EMERSON ELECTRIC CO Q2 FY2025 earnings call

• Emerson delivered a strong second quarter with underlying orders growth of 4% exceeding expectations, all regions positive including China. Process and Hybrid businesses up 6%, Discrete businesses turned positive with Test and Measurement up 8%. Underlying sales were at the top of the guide with record margin performance and adjusted EPS exceeded guidance by $0.06.
• Completed buy-in of AspenTech, which operates as an independent business unit within the Control Systems and Software segment, expected to be modestly accretive to adjusted EPS in 2025 and targeting $100 million of cost synergies by 2028.
• Gross exposure to tariffs in 2025 is $245 million, with plans to fully mitigate through pricing actions and production reconfiguration.
• Safety and Productivity business retained after strategic review, comprises ~8% of sales, underpinned by reshoring and domestic manufacturing.
• Industrial software businesses performed well with total company ACV up 11% year-over-year, demand better than expected, and record profitability with gross profit and adjusted segment EBITDA margins at prior highs.

Emerson's segments showed varied performance. The Process and Hybrid businesses had underlying orders growth of 6%, with underlying sales up mid-single digits. The Discrete businesses collectively turned positive, with Test and Measurement up 8%; first half underlying sales were down low single digits but expected to recover in the second half with high single digit growth. The Industrial Software segment had total company ACV up 11% year-over-year, underlying orders grew 4% year-over-year, underlying sales up 2%, gross profit margin was 53.5% (a 130 basis point improvement year-over-year), and adjusted segment EBITDA margin was 28% (a 200 basis point improvement versus the prior year).

• Underlying sales growth expected to be approximately 4%, raising the midpoint of adjusted EPS guide to $5.90 to $6.05 per share.
• Free cash flow guidance is $3.1 billion to $3.2 billion, expecting to return $2.3 billion to shareholders through dividend and share repurchase.
• For the third quarter, expect underlying sales to be up 3.5% to 4.5%, FX favorable ~1 point, adjusted segment EBITDA margin ~27%, and adjusted EPS between $1.48 and $1.52.
• Full year adjusted segment EBITDA margin expected to be approximately 27%, up 100 basis points over prior year but lower than first half due to tariffs and segment mix.

• Tariffs pose a gross incremental impact of $245 million in 2025, including US imports and China's retaliatory tariffs, but mitigation plans are in place with pricing actions and production reconfiguration.
• Pockets of softness exist, such as muted recovery in China factory automation, slower recovery in factory automation, and continued softness in construction markets affecting Safety and Productivity.

Q: Just a question on discrete automation. Clearly, you guys are seeing some momentum, right, you're highlighting test and measurement orders, but at the same time you're highlighting factory automation limited recovery. So what exactly is getting better in discrete, what end markets?

A: So a couple of things here. First on Test and Measurement. The recovery in the Test and Measurement business has been driven by the portfolio business and aerospace and defense. The portfolio business is a broad based business with tens of thousands of customers and is a great indicator of industrial activity across the world. We continue to be muted in semiconductor, although recovering, and certainly down on automotive. We saw those same negative trends in automotive across the traditional Emerson discrete business. That's predominantly impacting our China and Germany business, which has a higher exposure to automotive, although we see some of that in the US as well. Now in terms of positives and underlying discrete, we saw some green shoots across a number of industries, some of the packaging industries, MRO markets and applications, which turned positive for us as well in the quarter. So overall, certainly in a different place than we were a quarter ago at plus 3%, but very encouraged about the churn in test and measurement. We believe that is sustained as we indicated in our materials and accelerating as we go through the year.

Q: I just wanted to ask on AspenTech and just get a sense now that you've closed the deal. What do you feel like you can do with the asset now that you fully control the outcome that you really couldn't do before?

A: I'll start off and I'll give I'll hand it off to Ram to give his perspective as well. Look, first, we're very excited about completing that transaction. We have a great management team that we put in place, which much like we did at NI is a combination of Emerson folks and AspenTech folks. So I think we have a team that can execute on a plan, predominantly driven around growth. The opportunity here is to drive ACV into the double digit range and sustain that over time. We believe the technology is highly differentiated. And we further believe, Scott, as we'll highlight at Emerson Exchange, that to deliver our vision of boundless automation in the next generation of distributed control system around enterprise software, the AspenTech and DeltaV Ovation platforms collaboratively coming together is going to be critical.

Q: Could you start with the decision to keep safety and productivity? It's got a great reputation, great brands. Did you not get the right multiple for it? It's just maybe it's not the right environment given the macro to maximize value. But just kind of what was the process? And would this be revisited?

A: Look, we did conduct a very thorough review of the S&P business. And through that review, obviously, the external environment has something to do with it. We ultimately concluded that the best value for the shareholders is to retain the business. And Dean, one of the things that this management team has been very focused on through the transformative transactions is value creation for shareholders in terms of not just the disposals but certainly on the acquisition side as well. So look, at this point, we feel really good about the opportunities. We do believe the business is well aligned to the macros of reassuring, in particularly US manufacturing. As you may know, this is entirely a US manufacturing business with manufacturing in Elyria, Ohio, with great technology to address those under secular drivers. So look, we will apply the Emerson management system. We see opportunities for value creation within a highly profitable segment leading margins and cash flow and are excited to go to manage on a go forward basis.

Q: Can you just talk about maybe what's within process? What's holding up for you guys and where the strongest growth is and maybe how the MRO is playing in there with kind of the field device MRO side?

A: Look, MRO was about 62% of sales in the quarter, so it continues to be robust, which is important, and we watch that very carefully with our programs, as you know. But also the capital funnel continues to be important here. The awards at $375 million are relatively balanced. But the three areas that pick out in hybrid and process are life sciences, power and LNG. And we have not seen any arrest in the momentum in those markets and continue to be relatively bullish as we go through the remainder of this year into the exit of 2025 and into 2026.

Q: Can you expand on Test and Measurement a little bit? I think there were at least a couple of data points over the course of the past couple of months that pointed to some push outs that was more production side and the R&D side. Just talk about where you sit on the validation side and end market exposures and why the demand trends for you could be a little bit more insulated from some of the other pressure that's out there?

A: Yes. So in Test and Measurement, we have four segments, so equally weighted 20% to 25% of the sales mix. Two of those segments, Aerospace and Defense and Portfolio are seeing very, very strong growth driven by underlying demand fundamentals. Certainly, the portfolio business, which is a broad variety of end markets, 30,000 plus customers, and mostly sold through distributors and integrators represents the broadest exposure that we have to customers. And so, strength in that segment bodes well for the overall recovery in the Test and Measurement markets overall. And then the Aerospace and Defense piece is stimulated by focused customer spending at large accounts. So those two markets are very strong. Semiconductors, we are seeing recovery. We expect further recovery into the second half supported by earnings releases from the likes of TI, for example, that saw robust demand for their analog segment. We play in analog and mixed signal, RF and mixed signal. So we expect that trend to get positive in the second half. The only segment where we haven't seen any signs of a recovery is the automotive piece, which is primarily EV battery testing. That's the one part that we're watching. But certainly, three of the four markets that we play in, we see strong fundamental demand.