Emerson Electric (EMR) Q3 2026 earnings call transcript

I would now like to turn the conference over to your host, Doug Ashby, Director of Investor Relations at Emerson. Please go ahead. Good afternoon, and thank you for joining Emerson's 3rd Quarter 2026 Earnings Conference Call. Today, I'm joined by Emerson's President and Chief Executive Officer, Law Carson By, Chief Financial Officer, Mike Bachmann, and Chief Operating Officer, Ram Krishnan. As always, I encourage everyone to follow along with a slide presentation which is available on our website.

Please turn to slide two. 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-gap measures. I will now pass the call over to Emerson's President and CEO, Law Carson By, for his opening remarks.

Thank you, Doug. Good afternoon, everyone. I'd like to begin by thanking my Emerson colleagues around the world for delivering an outstanding quarter. We have created momentum in our business, built on customer intimacy, investment in innovation, and operational execution. All the testament of the strength of the Emerson Management System.

Please turn to slide three. I would like to recognize our Chief Technology Officer, Peter Zornio, who will retire on December 31st following an exceptional career at Emerson. Peter joined Emerson in 2006 and played an instrumental role in the development of our industry-leading control systems and software portfolio. He has been a key member of the executive leadership team in our automation business since 2017 and played a pivotal role driving innovation as CTO during our portfolio transformation.

Thank you, Peter, for your contributions and friendship over the past 20 years. And please know, it has been an honor working with you. I'm also excited to announce Huri St Gupta as our Senior Vice President and Chief Technology and AI Officer, effective August 15th. This appointment reinforces Emerson's strategy to lead an AI-enabled automation, advancing the full technology stack, and helping customers achieve autonomous operations at scale.

Huri joined Emerson through the acquisition of NI and brings decades of experience in software-defined automation, spanning engineering, product, and corporate strategy and operations.

Currently serving as Vice President and General Manager of Test and Analytics software, Huri has advanced NI software differentiation, including the development of award-winning Nigel AI. He brings a deep understanding of technology and AI and his leadership of our enterprise AI vision and long-term technology roadmap will be key in accelerating innovation across Emerson and positioning the company for continued growth.

Please turn to slide four. End-market demand is robust, supported by secular trends in our growth verticals and meaningful investment in automation. Underlying orders grew 7% in the third quarter with broad-based growth across all business groups led by software and systems, which was up 10%. Demand was strongest in North America and Asia and I'll discuss demand trends in more detail on the next slide.

Emerson delivered an outstanding third quarter with sales, margin expansion, earnings, and cash, all exceeding expectations. Underlying sales grew 6% led by sustained momentum in test and measurement and in our ovation business, both up 23%.

Overall, our growth verticals were up 27%, led by semiconductor and power, which both saw significant growth. Adjusted segment EBITDA margin expanded 140 basis points to 28.5%, and adjusted earnings per share grew 13% to $1.71 above the top of our guidance.

Annual contract value of our software grew 9% year over year and ended the quarter at $1.68 billion. While the situation in the Middle East remains dynamic, the resilient efforts by our teams and customers drove a better than expected performance in the quarter relative to our reduced expectations.

The demand environment in the Middle East is constructive, with repair work underway. Our field service engineers are now operating at pre-conflict levels, but customer operational capacity remains approximately 75%.

Large projects are moving forward and we are seeing new opportunities emerge across the energy chain to support energy security and resiliency in the region.

Emerson's customer relationships and strong local presence position us well to capture the near-term investment priorities, pipelines and alternative export routes to reduce dependence on the Strait of Hormuz.

The long-term capital outlook is robust and we remain confident in the growth potential of the Middle East. Lastly, the year is shaping up largely as expected, with a meaningful second half step up in organic growth and a slightly better Middle East than what we forecast in May. We are raising a four-year guidance, reflecting strong third quarter results and healthy demand trends.

We are raising sales growth expectations to 5%, with underlying growth of 3.5%. A Justice Segment EBITDA margin is still expected to be approximately 28%. And we are raising our adjusted EPS guide to $6.55.

Through the third quarter, Emerson completed $898 million of share repurchases and we remain committed to returning approximately $2.2 billion of capital to shareholders this fiscal year.

Please turn to slide five. Underlying orders grew 7% in the third quarter. With broad-based demand across the portfolio, as customers are investing in automation to enhance productivity, reliability and resilience in their operations.

North America and Asia drove the growth, led by the continued strength in the US, India, Japan and Southeast Asia. Demand in Europe and China remain soft, but showed signs of improvement in the quarter.

Test and measurement orders growth of 19% exceeded expectations with semiconductor up 70% and double-digit growth in aerospace and defense and the portfolio business. We are seeing a continuation of the unprecedented investment in power generation with orders in our ovation business up 31%.

Electrification is also driving exceptional activity in grid modernization and ACV in AspenTech's digital grid management suite was up 28%.

Our project funnel grew $1.2 billion to $12.4 billion, up 8% year over year. Secular tailwinds are supportive of sustained capital activity in our growth verticals, which were up $1 billion sequentially.

Power was up $450 million from the second quarter, and now accounts for $3 billion of the funnel. The power generation build out is accelerating with substantial demand for both utility and behind the meter power.

The need for more stringent cybersecurity and critical infrastructure is also leading customers to accelerate retrofit and upgrade programs. The LNG funnel grew $350 million to $2.2 billion, and we see resilient momentum across the Americas and the Middle East, reinforcing the demand trajectory we outlined at our investor day last November. In the third quarter, Emerson won approximately $400 million from the funnel.

80% came from our growth verticals, and I want to highlight a few key wins. First, Emerson was selected to retrofit control systems for a 2.1 gigawatt power plant for CFE, Mexico's largest power producer, and national utility.

Emerson will deploy its industry leading ovation control system, which was selected for our proven ability to execute complex retrofits within accelerated timelines. This modernization will enhance plant reliability and support CFE in meeting Mexico's growing power generation's demand.

Next, Emerson was chosen by China nuclear power engineering company. The design firm for the new, while long one, pressurized water reactor in Guangdong Province, which will add 2.4 gigawatts to China's nuclear installed base. Emerson will supply pressurizer pilot operated safety valves, one of the most critical valve applications to ensure over pressure protection of the primary circuit. We were selected based upon our strong application expertise, nuclear qualifications, and our local presence in support.

Lastly, Emerson will provide NI semiconductor test systems for a leading semiconductor manufacturer based in Taiwan. Emerson's solution improves test accuracy and consistency for critical components, ensuring a faster product roadmap to help the customer capture opportunities in the AI market.

With that, I will now turn the call over to Mike Bachman to discuss our financial results and guidance in more detail.

Thanks, Lawl. Please turn to slide six for a more in-depth look at our financial results. Q3 underlying sales growth was 6%. Each of our business groups exceeded expectations led by software and systems up 11%. I will provide more details on geographic and group performance on the next two slides. Price contributed three points to growth, and MRO was 65% of sales. Backlog ended the quarter at $8.2 billion up 7% year over year, and our book to bill was one.

Adjusted segment EBITDA margins of 28.5% were up by 140 basis points. Margin expansion exceeded expectations due to better volume than expected and favorable segment mix. Price cost and cost reductions more than offset inflation.

Adjusted earnings per share was $1.71, up 13% year over year. Operations contributed the full 19% increase reflecting outstanding performance.

Q3 free cash flow of $1.3 billion was up 36% and at a margin of 27.1%. Cash exceeded expectations due to good operational performance along with the impact of tariff refunds and the timing of tax payments which shifted from Q3 to Q4. Year to date, free cash flow is up 9% with a margin of 19%.

Please turn to slide seven for details on Q3 underlying sales by region. The Americas were up 8% with the US up 10%. We saw a very healthy pace of business in the US with software and systems up 14% and intelligent devices up 9%. Asia, Middle East and Africa was also up 8%, led by the Middle East and Africa up 11%. As Long mentioned, a great performance by our teams in the Middle East resulted in a revenue impact that was better than our revised expectations coming into the quarter. Overall, the impact in Q3 was about a $25 million headwind compared to our February guidance and we expect the Q4 impact to be similar as supply chains remain complex.

China improved to down 3% year over year which was in line with our model and Europe remained soft as expected and declined 1%. Globally, our growth verticals continue to be meaningful drivers of performance and we were up 27% in the quarter. Growth was very strong in semiconductor which was up 53% and power which was up 37%.

Please turn to slide eight for details on the third quarter underlying sales and margin performance for our three business groups. Software and systems grew 11% underlying with robust growth at test and measurement up 23% and control systems and software which was up 7%. We saw significant software and systems growth in power, semiconductor and aerospace and defense. Software and systems margin of 31.8% decreased 30 basis points year over year compared to a very strong performance last year. The current year margin included a drag of 1.5 points due primarily to the software contract renewal dynamic and a higher mix of lower margin projects. Intelligent devices underlying sales were up 5% better than expected due to our performance in the Middle East and the timing of project shipments and sensors.

We saw consistent strength in power and LNG as well as solid growth in midstream gas and chemical. Intelligent devices margins of 27.9% increased 240 basis points year over year from volume leverage, price cost and cost reductions. Safety and productivity was up 2% underlying driven by electrical products and industrial activity in North America. European and automotive markets remain soft. Safety and productivity's margin of 21.2% was up 80 basis points year over year driven by discipline price cost and cost reductions offset by lower volume and inflation. Please turn to slide 9 for our 2026 underlying sales guidance by business group. We expect software and systems to be up approximately 10% in Q4 with both test and measurement and control systems and software expected to grow 10%.

We are increasing our full year expectations for software and systems to up 6% based on the strength of our growth verticals in this business and strengthen the US. We are raising full year growth guidance for test and measurement now 14% and control systems and software now 3.5% including approximately three points of headwind from software renewals. ACD continues to grow on plan and we still expect ACD growth of 10% plus in 2026. Intelligent devices is projected to grow 3% in Q4 and 2% for the full year. Growth in intelligent devices is supported by stable MRO with strength in the US and growth in 2026 impact from the conflict in the Middle East as the Strait of Hormuz remains effectively closed.

Safety and productivity is expected to grow 1% in Q4 and 2% for the full year. The North America market continues to recover and we are seeing sustained strength in electric utilities. However automotive and European markets remain weak. Overall Emerson expects to grow please turn to slide 10 for details on our full year and Q4 2026 guidance. We are raising full year guidance for sales, EPS and cash flow. For the full year we expect 5% gap sales growth and 3.5% underlying sales growth. We still expect adjusted segment EBITOM margin of 28%.

We are guiding 2026 adjusted EPS of approximately $6.55 and free cash flow of approximately $3.6 billion. There are no changes to our planned return of approximately $2.2 billion to shareholders through $1.2 billion in dividends and $1 billion of share repurchase.

Moving to the fourth quarter sales growth is expected to be approximately 5% with minimal impact from FX. We expect adjusted segment EBITOM margin of 28.5% and adjusted EPS of approximately $1.85. Overall the full year is unfolding largely as we expected and underlying orders growth of 7% for the first nine months reflect stable MRO activity and the secular tailwinds driving long cycle capital projects.

A stronger than expected growth in the US has offset a slightly weaker China and we have minimized the effects of the Middle East conflict to approximately half a point of revenue. Our second half underlying sales growth is accelerating as we lap the software contract renewal dynamic and execute project shipments from our backlog which continues to grow year over year.

With that I would like to turn the call back to Alexandra for Q&A.

Hi Dean.

Afternoon.

Yeah hey Dean this is Rob here. Certainly the underlying market in both semis and power as you know is very very strong but I will contend that certainly in power both on the generation side with ovation with fleet modernizations but also behind the meter opportunities driven by data centers and new capacity ads in North America there is significant penetration gains or participation gains we're driving and similarly with our DGM business our digital grid management business on the software side with Aspen Tech. So a combination of a strong market but participation gains and I would venture to say maybe to a lesser extent in test and measurement but a very very strong market and RF and mix signal and participation gains with new products in both spaces.

No thanks Dean. So just first of all yes we're very aware of the facilities that were impacted. None of those facilities had an Emerson or a innovation control system in them so that's first and foremost. Secondly cyber security spend has been a significant driver of upgrades in control systems both in power generation and in water systems and we continue to see that Dean as a significant driver on a forward basis particularly with these attacks and other vulnerabilities that are in light. So feel good about the offering that we have and the various standards that we bring to market but a very important part of the business for sure.

No not really look we continue to see about the same level of awards in the quarter if you recall we want approximately 400 million dollars that's very similar to the amount that we reported in the second quarter as well. So the timing on financing and awards continues to move relatively consistently. Over time what we're seeing is just a very significant increase in the number of projects and the value of projects particularly well I'd suggest across all the growth fact verticals but certainly in liquefied natural gas which was up 19% and in power. And now we have almost a thousand projects individual projects in the funnel across those two markets alone. So continue to see good conversion there and again as you know Jeff we don't look at this this is not a 10-year funnel this is a relatively three to four-year view and and we do work very very actively in the quarter.

Yeah price cost certainly remains green for us and you know if we look to the full year we were tracking to about two and a half percent price for the year that still the case might catch around and be at three percent. But we continue to to see good price and managing the inflation which we certainly have seen I think as we head into the fourth quarter here we will be lapsing all of the tariff pricing so we did have a little bit of tariff pricing in Q3 but the majority was was just our annual and spot prices that we do through the year so that yeah so price price has been strong and we're green on price cost.

Relatives to tariffs we got 82 million dollars in the quarter we continue to file some claims just a reminder that we are accounting for those on a cash basis as we get them and we report them in cost of sales so the margin certainly on a gap basis improved in the quarter due to that 82 million dollars that we saw. So yes and that was certainly part of cash flow performance in the quarter as well to receive a 82 million dollars.

And even with that 82 do you have net cost headwinds related to other tariffs or other changes or we should think of we had some drop through the margins on that. Well that was taken out of our adjusting so it's been removed and you know the tariff landscape has obviously been changing some tariffs have come off some tariffs have come on when we look at the year we certainly got a net benefit that was largely eaten up by other inflation that was above and beyond the model that we had when we started the year so a little bit of a tail end of the bottom line which was what we talked about and expected last quarter so pretty much tracking the way the way we expected.

Hello.

Yeah at this point. That's exactly why it's got where we're sitting in the fourth quarter of 27 reaching into 28 at this point.

Yeah the chemical comment was specific to intelligent devices and it was a bit of a change in the quarter and it was up and that was largely in the final control business. We still have slow chemical markets in China and Europe and Europe but the United States and Middle East is you know doing very well so it was up in the quarter we did want to make that comment and it was particularly up in the in the final control business.

You know it's it's a good question it really you know in the status quo in terms of an on off situation the Strait of Hormuz challenges with getting product out of the golf I think that's going to continue to be touch and go. Maybe conditions improve and that gets a little bit better for us as we go through the second half of 2027 but right now as we're planning I would expect to be realistic that the certainly the fourth quarter and perhaps into the first quarter of this of our fiscal year the conditions remain relatively the same.

Yeah no we underlying sales just a correction there are 6% on underlying sales underlying orders with the 7% number that you referenced.

Yes you will write ACV growth of 9% the ROM if you want to comment on on the businesses as a whole. Yeah you know so ACV 9 and I think we feel pretty good about exiting the year at 10 plus percent on ACV so I think from a software perspective the dynamics of if your specific question was the renewal dynamic that certainly reverses in the fourth quarter and you'll see that reflected in the numbers in the fourth quarter and then you know all segments of our software business whether it is the Aspen core business certainly DGM when we threw out the number there for DGM was 28% growth in DGM so that continues to accelerate the ACV performance there is very very strong and then certainly on the test and measurement side as well so our software business is executing according to plan I think exiting the year at 10 percent gives us confidence about a very very solid 2027.

Great I'll take the one on power you know power to date which has been extremely strong has been mostly fleet modernization but we are starting to see particularly in the quarter we concluded but going into Q4 and into the early part of next year some of the newer capacity coming online certainly gas fired in North America will be a big part about the tailwind certainly the data center opportunity you can classify that as behind the meter and that's greenfield and then certainly on the DGM side which we also capture and power and nuclear power a lot more of that is greenfield so yeah you're going to start seeing more of that in the numbers but to date the the momentum has been on fleet modernization or brownfield as you referenced.

I'll follow up on the semiconductor question look we're not going to obviously guide into 27 you can certainly read into the tremendous order momentum that we have in the semiconductor business within T&M today but I will highlight that there is a differentiation in growth in the applications from the laboratory where I think the pure that you're referencing largely plays to the validation and production side where we largely play and that has a different dynamic on growth and in the cycle as well and so at this point in time I continue to be relatively robust on semiconductor through 2027 super helpful thank you very much your next question comes from the line of Andy kapluitz with city group your line is now open please go ahead good afternoon everyone how you doing good thank you Andy well maybe just your thoughts on MRO in general I think you I let it today is stable but I think generally it's seen it's been pretty strong across at least you and your peers so so what do you see there that I assume led by North America but you know obviously we're running facilities pretty hard so so what do you see going forward here yeah really no material change to the MRO rates anywhere that we've observed around that two thirds of the business level that seems to be pretty consistent that continues to be spent on replacement we have seen and I think your point we've seen some delays in shutdown turnaround activity because exactly facilities are being run relatively hard right now so that we'll see how the fall season ultimately shapes up there which will will may have an impact to MRO activity but day to day MRO continues to be very strong for us across the every just about every region and every business and maybe related to that law like just growth by region obviously kind of been kind of slowing Emerson down a bed but maybe a little bit better here and I think you mentioned Europe a little bit better we've had mixed reads this quarter out of Europe so sort of what are you seeing you know outside of North American doesn't give you a little more confidence in improving sort of outside of North American outside the Middle East yeah no look I again obviously you know Andy we've spoken how bullish we continue to be about the USA and the investments that are being made in the USA and I think that's got a significant amount of of legs to it and we were up 10% in sales in in the US in the quarter I don't expect that to to subside we're covering Europe look Europe was down a point in sales in the quarter but again a little better than expected orders were positive in Europe so that's a good sign as we go through the last half of this last part of this year and into the first quarter of next and then China slightly better still negative mid-single digit negative but we believe improving certainly sequentially and as we're going to next year so that's kind of how that environment looks like and then of course other Asia was very very strong and that's powered by Japan and India in Southeast Asia go ahead Mike no that's it that's great appreciate all the color guys your next question comes from the line of Andrew Buscalia with BNP Paribas your line is now open please go ahead thank you good morning everyone or good afternoon yes it's been a long day if you guys could expand on the channel comment first off did it stabilize in the quarter is it as expected and then you know within intelligent devices I I wonder can can that growth rate get back to kind of historical peak levels without China really picking up or do you think there's enough enough growth in North America and elsewhere to more than offset it and get back to like types of growth we've seen in the past in the double digits in that segment so on intelligent devices the answer is absolutely I think as as as if you looked at orders performance as a lead indicator I think you'll start seeing that now majority of the sales impact in the Middle East is in our intelligent device business so you'll see that obviously suppress the growth rate so far but that will unlock in Q4 and into next year so yeah no concerns about the return to growth of intelligent devices now our guide there is three to six percent I mean we've had years of double digits but intelligent devices are in our long-range framework our systems and software businesses are six to nine percent growth business which includes control systems and T&M and intelligent devices in three to six so we feel very good in that in that framework and then your question on China China I think minus three is better than what we had seen in the first half so it is improving and it was sequential growth in Q3 over Q2 so again we expect China to continue to improve into low single-digit type growth levels as we as we plan for 2027 okay fair enough and and my other questions on software control I think someone tried to get at this but it off get in a different way but there's been a lot of noise in that segment the last couple years and can you just help us kind of rebase what you anticipate to be more of like a through-cycle growth rate in software and systems and then how how did we think about that growth you know more in an up-cycle now that we have this test and measurement business they didn't have an up-cycle to anchor us to what I guess I'm trying to get at what the 2027 number looks like if we are indeed in in a strong up-cycle you know what you know obviously it's a little early to comment yet on 2027 but if your question is what is our thinking as we built this portfolio around long-range growth for soft the control systems part of software and control as well as test and measurement they're both in the 69 type framework that's kind of how we are thinking about it through the cycle through the cycle so it's presumably more than that though and its orders are starting to take up and and accelerate from here was there a question Andrew sorry yeah I guess I'm just I'm just saying for is our accelerating here it should be anticipated more the high end of that or but are better in an up-cycle well certainly T&M this year is in that up-cycle and you know is certainly outside of the range so yes when things are on an up-cycle they can get outside above that range yeah T&M is 14 this year so yeah thank you your last question comes from the line of Ken Newman with key bank capital markets your line is now open please go ahead hey good afternoon yes excuse me and sure maybe just to ask the the greenfield question in a different way that was asked earlier you know Ron I appreciate the comment on the power and the semi-market that you made earlier is there a way to help frame how much of the total project funnel today is for new greenfield versus brownfield and I'm just curious if you're seeing any kind of material differential in pricing for those new orders versus the 3% your quarter of the back order yeah so majority of how we define our project funnel the bulk of it is greenfield and and the brownfield modernization is led separately and it's a it's a different cut we take to those type of funnels I mean the pricing obviously we get better pricing on the modernizations than we do typically on greenfield and we get better pricing on MRO than brownfield so that's somewhat consistent with how we've always kind of positioned it but most of the 12.4 billion dollars I would say venture to say we we look at that as greenfield got it that's that's helpful and then you know look I know the crystal ball on the Middle East is kind of clear as mud in this environment but you know just given what you're hearing from your customers do you have do they have any you know comments or thoughts about what kind of stability or a certain amount of stability in terms of timing that they could need to see before they can start to normalize orders back to you know pre-conflict conditions or is that just too hard of a of an exercise to do at this point it is it's a challenge you know we're seeing new projects coming online particularly related to pipeline storage transportation built on the resiliency of their networks obviously trying to avoid the shred of our moose and and and now avoiding the Red Sea as well so there's a challenge there there's certain products that are easily transportable via pipeline but there's some that are impossible like lng lng is can be transported over a couple miles but you're just not going to build a 400 mile pipeline to take lng so there are a lot of challenges that customers are wrestling with right now and I think they're going to need a certainty in a in a in a some kind of a agreement between the United States and Iran before things calmed down and there's some trust back in the system.

I think relatively quickly to be very honest we're seeing we're seeing really good activity in quotation and preparedness for some large petrochemical expansions lng field expansions in Qatar so we know that's that's coming and so we expect that to be released relatively quickly.