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Emerson Electric Co (NYSE:EMR)
Q1 2021 Earnings Call
Feb 2, 2021, 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Emerson First Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Pete Lilly Investor Relations Director. Please go ahead.

Pete Lilly -- Investor Relations Director

Good afternoon, thank you so much and welcome everyone to Emerson's first quarter 2021 earnings conference call. I hope everyone is staying safe and healthy.

Today, I'm joined by David Farr, Chairman and Chief Executive Officer; Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer; Jamie Froedge, Executive President of Emerson Commercial and Residential Solutions and congratulations to Lal Karsanbhai, Current Executive President of Emerson Automation Solutions, who has recently announced as Emerson's next Chief Executive Officer, effective on February 5th.

As usual, I encourage everyone to follow along with the slide presentation, which is available on our website. Starting on Slide 3. I'd like to briefly highlight two examples of the great work, our global teams are doing and some recent recognition from customers and the marketplace. First, Emerson's Plantweb Optics Analytics software recently received the 2021 IoT Breakthrough Award. Emerson's Plantweb Optics platform helps customers to collect OT data from a variety of sources and apply practical and customized visualization and analytics, delivering key operational insights to the right people at the right time.

Next, turning to Slide 4. Emerson recently received the 2021 Control Readers' Choice Award for our industry-leading automation control and instrumentation solutions. Emerson continues to receive positive feedback from customers and users of our products based on a relentless focus on technology, unmatched customer service and critical domain expertise in our customers' industries.

Turning to Slide 5. We will review the highlights of a very strong quarter. First, Emerson remains steadfast in our commitment to health and safety for our employees, customers and communities. Serving our customers in critical industries, disciplined cost control and positioning to outperform as we emerge from COVID-19, remain our key thematic priorities and we are starting to see the benefits of this focus flow through.

Next, our regionalized operations remained sturdy and stable and we will continue to build upon our firmly rooted strategy of business localization. Turning to performance, Emerson delivered a very strong quarter in a challenging, but stabilizing and improving demand environment. The organization delivered adjusted EPS of $0.83 in the quarter, which was up 24% from the prior year and well above expectations. We continued our execution of the broad cost reset plan with an additional $69 million of new restructuring actions.

Cash flow was a new first quarter record for the company, with operating cash flow of over $800 million and free cash flow of $686 million, up 90% and 121% respectively. It is important to emphasize that the balance, the end-market diversity and the stability of our two platform business strategy was critical to enabling the strong operational and cash flow outcome. Even on down 2% organic revenue, segment margins grew by 230 basis points to 17.7%. This margin improvement is a strong testament to the consistent operational execution of the global organization throughout the pandemic.

Despite lingering uncertainty and demand challenges in many key markets, sales and orders finished ahead of previous guidance. Commercial and residential solution's underlying orders remain quite strong finishing up 15% on a trailing 3-month basis. Importantly, our Automation Solutions business is showing signs of stabilization and improvement. Given the orders, sales and profitability improvement, we are updating full-year guidance to reflect the stronger outlook.

Please turn to Slide 7, which offers details on the results of the quarter. Both underlying orders and sales came in ahead of expectations, down 4.5% and down 2%, respectively. Commercial and residential solutions underlying sales was up 12%, while automation solutions was down 9% but improving. Adjusted EPS, which excludes restructuring and first year purchase accounting and fees, was up 28 -- 24% to $0.83 well ahead of expectations. As previously mentioned, the organization achieved a new Q1 cash flow record driven by increased earnings and strong working capital management. Operating cash flow increased 90% to $808 million and free cash flow increased 121% to $686 million.

Turning to Slide 8, we will briefly bridge adjusted EPS in the quarter. Starting with adjusted EPS in Q1 of 2020 of 68 -- $0.67. Non-operating elements including tax interest FX and other items were combined non-factor, adding a penny in total. The most important element was operations, which drove the vast majority of the EPS outperformance contributing $0.13. Share repurchase added $0.02 for a total of $0.83 in the quarter.

Moving to slide 9, we will review the P&L. Net sales were flat and we saw a slight reduction in GP margin which was driven by volume deleverage and mix. Meanwhile, SG&A as a percentage of sales, declined by 310 basis points to 24%, as aggressive cost control actions took effect. EBIT and adjusted EBIT margins, which exclude restructuring and first year purchase accounting fees increased 350 basis points and 260 basis points, respectively also reflecting the cost containment actions flowing through. Lastly, the effective tax rate came in at just below 20%, slightly lower than expectations.

Turning to Slide 10, we will review underlying sales by world area. In the quarter, the Americas continued to show the steepest declines, down 7%, but importantly, they started to improve. In North America, we saw strength in residential, cold chain, life sciences, medical, food and beverage, and some discrete markets more than offset by weakness in many other automation end markets. Europe grew 4% while Asia, Middle East and Africa grew by 3% fueled by strengthened China at 7%. All commercial and residential solutions world areas turned to growth.

Please turn to Slide 11 and we will discuss the business segment performance. Total segment adjusted EBIT margin increased 230 basis points to 17.7%, reflecting aggressive cost-control measures and strong operational execution, even with slightly down underlying sales. Adjusted pre-tax earnings increased by a similar magnitude, 240 basis points to 15.2%. As previously highlighted, Q1 cash flow performance was record setting with operating cash flow and free cash flow increasing 90% and 121%, respectively. Free cash flow represented a 152% conversion of net earnings. Importantly, trade working capital dropped to 17.8% of sales, driven by strong execution by operations.

Turning to Slide 13, we will discuss the business platforms. Automation solutions underlying sales finished down 9% for the quarter. The Americas remain the most challenged, down 20% but showed signs of stabilization and early improvement. Overall, we saw continued momentum in life sciences, food and beverage, and semiconductor markets as well as some early signs of improvement in upstream energy markets. Meanwhile, Europe, and Asia, Middle East and Africa, both turned to low single-digit growth driven by strength in Eastern Europe and China respectively.

Trailing three months' underlying orders were down 13%, again reflecting stabilizing and early improvement trends. Geographically, the Americas continued to be the most challenged down 27%. Asia, Middle East and Africa declined modestly by 1% supported by China orders growing 6%. Europe declined by 3% due to weakness in energy markets somewhat offset by chemical, power and life science projects. Restructuring actions totaled $64 million across the platform as we continued execution of the return to peak profitability.

The platform delivered robust positive profitability improvement despite the drop in revenue. Adjusted EBIT and adjusted EBITDA margins increased 200 basis points and 290 basis points respectively as the effects of the ongoing cost actions took hold. Lastly, the platform increased backlog by $600 million, of which $300 million was due to the acquisition of OSI. The ending balance was $5.3 billion.

Turning to Slide 14, commercial and residential solutions underlying sales were up 12% in the quarter. All core world areas were solidly positive with the Americas showing the strongest growth at 14%, driven by strong residential, cold chain, and home products demand. This growth points to share penetration gains in many of our end markets. Europe was up 8% as heat pump demand was driven by sustainability regulations and customer technology preferences. Finally, Asia, Middle East and Africa was up 7% driven by China up 10%. As mentioned, trailing three-month underlying orders remained robust, up 15% with all business units growing. North America increased by 16% and robust HVAC and home products demand, while China was up 17%.

Restructuring actions totaled $3 million in the platform and were primarily focused on facility rationalization and optimization programs. Adjusted EBIT and adjusted EBITDA margins were up 230 basis points and up 210 basis points, respectively, reflecting leverage on the increased volume and improved cost base. Finally, backlog in the business increased by approximately $200 million and in the quarter at nearly $800 million, which is well above normal levels.

Please turn to Slide 16 and we will introduce second quarter guidance. We now expect the underlying sales will be roughly flat year-over-year, with a range of down 1% to up 1%. This potential for the company to return to positive growth is earlier than previously forecasted. The top line outlook is driven by continued momentum in residential, life science, medical, discrete, and food and beverage markets, and ongoing stabilization and improvement in other automation markets. GAAP EPS and adjusted EPS are expected to be $0.83 and $0.89 respectively, plus or minus $0.02.

We expect adjusted EBIT margin to be 17% to 17.5% with adjusted EBITDA margins in the range of 22.2% to 22.8%. Lastly, it is important to note that this guidance embeds an $0.11 change in stock price costs due to movement in the stock price.

Slide 17 introduces our updated full-year 2021 guidance framework. Management assumes that the demand will continue to be challenging but stabilizing stabilizing and steadily improving as global vaccine efforts mature. We also assume there are no major operational or supply chain disruptions and that oil prices remain in the $45 to $55 range. Given that context, we expect underlying sales growth this year with a range of flat to plus 4%. Automation solutions is expected to be in the range of down 3% to up 1% underlying sales, while commercial and residential solutions is expected to grow between 8% and 10%. As you can see, both of these platforms -- platform outlooks are improvements from November.

We expect a slight decrease in effective tax rate, as well as increases in operating cash flow and free cash flow to $3.15 billion and $2.55 billion respectively. There is no other change to the capital allocation outlook. GAAP EPS is expected to be $3.39 plus or minus $0.10, while adjusted EPS is expected to be $3.70 plus or minus $0.10.

We have also updated our outlook for profitability headwinds and tailwinds in the year. Since last quarter, we expect that COVID-related savings will now only be down $40 million this year, up from the previous estimate of $70 million. However, we now expect that price cost dynamics will be slightly negative as raw material costs and availability become more of a short-term challenge. Operations are working diligently to mitigate this issue. Lastly, stock price will be more of a headwind.

And now, please turn to Slide 18 and we will briefly cover the changes to the recent restructuring and COVID-related savings plan. Total company planned restructuring spend remains $200 million for the full fiscal year. As mentioned, we now expect only $40 million of the $150 million from COVID-related savings from 2020 to return as business conditions start to normalize in the back half of the year. Accordingly, incremental 2021 savings have improved to $220 million. Total long-term annualized savings of the overall reset restructuring program are expected to be $650 million.

Please turn to Slide 20 and I will now hand the call over to Mr. David Farr.

David N. Farr -- Chairman and Chief Executive Officer

Thank you, Pete. First, I want to welcome everyone to the first quarter earnings call. I want to thank you very much for the interest in this great company. I'm clearly a little bit biased on that but it is a great company. Second, I want to thank the global leadership team, the executive leadership team, and all the employees around the world executing and delivering a fantastic first quarter for all of our investors. The last 19-months have been hard with the cost reset for peak margins, downturn in late 2019, COVID-19 pandemic and a resulting global recession, and now the return to growth.

By recognition in applauding to all of you is powerful and thankful. I want to thank all of you from my heart for what you've done over the last 19 months. But now we have a new threshold of execution for the second quarter in total fiscal year. I believe this team will make it happen, they are good.

Third, I want to recognize and congratulate Lal Karsanbhai, as the new CEO of Emerson. I'm so proud of you and so excited for you and how you and your new OCE team will take Emerson to new heights, as I and we have done the last 20 years. When Chuck Knight turned over the reins to me in late 2020, I took a deep breath, I paused, I smiled and then I move forward. You're ready and have what it takes to lead Emerson, you have the right stuff, as does all the OCE and Global leaders. I'll be your best cheerleader, your supporter and my phone line is always open to you and your team. [Indecipherable]

Now, why now? I'm healthy folks. I'm not sick, nothing is wrong with me, other than my right knee, which has definitely gone, no golf, so the knee replacement is on the way, I've already talked to my doctor.

The Board's succession plan and process ran its course with many great candidates over the last five years. I want to thank all of them. They all know who they are, couple could be in this room. I also want to thank Bob Sharp, who is a close friend and really wanted to be CEO of Emerson, but as he and I talk, told him it was not going to happen so we decided to figure out how to make it happen somewhere else. I wish him the best of luck.

As we went through the first quarter, it was clear to me, the Board that we clearly had one strong obvious candidate, Lal. The others are great leaders, they're great individuals, they are great friends, they've done great things at Emerson. But Lal is the next leader. So we decided, but that's not the only issue. There are other things going on across the company. The company is in great shape. The P&L, the balance sheet, and the cash flow as the Finance Committee told Lal this morning don't blanket up. We had a very good final quarter in fiscal 2020 as you all know, orders have been turning up strongly, the V-shape recovery has been taken hold and is really firm at this point in time.

We've had strong exceptional execution around the massive cost reset that we embarked upon back in 2019. The cost reset costing is over $600 million when it's all said and done. The progress is enormous, you've seen it in the margins in the fourth fiscal quarter, you've seen the margins in the first quarter. We're going to deliver over $650 million of savings for the company, when it's all said and done. The global teams led by these two individuals, these three individuals in this room, Lal, Jamie and Frank are getting the job done. They don't need my help.

We are going to continue to deliver, I guarantee you that's one commitment that I made to the Board, when I said yes Lal' the guy. The first quarter was strong in all fronts, GAAP sales were flat, underlying sales only down 2%. And I believe in the second quarter, our GAAP sales will clearly be up and I think our underlying sales will be up also. Maybe not a lot, but I think they'll be positive. Profitability was very good and with improving volume and cost out in the first quarter, great incremental margins on both sides.

Strong margins, EPS momentum and yes, record first quarter cash flow of $800 million and free cash flow of $700 million, extremely strong execution around earnings in the balance sheet. And we see a solid fiscal quarter in both platforms across fiscal '21.

Sales will grow this year, both in GAAP and underlying growth standpoint. We'll have increased margins, stronger EPS potentially even that $3.70, which was our 2019 EPS, we're much higher sales in 2019. Plus strong cash flow, in my opinion, the number will bust the 3.2, but I'm not the CEO, so he has to live with that number.

With order and sales momentum in the second half of 2021 and going into 2022, we the OCE believe will finally deliver the 4 plus dollars EPS in '22, based on global economic recovery, the momentum we see in the cost out, it looks very good. And we'll talk about that on the 16th.

Cost reset, the drive to new peak margins in '22-'23, they are firmly in place. The entire next generation team is ready to take the reins and lead Emerson forward. Clearly even with the COVID-19 vaccine rolling out, we continue to restricted from what we can do. We have to operate in a safe environment. The normal year Emerson management process is somewhat turned, not quite the same. Global travel, live customer engagement, our face-to-face planning conference, which is known to be a comped 4 times. Organization planning process, leadership planning process are all restricted and delayed. We're doing them, but they're not the same.

Because, I thought about what I can do as a CEO in this environment is basically take my experience, my maturity which many of you know I am mature, in this environment and help the next team. Name the new team, put it in place, get out of their way and help. That's what I'm going to do. I talked to Board about this, it makes the most sense. Yes, I said 2021 yes, I even said maybe most likely later in 2021, but the new facts and issues, and I always like to surprise with our Annual Investor Conference coming up this month in the 2016, I think the time is right for the new CEO to stand up, present and not have the Dave Farr game which many you've had for over 20 years, and in some cases more than that as I work for Mr. Knight.

The February 16 time, the February 16 presentation with the next generation team is very important. I'll be there to help. I'll be there to advise, I care about this company. I'm a big shareholder of this company. It's been my life for 40 years, leading it for over 20 years. The time is right. As you know, I've never believed in long drawn out successes, Chuck and I had 3 days, he hit me with the keys of the chest, he took off per year for 6 months. I had to track him down because they try to break the quarter strength and earnings. The team, the valve are ready. So let's move on as I talk to Board, we all said the same thing. So again my congrats to Lal and the OCE and if anyone wants to start a yelling match with me, you'll quickly see on that sick.

Let's go to chart. I do have my Stan Musial bat, my Rally Monkey and my Rally Squirrel, which is really a rally Ferric sitting here today, helping us out, making sure I don't lose my train of thought. We had pretty good momentum in orders, we laid out boxes, we started this box game as we put our forecast out in I think April of 2019-2020 with with Frank, at that time Bob and myself, we delivered actually be it, we laid out the box in the first quarter. You can see we came in better, the blue dot is where we thought would be, we're above that, obviously, the upper right hand corner.

Jamie' business has been very strong. He is executing, he's building backlog, that's one of the issue, he's got to get that backlog down. Lal's business has turned, it's not going to be quite as sharp as Jamie, clearly is a different business model, but he's turned, if you look at the next forecast next quarter, we now have a blue dot sitting pretty much on orders above the line with the minus 4 to plus 6.

We're seeing good momentum in Europe, we're seeing good momentum in Asia, we see good momentum in Jamie's business in North America, and we're seeing some, an improvement in Lal's business, which I'm sure he'll talk about.

So again very good momentum in orders as we laid this out. That's how we see it. Jamie's business will flatten out, it will turn down a bit. He is running at high levels at this point in time. Clearly, I mean, new opportunity of growth there. With all his markets as he will tell you going the right way, which is great to see.

So if you look at chart 21, what we're looking at right now for the growth this year as we presented the Board, we're looking at somewhere around the plus 1 minus 1 for the second quarter, depends what kind of execution Jamie can get on the backlog. He clearly has issues relative to capacity, COVID, materials, which we'll talk about, I think Lal's short-term business is starting to turn up and we'll talk about that and his discrete business, even some of the ones he choose the orders are starting to happen. We have a broad second half. It's hard, the third quarter will be a spike as we all know it will spike down, but the key issue for us is to look at good growth in second half. Obviously the ratios will look really good in the third quarter, but that -- we're looking at the second half in our overall business space and that second half going into fiscal '22.

What I want to do is turn it over to Lal now, so he can talk a little bit about his forecast and what he sees, some insights into the marketplace and then we'll turn it over to Jamie let him do the same thing. So Lal, the the floor is yours.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Thanks. Thanks, David. Sorry. It's been an emotional time for a lot of us, David and [Indecipherable] is very special. I'm very proud of the team and what the team has accomplished in the quarter. It's a phenomenal execution of a plan that we laid out for our investors last February. We committed to do and we're now seeing it reflected in the P&L of the company. We're generating some of our own tailwinds, which I'll talk to you about, and the market is starting to recover broadly across many geographies as well, which is highly encouraging. This page 22, nothing really changed appreciably in our orders as we went through the summer months. However, as we got into the late fall, we started to see an increase in activity, particularly driven by Europe and by Europe and Asia.

I'll flip to the next chart and give you some perspectives on how we see the outlook right now. The industries that drove growth dramatically or the discrete industries driven by Germany specifically, which had turned its economic engine on and started to accelerate, both in the process space for internal consumption and its vast export markets engine. So we started to see that improve in automotive, in semi-conductor, packaging OEM, as well as productivity activity across Europe around power and the specialty chemical segment.

In Asia, driven by China, as Pete highlighted growth of 6%. We feel very good about what we've seen there and expect that growth to accelerate into Q2 as we'll talk about in a moment, But the big elephant in the room is North America and what we experienced in North America was a stabilization of the oil and gas markets, albeit at lower levels but a forecastable level of business. With the business, what has driven the business on the continent has been power generation, mining in the Southern Cone, and life sciences throughout, which has been a great story for us.

As a result of that, we are seeing a recovery and expect to see sequential improvement in order pacing, and sales spacing in the second quarter and in the second half of the year as indicated by chart 22.

Let me turn the NP to Chart 24 and will give a perspective of how we see the world areas first half to second half. And, in across most of the world -- and I can pick up out one or two pockets here -- we will see that improvement reflected in the environment. That discrete energy, that discrete momentum that we built in Europe and Asia will begin in the Americas, in North America particularly. And we've seen, as David noted, early signs of distribution-based business recovery as we've navigated through December into January. So that's very encouraging to see.

I was in Odessa Texas a few weeks ago. I saw, I met within the -- with teams and talked about the plans for $3.8 million of barrel -- barrels a day production for the year, which is a stable level for where it was a year ago. So we'll see maintenance of that, increased drilling to maintain those levels in those fields. So some encouragement there. But obviously demand will ultimately drive those that market.

In Europe, I've talked about it, it's really been a German story our discrete business is up over 30%, our process business is up over 10% in Germany alone in that, and then there is increased momentum throughout. The continent is very pleased with a positive first quarter and we expect that to continue. And then Asia, the China bounce-back was important that was discrete driven and process-driven as well, and we feel very good about the funnel of activity that we see as we look out right now.

So I feel much better than I did in October, David and team, but -- and I look forward to a much better outlook in executing in a much better environment as we go forward.

David N. Farr -- Chairman and Chief Executive Officer

You did feel better until you got that CEO ring.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

I totally felt better because I've got Jamie.

David N. Farr -- Chairman and Chief Executive Officer

Yeah, yeah.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Jamie is rolling.

David N. Farr -- Chairman and Chief Executive Officer

Yeah, well. I just set you up for a very soft second quarter. So now I think so -- I mean, it'll be very interesting to see -- it's too early to talk about January, but you can see the analyzing around January because I think we are feeling the distribution, we are feeling some semblance of optimism in even the Americas and you've actually see some very good international orders. So I think that things are setting up. It doesn't mean it's going to be perfect straight up. You're going to be going here there, you go sideways definitely but I feel very good about it.

Jamie, I mean you have a -- like you said, you're -- you can't be the slowest antelope in the pack with the tigers out there.

Jamie Froedge -- Executive President of Commercial and Residential Solutions

That's right.

David N. Farr -- Chairman and Chief Executive Officer

Right now, you're not the slowest antelope, but you've got a tiger out there running around, so how do you see how is to your business in the second half?

Jamie Froedge -- Executive President of Commercial and Residential Solutions

Yeah. The tiger is some kind of combination between growth that folks have never seen before and kind of a material situation that we're all dealing with around the world.

David N. Farr -- Chairman and Chief Executive Officer

In customers.

Jamie Froedge -- Executive President of Commercial and Residential Solutions

Before I jump into that, I just want to say a couple words, because this is a special moment in time here, it's not going to coming again. I want to say thank you and congratulations to David on just really an unprecedented career. What you've done in this space, there is no comparison to it. I know there's thousands of families and employees around the world that you've touched that wished they could be here to say this, I'll speak to them as well to say thank you for all you've done. You're part of the fabric of this company forever. And you've been a great leader and mentor for me, but you've also been a -- you are a great friend. So, congratulations.

David N. Farr -- Chairman and Chief Executive Officer

Thank you.

Jamie Froedge -- Executive President of Commercial and Residential Solutions

Lal, I want to say congratulations to you. We've known each other pretty much since since I joined the company. We are in a similar leadership class together and worked at corporate together, we worked in the businesses, work for you in automation and now, as a business leaders, now, I get to see you in the CEO role, and I'm very proud of you, I know that the leadership team has a great deal of confidence in you and we're very excited about this next chapter together. So congratulations to you and your wonderful family who I've got to know over the years. So, congratulations.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Thank you, Jamie.

Jamie Froedge -- Executive President of Commercial and Residential Solutions

So with that said, let's jump into the first chart there. Chart 25, it shows the updated outlook for underlying sales for the year. As you can see, you heard throughout the call, the outlook for the year has improved since we last spoke. In November, we were out looking 4% to 7% underlying growth for the year. It was going to be about 5% to 6% in Q1, 2% to 4% in Q2 five days in the second half. And growth in orders and sales that really accelerated in Q1 and Dave talked about, and we saw a greater than expected strength in North American residential markets along with accelerated improvement really in all other businesses and world areas. And so from a Q1 order standpoint, we saw double-digits trailing three-month underlying orders for all of our businesses with the exception of professional tools, which came in at 2% after delivering 8% percent orders growth in the month of December. So it was improving as the quarter went on.

The broad product line of world area of strength that we saw in Q1 orders, the backlog we built, what we continue to see in our business trends in January support the increased our outlook for the remainder of the year.

So we go to the next chart, Chart 26. These two -- the next two charts look look at the business from a product line and then the geographic perspective. First, from a product perspective, we see underlying sales growth in the heating and AC business in the 9% to 12% range for the year, extremely strong first half driven by residential market, and a more moderate second half as by the fourth quarter, inventory restocking should stabilize demand, May settled into a pattern close to historic cycles. However, we do see positive the medium, long-term trends in the residential market driven by homeownership, remodeling, and a focus on efficiency and environmental concerns.

Our cold chain business has exhibited a quicker growth recovery than anticipated. In November, we expected cold chain to grow more than 3% to 6% range for the year. Now it's 6% to 9% supported by a stronger Q1 than expected, which was really driven by a 20% plus Q1 sales in global transport, positive growth in U.S. food service in December.

So even though food service is a tough market, it's coming back slower. We had positive growth in December. Double-digit growth in U.S. food retail in the second half of the quarter and double-digit aftermarket growth. China delivered double-digit Q1 cold chain sales growth with transport up more than 40%. We anticipate solid stable growth in the cold chain as the year evolves, Food Service will continue to lag other segments, but improvement in vaccine rollout could drive upside in that space in the back half of the year.

In November, our outlook for tools and home products was also in the 3% to 6% range. It's now 6% to 9%. Our home products business and tools we have impacted by residential demand. We will see extremely strong growth in the first half. Just to put some of the home and contractor growth perspective, in Q1, our wet dry bag business posted 38%, trailing three-month fixed rate orders and our InSinkErator business saw 20% plus trailing 3 month fixed rate orders growth. Again the residential markets will settle in to a more moderate growth rate as the year progresses, but very strong growth for first half, good overall fundamentals in the medium, long term. For the remainder of our professional tools product, we will see a return to quarterly sales growth in Q2, followed by double-digit growth in the second half of the year, aided by comparables in Q3, but also a general improvement in market conditions globally, which we already started to see, as David mentioned, for example, EMEA, Asia both turned positive in Q1 and general industrial been steadily improving. Overall commercial building construction globally will continue to lag the recovery of most of our other served markets.

All right, next chart, chart 27. Our heating and AC compression business of 24% plus trailing, three month Q1 orders growth with exponentially higher growth in residential. Our Q1 U.S. residential heating and AC compression business as sales grew 69% in the quarter, with growth accelerating as the quarter unfolded. We do expect the U.S. residential markets to settle in the lower growth in the second half of the first half as we've seen unique near-term growth dynamics and the rebuild of inventory in the channel. However, as I mentioned earlier, we do see some longer-term positive residential trends persisting.

North American industrial continues to improve with commercial building construction lagging. Asia climate trailing three month fixed rate orders due December were up 11%, year climate was up 12%, supported by continued strength in the heat pump space in Europe along with weather conditions improving market conditions overall in China.

Overall, Europe Q1 climate fixed sales growth up 8% with heating growth up 40%. Overall Asia fixed rate climate sales were up a little more than 6%, the climate part was up 15% and the heating piece inside of that was up 30%. So we see pretty the growth dynamics, the remainder of the year in North America, Europe, China and the Middle East and several smaller markets but a slow recovery in parts of North and South East Asia, the COVID situation is dynamic.

We're watching it closely around the world, we'll let you know, if we start to see any changes to reflect our current view of how the year is going to unfold. And just to wrap up, I want to say thank you to the entire Commercial Residential Solutions team, the whole Emerson team for a tremendous quarter you all responded to unprecedented demand increases worked long hours to make sure we meet our customer needs while working hard to keep our employees safe and we saw a historic increases in demand in several businesses, our team did a great job responding. And what we all can't forget is the middle of a pandemic. And so I want to, I want you to know how much the entire leadership team appreciate all of your efforts.

So, with that I'll pass it back to Dave, Dave you have it all.

David N. Farr -- Chairman and Chief Executive Officer

Thank you very much, Jamie. Key issue here is, while I'll need you to come through again in the second quarter. You and your team, I know you got a lot of issues with -- obviously keeping the plant up and running. As we told the Board yesterday, and again today, we are making investments for capacity, for productivity for you, now Lal' clearly got plenty of capacity, but he is moving new facilities out, so it will have capacity when it comes to the '22-'23. So, you really have a lot of moving parts. I think your teams in really great shape and I know the team here at corporate, will try to support the best can as you go through this process. Because we're banking on your strong execution to deliver this year.

Jamie Froedge -- Executive President of Commercial and Residential Solutions

Yeah.

David N. Farr -- Chairman and Chief Executive Officer

For the people on the phone, I've been very busy the last two days, if you can imagine Board meetings, shareholder meetings. I received over 500 emails and texts, I will get back to everybody. It takes time. I'm not ignoring you. I didn't change my email address and I didn't block all the crazy ones out there, that people send me emails too, it's wide open. And I will. I have a webcast tomorrow morning with Lal and then I'll start the process and work my way up. You all mean a lot to me, you're my friend. We debate, we don't always agree, but you're my friends and I will get back to every single person that has sent me emails and texts, over the last 2 days. I appreciate that. With that, we're going to open the floor for Q&A, again look forward to this webx through the webcast the next time, I guess, that will be May and so you guys are going to have fun, but today we have little fun one more time. So open the floor up. But whose going to hit me first.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Andy Kaplowitz with Citigroup. Please go ahead.

Andrew Kaplowitz -- Citi -- Analyst

Good afternoon. Good afternoon, guys.

David N. Farr -- Chairman and Chief Executive Officer

Good afternoon Andy.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Good afternoon

Andrew Kaplowitz -- Citi -- Analyst

Dave, I know I speak for all of you've been a great help to the entire investment community keep it real, you keep it light at the same time, which we appreciate. Congrats Lal. I think you're going to need some sort of rally animal to fill those shoe of Dave.

Pete Lilly -- Investor Relations Director

He can take my rally Monkey and my rally bear. That sucker is both going home with me..

Andrew Kaplowitz -- Citi -- Analyst

So, Dave, maybe, the first question is one of the things you've talked about in the past is that you are hopeful that CEOs would begin to spend on capex, again, as the new near and solds and that seen distribution begins to ramp up. So in order suggest, maybe that you're seeing a little bit of that in Automation Solutions, but maybe you could step back and tell us, if your conversations with customers are changing yet to the point where they're starting to open up their capex spigot?

David N. Farr -- Chairman and Chief Executive Officer

So, I wouldn't use the word spigot but I would use -- I think that the conversation is with CEOs, my fellow CEOs, is that in the capital, industrial, they are opening up and are talking about spending money, around bringing lines back up Andy being -- getting some incremental capacity. Now we have a situation right now in the supply chain for Jamie side of the business, there is a huge capacity issue, rather there is not enough capacity and we know they're going to have to, they are going to start spending money around steel, iron ore, mining, copper, plastics, all these things. So what guys are hearing and we were hearing quite a bit across United States even now, and even in Europe, they are starting to talk about small projects and spending. So I think those conversations will continue. I think you'll start seeing capital we're going to spend more capital this year. I bet you, if we had the time we'll probably even spend more, but the time is not big issue for us. I think that we are feeling it. And while seeing it, where I really, really, really want to see it is the USA and I guarantee it Jamie customers his facilities all need capital, and Lal is the one who is going to make it form. So that's what we see. But we'll see how it unfolds, this year I think our discrete business in the U.S. probably had a good month, we don't know yet totally. But I think they had a very good month and that will tell me that the projects are coming at the distributors of the channel, they're talking, they're ordering product. I think the professional tools be the same way. If I turn to Jamie shaking his head. So that means the channels come in, Andy. So I think that I feel good about it. Now the questions, the momentum we will see how much, but they've going to spend some money here, they got to get things going productivity wise. And so, I feel good about right now.

Andrew Kaplowitz -- Citi -- Analyst

It's good to hear, Dave. And then at the risk of front running your Analyst Day, a little bit. When you think about Automation Solutions coming out of the downturn in the margin progression. When we look at Q1, you obviously improved adjusted EBITDA by 200 basis points despite a decline in revenue, so as the segment improved should you be capable of delivering over that mid 30% incrementals, you've talked about in the past given your restructuring efforts.? And do you see a path back to the high-teens adjusted margin here over the next couple of years?

David N. Farr -- Chairman and Chief Executive Officer

I'll let Lal answer that, I have my opinions, but i'll let him answer first because he is the one got delivered.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Absolutely, absolutely, we are well on path Andy to delivered that peak margin plan in 2023. We want to state that course, if we do get that tailwind, we have investments that we will need to make in this business. This is a technology business that's built around phenomenal products, that differentiate us in the marketplace and I allow those participation gains that we always have enjoyed and benefited from. So we will invest back in the business and will stay measured. But I think we have opportunities obviously and we are in a phenomenal momentum right now in terms of margin execution.

David N. Farr -- Chairman and Chief Executive Officer

So, if you think about that in the next 2 or 3 quarters, the way Lal's business falls, he's going to have is earlier cycle businesses, those are all higher margin business. And so if you think about D&I, you think about Measurement Instrumentation, if you think about those business, is a flow businesses, those are better margin business, that's what's going to come back for him first, so he should have a pretty good incrementals, he doesn't have the same cost price pressure. He has a little bit of it, but not as much as Jamie does and I don't see a lot of KOB1 type projects coming in for what 12 to 18 months long. So I think that as he goes into '22 my gut tells me, he's going to have strong double-digit orders going into '22 in the fourth quarter, question will be, is the execution as of plans ready, is he got the moves done and I think he set up for a very good first half of '22 margin flow through, not every quarter is going to be perfect like this one, but I think overall his team is really focused on this and I think they got -- they're ready to have a good execution on margin and they will reach those new peak margins.

Andrew Kaplowitz -- Citi -- Analyst

Congrats again. Guys, good luck, Dave.

David N. Farr -- Chairman and Chief Executive Officer

Andy thank you very much.

Operator

Next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.

Joe Ritchie -- Goldman Sachs -- Analyst

Thanks, Good afternoon everybody.

David N. Farr -- Chairman and Chief Executive Officer

Good afternoon. Joe.

Joe Ritchie -- Goldman Sachs -- Analyst

Dave you're going to be missed. Hope you get that knee fixed soon, go hit the lanes and enjoy retirement. But, yeah, Thanks everything throughout the years.

David N. Farr -- Chairman and Chief Executive Officer

My neighbor does not sound too excited about me retiring. He called me. He called me a walking dude and [indecipherable] earlier when he came up in his truck, he said, what are you guys doing in the neighborhood? I said, I am not going knocking at doors and asking to help you do things like fix the air conditioning, the concrete work, a lot of my neighborhood just think about, I need to move. Okay, Joe, let's get back to you.

Joe Ritchie -- Goldman Sachs -- Analyst

All right. Well, Lal, congratulations as well.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Thank you.

Joe Ritchie -- Goldman Sachs -- Analyst

And I look forward to working with you closer. But, maybe my first question, I know you're going to tell us more at the Investor Day in a couple of weeks, but maybe talk to us a little bit about how you're thinking about looking at things, maybe with from like a clean slate? And maybe that's the portfolio, maybe that's the margin trajectory, maybe that's the cost structure. Just any initial thoughts that you have on the transition and then making your imprint on organization?

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

All right. I surely appreciate the question and I was waiting to hear, who is the first one to ask. So congrats on that. There are a lot of things that I've thought about. That I need to internalize and discuss with the team? Allow me a little bit of time. I'd like to really focus today on what's been just a phenomenal quarter for us, for our organization. Any guidance that we put out for the year, the 16th of February will be shortly upon us. You will hear our voices, you'll hear some of our thoughts and if you allow me that I truly appreciate it.

Joe Ritchie -- Goldman Sachs -- Analyst

Okay, fair enough. Maybe turning it over to Jamie for a second. Jamie, when you take a look at that Slide 25, and you take a look at like the growth outlook for the second half and compare it to what we saw in 2020, clearly like you have your easiest comp in the third quarter.

Jamie Froedge -- Executive President of Commercial and Residential Solutions

Yeah.

Joe Ritchie -- Goldman Sachs -- Analyst

And I recognize that things have been kind of like white hot for you guys in the first half of this fiscal year. But, how do I reconcile those two things? In that, growth is going to step down in the second half, given what seems like a really easy comp in Q3?

Jamie Froedge -- Executive President of Commercial and Residential Solutions

Yeah, we'll see. I mean I think Q4 is a big question mark right now in the model. And what we -- one scenario is that a dramatic portion of -- a pent-up demand, plus inventory that had to be restarted got pulled into the first two -- two quarters and possibly a little bit of the third quarter. And so, then by the time you get to the fourth, which you've got a tougher comp. We have started to see growth come back toward the end of last fourth quarter. So it's a different comp you're chasing and could the residential markets go flat, even slightly down, slightly positive in that range. So you're -- I think if we see the professional tools business is doing very well in the second half, both in terms of comps, but also just demand improving. Cold chain is going to be steady throughout the year. So it's really a residential story. If residential has another wave here and stay strong and you have a hot summer, you have a very strong buying market in the housing market, I think that there's a lot of folks that didn't participate in the last wave of this housing remodeling and purchasing that may be on the sidelines, ready to go. It could -- that it could extend, we can have upside, but it's too early to tell, and so that's -- but that's going to be the key thing.

Joe Ritchie -- Goldman Sachs -- Analyst

Got it. Thank you, guys.

David N. Farr -- Chairman and Chief Executive Officer

Thank you, Joe. all the best to you.

Operator

The next question comes from Steve Tusa with JPMorgan. Please go ahead.

Steve Tusa -- J.P. Morgan -- Analyst

Good afternoon.

David N. Farr -- Chairman and Chief Executive Officer

Afternoon, Steve.

Steve Tusa -- J.P. Morgan -- Analyst

Congrats to you both. Dave, thanks for all the really fun times over the last, I don't know 15 years or so. It's been a lot of fun.

David N. Farr -- Chairman and Chief Executive Officer

Thank you very much Steve. Hopefully we'll see each other at least one more time.

Steve Tusa -- J.P. Morgan -- Analyst

Maybe. Hope -- I'm definitely hoping for that. But on to the results, which were pretty good, the second quarter guidance, I think for ANF, reported revenue looks like flat sequentially. Do I kind of have that right and can you kind of explain why that would be? I mean looking back, other than in 2020, it seems like that business is always kind of up sequentially, comfortably, and then I've just a quick follow-up on the margins.

David N. Farr -- Chairman and Chief Executive Officer

Okay. I would say with the initial look at it, you're right. It's probably flat because of FX, foreign exchange, delta there. And the question is also is this a mix of business -- does Lal get the -- does he get the U.S. business coming in? Until we see that really as we've know that U.S. businesses, we're trying to be cautious on Lal's business. He has done well the last two quarters, beat the number of Steve. But right now, it's just a function -- we got to get on that early turn cycle business and so we did see that. It happened in January. You should be able do well in that second quarter. So, probably a little cautious more than anything else and the currency impact from that perspective, Steve. But you're right, your analysis as always -- we'll see. Hopefully, it has a better quarter.

Steve Tusa -- J.P. Morgan -- Analyst

Yeah. And...

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Go ahead, Steve. Yeah, just very quickly, we're watching our later cycle businesses very carefully. Those who lack control, sort of control, you know which ones they are. They -- project-based businesses which have good and lag coming into the down cycle. So Ram was still experiencing solid growth at this point last year. And having weakened, and and so we'll see him come in a little bit later. So that's going against us as well.

Steve Tusa -- J.P. Morgan -- Analyst

And how much revenue will will OSI contribute this year?

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

The board plan, I can tell you what that is. It's around $180 million in sales. Hopefully, get to $200 million. We have a real shot.

David N. Farr -- Chairman and Chief Executive Officer

I mean, we had a good strong quarter the first quarter. Steve, on the question is kind of keep the momentum going there. They are really taking hold right now with our channel, and obviously this whole renewable push is helping these guys a lot too, but it's a question of how much they can execute around the various customers. But the orders right now easily hit the $200 million run rate.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Yes. We booked nearly $95 million in the first quarter.

David N. Farr -- Chairman and Chief Executive Officer

Yeah.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Somewhere around that...

Steve Tusa -- J.P. Morgan -- Analyst

Right. And then and then one last one for you. I mean I guess despite kind of this quarter, which was well above prior year margins on a decline, you're basically guiding, I think the flat adjusted segment margins year-over-year for 2Q. I mean is there any reason, is our mixed dynamic there, is there some some going on that we have to -- is it price cost, like, what's the driver of a kind of a flattish margin year-over-year?

David N. Farr -- Chairman and Chief Executive Officer

Yeah, I think that, did we give the individual margins out for the quarter for the guides? No. So Steve, what you're seeing is Lal's business will have a good second quarter, second quarter margins. The big issue that Jamie is now going to override is the price cost. As the material inflation is coming in, yes, he's got leverage from volume, he's got leverage from the reset, but the material cost numbers are starting to hit him right between the eyes. At this point in time, we had good coverage in the first quarter and now his team is working -- scrambling hard to figure out how to offset that. So I mean, if we get good news there, then it'll be better in the margin in the second quarter. He's the one that's going be struggling when it comes to margins, because the material cost. And Lal. I think what we'll have a good second quarter. I don't see -- automation business, will have a good second quarter.

Steve Tusa -- J.P. Morgan -- Analyst

And then one last one. One last one for you, Dave. I know you had kind of a tough ride in your first year as CEO. You had to kind of, like break the streak and cut guidance. I mean, do you have enough visibility to kind of make us feel comfortable that we're not going to be kind of sitting here in the same shoes six months from now?

David N. Farr -- Chairman and Chief Executive Officer

Yes, I mean, the other prime is the game stuff that things going out in our third year. We did have a dotcom. The dotcom bust came in March of -- for me that year. We would have had problems with the 9/11 issue to that year. So we -- yeah, I did break the string. I did go see Chuck and say, Chuck, we are about the break the 44-year quarters. I knew, I got to do it eventually but not my second quarter in. You're right, Steve. I think w have a better feel for what's going on right now, and I don't see a dotcom bust. So I feel comfortable. I don't think that we're -- I'm not setting Lal up for that famous phone call to you guys.

Steve Tusa -- J.P. Morgan -- Analyst

No spack bubble? Okay.

David N. Farr -- Chairman and Chief Executive Officer

No spack bubbles. No spack bubble. Steve, you're such an optimist. Thank you.

Steve Tusa -- J.P. Morgan -- Analyst

Did you break your leg playing hockey last week.

Jamie Froedge -- Executive President of Commercial and Residential Solutions

One thing I want to follow up with Dave is you're absolutely right, what we're facing, but I didn't -- for all those on the call, this is -- we've seen these cycles before. I think the bounce back in volume is faster than we've seen before. Some of the materials issues are greater than the markets has experienced. However, we're confident that throughout this year as we go into early part of next year, the relationships we have with our customers and contracts we have with our customers in regards to price in the mind. It all works itself out. So our focus right now is on partnering with those customers, getting this point we need, making sure we meet their needs. But we also have a very much in focus how this tends to play out in regards to the price in my situation. So it will be -- there'll be months where it's a little rocky as we change things, there'll be other months that are fantastic as it flows through so.

Steve Tusa -- J.P. Morgan -- Analyst

Thanks. Thanks very much.

David N. Farr -- Chairman and Chief Executive Officer

Okay. Next question, Thanks Mr. Tusa.

Operator

The next question comes from Andrew Obin with Bank of America. Please go ahead.

Andrew Obin -- Bank of America -- Analyst

Hello. Hi, how are you guys?

David N. Farr -- Chairman and Chief Executive Officer

Hello, Andrew.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Hello Andrew.

Andrew Obin -- Bank of America -- Analyst

Hi, Dave. So thank you, Dave and wow, congratulations.

David N. Farr -- Chairman and Chief Executive Officer

Thank you, thank you, Andrew.

Andrew Obin -- Bank of America -- Analyst

So the question is sort of, maybe, it goes a little bit into what you guys going to talk at the Analyst Day. But, with democratic control of the senate, has the tone of the conversations with your customers regarding green opportunities has changed. I think I'm specifically talking about things related to the grid, as it relates to ovation and maybe anything you're seeing on mining in terms of change in tone as it relates to EVs and batteries.

David N. Farr -- Chairman and Chief Executive Officer

Okay, so for these two guys Tom, we spent two hours with the Board today on this very topic, because we've been working on it. The Board knows, we have been working on it. So we made a decision to bring in the organization to talk about this today. So, and so I'll let Lal and Jamie in both sides of these our businesses are very much involved in this whole ESG around their sustainability renewable stuff, and I just let Lal go first and then I'll let Jamie go on this one, because that's up very relevant question. And we are really relevant in this space, Andrew. Go ahead.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

And you're right, Andrew. This is dramatical for us and what we'll talk about in the February meeting. And we're very excited to share that with the investors and talk about the opportunities we have as Emerson.

Jamie Froedge -- Executive President of Commercial and Residential Solutions

We're going to have dedicated section on it, Andrew.

Andrew Obin -- Bank of America -- Analyst

Okay.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

And so, the dimensions that will speak about are within Emerson the greening of Emerson, it's the greening by Emerson as we aid our customers around various elements and Andrew and I've spoken about the carbonization and energy efficiency and emissions management and it's the greening with Emerson. So it's a partnering of out solutions and organizations around the world. We have -- we are in a unique position, as an Automation and as the Commercial, Residential business. Do we really fulfill what is a global demand and a global need here. So I'm pretty excited, about where we sit. It's a growing business, there are various facets to it, we'll try to walk you guys through it, but over the last, nearly two years, David, we've had a number of individuals around the world, working specifically. So I'm excited to share that with you on the 16th, as Jamie.

David N. Farr -- Chairman and Chief Executive Officer

I think around alternative energies, Andrew, I mean we have a tremendous start and site. I think we had the core technologies I told the Board. We're going to have to create some new technology solutions both internally and externally. But we have the credibility with our customer base and some of these areas here. It is going be a lot of work that happens in the marketplace over the next 5 to 10 to 15 years and I think we have been pretty good start, Jamie and I'll let Jamie talk, but we've been working on this for quite some time. We've been involved with the whole thing around refrigerants efficiencies you think of the changing technologies and stuff is going on here, we've been living that with the governments around the world now for well over 10 years and there's some big moves happening right now. So, that's why Jamies business in Europe is so strong, so why dont you?

Jamie Froedge -- Executive President of Commercial and Residential Solutions

I think it's a great point. I think in general, it's a broader political topic around regulations, not going to get into that. If you just look at how it could impact our markets, when there is a clear regulation that gets put in place and it gives clarity and certainty in the decision-making around what people should purchase, what they have to purchase, what they need to do, in order to meet whether its efficiency targets or its emissions targets, etc. So, generally speaking, it's good for our business because are, we're delivering compression solutions that have better efficiency, that use lower GWP refrigerants, we're the leader in disposal capabilities globally. And we got a lot of other markets that we'll talk to you about here as we go to the Investor Day, but just in general terms, it's a very positive trend for our business because it gives certainty to folks around how they need to deploy their capital. But where they need to spend their money. And as Dave said, we look -- our engineers, our business leaders are on all the major committees around the world have been for many, many years that are driving these policies and driving the technical environments around them and we're ready for it and a lot of cases, the technology is already being developed and we get ready to launch here in the next 18 months because we've seen this next transition coming for example on efficiency and low GWP refrigerant, so.

David N. Farr -- Chairman and Chief Executive Officer

I would say in Lal's Automation business, our European team really pushes because they're not big oil refining business, we saw some push out of Asia, when Jamie was all in Asia, but the European and so they got started about 2 years ago and now with the acceleration, what's going on around the world, we have a very good running start from the standpoint, the opportunity and that's what we want to share with you. We're a combination of doing ourself but also working with our customers and helping everyone reach to these goals. But I will, I'm pretty excited about this and Automation in the Commercial and we have a unique situation for the next 5, 10, 15 years in this space. So, I feel good about it.

Andrew Obin -- Bank of America -- Analyst

Thank you. It sounds like you guys going to have quite a bit say on the Analyst Day. Final question on software, I think you have sort of, there are multiple definitions of software, but the stand-alone software, I think, look, I think it's like worth $1.1 billion that's sort of the market, I am referring to, what kind of growth rates, have you guys seen last quarter and what are you expecting for the business to grow at this year? Thank you.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Yeah. We continue to see in that high-single digit range, Andrew, as we spoke about I think in the past that seems to be consistent trough Q1, and what we expect for the year. And again, we, it's driven by a lot of work in Life Sciences there is opportunities in the electrification grid, you talked about, but in core discrete and process as well.

David N. Farr -- Chairman and Chief Executive Officer

Yeah, I think what have been, some years its really strong, some year's less but I, we're making good momentum and we're going to continue to invest in start-ups and ventures around this area because it's both internal as you know Andy, Andrew, And then also through obviously trying to look at acquisitions, but we have a good foothold in this right now, it's really have -- it's going to be a key part of what we're doing around the sustainability, because it's not only doing a compression, but you've electronics and software. Same thing with a lot of software for Lal's business to as we had hoped.

Jamie Froedge -- Executive President of Commercial and Residential Solutions

I mean we were just talking about the other day. When you start rolling out, each of our refrigerants, lower to your refrigerants they are going to require, it will be in the legal requirements around what the sensing, you have to have.

David N. Farr -- Chairman and Chief Executive Officer

Correct.

Jamie Froedge -- Executive President of Commercial and Residential Solutions

How often you have to monitor, how you have to remediate it if there is a leak or there's an issue, so as the world moves more and more in that direction. It's just going to require more insight real-time to data and a it's a huge opportunity for our business.

David N. Farr -- Chairman and Chief Executive Officer

Andrew, so we have to lot to say but we only have so much time because unless they eliminated former Chairman, we will run out of time. But, and so that's why give me one chart, hello, and goodbye. So we will see.

Andrew Obin -- Bank of America -- Analyst

Thank you, Dave and I want to congrats again.

Jamie Froedge -- Executive President of Commercial and Residential Solutions

Thanks Andrew.

David N. Farr -- Chairman and Chief Executive Officer

Give me another half chart, [Indecipherable].

Operator

The next question comes from Jeff Sprague with Vertical Research. Please go ahead.

David N. Farr -- Chairman and Chief Executive Officer

Is that Jeff Sponge, or Jeff Sprague. We can call you jeff.

Jeff Sprague -- Vertical Research -- Analyst

It was Sprague before but...

David N. Farr -- Chairman and Chief Executive Officer

I like that your nick name, so we are going to call you sponge. How you doing, Jeff.

Jeff Sprague -- Vertical Research -- Analyst

I'm doing well, Dave, congrats. We're really going to miss you. You are like the last of the Mohegan you know that right? I mean

David N. Farr -- Chairman and Chief Executive Officer

I know I'm the last of the Mohegan truly, probably would -- but that's OK, you guys can't handle any more Mohegan around here.

Jeff Sprague -- Vertical Research -- Analyst

Yeah, that's right. And no doubt Lal will do a great job. Congrats Lal.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Thank you Jeff.

Jeff Sprague -- Vertical Research -- Analyst

Dave, I was wondering if you could address for us again as all the succession was culminating to what degree, if any, did kind of the discussion about, hey, maybe naming two CEOs and splitting Emerson at this particular juncture in its history and clearly were the decision landed is clear based on the discussion today, but kind of what if any was the debate around that and kind of the pros and cons in your mind?

David N. Farr -- Chairman and Chief Executive Officer

Well, so nothing's replay history, we went through that process back in 2019. So as we took the Board true for the June through the end of -- I'll say November time period and we looked at the analysis of the two platforms of the strategic rationale around the two platforms. And that was obviously on the table at that point in time, and the Board hired outside help relative to these two issues. In their opinion and working with outside help, it was very clear that we thought of might believe is more value in the combined basis then separating the two businesses. And so the logic was around the investments we see going relative to this whole around the ESG, around sustainability, around software, what we see happening on the global world right now, as you look at the different cycles classic is what's going on right now, and the two different cycles and how they leverage each other, that work was done back in the mid to late 29, the Board made a decision, and as we went through this last 18 months, this is not quite 18 but close to 18 say 12 to 14 months, the Board did not think about that at this point in time, they made that decision a while back and that's where it sits. And I obviously, clearly for a Lal standpoint, the Board will continue to evaluate that in our strategy sessions with the Board -- his strategy sessions with the Board and I thought I might do that we'll constantly in the table as we look at the mix of the businesses. If we look at where we want to go next. And when we may want to get out off, this company has been in and out of businesses, we get out of this business, will go here and that's what's made Emerson unique for from the 40 years I've been around. If you look at the 40 years and how we transformed this company, let alone the 20 years I did, well, we don't sit still. So I mean I guarantee before Lal retired the company will look different. than it is today. Now, how is it going to look differently? Well, that course will play it's a handout with him and his team and the Board. So that's how we look at Jeff. We don't look at trying to status quo. It's not a word, status quo is not a word around here as you know.

Jeff Sprague -- Vertical Research -- Analyst

Yeah, no doubt, and I was also wondering, you've obviously worked extraordinarily hard to get cost out through this restructuring, when we think about these COVID-related temporary savings, only $40 million of which are coming back, how much to that total $150 million do you think does come back? It sounds like you're working hard to really mitigate that even looking into 2022.

David N. Farr -- Chairman and Chief Executive Officer

You're going to -- it's going to be really hard to make because by the time we get to '22, the business is growing again. So I would say, obviously what we've learned through this process, some things will change. So certain things will be different from a meeting standpoint, travel standpoint, but at the same time you going to be looking at a company that's growing. As you get into '22, it's going to be a solid growth year for 2022. But I mean clearly not a dollar per dollar coming back, but you're going to be seeing growth investments happen at that point in time as we're growing. But I would say it's been hard for us to get exact number, but we know it's not 100% coming back, but we also know it's not only 50. So I mean, I've always felt that you are going to be probably somewhere around the 80% -- 80% would probably have to come back over time, and 20%, we've learned from a different process. But it's really what happens, what businesses grow, Jeff. But I guarantee we've learned a lot of different things here in the last -- not always a lot of fun things, let's put it that way, but we learned a lot.

Jeff Sprague -- Vertical Research -- Analyst

All right, I'll leave it there. Thanks again. Congratulations, around.

David N. Farr -- Chairman and Chief Executive Officer

Thank you Jeff.

Jeff Sprague -- Vertical Research -- Analyst

Yeah. Bye.

David N. Farr -- Chairman and Chief Executive Officer

I will see you take care. Sponge.

Operator

The next question comes from John Walsh with Credit Suisse. Please go ahead.

John Walsh -- Credit Suisse -- Analyst

Hi, good afternoon.

David N. Farr -- Chairman and Chief Executive Officer

Good afternoon. John.

John Walsh -- Credit Suisse -- Analyst

A thank you to you Dave, and congratulations to Lal.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Thanks, John.

John Walsh -- Credit Suisse -- Analyst

One and two, I've got.

David N. Farr -- Chairman and Chief Executive Officer

I said at least we know it not condolences.

John Walsh -- Credit Suisse -- Analyst

Well, you said that it was just your knees, so not yet luckily. So, I noticed some new disclosure here in the back around software. I was just curious if this is just shuffling some things around for financial reporting or if you're changing the way some of this software actually goes through channel to your customers? It's a fundamentally as we've talked about, we're talking about trying to start to report on our software sales. It's -- in the early stages of what, how we measure it, because one thing you want to do, once you start going out with management world and accounting world, the counts are going to sit there order is going to look there and they're going to say, we Frank's shaking his head. So we've got to make sure we understand it exactly. So we can measure. A lot of companies don't worry about those things but Emerson does worry about the integrity around the numbers, so it's our first step as we start talking about it. We want to make sure that we have a really grounded numbers. So we tell you what that is, you know what it is and you can measure it, so that it's a first step process. No change to channel no mean to reporting just from that perspective

David N. Farr -- Chairman and Chief Executive Officer

No.. We now start giving some more insights around software.

John Walsh -- Credit Suisse -- Analyst

Okay, great. Looking forward to that. And then I guess just on the free cash flow guidance I guess is there is some working capital associated with the higher sales. It seems like you took the the earnings up higher than the free cash flow. I just wanted to understand the dynamic there a little bit.

David N. Farr -- Chairman and Chief Executive Officer

Okay. So yes, what we see happening in this third and fourth quarter is growth will be pretty strong. Now, if someone said earlier, Jamie, it's kind a unique situation we have is compared to the third quarter is really easy. So he can spike and he doesn't know what it's going to be like in the fourth quarter. So we're trying to be cautious. The other issue that we face right now. And one of the reason we had very, very strong operating cash flow in the first quarter. Yes. Lal's execution was very good. Yes, Jamie is execution is very good. But we're in a situation with Jamie's business that we haven't seen before of this magnitude, we're also, these shipping using all the inventory you can and from the standpoint of getting the inventory out getting paid and maybe not paying on as far as the payable side standpoint. He is in a situation right now where his trade working capital as a percent of sales is extremely low. This way is based out and we know some of that will reverse as business start slowing down in certain areas. So I think we want to be very cautious as they try to estimate how much was that cash pull in because of the working capital, but it was a very good quarter on earnings and execution, and I think, Frank and his team as we talk to the Financial officers out there a little bit, a little bit more cautious. I think as we get a better feel in the second quarter when the cash comes in, I think -- I wouldn't be surprised we don't tweak it back a little higher, John to be all honest but we're just being careful, right now, but I think that the earnings and cash flow execution right now is very good and we definitely will have cash burning as we get into that fourth quarter, just their growth rate.

John Walsh -- Credit Suisse -- Analyst

Great Thank you very much.

David N. Farr -- Chairman and Chief Executive Officer

Thank you very much, John. See you soon.

Operator

The next question comes from Gautam Khanna with Cowen. Please go ahead.

Gautam Khanna -- Cowen & Co. -- Analyst

Yeah. Thank you, guys. And congratulations...

David N. Farr -- Chairman and Chief Executive Officer

How are you doing Gautam.

Gautam Khanna -- Cowen & Co. -- Analyst

I am well. Thanks, congrats on the great run Dave and

David N. Farr -- Chairman and Chief Executive Officer

Thank you

Gautam Khanna -- Cowen & Co. -- Analyst

And congrats to Lal and best of luck.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Thank you, Gautam.

David N. Farr -- Chairman and Chief Executive Officer

Now you're going to have to be entertaining on these calls too.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

I thought we are passed that.

David N. Farr -- Chairman and Chief Executive Officer

[Indecipherable] I got other baseball bats, I have got Cricket bats. [Indecipherable] These guys are very encouraging people. Between these guys and my neighbor I will be in the ditch digging -- I will be in the garbage business. Okay, have you got back into real life yet, or are you still hanging out in the Jackson Hole?

Gautam Khanna -- Cowen & Co. -- Analyst

Yeah, no. Not yet. so this is going to be possible. I was going to ask you, maybe you will address this in a couple of weeks. But you hear the HVAC OEMs talk a lot about indoor air quality and that being a potential driver, especially in the commercial market commercial HVAC market. I was wondering does Emerson really play in that. Is there any specific products or solutions you guys are offering that might add another leg of growth to your commercial HVAC sales?

Jamie Froedge -- Executive President of Commercial and Residential Solutions

Yeah, we do, I mean, some of it's direct and some of it's indirect. right indirectly as the OEMs work with different folks and they may put a broader air quality solution in place. It will also include an upgrade or a change out to the core compression solution. I think the other piece around air quality is that tight humidity control completely. I think of it big component of that and we found that a lot of the air quality solutions work better in a tighter humidity band, our 7AC business that we just bought, we invested in early stage, then we bought it out and our commercializing it is a business that has 30%- 35% more energy efficient and providing very tight humidity bands for their handling space. For initially commercial buildings, for example, and we'll do some of that directly and we'll also sell some of that through some of our large OEM partners. So there is multiple ways we play and I think we'll continue to invest in that space as we go forward in both solutions with OEMs and maybe some that we sell direct to the end user base, but already we see a lift from it today.

David N. Farr -- Chairman and Chief Executive Officer

Yeah, I think the key issue here, Gautam, is that, what Jamie has highlighted earlier in the conversation, is that we see the states, as we go through this current efficiency and refrigeration change, we see the states putting in some controls and monitoring and some justification of where things sit, which will be censoring software base. And I think that's where we're going to be playing around this whole area, because they're going to want to know that systems, especially in the commercial operating. So I think they're -- I think that area will unfold here. That's something Jamie is going to talk about and we're investing in right now. But I think that --I think that efficiency does air quality, air efficiency, comfort does quite for us. And so I think it's going to continue to build out. I'd like that game for us.

Jamie Froedge -- Executive President of Commercial and Residential Solutions

We always thought of automation, we work in that business close and -- we have closed loop twin control system, final control element, for measurement element. If you think about the air quality space fundamentally, it's moving our direction. You got to close the loop. You got to close the loop between the monitoring the electronics, the controls, humidification, particulate management. And so if, for example, if you have a large commercial or residential thermostat business that's tied to key diagnostics and electronics, then you've got a big part of the puzzle there. And there's partnerships that you can have around those other pieces to close the loop and build a full solution. So we'll talk more about it in a couple of weeks. But we're very active in that space, and I think we'll do more there going forward.

Gautam Khanna -- Cowen & Co. -- Analyst

Good.

David N. Farr -- Chairman and Chief Executive Officer

What else you want to know Gautam?

Gautam Khanna -- Cowen & Co. -- Analyst

And, and -- yeah. Just a second question maybe on Automation Solutions. So, obviously the order comparisons get a lot easier come May, June when you're comp being down 13%, down 19% in orders, and what is the right expectation? I mean I know you gave the second half guidance for the a range at automation, but are we going to see a bigger snapback in the absence of KOB1 kicking in, where we could see a double-digit month over two or three as we have get to the third quarter, the fourth quarter.

Jamie Froedge -- Executive President of Commercial and Residential Solutions

I think your assumption is right. We should not expect the KOB1 activity for the next 18 months, I don't foresee that. More significantly, will be 2 and obviously what we've been living on KOB3 certainly. What I would tell you is that snapback is fully dependent on what happens in North America, U.S.A period end of story. And that's really the -- that will measure the dimension of how quickly it comes back. How hard that snapback is,

David N. Farr -- Chairman and Chief Executive Officer

So I think we're trying to be cautious -- what's the order pattern that these guys will put out, because we're not going to stop that assuming Lal not going to start that he may make that decision. But just watch and see what happens at that standpoint, there's time for one more question out there for the next person, who is it?

Gautam Khanna -- Cowen & Co. -- Analyst

Thank you.

David N. Farr -- Chairman and Chief Executive Officer

Thank you, take care and I hope to see you in a real city one of these days.

Gautam Khanna -- Cowen & Co. -- Analyst

Yeah. Likewise, looking forward to it.

Operator

Final question comes from Josh Pokrzywinski with Morgan Stanley. Please go ahead.

David N. Farr -- Chairman and Chief Executive Officer

You got that one right, good way Josh.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Close enough. Dave, it's been a pleasure. Enjoy retirement.

David N. Farr -- Chairman and Chief Executive Officer

Hey, closer than Jeff Sponge. So...

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

He deserves it.

David N. Farr -- Chairman and Chief Executive Officer

It's OK. Its a mud here. Okay. Josh.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

David enjoy your retirement get a few more dogs, take in a few more cardinals games. I'll certainly miss you and Lal, congratulations and good luck. You don't need it for sure.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Thank you.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

But onto the question side of things. If I look at AutoSol kind of similar angle as what was brought up before in C&RS, it looks like for the second half, the range, got a little wider and maybe a little bit lower, I know that, Lal and Dave, you guys both talked about KOB 3 and kind of the process energy complex is being guidance parameters, drivers of the high-end versus the low in last quarter, how do you see those evolving, what are the drivers of that range today and how important is kind of that KOB 3 process bucket?

David N. Farr -- Chairman and Chief Executive Officer

So I'll give my answer. And I'll give -- I know how these guys are thinking right now. They've had a couple of good quarters and they're still negative. Josh, as you clearly see, they have been very cautious relative to take in the back end up. So, I think they've been -- as you're right, as it got little bit better in second, third, it might get a little bit on the fourth, as I look at the quarter. And so I think they're just -- I think these guys are being cautious because that we have not been it's pure white of the eye relative that U.S. recovery. If we get a month or two, where we see that consistent KOB3, KOB2 type of order in the USA, like we've been seeing in Asia, like you're seeing in Europe, I think these guys will get a little more comfortable relative to that volume and that profit coming in. So that's my impression of these guys. They've gone through a tough market here, a cost reset, and no one wants to say, hey, this thing is over. Lets just go. I mean, that's like Jamie, Jamie was cautious couple of quarters ago, and now as you run through, it's hard for him to hide. So I think that's my feeling, anything you want to say there?

Jamie Froedge -- Executive President of Commercial and Residential Solutions

No, I would add, I think it's well said. David, obviously we watching things like site access very carefully in terms of our engagement customers. This spring outage schedules, which are holding right now which is very important as well. Those are all positive signs.

David N. Farr -- Chairman and Chief Executive Officer

Short-dated. I mean, the order pattern so what was your day to day order this month, where you think it's going to be?

Jamie Froedge -- Executive President of Commercial and Residential Solutions

In the month of January, it'll land somewhere between $40 million and $43 million, somewhere in their day.

David N. Farr -- Chairman and Chief Executive Officer

So that's a good number, that means he's is coming back. So I think he is gaining -- everything is holding that we talk about from the standpoint, Josh. And now, he just want to see a couple of months of that continue, I mean we saw other early signs in December if January get the details, he want to analyze the details that'll be good, early at first half of February gets the investor conference, then I think he's going to say, OK, it's definitely take a hold for just like we said three or four months ago with Jamie's business. So I think that's what it is, but all signs are doing the right things.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Got it. That's then going to the longer cycle into the equation. The the longer projects that got shelved with COVID, you guys think that those come back off the shelf. Do we wipe the slate clean start over just giving the world has changed so much. What are you hearing, what you're talking about with your customers today? Do we have a scenario where those come off? Plus we have post COVID kind of new projects and in Nirvana scenario just happy to weigh in on all fronts, that would be great.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Yeah, I'll give you a quick color, the funnel, it's at about $6.5 million and appreciate have not changed for the last three months, what happened within that funnel, there are a number of cancellations, but they will replace by some -- high number of smaller jobs, so, quicker paybacks those types of things. In addition to that, what's been interesting is, we now have about a $1.6 billion electrification project funnel, which OSI brought to us. So that's in addition to the $6.4 billion KOB1 funnel that we've been talking about, traditionally. We will talk about this a little bit more in detail in a few weeks, but overall feel that those projects are going to eventually move forward. It's just a matter of time here along demand.

David N. Farr -- Chairman and Chief Executive Officer

Yeah, I think from my perspective as I hear from the customers. I think the lowest projects will sort of be recut differently. The pressures on the CEO's relative to capital and things like that. So I think the projects, they are good projects, they will move forward, but it might be smaller, it might be cut a little bit differently. I think there's been a lot of discipline in our customer base around spending capital that has been -- learned the whole way through a lot of pain like broken legs, broken arms, couple knives at the back. And so I think that I feel good, that they're going to be good, to be obviously some relief of some new. But overall, I think it's going to cut, and I think Lal's got one more thing.

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Yeah, just one more thing to your point, David. You're exactly right. If your project was a quote unquote bottom of the barrel, type of refinery project, that's got scrapped, if your project is a conversion to a biofuel in a refinery, those projects are moving forward. There are many active in the United States, in Europe, and we're very engaged in those processes.

David N. Farr -- Chairman and Chief Executive Officer

It's going to be -- that'll be a good --- that'll be more late '21, early '22 Josh as I see it right now. So even -- Lal' team has got a lot of work to got to get done. They've got a lot of repositioning work in the facilities under way right now in Europe, and he's got to get that done because his business is coming back. And he can use capacity around the world right now to cover it, but when he starts getting all the wall every market is going. He's got to get that -- those new facilities up and running.

And with that I want to thank everybody and again, I will get back to people on the emails, it's going to take me a while and I truly appreciate what people sent to me in texts and emails and I look forward. Lal and I will try to get in, before I probably go out to pasture, we will try to get into New York and have some sessions. I'm trying to help Lal and most likely will probably bring Jamie along this time, so he can learn too. But we want to do that, that's part of my learnings that I could pass on to these guys, these gentlemen and I have been doing this a long time, as you know, not only 20 years of CEO. But I was, when I came back from Asia, I became the spokesperson for Emerson for those 3 years, and I was Investor Relations guy for multiple years for 18 months, but I look forward to seeing all of you and I truly appreciate, I think what you've done for me over the years and keep me straight, keep me honest and challenge me and disagree on me, I love that. Take care. Bye.

Operator

[Operator Closing Remarks].

Duration: 85 minutes

Call participants:

Pete Lilly -- Investor Relations Director

David N. Farr -- Chairman and Chief Executive Officer

Lal Karsanbhai -- Executive President of Emerson Automation Solutions

Jamie Froedge -- Executive President of Commercial and Residential Solutions

Andrew Kaplowitz -- Citi -- Analyst

Joe Ritchie -- Goldman Sachs -- Analyst

Steve Tusa -- J.P. Morgan -- Analyst

Andrew Obin -- Bank of America -- Analyst

Jeff Sprague -- Vertical Research -- Analyst

John Walsh -- Credit Suisse -- Analyst

Gautam Khanna -- Cowen & Co. -- Analyst

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

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