efficiency in the sales channel, dedicating resources to larger customers or those customers with potential for outsized growth, a strategy we plan to deploy at NI. In addition, G&A and corporate present clear opportunities to streamline duplicative functional costs and improve efficiency. Finally, we see improvement opportunities in working capital. By utilizing Emerson's best practices, we expect to improve balance sheet productivity with a focus on inventory and receivables. In total, we expect approximately $155 million of cumulative cost to achieve the $165 million of run rate synergies.
These synergies, along with base plan improvements, will help NI drive to approximately 28% adjusted EBITDA margins from 15% in 2022. Turning to slide 11. Our differentiated Emerson Management System and this management team's prior experience integrating large acquisitions gives us confidence in the $165 million synergy target. Our Emerson Management System provides the toolkits, the framework, and resources to be successful in our integration of NI. We will leverage our innovation processes to drive efficiency at NI and utilize our commercial excellence tools around pricing and go-to-market. We will manage the business through our disciplined management process and monthly, quarterly, and yearly profit and financial reviews. This management team has experience integrating large acquisitions, as you know.
For example, with the acquisition of valves and controls business from Pentair, we were able to realize over $300 million of year-five synergies, utilizing many of the same principles around operational execution, commercial excellence, and innovation. Ultimately, we delivered 790 basis points
...of improvement in final control adjusted EBITDA margins from 2018 to 2022. The execution by the team with the valves and controls integration provides a framework for how we plan to run NI under our operational leadership. With this, I will now turn the call over to Frank.
Thank you, Ram and good morning, everyone. Please join me on slide 12. At our Investor Day, we discussed the importance of value-creating acquisitions within our capital allocation framework. We also stressed the strategic, financial, and integration discipline we would maintain in our M&A decision process. Our announcement today reflects our commitment to the process that we described to you. NI's leading test and measurement business allows us to enter a strategic adjacency at scale, one of the four priority verticals we identified. This transaction meets the financial criteria that we established, an accretive growth profile contributing to our through-the-cycle targets, accretive gross margins, and a clear synergy roadmap to accretive adjusted EBITDA margins. Very importantly, execution of our synergy plan contributes to profit and cash flow improvement that will generate a high single-digit cash-on-cash return and meet our risk-adjusted return requirement.
We will apply our proven integration capability to drive the synergy savings, which we expect will be realized more or less ratably and substantially realized by the end of year four. Our balance sheet will remain strong and flexible, enabling us to continue our balanced approach to capital allocation, including consistent cash returns to our shareholders. If you would please turn to slide 13, I'll wrap up here. In summary, the acquisition of NI will expand Emerson's leading automation business into the attractive test and measurement space and also provide strategic industry diversification. It meets the financial criteria we have communicated as part of our value creation framework for Emerson shareholders. We'll turn our attention now to completing the customary regulatory and closing conditions we expect to close in the first half of Emerson's fiscal 2024.
We are energized by this transaction and the opportunity that it presents for our shareholders. We'll open it up for Q&A in a second. I would just like to call your attention to the press release. We reiterated our confidence and our guide for the second quarter, where we believe we continue to have a solid outlook and expect to deliver results well within our guide. Thank you for your attention, and now we will open it up to Q&A.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Josh Pokrzywinski with Morgan Stanley. You may now go ahead.
Hey, good morning, all.
Good morning, Josh.
Well, congratulations on getting the deal announced. I'm just wondering if you could walk us a little bit through the timeline of obviously on the first quarter conference call, you know, a lot of sensitivity around 60. We find ourselves there today. I would imagine, you know, what you guys saw behind the scenes, you know, sort of fills in the gap there. You know, maybe talk a little bit about what specifically you saw and then, you know, how we should think about the $165 million of synergies. I know Frank said it was ratable, but, you know, I think using the valves and controls acquisition, you know, as maybe a case study says that maybe there's confidence to the upside.
Just what you guys are seeing there that, you know, that supports that higher level to start on the deal?
Yeah. You know, Josh, I'd be happy to, and I'll turn it to Ram to comment on the synergy specifically. Look, this transaction that you note is a culmination of a process that was highly competitive. This is an excellent company, very profitable, with a great portfolio of technology and well-positioned in markets and t hat brought some very interesting players to the table. Secondly, throughout the process, we have stayed very focused alongside our board of directors on two objectives: the strategy that we laid out on November 29th, and the financial objectives that we committed to our shareholders at that time. Number three, eight weeks of extensive due diligence, led us to like the company more. We learned a lot.
We engaged with lots of management over seven-plus engagements during that time, and there was a lot that we liked and we learned. Number four, all the criteria is met, the accretion on growth, on margins, and the financial returns, as Frank described and so, look, we, on a headline basis, yeah, $60, but you take into account the shares that we already own in the business, which is, we bought at an average price of slightly under $37. The effective price is under the $60 at $59.61, which meets that guideline that I had laid out about three months ago. Ram, on synergies?
Yeah. Josh, we, you know, obviously the eight weeks of work, exposure to the management team and outside-in analysis, obviously lots of good information in the data room. We feel.
Very, very good. I mean, it's a balanced set of synergies across productivity and R&D, optimizing the go-to-market model, certainly opportunities on the G&A front. We have very detailed plans laid out. You know, I can tell you that, having done valves and controls and gone through that process, we're at a much better starting point with National Instruments. Many of the initiatives there have momentum, and I think we'll come in and be able to accelerate that process that defines the $165+ million in synergy. We feel good, much better than we did, you know, eight weeks ago, that's really the confidence around why we believe that, you know, the price we're paying for this asset, it is the right number.
That's great. If I could ask just one follow-up, 'cause you've used valves and controls as a case study a couple times. You know, I think that asset was purchased at maybe close to the bottom of a process cycle. This one, you know, depending on where we are, who knows, you know, it seems like headlines change every day, but maybe closer to the top of a discrete cycle. How do you think about the cyclicality of that?
Yeah, you know, I think at the end of the day, our plan is prepared in terms of addressing that. I mean, we don't believe. I think looking at the business and looking at some of the acquisitions they've made and looking at where they are in the cycle, you know, I think we've planned for that. You know, fundamentally though, we've really built the synergies around disciplined cost actions. You know, I mean, obviously we will anticipate some form of a slowdown, but over time, the fundamentals of these markets will support mid to high single-digit growth, and we feel very, very good about that. Over the five years, we're not concerned about the top line performance, and we'll stay very, very focused on driving the operational cost actions that define the $165 million.
So, That's really how we're looking at it.
I think that's well said, Ram. I think that the exposure to the secular macro trends is critical here and NI has done a phenomenal job of aligning their tech around EV, semiconductor exposure. We see very strong fundamentals there through the cycle based on the nearshoring and elements around digital transformation that we highlighted earlier. Go ahead.
Given some of those end markets, it's also important to understand that as opposed to some of the other players in this space, NI is more exposed to design validation on the R&D side as opposed to the production side. The production side may cycle a little more as, you know, the markets adjust, but we feel pretty confident that NI's mix of business plus also the fact that they're exposed to a lot of other end markets across the portfolio of businesses, and with 35,000 customers, they'll be more resilient through a down discrete cycle than maybe some of the others exposed to large end markets like semis.
Great. Thanks. Best of luck, guys.
Thanks, Josh.
Our next question will come from Nigel Coe with Wolfe Research. You can now go ahead.
Thanks. Good morning, everyone. I'm sure you've been pretty busy for the last two months or so. Just, you know, obviously, big deal, big integration. Cultural aspects of the deal are really important, obviously very hard to quantify on a spreadsheet. During your due diligence process, you know, now, how do you get comfortable on the cultural fit between Emerson and National Instruments?
Hi, Nigel . Good to hear your voice. I, we spent a lot of time engaging with the teams over the eight weeks. The cultural fit is a very important dimension to this transaction. We are both technology companies, engineering companies. We thrive on solving customer problems. That is at the core of what NI is and at the core of what Emerson is. We have significant presence in Austin, Texas, where we employ nearly 2,000 people in our PSS business. NI, of course, brings significant employment there. That's important as well. Truly, we believe being part of a larger organization gives NI's employees, as we go forward, further opportunities within a broader automation space to grow and drive their careers. I feel really good.
I feel really good about the culture, what I've learned about it, what I saw in the engagements. These are very direct people who answer questions and address problems in a very similar way to the way we're doing it. That was a big part of the learning, Nigel, for certain. Ram, anything to add?
Okay. That's great. Thanks all.
No, I think well said.
Great. Just off the beaten track a little bit here, you reiterated second quarter guidance, which is good news. Did not reiterate full year. We've had a few questions coming in. Just maybe just clear that up. I don't know whether it's Frank or Lal, but anything to read into the you know.
Yeah. No, there was no implication for the full year.
No. No.
We are also comfortable with the full year guidance that we provided.
Yeah. No, no.
Okay. That's good to clear up. Thanks, guys.
Thanks, Nigel.
Our next question will come from Andy Kaplowitz with Citigroup. You may now go ahead.
Good morning, everyone.
Hi, Andy.
First of all, congratulations on the deal. Lal, if I think about sort of the synergy ramp up, you know, over time, maybe you can talk a little bit more about pacing and sort of what is low-hanging fruit. I mean, obviously, you know, you talked about R&D, you know, improving productivity. That seems like it would happen over time. You know, SG&A as a % of sales is pretty high at NI. How quickly could you sort of get into that?
Look, a couple things I'll say just to set the stage. Number one, this is a very profitable company to begin with. Number two, it has a core of operations that is very important for us to have continuity in as we go forward. When you buy a business like this, you're buying people, you're buying knowledge, and we're going to be very respectful of what has been built and exists in Austin, Texas, and what has been built and exists in Malaysia and in Hungary. We were very impressed with everything we saw there. Having said that, there are opportunities. We're going to work to optimize the R&D process.
We're going to augment what is done, I think, in Austin in a good way with best cost engineering, leveraging the capabilities that we have in places like India and Eastern Europe. We're going to look at the low-hanging fruit, to your point, which is mostly around public company costs that sit in the company today, and we'll look at those. We'll look at the selling organization. It is a very, it's an engineering sale, so there are no channel synergies with what we do today, so we have to be respectful of that. We'll work to optimize based on customer segmentation, and where we can best utilize resources.
There are facility opportunities as well and a few other things, look, we're gonna work very diligently here over the next five years to deliver the 165. What I will tell you as a landmark is I expect somewhere around 40%-50%, let's say, % of that to be realized within the first 2-3 years.
Very helpful, Al. Then, you know, maybe on the revenue synergy side, as you've dug into and I, you know, and looked at it, obviously it's in your core, target market of test and measurement. You know, how does it sort of expand on your... You talk about, you know, higher percentage of software, but obviously, you know, they've got a very strong software business. Maybe talk about the complementary aspects of both, you know, the software business and then discrete automation a little bit more. What does it do from, say, on the revenue synergy side?
Right. No revenue synergies assumed in here, Andy, at all. I'm certain there will be overlap in customers as we get into this. Honestly, where they sit in the value chain and in the design phase and even in production, there's very little overlap to what we do today. We have not assumed any in the transaction numbers that we shared with you. Having said that, we do have a discrete business of scale today that sits that obviously more than doubles as we go forward here to 18% of Emerson's revenue. We'll continue to look across the technology stack that Ram described to augment potential opportunities, particularly on the software side as we go forward.
Appreciate it.
Thanks, Andy.
Our next question will come from Deane Dray with RBC Capital Markets. You may now go ahead.
Thank you. Thank you. Good morning, everyone, and congrats on the announcement.
Thanks, Deane.
Hey, maybe first question is about earnings visibility for National Instruments. You know, we're interested in hearing about the exposure to these multi-year secular drivers like semiconductor, A&D, and transportation and how much of the earnings mix would you expect, let's say, on an annualized basis as being coming from these secular drivers vs. what might be a more book and ship type of test and measurement revenue mix?
Well, I mean, I think, you know, obviously we'll get into those details as we really dive into the dynamics of what drives the business going forward. Today, you know, if you look at their business, the mix is very balanced, right? 26% is exposed in semi and electronics, 25% in the A&D space, 18% transportation and then t he biggest chunk of their business, which is very very steady repeat purchases, 31% of their sales is what they define as portfolio. So, I think they've got and with 35,000 customers, they're very resilient through cycles.
You are right, in terms of where they see the growth to drive mid to high single-digit growth is unique opportunities in the semicon space, transportation space, and frankly, the A&D space, and some unique growth opportunities through M&A as well as organic growth initiatives they're driving. I think that's gonna give them the 1-2 points of growth above the market, but they're gonna be very resilient to down cycles because of their nature of their customer base, particularly in the portfolio segment.
That's real helpful. Just second question, can you comment on the timing of potential portfolio moves you could be doing ahead? You know, there are still some non-core businesses in the portfolio. You're making an important strategic addition here. Are there just potential divestitures ahead, and what might the timing be considered?
Yeah, Deane, this is Al. Look, as you know, we've done a lot in 26 months in this company. It's if you look at the portfolio where it was in February of 2021 and where it is today, it is an entirely, almost entirely different company. We have a company that we believe we can run and create significant value on a go-forward basis. At this point, beyond doing bolt-on opportunities, which we have a few in front of us, we don't plan any further divestitures of scale in the near term.
Great. Congratulations.
Thanks. Thanks, [audio distortion].
Our next question will come from Julian Mitchell with Barclays. You may now go ahead.
Hi, good morning. Congratulations. Maybe, you know, you get one thing announced, everyone always wants to ask about the next thing, of course. If I look at slide 3, you reference the net leverage of sub 2x expected at close, just trying to understand sort of capital deployment, you know, pre-close and post-close, how you're thinking about that. I'm assuming between now and the close, excess cash is really just going on the dividends. Post-close, you know, how active or hungry would you be on further M&A as you look to build out those four adjacencies that you laid out six months ago?
No, Julian, this is [audio distortion], I'll let Frank comment as well. First of all, we're very committed to the entire capital deployment journey that we laid out on November 29th . That's a dividend, that's share repurchase, and that's M&A if, when and if it makes sense strategically and financially. Obviously, that's not going to change as we get through this year and going to 2024 and it's an important part of returning and creating value for our shareholders, all of the three dimensions together. You know, there may, like I said earlier in the call, there are always going to be bolt-on opportunities in our business, and we're always going to continue to look for opportunities to expand our markets and our tech in differentiating ways.
Of scale, however, we've done a lot, Julian. We need to now run these businesses. We need to integrate the businesses, and we need to deliver the value that we've committed to our shareholders on the return parameters that we talked about. That's what we're gonna be focused on as an organization, and we're actually very excited about that.
That's helpful. My second question, one would be sort of looking at slide 9, you've got that just under 50% pro forma gross margin. What should we think about as the kind of operating leverage entitlement of Emerson medium term, given how much the portfolio has been mixed higher in the last couple of years? Just a kind of bookkeeping one, maybe I missed it, but how will NI be sort of integrated and reported across Emerson's segments?
Julian, hello, this is Frank. To your first question, I think we should still think in terms of mid-thirties, 35% leverage. As we think about the integration plans here and going forward, we can refine that, but for now, I think that's still a good assumption, with NI in the fold when we ultimately close. The reporting, you're referring to the financial segment reporting, that's something we'll decide in the period now between signing and closing. We haven't exactly determined how we're gonna handle that yet.
Great. Thank you.
You're welcome.
Our next question will come from Chris Snyder with UBS. You may now go ahead.
Thank you. The presentation says the price pegs valuation at about 15x consensus 2023 EBITDA, which includes the $165 million of cost synergies. I guess my question is, you know, kind of based on your due diligence, do you think consensus 2023 EBITDA for NI is realistic? You know, just kind of looking at FactSet, has it up 25% year-on-year? Thanks.
Yeah. I mean, I think we feel pretty comfortable that they will trend towards that. I think a big part of that is the recovery of the $66 million of PPV that they encountered that's unwinding as we speak. Getting the GPs back into the mid-seventies type range is really what that's based on. They do have some of their cost actions coming through as well around their selling channel and pricing continues to be relatively strong. Yeah, we feel pretty good about that, and then we'll tack on our synergies on top of it as we execute as we go into the year.
Thank you. I appreciate that. You know, I appreciate the buckets of the cost synergies between research development, sales and marketing, and then just corporate general. You know, could you provide, you know, any more color on how the $165 cost synergies kind of bucket out across those three? Thank you.
Yeah, we're still working through, you know, finalizing those details. We have them, and we'll communicate them in due time.
Thank you.
Our next question will come from Jeff Sprague with Vertical Research Partners. You may now go ahead.
Hey. Thank you. Good morning, everyone. Hey, first just back to kind of the integration plan here. You know, I just... This looks very different to Pentair, you know, to me, and obviously that's an internal example and a success story, and I understand why you're pointing to it, right? You know, that was clearly a more synergistic combination and a company with a sub-optimized footprint for tax benefits. You know more than me, you know, the work that needed to be done on the footprint there. This does look and feel much different in terms of getting after the synergies.
I wonder if you could just kind of maybe, you know, give us a little more clarity on what's different relative to Pentair and what you need to, you know, maybe proceed more cautiously on, and maybe some of the larger challenges that you're keeping an eye on as you move forward?
Yeah, I'll say a few words and let Ram add color as well. You're right, your observation is keen. The Pentair was a heavy lift on manufacturing and supply chain, on product line rationalization. A lot of that was executed incredibly well and rapidly by the management team, inclusive of course, of Ram and [audio distortion] and others. This is different. This is a company that generates today 68% GPs that at one time were 78 points higher. There are certain opportunities but we have to be, to your point, cautious. It's an engineering company, and the tech and how that advances is critically important.
Bringing best cost opportunities that are additive and incremental in structure in the management processes to deliver commercially viable tech in a timely fashion is very important here. We built a lot of that in and of course, beyond that, it's the channel. It's really an examination of the 35,000 customers. Continuation of some of the work that the team has started already in the transition of channel. That's some of that's underway under Eric's leadership and w e'll continue to look at that. We'll bring some of our learned lessons, which have been very significant over the last eight years that we've been undergoing our channel transformation. I think that will drive significant value as well. Ram?
Yeah, I think you said it well. I think that, you know, to put it simply, I think the levers that we will have to pull will be different, and you are absolutely correct. In terms of valves and controls, we had a core business that we could leverage from. In this case, we wouldn't. I think the cadence around how we have evaluated the opportunities and put it into the right buckets, and more importantly, the deployment of the Emerson Management System to go after the opportunities in a disciplined fashion, that doesn't change. I think that's gonna be very similar to how we approach valves and controls, and whether the levers around the use of our best cost centers for engineering productivity or the tools that we have around commercial excellence to optimize the go-to-market.
Then what's different from valves and controls is some of the costs associated, G&A costs associated with being a public company. I mean, some of those will be, you know, different. Frankly, consolidation around sales offices and facilities, etc , are very similar to valves and controls. So I think there's gonna be some similarities, but a few differences but the deployment of how we go about it utilizing our Emerson Management System remains the same.
Great. Could we just address growth also? You know, I guess the question would be, you know, relative to what you divested, no doubt, right, this is a higher margin business with better growth. I think the 10-year top line CAGR is, you know, 4% or so, and there's a little bit of M&A in there, I think. Just kind of wonder the actual confidence on mid to high-single-digit going forward. You know, what needs to happen to drive that? Is that an organic expectation of what the business can do?
Yeah. You know, we obviously, I think the one thing is if you go back historically, NI has grown at the lower end of the cycle, but the most important thing, it's been very resilient. It hasn't had because of the fragmentation of the customer base, the larger portfolio business. We like the fact that we're protected from the downside risk in terms of down cycle. Now, what's different about NI going forward is they've made some very important bets in markets that have secular tailwinds, particularly EVs, semiconductor test solutions around 5G, Wi-Fi, ultra-wideband, selective opportunities in the A&D cognitive systems and A&D, and we actually like those. Those are a combination of organic initiatives that they are driving through new product development, coupled with strategic acquisitions they've made.
Also, they're building out their software business beyond LabVIEW into test execution software and data analytics software, which is unique and different than this market. We feel that the bets they have made are good bets, and obviously, we wanna come in and accelerate the execution of those bets but the combination of their portfolio business, which provides resilience plus the upside driven by these growth opportunities, we feel very, very good in driving this business in the top end of the 4-7 band that we want for all of Emerson. This platform, we believe, will be at the top end of the 4-7.
Great. Thanks for the perspective. Appreciate it.
Our next question will come from Steve Tusa with JP Morgan. You may now go ahead.
Hi, good morning.
Good morning, Steve.
Congrats on on the deal.
Thanks.
Can you just help level set us a bit further on the baseline EBIT, EBITDA margin assumption? I mean, you gave us the 28. What level do you expect that to be coming in at in FY, you know, in that first year or maybe just what you expect it to be this year. I mean, you mentioned the EBITDA implied, and I'm having a little bit of trouble getting to that number relative to what I see on consensus here. Maybe just what's kind of like the baseline EBITDA number that you're using versus the 28 target?
2022, 15%. Approximately 20% into 2023, and 28% by 2027.
Okay, got it. Then I guess, management had put out a target that said that they could get to 25. I'm not sure if that was an EBIT, EBITDA number or an EBITDA number. I mean, is that, is that a comparable, you know, kind of margin and I guess I'm just wondering, like can you maybe break out, are these synergies over and above what they've been talking about in their plan or is this, you know, your synergies utilize some of what they're talking about?
You know, I think our synergies are over and above what they have in the plan. Obviously we'll need to get into the details of exactly what assumptions they've made in their plan. I think what is key though is the, I think the 25% number that you referenced is. It's the addition of the stock comp.
Got it. Okay. That's not really a similar number and you're gonna account for that differently.
Right. Mm-hmm.
Okay, great. Sorry, just one more for you here. What is the nature of the software sales here, the 20% of software sales? Are there any, you know, value-added services in there at all? Is that, you know, pure software? Where are they in the... Is there any kind of like SaaS journey going on here? Maybe just give us a little bit of color on the software sales.
Yeah. The, the 20%, approximately $300 million is pure software. They have another $125 million-$135 million services business, primarily repair and calibration services that is outside of the software number. So, the 300 is pure software, approximately 20%. They do have a journey, perp to subscription journey that's underway across the different software offerings within their portfolio. I think it's one of the most comprehensive software offerings in the test and measurement space. I mean, obviously the biggest piece is the LabVIEW platform, which is a graphical programming environment, but they are building out a very nice capability and test execution software as well as data analytics software through M&A that they have done. Yeah, it's $300 million of pure software revenue.
Got it. Then one more for Frank, sorry. What is your risk adjusted cost of capital? I think you guys mentioned it, in the slides. What is that number?
In the past, we've said that we're at high single digits, and we've got a return here that will clear our risk adjusted cost of capital.
Great. Thanks a lot for the detail. Appreciate it.
Thank you.
Our last question will come from Joe O'Dea with Wells Fargo. You may now go ahead.
Hi, good morning. I just wanted to touch on the four adjacencies that you've identified. I think you were pretty clear about needing a foundation in test and measurement. As you think about these adjacencies moving forward, you know, how much of the growth opportunity do you think is organic investment? You know, are there any areas that you see where inorganic would still be pretty important to the story?
Hi, Joe. Lal here. Look, I think we have now established a scalable presence in test and measurement, which obviously bleeds into our discrete presence in a very relevant way. We have a very strong industrial software business with AspenTech. As we look at the portfolio today and the mix of the portfolio, we feel really good about it. There's a tremendous amount of organic growth opportunity here, as Ram well described during the call in that 4%-7% range a nd we have to execute. We have to execute to deliver the synergies that we've committed to and to ensure that the value that's there to be had through this cycle is captured with the technology that we can bring to market and engage with our customers. So, v ery excited about that part.
Having said that, we continue to be active in the marketplace. We look at bolt-ons on a monthly basis, if not more frequently. You may see a few things there. Those are really used to augment tech and to expand market and channel and geography. Feel really good about what we've done here and where the portfolio sits and the mix of business as it's more balanced de-risk significant exposures we've had in the past. Now with discrete at 18% of revenue really becomes a relevant part of how the company operates and reacts in different cycles.
Also wanted to touch on the due diligence process. I mean, it had been many months that you had been looking at NI already. You know, just over the eight weeks, and you talked about the extensive due diligence, I mean, what were the, you know, sort of incremental biggest learnings that you had over the course of those efforts?
Well, the most important learning I had is that this is a business with tremendous amount of quality people. For me, that was the most important element that I needed to verify. There's deep knowledge, there's professionalism, and there's willingness to win and work with customers. That element was very attractive. Operations are well run. We're impressed with the plants in Hungary and Malaysia, beautiful plants, clean, well run, great logistical models to serve customers globally. We're looking forward to engaging with this great group of people as we go between now and closing.
Thank you.
This concludes our question and answer session as well as the conference. Thank you for attending today's presentation. You may now disconnect.