Emerson Electric Co. (EMR) Earnings Call Transcript & Summary

We're going to get started again. We are really excited to have Emerson with us today. We've got Lal Karsanbhai, who's the President and CEO of Emerson and Mike Baughman, who is the CFO.

Lal, as I walk over to you, it's been a year since you closed the acquisition of the remaining shares of AspenTech almost a year. And I know you had a vision to be more seamless to your customers around the integration of software and hardware. So maybe talk about what you've accomplished over the last year and that maybe you wouldn't have accomplished if you didn't have all of the shares of AspenTech. And then you've reiterated 10% ACV growth for your software business. What are the biggest drivers of growth in the business right now?

Super well. Good morning. Thanks for having us, Andy. Great to be here. Well, perhaps before I comment on the work we've been doing at Aspen, I should maybe step back a little bit, that's good and just talk about industrial software as a whole and our perspective on our software offering and what that means in the marketplace. Obviously, there's a lot being written right now, particularly as it relates to AI agents taking on the execution of workflows and the impact that, that may have on horizontal software, point-of-use applications and certainly the economics around seat-based licensing and the economic models around it. So from Emerson's perspective, our $2.5 billion of new software business or $1.6 billion ACV valued software business has 3 very important moats that differentiate it and protect it against threats from AI. The first is that our software is vertical in nature, it's a deterministic and it's based on decades of deep domain expertise with broad industry and application knowledge. As opposed to that, you have AI, which is generic in nature and uses inference to arrive at solutions. So moat #1 is deterministic and domain expertise. The second moat is that we serve mission-critical applications in what are highly regulated industries, such as power generation, pharmaceuticals and energy. Over 3/4 of our software goes into those 3 industries. As opposed to that, in AI, a couple of the really interesting features like latency and hallucinations are not desired features in those industries. What is desired is real-time compute and traceability of data, and that's moat #2. And then the third moat is the economic moat, which is 100% of everything we sell in terms of software is either perpetual license or token and the tokens are on a usage basis. As opposed to a seat license, which is sold on a per human basis, a token based on usage. That usage can be a machine, it can be a human, and it's -- and that's how we transact. And then the perpetual license is predominantly how we sell Ovation and DeltaV into the marketplace. And the last thing I'll say, Andy, is -- and this really goes to your question is, our customers are asking for us to integrate AI into our existing software. They want to use it. They see the value. And we have released today 3 very important products. We talked about Nigel as it relates to LabVIEW at our last earnings call. We have Ovation Virtual Advisor, which sits inside of Ovation. We have over $100 million of quotations for Ovation Virtual Advisor today outstanding. And then we have Aspen Virtual Advisor, again, built into the Aspen suite. So customers want to use it, but they want it integrated into the software suites that we offer due to that domain expertise that we have. So to your point, look, we grew ACV 9% in the last Q. We expect it to grow in a very similar rate in this current Q with a 2-point headwind from the Total job a year ago, but we expect to finish the year at 10% plus ACV growth at Emerson. And ultimately, that's the tale of the tape is if you're under threat, you're not going to be able to grow your ACV double digits or higher. We feel very strongly that, that's the pathway that we're on and that those 3 very important moats differentiate the software that we have.

I can tell you that AI hallucinations in a nuclear plant would be not very good right now.

It would be tough. It would be very difficult to run any of the critical processes, whether you're in power generation, whether you're liquefying gas, whether you're managing a bioreactor with the latest cancer treatment drugs, you don't have accurate high-fidelity systems doing that.

So Lal, let me ask you just related to that. Like -- so I feel like you have a unique position here to maybe go on offense to use Nigel, to use sort of advanced AI. So like as we talk about, the world is changing really quickly, right? So how do you make sure you can go on offense to use your domain knowledge -- we're all worried about you're losing, but maybe you can actually win.

100%.

Talk about as CEO, how do you get more aggressive because you have it versus these competitors? How do you do that?

100%. And I think leveraging our domain expertise and process application knowledge, to bring new products to market and bring them to commercial success is what we're focused on. So the Ovation Virtual Advisor, as an example, was released less than 2 quarters ago and already is building, I don't know where we sit on quotations, but 2 weeks ago, it was well over $100 million of quotations for that outsetting quotations for that product. So we're driving significant commercial activity around the products that we have. And we're listening to our customers about what technology they need to be embedded into the existing software. So you're absolutely right. We want to take advantage of that. We've taken our R&D dollars up in our software businesses, specifically to address an opportunity to differentiate here.

Yes. No, Andy, I would just add on to that. Those are the discussions we're having with customers and clients today. And they are going through the same process, interestingly that we're going through as Emerson to say, what is the AI road map and how does it improve operations? And we have some major customers coming back after studying it and saying, you are a big part of our future in our AI road map. And they're taking -- I think we take chatbots and virtual advisers for granted today, but it is new in those environments, and it's being very well received. They're seeing that. They're seeing that we're developing those products offerings and saying, help us move along the path. So the discussions are very constructive.

Yes. And Lal, just to the point of sort of control of all of AspenTech now, you and I have talked about next-generation control systems. So sort of where are you in the process of that? And maybe to my earlier question, like are there things that are just easier for you to do now that you own all that?

Absolutely. We released our etch controllers. We released our next-generation version 16 DeltaV a few months ago. We're working on next-generation Ovations. We have Ovation Green in the market. All of that is made possible by significant collaboration between engineering teams in Bedford, Pittsburgh and Austin. And a collective vision of where we take elements of control and optimization and reliability to our industries, I think, becomes much more viable now that we can take the engineering resources and leverage them across the entire platforms.

Got it. Helpful. So Mike, maybe shifting gears then. I think you're going to grow 2% in the first half of the year, 6% in the second half of the year. You obviously had good order growth. We'll get to that of the sort of 9%, but is there anything that needs to happen to reach that second half growth? Because I get that question a lot. Do you need improvement in short-cycle test and measurement to continue, maybe legacy discrete? Like how would you answer that question?

Yes. I would start by highlighting what we've been talking about that the 2% to 6% looks pretty stark, but you have to remember the software renewal dynamic that we've been talking about, and it's really sort of a 4% to 6%. So there is acceleration, but it was all built into the plan, and it was based upon the backlog that we had when we built the plan, knowing that there were more project shipments coming in the second half. So I would say the quarter -- the first quarter was right on target. Obviously, orders were a little better, and we can talk about that later. Backlog built, all of those projects expected to ship were -- are still there on track. And then I would say, very importantly, yes, we needed orders. Yes, we need T&M to continue. That happened. The orders came. And when you look at the 9% orders and you peel out some of the larger power orders and really look at what's that MRO order rate, it's mid-single digits. So it's very supportive of what we need to hit the full year, and we feel very comfortable sitting here today that what appears to be a big ramp of 2% to 6% is going just as we had planned it out and the order rates are very supportive of that.

Yes, if I may add, Andy. What we do not need, and we've entirely assumed, we've assumed a weak China, no recovery. And we've assumed a weak Europe, no recovery in the forecast that we put out there. So if China, for whatever reason, strengthens, great. It has pockets of strength in power generation in semiconductors, the portfolio business at T&M is strong, but it has vast pockets of weakness in the chemical markets, in the automotive markets and others. We don't need it. We don't need it to improve beyond where it sits in the mid-single digits down. And then Europe is very -- Western Europe is very weak as well. So it's -- again, it's a story of the United States, the Arabian Peninsula and then a few odds and ends like Japan, Brazil, parts of Southeast Asia that are strong.

Lal, just to the point of like customer decision-making on these projects that you expect to sort of move forward in the second half, is it changing at all? Like is it -- because it's obviously been a pretty uncertain environment out there. So like, again, we're going to talk about orders, but just in terms of timing of projects, are customers getting more used to the craziness? Or is it like...

No. Look, I haven't seen a whole lot -- there's a lot of activity, particularly in the United States. And you can call it great strategy or dumb luck, but we aligned our company to serve 5 critical growth factors: semiconductors, aerospace and defense, energy, life sciences and power. It just happens that those specific 5 industries have -- are experiencing accelerated growth in what is our most important, most profitable market, the United States. And the entire American administration's industrial policy favors those 5 markets. So we're seeing a lot of activity, whether it's related to new drug expansions, nearshoring, new semiconductor chips or near-shoring, power generation and expansion, which, by the way, Andy, today is predominantly modernizations and behind-the-meter work at data centers, what we experienced at Ovation, 74% orders growth, yet to come at the large greenfield builds, which we'll experience in the country, and we're in the middle of those quotations now. So a lot of activity. I think we've had to make significant investments in our business in terms of capacity for this, but we're not seeing any change in pricing expectations. We're not seeing change in customer behavior related to it, but it's aggressive in the U.S. in terms of pace.

Right. And just to get it out of the way, Lal, kind of fair to say that your fiscal Q2 is the same kind of as it was in Q1, more or less so far?

Yes, it is. And look, there's nothing fundamentally that has changed between earnings and today. I was telling you before, [ Rick, ] I just came back from Saudi Arabia, South Africa, Angola last week. And again, my -- I continue to see a lot of positive activity in that part of the world. The customer engagements certainly support the forecast that we've had, and we continue to see good order momentum in the United States.

Well, I should just ask you about that because you were just there. Like Middle East has been supportive of Emerson's orders. Like so do you expect that to continue based on your trip? Like where is it coming from?

I do. I was in Dubai in the Emirates and part of our team went up to Qatar as we're pursuing a very significant opportunity there now, which we should book this month or next month in the quarter. And then I met with the CEO of Aramco and again, a great partner of ours. And I feel -- I came away very strong with strong conviction of the investments they're making in systems and AspenTech as part of their future road maps in those customers.

Great. And so then you mentioned the 74% growth from Ovation. Obviously, it's probably not repeated, but you never know. But if behind-the-meter type work is proliferating and Emerson is the market leader in power-related control systems, why couldn't you see better growth? Because I think you've modeled mid-teens growth expectations for power this year, 74% is a lot higher than mid-teens.

Yes. Great order momentum, and that continues into this quarter. It's a U.S., Middle East, China story for us. We are winning in China with Ovation. We continue to win, which is important, but there's a lot of activity in this country. And certainly, the behind-the-meter data center work is new to us and has been a complete incremental opportunity for Ovation, which is very, very interesting. So look, we want to guide a number that we can definitely hit, but we are putting a lot of resources into Bob's business to drive and to capitalize on the opportunity of growth.

Yes. Great. No pressure, Bob. So then you mentioned, Lal, the potential of power-generating capacity, right? A lot of the work today is modernization, behind-the-meter work. So if that does ramp up, could it lead to another acceleration in power in '27 for you guys? Like how do you think about that?

Good. No, you've got to keep in mind that greenfield work takes time. It doesn't -- plants don't sprout out of the ground overnight. So it's 2 to 3 years of a build-out on a combined cycle plant, new coal perhaps. There's talks about nuclear restarts. And the SMR story probably moves a little bit more to the left in the 2030 versus the 2035. We'll see. The economics around combined cycle are just so much better in the United States, we'll probably lean heavily in that. But certainly could have another -- I'm very bullish on power. And that's just the generating capacity. We also have the whole transmission and distribution grid that needs to be upgraded and is in the process of being upgraded. So that's another -- and DGM's orders are up over 25% on an ACV basis -- sorry, ACV order -- ACV was up 25% at DGM in the prior quarter.

Yes. Bob probably wants to run up here, but like I just will ask you about nuclear just in the sense that one of your competitors talks about nuclear a lot. But I feel like you talk about maybe a little less, but it's still very important and growing for you guys, right? So do you see it as another incremental growth driver here?

Absolutely. And look, the position we have addresses every source of generating capacity from solar, wind and hydro to the conventional gases, coals and nuclear. Our position with Westinghouse is, as you know, we're the unique supplier of systems to Westinghouse. But Bob is also -- we've also worked on relationships with other potential manufacturers, particularly in the SMR world, which could develop quicker than we expect. So we feel really good. And it's not just in our systems business. We have a phenomenal valve business that addresses -- that has high shares in nuclear. I don't think there's a nuclear facility out there that doesn't have a fisher valve. And then we have a very strong instrumentation business both in ASCO and Rosemont that are applied in those industries.

I'm going to open up to the audience in a second, but let me ask you about MRO because obviously, it's still a big portion of your sales, almost 2/3 of the business. So maybe more color into what you're seeing in your installed base. You've obviously -- we just talked about project starts, like is MRO growing at that sort of 6% rate in the second half? And we know you've seen strength in North America. Is that across all your end markets? And is there an opportunity for share gain...

It's pretty broad, Andy, in terms of the MRO. Now the pockets of weakness that Lal talked about are there in China and in Europe. But the installed base you mentioned is a big part of the growth algorithm as we move forward with $155 billion of installed base. And we don't talk a lot about what we do there to protect that. And as you can imagine, we're very active. And I think what we do in the final control space, which is about a $55 billion installed base is a good reflection of that and where we're investing to grow that MRO. We're going to grow the service centers by about 25% over the next 3 years, and we'll have about 10% more head count because we see those opportunities. That team does a great job of understanding shutdown turnarounds and when they are, what our content is, ready to execute. Service is very, very important to the customers. And that process yields a $2 billion funnel that's outside of the $11 billion funnel that we talk about in terms of projects. So it's an important part of the business. And as I mentioned before, in the order rates, the pace of business has been in that mid-single-digit range, which is supportive of what we need as we move forward into the...

Mike, I think that's important, right, because MRO really hasn't fluctuated that much. Everybody worries about process, blah, blah, blah, but it stayed kind of mid-single digits for this whole time, more or less.

Yes. The total order rate trailing 12 months is 6%. So it has been -- and certainly, MRO is a component of that, a very important component of that at roughly 65% of the business.

Yes. Any questions from the audience? Any may want to ask a question? All right. Well...

Bob had a question.

You could ask what if you like. I still have plenty of questions. So maybe I'll shift to talk about National Instruments for a second or test and measurement, excuse me. So you do seem to be winning there. Your bookings growth has started with a 2 handle for the last couple of quarters. So maybe talk about sort of what you've done there? How much of it is the cycle versus you guys? And let's start with that.

So I'll start off and kick it over to Baughman on the financials. We're well on track to deliver the synergy plan that we communicated to our investors at the time of the deal. If you recall, we embarked on a $200 million cost takeout. We saw that opportunity at SG&A in the business. This is a business that has run 70% plus GPs and runs really well at the GP line, 2 manufacturing facilities, a well-defined competitive supply chain, the right levels of vertical integration when it comes to electronics where needed, particularly in high mix, low-volume boards. So we felt really good. And to be very honest with you, there's been minimal parts that we've touched above the GP line. The entire opportunity came at SG&A, where we felt that there was a significant gap between where NI operated and where the rest of their peers operated. And that came to an understanding around efficiencies of engineering, selling and administration. The $200 million work is complete. I think we came out a couple of quarters ago. And we took full advantage of a prolonged downturn in that space to get the costs out. What we're seeing now is the returns on all that work. As volume has come back last quarter, we printed over 29% segment EBITDA in that business. If you recall, 30% was our target. So we're touching those numbers right now. We're seeing phenomenal order growth in 3 of the 4 businesses, in semiconductor, in aerospace and defense, which has been strong throughout the cycle and in the portfolio business, which gives us a lot of confidence because that is just about every SIC code that you can think of. It's the automotive or transport market that is the weakest. You get a little bit of a comparison benefit, but it can fundamentally still a very weak market, whether it's on electrical batteries or ADAS is in conventional cars, still very weak.

Yes. So just the financials, 20% order growth. So obviously, a very constructive market that we expect to continue 11% sales growth in the first quarter and expecting high single digits for the year. When -- if you would have rewound a couple of years ago, I think there was a lot of -- and we had the same concern going in and talking about a lot of cost out. Some of it in R&D and would we be focused in the right places. So while we have a constructive market, we believe we're doing the right things around technology like the Nigel Advisor and then not only having a very good adviser that customers really like, but then improving the functionality as we move along that curve toward Agentic. And we talked about it at earnings where Nigel can really make a test engineer's life better by making some of the initial coding a lot easier. Is it Agentic? Can you just feed in a product spec and outcomes your test plan? Not yet, but we're on that path and continue to do that. Just as an example where we are investing in R&D heavily there and continue to have a road map to keep the product at the forefront.

And the last thing I'll say is we put a phenomenal management team in place with Ritu Favre running the business, who was an insider. We surrounded her with 2 or 3 Emerson folks. That entire management team now 2.5 years into this is entirely in place. We've had no turnover. It's a great team. They're executing at a very high level, and there's a lot of great energy on that campus, which is fun to see.

So I'm sure you don't want to set a new target, but to your point, 29% margins already and one of your businesses inside is still pretty weak. So like do you see more opportunity to continue to have high incrementals? When I look at Test & Measurement, one day, I might be looking at, I don't know, well north of 30%. Is that possible?

Look, I'm not going to make a commitment beyond the 30%, and you'll see as we come through the second quarter, perhaps there's some modulation there. There was lots of positives in the first quarter. It was a great mix. It's a big volume quarter for them, a lot of positive things. So let's stick with the 30%, and then we'll talk about a new target when we hit that for the year.

That's fair. So maybe back to sort of regions, right? U.S. had 18% growth. Is that mostly power? Is there anything else going on there that like...

Yes. I would say all of the growth verticals are performing well in the U.S., and it's certainly been the strongest with a strong MRO. Lal touched on the Middle East, where there's a lot of greenfield, it's LNG, it's energy, chemical, power, all doing very well. And then although Asia -- the rest of Asia has been -- outside of China has been strong with power and energy China has a lot of power going on, which has been -- which has certainly been a bright spot. So certainly, the growth verticals are reading through everywhere. And as we talked about before, outside of this lingering softness in Europe and China, the rest of the world is really doing pretty well.

Right. And so in terms of the growth verticals, right, they seem overweight to the U.S. to some extent. I mean, you tell me. I heard you say yesterday that you think you're midway in the LNG cycle, so I won't ask you that again. But like on the life sciences side, you and I have talked about a pretty big reshoring effort, maybe even a couple of years ago that was about to commence. So like how do you sort of now look at that? Like is it what you thought it was going to be? Where are we in the cycle there? Because you guys are the leader, I think, with DeltaV and that stuff.

So yes, we have over 4,000 DeltaVs installed in -- across the pharmaceutical industry, all top 25 of the largest pharmaceutical companies use DeltaV as their manufacturing systems. We haven't yet with a few exceptions, minimal exceptions, seen the $350 billion of announced near-shoring investments in the life science industry. What we have seen is expansions and new builds in the U.S. for new drugs. So -- which you can consider a near-shoring effort that Eli would decide to build their next facility in Houston and not in Ireland. Those commitments, which are really capacity expansions for successful drug treatments, we're seeing that today. But the plants that sit in Ireland, that sit in Switzerland, in the Netherlands and the effort to bring those down, which is that commitment that has been made to the administration, we're yet to see those come in mass. And that's down the line for us. So pretty exciting on the vertical as well.

How does the time line work? Like is it -- when do you get the order?

We get the order -- we -- well, it's interesting because the plants are built like-for-like, right? You want to maintain the FDA approvals and the processes that you use for making a drug. And so we get the order relatively early in the cycle so that the engineering can begin and the validation and the processes can work. So you expect -- we expect that to continue through late '26 through '27 and '28.

So I think I might have asked you this even last year, but like you already answered my question on the Middle East, but let's talk about like India and the Middle East versus China, right? Like because I mean, China is more difficult these days. So should we be talking more about the other emerging markets? Could they equal or be greater than China as we go forward? Like how do you guys think about that?

100%, 100%. I mean, for us, in India and Middle East, Africa, at $2 billion, which is about the size of China is -- it will get there quicker than we expected in the next 2, 3 years. Fundamentally, the growth in those markets helps offset the slowdown in China. And keep in mind, we also lost in 2022, a very fast-growing Russia market that we walked away from. That was not -- that was a market that was small, but was growing at a very high rate, particularly as it related to energy for the company. So we lost a couple of growth levers. We had to go replace them, making significant investments in Saudi Arabia with manufacturing, people. We now have full manufacturing in Saudi Arabia. And by the way, we're expanding that just because of demand already and the plant is only 18 months old, and in India as well.

It reminds me to just ask you any sort of new developments in Venezuela or we just kind of wait and see?

No, it's actually -- it's a great question, Andy. And our Board -- we presented a deck to our Board last month because certainly, that's a question. Look, we have over $800 million of installed base in Venezuela. So you go back to the legacy of [ PDVSA, ] it's predominantly in our valve sensing business, although we do have a few systems. So that's important and it's there. Certainly, the infrastructure is a concern. The security element is a concern. We're going to take the lead from our customers on pacing. Chevron, of course, we've been doing business, about $1 million of business with Chevron into Venezuela over the last few years, but we're waiting to see where the more licenses are awarded for Western companies to participate in that marketplace. There will be a significant wave of investment. It may be not dissimilar to what we experienced in Iraq after the war. So we are ready. We've got our partners in place. We still have our entities. We have trading entities and legal entities in Venezuela, all of that ready. And we have, as you can imagine, many Venezuelan expatriates that left the country, engineers that work in our company that are more than eager to go back and build the infrastructure of their homes. So we're ready. We're watching it very carefully, talking to customers and ready to go.

One of the interesting things about taking a look again at the market, we think traditional energy, but power will be an issue there as well and might actually come first in terms of where the investments will be. So yes.

Interesting. So just on supply chain and price versus cost, I think Ram mentioned on the last call, you're watching DRAM availability very carefully. So how do you ensure availability given the high demand that's out there? And then I think you've baked $130 million in tariffs into the '26 plan, but it seems -- you seem to suggest if we -- I don't know if we have an India trade deal or not. But if we do, like does that help you or like...

Yes. So on the memory chips, I mean, certainly, qualifying new vendors raising safety stocks, and we feel pretty good about where we are today from a cost perspective. And we're lucky because the chips that we use are a little different than the chips that are used in AI. So there's pressure there but not as much as the DDR5 chips. And obviously, an important component for our electronics, our instrumentation and the test and measurement business. From an economic standpoint, it's immaterial. So it's -- we could pay 2x and it wouldn't affect the rounding. So not an issue there. On the tariffs, yes, it continues to be fluid. There was this discussion around the India deal. I think there was an agreement to go from [ 25 to 18. ] That will be a small upside, but it really isn't material to the overall year or quarter.

Yes. Got it. And then just one other sort of detail. I think you mentioned you still will be a bit challenged in your Intelligent Devices business in Q2 after a couple of good years and then start to improve. So maybe just give more color into that dynamic of turn? What's going on in that business?

There was a little bit of backlog liquidation, particularly in North America that we're fighting in the comps. So it's really nothing more than that as we move forward. And again, with the Q1 order rates coming in where they are, what we see for the rest of the year, not only in the projects, but in the MRO staying stable, we feel good about the back half of the year.

Got it. Helpful. So Lal, I'm going to ask you a safety and productivity question. I know you don't get this very often these days, so be on your toes. But the business' sales have turned mildly positive over the last couple of quarters and margins started to creep up in the business. So dare I ask if it's actually having some sort of an inflection given the state of nonres construction, like -- maybe you can talk about that.

It's certainly -- it's been pleasing to see the recovery in the United States, which is driving the numbers. It continues to be very weak in Europe, particularly in the construction markets, manufacturing, light commercial, very, very soft. But as you know, it's predominantly a U.S. business for us.

Like 70% U.S.

70% odd U.S., perhaps a little lower than that. But it's really encouraging to see that in the U.S. We'll see. We'll see whether that's sustained. Obviously, PMI numbers are encouraging, but on one data point doesn't really move the needle a whole lot, but at least positive.

Yes, positive. But there's an auto exposure there that's bigger than the rest of the business groups that continues to be tough. But yes, the order rates in that business group were also mid-single digits. So we're seeing some goodness.

Is there a margin opportunity there if it does...

They get volume for sure. And as we talked about, they're getting a lot of good price, and we'll continue to drive that where we can. So we're sure there's some margin opportunity.

Okay. And Lal, maybe just the current state of the portfolio, right? So I think you committed to returning $10 billion in cash to shareholders, $6 billion repurchases, $4 billion dividends. Those are some big numbers, right? So maybe just you'll be content to do an occasional tuck-in, but like how do you feel about current portfolio versus kind of just giving cash back to shareholders right now?

Yes. And that was -- we spent a lot of time thinking about what this next chapter of our company would look like. And it really pivoted around the capital allocation story. We had to spend the capital to design this company. And that took us essentially 4.5, 5 years to design the company that we wanted to run, the company that was aligned and could deliver differentiated growth through cycles that was aligned to the key vectors that had the geographic exposure that we wanted that had the meaningfulness from a customer wallet perspective and the stickiness that we thought was critical. That work was done, It's $42 billion of capital between disposals and acquisitions that we completed over the 5 years. The next chapter is really around execution. It's around investing in our company on technology, innovation and the commercial engine, ensuring that we can take that technology and drive customer adoption around the world and returning cash to our shareholders. I think you're absolutely right. I think that's what's going to characterize our journey to 2030. The commitments that we made around dividend and share repurchase are very important. But it gives us ample firepower, not just this year as we continue to drive our leverage rates down and pay down the debt. I think we'll be basically back there with a very good balance sheet at an [ A2A ] rating, which is important to us gives us that flexibility into the future. But ample firepower if we see a great tuck-in, a great bolt-on to bring into the business. But really, the focus is around that capital allocation model you described.

And with the understanding that you could always prune the portfolio, it seems like you're fine with what you have right now, no bigger pruning. Never say never, but like...

Right. And look, Andy, I mean, we have ample opportunity to create value with what we've created here, and that's what we're focused on. We're running our businesses through our management system. We have phenomenal talent that we've been able to attract and retain in the company because of the new company, because of the work we've done inside of the company and how we run the company, what it feels like to work in our company. And so I feel great. And we ask there may be things that come in and out and -- on the smaller end, but we feel good about what we've created.

Mike, I just want to ask you quickly about free cash flow margin because you have a very high margin, right, like 18% going to 20%. So where does that come from to sort of get up to 20% because you're already pretty high. So...

Yes. We have a lot of -- the management system drives initiatives, not only in the P&L, but on the balance sheet management. So we continue to drive improvements in trade working capital and then just growing the profitability, which we certainly plan to do with the growth gets you to the higher margins. So we feel good about the road to 20%. We -- and it's really the management process and growth that will get us to the higher free cash flow margins.

Got it. And Lal, last...

There's runway.

Got it. Last question. So we ask you this every year, what are the top 2 or 3 innovations and structural changes affecting your company over the next 5 years? And are there any emerging industry trends that are perhaps being overlooked in the current discourse?

So a couple of ways to answer that. Certainly, we are investing. When I became CEO, the company invested less than 4% into R&D. We are 8% now. The top of our technology stack across DeltaV, Ovation and software is at double digits plus 15% plus. We'll continue to drive innovation at the top of the stack. I think the integration of -- and the evolution of AI into our technology to respond to customer needs is critical. That will drive differentiated performance. And to your earlier question, put us in an attack position, in an offensive position with tech. So that's number one. Number two, we have to continue to refine. It's great to have technology. We've got to continue to refine our commercial engine and how we sell to whom we sell. Traditionally, Emerson on an automation perspective has been an OT company. We do a great job, and we have fabulous people around the world that call on operating people, engineer-to-engineer sale in a plant. To be successful, selling software and where systems are going, we need to evolve and create a channel that can be a C-suite calling channel. Now we brought that in with AspenTech. And if you take -- if you step back and you think about the Total deal, for example, that was a CEO to CEO sale. And of course, with advocacy inside of the customer for digital transformation, but we need to also sell at an IT or at a C-suite level to drive true transformation and adoption of the software. So those are the 2 pieces that I'm most focused on that we, as a management team, need to ensure we do well to deliver those 2030 targets that we shared with you at our Capital Markets Day. And then in terms of trends, look, we have to stay very nimble, and I think our management system enables us to do that around whether it's a technology disruption or geopolitical disruptions. Every day is a new day when it comes to potential disruptions, whether it's tariffs or a war. We just need to stay very nimble and adapt and respond with the management system.

Awesome. Lal, Mike, thank you very much.

Thanks for having us, Andy. Thank you.