Emerson Electric Co. (NYSE:EMR) J.P. Morgan’s 2024 Industrials Conference March 13, 2024 3:00 PM ET
Company Participants
Stephen Tusa - Analyst, J.P. Morgan
Ram Krishnan - Chief Operating Officer, Emerson Electric Co.
Colleen Mettler - Investor Relations, Emerson Electric Co.
Mike Baughman - Chief Financial Officer, Emerson Electric Co.
Conference Call Participants
Stephen Tusa
All right, great. We’re going to move along here with Emerson, CFO, Mike Baughman. What’s your title now? COO. I mean you’ve done so much to this company, and I forgot. But COO, Ram Krishnan; and from Investor Relations, Colleen Mettler of Emerson. All of you, thank you so much for being here. Really excited to have you. And let’s just start with the usual intro question, which is how’s business? And any updates that you guys wanted to give from a fundamental perspective here relative to the last time we talked?
Ram Krishnan
Yeah. So consistent with what we said in our earnings call, I think we feel pretty good about where we sit. I’ll comment on orders. I think orders, we exited Q1 with 4% underlying orders. We’re going to do low-single digits in the first half, strength in process hybrid, strong funnel, offset by weakness in discrete, which as it recovers into the second half, we’ll get into mid-single digit too. Orders growth and exit the year at around mid-single digits.
So that’s from an orders’ perspective, from an underlying sales’ perspective, 10% in Q1, some liquidation of backlog as we go through the year. But our backlogs overall remain at very, very good levels at about $7.6 billion, we built about $500 million of backlog in the core business and added another $500 million with NI.
And the pace of business is, we look very closely at the project funnel, which is a very healthy funnel at $10.4 billion, we built about $200 million into the funnel. In terms of size, we’re yielding about $400 million to $500 million from the funnel every quarter, which fuels our project business. KOB3 remains strong at about 65%. So we feel very good.
The underlying trends, the secular tailwinds around re-shoring energy, security and affordability, the software trend in our customers as they digitize their operations, and certainly the spend around sustainability and decarbonization remains very positive. We believe the discrete cycle will certainly turn.
We’ve had four quarters of down orders, this quarter will be another quarter of down orders, and then we’ll turn positive into the second half and into ‘25. And that should fuel some good momentum on the order side. But the process hybrid capital cycle has been very disciplined, and with the tailwinds I described, we expect consistent growth in the process hybrid side of the business.
Stephen Tusa
As you’ve moved through the current quarter, is there – everything seems on track. But is there anything that’s, anything moving around, anything a little bit better, a little bit worse from an end market perspective?
Ram Krishnan
No. I think consistent with how we laid out the year. I mean, if you look at our businesses, the business is exposed to process and hybrid. Our Final Control business, our Measurement Solutions business and our Systems Business continue to operate with the high-single digit orders growth.
Now, some of the businesses like Measurement Solutions, which had a 28% sales growth in Q1, driven by improving supply chains and liquidating some of the backlog. So strength there. Certainly the pace of recovery in the discrete business is consistent with how we laid it out. But we really need to get through Q2 and into the second half before we really see that recovery come through.
From a world area perspective, our Middle East, India business is growing at double-digits. Strong double-digits. Surprisingly, we’re seeing good performance in Western Europe. Western Europe printed a 10% underlying sales growth in Q1, and our Latin America business has been strong. China printed a 9% Q1 growth – sales growth, and we expect mid-single digit growth in China.
Majority of our China business is exposed to power and chemical, two industries that continue to spend. So we feel pretty good about China and North America has been low-single digit growth. I mean, we’re watching the moratorium on LNG very carefully. It doesn’t impact our business this year or next, but it’s something we hope will turn around because it’s a big part of our funnel and an important part of our funnel.
Stephen Tusa
So just digging a little bit deeper into that, China now is roughly 10%, 11% -
Ram Krishnan
11%, correct.
Stephen Tusa
For you guys. And then how big are Middle East and India kind of combined?
Ram Krishnan
So $1.5 billion in Middle East and India, China at $1.9 billion. So I think that’s the region we will see. And frankly, I was telling the Group just before this meeting, that’s really what makes us feel good, as we see another robust region with a capital cycle rival China in size. And we expect that investment profile in Saudi, Qatar and certainly India to continue.
ADNOC in the UAE to continue at a pace that can rival China. So China will still grow for us, but it’s grown at a high-single digit in the last 10 years. It’ll slow-to-mid single digits, but we expect double-digit growth in $1.5 billion region to somewhat balance out a slowing China.
Stephen Tusa
And can we just dig into discrete a little bit? Like what are you – people say recovery and discrete. Everybody says recovery and discrete, but I think there’s dramatic differences between what recovery means between different companies? So when you guys say you’re expecting it to recover in the second half sequentially, what does that really mean? Because there are some companies out there like strong double-digit, and if you are counting on a meaningful pickup there, sequentially what are the verticals within discrete that you’re kind of counting on and that we need to watch?
Ram Krishnan
Yeah, so we have two businesses with – which so we have our Discrete Automation business and then we have NI test and measurement –
Stephen Tusa
Yeah, putting NI aside.
Ram Krishnan
Putting NI aside. So in the Discrete Automation business, I mean, we have baked in very modest sequential recovery and pace of orders in the second half, but that’ll translate to orders growth because we had a dip in the second half of last year and that’s really how we’ve modeled it. So modest sequential gain, which is obviously driven by automotive, semiconductors, some of the industrial and commercial accounts we have exposure to and so we feel pretty confident about that. We haven’t built-in huge recovery in China, so we’re very – we have a very cautious model laid out, but that’ll lead to orders recovery and growth into ‘25.
Stephen Tusa
You guys are really good at the macro work around the funnel and the projects that are out there. Lots of valid concern around the EV build out here in the US as far as the factories, there has been some push outs of semiconductor plants, which in my mind is that’s like when you say US manufacturing re-shoring, that’s the bulk of it. So what’s your – how are you seeing those projects move at all or are they still pretty rock solid from what you can see?
Ram Krishnan
So I’ll take Semis first. Our Semiconductor business with NI now is about a $550 million business. NI brings the big element of about $350 million to $400 million in semis. It’s important to understand where we play in semis as RF and mixed signal. We’re not big into memory and logic. And so the modernized chips that where the re-shoring and the investments around 3 nanometer and the modern chips, that’s not where our exposure is.
Our exposure is in the likes of TI and ADI building chips for companies like Emerson on the industrial side who consume them in industrial sensors and PLCs and DCS. So that we believe is going to be – that capacity continues to be added at a very reasonable pace. There’s re-shoring happening.
TI for example, has a huge capital budget and they’re betting big on being the analog company of choice. So we feel pretty good about the pace of recovery. Now it’ll come later than when memory and logic recovers. And capacity, whether it’s in Sherman or certainly in Oregon, that’s being added for the RF and mixed signal pace, the investments Qualcomm is making, we feel pretty comfortable about that.
On the EV side, EVs are about $175 million business for us. So it is an important business, but not of the scale of a semi or a life sciences or metals and mining. There we do a lot of the work on battery validation. It’s not contingent on a plant being invested in. It would be good if that’s a follow through. But a lot of the companies like GM and Tesla are working with us on the battery validation side, which is where NI plays and we expect that is a temporary pause. We’ll expect that business to come back, and we feel pretty good about it.
Stephen Tusa
So then, in the core discrete business, what are you counting on? Is that some of the machine builders in Europe, this modest sequential uptick, it doesn’t sound like it’s semis or EVs. What are you counting on – for that sequential uptick?
Ram Krishnan
Primarily machine builders. So in Germany – it’s the machine builder.
Stephen Tusa
It’s the German machine builders. So what are you seeing there? What are you – I think that business was very strong. It went down. It’s kind of stable. Any signs of life from those guys at all?
Ram Krishnan
Yeah. Pace of orders in Q2 are marginally better than Q1. Still down year-over-year. And when we talk to our customers in Germany, which is a big piece of our market, they’re bullish about the second half. Now, we haven’t baked that into our plans, because we want to see it come through. I mean, these are OEMs, obviously, and they provide us forecasts. So that’s what we’re watching cautiously.
Now, the part of their business that they build to serve Europe, we feel very comfortable with, a part of their business that is built in Europe, exported into China, is what we’re watching cautiously on what impact the Chinese economy will have on the German machine building industry.
Stephen Tusa
Got it. On the funnel. How do we expect that to kind of play out over the next couple of quarters? And then I guess translate it into backlog. Where do you see kind of funnel and backlog ending the year?
Ram Krishnan
Yeah, so I think the funnel at $10.4 billion, we feel pretty good about. I mean, we’ll continue to add to the funnel at a marginal rate, $200 million. I mean we’ll have – obviously we had about $400 million of project wins. This quarter, we had about $500 million in the prior quarter. 4% to 5% yield on that funnel is what we expect, and new projects will continue to fuel it. It is a very diversified funnel with about $5 billion around energy transition, $3 billion around sustainability and decarbonization. So it is pretty balanced, and we see that continue to slowly move up at that level.
Backlog levels currently, we sit at a very good level at $7.1 billion in the core Emerson, $500 million from NI. So at $7.6 billion. We expect that to remain at high levels through Q3. We typically liquidate about $200 million of that as we go into Q4. That’s kind of the plan we have. We’ll see how orders manifest in the second half. But irrespective of that, it will still be a very good level of backlog as we go into next year.
Stephen Tusa
And within that funnel and backlog, I mean, you mentioned LNG maybe talk about how big that business is currently as a percentage of revenues? And what your view is – I know there’s a lot more going on than just the administration and dealing with projects here. It’s a global business. So maybe just help us put the LNG issue in the proper context?
Ram Krishnan
Yeah. So LNG, obviously, is a very, very global business. Just to quantify it off the $10.4 billion, 17% of that funnel is LNG. So it’s a pretty healthy funnel. This wave, which is the third wave we’ve had, if you go back in the history of LNG, LNG started its journey in 2000. 2000 to 2010 was the wave in the Middle East, primarily Qatar. 2010 to ‘20 was the US, both Canada and the US, Russia and Australia, Shell Gorgon was a big capacity addition.
This wave is primarily Canada, Texas, Louisiana, Mexico, East Africa and Qatar. That’s a 250 MTPA wave, 150 to 170 MTPA of that is already in flight. There’s another 100 MTPA which will depend on future approvals and future capacity being added. So we feel pretty good. It’s – on an annual basis, it’s about a $300 million to $400 million business, primarily driven by projects and then the annuity stream around KOB3.
I think the US moratorium impacts three or four projects for us, Venture Global Calcasieu Pass or a couple of Sempra projects. It’s not a big piece of the funnel, and we’re winning a lot in Qatar and East Africa. But we’re pretty confident that come November and going into ‘25, LNG is going to come back in a big way.
Stephen Tusa
One thing that is very clear is that, we are likely to need more base load capacity, a power gen capacity here in the US. If we want to realize these AI dreams. Maybe talk about your exposure to the utility sector with Ovation. And is that at all – are there at all like a discussions being dusted off on any of that as of yet?
Ram Krishnan
Yeah. I mean so obviously, as you know, Ovation, 50% of power generated in the US, the control system is Ovation. We have great relationships with all of the power generation companies. It is a business that’s growing low-single digits in the US as most of it driven by modernizations and KOB3.
At this point, it’s a great question. I would say it hasn’t manifested into a huge power capacity expansion in the US yet. But at some point, that’s going to come to light. And if that happens and when that happens, we’re going to be well positioned with Ovation.
Where we are seeing the investment obviously is in the build out of the grid in terms of the transmission and distribution network, which will manifest itself on the $200 million OSI DGM business that sits in Aspen and consolidates into us. That’s really where we are seeing utilities of today fuel their capital dollars. But the point you make is a good one. In terms of if electrification has to manifest, the power infrastructure or capacity in this country has to get built out. If it does, Ovation is well positioned with the relationships we have to capitalize on.
Stephen Tusa
Okay. Moving to NATI. The business has obviously been through a bit of a downturn here. Maybe talk about the end markets. The orders are down, I think –
Ram Krishnan
17%.
Stephen Tusa
17%, but up quarter-to-quarter. What’s kind of the trend? And then maybe just talk about the different end markets there? What’s growing and what’s not? And what the visibility is to more of a bottoming and an easing of the comps there?
Ram Krishnan
Yeah. So just NI, from an industry mix perspective, 31% of NI’s business is what we call the portfolio business that is sold to universities and research and academia, life sciences and energy.
It’s a broad spectrum, 35,000 customers sold predominantly through distribution. 23% is exposed to semicon, RF and mixed signal, 19% to aerospace and – or 19% to transportation, which is fundamentally EVs and ADAS systems into the automotive companies like GM, Tesla, Ford and then 23% to aerospace and defense companies, fundamentally defense but commercialization of space and new applications around space technology. So it starts to make up. So diversified.
Q1 AVG, which is the 23% of the sales mix is up 12%, and that is going to have a nice run through this year and the foreseeable future. The other three parts of the business are down 20%-plus. We expect semicon to certainly be the first to recover, easier comparisons plus investments into RF and mixed signal by the likes of TI and ADI. TBU, which is the transportation business next and then eventually easier comparisons and GDP-driven dynamics, PPI-driven dynamics around the portfolio business. So that will be the sequence of recovery around the NI businesses.
Sequentially, orders will improve in the second half. But even if they do remain flat, we’ll see orders growth into the second half. So on a full year basis, orders will be down low-single digits for NI. That’s what we’re baking in with orders growth into 2025.
Stephen Tusa
And then what about on the revenue side because the revenue is obviously lagging, you guys are working off backlog. How do we think about revenues here for the next couple of quarters?
Ram Krishnan
So we guided $1.5 billion to $1.6 billion in terms of revenues for the full year, we’re going to be in that band. So we feel pretty comfortable about that. So again, I guess, I don’t know the math of $1.6 billion, I think will be down low-single digits. You can do the math on the $1.5 billion versus prior year. But that – we feel pretty good of landing the ship there. And then as we see orders recovery, we’ll plan out ‘25.
Stephen Tusa
And how do we differentiate this business when you look at either Keysight or Fortive’s Tektronix business. How are you guys differently positioned? Because I know there’s always read across from those companies. How do we –
Ram Krishnan
So tech is – it’s pretty – tech is purely very much on the upfront R&D side. And I predominantly 60%-plus of the business is design validation. So it’s between R&D and production. Keysight is across the Board, but a lot more on the production side. Industry mix, Keysight heavy into telecom. It’s not an industry replaying, they got the 5G wave. Tech is more like our portfolio business, broad-based, multiple customers. So NI is a little from Keysight, but probably closer to Keysight than tech.
Stephen Tusa
Got it. And then you also have a decent-sized software business here as well. I mean, I assume that – Is that – do those attachment rates kind of move with the equipment? Or is that business holding up and pretty stable?
Ram Krishnan
It has been pretty stable. In some ways, it is a business where they are moving it from perp to subscriptions. We are in the midst of that. So there is some choppiness around revenue associated with that. But net-net, that’s going to be – that’s about a $250 million business, high margins, and we want to build out a subscription-based model. They have great capability around test software that is test sequencing, test orchestration, certainly LabVIEW, which is more the design piece of it. It’s the graphical programming environment.
And then they have an analytics capability with an acquisition they did in Israel called OptimalPlus that takes test data from validation or end of line testing analyzes it and then drives actionable insights to improve product designs or up production yields, mostly in semicon. So we want to build all that out into an integrated test software that does the graphical programming design that LabVIEW has for designing test systems, but also a linked software offering that can then provide higher-level capabilities around orchestration or data analytics.
Stephen Tusa
So revenue-wise, you’ll be exiting on a year-over-year basis for this business up on revenues in the fourth quarter?
Ram Krishnan
Yeah, fourth quarter revenue, yes. Absolutely.
Stephen Tusa
And then on the cost side, maybe going to the synergies you recently raised the synergies – how are the visibility there and things clearly seem to be going better than expected?
Ram Krishnan
Yeah, very good. You saw that in the margin numbers. We upped the synergy to $185 million by year three. We’re holding on to our 31% adjusted EBITDA margins by year five. So it’s a logical question and you raised – pull forward the synergies held on the 31%. It’s a 5th year number. We want to execute on the synergies and then look for opportunities to invest in the business to up the growth rates. That’s kind of the thesis, but we’ll relay that out as we execute on the synergy actions.
$80 million will be recognized in year one. We feel good about that. Corporate cost out, optimizing the go-to-market model. Prioritizing R&D investments and obviously a set of actions associated with that opportunities in direct materials, which is semiconductor ICs, interconnects, IT purchases, logistics. So we’re looking at the entire speed. Airfreight is another opportunity.
We see great momentum, great team, good leadership. We infuse some Emerson talent in there, a culture, which is customer-centric, focused on innovation. Very collaborative, but most importantly, they’ve bought into the Emerson value creation playbook in our management system, which is great. That was an unknown coming in. We feel very good. The team is executing at high levels. As the orders turn, I think we’ll get the business positioned to continue to perform at a very high level going into ‘25.
Stephen Tusa
So you’re raising the – you’re missing the sales target this year, but your – you upped your accretion target for NATI. How does that reflect on the incrementals on the way up? Is there any reason to believe that as volumes improve and revenue improves, that you’re not going to – in the first couple of years, you’re not going to leverage this, are there going to be costs you have to add? Or is there anything that will be a lag on those margins as you – as the revenues come back?
Ram Krishnan
No, I think we’ll make prudent investments. But at the end of the day, if you do the math, GP is at 75% synergies coming through, business in the low 20s EBITDA margins today. By ‘26, if you just do the math, we’ll be in the high 20s. That’s the number you look for and then the 31% by year five. So, the leverage will pretty good.
Stephen Tusa
Yeah, like I mean 100% incrementals type of thing.
Ram Krishnan
Yeah. Colleen will do the math for me. But yeah, pretty good numbers.
Colleen Mettler
And just to clarify, too, are holding our target for sales at $1.5 billion, $1.6 billion that you’re taking it down.
Ram Krishnan
We’re lower than that, but we’ve actually, I think, better accretion because I think you guys are sandbagging on synergies.
Stephen Tusa
On the price-cost side, what level of pricing are you expecting this year? And what’s your latest view on inflation?
Ram Krishnan
2% price, a percent of favorable NMI, three points of spread. Last year, it was 4% price, one point of unfavorable NMI, three points of spread. So it’s a changing dynamic. Less price, favorable NMI, three points of price-cost, green, very confident.
Stephen Tusa
And the incremental margin that you’re getting off of that, I mean, that kind of spread would suggest that you maybe should be a little bit better on the incremental margin performance? Is there anything in there like investments or anything like that, that’s offseting I know 4x can have a bit of impact? You guys are conservative on your 4x forecast? Anything you can think of the offsets?
Mike Baughman
The foreign exchange was a big delta as we came out of first quarter, about $150-ish million. So that certainly had to understand.
Ram Krishnan
And down discrete. So I mean, this year, the dynamic. Last year mix.
Stephen Tusa
Mix. Yeah. Okay. And as far as pricing going forward, is 2% now like the right sustainable level? Or are we back to more of a 0 to 1, which is, I think, is what it’s been historically?
Ram Krishnan
I mean, again, we’ll see how the markets behave in ‘25, but I think 2% is a good number for us. I think given the quality of the businesses, the technology, I mean, certainly, the pricing power and Final Control and Measurement Solutions, we lead in each of these markets. So we will be a price leader. And yeah, I see 2% is a good number.
Mike Baughman
65% MRO. We’ll stay above 60%, we believe, and that gives us good pricing pressure.
Stephen Tusa
Yeah. You guys tend to get decent amount of price on that. One last one on the businesses, and I have to ask it just to get it out there. But I think if you pull up a very rudimentary analysis in a chart, it looks like process markets follow discrete markets. We get this question a lot. Just to reinforce why this cycle may be a little bit different than the chart would suggest on that front?
Ram Krishnan
I think capital discipline. I think it goes down – Mike and I were talking about it in the plane over the last 20 years, if you looked at our automation business, you take out the two black swan events of the financial crisis and COVID, there’s only been one decline in ‘15 and ‘16, and that was that followed a capital surge in 2010 to ‘14. Shale, Gulf of Mexico, North Sea, car sands. We haven’t seen that. We haven’t – we’ve seen very, very disciplined capital behavior by our customers. And then all of the secular tailwinds re-shoring.
Energy security and the role of gas in shoring up economies, investments in software and then the prudent investments in sustainability and decarbonization. So we don’t see it, the capital budgets of all our customers, weighted average low-single digits to mid-single digits this year. Saudi Aramco just put out a 7% number. So again, I think it’s a different environment in terms of there hasn’t been a surge in capital for a correction. And so I think that’s why we believe that I think momentum will continue in the process market.
Stephen Tusa
Yeah. I mean, I go back to like ‘15 and ‘16 when all these commodity markets corrected and discrete bumped along because it was at a relatively low level for our side. I think sometimes the people pick and choose what data they want to live by. But on the free cash flow front, the – it’s been tough to tease out conversion of the core. I mean, you’re consolidating Aspen, you don’t really have access to the cash. So then you bring in NATI, there’s some restructuring in there. What are some of the hurdles to getting the core business, including or excluding NATI, the core business to 100% conversion?
Mike Baughman
Yeah. The only big headwind there is tax related. So we have part of the TCJA included this capitalization of R&D, which is costing us about $100 million, $125 million a year. That’s a headwind. And as you pointed out, we have the headwinds this year of the $250 million around NI costs, cost to achieve and then the $50 million for CapEx. What we’re looking at to kind of gauge how the business cash flows, particularly relative to peer is free cash flow margin.
And we’ve said we’ll be in that 15% to 18% range. If you look at peer, a group of companies in that 16 range, not many over. We believe we’ll get over that 16 – over 16 being the 17/18 range pretty quickly, which would be a better indication really of our cash flow generation. And I like it better because it’s all GAAP numbers. It’s not an adjusted concept. Everyone has a front adjusted concept for earnings. So that’s the way we are thinking about. But yes, we – the headwind I would call out would be this.
Stephen Tusa
And then as far as NATI’s concerned, I think there were working capital opportunities there. Have we seen the fruits of that labor? Or is that out in front of us, the NATI – core NATI cash opportunity?
Mike Baughman
Out in front of us. Early days. Early days. But that’s an important element of how we’re going to have to drive value.
Stephen Tusa
So – but if I wanted to stick with conversion, it’s really that tax number is probably like the biggest one that’s out there?
Mike Baughman
That’s the biggest single headwind.
Question-and-Answer Session
A - Stephen Tusa
Yeah, it makes sense. I mean it’s kind of hard to control that one. Okay. Any questions out there? I mean this whole last two days is like literally one question for these companies. I don’t know what – how that reflects on anybody, maybe me. On Aspen, maybe talk about the strategy there and the decision to bring it in fully to the portfolio or you like it the way it is. Maybe just give us an update on your guys’ strategic mindset around Aspen?
Ram Krishnan
Yeah. I’ll give you my perspective. I mean, obviously, I sit on the Board and then I’m part of the Emerson team. I mean, we like the structure. We like where we sit. I mean there are three very important levers we’re pulling. One is growth through the commercial agreement. Two is the unlock of the value as we transform the business model at OSI or DGM and SSE.
And then most importantly, the technology collaboration as we look at ways in which Aspen and the DeltaV business or the Ovation business can transform into a software-defined automation architecture, which can fundamentally move the industry to a different tier of automation.
The commercial agreement is working well, Aspen double-digit ACV growth. 40% EBITDA margin, rule of 50 companies. So the performance is good. I mean, would we want to grow better at a faster pace? Yes, but at this point we like where we sit on how that’s manifesting both on greenfield as well as the white space opportunities.
The unlocking of value got off to a tougher start in DGM now they’re through that. So we feel pretty good about where SSE and DGM are as it relates to subscriptions and tokenizations and getting customers in the utility space to buy into that.
Where we’re making a lot of investment and will be a longer-term play is to integrate Aspen and the Emerson suite into a software-defined architecture at the enterprise level, where you can design, process design, design the operations, run, control, optimization, supply chain, asset optimization as well as an integrated software offering and a data lake that can collect, visualize, contextualize, democratize the data and drive animal insights.
And that’s going to be probably the catalyst to determine whether current structure is the optimal structure where we can do M&A and can we collaborate around that? Or is that a capability we need to have in order to realize the true power of the technology. We’re nowhere close to making that decision. I think we’re going to continue to execute in the current construct. And at some point, that’ll be the debate. But the pace at which the industry can move and the pace at which we can drive the industry there will be the pacing item.
Stephen Tusa
So nowhere close. So that means that you likely won’t be buying in the rest of it in 2025, when you say nowhere close?
Ram Krishnan
I’m not going to comment on that. I would say definitely not in ‘24. How is that?
Stephen Tusa
Right. Right. Right. Okay. All right.
Ram Krishnan
Because we move fast, so we could – you never know.
Stephen Tusa
Yeah, nowhere close seems like longer than 2025. All the things move pretty quickly. So I have two pretty like generic stupid questions to finish this off. US election, are you guys talking at all in the boardroom about any kind of change in how you’re investing if there’s a new administration? And how that would impact some of your business, whether it’s from tariffs or changes in stimulative policies?
Ram Krishnan
So I’m going to take a crack at –
Stephen Tusa
How active is that conversation if at all? You can say no, too.
Ram Krishnan
No. I mean, we think about it, but I think for us, I’ll give you the logic on why it’s net-net neutral to slightly positive. I mean, I think three big pieces, right. I mean, obviously, there’s the Infrastructure Act and the CHIPS Act, which I think there’s consensus are on both sides. That’s going to continue. That’s pretty well defined. And the benefits of that will be there, whoever, whether it’s Biden or Trump.
The piece that will get debated is the IRA, because it’s early, somewhat confusing and people want to know, okay, what happens to that, because there’s investment dollars going in. In the case of a Biden win that continues as usual, the green initiatives will continue, we’ll benefit from it.
In the case of a Trump win, if you look at where the IRA money is going, it’s in red state. So we believe that, okay, there might be some slowdown, but it’s not a significant change, but the positive is the LNG moratorium or the pivot towards traditional energy investments will be a net favorable dynamic for Emerson.
So overall, we feel pretty good that it’s worst-case neutral, best case, slightly better than neutral. On the tariff side, the regionalization, we’ve driven the impact of the tariffs will be de minimis on us. But if they – if we do get tariffs into – from Mexico or in China, we have enough pricing power to offset it. So we’re not concerned. The dynamic around tax –
Mike Baughman
Taxes, you could argue one way or another, but who knows.
Stephen Tusa
Yeah, that’s a tougher one to call. But it’s all really tough to call. But lastly, on AI. Putting aside your products, which I’m sure some of the process stuff has some AI embedded, but at the corporate level, where are you as far as testing out different use cases from a productivity perspective? I’m sure consultants have been in and shown you a bunch of stuff. Where are we in that process?
Ram Krishnan
So I’ll take a crack and then have Mike talk to it. I think it’s a broad topic of discussion we’re spending a lot of time thinking about it, and I think we’ll catalyze all that in our Annual Meeting this year as we lay out the road map. But fundamental areas where it can have benefit. And most of it inside will be in collaboration with the software providers we have, whether it’s Salesforce or Oracle. What is the AI capability they build in to significantly enhance productivity in our inside sales or customer service.
Our finance transformation journey, what elements of finance can completely transform as our finance modules get workflows where AI can generate a lot of our charts and analysis and data. HR is an element where the co-pilots and software modules can generate a lot of productivity. So we’re looking at – and the fourth area is supply chain and the connectivity of the supply chain and the optimization of S&OP and MRP. So that’s –
Stephen Tusa
Are you going to say Investor Relations?
Ram Krishnan
That’s true. Nobody can. I mean, the AI model tried to model the Colleen. It went into hallucination and it couldn’t –
Stephen Tusa
Not going to comment on that one.
Ram Krishnan
But the biggest piece – so those are in partnerships with the likes of Oracle and Salesforce and others to say, what do they build in that we can then deploy. But the biggest piece where we have the opportunity in-house, which is somewhat consistent with the capabilities we’re building into DeltaV Ovation as co-pilots, is, we have a large engineering organization that fundamentally gets specs in from customers and configures a DeltaV system for a particular project.
There is obviously AI models that can fundamentally take a customer spec and customer engineer the DeltaV without human intervention. So that is probably an engineering productivity opportunity that most companies will look at, but that’s the co-pilot capability we’ll build into DeltaV for a third-party who’s looking to configure DeltaV to you. So we are exploring it. It’s early, but there are a lot of use cases that apply.
Stephen Tusa
All right. It sounds like things are pretty good.
Ram Krishnan
Yeah.
Stephen Tusa
I read that the right way?
Ram Krishnan
That’s right.
Stephen Tusa
Okay. All right. Things are good. Thanks, guys. See you.
Ram Krishnan
Thanks.