Emerson Electric Co Q1 FY2021 Earnings Call

Good day, and welcome to the Emerson First Quarter of 2021 Earnings Conference Call. All participants will be in a listen-only mode. Operator Instructions. After today’s presentation, there will be an opportunity to ask questions. Operator Instructions. 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 first quarter 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 Dellaquila, Senior Executive Vice President and Chief Financial Officer; Jamie Froedge, Executive President of Emerson Commercial & Residential Solutions; and congratulations to Lal Karsanbhai, 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 some recent recognition from customers and the marketplace. First, Emerson's Plantweb Optics analytics software recently received the 2021 IoT Breakthrough Award. Emerson's Plantweb Optics 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 Reader's 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-19 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 million of new restructuring actions. Cash flow was a new first quarter record for the company with operating cash flow of over $800 million and free cash flow of $686 million, up 90% and 121%, respectively. It is important to emphasize that the balance, the end market diversity and the stability of our two-platform business strategy was critical to enabling the strong operational and cash flow outcome. Even on down 2% organic revenue, segment margins grew by 230 basis points to 17.7%. This margin improvement is a strong testament to the consistent operational execution of the global organization throughout the pandemic. Despite lingering uncertainty and demand challenges in many key markets, sales and orders finished ahead of previous guidance. Commercial & Residential Solutions underlying orders remained quite strong, finishing up 15% on a trailing three-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 at down 4.5% and down 2%, respectively. Commercial & Residential Solutions underlying sales was up 12%, while Automation Solutions was down 9%, but improving. Adjusted EPS, which excludes restructuring and first year purchase accounting and fees, was up 24% 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% to $808 million, and free cash flow increased 121% to $686 million. 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 $0.01 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&L. Net sales were flat, and we saw a slight reduction in GP margin, which was driven by volume deleverage and mix. Meanwhile, SG&A as a percentage of sales declined by 310 basis points to 24% as aggressive cost-control actions took effect. EBIT and adjusted EBIT margins, which exclude restructuring and first-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 & Residential Solutions world areas turned 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 a 152% conversion of net earnings. Importantly, trade working capital dropped to 17.8% of 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%, but 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-month underlying orders were down 13%, again reflecting stabilizing and early improvement trends. Geographically, the Americas continued 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 million 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 margins increased 200 basis points and 290 basis points, respectively, as the effects of the ongoing cost actions took hold. Lastly, the platform increased backlog by $600 million, of which $300 million was due to the acquisition of OSI. The ending balance was $5.3 billion. Turning to Slide 14. Commercial & 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, cold 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% in robust HVAC and home products demand, while China was up 17%. Restructuring actions totaled $3 million in the platform and were primarily focused on facility rationalization and optimization programs. Adjusted EBIT and adjusted EBITDA margins were up 230 basis points and up 210 basis points, respectively, reflecting leverage on the increased volume and improved cost base. Finally, backlog in the business increased by approximately $200 million, ending the quarter at nearly $800 million, which is well above normal levels. Please turn to Slide 16, and we will introduce second 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 EPS and adjusted EPS are expected to be $0.83 and $0.89, respectively, plus or minus $0.02. We expect adjusted EBIT margin to be 17.0% to 17.5% 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 & Residential Solutions is expected to grow between 8% and 10%. As you can see, both of these 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 $3.15 billion and $2.55 billion, respectively. There is no other change to the capital allocation outlook. GAAP EPS is expected to be $3.39, plus or minus $0.10; while adjusted EPS is expected to be $3.70, plus or minus $0.10. We have also updated our outlook for profitability headwinds and tailwinds in the year. Since last quarter, we expect that COVID-related savings will now only be down $40 million this year, up from the previous estimate of $70 million. 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 restructuring and COVID-related savings plan. Total company planned restructuring spend remains $200 million for the full fiscal year. As mentioned, we now expect only $40 million of the $150 million 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 million. Total long-term annualized savings of the overall reset restructuring program are expected to exceed $650 million. 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 first quarter earnings call, and I want to thank you very much for the interest in this great company. I'm clearly a little biased, but it is a great company. Second, I want to thank the global leadership team, the executive leadership team and all the employees around the world for executing and delivering a fantastic first quarter for all of our investors. The last 19 months have been hard with a cost reset for peak margins, the downturn in late 2019, the COVID-19 pandemic and a resulting global recession, and now the return to growth. My recognition and applause to all of you is powerful and heartfelt. I want to thank you from my heart for what you've done over the last 19 months. But now we have a new threshold of execution for the second quarter and the full fiscal year. I believe this team will make it happen. They are strong. Third, I want to recognize and congratulate Lal Karsanbhai as the new CEO of Emerson. I'm so proud of you and so excited for you and how you and your new OCE team will take Emerson to new heights as we have done over the last 20 years. When Chuck Knight turned over the reins to me in late 2000, I took a deep breath, paused, smiled, and then moved forward. You're ready and have what it takes to lead Emerson. You have the right stuff, as do all the OCE and global leaders. I'll be your best cheerleader and supporter, and my phone line is always open to you and your team. Pause for a second. Phew. Now, why now? I'm healthy, folks. I'm not sick. Nothing is wrong with me other than my right knee, which is definitely done, so no golf. The knee replacement is on the way. I've already talked to my doctor. The Board's succession plan and process ran its course with many great candidates over the last five years, and I want to thank all of them. They know who they are. A couple could be in this room. I also want to thank Bob Sharp, who is a close friend and really wanted to be CEO of Emerson. As he and I talked, I told him it was not going to happen here, so we decided to figure out how to make it happen somewhere else. I wish him the best of luck. As we went through the first quarter, it was clear to me and the Board that we had one strong, obvious candidate: Lal. The others are great leaders, great individuals, great friends, and have done great things at Emerson, but Lal is the next leader. So we decided. But that's not the only issue. The company is in great shape — the P&L, the balance sheet and the cash flow. As the Finance Committee told Lal this morning, don't mess it 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 is really firm at this point. We've had exceptional execution around the massive cost reset we embarked on back in 2019, a reset that will cost us over $600 million when it's all said and done. The progress is enormous. You've seen it in the margins in the fourth fiscal quarter and in the first quarter. We're going to deliver over $650 million of savings for the company when it's all said and done. The global teams led by Lal, Jamie and Frank are getting the job done. They don't need my help. We are going to continue to deliver. I guarantee you. That's one commitment I made to the Board when I said yes, Lal is the person. The first quarter was strong on all fronts. GAAP sales were flat and underlying sales were only down 2 percent. I believe in the second quarter our GAAP sales will be up, and I think our underlying sales will be up as well, maybe not by a lot, but positive. Profitability was very good, with improving volume and cost out in the first quarter and great incremental margins on both sides. Strong margins, EPS momentum and record first-quarter cash flow of $800 million and free cash flow of $700 million — extremely strong execution on earnings and the balance sheet. We see a solid fiscal year across both platforms in fiscal 2021. Sales will grow this year on both a GAAP and underlying basis. We'll have increased margins, stronger EPS, potentially even reaching the $3.70 we saw in 2019 but with much higher sales in 2019, plus strong cash flow. In my opinion, the number will surpass $3.2 billion, but I'm not the CEO, so he has to live with that number. With order and sales momentum in the second half of 2021 and into 2022, we in the OCE believe we'll finally deliver $4-plus EPS in 2022. Based on the global economic recovery, the momentum we see and the cost reductions, it looks very good, and we'll talk about that on the 16th. The cost reset and the drive to new peak margins in 2022 and 2023 are firmly in place. The entire next-generation team is ready to take the reins and lead Emerson forward. Clearly, even with the COVID-19 vaccine rolling out, we continue to be restrictive in what we can do. We have to operate in a safe environment. The normal Emerson management processes are somewhat different; they're not quite the same. Global travel, live customer engagement, our face-to-face planning conference, which can be intense at times, the organization planning process and the 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 the CEO in this environment, it's basically to take my experience and maturity and help the next team: name the new team, put it in place, get out of their way and help. That's what I'm going to do. I talked to the Board about this. It makes the most sense. Yes, I said 2021, and I even said most likely later in 2021. But with our annual investor conference coming up on the 16th, I think the time is ripe for the new CEO to stand up and present and not have the Dave Farr game that many of you have seen for over 20 years. The February 16 presentation with the next-generation team is very important. I'll be there to help and advise. I care about this company. I'm a big shareholder. It's been my life for 40 years, and I've led it for over 20 years. The time is ripe. I've never believed in long, drawn-out successions. Chuck and I had three days. He gave me the keys and took off. I had to track him down. The team and Lal are ready. So let's move on. Again, my congratulations to Lal and the OCE. If anyone wants to start a 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, sitting here today to help me stay on track. We have pretty good momentum in orders. We laid out boxes; we started this box game when we set our forecast, I think, in April 2020 with Frank, Bob and myself. We actually laid out the box in the first quarter and came in better. The blue dot is where we thought we would be, and we're above that in the upper right-hand corner. Jamie's business has been very strong; he's executing and building backlog. That's one of his challenges — he needs to get that backlog down. Lal's business has turned. It won't be quite as sharp as Jamie's because it's a different business model, but it's turned. 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 percent to plus 6 percent range. We're seeing good momentum in Europe and Asia, good momentum in Jamie's North American business, and some improvement in Lal's business, which I'm sure he'll discuss. So again, very good momentum in orders. As we laid this out, that's how we see it. Jamie's business will flatten out and turn down a bit; he's running at high levels right now, and there's some unique opportunity for growth across his markets. If you look at Slide 21, for growth this year as presented to the Board, we're looking at roughly plus 1 percent to minus 1 percent for the second quarter, depending on how well Jamie can execute on his backlog. He has issues related to capacity, COVID and materials, which we'll talk about. I think Lal's short-term business is beginning to turn up, and we'll review that in detail. Even some of the one-off orders are starting to happen. We have a broad second half. The third quarter will be a spike downward, but the key issue for us is to look at good growth in the second half and the overall business pace going into fiscal 2022. What I want to do now is turn it over to Lal so he can talk about his forecast, his market insights, and then we'll turn it over to Jamie to do the same. Lal, the floor is yours.

Thanks, David. Sorry. It's been an emotional time for a lot of us, Dave, and 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 plan that we laid out for our investors last February that we committed to do, and we're now seeing it reflected in the P&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 highly encouraging. 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 then 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, Steve highlighted growth of 6%. We feel very good about what we've seen there 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. 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 and sales pacing in the second quarter and in the second half of the year as indicated back on Chart 22. Let me turn then to Chart 24, and we'll give a perspective of how we see the world areas first half to second half. And across most of the world, and I can pick out one or two pockets here, we will see that improvement reflected in the environment. That discrete momentum that we've built in Europe and Asia will begin in the Americas, in North America, particularly. And we've seen, as David noted, early signs of distribution-based business recovery as we navigated through December into January. So that's very encouraging to see. I was in Odessa, Texas a few weeks ago. I met with teams and talked about the plans for 3.8 million 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 that market. In Europe, I've talked about it's really been a German story. Our discrete business is up over 30%. Our process business is up over 10% in Germany alone. And that and then there's increased momentum throughout the continent, very pleased with the positive first quarter, and we expect that to continue. And in Asia, the China bounce back was important. That was discrete-driven and process-driven as well. And we feel very good about the funnel of activity that we see as we look out right now. So I feel much better than I did in October, David and team. But and I look forward to a much better outlook in executing in a much better environment as we go forward.

You did feel better once you got the CEO ring.

Well, I feel even better because I've got Jamie. Jamie's rolling.

Yes. Well, I just set you up for a very tough second quarter. So now I think it's very interesting to see. It's too early to talk about January, but you see the analysis around January because I think we are feeling the distribution. We are feeling some semblance of optimism even in the Americas, and you've obviously seen some very good international orders. So I think things are setting up. It doesn't mean it's going to be a perfect straight up. You're going to go here or there; you'll go sideways stepping. But I feel very good about it. Jamie, like you said, you can't be the slowest antelope in the pack when the tiger's out there. Right now, you're not the slowest antelope, but you've got a tiger out there running around. So what do you see happening to your business in the second half?

Yes. 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. Before I jump into that, I just want to say a couple of words because this is a one 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 the 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 for 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 a great friend. So congratulations. 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 business together. I worked 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 I have gotten to know over the years. So congratulations. So with that said, let's jump into the first chart there, Chart 25, that shows the updated outlook for underlying sales for the year. As you can see, you heard throughout the call, the outlook for the year has improved since we last spoke. In November, we were outlooking 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 has 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-month 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 quarter went on. The broad product line and 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 the increase in our outlook for the remainder of the year. So if you go to the next chart, Chart 26. These next two charts look at the business from a product line and then a geographic perspective. First, 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 the residential market and a more moderate second half as, by the fourth quarter, inventory restocking should stabilize. Demand may settle into a pattern closer to historic cycles. However, we do see positive medium- and 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 Cold Chain 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 in December. So even though foodservice is a tough market, coming back slower, we had positive growth in December, double-digit growth in U.S. food retail in the second half of the quarter 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 evolved. Foodservice 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 & Home products was also in the 3% to 6% range. It's now 6% to 9%. Our home products business and tools have been 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 InSinkErator business saw 20% plus trailing 3-month fixed rate orders growth. Again, the residential markets will settle into more moderate growth rates as the year progresses with very strong growth in the 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 of the year, 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, Asia both turned positive in Q1, and general industrial has been steadily improving. Overall, commercial building construction globally will continue to lag the recovery of most of our other served markets. All right. Next chart, Chart 27. Our heating and AC compression business saw 24% plus trailing 3-month Q1 orders growth with exponentially higher growth in residential. Our Q1 U.S. residential heating and AC compression businesses sales grew 69% in the quarter with growth accelerating as the quarter unfolded. We do expect the U.S. residential market to settle into lower growth in the second half for 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 trailing 3-month fixed rate orders due to 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 marketing 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 for the remainder of the year in North America, Europe, China and the Middle East and several smaller markets but a slower recovery in parts of North and 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 would 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 & Residential Solutions team, the whole Emerson team for a tremendous 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. And 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 Dave. Onto you, Dave.

Thank you very much, Jamie. Key issue here is Lal needs you to come through again in the second quarter, you and your team. I know you've 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 clearly got plenty of capacity, but he's moving new facilities out, so he'll have capacity when it comes to '22, '23. 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 they can as you go through this process because we're banking on your strong execution to deliver this year.

Yes.

For the people on phone, I've been very busy in the last two days if you can imagine, Board meetings, shareholder meeting. I received over 500 e-mails and faxes. 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 e-mails, too. It's wide open. And I will have a webcast tomorrow in the morning with Lal, and then I'll start the process and work my way up. You all mean a lot to me. You're my friend. We debate. We don't always agree, but you're all my friends, and I will get back to every single person that has sent me e-mails and faxes over the last two days. I appreciate that. With that, we're going to open the floor for Q&A. I, again, look forward to listening to this Webex or 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. Well, who's going to hit me first?

We will now begin the question-and-answer session. Operator Instructions. Our first question comes from Andy Kaplowitz with Citigroup. Please go ahead.

Good afternoon, guys.

Good afternoon, Andy.

Good afternoon.

Dave, I know I speak 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 of Dave.

He isn't taking my Rally Monkey or my rally ferret. Those are going home with me.

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 that same distribution begins to ramp up. So your orders suggest maybe that you're seeing a little bit of that in Automation Solutions, but maybe you could 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 the phrase that CEOs in the capital industrial world are opening up. They're talking about spending money around bringing lines back up, being — 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, where there's not enough capacity, and we know they're going to have to start spending money around steel, iron ore, mining, copper, plastics, all these things. So what Lal's guys are hearing and we've been hearing 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 — Lal's seeing it. Where I really, really, really want to see it is the U.S.A. And — but I guarantee you Jamie's customers, his facilities, all need capital, and Lal's the one who is going to make it for him. 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. They're ordering product. I think that Professional Tools will be the same way.

Yes.

That's good to hear, Dave. And then at the risk of front-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 at Q1, you obviously improved adjusted EBIT by 200 basis points despite the decline in revenue. So as the segment improves, should you be capable of delivering over that mid-30% 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.

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 us in the marketplace and allow those participation gains that we always 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 two or three quarters, the way Lal's business will unfold, he's going to have his earlier-cycle businesses. Those are all his higher-margin businesses. And so if you think about D&I, you think about measurement and instrumentation, you think about those flow businesses. Those are better-margin business. That's what's going to come back for him first. So 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 KOB1-type projects coming in for, what, 12, 18 months. So I think that as he goes into 2022, my gut tells me he's going to have strong double-digit orders going into 2022 in the fourth quarter. The question will be is the execution of the plans ready, has he got the moves done. And I think he's set up for a very good first half of 2022 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.

Congrats again, guys. Good luck, Dave.

Andy, thank you very much.

The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.

Thanks. Good afternoon, everybody.

Good afternoon, Joe.

Dave, you're going to be missed. I 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 a walking dude and laughed earlier when he came up in his truck, he said, what are you guys doing in the neighborhood? I said, I’m not going to knock on doors and ask to help you do things like fix the air conditioning, the concrete work, so a lot of my neighborhood just think about, I need to move. Okay, Joe, let’s get back to you.

All right. Well, Lal, congratulations as well.

Thank you.

Maybe my first question, Lal. 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 a clean slate. 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 the organization?

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 and the guidance that we've put out for the year. The 16th of 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 second half and compare it to what we saw in 2020, clearly, like you have your easiest comp in the third quarter. And I recognize that things have been kind of white hot for you guys in the first half of this fiscal year. But 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 a 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 third quarter. And so by the time you get to the fourth, which you've got a tougher comp. We started to see growth come back towards the end of last fourth quarter. So it's a different comp you're chasing and could the residential markets go flat, even slightly down, slightly positive in that range. So I think it — we see the Professional Tools businesses doing very well in the second half, both in terms of comps but also just demand improvement. Cold Chain is going to be steady throughout the year. So it's really a residential story. If residential has another wave here and stays 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. They could then it could extend. We could have upside. But it's too early to tell. And so that's going to be the key thing.

The next question comes from Steve Tusa with JPMorgan.

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 onto the results, which were pretty good. The second quarter guidance, I think, for AS 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, initial look at it, you're right. It's probably flat because of FX, foreign exchange, the delta there. And the question is also just a mix of business as Lal gets the — does he get the U.S. business coming in. Until we see that, really, as we know that the 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 of we've got to get some of that early-turn cycle business. And so if he did see that happening in January, he should be able to do well in that second quarter. So probably a little cautious more than anything else and the currency impact from that perspective, Steve. But you're right in your analysis as always. And we'll see. Hopefully, it has a better quarter.

Yes. We're watching our later-cycle businesses very carefully. Those will lag Final Control, which are the project-based businesses, which had good and lag coming into the down cycle. So those will come in a little bit later.

And how much revenue will OSI contribute this year?

The Board plan, I can tell you what that is. It's around $180 million in sales.

Hopefully, it gets to $200 million.

We have a real shot.

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 something 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?

I think that — did we give the individual margins up for the guys? No. So Steve, what you're seeing is Lal's business will have good second quarter margins. The big issue that Jamie has now got to override is the price cost as 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 first quarter. And now his team is working, scrambling hard to figure out how to offset that. So if we get good news there, then he'll be better than the margins in the second quarter, but he's the one that's going to be struggling when it comes to margins because of the material costs. And Lal — I think Lal will have a good second quarter. I don't see the automation business having major issues.

And then one last one for you, Dave. I know you had kind of a tough ride in your first year as CEO. You had to kind of 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 6 months from now?

I think we have a better feel for what's going on right now, and I don't see a dot-com bust. So I feel comfortable. I don't think that we're — I'm not setting Lal up for that famous phone call to you guys.

No SPAC bubbles.

Steve, you're such an optimist. Thank you.

One thing I want to follow up with Dave is you're absolutely right, what we're facing. But I didn't want to — for all those on the call, this is — we've seen 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 have experienced. However, we're confident that, throughout this year, as we go into early part of next year, the relationships we have with our customers, the contracts we have with our customers in regards to price and MI, 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 have very much in focus how this tends to play out in regards to the price and MI situation. So there'll be months where it's a little rocky as we chase things. There will other months that are fantastic as it flows through.

The next question comes from Andrew Obin with Bank of America.

Thank you, Dave. And Lal, congratulations.

Thank you. Thank you, Andrew.

So the question sort of maybe goes a little bit into what you guys are going to talk at the Analyst Day. But with Democratic control of the Senate, has the tone of the conversations with your customers regarding green opportunities 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 two hours with the Board today on this very topic because we've been working on it. The Board knows we have 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' businesses are very much involved in this whole ESG, around the sustainability and renewable stuff. We are very relevant in the space, Andrew. Go ahead, Lal.

Yes. And you're right, Andrew. This is thematic for us in 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 as Emerson. 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 the greening with Emerson. So it's a 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 two years, David, we've had a number of individuals around the world working there specifically. So I'm excited to share that with you on the 16th as is Jamie.

We're going to have a dedicated section on it, Andrew.

Now so 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 the greening with Emerson. So it's a 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 two years, David, we've had a number of individuals around the world working there specifically. So I'm excited to share that with you on the 16th as is Jamie.

I would say, in alternative energies, Andrew, we have a tremendous start in sight. I think we had the core technologies. We're going to have to create some new technology solutions, both internally and externally, but we have the credibility with our customer base on 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 and 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 refrigerant 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 so strong. So why don't you, Jamie?

I think in general, it's a broader political topic around regulations. If you just look at how it could impact our markets, when there is a clear regulation that gets put in place, 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 its efficiency targets or its emissions targets, etc. So generally speaking, it's good for our business because we're delivering compression solutions that have better efficiency, that 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, 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 low-GWP refrigerants.

In Lal's business, the automation business, our European team really pushes because they're not big oil refining business. We saw some push out of Asia when Jamie was in Asia, but the European one got it started about 2 years ago. And now with the 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 you. We're a combination of doing it ourselves but also working with our customers and helping everyone reach these goals. But I'm pretty excited about this in automation and in commercial. And we have a unique situation for the next 5, 10, 15 years in the space. So I feel good about it.

It sounds like you guys are going to have quite a bit to say about it at the Analyst Day. A follow-up question on software. I think you have sort of multiple definitions of software. But the stand-alone software, I think it's like $1.1 billion. 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?

We continue to see in that high single-digit range, Andrew, as we spoke about in the past. That seems to be consistent through Q1 and what we expect for the year. And again, it is driven by a lot of work in life sciences. There's opportunities in the electrification grid you talked about and in core discrete and process as well.

I think there'll 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 and also through acquisitions. But we have a good foothold in this right now. And it's really having a — it's going to be a key part of what we're doing around sustainability, because it's not only doing it with the compression but using electronics and software. Same thing with a lot of software for Lal's business too.

When you start rolling out A2L refrigerants, low-GWP refrigerants, they're going to require — it will be legal requirements around what sensing you have to have, how often you have to monitor, how you have to remediate it 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 the data, and it's a huge opportunity for our business.

Andrew, so we have a lot to say, but we only have so much time. But we'll cover it at the Investor Day.

The next question comes from Jeff Sprague with Vertical Research.

Dave, congrats. We're really going to miss you. You're like the last of the Mohicans. You know that, right? I mean, Dave, I was wondering if you could address for us again, as all this succession was culminating, to what degree, if any, did kind of the discussion about, hey, maybe naming two 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 cons in your mind?

We went through that process back in 2019. As we took the Board through for the June through the end-of-year period and we looked at the analysis of the two platforms, the strategic rationale around the two platforms, that was obviously on the table at that point in time. The Board hired outside help relative to these two issues. Their opinion and working with outside help, it was very clear and we fundamentally believe there's more value in the combined basis than separating the two businesses. The logic was around the investments we see going relative to ESG, sustainability, software, what we see happening globally now. That work was done in mid- to late 2019. The Board made a decision. And as we went through these last many months, the Board did not revisit that at this point in time. They made that decision a while back, and that's where it sits. And I fundamentally believe that will constantly be on 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 move into another. That's what's made Emerson unique. Over the 40 years I've been around, the company has transformed many times. So that's how we look at it. We don't look at status quo.

I was also wondering, you've obviously worked extraordinarily hard to get costs out through this restructuring. When we think about these COVID-related temporary savings, only $40 million of which are coming back, how much of that total $150 million do you think does come back? It sounds like you're working hard to really mitigate that even looking into 2022.

You're going to have — it's going to be really hard to measure because by the time we get to 2022, the business is growing again. So I would say it's not 100% coming back, but it's also not only 50%. I've always felt that we'll probably be somewhere around 80% coming back over time and 20% we've learned from a different process. But it's really what happens and what businesses grow. We've learned a lot over the last year.

The next question comes from John Walsh with Crédit Suisse.

A thank you to you, Dave, and a congratulations to Lal.

Thanks, John.

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.

Fundamentally, we're starting to report on our software sales. We're in the early stages of how we measure it. The columns and the auditors will look at it, and we want to make sure we understand it exactly so we can measure it. A lot of companies don't worry about those things, but Emerson does worry about the integrity around the number. 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 that is, you know what it is, and you can measure it.

No change to channel, no change to reporting just from that perspective. We're going to start giving some more insights around software.

Great. And then on the free cash flow guidance, 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. I just wanted to understand the dynamic there a little bit.

Yes. What we see happening in the third and fourth quarter is growth will be pretty strong. Jamie has a unique situation where his comparison to the third quarter is really easy so he could spike. The other issue is Jamie's business shipped using all the inventory it could and got paid and maybe not paid all suppliers on the payable side. He's in a situation where trade working capital as a percent of sales is extremely low. We know some of that will reverse as his business starts slowing down in certain areas. So we want to be cautious estimating how much was that cash pull-in because of working capital, but it was a very good quarter on earnings and execution. If we get a better feel in the second quarter on the cash, we wouldn't be surprised if we tweak it up a little higher, but we're being careful right now.

The next question comes from Gautam Khanna with Cowen.

Congratulations. Congrats on the great run, Dave. And congrats to Lal, and best of luck.

Thank you.

I was going to ask — HVAC OEMs talk a lot about indoor air quality and that being a potential driver, especially in the 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?

We do. Some of it is direct, and some of it's indirect. Indirectly, as the OEMs work with different folks and they may put a broader air quality solution in place, it will often include an upgrade or a change out to the core compression solution. I think the other piece around air quality is that tight humidity control would be a big component of that. Our 7ac business that we just bought, we invested in early stage, then we bought it out, and now we're commercializing it. It is a business that is 30% to 35% more energy efficient at providing very tight humidity bands for the air handling space for, initially, commercial buildings, for example. 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. Already, we see a lift from it today.

The key issue is that as states put in controls and monitoring and some justification of where systems sit, which will be sensing software based, that's where we're going to be playing. Efficiency and air quality and comfort do play for us, and I like that game for us.

We always talk about automation. We work in that business close, and we have a closed loop between control system and our final control element or measurement element. If you think about the air quality space, fundamentally, it's moving in that direction. You've got to close the loop between the monitoring, the electronics, the controls, humidification, particulate management. 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. There are partnerships that you can have around those other pieces to close the loop and build a full solution. We'll talk more about it in a couple of weeks, but we're very active in that space, and I think we'll do more there going forward.

Second question for Automation Solutions. The order comparisons get a lot easier come May and June when you're comping down 13%, down 19% in orders. What is the right expectation? Are we going to see a bigger snapback in the absence of KOB1 kicking in where we could see a double-digit month or two or three as we get to the third quarter or the fourth quarter?

Gautam, your assumption is right. We should not expect KOB1 activity for the next 12 to 18 months. I don't foresee that. More significant, KOB2; and obviously, what we've been living on, KOB3, certainly. The snapback is fully dependent on what happens in North America. Period. End of story. That will measure the dimension of how quickly it comes back and how hard that snapback is.

We're trying to be cautious, but watch the order pattern these guys put out because we're not going to stop that.

The final question comes from Josh Pokrzywinski with Morgan Stanley.

Dave, it's been a pleasure. Enjoy retirement. Lal, congratulations and good luck. If I look at Automation Solutions, it looks like for the second half the range got a little wider and maybe a little bit lower. I know you both talked about KOB3 and 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 that KOB3 process bucket?

I'll give my answer. These guys have had a couple of good quarters. They're still negative. They've been cautious relative to taking the back end up. I think they're being cautious because we have not seen the pure whites of the eye relative to that U.S. recovery. If we get a month or two where we see consistent KOB3, KOB2 type of ordering in the U.S.A. like we've been seeing in Asia and Europe, I think they'll get more comfortable about the volume and profit coming in. That's my impression. They don't want to overpromise.

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.

In the month of January, it will land somewhere between $40 million and $43 million a day in orders, somewhere in that range.

So that's a good number. That means he's coming back. So I think he's gaining — everything's holding that we talked about from the standpoint. Now he just wants to see a couple of months of that continue. You saw early signs in December. If January gets the details, we want to analyze the details. Early in the first half of February, he gets into the investor conference, then I think he's going to say, okay, it's definitely taking hold firmly.

Got it. That's helpful. And then going to the longer cycle end of the equation, the longer projects that got shelved with COVID, do those come back off the shelf? Do we like the slate clean, start over given that the world has changed so much? What are you hearing? Do we have a scenario where those come off plus new post-COVID projects?

I'll give you quick color. The funnel sits at about $6.5 billion. It really has not changed appreciably for the last three months. What happened within that funnel, a number of cancellations were replaced by a high number of smaller jobs — quicker paybacks, those types of things. In addition, we now have about a $1.6 billion electrification project funnel, which OSI brought to us. So that's in addition to the $6.4 billion KOB1 funnel 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 forward. It's just a matter of time around demand.

From my perspective, customers will recut projects differently. There will be discipline around spending capital they've learned. Projects are good and will move forward, but they might be smaller or in different configurations. It will be a process through late '21 and early '22. Lal's team has a lot of repositioning work in their facilities. They've 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 world area markets going, he's got to get those new facilities up and running.

To your point, David, if your project was a bottom-of-the-barrel type of refinery project, that got scrapped. If your project is a conversion to a biofuel refinery, those projects are moving forward. There are many active in the United States and Europe, and we're very engaged in those processes.

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. I truly appreciate what people send to me in faxes and e-mails, and I look forward to seeing all of you. I truly appreciate everything you've done for me over the years and keep me straight, keep me honest and challenge me and disagree with me. I love that. Take care. Bye.

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