Q4 2025 Earnings Call Transcript

Greetings, and welcome to the Emerson Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Colleen Mettler, Vice President, Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining Emerson's Fourth Quarter and Full Year 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 the slide presentation, which is available on our website. Please turn to 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. Before we begin the presentation, I would like to highlight our upcoming 2025 investor conference on November 20. We are looking forward to presenting on our transformed company, a global automation leader set to deliver a differentiated value creation framework. We will discuss the drivers of our 4% to 7% organic growth framework, detail our plans for additional margin expansion and outline our capital allocation priorities. Additional information about this event is now available on our website.

I will now pass the call over to Emerson's President and CEO, Lal Karsanbhai, for his opening remarks.

Thank you, Colleen. Good morning. 2025 marked the 135th anniversary of our company. The Emerson Electric Manufacturing Company was established in St. Louis, Missouri in 1890. The development of a reliable electric motor was the vision of 2 Scotland born brothers, Charles and Alexander Meston, made possible by the financial backing of John Wesley Emerson, a former union army officer, judge and lawyer.

Throughout nearly 1.5 century of economic cycles, The Great Depression, 2 World Wars, significant technology innovations and a handful of iconic industrial leaders who navigated uncertain waters, our company completed 2025 stronger than ever. We have transformed. We have momentum in our markets. We have great people, and we are optimistic about our future.

Thank you to the 70,000 Emerson employees around the world, to our management team, our Board of Directors and our investors for your trust. I am honored to work alongside each and every one of you in our value creation journey. Please turn to Slide 3. Emerson continues to see resilient demand as customers invest in automation technologies to drive digital transformation and enhance efficiency, reliability and safety in their operations. Underlying orders grew 6% in the fourth quarter, driven by sustained demand in our growth verticals and accelerating orders growth in Test & Measurement up 27% and exceeding our expectations.

We had a robust finish to the quarter, and I will discuss more details on demand on the next slide. 2025 was another solid year from Emerson. Underlying sales in the fourth quarter were up 4%. Execution was strong in the quarter with adjusted segment EBITDA margin of 27.5% up 1.3 points. We delivered $1.62 adjusted earnings per share in the quarter, at the top end of our guide.

For the full year, underlying sales grew 3%, slightly below expectations as Europe and China were softer than initially expected. Emerson delivered strong profitability with adjusted earnings per share of $6 up 9%; and free cash flow of $3.24 billion up 12% year-over-year. Annual contract value of our software grew 10% year-over-year and ended the year at $1.56 billion. For fiscal 2026 we are guiding sales growth of 5.5% with underlying sales growth of approximately 4%, supported by sustained investment in our growth verticals and robust performance in Test & Measurement.

We expect to deliver adjusted segment EBITDA margin of approximately 28% and adjusted earnings per share of $6.35 to $6.55, reflecting strong operational execution. ACV is projected to grow 10% plus as customers further invest to advance their digital transformation ambitions. We plan to return approximately $2.2 billion of capital to shareholders, $1 billion in share repurchases and $1.2 billion in dividends including a 5% dividend per share increase. Please turn to Slide 4. Emerson delivered 6% underlying orders growth in the fourth quarter. marking our third consecutive quarter of mid-single-digit growth.

This reflects sustained momentum across key geographies, and we are seeing broad-based strength in North America, India and the Middle East and Africa. However, demand in Europe and China continues to be soft. MRO spend across our $155 billion installed base remains resilient, supporting a healthy pace of business led by strength in North America. The capital cycle remains constructive and large project bookings in power, LNG, life sciences and aerospace and defense contributed to a better-than-expected finish to September.

Momentum in power continues to build and orders in our Ovation business were up 18% in the quarter and 30% in the year, driven by greenfield projects and modernization. Test & Measurement orders were up 27% in the fourth quarter with robust growth in all regions led by semiconductor, aerospace and defense and a broad-based portfolio business. Please turn to Slide 5. Emerson continues to see success in our growth platforms. Our technology leadership and ability to deliver differentiated solutions are enabling us to capture large-scale opportunities and drive sustainable growth.

And I'd like to highlight a few key wins from the quarter that supported our 6% orders growth. First, I will highlight 2 projects in power demonstrating strong adoption of our Ovation 4.0 Distributed Control System. In August, we talked about Ovation winning 2 greenfield combined cycle plants with Entergy. Ovation 4.0 has now been selected by Entergy to automate 3 more power generation facilities.

Entergy today provides electricity to 3 million customers and the 5 facilities will provide approximately 3.1 gigawatts of generation capacity. In another win, Ovation 4.0 was chosen to replace the existing excitation system at the dual nuclear power station in Belgium, unifying the control systems across the site. Doel provides around 15% of the country's electricity, and Emerson will help ensure the delivery of safe and clean baseload power. Next, Emerson is excited to announce its support to Bechtel Energy and Woodside Energy in the automation of the Woodside Louisiana LNG project.

The liquefaction and export terminal in Calcasieu Parish is a premier LNG project designed for safe, reliable and efficient operations, delivering LNG to global markets. This development can produce 16.5 million tons per annum with a permitted expansion capacity of up to 27.6 million tons per annum. Emerson is proud to be chosen as a key automation partner for Bechtel Energy. Last, Emerson was selected as the automation provider for 3 manufacturing facilities being built in Indianapolis by a large U.S.-based life science customer, a major step forward in their near-shoring initiatives and in advancing innovation and efficiency.

Emerson will provide our leading DeltaV Control Systems & Software portfolio to enable reliable, scalable and data-driven automation. Through this collaboration, Emerson will deploy state-of-the-art DeltaV technologies designed to accelerate the time to market of next-generation weight management drugs, enhanced production performance and ensure regulatory compliance. These wins reinforce our position as a global automation leader and demonstrate the strength of our portfolio in addressing the challenges our customers face today. Our continued success is driven in part by our industry-leading innovation, and we are consistently investing to advance our technology, including investing 8% of sales in 2025. In the fourth quarter, we launched 2 AI-powered applications to unlock productivity and workflow automation.

First, we launched Guardian Virtual Adviser to enhance our DeltaV life cycle management software. This solution combines Emerson's deep domain expertise and decades of data with conversational AI to help customers quickly resolve issues, optimize system performance and reduce downtime. Currently available for DeltaV, we are innovating it to expand across Emerson's automation platforms to support smarter decisions and operational excellence across the plant life cycle. We also introduced AspenTech's subsurface intelligence, a cloud-native AI-powered platform that accelerates decision-making for seismic interpretation.

This AI platform automates workflows and improves collaboration across disciplines to help customers optimize production and reduce operational silos. Please turn to Slide 6. Emerson executed well in a fluid macroeconomic environment and continues to deliver excellent operational performance. Growth reflected sustained momentum in North America, India and the Middle East and Africa, offset by persistent softness in Europe and China. LNG, power and life sciences continue to attract significant investment globally and collectively were up 11% year-over-year.

Sales in Test & Measurement accelerated sharply as we exited the year up 12% in the fourth quarter with broad-based strength. Our Test & Measurement business continues to gain market share driven by innovation and channel optimization. MRO for the company represented 65% of sales. Emerson achieved annual records for both gross profit margin of 52.8% and adjusted segment EBITDA margin of 27.6%.

Margin expansion was driven by strong price cost, higher mix of software and the benefit of cost reductions in synergy realization offsetting a 20 basis point impact on gross profit from tariffs. We made meaningful progress integrating AspenTech, realizing $50 million of synergies in 2025 and now plan to achieve $100 million in run rate synergies by the end of 2026, 2 years ahead of plan. Earlier this year, we completed all the actions to achieve our commitment of $200 million of run rate synergies for Test & Measurement. Adjusted earnings per share of $6 was consistent with our guidance.

Finally, we generated $3.24 billion in free cash flow, exceeding our August guidance of $3.2 billion and in line with our initial guidance as we offset approximately $200 million of acquisition-related headwinds. Our 2025 performance underscores our commitment to operating results and positions us well to continue investing in growth and returning capital to shareholders. Emerson's alignment with secular trends, leading technology and improving orders momentum reinforce our confidence in our 2026 plans. I will now turn the call over to Mike Baughman to discuss our 2025 results in more detail and expectations for 2026.

Thanks, Lal, and good morning, everybody. Please turn to Slide 7 for a more in-depth look at our 2025 financial results. Underlying sales growth was 3%. Growth was led by Software and Control, which grew 5%; and Intelligent Devices grew 2%.

Our process and hybrid businesses were up 4% and were resilient throughout 2025. Our discrete businesses finished the year up slightly at 1% with lingering weakness in automotive and factory automation. While our discrete businesses accelerated through the year, year-over-year volume was down and represented about a 1 point headwind to Emerson sales growth. Pricing contributed 2.5 points to growth as expected. Underlying growth was 5% in the Americas and 3% in Asia and the Middle East and Africa, while Europe was down 2%.

Our backlog ended the year at $7.4 billion. Backlog was up 3% year-over-year due to second half orders growth of 5%, which positions us well for 2026. Adjusted segment EBITDA margin of 27.6% exceeded expectations and was up 160 basis points year-over-year. 50 basis points of this expansion was due to a favorable software contract renewal year in 2025 and the remaining 110 basis points of improvement came from positive price cost, the benefit of cost reductions and synergies from the Test & Measurement and AspenTech acquisitions, which more than offset inflation and tariffs. Adjusted EPS came in at $6, a 9% increase year-over-year, and I will provide more details on the next slide. 2025 free cash flow exceeded our expectations.

The free cash flow growth was driven by higher earnings and improved working capital efficiency, which helped offset approximately $200 million of transaction-related costs. Our 2025 free cash flow margin was 18%, up 140 basis points from the prior year. Overall, these results underscore the strength of our portfolio, the resilience of our end markets, and our ability to execute in a dynamic macro environment. Please turn to Slide 8, where I will bridge 2025 adjusted EPS from the prior year.

Operations delivered $0.62 of incremental EPS in 2025, which included a $0.15 benefit from higher software renewals in the year. Excluding this benefit, solid execution from operations contributed $0.47 reflecting continued margin expansion, segment mix and synergy realization from Test & Measurement and AspenTech. Nonoperating items were an $0.11 headwind due primarily to pension of $0.09 and stock-based compensation of $0.02. Please turn to Slide 9, where I will discuss our 2026 sales outlook by region. The resilient demand environment we are seeing informs our view for 2026 underlying sales.

The Americas, India and the Middle East and Africa are expected to remain strong drivers of growth in 2026 with muted demand in Europe and China. The Middle East and Africa is planned to grow high single digits, supported by a healthy capital cycle and significant greenfield investments. The Americas are projected to be up mid-single digits driven by sustained strength in our growth verticals and MRO. Asia is forecasted to be up low single digits led by robust growth in India and momentum in Southeast Asia and Japan offsetting a flat China.

Europe is expected to be flat year-over-year. We expect growth to come from the trends that are benefiting the power, LNG, life sciences, semiconductor and aerospace and defense markets, which comprise approximately $6 billion of our $11.1 billion large project funnel. Power, including nuclear, is projected to see robust growth as electrification, modernization of the grid and data center trends drive substantial investment. Energy security and self-reliance as well as energy transition commitments are supporting global LNG projects.

Life sciences growth is projected to continue across greenfield projects and capacity expansions to meet demand for biologics and GLP-1s. Semiconductor is also expected to perform well in 2026, with expansions in North America driven by nearshoring investments and government incentives. Lastly, aerospace and defense is set to benefit from investments in new space projects and increased government spending commitments. Please turn to Slide 10 for an overview of our 2026 guidance.

For the full year, we expect sales to be up approximately 5.5% with underlying sales up approximately 4%, supported by a healthy pace of business, meaningful growth in Test & Measurement and approximately 2.5 points from price. We project Europe and China to remain weak. The year-over-year growth is also negatively impacted by about 1 point due to a software contract renewal dynamic, which I will discuss in more detail on the next slide. Full year adjusted segment EBITDA margin is expected to be approximately 28% reflecting strong execution and continued margin expansion.

Tax rate is modeled at 21.5% for the full year. We are guiding adjusted earnings per share of $6.35 to $6.55 and free cash flow of $3.5 billion to $3.6 billion. Turning to the first quarter. Sales growth is expected to be 4% with underlying sales growth of 2%.

Adjusted segment EBITDA margin is guided to be approximately 27%, and we expect to deliver adjusted earnings per share of approximately $1.40 in the first quarter. Please turn to Slide 11 for additional details on 2026 guidance. I would like to take a few minutes to provide further granularity on sales growth and to explain some dynamics affecting margins and EPS growth rates. Our Test & Measurement segment is planned to have high single-digit growth in both the first half and full year, while the Control Systems & Software segment is expected to be down low single digits in the first half due to a $110 million headwind from a lower value of software contracts up for renewal in 2026. This headwind is projected to be $120 million for the full year.

The underlying health of our Software businesses remains robust with ACV expected to grow 10% plus in 2026, but having fewer contracts up for renewal adversely affects GAAP revenues. This accounting dynamic does not affect cash flows and reverses through 2027 and 2028 when we expect to see tailwinds from renewals. The Intelligent Devices business group is projected to grow 3% in the first half and 4% for the full year with sustained strength in MRO across core verticals. Second half growth is supported by backlog phasing and the timing of project shipments.

Overall, Emerson expects to grow approximately 2% in the first half and 4% for the full year. Excluding the impact of software contract renewals, Emerson's growth rate is approximately 4% in the first half, 6% for the second half and 5% for the full year. Please turn to Slide 12 for additional detail on adjusted segment EBITDA margin and EPS guidance. Our Q1 adjusted earnings per share guidance of approximately $1.40 reflects strong operational execution despite a softer sales growth quarter and a tough comparison to Q1 2025. We expect EPS contributions from operations of about $0.05 and nonoperating items of approximately $0.04, offsetting a $0.07 impact from the software contract renewal dynamic just discussed.

As a reminder, Q1 2025 adjusted EPS of $1.38 included the benefit of several dynamics such as discretionary cost containment and favorable project closeouts in Control Systems & Software. It's also important to note that lower volume from renewals impacts Emerson's adjusted segment EBITDA margin by approximately 80 basis points in the quarter. For the full year, the renewal dynamic reduces adjusted EPS by approximately $0.15 and adjusted segment EBITDA margin by approximately 40 basis points. Operations is expected to generate about $0.50 of incremental EPS in 2026 with approximately 80 basis points of margin expansion from positive price/cost and the continued benefit of synergy realization from AspenTech and Test & Measurement.

Please turn to Slide 13 for a few comments on cash flow and capital allocation in 2026. As mentioned earlier, we are expecting free cash flow of $3.5 billion to $3.6 billion in 2026, representing approximately 10% growth, which will come from higher earnings and working capital efficiency. During the portfolio transformation, our capital allocation was weighted towards M&A. Increasing the dividend has been a priority for the last 69 years, but the annual increases to dividend per share were minimal during the transformation. Now that the transformation is complete.

In 2026, we plan to raise our full year dividend per share $0.11 or approximately 5%, which is a significant increase compared to prior years. This raise marks the beginning of our 70th consecutive year of increasing dividends and underscores that long-standing commitment. During the transformation, we consistently completed base share repurchases of $400 million to $500 million per year. 2023 and 2025 were significantly higher because we allocated a portion of proceeds from divestitures to share repurchase. For 2026, we intend to return approximately $1 billion to shareholders through share repurchase, which we have planned to be ratable throughout the year.

We previously communicated our intention to pay down approximately $1 billion of debt in 2026. That is still the plan and reflects our commitment to maintaining our strong A2A credit ratings. We ended 2025 with a net debt to adjusted EBITDA ratio of 2.3x and expect to end 2026 at approximately 2x. With that, we will now turn the call over to the operator for Q&A.

[Operator Instructions] Our first question comes from the line of Deane Dray with RBC Capital Markets.

Maybe just start with some clarification on the software renewal. Is this an accounting change that was impacting the guide here? Or is it really like the timing of your contracts that are up for renewal? And then related, you called out a benefit in your 2025 bridge of $0.15. Is that related to this?

Or is that separate? Because you are expecting to recoup this in '27 and '28 that you called out?

Yes. I'll start with the second half first, which is to say your understanding is correct. And thanks for the question on this contract renewal issue. It's an important dynamic that I want to make sure everyone understands.

So we have a portfolio of multiyear term license contracts that have renewal dates over several years. And each year, there are so many that are up for renewal. And this year, we had more than normal that were up for renewal, and that's what drove the $120 million increase that we're calling out on the bridges. Next year, we revert to something more normal, but it represents about $120 million headwind in 2026, and it is an accounting dynamic.

And remember, since these are multiyear term licenses, you recognize multiyears of the revenue at the time that you execute the renewal. And that revenue recognition pattern is one reason that the ACV or the annual contract value is so important, because ACV has the effect of smoothing out that accounting dynamic. And the other important reason to measure ACV is that it more closely approximates the cash that we can expect out of that portfolio in the next 12 months. So as ACV grows, the cash flows grow.

So you have it right. That is the item that we're talking about. It's not a change in our accounting. It's not a change in the accounting rules.

It's just an accounting dynamic that exists in revenue recognition for these multiyear term license contracts.

That's really helpful. And just to make sure I heard it correctly, there's no impact on free cash flow. Is that correct?

That is absolutely correct. And you made another point that I would like to reiterate, which is that this is a dynamic that will reverse in '27 and '28 relatively ratably over those 2 years.

Great. And then just as a follow-up on the Test & Measurement. This was above expectations in terms of orders. You called out some of the verticals.

Is there anything else in terms of -- have you really turned the corner here because this was an expectation that you would start to see this, and you did highlight some share gains. But just any other color on the dynamics of that business would be helpful.

No, Deane, there's significant momentum certainly across the 3 categories that I described: semiconductors; aerospace and defense, which has been relatively robust over the last 2 years to begin with. And then most encouraging has been the broad-based portfolio business and that's where the multitude of tens of thousands of customers sit. It touches just about every industry macro that you can name. And seeing that resilience in that business and the return to growth there gives us -- and broad-based geography gives us the confidence that momentum continues and that our guide on Test & Measurement for 2026 is solid.

Our next question comes from the line of Andrew Obin with Bank of America.

David Ridley-Lane: This is David Ridley-Lane on for Andrew Obin. Just a quick numbers question. Could we get the orders growth by process and hybrid, discrete, and Safety & Productivity in the quarter? And any color that you could give on how first quarter orders are shaping up?

Well, I think from an orders perspective, process fibrin orders, to your point, I mean, they stayed resilient at mid-single digits. Discrete recovered to driven by Test & Measurement, which exposed in the discrete markets into a high single digit and weights to that 6% orders growth that we reported. S&P orders remained flat to low single digits in the quarter. And we expect good momentum to carry through into the first quarter of this year.

David Ridley-Lane: And then in fiscal '25, excluding this timing dynamic, which I completely understand is driven by ASC 606 and was a long-standing driver of how AspenTech's results were reported. But excluding that impact, you had core ops of 110 basis points margin expansion in fiscal '25. You're guiding for 80 basis points in fiscal '26. It would seem like you have faster revenue growth, less tariff impact, further Aspen synergies. Are there any offsets to consider thinking about for margins in '26?

No, I don't think so. You've got it right. As we look ahead, we've got the drag of the renewals that's about 40 basis points. We've got some synergies and the operations continue to drive about 60 basis points, which is what the operations have been driving for really the last 2 years, right in that 50 to 60 basis points range and that's the margin expansion that we consistently talk about driven by the Emerson Management process and what we expect to continue into the future.

Our next question comes from the line of Andy Kaplowitz with Citigroup.

Lal or Mike, just digging a little bit more into that first half versus second half organic guide for '26. The growth in mechanics are what they are, but you also talked about the timing of shipments and how they support the second half growth. Are you expecting any sort of larger project order recovery and or change, for instance, in process markets to get you there? Or is it really just you have the visibility already in the back of the pipeline and everything is -- just talk about the visibility there?

Yes, Andy, Ram here. Yes, we absolutely have the visibility and the momentum that we had in terms of orders in the second half phases that backlog into the second half of 2026. That's point number one. Secondly, if you take out the software renewal dynamic, as Mike explained, the first half growth is 4%, the second half growth and for an overall growth of 5% minus the software renewal dynamic, which is the core growth you've got to look at and that sequential growth second half to first half versus that is about 11%, which is what we executed this year, albeit with a better backlog phasing going into the second half of next year.

So we feel relatively comfortable around the second half, first half guide and the software renewal dynamic is what shows up as the 2% and 6%. But in reality, it's 4% and 6% for a weighted average 5% through the year.

Thanks for that Ram. And there's obviously a lot of excitement about power markets. You gave us the data up almost 20% in orders in Q4 in Ovation, 30% for the year. But maybe you can give us a little more color on what you're expecting for '26. Obviously, there's a particular focus on nuclear.

You guys have pretty good share there. Maybe you could remind us of that. And order growth was a little bit lower in Q4 than for the year, but do you expect acceleration in '26 in that end market?

Yes, Andy. Lal here. No, certainly, we're excited about what we're seeing broadly, not just across generating capacity, but transmission and distribution investments, which, as you know, impacts our Aspen business. We expect to continue to see investments across combined cycle in the United States.

Coal and nuclear in China and nuclear broad-based across Eastern Europe and the U.K. I think the underlying dynamics of demand driven, of course, by data centers and by the age of the capacity that's in place today should give us a good, and we project a very good 3- to 5-year run in this segment of the business at high single digits to low double-digit growth.

Our next question comes from the line of Steve Tusa with JPMorgan.

Just wanted to clarify. So is the first quarter -- the first quarter orders should kind of sustain this, I don't know, like the 5% to 6% type of momentum that you saw in the 4Q? Is that the messaging?

Yes.

Okay. Okay. Great. And then just on the bridges, it's hard a bit to parse out the software impact.

But I think you have $0.50 of ops for the year, which I think is probably, I don't know, a 45% to 50% kind of core incremental. Am I getting into the right ballpark there? And then in the first quarter, you only have $0.05. Is there a reason why those incrementals may be a little bit weaker, kind of putting the software impact aside?

Yes. I think your leverage expectation is about right when you look at the quarter that way. When you look at first quarter, it's really this dynamic of last year being as strong as it was with that discretionary cost and some of the project closeouts and the EBITDA margin that quarter, I believe, was 28%, and so it's sort of a comparison dynamic.

Yes, and Steve. Yes, we leveraged the 265% in the Q1 of '25, and it just puts us in a -- it's just a tough comparison, not just -- even if you take out the software renewal dynamic, it's a tough comparison for our base operations, just given the dynamics Mike described.

Our next question comes from the line of Julian Mitchell with Barclays.

I just wanted to follow up a little bit more on the trends in Test & Measurement and discrete, automation. So I think in Test & Measurement, you're guiding still for high single digit growth later in the year despite the sort of pretty tough comp there. Maybe help us understand the visibility on that business. And then in the discrete world, any updates on some of the different end market trends, please?

Julian, Lal here, and I'll start and I'll have Ram add some color as well. Now certainly, we have a high degree of confidence in what we're seeing in 3 of the 4 test and measurement markets, aerospace and defense, semiconductor and then the broad-based portfolio business. However, and this bleeds over into your discrete question, the automotive business continues to be very weak. We're continuing to see weakness in the packaging machine making business, which is very Western Europe dependent, Italy, Germany and of course, impacted in China and the U.S. as well.

So that segment, what has been a traditional discrete market has -- is in the flat to low single-digit range, and you've got Test & Measurement in the high range that brings up our broad discrete orders. Ram?

Yes. And you said it. And I think from a geographic cut on the Test & Measurement side, very, very strong Asia driven by semicon and portfolio; a very, very strong North America driven by aerospace and defense, semiconductors and portfolio business; and Europe is probably our most muted region because that's where we have a disproportionate exposure to automotive and the EV side. Though, the aerospace and defense piece in Europe as well as the portfolio business is strong.

And then in the core discrete business, as Lal described, North America is probably the market where we have good low to mid-single-digit growth in the core discrete business, but Europe and China remain weak in the factory automation and automotive space, as Lal described.

That's great. And then just my follow-up question would be around, I know in the past, you'd mentioned some of the project funnel was tied to elements such as hydrogen, clean fuels, carbon capture and so forth. And I suppose domestically in the U.S., the outlook there is worse today because of the subsidy environment changing. I just wondered if that type of activity, if you are seeing pushouts there yourselves and if it represents much of your backlog or it was just something that was in the prospective funnel and never really came into the orders or backlog more fully?

Julian, thanks for the question. Nothing impacted in the backlog. These were projects that we've been highlighting as part of our funnel. there's been a significant reduction in the outlook of projects in this category on a forward basis. So we have adjusted our funnel accordingly, but none of it has been impacted in any backlog in the business.

So to give you perspective, the funnel that we showed today at $11.1 billion has approximately a $1.5 billion reduction in S&D projects. And so we've removed a large number of carbon capture and energy management projects. We retained those customer engagements that are still relevant at that point, but that's a very significant reduction in the value of the funnel related to S&D. And that's broad-based across North America, Europe and Asia.

And then just to add to that, Julian, the reason the funnel stays flat as we have seen a significant uptick in power generation, certainly LNG, and then continued build-out of the funnel in aerospace and defense and certainly life sciences. So overall, the funnel remains flat. But to your question, appropriately adjusted for the slowness in sustainability and decarbonization project, mostly in North America, but some in Europe as well.

Our next question comes from the line of Nigel Coe with Wolfe Research.

I'm going to probably ask a steeper question on the accounting for AspenTech, so please bear with me here. Can you just explain why this is a onetime issue? And just confirm that this is more of a first half '25 renewal issue comping that as opposed to something this year. So that's my main question.

And really, just maybe just talk about the difference in accounting for renewal versus a new contract and why renewals would have this kind of headwind?

Yes. Nigel, it's not necessarily a onetime event. It's, again, just how the renewal dates stack up in the portfolio of these multiyear term contracts. And when you go into a particular year, there's going to be a number of contracts that are up for renewal.

And whatever that is, is sort of the revenue opportunity for that year. And we are certainly, in fact, working a bit to smooth that out. But historically, AspenTech was not concerned with the wrinkles that happened because of this accounting dynamic. Again, I want to stress it's nothing new, and it's not a different accounting.

It's just the gap that is used on accounting for these contract renewal dynamics.

And Nigel, Ram here. Just to add to that. Now as you rightly pointed out, this dynamic is largely driven by the software renewals within AspenTech. And one of the initiatives we will continue to drive going forward is to manage the renewal dates as we renew these contracts to smooth them out in a fashion where we don't see these dynamics repeat as we move forward.

It's certainly going to be a tailwind in '27 and '28 given the reset in '26, but we want to make sure that going beyond '28, we don't have another year where we see these renewals build up in a favorable fashion to reverse in the next year. So it's an initiative now that we're driving the integration of AspenTech that Vincent Servello and the team at Aspen are driving. But it's a good question.

No. It's a dumb question, I'm sure. And then just thinking about that in the plan, the acceleration within ID from 3% to 5%, first half, second half. You called out some backlog timing.

Clearly, with that kind of timing, we're talking here about longer cycle projects. So I'm wondering, are these greenfield projects? And if you can give any details on some of the end markets that's driving that acceleration?

Yes, Nigel, Lal here. Again, I'll reiterate a point that Ram and Mike made earlier. It's important to note that adjusted for the renewals the first half to second half ramp is actually consistent with what we executed in 2025, which is a sequential 11% ramp-up. It would be 4% growth in the first half and 6% in the second half of 5% a year.

So that renewal dynamic because it is first half, predominantly first half loaded, really impacts and skews that ramp-up on the underlying business. But to your point, we feel great about the backlog situation. We have good visibility in our Intelligent Device business to execute this plan that we put forward.

And just the projects that you referenced that are loaded into the second half that we won in the second half of '25 are in life sciences, in power and LNG, many examples that Lal had in his script. But these are the very same projects, primarily power, LNG and life sciences that will phase into the second half of '26.

Our next question comes from the line of Amit Mehrotra with UBS.

Sorry, I dialed in a little bit late, so excuse me if this has been asked. But I wanted to talk about power gen, how that funnel is progressing. I imagine there's obviously a lot of electricity demand. Wondering if you could just talk about that and how much visibility you have and kind of at what point does Emerson enter kind of that power gen life cycle versus, say, a turbine?

Yes, thanks for the question. We are certainly energized by what we see in the power generation, distribution and transmission markets. Just in context of the funnel and the visibility that we have to the business, we added approximately $1 billion of projects into the $11.1 billion project funnel. That is capturing broad-based modernization and new capacity coming online over the next, let's say, 3 to 4 years.

The activity is very robust, not just in the United States, but broad-based into Europe and into China in this segment. That's one area of China growth that we did experience in 2025, and we expect that to continue into 2026. And just to give you perspective, Ovation today controls approximately 30% of all the power generated in the world: over 50% in the United States, over 30% in China, over 30% in Europe. And we have great visibility well ahead because, obviously, we're upstream around turbine and boiler controls to the construction cycle. So we're in those conversations today early with the utilities around the world as they plan out their investments.

Great. That's helpful. And just one quick follow-up on software. I know you have this renewal dynamic happening. But I guess I just wanted to ask how software annual contract value is trending versus your installed base? How do you expect that to kind of perform going forward? How do we think about like attach rate trends there?

Yes. Our ACV, we shared the data -- finished the year at $1.56 billion, up 10%. We expect that to continue into another double-digit year next year. So very, very solid in terms of adoption of software and the cash flow trends are trending with ACV with double-digit growth, and we're operating at a Rule of 45 when you look at cash flow and ACV growth from a software perspective.

So very positive trends and consistent with the long-range plan we laid out when we brought AspenTech in.

Our next question comes from the line of Brett Linzey with Mizuho Securities.

Just wanted to come back to the power discussion 1 more time. So you gave some great examples on the traditional side and talked about nuclear being robust. I know Emerson's valve and instrument content is about 90% of the world's nuclear reactors. Is there any way you can sensitize the content per new reactor or anything you can add on the aftermarket side that you can capture there?

Yes. So in a nuclear reactor or a nuclear power plant, I mean, Emerson, typically, if you get the full scope, which is obviously the control system, the instrumentation and the valves, we get $40 million of content for a complete greenfield nuclear reactor with an opportunity to deliver more than $40 million, $40-plus million over a 10-year annuity from an MRO life cycle services perspective. So that is kind of the scope we operate in nuclear, a lot of valves, instruments and control systems as part of that automation scope.

Okay. Great. And then maybe shifting back to Ovation. You saw the strength in orders this year, greenfield modernization. Is this predominantly the power vertical driving this or are you starting to see some sales synergies between Aspen and the legacy Emerson as you mine that installed base?

No. Certainly, it's a good question. Certainly, as you may recall, in the GGM business, there are absolute synergies between Ovation, which is inside the valves to generating valves in the distribution and transmission networks that utilities owned throughout the world. So we are managing these on a broad account basis, covering both opportunities because very honestly, the distribution and transmission network is in a state of upgrade as well.

And if you're going to put the generating capacity onto the grid that we're talking about, we certainly see the investments going into the data systems and the software systems to manage those loads within the grid.

Absolutely. And I think from a customer perspective, a lot of synergies of the same customers we deal with on the generation side are investing Monarch to upgrade their transmission and distribution systems. And then from a product perspective, we're developing Ovation, for example, in substation control that extends beyond generation into transmission and distribution and symbiotically works with monarch to deliver value for our customers.

Our next question comes from the line of Andrew Buscaglia with BNP Paribas.

Yes. I wanted to drill down a little bit on the LNG side of the story. Are you able to quantify what portion of that backlog is LNG? And then do your broader comments around Europe and China weakening impact your view of what's likely to move forward in 2026?

Yes. Your first question was what portion of our $7.4 billion backlog is LNG?

I'm thinking -- yes, that the -- am I confusing with the $11 billion you've put out there?

Okay. Of the $11 billion, I think LNG is what, about yes, $2 billion is LNG since you asked of the $7.4 billion of backlog, about $350 million is LNG. And then your second question was dynamics around Europe and China?

Yes. The kind of the weakening...

At this point, obviously, when you talk about China, the core business that we do today, chemical, petrochemical, refining is really what's muted. But we're seeing pockets of opportunity. Certainly, power has remained strong. Our export business in China has remained strong.

Shipbuilding and marine, which is a unique market for us, has remained strong. And then T&M, which has a decent-sized business in China, has seen strong recovery. So there are pockets of opportunity. I would say we're prudently and conservatively planning for a flat China.

I think it's a wildcard on China recovery. There is a possibility it could recover into the second half of '26, but we haven't built that into our plan. Similarly, in Europe, I think the concerns around sustainability, decarbonization, bulk chemical, automotive and factory automation remain. We haven't seen a catalyst to indicate that those will turn in Europe.

So again, a plan for a flat Europe. But certainly, activity around LNG, which is EPC driven in Europe, life sciences, power and specialty chemical is where we will see the opportunity going forward in aerospace and defense.

Got it. Maybe one more on your capital allocation in that pretty robust cash flow. Your stock is rather cheap probably relative to what you'd expect heading into the new year. So maybe can you talk about your balance between repo and expectations for M&A?

Yes. We laid out the $1 billion expectation around repo. As far as M&A, that's opportunistic, and there's nothing right now that's in sight that we would say we're going to allocate to. So that's what 2026 looks like.

Thank you. Ladies and gentlemen, this does conclude our time allowed for questions and will conclude our call today. We thank you for your interest and participation. You may now disconnect your lines.