The paragraph is an introduction to the Emerson First Quarter 2025 Earnings Conference Call. Colleen Mettler, Vice President of Investor Relations, starts the call by introducing key executives including CEO Lal Karsanbhai, CFO Mike Baughman, and COO Ram Krishnan. It is mentioned that the presentation would include forward-looking statements with business risks. CEO Lal Karsanbhai shares his appreciation for the team's achievements over his four-year tenure and thanks the board, management, and employees for their dedication. He also notes the recent grand opening of Emerson's new global headquarters in St. Louis, highlighting the significance of the event.

The paragraph discusses Emerson's positive Q1 performance and optimistic outlook for the year due to strong market fundamentals and its management system. The company is focusing on value creation in automation technology, driven by energy security, nearshoring, and energy transition. While there was improvement in orders for some businesses, it was offset by slower performance in automotive and factory automation. However, Emerson remains confident about future growth, particularly in software solutions, which saw significant growth. The company exceeded expectations in margin leverage, earnings, and cash flow, aligning with their 2025 plans.

The paragraph discusses Emerson's financial guidance and strategic initiatives. The company reaffirms its sales, earnings, and cash flow forecasts, attributing success to effective execution despite currency fluctuations. Expectations for operating leverage have been raised. Emerson's portfolio growth is supported by its team, technology, and management system. The company announced plans to acquire remaining AspenTech shares for $265 each in an all-cash offer, with further details in a January 27 press release. Emerson is also exploring strategic alternatives for its safety and productivity segment. Regarding tariffs, Emerson minimized impacts from U.S. tariffs on China since 2018 through pricing and supply chain adjustments, expecting limited effects from current tariffs, including negligible impacts from Canada.

In the paragraph, Emerson highlights its readiness to adapt to changing scenarios in Mexico, including implementing price adjustments to protect financial commitments. The company's Q1 performance demonstrated consistent execution, with a 1% year-over-year increase in underlying orders driven by strong demand in the Middle East and the U.S., particularly for power, energy, and energy transition projects. Although demand in China was mixed, the process and hybrid businesses saw mid-single digit sales growth. There was robust project activity in the Middle East, and strong performance in North America, Latin America, and MRO, which accounted for 64% of sales. The company achieved record gross profit margin of 53.5% and record adjusted segment EBITDA margins of 28%, reflecting strong operational performance and cost management.

Emerson's financial performance has exceeded expectations, with significant improvements in operating leverage and adjusted earnings per share. The company generated strong free cash flow and completed $1 billion in share repurchases. Emerson's DeltaV Edge Environment was recognized as a breakthrough product, enhancing data accessibility and AI application in industrial processing. The newer version, DeltaV Edge Environment 2.0, supports batch data integration, facilitating advanced analytics and decision-making in various industries. This development aligns with Emerson's goal to advance automation solutions.

The paragraph highlights Emerson's achievement in winning the 2025 IoT Breakthrough Award for its DeltaV workflow management software, which aids life science companies in scaling and efficiently producing therapies. The award program received over 3,850 global nominations and consistently recognizes Emerson for its industrial technology innovations. The latter part of the paragraph shifts focus to liquefied natural gas (LNG) opportunities linked to Emerson's energy transition growth platform, anticipating significant capacity increases in North America, the Middle East, and Africa. Despite progress in these regions, expansion in 2024 was limited by the U.S. moratorium on export licenses, affecting the selection of engineering, procurement, and construction (EPC) firms and delaying automation processes.

The paragraph describes the growth and opportunities in the LNG project pipeline, highlighting Emerson's strong position in the industry. With the lifting of a moratorium, there is potential for over 80 MTPA per year awarded to EPCs in the next three years. Emerson's portfolio and expertise position them well for automation opportunities, with potential orders exceeding $1 billion. Emerson's technology, including valves and control systems, are widely used in LNG projects, and they recently secured a key project at Cedar LNG in British Columbia. Additionally, Emerson classifies traditional power as a growth platform due to increasing sector opportunities.

The paragraph discusses Emerson's strategic position and capabilities in the power and renewables sector, which accounted for about 10% of its 2024 sales. It highlights the projected tripling of global renewable energy capacity by 2030 and the need for over $3 trillion in grid infrastructure investment to accommodate electrification and renewables. Emerson offers advanced solutions for power generation, transmission, and distribution, including the industry-leading Ovation Control Systems and AspenTech software. Their Ovation system automates approximately 20% of global electricity generation, with significant implementation in U.S. power plants and nuclear reactors worldwide. Emerson is noted for its strong portfolio in combined cycle gas plants and nuclear power, with control valves that are widely used in nuclear facilities. Their nuclear power sales amounted to around $325 million the previous year.

Emerson recently won an award for the Sizewell C nuclear power project in the UK, contributing valves and instruments due to its innovative technology and long history of quality solutions. The project, led by Framatome, will involve two pressurized water reactors to generate 3.2 gigawatts of electricity for 60 years, powering around 6 million homes. Emerson is in a resilient capital cycle, reclassifying its traditional power funnel as a growth platform and integrating Tesla measurement into its processes, enhancing pursuit and management of projects. While the semiconductor sector faces challenges, it's viewed as a future growth driver due to macro trends like near-shoring. Emerson's project funnel now stands at $11.5 billion, or $11.2 billion excluding semiconductor opportunities, showing a 7% year-over-year growth. Significant growth is seen across various sectors including Life Sciences and nuclear power, despite $400 million in project awards exiting the funnel this quarter. The update concludes by transitioning to Mike Baughman to discuss financial results.

The paragraph highlights the company's financial performance, noting a 2% underlying sales growth driven by process and hybrid businesses, while discrete businesses saw a decline. Growth was significant in industrial software, energy transition, and Life Sciences. Sales growth was aided by a price increase contributing 1.5 points. Asia, the Middle East, and the Americas saw sales growth, while Europe declined. The backlog rose to $7.3 billion, with improved EBITDA margins reaching a record 28%, driven by favorable pricing, reduced costs, and other factors. Adjusted EPS grew by 13% to $1.38, indicating strong quarterly operations. Free cash flow significantly increased by 89% to $694 million, with a free cash flow margin at 17%, supported by higher earnings and improved working capital.

In the paragraph, the company reports a 13% year-on-year growth in adjusted EPS to $1.38, driven by contributions from Software & Control and Intelligent Devices. Despite headwinds from stock compensation and pension, an FX tailwind offset last year's unfavorable impact. For 2025, the company reiterates its full-year guidance for underlying sales, adjusted EPS, and free cash flow, expecting growth in the process and hybrid markets while lowering expectations for discrete businesses to low single digits due to a slow start. Recovery is anticipated in the second half, especially as China demand is projected to improve. The guidance for GAAP net sales is reduced due to foreign exchange headwinds, impacting adjusted EPS by approximately $0.08. However, strong Q1 performance offsets this impact, maintaining prior EPS guidance. The company raises its 2025 operating leverage expectations and reiterates its free cash flow guidance of $3.2 to $3.3 billion.

The company plans to return approximately $3.2 billion to shareholders this year through dividends and share repurchases, having completed $1 billion in repurchases in Q1. In Q2, they expect a slight sales growth of 1% to 2%, but anticipate an unfavorable foreign exchange impact of about 1.5 points. Challenges include difficult comparisons in their process and hybrid businesses and ongoing softness in discrete, though discrete volumes are improving year-over-year. They project an adjusted segment EBITDA margin of 26.5% and adjusted EPS between $1.38 and $1.42. The guidance includes safety and productivity contributions and a 57% stake in AspenTech, with specific EPS contributions outlined. While the AspenTech transaction's impact isn't part of current guidance, a potential 2025 transaction closing wouldn't alter their EPS guidance range. The paragraph concludes by transitioning to a Q&A session, with Jeff Sprague from Vertical Research asking the first question.

In the conversation, Lal Karsanbhai addresses questions from Jeff Sprague and Steve Tusa about Emerson's business operations. Jeff asks about the company's exposure in Mexico and their preparation for potential tariffs, to which Lal responds that they are prepared but declines to provide specifics on the cost of goods sold (COGS). Jeff also queries the performance trajectory of Emerson's discrete and test and measurement businesses, and Lal confirms they are evaluated collectively, noting strengths in the semiconductor sector and industrial applications but cautioning about factory automation and automotive sectors. Steve Tusa asks about foreign exchange impacts, noticing a discrepancy where forex was a sales headwind but appeared as a $0.04 benefit to earnings per share (EPS) in their earnings slide.

The paragraph features a discussion among several individuals about financial performance and macroeconomic factors affecting a company's earnings. Mike Baughman explains a $0.04 benefit due to the absence of certain foreign exchange losses from the prior year. Steve Tusa inquires about strong incrementals and whether it was due to raw material deflation or mix impact. Ram Krishnan confirms positive pricing, favorable material inflation, strong mix, and growth in AspenTech contributed to the strong performance. Andy Kaplowitz then asks Lal Karsanbhai about the stability of the project funnel at $11.2 billion, amidst geopolitical and macroeconomic uncertainties, and whether LNG and power projects are now leading growth compared to clean energy projects under the new U.S. administration's focus.

Lal Karsanbhai discusses the strong commitment of customers to invest in energy security, affordability, and decarbonization, supported by commitments to stakeholders. He notes balanced investments in power generation, with a resurgence in nuclear energy and continued investments in gas, hydro, wind, and solar. Hydrogen energy projects are also progressing, particularly in the Middle East, Korea, and Japan. Karsanbhai expresses optimism about the ongoing growth in hybrid markets, driven by capital investments and modernization efforts, with maintenance, repair, and operations (MRO) accounting for a significant portion of revenue and profitability.

In the paragraph, it is discussed that Ram and the speaker are traveling, with Ram visiting India and Asia and the speaker heading to the Middle East. Their aim is to assess customer investments and monitor market growth. China is noted as a concern due to slow growth, but the second half of the year might be better. Strength is expected from the Americas and the Middle East and Africa region. Ram Krishnan mentions that while China’s bulk chemical segment is closely monitored, there are active sectors like power and exports. They aim to maintain stable growth in China and see potential in North America and the Middle East. Andy Kaplowitz thanks them, and the conversation moves to Joe O'Dea from Wells Fargo, who wants to discuss margins.

In the paragraph, Mike Baughman discusses the factors that contributed to margin strength for the quarter, highlighting cost reductions as a significant driver, even more so than price cost. The company made considerable strides in cost control, particularly in test and measurement and discrete businesses, and expects continued benefits despite FX headwinds. A strong performance from Aspen also bolstered margins, though its impact will be less in the next quarter. Cost reductions and pricing are outpacing inflation, positively affecting margins. Joe O'Dea seeks further clarification from Lal on the final phase of portfolio transformation and future merger and acquisition (M&A) strategies, suggesting a potential shift towards smaller, bolt-on acquisitions.

In the paragraph, Lal Karsanbhai emphasizes the company's focus on disciplined mergers and acquisitions, particularly bolt-ons, as part of their transformation strategy. The company aims to enhance customer relevance by integrating technology through smaller acquisitions while maintaining a commitment to returning cash to shareholders via dividends and share repurchases. Additionally, investing in organic growth opportunities is a priority. Nigel Coe from Wolfe Research raises a question about near-term indicators of growth in Discrete Automation and National Instruments. Ram Krishnan responds, noting positive signs like sequential orders growth in the Discrete business, increased activity in the semiconductor segment for National Instruments, and broader customer base restocking, which collectively indicate an upward trend.

The paragraph discusses the positive outlook for the North American Discrete Automation business, highlighting promising growth prospects, particularly in the semiconductor segment. It suggests that the second half of the year will see sequential growth and more favorable year-over-year comparisons. The conversation then shifts to the LNG sector, where the lifting of a moratorium on new permits had impacted investments and project awards. The win rates in North America are discussed, with efforts being made to strengthen positions there, although it is noted that the company's success is more pronounced in the Middle East and Africa, especially in Qatar.

In this discussion, Brett Linzey from Mizuho asks about the sales cycle and backlog conversion for power and renewable projects. Lal Karsanbhai explains that large projects, such as new combined cycle power plants, have long timelines before reflecting in the backlog, while modernization and capacity expansion projects move more quickly. Ram Krishnan adds that nuclear projects and new greenfield plants also take time. When asked about order growth assumptions for the year, Lal Karsanbhai states that the company does not publicly forecast orders, therefore, no specific details are provided on that aspect.

The paragraph discusses the company's performance and expectations in terms of book-to-bill ratios, noting that the ratio was greater than one in the first half of the year, expected to be under one in the second half, and about one for the full year. Deane Dray from RBC Capital Markets inquires about the start of January, to which Lal Karsanbhai responds that they have not commented on it but feel good about their guidance. Ram Krishnan mentions their strong position in benefiting from mega projects, particularly in LNG and power industries, with significant opportunities in North America, Qatar, and various sectors such as chemical modernization, life sciences, and metals and mining.

In this discussion, the speakers highlight financial projections and cost strategies for the remainder of the year. The $11.5 billion funnel, reflecting a 7% year-over-year increase, indicates strong activity across diverse industries. When discussing costs and synergies achieved in the first quarter, it is noted that while there will be some reduction in cost-cutting benefits in subsequent quarters, overall cost reductions will persist throughout the year, positively impacting margins. The high gross margin in the first quarter was due to favorable mix dynamics, expected to moderate as the year progresses. Price cost dynamics will remain positive, yet some discretionary spending will return, slightly tempering previous margin benefits.

In the paragraph, Saree Boroditsky asks Lal Karsanbhai about the markets of factory automation and autos, particularly EVs, which have been depressed. Karsanbhai notes that while these markets have been seeing limited activity in regions like North America, Europe, Germany, and China, he does not expect a significant recovery in the second half of the year. However, due to easier comparisons, growth is anticipated. Christopher Glynn then asks about the pace of competitive conversions in control systems. Karsanbhai explains that the strategy has remained consistent, focusing on the installed base and maintenance, with continued success in competitive displacement, particularly in the power business and with the DeltaV system.

In the paragraph, Christopher Glynn inquires about the profitability of Emerson's Measurement & Analytical and Control Systems & Software segments, noting they achieved new levels of profitability. Mike Baughman explains that the systems business experienced strong gross margins due to project closeouts and favorable SG&A spending, while the Measurement & Analytical business maintained consistent and strong gross margins, benefiting from previous cost-cutting measures. He expresses satisfaction with the performance of these segments. The operator then ends the question-and-answer session and concludes the conference.

This summary was generated with AI and may contain some inaccuracies.