Emerson Electric Co. (EMR) Citi's 2024 Global Industrial Tech and Mobility Conference (Transcript)

Emerson Electric Co. (NYSE:EMR) Citi’s 2024 Global Industrial Tech and Mobility Conference February 20, 2024 9:40 AM ET

Company Participants

Lal Karsanbhai - President and CEO
Mike Baughman - EVP and CFO
Colleen Mettler - VP of Investor Relations

Conference Call Participants

Andy Kaplowitz - Citigroup

Andy Kaplowitz

All right. We're going to get started again. Thank you for joining us. We are really excited to have Emerson with us today. We've got Lal Karsanbhai, who is the President and CEO. Lal started in 1995 in Emerson. Mike Baughman, who's the EVP and CFO. Mike joined the company in 2017. And then, we have Colleen Mettler, who is the VP of Investor Relations.

So Lal, I'm going to come over to you. And while I do, I'm going to ask you about your vision when you took over Emerson a few years ago. Can you talk about where Emerson is now versus that initial vision? What would you say has gone better than expected? And then maybe what are one or two things that have been more challenged than you expected? And what's your confidence level at this point versus the Investor Day you hosted in late '22 that Emerson could deliver 4% to 7% due to cycle growth?

A - Lal Karsanbhai

Thanks, Andy. Great to be here. Good morning to everybody. Certainly, we set out on a very intentional journey to execute on a vision that, at least from an external perspective, involved a significant shift in our portfolio. And it was a design -- the design that we aim for, was to create a company that had exposure to macro secular drivers that would yield growth that created a portfolio that had diversification of market exposure and a portfolio that had higher profitability opportunities.

It was a long three years. Obviously, as many of you we probably executed a little quicker than we actually thought originally, but we did a lot of work over three years, $36 billion of transactions over the three years, both the disposals, most notably InSinkErator, Climate being the two; and on the M&A side, of course, with the majority stake in AspenTech and National Instruments. But today, we find ourselves in a place which is entirely aligned with the design that we set out to create. And we feel really good about the opportunity that we now have to execute and to deliver differentiated results with this portfolio of companies.

The two other aspects that I'll mention are the work that we'll continue to do in our company around culture, which is very differentiated for us in terms of our ability back and retain the best talent. And thirdly, the work we've done on our management process, our management system. How run the company, how we empower our managers to make decisions and to drive for results. Feel really good about those, and we have assembled a great C-suite of officers, entirely essentially new from three years ago. And feel good about the future ahead of us, Andy.

Question-and-Answer Session

Q - Andy Kaplowitz

Well, maybe just one follow-up because I think culture was a big deal to you when you became CEO. So like where are you on that progression? Are you -- where you want it to be or how much more do...

Lal Karsanbhai

Yes. No, look, I think culture for anyone who speaks about it, very honestly, something that is continuously evolving. We happen to be a company that got stagnated at one point in time in terms of our culture. And so it was important for us to at least get off the starting block and modernize not just work practices, but how we think about inclusion, our engagement level in our company that sits right below 80%, which is a very high level today. And we continue to have the right mechanisms and to listen to our employees and to address the work that we're doing. But also the commitments we've made around diversity, both from a governance perspective, of course, but also as a leadership team in the company.

Andy Kaplowitz

So Lal, can you just update us on anything you're seeing in the quarter that might differ from running? I know earnings weren't that long ago. Is Chinese New Year driving any impacts? How is order progression looking for the year, whether it's first half, second half, full year?

Lal Karsanbhai

I can -- you want to add a little.

Mike Baughman

Yes, I will cover that one and I'll take that one and give you a break here. Yes, Andy, the -- since the earnings call really quarter shaping up as expected. We were pleased to end the first quarter with a 4% in orders growth rate. We expect that to be low single digits in the first half. And then as the discrete businesses turn, we expect to see mid-single digits for the full year. So, really no change there and no change around the revenue expectations either.

Andy Kaplowitz

Got it. And then Mike, this might be for you or like you did lower your FY '24 incremental margins a bit, really just FX to low to mid-40%. But you've been running ahead of your longer-term algorithm of 35%, and that's obviously without the higher gross margin. So do you think you can sustain that kind of margin improvement you're delivering in '24 over the longer term?

Mike Baughman

We've been really pleased with the margin accretion and the resulting leverage that's going on. And as you said, with our mixing up the business, obviously, last year was a pretty extraordinary year. We managed I think, exceedingly well. Remember, last year, we also had a mix dynamic that was favorable on all fronts. So -- yes, the FX that you discussed, I think everyone understands is the FX changes, assumption change and the revenues come in, they'll come in at a lower margin than incremental revenues will come in. But yes, it's a metric, the 35% some metric that we'll continue to evaluate, but we've been -- really pleased with the performance over the last two years for sure.

Andy Kaplowitz

And Lal, maybe back to you. China, how do you think about the prognosis for the business there longer term? I think I understand it's very differentiated there, high single-digit growth in Q1, mid- to high-single digits for the year. But could you elaborate on why you're winning in China? And talk a little bit more about your regionalization strategy in China, the visibility you have towards a process and hybrid growth in China?

Lal Karsanbhai

No, happy to, and we were just there in late -- right before the holiday break, which was great to connect typically travel to China a couple of times a year, engaging with customers and, of course, our people. It's a heavily regionalized country for 96% approximately of everything that we sell in China is made in China. We're not dependent on outside exports to serve for the most part, to serve the market. About $2 billion in revenue, 11%, 12% of total sales, and I, of course, adds to that as we brought them in.

It's a company that's run by local talent across China for us. We have one expat in a business where we have 7,000 people, and that person is originally from Hong Kong. So it is certainly very differentiated, particularly when you look across how our peers are structured. Manufacture, we source. We sell locally. We apply the engineering locally. Look, the secret sauce there is aligning with customers that are growing. It's a lot different than anywhere else.

Near-shoring is important in China. Energy security and affordability is important in China. Sustainability is important in China. Digital transformation is important in China. And they're making the investments they're making may be slightly different from what we see in Europe and the United States, but relatively consistent. And our technology applied to those. So I foresee mid-single digits for the year, Andy, as we go forward. And we, again, structure our business and align our resources there to make sure that we can continue to work with our customers.

Andy Kaplowitz

That's helpful. And then maybe just stepping back, you've got this project funnel that you updated us on and it was up to $10.4 billion versus $10.2 billion last quarter. How should we think about growth in the funnel moving forward as well as Aspen's contribution? And maybe just a follow-up there, too, is like -- you've highlighted the funnel opportunities are sort of aligned with your growth programs, right? So maybe talk about what's contributing to growth in these areas?

Lal Karsanbhai

Yes. $10.4 billion -- the funnel was approximately $9.5 billion, $9.7 billion in August of '23 as we reset it. Certainly, energy transition is a big part of that funnel. And over the last three quarters or so, you've seen a significant amount of activity, particularly in liquefied natural gas, in the Gulf of Mexico, of course, but also in Qatar, the East Coast of Africa and in Guyana. So, we have a significant amount of activity that's related to that transition that's occurring on a global basis.

But importantly, for us, it's well beyond that. life sciences, which is why we thought about including getting the funnel, power generation and what's going both happening both in sustainable power generation and the traditional sources with nuclear becoming a more relevant part of the transition story. And there's a whole slew of other sustainability programs that are now a very significant part of the funnel.

So, it's a two- to three-year view. It's dollars that are specific to Emerson or automation spend. We executed about $400 million out of that funnel in the last quarter. $300-million-odd was added on. I think culling through the quarter. And we're winning it somewhere in that 50-ish percent rate across what we see. So, we feel pretty good about that as we go forward. Again, it's something we watch very carefully. It's part of the management tools that we have. But as you know, in our business, it accounts -- that funnel accounts for about 12% or 8% of everything we do. We have such a large MRO portion of the business, that's also important to manage.

Mike Baughman

Andy, can I just build on that too, just to make a point, the last two quarters, we have very intentionally shown what's coming out of the funnel. The funnel is great, winning is even better. And if you look at what's making up that win in each quarter, yes, we continue to be strong in our core traditional energy power chemical. But you see a lot more of the blue as we've colored it that are the sustainability, LNG, nuclear, life sciences, metals and mining. That's now north of 60% in the last couple of quarters. And that sort of speaks to the secular tailwinds and the mix change that's happening in drivers for our business.

Andy Kaplowitz

That's helpful. And Lal, as you know, it's an election year, so you get some noise from Washington and you had this pause in LNG, and you were asked that question on the earnings call, like -- and I think you gave an answer or talking about how these are kind of long-cycle businesses, and there's a lot of opportunity internationally. I mean so how do you view LNG here? How does it impact your funnel? Like how do you think about -- because it is still a pretty big end market for you?

Lal Karsanbhai

It is. It is. And if you look across our funnel today, there are approximately 12 U.S.-based LNG projects within that funnel, about $500 million, $600 million of value out of the $10.4 billion odd funnel size. I would suggest that somewhere between eight and nine of those projects are potentially impacted by FERC approval or impacted by the lack of having future export approvals. They're out in the out years.

They're not calculated into our '24 or maybe later '25. So the action may have an impact, obviously, as those move. Having said that, the activity outside of the United States continues to be very robust, and the activity in the United States of projects that have that export license approval continue to move forward at an under 30 pace. So we continue to feel good about. Again, an energy source that I think is critical in the transition.

Colleen Mettler

Yes. Well, and I think to just a reminder. It's a global business. They're going to -- you take a look at Europe, they're going to need the gas. So if it doesn't come from the U.S., we're actively participating in projects outside of there as well. And so I think that's important. The other point I want to make, and you kind of hit on it, too, but we get the question quite a bit in backlog. Those projects are ongoing. They're under construction and no impact to what we're expecting for our 2024 in terms of revenue expectations. Those are ongoing and no impact.

Andy Kaplowitz

That's helpful, Colleen. And -- so you get this question all the time, right? So discrete has slowed, so that must mean that processing hybrid are going to slow. And I think it's hard for us, right, is we don't have the ability that you guys have into things like near-shore and on-shore or you mentioned energy transition. So like you've been doing this a very long time, right? So maybe you can opine on sort of give us examples of how it's impacting the business, whether it's near-shoring or whether it's energy transition? And how long is the durability of these trends?

Lal Karsanbhai

Yes. No, I have gotten the question now for three or four quarters, of course, Andy. And it's a very rational question and I think a very rational conclusion. You want to look at prior cycles to try to predict the future, as we do. We are a very numbers run company. We're a very analytical company. And so we look at what's happened in prior cycles as the discrete market has led downturns. Equally, the discrete market typically has led recoveries in the macro. And we continue to be somewhat surprised that we haven't seen that degradation in the hybrid and process space.

I can solely account it to two elements, and I'll give you a couple of specific examples afterwards, one being the macro secular. I don't think any nation out there and ours included, is taking their foot off the pedal on the near-shoring initiatives. The life science projects continue in places like China, in places like Australia, in places like Northern Europe as those countries will not again be dependent on other countries in the next pandemic or the next health crisis.

The metals and mining exploration work and processing work continues on a global basis as well. Again, those trends, we haven't seen any slowdown at all. Energy transition we just talked about, another one that I think is a macro secular element. Today, for us for gas, but I think nuclear and what were the developments that we're seeing in nuclear beyond the SMR, but even in traditional nuclear in places like India, the Middle East, and of course, extension of nuclear power plant life in Western Europe and in the United States, very important as well. So, those aren't critical. And I think those have a secular impact that I think is differentiated.

But the second element is that in the last cycle of capital formation, we didn't get -- our customers didn't get out of control. I think the spending was a lot more managed as our customers went through that cycle. And so, we didn't have a lot of capacity that was built where we now -- there was a lot more, I think, management around cash and investors. And I think we're benefiting from that more moderated spend as well. So, that's what we're watching. Of course, we look at units. We look at units coming out of our plants, stocking units, everything else that we can try to predict. And certainly, within our Process and hybrid businesses, we have businesses that are ahead of others, and we look at units in those areas as well.

Andy Kaplowitz

Lal, you mentioned India, like I told you earlier today, like surprise at the most comments around India and Saudi adding up to maybe what China is like you guys have a big Middle East business, too, and India is growing. So how do you look at Middle East and India versus China? Could it be as large you want to?

Lal Karsanbhai

I thought the comments were great. I was just in India and the Middle East in late January. India is our single fastest-growing country in the world over the last three years. It's growing at a clip of above 15%. We have a large presence in India, a long 40-year historical presence in India and continue to make investments. We have engineering regionalized -- global engineering in Pune and Bangalore, and we have regionalized manufacturing in Chennai, and north in just south of Mumbai. That serves the region and serves to some extent, Southeast Asia for us as well in the Middle East.

Saudi Arabia, again, one -- Middle East as a whole, one of the fastest-growing regions as well. So look, it's somewhere together around $1.3 billion, $1.4 billion Middle East and India, $1.5 billion. China is $2 billion. It's growing at a higher rate than China today. So I'm not surprised by the comments, and I would concur that the investments we're making in Saudi Arabia and India align with the future potential that both those markets represent for us.

Andy Kaplowitz

Very helpful. I want to open it up to the audience in a second, but let me ask you this other question about AspenTech as I'm sure you get this all the time as well. How do you think about your ownership stake? And as you know, the standstill agreement ends a few months from now. So could you reflect on your two years of ownership? When you announced the deal, you mentioned expected $110 million of EBITDA from revenue and cost synergies by '26 for Aspen and then another $45 million of synergies for Emerson. Is Aspen and Emerson is still on track for these estimates. And then you know Aspen has had a time some quarterly volatility and even integration issues. So how do you think about the commercial arrangement that you have?

Lal Karsanbhai

Yes. No, it's a great question, anyone that's important to address. Certainly, we believe as a business that it's important for us to have a year of quiet from a portfolio transformation perspective. We worked really hard to create what we've created. And we're off to a great start from an execution perspective.

We have some important tailwinds in our markets that we want to make sure we capitalize on. And so, 2024 for us is a year for us to prove that we can create value with the business that we've created, which means we will not undergo any kind of change on a macro on a large scale, like an Aspen transaction or another disposal. .

We may do a bolt-on here and there. Those are sub-billion dollars things. We have two or three that we're constantly pursuing, but nothing on a major scale. In terms of specific AspenTech, yes, we've learned a lot working together. Nothing's really changed my perspective in terms of the three important factors of why we put this together.

Number one, we believe we have the majority stake in the best industrial software company out there, that is most relevant to our customers, that is best aligned to the control system and differentiating our offering. And some of the commercial examples that we've shared with you, be it in the chemical space, the pulp and paper space, the life science space aligned to the joint power of Emerson -- commercial power of Emerson and AspenTech.

Number two, the technical differentiation and the ability to execute on a vision that we have around innovation and technology cannot be done alone by Emerson. We need the analytical models. We need to code that's embedded in the AspenTech modeling and predictable software. That's truly going to differentiate what we can do as a company from an analytics perspective on a go-forward state with the distributor control system.

And then number three, look, we have a great governance model. I have a great relationship with Antonio. We spend a lot of time together. Our boards are close. Of course, we have Ram on the Aspen Board. And we continue to look at M&A opportunities there. We continue to look at opportunities that, that company can continue to differentiate in the markets that it served. And so at this point, we're going to run it, and we're going to see how '24 shapes up.

But again, as you know, it's not going to be -- the answer on AspenTech from my perspective, as I sit here today, is not going to be that we're going to sell off our ownership in it. At some point in the future, it's very likely that I'll stand in front of you and tell you that we're going to acquire the remaining stake, and we're going to hard integrate it into Emerson and create a systems and software business that starts to inch towards 20-odd percent of our revenue as it grows. But today, no. Today, that's not the answer. And today, we continue to run it as...

Andy Kaplowitz

Any questions from the audience? Any questions? All right. Then, we'll keep going. So Lal -- and maybe this is for Mike, a little more color into expected free cash flow for the year and how you're thinking about conversion at this point? We know you have a couple of hundred million of acquisition and integration costs are impacting '24. But your adjusted free cash flow conversion still is a little below 90%, including those costs. So what's your confidence level that you assume 100% conversion next year as these costs aren't repeating how much working capital opportunity do you have?

Mike Baughman

Yes. So we held our cash flow guide at $2.6 billion to $2.7 billion with the headwinds that you mentioned around acquisition integration and a little bit of elevated CapEx for '24. And you got the numbers right. If you adjust for that, you end up around 90% free cash flow conversion. We continue to grow, which requires some working capital and other things, but we do expect that free cash flow conversion metric to continue to move toward 100% for sure. The one metric that we're spending more time with that we think is very meaningful as free cash flow margin. If you think about an adjusted conversion, it's a little less comparable across peer set.

Everyone has a little different definition of adjusted, but I really like free cash flow conversion because it's three GAAP numbers, and those tend to be a lot more consistent. And if you look at our free cash flow conversion, we'll be around 15% reported, over 16% on an adjusted basis. And when you begin to compare that across our peer set that looks differentiated, and we expect to get it up to the 18% level which would clearly break us out from the packet companies that sit around 15. And I think that's a great measure that is very comparable that speaks to our ability to turn revenues into cash. So we're watching that one very closely.

Andy Kaplowitz

Helpful, Mike. And then maybe shift gears and talk about National Instruments a little bit more. So you raised your synergy targets. You went to $0.40 to $0.45 from $0.35 to $0.40. You're at $1.65 for five years, and now you're at $1.85 or three years, by year three. So I do think we understand the need to be conservative as you first integrated. But maybe you could tell us what's been the biggest positive surprise in terms of where you've been able to get more synergies? And has there been an area of the plan for integration that's actually been more difficult than expected so far?

Lal Karsanbhai

No, it's been a really good start. We have a great management team. We were blessed that we found the leader in retreat in the business, which is always an advantage. She has been in the company for almost five years now. Understands the technology, understands how the company works, but wasn't born in the company. So she brought a perspective that was very differentiated to us as a management team around a vision to create value in natural instruments.

She created a new management team around her, many from NI who moved up into new positions. And then we infused three Emerson talents into the company as well to create what we believe is an excellent management team. So they're -- and they got off to a very fast start. They did two very significant rounds of actions in the first 2.5 of ownership to really set the stage for operating at a lower level of SG&A and higher level of productivity.

Areas that have been impacted, of course, with general G&A functions. Selling as we continue the transient into more of a bifurcated selling models using distribution, digital channels as well as direct and of course, looking at it, the engineering resources as well. For us, we made a commitment that a bunch like we did with DeltaV that we're going to be an Austin-based company on our technical differentiating. We believe we can augment that engineering talent, which is very strong in Austin with talent in places like Pune, India and Bangalore where we already have a base. All that work is vastly, vastly underway.

There's been a lot of customer engagements that have been inclusive of myself and Ram Krishnan as well as we've gotten to know the National Instruments customers. That's been really important to calm the waters a little bit after such a large transaction and perhaps somewhat one that would alarm a customer and that is not familiar with Emerson and has had the history with us. So that's been very useful as well over the last months.

Look, as we go forward, what we're watching now, Andy, is the order rates. It's down in the mid-teens. That's very much where we've planned it. But we're watching how that recovers into the second half. We expect that to turn positive in the second half of the year. And you've seen the kind of P&L that they're putting up in the tough sales environment. As orders turn and sales convert, I think we'll have a phenomenal opportunity to drive more value there.

In terms of upping our number, look, it's still very cost based. I get asked the question about synergies on sales as well. I wouldn't be surprised that when we come out in the fall is, if we do an investor conference at that point, we may then we talk a little bit more about sales synergies because they do exist, particularly in the semiconductor space and in the automotive EV space, with some of the traditional Emerson discrete and automation companies. But we're still working that. And we want to make sure that when we do come out and commit to those that they are numbers that we can stand behind and deliver.

Andy Kaplowitz

One follow-up, Lal, there. Like you -- they obviously had -- they spend a fair amount of money in R&D. You have a big global R&D franchise. Like I feel like that's one of the big opportunities is to sort of leverage your franchise. Like so how have you proceeded on that front?

Lal Karsanbhai

No. Look, there are two ways you can quickly ruin a company. Mess with the sales force and mess with the engineering and ruin the innovation feature of the company. We're a company that's investing somewhere between 7% and 8% of our revenue in innovation today. We believe that that number continues to creep up, but innovation has to have a purpose.

I think we, as stewards of many industries an automation in many industries over the years have proven that there is a role for R&D. There's always a role to think about what the future looks like. But the bulk of your innovation spend has to be in commercial ideas. Ideas like a customer that will solve a problem that will move an industry. And that's where we found the mix at NI wasn't necessarily appropriate.

There were a disproportionate amounts of fund research projects and not enough to have commercial viability. And so just adjusting that mix, taking some cars off the highway, there are 10 very important programs within NI that we need to get done in the next 18 months. They're funded, they're protected and there's still a little bit of a role for what the future may look like, whether that's the integration of AI and the testing systems. Whether that's the next-generation chassis on the hardware, all of that is still ongoing there as well. Do you want to say something.

Mike Baughman

I just want to add one point around test and measurement, which is we are bringing the Emerson management process to the business, and you never know how that's going to go. It's a rigorous process, and the team has really embraced that. So Test and measurement colleagues, I'm sure, listening. Thank you very much. So far, it's been great, and we certainly find ourselves more like than not, which is important.

Colleen Mettler

We have a very similar culture to ours. It's a learning collaborative culture, very customer-oriented and obviously innovative as well. And so I think as they -- we came in with them, rate management system, working together, it's been a very collaborative process. And I think also contributes, Andy, to the success we've seen so far and our confidence to be able to bring up those synergy targets.

Andy Kaplowitz

That's very helpful. And then, Lal, maybe just digging in a little bit to the expected discrete recovery that you mentioned. You did mention some green shoots, particularly in semiconductor. Over the last six weeks since a few weeks since you reported seeing anything else in terms of discrete? And how do you get conviction in the second half recovery?

Lal Karsanbhai

No, we continue to see kind of that high single, low single-digit number. As we go through the quarter, they were down about 7% on orders or so, on sales, excuse me, as we went through the quarter. But we expect that to recover in the second half. That's what we built into the plan that we shared with you and guide -- some of that's just built on the comparatives that we have. We're not a high stocking company. We don't have a lot of our technology that sits on distributor shelf.

But there is some amount of that in our discrete business, if it exists anywhere it's there. And so we're watching those turns within our distributor partners, particularly within our ASCO brand and Appleton brands. We're watching what's going on in semiconductor. We're watching what's going on in the automotive space as well, which impacts us significantly there. But I still believe that the early signs are positive. And that we'll see that quarter recovery in the second half, which gives me then a little bit of more confidence that we can exit the year at Emerson in mid-single-digit type of rate.

Andy Kaplowitz

Got it. And do you see any difference between the NATI business and your own discrete business in terms of pace of recovery just out of curiosity?

Lal Karsanbhai

NATI is probably going to move ahead because they're in the development part as well as production, whereas we are predominantly in production on our discrete piece. So you're going to see when those investments are first made in the next-generation X, Y or Z, you're going to see the spend pick up at NI, I think, first.

Andy Kaplowitz

So you don't seem to get a lot of questions anymore regarding safety and productivity. So I feel like I'm going to throw one in there and just say revenues have been sort of relatively lethargic the outlook for that business instead of that, how do you think about what's core versus noncore in Emerson these days?

Lal Karsanbhai

No, certainly, it's a really good business and very differentiated in the markets it serves. It's a commercial industrial business for the most part. These are tools that are used by professionals, not by your typical homeowner for the bulk of that business. For us, it's not a value unlock opportunity, if we were to do something with that business. But to be frank, it's not a "automation" business.

It's a business we like to own. It's a business we know how to operate. It's gone through a cycle. It's not recovering. It's going to flatten out a little bit, which we like. It generates very good margins, very high level of margins, generates very strong cash flow. So, if there's an opportunistic somewhere down the road, we may look at it. But for the time being, we don't believe that it's part of an equation that we need to solve in terms of the portfolio.

Andy Kaplowitz

And just in terms of portfolio, Lal, you mentioned this will be a quieter year. But you also mentioned you might still do bolt-ons. Like are there any white spaces that you have left in the portfolio?

Lal Karsanbhai

No, surely. We just opened up a $35 billion TAM with electronic test and measurement. And certainly, Ritu and her team will have priorities in terms of bolt-ons there. There are many interesting spaces across semiconductor, EVs, aerospace and defense as well. So we're looking at that. There continue to be opportunities in the traditional process space in areas like gas detection in areas like advanced measurement that we continue to look at.

And of course, the discrete space, that's an area where we want to build on the electrical Linear Motion acquisition we did at the tail end of last year a fog with other capabilities that will drive differentiated growth in discrete. So those are really the areas that we're looking at, Andy. And then the last one would be within the AspenTech space, the industrial software area, whether that's in grid management which we believe there are good opportunities or a little bit more in the traditional energy or power segment.

Andy Kaplowitz

Got it. I'll open up to the audience one more time in a second. But like -- so one of the comments you made in the early going, Lal, was around MRO. And still the majority of your business. I think on the call, you had alluded to -- you seem to suggest that MRO could stay around that 65% of revenue for '24, which I thought was maybe a little bit better than what you started talking about the year at. Is that because MRO is better or projects are moving to the right like head...

Lal Karsanbhai

It's -- we have $150 billion installed base around the world. That is -- and that installed base, we know exactly where it is. We know it sits for the most part. We understand how long it's been in service. And we have programs designed across countries, customer sites, and units within customers to ensure that when that product has an opportunity to be replaced or to be upgraded that we are in a position to do it.

So these -- and we have incentives around service organizations and selling organizations to do so. So I have a very strong -- we've built that over time into a very strong business on its own because, of course, of the differentiated profitability that it brings to our company as well. It's a price in elastic business for the most part when you are selling a like-for-like replacement and you've done all the hard engineering work already.

So I feel really good about that, and that's got an engine of its own that propels it forward. Of course, NI as it comes into the business, will impact that mix of MRO, that's XNI. NI has somewhere between $14-odd billion of installed base around the world. So they'll add to our installed base, but they have a very different more capital-intensive spend to their business. So we'll remix that with you as that goes forward.

Look, I think it's a mix of both, right? We continue to execute on that 12%, 13% capital opportunity. Those typically sit in backlog for a lot longer period of time, whereas the MRO churns on a book-to-bill that is relatively shorter, sometimes a short as within the quarter itself. So it's a mix of both, Andy. But I think 65%, 63% is not a bad number.

Andy Kaplowitz

No, that's pretty good. And Lal, you kind of alluded to this earlier, when you talked about Aspen and the drive towards 20% software, like just if I step back and think about recurring earnings in general, like where is your focus these days, like because it seems like maybe you don't get enough credit for the business and recurring. Like so, where is your focus on the recurring side would you say?

Lal Karsanbhai

Yes. No, I'll let Mike make a few comments here. But look, we have a very differentiated unique technology stack. And there's not a moment in time where we think about our business in so blocks. We think about the holistic ability that we have to create a differentiated solution for our customers. Whether that's the intelligent devices, whether that's the final control elements, the control system and the evolution that we have ongoing around the Ovation and DeltaV.

And then to your point, the analytics layer that sits on top, all equally. And what makes the analytics powerful for us -- excuse me, powerful for us is that our intelligent devices are at the application. We understand how -- we don't make compressors for industrial applications. We don't make pumps, but we understand how pumps fail. We understand what makes a pump work because of our sensors that we use, which then drives our ability to model those analytics in a very differentiated way.

We moved some of that controls of this business into more of a recurring revenue model as we evolve into a more suggest hardware agnostic system autonomous system. That's an evolution that we have underway. But of course, that will take some time as well, but we're starting that journey.

Mike Baughman

I agree, as usual. You've -- I don't know me I would only add the carpeting focus around verticals is also helpful in that regard, and we continue to do that, and I think that will bear-fruit as well.

Andy Kaplowitz

Any audience questions? So let me ask you -- I ask this question of every company and I asked it to you last year. What are the top two or three innovations and structural changes affecting your company over the next five years? And are there any emerging industry trends that are perhaps being overlooked in the current disclose?

Lal Karsanbhai

It's a great question. Look, think about all the hard work we did in reshaping the portfolio. To your original question, Andy, which I thought was excellent. Our objective and a commitment that we made to you, was to grow -- create a company that can grow through a cycle at 4% to 7%. That's no easy fee given where we came from, which was a company that could grow 1% to 2%. That's what we did over 20, 30 years. We are now positioned our portfolio to grow 47%. Some of that comes from the markets we're exposed to.

You point to ship in the right direction. You get the exposure of a market that's growing faster than the markets we used to serve. But the remainder of it has to come from the things we do inside of our company. How we sell and most importantly, how we innovate. Those are within our control. And so innovation in our company is of critical importance and ensuring that what we've done in the past, which has been really good.

We've been stewards of the automation industry from the -- from heart to wireless heart to foundation field bus to the evolution of digital from analog in the control systems. These are all innovations that we, as Emerson drove over many, many years. And today, we have an equal responsibility to think about disrupting not just ourselves but the industry yet again, whether it's the next generation of our sensor technologies, whether it's thinking about sustainability and products that are necessary for the world to transition particularly around hydrogen use and things of that sort.

But for me, the most exciting of all the innovations that we have is what we're calling boundless automation. It's really a disaggregation. You can think of of how a control system works. Today, despite everything we've done and how much we talk about data, data is still very siloed across most customer bases. It's used by departments, it's captured by departments and it's processed by departments. But it's not holistically viewed for an enterprise. And there's very little connection at a ITOT level for that to happen.

A boundless automation vision does exactly that. It allows compute to exist in three important places. At the device level, these are all intelligent devices that have ability to compute; at the edge, which the edge being completely separated from what a control system is today. What's differentiated about our control system, when you think about Ovation and DeltaV is the software that's embedded in the decision making of that brain. It should not be the hardware or the IO cards that differentiate control system from another.

And most importantly, computing can occur at the cloud, be it a prem or in a public cloud, whatever cloud the customer chooses. All those levels are points of compute, which democratize the data that exists. And that's the reason that we're creating around boundless automation. We unveiled it last fall in Anaheim when we held our conference. We're going to do it again next week in Dusseldorf, Emerson Exchange. But a very important vision for us as we, again, disrupt a DeltaV innovation position that's number one globally with a vision that we believe is going to be highly important for our customers for industry -- where industry is going.

Andy Kaplowitz

Well, well, Mike, Colin, thank you very much for joining us.

Lal Karsanbhai

Thank you.

Mike Baughman

Thank you, Andy.