Detailed Narrative
Middle East Conflict — Disruption, Damage and the Rebuild Path
Emerson runs a $1.2B business in the Middle East (7% of sales) on an $8.5B installed base with over 1,400 employees. The conflict and closure of the Strait of Hormuz cut ~1 point (~$50M) from Q2 underlying sales by halting component imports for instruments and valves and forcing a temporary manufacturing shutdown; field-service engineers ran below 50% of pre-conflict levels in March. 47 customer sites were damaged. By mid-April sites were largely operational but at ~75% capacity, manufacturing was restored, and field service recovered to 80%. Management modeled a full-year 1-point headwind and quantified a ~$100M rebuild/restart opportunity over ~6 quarters — explicitly excluding the far larger, unscoped opportunity from ~17% of LNG capacity taken offline.
Orders Momentum and the Growth Verticals
Underlying orders grew 5%, led by North America and India, with growth verticals up strongly (semiconductors the 'lowest' at mid-teens). Software & Systems orders grew 18% (Test & Measurement and Control Systems & Software each +18%), Ovation orders were up 41%, and AspenTech digital grid management ACV grew 31%. The project funnel expanded to $11.2B, driven by new power opportunities, and Emerson won ~$450M of projects in the quarter (85% from growth verticals — power, life sciences and LNG). Management views mid-single-digit order growth as sustainable through the balance of FY26, setting up H1 FY27.
Software Portfolio, ACV and the AI Opportunity
ACV grew 9% YoY to $1.64B, with 10%+ growth expected for the full year. Management addressed broader-market AI concerns by stressing that Emerson's industrial software serves mission-critical, highly regulated applications where '99.9% right is not good enough,' requiring real-time compute and data traceability. Emerson is embedding AI across Ovation, DeltaV, AspenTech and NI (Nigel), and recently deployed Aspen Hybrid Models for Aramco to build one of the world's largest multisite refinery-planning optimization models. AI is seen as a differentiator generating heavy customer dialogue and quoting but not yet meaningful revenue — a 2027-plus driver, with value captured via tiered higher-tier products.
Q2 Financial Results and the EPS Bridge
Q2 underlying sales rose 0.5% (~3% ex the software renewal and Middle East headwinds). Price contributed 3.5 points and MRO was 65% of sales. Adjusted segment EBITDA margin of 27.6% exceeded expectations on favorable segment/geographic mix, with price/cost and cost reductions more than offsetting inflation; ex the 90 bps software-renewal drag, margin was up 50 bps. Adjusted EPS grew 4% to $1.54: excluding the $0.09 software-renewal impact, operations added $0.08 (S&S +$0.05, ID +$0.02, S&P +$0.01) and non-operating items (mainly FX) added $0.07. Q2 cash flow was $694M at 15% margin, with the first half affected by Aspen buy-in interest, tax-payment timing, and working-capital build for H2.
Power Demand — Modernization, Greenfield and Behind-the-Meter
Power was a standout, up 23% globally, with healthy investment in plant modernizations, lifetime extensions and behind-the-meter generation for data centers. Ovation was up mid-teens on sales and +41% on orders. Management expects greenfield and behind-the-meter activity to build in the second half and into 2027, flowing through to valves and instruments and to the digital grid management / T&D business. North America is the strongest market, with momentum also in Latin America (notably Mexico), rest of Asia and some Europe. Named wins included Oncor (AspenTech DGM for distribution-grid modernization) and NextDecade's Rio Grande LNG Train 4 & 5 expansion (+12 mtpa).
Regional and Segment Performance
By region, the Americas were up 5% (U.S. +9%), Europe was soft at -4%, Middle East & Africa fell 5% on the conflict, and China dropped 9% on weak, overcapacitized chemical spend. Growth verticals were up 22%. By group: Software & Systems underlying sales rose 1% (a 4.5% software-renewal headwind masking T&M +12%), margin 29.2% (-250 bps, 300 bps renewal drag); Intelligent Devices fell 1% (Middle East a 2-point drag), margin 27.9% (+80 bps); Safety & Productivity rose 2% on electrical products and North American project activity, margin 21.7% (-10 bps). Backlog ended at $8.2B (+9% YoY) with a 1.07 book-to-bill.