Emerson Electric Co

NYSE:EMR

Earnings Call Analysis

Emerson's Exceptional Year and Positive Outlook

2023 was an extraordinary year for Emerson, marked by a 10% increase in underlying sales, a 330 basis point expansion in GPE to 49%, and a 220 basis point rise in adjusted Segment EBITDA to 25%. The company achieved a 22% growth in adjusted EPS to $4.44, alongside robust free cash flow of $2.4 billion, reflecting a strong operational year with significant orders growth and a 53% leverage. Entering 2024, Emerson anticipates a promising year with 4% to 6% underlying sales growth and an adjusted EPS between $5.15 and $5.35, which includes NI's contribution of roughly $0.35 to $0.40.

A Landmark Year and Transformational Changes

For Emerson, 2023 was described as an exceptional year, where the company's value creation strategy delivered impressive results. Three core aspects have been pivotal; culture, portfolio transformation, and execution. The company embarked on cultural changes that were well-received as indicated by internal surveys, with advancements in diversity, sustainability, and employee development. Significant portfolio reshaping occurred with the divestiture of Copeland and the acquisition of National Instruments (NI), marking Emerson's shift towards a more cohesive and higher-margin automation focus. Execution shone through with underlying sales growth of 10%, gross profit expansion of 330 basis points reaching a 49% margin, and adjusted Segment EBITDA jumping 220 basis points to 25%. Adjusted EPS increased by 22% to $4.44 while free cash flow was an impressive $2.4 billion, signifying a strong year for the company.

Sustained Operational Excellence and Growth Projections

Operational excellence is palpable as reflected by a 53% operating leverage and strong execution practices. Emerson's strategic journey since 2021 has led to consistent underlying sales growth and market share expansion within the automation sector. The company's installed base, worth $150 billion, underpins this result with maintenance, repair, and overhaul (MRO) sales making up 65% of the revenue. Consistently delivering operational leverage over 50% and achieving two consecutive years of over 20% EPS growth underscores Emerson's long-term value potential. Looking forward to 2024, advancements in innovation will continue with significant product launches enhancing the DeltaV platform, aiming at improving integration and data utility for enterprise environments.

Anticipating Continued Robust Performance in 2024

Emerson projects another strong year ahead, with anticipations of mid to high single-digits sales growth in process and hybrid markets driven by factors such as energy security and digital transformation. The discrete automation and test and measurement segments are expected to start recovering in the latter half of the year, with underlying sales for discrete businesses projected to be flat to low single-digits. At a higher level, the company guides for 4% to 6% underlying sales growth. Adjusted EPS for 2024 is estimated to be between $5.15 and $5.35, with free cash flow forecasted at $2.6 billion to $2.7 billion. Capital investments will concentrate on innovation and strategic bolt-on acquisitions, with a committed capital allocation and the continuation of a dividend increase streak, alongside plans for $500 million in share repurchases.

Free Cash Flow Outlook and Capital Allocation Focus

2023 ended with a robust free cash flow of $2.4 billion. Looking into 2024, despite expected acquisition-related payments and higher capital expenditures mainly for facility expansions, free cash flow is projected to remain strong at $2.6 to $2.7 billion. Emerson's disciplined capital allocation strategy continues with significant investments in R&D, targeted acquisitions to bolster the portfolio, and sustained shareholder returns through dividends and share repurchases. The company's capital leverage ended at 2.2x net debt-to-EBITDA, and with a focus on balancing growth with shareholder value, Emerson is positioned for sustained financial health and future growth.

Risk Disclosures and Non-GAAP Measures

In evaluating Emerson's performance, it is essential to note the presentation may contain forward-looking statements subject to business risks and uncertainties. Non-GAAP financial measures were utilized to provide a more complete understanding of the company's performance and should be considered alongside GAAP results.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and welcome to the Emerson Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Colleen Mettler, Vice President of Investor Relations. Please go ahead.

[Colleen Mettler, executive]

Good morning, and thank you for joining us for Emerson's Fourth Quarter and Full Year 2023 Earnings Conference Call. Today, I am joined by President and Chief Executive Officer, Lal Karsanbhai; Chief Financial Officer, Mike Baughman; and Chief Operating Officer, Ram Krishnan. As always, I encourage everyone to follow along with a slide presentation, which is available on our website.

Please join me on Slide 2. This presentation may include forward-looking statements, which contain a degree of business risk and uncertainty. Please take time to read the safe harbor statement and note on the non-GAAP measures.

I will now pass the call over to Emerson's President and CEO, Lal Karsanbhai, for his opening remarks.

[Surendralal Karsanbhai, executive]

Thank you, Colleen. Good morning. 2023 was an exceptional year for Emerson. The management team, alongside the Board of Directors, boldly delivered across the three dimensions of our value creation strategy. Firstly, culture. Our management team just completed a trip around the world where we have the opportunity to engage with our customers and our teams. It was an energizing trip and it was evident to me that the changes we are driving in the culture of Emerson are embraced as evidenced by our engagement survey.

2023 was an important year. We made significant progress across multiple dimensions of culture. We rolled out an employee value proposition, advance our diversity and inclusion metrics and made significant strides in our sustainability targets as well as launching a differentiated talent engine program.

Second, our portfolio transformation is largely complete. The Copeland divestiture and more importantly, the acquisition of NI have enabled us to create an Emerson focused on automation with a cohesive higher growth, higher profit margin, diversified portfolio aligned to the critical macro secular drivers, energy security and affordability, near-shoring, sustainability and decarbonization and digital transformation. I would like to welcome Ritu Favre and the NI family to Emerson. This is an exciting time. With NI, our technology stack is unequaled, and we are in position to continue to push the boundaries of automation to meet our customers' needs.

Thirdly, execution. The Emerson management system is delivering differentiated results. Underlying sales for 2023 grew 10%. GP expanded 330 basis points to 49%, and adjusted segment EBITA expanded 220 basis points to 25% after delivering yet another year of over 50% leverage. Adjusted earnings per share in 2023 grew 22%, $4.44 and free cash flow was $2.4 billion. Orders growth exited the year at 5%, and we grew across all world areas. We have strong price realization in the business at 4% for the year and MRO represents 65% of our revenue with now a $150 billion installed base around the world. And we exited the year with $6.6 billion of backlog, up 12% year-over-year.

We delivered on innovation in 2023. It was a year of significant releases in our DeltaV platform, Aspen models and intelligent devices. Our R&D spend as a percent of sales rose to 7% in 2023. Cost management is the way of life at Emerson. The differentiated leverage of 53% is reflective of aggressive cost actions across our business. We also delivered on commitments of no stranded costs related to the Copeland transaction. And we'll be delivering on the $100 million corporate cost takeout by the end of 2024 through significant transformational activities driving certain functional activities to centralization and best cost locations. I am humbled by the exactness of our performance, and I'm certainly optimistic about the future of our company. I'd like to express my appreciation to our customers who increasingly place their trust in Emerson to solve the world's most challenging problems.

And lastly, in my opening remarks, I'd like to say I am but one of over 70,000 Emerson team members around the world. I would like to thank our global employees for your passion, hard work and energy that you bring to Emerson every single day.

Please turn to Slide 3. As I said earlier, and it bears repeating, 2023 was an exceptional year. We are excited to run this cohesive high-growth and diversified portfolio. The financial performance was differentiated with double-digit underlying sales growth 53% operating leverage and 22% adjusted EPS growth. As we look ahead, 2024 is expected to be another strong year. Operating leverage, excluding NI, is expected to be in the mid- to high 40s and adjusted EPS is expected to be $5.15 to $5.35, including roughly $0.35 to $0.40 contribution from NI. We hit the ground running on October 11, as soon as we closed the transaction, to begin executing the synergy plan, and we expect it to provide early benefits in 2024.

We are expecting 4% to 6% underlying sales growth, driven by our focus and commitment to winning in our growth platforms and leveraging our innovation. Energy transition, industrial software, life sciences, and metals and mining are expected to remain resilient parts of our portfolio, and we are utilizing our leading technology, customer relationships, installed base and expertise to capture investments in these markets. While discrete markets are down in both our factory automation business and test & measurement, we are expecting recovery in the second half of the year.

Turning to Slide 4 for some additional details on how we finish the year. 2023 was a remarkable operational year for Emerson. Starting with the orders performance, our teams executed exceptionally throughout the year. We won in the marketplace. We won in markets like LNG, hydrogen, renewables, life sciences, and metals and mining, resulting in 5% orders growth for the year. This shows our portfolio relevance and leadership position for our customers. Orders were also up 5% in Q4, led by double-digit order growth in China and the rest of Asia.

Underlying sales were up double digits for the year, exceeding our initial expectation of 6.5% to 8.5% last November and in line with our August guidance. The strength was widespread across the organization with all world areas growing 9% to 10% and both business groups growing 10%. I am most proud of our performance around operating leverage this year. 53% is differentiated. It is a testament to our Emerson management system and our operational talent, which drove strong performance. Adjusted EPS ended the year at $4.44, beating the midpoint of our original November guidance by $0.37 and near the top of our August guidance. Lastly, free cash flow of $2.4 billion was up 35% year-over-year and above our August guidance.

Turning to Slide 5. Our 2023 performance caps 3 strong years of execution, demonstrating the power of our Emerson Management System and its ability to create value for our shareholders. We embarked on a transformational journey of Emerson in 2021 and remained focused on execution. Underlying sales growth of 7% and 10% in 2022 and 2023, respectively, shows the leadership position of our automation technology and our world-class sales organization. It is also indicative of our market share expansion within the $160 billion served automation market. Our ability to both leverage our $150 billion installed base, as evidenced by our MRO sales in 2023 of 65% and win new projects, a strength of this company and critical to the long-term success of this business.

As we invest more in digital technology and software, we are also seeing the benefits to gross margins, which have expanded 470 basis points to 49% since 2021. Strong price discipline and differentiated technology have also provided positive contributions, and the addition of NI will further expand our gross margins. This enabled strong operational leverage across the business, over 50% leverage for 2022 and 2023 is distinguished amongst industrials. Cost discipline remains part of the DNA at Emerson, driving further cost productivity and margin expansion. Put all this together, and Emerson has delivered back-to-back years of 20-plus percent EPS growth.

Please turn to Slide 6. I want to provide a couple of strategic updates on our business. In October, we hosted Emerson Exchange Immerse in Anaheim, California. The event showcased our control systems and software technology and highlighted our integration with AspenTech throughout different solutions and industries.

Featuring over 1,400 attendees and over 100 customer presentations, the week was spent discussing the exciting roadmap of our DeltaV, Ovation and AspenTech products and working with customers to solve their toughest challenges. This was all reflected in our keynote presentations from three important customers. Syzygy, a provider of electric catalyst reactor technology; Biogen; and Tesla, who discuss their automation challenges and partnership with Emerson. These types of engagements not only help our users' understanding of our current products, but also provide important inputs into our next-generation products and innovation.

Throughout this event, we've highlighted our boundless automation vision, the next-generation automation architecture that Emerson is uniquely positioned to deliver based on our leadership position in intelligent devices, control systems, and software. This vision empowers our customers to unlock and access all their operational data, enabling better decisions through analytics and optimization. It also enables customers to balance their production and sustainability goals through enterprise management and a unified software platform.

On Slide 7, as part of this vision, we continue to accelerate innovation across four priority domains: Disruptive measurement technologies, software-defined automation systems, self-optimizing asset software, and our sustainability portfolio. Each of these areas provide stepping stones to enable the boundless automation vision. At Immerse, we introduced many significant new products to our leading DeltaV portfolio. First, DeltaV version 15 feature pack 1, is one of our biggest rollouts in recent history. The package includes enhancements to software like DeltaV Live, the most advanced DeltaV HMI ever developed. And the introduction of a subscription controller, PK Flex. It also includes the DeltaV Edge Environment, a first-of-its-kind edge solution, allowing users to securely move data into their enterprise environments.

As we look at the next generation of software solutions and automation platforms, this is a key enabler to unlocking data that users previously discarded. Throughout the rest of the organization, we are also making focused investments in strategic areas. This includes next-generation intelligent devices to further cement our leadership position in our measurement and analytical portfolio and relevant additions to our sustainability portfolio. At AspenTech, many of the new releases are focused on enabling sustainability and energy transition segments. In addition to further building out capabilities like AI and data works to enable self-optimizing asset management.

Please turn to Slide 8. On October 11, we closed the acquisition of NI and announced we will report the business as a new Test & Measurement segment in 2024. We are very pleased with the progress already in the first month with NI and are excited about the opportunities in this business. We remain committed to the $165 million of synergies by the end of year 5, resulting in approximately 31% adjusted segment EBITA when moving stock comp to corporate. As we have openly stated, NI completes the significant portion of our portfolio transformation, and we are excited to execute as a new company. We will, however, continue to be active with bolt-on acquisitions that fill technology gaps in our business, and we have the balance sheet flexibility to do so.

These will be prioritized in four segments we introduced a year ago: Industrial software, test & measurement, factory automation, and smart grid solutions.

In the fourth quarter, we completed two of these bolt-on acquisitions. FLEXIM is a global leader for clamp-on ultrasonic technology measuring liquids, gases and steam. The business is highly complementary to our existing leading flow portfolio consisting of Coriolis, DP Flow, [ Mag and ] Vortex and will also serve attractive growth markets in the energy transition. We also completed the acquisition of AFAG in the fourth quarter, a highly strategic asset in the factory automation market. AFAG's electric linear motion solutions, combined with our existing pneumatic motion offering, creates a leading motion portfolio for discrete industries in a $9 billion TAM.

Please turn to Slide 9. As I mentioned, the large pieces of our portfolio transformation are behind us. And this slide shows that we were able to accomplish what we were able to accomplish over the last few years. We have three main objectives that I communicated when we started this journey. First, cohesiveness, which we now have with an unmatched technology stack. Second, diversification. Discrete is now our second largest end market with further opportunities to expand into attractive diversified industries. And third, our growth is aligned to secular growth drivers. This alignment to energy security and affordability, sustainability and decarbonization, nearshoring, and digital transformation will allow Emerson to move to a more secular and less cyclical business profile.

$36 billion worth of transactions, disposing of assets low single-digit growth profiles and adding businesses, we expect to grow cumulatively in the high single digits to low double digits. The profitability improvement is also remarkable, trading 30% GP businesses for those that operate 70% plus gross profits, which are already seeing -- we are seeing the benefits of today. We are all energized by the opportunity we have with this new Emerson.

Please turn to Slide 10. Our current strategic funnel is now over $10 billion in opportunity with nearly 2/3 residing in our growth platforms. We're also encouraged by the activity of projects already in the funnel, considering the interest rate environment and global uncertainty. In the fourth quarter, Emerson was awarded over $500 million of project content with over 60% of those in our growth platforms. This includes strategic wins in LNG, carbon capture, hydrogen, life sciences, and metals & mining. These successes are indicative of our team's focus and our technologies relevance within these markets.

As we look at further diversifying our portfolio into hybrid and energy transition markets, 2023 was a fundamental foundational year. Specifically, there were three highly strategic projects to highlight. First, Emerson was selected to automate five different plants for Samsung Biologics as it standardizes on our DeltaV automation platform. The Emerson solution provides control for both production skids and for plant-wide operations. We are also currently engaging with the customer on the potential to leverage AspenTech software for future expansion.

Secondly, in the third quarter, we highlighted Emerson's selection for the Port Arthur LNG project with Bechtel Energy and Sempra. This quarter, we are pleased to announce we were also selected for another large-scale world-class LNG facility in the United States, the Rio Grande LNG project from Bechtel Energy and NextDecade located in Texas will be capable of producing 17.6 million metric tons per annum of LNG across three liquefaction trains. Emerson is providing much of our leading technology, including analytical and measurement technology and control, pressure relief, and isolation valves.

And finally, AspenTech was awarded a synergy win in the most recent quarter with a world-leading pulp and paper producer. Emerson's DeltaV system is already installed at the site and through this relationship with the customer, Emerson was able to bring AspenTech to the table. Through this engagement, the customer chose to displace the current incumbent provider of adaptive process control software and instead move to AspenTech. This example demonstrates the power of our Emerson AspenTech integrated solutions and the opportunity to expand AspenTech utilizing our global sales channel. These wins and the continued evolution of the funnel provide a strong foundation as we head into 2024.

With that, I will now turn the call over to Mike Baughman.

[Michael Baughman, executive]

Thanks, Lal, and good morning, everyone. Please turn to Slide 11 that summarizes our fourth quarter financial results, which were in line with our expectations. Underlying sales growth was 5%, growing off a tough comp in 2022 when sales shifted from the third quarter into the fourth quarter due to China shutdowns and electronic component shortages. Price contributed approximately 4 points of growth. As expected with our typical seasonality, backlog declined sequentially about $300 million to $6.6 billion, up 12% versus where we entered 2023. Software and control sales grew 2% on an underlying basis, which now includes AspenTech as we lapped a year of ownership.

The control systems and software business came in largely as expected, and it was comparing against a very strong prior year Q4. AspenTech tends to be lower sales volume in our fiscal Q4 due to the timing of renewals and its sales can be more variable due to ASC 606 accounting. The sales were on forecast, and importantly, ACV showed strong growth at 10.9% year-over-year. Intelligent devices grew 6%, led by process and hybrid exposed businesses, mainly measurement and analytical and final control. Our discrete automation business was down in the quarter with softer-than-expected demand and Europe and China weakness impacting this business.

Emerson adjusted segment EBITA margin improved 80 basis points to 25.5%. Operating leverage, excluding AspenTech was 45%. Volume, margin-accretive price cost, which included not material deflation, and ongoing productivity programs contributed to the margin improvement. Adjusted EPS grew 21% to $1.29. Lastly, free cash flow for the quarter of $838 million was up 17% from the prior year.

Please turn to Slide 12. As Lal summarized, 2023 was an exceptional year for Emerson. Underlying sales growth was 10% with 4 points of price contribution. Software and control, and intelligent devices, both finished with underlying sales growth of 10%. All geographies reported strong sales growth with Americas up 10%; Europe, up 10%; and Asia, Middle East and Africa up 9%. Emerson adjusted segment EBITA margin improved 220 basis points to 25%. Operating leverage, excluding AspenTech, was 53%. As we've talked about throughout the year, this was driven by leverage on double-digit sales growth, strong execution by our operations teams, margin-accretive price cost and favorable product and project mix. Adjusted EPS grew 22% to $4.44 with $0.27 of contribution from AspenTech.

Lastly, free cash flow of $2.4 billion was up 35% versus the prior year. This includes approximately $100 million from the interest on undeployed proceeds from the Copeland transaction. For the year, free cash flow conversion of adjusted earnings was 88%, slightly ahead of our expectations. This also represents a 15.6% free cash flow margin, a metric we plan to utilize moving forward.

Slide 13 details the drivers of adjusted EPS growth from the prior year. Operational performance was exceptional. 10% underlying sales growth and 53% segment-level operating leverage contributed $0.77 of year-over-year EPS growth. FX was a $0.12 headwind. Stock comp was a $0.16 headwind versus the prior year due primarily to the mark-to-market accounting for the company's old stock compensation plan, which was mostly offset by pension and other corporate items. The reduced share count resulting from the $2 billion share repurchase contributed $0.14 and the Copeland note receivable interest contributed $0.05 to adjusted EPS for the year. Overall, adjusted EPS grew 22% year-over-year to $4.44.

Please turn to Slide 14. We believe 2024 is shaping up to be another good year of financial performance. Our end markets remain generally resilient evidenced by 5% underlying orders growth in Q4 and for all of 2023. This has resulted in healthy backlog levels, which were up 12% versus where we entered 2023, giving us good visibility into 2024 sales. We also have good visibility through our MRO business, which was 65% of 2023 sales. This day-to-day replacement business gives us good perspective on pace of business and remains constructive. Lastly, we are entering 2024 with a $10 billion-plus funnel, up $3 billion from where we entered 2023.

This all feeds our 2024 outlook. Process and hybrid end markets remain strong, driven by secular trends like energy security, sustainability and decarbonization, nearshoring, and digital transformation. We expect process and hybrid sales growth of mid- to high single digits in 2024. We continue to see investments moving forward in energy transition markets like LNG, nuclear, hydrogen, carbon capture and renewables. We continue to see nearshoring investments here in the U.S. and around the world in life sciences and metals and mining, especially midstream metals processing and refining, which is being expanded to the United States and Europe. These secular trends in process and hybrid end markets and our ability to help customers be successful give us confidence in our 2024 outlook.

Discrete markets are obviously in a different part of the cycle, which impacts both our discrete automation and test & measurement businesses. Orders have been negative for 2 to 3 quarters, but we expect this to begin to turn positive in the second half of 2024. We expect underlying sales to be flat to up low single digits in 2024 for our discrete business. From a world areas perspective, it should continue to be a balance, and we expect each world area to grow in the mid-single-digit range.

Please turn to Slide 15, where we have outlined our 2024 guidance. Our later cycle exposure, robust backlog and continued orders resiliency support our 2024 guidance for underlying sales growth of 4% to 6%. We expect both intelligent devices and software and control to be within this guidance range for underlying sales. Test & measurement is excluded from 2024 underlying sales and is expected to add another 10 to 10.5 points to reported growth or approximately $1.6 billion of sales. FX is expected to be a 1-point tailwind.

We remain committed to drive a differentiated incremental margins through our operational execution. Operating leverage, which now includes AspenTech, but excludes test & measurement, is expected to be in the mid- to high 40s in 2024, which includes cost savings from our corporate and platform rightsizing. Price cost will continue to be margin accretive in 2024 and ongoing productivity and cost savings will drive further benefits. We expect adjusted EPS to increase from $4.44 in 2023 to between $5.15 and $5.35 in 2024, an 18% increase at the midpoint. This includes approximately $0.35 to $0.40 from NI, inclusive of stock compensation and approximately $0.32 to $0.34 from AspenTech.

There are some movements below the line in stock compensation, pension and other corporate items, which roughly offset year-over-year. This detail can be found in the appendix. As a reminder, stock compensation from NI is now reported in our corporate stock compensation line item. Net interest expense is expected to be approximately $105 million. Lastly, free cash flow is expected to be $2.6 billion to $2.7 billion, which we will discuss in more detail on the next slide. For the first quarter, we expect underlying sales to increase 6.5% to 8.5% with leverage in the mid-30s. Adjusted EPS is expected to be between $1 and $1.05, a 31% increase at the midpoint. NI is expected to contribute approximately $0.05.

As I mentioned, we will discuss some additional details on Slide 16 regarding our free cash flow. We ended 2023 with free cash flow of $2.4 billion or 15.6% of sales. This included just over $100 million of after-tax cash from interest on the undeployed proceeds from the Copeland transaction, which will not repeat in 2024. Taking this into consideration and starting from a foundation of approximately $2.3 billion of free cash flow, we expect approximately $300 million of contribution from NI operations and another $350 million increase from base operations.

This would have resulted in a free cash flow margin of approximately 16.8% or $2.9 billion of free cash flow. However, we have two headwinds in 2024. First, we expect approximately $200 million of acquisition-related cash payments associated with the NI and bolt-on acquisitions. Second, we are expecting an elevated CapEx spend related to facility expansions, which will increase our CapEx to approximately 2.5% of sales, up from our historical and future expected rate of approximately 2% of sales. Including these two headwinds bring us to our guidance of $2.6 billion to $2.7 billion of free cash flow or 15.2% to 15.4% free cash flow margin.

Before we turn the call over to Q&A, I will quickly discuss capital allocation on Slide 17. We remain committed to disciplined capital allocation. Internal development and organic growth investments remain a high priority. This accelerated in 2023 with R&D spend now representing 7% of revenue and NI will further mix this up in 2024. This increase was driven by increased innovation in our four priority breakthrough domains: Disruptive technologies and measurement, sustainability, software-defined automation systems, and self-optimizing asset software. We also remain committed to the dividend and announced today, we are beginning our 68th year of consecutive increased dividends with our $0.525 per share declared dividend this quarter.

The right side of this chart is where we have flexibility. We will continue to be active in pursuit of strategic bolt-on acquisitions to strengthen our portfolio in targeted areas and we will remain committed to strong returns on these investments. Finally, we plan to have approximately $500 million of share repurchases in 2024. We are energized as we enter the new fiscal year, and we are focused on the execution of our plans.

Thanks for your attention. I will turn it back to the operator to open the call for questions.

[Operator]

[Operator Instructions] Our first question comes from Jeff Sprague with Vertical Research.

[Jeffrey Sprague, analyst]

Just a couple of specific NATI questions, if I could. Some noise with the bolt-ons. So could you just be clear for NATI revenues in 2024? And also, if you could provide any color on how their orders progressed in the fourth quarter? And finally, maybe a little bit of around how much of that synergy target happens in the first year.

[Surendralal Karsanbhai, executive]

Yes, Jeff, Lal here. So on the revenue, as Mike stated, $1.6 billion is the assumption. It's not in the underlying sales as we reported. Orders in the environment, as I expressed in my presentation are still challenging in the business, exiting the quarter at down 16% at NI, which is very much aligned to the plan that we had in place. And we do expect much like in our core discrete markets, orders to flatten out as we get into the second half of the year. So feel very much that they're under in plan from an orders perspective, although still in a challenging environment.

And then lastly on synergies. Look, we got off to a really good start, day 1. The team's executing very, very well. We haven't given guidance on year 1. What I did, I will say is that about half the synergies will be delivered in the first 2 years.

[Jeffrey Sprague, analyst]

Right. And just as an unrelated question, maybe it's for Mike. But just thinking about the organic guide for 2024. You're exiting here at 4% price with 5% order growth, right? It feels like there's a little bit of room in those organic numbers. Maybe just share how much price is embedded in that 4% to 6% for 2024?

[Michael Baughman, executive]

Yes. Jeff, the 2024 price assumption is 2%.

[Operator]

Our next question comes from Steve Tusa with JPMorgan.

[C. Stephen Tusa, analyst]

Can you just talk about within the cash guidance, what you're assuming on working capital? And then that $250 million that's kind of running through this year, how does all that trend kind of into '25?

[Michael Baughman, executive]

Yes, I'll start with the second half or the second part of the question first. The $250 million is really onetime and in the year related to the acquisitions and some of the higher CapEx that we've got.

[C. Stephen Tusa, analyst]

Great. And then just working capital?

[Michael Baughman, executive]

Working capital for the year. Yes, we exited working capital, trade working capital at about 20.5%, and we're expecting about 50 basis points coming off 20.5% of revenue. So we do expect to have a little bit of balance sheet goodness in 2024.

[C. Stephen Tusa, analyst]

Great. And then just one last one, just on orders. How do you guys kind of see the funnel stepped up a bit, the backlog, year-ended backlog seasonally, how do you guys going to see orders and backlog trending over the course of the year here?

[Surendralal Karsanbhai, executive]

Yes, I'll comment, Steve. Obviously, we exit at 5%, so we have optimism, and we have momentum out there. Obviously, we have some challenges in discrete, as we talked about in the business. I think as you think about the start of the year, my expectations are flat to low single digits. But as we get into the second half of the year, my expectation is exiting at -- in the mid-single-digit range. And for the full year, somewhere in the low single to mid-single digit orders.

[Michael Baughman, executive]

And then Steve, just on backlog. There -- that pattern holds, there shouldn't be a meaningful change in backlog as we exit 2024. So the backlog should remain healthy.

[Operator]

The next question comes from Julian Mitchell with Barclays.

[Julian Mitchell, analyst]

Maybe first off, just looking at Slide 15. So I wanted to understand why the operating leverage steps up after Q1 when the organic sales growth steps down? Is there any one segment or subsegment or something happening with mix that's driving that? And should we assume that, that organic sales growth just steadily decelerates through the year? .

[Michael Baughman, executive]

Yes, there is a little bit of mix. And I would say the discrete automation softness that we are expecting in the first half of the year plays in on that. There's -- we've been ramping up our spend around growth platforms and innovation. And so as you come into the first quarter, there's a little bit of a year-over-year comparable that plays into that first quarter leverage as well.

[Julian Mitchell, analyst]

I see. So it's really discrete sort of getting better and that pushes up the op leverage.

[Michael Baughman, executive]

That's -- yes, that's correct.

[Surendralal Karsanbhai, executive]

Again, obviously, we're driving restructuring in the discrete business given the trend in the orders, and you will see that margin expansion come through in the second half, which would drive up the leverage rates.

[Julian Mitchell, analyst]

That's helpful. And then just a quick follow-up would be around, I suppose, historically, process cycles in automation followed discrete by around 12 months, and we see discrete is soft now. Are there any sort of specific reasons why process should hold up differently this time versus history instead of following discrete lower later this year?

[Surendralal Karsanbhai, executive]

It's a good question, Julian. One that we've thought a lot about and been watching very carefully. The fact of the matter is that we have some very unusual secular trends going on in the world right now. I think a lot of our process activities driven by three critical areas: The nearshoring activity, which impacts life sciences and the metals and mining value chain; the energy affordability and security, which is impacting significant continued investment in liquefied natural gas and nuclear; and thirdly, equally important sustainability. I think we're past the tipping point in terms of our customers' commitment around sustainability, and we're seeing continued investments there. So whether we believe those will transcend certain economic cycles, and that will impact how we should think about the strength of process as we go through 2024. Ram, you have something to add?

[Ram Krishnan, executive]

Yes. And the other point I'd make, Julian, is the capital spend in process, hybrid industries, has been pretty disciplined. There hasn't been a boom in capital to cause a correction as we move forward as opposed to the prior cycles we saw. So I think that disciplined capital spend plus, obviously, the trends that we all identified where the sustainability investments provide that tailwind, we expect process to continue to run for a lot longer.

[Julian Mitchell, analyst]

I see. So you...

[Surendralal Karsanbhai, executive]

In hybrid. In hybrid. Yes.

[Julian Mitchell, analyst]

Got it. So the process on hybrid orders growth should stay fairly steady through 2024?

[Surendralal Karsanbhai, executive]

That is our expectation, yes.

[Julian Mitchell, analyst]

Fantastic.

[Operator]

The next question comes from Nigel Coe with Wolfe Research.

[Nigel Coe, analyst]

Okay. So National Instruments, I think that the 4Q fiscal sales were down, I think, high single digit organic. Is that the right number? Is my math correct? And it looks like the guide implies flattish to maybe slightly down organic. Just wondering what the profile is on that? And anything on orders? That would be helpful.

[Ram Krishnan, executive]

Yes. So Ram here, Nigel. From an orders perspective, as Lal indicated, the last quarter which is their -- our fourth quarter, down 16% in orders, we expect orders to remain down for the first half and turn positive in the second half. And you are right, the $1.6 billion that we're guiding will translate to down 5% to 6% for the year from a sales perspective. And sales should turn positive in the fourth quarter. So we'll have down sales for the first 3 quarters and positive in the fourth quarter.

[Nigel Coe, analyst]

Okay. Great. I'm sorry, I missed the order number. And then on the backlog, backlog down from 6.9 to 6.6 QoQ. Maybe just to clarify, I don't think that's unusual from a season's perspective. I think it's normal to see 4Q backlog consumption. Was there any FX revaluation impacts there? I just want to make sure to understand the organic movement there?

[Michael Baughman, executive]

No. That's a consistent GAAP basis.

[Operator]

The next question comes from Scott Davis with Melius Research.

[Scott Davis, analyst]

Congrats on all the stuff done. Lal, it sounds like you were just in China and you were around the world, and it seems pretty topical to get an update from what maybe you saw there. I'll just leave it there.

[Surendralal Karsanbhai, executive]

Yes, I, actually, on this particular trip did not hit China. We'll do that later in the year. I was there in May. But having said that, look, we had a very good year in China. We exited orders at 11% in China. So feel good about the momentum there again. There -- the investments there are really around energy security and nearshoring are very significant. Sales in mid-single digits for the year, but we continue to see robustness in our core process and hybrid spaces, and not unlike Europe and the United States struggling on the discrete side. But certainly, the process hybrid strength will continue as we expect into 2024.

[Scott Davis, analyst]

And then the discrete in China was negative, I'd assume this quarter?

[Surendralal Karsanbhai, executive]

Yes, it is negative in the quarter. Yes, sir.

[Operator]

The Next question comes from Joe O'Dea with Wells Fargo.

[Joseph O'Dea, analyst]

One, just on the NI's earnings contribution for the year. $0.05 in the first quarter would be kind of running, I guess, $0.10 a quarter or a little better for the rest of the year. But any more detail on that cadence, anything that's sort of cost heavy upfront and then the progression through the course of the year as you're thinking about that earnings contribution?

[Surendralal Karsanbhai, executive]

No, I don't have anything else to add, Joe. I mean, obviously, there's, as Ram expressed, a volume expansion as we get to the second half of the year that will drive leverage and incremental profits. But that's really what the tale of the tape there is.

[Joseph O'Dea, analyst]

Okay. And then on the R&D side and the step up to 7%, it sounds like it goes even higher in '24. Any context on that? And then sort of additional insight on sort of the products and verticals that are getting outside investments as well as what your returns focus is on R&D, the prioritization around share gain or sort of the revenue dollars that you want, returns on R&D investment? Any sort of context around that?

[Surendralal Karsanbhai, executive]

From a dollars perspective, yes, we get the benefit of Aspen coming in, that mixes us up and then NI comes in and also mixes us up. So you'll continue to see that commitment to growth, innovation, accelerate and increase as we move on.

[Ram Krishnan, executive]

And in terms of where the investment is going, a lot of the investment really is across the four technology areas we've consistently showed you guys. It's a disruptive measurement, which is the sensing technology in our measurement technologies business; our automation system, the next-generation automation system that Lal referenced in the presentation; and also collaborative technology development with Aspen around asset performance management. So those are the areas where we see lots of opportunity in terms of new to the world type innovation that we can drive as an automation company, and that's where the investment's going.

[Operator]

The next question comes from Christopher Glynn with Oppenheimer.

[Christopher Glynn, analyst]

Just curious about the funnel conversion comment. I think last quarter, you indicated that conversion rates of those are picking up as the size of the projects ramps and some of the newer technologies and applications. So just curious, trend line, if you're seeing further acceleration and how much of that notion is baked into the fiscal '24 guidance? Or could that be an opportunity?

[Surendralal Karsanbhai, executive]

No. Chris, Lal here. No, look, we continue to see the funnel expand organically to begin with. So it did grow from quarter-over-quarter, which is why we thought it was important to show you. But what's most interesting, it's growing in the right spots for us. It's growing along the growth platforms where we have the focus of the organization. So that comprises about $6.6 billion of the funnel today, of which energy security and transition is a big part of that and sustainability and decarbonization are large part of it.

If you look at the wins, they're very much aligned in the same way as the funnel, winning at about 60% aligned on the growth platform-ish with energy transition a big part of what we are converting here. So we feel really good about it. We're watching it carefully, of course, in terms of movement through FID and other elements. But at this point in time, continue to have optimism, particularly products that are purely connected to national security, nearshoring or energy affordability elements. So we feel pretty good about what we see in front of us.

[Christopher Glynn, analyst]

And if I could ask another. On discrete, what kind of impacts are you seeing in terms of channel versus end demand?

[Ram Krishnan, executive]

Well, from a channel perspective, I mean, if you're referencing destocking, we're not seeing that. The discrete slowness is purely market-driven. Certainly European machine builders, China as an end market and an overall slowdown in the factory automation segment in North America. And you see that with obviously a lot of our peers that have a lot more exposure in discrete, frankly, versus our peers were holding our own in terms of the order rate decline in discrete, and we do expect to see a second half '24 positive orders for the business.

[Operator]

The next question comes from Andy Kaplowitz with Citigroup.

[Andrew Kaplowitz, analyst]

Well, I think last quarter when you began to talk about FY '24, you mentioned more normalized incrementals in the mid-30% range, but you're guiding to mid- to high 40% ex test & measurement. So could you give us a little more color into the assumptions? I know you get price for '24 and your starting off a little lower, but it seems like you're still getting supply chain tailwind benefits. How would you assess your performance versus your longer-term algorithm of 35%? Is it possible that, that algorithm could be a bit conservative?

[Surendralal Karsanbhai, executive]

It's possible. Yes, Andy. We've been operating in the mid-50s over the last couple of years. There's a significant amount of momentum around cost in the business. As I mentioned, we have tailwinds that will be delivered through the actions we're taking, not just within the segments, but also our corporate as we go through 2024. Now having said that, on the supply chain side, we're on the positive side of most of the measures. Obviously, logistics environment is flipped. And on material flow, generally significantly better. Of course, we fight spot shortages as you'd expect in any business. But generally, we are in a very different world on the supply chain. So that's all very positive.

So it's really around execution. Look, we have a -- the gross margins of the business are 49% in 2023. They'll expand further, as Mike described, in 2024. And with that comes an expectation of a higher leverage and a higher incremental for the business. So at this point, feel very comfortable with the guide we put out there for the year in that mid- to high 40s which is, I think, differentiated. And we think through what we talk about and guide on a longer-term basis from a financial plan perspective as we go through the year.

[Michael Baughman, executive]

Just to amplify that a little bit, Andy. We've also been talking about this $100 million of corporate platform cost takeout, which has been reading through in the businesses, and will read through in the business in '24 as well, which is an uplift for the year.

[Andrew Kaplowitz, analyst]

It's great to hear. And then I know you want to retire the KOB1, 2, 3 names. But when we think about '24, I think you've been averaging kind of like 65% KOB3. Would you expect that to hold up and around that level? And what are you seeing on the KOB3 side? Is there just a lot more activity that could also help with margins, given that tends to be higher margin work?

[Surendralal Karsanbhai, executive]

Yes. No, we certainly expect MRO in the 60% range for 2024, Andy. You're absolutely right, it's the most price elastic portion of our business. It's typically replaced like for like within processes. And so we feel we have a great understanding of where the install -- the $150 billion of installed base is located. And we have specific programs across our service organizations and selling organizations to ensure that we mine that and we keep that product evergreen. So I feel good about that. But in that 60% range, I think, would be the right expectation.

[Operator]

The next question comes from Tommy Moll with Stephens.

[Thomas Moll, analyst]

Well, I wanted to start with a follow-up on discrete. You've called out the weakness there previously. Obviously, it's been front and center today. So I'm just curious, were there incremental pockets of weakness you picked up through the last quarter?

And as you look through to the second half of the coming fiscal year where you expect a return to growth, is the visibility there more just a comps issue? Or are there some green shoots in terms of the real underlying demand that you can call out at this point?

[Surendralal Karsanbhai, executive]

No. So a couple of things. What we're experiencing through the quarter, or we have experienced through the quarter is demand-driven weakness. It's -- as Ram accurately portrayed, it's not a destocking element. As a matter of fact, a very small percentage of our business runs through stocking distributors in the discrete side. But nevertheless, it's demand that we're really focused on. And it's global weakness across the key markets. Now having said that, the comparables do get easier as we get into the second half. We're not counting on underlying demand conditions in the discrete's market, significantly improving in the second half. What we're benefiting from is obviously the comparators for us.

[Thomas Moll, analyst]

Makes sense. And then if I look at the consolidated outlook you've provided for the first quarter and then the full year, you're starting the year in the high single-digit range. Full year in the mid-single-digit range, so there's some deceleration implied there. Is there some conservatism around there just given the issues you've called out on the discrete side? Are there comp items that you would point out for us?

[Surendralal Karsanbhai, executive]

There's nothing extraordinary other than we got to be cautious on the discrete cycle.

[Thomas Moll, analyst]

Great. We appreciate the insight.

[Operator]

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.