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Text: Today, I am joined by President and Chief Executive Officer Lal Karsanbhai, Chief Financial Officer Frank Dellaquila and Chief Operating Officer Ram Krishan.
Please join me on slide two.
Please take time to read the safe harbor statement and note on non-GAAP measures.
First, Mike Train, our Chief Sustainability Officer, will be attending this year's United Nations Climate Change Conference, COP26, in Glasgow.
Mike will be a panelist at the adjacent Sustainable Innovation Forum, participating in two notable discussions.
The first discussion will be 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 of, by and with Emerson initiatives.
One notable greening -- green by example is in the recent announcement between BayoTech and Emerson to accelerate production of and distribution of low-cost, low-carbon hydrogen.
In the agreement, Emerson will deliver advanced automation technology, software and products in support of BayoTech 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 insight into cutting-edge technologies that have the potential to solve real customer challenges.
The investment commitment will advance the development of disruptive, discrete automation solutions, environmentally sustainable technologies and industrial software in key industries.
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 be located at the New York Stock Exchange on May 17, 2022.
2021 was a phenomenal year for Emerson.
It developed very differently, obviously, 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 which 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.
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 KOB three mix for 2021 was up two points to 59%.
And Emerson's September three-month trailing orders were plus 16%.
We grew 5.3% underlying and leverage at 38% operationally, inclusive of a $140 million swing in our price/cost assumptions from November through to the end of the fiscal year.
The earnings quality of this company continues to be excellent with free cash flow conversion of 129%.
The fourth quarter, however, was challenged significantly by supply chain, logistics and labor challenges.
And that is not dissimilar from anything you've heard before.
This was experienced in the form of material cost inflation, notably steel, electronics and resins, and lead time extensions.
In addition, we experienced logistics challenges in availability of lanes and costs.
And lastly, U.S. manufacturing labor, which was characterized by higher turnover rates, absenteeism and overtime costs.
In the quarter, we missed sales by $175 million.
And alongside a challenging price/cost environment in our climate business, it resulted in a negative $0.14 impact to earnings per share for the quarter and a $0.19 impact to 2021 EPS.
Having said that, the company grew 7% in the fourth quarter and had 19% operating leverage.
Turning to 2022 and some initial thoughts.
The first half of the year will not look dissimilar from the fourth quarter with slight sequential improvement as we go to Q2.
Price/cost and supply chain challenges unwind in the second half of the year against the 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 A/C cycle will moderate as we go through 2022.
However, we expect automation markets to continue to strengthen driven by digital transformation and modernizations, replacement in MRO markets and select LNG and sustainability-driven KOB one, most notably methane emissions reduction projects and carbon capture.
I have confidence that we will deliver 30% incrementals 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 equally taken significant steps in our journey to modernize our culture and advance ESG initiatives.
The Board named Jim Turley as the company's Independent Chair of the Board, we named 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 and the commitments we have made to accelerate greenhouse gas intensity reductions.
Lastly, turning 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 road map and pathways.
The key elements were as follows.
Firstly, in terms of the portfolio today and how we are thinking about it.
We will continue to divest upstream oil and gas hardware assets.
Secondly, we will action low-growth or commoditized businesses.
And lastly, we will action disconnected assets.
All three of these actions will take place over time with intentionality, with patience and a keen awareness of cycles and meeting the value-creation proposition to our shareholders.
Secondly, we identified four large, profitable, high-growth end markets, each with at least $20 billion of size and projected to grow higher than 4% a year into the future supported by macros.
The four end markets will be the hunting ground for our M&A activity.
Lastly, we defined two possible end states for the portfolio and the journey that we'll embark up and have embarked on.
One of the four markets is industrial software, a $60 billion segment that we identified 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 who I have the greatest personal admiration.
The AspenTech company will be a highly diversified business with transmission and distribution as its largest served market and is uniquely positioned to enable our energy customers to transition to a lower-carbon future.
I'm optimistic of the synergy opportunities that exist and believe the new AspenTech, which will be 55% owned by Emerson shareholders, will be a differentiated 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.
So 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 much as we thought it would.
There was continued strength in global discrete and hybrid automation markets, and the North America process markets began to gain momentum later in the year.
The global demand in our commercial/residential markets was strong and broad based, particularly in the U.S. residential air conditioning market, and it far exceeded the expectations that we had going into the year.
Our operations team successfully worked through labor and supply chain issues, particularly toward the end of the year, and delivered strong results that we're able to report to you today.
Toward the end of the year, the intensifying combination of rising material costs, supply chain challenges and labor constraints in the U.S. did begin to weigh on sales volume and profitability.
We've worked through that in the fourth quarter.
We will continue to work through that in the first half of fiscal 2022.
Despite these fourth quarter challenges, we're pleased to report that we achieved the key financial targets that we committed to you in August regarding underlying growth, adjusted EBIT margin, adjusted earnings per share and cash flow, and you can see all of that in the table.
This was achieved in the face of an unexpected increase in key raw materials, mainly steel and copper, that resulted in an unfavorable price/cost swing of $140 million during the year versus the expectation and the guidance that we gave you a year ago.
We're very 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 that we have seen.
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 EBIT benefited from strong leverage in operations, 38%, as Lal just mentioned, and adjusted EBIT from underlying volume and the benefit of cost reset actions that were begun two years ago.
These cost reductions more than offset price/cost headwinds, which, as I said, were $140 million versus our expectation at the beginning of the year, and the supplies chain challenges that raised costs and reduced availability.
Cash flow was robust, up 18% year-over-year attributable to the 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 guide by $0.03 at the midpoint and up 19% for the year.
Automation Solutions grew -- 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 EBIT increased 230 basis points due to the strong leverage driven by cost reset benefits.
Commercial & Residential saw exceptional growth, up 6% underlying year-over-year due to broad strength across the residential and commercial markets with mid-teens growth in all world areas.
Adjusted EBIT increased 20 basis points versus 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.
Operational performance was strong throughout the year, adding $0.59 to adjusted EPS, overcoming a $0.19 headwind from supply chain and $90 million of unfavorable price/cost.
Operations leveraged at more than 35% on volume and cost actions.
Nonoperating items contributed $0.02 in that, overcoming a significant headwind from the stock comp mark-to-market accounting.
Share repurchase totaled $500 million, as we guided, and added about $0.03.
In total, adjusted earnings per share was $4.10, as I said, an increase of 19%.
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 EBIT 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 headwind in commercial/residential.
Free cash flow declined 39% mainly due to higher working capital to support the growth versus the prior year.
Adjusted earnings per share was $1.21, exceeding the guidance midpoint by $0.03 and up 10% and versus 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 four points due to supply chain constraints.
Our backlog was up 16% year-to-date and now sits at $5.4 billion, $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 remains elevated above the levels we would otherwise have expected.
Strong leverage and cost reductions drove a 170 basis point improvement in adjusted EBIT.
Commercial & Residential underlying sales increased 13% and 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 three points due to supply chain constraints, which, together with sharply increasing material cost headwinds, which were expected, perhaps a little worse than we expected in August but are expected, drove a 340 basis points decline in adjusted EBIT.
Clearly, as you can see, the operating environment is a challenge as commodity inflation, electronic supply, logistics constraints and labor availability continues to impact our global operations.
Net material inflation headwinds accelerated through fiscal 2021, as you can see on the chart, primarily driven by steel prices, with 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 do 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 2022.
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 will be a strong positive for the second half of fiscal 2022.
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 to the fiscal year.
Now while COVID-related restrictions are improving in Southeast Asia, capacity at key electronic suppliers remains constrained.
Several key component suppliers have extended lead times and pushed out delivery forecasts, which has increased shortages and decommits to our EMS suppliers.
Furthermore, we are closely watching the impact of industrial power outages in China, which have become a common occurrence at manufacturers and has led to an increase in silicon prices.
For us, electronic shortages are impacting multiple business units in both platforms, and supply is expected to remain a challenge into fiscal 2022.
Extended logistics lead times, particularly on ocean freight, has had an impact on our global operations, port congestion in the U.S., weather and COVID-related disruptions in China being the key drivers.
These dynamics are highlighting how critical regionalization is even on lower-variation parts and components, and the work we have done over the past many years to regionalize are clearly proving the importance of this strategy.
This is exemplified by several of our businesses with strong regional supply bases which have performed very well and avoided expensive airfreight and significant expediting costs.
Finally, hiring and retention challenges continue in many of our U.S. plants, predominantly in the Midwest, as competition for available labor is intense.
High levels of turnover and absenteeism in these locations have impacted productivity and driven increased overtime.
Now on slide 12, despite the unprecedented challenges, our supply chain and operations teams have worked tirelessly to continue to meet the needs of our global customers.
Many creative solutions are being implemented on a real-time basis to ensure continuity of materials supply to our global plants and availability of freight lines to make our shipment commitments.
Our teams have leveraged strong supplier relationships, utilized prequalified alternate sources, leveraged contractual agreements 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 spent years developing has certainly been an advantage for us in these challenging times.
Accelerated actions around hiring and production shifts to plants with stable workforces has ensured 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 allowed us to unlock additional capacity to combat labor availability challenges.
And looking forward to 2022, demand continues to be strong across both of the platforms.
The trailing three-month orders for Automation Solutions were up 20% versus the prior year driven, as I said prior, by continued automation investments in discrete and hybrid markets, and we believe that will continue into 2022, and, of course, the strengthening of the process automation spend.
While KOB two and KOB three drove most of the orders growth in 2021, the new infrastructure bookings for LNG and decarbonization will improve, I believe, through 2022, providing further upside.
Increased site access will drive increased walkdown and shutdown turnaround activity in the business.
To give you perspective, 2021 walkdowns were up 50% year-over-year with more than 5,000 globally, with each walkdown driving substantial KOB three pull-through.
Shutdown turnaround bookings were up -- for -- in 2021 10% year-over-year driven by strong spring season that extended into the early summer.
2022 shutdown turnaround outage activity spend is expected to be up mid-single digits, led by chemicals and refining, leading to high single-digit bookings growth.
Turning to Commercial & Residential Solutions.
The U.S. and Europe order rates continue to be strong heading into 2022, while Asia has begun to moderate.
Overall, the trailing three-month orders were 9% in September.
And thinking a little bit further into 2022, many of our key climate technologies end markets will continue to have momentum, including aftermarket refrigeration, commercial HVAC, food retail and foodservice driven by new store builds and quick service restaurants and residential heat pumps.
Turning to slide 15.
Looking ahead to 2022, it will be 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 and mid-single-digit growth, respectively.
Growth will moderate in residential markets as demand stabilizes, but improving commercial and industrial environments will benefit Commercial & Residential Solutions.
Decarbonization and sustainability projects, as noted earlier, will provide further growth opportunities as budgets get allocated toward these projects.
Based on this macro landscape, we believe -- we continue to expect demand to be strong in 2022.
Supply chain and price/cost headwinds continue through the first half, pressuring first quarter leverage but turn to significant tailwinds in the second half and end positive in the year.
The team has done a significant amount of work progressing our 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 longer-term facility projects left to be completed.
Great work as a team.
So 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 & Residential Solutions will be 6% to 9%.
As Ram discussed, we expect price/cost to turn into tailwind for the year of approximately $100 million.
$150 million of restructuring activities includes the minimal remaining spend on our cost reset program and additional programs, including footprint activities, that have been identified and are planned in the fiscal year.
Historically, our adjusted earnings per share excludes restructuring and other items like first year purchasing accounting in the calculation.
Looking at the 2021 column of the bridge to the right, our prior adjusted earnings per share of $4.10 increases to $4.51 when removing the impact of intangibles amortization expense of $0.41.
For 2022, the amortization expense is expected to be approximately $0.42 driven by -- driving, excuse me, our adjusted earnings per share to between $4.82 and $4.97.
Please note that all guidance does not include the impact of the AspenTech transaction, which is expected to close, as I said earlier, in the second quarter of calendar year 2022.
Turning to slide 17.
We expect a first quarter 2022 underlying sales growth of 7% to 9% with broad underlying strength across Automation Solutions and Commercial & Residential Solutions.
Automation Solutions will experience underlying sales growth in the mid to high single digits, while Commercial & Residential Solutions underlying sales growth will be in the high single digits to low double-digit range.
Adjusted earnings per share is expected to be between $0.98 and $1.02.
Amortization for the quarter is expected to be roughly $0.10.

user
sees fy 2022 adjusted earnings per share $4.82 to $4.97 .
emerson - fourth quarter net sales were $4.9 billion up 9 percent from the year prior.
emerson - expect that 2022 will be characterized by strong underlying demand.
emerson sees q1 adjusted earnings per share $0.98 to $1.02.
emerson - sees 2022 net sales growth 5% to 7%.
emerson - sees 2022 adjusted earnings per share $4.82 to $4.97.
emerson - qtrly adjusted eps, which excludes restructuring and first year purchase accounting charges, was $1.21.

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