Emerson Electric Co. (NYSE:EMR) Q2 2024 Earnings Call Transcript

Emerson Electric Co. (NYSE:EMR) Q2 2024 Earnings Call Transcript May 8, 2024

Emerson Electric Co. beats earnings expectations. Reported EPS is $1.36, expectations were $1.28. Emerson Electric Co. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Emerson Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to our host, Colleen Mettler, Vice President of Investor Relations at Emerson. Please go ahead.

Colleen Mettler: Good morning, and thank you for joining us for emerson’s second quarter 2024 earnings conference call. This morning, I am joined by; President and Chief Executive Officer, Lal Karsanbhai; Chief Financial Officer, Mike Baughman; and Chief Operating Officer, Ram Krishnan. As always I encourage everyone to follow along with the slide presentation, which is available on our website. Please join me on slide 2. This presentation may include forward-looking statements, which contain a degree of business risk and uncertainty. Please take time to read the safe harbor statement and note on the non-GAAP measures. I will now pass the call over to Emerson’s President and CEO, Lal Karsanbhai for his opening remarks.

Lal Karsanbhai: Thank you, Colleen. Good morning. I’d like to begin by thanking the Emerson’s global team for yet again delivering very strong operating results. It is a testament of the strength of our people, the culture we are building, the portfolio we have created and the value of the Emerson Management System. I would also like to thank the Emerson Board of Directors for your continued support of the management team and to our shareholders for the trust you place in us. The second quarter was characterized by strong operating performance, which exceeded our expectations. We continue to have confidence in the underlying market conditions, driven by demand in the process and hybrid markets aligned with secular macro trends; energy security and affordability, sustainability, nearshoring and digital transformation.

The P&L execution was nearly flawless in the quarter. Underlying sales grew 8% operations leveraged at 54% expanding EBITDA by 140 basis points to 26% and delivering 25% EPS growth and 32% free cash flow growth. 2024 is the year of execution with no major portfolio moves planned. And through the first half, we feel confident and have raised our outlook for the year. We are energized about the power of our differentiated automation portfolio. Our NI team led by Ritu Favre continues to drive the integration plan and have again accelerated cost-out activities in response to a slower than anticipated market recovery. We will now deliver $100 million of synergies in 2024. Further, I’m excited about David Baker’s appointment as CFO of AspenTech. Dave is an experienced global automation CFO and a 27-year veteran of Emerson.

He will bring a degree of structure, forecasting accuracy, and work with Antonio Pietri to reinforce a diligent management process. Lastly, I remain excited about what we can accomplish at Emerson. Our technology stack, comprised of intelligent devices, control and software is highly differentiated in the marketplace, delivering scaled value to our customers. Further innovation is alive and well at Emerson. And we continue to stretch the boundaries of the possible in automation. Please turn to slide 3. Emerson and our Board are committed to ongoing Board refreshment. And today we have the privilege of announcing, the newest member elected to our Board of Directors. Calvin Butler is the President and Chief Executive Officer of Exelon, the nation’s largest utility company by customer count and a member of its Board of Directors.

As part of Exelon and its operating companies, Calvin has held senior management roles in executive management, operations, corporate affairs and regulatory and external affairs. He is a passionate advocate for community equity. And his unique expertise in reliable, clean and affordable energy solutions will benefit Emerson as we continue to enable the energy transition and decarbonization for our broad customer base. He also has a local connection as he was born and raised in St. Louis and graduated with a law degree from Washington University School of Law. Calvin will officially join our Board on August 1, 2024. This will expand Emerson’s Board to 12 members, half of whom are women or people of color. Having the right skills represented on Emerson’s Board is critical to our continued success and we are excited to have Calvin join us.

Please turn to slide 4. The second quarter exceeded our expectations and our strong results highlight our continued focus on execution. Sales, operating leverage and adjusted earnings, all exceeded Q2 expectations. Stronger volumes were driven by outstanding operational performance and more backlog conversion than expected. Price/cost and business segment mix were also more favorable than expected. Orders in the first half met our low single-digit growth expectations with a book-to-bill greater than 1. For the first half, process and hybrid saw mid-single-digit growth, while as expected discrete saw a decline of mid-single digit. The demand environment for process and hybrid markets remains favorable. Discrete Automation orders were down year-over-year on a tough comparison, but were up sequentially low single digits.

And we now expect their orders to turn positive in Q4, a quarter delayed from our original expectation. While not impacting underlying Test & Measurement orders were softer than anticipated in Q2 down 15%. For the second half, we expect mid-single-digit underlying growth in orders and low single-digit to mid-single-digit growth for the full year led by process and hybrid resilience with delayed discrete improvement. Test & Measurement continues to perform and delivered slightly better-than-expected Q2 results for both sales and earnings. The turn to positive orders in this business is now expected in the first half of 2025, two quarters delayed than our original expectation. We are seeing continued softness in transportation and semiconductor demand driven by constrained CapEx environment, while aerospace and defense is expected to be positive due to continued strength in government research and defense spending.

This extended downturn enables another acceleration of synergy actions. And we now expect to realize $100 million of synergies in 2024, up from our prior expectation of $80 million, as we pull in additional actions that will begin this quarter that were in the plan for 2025. Our differentiated portfolio is driving value creation for our shareholders. While we remain cautious on the timing of a recovery in discrete end markets and were slightly impacted by AspenTech’s latest guidance revision, Emerson’s first half performance, stable process and hybrid demand and additional self-help actions provide confidence to increase our full year guidance. We are increasing our underlying sales guidance to 5.5% to 6.5% and raising our adjusted EPS expectations to $5.40 to $5.50.

We will remain focused on execution and integration this year, leveraging our Emerson Management System. And we are energized as we look ahead at the strength of our new portfolio to deliver differentiated results. Our leading technology and exposure to secular growth markets paved the way for continued value creation. Please turn to Slide 5. Emerson’s Q2 exceeded guidance in underlying sales and profitability. Underlying sales for the quarter grew 8% with our process and hybrid businesses again exceeding expectations and better backlog conversion than initially expected. Energy security and affordability and sustainability commitments drove strong performance in energy, LNG, chemical and power. Hybrid end market strength continued with life sciences project momentum in North America, Europe and Asia and robust metals and mining activity.

Factory automation demand remained soft with continued weakness in China. Europe, Asia and the Middle East were particularly strong in the quarter with persistent strength in process markets driven by energy transition and traditional energy markets. One noteworthy example is India, which has seen double-digit growth in five of the last six quarters, including this quarter, driven by broad economic expansion across multiple segments. Our growth platforms also continued to perform strongly with underlying sales up double digit in the quarter. Our profitability continues to reflect the strength of our new portfolio. Gross margin has significantly improved since we started our portfolio journey when I took over as CEO in 2021. Gross margins at that time were in the low 40s.

And in this fiscal year, we expect to achieve gross margins over 50%, nearly a 1,000 basis point improvement. In Q2 gross margin was 52.2%, a 430 basis point improvement from the prior year. Operating leverage was 54%, stronger than our expected low to mid-40s, again due to stronger volumes and favorable price/cost and mix. Adjusted EPS also came in ahead of plan at $1.36, $0.10 above the top end of our guide and up 25% from 2023. Emerson generated free cash flow of $675 million, up 32% year-over-year. Mike Baughman will go through additional details on our results in a few slides. We are pleased with our Q2 performance and the persistent strength in our process and hybrid businesses, giving us additional confidence as we look to the rest of the year.

Please turn to slide 6. Our strategic project funnel continues to grow and now sits at $10.8 billion, up approximately $400 million from Q1, with our growth programs up by $300 million and representing nearly two-thirds of the funnel. The funnel growth is in line with the constructive CapEx environment for our process and hybrid customers. This also reflects our exposure to robust secular trends as the increase primarily came from projects supporting sustainability and de-carbonization and energy security and affordability. In the second quarter, Emerson was awarded approximately $350 million of project content with the increase in traditional energy stemming from the award of several large offshore vessels in Brazil. Our growth programs continue to demonstrate success.

And I want to highlight three key project wins. First, Emerson and AspenTech were awarded an automation pilot project for a large chemical company in China. This is an important synergy win as the customer is developing a pathway to software-driven autonomous operations. The multiyear agreement is an integrated solution for Emerson and AspenTech software that will provide high-fidelity hybrid models and control automation for optimizing process operations based on real-time production data to increase product yield and reduce energy consumption. This example showcases the unique ability of the integrated Emerson and AspenTech portfolio to provide differentiated solutions for our customers. In the Energy Transition space, Emerson was selected to support Shell’s proposed Polaris carbon capture project in Canada.

Polaris, subject to final investment decision by Shell, would capture CO2 from the refinery and chemical plant located at the Shell Energy & Chemicals Park in Scotford, Alberta. Emerson is providing much of our leading technology, including instruments and valves. And finally, Emerson was chosen to automate a $4 billion manufacturing complex being built in Indiana by a large U.S.-based life science customer. Emerson will provide our leading DeltaV control systems and software portfolio, including a five year subscription agreement for our DeltaV MES. Please turn to slide 7. This is a transformative moment for the US power industry as data centers are driving electricity demand increases not seen since the early 2000s. At the same time, power producers are retiring carbon-intensive assets in a drive to de-carbonize their operations and investing in the resilience and optimization of the grid.

The grid is also experiencing an unprecedented shift from the unidirectional grid of the past to a bidirectional intelligent grid of the future, which will be increasingly supported by intermittent power sources. There are multiple factors driving this generational increase in US electricity demand. And data centers alone account for nearly one-third of all new US electrical demand. AI data center racks consume significantly more power than traditional data centers with a search on ChatGPT consuming 6 to 10 times the power of a traditional search on Google. Hyperscalers are revising CapEx estimates upward and increasing annual CapEx significantly in 2024 and build their AI infrastructure. This is expected to continue for multiple years. The increase in demand is real and it is happening today.

Utilities in key regions across the US are revising low-growth estimates upward materially from recent year’s estimates. Georgia Power issued a revised assessment in which projected load growth was 17 times greater than previously forecast, resulting in approximately 30% greater total winter peak demand for the 2030-2031 winter. Dominion Energy has been a key beneficiary of traditional data center growth and forecasting another tailwind for AI data centers more than doubling their 10-year average annual summer peak load growth from 2022. The North American Electric Reliability Corporation recently put out their annual nine year growth forecast with new demand more than doubling from the prior year forecast. While Emerson does not have material content in data centers, Emerson is a key player in the power industry for generation, transmission and distribution all of which are set to be beneficiaries.

Approximately, 9% of Emerson sales are in power. And while we have a strong portfolio across our technology stack, I want to highlight the software and control layer which is relevant across the power landscape from generation to transmission and distribution. The Ovation automation platform and Ovation Green portfolio of renewable solutions are purpose-built for power generation greenfield builds and plant modernization applications. Together, our Ovation automation technology and Green solutions automate approximately 50% of North America and 20% of global power generation. Emerson’s strategic project funnel in power is up 45% year-over-year reflecting the emerging potential. And I’d like to mention a key win from the quarter. Emerson was selected by a large Midwest utility to modernize nine sites with the latest Ovation hardware, software and cybersecurity solutions.

We were awarded based on our demonstrated ability to execute plant modernizations, while ensuring safety quality and reliability all vitally important in the power industry. With the increasing mix of generation sources and rise of distributed resources and microgrids, utilities must now also manage the integration of varying and bidirectional power flows. AspenTech’s Digital Grid Management or DGM software also plays a critical role in managing the ever-increasing complexity of today’s grid to maintain stability and control through real-time power management and demand-side management software. DGM is a strong participant in these markets with approximately 40% share in North America and approximately 20% globally. The necessity of grid digitalization is driving investments in the advanced capabilities that software provides with the market forecasted to grow in the high-teens.

Emerson’s leading products and application expertise across the power landscape make us well-positioned to capture the coming investments both in the US and globally. And we are excited to watch the future of power generation, transmission and distribution unfold. With that, I will now turn the call over to Mike Baughman.

Mike Baughman: Thanks, Lal and good morning, everyone. Please turn to slide 8 to discuss our second quarter financial results. Underlying sales growth was 8% led by our process and hybrid businesses. Price contributed approximately three points of growth slightly higher than expected due to the mix of our shipments this quarter. Growth was led by Europe which was up 12% and Asia, Middle East and Africa up 11%. The Americas also had solid growth up 4%. Intelligent Devices and Software and Control grew by 6% and 14%, respectively. AspenTech sales increased significantly over the prior year up 21% on an underlying basis. Discrete Automation was down mid single digits as expected due to continued market softness and against a tough prior year comp.

Test & Measurement, which is not included in the underlying measure, contributed $367 million to our net sales exceeding expectations for the quarter on stronger backlog conversion. Backlog was essentially flat to the prior quarter at $7.55 billion. Adjusted segment EBITDA margin improved 140 basis points to 26%, and as Lal mentioned gross profit margins of 52.2% contributed to this margin expansion. Leverage on volume, favorable mix, price, net material deflation and productivity programs all contributed to the margin improvement. Operating leverage excluding Test & Measurement was 54% exceeding expectations. Test & Measurement adjusted segment EBITDA margin was 21.4% above expectations driven by leverage on slightly higher sales volume mix and higher cost actions.

Adjusted earnings per share grew 25% to $1.36. And I will discuss additional details on adjusted EPS on the next chart. Lastly, free cash flow improved 32% to $675 million exceeding expectations driven by earnings and improved inventory levels. Acquisition-related costs, integration activities and higher CapEx reduced the quarter’s free cash flow by approximately $70 million. Please turn to slide 9. Adjusted EPS growth of $0.27 was driven entirely by operations as other non-operating items netted to 0. Software and Control led the growth contributing $0.18 and Intelligent Devices contributed $0.09. Overall, adjusted EPS grew 25% year-on-year to $1.36. Please turn to Slide 10 for details on our updated guidance for Q3 and 2024. Underlying sales are now expected to grow 5.5% to 6.5%, which raises the bottom of our February range.

Our process and hybrid businesses are performing well and support the outlook for the rest of the year. We still expect underlying sales of our Discrete Automation segment to turn positive in Q4. And we are watching the orders progression, which we believe is now delayed by one quarter. Reported net sales growth is expected to be 15% to 16% with Test & Measurement contributing approximately 10 points of growth or approximately $1.5 billion in sales, the low end of the February guide, offset by a 0.5 point drag from FX. Incremental margins are held at low to mid-40s, which suggests mid-30s incrementals for the second half. The second half will see a change in mix with higher project-related shipments and changes in segment and geographic mix.

Adjusted EPS has increased to $5.40 to $5.50. Test & Measurement is still expected to contribute $0.40 to $0.45 as we accelerate synergy activities. We now expect to have $100 million of synergies realized this year. AspenTech lowered their guidance yesterday afternoon. And we have incorporated the latest revisions into our guide. We now expect AspenTech to deliver $0.30 to $0.32 for the year versus the $0.32 to $0.34 in our February guidance. Free cash flow performance in the first half of the year and our updated earnings projections support free cash flow for the year of approximately $2.7 billion. Share repurchase, dividend and tax rate expectations are unchanged from February. For the third quarter, we expect underlying sales growth between 3% and 4.5% and leverage in the mid-30s due to the project and geographic mix I described earlier.

Adjusted earnings per share is expected at $1.38 to $1.42. And finally, Test & Measurement sales and earnings per share contribution is expected to be at similar levels we saw in quarter two as we watch orders carefully. Our first half performance exceeded expectations, and we are excited to continue delivering strong results. Our transformed portfolio is meaningfully improved with higher profitability driven by gross profit margins above 50% and higher organic sales growth driven by secular trends. And our Emerson Management System continues to drive operational excellence. With that, I’ll turn it over to the Q&A portion of our call.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question is from Davis Scott, Melius Research. Please go ahead.

Scott Davis : Hey, good morning everybody, Lal, Mike and Ram.

Lal Karsanbhai : Good morning, Scott.

Scott Davis: A lot of good detail in the slides. But I wanted to start with just a sense of the synergies that you’re seeing and just get a little bit more color on what you’re getting as far as structural cost-out, what may have to come back when revenues recover and how we might think about what really that asset looks like in kind of a more normalized situation from a profit perspective?

Lal Karsanbhai : Yes, Scott. I’ll say a few words and let Ram add some color to this. First and foremost, we’re very excited about the company. It’s a far better company than we expected in terms of the quality of people, the quality of the technology, the loyalty of the customer base and the opportunity to grow and expand as a leader in the industry. So we’re very pleased. We have a great management team in place. And we’re most pleased about is the responsiveness of that management team to the market conditions. This is now being run as an Emerson company. And they’ve gotten ahead of the activities around cost takeout in a very diligent way, this was all laid out prior to close with the teams. So we’re essentially working down a playbook.

We’ve now moved into some of the actions as I referenced that were outlined for 2025 that have been moved forward. But none of these are elements that we believe we necessarily have to add back. This is really driving around efficiency in the company and position it to the SG&A structure to be more competitive, a little leaner on a go-forward basis. Ram, if you don’t mind?

Ram Krishnan: Yes. And just to add to that, I think the balanced approach around G&A the optimization of the go-to-market, optimizing and focusing the R&D efforts on critical growth factors that are going to pay a lot of benefit for us as the market recovers. And that’s really what we’ve been focused on. Obviously, we are seeing opportunities in logistics and supply chain, which is additional to what we had originally planned. But net-net, the $185 million we’ve committed to is a programmatic approach that is divided across these four segments. And we’ve been able to accelerate these actions just given the environment we’re in, mostly because they were all well planned out and we are able to pull forward these initiatives given that they’ve been bought out and the teams are actioning them at a rapid pace.

Scott Davis: Got it. That’s helpful. Hey guys, I’m looking at slide 7 at the DGM and the Ovation. And give us a sense of how this upgrade cycle works. The power demand, obviously, and grid, I think we’re all quite aware of what’s going there. But does it require — and I mean maybe just a little bit more color on how these two DGM and Ovation kind of — do they integrate? Do they sell together? Is there any way to kind of get more benefit, I guess from having the two assets versus the one? And it’s a little bit of an open-ended question. I’m just trying to get a sense of the materiality in the upgrade cycle here. But maybe the best way to start with that is just to understand if those assets actually can integrate and work together and if that’s a benefit to the utility. Thanks. I’ll pass it on.

Lal Karsanbhai: Yes. No. Certainly, we would be happy to comment. I think there’s three very important elements. I think element of materiality relates to the high growth in the outlook of projects and activity. We saw that 45% expansion in the funnel. We haven’t seen that level of activity in power generation in a long time with a positive growth in North America, again driven by the data center demand that we outlined. Secondly, inside of the generation capacity, there certainly are opportunities for optimization software. That is an area that really is untapped. And that’s a synergy opportunity that exists between Ovation and AspenTech. And then thirdly, certainly, the leverage of the strength in our utilities, the customer base takes us outside the walls of the plants into the transmission and distribution.

And even though there are not technology synergies between DGM and Ovation per se, there certainly are significant customer synergies and credibility that has been built with Ovation that takes us into the transmission distribution software.

Scott Davis: Very helpful. Thank you. Best of luck this year, the rest of the year.

Lal Karsanbhai: Thanks Scott.

Ram Krishnan: Thanks Scott.

Operator: The next question is from Coe Nigel of Wolfe Research. Please go ahead.

Nigel Coe: Great and thanks for the question, guys. Good morning.

Lal Karsanbhai: Hey. Good morning, Nigel.

Nigel Coe: Good morning. So, just wanted to dig into the operating leverage assumptions in the back half of the year. I think you said mid-30s on sort of mix changing. And I think we’ve had this MRO mix now of 65% or so for the last couple of years. Are we starting to see that mix changing, notably in the back half, maybe getting towards maybe, I don’t know, 60% MRO? And does this — do you expect this to continue in 2025? It feels like it should be. But do you think 2025 is more like a mid-30s? Or do you still think you can maintain 40%-plus operating leverage in 2025?

Mike Baughman: Yes. Nigel, it’s Mike. So, as we look to the back half of the year, the mix change is meaningful. And you’re correct we’ve been at the 65% MRO, which is about where we were for the second quarter as well. That is going to drift down on us as we go into the second half. We also benefited this past quarter quite a bit from price. We’ll continue to get the roughly 2% price but it won’t be the 3%, we don’t believe that we saw in the last quarter. So those are the big things. There’s also a geographic mix element to this with the US growth moderating relative to other geographies. And then, if you start to think about the 54% that we printed this quarter versus what we’re expecting in the second quarter, there was an uplift this quarter from AspenTech which had a great quarter that will moderate in the back half of the year. So you need to put that into your thinking as you go forward as well.

Nigel Coe: Okay. I’m guessing no comments on 2025. But if you do think that continues, I’d appreciate that comment. But on National Instruments, it just feels like — so just to paraphrase the way you’ve set this up for the second half. Third quarter looks pretty flat sequentially on sales, call it, $360-ish million of sales and then we’re picking up towards $400 million in the fourth quarter. I just want to verify that that pickup in the fourth quarter is entirely seasonal. I think when you go back in time we typically see that coming through in that quarter. So it doesn’t feel like we’re taking a huge cycle call there. And then with the synergies, do we expect the margins to continue to move higher sequentially through the back half of the year?

Ram Krishnan: Yes. I think you summarized it well. Yes.

Nigel Coe: Okay. Margin would be up, correct.

Ram Krishnan: And to your 2025 question, I mean it’s early for us to plan 2025. But at the end of the day, we don’t expect leverage rates in 2025 to be materially different from what we’re going to deliver in 2024.

Nigel Coe: Okay. That’s great. Thanks.

Operator: The next question is from Andy Kaplowitz, Citigroup. Please go ahead.

Andy Kaplowitz: Good morning, everyone.

Lal Karsanbhai: Hi, Andy.

Andy Kaplowitz: Well I know you’re still expecting mid-single-digit order growth in the second half after the negative 1% in Q2. So maybe you could discuss how you start off Q3 in April. Give us a little more color into visibility regarding that mid-single-digit growth in the second half. Do you have visibility in the process and hybrid staying at that mid-single-digit level? And then is the mid-single-digit organic growth kind of weighted to Q4, given the turn in discrete then?

Lal Karsanbhai: Yes. Certainly Andy. Look we’re off to a good start in Q3. April over April of last year is up double digit 10% on orders. Certainly – and the three months has turned positive as well. So we flipped that to the low single digits on a three-month basis trailing three-month basis. So feel good about the start, feel good about the funnel and the conversion and the markets. And it’s again, driven by the process and hybrid environment across most of the world areas. Discrete we’re watching very carefully. As we said, we expect that to turn now a quarter later than originally expected. But we’re seeing green shoots that started developing in March and into April, particularly in Western Europe, in Germany around machine makers and some of the discrete industries.

So optimistic start for the quarter again gave us the confidence as we tested our businesses and worked out process that exiting the year in that mid-single digit low single-digit type of range on orders is very, very feasible.

Andy Kaplowitz: Lal just a quick follow-up to that last comment. Did you just get a couple of larger projects in April? Is that kind of what happened to swing that?

Lal Karsanbhai: No, no, no. There’s funnel conversion Andy but nothing exemplary there.

Andy Kaplowitz: Okay. And then maybe what are your customers telling you on the NATI side as to sort of why the recovery is still delayed there? And if NATI is still slower to turn than you currently expect do you still have more flexibility to sort of continue to push the envelope on integration cost-out? And then ultimately I know Ram said, you’re still targeting the $185 million. But could you do more than that?

Lal Karsanbhai: No certainly. Look I think the team has a great set of ideas on their walls in terms of opportunities to drive efficiency and productivity in the business. But we believe that ultimately this is a growth business. And while we’re doing this we’re driving investments in core technology programs so that we hit the ground running. We’re working on customer demand, both Ram and myself alongside, the management team at National Instruments is well engaged with the customers. Ram will actually speak at NI Connect in a couple of weeks along with Ritu, which will be a pivotal moment for us. And we have a very successful event in Dallas I believe with Ram this year. So look we’re very excited about the potential in the business and this business turning positive in early 2025. Ram a few words?

Ram Krishnan: Yes. And I think to answer your specific question as it relates to customer what we’re hearing from customers certainly segments like the defense segment or what they call aerospace defense and government segment are positive. I think we’re going to get into easier comparisons. Frankly, April was also a very good month for – given the expectations for T&M, which was positive for us. And I think really the only two segments we haven’t seen the turn which is why we believe it’s at least one to two quarter delayed in T&M is semiconductors and Asia. North America, actually turned positive in April. Europe has turned positive. We feel good about the ADG segment. And we’re cautiously optimistic about transportation. But the portfolio segment, particularly driven by Asia and then semiconductors is where we still have to see recovery. We’re watching that very carefully.