EMR
Earnings call · Mar 2025 (Q2 FY25)

EMERSON ELECTRIC Q2 FY25 earnings call EMR

May 7, 2025 Source

Executive summary

Emerson Q2 FY25 — Strong Orders and Record Margins, AspenTech Integration Complete

Emerson delivered a strong second quarter, marked by robust underlying orders and record profitability, driven by resilient process and hybrid markets and a nascent recovery in discrete. The company completed its portfolio transformation with the AspenTech buy-in, which is already contributing positively to EPS. Management is actively mitigating significant tariff headwinds through pricing and supply chain actions, while navigating pockets of demand weakness in factory automation and China.

Highlights

5

  • Underlying orders grew 4% in Q2, exceeding expectations with all regions positive, including China.

  • Underlying sales reached the top of guidance, with record gross profit margin of 53.5% (up 130 bps YoY) and adjusted segment EBITDA margin of 28.0% (up 200 bps YoY).

  • Adjusted earnings per share of $1.48, up 9% year-over-year, exceeded guidance by $0.06.

  • Generated strong free cash flow of $738 million, up 14% year-over-year, achieving a 17% margin.

  • Completed the AspenTech buy-in, which is expected to be modestly accretive to adjusted EPS in FY25, targeting $100 million in cost synergies by 2028.

Concerns

3

  • Anticipated gross tariff exposure of $245 million in 2025 from US import and China retaliatory tariffs.

  • Muted recovery for factory automation and continued declines in the automotive sector.

  • Softer demand dynamics in China and construction markets contributing to an approximately $0.10 headwind for full-year FY25 adjusted EPS.

Guidance & targets

CategoryTargetConfidence
Underlying sales growth
approximately 4%
high materiality
High
Adjusted EPS
$5.90 to $6.05
high materiality
High
Free cash flow
$3.1 billion to $3.2 billion
high materiality
High
Return to shareholders
$2.3 billion
high materiality
High
AspenTech cost synergies
$100 million
medium materiality
High
Test & Measurement run rate cost synergies
$200 million
medium materiality
High
Total company ACV growth
double-digit
medium materiality
High
Process and hybrid sales growth
mid-single digits
medium materiality
High
Discrete sales growth
double digits
medium materiality
Medium
Underlying sales growth
mid-single-digit growth in the third quarter and for high single-digit growth as we exit the year
medium materiality
High
Underlying sales
up 3.5% to 4.5%
medium materiality
High
FX impact on sales
favorable approximately 1 point
low materiality
High
Adjusted segment EBITDA margin
approximately 27%
medium materiality
High
Adjusted segment EBITDA margin
approximately 27%
medium materiality
High
Adjusted EPS
$1.48 and $1.52
high materiality
High
Total price contribution to growth
approximately 3%
medium materiality
High
FX impact
flat
low materiality
High
Adjusted EPS benefit from Q2 operational performance
$0.08
medium materiality
High
Adjusted EPS headwind from softer demand
approximately $0.10
medium materiality
High
Adjusted EPS upside from FX expectation change
approximately $0.05
low materiality
High
Dividend distribution
$1.2 billion
medium materiality
High
Share repurchase
$1.1 billion
medium materiality
High
Available free cash flow for share repurchase and M&A
approximately $2.5 billion
medium materiality
Medium
Net debt to adjusted EBITDA
approximately 2x
medium materiality
High

Segment performance

SegmentRevenueYoYQoQMargin
Software and Control
Contributed to adjusted EPS growth.
Driven by higher software sales
—7%——
Intelligent Devices
Contributed to adjusted EPS growth.
Due to Safety & Productivity and Discrete Automation
—flat——
Process and Hybrid businesses
Expected to maintain mid-single-digit growth in Q3 and Q4. Sustained global investment in LNG, life sciences, and power. Planning for gradual improvement in China aided by easier comps and investment momentum in power and marine.
Underlying orders growth: 6% (Q2)First half growth led by Asia and Middle East and AfricaAmericas growth: mid-single digits (H1)Europe growth: low single-digit (H1)
—mid-single digits——
Discrete businesses
Orders recovery in Q2 and low base of comparison support H2 plan. Expected continued improvement in discrete MRO and Test & Measurement markets. Muted recovery for factory automation and declines in automotive expected to prolong weakness in Europe and China.
Underlying orders growth: 3% (Q2)Most pronounced weakness in Europe and China (H1)Expected high single-digit underlying sales growth in H2Regional growth led by Americas and Asia ex-China (H2 expected)
—down low single digits——
Industrial Software
Ended first half with strong ACV growth. Full year expected double-digit ACV growth.
ACV: $1.5 billion (H1)Driven by AspenTech's digital grid management and manufacturing and supply chain suitesDeltaV software growth: double-digit (subscriptions)LabVIEW growth: high single-digit
—11%——

Operational metrics

Total company ACV
$1.5B up 11% year-over-year
H1 FY25

Industrial software businesses continued to perform well.

Underlying orders growth
4%
Q2 FY25

Exceeded expectations, all regions positive including China.

Underlying orders growth
7%
April trailing 3-month

Strong start to Q3.

Underlying sales growth
2%
Q2 FY25

Came in at the top of guide.

Underlying sales growth
slightly under 2%
Q1 FY25

Reference for sales acceleration.

Price contribution to growth
1.5 points
Q2 FY25

Contributed to underlying sales growth.

Gross profit margin
53.5% 130 basis point improvement year-over-year
Q2 FY25

Matched prior highs set in Q1.

Adjusted segment EBITDA margin
28.0% 200 basis point improvement versus the prior year
Q2 FY25

Came in well above expectations, matching a record high from Q1. Driven by favorable price-cost, segment mix, cost reductions, and synergy realization.

Operating leverage
180%
Q2 FY25

First half leverage was ~220%.

Adjusted EPS
$1.48 up 9% year-over-year, up $0.12 year-over-year
Q2 FY25

Exceeded expectations by $0.06.

Free cash flow margin
17%
Q2 FY25

Burdened by $130 million of acquisition-related costs.

Adjusted EPS bridge (Q2 FY25)
$1.48 from $1.36 prior year
Q2 FY25

Bridging from prior year adjusted EPS of $1.36 to current $1.48.

Annualized US imports
$1.6 billion
2024 annualized

Represents 19% of annual cost of goods sold, used for manufacturing plants and distribution centers.

Gross incremental tariff impact
$320 million
annualized

On US imports. Most impact driven by 125% reciprocal tariff on imports from China.

Gross incremental tariff impact on US imports
$185 million
2025

Expected impact in 2025.

US exports to China
$105 million
2024 annualized

Annualized basis.

Gross incremental tariff impact (China retaliatory)
$135 million
annualized

Under third round of China's retaliatory tariffs.

Gross incremental tariff impact (China retaliatory)
$60 million
2025

Expected impact in 2025.

Total gross tariff impact
$245 million
2025

Expected total gross impact in 2025.

Total gross tariff impact
$455 million
annualized

Annualized basis.

Targeted incremental price and surcharges
$190 million
FY25

To mitigate tariff impacts.

Operational mitigation benefits
$55 million
FY25

To mitigate tariff impacts.

AspenTech transaction-related headwinds
approximately $200 million
FY25

Burdening free cash flow guidance.

Dividend per share
increased
69th year

Emerson is in its 69th year of increased dividends per share.

Dividend distribution
$1.2 billion
FY25

Expected to be distributed to shareholders.

Share repurchase
$1.1 billion
FY25

Completed in the first half of the fiscal year.

MRO sales
62%
Q2 FY25

Percentage of total sales.

Large project funnel
$11.4 billion
current

Provides a 3-year outlook of capital activity.

Project awards
$375 million
Q2 FY25

Generally consistent with awards over the last few quarters around $350 million to $400 million range. Broad-based across LNG, power, life sciences, sustainability, and decarbonization.

Test & Measurement segments sales mix
20% to 25%
current

Each of the four segments is equally weighted.

Test & Measurement portfolio business customers
30,000+
current

Broad-based business, good indicator of industrial activity.

Pharma announcements (analyst-cited)
Roche $50 billion; Novartis $23 billion; J&J $55 billion; Eli Lilly $27 billion
current

Analyst-cited figures for spend by major pharmaceutical companies, confirmed by management as 'very real' activity.

Industry KPIs

MetricValueDetails
Book to bill ratio1.04
Orders bookings growth4% %
M a acquisition contributionmodestly accretive
Backlog by segment end market$7.5B USD
Incremental flow through margin180% %

Orderbook & backlog

Total backlog $7.5 billion Q2 FY25 end

up 3% sequentially

Book-to-bill ratio 1.04 Q2 FY25
Process and hybrid backlog mid-single digits Q2 FY25 end

up sequentially

Discrete backlog low single digits Q2 FY25 end

up sequentially

Product announcements

ProductTypeDetails
Latest technology for successful creation and innovationlaunch

Deals & partnerships

AspenTech Completed buy-in of AspenTech, which now operates as an independent business unit within Control Systems & Software segment.

Completed on March 12. Integration is a key priority in 2025, aiming to accelerate to double-digit ACV growth.

Risks & headwinds

Tariff Impact 2025 and annualized

Gross exposure of $245 million in 2025, $455 million on an annualized basis (approximately 2.5% of sales).

Mitigation:Targeting $190 million of incremental price and surcharges in FY25, plus $55 million of operational mitigation benefits from inventory and supply chain actions. These actions are expected to completely offset the tariff headwinds in FY25, with carryover benefit for 2026.

Factory Automation Weakness Second half FY25

Muted recovery for factory automation, contributing to an approximately $0.10 headwind for full-year FY25 adjusted EPS (part of broader demand dynamics).

Automotive Declines Second half FY25

Continued declines in automotive, particularly EV battery testing, contributing to an approximately $0.10 headwind for full-year FY25 adjusted EPS (part of broader demand dynamics).

China Weakness Second half FY25

Continued weakness in China, specifically bulk chemical, contributing to an approximately $0.10 headwind for full-year FY25 adjusted EPS (part of broader demand dynamics).

Mitigation:Planning for gradual improvement aided by easier comps and investment momentum in power and marine. Also seeing nascent growth in China of export EPC business.

Construction Market Softness FY25

Weakened demand in Safety & Productivity from continued softness in construction markets, contributing to an approximately $0.10 headwind for full-year FY25 adjusted EPS (part of broader demand dynamics).

What to watch in Q3 FY25

Discrete sales growth

H2 FY25 / exit FY25
Current Down low single digits (H1 FY25), up 3% orders (Q2 FY25)
Target High single-digit growth as exit FY25

Why it matters

Indicates a broader industrial recovery and validates the company's growth acceleration thesis.

Overall, improving underlying demand fundamentals coupled with easier second half comps, position our discrete businesses for accelerating year-over-year growth in the back half, and we expect to hit double digits as we exit the year.

Q&A highlights

What specific end markets are driving the improvement in Discrete Automation, given the mixed signals (T&M up, factory automation/automotive down)?

The Test & Measurement recovery is driven by the broad-based portfolio business and aerospace & defense. Traditional discrete saw green shoots in packaging and MRO. Automotive remains a drag, especially in China and Germany.

“The recovery in the Test & 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.”

asked by Andrew Obin · answered by Surendralal Karsanbhai

2 min read 5 chapters

Detailed narrative

Portfolio Transformation & AspenTech Integration

Emerson has completed its portfolio transformation with the full acquisition of AspenTech, which now operates as an independent business unit within the Control Systems & Software segment. The transaction is expected to be modestly accretive to FY25 adjusted EPS, with $100 million in cost synergies targeted by 2028, primarily from corporate cost harmonization and R&D productivity. The integration is a key priority for 2025, aiming to accelerate AspenTech's ACV growth to double digits, leveraging its digital grid management and manufacturing & supply chain suites.

Tariff Mitigation Strategy

The company faces a gross tariff exposure of $245 million in 2025, stemming from US import tariffs (IEEPA, steel, aluminum, and reciprocal tariffs, including 125% on China imports) and China's retaliatory tariffs on US exports. Emerson plans to fully mitigate this impact through $190 million in targeted surcharges and pricing actions, and $55 million in operational benefits from inventory on hand and supply chain regionalization initiatives. These actions are expected to completely offset the tariff headwinds in FY25, with carryover benefits for 2026.

Discrete Business Recovery

After a prolonged downturn, Emerson's discrete businesses collectively turned positive in Q2 FY25, with underlying orders up 3%. Test & Measurement orders led this recovery with 8% growth, driven by the broad-based portfolio business and aerospace & defense. While factory automation and automotive (especially EV battery testing) remain areas of weakness, improving underlying demand fundamentals and easier second-half comparisons are expected to drive accelerating year-over-year growth in the back half, exiting the year in double digits.

Process & Hybrid Market Strength

Demand remains resilient in process and hybrid markets, which saw 6% orders growth and mid-single-digit sales growth in Q2. This strength is expected to continue with mid-single-digit growth in Q3 and Q4, driven by significant capital investments in energy, LNG, and life sciences projects, particularly in the Middle East, Africa, India, Southeast Asia, and the Americas. The large project funnel stands at $11.4 billion, with $375 million in awards during the quarter, consistent with prior periods.

Capital Allocation Priorities

Emerson maintains a disciplined capital allocation strategy focused on reinvestment for organic growth (targeting 4-7%), increasing dividends (69th consecutive year of increases, $1.2 billion expected in FY25), and maintaining A2A credit ratings. The decision to retain the Safety & Productivity business makes debt paydown a priority over the next two years, with a target to bring net debt to adjusted EBITDA back to approximately 2x by the end of fiscal 2027. The company completed $1.1 billion in share repurchases in the first half of FY25.

AI-generated summary of the company's earnings call. Not investment advice.