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

Good morning, and welcome to Emerson's Fourth Quarter and Full Year 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to your host, Karl Schumacher, Vice President of Investor Relations at Emerson. Please go ahead.

Good morning. And thank you for joining Emerson's Fourth Quarter and Full Year 2026 Earnings Conference Call. Before we begin, please allow me to take a moment to introduce myself. My name is Karl Schumacher. I've recently been appointed as Emerson's new Investor Relations leader. I've been with Emerson for over 12 years now, and I've had the opportunity to hold finance leadership roles across multiple geographies and segments. . Most recently, I served as the segment CFO for test and measurement. I'm excited to work with everyone, and I look forward to meeting with you all soon. Today, I am joined by Emerson's President and Chief Executive Officer, Lal Karsanbhai; Chief Financial Officer; Mike Baughman; and Chief Operating Officer, Ram Krishnan. I would encourage everyone to follow along with the slide presentation, which is available on our website. Please turn to Slide 2. This presentation may include forward-looking statements, which contain a degree of business risk and uncertainty. Please take time to read the safe harbor statement and note on the non-GAAP measures. I will now pass the call over to Emerson's President and CEO, Lal Karsanbhai, for his opening remarks.

Thank you, Karl. Good morning, everyone. I'd like to begin by thanking Emerson's 70,000 employees for their dedication, passion and perseverance. Together, we delivered a strong fourth quarter and finish to 2026. The Emerson has the most talented team in the automation industry, and our efforts are reflected in the results we will discuss today. More importantly, this theme has positioned us to keep winning. One year ago at our investor conference in New York City, we outlined a value creation framework. One year into this 3-year plan, we met our strategic objectives. And remain on track to deliver our 2028 commitments. Our momentum carries into 2027, driven by our growth verticals and supported by secular macro trends. Customers are investing in automation at a rapid pace, and our orders reflected. The diversity of our customer base and the range of industries we serve give us confidence in the resilience of the company we have built. As I complete my sixth year as CEO, I reflect on the strength of the Emerson management system, designed in the 1970s under Chuck Knight's leadership, it has evolved over time, but most meaningfully over the past 6 years. We have deliberately changed our culture to push trust and empowerment deeper into the organization while maintaining a high standard of accountability. This environment enables us to attract and retain top talent, energized to deliver outstanding results and create differentiated value. I am excited about the opportunities ahead and more confident than ever in Emerson's future. Lastly, I would like to thank our customers, the Emerson Board of Directors and our investors for your continued trust in us. Please turn to Slide 3. Underlying orders grew 14% and with broad-based demand across all business groups. Demand was most pronounced in Software and Systems, up 82% and intelligent devices, up 13%. All regions experienced growth, led by North America, up 15% and the Middle East, up 42%. I will discuss more details on demand later in the presentation. Emerson exceeded expectations for sales and profitability in the fourth quarter. Underlying sales were up 7% and with software and systems accelerating to 14% growth with strength in Test & Measurement up 15% and control systems and software up 14%. Adjusted segment EBITDA margin expanded 160 basis points to 29.1%, and adjusted earnings per share increased 15% to $1.86. For the full year, we delivered underlying sales growth of 4% and adjusted earnings per share rose 10% to $6.59, both above expectations. Free cash flow was up 9% to $3.5 billion, and we completed $1 billion of share repurchase, retiring 7.2 million shares. As expected, annual contract value of our software grew 10.1% to $1.7 billion. For fiscal 2027, we are guiding underlying sales growth of 5%. We expect to deliver adjusted segment EBITDA margin of 29% and adjusted earnings per share of $7.25 and reflecting meaningful progress on the pathway to our 2028 targets. We plan to continue returning substantial capital to shareholders. and we expect to return $3.8 billion in 2027, $2.5 billion in share repurchases and $1.3 billion in dividends, a 7% dividend per share increase of $0.16. Please turn to Slide 4. Emerson navigated the conflict in the Middle East and inflationary headwinds to deliver another year within our value creation framework, demonstrating the resilience and profitability of our automation portfolio. Underlying sales growth was led by the United States and the Middle East, both of which were up high single digits, offset by persistent softness in Europe and China. Our growth verticals were up 21% year-over-year as secular tailwinds are supporting investment across greenfield projects, modernizations and MRO. Adjusted segment EBITDA margin of 28.2% expanded 60 basis points, driven by price/cost and the benefit of cost reductions and synergy realization. We also realized $100 million of synergies at AspenTech, completing the integration 2 years ahead of our initial target. Adjusted earnings per share of $6.59 a marked our sixth consecutive year of double-digit adjusted EPS growth. Emerson demonstrated strong free cash flow generation at a margin of 18.6%. Please turn to Slide 5. Underlying orders grew 14% in the fourth quarter with broad-based demand across the portfolio and strengthening long-cycle project activity, led by power, LNG and Aerospace and Defense. Test & Measurement orders growth of 14% exceeded expectations with semiconductor up 59%. Control systems and software orders were up 20%, with orders in our Ovation business up 26%. North America, Southeast Asia and the Middle East saw significant demand from our growth verticals and energy security projects. China orders remain negative as both chemical and refining continue to weigh on demand. Electrification is benefiting Emerson across the technology stack as power generation projects, modernizations and grid investments are advancing in all regions. The need for energy security is also increasing, the capital being deployed in LNG and traditional energy projects. Last November, we outlined an opportunity pipeline of [ 350 million ] tons per annum of LNG yet to be awarded and approximately 100 million tonnes per annum were awarded in 2026. The However, the demand for gas continues to grow, and we now see an opportunity of 275 million tonnes per annum remaining. Nearshoring and self-sufficiency investments continue to unlock activity in semiconductor, life sciences and Aerospace and Defense. These opportunities are manifesting in our project funnel which increased $600 million to $13 billion, up 17% year-over-year. New capital formation is being driven by our growth verticals which were up $500 million sequentially. In our fourth quarter, Emerson won approximately $575 million from the fund. 75% came from log growth verticals and I want to highlight a few large wins. First, we were selected for a major petrochemical project in Qatar, where our customer is expanding downstream capacity with a world-scale ethylene cracker complex. Emerson will provide integrated control and safety systems as well as measurement instrumentation. We were chosen for our proven reliability and demonstrated performance on the first phase of this facility. Next, Emerson was chosen by LNG Canada for their Phase II expansion at their LNG export facility in Kitimat, British Columbia, which will double the capacity from 14 million to 28 million tons per annum. Emerson will provide our leading valve and sensor technology, building on the success of our Phase 1 solutions. And finally, Emerson signed a 10-year DeltaV MES subscription agreement with a leading global life sciences contract manufacturer. Spanning multiple systems across 3 sites Emerson's software will help improve operational efficiency through automated data collection, more accurate electronic batch records and more consistent manufacturing workflows. Please turn to Slide 6. We expect the United States, India, Southeast Asia and the Middle East as well as our growth verticals to be strong contributors to growth again in 2027. The Americas account for around half of Emerson's sales and grew 7% in 2026. We expect sales to be up mid-single digits in 2027, underpinned by broad-based growth in the United States with healthy MRO. We are planning for significant activity in growth verticals in the United States, where about 1/3 of our business is serving power, LNG, life sciences, semiconductor and aerospace and defense. In Latin America, electrification and energy security needs are expected to unlock project activity. Europe was down 1% in 2026. And we project a modest improvement to low single-digit growth with sustained project activity in LNG, power and life sciences offset by lingering weakness in industrial markets. We do not expect an inflection in the region as demand in Germany, France and Italy remain soft. Approximately 30% of Emerson sales are in Asia. The Middle East and Africa, which collectively grew 3% in 2026, including an approximately $85 million headwind related to the conflict in the Middle East. In 2027, we modeled mid-single-digit growth with continued momentum in the Middle East, which are -- we expect to be up high single digits again, assuming the conflict does not escalate. Rehabilitation work is progressing and resiliency investments provide long-term opportunities in this region. We are not planning for a recovery in China, due to the persistent headwinds in both chemical and refining. We have a mid-single-digit outlook for the rest of Asia as energy security grid modernization and FPSOs support greenfield investment and stable MRO. Growth verticals grew 21% in 2026 and now comprise 27% of Emerson sales. We expect low double-digit growth in 2027, driven by secular trends of electrification, energy security and yousuring which are supporting investments in automation globally and most prominently in the United States. Our other automation markets were collectively flat in 2026 with prolonged weakness in Europe, in China. We modeled a moderate increase to low single-digit growth in 2027 with improving MRO activity from pent-up demand and energy and favorable trends in North American industrial activity and electrical equipment. We are entering 2027 from a position of strength, and I am confident in our plans to deliver the year. With that, I will now turn the call over to Mike Baughman to discuss our financial results and guidance in more detail.

Thanks, Lal. Please turn to Slide 7 for a more in-depth look at our Q4 financial results. As a reminder, the impact of tariff refunds are excluded from our adjusted earnings results. Q4 underlying sales grew 7%, with volume contributing 4 points. Each of our business groups exceeded expectations, led by software and systems up 14%. I will provide more details on geographic and group performance on the next 2 slides. . Backlog ended the quarter at $8.2 billion, up 11% year-over-year, and our book-to-bill was 1.01 above typical seasonality. Adjusted segment EBITDA margin was 29.1%, up 160 basis points. Margin expansion exceeded expectations due to better volume in software and systems and intelligent devices as well as favorable segment mix. Price cost and cost reductions more than offset inflation. Adjusted earnings per share was $1.86, up 15% year-over-year. Operations contributed an incremental $0.25 with $0.19 from Software and Systems. FX was a $0.01 headwind. And Fourth quarter free cash flow was $916 million, up 9%, with a margin of 17.6%. Full year free cash flow of $3.5 billion was also up 9% and margin expanded 60 basis points to 18.6%. Please turn to Slide 8 for details on Q4 underlying sales by region. The Americas grew 9% with the U.S. up 11%. The pace of business remains strong in the U.S. with software and systems and intelligent devices, both up low double digits. Growth was broad-based across end markets, with the majority of our business units up mid-single digits or better in the U.S. Asia, Middle East and Africa grew 7% and led by the Middle East and Africa, up 19%, while Asia was up 2%. Another outstanding performance by our teams in the Middle East led to a smaller adverse revenue impact than expected in the quarter. As the duration of the conflict extends our customers and our teams have consistently found ways to drive business continuity. Europe continued to experience weak markets and grew 1%. Globally, our growth verticals contributed meaningfully to sales and were up 25% in the quarter. Growth was strongest in LNG, which was up 68%, benefiting from the delivery of projects. Growth was also robust in semiconductor, up 43% and power, up 24%. MRO was 63% in the quarter and projects ticked up slightly in the quarter to 37% of sales. We saw a sustained strength in North America MRO and robust project activity in the Americas, Middle East and Southeast Asia. Please turn to Slide 9 for details on fourth quarter underlying sales and margin performance for our 3 business groups. Software & Systems was up 14% underlying as Test & Measurement grew 15% and Control Systems and Software grew 14%. We saw significant growth in power, LNG and semiconductor. As expected, ACV grew 10.1% year-over-year. Software and Systems margin of 32.3% increased 490 basis points due to leverage on volume, price/cost and mix. Intelligent Devices underlying sales were up 4%, better than expected, largely due to final control delivering more project shipments in the Middle East. Growth was led by LNG, power upstream gas and midstream gas. Intelligent Devices margin of 28.4% was down 10 basis points year-over-year, driven by mix, offset by strong price cost and leverage on volume. Safety and Productivity was up 2% underlying. Strength in electrical products and U.S. industrial activity was offset by persistent weakness in Europe. Safety and productivity's margin of 22.9% was up 30 basis points year-over-year due to price/cost and cost reductions offset by inflation. Please turn to Slide 10 for our 2027 underlying sales guidance by business group. We expect software and systems to grow 8% to 9% in the first quarter and 7% to 8% for the full year. We are planning for high single-digit growth in both test and measurement and control systems and software from broad-based demand in the U.S. and growth verticals. ACV is expected to grow approximately 10% in 2027. Intelligent Devices is projected to grow 3% to 4% in the first quarter and 4% for the full year, supported by stable MRO, project activity and growth verticals and strength in the United States. Safety and Productivity is modeled to grow 3% to 4% in both Q1 and the full year. While we are seeing continued growth in electric utilities and North America Industrial active aging, European markets are soft. Overall, Emerson expects to grow approximately 5% in both Q1 and the full year. Please turn to Slide 11 for details on our full year and [ Q4 ] 2027 guidance. For the full year, we are guiding GAAP and underlying sales growth of approximately 5%. And -- we expect a more normalized pricing environment in 2027 and have built 2% price realization into the plan. We expect adjusted segment EBITDA margin of 29%, up 80 basis points year-over-year. We are guiding 2027 adjusted earnings per share of $7.25 up 10% and free cash flow of $3.8 billion to $3.9 billion. As Lal discussed, we plan to return approximately $3.8 billion to shareholders through $2.5 billion of share repurchase and $1.3 billion in dividends, including raising dividend per share by 7%. We are entering our first consecutive year of increased dividend and a $0.16 dividend per share increase of model demonstrates our commitment to the dividend. Moving to the first quarter. We expect GAAP and underlying sales growth of approximately 5% and adjusted segment EBITDA margin of 28% and adjusted earnings per share of $1.58 to $1.62. We are also planning to complete approximately $1.5 billion of share repurchase in Q1. Please turn to Slide 12. At our investor conference last November, we introduced our value creation framework, which rests on 3 pillars: organic growth, operational excellence and capital allocation. We also laid out clear targets for 2028. Our automation portfolio is aligned to multiyear secular tailwinds that support 4% to 7% underlying sales growth. Our operational excellence has been a hallmark of Emerson for generations, and our capital allocation is focused on returning cash to shareholders through meaningful share repurchases and dividend increases. We delivered 2026 and exited the year with strength in orders and a backlog position that give us confidence in achieving 2027 results that are right in line with our 2028 targets. With that, I will now turn the call back to the operator for Q&A.

[Operator Instructions] Our first question comes from the line of Scott Davis with Melius Research.

Morning, Lal, Mike and Ram, and welcome, Karl. Yes, I just wanted to stress test the guidance. Just a little bit, I have to ask. I mean you had orders up 14%. You got backlog up 11%. Last quarter, orders were up 7%. I can understand the Q1 kind of being relatively conservative on the top line with the 5%. But I would have thought you would have had that accelerating a little bit after Q1 -- are you just being conservative on Europe and order cycle stuff or a little cushion in there? Just maybe help us understand those kind of deltas.

Yes. Great question, Scott. We obviously feel very good about the pacing of orders as we exited really, the last 2 quarters and saw significant acceleration in the growth vertical orders, particularly. And as Mike pointed out, 37% of the really being driven by projects, whether those are modernizations of greenfield investments. So that acceleration gives us significant confidence as we head into the year. And particularly reflected in the backlog growth in the business as well. Having said that, I think your point is valid. We have we have a Europe that continues to be something that we need to watch given the negative performance in 2026. And of course, China, although there was positivity in China in a few of our markets like Casa Measurement overall, it continues to be a concerning market for us, and that has combined with Europe, led us to the guide that we put together.

Makes sense. And I have to ask a question. Just I'm sure the script is written before the election results. Any any tweaks that you would make based on the election results or end markets that you might think might be a little better or a little worse?

Not really. I mean I think we -- I think the industrial policy in the United States, particularly over the last 2 years has been really positive for our business. Certainly, an energy policy, a near-shoring policy has benefited Emerson, and we expect that to continue because ultimately, those policies do create American jobs and to create American well-being. So we hope that continues. I don't think I would change anything related to how we outlook the year right now.

Okay. Best of luck in 27 guys. I appreciate it.

Your next question comes from the line of Andy Kaplowitz with Citi.

Well, maybe you could characterize a little more of the surge in orders that you saw in Q4 and especially in the Middle East, I know you mentioned a large petchem project in the region, but I assume much of that growth in the region is associated with energy security type projects. So when you step back for the overall company, do you think this recent order surge is somewhat durable into '27 when you look at energy security under the ongoing cycles you have that you mentioned power among the customers you're in?

Yes, Andy, really good question. So maybe answering the first part. The Middle East continues to invest in too fast. It's, one, gas production, liquid production, but of course, the downstream investments as well. And then secondly, on resiliency projects, whether that's pipeline storage, transportation, which we're starting to see as well. The particular project that we won in Qatar that I referenced is a downstream petrochemical project, the largest expansion of the downstream facility we've seen in the region in many decades. . Which was encouraging to see in the midst of all the disruption, of course, resulted in the war. So that customer had enough confidence to move that forward and finance it, and we were excited to be awarded the project. To the second part of your question, we absolutely believe that there is continued momentum in the Middle East and Africa as we go into 2027 in both facets of that back of work. So we're excited about what the what the team is accomplishing there and for the outlook. Now that assumes Andy, of course, that we're kind of status quo on the war. But if that's the case, we feel really good about what the plan that we put forward here.

That's great. And then Ram, Mike, I think you've been relatively positive regarding Emerson's ability to pricing, I think, ended around 3% for the year. Vice first cost data in the green. So maybe give us more color to what's embedded in your 2027 expectations. In terms of pricing and the confidence level you have to stay ahead of cost given cost efficiency ring out there, I think you've got sort of normal incrementals modeled for 2027, but maybe just elaborate on that.

Yes. So 3% price was this year, obviously, a point came from tariff and 2% normalized pricing. And so going into next year, we feel pretty good about 2% price in the plan. That's normal level of pricing. I think it's supported by our positioning in almost every category and every end market. So we feel pretty good. That's how we've gone into the year. Now certainly, inflation, particularly material inflation, we've modeled in electronics, and some of the pricing related to memory will be unfavorable. Tariffs will be marginally favorable versus this year. But net-net, good positive green on price/cost should underwrite the incrementals and the margin plan for next year.

Your next question comes from the line of Steve Tusa with Wells Fargo.

Just on the first quarter, it looks like I think the implied incremental is a little bit lower than what you've guided for the year. I think you've got a bit of an easy software comp. Is there something else in the bridge for the first quarter on margins that we should be aware of? .

Steve, it's Mike. Yes. For the first quarter, we'll see year-over-year improvement. And as you point out, we'll get some software contract renewal benefit there. We do have some mix. We're continuing to deliver more projects. We've got some start-up costs that's coming in for an expansion that we've done that will affect really the first half, and that reads through in intelligent devices. And we continue to invest in the business. As we look at '27 for the full year, we've dialed in about 80 basis points of improvement -- and there will be the software contract dynamic, which creates a tailwind. And we will continue to do what we've been doing around price/cost being green and offsetting inflation and cost reduction. So we feel very good about the profitability that we've dialed in and the full year incrementals, I think at the midpoint, are sitting right there at about, so feel like we've put together a very responsible profitability plan as we move into '27. Although as you point out, out of the gate here, consistent really with, I think, the pacing that we had last year, the first quarter is a little slower than the rest of the year.

And is there something different in the mix relative to -- does that mean 4Q, I think you had some decent greenfield in 4Q or the next versus 4Q.

4Q was really a story of control systems and software, where we had a very strong quarter that came in at 33.1%, which was above our expectations and above the prior year of 27%, which was the lowest quarter of the year, so they had some easy comps. Q4 had several tailwinds. We continue to do very well in power. So Ovation is in that segment and continues to do well. We had a good quarter in software, so the mix was good. It was the end of the year where we've got project closeouts that typically happen. Sometimes those are positive. Sometimes they're a negative this year. they were positive. And then we also had good price there. We had the pricing dynamic with the memory cost coming in. I think we've talked about it before that in Q3, we had a little bit of leakage in price that all came back in Q4. So they had 5 points of price in that segment. So that's really what drove the quarter ahead of expectation -- and it was just a confluence of a lot of goodness at CSS that all in quarter.

Your next question comes from the line of Andrew Obin with Bank of America.

Just a question on corporate expense in the fourth quarter. It came in sequentially quite a bit higher than we thought. What's driving it? Are we pulling any expenses forward here? .

Yes, Andrew, great question. All the goodness I talked about at CSS, we have the exact opposite story at the corporate level, and we were about $45 million higher than we expected to be I would tell you that, that is several individually consequential items that all added up to a big number. And if you look at the EPS bridge, I think it's worth noting that was about $0.05 that was offset by lower interest and share count and we continue to get tax benefits year-over-year. So it really didn't have a big impact on the EPS. Now what was it? We had some FX headwinds and -- at corporate, we manage assets that are nonoperating assets. Sometimes we have gains, sometimes we have impairments and losses -- this quarter, we actually had modeled in a small gain that didn't happen, and we had an impairment that we had to take. We also had a really bad performance around our medical claims experience corporate charges those out for the year and then pays the actuals and takes the over under. So we had a bad quarter there. And then there was just some smaller items, all of which broke that. Now -- in terms of discretionary investments, we did make some discretionary investments in IT. And I think that it's worth noting we continue to plan those investments out into '27. So if you bridge '26, we finished the year at Corporate/Other about $209 million. The $45 million that we saw in Q4 will largely not repeat but we will be making an incremental investment of about $25 million through 2027 in digital enablement to improve our commercial tools that support the sales force, contracting, HR systems, and really getting us in a position to better leverage AI as we move forward. So that incremental 5 will read through and then we've got some inflation that gets you to the [ $195 ] assumption for 2027. So yes, Andrew, a tough quarter at corporate with a lot of one-offs that won't affect '27 in any meaningful way. But we are investing in '27 in the digital enablement that will read through.

And just a follow-up just on orders. How should we think about how much of your order book right now is actually for '28 versus '27? Because I do appreciate your comments in China in Europe, but I would imagine orders reflect those markets as well. So maybe can you talk about from a temporary like time perspective, how does it flow? What percent of your order book is for '27? And how much of it now extends into '28? .

Yes. Andrew, you'll see in the 10-K, we make that disclosure of the percent of the backlog in the next 12 months. And that has been pretty sticky at 75% for a long time. That dropped to -- so it's -- your point is a good 1 and 1 that we've been making as well that the order book is filling up with long cycle, and that's starting to read through. Now that said, MRO activity remains robust in certain markets, and it exited the year very healthy high single digits. So -- and supported, obviously, the 7% growth in the quarter. So we feel very good about the orders. But yes, some are longer dated.

Your next question comes from the line of Nigel Coe with Wolfe Research.

Just wanted to just dig into a little bit there between obviously, software and services, software solutions, if we I'm assuming the control systems portion of that is growing high single digits, obviously, double digits this quarter. The ID portfolio is growing 4% in 2027. So I just want to understand a little bit better that divergence. I'm assuming it's a project versus MRO, but any additional color would be great.

Yes, I think -- I mean, Nigel, Ram here. on the 2 dynamics on systems and software, as -- obviously, there's T&M growth in there, which is strong growth 15% our power business, the Ovation business had significant growth in the quarter, and AspenTech had strong growth. So those are the dynamics as it relates to a secular tailwinds around T&M and power that is driving the growth. Intelligent devices, of course, which is our final control and our sensor business has broad-based participation across many markets. And frankly, the dynamics around Europe, China and also the Middle East did impact intelligent devices.

Great. And then you mentioned Middle East. I have to check the number twice the 40% plus growth in the quarter. How much of that is just kind of a catch-up on prime activity I think you're assuming that strength continues in 2027. I just want to understand a little bit better what you're seeing in the Middle East? And how much of this is just catch-up versus new project stroke rebuild?

Yes. I mean, obviously, a big part of it was related to project activity. We did reference the downstream petrochemical project in Qatar, which was a big win for us, but there was plenty of good activity in Saudi and UAE as well. So I think timing on projects plus strong MRO in the quarter, which should continue, assuming there is no additional bad news in the Middle East and disruptions as it relates to the war. I think all end markets, Qatar, UAE, Saudi and obviously, a strong Africa is what we've modeled in for next year. And at this point, we feel pretty good about that plan.

Your next question comes from the line of Julian Mitchell with JPMorgan.

Maybe just wanted to start off with the capital deployment and sort of cash flow as that hasn't really come up. So you've been very disciplined or constrained on M&A activity for a couple of years now. I'd wonder if you might become a bit more expansive given that, but I suppose should we read the large buyback as a sign that M&A probably remains very limited for some time.

Julian, our Yes. I think you've read that correctly. We made a commitment in 2020 -- in 2025 at our investor conference around capital allocation and really a focus on returning cash to shareholders. Over this 3-year cycle. Obviously, year-end now guiding into the second year, we maintained that in line with that plan. Having said that, there's amplifier power for bolt-on acquisitions. We continue to work those. So in terms of bolt-on M&A, billion, some billion dollar type opportunities, we'll continue to evaluate them. But in terms of the large-scale work we had done in the past, that's not in the cards in this plan.