Open Systems International, Inc. (EMR) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Special Emerson Conference Call. [Operator Instructions] This conference is being recorded today, August 27, 2020. Emerson's commentary and response to your questions may contain forward-looking statements, including the company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson's most recent annual report on Form 10-K as filed with the SEC. I would now like to turn the conference over to David Farr, Chairman and CEO. Please go ahead.

Thank you very much. I want to welcome everybody here this morning. I appreciate your time. We're sitting right now live in my conference room and myself and Mark Bulanda here to my left, kitty corner to me is Bob Yeager, who runs our PWS business. Jim Nyquist is across from me, who runs all of PSS, headquartered in Austin; Lal Karsanbhai, who runs all of their Automation Solutions business, and then we have Pete Lilly, who is in charge of Investor Relations, but also for many years, worked at the power business. So he knows quite a bit about this acquisition than myself. And so I want to welcome all the investors, the sell-side analysts, and I also want to welcome the Emerson and the OSI employees, I'm sure are all also looking and listening to this conference call today. For your information, and just to clarify things, there were 2 OSI companies being auctioned off at the same time. We had OSIsoft, who I know very well, Pat Kennedy, a longtime friend, Jim and I knew Pat for at least 25 years.

Yes.

Very close friend, associated iconic person in the process business. And we did obviously involve in that process at that point in time, and they were bought out or are in the process of being bought up by Aveva. And then OSI, Inc., which we refer to internally as OSI Power and the reason we did that is we had 2 acquisitions underway, and I had to clarify for the management team and also for the Board, as we talked about OSI Power and OSIsoft. So there were 2 companies out there and the marketplace talked about them, but they got them intertwined from time to time. This is -- as you look at Chart 3, you think about our acquisition strategy, this is extremely strategic, a company that we've known for many, many years, headquartered up in Minneapolis, where we have also a lot of sensor capability in Minneapolis. We're a very large employer in the Minneapolis region. As you look at this pyramid, as you can see, we've been making strategic acquisitions in our data management services software-based companies now for the last several years. We've done 14, inmation was just recently a joint venture investment we're making in Germany, a very nice acquisition, helpfully from the data management standpoint. We look forward to doing more with that company. But when you look at our makeup, we've done a lot of acquisitions in the software. And yes, we continue to build bolt-ons in the sensors and devices area. But clearly, it brings a lot of power to us, and you're going to see as we go through this presentation, where we have a lot of synergy both within the power side of the business, but also on the process side of the business. A lot of technology that we're going to be able to share back and forth. We're extremely excited about this. We're really excited about Bahman and his team and in this and Al, that build a great company in Minneapolis, and we're looking forward to working with them. This business will report into Jim, Jim Nyquist is our -- as we look across the whole PSS business, obviously, has a very close connection to what Bob runs on the Power side, and you'll see that very quickly, but there's going to be a lot of sharing of technology across Emerson, but a very unique software acquisition, and we're very, very excited about it. And with that, I want to turn it over to Lal and Jim to talk and Bob and Mark to talk a bit about the slides. And what we'll do is we'll interject amongst all of us, we'll come in and play and talk about it. Then we would do the same thing in the Q&A area to see if you get a perspective from each of us. So Mark, go ahead.

So Slide 4, good morning everyone. We're really excited to have OSI join Emerson and -- in our Power markets. We have had a strength and built a strength in the generation side with the acquisition of Westinghouse back in the '90s and have really built up that business. And it's our Power & Water Solutions business and very much focused on the power generation side in steam and gas turbine as well as an acquisition we did earlier this year with American Governor on the hydro side renewable energy. What we're adding into the equation is OSI, who is in the control space and for transmission and distribution, which is a very important area, and we view being able to connect across from generation all the way to distribution. So we will cover that entire spectrum in the market. OSI really helps manage the energy flow in the distribution side with the ADMS product line that they have. It is a world-class product line there as well as EMS. And with the advent of renewable energy and microgrids coming into the power equation, ADMS is becoming more and more adopted to control the 2-way flow of electricity as well as restore any kind of outages that occur out in the market as we all want to have our power working all the time. So OSI has really created a world-class platform that is in this space and allows us also to extend into other spaces. And if you look on Slide 5, to depict where we are on the different -- in the best technology stack of devices, controls and data management, you can see where Emerson's current capabilities are in generation. And then OSI brings what's listed in green, primarily across the software and control space. But what is really exciting about this, it also gives us a runway into some future opportunities. So Lal and Jim will talk about our market expansion with OSI itself of $2.7 billion, growing very nicely. But we have opportunities to add down the road in another $5 billion market space over the coming years. So Slide 6 then is OSI, the company.

So I'll take it from here, Mark. Thank you. I would like to second David's words and congratulate Bahman Hoveida and Ron Ingram for really establishing a phenomenal company here. And Al Eliasen for running it for a number of years now. For that team, this is a unique asset. And a unique opportunity for us from a market expansion technology perspective. Chart 6 is the profile of the company, based just outside of Minneapolis, in Medina, founded in '92. We add about 1,000 employees to the already 2,000 employees that we have in the Minneapolis area. Across Emerson, it's a very important regional area for us, as David referred to, sensor manufacturing and the key industry here is transmission -- power transmission and distribution. Although there are applications on the natural gas grid side and distribution and water distribution as well as many principles that can be applied to electricity, can be leveraged into other medium here. It's predominantly a U.S. company today. With 85% of their sales in North America, in U.S. and Canada, but with tremendous opportunity to be globalized around the world as well. I'll turn it to Page 7. This is a compelling chart. And one of the key reasons, as Mark highlighted earlier, that the asset was of interest to us. On the left-hand side of the chart is our -- was our current power generation market, approximately $2.7 billion in size with the DCS, the Distributed Control System, representing the bulk of that market opportunity. The acquisition of PWS, the Westinghouse business in 1998, Bob?

That's correct.

In 1998, at the time, David was running automation, the process. It was 13% market participation company. We drove that to about 1/4 of the global market in power generation and controls and about 50% in the U.S., in North America. So tremendous work there. On the right-hand side of the chart, is the market expansion opportunity here. David -- excuse me, Mark already talked about the advent of renewables and the implications to the grid of renewables entering the grid. But the overall market essentially doubles. The sandbox doubles as we look at control elements now in both transmission and distribution. The traditional, what we call EMS, Energy Management Systems, and then the more advanced and faster growing, driven by the renewable into the grid Advanced Distribution Management Systems, the ADMS, and we'll refer to that a number of times. Jim, would you want to talk a little bit about ADMS.

Yes, a lot of things that's happening in the distribution, of course, is the 2-way flow of power now and a lot of the software out there that's controlling a distribution system simply can't handle that. So as that -- as those renewables come on, more and more distributed energy resources comes on, having a software that can manage that is so critically important. And these guys really have developed a very, I'd say, modern, modular package, scalable that they can drive into that space. And so you see on the right-hand side there, the adoption. So this is a new, I'd say, emerging area because there's a real discontinuity in the market here. And so only about 35% of the market today has ADMS. They have more of a traditional distribution management system, so now about 35% penetration today. So a large market here for us to go back in there, modernize those software systems, replace what's out there today or something now that can handle renewable portfolio.

And one of the things I would like to bring in here, Bob, can you -- in the world of renewables today, the U.S. manufacturers of power are starting to struggle with the renewables. A classic example is California, really ridging down. But today as a percentage of renewables' power generation is you want to get where it is and where it's got to go to, and that's where the ADMS really comes into place. So all the major utility companies really need to move to ADMS and the other managers we've been able to...

Yes. So yes, traditional utilities are getting into commercial microgrids, right? And so wind and solar and that generation can be disruptive on the grid. So it's creating -- it creates, as you've mentioned in California, frequency issues and spinning results today.

Well, today what is the U.S. grid, have in renewal, 10%, 12%.

We got 10%, 12%, right.

And then where -- and then target someplace where California is 100%...

Yes, California is saying they want to go to 100% renewal.

But mostly, we're looking at 25%, 30%.

Yes, something like that.

By law.

Yes. So when the renewables generation is coming on to the grid, it's creating this instability, right? And it can be, as we're saying in California, it can be forced outages because there's no generation. There's no spending reserve. But also what's happening, it's frequency. And this is why ADMS and monarch, their platform, are so important to us because do both bar control and frequency regulation across the grid, together with our software. Mark mentioned that we have about 50% of the U.S. generating capacity and about 1.3 million megawatts around the world. And if you bring in the T&D, together with our code, we have about 25 million to 30 million lines of code in generation. They have about 15 million to 20 million lines of code in transmission and distribution, and we believe this can be the next generation for the total power system in certainly United States and globally.

So there's a huge growth opportunity here, both here in the U.S. and around the world. And we know it's happening like basically being driven by the renewable drive by the government. So Jimmy, back to you or Bob.

Yes. So just to close out Chart 7, David. We feel very strongly that we can take what the OSI has on a global participation basis today at 5% and double that plus as we look forward and grow the company.

And still kind of target out there for, Bob, what's the target for you to get by '20. What's that number, that 24%? 24% is a chicken s***.

Yes -- you went north of 30%.

I went north of 30%. Before I die.

Yes. Yes. Understood. I'm going to do it, too. We're very excited.

Okay. Well, let's turn to Page 8. I'm going to ask Bob to help me cover this, but this is a compelling chart from us -- for us. And it points to the electrical generation distribution landscape, across North America. And we've bifurcated here the market into 3 buckets here. The large utilities, these are large integrated utilities, companies like Duke...

Duke, NextEra, Southern Company, Wilcox Company...

There are a group of large and mid-sized utilities. That's about 50 companies. We segmented there. And then the smaller, midsized munis on the -- and co-ops down at the bottom. And we've taken the terawatts produced generated by each of these companies and put them in the appropriate buckets. The first message here is that Emerson has a significant presence in terms of terawatts controlled particularly at the top of the pyramid, along the top 20...

In United States, about 450,000 out of 1 million megawatts in the U.S.

Okay. And 17 out of the 20 companies that we control on the generation. OSI, on the other hand, is very strong that at the bottom of the pyramid. They've been able to grow and gain relevance, working with the smaller utilities, the munis and co-ops, et cetera.

Correct.

The opportunities clearly for us is to bring OSI into the large-scale utilities up at the top, and for us to come down into the smaller side on the generation side. So there are synergies on both ends here, Bob.

100% Lal. So if you think about the large generators in the U.S. You look at the top 70, we have great presence there. We have great relationships there. And a lot of those utilities have standardized on our control system, Ovation. So it'd be a great relationship there. Like you said, well then on the 2,900 companies out there. So as we -- what's very exciting is when we join our business development and sales teams together around the world, it will go and be able to address these key accounts and really meet their needs from generation through transmission, distribution, all the way to the standardization. So a very powerful combination, not only from a technology perspective, which we just love. I mentioned they have 20 million lines of code that will work right into our 30 million lines of code. So we're now 50 million lines of code right to cover that, it's a great support for our customers.

So one of the issue before we go back to Lal is I think that we're starting to see as we've got to know about OSI Power and then maybe even improving the technology movement within the generation world between the distribution side and the generation side. And we can bring, offering more services and capabilities to the power generation companies, which they've never had available before given the makeup of these 2 businesses together. Anything you want to comment?

Creating this common platform. Another thing that we're really excited about is we have a Digital Twin, right? So we've added like 5 million to 6 million lines of code, and they have a Digital Twin, right? So -- and a history. Right, call it, Chronus. So we see 2 immediate needs, not only the monarch platform innovation coming together and meeting our key customers' needs. But the historian will be something that we can drop right in. All we need is some connectors, which is not hard to do develop that code. So that can become the motivation default historian. It already is the monarch default historian, and it's so great. There's commonality and do data exchange between transmission, distribution and generation. So that's step one. Digital Twin, we're really excited about because we have well over 100 -- maybe 200 digital twins around the world now. So very breakthrough technology because these are same engineering tools for the Digital Twin as it does the generation side. And if we can combine their Digital Twin and ours, we can create this unified virtual system from end-to-end across the entire power system. So if you think about outage management, we could go to large utilities and say, look, here are all your generating assets. We have this virtual version of this, here's what your transmission looks like, right? So you can do what if scenarios, if you lose generation, if you lose different grid, you can reconfigure the grid, you can refigure the whole power system virtually. This is the way that is the virtual -- this is the way of the future. That's all...

The other thing I'd mentioned too, Bob, in addition to that the historian, back on the historian topic, taking that and dropping in an Ovation. We can also play the same game on the process side with our DeltaV with our process customers too because that same thing a few new connectors and things, we really can...

This is cloud-native historian. It is cloud-native historian. So it's very advanced in terms of technology.

Advanced historian, yes, so it's a great fit. Low hanging fruit for us to go...

That is a very straightforward integration.

Probably, now we have our own opportunity to go after some new competitors in this space.

Yes, we might, possibly.

Okay. So on slide, if we turn to Slide 9, we've hit a lot of these points on the page, but just to cover them. That we -- cover what we did. In the upper part, it does expand our software portfolio, and we'll show you what the breadth and depth of that is in the next couple of slides. But OSI itself has 50% recurring revenue and has 100% customer retention rate. So we see those as very exciting to add into our portfolio as we expand our presence in the power market. We've already talked about the modular technology. We have the ability to take that to other areas of Emerson into other end markets and to other geographies. So a large part of our synergy plan. We talked to you about the extension into transmission and distribution. We've been working on different angles to move into that space for some time now, and it's great to be able to bring OSI into Emerson. We've already mentioned it doubles the served market and then also gives an entrée to another $5 billion of expansion. The megatrends, clearly, environmental sustainability, adoption of renewable energy across the grid, across the world will be with us for some time to come and will really drive the adoption of ADMS. We've had OSI, hats off to the entire team. Through 2020, they marketed their company. They battled COVID, and they grew 20%. So phenomenal job. Their historical growth rate is around 15% consistently in the last 5 years. It is margin accretive immediately at mid-30s. EBITDA, with 25% free cash flow margins, extremely strong backlog running into 2021 and beyond with some significant large customer contracts that are multiple years. So we have a really good background -- excuse me, backlog to grow.

And I interrupt you here. A couple of comments here. One, we fundamentally believe this business will grow 10%, 15% in the next several years. And then what we see right now, they have a huge backlog and a huge -- basically [indiscernible]. What do you guys see right now, Jim and Bob, for the backlog and also for the funnel?

Exactly. Right now is about $300 million. And we say we think we'll generate another $100 million in backlog in '21. So going into '22, we should have our $400 million -- get close to $400 million in backlog.

On the funnel side, they've got about a $1.3 billion funnel worldwide projects they're pursuing right now in bidding all the way from early qualification to bidding and closing. A lot of that is international, Dave. So one of the things, as you see, 85% in North America, but a lot of the opportunity we see right now, and they see is to go internationally here. And that's something, I think, from our international infrastructure, we can take the...

Much stronger than they have.

Much stronger than they have. We can take them into some of the world areas and be really successful in converting that funnel.

A lot of the large utilities very globally. We have 1.3 million megawatts to get around the world. So we have great presence globally in power generation. We can go into those key accounts then.

Good. Go back to you, Mark.

In terms of the transaction summary, it was a competitive process that was run. The cash price is $1.6 billion, as we indicated in the press release, with $23.5 million next 12 months EBITDA. It is EPS accretive immediately, excluding amortization and other acquisition accounting charges. We believe this will close very early in our fiscal 2021. So you can think about October. And our pro forma net leverage ratio will be 1.6x. So all well within our balance sheet capacity. So we really look forward to working on the integration plan with OSI and look forward to getting past the customary regulatory approvals to get it part of Emerson as soon as possible.

So one of the things that we had done, if you paid attention back in the April, May time period -- April, May time, March time period, Frank Dellaquila went out and borrowed some money at very low interest rates to get our balance sheet strong. One, for the COVID crisis, but also, we knew in this process we are working forward to getting to try to land one of these acquisitions. So we had already funded this at very low cost of funds and our balance sheet has the flexibility to do this acquisition at this point in time. And then we also have the flexibility to do more acquisitions in the next 12 months as we get forward here and continue to integrate. Something that we're ready for this and our balance sheet is in great shape to handle this one right now.

Okay. Why don't we step back a little bit and look at the overall software portfolio, David, and Mark and I go through the next few charts, Page 10, then. Back in February, in New York, we segmented the software business within automation. And this is an Emerson perspective here on Page 10. We talked about a $500 million software business. The total software business at the top of this pyramid, which is we're calling stand-alone software is sized at $1.1 billion today. That is $750 million approximately pro forma with OSI Power in it. And about $350 million of associated services, engineering services for implementing an application of the software. So that's the top of the pyramid. In addition to that, there is embedded control software and software-enabled devices, which are a variety, you can see a few of their brand names that we use across the corporation. There from DeltaV, to pack systems in commercial, residential.

Ovation.

Ovation, of course. $1.3 billion there. So in total, the total -- the software innovation is approximately $2.4 billion of revenue as we look across the Emerson portfolio.

And we'll start tracking and monitoring this information and report to the shareholders, so we can see it. Because we've been making this investment for quite some time. It's not a onetime push. We've been doing this on for the last couple of years. Obviously, we have not disclosed it until February. And now I think it's very, very important for us to continue to disclose it. In particular, given the fact that we're making a significant investment, the largest investment in software that we've ever done with the OSI acquisition here. But we have a great background and a lot of software-enabled products across this company and a very strong, powerful situation as we built it in the last couple of years.

Now if you turn to Slide 11, we just give you some examples. We've talked about a few of these already, OSI ADMS, and Bob talked about the Digital Twin clearly, software at the highest level. And then the control level of Ovation Control System or, again, PWS under Emerson has moved from 25% market share to around 50% in North America and controlling half of our power in the country. This also applies to commercial residential solutions with the Supermarket Control System, which we've actually had for over 15 years in the marketplace, and we continue to add capabilities on the commercial and residential side with the recent acquisition of Verdant for hospitality, energy efficiency, thermostats systems that cut across the whole hotel, for instance. And then at the device layer, obviously, we've debated how to include the devices, when to include them. So we've taken a very cautious approach in what we include in ensuring that the embedded software-enabled devices that we include really meet the software side of the equation for them to exist. So we wouldn't have Cargo Tracking if we didn't have the corresponding software. That is what really creates the value. So we're taking a pretty strict definition there to make sure that software is the primary driver of everything on this page and everything on the prior page that Lal went through with you. Okay and then Slide 12, just to wrap it up and then move into Q&A. Really, as we look at the spaces that we can continue to look at in the software area. We do like our devices. So rest assured, we will continue to look for the right devices to help us create a stronger solution for our customer and create value for our shareholders. We are also looking at adjacencies within the software space for both platforms and for Emerson in total. There's some exciting opportunities. As you all know, these are very high growth areas, high margin areas, expensive to get into, but well worth getting into these areas to create a broader solution in the marketplace and continue to strengthen Emerson for the long term.

With that, we'll move to the Q&A. We'll open the phone line up to take on questions. And again, what I'll do is, you can either ask an individual or just ask question and we'll probably pass around the room based on you get the various inputs from the various leaders here in the room. So with that, the line is open.

[Operator Instructions] Our first question is from Steve Tusa from JPMorgan.

When you think about the technology here, I think you touched on it a bit, but how do we think about this as kind of longer term, the growth is in T&D? Or can you -- or are -- is there an opportunity to kind of take the platform or the embedded technology and leverage it kind of across other process disciplines or discrete disciplines as more of kind of an end market neutral type of technology?

So Steve, I'll give you my inputs first, and I'll turn it over to the experts, who's Jim and Bob here. But from my perspective, we see -- when we went into this process and started looking at OSI, I call it OSI Power, that we saw a lot of unique technologies, a lot of integration opportunities. So we see a lot of opportunity to take this outside what I would call the core power and water distribution side, into the generic power process side. We're very excited about it. Clearly, we will take our time, and we'll let Lal and Jim go through this, but there's some unique opportunity here for us to take this a lot broader and to move it way outside the bandwidth. It's -- it is today, and it's the reason why I wanted to report into Jim Nyquist versus Bob Yeager. Because Bob is very much focused on power to water. And Jim will take you to a broader perspective. So Jim, why don't you -- Lal, why don't you give your 2 cents?

Yes. David, that's exactly right. And what we actually found when we began our engagement with the management team in Medina, Steve, was that they had already started to pursue opportunities in a broader segment of the marketplace beyond power. And it's all very important from their perspective to diversify their business into natural gas distribution networks, into water and wastewater controls. So there's absolute application. And Jim, you've seen the funnel and there's a significant amount of process.

There are some product opportunities. And I think you may recall, we bought a company ESI a few years ago that really does pipeline optimization and scheduling applications. And so when you take that kind of capability, it sits in that pipeline area and combine it with the scale and the distribution capabilities here, it's a natural fit. So we see those kinds of synergy opportunities on an industry basis. We also see, again, we talked about the historian. The historian is because we scale that across very horizontally across all industries. And so that's another easy piece. And so we begin to develop that list of -- we think there's a great opportunity to take either technology or applications and then move into some of the other industries.

Yes. I think Steve...

And what's so special about that technology? Is there something that is -- they've worked on a kind of something unique to these guys outside of the end market?

Okay. So let me start with the monarch platform itself. We believe it's technically superior to the competition right now because if you think about the T&D space, the competitors right now, when they do a new transmission or distribution system, they have to write a lot of custom code and they kind of -- a lot of times it goes with a one-off system. The unique thing about monarch and what Bahman has done over the last 10 years is create a very standard -- a lot like Ovation. You'll see the same hardware, the same software in a nuclear plant that you own a hydro plant, you have a coal plant or a combined-cycle plant, you see monarch with this configurable software, modular software, no custom code required. It's a very, very unique feature, and that's why they're so profitable, okay? If you look at their EBITDA and Mark's gone through that, that's why they're profitable because they don't have to write a lot of custom code for this platform. Now if you think about changing the dynamics, so they've done it in the T&D side already, now think about pipelines. Now think about water distribution, right? If you have a configurable software product that can do that across all those and just the apps that are different, so the enormous advantage from just delivering projects and cost reductions and profitability and then we merge the platforms together and create at least in power, the next generation power management system that's configurable, that's going to be...

And I think they have the core software, as you say, modular, and then the opportunity for us to put more applications on top of that core system in the other industries.

And that's why it's so unique, Steve, is because their approach and the fact that we can use our core software today and embed it right into their modules and sell it on. So there's -- it's a lot easier to take it across. It was very specifically written for one industry. This is not written for specific one industry. And I think we can take into other industries. And more importantly, we can take it around the world, which they do not have the strength that we have around the world. So there's a lot of growth opportunity here in a very profitable business and allow us to change some of our investment profiles within the company today to not just in power.

Next question is from Andrew Obin from Bank of America.

All right guys. Can you hear me?

Yes, I can hear you, Andrew. That's okay.

Yes. Just as I think about this deal, so it seems a very nice tuck-in just in, but how should we think about 2 things. First, M&A, how much spend on software versus hardware going forward? And the second, just in terms of capital allocation, M&A versus buybacks, how do you think about the 2 of these balances?

Yes. So I think that from our perspective, we -- I would say that we're trying to target more of a 50-50 software versus unique software -- sensors or hardware, Andrew. And I think that's very important. Now a lot of software assets out there that are very specific to this industry, but we're continuing to look at those. So be -- we're looking at a 50-50. If you look at the number of deals the last couple of years, you look at the number of software and control and the number of sensors, we were basically 50-50 in number of deals, the dollar-wise was more probably deals with sensors because of the V&C acquisition. So from a capital allocation standpoint, we'll still target next year, $1 billion-plus type of transactions for acquisitions. And we'll be looking next year, most likely around the $500 million share repurchase number. We'll take it down a tad because of this acquisition, as we talked about in February, but we're still going to do share repurchase. And if we don't do the deals, we'll do more share repurchase. But we want to get our ratios back down a little bit. I think we're going to be a 1.6%, 1.7% EBITDA-to-debt. And so what we want to do is get that down the tad. But that's how we look at it right now, and we're out there working software deals as fast as we can from that perspective. Andrew, your son could ask a question.

Yes, I know I'm getting incoming messages on that.

Okay. Well, if he had a good question, he wants to know, is dad a good guy or not, let me know, I'll talk to him about, okay?

He has a toy dinosaur called, David Farr, so you should...

You called me a dinosaur.

No, no.

I hope because my favorite dinosaur was the tyrannosaurus rex. So you can imagine I used to inch it.

It is -- well, I think that's the reference where we're going for, Dave.

Trex. Okay. Next one.

Our next question is from Andy Kaplowitz from Citigroup.

So look, 40 customers at times, I think you know they tend to be a little slow at adopting new technology, but it doesn't seem like OSI has had any issues with its growth. So could you give us more color into that 5% market penetration that you talked about with OSI. How likely do you think it will be, for instance, for utility customers to adopt ADMS at an accelerated pace, as you mentioned, do they have to adopt as they move more to renewable-based? And how much is Emerson global power gen platform help awareness to that penetration?

So I'll let Bob answer the question in detail because we're getting into the micro. But the top line, Andrew, they really have no choice. The major utility companies are going to have to go this route. They built the structure off of the old GEs and the Siemens or the ABBs. And it's just not flexible enough to deal with this movement to renewables, and it's bounced back and forth. On the short term, wire power business North America is doing so well right now is because the power grid is struggling or the power generation is struggling, while renewables and our service business right now is growing more than double digit, basically in North America because this, but they really have no choice. So Bob.

So we mentioned about the -- it's highly underpenetrated at 35%, right? And we know about the micro grids, the commercial microgrids and the introduction of renewables is not going to change. And as this continues, and this trend will continue, it creates these instabilities. It creates instabilities on the grid, with both bar creates frequency issues. So the distribution level, this is definitely software that's needed. And as more and more microgrids come on and the renewables come on, it's going to create more of these issues, and they're going to definitely a widely adopted distribution.

I mean the hydrocarbon plants right now are running very inefficiently. They're breaking down, and that's why our service is doing so well. And as the states and the countries have set renewable goals. I mean for instance, Europe has set renewable goals. U.S. state has set renewable goals, the state of Missouri right now, the number is 30%. They're sitting probably at 10%. So they have no choice, they're going to have to move this way in order to manage that or they're going to have a very unstable grid like you see in California right now, and that's not going to work for the consumers at all. So I think this is a very powerful message. We know right now, a southern company, not mention the name of the company, but a southern type company is looking right now to go this way. They're going to go out and go towards ADMS versus the old stock.

Yes. So if you look at just CapEx, capital spending, traditional generation versus transmission distribution, it's like 10x the amount of capital spending over the next 5 to 10 years.

In T&D.

As we look at what we see, that's obviously 10x more M&A.

For 2 reasons, one for the grid stability issues and just for the support of renewables.

Correct.

And if I could just add one thing. We're buying the leading technology in ADMS, in our opinion, in OSI's technology, coupled with Emerson's financial backing and breadth and depth in the power industry provides a lot of credibility for these larger North American power utilities to adopt OSI's technology as part of Emerson as opposed to an independent company. So it is a very strong value proposition that we can now give to the power industry.

Very helpful, guys. And just as a quick follow-up there. Like you mentioned the 5% that they have as a percentage of the T&D automation market, who has -- I mean what are the -- what's the competitive landscape like? And is it as simple as this renewable ramps up and as part of the Emerson platform, you get that above-market growth that gets you much higher penetration like where you could go there from?

Andrew, Andy, let's -- Lal mention it first and then Bob can comment here, too, because we see against. So we know who the common -- the guys in the old technology, the ADMS technology. Who are the capital players in some of the older technology?

So we've got General Electric out there. We've got ABB Hitachi, the oldest technology established. The ADMS technologies, that shift is occurring at about a 9% market clip. You know OSI is growing at a 15% market clip on that. And it's displacing some of those traditional GEs, ABBs that are out there in the grid, Bob?

Right. So it's -- again, it's a standard approach, right? So -- and what most customers do not want is a one-off. They don't want someone to come in and put a system in and then write a lot of custom code and they're coming off on their own. They like be able to upgrade over time, and they like to take advantage of new features of the software. That is the key difference between the monarch platform and the competition. So that is really what the differentiation is there. ABB is now -- their grid system is now part of Hitachi. So there's a lot of dynamics going on there. So we believe that from a product technology perspective, OSI is a level above the competitors. And when people are looking to get this new system, they want one standard platform.

So I think the key issue, Andy, is that with our reach across the world in the power generation, we have a very strong presence. They know who we are from the top, from me on down, and so we have the capability to really take them into customers they've been in before, both on the power side, but going back to another question we had into the process world too, where there's this type of distribution going on in the temporary industries that we see. So a lot of unique leverage both in the core but outside the core.

Congrats on the deal.

Our next question is from Joe Ritchie from Goldman Sachs.

Interesting deal. Can you guys dig in a little bit into the revenue model? So you guys mentioned 50-plus percent recurring revenue, but then also kind of referenced the backlog that was almost 2x the size of your trailing 12 months revenue. So like how does the revenue model actually work? And is it right to think of the -- your backlog is kind of being like a 2-year backlog?

No, no. It's not 2 years. So what happens, and I'll let Jim talk about it. So they just won a huge Hydro-Québec project on its T&D side. We won the system side, generation side. So Siemens has been taken out there. We're putting Ovation, and they won the T&D side. These typical backlogs will go 5, 10 type of years. So you've given how the model works relatively, it's trying to understand this from the standpoint of all of sudden, we're going to see $500 million of sales in the next 2 years. How does that work?

That's spread out. So it really is a combination of licensing, all the engineering, software engineering services. That go along with it. And so I think if you want to split those up, you could say it's probably about 40% license, 40% engineering services and then about a 20% ongoing maintenance and recurring revenue specifically on that side. So that's the way it works. And I would say, yes, that backlog is going to run out, over some of that backlog going to run out over 4 or 5 years, like a Hydro-Québec. You see there's a little bit of quick turn business here, the subscription or the ongoing recurring revenue, but then you've got the longer-term licensing, which will run out over multiple years as they ship it out.

And so we'll have to do, Joe, is when we bring it in. I haven't talked to Frank Dellaquila about this, but we'll -- we have a very disciplined approach to backlog. And when we report backlog to you guys, it doesn't go 10 years or 5 years. We're -- I think, what, 18 months?

Correct.

18 months. So we'll -- so when you report backlog, Bob's got contracts to run out 5 or 6 years. So how long does your hydro contract runs?

The maintenance goes for 15 years, but the base contract will be down mid-2023.

Yes. So we'll bring that into our backlog calculation. But what we want is they have a very healthy business model right now, running out for many, many years. And then we're going to quickly work on the big project, in particular, outside United States, see if we can land those projects given our organization to help them land them very quickly. So very healthy background right now -- backlog and helpful from that standpoint. Does that help you out?

Yes. Super helpful. And then I guess just the follow-on as you're thinking about the international opportunities, still a small portion of the business today. Is it predominantly Europe? How much of it is being driven by, obviously, renewable standards and the Euro Green Deal, maybe accelerating some of those standards. I'm just curious how you kind of plan to go after the international opportunity?

So the $1.5 billion funnel, about $400 million is in Europe, about $400 million in the U.S. and the rest is split between Middle East and Asia. So Europe is approaching the U.S. pursuit list, yes.

To your point, right. Europe is going to be very thick.

Which is why we love this because we were counting on North America where we have a lot of presence there, and we talked about the key accounts and the collaboration in the key accounts. But equally exciting, maybe more exciting is the international expansion.

So today, Bob, if you break down PWS in between the 3 buckets, I look at the Americas, Europe, to help Joe out here, and Asia Pacific. How do you break down roughly today.

So we're about half the U.S.

North America...

Yes, North America about 50%, and then about 35% Asia. And then the split between 15%.

Okay. That's how we break down PWS. So I would say that Europe is going to be probably bigger in this case here because we're extremely strong. We've a largest power generation player in China.

Exactly, we are -- we have over 1,000 systems in China, power generation systems.

I think you're going to see this go over many years ago to 50-50, and 50 inside the United States and 50 outside United States. And we can drive that, given our organization. As you know, we have a very powerful organization outside. So automation solution today is what is your breakout down today between Americas.

So in the Americas today, we're about 45, David?

Yes, 45%, 55%.

So right around that range.

We have a large organization, we can help pull this thing around the world.

Our next question is from Julian Mitchell from Barclays.

Congratulations on this news. Maybe...

Sorry, I guess non-European companies can buy our software company. I just paraphrase your...

No, no, no. I said, congratulations. Good to see the stars getting evened out.

I saw a note come out on OSIsoft and you said U.S. companies are dead and are not doing anything in the...

So I suppose -- so now at the end of the title, but that's -- no, you're right. This is a -- this evens out the playing field.

So you got to take cheap shots on the CEO once in a while because you're going back to me, as you all know.

So the -- maybe Dave, one question around the integration of the business. As you know, it can be difficult for industrial companies sometimes to integrate software, pure plays. That's a common issue across the world. Maybe help us understand how this will be integrated, what happens to the management of -- the existing management of OSI Power?

Okay. I'll let Lal come first with it. And then Jim, but go ahead.

Yes. Yes. Thanks, Julian. We do have a $1.1 billion software business within the corporation already that we're managing and working through. The cultures in those business, the times and the management processes we use are different. We integrate them into the overall financial systems, et cetera. We're excited about the management team. It's a very solid management team. We're buying a great group of employees. And I'll let Jim add a few -- a little more color on how the actual integration is going to go in the first 3 months to a year.

Just to add, when we bought Westinghouse, so at that time, was called Westinghouse Power and we bought it, and we changed the name to PWS because I didn't want to pay Westinghouse anymore fees after a while. We've left it alone. It reported up into -- at that point in time, I think it was you, Jim. I think when I bought it, you were still running the Systems business. So we will keep it isolated, and we'll try to leverage it because we understand to what your point Julian, we could destroy it. And that's not what we want to do. Because software is way too important into the next-generation of growth. And so we'll keep it isolated as best as we can and use the resources, but they have a great team today already, and they're young from that standpoint.

So yes, I'll just add a couple of things, Julian, that, yes, some of the odd software acquisitions we made are product line extension or a gap filler in a particular business. So we integrate that pretty quickly. And I think one of the examples we bought a couple of years ago for the life sciences MES layer called Syncade now. And that's very tightly integrated in and part of that group or that business. This one, we see really more like we did with Power & Water is, as Dave said, it will be a stand-alone business, new business unit. So we'll create a new business unit for T&D here. This will be the cornerstone of that, and it will be really pretty much stand-alone. We'll run it as its own independent business, it's a stand-alone today. And then we'll look at where those synergy opportunities are, work very closely with Bob. And then we have some other shared areas that we share across functional areas, across our Systems businesses, and we'll look at how we can leverage those as well for some efficiencies. But this will really continue to be pretty much a stand-alone new business unit. And we have an integration plan now that will -- first thing will be, go out and work with our -- with their accounts and their customers and how can we leverage the strength of Emerson to help them close some of those deals. And the second priority will be where we find these technology and industry synergies that we already talked about.

Very helpful. And maybe just a more prosaic financial question secondly. Maybe help us understand what kind of cash-on-cash returns, maybe by year 5, you'll get from the deal and whether that type of return is consistent with what we should expect from future Emerson software acquisitions?

I mean I'm not going to put a cash-on-cash return out there, but it's going to be a very good cash-on-cash return, and it will be consistent. I think some of the smaller deals, we get better cash-on-cash deals because they're less competitive from the standpoint of the opportunity here. But this is accretive from a return standpoint and margin standpoint, and returns are very good. And from our software acquisitions, we've done very well over the years. And obviously, we get the smaller ones, we get better returns, but that's how we stand, Julian.

Our next question is from Joe Pokrzywinski (sic) [ Josh Pokrzywinski ] from Morgan Stanley.

I guess close enough. I think that's me.

You want to pronounce -- you want to try that again, [ Joe ].

We'll go with Josh Pokrzywinski. I didn't know if Joe Goldman was.

No, but he doesn't have that...

[indiscernible] taking over my family.

Yes, he's inherited you. And you just send all the bills to Joe Ritchie at Goldman, okay?

Will do. We've covered a lot of ground, good detail out there. It looks like a good pickup for you guys. I guess in terms of the selling process, you have a few electrical guys that weren't on the list of some major competitors for this business. I think if somebody like an Eaton that I think has some grid automation and self-healing capability. I guess as you go-to-market with OSI or as OSI goes to market, is there some natural attachment point between hardware and software that needs to occur? Or is there a channel by which, hey, if you're selling some of the electrical gear, it's an easier add-on. I guess just help me out interface for us.

That's the beauty of OSI. They're not tied to any specific hardware architecture. So as a result, they're able to go across all the competitors' installed base. And with -- and as we said earlier, with this highly configurable code that doesn't even one-off in a lot of custom code, that's really where -- a lot of their growth does come from competitive displacements. And you combine that with this very fast-growing ADMS market and, yes, we just really see it taking off.

I mean there's a lot of smaller competitors out there. But the big competitors in this space are the big global companies that we all know who they are. We talked about them. They're the major players.

It's a lot like our control system when you acquired this in 1998.

Yes.

We didn't have the hardware. We didn't have the turbines. We didn't build the turbine. That was all divested. So as a result, we weren't tied to a specific major equipment or hardware at that time.

Makes it a lot easier for us to sell.

But as Mark highlighted on Chart 5, there are an interesting set of potential future opportunities at the device layer around intelligent expenses. And that, I think is something we're going to continue to work and think about.

Okay. Got it. That's helpful. And then I guess the other element related to kind of the purchase cycle is, are customers really looking to interface as they're adding renewables to the grid, i.e. do they need to be buying stuff to want to buy this or at any point along the way, will they just pull the trigger on ADMS?

It's not tied to the original -- this is for optimization. So to look at the generation loads, to look at what I talked about ballpark control, frequency regulation, they can add that in. As you know, it's not part of the greenfield project, but later on, i.e. to optimize distribution. So today, if you went out...

So how much money is being spent this year, the U.S. utility industry? What's the number?

In the grid for the total T&D architecture, we'll do, for example, spending $10 billion over the next 5 years.

I think the top 10 are $90 billion.

$90 billion. So they're spending a lot of money on this area right now because the big problem before they really expand the renewables as they go through a lot of mobility, bring stability to the network, unlike California, we didn't think about things like that until the last second. You've got to bring that into. So all the big major utility companies that supply the rest of the country are thinking about how they do that, and that's why they're going to invest it. And they'll do it -- they go out and make those movements, and it will be made over 5 or 8 years. It won't be a one big bang because they'll try to figure out how to manage that grid. But once they go forward, they move, they don't stop.

And they're going to live with their custom software so long that the pain is so much, they really got to move to a new architecture here.

Our next question is from Christopher Glynn from Oppenheimer.

So you talked about kind of the 10%, 15% growth outlook. It seems like that's the industry growth, but you've got a nice Slide 8 on cross-selling opportunities and talked about the impact of Emerson's financial backing helping them. So kind of wondering what are the prospects you could really grow much faster than that growth target because that almost sounds like the market rate, but you've got some real levers.

Yes, the market is growing less than 10%. The market is growing more like 8% or 9%. But I would say, to be honest, Chris, the key issue for us from our perspective is if we can land some of the international programs, which they have underway, if we can go out and land 1 or 2 of the big, big North America, the top 20 customers in North America, then we really do have a chance to grow this business faster than we just talked about there. But we've got to land those. We've got to bring them on board. But I think the growth opportunities are enormous out there for us as we get to working together on this. But I think that from my perspective right now, our plan assumes X percent of share gains around the world because we're looking at, say, just pick the midpoint 12.5% versus the market of 8% or 9%. So we have that built in, right, our hope is to obviously beat that going forward. It's so profitable that we can generate a lot more cash and returns for our shareholders.

And one of the limiting factors have been just reach and the infrastructure around the world, be able to do that. And I think when you -- when we bring ours in, both from a sales infrastructure, country infrastructure, engineering, service infrastructure, I think we can really create some real synergy there.

Anything else, Chris?

What's that?

Another question?

Yes. I was just going to say, what direction do you see the sales synergies developing faster because synergies to Emerson's platform would probably be displacement versus Emerson pulling OSI would be pulling adoption probably?

Yes. I think our biggest opportunity is really to help them with our international organization, and we're going to work very closely with Bahman and Al on this from that standpoint. We're going to try -- we'll mobilize their teams and our teams together in the international projects that we see in particularly around Europe, which are on the table right now. And then the next -- I think the next thing is that we'll be able to go out. There will be our Qs coming in the U.S., the major -- the top 50 utility companies, there are Qs coming right now around this change to ADMS. And I guarantee you, we will be right there as one company. And OSI, will now have a backing obviously of Emerson. Same thing that Bob saw when he was a young engineering guy at Westinghouse, when the backing of Emerson made a big difference relative to getting these customers.

Quadruple that business as becoming part of them.

So I think that's where we go. And then the technology stuff will take some time. You're exactly right. But I think there's some things we can do pretty quickly. And we're pretty excited about this. And I'll wrap it up here with you, Chris, but we're extremely excited about it, a unique opportunity. A unique software company that really fits very, very core to what we offer today, both on the true process side, the power side, the water side. And I think we see some unique opportunities to create some new business models to grow and to change the profile of some of our businesses inside automation solutions. So with that, I'm going to wrap it up. I want to thank everybody. If you have any questions, call Pete. He's quite knowledgeable about this space, obviously, be involved in the due diligence, but also coming out on the power side of the process growth. So thank you very much, and I appreciate your time today. Bye.

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