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…

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…

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.