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F500-2020-176-Emerson-Electric

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Emerson Electric provides automation systems, sensors, and software for various industries, including energy, manufacturing, and utilities. Founded in 1890, the company employs about 73,000 people and operates in over 170 countries. In 2024, it sold its remaining stake in its Copeland climate business to Blackstone to sharpen its focus on automation and sustainability.

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Q1 2025

Emerson Electric (EMR): Company Profile, Stock Price, News, Rankings

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Emerson Electric

emerson electric

Greetings and welcome to the Emerson First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Doug Ashby, Director of Investor Relations. Thank you. You may begin.

Good afternoon, and thank you for joining Emerson's First Quarter 2026 Earnings Conference Call. For those who don't know me, my name is Doug Ashby, and I'm the Director of Investor Relations for Emerson. Today, I'm joined by Emerson's 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 turn to slide two. 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.

Thank you, Doug, and good afternoon, everyone. Thursday, February 5th, marks my fifth anniversary as Chief Executive of Emerson. Over the five years, I have found the work challenging, motivating, and rewarding. The execution of our vision to transform Emerson into the world's leading automation company has been incredibly gratifying. We aligned the company to important secular drivers which will experience outsized growth well into the future.

Our customer engagement teams now deliver an unequaled, software-enabled technology stack to solve industry's biggest challenges. I am surrounded by the best management team in industrial tech and by 70,000 talented, engaged colleagues all around the world.

The Emerson Management System will enable best-in-class execution led by growth, earnings, cash, and resulting in differentiated value creation. I remain ever grateful to Emerson's Board of Directors, employees, and investors for their trust and support. Please turn to slide 3.

In November, we hosted our first investor conference since completing our transformation, and it was energizing to present Emerson as the global automation leader executing on our vision to engineer the autonomous future. In addition to highlighting our technology advancements and innovation, we introduced our value creation framework which guides how we operate the company, beginning with organic growth.

Emerson's automation portfolio is aligned to powerful secular tailwinds: electrification, energy security, and nearshoring and sovereign self-sufficiency, and we expect these to drive growth over the next three years and beyond.

We are also delivering innovation that enables customers to unlock significant value from automation. Operational excellence is a hallmark of Emerson, and we have plans to further expand adjusted segment EBITDA margins by 240 basis points by 2028.

Importantly, we plan to return $10 billion, or 70% of cumulative cash, to shareholders through $6 billion of share repurchase and $4 billion of dividend payout. We remain confident in achieving our 2028 targets: the $21 billion top line, 40% incrementals that deliver the 30% adjusted segment EBITDA margins, $8 of adjusted EPS, and 20% free cash flow margin.

We believe this is a highly differentiated value creation framework, and we are excited for the future of Emerson. Please turn to slide 4. 2026 marks the 50th Anniversary of National Instruments, which was founded in Austin, Texas, in 1976 by James Truchard, Jeff Kodosky, and Bill Nowlin.

The trio was frustrated by the inefficient tools they encountered while working in a test lab at the University of Texas and believed connecting instruments to a computer could revolutionize electronic Test and Measurement.

They developed LabVIEW while working out of Truchard's garage, and since its release in 1986, LabVIEW has redefined productivity and engineering workflows through software-defined test. Today, Emerson's NI is the leader in test automation systems, and two recent developments demonstrate how Emerson is still driving tests forward through software.

In January, our Nigel AI advisor was one of 13 products recognized as a 2025 Product of the Year by Electronic Product Design and Test. This U.K.-based trade publication focused on electronic test, validation, and manufacturing, and their annual list highlights products that use innovation to achieve even greater levels of performance.

Nigel provides intelligent workflows with AI-driven test design and orchestration to accelerate troubleshooting, optimize lab performance, and enhance decision-making. This award demonstrates Emerson's leadership in AI-enabled test automation and reflects continued momentum as we move the industry towards autonomous test operations.

Nigel AI is purpose-built to support the specific tasks engineers face throughout the different stages of the product lifecycle. Today, Emerson released the next generation of Nigel AI, strengthening our capabilities in AI-enabled test. These upgrades deliver a step-changing performance by moving Nigel AI from an AI assistant to an AI author, accelerating code development to make engineering workflows more efficient from design and validation through production.

Processes that previously took hours can now be completed in minutes. For our customers, this means engineers spend less time navigating tasks and more time focused on improving test outcomes. This evolution marks a clear step along our roadmap towards Agentic AI, where software increasingly enhances productivity, and we are seeing accelerated user adoption of LabVIEW since the first launch of Nigel in 2025. Please turn to slide 5. Robust demand continued in the first quarter, with underlying orders growth of 9%.

Customers are deploying capital in longer-cycle projects in our growth verticals, with momentum building in North America, India, and the Middle East and Africa. I will discuss more details on demand on the next slide. Emerson's first quarter results reflect disciplined execution. Underlying sales met expectations and were up 2% year-over-year.

Momentum continued in Test and Measurement, up 11% year-over-year, and our Ovation business accelerated sharply, up 20%, driven by the secular demand for Power. Profitability exceeded expectations, with an adjusted-segment EBITDA margin of 27.7% and adjusted earnings per share of $1.46.

Annual Contract Value of our software grew 9% year-over-year and ended the quarter at $1.6 billion. We remain confident in our plans for 2026, supported by a good start to the year and our proven track record of operational excellence.

We are reiterating our guidance of 5.5% sales growth, 4% underlying sales growth, and an adjusted segment EBITDA margin of approximately 28%. We are also raising the bottom and midpoint of our adjusted EPS guide and now expect $6.40-$6.55 per share. Emerson completed $250 million of share repurchase in the first quarter, and we are committed to our plans to return approximately $2.2 billion of capital to shareholders.

Finally, I want to highlight multiple key developments in technology and innovation at Emerson. In January, Emerson was named the 2026 Industrial IoT Company of the Year by IoT Breakthrough, marking the fourth time in the past five years that we have received this recognition.

Over 4,000 companies were nominated globally for the 2026 competition, and Emerson was selected for having the most complete industrial IoT technology stack.

Additionally, we released DeltaV Version 16, which advances our software-defined automation vision and is an integral piece of our enterprise operations platform. With flexible architecture and enterprise integration, DeltaV Version 16 empowers customers to make smarter decisions by improving access and providing context to operational data to facilitate advanced analytics and AI optimization.

Lastly, we strengthen our leadership position in Life Sciences through a strategic collaboration with Roche, underscoring how Emerson software dramatically improves and shortens the technology transfer process. The new DeltaV Modality Library enables Life Sciences customers to efficiently design, scale, and deploy new production processes with pre-built and proven solutions that save months of development.

Please turn to slide 6. Underlying orders were up 9%, marking four consecutive quarters of strong order growth. Trailing 12-month orders are up 6%, providing the backlog to support sales in the second half of 2026 and into 2027.

North America, India, and the Middle East and Africa continue to show robust demand while we are seeing ongoing softness in Europe and China. Order growth was most pronounced in our Software and Systems group, which was up 23% year-over-year. Broad-based strength in Test and Measurement drove orders growth of 20%, led by Semiconductor, Aerospace and Defense, and the portfolio business.

AI and digital transformation of manufacturing are leading customers to deploy significant capital towards greenfield and modernization projects for power generation, especially in the U.S. Orders in our Ovation business were up 74%, driven by large project wins, including behind-the-meter data centers and fleet modernizations for major utility customers, and we expect growth in the mid-teens for the year.

We are also seeing healthy investments in grid digitization, with ACV and AspenTech's Digital Grid Management suite up 25% year-over-year.

Secular tailwinds are driving substantial long-cycle project activity, and Emerson won approximately $450 million of automation content from our project funnel in the quarter. 80% of these wins came from our growth verticals led by Power and LNG. Our funnel remains at $11.1 billion, replenished by new opportunities in our growth verticals, and I want to highlight a few projects that support our confidence in continuing to win at high rates.

First, Emerson was chosen to automate on-site power generation for a new 1.7-GW AI data center in the United States, helping to meet accelerated deployment timelines and mission-critical reliability. The project will leverage proven behind-the-meter power generation management software as part of the Ovation platform, enabling faster time-to-market for the customer.

Emerson's recently announced strategic collaboration with Prevalon Energy played an instrumental role in our selection for this project, as the collaboration brings together Emerson's automation and control expertise with advanced energy storage to help data center operators improve reliance, resilience, reliability, and efficiency in increasingly power-constrained environments.

Next, Emerson was selected for Sempra Infrastructure's Port Arthur LNG Phase II project, which will add 13 million tons per annum in capacity to the U.S. Gulf Coast facility. Emerson's DeltaV control system and severe service control valves were chosen based upon our reputation for strong operational performance in LNG applications and our local presence and support.

Lastly, Emerson won projects that have multiple large new space customers and will help develop, test, and validate complex communication links for their satellite-based programs to provide reliable, high-speed internet around the world.

The customers will use NI's leading test software and PXI platform, which were selected due to their superior performance in reducing test times while providing best-in-class measurement accuracy. I will now turn the call over to Mike Baughman to discuss our results and 2026 guidance in more detail. 

Thanks, Lal. Please turn to slide 7 for a more in-depth look at our Q1 financial results. As a reminder, our first-half financial results are adversely affected by a software contract renewal dynamic that we detailed in our November earnings call.

This impacted our Q1 year-over-year sales growth by approximately 1 percentage point, adjusted segment EBITDA margin expansion by 70 basis points, and earnings per share growth by $0.06. For Q1 and including the 1-point drag, underlying sales growth was 2%, with all segments reporting growth.

Growth was led by software and systems, which was up 3% and 6% without the software contract renewal dynamic, while Intelligent Devices grew 2% and Safety and Productivity was up 1%. I will provide more details on geographic and group performance on the next two slides.

Price contributed 3 points to growth, as expected. MRO for the company represented 65% of sales. Our backlog ended the quarter at $7.9 billion, up 9% year-over-year, and our book-to-bill was 1.13. Adjusted segment EBITDA margin of 27.7% came in above expectations. Favorable price cost and cost reductions, including synergies, outpaced inflation to benefit margin.

Excluding the 70 basis points impact from the software dynamic, adjusted segment EBITDA margin was up 40 basis points. Adjusted earnings per share came in at $1.46, a 6% increase year-over-year.

Q1 free cash flow of $602 million, with a margin of 14%, came in slightly better than expected, positioning us well for our expected full-year growth of approximately 10% at greater than 18% margin. Overall, Q1 was a very good start to 2026. Please turn to slide eight for details on Q1 underlying sales by region.

As expected, underlying sales were strongest in the U.S. and the Middle East and Africa, while China remained soft. The Americas were up 3%, and the U.S. remained strong, up 6%, with sustained momentum in Power and LNG while also benefiting from nearshoring with expansions in Life Sciences and Semiconductor.

North America's pace of business remained healthy, with resilient MRO spend. Europe was up 3%, benefiting from the timing of projects in Eastern Europe, although the overall pace of business was subdued.

9% growth in the Middle East and Africa was driven by Greenfield project activity. We are seeing broad-based momentum in our growth verticals, which collectively were up 14%. Power led the strength, up 17%, with elevated activity across lifetime extensions, upgrades, and greenfield projects to support the unprecedented increase in electricity demand.

Life Sciences also provided significant growth, driven by GLP-1 demand, with greenfield and modernization products to support nearshoring and self-sufficiency in multiple regions. Ongoing strength in North America and the Middle East, as well as our growth verticals and sustained demand for automation, give us confidence in our full-year outlook.

Please turn to slide 9 for details on sales and margin performance for our three business groups.

Software and systems underlying sales growth of 3% was led by broad-based strength in Test and Measurement, which was up 11%, and helped offset a 3-point drag from the software contract renewal dynamic in Q1. We saw significant growth in Power, Life Sciences, Semiconductor, and Aerospace and Defense.

Software and Systems margin of 31.3% increased 20 basis points year-over-year, driven by strong profitability from Test and Measurement and the benefit of synergies, offsetting a 2-point headwind from the software contract renewal dynamic. Intelligent Devices underlying sales growth of 2% was led by Power, LNG, and North America MRO, offset by weakness in China.

The pace of business in Europe and China was light, although Q1 growth in Europe benefited from the timing of projects.

Intelligent Devices margin of 26.9% decreased by 70 basis points year-over-year, driven primarily by mix and headwinds from FX due to a favorable impact last year. Safety and Productivity was up 1% underlying, driven by electrical products and stable project activity in North America, while European markets remained soft.

Safety and Productivity's margin of 20.9% was down 40 basis points year-over-year due to lower volume, offset by benefits from price and cost reductions. Please turn to slide 10, where I will bridge Q1 adjusted EPS from the prior year. Excluding the $0.06 impact of software renewals, operations delivered $0.10 of incremental EPS in Q1.

Software and Systems contributed $0.08, reflecting strong operational execution, and Intelligent Devices added $0.02. Non-operating items added $0.04 from share count and tax rate benefits. Overall, adjusted EPS grew 6% year-over-year to $1.46.

Please turn to slide 11 for an overview of our Q2 and full-year 2026 guidance. We are reiterating our full-year guidance for sales, Adjusted Segment EBITDA margin, and Free Cash Flow. We are raising the bottom and midpoint of our 2026 Adjusted EPS guide and now expect $6.40-$6.55. We still expect to return approximately $2.2 billion to shareholders through $1.2 billion in dividends and $1 billion of share repurchase, of which we completed $250 million in Q1.

Turning to the second quarter, sales growth is expected to be 3%-4%, with underlying sales growth of 1%-2%. We expect Adjusted Segment EBITDA margin of approximately 27% and Adjusted EPS of $1.50-$1.55. I will provide additional details on guidance in the following two slides. Please turn to slide 12 for our 2026 group underlying sales guidance.

We expect Software and Systems to be flat in Q2 and up 4% for the full year. Test and Measurement is planned to have high single-digit growth in both Q2 and the full year, while the Control Systems and Software segment is expected to be down low single digits in Q2 due to a $65 million headwind from the timing of software contract renewals.

As a reminder, this accounting dynamic adversely affects GAAP revenues by $110 million in the first half and $120 million for the full year. We continue to see robust adoption of our software and expect ACV to grow 10%+ in 2026. Intelligent devices is projected to grow 2%-3% in Q2 and 4% for the full year, with stable MRO led by strength in North America. Second-half growth is supported by backlog phasing and the timing of project shipments.

Safety and Productivity is expected to grow 1%-2% in Q2 and 2%-3% for the full year. Growth is driven by North American markets and electric and utility strength, but offset by continuing weakness in European markets. Overall, Emerson expects to grow 1%-2% in Q2 and approximately 4% for the full year.

The second-half growth acceleration to approximately 6% is supported by our strong orders momentum and lapping of the software contract renewal dynamic. Excluding the impact of software contract renewals, Emerson's growth rate is expected to be 3%-4% for Q2 and 5% for the full year. Please turn to slide 13 for additional detail on adjusted segment EBITDA margin and EPS guidance.

For Q2 2026, we expect operations to contribute around $0.05 to EPS, with another $0.09 from non-operating items, primarily FX, to offset a $0.09 impact from the software contract renewal dynamic. As a reminder, Q2 2025 adjusted EPS of $1.48 benefited from about $0.04 from the TotalEnergies project that we discussed in our Q2 2025 earnings call.

The lower volume from renewals and the TotalEnergies deal impacts Emerson's adjusted segment EBITDA margin by approximately 150 basis points compared to Q2 2025. We are guiding our Q2 2026 adjusted EPS at $1.50-$1.55. For the full year, we are raising the bottom of our EPS guide by $0.05, reflecting the good performance in Q1.

The renewal dynamic reduces adjusted EPS by approximately $0.15 and adjusted segment EBITDA margin by approximately 40 basis points.

We still expect operations to generate about $0.50 of incremental EPS, with approximately 80 basis points of margin expansion from positive price cost and the continued benefit of synergy realization from AspenTech and Test and Measurement. With that, I would like to turn the call back to the operator.

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue.

For participants using speaker equipment, it may be necessary to pick up their handset before pressing these star keys. We also ask each person in the queue to limit themselves to only one question and one follow-up to allow everyone a chance.

Our first question comes from the line of Andy Kaplowitz with Citigroup. Please proceed with your question.

Lal, could you break down a bit more your 9% order growth in Q1 between process and hybrid? I think you said 74% Ovation growth, which was impressive, and I think you said sort of mid-teens growth in Power is expected this year. But could that higher level behind-the-meter Power opportunities lead to a more extended runway of power?

And then, generally, would you say your process and hybrid markets are settling into sort of this mid-single-digit order growth rate despite some of the concerns that we hear out there?

Yeah. No, look, we were very let me start with Power. Very energized with what we saw in the marketplace.

It's, as you know, starting to develop in 2025, but we saw certainly an acceleration in orders in the first quarter. It's predominantly driven by two areas today, but there'll be a third that I think starts to pick up steam as we go forward into the year. The two areas are modernization, upgrades of existing facilities, and behind-the-meter power generating capacity at data centers. That's generally what drove the investment in the power generating capacity.

Of course, on the same line, we saw modernizations of the grid and investments in our and we saw that reflected in the ACV of our DGM business at Aspen. What we'll see, I think, develop a little bit more further, longer cycle, Andy, will be new generating capacity coming in. We see plans being put forward, but we're really right now on evergreen modernizations and behind-the-meter work.

I'll also highlight, in terms of the order drivers, the activity at Test and Measurement. Orders were up 20% in the queue. And, Andy, it was broad-based. Portfolio business, Semiconductor, and ADG, all up between 20% and 30%+ percent. The one offset there continues to be the Transportation segment, which is relatively challenged.

But overall, great momentum in that business, and we've seen very steady, consistent growth there. Ram, anything to add?

Yeah. Just to add, I'll give you geographic color on the 9%. Lal gave it to you about business, but North America was up 18%, reflecting many of the end markets that Lal described. Certainly, Power, LNG, and many of the T&M markets in North America were very strong. Middle East was up 6% for us. Latin America was up 9%. So, those fundamentally drove the strength. India was up 22%.

So consistent with the commentary, where we thought we had strength, we demonstrated a lot of positive momentum that should continue. Certainly, Europe was down low single digits, and China was down high single digits in the quarter from an orders perspective.

And then the last thing I'll add, Andy, just on the funnel, on the projects, it was a significant, as we highlighted, $432 million of wins. It came from approximately 70 project wins. A third of those were in Power. But they had heavy participation in LNG and in Semiconductor, Life Science, and ADG as well, with each of those representing about 15% of the wins.

So, lots of broad-based activity, but of course, power generating, transmission and distribution will be driving the numbers right now.

Lal, that's very helpful. And then ACV growth was 9% in the quarter.

You're still talking about expected 10%+ growth for the year. But as you know, there's angst regarding AI's impact on software. So, I think you already spoke about Nigel AI. I know you've talked about the greater vision of balanced automation. So, maybe you can remind us why AI could be complementary to growth for you guys in ACV and margin in your software businesses.

Yeah. For us, from a software perspective, first off, all of our software offerings are built on first-principle models, very, very sticky, and a lot of domain knowledge built into these simulation capabilities, not just at Aspen, but also our software offerings with Ovation, DeltaV, and certainly the NI suite.

So, the threat of AI disrupting our software business is very minimal as we see it today. And really, as a counterpoint, that AI capability we're building into our software should, frankly, accelerate the growth.

So, we see AI and all the AI capabilities we've launched, not just with Nigel, but also the capabilities in Ovation and DeltaV, should be a net accelerator for our software offerings. And that's really what we expect to see with continued ACV growth.

Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question.

Thanks. Good afternoon. Going back to the order commentary, you've obviously caught up LNG, caught up Power. Obviously, these are two very long-cycle end markets. So, I'm just wondering if some of the orders we're seeing, especially in Power, are pushing beyond this year and into sort of multi-year phases.

Certainly, it's given us the confidence, not just in the back half of 2026, as we see the backlog timing, but we start to gain confidence into our 2027 as we see those orders and that timing of those shipments. But I'll also suggest, Nigel, that if you look at the Test and Measurement business, there are projects in that business, but there's a lot more of the short-cycle activity, particularly in the portfolio business and in elements of Semiconductor as well.

Okay. And then a quick follow-up thanks, Lal. A quick follow-up on, I guess, the Sensors is the new name. The Sensors margins were down, I think, 200 basis points year-to-year. I think you talked about FX benefits in the prior-year quarter. Is there any impact of memory chip inflation here?

Because if there's one area of Emerson where you might see some of this extreme inflation, I think it might be there. So, just maybe just touch on the margin weakness and then talk about the memory chip inflation as well.

Hey, Nigel. It's Mike. Yes, your memory is very good. We did, last year, have some FX benefits that were in that segment that we don't have this year, which drove about a point of the year-over-year negative comparison of about two points. The other things going on there related to mix, there was geographic mix.

Ladies and gentlemen, please stand by with the technical difficulties. Ladies and gentlemen, thank you for your patience. We will resume. You may continue.

Nigel, that was such a great question. They just tried to end the call on that. Okay.

So, Nigel, where did we drop so we can where did we drop?

I think you were talking about geographic mix, and then I went dead.

Did I finish the DRAM explanation or not?

Okay. Okay. Let's go back to your question, Nigel, about sensors margins. And I was commenting that you were correct about the FX impact, which was about 1 point of the approximately 2 points that the sensor margin was down on a year-over-year basis. There was also some mix dynamics. The prior year had a stronger North America and some backlog dynamic going on that benefited them.

Emerson Electric (EMR) Q1 2026 Earnings Call Transcript

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