Q1 2025 Earnings Call Transcript

Good day and welcome to the Emerson First Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Colleen Mettler, Vice President of Investor Relations. Please go ahead.

Good morning and thank you for joining us for Emerson's first quarter 2025 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 a 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 GAAP measures. I will now pass the call over to Emerson's President and CEO, Lal Karsanbhai, for his opening remarks.

Thank you, Colleen. Good morning. Today marks the anniversary of my fourth year as CEO of Emerson. I reflect on this time with tremendous admiration and gratitude for what we have accomplished as a team to deliver on our collective vision.

Thank you to the Emerson board of directors for your trust and support, to the management team for your commitment and energy and most importantly to the 70,000 Emerson employees around the world for your dedication and deep care for our customers, our communities and each other. All of you make me better. Yesterday, alongside the Emerson board of directors, employees, community leaders, local CEOs and Emerson retirees, we held the grand opening ceremonies for our new global headquarters in St. Louis.

It was an exciting day. The modern offices align our work environment with the industrial technology company we created, an environment that fosters innovation, collaboration and inclusiveness. Thank you to the Emerson leaders, who brought our new space to life. I remain as energized as I was on February 5, 2021 about the future of our company.

Please turn to Slide 3. We are excited about our Q1 performance and the outlook for the year as healthy market fundamentals and our Emerson management system have positioned us to capitalize on value creation opportunities. Our process in hybrid markets continue to demonstrate stable demand as secular drivers propel continued investment in automation technology to drive efficiency, reliability and safety. Energy security, nearshoring initiatives and energy transition commitments are driving sustained spend in LNG, life sciences, power and metals and mining. We saw sequential orders improvement in our discrete businesses although the amplitude was a little softer than expected as momentum in industrial, semiconductor and discrete MRO was offset by muted performances in automotive and factory automation.

We are expecting discrete orders to turn slightly positive in Q2 with a more meaningful orders ramp in the second half. We saw robust underlying demand for our software solutions across the portfolio with 10% growth in ACV, or annual contract value, led by double digit growth from control systems and software. Emerson again executed at a world-class level and demonstrated the profitability of our transform portfolio as margin leverage, adjusted earnings per share and cash flow all exceeded our expectations. Q1 underlying sales were inside the guide.

Now I'll go into more detail on the next slide. We remain confident in our ability to deliver our 2025 plans and are energized by the robust operational start to the year and sustained high level performance. We are pleased to reiterate our guidance for underlying sales, adjusted earnings per share and free cash flow with outstanding execution offsetting the profitability headwinds from the large movements in FX since our initial guide. Additionally, we are increasing our expectations for operating leverage for the year to the 70s from the mid-40s.

The growth and profitability of the Emerson portfolio is evident supported by our exceptional team, world-class technology and differentiated Emerson Management System. Last week we took a significant step forward in the final phase of our portfolio transformation by reaching an agreement with AspenTech under which Emerson would acquire all outstanding shares of AspenTech common stock not already owned by Emerson for $265 per share pursuant to an all cash tender offer. You can find our comments regarding the AspenTech agreement and pursuant tender process in our January 27 press release. And we will not be commenting further until appropriate.

The strategic alternatives process for safety and productivity is still underway and we will provide an update when appropriate. Now I want to spend a few moments to talk about tariffs. In 2018, the United States enacted Section 232 and Section 301 tariffs, primarily targeting exports from China. At that time, we acted immediately to use price and surcharges to protect profitability and we also embarked on a program to de risk our supply chain for raw materials, sub-assemblies and finished goods.

The impact of those tariffs was de minimis due to our swift actions and ability to capture price. The current tariff situation is fluid, but based on our supply chain regionalization strategy, learnings from prior tariff responses and planned price actions, we feel very good about our position. Starting with China, we do not expect a material impact based on actions taken since 2018. Next, we expect the impact from Canada to also be de minimis as we do not have any material exposure there. Last, the situation in Mexico is evolving and we are prepared for a variety of scenarios.

We are ready to implement price and surcharges to protect the P&L commitments of the company. And these assumptions are embedded in our guide. Please turn to Slide 4. Q1 once again showcased Emerson’s ability to consistently execute. Underlying orders were up 1% year-over-year, led by healthy processing hybrid markets, which were up low-single digits despite a difficult comp from the prior year, which benefited from the timing of mega project bookings.

Orders growth was led by robust demand in the Middle East and strength in the U.S., both from MRO business and several project awards. We saw exceptional demand growth in our power business, as well as continued strength in energy and energy transition projects globally. Chemical in the Middle East and Americas continues to see strong investment from capacity expansion and modernization efforts. Demand in China remained muted as strength in power was offset by weakness in chemical and discrete end markets.

Underlying sales were up 2%, led by sustained strength in our process and hybrid businesses, which were up mid-single digits. We saw healthy activity in power and energy markets globally with sustained capital project momentum as customers are moving to meet the demand for energy security and affordability, as well as increasing electricity demand. Robust project activity in the Middle East offset softness in Asia and we saw strength in North America, MRO; and Latin America broadly. MRO also performed well in the quarter, representing 64% of sales.

Gross profit margin was a record 53.5%, reflecting the value of our transformed portfolio. We also delivered record adjusted segment EBITDA margins of 28%, a 340 basis point improvement driven by strong operational performance including price cost management, mix, and the benefits of cost reductions and synergy realization. This profit performance in addition to the impact of FX, drove our operating leverage significantly above our guide. Adjusted earnings per share exceeded expectations, as $1.38 was above the top end of our guide and up 13% year-over-year.

Emerson also delivered strong free cash flow of $694 million, a margin of approximately 17% and up 89% versus Q1 2024. Additionally, Emerson completed approximately $1 billion of share repurchase in the quarter as guided. Mike Baughman will provide additional color on our financials in a few slides. Please turn to Slide 5. Emerson’s innovation and differentiated product portfolio continues to be recognized by our customers and industry experts. And I’d like to highlight two recent awards recognizing our DeltaV business.

In December, Emerson’s DeltaV Edge Environment was one of 10 products recognized as a 2024 Processing Breakthrough Product. Processing’s annual award honors innovative technology solutions that made significant contributions to increase efficiency, productivity, safety and profitability in industrial processing operations. DeltaV Edge Environment was selected, because it is its first of its kind, integrated software solution to help customers access and contextualize data to improve enterprise operational performance. It also enables customers to run AI tools on the edge, moving the compute process closer to the intelligent field to make better use of their data.

We also recently released DeltaV Edge Environment 2.0, which now supports batch data integration to help life sciences, chemical and other batch processing industries bridge the gap between OT and IT applications. DeltaV Edge Environment 2.0 provides secure contextualized DCS data to help customers deploy advanced analytics, AI and machine learning at the edge or in the cloud to make better operational and business decisions. This release is another step forward in our vision to bound this automation. As it helps to eliminate data silos and drive competitive advantage.

Emerson was also awarded the 2025 IoT Breakthrough Award for industrial IoT innovation of the year for its DeltaV workflow management software. This year's program attracted more than 3,850 nominations globally. And the award recognizes Emerson's next-generation Software-as-a-Service solution to help life science companies more efficiently develop, scale and manufacture life-changing therapies. DeltaV workflow management provides a cloud-based solution with simple recipe authoring, execution and electronic data capture, which helps life science customers scale and deliver drugs to market safely, efficiently and quickly.

Emerson has been recognized every year by the IoT Breakthrough Awards since their inception due to our industrial technology portfolio, driving innovation across the world's essential industries. Please turn to Slide 6. We see significant opportunity in front of us for LNG. When we announced LNG as part of our energy transition growth platform in 2022, we expect that the current wave to add approximately 250 million tons per annum of operational capacity, predominantly across North America and the Middle East and Africa. While we are approximately two-thirds through the initial 250 MTPA, we are seeing large incremental opportunities as additional projects are announced to meet the world's growing demand for gas.

LNG will continue to play a large role as a transition fuel, and we will also benefit from a rising demand for power generation. An important milestone in the LNG project timeline is when an EPC is selected because this typically starts the process to award automation, which can take up to a year. In 2024, only 18 MTPA was awarded to EPCs, partly due to the U.S. moratorium on export licenses. The LNG project pipeline continues to see significant growth, and we have solid visibility into a potential 80-plus MTPA per year being awarded to EPCs over the next three years as the moratorium has been lifted, and the LNG wave is proving to be larger than we had initially expected.

These are large, complex projects in which our differentiated portfolio, global scale and demonstrated project execution capabilities to enable a strong value proposition for customers. We continue to see an opportunity for automation content of approximately $10 million per MTPA of liquefaction across our leading valves, instrument and control system and software portfolio. We have continued to see a win rate of approximately 50% for the full portfolio and greater than 50% for control systems in large LNG projects and are seen as a premier automation supplier globally. For example, around 70% of the world's LNG flows through Emerson valves.

And we have won control systems on six of the last 11 projects awarded. Given the incremental opportunity for projects expected to move forward and our projects go, we see a potential for greater than $1 billion in Emerson orders over the next few years. We were recently awarded one such key win, Cedar LNG, a floating LNG facility in British Columbia. Cedar LNG is a partnership between Pembina and the Haisla Nation is being executed by a leading EPC, Black & Veatch.

Emerson will provide our leading technology from across the automation stack, including valves, instruments, control systems and optimization software. Emerson was selected through our demonstrated FLNG expertise and global reach. Please turn to Slide 7. As we communicated last year, power is an area where we have seen strong orders growth as the fundamental opportunities in this sector continue to accelerate. As such, we are now classifying traditional power as a growth platform for Emerson.

Power and Renewables represented approximately 10% of sales in 2024, and Emerson is poised to capitalize on positive trends across the power landscape as global project investment continues to increase in response to rising electricity demand forecasts and grid complexity. Installed renewable capacity globally is expected to triple by 2030, taxing an aging grid developed for the one way flow of electrons. It is estimated that over $3 trillion of grid infrastructure investment is required by 2030 to support electrification and renewable energy. Utilities are also making large investments for incremental generating capacity to a mix of greenfield, brownfield and modernization projects.

Emerson has leading solutions across the technology stack to serve customer needs for power generation, transmission and distribution, including our industry-leading Ovation Control Systems, control valves and AspenTech’s digital grid management software. Our Ovation Control System technology currently automates around 1.8 terawatts or 20% of the electricity generated globally, including 50% of power generated in the U.S. and we also have a large installed base in power across our instrument and valve portfolio. These projects include many types of generation and I want to highlight our strength in combined cycle gas plants and nuclear power, including a recent win in nuclear.

Ovation automates 18 of the 20 largest combined cycle gas plants in the U.S. and approximately 100 nuclear reactors globally also use the Ovation technology. Our control valves were the first ever to receive ASME certification decades ago for use in nuclear facilities and have been installed in approximately 90% of the world’s nuclear plants. Emerson has the most complete portfolio of nuclear grade isolation, control, and safety valves and has been serving customers in the nuclear power industry for decades. With nuclear power sales of approximately $325 million last year.

Emerson’s expertise in intelligent devices for the nuclear power industry was critical to recently winning an award for the Sizewell C project in the UK. Within the project, Framatome will deliver two pressurized water reactors that will generate 3.2 gigawatts of electricity, powering the equivalent of around 6 million homes for 60 years. Emerson will provide valves and instruments and was selected for our innovative technology and long history of high quality solutions. Please turn to Slide 8. We are in a resilient capital cycle with a healthy strategic project funnel and I’d like to walk through some updates to align with our current portfolio and market opportunities.

As discussed on the prior chart, we are now reclassifying our traditional power funnel as a growth platform. Additionally, we have owned Tesla measurement for a year and integrated into our processes including how we pursue projects and manage the business. While semiconductor has been in a tough cycle, we see it as a driver of future growth supported by macro trends such as near shoring, advanced packaging and ubiquity of chips. We have included the large semiconductor project opportunities currently valued at $300 million and are classifying it as a growth platform.

With this addition, our funnel now is at $11.5 billion. Excluding semiconductor, our funnel is $11.2 billion consistent with last quarter and up 7% year-over-year. Many verticals in the funnel were up double-digit year-over-year led by Life Sciences, LNG, sustainability and decarbonization, nuclear and traditional power. Combined with the approximately $400 million of project awards in the quarter that exited the funnel, this showcases a constructive environment in which customers continue to invest and advance projects.

I’ll now turn the call over to Mike Baughman.

Thanks, Lal, and good morning, everyone. Please turn to Slide 9 to discuss our first quarter financial results. Underlying sales growth was 2% led by our process and hybrid businesses, which were up approximately 5%, while our discrete businesses including safety and productivity were down approximately 4%. We continue to see strong performance from our growth platforms, which were collectively up mid-single digits, led by industrial software, energy transition which includes LNG and Life Sciences.

Investment across greenfield, brownfield and modernization projects continues at robust levels. Price contributed 1.5 points to growth. Underlying growth was up 4% in Asia and the Middle East and up 3% in the Americas. Europe was down 2%.

Software and control grew 4% while intelligent devices grew 2%. Backlog increased slightly to $7.3 billion, sequentially and excluding FX, total backlog was up 4% led by our process and hybrid businesses, which were up mid-single digits while our discrete businesses were up low single digits. Adjusted segment EBITDA margin improved 340 basis points to 28% a record high. Margin expansion was driven by favorable price and net material inflation, mix, the benefit of cost reductions and synergy realization.

Operating leverage of 265% exceeded our guide due to outstanding profit performance and the effect of foreign exchange rates on margins. Adjusted EPS grew 13% to $1.38, up $0.16 and is a strong start to the year. I will discuss adjusted EPS in more depth on the next chart. Lastly, free cash flow was $694 million, up 89% versus the prior year.

This strong performance was driven by higher earnings, improved working capital and tailwinds from the prior year cash outflow of approximately $100 million for acquisition related costs and integration activities. Free cash flow margin for the quarter was approximately 17%. Please turn to Slide 10. We delivered another exceptional quarter operationally in Q1. Adjusted earnings per share increased $0.16 from the prior year due solely to operations. Software & Control led the growth contributing $0.09 and Intelligent Devices contributed $0.07. Corporate and other items netted to zero as headwinds from stock comp and pension were offset by an FX tailwind from an unfavorable impact last year.

Overall, adjusted EPS grew 13% year-on-year to $1.38. Please turn to Slide 11 for details on our Q2 and full year 2025 guidance. The sustained momentum in process and hybrid markets and our strong Q1 operational performance put us in a position to reiterate our full year 2025 guidance for underlying sales, adjusted EPS and free cash flow. Overall, we expect our process and hybrid businesses to grow mid-single digits for the year, supported by backlog and a resilient funnel. We have lowered our full year outlook for our discrete businesses to the low single digit range.

Our discrete businesses have started the year slower than expected, but we expect a meaningful recovery against easier comps in the second half. As Lal mentioned earlier, China demand has been muted, but we are looking to see growth in the second half as we are expecting recovery in chemical and discrete with power continuing to be strong in the region. We are holding underlying sales at 3% to 5% but lowered GAAP net sales guidance to 1.5% to 3.5% due to a foreign exchange headwind of approximately $350 million as the U.S. dollar strengthened at the end of Q1. This FX movement unfavorably impacted adjusted EPS approximately $0.08, which we have predominantly offset with our strong Q1 operational performance to hold our prior guidance of $5.85 to $6.05 per share.

We are increasing our expectations for 2025 operating leverage to the 70s versus the mid-40s guidance from November due to the operating performance in Q1 and the impact of FX on leverage. We are reiterating our free cash flow guidance of $3.2 billion to $3.3 billion. For the year, we expect to return approximately $3.2 billion to shareholders through dividends of approximately $1.2 billion and share repurchases of approximately $2 billion, of which we completed approximately $1 billion in the first quarter as planned. In the second quarter, we expect underlying sales to be up 1% to 2% and FX to be unfavorable by approximately 1.5 points.

Our growth reflects tough prior year comps for our process and hybrid businesses and continued softness in discrete. However, discrete volumes are expected to be up sequentially and better on a year-over-year basis compared to the Q1 year-over-year change. We expect adjusted segment EBITDA margin of approximately 26.5% and adjusted EPS between $1.38 and $1.42. Consistent with November's guide, our current guidance includes safety and productivity and a 57% ownership of AspenTech. We have provided the contribution of safety and productivity as a reference for investors to understand when an exit of this business could look like.

For the year, we continue to expect safety and productivity to contribute approximately $0.48 of adjusted EPS and approximately $200 million of free cash flow on flat underlying sales. Regarding AspenTech, we are expecting $0.11 in our Q2 adjusted EPS guide and $0.44 to $0.46 for the year, also the same as communicated in November. Finally, regarding the AspenTech transaction, while the effect of the pending AspenTech transaction is not part of our adjusted EPS guidance today, if we had assumed a successful close in the first half of calendar 2025, the minority buy in would not have changed our current guidance range of $5.85 to $6.05. And with that, we will now turn the call back to the operator for Q&A.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jeff Sprague from Vertical Research. Please go ahead.

Hey, thank you. Good morning, everyone. Just – and Lal thanks for the color on the geographic and congrats on the anniversary. I didn’t realize today was the day. Could you just be a little more specific on Mexico? Maybe the size of your COGS down there and what parts of your business are most highly exposed?

Good morning, Jeff. Thank you. Good to hear you. Now, look, I think we feel very comfortable obviously with the understanding of the exposure related to potential tariffs in Mexico. We’ve done the work with our businesses to assess the required price and surcharge activities that we’d have to put in place and we’re ready to go. But I’m not going to go into the details on COGS, et cetera.

And then on the discussion on discrete that Mike went through. Your commentary on discrete is collectively legacy, Emerson discrete plus test and measurement. Is there any distinction to be drawn between what you’re expecting for the remainder of the year in those two businesses in terms of their trajectory or other factors?

No, that’s a correct interpretation. As we referenced the end market, we are referencing those two businesses. The color I gave really applies across both as we have exposure in all markets obviously certainly one or two weighted one way or the other. Strength in semiconductor in the quarter, which was encouraging to see, certain elements of MRO were stronger, and industrial applications of those products.

The offset there we’re watching very carefully is broader factory automation and of course automotive.

Great. Thank you.

Thank you.

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

Hey, good morning.

Good morning, Steve.

Just a kind of a question on like a little bit of a nit, which is the forex side. I think it was a headwind on sales but looks in the earnings bridge on in the slides that it was a benefit to EPS of like $0.04 or something. Can you just explain what’s going on there?

Yes, Steve, it’s Mike. The benefit of $0.04 was largely some transactional FX that was in the prior year that didn’t happen in the current year. So we had a number of losses that didn’t emerge. And again, that’s not the translation of the P&L. That’s just translating the non-functional balance sheet pieces. And that’s the $0.04 that we’re referencing.

Okay. Great. And then just one follow-up on the incrementals. I mean like super strong core incrementals here.

A little bit tough to explain just by operations. Is there – did you guys have raw material deflation this quarter or is that just a mix impact? I mean it was pretty much across the board. So just curious as to maybe a little bit more on the bridge for the profits, whether that’s deflation or beneficial mix?

Yes, Steve, Ram here. Yes. I think we certainly had positive price, 1.5 points of positive price. We had favorable net material inflation, which is the deflation you referenced.

We had strong mix, strong growth in AspenTech at good margins. So the mix was in our favor. So a lot of things went our way in the quarter as it relates to price cost, cost reductions and favorable mix to drive the incrementals that you saw.

Okay. Great. Thanks.

The next question comes from Andy Kaplowitz from Citigroup. Please go ahead.

Good morning, everyone.

Good morning, Andy.

Lal, so project funnel at $11.2 billion ex semi was pretty stable as you said versus Q4, but obviously there’s a lot of geopolitical and macro noise out there. So maybe just stepping back and opining on the ability of the funnel to continue to grow. I know you highlighted LNG and power. So did they for instance now lead growth versus let’s say clean energy type projects given the new U.S. administration’s focus?

And then could you comment on your visibility into process in hybrid markets continuing to grow mid-single digits? I know you reiterated that, but confidence level on that.

Yes. Thanks, Andy. That’s a great question. Certainly we have not seen any abatement in the commitment of our customers to not just make investments to increase energy security and affordability efforts, but also to decarbonize their operations.

They seem to be working hand in hand and that’s based on commitments that they have made to shareholders and employees and communities. So, we're continuing to see that across the world. Further, the investments in power generation seem to be relatively balanced. We certainly think that nuclear will have a – we're in the beginnings of a renaissance on the nuclear space with not just the extension of life of plants, but the recommissioning of – in the past mothball facilities.

There's three such in the United States that have been publicly announced so far. But in addition to that, combined soccer will play a big role. So gas burning, which ties back to the investments made in the field. But we're continuing to see acceleration as well in hydro, wind and solar investments.

And of course, the promise of hydrogen continues to be out there with significant investments being made in the Middle East, and use cases being developed in Korea and Japan for that energy. So watching all of those carefully don't really have a sense today or concern about a slowdown in a sustainability funnel and would expect that to continue to be robust through the quarter. In terms of process and hybrid. Yes, we are – we continue to be optimistic based on what we see in the marketplace.

Not just driven by the capital, but also by the modernizations and certainly by the MRO. 54% of total revenue in the quarter continues to be a very significant driver of our business and the profitability in the business as well. Ram and I are going to be traveling around, Ram will be in India and Asia. I'll be in the Middle East next week. We'll continue to get a sense with our customers of the investment, but nothing that we've heard to date would give me concern on the strength of the funnel.

It’s helpful. Maybe a preview of your trip next week. Like in terms of geography, obviously you mentioned China is still a little slow. Do you think China grows in 2025 and if it doesn't, can you offset it, for instance, with continued Middle East strength?

That's exactly right. We're down mid-single digits in China in the quarter. We do expect it to better towards the second half, but growth is something we're going to be watching carefully there. The strength really comes from two world areas, the Americas being one, driven by North America and the Middle east and Africa region.

That's the press. And then I will say on a tertiary basis, India and other parts of Asia as well. Ram, anything to add?

Appreciate it.

Yes, no, I think on China, certainly the one segment that we're watching very carefully, which is a significant part of our sales mix, is bulk chemicals. But there are pockets of activity in power, in exports. Certainly, we have a $20 billion installed base in China. We're driving that.

But China overall to your point, I think if we can drive to a flat year in China, I think that's what's baked into a plan. And as Lal said, the upside for us or where we have to really press hard is North America and the Middle East.

Appreciate the color, guys.

Thank you.

The next question comes from Joe O'Dea from Wells Fargo. Please go ahead.

Hi, good morning. Wanted to spend a little bit more time on the margins. It sounds like price cost was the biggest driver of the margin strength in the quarter and so maybe just confirmation around that and then as well, how you think about that dynamic moving forward is that easing and any color on the cost component of it that market-based costs or more Emerson actions?

Hey Joe, it's Mike. On price cost. Yes, it was a driver as it consistently is for us. I would say this quarter cost reduction was actually a bigger driver.

We did a lot of work last year in as you know, test and measurement with the integration and in the discrete business Measurement & Analytical. We did a lot of cost work that's reading through. We also got off to a great start on just discretionary cost control in the first quarter that I think we'll see some of that come back in the second quarter, and I'm really glad we did that given what we saw in FX and the FX headwind that we're going to face in the back half. The other thing that we thought that Ram touched on was mix.

There's business mix in there. The Aspen contribution in the quarter was significant. They had a very strong quarter, which drove the adjusted segment EBITDA margin up quite a bit. Now again that impact in Q2 won't be quite as big.

And then there was the FX that we touched on which also drove actually a full point of that 340 basis points in the quarter that we won't see. So, it was a combination of all of those things. We'll continue to see cost reductions in price as we do every quarter. And to give you a little more color, those are running ahead of inflation so it's accretive to the margin.

That's great color. And then, Lal just wanted to touch on your comment about being in the final phase of portfolio transformation, and how we think about that vis-à-vis sort of future M&A appetite. You think about sort of post portfolio transformation that we enter more of a bolt-on environment, but just overall what the future sort of portfolio priorities are?

Yes, thanks Joe. Yes. So, I'll reiterate what I said. I think three months ago.

This was a very significant transformative effort for the company. A significant amount of M&A activity to put us in the position that we are in now. And so on a go-forward basis, our focus will be on disciplined M&A around bolt-ons. We believe there are continue to be billion – sub billion dollar opportunities to bring technology into the company and expand our customer relevance.

But certainly returning cash to our shareholders through the dividend, share repurchase where appropriate as we committed to and investing back into our businesses. We have a great portfolio of technology opportunities for organic investment and that’s where the focus will be as we get through this transformation here, which is right in front of us.

Thank you.

Thank you, Joe.

The next question comes from Nigel Coe from Wolfe Research. Please go ahead.

Thanks. Good morning, everyone. Just want to come back to the second half inflection in the Discrete Automation and National Instruments. I mean easy comps I get and that’s very clear.

But what about any sort of near-term KPIs you’re tracking? I mean, obviously, we’re seeing some good news on ISM, but are you seeing any kind of orders inflection or book-to-bill above one? Anything to kind of give you confidence that that’s actually playing out?

Yes, Nigel, here – Ram here. First off we saw sequential orders growth in the Discrete business in the first quarter. So that’s a positive sign. Certainly segments where we’re seeing inflection is semis for National Instruments on the Test & Measurement side and also the broader business, the portfolio business, which is again representative of our customers, the broad-based 35,000 customers stocking up and distribution and integrators putting stock back in.

So that’s a good sign. Certainly, the North America activity in our traditional Discrete Automation business has been promising. So some green shoots, but again, the way the second half recovery for us will work is certainly sequential growth to the first half which I think is built in at a pretty nominal rate to the plan. But certainly on a year-over-year basis, the second half comparisons given the second half of last year will be more promising.

And so I think it’s a thoughtful plan as it relates to how we expect the markets to come back. And the green shoots have certainly been semiconductors portfolio and North America in our Discrete business.

Thanks Ram. That’s helpful. And then just switching to the LNG slides. Number one, did the moratorium have any impacts in terms of the – I mean, I’m sure it did, but how significant is the lifting of the moratorium on new LNG permits?

And then the pipeline, 35% in North America is a stunning number. Does your win rates vary across regions? I’m just thinking do you have a stronger win rate in North America versus global? And do you expect any sort of big order inflection in the back half of the year?

Thanks.

Yes. No, good question. No, certainly, the moratorium had an impact as investments paused. It was difficult, obviously, to think about financing – obtained financing in an environment where there was uncertainty on whether you could actually export the product.

So we saw the delays in place there, which resulted in a significantly lower amount of awards to EPCs in 2024, as I described. In terms of the win rate itself, no, look, we put significant effort over the last 2.5 years to create an understanding and develop relationships in North America to ensure that we could be in a winning position. But our story is even stronger, to be very honest, if you look at Middle East and Africa where the early projects existed in Qatar predominantly. And so we feel really good globally and our teams continue to operate and pursue in a very consistent fashion, and we’re in a very consistent action around the world.

Okay. Thanks guys.

The next question comes from Brett Linzey from Mizuho. Please go ahead.

Hey, good morning all.

Good morning.

Yes. I wanted to come back to the power and renewables portion of the funnel, pretty healthy contribution in the first quarter there on the project wins. Any context you can offer on the elongation of the sales cycle there or when these wins might begin to convert to the order backlog?

Yes, no, not really a whole lot of color. You can imagine, I think much like LNG; these are large, particularly when you're talking about additional capacity. Those are long lead time projects that take time to work themselves through backlog. I will suggest, however, and I'll ask Ram to add some color that in the modernizations or capacity expansions those go pretty quick.

They're a little faster to bring online. So it really varies when you're thinking about building a new combined cycle power plant, that's a five-year or six-year type of venture. Ram?

Yes, I think you said it. The modernization projects which actually had a significant impact in Q1 orders performance for us in power will go through faster in terms of conversion to sales. But certainly the nuclear projects which is a good portion of our funnel as well as the combined cycle greenfield plants take much longer to convert to sales.

Okay, got it. And then just a follow-up on orders, so up 1% in the quarter. What are you assuming for order growth for the year as part of this operating framework on the sales side? And then any color on book-to-bill embedded as part of the planning assumptions?

Yes, Brett, we don't forecast the orders publicly, so we're not going to comment on that. Book-to-bill was greater than one in the first quarter. Book-to-bill was greater than one and we will see our typical seasonal book-to-bill with the first half being greater than one and the back half being under one. And for the full year, I'll tell you that we're expecting book-to-bill to be about one.

Yes.

Okay, great. Appreciate the detail. Best of luck.

The next question comes from Deane Dray from RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Deane.

Hey, I signed on a bit late. I'm not sure if I missed this, but any comments on how January has gotten off?

The good news is being you didn't miss anything. We didn't comment on January. I'm not going to comment on it, but beginning of the quarter and we feel good about the guide we just put out there.

Okay. And I know there was a reference to mega projects and there's still lots of focus on where and how they play out. There was a reference to them in on the automation side. Just what's your setup? What's your expectation? How might there be some ways you benefit and some of the tarts that are coming, we think over the next 12 months?

Yes. Deane, Ram Krishnan here. On the project funnel, the areas where I think we are well positioned to certainly capitalize are twofold. LNG, which Lal described and in very much a detail and there's a big pipeline of new capacity – liquefaction capacity coming down the pipe, both in North America as well as in Qatar where we're well positioned and then certainly the power industry.

But across the board, activity in terms of chemical modernizations in North America, greenfield chemical in the Middle East, certainly life sciences diabetes driven drugs investments in the U.S. So there's a plenty of activity across life sciences and metals and mining as well where we feel pretty good. So the $11.5 billion funnel, which if you take semiconductors out was $11.2 billion and up 7% year-over-year represents a pretty robust set of activities across a diversified set of industries we're pursuing.

Great. Thank you.

The next question comes from Saree Boroditsky from Jefferies. Please go ahead.

Thanks for taking the question. You mentioned some of the cost and synergy actions you realized in the quarter is driving the margin. Could you just talk about how that plays out over the remainder of the year? I think you talked about some discretionary costs coming back starting in the second quarter. So maybe if we should expect a less of a benefit going forward? Thank you.

Well, yes, there will be a certainly compared to the first quarter; there will be a tempering of some of that cost reduction, but the cost reduction benefits will continue throughout the year. I think the other thing that we touched on that's important to think about is gross margin in the first quarter was particularly high due to mix and that will temper a bit as the year goes on as well. So, I touched on the other drivers as you think about moving forward in comparing the first quarter to the rest of the year, particularly around FX, which was the one point in the quarter. But we will continue to drive cost reductions throughout the year and that will be an uplift to the margin as we move forward.

Yes, you said it, Mike. I think price cost, which was positive in the first quarter, continues through the year. Cost reductions, which was positive in the first quarter continues through the year. What will change is fundamentally the mix dynamic, which was hugely positive and Q1 and drove the 28% EBITDA margin at the segment level will change.

We've modeled that into the year as well as dynamics around discretionary spend, which was throttled in the first quarter. Some of that, as Mike referenced will come back. So that's how I would think about modeling margins for the rest of the year.

Great. And just a quick one on the discretionary commentary you talked about factory automation and auto as markets you're watching. Just maybe comment on what you're seeing from both of those and how you expect those to potentially accelerate in the second half?

Yes, I mean both those markets have remained pretty depressed auto very depressed, particularly on the EV side. And then certainly on the factory automation though, we've seen pockets of activity in North America, Europe, Germany and then certainly China where we have that exposure, have been muted. We are not expecting significant recovery on an absolute basis as we move into the second half. But the power of easier comparisons in the second half will drive growth in both those segments and that's how it's modeled in for the rest of the year.

The next question comes from Christopher Glynn from Oppenheimer. Please go ahead.

Yes, thanks. Just wanted to ask about the overall pace of control system competitive conversions. I think that's part of your story, a lot of end market focus today. But curious about win rate trends as you leverage the combined technology portfolio across Emerson for competitive displacement and any updates on any revenue model changes there in terms of the install value versus recurring maintenance with the control system side of the business.

Yes, I mean no major changes as it relates to, I think the K [ph] as the installed base win and the MRO conversions. That's pretty consistent with how we have traditionally operated in our control systems business, both with DeltaV innovation. I think the competitive displacements, particularly in our power business continue. That's been a strength of how we've driven differentiated growth in that space and certainly with DeltaV as well.

But we couldn't point to any significant change in the level of activity there. I think it's consistent with how we've performed in the past and we continue to gain momentum.

Great. And then you talked a lot about margins on an overall Emerson level. I think in particular, Measurement & Analytical and Control Systems & Software hit kind of new threshold levels of profitability. And that doesn't get explained by AspenTech having a really strong quarter for Emerson's overall mix. So curious if you could talk a little bit about those couple segments profitability.

Yes. So, for the systems business, they had a very strong gross margin quarter. They had some favorable closeouts of projects due to strong execution. And they also benefited quite a bit from the SG&A spend during the quarter.

And then on the MSOL business, the Measurement & Analytical business, they had pretty consistent gross margins quarter-to-quarter, very good gross margins, but consistent and benefited from the SG&A. And that was in part due to the work that was done last year to take some cost out of that cost base. And they had some discretionary as well. So that's what was going on with those two.

And we're really pleased with the performance there.

Sounds great. Thank you.

This concludes our question-and-answer session and the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.