Good day and welcome to the Emerson Fourth Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would like to turn the conference over to Colleen Mettler, please go ahead.

Thank you. Good morning and thank you for joining Emerson's fourth quarter and fiscal year-end Earnings Conference Call. Today, I am joined by President and Chief Executive Officer, Lal Karsanbhai, Chief Financial Officer, Frank Dellaquila, and Chief Operating Officer, Ram Krishnan. I encourage everyone to follow along with the slide presentation, which is available on our website. Please join me on Slide Q. As always, this presentation may include forward-looking statements which contain a degree of business risks and uncertainties. Please take time to read the safe harbor statement and note on non-GAAP measures. As I turn to Slide 3, I would like to highlight two areas where Emerson is making a difference. First, Mike Train, our Chief Sustainability Officer, will be attending this year's United Nations Climate Change Conference in Glasgow. Mike will be a panelist at the Adjacent Sustainable Innovation forum, participating in two notable discussions. The first discussion will be about how to support small to medium enterprises to adopt net-zero pathways, and the second on supporting breakthrough innovation to green hard to abate sectors. Mike has worked this year to drive many greening initiatives, notably the recent announcement between BayoTech and Emerson to accelerate the production and distribution of low-cost, low-carbon hydrogen. In this agreement, Emerson will deliver advanced automation technology, software, and products, and support BayoTech in building hundreds of fully autonomous hydrogen units to enable hydrogen fuel cell commercial trucking fleet and abatement projects in steel and cement. Another exciting initiative is our $100 million commitment to corporate venture capital, Emerson Ventures, designed to accelerate innovation by providing insights into cutting-edge technology that has the potential to solve real customer challenges. This investment commitment will advance the development of disruptive discrete automation solutions, environmentally sustainable technologies, and industrial software in key industries. A formal announcement and more information will be shared in tomorrow's press release. Finally, our investor conference historically has been in February. However, due to the recent announcement with AspenTech, we have decided to move our investor conference to May. It will occur at the New York Stock Exchange on May 17th, 2022. I'd like to now turn the presentation over to Emerson's President and CEO, Lal Karsanbhai for his opening comments.

Thank you, Colleen, and good morning, everyone. 2021 was a phenomenal year for Emerson. It developed very differently than we planned a year ago. For one, I was named CEO and brought a new value creation agenda to the table. But equally important, we operated in an environment that was both rewarding and challenging for the organization. Through it all, our teams around the world did a fabulous job. I want to express my sincere gratitude to all the Emerson employees around the world. Thank you. I would also like to thank Emerson's Board of Directors and our shareholders for your support and confidence in the management team. 2021 was characterized by strong demand in our Residential Air Conditioning business, as well as our hybrid and discrete markets in Automation. Furthermore, we have experienced a recovery in Process Automation markets. The automation KOB3 mix for 2021 was up two points to 59%. And Emerson's September three-month trailing orders were up 16%. We grew 5.3% underlying and leveraged at 38% operationally, inclusive of a $140 million swing in our price cost assumptions from November through the end of the fiscal year. The earnings quality of this company continues to be excellent, with free cash flow conversion of 129%. However, the fourth quarter was significantly challenged by supply chain, logistics, and labor issues. This was experienced in the form of material cost inflation, notably steel, electronics, and resins, as well as lead time extensions. Additionally, we faced logistics challenges, unavailability of containers and costs, and lastly, U.S. manufacturing labor was characterized by higher turnover rates, absenteeism, and overtime costs. In the quarter, we missed sales by $175 million, and alongside the challenging price cost environment in our climate business, it resulted in a negative $0.14 impact to EPS for the quarter and a negative $0.19 impact to 2021 EPS. Having said that, the company grew 7% in the fourth quarter and achieved 19% operating leverage. Looking ahead to '22, some initial thoughts. The first half of the year will not resemble the fourth quarter, with slight sequential improvement as we go to Q2. Price cost and supply chain challenges are expected to unwind in the second half of the year, against a backdrop of continued strong demand. The price cost assumption in the year will be a positive $100 million for 2022. I'm very optimistic for 2022. The operating environment has unpredictability, but it is significantly more stable than a year ago, and demand is much stronger. The residential AC cycle will moderate as we proceed through 2022. However, we expect automation markets to continue to strengthen, driven by digital transformation and modernization, replacement in MRO markets, and select LNG and sustainability-driven KOB1. Most notably, methane emissions reduction projects and carbon capture. I am confident that we will deliver 30% incremental growth on our underlying sales in 2022. This addresses execution and, as you know, that's one of the three pillars we identified as a management team for accelerated value creation. We have also taken significant steps in our journey to modernize our culture and advanced ESG initiatives. The board named James Turley as the Company's independent Chair of the Board. We appointed Mike Train as the Company's first Chief Sustainability Officer, and we hired Elizabeth Adefioye as Emerson's first Chief People Officer. I'm very proud of the diversity targets we set for the enterprise. The changes to our long-term compensation and annual bonus structure to include ESG measures are noteworthy, as are the commitments we have made to accelerate greenhouse gas intensity reductions. Lastly, with respect to the portfolio, we recently concluded a comprehensive portfolio review, which culminated in a two-day session with our Board of Directors in early October. We left the meeting with a defined portfolio roadmap and pathways. The key elements were as follows: firstly, in terms of the portfolio today and how we're thinking about it, diversification is critical. We will continue to divest upstream oil and gas hardware assets. Secondly, we will address low growth or commoditized businesses, and lastly, we will work on disconnected assets. All three of these actions will take place over time, with intentionality, patience, and a keen awareness of cycles and adherence to the value creation proposition for our shareholders. Secondly, we identified four large, profitable, high-growth end markets, each with at least $20 billion in size and projected to grow over 4% annually in the future supported by macro trends. These four end markets will be the hunting ground for our M&A activity. Lastly, we defined two possible end states for the portfolio in the journey that we will embark on. One of these four markets is Industrial Software: a $60 billion segment that we identified as growing at 9%. The AspenTech transaction is an exciting step for Emerson and a very important transformational step for this corporation. AspenTech is one of the best-run industrial software companies in the space, with highly differentiated technology and a phenomenal leadership team led by Antonio Pietri, for whom I have the greatest admiration. The AspenTech Company will be a highly diversified business, with transmission and distribution as its largest served markets and uniquely positioned to enable our energy customers to transition to a lower carbon future. I'm optimistic about the synergy opportunities that exist and believe the new AspenTech, which will be 55% owned by Emerson shareholders, will be a distinct platform for future industrial software M&A. I'm very excited about this, as I hope you can tell. We expect to close the transaction in the second quarter of 2022 following the completion and approval of the customary regulatory items. With that, I will now turn the call over to Frank Dellaquila, Emerson's Chief Financial Officer.

Thank you, Lal, and good morning, everyone. Please turn to Slide 6, if you would. We're really pleased with the financial results for fiscal 2021. As Lal said, we ended the year with a great deal of uncertainty and far exceeded the expectations we had at the beginning of the year. The underlying demand environment developed as much as we thought it would, with continued strength in global discrete and hybrid automation markets and North American process markets gaining momentum later in the year. Global demand in our commercial residential markets were strong and broad-based, particularly in the U.S. residential air conditioning market, far exceeding our expectations going into the year. Our operations teams successfully worked through supply chain issues, particularly towards the end of the year, to deliver the strong results that we are reporting today. Towards the end of the year, the combination of rising material costs, supply chain challenges, and labor constraints in the U.S. began to weigh on sales volume and profitability. We've worked through that in the fourth quarter, and we will continue to address these challenges in the first half of fiscal 2022. Despite these fourth-quarter challenges, we're pleased to report that we met the key financial targets we committed to you in August regarding underlying growth, adjusted EBITDA margin, adjusted earnings per share, and cash flow. You can see all that in the table. This was achieved in the face of an unexpected increase in key raw materials, mainly steel and copper, resulting in an unfavorable price cost swing of $140 million during the year compared to our previous guidance. We're grateful for the extraordinary effort of our operations teams at every level and the manufacturing employees who made this happen under some of the most challenging conditions we have faced. Please turn to Slide 7. This slide highlights our strong 2021 results. The continued recovery in our end markets drove strong full-year underlying growth of more than 5%, net sales were up 9% year-over-year, including a one-point impact from acquisitions, mainly OSI, which closed at the beginning of the fiscal year. Adjusted segment EBITDA benefited from strong leverage and operations, achieving 38% as well. Adjusted EBITDA from underlying volume along with benefits from cost-reduction actions initiated two years ago helped to offset the price cost headwinds, which amounted to $140 million compared to our expectations at the beginning of the year, along with supply chain challenges that raised costs and reduced availability. Cash flow was robust, up 18% year-over-year attributable to strong earnings growth and working capital efficiency. Free cash flow conversion of net earnings was 129%. Adjusted earnings per share was $4.10, exceeding our guidance by $0.03 at the midpoint and up 19% for the year. The Automation Solutions underlying growth was flat year-over-year. Growth turned positive in the second half, driven by strong discrete and hybrid markets, while the later Cycle Process Automation markets delivered sequential improvement as we moved through the year. Adjusted EBITDA increased 230 basis points due to strong leverage driven by the benefits of cost resets. Commercial and Residential saw exceptional growth of 16% underlying year-over-year due to broad strength across the Residential and Commercial markets with mid-teens growth in all world areas. Adjusted EBITDA increased 20 basis points versus the prior year. Price cost headwinds worsened in the second half, particularly in the fourth quarter, as we anticipated on the call in August, but were offset for the full year by strong underlying leverage and spending restraints. Please turn to Slide 8. Operational performance was strong throughout the year, adding $0.59 to adjusted EPS, overcoming a $0.19 headwind from supply chain issues and $90 million of unfavorable price costs. Operations were leveraged at more than 35% on volume and cost actions. Non-operating items contributed $0.02 net, overcoming a significant headwind from the stock comp mark-to-market accounting. Share repurchase totaled $500 million as we guided, adding about $0.03. In total, adjusted EPS was $4.10, which reflects an increase of 19%. Please turn to Slide 9. Regarding the fourth quarter, strong end market demand drove underlying growth of 7%, with net sales up 9%. This growth was achieved despite a $175 million impact from supply chain, logistics, and labor constraints that affected both platforms in somewhat different ways. Adjusted segment EBITDA dropped 10 basis points, reflecting a 200 basis point impact from supply chain volume constraints across the company and from the increasingly negative price cost headwinds in commercial and residential. Free cash flow declined 39%, mainly due to higher working capital to support growth versus the prior year. Adjusted earnings per share was $1.21, exceeding the guidance midpoint by $0.03, and up 10% from the prior year. Automation Solutions' underlying sales were up 3%, with strong recovery in the Americas, particularly in the power generation and chemical markets, partially offset by declines in other world areas. Sales were reduced by about $125 million, or 4 points, due to supply chain constraints. Our backlog was up 16% year-to-date and now sits at $5.4 billion, or $100 million less than at the end of the third quarter. Typically, our backlog would reduce more in Q4. However, due to strong orders and supply chain constraints, backlog remained elevated above the levels we would otherwise have expected. Strong leverage and cost reductions drove a 170 basis point improvement in adjusted EBITDA. Commercial and residential underlying sales increased 13%, driven by continued strength in North America residential HVAC and home products, as well as heat pump demand in Europe. Sales were reduced by about $50 million, or 3 points, due to supply chain constraints, which, together with sharply increasing material cost headwinds were expected but perhaps a little worse than anticipated in August, resulted in a 340 basis points decline in adjusted EBITDA. With that, I'm going to turn it over to Ram to provide color around the price cost and some of the other operational issues that we are dealing with.

Thank you, Frank. Please turn to Slide 10. Clearly, as you can see, the operating environment is a challenge, as commodity inflation, electronics supply, logistics constraints, and labor availability continue to impact our global operations. Net material inflation headwinds accelerated through fiscal 2021, primarily driven by steel prices, with the majority of the impact being felt by our Climate Technologies business. North American cold-rolled steel pricing increased once again in October, extending the streak of monthly price increases to 14 months. However, the magnitude of the increases have declined in recent months, and more importantly, hot-rolled steel prices dropped around $20 a ton in October, a positive sign for us. We anticipate steel prices to start to flatten out over the next few months, and net material inflation to peak in the first half of fiscal '22. We continue to stay focused and diligent on our pricing plans by executing on our contractual material pass-through agreements, surcharges for freight, and more aggressive annual general price increases. We remain confident that price cost will turn green and become a strong positive for the second half of fiscal '22. Our current plans indicate that price cost will be approximately a $100 million tailwind for the fiscal year. Turning to the next slide. On the commodity front, while steel prices are at elevated levels today, as I mentioned earlier, they are showing some signs of flattening, providing optimism that we will see North American cold-rolled steel prices start to decline in the coming months. Plastic resin prices have remained elevated due to high price inelastic demand and weather-related supply challenges. Copper prices have also surged as of late, but our hedge positions will dampen the impact for the fiscal year. While COVID-related restrictions are improving in Southeast Asia, capacity at key electronics suppliers remains constrained. Several key component suppliers have extended lead times and pushed out delivery forecasts, increasing shortages and decommits from our EMS suppliers. Furthermore, we're closely watching the impact of industrial power outages in China, which have become common at manufacturers, leading to an increase in silicon prices. For us, electronic shortages are impacting multiple business units across both platforms, and supply is expected to remain a challenge into fiscal 2022. Extended logistics lead times, particularly on ocean freight, have impacted our global operations. Port congestion in the U.S. and weather and COVID-related disruptions in China are key drivers. These dynamics highlight the critical nature of regionalization, even on lower variation parts and components. The work we've done over the past several years to regionalize certainly proves the importance of this strategy. This is exemplified by several of our businesses, which have strong regional supply bases that have performed well and avoided expensive air freight and significant expediting costs. Finally, hiring and retention challenges continue in many of our U.S. plants, predominantly in the Midwest, where competition for available labor is intense. High levels of turnover and absenteeism in these locations have impacted productivity and increased overtime. Despite the unprecedented challenges, our supply chain and operations teams have worked tirelessly to meet the needs of our global customers. Many creative solutions are being implemented on a real-time basis to ensure continuity of material supply to our global plants and availability of freight lines to meet our shipping commitments. Our teams have leveraged strong supplier relationships, utilized alternative sources, and stepped in to assist our suppliers where needed. Our regional manufacturing footprint and the enhanced resiliency of our supply network through multi-sourcing that we have developed over the years have certainly given us an advantage in these challenging times. Accelerated actions around hiring and production shifts to plants with stable workforces have ensured that we continue to meet our customers' needs. Many of our global plants are producing at record levels, as our disciplined investments in factory automation have unlocked additional capacity to overcome labor availability challenges. Finally, I want to sincerely thank our global teams for delivering an outstanding operational year. With that, I'll turn it over to Lal to walk through our fiscal '22 outlook.

Thanks, Ram. Let's please turn to Slide 14, and I'll give the team some context on the current environment. As we look forward to 2022, demand continues to be strong across both platforms. The trailing three-month orders for automation solutions were up 20% versus the prior year, driven by ongoing automation investments in discrete and hybrid markets. We believe this will continue into 2022, alongside a strengthening process automation spend. While KOB2 and KOB3 drove most of the orders growth in 2021, new infrastructure bookings for LNG and decarbonization initiatives are expected to improve through 2022, providing further upside. Increased site access will drive increased walk-down and shutdown turnaround activity in the business. To give you some perspective, walk-downs in 2021 increased by 50% year-over-year, with more than 5,000 occurring globally, with each walk-down driving significant KOB3 pull-through. Shutdown turnaround bookings were up 10% year-over-year driven by a strong spring season extending into the early summer. In 2022, we expect shutdown turnaround outage activity to be up mid-single digits, led by chemicals and refining, leading to high single-digit bookings growth. In terms of Commercial Residential Solutions, U.S. and European order rates continue to be strong as we enter 2022, while Asia has begun to moderate. Overall, the three-month orders were up 9% in September. Looking further into 2022, many of our key Climate Technology markets will continue to have momentum, including aftermarket refrigeration, commercial HVAC, food retail and food service, driven by new store builds and quick-service restaurants, along with residential needs. Turning to Slide 15, looking ahead to 2022, we anticipate a year characterized by strong underlying demand and an improving operating environment. The late cycle process automation business will continue its recovery with mid-single-digit annual growth. Meanwhile, discrete and hybrid momentum will endure, with high-single-digit to mid-single-digit growth anticipated, respectively. The growth in residential markets will moderate as demand stabilizes, but improving commercial and industrial environments will benefit Commercial Residential Solutions. Decarbonization and sustainability projects will provide further growth opportunities as budgets get allocated towards these initiatives. Based on this macro landscape, we continue to expect strong demand in 2022. Supply chain and price cost headwinds will persist through the first half, impacting first quarter leverage, while returning to significant tailwinds in the second half, and resulting in a net positive for the year. The team has accomplished a significant amount of work through restructuring programs. Emerson's 2021 adjusted EBITDA of 23.1% surpassed our previous record. Over 90% of our restructuring spend communicated in our Investor conference is complete, and over 70% of the savings have been realized, with remaining long-term facility projects yet to be completed. Great work all around. Turning to Slide 16 and discussing guidance, given this landscape, we expect underlying sales growth of 6% to 8% in 2022 and net sales growth of 4% to 6%. Underlying sales growth for Automation Solutions will be 6% to 8%, while Commercial and Residential Solutions will range between 6% and 9%. As Ram discussed, we expect a price cost tailwind for the year of approximately $100 million. $150 million of restructuring activities includes minimal remaining spend on our cost reset program and additional programs identified and planned for the fiscal year. Historically, our adjusted EPS excludes restructuring and other items like first-year purchase accounting in the calculation. Looking at the 2021 column of the bridge to the right, our prior adjusted EPS of $4.10 increases to $4.51 when removing the impact of intangibles and amortization expenses of $0.41. For 2022, the amortization expense is expected to be approximately $0.42, which will drive our adjusted EPS to between $4.82 and $4.97. Additional details on the calculation are provided in the appendix, as well as the accounting tables in the press release. Please note that our guidance does not include the impact of the AspenTech transaction, which is expected to close in the second quarter of calendar year 2022. Moving to Slide 17, we expect the first quarter of 2022 will see underlying sales growth of 7% to 9%, with broad underlying strength across Automation Solutions and Commercial Residential Solutions. Automation Solutions is expected to experience underlying sales growth in the mid to high single-digits, while Commercial and Residential Solutions will see underlying sales growth in the high single-digits to low double-digit range. Adjusted EPS is anticipated to be between $0.98 and $1.02. Amortization for the quarter is expected to be roughly $0.10. With that, I will turn the call back over to Colleen Mettler. Thank you.

Thank you, Lal. We will now turn the call to the operator to begin the Q&A portion of our call.

We will now begin the question-and-answer session. The first question is from Andy Kaplowitz with Citigroup. Please go ahead.

Hey, good morning, guys.

Good morning, Andy.

Good morning, Andy.

Well, maybe you could give us a little more color into how you're thinking about orders play out in FY22. Obviously, a nice recovery is continued in Automation Solutions, but you mentioned that you think KOB1 bookings could come in LNG and Decarbonization. When do you see those types of projects hitting? And could they help maintain bookings growth at current levels as comps begin to get more difficult over the next few months? And then in C&RS, it's held up obviously very well despite Asia moderating a bit. So maybe more color into what you expect there.

No, I think the environment is positive, starting with Automation. The strength in the Process Automation sector is expected to persist throughout the year. Honestly, the uncertainty surrounding $100 oil and the observed restraint in U.S. shale, along with OPEC's discipline, will free up substantial capacity. This is especially relevant for NLCs and some of the larger integrated companies to advance various programs driving decarbonization initiatives. We've already observed this with several flaring projects in the U.S., and carbon capture projects are also accelerating, which makes me highly optimistic. On the LNG front, we are actively pursuing two major programs likely to be awarded in the second half of the year: the Baltic LNG investment and the Qatar North field expansion. Both of these projects represent significant capacity additions and investments in automation. In the commercial and residential sectors, I expect the residential air conditioning market to moderate over the year; however, it will be supported by strong commercial demand, which is important for us. Therefore, I anticipate a mixed outlook in the Commercial Residential sector due to the moderation in residential air conditioning.

Well that's helpful, man. Obviously, one of the main concerns that we've heard from investors post the announcement of your deal is that Emerson instead of diversifying actually doubled down on oil and gas. So I'm sure you anticipated that concern. So maybe you could address it head on, Lal. Ultimately, I know you think industrial software is a different market; you said that in your prepared remarks. But is your view that you believe AspenTech gives you the best chance of hitting or exceeding the long-term guidance you gave us earlier in the year?

I do. I think that the solutions that AspenTech brings to the table are incredibly broad, particularly in the sustainability journey. What we're witnessing is that the importance of software for the design and optimization of assets will be incredibly relevant as these customers embark on new projects. I regard the energy position as important, but more critically, I consider the transition and the share of wallet spending that will occur in the Energy segment. That being said, the platform for investments in diversification, which has been a core component of the Aspen board for a long time, will continue to be a priority as we move forward. The opportunity, whether for M&A and growth in TD and other segments, remains a core part of this synergy value.

Thanks, Lal.

Thanks, Andy.

The next question is from John Walsh with Credit Suisse, please go ahead.

Hi. Good morning, everyone.

Good morning.

Good morning, John.

Just wanted to talk a little bit more about the margin bridge here through the year. I think in your prepared remarks, you remained confident in the 30% underlying leverage. The guide for Q1 implies we're certainly starting, I think, below that. Is it all just price cost timing driven, or is there something else we should be aware of in our models for the Q1 margin performance?

Yes. Good morning, John. This is Frank. Yes, it is primarily price cost driven. We will be below the 30% assumption for the first half of the year, but as the price rolls through, which we have plans for, the margins will increase throughout the year. We're very confident that we'll achieve that, but obviously, Automation Solutions leverage will improve as we progress through the year. It's in our Commercial Residential segment where we need to ramp up as price cost normalizes and turns positive in the second half of the year.

Great. And then maybe a question, Lal, around earlier in the call, you talked about still some portfolio pruning around some upstream oil and gas assets, disconnected assets within the portfolio. Could you size that for us? What is the revenue size that you're talking about for that bucket?

No, John, I'm not going to do that. But I will tell you that the activities related to divestitures will occur over time. As I've noted earlier, they will be done carefully, alongside incoming assets as well. Obviously, we have a large impending transaction on the horizon. But I believe firmly that share of wallet in the energy segment will continue to move towards zeros and ones, away from hardware structures. Hence, we're going to continue to drive down that path. However, in terms of sizing that entire bucket, I apologize for not being able to provide that, John.

No, worth a shot. Thank you very much. Appreciate you taking the questions.

Thanks, John.

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

Good morning, guys.

Good morning, Andrew.

Good morning, Andrew.

One question we got in particular looking at the results from one of your peers yesterday in Auto Sol: how do you reconcile 20% year-over-year order growth, 16% year-over-year backlog growth, and then 6% to 8% FY22 organic revenue guidance? What's incorporated into the FY22 revenue guidance? I know you gave us some color, but just the disconnect.

As we entered September and the first quarter, we encountered some favorable comparisons in the business. This is one aspect to consider. Moving forward, as we navigate what is likely to be a strong environment, I believe it is important for us to provide cautious guidance for this sector. Nevertheless, you are correct that the opportunities across the three market segments are significant. I am confident that the underlying demand remains strong, but due to certain uncertainties within the supply chain, I felt it necessary to take a cautious approach. That said, the demand outlook is quite positive.

Makes perfect sense, and another question that has gotten a lot of inquiries from investors: what is your sense of inventories in the channel and with your customers? This earnings season, there are many companies mentioning strong backlogs, even those with typically short-cycle businesses. Investors are concerned that this may not end well sometime mid-year next year. What do you sense regarding inventories in the channel and your customers? How do you think that plays out throughout your fiscal '22 or calendar '22?

On the automation side, I really don't see that as a concern. Most of the KOB3 part of the business, which accounted for 59% last year, was booked to ship directly to end-user applications, not into inventories. As for the Climate Business, Ram, perhaps you can provide a few comments.

Sure. I would say, across both our OEMs and in the wholesale community, I would say inventories are slightly elevated compared to where they would typically be, as businesses anticipate supply chain challenges and have been bringing in more material. That said, I believe that the inventory is being directed out to the end customer base through the wholesale channel and through our OEM. So, I wouldn't categorize it as a significant issue; rather, they may be at slightly elevated levels, but it's not unreasonable or unseasonal.

I really appreciate your answer. Thanks a lot.

Thanks, Andrew.

The next question is from Tommy Moll with Stephens. Please go ahead.

Morning and thanks for taking my questions.

Thanks, Tommy.

I wanted to start on your outlook for Automation Solutions. I think you called for 6% to 8% underlying for the 2022 outlook. I'm curious what your visibility and assumptions are there for oil and gas customers. You're planning your fiscal year several months in advance of when a lot of them do, and I'm just looking at $80 crude, wondering when those budgets will roll out at year-end or early next year if there's some substantial upside potential?

It's a great question. Obviously, we are several months ahead of seeing those budgets and capital plans. What we are seeing and have assumed, Tommy, is sustained strength in operating budget spending, which accounts for a significant portion of KOB3 and some KOB2 expenditures. That strength picked up in the second half of fiscal 2021, and we believe it will continue to gain traction in 2022. As for capital environments beyond the two LNG projects I previously mentioned, we will see what else emerges from the capital plans. However, I would expect that sustainable investments will transpire, especially regarding methane emissions. We have observed some initiatives from the U.S. in this regard, and, of course, carbon capture will become increasingly significant as we progress through the year. We will continue to monitor this carefully as we head into January.

Thank you for that. That's helpful. I wanted to pivot to OSI. Can you refresh us on what the top-line contribution was in 2021? What's your plan for 2022? I think it's fair to say you've realized some revenue synergies since acquiring the asset. Any anecdotes you can share on how you drove those in such a short timeframe would be helpful.

We had a phenomenal first year for OSI, approximately $190 million in revenue in 2021, growing to approximately $220 million in 2022, well ahead of synergy board plans. The execution globally has been exceptional. We won our first transmission distribution project in Europe with a major customer in the Netherlands and Northern Germany. Additionally, we secured our first project in Australia in Tasmania. We are currently engaged with major power producers and transmission companies in the U.S. The synergies were realized successfully, and growth and profitability are strong, which gives me a lot of confidence regarding this acquisition. This momentum will carry through as we move into the AspenTech transition.

I appreciate that, and I'll turn it back.

Thanks, gentleman.

Thank you.

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

Hi, good morning, guys.

Good morning. Good morning, Josh.

I was just wondering, on the Auto Sol side, hoping to shore up some of the growth differential you guys are looking at versus Rockwell. Any observation on the mechanical or balance and controls type business versus more of the software and automation side? Is there a wider spread in that outlook for 2022 than usual?

Not really. Obviously, our systems and software business has outgrown our device business. Our digital transformation initiatives, which encompass both software and device-based segments, have outpaced the remainder of the business. However, I wouldn't note a significant difference as we progress; KOB3 business predominantly serves the device layer, which may reflect a slight bifurcation. Nevertheless, I believe we will see a broad portfolio align as we move through, with only a delta of a point or so between them.

Got it. That's helpful. And then, just shifting over to Commercial Residential Solutions. What is the price embedded in that outlook? You mentioned steel is coming down. Going forward, based on futures, I know some of that is contractually set; if that comes down, will that impact how prices are defined with the OEM relationships there?

On the steel situation, as it is expected to decline in the second half, we’ve modeled it as a moderate decline then. However, any significant material cost reductions will not affect '22 but will have implications for pricing dynamics in '23. It's not a substantial concern for us in '22, but we’ll keep therefore looking closely. Naturally, we would like any declines which will help us in the second half. Regarding the pricing piece, we won't provide an exact price number, but the inflation dynamics of '21 will translate and convert into material price pass-through pricing that we will realize in '22.

Thank you for that color.

Thank you.

The next question is from Deane Dray with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Deane.

Good morning, Deane.

Quick question for Frank, if I could. Free cash flow was well below your 4Q average. I know you called that working capital pressures. Maybe some color there would be helpful.

Yes, the sales ramp and comparison versus prior year when we were taking cash from the balance sheet contributed to a disruption in the fourth quarter's cash flow. It will normalize. The year was very strong, but the cash flow was lumpy, given the way the year transpired, particularly in the commercial and residential segments.

Got it. And then for Lal, on the expectation of focusing M&A on industrial software. Since it is a new structure for us with Aspen Technology, when you say industrials, is that Emerson-driven? Is it Aspen? Would it be folded into Aspen? Does Aspen have a role in the review process? Thank you.

Industrial software M&A will take place at AspenTech. However, industrial software is only one of the three large market segments where we will pursue acquisitions. You'll see these plans come to light as we progress, and of course, they will become public knowledge. We have a great platform there to execute industrial software M&A transactions that should enable a favorable market multiple and deliver value creation.

That's really helpful. Thank you.

Thank you, Deane.

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

Hey, thanks. Good morning, everyone.

Good morning.

Hey, Lal, good morning. Regarding the portfolio review, the comment about two end states, I suppose that means you do the addition and subtraction you're discussing, and then continue as Emerson. There's option one and option two. As you embark on that journey, if there's more you can share about your thought process or what might trigger one outcome over the other, that would be quite interesting.

We are taking a measured approach. I previously mentioned this is a marathon; we're proceeding with intention and thoughtfulness. We will remain acutely aware of the value proposition to our shareholders and how changes affect cash flow and our value creation strategy. The end game is to establish a connected portfolio with higher underlying sales potential that can consistently deliver double-digit EPS growth through cycles. As we move forward, both our strong balance sheet and AspenTech’s strong balance sheet will serve as tools for our divestiture efforts, and I believe we'll achieve this over the years. Our board has had meaningful discussions and debates that aided our strategies, which involved considerable groundwork over months. We now have mapped pathways and options, which is why two potential end states have been defined.

That's great. And then just as a follow-up, sort of a bundled question around price cost and margins. The positive price cost of $100 million, does that arithmetic get you to neutral margins on price cost? Also, regarding the additional restructuring, could you elaborate on that? What kind of savings tailwind are you expecting in '22 from both the prior actions you took in '21 and the new actions discussed for '22? Thank you.

We're considering it in context of achieving leverage for the business regarding price cost in isolation. As we move up, it's not necessarily margin accretive. So we're viewing it holistically in terms of achieving 30% operating leverage for the year. The price cost, due to the way it has rolled and will roll, is inconsistent and somewhat misleading within quarters. Our focus is to hit that target for the year while enhancing margins and achieving operating leverage for the total enterprise. Regarding the restructuring, I've discussed identifying further opportunities within both branches during this week. Some involve consolidating our footprint, and ongoing cost reduction is a continuous pursuit. There are always considerable opportunities in any complex business, and we're often aiming for improvements in our cost position. A significant portion of our CapEx and restructuring over the next couple of years will focus on adding capacity for the expected growth in both businesses. So we may engage in some restructuring measures that would be higher than historical levels to enhance our cost position and put capacity in the right locations.

You've articulated that well.

The next question.

The next question is from Scott Davis from Melius Research. Please go ahead.

Thanks. Good morning, everybody.

Good morning, Scott.

Morning, Scott.

Best of luck for 2022. I have a couple of questions for you. First, the 30% incremental you mentioned, is that more of a baseline or a goal? Does that include the $100 million price tailwind? If you've already addressed some of this, I apologize, but I'm looking for more clarification on it.

That is indeed the plan. That aligns with our fiscal targets; it includes positive pricing implications. We are aware of the first half headwinds we discussed, which will normalize in the second half. I feel strongly about achieving 3 points of incremental growth on the underlying sales.

Okay, and then the comments regarding carbon capture and methane, LNG. Is there a point where you can start measuring what percentage of your orders those specific types of projects represent, where we can understand the materiality of the future growth there?

We pinpointed around $1 billion of KOB1 projects, which includes also the transmission distribution work but encompasses a variety of sustainability and renewable initiatives, such as hydrogen and carbon capture. We are actively tracking and analyzing our funnel and the communications around it to get insights to you soon regarding those specifics. So I think that's a fair question.

Well, good luck in 2022.

Thank you, Scott.

Thank you. I'll pass it.

Thank you, Scott.

The next question is from Julian Mitchell with Barclays. Please go ahead.

Hi, good morning. I would like to start by discussing the organic growth forecast for the Automation Solutions segment. You're estimating that this business will grow approximately 7% this quarter and will maintain that rate over the next three quarters, despite facing tougher comparisons. I would like to know if everything in that segment is stable as you go through the year concerning hybrid, process, or discrete categories, or KOB1, 2, and 3. Is there anything changing in those areas that would enable the organic growth rate to remain steady despite the more challenging comparisons?

Indeed, backlog situations have normalized if you observe our typical performance in Automation, as for example, last year, we reduced our backlog by $400 million in Q4. This year, we only reduced it by $100 million. A lot of that was reflected in the $125 million hit for Automation Solutions in the quarter. So our backlog coming into the year is robust. However, we expect KOB3 to stay strong. The data we're collecting on our customers’ commitments, particularly regarding STL activity, looks very encouraging. Furthermore, we expect that modernization programs and KOB1 initiatives I outlined earlier will contribute positively in the second half. KOB1, for the most part, won’t translate into revenue in the short term but could show some early returns through our systems business.

That's helpful. Thank you. And then just switching to Com-Res. Given that over 50% of the revenues in that business are residential facing, you call out the slowdown you're anticipating in Resi through the year, but I don't believe you're flagging any imminent cliff. Can you discuss how you're thinking about the dynamics with the OEMs in Resi and how confident you are of sustaining positive growth through the year amidst tough comps?

We've got some regulatory changes looming on the horizon. Efficiency standards and refrigerants will be regulated effectively in '23 and '25. It's been enlightening for me to spend time with two of our largest OEM customers this quarter. I visited our operational sites with Train and Carrier in North Carolina and Miami, respectively. We’ve stayed closely aligned with their demand projections as we navigate through the fiscal year. In conclusion, I believe there will be a moderation, rather than a cliff, as we progress through the year.

Great. Thank you.

Thank you very much, and with that, I will close the call. Thank you all for your time and the inquiries. We appreciate your support.

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