Q2 2023 Emerson Electric Co Earnings Call

Participants

Colleen Mettler; VP of IR; Emerson Electric Co.

Frank John Dellaquila; Senior EVP & CFO; Emerson Electric Co.

Mike Baughman

Ram R. Krishnan; Executive VP & COO; Emerson Electric Co.

Surendralal Lanca Karsanbhai; President, CEO & Director; Emerson Electric Co.

Andrew Alec Kaplowitz; MD and U.S. Industrial Sector Head; Citigroup Inc., Research Division

Andrew Burris Obin; MD; BofA Securities, Research Division

Charles Stephen Tusa; MD; JPMorgan Chase & Co, Research Division

Deane Michael Dray; MD of Multi-Industry & Electrical Equipment & Analyst; RBC Capital Markets, Research Division

Jeffrey Todd Sprague; Founder & Managing Partner; Vertical Research Partners, LLC

Joseph John O'Dea; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division

Nigel Edward Coe; MD & Senior Research Analyst; Wolfe Research, LLC

Scott Reed Davis; Founding Partner, Chairman, CEO & Research Analyst of Multi-Industry Research; Melius Research LLC

Presentation

Operator

Hello. Welcome to the Emerson Second Quarter 2023 Earnings Call. Please note, today's event is being recorded. I would now like to turn the conference over to your host, Colleen Mettler, Vice President of Investor Relations at Emerson. Please go ahead.

Colleen Mettler

Good morning, and thank you for joining us for Emerson's Second Quarter Fiscal 2023 Earnings Conference Call. Today, I am joined by President and Chief Executive Officer, Lal Karsanbhai; Chief Financial Officer, Frank Dellaquila; and Chief Operating Officer, Ram Krishnan. Also joining us today is Mike Baughman, who is announced earlier this morning as our Chief Financial Officer effective May 10.
As always, I encourage everyone to follow along with the 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 risks and uncertainty. Please take time to read the safe harbor statement and note on non-GAAP measures. I will now pass the call over to Emerson's President and CEO, Lal Karsanbhai, for opening remarks.

Surendralal Lanca Karsanbhai

Thank you, Colleen, and good morning. Please turn to Slide 3. I'd like to begin by thanking the global Emerson team for a tremendous performance, our Board of Directors and shareholders for the trust that you place in us. It has been a busy first 26 months as CEO as we reinvented Emerson. The second quarter performance was exceptional. It was a quarter in which we significantly advanced our strategic agenda across the 3 dimensions of our value creation model.
First, culture. In the last 2 months, we announced 2 important leadership changes. Vidya Ramnath was named as the company's Chief Marketing Officer, replacing Kathy Button Bell, who had a distinguished career at Emerson and put Emerson's brand on the map while working for 3 different CEOs. Vidya is the right person to accelerate our journey as a pure-play automation company. She brings deep technical knowledge and customer exposure, is an engineer, and for the last 4 years, has led Emerson's Middle East and Africa business. We believe this is a highly differentiating move for us as a company.
Secondly, this morning, we announced Frank's planned retirement and Mike Baughman as Emerson's CFO. I'll say a few more words about this later in the presentation. Lastly, we completed our first digital employee engagement survey. We heard from 85% of our global employee base and received a high quartile net engagement score. This gives us a stake in the ground and a great perspective on the areas of strength and opportunities to better the talent experience at Emerson.
Second, the portfolio. We will be finalizing the climate transaction in the current quarter. The CEO for the joint venture has been named, Ross Shuster, and we are excited by what his leadership and experience brings to the business. I'd like to thank Jamie Froedge for the work he did in the business. and for his contributions over 16 years of service at Emerson. In addition, we signed a definitive agreement to acquire National Instruments. We're very excited about the company, the technology and most importantly the people. This is an important point. The large portfolio moves are now complete. As an investor, you now have clarity that an investment in a share of Emerson is an investment in the leading global automation company serving a diversified set of end markets with a high growth, high profitability and cash flow, cohesive and differentiated tech stack made up of intelligent devices, control and software led by AspenTech.
Our focus on a go-forward basis as we did this quarter will be on creating value with this tremendous company.
Lastly, our third pillar, execution. None of the work we've done would have been possible without it. The phenomenal results and momentum we have in the business is a testament to the quality of our global teams and to the strength of the Emerson management system. Underlying orders were up 7% with late cycle process markets continuing to exhibit strong demand. Hybrid also remains robust, driven by reshoring investments globally. From a world area perspective, Americas orders led with China returning to growth as expected. As we look to the remainder of the year, we still feel confident in continued mid-single-digit order growth.
The strong demand and steadily improving supply chain environment enabled 14% underlying sales growth in the quarter, well above our expectations. All world areas were up double digits, led by the Americas, up 15%. Intelligent devices and software and control were also both up double digits. This strong sales performance and the continued operational execution of our teams led to 53% operating leverage in the quarter, excluding AspenTech.
Favorable impacts from mix and price cost also drove a 320 basis point improvement in adjusted segment EBITA to 24.6%. Adjusted EPS was $1.09, beating the midpoint of guidance by $0.11, again, driven by the strong sales and operational performance. This is a 25% increase versus Q2 of 2022. Free cash flow was up 64% year-over-year and up 23% year-to-date, which is on track to meet our full year expectations.
Turning to Slide 4. Our value creation priorities and growth initiatives around innovation and secular growth platforms that we outlined at our investor conference in November 2022 are yielding meaningful results. First, Emerson was recognized by Fortune Magazine as one of America's Most Innovative Companies. The recognition is a testament to our innovation history and dedication from our employees to create leading technology and software for our customers. We are extremely excited to be recognized for this award and are working continuously to accelerate our innovation engine for future growth.
Similarly, Emerson continues to differentiate as a leader in growth markets like energy transition, metals and mining and software. In the second quarter, Emerson was awarded the software and automation contract for Intermountain Power Agency's renewed power plant. The Utah project transforms a retiring coal-fired power plant into a clean energy plant running on hydrogen. At first, the plant will use a mix of 30% hydrogen, 70% natural gas before transitioning to 100% hydrogen by 2045. The hydrogen will be supplied by the Mitsubishi Power Advanced clean energy production and storage hub, another greenfield project that Emerson was awarded in 2022. When complete, the Intermountain project will supply 6 Western states with carbon-free power, a critical step towards a net zero world.
With our integrated end-to-end renewables and power generation platform, Emerson was chosen because of our industry expertise and proven experience in hydrogen and complex projects.
Secondly, Emerson and AspenTech were jointly selected to automate and optimize the Golden Triangle Polymers facility on the Texas Gulf Coast. The $8.5 billion project is a sister facility to QatarEnergy and Chevron Phillips Ras Laffan project that we highlighted in the first quarter. Emerson will lead its -- will provide its leading DeltaV control system and intelligent devices and AspenTech will provide its leading simulation software. This technology will allow the facility to operate with approximately 25% lower greenhouse gas emissions than similar projects in the U.S. and Canada. This is a great example of the differentiating strength of Emerson and AspenTech.
Turning to Slide 5. We remain energized and excited by our recently announced acquisition of National Instruments. National Instruments will expand our leading automation business into the attractive test and measurement space and provide important industry diversification into discrete markets. NI's leading portfolio of technology and software are well positioned to capitalize on secular trends within semiconductor and electric vehicles, and we expect the transaction to be accretive to our long-term underlying growth.
Inclusive of $165 million of synergies by the end of year 5, the transaction meets the financial criteria we have communicated. We will work to complete the customary regulatory and closing conditions and expect to close in the first half of Emerson's fiscal 2024. We have the opportunity to meet the extended management team and to do a global town hall with NI employees last week while visiting Austin. From that meeting, we came away even more confident in the potential opportunities of our combined company. The technology is differentiated and has ample room to expand, and the talent, well, it's simply exceptional. But most importantly, I was energized by the warm reception we received from the leadership team and all the employees we met. In a way, I am proud to be an NI-er now as well.
Please turn to Slide 6. The past 26 months have been fast paced and an exciting journey for Emerson. We moved from a $17 billion 2-platform business to a cohesive $16 billion automation leader. It took a lot of hard work to transform this business, and we now have an outstanding opportunity to create value for shareholders. It is a portfolio that is exposed to secular growth trends that are expected to drive growth for years to come and we remain committed to our 4% to 7% through the cycle underlying growth target.
Our new portfolio is higher margin at approximately 49% gross profit and 23% adjusted segment EBITA margin. Our industry mix is more diversified than 2 years ago, focused on automation, and with the discrete markets now our second largest customer end market. While we will continue to pursue bolt-on acquisitions, we're now turning our focus to executing the strategy we laid out at investor conference in delivering the synergies we have committed to for AspenTech and NI.
Please turn to Slide 7. Emerson and our Board are committed to ongoing Board refreshment. And yesterday, we had the privilege of announcing 2 new Board members to our Board of Directors. Leticia Gonçalves is the President of Global Foods for ADM and a member of the company's Executive Council. As part of ADM, Bayer and Monsanto, Leticia has held roles in digital solutions, commercial operations, international management and technology development and is a long-time advocate and driver of diversity and inclusion. Her experience in these areas and accelerating change make her an excellent addition to our Board. Leticia is originally from Brazil. She is a chemical engineer and has a tremendous passion for innovation.
Speaking of innovation, Jim McKelvey is a successful entrepreneur who founded Block, Invisibly and Fintop Capital. He brings a unique innovation-focused perspective to Emerson and will serve as a key collaborator as we continue to accelerate innovation and invest in technology and engineering. Jim has expertise in many areas, including software, cloud and cybersecurity, which will benefit Emerson as we provide customers with leading digital solutions.
They are energized and so are we. And we are excited to have both Leticia and Jim join our Board of Directors.
Before I turn the call over to Frank, please turn to Slide 8. I would like to congratulate Frank for a distinguished career of over 32 years at Emerson and the past 14 years as CFO. Frank, I met you 28 years ago, and it has been an honor to be your colleague. Please know that you created a legacy here at Emerson. We could not have accomplished what we did over the past 26 months without you, and I would not have been able to lead this company without your wisdom, confidence and support. You made us better. You made me better. Thank you for the lasting impression you left on me and the impact you made on all of us.
I'm also excited to announce Mike Baughman as CFO of Emerson effective May 10. Mike has over 35 years of experience in finance, operations across Baxter, Emerson, of course, and PwC. I'm excited about what Mike brings to the role, and please join me in welcoming him. Mike, congratulations.

Mike Baughman

Thanks, Lal, and thanks to you and the Board for giving me the opportunity to serve as Emerson's next Chief Financial Officer. I'm very excited to get into the role.
Good morning, everyone. I've had the opportunity to meet several of our investors and analysts, and I'm looking forward to meeting more of you and working with you in the future. And to my Emerson colleagues listening in, thank you for a fantastic quarter.
As Lal just talked about, it's been a productive 26 months with respect to reshaping our portfolio and we're on track to achieve what we set out to do. The impressive result is a more cohesive $16 billion automation company, expected to grow 4% to 7% through the cycle with peer-leading margins and a more diversified end market exposure. I think that the portfolio transformation is a great start. And now we get to operate in this new environment. Execution has always been a hallmark of Emerson, and we're building on that to focus on accelerating profitable growth, integrating NI and growing our cash flows as the supply chain normalizes.
I certainly expect successful execution in these areas to result in increased shareholder value. While I'm excited about our future, transitioning to the CFO role is a little bittersweet for me personally. Frank was a major reason I joined Emerson a little over 5 years ago. And during that time, I've come to know Frank is a great finance professional and, more importantly, a wonderful person. I'm confident we'll have a smooth transition over the coming months.

Surendralal Lanca Karsanbhai

Thanks, Mike. And now I'll turn the call over to Frank.

Frank John Dellaquila

Lal, Mike, thank you so much for the kind words. When I showed up here 32 years ago, I never -- didn't really know what to expect, but I never could have imagined the opportunities that I would have, the things I would get to do, and above all, the people I would have the privilege to work with. The last 13 years have truly been a privilege, leading a world-class finance organization who I respect and I trust implicitly, who've never let me down. And I thank them from the bottom of my heart.
The last 2 years, working with Lal and Ram, and the people in this room and our extended team on the portfolio transformation have been truly special and just a wonderful capstone to my career, and I will always be grateful for that opportunity. Thank you, Lal. I'm truly grateful for that.
It's been a heck of a ride.
Emerson is well positioned for the future. This is a perfect time to turn it over to Mike, who I've come to know well as a person, respect as a leader over the last 5 years. I am confident he's going to provide the right leadership for the challenges we have again. The future is very, very bright, and I'm so happy to have been a small part of it. I've enjoyed working with all of you over the last 2 years on the phone with our analysts and our investors. And I couldn't think of a better way to go out, and I'm very grateful and I'm just so thankful for that.
Thanks, everybody, and there is no crying on earnings call.

Surendralal Lanca Karsanbhai

Thanks, Frank. And to you on Chart 9.

Frank John Dellaquila

Okay. Here we go. Good morning, again, everyone. Please turn to Slide 9. Our second quarter financial results were outstanding, reflecting our strong end markets and operating execution. Lal summarized the results for you so I'll provide a bit more color. Additional details are in the press release and in the slides, in the appendix to this presentation.
Underlying sales growth exceeded our expectations at 14%. All world areas in both business groups were up double digits, reflecting the strength in our end markets, our positioning in them and our geographic presence. Demand was broad-based with later cycle process markets up high teens and hybrid markets also up double digits in the quarter. Discrete demand has begun to moderate after several quarters of strong growth, but sales were still strong in the quarter, up high single digits. Safety and productivity returned to growth, up 3% in the quarter.
Net sales also were up 14% for the quarter with a 3-point drag from currency, which was essentially offset by acquisitions and divestitures. We did close our Russia divestiture in March and we now report the business we had on the divestiture line of our net sales bridge.
Our businesses continue to realize significant price. In the quarter, price contributed approximately $150 million and 5 points of growth. Backlog also grew $300 million, reflecting the strong orders, backlog of approximately $6.9 billion to end the quarter. AspenTech revenue was below expectations for reasons they explained on their call, and I'll briefly summarize those here. Please keep in mind that AspenTech reports revenue under ASC 606 so the factors affecting GAAP revenue are complex, as explained on AspenTech's earnings call. There were 3 factors in play.
The first was longer than planned project execution in the OSI business, which pushed out the recognition of project revenue milestones. This is mainly a timing-related dynamic, and we continue to see strong demand trends from the power transmission and distribution market. AspenTech also experienced shorter-term contract lengths within the SSE business. Overall, the shift from perpetual to term contracts is progressing well, but some customers are choosing shorter contract lengths than we expected, and that has a direct impact on upfront revenue recognition. And lastly, AspenTech is seeing some weakness in OpEx spend in the bulk chemical market, which is impacting heritage AspenTech.
For further clarification, Emerson's chemical exposure is more diversified across both bulk and specialty chemicals and both OpEx and CapEx spend.
Adjusted segment EBITA margin improved 320 basis points. Leverage excluding AspenTech exceeded 50%. Strong sales growth, favorable business and world area mix and margin-accretive price costs all reflect exceptional execution by operations and contributed to the margin improvement. Adjusted EPS grew 25% to $1.09, and we'll discuss that on the next chart. Lastly, free cash flow was up 64% versus the prior year quarter and up 23% year-to-date. The strong earnings growth and slight improvement in working capital contributed to that growth. AspenTech contributed $129 million to free cash flow.
Please turn to Slide 10. Most importantly, 14% underlying sales growth and 53% segment-level operating leverage contributed 26% of our EPS growth quarter-over-quarter. Of that, AspenTech contributed $0.04. Currency was a $0.03 headwind and other items, mainly income tax because we had favorable discrete items last year, were a net $0.05 headwind. The reduced share count resulting from the $2 billion share repurchase that we completed in the first quarter contributed $0.04 to earnings per share. So again, overall adjusted EPS grew 25% year-over-year.
Please turn to Slide 11, and we'll talk about our revised 2023 market outlook. We continue to see broad-based strength in most key end markets. In particular, we've updated our expectations for both process and hybrid markets. We have increased our expectation for process sales to a high single-digit to low double-digit growth range on the back of continued energy, energy transition and chemical market momentum. This market was strong in the second quarter and our customers continue to signal favorable spending plans for the rest of the year.
Within chemicals, we continue to see strong CapEx spending particularly in the U.S., the Middle East and Asia. Within the hybrid space, life sciences and metals and mining continue to be strong and we expect this market to grow high single digits in 2023. Reshoring continues to be a prevalent topic among our customers and we expect near- and longer-term benefits from this trend. As I mentioned, discrete demand is beginning to moderate as these earlier cycle markets have been strong for the last few years. We are seeing this first in Europe as industrial production is affected by rising input costs. Still, we continue to hear optimism about spend on factory automation and productivity improvements from our customers.
Please turn to Slide 10, and we'll talk about our revised guidance. Based on the market strength I described and our continued expectation of mid-single-digit order growth, we are increasing our sales and earnings guidance for the year. For 2023, underlying sales growth has been increased to 8.5% to 10% year-on-year and net sales to 9% to 10.5%. We expect Intelligent devices to be near the top of this range and software control nearer to the lower end. We are also increasing our expectation for segment operating leverage based on the strong first half achievement and our second half outlook.
Continued sales strength, favorable price/cost and continued operational performance give us confidence in increasing this guide. We now expect segment operating leverage to be in the low to mid-40% range, excluding AspenTech. Adjusted EPS guidance has been raised to a range of $4.15 to $4.25, up $0.15 at the bottom of the range and $0.12 at the midpoint. AspenTech is expected to contribute approximately $0.25 to this improved guidance. The strength in core Emerson operations is more than offsetting the reduced AspenTech expectation, which is incorporated into our guidance.
Free cash flow is expected to be approximately $2.2 billion for the year, of which AspenTech contributes approximately $300 million. This is consistent with our prior guidance of approximately 100% free cash flow conversion on GAAP net earnings and is equivalent to approximately 85% on an adjusted net earnings basis. In the future, we will express free cash flow conversion on an adjusted net earnings basis, consistent with our other key non-GAAP metrics, adjusted EBITA and adjusted earnings per share.
The business we have today has strong cash conversion characteristics that we expect to convert over time at an average of 100% on an adjusted basis. We now expect AspenTech's adjusted segment EBITA to be slightly below 40% for the year. As a reminder, Emerson's third quarter is AspenTech's seasonally strongest quarter due to the timing of contract renewals. We believe the operating items that affected AspenTech's third quarter results reflects transitory operating and market challenges. We are as confident as ever about the long-term strategic opportunity afforded by our ownership of AspenTech and in the $110 million year-5 synergy commitment that we made. As a reminder, all of this guidance excludes the impact of Climate Technologies' operations, interest income and the financial impact of the sale, which we expect to close, we hope, May 31.
In the appendix, we have provided information on the post-closing financial reporting treatment of Climate Technologies. Briefly to turn to the third quarter, that guide also reflects the strong outlook for the year. We expect underlying sales growth of 10% to 12%. We expect leverage to be in the mid- to high 40s in the quarter and adjusted EPS to be between $1.07 and $1.11. This represents an 18% increase at the midpoint versus prior year. We should point out for context that last year's third quarter was negatively impacted by China shutdowns and serious supply chain challenges around electronics, which at the time, we estimated reduced third quarter sales by approximately $150 million with the China impact being pushed into the fourth quarter.
Thank you for your attention. I'll turn it back now to the operator to open the call for questions.

Question and Answer Session

Operator

(Operator Instructions) And this morning's first question comes from Andrew Obin with Bank of America.

Andrew Burris Obin

So Frank, congratulations, and thank you. And Mike, welcome. So I guess my first question is a lot of debate with investors about the impact of improving lead times on orders, backlog and free cash flows. Clearly, you're starting releasing working capital. But if you're releasing working capital, perhaps you're ordering less stuff. And if you're ordering less stuff, maybe somebody else is ordering less stuff. How do you think this dynamic will play out over the next 6 to 12 months?

Surendralal Lanca Karsanbhai

Well, I'll start off with some comments just on the underlying environment, which we're still optimistic about, as you heard on the call, Andrew. Mid-single-digit order run rates, we came out of the quarter at 7% and expect that range to continue through the remainder of the year. So the demand environment based on our [C] is strong. And as Frank outlined correctly, I think there are some puts and takes out there, and we're watching those carefully. But as a whole, we feel very good about that.
Having said that, we have a very robust backlog as well. We did build backlog in the quarter. And we continue to work through that, which gives me further confidence obviously in the performance of the company for the second half. Naturally, with supply chain challenges largely alleviated, of course, there are still a few issues out there, but largely alleviated. Lead times have started to come down. And -- but we haven't seen that reflected in any slow in orders. And very much, as you saw quarter-over-quarter and sequentially, our order pace continues to be very consistent there. Ram, anything to add?

Ram R. Krishnan

Yes. I would say, again, Andrew, I think from a lead time perspective, distribution, for example, is less than 20% of our overall sales. So we -- and frankly, even with distributors, as our lead times have come down, we haven't seen any change in ordering patterns. Our KOB3 business, which is the other piece that is lead time dependent, continues to be strong. So no fundamental change for us as it relates to ordering patterns from our customers as lead times across all categories of products for us have come down. Now I know others have mentioned that. But to date, we haven't seen the impact.

Andrew Burris Obin

Great answer. And just maybe a follow-up question on aligning Aspen and Emerson sales channel. You guys clearly highlighted golden triangle, success of going to market together, you reaffirmed the synergies. But I guess the question I have, as you work closer with Aspen, what are the opportunities to improve visibility at Emerson, right, because you have access now to a lot of CIOs? But also, what are the opportunities at Aspen to benefit from deep and broad relationships that Emerson has with their key clients, for example, in the chemical space, right, you said our relationships are much broader. What can you do to improve visibility at Aspen in key verticals?

Surendralal Lanca Karsanbhai

Yes. No, it's a good question. It goes back to the heart of the commercial agreement that -- the very robust commercial agreement that we have with AspenTech. There is world area alignment in leadership. There's sales force alignment and incentives, and very honestly, joint pursuit in 2 areas: capital projects, which was the example that I shared with you; and then a very robust analysis on an industry-by-industry basis of the white space opportunities that exist, particularly for our control system and for AspenTech. And that's more of a systematic approach by the selling organizations but one that will prove to be and is proving to be quite a large opportunity as well. Ram?

Ram R. Krishnan

Yes. And just to add, I think the customer landscape is really the way we really want to drive more [C] for AspenTech. Certainly, the momentum on projects is there early. But as we shared with you before, 70% of the control systems that we have, DeltaV innovation, don't have Level 3 software capability at many of our customers. 9,000 of those are in markets like life sciences and metals and mining. So those are the unique type of opportunities, the AMS systems that we have where we can bring Aspen. That's the approach we're taking through our commercial agreement. They are very, very quickly focused as well, where we look at markets where Aspen doesn't have the strength, and that's really where a lot of the effort is being put. So we'll see that benefit come through. It's 3 quarters in, obviously, in the relationship. The momentum is early on projects, but more will come as it relates to the white space that I described over time.

Operator

And the next question comes from Deane Dray with RBC Capital Markets.

Deane Michael Dray

I also want to wish Frank all the best. It's been great working with you, and congrats to Mike. So my first question is maybe take us through the -- what you're seeing on the discrete side with some of the demand moderating. How did it progress through the quarter? Is it isolated to some specific verticals or geographies? Because we are hearing elsewhere slowing in Europe especially on the chemical side. But we appreciate to hear the color there, please.

Ram R. Krishnan

Yes. So Deane, Ram here. From a discrete order activity, now the discrete business from a sales perspective, we had good strong growth in the quarter, 9.5%, close to 10% growth in the quarter from a sales perspective, which was driven by backlog reduction. Orders did go slightly negative this year -- this quarter, I should say, primarily driven by slowdown in Europe. Frankly, we haven't seen much of a slowdown in North America but a slight slowdown in Europe, particularly in Germany and the segment around machine builders. We do serve the machine builder segment in Germany, which is both domestic German market as well as these machine builders export. So that's really probably the one segment. A little bit of slowdown in the U.K. Frankly, Asia is holding up and China remains good. So that's the color. We do expect discrete to get into tougher comparisons as we get through the second half of the year, and we expect orders to remain negative before they turn positive into '24.

Deane Michael Dray

Got it. And then just a follow-up, and I also just want to hear, Frank, one more time here. On the free cash flow difference between GAAP and adjusted this year, that difference, how much of that is either working capital needs given kind of supply chain? Or is it more from Climate?

Frank John Dellaquila

No. I mean, there is none of the difference. The difference is simply the calculation, the denominator. I mean, Deane, we're just talking about the $2.2 billion guide of free cash flow and whether we use GAAP earnings or we use adjusted earnings as a denominator, and that's the difference between the conversion ratio. There's no difference at all in the calculation of the cash flow itself.

Operator

And the next question comes from Scott Davis of Melius Research.

Scott Reed Davis

And I'll echo what the other fellows and I'm sure others will say, and congrats to both Frank and Mike on the changes here. So I don't want to fixate on AspenTech. We can do that later perhaps, but I will anyway, the bulk chemical OpEx, is it typically that volatile? Is this something that they've experienced in the past and perhaps you might see in the future? Or is this kind of an unusual circumstance?

Ram R. Krishnan

No, I think the bulk chemical dynamic, as I mean you see many of the chemical customers say at the end of the day with a little bit of slowing demand there and their utilization rates being optimized, the portion of the AspenTech business which typically gets impacted as their manufacturing and supply chain software suite. So in terms of new purchases or new contracts around that, which we have built into the forecast, that's where we're seeing slowdown. So that's pretty normal. Obviously, refining for them continues to remain strong. Upstream and midstream continues to remain good. It's really the manufacturing and supply chain suite in bulk chemicals where we have seen the slowdown, and we've seen that in the past when the large chemical customers slow down spending on the OpEx side.

Scott Reed Davis

Okay. That's helpful. And guys, assuming your stock price works, and I know AspenTech is down quite a bit from its highs, but is there any interest in -- and I know there's some restrictions, but those things can always be discussed in taking an even larger stake in the entity and perhaps over time, integrating it fully into Emerson?

Surendralal Lanca Karsanbhai

Scott, this is Lal. No, look, we're still very committed to the model that we set forward a year -- closed nearly a year ago now. It works. We're seeing the commercial value. We're working the technology piece as well. And like I've said in the past, if at a point in time that changes and we have impetus to then address that through the change in the ownership structure of the vehicle, we'll think about it then, but not at this point. And then furthermore, as you know and you noted, we are in a standstill period for another calendar year from now.

Operator

And the next question comes from Andy Kaplowitz with Citigroup.

Andrew Alec Kaplowitz

Congratulations, Frank and Mike. Lal, could you give us a little more color into your incremental margin performance both for Q2 and 2023. I know the new Emerson is supposed to record higher incrementals well into the 30s. But what's changed for Emerson in '23 that's allowing you to record low to mid-40s over 50% in Q2? Is it mostly 5% price that Frank mentioned and much improved supply chain environment? Is maybe underlying Emerson able to sustain incrementals in the 40% plus ex-Aspen over the longer term? And how you're thinking about price versus cost moving forward?

Surendralal Lanca Karsanbhai

Yes. We certainly -- I'll let Ram add some operating color as we went through the quarter. But we certainly believe in the strong guide that we put together in the 40% leverage for the full year given the early performance in the first 6 months. Look, there are a lot of things that were positive. Obviously, the execution was exceptional. I think the operating executives in the businesses performed very, very well and exact. The volume was important, as we noted, growing the underlying sales of 14%. But furthermore, mix and price/cost were beneficial as well in the quarter. So a lot of things on our way there. But honestly, working within the management system that we've designed is a very important parameter that enables our businesses to perform at a very high level here. Ram?

Ram R. Krishnan

Yes. I mean, other dynamics that certainly went our way is strong North America in the quarter. Strong performance in our instrumentation and final control businesses and the leverage we got there. So dynamics are on mix, certainly the price/cost element that Lal mentioned. But fundamentally, the 14% sales growth in the quarter does help leverage. So all of those dynamics went in our favor.

Andrew Alec Kaplowitz

That's helpful, guys. And then maybe you could give us a little more color into what you're seeing by region. I think China was relatively weak for you in Q1. It seems like it's better in Q2. I think, Lal, you mentioned easy comparisons in Q3. So how are you thinking about regional demand moving forward for the rest of the year?

Surendralal Lanca Karsanbhai

Feel really good. It was a very robust quarter globally for us in terms of sales performance and very honestly orders, as Ram and -- excuse me, Frank outlined. China flipped for us. It was down in the mid-single digits a quarter ago. It is up both in orders, high single digits and in sales in the mid-single digits. So we feel very good, and we feel good about what we see in China for the remainder of the year as well. So that's a positive.
Look, North America, very robust growth, broad strength, a lot of it driven by the near-shoring elements and core strength in hybrid and processed with growth of 15-ish percent in sales. Europe, that's been very honestly, Andy, the biggest surprise of the year. It continues to be very strong for us with growth in the mid-teens, 14% in the quarter in sales and orders that are very strong, and very honestly, highlighted by energy, sustainability and life science investments.
And then the rest of Asia, driven by India, Southeast Asia and then an incredibly strong Middle East and Africa region as well with significant investments in sustainability, in LNG across the region. So at this point in time, with the exception of the discrete weaknesses that we've already talked through, continue to see very, very strong global momentum as we go through the quarter here into the rest of the year.

Operator

And the next question comes from Steve Tusa with JPMorgan.

Charles Stephen Tusa

Congratulations again to both CFOs, outgoing and incoming.

Frank John Dellaquila

Thank you, Steve.

Mike Baughman

Thank you, Steve.

Charles Stephen Tusa

What was price capture in the quarter? And where do you expect it to be for the year?

Frank John Dellaquila

Yes. It was 5 points in the quarter. We expect it to be 3% to 4% for the year.

Charles Stephen Tusa

Okay. Great. And then, Lal, just curious from like a governance perspective, the Aspen results, there's a lot going on there. I guess at a high level, some of it sounds like execution on some of these contracts, perhaps in the, I guess, I call it, integration phase of what they're doing even though it's not really an acquisition by them, I guess. It seems like that there were a couple of things that surprised them about the assets that you guys are contributing. How does that conversation work in the boardroom there? Because those are like assets that you guys knew. I'm not sure how surprising that was to you, but it was clearly surprising to the market the way this has played out. So I'm just curious, like a little more color from your perspective on the integration that's going on there, and perhaps how that kind of discussion and then how to move forward plays out when that type of thing happens?

Surendralal Lanca Karsanbhai

Yes. No, absolutely, Steve. I'll give you some color here. Let me -- and maybe there's 3 or 4 here critical points. Let me first begin by saying that we're -- I continue to be and we collectively continue to be very optimistic about the business and the differentiation that it provides as a technology solution across a diverse customer base. That's very important. Secondly, the execution of both the commercial and the technology synergies is progressing ahead of pace. We have alignment across all selling organizations, the technology teams. And I highlighted a capital project win that we worked on, and we're working on many across the world that we have a joint funnel of pursuits.
So what happened in the Q? And I think there are important dimensions here to talk about. The first, the company continues to perform extremely strongly. It's a rule of 50 software business with ACV growth exceeding 11% and strong cash flow. But there were 3 challenges in the quarter, and these were challenges that we have a robust communication process not just at the Board level but at an operating level. And we speak with Antonio and Chantelle, who is the CFO, on a regular basis.
The first is shorter-term contracts on subscriptions at FSC, which is -- obviously was one of the assets that we contributed to. The assumption in the plan was on a 3- to 4-year basis of subscriptions that we converted -- AspenTech converted those from perpetual license to subscription. The reality is that they came in more in the 1-year level. So that had an impact on revenue recognition, just the nature of that conversion journey and a challenge as those customers in that market space, except subscription contracts, over the perpetual traditional licenses.
The second, you also referenced is OSI. We do -- it is a differentiated business in a high-growth segment, as you know. But the integration has been slower. It's a business that came with a heavy service component to it. And very honestly, that migration and conversion ultimately from perp to sub on the software is taking longer than expected. But we continue to be jointly very optimistic about the business. The orders in the business are strong and we will work through the next few quarters to execute there.
And then lastly, as Ram described earlier, the heritage AspenTech business and the slowdown related to the bulk chemical segment there. Having said all of that, look, the plan has been reset. It's embedded in our results here. It's embedded in the outlook that we provided in the guide. And the investment is, I still believe there's a tremendous amount of value creation opportunity here for Emerson shareholders, and we continue to be very committed. And I think we have the processes, both operating, which is CEO to CEO, CFOs and through the Emerson management process, as best we can here and through the Board of Directors in which to manage in and to be part of the conversations and discussions with that team.

Charles Stephen Tusa

Are you assuming a bounce back in your fourth quarter in those results? Thanks for all the color, too.

Surendralal Lanca Karsanbhai

Yes, of course. No, look, I think we've embedded their perspective, which they shared with their investors on their call into our guide.

Operator

The next question comes from Nigel Coe with Wolfe Research.

Nigel Edward Coe

And Frank, it's hard to believe you've been CFO for 14 years. So a good run. Congratulations, and good luck in retirement. And Mike, congratulations.

Frank John Dellaquila

Thank you, very much.

Nigel Edward Coe

Yes. Just on the -- just maybe picking up on Steve's question there. Maybe just -- maybe this is a question for you, Frank. Maybe just talk about some of the moving pieces in the guide. I mean, clearly, the bulk of the uplift is driven by much better revenue conversion -- margin conversion. But maybe some of the moving pieces, AspenTech, how has that changed in the guide, maybe stock comp? Any of the sort of major discrete lumps would be helpful?

Frank John Dellaquila

Well, I mean, the main driver is obviously the improved outlook for operations, the uplift in the sales as well as the operational execution, the strong price realization, all the things that drove the strong leverage in the second quarter we expect to have in the third quarter and throughout the rest of the year. So I mean, that is mainly the story and that is strong enough to overcome the reduced AspenTech guide. I mean, as Lal said, we essentially incorporate their guide into our numbers. And they took the guide down for the year. So we've overcome that headwind as we move from the February to the current guidance. And those are the main pieces.

Nigel Edward Coe

And that's about $0.06, $0.07 mark-to-market on AspenTech?

Frank John Dellaquila

For the year, roughly, yes, in that range.

Nigel Edward Coe

Yes. Okay. Great. And then just on the -- maybe picking up off Ram's comment on the sort of the installed base of DCS. You said 70% don't have Level 3 software capability. Does that precipitate an upgrade cycle? I know we've talked about this over in the past. But are we at the threshold now where we might see an installed base upgrade cycle? Or is it more just patching around that with some of the capabilities around software?

Ram R. Krishnan

I mean, I don't know if we're planning for a major upgrade wave. I think it's more a disciplined approach with each one of our customers to address the optimization benefits and the APM benefits and some of the capabilities that Aspen brings to improve the performance of the overall automation system that is installed in many of these customers. And we're going across the board, across industries, power and life sciences being the focus area. Everybody is very interested in digitally transforming their assets. And we're seeing more and more interest from our customers to launch digital transformation programs across the automation stack where level 3 software has an important role to play, primarily around optimization on the manufacturing suite and then more the asset performance management and the reliability software on uptime of assets in their infrastructure. So that's the journey. I think you're going to see more and more of that. Sustainability is another area where software will get deployed. But I don't think it's a big wave. I think it's more a disciplined wave over time, and we have the opportunity to drive it.

Operator

And the next question comes from Jeff Sprague with Vertical Research.

Jeffrey Todd Sprague

Congrats to Frank and Mike. Frank, I think it's hard to believe you've been CFO for 14 years because until we got a new CEO, we didn't have many opportunities to get to know you. The new structure is better, so congrats all around.

Frank John Dellaquila

Thank you, Jeff.

Jeffrey Todd Sprague

A lot of ground covered. I just want to touch back on capital deployment. And Lal, as you said, the big moves are done and that certainly makes sense. But you did indicate that you're working bolt-ons. And it looks like you also maybe have a 6-month gap or so between the Climate proceeds and National Instruments closing. Just wonder how that might play out over that time frame? Is there room for some more share repurchase? Are there actionable bolt-ons that could be happening kind of over this interim period or just what we should expect there?

Surendralal Lanca Karsanbhai

Yes, I'll let Frank comment as well here. But no, look, we'll obviously work towards the closing of National Instruments over those 6 months aggressively. It may come sooner, we'll see. It depends on the regulatory approvals. That's going to be the key pacing items, as you know, Jeff. The bolt-ons, we work them aggressively within the businesses. And some are competitive processes, others not. And we have 2 or 3 of those that we're looking at any given point in time. It will continue to do so. These are sub-billion purchase price type of deals. And we have a low -- a small number we're looking at right now and evaluating.
And then, look, we continue to be very committed to return cash to our shareholders, whether that's through the dividend or share repurchase. And as we go into 2024, we'll lay out what the appropriate plan there is and communicate that. Frank, anything to add?

Frank John Dellaquila

Yes, yes, Jeff, I wouldn't view share repurchase decisions in the context. That's kind of the gap between closing Climate and closing NI. I would view it more broadly as part of the capital allocation strategy. I mean, when we -- after we close NI, we'll have a balance sheet that's well below [2] debt-to-EBITDA and a tremendous amount of financial flexibility. So we'll just continue to make those decisions in that context.

Jeffrey Todd Sprague

Great. And then just back to chem. And I do understand you have a more diverse business than Aspen, but why shouldn't we kind of view this as an early warning sign of pressure in the core business income? And maybe just a little bit more color what you're seeing there because there are obviously CapEx and profitability issues kind of across a lot of that industry right now?

Ram R. Krishnan

Yes. So for us, the capital cycle in chemical, particularly specialty chemical is as good as we have seen it, particularly in Middle East, Asia Pacific and ethylene and methanol investments in North America. So for us, we haven't seen the capital cycle slow. However, what Aspen is referencing is the OpEx spend in chemical customers as they throttle their production in response to slowing demand. And therefore, that translates to MSC purchases, the manufacturing supply chain suite purchases is really the dynamic that's impacting them. It's a small impact to them at this point, but -- given it's 18% of their sales mix, I think they've referenced that. But to be honest, we haven't really seen any KOB3 slowdown or KOB2 in chemical. And then certainly, many of our major project wins to date that we have been sharing with you have been in the chemical, petrochemical space, particularly in the emerging markets. So at this point, we don't see that as an inflection point or a slowdown in the industry despite the higher feedstock costs.

Operator

And the next question comes from Joe O'Dea with Wells Fargo.

Joseph John O'Dea

Congrats to Frank and Mike. I wondered just on the discrete, if you could elaborate a little bit on North America and the interplay between some of the structural, and it sounds like continued strength that you're seeing in sort of battery electric and semiconductors. But then the flip side of that, anything that you're just seeing from sort of a general industrial cyclical standpoint, whether the macro uncertainty is having any impact or whether it's more just kind of like natural digestion of what's been ordered over the last few years?

Ram R. Krishnan

Yes. I mean in North America, to be honest, on the discrete side, we haven't seen -- I mean, we obviously don't play in a big way in semiconductors and batteries yet. We play in a smaller fashion with our DeltaV business. But obviously, we'll get a lot more exposure to that dynamics with National Instruments. In the core machine automation business that we play in North America, we haven't seen a significant slowdown to date, but it is obviously slower than the momentum we're seeing in the process markets.

Joseph John O'Dea

Got it. And then also just wanted to ask about [Nati] and integration planning and sort of what efforts are currently underway that you're standing up, say, over the next 6 months to ensure a successful launch of the integration process there?

Surendralal Lanca Karsanbhai

Yes, sure. This is Lal. We kicked that off last week in Austin over 1.5 days with the management team. We have assembled a team, a steering committee, and then we have functional integration leadership across the 8 value drivers or so that's been identified. Obviously, on a steering committee basis, I participate, as does Eric Starkloff. And we've each named a leader on the integration team, and in our case, Vincent Servello. So that's up and running. Meetings are taking place. We'll have an in-person kick off with a large group here in St. Louis coming up, and then we'll be up and running on all the full integrations. But really good start, great organizational discussions already have taken place. And now we are excited about this work ahead of us as we had to close.

Operator

And this concludes both the question-and-answer session as well as the event itself. Thank you so much for attending today's presentation. You may now disconnect your lines.