In the opening remarks of Emerson's Second Quarter 2025 Earnings Conference Call, Chief Investor Relations Officer Colleen Mettler introduces key executives, including President and CEO Lal Karsanbhai, CFO Mike Baughman, and COO Ram Krishnan. The presentation includes forward-looking statements with associated risks and non-GAAP measures. CEO Lal Karsanbhai extends gratitude to Emerson's employees, board, customers, and shareholders for their support. He highlights the success of the Test and Measurement team's recent NI Connect event and acknowledges two individuals — Antonio Pietri for his successful career at AspenTech, and Vincent Servello, who will lead a business unit within Emerson.

The paragraph discusses Emerson's positive performance and outlook. They expect to showcase innovations at the Emerson Exchange in May 2022. Despite market volatility, Emerson's second quarter exceeded expectations, with strong order growth, particularly in their Process, Hybrid, and Discrete businesses. They highlight successful sales and earnings performances, anticipating a robust second half of the year. Emerson plans to mitigate $245 million in gross exposure due to tariffs by 2025. They project underlying sales growth of 4%, adjusted EPS between $5.90 and $6.05, and free cash flow between $3.1 billion and $3.2 billion. Additionally, $2.3 billion is expected to be returned to shareholders through dividends and share repurchases.

The paragraph discusses several strategic business updates related to Emerson's ongoing transformations and financial performance. It highlights the completion of the AspenTech acquisition and integration, aiming for cost synergies and EPS growth by 2025. The integration of Test and Measurement was also completed with targeted cost synergies by 2025. A strategic review led to the decision to retain the Safety and Productivity business, which is profitable and well-positioned for growth. Overall, Emerson's industrial software segment is performing well, with a notable increase in annual contract value and record profitability in the second quarter.

The paragraph highlights Emerson's strong financial performance and positive outlook. The company improved its gross profit margin to 53.5% and its adjusted segment EBITDA margin to 28%, with adjusted earnings per share rising 9% year-over-year. Emerson generated a strong free cash flow of $738 million, a 14% increase from the previous year. Orders grew by 4%, with significant demand in the process and hybrid markets, especially in energy and LNG projects. Their project funnel stands at $11.4 billion with $375 million secured in the second quarter. The discrete business turned positive, exceeding order expectations with a 3% growth, and test and measurement orders increased by 8%. Positive trends are noted in aerospace and defense, yet macroeconomic uncertainty may impact factory automation demand.

The paragraph discusses the company's optimistic outlook for accelerating year-over-year growth in the latter half of the year, aiming for double-digit growth by year-end. Despite monitoring potential tariff impacts, strong demand has been observed, particularly in the Process and Hybrid businesses and a recovering discrete sector. Growth drivers include energy security, self-reliance, and energy transition commitments, which should sustain spending in LNG and power. Near-shoring is expected to boost Life Sciences. Process and Hybrid markets are performing well globally, with significant investments in Asia, the Middle East, and Africa, offsetting China's ongoing challenges. The Americas show mid-single-digit growth, while Europe sees low single-digit growth supported by energy transition and Life Sciences. The company maintains its full-year growth forecast of approximately 4%, expecting continued mid-single-digit growth in Process and Hybrid sales, driven by global investments. There is also an anticipation of gradual improvement in China.

In the first half, underlying sales declined slightly, mainly in Europe and China, but an orders recovery in Q2 and a low base of comparison are expected to drive high single-digit sales growth in the second half. The Americas and Asia (excluding China) are projected to lead regional growth, with improvements in discrete MRO and test and measurement markets. However, factory automation recovery is expected to remain slow, and automotive declines continue, impacting Europe and China. Despite these challenges, the company anticipates low single-digit sales growth for the full year due to strong performance in industrial software, with high demand for AspenTech's digital solutions. DeltaV software saw double-digit subscription growth, and LabVIEW contributed with high single-digit growth. Full-year expectations include double-digit ACV growth supported by a robust EPC project backlog. The second quarter saw 2% underlying sales growth, mainly from process and hybrid businesses, with software and control sales increasing by 7%.

In the reported quarter, the company experienced a backlog increase to $7.5 billion with a book-to-bill ratio of 1.04. Backlog growth was largely due to mid-single-digit increases in process and hybrid businesses, and low-single-digit growth in discrete businesses. Adjusted segment EBITDA margin rose by 200 basis points to 28%, driven by favorable price cost, segment mix, and cost reduction benefits. Strong profit contributions came from test and measurements and control systems, including AspenTech. Operating leverage was reported at 180%, and adjusted EPS rose by 9% to $1.48, a $0.12 increase from the previous year. Free cash flow grew by 14% to $738 million, despite $130 million in acquisition-related costs, leading to a 17% free cash flow margin. Sequentially, operations contributed $0.14 to the EPS, with software and control, Intelligent Devices, and the AspenTech acquisition adding to the EPS growth. A key customer booking in France added unexpected benefit, while non-operating items like FX and pensions posed a $0.07 headwind.

The paragraph discusses the financial impact of tariffs on Emerson's operations. In 2024, Emerson's imports into the US were valued at $1.6 billion, with tariffs on these imports (including those under IEEPA, and Section 232 for steel and aluminum) resulting in a $320 million gross impact annually. Most of this impact comes from a 125% reciprocal tariff on Chinese imports. Conversely, the impact from Mexico is largely mitigated by USMCA exemptions. In 2025, the expected tariff cost for US imports is projected to decrease to $185 million. Additionally, Emerson's exports to China face a $135 million annualized tariff impact due to China's retaliatory measures.

The paragraph discusses expected financial impacts and mitigation strategies related to tariffs and semiconductor fabrication origins. In 2025, a gross incremental impact of $60 million is anticipated, representing 0.35% of sales, with a total gross impact of $245 million rising to $455 million annually, or 2.5% of sales. The company plans to offset these impacts through targeted surcharges, pricing actions, production reconfiguration, and supply chain regionalization, aiming to raise $190 million from price adjustments and gain $55 million in operational benefits. These efforts will fully counteract the tariff challenges in 2025 and cover the annualized impact by 2026. Pricing actions are already being implemented across all businesses, with flexibility in their global operational footprint aiding these efforts.

The paragraph discusses the company's financial outlook and performance, highlighting their 2025 sales growth expectation of approximately 4%, with pricing actions potentially adding 3% despite reduced demand in certain markets like China and construction. The FX impact is now expected to be flat, improving from a previous unfavorable outlook. The company is raising its adjusted EPS guidance to between $5.90 and $6.05, attributing an $0.08 boost to strong Q2 performance and aiming to offset tariff impacts by 2025. Challenges include a $0.10 demand weakness impact and a $0.05 gain from improved FX expectations. The Process and Hybrid segments are expected to grow mid-single digits, while discrete businesses anticipate a low single-digit growth by year-end. The adjusted segment EBITDA margin is projected to increase to approximately 27% for the year, despite being impacted by tariffs and segment mix.

The article discusses Emerson's updated financial guidance and capital allocation strategies. The company projects free cash flow of $3.1 billion to $3.2 billion, factoring in the AspenTech acquisition, with an expected free cash flow margin of 17%. Third-quarter sales are anticipated to rise by 3.5% to 4.5%, supported by strong performance in their Process and Hybrid businesses. Emerson plans to maintain a disciplined capital allocation approach, prioritizing reinvestment for organic growth, dividend distribution, debt reduction, and share repurchases. They are committed to increasing dividends and maintaining strong credit ratings. By fiscal 2027, Emerson aims to reduce its net debt to adjusted EBITDA to around two times.

In the Q&A session, Andrew Obin from Bank of America Merrill Lynch asks about the progress in discrete automation. Lal Karsanbhai explains that the recovery in their Test and Measurement business is driven by the portfolio business and aerospace and defense, though the semiconductor and automotive sectors, particularly in China and Germany, remain challenged. Positive trends have been observed in packaging industries and MRO markets. Karsanbhai is optimistic about sustained growth, especially in test and measurement. Obin also points out significant planned capital investments by pharmaceutical companies, likening them to semiconductor industry levels, and notes the company's strong market position in pharmaceuticals.

In the paragraph, Lal Karsanbhai emphasizes the reality of reshoring manufacturing, particularly in the life sciences sector, citing serious commitments by companies to this trend. He mentions the demand for treatments like weight loss and diabetes and new drug developments influencing the placement of manufacturing facilities. The company is actively involved with these customer plans and sees early projects emerging, although it acknowledges it is still in the early stages. Additionally, after acquiring AspenTech, Karsanbhai highlights the strategic advantage of having a strong management team comprised of both Emerson and AspenTech personnel, focusing on driving growth and achieving double-digit annual contract value (ACV) growth over time.

The paragraph discusses Emerson's strategic focus on integrating AspenTech and DeltaV Ovation platforms to propel their vision for advanced automation, particularly in areas like power and life sciences. They emphasize the potential in collaborating to enhance their software offerings and fast-track innovation. There's also a discussion about managing tariff impacts by the end of the fiscal year 2025. Additionally, a question is raised regarding Emerson's decision to retain their safety and productivity segment, suggesting they might not have received the desired valuations in the current macroeconomic climate, though the future sale remains a possibility.

In the paragraph, Lal Karsanbhai discusses the review of the S&P business, stating that retaining it offers the best value for shareholders. The focus of the management team is on value creation through both disposals and acquisitions, particularly in US manufacturing, which aligns well with current macroeconomic trends. Karsanbhai highlights the Emerson management system's potential to enhance value in a profitable segment. Deane Dray inquires about indications of market softness in China, particularly in factory automation and construction. Karsanbhai explains that in China, there's softness in the chemical sector due to low project activity, but there are growth opportunities in power generation and export EPC business.

The paragraph discusses the global expansion of Chinese Engineering, Procurement, and Construction companies, particularly in areas like factory automation and automotive, with a strong presence in China and Germany. In construction outside China, there are no significant concerns, and a global recovery is noted. Andy Kaplowitz from Citigroup inquires about the company's financial performance, particularly the strong incrementals in Q2 and expectations for the second half. Mike Baughman mentions high leverage, FX effects on sales, and how profitability was maintained through cost control and restructuring efforts from the previous year, along with positive contributions from AspenTech.

In the second half of the year, leverage is expected to be slightly lower than traditional levels due to factors such as currency fluctuations and tariff impacts leading to sales without incremental profit and the timing of AspenTech's sales. Overall, the company anticipates a strong year with approximately 60% incremental leverage. Andy Kaplowitz inquires about Aspen's performance, noting it is mildly accretive earlier than expected. Lal Karsanbhai attributes this to better-than-expected timing and aggressive cost management, particularly in G&A and corporate costs. Ram Krishnan adds that the business momentum remains strong, particularly for AspenTech's core offerings.

In the paragraph, the discussion highlights that there hasn't been a slowdown in demand for AspenTech, with expectations of strong contributions through 2026 and beyond. Lal Karsanbhai notes that Maintenance, Repair, and Overhaul (MRO) has been robust, making up 62% of sales for the quarter, and emphasizes the importance of the capital funnel with awards totaling $375 million across key areas like life sciences, power, and LNG. No unusual customer activities, like pre-buys ahead of tariffs or surcharges, were observed, indicating continued strong and resilient demand in Process and Hybrid segments.

In the paragraph, Joe O'Dea asks Lal Karsanbhai about the resilience of demand trends in the Test and Measurement sector, despite recent production and R&D delays. Karsanbhai explains that the sector is divided into four segments, with Aerospace and Defense and Portfolio seeing strong growth due to robust demand fundamentals. The Portfolio segment is particularly diverse, with over 30,000 customers, indicating broad market exposure. Aerospace and Defense growth is driven by large customer spending. While the Semiconductor segment is recovering, the automotive segment, primarily EV battery testing, hasn't shown signs of recovery yet. However, three out of the four segments are experiencing strong demand. O'Dea also inquires about the completion of the portfolio transformation following the Aspen acquisition.

Lal Karsanbhai discusses the company's strategy for future investments, emphasizing the focus on bolt-on opportunities under a billion dollars while balancing capital allocation for share repurchases, dividends, and debt reduction. He highlights a commitment to organic growth and investment in the core business. In response to Katie Fleischer's question about order and sales projections, Karsanbhai explains that the confidence in second-half sales growth stems from increased orders, projecting an overall 4% underlying sales growth for the year, up from just under 2% in earlier quarters.

In the paragraph, Katie Fleischer inquires about the strategic project funnel, which wasn't included in the presentation slides. Lal Karsanbhai responds by stating that the funnel is valued at $11.4 billion, with $375 million worth of projects awarded recently. This aligns with usual quarterly awards ranging from $350 million to $400 million and includes sectors such as LNG, power, life sciences, and sustainability decarbonization. The paragraph concludes with the operator ending the question and answer session and the call.

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