Emerson Electric Stock

Good afternoon and welcome to the Emerson Third 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, Doug Ashby, Director of Investor Relations at Emerson. Please go ahead.

Good afternoon, and thank you for joining Emerson's Third Quarter 2026 Earnings Conference Call. Today, I'm joined by Emerson's President and Chief Executive Officer, Lal Karsanbhai; Chief Financial Officer, Mike Baughman; and Chief Operating Officer, Ram Krishnan. As always, I 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, 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 a testament of the strength of the Emerson management system. Please turn to Slide 3. We I would like to recognize our Chief Technology Officer, Peter Zonier, who will retire on December 31, 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 Rudy Sengupta as our Senior Vice President and Chief Technology and AI Officer effective August 15. 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. Rudy 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, Rudy 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 road map will be key in accelerating innovation across Emerson, and positioning the company for continued growth. Please turn to Slide 4. End market demand is robust, supported by secular trends in our growth verticals and a 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 & 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 our full 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%. Adjusted 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 5. 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 U.S., India, Japan and Southeast Asia. Demand in Europe and China remained 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 time lines. This modernization will enhance plant reliability and support CFE in meeting Mexico's growing power generation demand.

Next, Emerson was chosen by China nuclear power engineering company. The design firm for the new Hualong-1 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, 1 of the most critical valve applications. to ensure overpressure protection of the primary circuit. We were selected based upon our strong application expertise, nuclear qualifications and our local presence and 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 road map to help the customer capture opportunities in the AI market. 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 6 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%. And I will provide more details on geographic and group performance on the next 2 slides. Price contributed 3 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 $0.19 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 was up 9% with a margin of 19%.

Please turn to Slide 7 for details on Q3 underlying sales by region. The Americas were up 8% with the U.S. up 10%. We saw a very healthy pace of business in the U.S. 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 Lal 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 8 for details on the third quarter underlying sales and margin performance for our 3 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% and 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 margin of 21.2% was up 80 basis points year-over-year driven by disciplined 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 strength in the U.S. We are raising full year growth guidance for test and measurement, now 14% and control systems and software, now 3.5%, including approximately 3 points of headwind from software renewals. ACV continues to grow on plan, and we still expect ACV 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 U.S. and growth verticals.

We are modeling an approximately $100 million full year 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 approximately 5% in Q4 and 3.5% for the full year.

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% GAAP sales growth and 3.5% underlying sales growth. We still expect adjusted segment EBITDA 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 EBITDA 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 9 months reflects stable MRO activity and the secular tailwinds driving long-cycle capital projects. A stronger-than-expected growth in the U.S. has offset a slightly weaker China and we have minimized the effects of the Middle East conflict to approximately 0.5 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.

[Operator Instructions] Your first question comes from the line of Deane Dray with RBC Capital Markets. Please go ahead.

I think I got the numbers right there, as Mike was zipping through them, but it really sounded like semiconductor and power at 53% and 37% were really standouts here. Can you unpack the growth opportunity? How much do you think was the underlying market? And are there any share gains going on as well, new product contributions, that type of color, please?

Deane, this is Ram 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 adds 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 AspenTech. 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 in RF and mixed signal and participation gains with new products in both spaces.

Great. And then just as a follow-up, and Lal, your comments about increasing focus on cybersecurity and critical infrastructure. I mean that was in the news this week with all of the cyber hacks across the water sector number of facilities, especially in Michigan. Now I know that's not a big focus for Emerson, but you do have a presence there. And this idea here that cybersecurity is a focus. How do you think this plays out? Is this a place for future investment for Emerson? What kind of opportunity do you see?

No. Thanks, Deane. So just first of all, yes, we're very aware of the facilities that were impacted None of those facilities had an Emerson or innovation control system in them. So that's first and foremost. Secondly, cybersecurity 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 Deane 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.

Your next question comes from the line of Jeff Sprague with Vertical Research.

The funnel movement is quite intriguing. Obviously, you gave some anecdotal color the growth in LNG and power in the funnel. Just also wondering, is this even increasingly long-dated sort of project activity. In other words, kind of conversion of funnel to proposal to order. Anything changing there of note?

No, not really. Look, we continue to see about the same level of awards in the quarter. If you recall, we won approximately $400 million. That's very similar to the amount that we reported in the second quarter as well. So the timing of 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 verticals, but certainly in liquefied natural gas, which was up 19% and in power. And now we have almost 1,000 projects, individual projects in the funnel across those 2 markets alone.

So continue to see good conversion there. And again, as you note, Jeff, we don't look at this. This is not a 10-year funnel is a relatively 3- to 4-year view and we do work it very, very actively in the quarter.

Great. And then unrelated, maybe pivoting to Mike. Just a little bit of update on where we're at on price cost at this point, 3% price look pretty healthy in the quarter. are you sort of "green on price cost? And just any tariff update there, refunds you may have gotten in the quarter or expectations in the current quarter for anything on the refund front? .

Yes. Price cost certainly remains green for us. And if we look to the full year, we were tracking to about 2.5% price for the year. That's still the case, might catch around and be a 3%, but we continue 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 just our annual and spot prices that we do through the year. So that -- yes, so price has been strong and we're green on price cost. Relative to tariffs, we got $82 million 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 GAAP basis improved in the quarter due to that $82 million that we saw. So yes, and that was certainly part of the cash flow performance in the quarter as well. The receipt of $82 million.

And even with that $82 million, do you have net cost headwinds related to other tariffs or other changes? Or we should think of you had some drop through the margins on that. .

Well, that was taken out of our adjusted. So it's been removed. And the tariff landscape has obviously been changing some tariffs have come off, some tariffs outcome 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 tailwind to the bottom line. which was what we talked about and expected last quarter. So pretty much tracking the way we expected. .

Your next question comes from the line of Scott Davis with Melius Research ahead.

The Ovation orders, I think you said up 31%. I think you said, Mike, up 31%. But -- what kind of lead times are you looking at now? Are you taking orders well into, I would imagine, on maybe even the back half of '27 at this point? .

That's exactly right, Scott. We're sitting in the fourth quarter of '27 reaching into '28 at this point. .

Okay. Fantastic. I'd call that high visibility expose anyways. And I think Mike said something positive about chemicals, and I haven't heard a positive thing said about chemicals in a lot of years. So have we turned a corner there? Or it's just a little bit of a blip as their chemicals could actually be somewhat helpful to you guys in the next couple of years? .

Yes. 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 in Europe. But the United States and Middle East is doing very well. So it was up in the quarter. We did want to make that comment, and it was particularly up in the Final Control business.

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

Yes. It's remarkable that turns out companies can exclude IEEPA refunds from their numbers. Sorry about this clip. Anyway, but thank you for taking a more conservative approach. Look, just a question on Middle East. I think you said repair construction is underway, $25 million headwind in third quarter, fourth quarter to be similar. So the question is, so Middle East rebuild opportunity is larger today and starting but still in that drag in fourth quarter. Does it flip to a tailwind in the first quarter of '27?

It's a good question. It really -- in the status quo, in terms of an on-off situation the Strait of Hormuz challenges with getting product out of the Gulf, 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.

And then maybe can we just talk a little bit about software. I think you said ACV was up 9%. Underlying sales were 7%. So can we just talk about sort of the pace of contract renewals year-over-year -- and just generally, I think software a big topic of conversation last quarter. this quarter, I guess, were back to inflation. But just what are you seeing operationally given all the sort of Bruha about sort of new solutions coming in? Just give us some color as to what you're seeing in the numbers.

Yes. No, we -- underlying sales just a correction, there are 6% on underlying sales, underlying orders were the 7% number that you referenced. But yes, you are right, ACV growth of 9%. Ram, if you want to comment on the business as a whole. .

Yes. 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 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% gives us confidence about a very, very solid 2027.

Your next question comes from the line of Alex Virgo with Evercore ISI.

I wondered if you could just flesh out a little bit of that power demand for us. Is that still mostly brownfield now? Or are we actually starting to see some of the more greenfield projects with your comment there on Q4 '27 and moving into '28. I just would like a little bit more detail on that. And then as a follow-up, really strong numbers on test and measurement. So really great to see that. One of your peers talked about concerns of a slowing market as you roll into next year on tougher comps and the length of the cycle. So without pushing you for guidance for '27, I wondered if you could give us a sense of the visibility that you have in that business and what we should be thinking about as we do start to think about '27.

Great. I'll take the 1 on power. 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 yes, you're going to start seeing more of that in the numbers. But to date, that the momentum has been on fleet modernizations 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 period 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 semiconductors through 2027.

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

Well, maybe just your thoughts on MRO in general. I think you've highlighted it today as stable. But I think generally, it's seen it's been pretty strong across as you and your peers. So what are you seeing there is that, I assume, led by North America, but obviously, we're running facilities pretty hard. So what are you seeing going forward here?

Yes. Really, no material change to the MRO rates anywhere that we've observed around that 2/3 of the business level. That seems to be pretty consistent. There continues to be spend on replacement. We have seen, and I think your point, we have 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 -- 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, Lal, like just growth by region, obviously, Sten has been kind of slowing number 1 down a bit, 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 outside of North America? And does it give you a little more confidence in improvement sort of outside of North America and outside of the Middle East?

Yes. No, look, again, obviously, Andy, we've spoken how bullish we continue to be about the U.S.A. and the investments that are being made in the U.S.A., and I think that's got a significant amount of legs to it, and we were up 10% in sales in the U.S. in the quarter. I don't expect that to subside. Recovery in Europe. Look, Europe was down 1 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 go into 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 and Southeast Asia.

Your next question comes from the line of Andrew Buscaglia with BNP Paribas.

Yes. Been a long day. If you guys could expand on the China comment. First off, -- was it -- did it stabilize in the quarter? Is it as expected? And then within intelligent devices, 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 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 if you looked at orders performance as a leading indicator, I think you'll start seeing that. Now a 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 yes, no concerns about the return to growth of intelligent devices. Now our guide there is 3% to 6%. I mean we've had years of double digits, but intelligent devices are in our long-range framework, our Systems and Software business is a 6% to 9% growth business, which includes control systems and T&M and intelligent devices in 3% to 6%. So we feel very good in that framework. And then your question on China. China, I think minus 3% 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 planned for 2027.

Okay. Fair enough. And my other question is on software control. I think someone tried to get at this, but maybe I'll ask it in a different way. But there's been a lot of noise in that segment in the last couple of 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 do we think about that growth more in an up cycle now that we have this test and measurement business that you didn't have in the past cycles to anchor us to. I guess I'm trying to get at, what's the 2027 number, look like if we are indeed in a strong up cycle?

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 -- the control systems, part of software and control as well as test and measurement, they're both in the 6 to 9 type framework. That's kind of how we are thinking about it. Through this through the cycle.

Cycle. -- so presumably more than that, though, in if orders are starting to pick up and accelerate from here. .

Was there a question, Andrew? Sorry. .

Yes, I guess I'm just -- I'm just saying orders are accelerating here should we anticipate more of the high end of that or better in an up cycle? .

Well, certainly, T&M this year is in that up cycle and it's certainly outside of the range -- so yes, when things are on an up cycle, they can get outside above that range

Yes. T&M is 14% this year or so, yes. .

Your last question comes from the line of Ken Newman with KeyBanc Capital Markets. Please go ahead. .

Maybe just to ask the greenfield question in a different way that was asked earlier. Ram, I appreciate the comments on the power and the semi markets 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% you quarter this past quarter. .

Yes. So majority of how we define our project funnel, the bulk of it is greenfield. And the brownfield modernization has led separately, and 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, I would say, venture to say, we look at that as greenfield.

Got it. That's helpful. And then look, I know the crystal ball on the Middle East is kind of clear as mud in this environment. But just given what you're hearing from your customers, -- do you -- do they have any comments or thoughts about what kind of stability or a certain amount of stability in terms of timing that they need to see before they can start to normalize orders back to pre-conflict conditions? Or is that just too hard of an exercise to do at this point?

It is. It's a challenge. 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 Strait of Hormuz and now avoiding the Red Sea as well. So there is a challenge there. There are 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 of 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 certainty in some kind of an agreement between the United States and Iran before things calm down and there's some trust back in the system. .

Whenever that situation does come to fruition, is there a way to think about how quickly you would expect to see those orders come through?

I think relatively quickly, to be very honest. 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 coming. And so we expect that to be released relatively quickly.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.

Greetings, and welcome to the Emerson Second Quarter 2026 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce Doug Ashby, Director of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining Emerson's Second Quarter 2026 Earnings Conference Call. Today, I'm joined by Emerson's President and Chief Executive Officer; Lal Karsanbhai; Chief Financial Officer, Mike Baughman; and Chief Operating Officer, Ram Krishnan.

As always, I 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 contains a degree of business risk and uncertainty. Please take time to read the safe harbor statement and 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, Doug. Good afternoon. I'd like to begin by thanking our colleagues around the world. At this moment, it is important to highlight our teams in the Middle East who persevered in a challenging at times, dangerous environment. All of our employees and families remain safe, and we continue to serve our customer needs throughout the region.

What defines our company is a high-performance culture based on deep respect for each other and an unwavering commitment to our customers, led by Liam Hurley, our team in the Middle East brought this to life. Thank you.

Please turn to Slide 3. We are committed to ongoing Board refreshment. And today, we announced the newest member elected to our Board of Directors. Jennifer Newstead is the Senior Vice President and General Counsel of Apple. Prior to joining Apple, in January 2026 Jennifer served as Chief Legal Officer at Meta. She previously held multiple senior roles at the U.S. Department of State, White House Office of Management and Budget and the Department of Justice. Jennifer also spent 12 years in private practice, advising technology, media and financial services firms on litigation and regulatory matters. Her unique expertise in corporate governance, global business and technology and innovation will be a tremendous addition to the Emerson Board. Jennifer will officially join our Board on August 3, 2026. This will expand Emerson's Board to 11 members, and we are excited to have Jennifer join us.

Please turn to Slide 4. End market demand remains strong. Underlying orders grew 5% in the second quarter, led by software and systems, which saw robust investment in our growth verticals and sustained momentum in North America and India. I will discuss more details on demand on the next slide. Emerson's second quarter results reflect our ability to deliver in a dynamic environment. Underlying sales growth of 0.5% was below expectations due to a 1 point impact from the Middle East conflict.

Test & Measurement continued to exceed expectations, up 12% year-over-year, and our Ovation business was up mid-teens, driven by the secular demand for power. Adjusted segment EBITDA margin of 27.6% exceeded expectations and we delivered adjusted earnings per share of $1.54 near the top end of our guidance. As expected, annual contract value of our software grew 9% year-over-year and ended the quarter at $1.64 billion.

We are updating our full year guidance to reflect the impact of the conflict in the Middle East, and we now expect sales growth of 4.5% with underlying growth of 3%. Adjusted segment EBITDA margin is still expected to be approximately 28%, and we are raising the bottom and midpoint of our adjusted EPS guide, now expecting $6.45 to $6.55 per share. We remain confident in our second half plans for 2026 based on the orders momentum we are seeing and the visibility we have from our backlog, which is up 9% year-over-year. Throughout the first half, Emerson completed $542 million of share repurchases, and we remain committed to returning approximately $2.2 billion of capital to shareholders this fiscal year.

Finally, I want to highlight the strength of our differentiated industrial software portfolio to address concerns in the broader software market regarding AI. We are seeing healthy growth in ACV and expect to finish the year up 10% plus. Our software is based on decades of deep domain expertise and serves mission-critical applications in highly regulated industries. These applications require real-time compute and traceability of data, where being right 99.9% of the time is not good enough. Further, we are well positioned to benefit from embedding AI in our solutions. This represents a great opportunity for Emerson as we advance the journey to autonomous operations.

Emerson recently deployed an AI-driven optimization solution for Aramco, one of the world's leading integrated energy and chemicals companies. Emerson's Aspen hybrid models were integrated into Aramco's existing refinery planning network to create one of the world's largest multisite optimization models and give Aramco a scalable, robust tool for global refinery planning. Next week, AspenTech and NI will both host user conferences, where Emerson will showcase our latest innovations, which will help customers unlock greater levels of optimization and productivity across their operations. AspenTech will hold their optimizing event with over 1,100 customers from 49 countries, including keynotes from ExxonMobil, TotalEnergies and NI Connect will feature keynote addresses from prominent customers, including NVIDIA and Alstom with over 1,600 attendees from 38 countries.

Please turn to Slide 5. Underlying orders grew 5% in the second quarter, consistent with our expectations and supporting our second half sales plan. North America and India continue to drive orders performance. Demand in Europe remained stable but soft while China has started the year slower than expected. Software & Systems orders grew 18% year-over-year, with Test & Measurement and control systems and software, both up 18%.

We saw sustained robust investment in power with orders in our Ovation business up 41% and ACV in AspenTech's digital grid management suite up 31%. We expect our growth verticals to be multiyear drivers of growth supported by secular tailwinds and we are seeing significant capital being deployed in projects. Emerson won approximately $450 million from our project funnel in the quarter, with 85% from our growth verticals led by power, life sciences and LNG. The funnel grew to $11.2 billion, driven by new opportunities in power.

Now I want to highlight a few key recent project wins. First, Emerson was selected by ENCORE, the largest electric delivery company in Texas, to enable the delivery of reliable power to more than 13 million residents. ENCORE will use AspenTech's DGM to modernize and scale its distribution grid, preparing for increased demand driven by the growing population in Texas. ENCORE will gain operational efficiencies and enhance grid management capabilities by leveraging a purpose-built OT platform for both transmission and distribution systems.

Next, Emerson was chosen by NextDecade for the Train 4 and 5 expansion to the Rio Grande LNG facility, which will add 12 million tonnes per annum in capacity. Emerson will supply instruments, valves and analytical systems and was selected based upon our strong operational performance in LNG applications and our local presence and support. Third, a major pharmaceutical manufacturer based in Indiana, chose Emerson to support their 3-site production program for oral GLP-1s. Ramping production quickly to meet substantial demand is critical for this project. And Emerson will provide our leading DeltaV control systems and software as well as our ability to execute complex projects. Lastly, Emerson will provide NI software and modular hardware to a leading aerospace company headquartered in South Texas for the production of the next-generation communication satellite. Emerson was chosen for its ability to provide improved test speed and measurement accuracy within a small footprint.

Please turn to Slide 6. We have a $1.2 billion business in the Middle East, representing 7% of sales. Emerson has an $8.5 billion installed base in the region and over 1,400 employees across manufacturing, field service and sales administration. The conflict presented a significant disruption in the quarter, causing a 1 point impact to underlying sales. First and foremost, the safety of our employees and customers is our ultimate priority, and we took actions such as shutting down manufacturing for a period to protect our people. In March, our field service engineers also operated at less than 50% of pre-conflict levels.

Emerson maintains a strong regionalized manufacturing strategy in the Middle East, but components for instruments and valves are imported into the region. Additionally, the closure of the Strait of Hormuz caused significant disruptions to ocean, air and ground logistics, which restricted our ability to import necessary components for instruments and valves. Our customers experienced a varying degree of impact with 47 customer sites identified as having been damaged in some capacity. We saw a slowdown of MRO and project activity in the quarter as some facilities restricted personnel, but we saw an improvement in activity in April. We are encouraged by the efforts of our employees and customers to drive business continuity. The situation remains challenging, and we expected to impact the full year 2026 underlying sales by 1 point.

Customer sites were largely operational by mid-April, although running at around 75% capacity due to their inability to move product out of the Strait of Hormuz. Emerson's manufacturing facilities are both operational and our field service engineers are now operating at 80% and of pre-conflict levels. The dedication and service levels of our employees is deepening customer relationships. And we are working proactively with our customers to ensure we can meet their needs as they begin to work to repair, damaged infrastructure. We have already seen rehabilitation activity, and we expect to have additional opportunities as customers continue to assess their facilities. Overall, we estimate a future rebuild and restart opportunity of approximately $100 million, which will play out over several quarters. Although the Strait of Hormuz remains effectively closed, our teams are implementing alternative routes and expect to see logistics continue to improve.

While we are seeing increased freight expenses in the region, the cost impact to Emerson is manageable. Importantly, on-site project execution work is now progressing well at several key sites, and the outlook for projects remains strong. I want to reiterate how proud I am of our employees for their resiliency and we continue to stand with our customers during this challenging situation. 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 Q2 financial results. As a reminder, our first half financial results are adversely affected by a software contract renewal dynamic that impacted Q2 sales growth by approximately 2 percentage points, adjusted segment EBITDA margin expansion by 90 basis points and earnings per share growth by $0.09. Our Q2 results were also adversely affected by the Middle East conflict by approximately 1 point. Excluding these headwinds, Q2 underlying sales growth was approximately 3%. We continue to see strong growth at Test & Measurement, up 12% in the quarter and control systems and software, which was up 4%, excluding the software renewal dynamic. I will provide more details on geographic and group performance on the next 2 slides.

Price contributed 3.5 points to growth as expected, and MRO was 65% of sales. Backlog ended the quarter at $8.2 billion, up 9% year-over-year, and our book-to-bill was 1.07. Adjusted segment EBITDA margin of 27.6% exceeded expectations and benefited from favorable segment and geographic mix. Price cost and cost reductions more than offset inflation. Excluding the 90 basis point impact from the software contract renewal dynamic, adjusted segment EBITDA margin was up 50 basis points. Adjusted earnings per share was $1.54, a 4% increase year-over-year, while Q2 cash flow came in at $694 million with a margin of 15%. We are on track for full year cash flow growth of approximately 10% at greater than 18% margin.

Q2 was a difficult quarter due to the conflict in the Middle East and I am proud of the operational performance we delivered. Please turn to Slide 8 for details on Q2 underlying sales by region. The Americas were up 5%, with the U.S. up 9%. The pace of business in North America remains strong with significant activity across our growth verticals and resilient spend in MRO. As expected, Europe was soft at declining 4%. The Middle East and Africa was down 5%, driven by the conflict in the region as customers were forced to curtail operations. As Lal mentioned in his comments, we have modeled the conflict in the Middle East as a 1 point headwind to consolidated difficulty...

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Thank you. You may now resume.

Okay. Sorry about that. We had some technical difficulties. We are going to resume on Slide 9, where we will talk about underlying sales by region. The Americas were up 5%, with the U.S. up 9%. The pace of business in North America remained strong with significant activity across our growth verticals and resilient spend in MRO. As expected, Europe was soft, declining 4%. The Middle East and Africa was down 5% driven by the conflict in the region as customers were forced to curtail operations. As Lal mentioned in his comments, we have modeled the conflict in the Middle East as a 1 point headwind to consolidated Emerson sales growth in 2026.

During the first half of our fiscal year, we have seen better-than-expected growth in the U.S. We expect the strength in the U.S. to continue, and we now expect the U.S. to grow high single digits for the year. This incremental growth is offset by a slower-than-expected China, which we now expect to be down mid-single digits for the year. Globally, we are seeing significant activity sustained in our growth verticals, which were up 22% in the quarter. Power was up 23%, and we saw a healthy investment in plant modernizations, lifetime extensions and behind-the-meter generation for data centers. We also saw robust performance across the other growth verticals, including -- particularly in aerospace and defense and life sciences.

Please turn to Slide 9 for details on the sales and margin performance for our three business groups. Software & Systems faced a 4.5% sales headwind from the software contract renewal dynamic and reported underlying sales growth of 1%. The growth was led by broad-based strength in Test & Measurement, which was up 12%. We saw significant software and systems growth in power, life sciences semiconductor and aerospace and defense. Software & Systems margin of 29.2% decreased 250 basis points year-over-year driven by the software contract renewal dynamic, which was a 300 basis point drag.

Intelligent Devices underlying sales were down 1%. The conflict in the Middle East impacted this growth by 2 points, offsetting strength in power and LNG. Intelligent Devices margin of 27.9% increased 80 basis points year-over-year from strong price cost and cost reductions. Safety & Productivity was up 2% underlying, driven by electrical products and stable project activity in North America, while European markets remain soft. Safety & Productivity's margin of 21.7% was down 10 basis points year-over-year, driven by lower volume, offset by benefits from price and cost reduction.

Please turn to Slide 10, where I will bridge Q2 adjusted EPS from the prior year. Excluding the $0.09 impact of software renewals, operations delivered $0.08 of incremental EPS in Q2. Of this Software & Systems contributed $0.05, Intelligent Devices added $0.02, and Safety & Productivity contributed $0.01. Nonoperating items added $0.07, primarily from FX benefits. Overall, adjusted EPS grew 4% year-on-year to $1.54.

Please turn to Slide 11 for our 2026 underlying sales guidance by business group. We are adjusting our full year guidance for sales to reflect the Middle East conflict and now expect full year underlying sales growth of approximately 3%. We expect Software & Systems to be up approximately 8% in Q3 and are increasing our full year expectations to up 5% based on the strength of our growth verticals in this business and strength in the U.S.

Test & Measurement is planned to grow mid-teens in Q3 and low teens in the full year, up from our prior expectations of high single-digit growth in 2026. The Control Systems & Software segment is expected to grow mid-single digits in Q3 and low single digits in the full year. We continue to see robust adoption of our software and still expect ACV growth of 10% plus in 2026.

Intelligent Devices is projected to grow 4% in Q3 and we are lowering our full year expectations to approximately 2%, driven by the conflict in the Middle East. Second half growth in Intelligent Devices is supported by backlog phasing and the timing of product shipments with strength in the U.S. and growth verticals offsetting a slower-than-expected China.

Safety & Productivity is expected to grow 1% in Q3 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 approximately 5% in Q3 and 3% for the full year. Excluding the impact of software contract renewals, Emerson's growth rate is expected to be 4% for the full year.

Please turn to Slide 12 for details on our Q3 and full year 2026 guidance. Before going through the details, I would like to highlight a few important assumptions embedded in our guidance. Our guidance considers a gradual resumption of activity in the Middle East and assumes the impact of the conflict remains in the region. Additionally, we expect a net neutral impact from the removal of IEEPA tariffs as this benefit is offset by increases in Section 122 and 232 tariffs as well as freight costs. Finally, our earnings and cash flow guidance excludes any benefit of potential tariff refunds.

For the full year, we expect FX to be a tailwind to sales of approximately 1.5% and GAAP sales to increase approximately 4.5%. We still expect adjusted segment EBITDA margin of approximately 28% and free cash flow of $3.5 billion to $3.6 billion. We are raising the bottom and midpoint of our 2026 adjusted EPS guide and now expect $6.45 to $6.55. We still expect to return approximately $2.2 billion to shareholders through $1.2 billion in dividends and $1 billion of share repurchase, of which we completed $542 million in the first half.

Moving to the third quarter. Sales growth is expected to be approximately 5.5% with underlying sales growth of approximately 5%. We expect adjusted segment EBITDA margin of approximately 28% and adjusted EPS of $1.65 to $1.70. With that, I would like to turn the call back to the operator for Q&A.

[Operator Instructions] Our first question is from Scott Davis with Melius Research.

Couple, just points to clarify. I thought the detail you gave on the call was pretty thorough. But -- so we lost about 1 point in the Middle East, and it sounds like you expect to get about 0.5 of that point back. Is that correct? Is the rest lost revenues? Or is there still optionality or potential to get to regain those -- the remainder of those revenues?

I think, Scott, we've seen the disruption in the Middle East. And as we mentioned, I think, on the call there was about $50 million in the quarter. So as we look out, we're expecting about another $100 million of disruption. What we see is encouraging with the supply chain improving, but it's still a very uncertain situation, and we've got 6 months left here for the year, and capacity right now is running at about 75%. So we mentioned that there is some opportunity out there for rebuild and restart and that has started, but that's going to take, we think, 6 quarters to unfold here and we'll see how that goes. But I would say I don't think there are revenues that are lost. And in fact, over the longer term, there should be opportunity, but in this next 6 months, based on what we saw in the quarter, based on what we see on the ground today, we felt it was prudent to bake that in and take the full year guide down by 1 point at the top line.

Okay. That's helpful. And then I don't think you mentioned why China was weak in the prepared remarks, but down 9% was pretty material. Is that chemical related? Or are there other dynamics

Yes, Scott, this is Lal. Yes, I think you hit the nail on the head. Our exposure to the chemical industry in China, an industry that continues to be overcapacitized and very weak in terms of spend. And we've been adversely impacted now for a few quarters, and that continued through the second quarter of the year, which then led us to to assess the China for the year more in the negative mid-single digits versus the low single digits as we had originally thought 3 months ago.

Our next question is from Andrew Obin with Bank of America.

Just a follow up on the rebuild question. Was that correct that the value of the rebuild is $100 million?

That's what we've assessed to date. That's based on pace of quotations and orders that we've received already. Now obviously, that's based on the 47 sites that have been impacted across the region. That number could change over time. And that's also based on what we assess a restart procedures will entail for MRO activity. So that's all we have today, Andrew.

I guess the question I have, if I'm just sort of thinking about damage to Ras Laffan and your content, just that gets a much higher number. So what's wrong with that kind of analysis? And then clearly, you guys on the ground, you know what's happening. But it's just -- it seems the number should be order of magnitude high given the amount of damage that we've been reading about.

So Andrew, I think the way the $100 million we've estimated is on the damage created to the installed base on the 47 sites impacted. Now if you're talking about the 17% LNG capacity that came online to be rebuilt, that's a much bigger opportunity. We haven't really scoped that. What we're scoping for you is the near-term disruptions we've seen in customers and as they try to restart operations what we call our life cycle services businesses, we've quantified that over the next quarters to be in the tune of $100 million. But to your point, the capacity that was taken offline as that comes online, that's a much bigger number, but we're not in a position to quantify it at this point.

Okay. That makes perfect sense. And then just another question, sort of a more fundamental question. Has -- changed post Middle East as to where downstream CapEx goes or chemical CapEx goes, right? Because I think a lot of capacity was reliant on Middle East feedstocks, huge capital costs, low cost of capital. But I guess, just as we've learned during COVID that maybe efficiency versus reliability, not necessarily the same things. Has thinking changed about where facilities go going forward from where this capacity will be domiciled going forward? I'm just thinking, right, because I don't think chemicals were particularly competitive in North America, but any glimmer of hope of any of that capacity coming to North America. Sorry for a long question.

No, no, it's a good question, Andrew. And I think it's certainly worth thinking about the future balancing of capacity in the chemical industry. As you know, at least on the bulk chemical side, that's been largely dominated by China, with Germany and the United States having smaller components. As you move towards the more specialized chemicals, the Europeans and the Americans have had more of a position. That's going to take some time. Right now, I'd say the first step is going to be the find alternatives in the Middle East for the Strait of Hormuz. There's a lot of pipeline quotation activity ongoing across Saudi Arabia and a few of the other countries to bypass what likely would be a concerning pinch point from here on forward. And so that activity has started. But certainly, I think as things start to settle, producers will eventually balance our capacity needs across the world and regionalize their production. .

Our next question is from Andy Kaplowitz with Citigroup.

Well, maybe just a little more color on the near-term demand environment and orders moving forward. I know obviously, you have difficult -- more difficult order comparisons from here. But as you said, you're getting good support from the growth verticals, particularly in Power and Test & Measurement. So can you sustain that mid-single-digit order growth rate in this environment? Did you see any difference in order cadence between January and April as a couple of your industrial peers called out a weak start to the calendar year outside of the Middle East?

Yes. No, we felt very -- it was a very strong quarter outside of the Middle East. It was driven for us as we remarked in the written comments by the United States and by India, which led, and we saw broad growth across all of the growth verticals with the lowest one being probably semiconductors in the mid-teens, that all of them in terms of orders grew above that. So feel really good in terms of that resiliency. Of course, the Middle East was much softer than expected in the quarter. We expect that to rebound. We have already seen in April that was encouraging in the Middle East, particularly as it relates to MRO activity, and we'll see how the projects ultimately pan out. But no, look, I think mid-single-digit orders are sustainable for us as we navigate through the remainder of 2026. At this point in time, we feel very confident that it's with our backlog support. We've got the second half well sized. And then with this momentum in orders, really setting us up for the first half of 2027.

Helpful. And as you said, your expectations for margins for really margin incrementals have been drifting up a bit given the lower sales forecast. And that's despite, I think, you're absorbing more inflation with price. So maybe talk about what you're doing to offset the inflation? Are you baking in more, for instance, memory chip inflation and confidence level they can continue to offset inflation headwinds even on lower growth?

Yes. I mean I think, obviously, our pricing has been very, very disciplined, our cost reductions and frankly, favorable mix in some of the sales we've executed has helped, but ongoing productivity actions and supply chain mitigation actions to offset the inflation is really what's driving the margins.

Our next question is from Julian Mitchell with Barclays.

I just wanted to understand quickly sort of how you thought about the high-level guidance moving part. So you've taken a little bit off the revenue line, the EPS dollar guide, low end though has moved up with an unchanged kind of segment margin guide. So is really what's happening there, I think, $10 million narrower corporate cost? And then perhaps some rounding in the margins. Is that what's helping? And on the mix front, you've mentioned it a couple of times, help us understand perhaps how you see that mix impact playing out over the balance of the year, please?

Yes. Julian. So from a margin perspective, you're correct when you say is it in the roundings. I mean it's not fundamentally changed. And if you think about it, our view other than the $100 million of the $50 million and the approximate $100 million in the back half of the year in a region that really has lower margins, our full year view hasn't changed. The mix will improve a little. But as we've said, a lot of this growth in the second half is in backlog, it's projects. So there will be a volume uptick with some project and some mix going forward, and it all nets out where we feel very comfortable holding the 28% for the year.

That's helpful. And then just as we're looking at the balance of the year. So I think you've got in Q3 and Q4, a mid-single-digit sequential revenue increase dialed in and kind of high 30s operating leverage. Is that a fair sort of placeholder for both quarters? Anything we should bear in mind in one versus the other? And on the ACV front, I think you're embedding an acceleration in the back half. Anything to call out there?

I think from a leverage perspective, we're -- the numbers are affected by that software contract renewal dynamic and the effects there. But if you take that out, we'll be over 40% leverage on the year, full year, and certainly, that means some acceleration in the back half. From an ACV perspective, yes, we continue to reiterate the 10% plus for the full year. We had a good quarter. And we continue to think that the ACV growth of 10% plus is the right number for us.

Yes. And I think you said sequential growth mid-single digits, that's correct. And also year-over-year growth is mid-single digits. So I think that's an important addition to your statements. So I think you're spot on. It's sequential growth mid-single digit, which is consistent with what we've executed year-over-year mid-single digit. And if you do the math, the leverage will be a tad better than the 30s you stated for the second half. .

Our next question is from Jeff Sprague with Vertical Research.

I just wanted to get maybe a broader sense of just the total global ramifications of this. The nature of my question, right, is the comment of the wars stays contained in the Middle East. But the economic impacts aren't contained, right? So we've got Europe becoming less competitive from an energy cost standpoint, maybe China not having the cheaper feedstocks it needs for its chemical industry. So when you're kind of framing this, and I know none of us have a crystal ball, like how are you thinking about those second order impacts? Or are you trying to dial those in in any way?

It's a very good question. And certainly, Jeff, we have to create a framework in which to set expectations for the second half and performance for the second half of our fiscal year. Of course, within a time frame of just 6 months that we have to work with in to mitigate potential impact. That framework that we built has a very important assumption as you stated, that this conflict essentially gets -- is constrained to the Arabian Peninsula, the Arabian Sea, the Persian Gulf area. There are certainly economic downstream impacts that are already being felt, certainly feedstock pricing and supply, we have electricity curtailments in parts of Southeast Asia. We've accounted for as much of that, that we know today. But very honestly, we have not assumed a significant deterioration in economic conditions or growth for example, in India or any of the countries in Southeast Asia that in a much broader, deeper conflict to significantly be impacted.

No. Understood. And then maybe just a little -- I think we didn't have this war going on, there probably have been a lot more Test & Measurement questions. Maybe just come back to Test & Measurement, the raw numbers you shared with us, growth rates sound quite encouraging. Anything beneath the surface on verticals, the distribution channel that you can share with us that is a little light on the demand profile here?

Yes. I mean I think the momentum in Test & Measurement is clearly led by semis and aerospace and defense, both end markets are doing very, very well for us. And frankly, I think we expect continued momentum across both those sectors, whether it's new space, defense spending and then certainly on the semi side, the RF and mixed signal investments that are happening, data center investments. So I think there's no surprise there. Now we -- obviously, the weakest segment we have within our Test & Measurement business is the transportation segment of the automotive segment, though we believe we've kind of hit bottom and that will start growing low single digits. Again, most of that business is in Europe. And our portfolio business has been resilient. Obviously, we had a nice run as we came through the recovery mode, but that has stabilized in the mid-single-digit type growth rate. So on a cumulative fashion, the double-digit for T&M is sustainable for the next couple of quarters, and we expect that to continue into 2027.

Our next question is from Deane Dray with RBC Capital Markets. .

We would love to do a similar run-through on power, bigger number there. I think you said up 23%. But could you just talk about the visibility. You called out plant modernization, but also behind the meter. Where does that stand and the outlook for the balance of the year?

Well, I think from a power perspective, I think the momentum in terms of the project funnel, which is a pretty big funnel, and that's made up of both modernizations as well as greenfield. And we're starting to see greenfield. There was some greenfield in Q2. We expect a bigger greenfield activity in the second half. And a similar comment on behind the meter. We saw some behind-the-meter opportunities in Q2, but we expect more to happen in the second half and into 2027. So broad spread for the Ovation business. Obviously, that flows through to our valves and instruments business, which is doing very well. And also, we called out our digital grid management business and the transmission and distribution side, a lot of investment happening in the T&D space. So broad-based strength and power, certainly led by North America, which is our strongest market, but we are seeing momentum in Latin America, particularly Mexico, good activity in China, rest of Asia and some activity in Europe.

All good to hear there. And then if we just spotlight MRO for a moment, and you called out it was 65% of your mix. In previous oil spikes when you get $100 oil, you'll often see the refiners just turn on the cash register, run 24/7 and defer as much MRO project activity as possible, like right up until regulatory limits. Have you seen any delays there? Do you expect anything like that this time?

No, no, Deane. As a matter of fact, we tend to see when you run things at hard, the opportunities for MRO to actually increase for us, particularly in stringent applications of high pressure, high temperatures. And -- but to date, we have not seen any change in trends that would alarm us to negativity on MRO anywhere in the globe, other than, of course, what we highlighted related to site in the Middle East.

Our next question is from Andrew Buscaglia with BNP Paribas. .

So obviously, very topical throughout the quarter and throughout the year, this year is on AI -- software. It sounds like you guys kind of -- you got these new products out, Nigel, you talked about quite a bit. It sounds like adoption is going well. But could you give us an update on I think you've learned intraquarter on that front. And then I'm curious on the outlook, like how impactful do you see these products contributing to growth going forward as soon as this year, maybe you can comment on that, please.

Yes. I mean I think a lot of customer interest, not only on Nigel on the NI side, but certainly, the capabilities we've launched on Ovation, DeltaV as well as AspenTech. I think it will be a very interesting user group event where you're going to see a lot more customer input as it relates to pace of adoption for both NI and AspenTech, we'll get to learn that in a couple of weeks. I would say, frankly, we do believe that it is a differentiator for us, and we are seeing a lot of activity, particularly in the Ovation business in terms of customer dialogue and a lot of quotes around AI. I would say it's a little early for it to translate into meaningful revenue opportunities. I mean we've been very thoughtful on pricing and making sure that we can extract value and tiering the product suite where we can capture the value with tiering on the higher tier products, which will have the AI functionality. I think time will tell. I think there's certainly a lot of customer interest, but we don't have meaningful impact on revenue as we sit here today. But I think as we progress into 2027 and beyond, I think it will be a huge differentiator for us.

Okay. Fair enough. And sticking with software, we want to check on your margin cadence through the back half of the year. There's a little bit of noise starting the first half versus second half. But -- can you comment on what's behind the implied guidance for the back half of the year for that segment and the puts and takes there?

This is controlled systems and software, our control systems and software, just to clarify?

Yes. So yes, software -- yes, your software and systems. .

Yes. It should be up a little bit in the second half versus where it was in the first half, but pretty consistent through the year. There's some project execution there that plays against some of the mix favorability that we'll see in the just the business mix that comes through.

Our next question is from Joe O'Dea with Wells Fargo. .

You made a comment about seeing significant capital deployed in projects and I would imagine that some of this is a continuation of what you're seeing in growth verticals, when you talk about power and LNG and life sciences. But I'm curious if you're seeing an acceleration as well as a broadening out at all. And asking because I think a lot of what we've heard in terms of industrial end market activity company seeing a continuation of spend on areas like productivity, but not so much a broadening out on sort of capital project side. And so just anything there if you're seeing some broadening out or acceleration of this.

No, I'll go and Ram, you can add a few comments. But no, we continue to see consistency in the funnel. And as you know, Joe, we look at that on a 2-year, 2.5-year out basis, 2- to 3-year basis. It grew to $11.2 billion. And the growth is coming from inside of our growth verticals. Power really drove the growth in the funnel. But the win rate and the project activities seem to be consistent within the growth verticals that we identified. We haven't seen tremendous broadening beyond that. It continues to be those 5 core verticals that are driving not just the activity, but also the feeding of the funnel.

Yes, you said it. I mean, I think the new capital formation in our 5 growth vectors of power, LNG, life sciences, semiconductors and ADG continues to accelerate. I think every meeting we have with our businesses points to more opportunities in the funnel being added across these 5 verticals. Obviously, the core markets in energy, refining and petrochem depends on the geography there. It is stable or muted activity, but I think as it relates to the growth verticals not slowing down. In fact, we see accelerating additions of opportunities to the funnel.

And then just touching on the margin strength in Intelligent Devices in the quarter. We saw it in both sensors and Final Control. If you can unpack that impact a little bit more with respect to mix, cost actions during the quarter. You do expect a step-up in the growth rate in the back half, curious to the degree to which volume then helps those margins sequentially and how mix is expected to play out as you move forward in the year?

Yes. as we talked about, it was the strong price cost and cost reductions, I will say we got a little bit of benefit in the quarter from not having the IEEPA tariffs. And obviously, as we move forward, that will -- as we talked about, that benefit will be offset by other tariffs and some freight cost pressure. I think as we move into the second half, the margins will kind of have as you suspected, offsetting factors of volume being beneficial with some mix pressure as projects get delivered. So I expect to see that group improved margins year-over-year as they have been doing and continue to to perform very well. But yes, there will be some pressures that should offset net-net, but year-over-year, we'll see improvements in the operating margins there.

Our next question is from Alexander Virgo with Evercore ISI.

I wondered if you could just touch on a couple of things for me. Free cash flow came in a little light of where I thought it might end up being. So I wondered if you could just talk a little bit about that how we might think about the phasing through the back half of the year? And then secondly, just on ID. I think even ex the Middle East, the business came in a little light of your guide. So is the primary driver of that weakness in China and Europe? Or you could unpick that a little bit for us, that would be really helpful.

Sure, Alex. In terms of cash flow, yes, the first half was certainly affected by the interest from the Aspen buy-in that was primarily in the back half of last year. And so we'll lap that out as we move forward. And we also had some tax payment timing that was a negative in the first half. And I would say we also had a buildup of some working capital as we get ready for the second half of the year. If you're looking at prior year, our cash flow that year was far more ratable than it historically has been. So this year, we'll look a little more like we have looked in the 2 years prior to last year. In terms of -- intelligent -- sorry. Sure. Yes. The Intelligent Devices this period versus the expectation, yes, it was some softness in China and Europe, as you suspected.

Thank you. This concludes today's conference. We thank you again for your participation. You may disconnect your lines at this time.

So we're going to move on with Emerson and Ram Krishnan, who -- what do you now? Like you're always something important. What's your?

COO.

COO now. And Ram and I have known each other for a long time. And the St. Patrick's Day, I thought maybe we could toast to St. Patrick's. Anyway, there's a maybe one afterwards. Totally forgot St. Patrick's day. I felt like that last night.

So thanks for joining us. I know you guys have a lot of global exposure. There's a lot going on in the world. Maybe just a bit of an update on what you're seeing in the Middle East and how it impacts your business or anything else that's going on globally that we should be aware of?

Yes. I mean, obviously, the last 2.5 weeks, to say interesting, I guess that's an understatement. But Middle East, I mean, it's an important region for us, 9% of our sales across Middle East and Africa. Middle East alone is about 7%, large presence in Saudi, in the UAE and Qatar. For us, the real focus right now has been -- we have 1,500 people in the region. So the safety of our people, certainly operational continuity to take care of our customers. We have service people deployed to our customers. And I will say we've done a very good job making sure our people remain safe, and we're working to take care of our customers.

Certainly, logistics remain challenging to bring material into the region. We were down about a week in Dubai, the first week, but we're up and running in Dubai. Our Saudi operation continues to execute for the quarter. So at this point, where we sit is, I mean, if the situation resolves in the next several weeks, I think the impact to the year is something very manageable. But right now, our focus remains on delivering on the quarter, but most importantly, the safety of our employees and continuing to take care of our customers and finding the right logistical solutions, if this remains and continues for a period of time, then we're looking at alternate avenues and making sure we can bring material in and keeping our plants running in the region.

It's maybe kind of like a moderate impact this quarter because of a few weeks, but if it ends quickly, it kind of comes out in the wash and you still feel comfortable for the year. Is that the right way to interpret?

At this point, that's really the way we're looking at it.

Okay. Is there any -- how do you see kind of the flip side of that with if oil stays higher for longer, how does it play through to your business in the rest of the world?

Yes. I mean that's an interesting question, an important question. Now in the region, obviously, the net positive will be when the region does come back, there will be pent-up demand. So I think there'll be a net positive in the region. But however, the scenario you painted of higher oil prices or higher gas prices, what does it do to Europe or China, that's a tougher one to model. At this point, our expectation is all of those are transitionary. They resolve and we get back to business as usual as we get into the second half of this year.

And so far this quarter pre -- what happened in the Middle East, what -- how was business as usual? How did it feel, how do things feel?

All of the positives in Q1 continued. In Q1, obviously, orders were up 9%. North America was up 18%. India was strong, up 20-plus percent. Rest of Asia was up 13%. We had strong activity in the Middle East. Our T&M business was up 20%. Our power business was up 17-plus percent on sales, 30% on orders. Ovation was up 74%. So all those elements continued into the second quarter. Certainly, T&M is on a recovery path, and we'll, I'm sure, talk more about it. Those continue. Obviously, the dynamic around the Middle East in the last 2.5 weeks, though I would say orders continue to come in. It's really how we can execute in our plants and logistics is what we're spending time on, but orders have continued to come in, in the region.

And any kind of preordering or people coming in, trying to get orders in before certain things happen or pretty consistent pace, but pretty solid pace. What about the businesses that aren't growing? Anything -- anything there? Is it still pretty stable and sluggish? I mean Rockwell was just here, talked about their large project pipeline, quotation activity being good, but not a lot of release on a lot of that stuff outside of your growth areas, you guys don't quite overlap in the growth areas.

Yes. I mean our project business, I mean, the project pipeline, $11 billion, almost $6.4 billion in these growth verticals of life sciences, aerospace and defense, semi, LNG and power, all continue to move at the right pace and the right momentum. Our MRO business stays strong at mid-single digits. The geographic concerns we pointed out and we modeled into the year, which is a weak Europe and a weak China, no signs of significant improvement in both those vectors, I would say. I think Europe, primarily driven by automotive, factory automation, export into China, for example, is soft. And China continues to be soft.

Now we see pockets of activity. For example, China is a $1.8 billion business. We have a nice power business in China. We have a $250 million test and measurement business, which is up 35%. Power is up nicely in China. Exports is up. But 40% of our China sales is in the chemical markets, and those continue to remain depressed as do the chemical markets in Western Europe. So still China and Europe watching carefully, but strength in North America, Middle East, India, test and measurement continue.

And as far as these orders you're seeing in power, I think you said the one -- it's kind of like a 2-year lead time from where you see those orders. So they should be really translating in '27 and '28. Is that the right way to think about the Ovation orders?

Correct.

Second half of '26.

And into '27 and '28.

From a revenue perspective.

From a revenue perspective.

And then how about life sciences and LNG? Similarly, pretty strong. What's the timing on the revenue conversion of those out?

Similar profile. I think on the LNG side, I think there's still runway on orders. I mean this wave of LNG, 585 MTPA of capacity in theory, 130 MTPA has already been put in place, 140 MTPA under construction, and then there's a significant amount, 315 MTPA that's still yet to be awarded. Now what we will see, and we have seen in the last couple of weeks is a lot of FIDs in the U.S. going through. Certainly, it's an opportunity for more LNG capacity coming online in the U.S. and exporting out to compensate for any LNG shortage in Qatar or in the Middle East in general. So we expect that to continue.

And Life Sciences, primarily driven by 2 vectors. One is the GLP-1 capacity that's being put in place in the U.S. and then the continued investment in biologics, which is the advanced therapeutic medicinal products continue. So we see good momentum in both those end markets for us.

So the LNG side, you are seeing like an incremental reaction to what's happening globally? Or were those already things that were -- they must have been like really close to the...

Arguably, they were things that were really -- But we just got it in 2 weeks, so I thought I'd mention in the last couple of weeks. I don't think it had anything to do with them at least. They would have gone ahead anyway.

On the T&M side, growth there has obviously been strong, but very easy comps. You're now kind of getting into tougher comps. What should we think about like the T&M kind of order growth rate going forward? Is that going to be more normalized? Or is that still aero and semis like still picking up really nicely? And what are you seeing in the more distribution-related business there?

Yes. I think aero and semis are going to be the strongest by far. I think they were -- both were close to 30% in the 20% orders growth we delivered in Q1. The portfolio business seems -- is very strong globally. I think that continues to be steady. The one segment we haven't seen momentum is really the automotive side, which is the EV battery testing, which still remains muted primarily in Europe, though we expect to see easier comparisons that to recover. The book-to-bill in Test and Measurement in Q1, they had 11%, sales growth was only 1.03. We expect that to build out through the rest of the year to give us the backlog position to deliver a good '26, but also importantly, in a good '27.

So we expect book-to-bill still above -- like nicely above 1 as you move into the second half of the year at T&M.

Correct.

Okay. So that should be a nice growth story in '27. On that front, you do have a decent sized backlog. Your book-to-bill has been pretty solid, nice order growth. What do you worry about other than Middle East? Is there anything -- what were the swing factors in the second half of the year that pre what's happening over there, you were maybe on watch? What watching for?

Yes, I would say nothing -- outside of the Middle East dynamic, nothing of concern. I think backlog is up 9%. I mean, obviously, if you do the math, the second half, our trailing 6-month and 12-month order rates are mid-single digits. So they're supportive of that 5% to 6% we have to deliver in the second half. Right now, we're -- we'll do mid-single-digit orders this quarter, mid-single-digit orders for the year, mid-single-digit growth in backlog as we exit the year into 2027, which then underwrites that 5% to 6% second half that we currently have in the plan. So no concerns there. We have the backlog and the phased backlog to execute in the second half. We'll just have to see the dynamics around what impact Middle East will or will not have in that.

And as we look back 3Q, 4Q, are we looking at kind of like the TTM. You're talking mid-single digit. Is that like a TTM of like 6% or 4%, like mid-single -- when you say mid-singles?

4% to 6%.

4% to 6%. All right. Just want to be a little more precise there. Lastly, just on discrete. I know it's a small percentage of your business and putting T&M aside, but the more core discrete business, any signs of life there? Anything you're seeing that makes you more positive or.

No. Honestly, no. We haven't seen any light -- I mean, the 2 very important markets for that are China and Europe and both remain somewhat muted.

And that's Europe would be the machine builder side of that.

Both domestic as well as export.

Okay. Just on the software side, I know you guys have this like tough comp at Aspen for this year. That should be normalizing next year. Just remind us of how that plays through and then what to expect in '27.

Yes. So software business, $2.5 billion in revenue, $1.6 billion of ACV. ACV growth will be 10-plus percent this year, 9% in Q1, 9% in Q2, acceleration in the second half. So from an ACV and a free cash flow generation perspective, on plan. Obviously, on the revenue -- on the $2.5 billion, half of it is Aspen, $300 million is Test and Measurement and the rest of it, the $900 million is DeltaV innovation software business.

So on the Aspen side, we did point out that $120 million, $110 million in the first half, $45 million in Q1 of the renewals impact. If you -- that's about 45% of the Aspen revenue. So we have maintenance revenue. We have obviously the new GACV or the incremental ACV plus services. So Aspen will be down about mid-single digits in revenue. The rest of the software -- the rest of the 50% of the software will be up high single digits. So net-net, we'll be up low single-digit software revenue this year and then double digits in '27 and '28 as the renewals dynamic reverses and we'll have a good renewal year in '27 and '28, and that's that $2.5 billion to $3.5 billion road map we laid out at our Industrial conference.

And is that a reversal in that you have the easy comp plus you have growth on top of that, so it's an even stronger growth rate or just grows like it should have grown that ACV rate off of that lower base.

No, the ACV will be consistent. Renewals is what's available to renew. So it's the ASC 606 accounting. That will come back where we have a lot more renewals scheduled for '27 and '28 just based on the timing of the renewals. So that will mathematically convert to revenue. ACV, no impact.

Yes. I was just thinking the trend line, if you go down, does the trend line recouple so it's an even stronger growth rate than ACV.

Right. You recover plus you'll have growth. Plus growth...

Recover plus growth. I think that's the point I was trying to get at. So next year should be a really good year in that particular part of the software. Maybe talk about the business model in software and how -- I know there's been a lot of debate around AI and disruption. And I think you guys put out a really good cheat sheet on your software business. Maybe go through your business model and why you believe that AI may even be an enabler as opposed to a challenge and a disruptor.

Yes. So obviously, our software business, we play in vertical software in mission-critical industries with high levels of regulation where being almost right is definitely wrong. And our customers really need real-time deterministic solutions on the control side and certainly high fidelity first principle simulations versus relying on inferential black box solutions. So I think that's 2 very important moats that protect our software offering on the control side, which is Ovation and DeltaV. Certainly on the simulation side, which is majority of the Aspen business and then also the test automation software on the NI business.

In addition, our pricing model on the control software is perpetual licenses. So it's value-based pricing, clearly not dependent on seat licenses. So even if customers are deploying AI at an enterprise scale that allows them to have less number of people, they will still pay the same amount for the perpetual license. And then on the Aspen side, it's usage-based models, so tokenized. So we've made that transition. So if the Aspen simulation is used by an engineer, we get paid. If it's used by an agent, we get paid. And so ultimately, we have all the moats necessary in our $2.5 billion software business, we feel comfortable based on mission-critical, high levels of regulation, real-time deterministic that we will not be displaced by frontier models.

Now we are building AI capability into our solutions, whether it's simple virtual advisers or complete task automation around building a test automation protocol or configuring control systems, task automation or even complete workflow automation through an agentic framework that allows our customers to then deploy AI in using our solutions and then through APIs, link our software to broader frontier models that build them productivity at an enterprise scale. So those are important investments we're making where AI can be a force multiplier.

But the most important thing we're doing, particularly in the OT space, is solving the data challenges, which make industrial AI hard for our customers, which is our inmation solution that then goes into these OT data silos, and we are deploying solutions that can liberate, democratize and contextualize OT data for AI orchestration at scale. And so that's a revenue stream that we will capitalize from because until that is done, industrial AI at scale is going to be very challenging for many of our clients.

How is your product differentiated there? That would seem to be a -- maybe somebody else would be doing that, helping contextualize the data. Why is it your entitlement to play in something like that?

Because our understanding of OT data in terms of the data that is trapped in control systems or reliability systems is a key differentiator. And we have a unique solution with all of the connectors needed because remember, the data has to be accessed from multiple sensors. You have to understand the sensors to contextualize the data. You have to understand the control system to contextualize it. So I think our domain expertise, coupled with this technology that we have within inmation and the ERP we're building puts us in a unique position versus, say, a generic consultant or even broad-based players in the defense space. I won't give -- throw out names. But there are others that are doing it in the defense industry, the ontology that they're building. In the OT domain, we believe our understanding of the domain gives us the right to win.

And that's your -- and the customer is fine with you touching that data? And is that their data, though? Or is that something that kind of comes into a repository that you can analyze and you can use.

No. It's their data, and we deploy it for them. So a big -- we just announced it in one of our earnings call, I don't remember which a big engagement with Total. Total is really going down the journey of using us. It's their solution. It's their data. We will deploy it for them, and our solutions will help them drive AI orchestration and scale, but it is their installation for them to get the benefits. Now they will couple that with frontier models that take other workflows, non-OT workflows and move them towards an AI journey, but we will have a meaningful role to play when it comes to OT.

I think Lal talked a bit about AI initiatives internally and driving some productivity. Where are you guys on that journey? And any meaningful wins so far?

Two big initiatives, finance and customer care. Combination of the two, we have about 10,000 people between FP&A, our GFS, our general ledger, AP, AR and then all of our customer care resources supporting the business units. Those are all opportunities for us to deploy an agentic framework on top of the systems of record, be it Oracle and finance or Salesforce/Oracle when it comes to customer care to automate financial planning and analysis, receivables, how we manage the general ledger, certainly quote to order in terms of customer support, where we have humans obviously working on the system of record, performing many tasks that an agentic framework can automate. So we're making meaningful investments in frontier models. Now it will obviously in partnership with hyperscalers and open source technology in order for us to unlock productivity. It's early, but we do believe that there's 30% productivity opportunities if those solutions work.

30% productivity opportunities. Is that a 3-year journey? Or is that something that can really like -- have an impact like in a more immediate sense?

It's built in as a terminal 3-year in our 30% adjusted EBITDA road map contributes a big portion of the 200 basis points of the 400 basis points of OpEx. And I think it will be ratable. I think we'll start seeing benefits in '27 and '28.

That's pretty significant.

Yes.

The long-term growth algorithm, we're going to be, I think, this year, probably at the low end potentially. Do you see a year in the next couple of years where we can kind of like get above the high end of that to average it out? And is that -- is the 4% to 7% still -- you're still confident that, that's kind of the right long-term trajectory to talk about for the business?

Yes, that is. That is the long term, and I'll describe in a second why we believe that. But I think this year, I mean, simplistically, it's $1 billion of growth a year. This year, we get currency favorability. So we'll deliver the $1 billion on the 4% -- so you get the $1 billion, the $1 billion and the $1 billion. So I think it's $18 billion, $19 billion, $20 billion, $21 billion is really how we're planning it, which gets us into the to 5 to 5.5-ish as we get into -- underlying as we get into '27 and '28, and we feel pretty good about that.

Now certainly, as we described it in our investor conference, $1 billion of that growth will come in software going from $2.5 billion to $3.5 billion. And then that the remainder of the business will grow at mid-single digit, powered by the growth verticals as well as the MRO growth at mid-single digits. That's really how we've underwritten the growth. So we're not relying on a meaningful acceleration for us to get into the high end of that range to get to the $21 billion in the near-term plan. Now could we get surprised by very favorable markets driving it closer to the [ 7% ] in '27 or '28? Possibly, but we're not relying on that to get to the $21 billion.

Right. Because the drag this year from software, that will flip. That will grow next year. Yes, that makes sense. And then how should we think about the normalized incremental margins on that growth rate. You guys have had some really good years of margin expansion. What's kind of the normal rate?

I mean I think 40%. I think mathematically, the 40% gets you to that 30%. Could we do better? Yes, I think we -- given our historical record, yes, this year will be a tight. It will be till the 40%, but the headwind from the renewals dynamic will hurt us a little bit this year. So we'll only do -- I mean we're guiding to till the '28, so 40 to 50 basis points from where we were last year, but then that ramps up 80 to 100 basis points in '27 and '28.

Putting the software impact aside, when you look at the segments, which of the segments do you think has the most opportunity from a margin perspective if you put the software, obviously, the low base of software.

I think both Final Control and Sensors have opportunities.

And is that -- what are the levers there, mostly volume leverage and mix? Or is it price?

It's all -- strong price, but a lot of the OpEx initiatives around footprint consolidation, regionalization of the supply chain, moving our best cost headcount by 5 basis points over this planning period and a lot of the productivity in finance and customer care is in that Intelligent Device segment.

And you're getting 2.5% of price this year. Is that a normal rate? Or should it -- it's a decent number? Or should that go down more to the 2% -- it seems like it's a bit more of a trend. Obviously, have maybe some tariff benefits in that this year. How do we look at it going forward?

Yes, I think 2% is really how we've modeled it. And I think that's reasonable.

And your normal algorithm around net material inflation, what do we think about as that benefit? Or is it margin neutral? How do we look at net material inflation?

A point of favorability on the materials. So 2 points of price, a point of NMI on $3.5 billion of material spend.

Okay. And you don't see enough inflation today exiting into the second half to really try and pick up more price? What is the normal cadence for your price increases as you move through the year?

Yes. I think we've obviously put in all of the price we need this year. Typically, it's on October 1 as we enter the year. And unless there is any kind of an event that forces us to look at incremental pricing, we stay disciplined and not have midyear price increases. Now obviously, the last 2 years have been anomalies. The only dynamic is if logistics costs continue to rise given the dynamics of what transpired in the last 2.5 weeks, that might be the only variable. But outside of that, I would say 2.5% price for this year, which is about 3% in the first half, 2% in the second half and then continued 2% into '27 and '28.

And on the MRO front, that's pretty steady. There's no real headwinds there that could impact mix. I know that's pretty favorable from a mix perspective, the MRO revenue. Nothing there that would really impact that.

No.

Okay. From a -- on cash, I think you're 90%, 95% type of conversion. Is there a pathway to get to 100%? Or is the amort, obviously, cash EPS is a kind of mathematical headwind to a degree?

It is. I think the mid- to high 90s is a good barometer. But the more important thing to model for us is we're really starting to focus on free cash flow as a percent of sales, which will be 18% this year with 20% by 2028. So I think 18% to 20% is the guide, and I think we'll be 18% this year and 20% in 2028.

What are some of the moving parts on free cash flow? Is any working capital opportunity or...

Yes. I think most of the working capital opportunity, I think, from test and measurement, we've already baked into the plan. It's going to be in this year. Frankly, I think working capital will be a little bit of a headwind as we grow the business. And so I think if we can hold it neutral and really drive the cash performance purely on earnings and mix -- software mix, where I think the software business and NI has higher free cash flow as a percent of sales. So as they ramp up in the growth cycle, we'll get cash generation due to mix.

Okay. And then on capital allocation, repo acquisitions, divestitures, just talk about what you're doing with the portfolio? And then any -- what's the incremental repo outlook for the rest of the plan?

Yes. So in this plan, '26, '27 and '28, $14 billion of OCF, operating cash flow generation in the plan that we laid out, of which $2 billion between capital and working capital usage. So that's $12 billion of free cash flow, $1 billion of debt paydown, $1 billion set aside for bolt-on M&A as we see opportunities in sensing or software, if some assets were to unlock at relatively decent valuations or test and measurement and then really $10 billion deployed back in return to shareholders, $4 billion of dividend, of which we're increasing dividends $0.11 this year, $0.10 in '27, $0.10 in '28, $6 billion of repo, $1 billion this year, $2.5 billion next year, $2.5 billion in '28.

And so that acquisition, I mean, that's a very small amount of bolt-ons. Could that change? Is there a toggle there at all if there's something out there that's interesting?

Yes. I mean, listen, I think we'll watch. It's the quality of the assets at the right valuation that will -- if they become available, we'll have to rethink that. Certainly, the condition in the market out in 2027, I mean, there are parts of the portfolio we could get out of. And there's obviously -- that may amp up our ability to do more. But at this point, I think we're staying pretty disciplined to this plan because we don't expect the opportunities to manifest in any way in '27.

Any updated thoughts on S&P and a divestiture there?

No. At this point, I think there's -- obviously, it's a part of the cycle where we see runway in that business. So we'll continue to execute and then we'll continue to monitor on an annual basis.

Okay. A couple more questions just on the technology front. Talk about your boundless automation initiative. I found that interesting when we visited you guys in Austin a while ago. Maybe how far is that coming virtual DCS, Explain what's going on there.

Yes. I mean great progress. I think, frankly, the 3 important pieces of the boundless automation vision or the virtual DCS is around the data fabric or the data lake. So we're investing in building that technology I described earlier, which is the Inmation platform to give the foundation of a unifying data fabric, software-defined control, which is the virtual DCS that you described, and that's making great progress on both Ovation and DeltaV and the ability to put the control logic as a software layer and decouple it from the hardware and the hardware goes from custom-built hardware with a lot of I/O to a simple Dell hyperconverged infrastructure server and a lot of the controls functionality and software.

And then AI orchestration and scale, all built in a Zero Trust architecture. So a lot of great new initiatives underway, many of those capabilities being launched with DeltaV version 16 innovation. And we do believe that as we build more traction with customers like Total, the deployment of the EOP will continue to gain traction. And very simplistically, the vision, what does it all mean? We play in a $30 billion market of DCS and software, which is 2/3 hardware and services, 1/3 software. And our vision is to move that market, even if there's no growth, hold a 30, but shift the mix where 2/3 become software and 1/3 is hardware. And if we can do that, we meaningfully drive the vision of an enterprise operations platform, AI orchestration at scale, solving the data problem and helping customers deploy these as enterprise solutions like they do in ERP versus site-specific DCS.

Right with all this labor around...

[indiscernible] some services and...

Yes, it seems arcane. And then just lastly, somewhat related to AI, I thought the example that you gave in test and measurement on the configuration agent, however you want to call it, how has that been resonating? And maybe just explain what you're doing there because I think it's one of the more interesting AI-related applications out there.

Yes. Great progress. I mean it's the Nigel platform. And fundamentally, what Nigel does is completely automates the workflow that today a test engineer performs. So if you take an ADG customer like Raytheon, for example, what -- in an R&D lab, they will get a spec, this thick from the R&D department to say, okay, we're developing a new product, come up with this is the test that we need to run, design the test and run the test for us.

What Nigel will do is fundamentally take that test spec and convert it into an automated test protocol with no human intervention. So that is weeks of work of a test engineer without Nigel to convert that spec from engineering into an automated test spec using LabVIEW Instrument Studio and then using TestStand and VeriStand to run the test. So fundamentally, the AI investment with the Nigel platform is to automate that and significantly eliminate the number of hours a test engineer has to spend. And that's making great progress.

And do you charge them? How do you charge them for that?

Great question. It is tiered into the LabVIEW with Nigel. So we get it as price built into the highest tier. We don't necessarily call out a specific incremental charge, but LabVIEW in the highest tier has Nigel built in. So we obviously market the capabilities of LabVIEW plus with Nigel and they pay for the highest tier and the margins are very, very high.

Any stats on penetration yet or usage or anything like that on this one?

Early, but I mean, a lot of enterprise accounts are switching to and we'll have a lot more traction as we get into '27 because many of these contracts are up for renewal.

If I look at the T&M business and how fast that's growing, how fast is the LabVIEW part of that growing? Is it materially above.

On par.

On par. Okay. Got it. Got it. Any questions out there? We have a couple of minutes left. Maybe just to kind of like step all the way back to the beginning. So I just want to make sure I'm clear on this. You're saying that very decent presence in the Middle East, very minimal impact this quarter, really comes out in the wash if it ends quickly.

It comes out of a wash if it ends quickly for the full year, full year. This quarter, we're -- I mean, I'm not in a position to quantify an impact. In theory, our plants are running. We have 3.5 weeks left. I think that's a fair assumption, but we've got to get through the quarter. I mean things could get worse before it gets better.

Right. Okay. All right. Anything else? Anyone? Thank you so much.

Thank you. Thanks a lot.

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.

Great. Well, thanks, everyone, for being here. It's my pleasure to have up next Emerson. We have Lal Karsanbhai, President and CEO; Mike Baughman, CFO. So thanks very much, both of you for being here.

Maybe start off with -- you had a very strong end to the calendar year on order intake. Maybe help us understand some of the main drivers of that. Are you optimistic that order strength broadly at least can continue kind of into the first half of this year?

Yes. Why don't I start, and I'll pass it on to Mike here on this. Yes. So trailing 3-month orders 9%, trailing 12-month orders at 6%, backlog increased 9% in the Q, and it certainly gave us a lot of confidence in executing the plan that we have and that we shared with you, particularly in the second half of our year. And really, as it starts to look into 2027 as well. The strength came predominantly across the 5 growth vectors that we've identified with significant strength in our power generation business, in the energy markets driven by LNG, semiconductor growth, life science growth and, of course, aerospace and defense. And from a geographic perspective, the growth was heavily concentrated in the United States, in the Arabian Peninsula and then a few countries like Brazil, Japan and other parts of Southeast Asia.

Yes, I would just add that the -- we're really pleased with 9% rates, the trailing 12 months of 6% is also very supportive of what we see as we go into the year. When we came into the year, we had a backlog that had a certain phasing to it that sort of favored the back half of the year. And so that is still there. If you peel back the 9% a little bit, as you know, orders can be lumpy. We don't expect to print 9% going forward. But if we look at the underlying MRO type of order rates that we're seeing, they're in that mid-single-digit range, which is very supportive of the ongoing business, which is very important to our growth algorithm. So really pleased with it.

We also were assuming a strong test and measurement and we're seeing that. So no news there, but confirming that the rebound in the markets for T&M that we were expecting, we're seeing, which is great. And as Lal said, the growth vertical is doing very well, both in orders and in revenues for the quarter. So really pleased with the start. Nothing there that says the year is going to be any better, but it's one quarter down right in line with our expectation around the core run rate in orders.

The one thing that's also embedded in our forecast, Julian, which is important to note is that we do not expect a recovery in China, and we do expect a weak Europe. So we're not counting on that to deliver the forecast and the guidance that we've shared with the Street. And we're continuing to see weakness in both of those markets.

And so I suppose it's fair to say the organic sales guide, yes, you have that acceleration in the back half, but it's assuming that order rate underlying hold pretty steady. You don't need a big pickup in the orders versus the pattern you've seen.

I'm not going to -- not in a place to forecast orders, but which I did, if you recall, as we came out of Liberation Day, and I felt compelled that I needed to because of all the uncertainty in the market. But we certainly expect to -- orders to moderate into the mid-single-digit range as we continue through the year, which will then support the forecast that we have.

Yes. And you, I think, said it right as an acceleration. I'll just briefly remind everybody that we do have the software renewal dynamic. So the 2% underlying that we'll be showing has 2% -- in the first half has a 2% drag in it from that software renewal dynamic. So it's really a 4% to 6%. And again, it was backlog phasing that we knew coming into the year, and we knew we needed the steady MRO-type orders to continue which we're seeing. So we feel good about the year despite the optics of this acceleration and the optics gets even more acceleration when you don't consider that software renewal dynamic in the first half of the year.

Perfect. And you mentioned now at the beginning the U.S. has been an area of order strength. A lot of that was coming in the power gen business and some of the other priority verticals for you. How are you seeing the health of kind of the overall U.S. industrial economy right now? People get excited about the PMI bounce 3 weeks ago. What are you seeing kind of bottom up?

Yes. So bottom up, certainly strength across those 5 growth factors, continued investment in liquefied natural gas that I haven't seen. There's been 1 or 2 odd things that have slowed, but other than that, it continues to be relatively robust with awards which will continue well into -- through the year. Power generation, look, Ovation was up 74% in the quarter. Our total power business was up 20%. That's inclusive of our sensors and our valves. And a lot -- there were a few greenfields in there, in the United States, but the majority of the power awards that we won were modernizations or behind-the-meter work at data centers. So we're yet to see the vast acceleration of the new combined cycle power plants, the next generation of coal plants or the evolution of nuclear in the United States come in. So that's good news for the future, but there's a lot of modernization work going on and a ton of behind-the-meter work at places like Google, Meta and Elon's data centers, and those have been really good for us.

Semiconductor recovery, that's been a cyclical recovery in the business that continues to be strong for us, particularly in the United States. And then aerospace and defense markets, not just the traditional suppliers, but also the new space economy continues to grow. And then lastly, a life science expansion, which, again, whether it's GLP-1, near-shoring of plants, new drug conjugates, gene therapies that are coming on the market are very, very strong. Weaknesses, I'd say automotive in the United States is weak. That's probably a global comment, Julian, to be honest with you. across Europe and China as well.

Chemicals, weak, particularly bulk chemicals, still in a situation of overcapacity. And that's going to take some time, perhaps another 6 to 12 months to correct, we'll see. Again, not counting on that in any recovery in our forecast. Beyond that, it's -- the U.S. economy, particularly is really good. And I would lastly say, Julian, that the industrial policy of this administration lies very well to our 5 growth verticals. It falls in very well to where the investments are coming in and call it dumb luck or call it good strategy, but we feel really good about where the United States is going and how our technology is positioned to serve those industries.

Yes. Julian, I would just add, as we talked about on the earnings call, we did have $450 million of wins coming out of the funnel. We didn't win them all. Some projects were taken out of the funnel that nobody won, just the project didn't move forward, and we managed to backfill all of that and the funnel stayed flat. So that's a pretty good indicator to us that there's still some great activity out there in capital formation.

You mentioned PMI. We don't -- the only business that we've got that is sort of PMI linked would be the Pro Tools business, and they did see an uptick in orders in the quarter. So we're seeing some of that read through, but obviously, that's relatively small and not going to move the needle.

Yes. And I think, as you said, sort of aerospace and defense, an area that people haven't historically associated Emerson with semiconductor as well. What are you doing there to kind of make sure you have an advantage. A lot of your presence there came from acquisition. So how are you kind of making sure that you keep eating on those businesses keep taking share in those industries?

Correct. You're absolutely right, particularly when it comes to aerospace and defense, that business, which represents nearly 5% of the company's revenues today sits entirely in the Test & Measurement vertical. And again, the innovation there is very customer-driven around requirements for circuit testing for new space delivery vehicles or defense systems. There's a lot of work being done there. That is customer design specifics. So staying ahead of that is important. And we have the leading position in the Test & Measurement market in the aerospace industry. So we want to make sure that, that is accentuated at the time.

Semiconductor is a little bit of a different story. Yes, led by our position in Test & Measurement. But interestingly enough, as you know, Julian, underneath every fab is a water plant and a chemical plant. And that's an environment that moves gases around and water around, cooling around, and that is an environment that's full of valves, instruments and control systems. So that's an area of opportunity for us that will continue. We've always had that business, but that's also a critical element for us on a forward basis.

Yes. I think well said an important thing there around innovation, and we've been talking about innovation more particularly in that -- the areas you speak of because of the LabVIEW and the importance of LabVIEW and the development of Nigel as a virtual adviser and then continuing to develop tools like that as we're doing across the suite of software offerings and then moving that up the curve to where, as we talked about on the call, you have Nigel actually beginning to do some simple authoring to help test engineers. So we have to keep innovating to continue to be leading and that's what we're doing.

Perfect. And then in some of the softer areas, perhaps chemicals, kind of what's the strategy there? Are you seeing the MRO business still holding up despite CapEx being softer?

Yes. MRO is still in that mid-single-digit range for us. And -- but we're not seeing any kind of expansion or modernization efforts in that bulk chemical space. Specialty is a little bit different, but certainly in the bulk space.

Which is certainly part of the story in China for us. That's an important chemical market for us, and it's been soft.

And oil and gas, I think the sensitivity is much lower now. How do investors think about kind of oil and gas CapEx, the effects on Emerson's overall top line today?

It's a good question, Julian. We've been very focused on winning in liquefied natural gas. It was a -- what appeared to be a niche 15 years ago that turned out to be a very viable strategy for our company as we took DeltaV into those applications. And today, we have over 50% of every liquefied natural gas installation on the planet is run by DeltaV. Our valve position is also very strong and our sensing position as well. So we found ourselves a great place to play in the energy space, which not just to where the bulk of capital investment exists in energy today, but I think as a viable energy source well into the future. So that's really the focus for us.

We have MRO business, of course, that we sell into the upstream space and into refining. But the bulk of the growth and the dependency and we will continue to watch very carefully is the investments in additional capacity in liquefied natural gas. And we believe, as we've talked about at Capital Markets Day that we are in the middle of the current wave, and we have about half of that wave yet to be awarded and that size of 1 million tons per annum to be awarded is larger than the first in the second wave of LNG investment in the world combined. So we feel really good, and we're seeing that developing now in -- continue to develop now in Qatar and in the United States.

Great. And then more structurally, I suppose, investor questions around sort of AI potential threats to industrial software and all kinds of software business models. I'm sure it's an area that you spent a lot of time thinking about as well as this kind of discussion has got bigger and bigger in the last few months. Any kind of perspectives on that today?

Yes, I'll share it, and I'll let Mike chime in as well. When we did place an infographic on our website, our investment website for reference, so to your point, I think a large part of the concerns come from AI agents replacing humans in executing workflows and the impact that, that has, particularly as it relates to horizontal software offerings, point of use and seat-based licensing. So perhaps what I should do is contrast our software offering and to that environment. So we have a $1.6 billion ACV valued software business, okay? And we have 3 very important moats that will protect us on the threat of AI. The first moat is that our software is vertical in nature, is deterministic and is based on deep domain expertise, fast customer libraries and understanding of process conditions. If you contrast that with AI, AI is generic. It's -- it makes -- comes up with solutions on an inference basis. And so moat number one is really thinking about our software is being deterministic and having deep domain expertise.

Moat number two is the fact that we serve mission-critical applications in industries that are heavily regulated. And heavy regulated industries require 2 things. Number one is real-time compute and traceability. You have to understand what you did moments ago because you have to technically either report that forward or have a great understanding of it. So traceability is important. Real-time compute is important. So 2 features of AI, latency and hallucinations are not very good in the industries and these industries that we serve. And over 75% of our software is sold into the energy space, pharmaceuticals and power, and those are heavily regulated industries.

The third, Julian, the third moat is around the pricing model. There is no seat-based pricing for Emerson software. The entirety of our software offering is sold either as a perpetual license, which is the bulk of DeltaV innovation or as a token on a usage basis. So if you're a seat-based license and you remove x number of humans from the equation, you get to sell x number of less seat licenses. If you're using a usage-based token, it doesn't matter whether it's a human or machine, you're selling it into an enterprise and you're monetizing that token. So that's how we are positioned.

And then the last thing I would say is our customers are demanding AI applications within our product, but they're demanding it from people like us and our peers who have deep domain expertise. They want it embedded in the software offerings that we currently have in the marketplace. We've released 3 products in the marketplace. Of course, Nigel, we've talked about. We did not name it after your peer, just so you know. The Ovation Virtual Adviser and the Aspen Virtual Adviser. We have over $100 million of quotations on the Ovation Virtual Adviser alone outstanding, and that's embedded in the Ovation system that we're selling in the marketplace.

Yes, I would only add, there's a strong linkage to product in the LabVIEW Test & Measurement offering that we've got. And as Lal said, this really becomes a force multiplier for us as we move forward and we begin to continue -- we've already put AI into our software products. We're going to continue that journey with our clients, and they're asking us for that. And certainly, we have customers that are looking at their landscape, getting their road maps together and they're coming to us and saying, "you're going to be an important partner here as we move forward." So this is really, I think, ultimately going to be a good opportunity for us. Make no mistake, we are terribly paranoid about everything going on and monitoring all that very closely, but we're also really focused on how this can be an advantage to us as we move forward with our software offerings.

And then the last thing I'll say just ultimately, the results is where the rubber meets the road. We grew ACV 9% in the first quarter. We expect high single digit, not a similar growth in the second quarter. And that's with a 2-point headwind from a total order that we had last year. So -- and then we expect 10% plus ACV growth in 2026. And that hasn't changed despite everything that's going on out there.

If you were to see some kind of risk like how -- where do you think it would show up? It would be in the course of what customer conversations, I suppose, and something changing around that?

Yes. No, I was -- I referenced in the earlier meetings, I was in -- Ram and I were in Saudi Arabia, South Africa, Angola, Nigeria last week. And we met with vast number of customers, inclusive of Aramco, of course. Everyone is investing in AI. Everyone should figure out how to replace human activity and workflows with agents. But everybody is very dependent on the fidelity of our control systems and the value that an optimization and what drives in performance that AspenTech brings. None of that has changed. As a matter of fact, they're asking more of us to embed those tools within the software pathogens, and it comes back to the domain expertise that we have, which is incredibly difficult to replicate and is built over decades of deep customer libraries of knowledge.

Perfect. And away from the software side of things, maybe on hardware, there's a lot of cost inflation around. We've been saying that in a way for sort of 4 years, 5 years now. Do you find it relatively easy still to pass those on to customers in terms of price? Or do you get kind of more resistance today?

I mean, we've got about 2.5 points of price in our plan. No, look, I think this business, our automation business, Julian, you've been following it for a long time, has been price cost positive as far back as I could go, and I've been in the company for 31 years. So we feel really good about our ability. It differentiates based on the value of the technology. Our GP is, of course, touching that 52-plus percent are strong indicators of the value of the technology in the marketplace. So no, we feel very confident in our ability to continue to manage price work humbly with our customers, which is important. We're not in we're not -- we're being very -- we have great conversations with our teams, and we do value-based pricing, and we do very strategic pricing based on where we have opportunities in the marketplace with strength of technology. And so it's not a uniform 2.5% across the entire portfolio.

Yes. And it's, as you know, a large customer base, 125,000 customers. And some of those are very strategic big accounts -- bigger accounts and -- but many are MRO-type accounts where they're buying periodically. And obviously, given the stickiness of the product, particularly around the MRO business, that there's some pricing power there. I think everybody has also gotten used to, if you will, some of these price increases.

And as we went through tariffs, I think customers' initial expectations were that price increases would be much bigger than they actually turned out to be. So while there's been a lot of price coming out of the supply chain issues a few years ago, that has moderated. We had 2.5% last year, 2.5% this year. We still see 2 points of pricing power per year as we move forward.

Great. And you mentioned the gross margins got to a very, very high level. When we think about kind of operating leverage for the company, I think it's guided in the sort of 40% in the second half of this year. What's the confidence level in that given that cost backdrop and everything else? You can speak to it.

I think we have a lot of confidence, and you're absolutely right, 40% is the value creation framework for leverage as we move forward. And we've got -- we feel like we have a nice path on the expected 240 basis points of margin improvement as well. Look, it certainly shows in our adjusted segment EBITDA margins that we've been at this a long time. And that's one of the things that we feel very comfortable about that we do at a world-class level, which is drive profitability. The opportunities, as we move forward certainly are in footprint. We have more to do there and then productivity.

We talked about it in terms of our solutions, but we have lots of opportunities for productivity using AI. We've launched several initiatives. We have all the same challenges that our customers do around data and getting data lined up to really make those tools work like an agent. But we've got those initiatives going. We're using copilots ourselves and seeing some efficiencies there, and we expect some profitability improvement. So yes, you're right, this year is not going to be 40%. We've got the software renewal dynamic, which, as we talked about, reverses. So it comes down to getting about 80 basis points per year an improvement in profitability and then driving the leverage and 40%, we feel very comfortable now.

Great. And on capital deployment, it was a very successful acquisitions since COVID. But I suppose at the Investor Day, sort of guarded on future M&A. Maybe help us understand kind of why, particularly in those 5 growth verticals that you have prioritized.

Yes. No, I will. Certainly, you hit on the head. The last 5 years have been highly transformative for us. And that was by design. That was the vision that we had of the company we wanted to create. And I was fortunate that our Board supported division and that we were able to execute it to create this company. On a forward basis, the capital allocation story for us is really centered around returning cash to our shareholders through the dividend, accelerated dividend payments and share repurchase as we talked about at our Capital Markets Day.

Now having said that, there's ample firepower to look at bolt-on acquisitions in key vertical opportunities. And we'll continue to do that, Julian. We have ample that comes in front of us, and we evaluate, but we also want to be smart. We have -- we've created a great, highly differentiated company that we can believe -- that we believe can grow 4 to 7 through cycles, and we don't do anything that deters from that in a negative way. So we're looking at assets that obviously would support that growth, which I think ultimately is what leads to -- for our company and multiple expansion, which is really the opportunity.

Fantastic. Well, with that, we'll turn now to the audience response questions, please. So the first one is around current ownership of Emerson.

Absolutely. Interesting.

I'm overweight.

Yes, me too.

That's reassuring.

Okay. So there's a lot of opportunity left in the broader group. Second question is really around sort of general bias, even if you don't own it.

It's like getting a performance review real-time, Julian.

Yes.

You put every CEO through this.

Okay. So neutral-ish. It's around kind of earnings growth potential. If we move to question 3, it's around, yes, EPS growth for Emerson versus say the multi-industry average.

Doug is voting 5 or 6x times for question.

Okay. So in line-ish on the whole. The next question is around capital deployment, uses of excess cash. So it's fairly even sort of small M&A and buybacks. Next question is on valuation, kind of what's the appropriate year 1 PE multiple? Average of [indiscernible]. And then last question is kind of why what's the biggest kind of anchor on the multiple right now?

So organic growth, the biggest question mark.

Great. So with that, Lal and Mike. Thank you so much for being here. Thanks.

Thank you.

Great to see you. Thank you very much.

Greetings and welcome to the Emerson First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Doug Ashby, Director of Investor Relations. Thank you. You may begin.

Good afternoon, and thank you for joining Emerson's First Quarter 2026 Earnings Conference Call. For those who don't know me, my name is Doug Ashby, and I'm the Director of Investor Relations for Emerson. Today, I'm joined by Emerson's President and Chief Executive Officer, Lal Karsanbhai; Chief Financial Officer, Mike Baughman; and Chief Operating Officer, Ram Krishnan. As always, I 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 risks and uncertainty. Please take time to read the safe harbor statement and not 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, Doug, and good afternoon, everyone. Thursday, February 5, marks my fifth anniversary as Chief Executive of Emerson. Over the 5 years, I have found the work challenging, motivating and rewarding. The execution of our vision to transform Emerson into the world's leading automation company, has been incredibly gratifying. We aligned the company to important secular drivers which will experience outsized growth well into the future.

Our customer engagement teams now deliver an unequaled software-enabled technology stack to solve industry's biggest challenges. I am surrounded by the best management team in Industrial Tech and by 70,000 talented engaged colleagues all around the world. The Emerson management system will enable best-in-class execution led by growth, earnings, cash and resulting in differentiated value creation. I remain ever grateful to Emerson's Board of Directors, employees and investors for their trust and support.

Please turn to Slide 3. In November, we hosted our first investor conference since completing our transformation, and he was energizing to present Emerson as the global automation leader, executing on our vision to engineer the autonomous future. In addition to highlighting our technology advancements and innovation, we introduced our value creation framework, which guides how we operate the company, beginning with organic growth. Emerson Automation portfolio is aligned to powerful secular tailwinds, electrification, energy security and near-shoring and sovereign self-sufficiency. And we expect these to drive growth over the next 3 years and beyond. We are also delivering innovation that enables customers to unlock significant value from automation. Operational excellence is a hallmark of Emerson, and we have plans to further expand adjusted segment EBITDA margins by 240 basis points by 2028. And importantly, we plan to return $10 billion or 70% of cumulative cash to shareholders through $6 billion of share repurchase and $4 billion of dividend payout. We remain confident in achieving our 2028 targets. The $21 billion top line, 40% incrementals that delivered a 30% adjusted segment EBITDA margins, $8 of adjusted EPS and 20% free cash flow margin. We believe this is a highly differentiated value creation framework, and we are excited for the future of Emerson.

Please turn to Slide 4. 2026 marks the 50th anniversary of National Instruments, which was founded in Austin, Texas in 1976 by James Truchard, Jeff Kodosky, and Bill Nolan. The trio was frustrated by the inefficient tools they encountered while working in a test lab at the University of Texas and believe connecting instruments to a computer could revolutionize electronic test and measurement. They developed LabVIEW while working out of Truchard's garage. And since its release in 1986, LabVIEW has redefined productivity and engineering workflows through software-defined test. Today, Emerson NI is the leader in test automation systems. And 2 recent developments demonstrate how Emerson is still driving test forward through software. In January, our Nigel AI adviser was 1 of 13 products recognized as a 2025 Product of the Year by Electronic product design and test. This U.K.-based trade publication focused on electronic test, validation and manufacturing and their annual list highlights products that use innovation to achieve even greater levels of performance. Nigel provides intelligent workflows with AI-driven test design and orchestration to accelerate troubleshooting optimize lab performance and enhance decision-making. This award demonstrates Emerson's leadership in AI-enabled test automation and reflects continued momentum as we move the industry towards autonomous test operations. Nigel AI is purpose-built to support the specific tasks, engineer space throughout the different stages of the product life cycle. And today, Emerson released the next generation of Nigel AI, strengthening our capabilities in AI-enabled tests. These upgrades deliver a step change in performance by moving Nigel AI from an AI assistant to an AI after, accelerating co-development to make engineering workflows more efficient from design and validation through production. Processes that previously 2 hours can now be completed in units. For our customers, this means engineers spend less time navigating tasks and more time focused on improving test outcomes. This evolution marks a clear step along our road map towards Agentic AI, where software increasingly enhances productivity, and we are seeing accelerated user adoption of LabVIEW since the first launch of Nigel in 2025.

Please turn to Slide 5. Robust demand continued in the first quarter with underlying orders growth of 9%. Customers are deploying capital in longer-cycle projects in our growth verticals, with momentum building in North America, India and the Middle East and Africa. I will discuss more details on demand on the next slide. Emerson's first quarter results reflect disciplined execution. Underlying sales met expectations were up 2% year-over-year. Momentum continued in Test & Measurement, up 11% year-over-year and our Ovation business accelerated sharply, up 20%, driven by the secular demand for power. Profitability exceeded expectations with adjusted segment EBITDA margin of 27.7% and adjusted earnings per share of $1.46. Annual contract value of our software grew 9% year-over-year and ended the quarter at $1.6 billion. We remain confident in our plans for 2026. The supported by a good start to the year and our proven track record of operational excellence. We are reiterating our guidance of 5.5% sales growth, 4% underlying sales growth and an adjusted setting EBITDA margin of approximately 28%. We are also raising the bottom and midpoint of our adjusted EPS guide and now expect $6.40 to $6.55 per share. Emerson completed $250 million of share repurchase in the first quarter. and we are committed to our plan to return approximately $2.2 billion of capital to shareholders. Finally, I want to highlight multiple key developments in technology and innovation at Emerson. In January, Emerson was named the 2026 Industrial IoT Company of the Year by IoT breakthrough, marking the fourth time in the past 5 years that we have received this recognition. Over 4,000 companies were nominated globally for the 2026 competition, and Emerson was selected for having the most complete industrial IoT technology stack. Additionally, we released DeltaV v16 which advances our software-defined automation vision and is an integral piece of our enterprise operations platform. With flexible architecture and enterprise integration DeltaV v16 empowers customers to make smarter decisions by improving access and providing context to operational data to facilitate advanced analytics and AI optimization. Lastly, we strengthened our leadership position in life sciences through a strategic collaboration with Roche, underscoring how Emerson's software dramatically improves and shortens the technology transfer process. The new DeltaV modality library enables life science customers to efficiently design scale and deploy new production processes with prebuilt and proven solutions that save months of development.

Please turn to Slide 6. Underlying orders were up 9%, marking 4 consecutive quarters of strong order growth. Trailing 12-month orders are up 6%, providing the backlog to support sales in the second half of 2026 and into 2027. North America India and the Middle East and Africa continued to show robust demand, while we are seeing ongoing softness in Europe and China. Orders growth was most pronounced in our Software & Systems Group, which was up 23% year-over-year. Broad-based strength in Test & Measurement drove orders growth of 20%, led by semiconductor, aerospace and defense and the portfolio business. AI and digital transformation of manufacturing are leading customers to deploy significant capital towards greenfield and modernization projects for power generation, especially in the U.S. Orders in our Ovation business were up 74%, driven by large project wins including behind the meter data centers and fleet modernizations for major utility customers, and we expect growth in the mid-teens for the year. We are also seeing healthy investments in grid digitization with ACV and AspenTech's digital grid management suite, up 25% year-over-year. Secular tailwinds are driving substantial long-cycle project activity, and Emerson won approximately $450 million of automation content from our project funnel in the quarter. 80% of these wins came from our growth verticals, led by power and LNG. Our funnel remains at $11.1 billion, replenished by new opportunities in our growth verticals. And I want to highlight a few projects that support our confidence in continuing to win at highways. First, Emerson has chosen to automate on-site power generation for a new 1.7 gigawatt AI data center in the United States, helping to meet accelerate deployment time lines in mission-critical reliability. The project will leverage proven behind-the-meter power generation management software as part of the Ovation platform, enabling faster time to market, for the customer. Emerson's recently announced strategic collaboration with Prevalon Energy played an instrumental role in our selection for this project. As the collaboration brings together Emerson's automation and control expertise with advanced energy storage to help data center operators improve reliance, resilience, reliability and efficiency in increasingly power-constrained environments.

Next, Emerson was selected for Sempra infrastructures toward Arthur LNG Phase II project, which will add 13 million tons per annum in capacity to the U.S. Gulf Coast facility. Emerson's DeltaV control system and severe service control valves were chosen based upon our reputation for strong operational performance in LNG applications and our local presence and support. Lastly, Emerson One project have multiple large new space customers. It will help develop test and validate complex communication links for their satellite-based programs to provide reliable, high-speed Internet around the world. The customers will use NI's leading test off to our NPXI platform, which were selected due to their superior performance in reducing test times while providing best-in-class measurement accuracy.

I will now turn the call over to Mike Baughman to discuss our results and 2026 guidance in more detail.

Thanks, Lal. Please turn to Slide 7 for a more in-depth look at our Q1 financial results. As a reminder, our first half financial results are adversely affected by a software contract renewal dynamic that we detailed in our November earnings call. This impacted our Q1 year-over-year sales growth by approximately 1 percentage point, adjusted segment EBITDA margin expansion by 70 basis points and earnings per share growth by $0.06. For Q1 and including the 1 point drag, underlying sales growth was 2%, with all segments reporting growth. Growth was led by software and systems, which was up 3% and 6% without the software contract renewal dynamic, while Intelligent Devices grew 2% and safety and productivity was up 1%. I will provide more details on geographic and group performance on the next 2 slides.

Price contributed 3 points to growth as expected. MRO for the company represented 65% of sales. Our backlog ended the quarter at $7.9 billion, up 9% year-over-year and our book-to-bill was 1.13. Adjusted segment EBITDA margin of 27.7% came in above expectations, favorable price cost and cost reductions, including synergies outpaced inflation to benefit margin. Excluding the 70 basis point impact from software dynamic, adjusted segment EBITDA margin was up 40 basis points. Adjusted earnings per share came in at $1.46, a 6% increase year-over-year. Q1 free cash flow of $602 million with a margin of 14% came in slightly better than expected, positioning us well for our expected full year growth of approximately 10% at greater than 18% margin. Overall, Q1 was a very good start to 2026.

Please turn to Slide 8 for details on Q1 underlying sales by region. As expected, underlying sales were strongest in the U.S. and the Middle East and Africa, while China remains soft. The Americas were up 3% and the U.S. remained strong, up 6% with sustained momentum in power and LNG while also benefiting from nearshoring with expansions in Life Sciences and Semiconductor. North America pace of business remained healthy with resilient MRO spend. Europe was up 3%, benefiting from the timing of projects in Eastern Europe, although the overall pace of business was subdued. 9% growth in the Middle East and Africa was driven by greenfield project activity. We are seeing broad-based momentum in our growth verticals, which collectively were up 14%. Power led the strength up 17% with elevated activity across lifetime extensions, upgrades and greenfield projects to support the unprecedented increase in electricity demand. Life Sciences also provided significant growth driven by GLP-1 demand with greenfield and modernization products to support near shoring and self-sufficiency in multiple regions. Ongoing strength in North America and the Middle East as well as our growth verticals and sustained demand for automation give us confidence in our full year outlook.

Please turn to Slide 9 for details on sales and margin performance for our 3 business groups. Software & Systems underlying sales growth of 3% was led by broad-based strength in Test & Measurement which was up 11% and helped offset a 3-point drag from the software contract renewal dynamic in Q1. We saw a significant growth in power, life sciences, semiconductor and aerospace and defense. Software & Systems margin of 31.3% increased 20 basis points year-over-year, driven by strong profitability from Test & Measurement and the benefit of synergies and offsetting a 2-point headwind from the software contract renewal dynamic. Intelligent Devices underlying sales growth of 2% was led by power, LNG and North America MRO offset by weakness in China. The pace of business in Europe and China was light, although Q1 growth in Europe benefited from the timing of projects. Intelligent Devices margin of 26.9%, decreased by 70 basis points year-over-year driven primarily by mix and headwinds from FX due to a favorable impact last year. Safety & Productivity was up 1% underlying, driven by electrical products and stable project activity in North America, while European markets remain soft. Safety & Productivity's margin of 20.9% was down 40 basis points year-over-year due to lower volume, offset by benefits from price and cost reductions.

Please turn to Slide 10, where I will bridge Q1 adjusted EPS from the prior year. Excluding the $0.06 impact of software renewals, operations delivered $0.10 of incremental EPS in Q1, Software & Systems contributed $0.08, reflecting strong operational execution and intelligent devices added $0.02. Nonoperating items added $0.04 from share count and tax rate benefits. Overall, adjusted EPS grew 6% year-on-year to $1.46.

Please turn to Slide 11 for an overview of our Q2 and full year 2026 guidance. We are reiterating our full year guidance for sales, adjusted segment EBITDA margin and free cash flow. We are raising the bottom and midpoint of our 2026 adjusted EPS guide and now expect $6.40 to $6.55. We still expect to return approximately $2.2 billion to shareholders through $1.2 billion in dividends and $1 billion of share repurchase, of which we completed $250 million in Q1.

Turning to the second quarter. Sales growth is expected to be 3% to 4%, with underlying sales growth of 1% to 2%. We expect adjusted segment EBITDA margin of approximately 27% and adjusted EPS of $1.50 to $1.55. I will provide additional details on guidance in the following 2 slides.

Please turn to Slide 12 for our 2026 group underlying sales guidance. We expect Software & Systems to be flat in Q2 and up 4% for the full year. Test & Measurement is planned to have high single-digit growth in both Q2 and the full year, while the Control Systems & Software segment is expected to be down low single digits in Q2 due to a $65 million headwind from the timing of software contract renewals. As a reminder, this accounting dynamic adversely affects GAAP revenues by $110 million in the first half and $120 million for the full year. We continue to see robust adoption of our software and expect ACV to grow 10% plus in 2026. Intelligent Devices are projected to grow 2% to 3% in Q2 and 4% for the full year with stable MRO led by strength in North America. Second half growth is supported by backlog phasing and the timing of project shipments. Safety & Productivity is expected to grow 1% to 2% in Q2 and 2% to 3% for the full year. Growth is driven by North American markets and electric and utility strength, but offset by continuing weakness in European markets. Overall, Emerson expects to grow 1% to 2% in Q2 and approximately 4% for the full year. The second half growth acceleration to approximately 6% is supported by our strong orders momentum and lapping of the software contract renewal dynamic. Excluding the impact of software contract renewals, Emerson's growth rate is expected to be 3% to 4% for Q2 and 5% for the full year.

Please turn to Slide 13 for additional detail on adjusted segment EBITDA margin and EPS guidance. For Q2 2026, we expect operations to contribute around $0.05 to EPS with another $0.09 from nonoperating items, primarily FX to offset $0.09 impact from the software contract renewal dynamic. As a reminder, Q2 2025 adjusted EPS of $1.48 benefited from about $0.04 from the TotalEnergies project that we discussed in our Q2 2025 earnings call. The lower volume from renewals in the TotalEnergies deal impacts Emerson's adjusted segment EBITDA margin by approximately 150 basis points compared to Q2 2025. We are guiding our Q2 2026 adjusted EPS at $1.50 to $1.55. For the full year, we are raising the bottom of our EPS guide by $0.05, reflecting the good performance in Q1. The renewal dynamic reduces adjusted EPS by approximately $0.15 in adjusted segment EBITDA margin by approximately 40 basis points. We still expect operations to generate about $0.50 of incremental EPS with approximately 80 basis points of margin expansion from positive price costs and the continued benefit of synergy realization from AspenTech and tested measurement.

With that, I would like to turn the call back to the operator.

[Operator Instructions] Our first question comes from the line of Andy Kaplowitz with Citi Group.

Lal, could you break down a bit more your 9% order growth in Q1 between process and hybrid? I think you said 74% Ovation growth, which was impressive, and I think you said mid-teens growth in power is expected this year. But could that higher level behind the mirrpower opportunities lead to more extended runway of power? And then generally, would you say your process and hybrid markets are settling into sort of this mid-single-digit order growth rate despite some of the concerns that we hear out there?

Yes. No, look, we were very -- start with power, very energizer what we saw in the marketplace. It's, as you know, start to develop in 2025, but we saw certainly an acceleration in orders in the first quarter. It's predominantly driven by 2 areas today, but there will be a third that I think starts to pick up steam as we go forward into the year. And the 2 areas are modernization upgrades of existing facilities and behind the meter power generated capacity at data centers. That's generally what drove the investment in the power generating capacity. Of course, on the same line, we saw modernizations of the grid and investments in our -- and we saw that reflected in the ACV of our DGM business at Aspen. What we'll see I think, developed a little bit more further longer cycle, Andy, will be new generating capacity coming in. We see plans being put forward, but we're really right now on evergreen modernizations and behind the meter work. I'll also highlight in terms of the order drivers, the activity at Test & Measurement. Orders were up 20% in the Q. And Andy, it was broad-based portfolio business, semiconductor and ADG, all up between 20 and 30 plus percent. The one offset there continues to be the Transportation segment, which is relatively challenged. But overall, great momentum in that business and we've seen very steady consistent growth there. Ram, anything to add?

Just to add, I'll give you geographic color on the 9%, Lal, gave it to you by business, but North America was up 18%, reflecting many of the end markets that Lal described, certainly power, LNG and many of the T&M markets in North America were very strong. Middle East was up 6% for us. Latin America was up 9%. So those fundamentally drove the strength. India was up 22%. So consistent with the commentary where we thought we had strength, we demonstrated a lot of positive momentum that should continue. Certainly, Europe was down low single digits, and China was down high single digits in the quarter from an orders perspective.

And the last thing I'll add Andy just on the funnel on the projects. It was a significant, as we highlighted, $432 million of wins, it came from approximately 70 project wins. 1/3 of those were in power, but they had a heavy participation in LNG and in semiconductor, life science and ADG as well with each of those represent about 15% of the wins. So lots of broad-based activity, but of course, power generating, transmission and distribution really driving the numbers right now.

Lal, that's very helpful. And then ACV growth was 9% in the quarter, you're still talking about expected 10% plus growth for the year. But as you know, there's angst regarding AI's impact on software. So I think you already spoke about Nigel AI, I know you've talked about the greater vision of balanced automation. So maybe you can remind us why AI could be complementary to growth for you guys in ACV and margin in your software businesses?

Yes. For us, from a software perspective, first off, all of our software offerings are built on first principle models very, very sticky and a lot of domain knowledge built into the simulation capabilities, not just at Aspen, but also our software offerings with Ovation, DeltaV, and certainly the NI suite. So the threat of AI disrupting our software business is very minimal as we see it today. And really as a counterpoint, the AI capability we're building into our software frankly, accelerate the growth. So we see AI and all the AI capabilities we've launched, not just with Nigel, but also the capabilities, innovation and DeltaV should be a net accelerator for our software offerings, and that's really what we expect to see with continued ACV growth.

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

Going back to the order commentary, you've obviously put out LNG call at Power. Obviously, these are 2 very long cycle end markets. So I'm just wondering if some of the orders we're seeing, especially in power are pushing beyond this year and into sort of multiyear basis?

Yes, you're absolutely right. Certainly, it's given us the confidence not just in the back half of '26 as we see the backlog timing. But we start to gain confidence into our 2027 as we see those orders and the timing of the shipments. But I'll also suggest, Nigel that if you look at the Test & Measurement business, that's -- there are projects in that business, but there's a lot more of the short cycle activity, particularly in the portfolio business and in elements of semiconductor as well.

Okay. And then a quick follow-up on the I guess, the sensors is the new name. The Sensors margins were down, I think, 120 basis points year-over-year. I think you talked about FX benefits in the prior year quarter. Is there any impact of memory chip inflation here? Because if there's one area of Emerson where you might see some of this [ accumulation ], I think might be there. So just maybe just touch on the margin miss and then talk about the memory chip mentation as well.

Nigel, it's Mike. Yes, your memory is very good. We did last year had some FX benefits that were in that segment that we don't have this year, which drove about a point of the year-over-year negative comparison of about 2 points. The other things going on there related to mix. There was geographic mix.

Ladies and gentlemen, please stand by with the technical difficulties. [Technical Difficulty] Ladies and gentlemen, thank you for your patience. We will resume, and you may continue.

Nigel, that was such a great question. I just try to stand the call on that. Okay.

So Nigel, where did we draw so we can -- where did we drop?

I think you were talking about geographic mix and NIM and Test.

Did I finish the DRAM explanation on or not?

No, nothing on DRAM, though.

Okay. Let's go back to your question, Nigel, about sensors margins. And I was commenting that you were correct about the FX impact, which was about a point of the approximately 2 points that the sensor margin was down on a year-over-year basis. There was also some mix dynamics the prior year had a stronger North America and some backlog dynamic going on that benefited them. And then there's some other regional mix that affected profitability. The Sensors business had a good quarter in Europe, which was largely project-based, which had a negative effect on the comparisons as well in the mix. So that was about the other point of margin decline in that business. As we look out to the full year, we expect some improvement on the 28.6% that, that business reported in the prior year. As for the second part of your question around the DRAM from a profitability perspective, no impact, but I'll pass it to Ram to talk a little bit about that.

So Nigel, we're obviously watching that carefully. We buy about $8 million of DRAMs that impact many product lines, but mostly in Control Systems & Software and T&M, the sensors to your specific question, less than $1 million of DRAM exposure. Of that, most of our buy is really Gen 3 and Gen 4 DDR3 and 4, where, yes, supply chains have extended. We're watching that carefully, we don't have a lot of exposure in Gen 5 DDRs, which is really the AI-driven constraints and inflation that we're seeing. But net-net, for us, the margin impact from the price inflation is something very manageable. We'll manage that within the scope of our P&L. It's really the availability that we're watching very carefully and making sure that we're addressing this with our suppliers and ensuring that we have enough availability to cover the year and beyond.

Our next question comes from the line of Steve Tusa with JPMorgan.

This [indiscernible] on for Steve. Just following up on the orders, the order trends are encouraging and the backlog is up quarter-over-quarter 2. But just there's longer cycle orders in there too, as you mentioned, earlier. And so just how should we think about the cadence of these orders translating into sales? And what businesses specifically do you expect to hit the second half that supports the full year guidance?

Yes. I mean, so if you look at the phasing of the backlog, they're very supportive of hitting our second half sales. So the backlog translate into the mid-single-digit growth, tell the 6% growth that we've guided for the second half. Our trailing 12-month orders at 6% also substantiate that, our backlog at $7.9 billion, which is up 9% also phase into the second half and into the first half of 2027. The backlog build is, frankly, across the board, certainly in our control systems and software business, both in Power as well as our DeltaV business. In Final Control, we have a balanced backlog position in our sensor business to support the second half. So the build is across the board.

Our next question comes from the line of Jeff Sprague with Vertical Research Partners.

Lal, congrats 5 years I can't believe it. That's amazing. Time does fly. Certainly seems like 4.5 to you, right? Just a couple of quick ones from me. Mike, thanks for all those bridge items. One thing I was curious about, though, is just the drop in sequential margins Q1 to Q2 on what should be maybe a couple of hundred million higher revenues sequentially. Can you give us a little bit of insight on what would be driving that?

Yes, go ahead.

Yes. It's primarily the impact of the software renewal dynamic even sequentially. I mean, frankly, the [ 65 ] over the [ 45 ] and the dilution driven by that is the fundamental driver. And frankly, unfavorable mix.

And the Total deal, Jeff, that came through, that was another boost to the barrier that won't be there.

And those software numbers have moved around a little bit, right? I think you were thinking $50 million in Q1, and it's $40 million. It sounds like Q2 went up a little bit. I think you were saying...

That's correct.

So just a little bit of movement there. Could you just also just address sort of the weak verticals? And do you see stabilization? I'm thinking Chem probably most notably, but some of these areas that have been just under a lot of secular pressure and this whole deindustrialization trend that's ongoing in Europe chemicals. Do you see any bottom there? Is that eroding your MRO activity? And I don't know if there's any other verticals to kind of talk about also.

Yes. Certainly, Jeff, you hit a very important point here. We're seeing continued flat activity in Europe for year. Certainly, there are industries such as automotive, packaging, but certainly chemicals in places like the Benelux and Germany that are still very challenged. And then our outlook on China has turned a little more bearish as we navigated another quarter, we now believe that we'll be down low single digits for the year based again on lackluster activity in particularly in the chemical sector. There are some green sheets in China, of course, there's activity that Test & Measurement is seeing. That's very encouraging. There's power generation activity but a large chemical business, which we've had for -- and foster for many years, continues to be. And we have not seen challenging and we've not seen a recovery in that business in either one of those large world areas.

And then certainly, the automotive segment, which is not as big as chemical for us, but certainly a meaningful part of parts of Safety & Productivity and T&M is -- continues to remain soft in both Europe and China.

Our next question comes from the line of Julian Mitchell from Barclays.

Maybe just wanted to understand kind of your own perspectives on the order strength. So I guess, first off, was surprise to you what those orders did it was sort of in the plan based on what you knew of the dollar value of orders a year ago that we can't really see on the outside. And I say I'm asking that just because you didn't change your organic sales guide for the year. In the second quarter, we don't seem to see a sort of short cycle pull-through into Intelligent Devices revenue growth, for example, from these orders.

Yes. I mean I think this -- obviously, we didn't expect plus 9%, so there were some projects from Q2 that we got into Q1. But certainly, the last 4 quarters, we were plus 4%, plus 4%, plus 6%, plus 9% trailing 3-month plus 6% is consistent to mid-single digits is consistent with how we thought about how the first half of this year will unfold and provide the need of momentum to deliver on the second half shipments. So I wouldn't say we're necessarily surprised why the level of order activity. It's consistent with how the funnel is manifested and these growth initiatives in LNG power semis, aerospace and life sciences playing out.

I think you bring up a good point in Intelligent Devices, Julian, we've been -- certainly, we had a phenomenal year as we work through backlog in that business in 2024 and 2025. We're now at a point where we've been a little bit challenged over the last few quarters in the business. We'll see that accelerate in the second half as we work our way out of it. But will be another softer quarter in Q2, and that will be largely behind us.

And then just my follow-up on the margins. So you've clarified second quarter. The second half of the year, I think you're dialing in kind of 40s type operating leverage year-on-year. So I just wanted to make sure that, that's roughly the right ballpark. And when you're thinking about that, is there any risks to it around price cost, for example? Or do you think that's a good kind of -- you're confident in it and it's a good run rate going into the following fiscal year?

Yes. We feel good about that leverage. And you're correct, it's the expectation for the year is in that high 30s, which again has affected the software renewal dynamic, but we do feel good about that. The leverage for the quarter of 20% when you adjust for that software renewal is back up in the mid-30s. So yes, I think as we move forward and think about the profitability and the growth and the leverage that we should see from the growth, we feel good about the expected leverage for the year in the back half.

And the other way to look at the leverage is, obviously, on a sequential basis, half 2 to half 1 will be up mid- to high single digits from a growth perspective, and that should lever in the 40s. So you can look at it year-over-year, you can look at it sequentially, and I think you'll calibrate that the second half margins will trend towards that 28% plus in terms of EBITDA margins.

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

Just on the pricing. What would we be thinking about for the second half? How should it flow?

Approximately in the second half or about 2.5% for the full year.

Got you. And just going back to this 18% North America order number, it's very, very impressive. Can we just -- I know you've sort of talked about it, but it's just a nice acceleration. And I know you sort of talked about sort of full forward on people have tried to see what's going on. But maybe can you describe to us how did it go through the quarter? What are we seeing? Are we seeing this rate of orders sustainable? And what do you think has changed in North American economies to drive orders like you can appreciate that you have behind the meter? I understand that you're in a number of sort of high growth industries and there are sort of idiosyncratic stores that 18% is just very, very impressive.

Thank you, Andrew. I'll try to give a little color and Ram can jump in as well. So look, I believe, and we're seeing it reflected in the customer activity that the industrial policy of the administration is benefiting 5 specific sectors that just happen to be our growth verticals. Electrification and power generation data centers, investments in AI, modernization of our grid and generating capacity, near-shoring impacting life sciences and semiconductor, a robust open energy policy that enables the development of shale gas and the export of LNG to our partners. And lastly, a defense policy that continues to modernize the American military apparatus, and we benefit from that through AI. So that industrial policy has holistically called incredibly well in the United States and aligns to our technology stack serves incredibly well.

Yes. And just to break it down, on the 18%, a large majority of the $450 million in project wins came in North America from a power and LNG perspective. We indicated our Ovation business was up 74% in orders. A lot of it was in North America. T&M was up 20% in orders up close to 30% in North America. So the elements of LNG power semiconductors, aerospace demand, life sciences, augmented with a strong MRO, which was up mid- to high single digit from an orders perspective, drove the strength in North America. Now we don't expect the 18% to continue through the quarter. But I think we're very confident that high single-digit growth in North America is something we will take into the plan for the full year.

Our next question comes from the line of Scott Davis with Melius Research.

I have to ask this question even though I'm not sure you're going to be able to answer it with much precision, but on the opportunity out there in Venezuela, there's got to be just a lot of old aging equipment in there that needs a refresh, but I'm not sure if you guys have any color you could provide on that opportunity or whether you're already talking to customers about potentially having some boots on the ground there or what you can do to kind of make sure you can benefit from a rebuild.

So I appreciate the question, Scott, certainly a subject that we've renewed here in the walls of our company, with our teams. We have a long-established history in Venezuela and relationship with Pinavisa that goes back for decades. We estimate to have approximately $1 billion of installed base in the country. And largely, many of our channel partners, believe it or not, are still intact in the country, although we are not -- we've not been transacting in Venezuela since the sanctions that have been transacting over the last 2 years directly with Chevron, that's sub million dollars a year. So we have a plan. We've mobilized and thought with the investments we need to put back into the country. we'll watch and see what happens with the national oil laws that need to be amended to enable foreign investment into Venezuela. But we believe that make, and you're absolutely right, that has been that has been underinvested lax talent is right for growth. So we'll see how things evolve, and we'll be ready to go in there and provide technology into those installations.

And just to add to that. Interestingly, as we looked at it, the first area that will probably go will be our, and so we'll have to work on the power situation there, and there's an opportunity there for us as well.

That's what I was going to ask as a follow-up really is I'm thinking about traditional upstream and perhaps maybe not thinking as much about some of the other stuff, including downstream or even other industries, I don't know Venezuela well enough to know if there's any infrastructure out there otherwise. But is there a wider TAM out there than perhaps just what we're talking about in oil and gas?

Yes. I think Mike's point on power generation is a valid one. But the biggest challenge that country is going to have is there's been an incredible range that's impacted Venezuela over the last 20 years. Lack of engineers, technical knowledge. And a lot of that has to be reestablished. Security situations to be improved and investment capability needs to be enabled by their Congress. So we're way to the way, but we're watching it very carefully, and we're at least. And to be honest, much like we did in Iraq after the Gulf or becoming prepared so that we can hit the ground running.

Our last question will be from the line of Deane Dray with RBC Capital Markets.

Just a couple of quick ones. Any update on tariffs, mitigation activity? Any color there? .

Yes. I mean, obviously, from a tariff perspective, the positive news on China, the IEEPA tariffs there, fentanyl tariffs going from 20 to 10. Now we did get some tariffs from Mexico where countries that don't have a trade agreement with Mexico and importing into Mexico have tariffs. So that's a little bit of a headwind. But net-net -- and obviously, the development today, it's early, but with India has a meaningful impact. So I would say more favorability. We still haven't quantified versus what we built in. I mean we built in -- I don't know if we've shared the number, Doug, on the amount of tariffs, we've built in about $130 million of tariffs into the plan. We are seeing relief to that number, but it's early to quantify how much. But it will be a net positive for the year versus what we've baked into the plan.

Got it. That's helpful. And then China has come up a couple of different times. I know it's not a new region of softness, but while you mentioned it could be some green shoots. So what's the latest there? What's the opportunity? What are those green shoots you're referencing?

Yes. We've seen really good activity in the Test & Measurement space in a broad portfolio of business. As you know, we're well participating in the Aerospace Defense segment there. The semiconductor, where we're allowed to with a very sanctious and [indiscernible] portfolio. And that business is up in the high double digits. So we feel very good about that. There are great opportunities and continue to be great opportunities in power generation. Again, there is a dynamic in China that very much aligns in the U.S. around data center build-out AI infrastructure and power generation needs. We're seeing new capacity come online as opposed to that way getting the U.S. Yes, there were 25 equine coal-fired power plants last year. There's a bunch of nuclear work to be done as well behind the meter work. So that's where we see the activity. But overall, continue to just overall concern that we will be in a low single-digit negative world in this year.

And ladies and gentlemen, we have reached the end of the question-and-answer session. And this also concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation. Have a great day.

Good morning. Thank you. Welcome to Emerson's 2025 Investor Conference. I want to invite everyone here in the room and those virtually online with us today. I'm Colleen Mettler, many of you know me, and I got to meet some new faces this morning, so that was awesome. Thank you. Three years ago, I stood on this very stage welcoming everyone to Emerson's 2022 Investor Conference.

Emerson at that time was a company in motion. And today, Emerson is a different company. Our portfolio has been transformed, and Emerson is now the global automation leader that is engineering the autonomous future. Before we dive in, please keep in mind that today's presentations may include forward-looking statements, which contain a degree of business risk and uncertainty.

Please take time to read the safe harbor statement as well as a note on the non-GAAP measures discussed in the presentation today and in videos you will see. All financial metrics are presented on a current continuing operations basis, unless otherwise noted.

And finally, we have included footnotes in the appendix section of our presentation for your reference. This morning, we filed an 8-K updating our segment and group structure. Now that the transformation is complete, we are taking the opportunity to reorganize our segments and groups.

This will simplify our reporting structure, aligning how we report our financials, how we provide guidance and how we will deliver management discussion. Starting on the left-hand side of the chart, you can see our prior 6 segment 2-group structure.

And as we walk across the chart, you can see that we are eliminating one segment, dissolving the Discrete Automation segment and distributing businesses from that segment into the respective technology groupings. Software and Systems Group, which was previously named Software & Control, continues to contain 2 segments: the Control Systems and Software segment and the Test & Measurement segment. Intelligent Devices also now contains 2 segments: Sensors, which was previously named Measurement & Analytical and an expanded Final Control segment, which now includes the Fluid and Motion Control business from our former Discrete Automation segment. Software and Systems and Intelligent Devices make up our automation portfolio, which is about 90% of our sales.

Branson and Appleton did not purely align to automation, and we have moved that to the Safety and Productivity segment in group, making up about 10% of our sales. In this morning's 8-K filing, we've included 5 years' worth of history.

And in our financial section of our Investor Relations website, you can now find a data analytic tool that will allow you to download not only the information in the 8-K, but all the historical information as well into Excel for ease of model updates.

Starting in Q1, we will be reporting these 5 segments in our financials, and we will provide guidance and management discussion by the 3 groups shown in the updated bar. In addition to the portfolio transformation, there were other transformations happening inside of Emerson.

Here in the audience with us today, we have Lal's executive management team and our group presidents. Many are new in their roles over the last few years. But as you can see, we have a very long tenured and experienced team.

Team, if you wouldn't mind, please raise your hand so those here in the room with us today can see where you're seated and they can say hello if they choose. Thank you, team. Our Board of Directors has also been refreshed during this time, adding new skill sets and fresh perspectives.

Today, we have 2 of our Board members here with us in the audience. Jim Turley, our Board Chair. Good morning, Jim. And Gloria Flach, our Compensation Committee Chair. Good morning, Gloria.

Finally, I'd like to take a moment to talk about how our culture continues to evolve, enabling us to realize our performance objectives. Our purpose has remained the same throughout the transformation, and our values continue to be our foundation. We have modernized our ways of working with 5 core capabilities that enable performance and accountability.

The first, deliver with discipline and rigor. This means we operate with focus and accountability as we translate commitments into results. Next, collaborate to realize value. We build trust and align around common goals to deliver value. Third, fuel growth through customer focus.

This is how we translate customer insights into new solutions that drive growth. Fourth, innovate for impact. We take smart calculated risk to drive innovation. We act decisively. We learn quickly and we adapt. And finally, unlocking the power of a team.

We foster teamwork, utilizing our unique skills and perspectives to advance outcomes. By empowering our people, we can deliver on our value creation framework of organic growth, continued operational excellence and capital allocation. Turning to the agenda today.

We will begin with Lal, our President and Chief Executive Officer, who's going to talk about how we drive growth and how we're engineering the autonomous future. After a short break, Ram will take the stage, our Chief Operating Officer, and he will dive into how we deliver excellence at scale.

Our last presentation today will be from Mike, our Chief Financial Officer, who will discuss how we realize value for our shareholders. After his presentation, we'll take another short break and then return to the stage for Q&A. It is my pleasure to welcome you all to Emerson's 2025 Investor Conference, Engineering the Autonomous Future.

[Presentation]

Okay. Good morning, everyone. Great to be with you this morning, and thanks for coming. And for those of you online as well following us, thanks for joining us today. I'm Walt Karstenbai, President and CEO of Emerson. Before I dive into the presentation, I just want to spend a few minutes giving you a little bit of context to the journey that we've undergone over the last 5 years. It's nearly 5 years that I've been CEO.

It's been a tremendous transformation in our company. Most evident to you has been the transformation of our portfolio. We strive to create a company that had higher growth, that was more resilient that had a software-defined technology stack that was unparalleled in the automation industry that served a diverse set of industries and a large diverse set of customers.

That's the company that we turned into a vision that we turned into a reality, and the Emerson will talk about today. None of that would be possible without a performance-driven culture. And Colleen did a great job expressing to you how we work inside of our company.

Our performance-driven culture is earmarked by 3 very important elements: trust, empowerment and accountability. And with that, you're able to attract and retain the best talent, of which you have over 330 years of automation experience in this room alone.

And it's this management team alongside our 70,000 colleagues around the world that have delivered this vision into reality. The last thing I'll tell you is we're going to talk about bringing affordable and secure energy to the world. introducing the next new drugs to cure diseases, exploring the far reaches of space.

All those things are possible with Emerson's technology. Things that I used to dream about when I was a kid, we get to do in this company, and it's a lot of fun. What we'll spend time on today is talking to you about what the next 3 years is going to look like in terms of growth, in terms of operating excellence and in terms of capital allocation.

So let's get started in the presentation here. The company is very different. On the left side of this chart, was a 2021 company. And honestly, there's just a very simple way to describe it. It was an industrial conglomerate. We were in a variety of different businesses, as you may recall, with a large commercial residential business within Emerson. Only 5% of our sales were software.

The margins in the company, 41.5% at the GP line, 20.9% at the adjusted segment EBITDA line. And we underwent the transformation. In November 2022, when we stood last met at the Capital Markets Day, we were in the midst of that transformation.

We had done the first step in the Aspen transaction. We had done the first step in the Copeland transaction. We were engaged with NI. We didn't talk about it publicly at that point in time, but that process had started. Over that period of time from 2022 to 2025, we completed the journey. We bought in the remaining elements of Aspen.

We certainly completed now 2 years ago, the NI transaction. We completely got out of the Copeland business with Blackstone. Obviously, InSinkErator was sold as well. And the company that we have today is an automation-focused company with nearly 90% of our revenues tied to the automation business. a global leader in the automation markets.

But what's even more dramatic is how the financial profile of the company has changed in that period of time. Software is a relevant 14% of our business today and growing, as I'll show you, in the low double digits. Our gross margins, fundamentally different in the quality of the technology and the value that our customers assign to our technology at 52.8%.

That is the single best indicator to the health and the value your customer places on the stuff you're selling is the GPs of the company, 52.8% and you'll see when Ron gets here to present and Mike, there's opportunity for additional expansion in this business. And thirdly, the adjusted segment EBITDA margin, 27.6% across tremendous improvements across all the businesses that are here, and I'll show you a little bit later.

A lot of that improvement is organic to the company we owned. 600 basis points of that improvement was driven in the businesses we already owned, not acquired. So really important distinction. We feel great about the company that we own and get to run now.

The transformation and the vision for the transformation was predicated on one very simple thing, growth. I've been in this company for 30 years. It's my 30th year. We all work collectively very, very hard over those years. We did a lot of great things, and many of you have followed our company for a long, long time.

I learned a lot. I got to live around the world, ran many businesses, as did many of the 330 years that I represented in this room. But what we struggled with since 1973 was growth. That's been the single biggest challenge that we've had.

I believe that growth is predicated on 2 core elements: number one, the technology; and number two, the end markets that you address. You have to have the right tech and you have to point it at the right set of customers that are growing and expanding in end markets. That was the vision for the portfolio transformation.

We grew 2% for 11 years since the last 11 years. There were a lot of good years in there, as you can see on this chart, but overall, it was a 2% company. We have significantly step changed the performance of Emerson over the last 5 years. We've averaged 7% CAGR over the last 5 years in growth, and we've had 18 consecutive quarters of growth. And you add in our guide for 2026, there will be 22 consecutive quarters of growth. Despite cyclicality in certain markets, Weakness in others, the portfolio is aimed to be resilient and to drive growth through the cycle.

And that gives us the confidence to stand up and guide of 4% to 7% through the cycle. Now certainly, as many of you will note, there will be quarters that are below that guide. There will be quarters that are above.

But through a cycle journey of 4% to 7%, we believe the resiliency of this portfolio, tech and end market exposure supports it. So this is the company we created, the global automation leader with revenues of $18 billion, the 528 GPs we talked about, 27.6% adjusted segment EBITDA margins, 14% software, which in this pictorial here is represented by $1.56 billion of annual recurring revenue or contract value, excuse me, growing at 10% on a forward basis.

Colleen covered the group structure. The company continues to be geographically diversified, as you see in the middle pie there. And then the resilience around the selling -- around sales growth comes from a large installed base and from a very significant MRO business, which represents approximately 2/3 of the business. And I'll give you a little bit of a perspective of what that looks like a little bit later.

About 35% of the business is new capital formation. This is the new business that we win over time, either through greenfields or modernization of existing facilities. And that's the profile on a forward basis. But that MRO resiliency is very critical to our growth trajectory. That installed base is $155 billion today.

If you think about it at 2/3 of our business, that means it's replaced about at an 8% rate every year. the pacing at which the business and the technology wears out, gets renewed, gets upgraded. That's a very important annuity to the company. The end market exposure is very critical.

The largest single market exposure is 10%. And we're giving you detail here. We did break out gas and oil, which is important to note. But there's a large diversity in the end markets. Markets that in the past, we didn't spend a lot of time talking about, like power, we'll talk about today. We talk about semiconductors, aerospace and defense, life sciences and of course, gas, growth opportunity markets, which will define our growth verticals of $4 billion of our sales.

And lastly, but equally important to the resiliency of the company is the large customer base. We have over 125,000 active customers at Emerson with not a lot of concentration. Our largest customer represents right about 1.5% of sales. Our top 20, 11% of sales. And just to give you some perspective, our 100th largest customer is $14 million.

Our 250th largest customer is $6 million, but there's 125,000 active customers. That's resiliency across the customer base and diversity across the customer base, which is very important to our business. And this is what we've done.

This is what this incredible management team has delivered over the last 5 years. Yes, in the midst of very significant portfolio transformation, which we drove at the top, the operating executives of this company delivered phenomenal performance. We talked about the 18 consecutive quarters of growth, the 850 basis points of margin expansion at the GP line, the 700 basis points of adjusted segment EBITDA expansion and doubling the EPS.

We kept our eye on the ball. And the core element of our culture that's been part of our culture since Chuck was CEO, has been operating excellence. That DNA is one that we carry forward with us. And if you mix that with the opportunity to drive a higher growth portfolio, that's the company we want to talk about today.

So let's think a little bit about the value creation framework. Colleen introduced it. I want to dissect it and build it back up for you.

The value creation framework is based on 4 parameters that are on this chart. We believe we have the right portfolio. We believe that we are the global automation leader with nearly 90% of sales exposed to the automation thematic and a strong MRO base of recurring revenue. Number two, we believe we're in the right markets that we, as I showed you, have broad market exposure and diverse sets of customers across the company. And some key verticals, which I'll walk you through, have accelerated growth potential over the next 5, 10 years. We play in a large sandbox, $175 billion served market across the world that's growing mid-single digit. Thirdly, we have the right differentiation. Our software-defined technology stack is unparalleled in the industry. Our 14% of sales in software, our 14,000 engineers around the world that are driving innovation at a higher rate than we've ever invested in the past. And lastly, is our financial profile, a strong company with growth opportunities in the 4% to 7% range and 40% incrementals on a forward basis as we move that GP up. That gives us ample opportunity to invest in our businesses and to deliver underlying EBITDA growth and EPS growth.

So this is the framework. Organic growth, the 4% to 7% we talked about, operational excellence, which will drive 40 points of incrementals. That's up from the 30 we've talked before, 10% EPS growth, and I'm going to give you some hard numbers around that as we go towards the end here and 18% to 20% free cash flow margin in the business. This company is built for performance. This company is built for resilience, and it's built to deliver long-term shareholder value. So I'm going to talk to you about these 3 elements. We'll start with the growth, where I spend the bulk of my time. Ram will cover the operational piece, but I'll tease it a little bit for you, and Mike will dissect in detail the capital allocation piece. I'll give you the headline there. But let's start with the growth piece. Remember, 2 core elements, technology stack and end market exposure to think through this. The first thing to understand is why is automation important? I know that most of you get this, but I felt compelled to put this chart in here. Automation solves customers' challenges. And I'm sure that you can pick up the Wall Street Journal on any given day and talk about productivity improvements, digital transformation. That's the kinds of things that automation solves.

Complex operational challenges, lack of labor, retiring labor, driving for safe, resilient operations and improving business outcomes. That's what drives investment in a $175 billion served market, $160 billion of which is automation and grows mid-single digit. These are the underpinnings of our market that drive the automation thematic for us and why we felt very compelled that aligned to the market and to the growth opportunities within that market were important for our company. Here's the plan. We have the most complete automation portfolio in the industry. We are the market leaders. Every single one of these brands is #1 or #2 in their marketplace. across the entire technology stack that you see here. The third thing I'll tell you is this plan is entirely organic. There is no M&A in anything that we'll show you today. $18 billion company growing $3 billion or mid-single digits, but 5% is a CAGR to $21 billion in 2028. That's largely driven by our Control, Intelligent Devices and Safety Productivity segments that grow from $15.5 billion to $17.5 billion in this time period, delivering $2 billion of growth, which is mid-single digit.

And then our software business, our industrial software business that grows from $2.5 billion in revenue to $3.5 billion in revenue over that same period of time. That is low double digits, driving $1 billion of growth in the business. I'm going to spend a little bit of time on that software piece specifically. It's a large market. It's a $30 billion served market. And the underpinnings and the drivers of that market are familiar to all of you. It's the IT/OT convergence. It's the data fabrics and industrial AI revolution. It's the automation of workflows across a variety of different industries. There are enormous spend dollars out there and commitments around next-gen AI, investments in equipment across industries and the digitization of elements like the grid and major factories and investments. The way we will talk about our software business is on an ACV basis, on an annual contract value basis. That $2.5 billion in revenue translates to $1.56 billion of ACV in 2025. You can see on the bottom there, the 4 brands of industrial technology that we take to market, the software technology we take to market. It's grown 10% over the last 3 years on a compounded basis, and we expect it to grow low double digit to 2028, $2.1 billion of ACV in 2028, supported by the macro trends that I just described and across our customer base.

Now why do we believe that we have the right to win in the software space? This is the history of automation. The X-axis represents time. The Y-axis are the various states of automation over time, starting with manual operations to our first introduction of automation in the industry to the optimization of automation with, of course, still regular human contact to the semi-autonomous state of industry, where there's some occasional human intervention and then to our vision to deliver an autonomous operation opportunity to our customers. The curve represents innovation, innovations, many of which were new to the world at the time that we've driven inside of Emerson. On the left side of the curve, our innovations around production operations. On the right side of the curve, our innovations around test operations. And I can pick out 3 or 4 of these that didn't exist until we invented them, things like LabVIEW, DeltaV, our wireless heart business, Mtell at AspenTech and now the latest suites of AI agents, Nigel at NI and the various suites of in DeltaV.

Our vision is to create an enterprise operations platform across production and a test operations platform across the test and measurement environment. We believe we have the right to win. We believe we have the technology to be able to accomplish this. So let me walk you through each of the 2, starting with operations, our enterprise operations platform. Now I'm trying to keep this as simple as I can, and we'll hit this a couple of times today. But think of it this way. There are many barriers to get to an autonomous state in manufacturing today. Data exists. There's lots of data, but it's hard to get at it. It sits in silos. You may have reliability data in one place, safety data in a different place, production data in a different place. That's a big challenge. Furthermore, that data is unstructured. Another way to think about it is some of the data is in German, some of it is in Japanese, some of it is in English. It's diff -- it doesn't connect. It doesn't -- it's not in the same language.

It's unstructured data. The architecture that exists across these facilities is rigid. It was not designed with the vision of autonomy. It was designed for a very different world around automation, optimization perhaps, but that vision forward never existed. So there's rigidity in the architecture that exists. And of course, it makes scaling AI or any modern tool of productivity very, very difficult across that stack. Our solution is listed here on the right and how we're addressing each one of these opportunities in the marketplace. Our vision, simply put, is the following: you have to begin by designing for autonomy. So the product technologies that we're bringing to market and were listed on the prior chart were all designed with this future end state in mind. Secondly, that technology adoption cannot require our customers to rip out the stuff that already exists. It has to layer in on top of existing hardware to utilize the data that's in place. Secondly, we're embedding intelligence in our sensors, our control and our analytics, and we're integrating that intelligence into the engineering workflows of the business. That's very critical because it does start with the smart instrumentation in the business.

And lastly, and critically important, we're developing unified data fabrics that enable our customers to drive to self-optimizing systems and ultimately to autonomous operations. Those are the 3 components of what's on this chart and how we're addressing this challenge for the industry. That same autonomous vision exists in the test environment. And look, customers are challenged with the same kind of stuff. They can't get at the data. There's too much complexity. The technology is disparate, but they're facing the same challenges in test as they are in production. They want to optimize yields, they want to optimize design and improve product. But with disparate tools that aren't connected and the data is not accessible, that is very, very difficult. And this is where our vision to create an NI test platform around unifying the data platform, making it available at the cloud and edge with modular test instruments and AI orchestrated workflows brings it to life. It's a significant opportunity and a vision where we can take this industry as the automation leader. So innovation is what will keep the technology stack evergreen and move us forward to deliver on this autonomous vision.

We are investing heavily in our software and systems business at 17% of revenue. It has delivered 70% new product vitality. That means that 70% of the revenue in that segment came from new product -- from products introduced over the last 5 years. That's how we define new product vitality. But we're investing across the stack at different rates, aligned with market and technology needs. Overall, Emerson is investing at 8% of revenue in innovation, and we are driving, on average, 30% new product vitality. That's up 5 points from the last number you saw in 2022. We're doing that with an innovation engine. We have 15 major innovation hubs around the world. The 14,000 engineers we talked about, over 2,500 software engineers and over 300 PhDs working across our company, driving this innovation to bring differentiated technology to the marketplace and drive to our autonomous vision. The second driver of growth are the end markets. It's all good and fine if you have phenomenal technology. But if you're selling it into end markets that aren't growing, that's problematic. And we did a lot of work in the portfolio transformation to identify markets that would drive strong underlying growth on a forward basis.

We started by trying to understand what the secular tailwinds were. And there are 3 very important listed on the left here. They're all familiar to you. electrification, energy security, nearshoring or sovereign self-sufficiency. And those 3 secular tailwinds drive investment in 5 incredibly important markets for our company. Power, and that's both generation, transmission and distribution, liquefied natural gas, life sciences, semiconductors and aerospace and defense. I'm going to walk through each of the 5 in detail. But today, they represent 22% of our revenue, $4 billion out of the $18 billion, and they represent over 50% of the new product capital funnel that we're tracking that we shared with you on a quarterly basis. So let's go through each of these in detail. And again, you follow these markets, you understand generally what's going on in the trends. We're seeing it in the outcomes in our business. So let's start with power. Certainly, data center demand is a big deal. But look, we do have an aging infrastructure. We have an aging grid, and there are investments in all segments of the power industry, from production, from generation all the way through transmission and distribution.

In the United States alone, we will have 400 gigawatts of new generating capacity between now and 2030. That's a 30% increase in generating capacity in the United States over the next 4 years. It's a very significant number. We have the #1 position with Ovation in generating capacity controls. And we have the most advanced software platform for grid management, which sits inside of AspenTech. You can see the performance of our company on the left here, $2 billion in sales, 10% we talked about, slightly over 10%, growing 8% from '24 to '25 and a large project funnel to support the future growth. Equally, liquefied natural gas. Now liquefied natural gas, we've been talking about for quite a while. And for a reason, we've gone through 2 very significant waves. The first wave, you may recall, started in 2000, went to about 2010. The second wave went from 2011 to about 2020, odd. We're now in the midst of the third wave. The third wave starting in 2021, it will go to 2030.

In the third wave, which is by far the largest wave of investment in liquefied natural gas the world has ever seen, it will deliver 585 million tons per annum of capacity to the marketplace. This is a large United States, Qatar and East Coast of Africa opportunity. But if you think about the investment in this wave already, 130 million tons per annum have been completed. 140 million are currently under construction, and we have 315 MTPAs yet to be awarded in the third wave. That 315 is larger than the first and the second wave combined, what's yet to come. We win at an over 50% rate in this marketplace. We have the #1 distributor control system in DeltaV in LNG with tremendous customer partnerships around the world. And the business in 2025 grew 12% to $450 million and is supported by a tremendous project funnel that goes beyond our control systems to our Final Control business and our sensing business as well. The third market I'll talk about is life science. I believe, and I get a little bit of a close look at this, obviously, with some of the other work I do, that we are in an unprecedented period of time in human science. The number of drug developments, new gene-based therapies, advanced treatments that are coming to market to address diseases like Alzheimer's, HIV, cancer, are fundamentally increased across the entire industry.

You couple that with over $350 billion of committed investments in the United States alone to nearshore and to reshore manufacturing of drugs. This industry is going to have a great run for the next 10 years, and we're incredibly well positioned. DeltaV has nearly 4,000 systems installed across the industry. It's the #1 platform for automation in the life science industry across 25 of the top 25 largest pharmaceutical companies on the planet. Business is growing. You see we grew 20% in 2025. It's supported by a large funnel opportunity for us. So very excited about what's going on in life science. Equally, in the fourth market, semiconductors. Huge opportunities here in terms of nearshoring, expansion of technology and the role that we have, particularly in -- with test and measurement. That's the most obvious. But inside of every fab, underneath, there's a basement. And if you've ever walked to one of these basements, that's a chemical plant and a water plant. That's what sits underneath the fab. So our opportunity in semiconductor is very significant in testing, in test and measurement and the position there is very strong.

9 of the top 10 semiconductor chip makers are standardized on NI, standardized. But our opportunity is also underneath that fab to ensure that we have the final control elements, the sensing elements and the Delta Vs to run the fabrication and make that water and those gases available for the chip making. Very excited about this industry. You can see we have a very sizable business. It's coming out of a trough. We had a great second half in that business as we went through 2025 and expect really good things here in 2026 and forward in the cycle. And then lastly, the fifth end market, aerospace and defense. That's new. We haven't talked to you guys a whole lot about aerospace and defense, but it's a $525 million business growing at high single digits. Now this is not just defense. There's a whole space industry being developed that will be close to $1 trillion in size by 2030. We spent a lot of time at NI developing relationships with the new space companies. And you can see we are standardized in 9 out of the 10 new space companies.

We'll continue to invest in this business, and we believe with our strong modular test equipment position, ability to bring LabVIEW and AI, Nigel AI into the marketplace, we'll continue to drive our differentiation in the validation and production of electronics for the aerospace and defense industry. So that's the growth piece. Technology differentiation, driving to an autonomous future and end market exposure, 5 key markets that will drive differentiated growth for our company. I'll touch on operational excellence, which I said is a hallmark of Emerson. This has been the journey over the last 5 years. 700 basis points of margin improvement. Now you think when you trade a Copeland for an NI or an InSinkErator for an Aspen that you'd naturally get adjusted segment EBITDA margin, but we actually did not. The core improvement here came from the organic, the company we already owned. It came from our DeltaV Innovation business. It came from our sensing business, from our Final Control business, 600 to 700 basis points in the business. And we see more opportunity. Ram is going to talk through in detail, but there are 3 key levers for us. One, a very disciplined price culture in our company. Price for us is not a top line number that we throw out our businesses.

It's something they build from the bottom up, taking into account the risk of pricing and products, taking into account customers and markets to adjust price. Secondly, we continue to have operational opportunities, whether that's cost reduction in products in plants, rooftops, the advent of digital transformation of our own factories and use of AI. That opportunity sits in that operational segment excellence segment. And then lastly, we did 2 large deals. NI, where we committed $200 million of run rate synergies. We completed that in 2025. That runs into the future. And AspenTech, where we committed to $100 million originally in 4 years, now will be done by 2026. We'll get the benefit of that $100 million run rate in this plan as we go forward as well. So there is more opportunity, and we're committing that 40% incrementals to 30% adjusted segment EBITDA margin in 2028. And lastly, this story is going to be a little bit different. And we have to deploy a significant amount of capital, nearly 1/3 of all the cash generated in the company to reposition the portfolio. On the left are the sources and uses of cash over the last 5 years. We generated $38 billion of cash. That's earnings, of course, we borrowed and we have proceeds.

We used $24 billion of that to do the work to create this company, predominantly, of course, NI and Aspen. We returned 30% of that cash back to our shareholders, minimal dividend increases and minimal share repurchase over the 5 years. We certainly offset dilution. This is the next 3 years on the right side of the chart. We will generate $14 billion of cash flow. $10 billion from net earnings in this plan. If you look on the right side on the uses, we'll continue to invest in our facilities, but we have a relatively CapEx-light model between 2% and 2.5% of sales on CapEx. We'll continue to pay down debt. We believe maintaining our A2A credit rating is important, and we have ample room to do bolt-on acquisitions. But 70%, 7-0 percent of our cash is going to be returned to our shareholders. The dividend, we announced an $0.11 increase in the dividend this year. There will be $0.10 and $0.10 in '27 and '28. Share repurchase. We announced $1 billion of share repurchase this year. We'll do $2.5 billion and $2.5 billion in '27 and '28. That's $10 billion, 70% of the cash back. This company is positioned to create value.

And that growth and margin opportunity translates to this chart right here, very critical and important for us in the value creation trajectory for the corporation. So that's the framework. These are -- the framework yields these very important numbers, which we're committed to. the $21 billion of top line, the 40% incrementals that delivered the 30% adjusted segment EBITDA margins, $8 of EPS, $8 of EPS in 2028 and 20% free cash flow margin. We believe that's a highly differentiated value creation opportunity. We're excited about the future of our company. We're excited that we get to run the company that we've created now. We have a phenomenal management team, phenomenal team across the world. And I hope you come on the journey with us. That's what I have. We're going to take a short 15-minute break. Please be back, let's say, 5 past the hour, and we'll go from there. Thank you, everybody.

[Break]

Welcome back. Hopefully, everyone got some coffee. We're fully caffeinated now. Yes. Okay, good.

Before we dive into Ram's section, we have a video on customer-centric innovation that's underway here at the company, specifically with our enterprise operations platform and our NI test platform.

[Presentation]

Well, first off, great to see everybody in person. Many, many familiar faces in the audience. I think I know many of you, but for those I don't, my name is Ram Krishnan. I'm the Executive Vice President and Chief Operating Officer. And hopefully, I'll get an opportunity to meet with all of you before we adjourn for the day. But most importantly, before I start off, I want to thank you for your interest in Emerson. Lal painted an extremely exciting plan that's ahead of us.

I mean we've had a great run the last 4 years, but what's more exciting is the plan that we have laid out, and it's an exciting journey, and I am personally very, very energized to be a part of it. I'm going to cover 3 important topics today, starting with our automation segment leadership, which clearly presents a winning formula for us as Emerson to engineer the future of autonomous operations for the industry and our customers.

And as you saw in the video, there is meaningful customer-centric innovation underway across the company, and we believe we're poised to separate from the competitive field as we bring this innovation to our customers.

I'll talk about the 2 groups that we laid out, systems and software and Intelligent Devices and the 4 segments that define those groups and the important programs around innovation and commercial excellence underway in each of our segments. Two, the margin runway and the forward plan.

We laid out a road map to 30% adjusted segment EBITDA margins by 2028. That's 240 basis points of improvement at 40-plus percent incrementals. I'll lay out the specifics of how we plan to drive that.

Again, historically, we've driven 700 basis points over the last 4 years, 160 basis points in 2025. So there is momentum, but we have more opportunities ahead of us to drive to that 30% margin. And then finally, the differentiated management system that supports this value creation framework and underwrites this plan.

So as you can see in this chart, I'll start off with the segment leadership. We clearly, as Lal showed, are the global automation leader with category leadership across all elements of the technology stack.

Our $6 billion software and systems group is the category leader in control systems and optimization software for production operations and modular software design test systems for test operations in our Test and Measurement business.

You can see, Lal showed you this, the DeltaV control system, 25 of the top 25 life sciences companies use DeltaV for their automation needs. From an innovation perspective, 50% of U.S. power generation is automated by Ovation, 20% globally from a capacity perspective, 30% on a consumption perspective, given the automation we deploy into coal, natural gas and nuclear.

On the AspenTech front, from an optimization software perspective, 19 of the top 20 chemical companies use Aspen for their optimization needs. And then from an NI perspective, 9 out of the top 10 semiconductor companies use NI for validation and production testing. So phenomenal leadership position with our customers, category leadership, which I will highlight for you in many of the categories we play in systems and software.

So very well positioned there. And then moving to our Intelligent Devices Group. Here, we clearly are the undisputed leader in measurement and analytical sensors, pressure, temperature, level, flow and analyzers that are used and then final control elements, which are valves, actuators and regulators, a critical and a differentiated part of the automation technology stack.

Brands that you would recognize like Rosemont and Fisher, you can see the installed base of Rosemont pressure sensors, 12 million plus. The number of operating hours of wireless sensors from Rosemont, 70% of the world's LNG flows through Emerson valves, primarily Fisher and our lineup of isolation valves and 90% of the world's nuclear plants operate with Emerson Valves.

So again, great positions within the served markets we play in, and we are poised to lead and separate in many of these categories, which I will detail out for you. Starting with our Software and Systems Group, play in an $85 billion served market that's growing mid-single digits with leadership position in 40% of the served market. So #1 or #2. Clear #1 positions when it comes to our DeltaV control system across the process industries.

Ovation is the category leader in control systems for power and water, AspenTech in modeling and optimization software and NI when it comes to test automation systems across a variety of industries. So again, 40% of the served market, we're #1 or #2. A very differentiated financial profile for this business, $6 billion in sales, 60% gross margins, 31% adjusted EBITDA margins.

$2.5 billion of software, which is about 43% of sales and a $1.56 billion of annual contract value. Balanced geographic exposure, 65% MRO with a $40 billion installed base. And as you can see, we delivered strong historical performance in this group. Back 4 growth was 7% organic CAGR and margin expansion of 13 points, driven by the softwareization of control systems.

It's a hugely important initiative for us as we move the industry towards software-defined automation and set the foundation for the enterprise operations platform that had a meaningful role to play in the margin expansion in the back 4 and then the acquisition synergies, the $200 million of acquisition synergies at NI that we executed in the plan.

Going forward, the through-the-cycle targets for this group and these 2 segments, 6% to 9% organic growth, 45% incremental margins. And as I will show you, game-changing innovation underway in both these segments and this group will support these through-the-cycle targets.

I'll lay out 3 critical areas of innovation in this group where we're making meaningful investments to win with our customers and move the needle for the industry. Starting with the enterprise operations platform. Lal talked about it. You saw our customers talked about it in the customer video.

But simplistically, we're developing a unified suite of best-in-class application software operating on a common data model that enables seamless integration across the production domains.

This is a significant challenge for our customers today because trapped data and disconnected software workflows and that trapped data across their different OT silos of production, reliability, safety, sustainability, their analytical data, their engineering data, these are data silos that we will solve with a unifying data fabric and build a unified software suite that can operate on that data to drive that into actionable insights.

And the most important element of how we're thinking through the enterprise operations platform is the ability for these solutions to accommodate legacy automation infrastructure, which gives us a huge playground to go into existing customers to deploy the enterprise operations platform to unlock meaningful value without having them to rip and replace their legacy automation infrastructure.

Now we are building clear differentiation into our solutions, starting with that unifying data fabric, which allows our customers to liberate, contextualize data that Lal talked about and then democratize that data to be used by our integrated suite of software, which will then allow the deployment of AI orchestration at scale.

And in addition to that, the ability for us to deploy our digital twins, a lot of which we acquired through Aspen gives us a unique opportunity to allow our customers to build digital twins at every asset at the site, every unit operation at the site, the entire site itself and eventually their network of sites, which is the enterprise.

That is huge value for them to unlock productivity, drive energy efficiency, safety, sustainability in their operations. And the ability for our unifying data fabric to unlock AI orchestration at scale and build these high-fidelity digital twins is a unique differentiator for our enterprise operations platform.

Of course, the virtualization of the DCS, the software-defined automation architecture will unlock flexibility and provide scale to our customers to now deploy control at the site or across the enterprise, which I think is huge with a software-defined architecture and then open up the opportunity to deploy cloud and edge applications that will convert that data into insights at the right time and granularity, all built with Zero Trust security in mind as we deploy this framework.

We are investing in the building blocks of the enterprise operations platform over this planning period. You can see key specific programs there at AspenTech, DeltaV version 16, Ovation 4.0 that will have many of these capabilities built in, and these programs will account to about $2 billion in 2028 sales.

So focused investment underway a critically important initiative for us to drive growth, but also for the industry and the value unlock for our customers will be significant as we bring this to life to help them achieve autonomous operations at scale.

Similarly, on the test and measurement side, as Lal explained, customers in the test and measurement space are constrained by the same challenges around fragmented data and disconnected application software. Now NI has always used a differentiated approach with their technology stack to address these challenges and advance the vision of autonomous test.

And they have been the leader in this industry with this approach around modular instrumentation, their PXI instrumentation that will allow for AI-enabled structured data acquisition. the flexible application software led by LabVIEW and now LabVIE+ to automate test workflows and then a centralized data platform that will enable product analytics and system health monitoring to help our customers run their network of labs, optimize production yields and then eventually improve product quality of that test data.

So immeasurable value by solving the data problem and coming up with an integrated application software suite. Now released earlier this year, the purpose-built NI Nigel AI Advisor accelerates test design, setup and orchestration and takes many of the workflows of a test engineer and drives them to autonomous workflows.

And so we are investing in very critical innovation programs here. Nigel NI is a big area of investment, but also investment in the integrated suite of product analytics and test automation software in addition to our RF suite of instruments, which is important for a very important end market like aerospace and defense and then our next-generation data acquisition system.

So important innovation underway, will drive a competitive advantage for us in many of the markets, but most importantly, advance the vision of autonomous test for our customers. And these programs will deliver about $750 million in 2028 sales in the Test and Measurement business.

Finally, we are taking a practical and programmatic approach to AI, building on decades of experience in machine learning for process control, optimization and test.

And our right to win here is defined by first principle models. We have a lot of experience in first principle models with deep OT expertise and the ability to train our agents on decades of OT data anchored in trust and reliability for our customers.

And we believe this gives us a clear advantage today in Gen AI models for task automation, which is really where we are and where the industry is through these AI advisers that we've developed. And you can see examples of products we've released at AspenTech around accelerating and optimizing operational decisions, abnormal situation prevention with the Ovation adviser that we've developed predictive reliability insights at DeltaV and then all of the work underway with Nigel and I on test design and orchestration around workflow automation for the test engineer.

We will continue, we believe, to separate from the field as we drive from task automation to complete autonomous workflows in an aggenic framework. We're effectively integrating generative and AgenicAI to drive meaningful value.

But our right to win will be defined by our understanding of the first principle models, access to OT data and deep OT domain expertise. Okay. Now switching to our Intelligent Devices Group. Here, we play in a $75 billion served market with leadership position here in 45% of the served market.

You can see Rosemount, #1 in pressure sensors, almost 40% market participation. Micro Motion, #1 in Coriolis flow sensors, almost 47% market participation there. And then Fisher control valves at 28% is the leading control valve manufacturer. So again, in important categories of pressure, flow, control valves, strong position, a very, very balanced financial profile, $10 billion in sales, 51% GP, 27%, leading industry in terms of adjusted EBITDA margins.

Balanced geographic exposure, 65% MRO and here, operating in a $95 billion installed base, $40 billion in Sensors and $55 billion in our Final Control business.

This group delivered strong historical performance, again, 8% organic sales CAGR, driven by a lot of innovation, strong MRO and a favorable CapEx cycle in LNG and power, 6 points of adjusted EBITDA margin expansion. And through-the-cycle targets here for this group, 3% to 6% at 40% incrementals.

And here, next-generation products that I will show you and redefine go-to-market motions in our sensing business and a resilient installed base annuity plus the CapEx cycle in power and LNG will support the through-the-cycle targets on the Final Control side. So for this group, 3% to 6% at 40% incrementals. On our sensing business, a complete revamp underway of our core product platforms.

You can see a lot of next-generation products being released in this cycle, pressure, temperature, magnetic flow sensors, level sensors, a complete revamp of our pervasive sensing or our IIoT sensing lineup. And in each of these capabilities, a significant improvement in performance and cost, and we will drive almost a 15-point improvement in new product vitality.

In Lal's chart, this group was around 9. Sensing is around 10% today. That will become 25% new product vitality as we gain market participation across core and adjacent markets by bringing these new products to our customers.

In conjunction with that and as important is are the investments we're making around our refined go-to-market motion in this business to unlock productivity in our sales structure to allow us to invest more feet on the street to go after new opportunities, new account acquisitions and white space.

Simple, but very important to do and investing in our state-of-the-art digital front door. We have a lot of light touch accounts, and we can -- with a state-of-the-art digital front door and digital sales engineers have the opportunity to then unlock investment capacity to put more feet on the street, more salespeople to drive new accounts and white space capture.

And then at the same time, we're making investments in modernizing our sales operations technology stack to operationalize our commercial excellence framework, almost run sales like we run operations, which is a very important step in making sure that we can stay disciplined in bringing these new products into new markets and new adjacencies of our customers.

So important initiatives underway in our sensing business that will drive growth in the framework I defined. And then our Final Control business, here, we have clearly an unmatched service footprint supporting our customer operations globally, a 5 billion installed base, almost 200 service centers between us and our partners serving these customers.

But here, the opportunity is the significant spend underway by our customers to maintain and upgrade valves. In 2025 alone, there were 5,300 maintenance events we call shutdown, turnaround and outage events. And each of these events is an opportunity for us to go sell more valves, more service, but also drive competitive displacement.

And we have almost 1 million valves as our installed base, and we serviced approximately 80,000 valves in 2025. That translates to that 8% yield that Lal talked about, which will underwrite mid-single-digit growth for this segment. And more importantly, we're making strategic investments here to continue to separate from the field, extend our leadership position and separate from the competition.

So very important businesses in the framework of our tech stack in sensing and Final Control and a very focused set of initiatives around next-generation products, refined go-to-market in our sensing business and then most importantly, a continued investment in our Final Control service infrastructure to keep moving the ball forward here.

Okay. Now pivoting to my next topic, margins. 30%, 240 basis points of improvement at 40-plus percent incrementals coming on the back of 700 basis points over the 4 years.

We exited 2025 with record margins, 27.6%, which is the 160 basis points of improvement. It was a great year from a margin perspective. A lot of things went our way, certainly mix, good set of cost reductions, the software side of the business contributed in a meaningful way. But what's important here is we continue to see significant margin runway with a focused set of multiyear initiatives. Our management process has a real focus on this, and we're constantly looking for new set of ideas. And that's really what funds these initiatives, and we're always 2, 3 steps ahead of where we need to be, and we continue to execute in a diligent fashion. So as you can see on the chart, 4 points from price, 4 points from operations, which has the leverage from the growth in it, 0.5 point from incremental acquisition synergies. I'll show you the $200 million plus the $100 million, $200 million at NI and the $100 million at Aspen. This is the incremental amount over this 3-year time frame, offset by inflation and then 1.5 points of strategic investments that gets us to the 30%.

Time-proven levers is what I call them, price, our operational excellence programs where we have a new set of ideas and then the full realization of the acquisition synergies. Starting with price. It is a critical lever for us for profitability, but also growth in the new Emerson. As Lal described, our diverse customer base the many industries we play in, the high percentage of MRO, 14% software mix that gives us the ability to get automatic price escalators and then our market leadership position that I just described across many of our product lines supports value-based price positioning. So we're starting with a very, very good foundation with the discipline in our management process to make sure it's always an important part of our go-forward plan. And price staying above net material inflation is something this company has always executed well. The new Emerson has a much better ability to continue that journey in a meaningful way. So we've built a 2% price into the plan. We did 2.5% price in 2025. We guided 2.5% in 2026. Obviously, the tariff dynamic supporting that, and then we've built in 2% into '26. '27 and '28. The organizational muscle to deliver on price is built into our commercial excellence framework through fundamental pricing strategies.

Our businesses execute this day in and day out, and this is a very, very important part of our thesis. But more importantly, the portfolio that we've created with software, with test and measurement with the leadership position across almost all categories within the automation space gives us the right to get price in a disciplined fashion going forward. So it's a lever that has served us well, and it's a lever that will continue to drive our road map to 30% margins. Our operational excellence priorities are focused on 3 specific opportunities over this planning period. Footprint optimization, our road map to 100 manufacturing sites by 2028. If you -- for those of you who were there in 2017, when we acquired Valves & Controls, we peaked at about 165 sites for continuing operations within this company. And over the last several years, we've had a disciplined road map to get to 100 sites for the company. We sit at 117 today with tangible plans to get down to 100 sites. Now I think what's important here is it's 100 sites, but the sites where we will make the right smart factory and automation investments to deliver world-class cost, speed, quality, safety, inventory management at these sites. So that's an important lever.

The regionalization journey on manufacturing and supply chain continues. Today, we sit at 85-plus percent of our cost of goods regionalized. Supply chain regionalization is north of 90%. But from a cost of goods perspective, 85-plus percent of our cost of goods regionalized. We operate in 42 world-class best cost country manufacturing sites. I've laid that out in the chart. This is truly an important cost advantage for us and a speed advantage for us, and we have an opportunity in this plan. Today, 60% of our manufacturing headcount is in best cost country. That will move by 5 points. But most importantly, what this allows us to do is get an unmatched cost structure with speed and resilience. This has been a traditional strength of ours. but there is more opportunity here, and we're continuing to invest to get to the 100 manufacturing sites and continue to strengthen the regionalization of our cost of goods and supply chain footprint. And then the third initiative is really the new frontier, the next frontier of productivity, particularly when it comes to enterprise functions, which we've been able to centralize for the new automation company through AgenicAI operating models.

And the 2 areas where we see the biggest opportunities are finance and customer care. We're investing in a centralized enterprise-driven technology stack with an Agenic layer with an enterprise data lake to allow us to capture these opportunities. And we believe there's about 30% productivity gains across both these functions as we deploy this framework. We're early in this journey, but we do believe that what we're learning so far, this would be a great opportunity to continue to drive productivity in our enterprise G&A functions. And then finally, I'm very proud of our global teams that delivered on our acquisition synergy commitments on both NI and AspenTech. It has had a meaningful impact on our plan to date and will be an important element of the go-forward plan that we have laid out. We talked about $200 million in NI synergies. All actions, as we said, have been completed in 2025 to achieve this run rate set of cost synergies.

And this will drive NI margins to 31%, which is what we committed to by 2028. And similarly, on the Aspen front, $100 million of planned run rate cost synergies by 2026 as we exit '26, 2 years ahead of plan and will drive AspenTech margins to 55% by 2028.

So a great body of work robust M&A processes that we have put in place and the new Emerson built into our management system to deliver on these type of commitments. But it starts with commercial due diligence and evaluation, which is an important part of the processes prior to buying these companies, rigorous integration planning with outside support, but with well-invested teams and then most importantly, putting the right people into these businesses, a combination of great people we acquired from these businesses, but the right Emerson leaders into these businesses and the right functions to help us deliver on this.

And certainly, our M&A muscle has become a significant strength for the company. I think it's an important capability that we've built. It served us well with NI and AspenTech, but more importantly, gives us confidence that as we do additional deals, not much in this plan, but going forward, we will have a great set of capabilities to deliver on our synergy commitments.

So that brings me to the final topic, which is our differentiated management system that supports this framework, underwrites this plan. I will say this is the funnest part of my job. The opportunity to drive a consistent and well-defined set of management engagements with these businesses and these business leaders throughout the year to drive collaboration with appropriate levels of planning and control. And we do spend a lot of time in planning and then executing on the plan, but long-range planning, annual planning around growth, margins and talent to optimize business outcomes. It is a high-touch process. I mean, Lal and I have worked in pretty much every business within the company. So that makes it very enjoyable. It is -- what it allows us to do is drive speed around decisions and investments. We don't take a lot of time. We -- a lot of our business leaders have worked with us. They've been with us for a long time.

We can and will move with speed around decision-making. And this clearly is the secret sauce that underwrites the plan. We don't talk about it a lot, but we spend a lot of time on it, and we allow the results to do the talking. But this is a critical part of what gives us the confidence that we can deliver on this plan. And I am personally very energized by the journey ahead of us. I'm personally very excited to work with our leaders and Lal and Mike and Colleen to execute on this plan. So I will leave you with a customer video that shares their excitement around how our technology is helping them solve industry challenges following which Mike will come up and talk about our financial framework to close out the session. Thank you.

[Presentation]

Good morning, everybody. I'm Mike Baughman, Emerson's Executive Vice President and Chief Financial Officer. And I'm excited to be here today to talk to you about how we plan to realize value for shareholders over the next 3 years. I'll take you through the plan in a little bit more detail than you've seen, and there'll be lots of numbers, as you would expect, but there's going to be 5 key numbers that you've heard before that represent our targets for 2028, and that includes $21 billion of revenues, 30% adjusted segment EBITDA margins, $8 of adjusted earnings per share, a cumulative $12 billion of free cash flow over that 3-year period, and we plan to land 2028 at a 20% free cash flow margin. So those are the 5 key numbers. And I think there's an important bonus number to talk about that a lot of investors, I think, will appreciate. which is the $10 billion that we plan to return to shareholders in the form of increased dividends and share repurchases over the next 3 years. So we've taken the bold moves to transform the portfolio. We've heard about that. We've got the automation portfolio to move forward with the management processes to drive towards these targets and achieve them. And I think we've got a great opportunity here to drive meaningful value creation for shareholders over the next 3 years. So before I get into the framework, I want to take one last look at the last 5 years, the 4-year performance here that has been a really great run.

Since we were here back in November of 2022, we've had these 4 great years and overdelivered to the value creation framework that we laid out at that time. We grew revenues at a 7% CAGR, and it was a resilient set of growth with 18 quarters of underlying growth, and we landed at the top end of the 4% to 7% framework that we presented back in 2022. Since 2021, we've expanded gross profit margins by 8.5 points. We've expanded adjusted segment EBITDA margins by 7 points, and we've got runway to go up another 2.4 points, and I'll unpack that for you in a little bit here in a little different way than Ram did. And we've driven 60% average incrementals over those time -- over that time in excess of the 35-plus percent that was in our prior framework. We doubled EPS Free cash flow grew at a 12% CAGR, and we landed 2025 at an 18% free cash flow margin at the top end of our former range. And remember, that had 1 point of headwinds in it related to the transaction costs from the Aspen buy-in. So it was a really great 4 years. And Lal, Ram and I get the privilege of standing up here and talking about the great performance.

But the great performance is driven by the BU presidents and the presidents in the back of the room and their team. So to you, I say thank you very much. It was a great run. We'll get going on the next 3 years. And to the Emerson folks listening, thank you very much for a great 4 years. So before we get into the framework, I'd like to set a little bit of context around Emerson's profitability versus peer profitability across the 3 business groups. of software and systems, intelligent devices and safety and productivity with gross profit margins and adjusted segment EBITDA margins. And what jumps off the page is the superior profitability of the Emerson businesses compared to peer. You've heard that we ended 2025 with a gross profit rate of 52.8%, reflecting our technology leadership and the value that customers place on our products. The adjusted segment EBITDA margin of 27.6%.

I think that's a great reflection of the management system and the processes that we run and our relentless continuous improvement and cost actions that are all over the company that drive that profitability. So if you look at each of the business groups, and then we think about our incremental margin, which is off on the right side of this chart that we're expecting through the cycle for these businesses, Software and Systems driving 60% GPs.

That's where the software revenue is. It has a very good mix of businesses in there, 60% GPs, 45% expectation of incrementals. Intelligent Devices, 51% GPs, expectation of 40% incrementals through the cycle. And then Safety and Productivity, a little lower at 43%, but 22% adjusted segment EBITDA and a 35% expectation of incrementals. That 45%, 40%, 35% is the support for the 40% that we're expecting through the cycle, and we'll continue to talk to you about the business in these 3 groups as we move on. So now getting to our value creation framework as we move forward and the key numbers that I talked about that you've seen before, starts with the $21 billion of revenue, 5% growth expectation in each of the next 3 years. That will be led by software and systems, growing in low double digits, Control Systems and Intelligent Devices growing mid-single digits, and that will support our 4% to 7% growth through the cycle value creation framework right in the middle there.

30% adjusted segment EBITDA, expecting 2.4 points of margin expansion. Ram talked about that. I'll show you the bridge for that in just a second. That growth and margin expansion will drive 10% EPS growth. That's our third key number, gets to our $8 per share. I'll show you what that looks like as well, $12 billion of cumulative free cash flow during those 3 years, and we expect to land 2028 at 20% free cash flow margin at the high end of the framework of 18% to 20% through the cycle here. And then just one other point on the value creation framework. that 40% incrementals. I can't tell you how many times I've heard over the last 3 years, when are you going to take that up? We took it up from the 35% plus to the 40% and I'll talk about that a little bit more. So here we go on the EBITDA expansion of 2.4 points. Ram took you through the 3 key profit levers, price realization, operational excellence in the form of footprint optimization and digital transformation as well as finishing off the incremental synergies from the AspenTech and Test & Measurement acquisitions. I'll take you back to the conference call for the fourth quarter year-end, and we talked about a headwind that we were facing from our long-term software contract renewals.

And at that time, we talked about a headwind of 40 basis points that would reverse as we move forward. into '27 and '28. So that's what we're showing here, bridging from the 27.6%, you see the 40-point headwind in '26 reverses in that '26 through '28 period of 50 points and becomes a little bit accretive. And then the operations will be driving the EBITDA margin expansion, 80 basis points in 2026. That will be split pretty evenly between Software and Systems and Intelligent Devices. And as we move forward, 1.5 points, which is weighted slightly towards software and systems. And remember, inside of that 2.4 points of adjusted segment EBITDA margin is 1.5 points investment back into the business. This type of margin expansion is a hallmark of Emerson. It's something that we've always done. It's why that profitability that I just showed you a couple of pages ago looks the way it does. We've been doing this for years. In the last 4 years, we drove the 6 points of improvement as we move forward. We're very confident in our ability to do the 2.4 points over the next 3 years.

I'll dive into the next key number here of $8 of adjusted earnings per share, a $2 increase. It will be driven by the profitable growth, the synergies, the share repurchases and tax rate. We're going to see a small reduction in tax rate as we move forward. Operations and synergies will drive $1.70 of that expansion. That's the 5% growth at a 40-plus percent leverage as we move forward, and all business groups will contribute to that, but it will be led by software and systems. And then there are 2 nonoperating items here that account for $0.35. The cash flows that we're going to generate will enable that $6 billion of share repurchase, and that will drive $0.35 of incremental EPS over the 3 years. And then we're going to benefit from some reduced taxes going from our 22% rate down to about a 20.5% rate in 2028. As we've settled into the new portfolio, the cohesive automation portfolio, and we've considered the effects of Pillar 2, which is a bit of a headwind in 2026, and we've looked at OB3, which will create a little bit of a tailwind, and we've rethought some of our internal financials and the way that we're doing business, we believe that we can bring down that tax rate from 22% to 20.5%, and we're already underway.

You'll recall that we guided 2026 at a 21.5% tax rate. There will be a 20% headwind there that you see, that is primarily net interest expense, but the compounding effects of the profitable growth, the share count and the lower taxes will drive the $2 of EPS to take us from $6 to $8, representing the 10% cumulative growth year-on-year. Okay. Now we get to the bonus number, the $10 billion that we plan to return to shareholders, that all starts with the profitable growth and the $14 billion of cash earnings that we're expecting over the 3 years. And whenever we do our capital allocation planning, one of the first places we start, as Lal mentioned, was making sure that we maintain a strong balance sheet. And that means that we focus on the target net debt leverage of 2x, and that becomes the anchor point. We talked about how as we went through the transformation, we took on some debt. We need to bring down debt. We brought it down in 2025. We'll spend an additional $1 billion to bring down the debt a little further in 2026. And then we'll need $2 billion over the next 3 years in CapEx and the working capital needed to support the business.

And that will leave us with the opportunity to return $10 billion to shareholders in the form of increased dividends and share repurchases. Lal covered the dividend, $0.11 in 2026, $0.10 in 2027 and 2028. And we're targeting 30% to 40% of free cash flow in each year to allocate to dividends. And the modeling that we've done here fits very well within that range. We'll also do $6 billion of share repurchase. That's what we've modeled, $1 billion in 2026, $2.5 billion in each of '27 and '28. That will retire about 36 million shares by the end of 2028. We have modeled in multiple expansion and share price as we move forward. And so there's our capital allocation plan for the next 3 years. I want to spend a little time talking about something that we haven't talked about in a long time at Emerson, which is returns. And we have picked a cash return on invested capital as a metric that we will track as we move forward here, and we picked it for 2 reasons. One, we believe that cash equates to share price. And as we grow cash, we can grow the share price. And two, it's a simple metric that's based on GAAP numbers. There's nothing adjusted about it. It's operating cash flow divided by the average of equity plus long-term debt and long-term lease obligations.

And as you can see in this chart, the portfolio transformation certainly had a negative effect on our returns going from about 24% down to about 11.5% over that time. And what I'd like to say is that we had a denominator problem. We generated $11.5 billion of gains. We took on debt to execute the transactions, and that's what drove this return level down to the 11.5%. Now throughout all of this, it's important to note that the 11.5% is still well above our cost of capital. And the good news is that as we move forward, the combination of growing operating cash flow at 9% and distributing $10 billion of the earnings out to the shareholders should drive us to about a 12.5% cash return on invested capital to 16% by 2028. This is also a nice metric because this is the same metric that is in FactSet. You'll be able to track this as we move forward. And it's one that we'll report on from time to time as we move forward as well. So that concludes my comments on the '26 through '28 plan. But before I wrap up, I'd like to reiterate our Q1 and fiscal year 2026 guidance.

There's no changes. We're still expecting a very good year with 5.5% GAAP revenue growth, about 4% underlying growth, about a 28% adjusted segment EBITDA margin, EPS of $6.35 to $6.55, and recall that the software renewal dynamic that we talked about on the call at year-end is about a $0.15 headwind in that EPS number for 2026. I will also expand for just a second, the sales guidance that we gave on the call. Now that we've got the resegmentation, we will include sales guidance moving forward on safety and productivity. That's the only change on this chart from the same chart that we showed at year-end, and we're expecting a 2% underlying sales growth rate in the first half, 4% in the second half and 3% for the full year. So that wraps it up, and I'll wrap it up on a page here. I believe we have a very clear value creation framework and a strategy for value creation that has 3 pillars. It starts with organic growth. We've got the automation portfolio. We have end market diversity. We're aligned to secular drivers like never before. We have an unparalleled tech stack, and we've got durable revenues, 65% MRO, $155 billion installed base, and we're innovating as we go toward the autonomous future.

We will continue our dedication to operational excellence with 2.4 points of margin expansion coming from pricing, footprint optimization, digital transformation, synergies, and we'll be increasing our cash generation. Those 2 elements of the value creation strategy support the value creation framework of 4% to 7% organic sales through the cycle, 40% incremental margins, 10% adjusted EPS growth and 18% to 20% free cash flow margin. The final element is the capital allocation. We will have a capital allocation that favors shareholders with an expectation of $4 billion in dividends, $6 billion in share repurchases. So one last time, the 2028 targets that we're setting, $21 billion net sales, 30% adjusted segment EBITDA, $8 of adjusted EPS, 20% free cash flow margin, $12 billion of cumulative free cash flow during the period and the bonus number of $10 billion returned to shareholders over that time. So these are not aspirational targets for us at Emerson. These are the result of our rigorous planning process, and this is what we're going to be laser-focused on as we move forward.

We believe we've got the right portfolio, the right management system to achieve these targets, and we've built a world-class automation leader. We built the company for performance. We built the company for resilience, and we built the company for long-term value creation for shareholders. So that's all I've got for you. Thank you very much. We are going to take a 15-minute break. So let's try to please get back by 11:20. We're going to set up the stage for Q&A, and we'll look forward to that. Thanks.

[Break]

Here we go, right. All right.

Here we go. All right, Colleen. I'll manage mics and everything.

Yes, we're going to do it. So a couple of quick notes. We've got Lal, Ram and Mike up on stage. We're going to take about 30 minutes to answer any questions you all have. Wait until you have the mic and, of course, introduce yourself as well. So who'd like to start?

Everyone who just raised their hand, will get to ask a question. We will get through if it goes longer than 30 minutes, we'll live with it, okay.

We're all really excited [indiscernible]

Mic working?

Mic is not working.

Andy Kaplowitz.

I will just stand by you. Go ahead.

All right. Andy Kaplowitz from Citi Group. So well, maybe frame the opportunity power across your high-growth markets a little bit more because like when I look at the table I see 8% growth in '25 in power, but it seems like it could accelerate from there. So like if more than 20% of your business or these high-growth businesses, you don't need that much growth in the high-growth businesses to kind of reach that 4% to 7%. So how do you think about that over the next three years? Do you expect things like power to accelerate life sciences, all that kind of stuff.

I'll give some comments and tell it to Ram as well. So certainly, you're right. We grew 8% in power in 2025, but our orders were up 30% in that segment. So we built backlog in that business, which is then going to translate into revenue in the '27 -- in '26, '27 and '28 time frame. Furthermore, I continue to see acceleration in orders in Life Science, Semiconductor, which came back very strongly at high single digits, low double digits in the second half of 2025. In orders, you saw revenue growth was only 1%. So we've got great momentum on the order side to support those five markets growing over the next three years.

Anything you want to add?

Yes, no, you said it.

And then just one follow-up.

It's better when Colleen is...

So I think it's on Slide 45. [indiscernible] price versus inflation, price up 4% and inflation 1.5%, but you guys mix has gotten better. They're very good at price. So I'm just curious about that. Like is that conservatism, something else going on, or...

I'll take it. The 4.5 points is all inflation, okay? So price was 4 points, ops was 4 points, 0.5 point from incremental synergies. What's in the 4.5 points is all inflation. Material inflation is included in it, but NMI there is actually positive. It's favorable. So it's really -- or simply put, if you want to model it on a $18 billion sales, we have all cost of -- all of our cost is about 13%, 4 of it is material, you take that out. There's no inflation. So it's really the inflation represented on $9 billion of cost base. You do it at 3.5%, that's your 4.5 points. So it's SG&A inflation, overhead inflation, indirect inflation is captured in the 4.5 points. Price versus net material inflation is a strong positive.

You should not expect this business with a quality of technology, the diverse customer base that elasticity around pricing to flip at any point in this window negative on price/cost. And we couldn't find a year in automation where that was negative. Julian?

Julian Mitchell at Barclays. Maybe my first question just around the discrete business. It's been resegmented a bit. Maybe help us understand your aspirations in things like the PLC unit, how we should think about growth and sort of market share ambition there, please?

Yes. So I think simplistically, on the discrete side, as we explained, Brandson and Appleton, which are obviously were in the old discrete automation platform is now in safety and productivity. And the pieces that moved into the core automation tech stack was our fluid and motion control business that went into Final Control and then the PLC business, which is about a $300 million business for us that moved into control systems and software. the way we see it is our automation tech stack serves process, hybrid and discrete markets. Obviously, our market presence is strong in process and hybrid. We'll continue to be opportunistic on end markets in discrete with PLCs, with our fluid and motion control products, islands of automation that we can drive there. But that will be our focus there. And then Branson and Appleton moved into the safety and productivity.

I'll just add a couple of things. Two of the markets that we highlighted of the end markets that we highlighted, which is, I think, important for how we want to start thinking about the company are discrete markets in nature, aerospace and defense and semiconductors. We believe that those particularly, whether you are in the test and measurement space or in the automation process space will be differentiated in growth, and we wanted to highlight those. In terms of the technology stack, look, I think there are going to be continued synergies on the PLC side with software and systems. But let's be frank, with a $300 million business, we are -- I wouldn't even venture to say we're a 1% player. And that's the world that we're in.

And then just a sort of more financially, I know, CFO type question perhaps. You have the 9% operating cash flow growth guide and a sort of 10% EPS guide after buyback. So is the 10% EPS growth goal more of a sort of baseline, I don't know, bottom of the range? I'm just trying to understand why that couldn't be higher if you get 5%, 6% organic growth, 40s incremental margin and then a buyback on top.

Yes. So the delta there is really the working capital that we'll need to support the $3 billion of growth. And so there's a little bit of a disconnect between the 9% that we showed and the 10% EPS. So they're very much aligned the cash flow growth, and we're working on working capital efficiencies. We're making a lot of progress. We're bringing down the percent of working capital to sales over this plan, but that's what drives the disconnect there.

Next, my hand looks bigger.

Everything went well until this part.

Yes.

Seems to be working.

It works now.

Is that good?

Yes.

Small again. So just on the power side, how much of your power business is actually U.S. power? And then how much is do you -- are you now exposed to nuclear?

So nuclear globally, but it's Westinghouse based, AP1000 based. So wherever that technology travels, which is predominantly the United States, Eastern Europe and the Middle East will travel with it, 100% of those units. In terms of overall power today, it's probably 60% U.S., 40% outside. We still have a sizable power business in China, which continues to grow. We don't participate in state-owned power providers, but we are in the private markets. There are 25 or so coal-fired power plants in China being built, and we're participating in half of those in 2025 and '26. So -- but it's a heavy U.S. business with about 60%, which just by chance, falls in well with these layers of investments that are to build out the 400 gigawatts of power in the United States over the next 4 years.

And then just on the margin bridge, I think there's like 1.5% of strategic investments. Will that be something we'll see in the ER&D account? Or is that outside of that account? And how fungible are those investments if the revenue doesn't come or you want to like let it rip a bit more to the bottom line if the revenue gets there?

There are 2 broad categories, Steve, innovation and commercial excellence. They are the 2 levers that we have within the company to drive organic growth. Certainly, those can be levered by Mike and Ram, working with our group presidents depending on the volume environment that we see in the marketplace. So there are some degrees -- significant degrees of freedom there.

Great. Michael [indiscernible]. So first question is AspenTech s a great business, EBITDA margins, targets, low double-digit core growth. However, software has become a bit of a dirty word with investors, is about disruption. Maybe talk about what the walled garden and protection is for AspenTech and why this software business doesn't get disrupted.

Are you talking about your general question of software being disrupted by AI?

Disrupted by AI and...

Yes. So good question. First off, I think that is more applicable to horizontal software workflow automation, products like CRMs or even an ERP for that matter or tools of that nature. When it comes to Aspen, it's a very sticky domain-specific high-fidelity simulation of chemical processes or processes across different process industries that is built on first principle models where we have years of experience, and it will be very, very difficult for an AI framework to come in and displace that capability.

So it's, A, very sticky; B, I think a lot of domain expertise built into those solutions, and it's more vertical software as opposed to horizontal software. And that's why we believe there's a lot of longevity. Now obviously, we're also investing in AI capabilities with Aspen to continue to drive productivity for the users of Aspen software in terms of advisers and workflow automation within the Aspen workflow. But we feel pretty good, whether it's the simulation side of Aspen or advanced process control or their reliability suite, there's a lot of domain expertise built into that software capability that gives us that protection of the moat.

Great. And then taking down the plant number, I think, from 160 in 2017 down to 117 today, down to 100 by 2028. Can you just talk about what that does to your kind of cost base? And then what have you done to mitigate supply chain risks going forward?

Yes. So I think from a cost base perspective, I mean, frankly, what we're trying to do is get to the right set of large, well-capitalized factories that can support our global business with the right levels of speed and regionalization. That was the playbook on going from the 160 down to 100. We believe a company of our size with the different business models we have where a sensor factory is different from a valve factory is different from where we assemble systems and software or NI, which is electronics manufacturing is different. And so we've optimized to believe that the $100 million is the right number. Obviously, the overhead savings from going to $160 million to $100 million or $117 million to $100 million from where we sit today is an important element of the productivity that we're driving and the operational excellence savings that we've built into the plan.

But all of this is with a thought of making sure we have regional manufacturing and regional supply chains to speed. 85-plus percent of our cost of goods are regionalized. As we execute that, we'll continue to move that number up. There are certain parts of the Middle East and rest of Asia where we need to get better, but we're very good in China. We're very good in North America. We're very good in Europe. But that's going to be the risk mitigation of our supply chain, the regionalization of our supply chain and then putting our manufacturing, 42 of the 100 is in the right locations where we need to be that give us the cost base.

I'll just add a couple of things. The rooftop consolidation has driven a tremendous amount of value with the build-out of the 42 best cost facilities. When you go from small sites to large sites, the magic thing that happens is you get better people. You now can go hire an HR manager that runs a plant that has 1,000 people instead of 4 plants of 100 people or 200 people. You get a higher-caliber plant manager. And the leverage opportunities and synergy opportunities are tremendous. So we've been able to -- we are able to upskill talent as you consolidate the plant, which is another added benefit of reducing sites. And Nigel, the last thing I'll say is we set a target at 100. We get to the 100, we'll set another target.

It's Deane Dray with RBC. A question on capital allocation. It's a bit unusual for a company to commit to a dividend increase annually to the cents number that you've given. How do you and the Board land on that in terms of an increase, your payout ratio, 35% to 40%. It's already there. But how do you -- how do you optimize the dividend between that and buybacks?

Yes, I'll just start and... No, go ahead.

Yes. So Deane, thanks for the question. The $0.10 is per year in '27 and '28 is obviously how we built the model. So we wanted to give clarity to everybody how we do that. We had a discussion -- a couple of discussions with the Board around dividend policy. We've done various studies that we've talked about. So as we took a look at the dividend, I mean, as you well know, we've been committed to the dividend for 70 years and increasing that dividend.

73.

Sorry.

73.

70 years.

70 this year.

70. So as we looked over the past few years, we were obviously very conservative as we were going through the transformation. And so felt that it was time to do a little bit more in the dividend. And then we talked about this target of 30% to 40%.

And if you go back to those years, we were actually outside of that. But as cash flows have grown, we're now in that band, which I think is a band that we're very comfortable with in terms of allocation of free cash flow to dividend.

And the reality is as that free cash flow grows, we're going to have to keep that sort of increase, which is why we did the $0.10 a year or we're going to fall out of the band and be below, which frankly would be outside of, I think, the norm of most of our investment peers. So we give it a lot of thought. That's how we landed there.

And again, it was really about giving clarity on how we built the model. The last thing I'll say is dividend decisions are things that we make each year, and you've got both a backward and forward look at that time, but we feel confident going into it that, that's about the dividend increase that we expect to give to shareholders over the next 2 years.

I'll just add one thing to that. And it goes without saying that in the prior 5 years, during the transformation, this was a lever that we use differently. We increased the dividend, but it was de minimis. We needed the cash, obviously, to transform the company. We're in a very different place today in a capital allocation model that has no large M&A, leaves us room, headroom for bolt-ons if they come, but gives us the opportunity to play within that 30% to 40% of returning cash to shareholders. We'll get to 73 years on this plan.

Great. And in terms of the market share profiles that you've shared today, one jumped off the page to me was the National Instruments at 9 out of 10 semiconductors. That -- just to make sure I understand how did you inherit those market positions. And the use of the word standardization was interesting because -- most of NATI is not standardized. It all gets customized.

But just can you give us some color there in terms of how much customization and this is all validation testing as well. Just wanted to be clear.

Correct. Yes, you said it. I think, first off, yes, we inherited that position when National Instruments came in. National Instruments has obviously been in the semiconductor space for a long time. And you're right, they are in the validation side.

When it comes to production testers, which is the CapEx side, it's the likes of Teradyne or Advantest. So those -- they make the ATEs or the end-of-line testing . NI does some of that, but the majority of our presence in semis is validation testing in RF and mixed signal type semiconductor products with the likes of TI and ADI.

Now when we use the word standard. NI's architecture is modular. I mean they have PXIs and the LabVIEW and -- but customers will then deploy that into standardized validation test systems for their own needs specific to the product that they are testing and hence, the word standardization is used there.

Just want to confirm on the plants. We're never going down to just one giant plant. Interested on where you're taking shots on goal on kind of the growth investments. For example, I think on the software and sensor side, you noted kind of 40% of the market or served market, you're 1 or 2.

So if you think about the strength where you're 1 or 2 and looking over where you're 4 or 5, where are those opportunities most prevalent? Are there any that you're specifically targeting? And how do we think about just kind of that share capture dynamic?

Yes, go ahead.

Well, the simple answer is we're investing in our leadership positions to further extend leadership. I mean the categories we talked about, whether it's DeltaV, Ovation, our pressure business, our flow business, I mean, the next-generation products level, for example, these are all areas where we lead, for the most part, #1 in several of those, #2 in a few.

That's really where we're making the investment because these are the big markets, the right technologies needed to move the industry. And then the areas of investment, if you really look, I mean, the EOP, the enterprise operations platform, huge area of investment for us, and that really is in our control systems and software business that encompasses DeltaV Ovation and Aspen, big investments in NI around Nigel, but also the Next-Gen of RF instrumentation and DAC. Big investment in the sensing business from a product perspective.

On the final control side, we are investing, but the investments there are in our service footprint because there, it is a big valve replacement opportunity, the MRO opportunity. So service centers, service technicians, that's really the area we're investing in that side of the business.

Just a follow-on to that. The pace of innovation differs greatly, as you know, Jeff, across the different businesses. The life cycle of products, the advancement of technology. One of the things that Emerson has done incredibly well through generations of leadership here is invested across the entire portfolio stack.

We want to remain in the #1 positions we have in sensing. That means that we have to introduce products with the new processing speeds. Different displays with better sensing, more accurate sensing. To do that, you have to -- and that's the investments that we're making.

Likewise, the innovations around software, many of those are new to the world in the way that we're thinking about what we can do at our customers. So we'll continue to invest across the stack. We believe that there's value to bringing that stack to market as one, and that's embedded in this plan.

And then maybe you mentioned life sciences. Just where are we at on sort of those opportunities kind of hitting the street as it relates to you, right, the $350 billion of announcements, how long the groundbreaking, how long the Emerson order? Is that stuff even in your pipeline?

Yes. No, it's a great question. You've seen a few groundbreaking announcements already. I think last earnings, we talked about an announcement of a large Indiana-based pharmaceutical company for GLP-1 drug expansion. I almost said the name of the thing. They didn't want us to use their name, but okay, which is fine.

So we're seeing some of that going to the ground. Now that one is purely demand-based expansion. The $350 billion is the near-shoring expansion, which large pharma has committed to as part of their negotiations with the administration around MFN and tariff avoidance.

So a lot of that is still in flux. I think the ones that are firmer are those that have reached the deal with the administration. So Eli, Pfizer, Novo Nordisk, we'll see those come first. We still have a large list of big pharma that aren't quite there yet.

Andrew Obin with BofA. Just a question. I think on one of your slides, you sort of said that you're improving best cost countries headcount by 5 percentage points. I would have guessed that consensus that in terms of CapEx, U.S. is one of the best markets. And I'm just sort of thinking, does this say something about more capital intensity in the U.S.?

Does it say something about actual -- how feasible real reshoring is in the U.S.? Or does it say something about how much growth opportunity you see outside of the U.S.?

Well, first off, I think there's growth opportunity -- I mean, there's certainly Middle East, India are important markets for us. Rest of Asia are important markets for us. So some of the capacity investments into Eastern Europe and Asia drive some of that. There's obviously -- Mexico still remains. I mean, obviously, we're watching the tariff situation carefully.

But with the USMCA exemptions, Mexico still remains an important area of manufacturing opportunity for us, and we're making some investments in the sensing business. And that's really what drives the 5 points. But with that said, North America is by far the fastest-growing market for us today and in this plan, and we believe we have a great footprint here.

We're investing a lot of the capital to recapitalize many of the facilities in North America, which includes Mexico, and that's really where the focus has been. But when we -- as we expand in the Middle East, as we expand in rest of Asia, some capacity into Eastern Europe and Mexico is what drives that 60% to 65% dynamic.

And I think it's important to note that we have ample capacity in the United States to meet the growing demand in this plan. We've made significant investments, particularly around final control and our sensing businesses in facilities, and we're currently in the process of building an expanded campus in Austin, Texas for those businesses to support the growth in America.

And just a follow-up on power. There's a lot of talk about grid resiliency. So it's not just adding power, but grid resiliency and the supply chain on your capacity seems will be constrained for a while.

So what are the new opportunities for you in terms of you have OSI Power, you have Ovation. What kind of service revenue can you derive sort of from operating existing facilities from improving efficiencies? How big of a market is it and how much visibility you have? Yes, just expand on that.

Yes. So I mean, obviously, all of the grid resilience, modernization investments or the digitization of the grid are opportunities for the OSI business, whether it's with ADMS, EMS, their outage management system capabilities. And that -- the ACV on that business is growing at 30-plus percent.

So we're seeing the scaling of the OSI business, which sits within AspenTech and within control systems and software. But the Ovation product, whether it's Ovation Green or some of the Ovation opportunities we're seeing in substation control as well as battery energy storage systems and some of these other capabilities that Ovation brings to build out the resilience of the grid as capacity gets added are all opportunities on the Ovation side that is something we're seeing as well.

So I think AI and new capacity in gas-fired power to bring power to AI, nuclear are on the capacity side, but equally important is the investments that is happening on the transmission and distribution side as part of this.

That's probably not AI related, but more generally, the modernization of the grid, we're getting that on the OSI side of the business.

Brett Linzey, Mizuho. Just on LNG, so there's a $2 billion pipeline of opportunity sitting there. You talked about Wave 3. How much of that $2 billion is representative of Wave 3 versus what's in process? And then when do you think you begin to see some of that convert -- that Wave 3 begin to convert into orders?

So it is converting as we speak. There's probably half of what's in process in that -- in our backlog. So under construction, awarded, that's in backlog. And then the funnel represents the next 2, 3 years of that wave. So as you know, that wave is going to go to 2030. So it's not entirely in the $2 billion. It's probably another $1 billion to $2 billion in addition to that to complete the wave.

Okay. Got it. And then just a follow-up on the footprint optimization. So the 117 to the 100 sites, is this going to be an announced plan that you'll restructuring, repositioning? Is this pay-as-you go? And then are you able to quantify the cost savings there?

Yes. It's pay as you go. We've been paying as you go on a lot of that plan, certainly not in the early years when we started at 170, nearly $170 million post V&C. That was a very specific restructuring plan to reduce rooftops. But this is a pay as you go.

The businesses are embedding those plans in their P&Ls, reviewing them with us, and then we're funding the capital to get that done. And there's certainly the savings that you see in the operating margin plan that Ram presented in the operational excellence piece.

Can you guys prioritize your M&A, your bolt-on kind of within the segments, where do you expect perhaps to be focused?

Look, there are 2 broad categories that I think about. Number one, growth and technology, right? So they've got to be -- the bolt-on has to be accretive to growth for the company. We did a lot of work to have an opportunity to grow at 4% to 7% through the cycle.

We certainly don't want to go backwards. So growth is critical. But the technology has to be accretive to what we currently bring to the table. So we're certainly looking within the elements of test and measurement. We continue to be interested in sensing as there are technologies, much like we proved with Flexim, which is an ultrasonic company, self-flow measurement company based in Germany, which we acquired last year.

There are opportunities like that in the marketplace, and we'll continue to look. At this point in time, we're always inquisitive. Our business presidents are inquisitive. They understand the market. They have a lot of relationships. So if one of those pops, those are really the priority areas that we think.

And then, of course, we think about the software area. The problem with the software area is the obviously, the valuation around those assets. And we just did a lot in industrial software at this point in time. So in this plan, in that $1 billion of bolt-ons, there isn't any room for large software M&A as we present.

If you take a step back and look at your deal model for NATI, you're probably below on the revenues, but you've taken a lot of cost out. Where would you be -- how far below the deal model would you be on a return perspective right now?

We're probably...

I'd say we're tracking -- Maybe around there, but we're confident that we'll get that back as we move forward, and we'll clear cost of capital. And obviously, those deals, both the Aspen and test and measurement deals were about multiple expansion, and we've seen that. So they've been very successful. The integrations have gone very well and obviously feel great about those 2 transactions.

It's Andrew Buscaglia here from BNP Paribas. Clearly, the message today is the transformation is pretty much complete. M&A is going to be rather limited going forward. So wondering on the flip side of that, your safety business, you decided to retain that. You've given some color around outlook on that. What is your commitment to that piece of your business?

Yes. No, look, it's -- there's perhaps a perspective that I can share. In the legacy of our company, there were some questions about the quality of M&A that we have done. And we're very cognizant of that as a new management team coming in. The deals we did do both the disposals and the acquisitions, we felt strongly that we got great value.

We worked really hard to get 18x from InSinkErator 14x from Copeland to buy a phenomenal asset in NI and Aspen. And I certainly was not going to give away what I believe is a great business, an American business that generates great cash, high margins and really has no peer in the marketplace that operates at the financials that Mike shared with you, as you saw.

And so we believe as a management team that we could run the business better, and we could create more value for our shareholders within our ownership than going out and essentially giving it away. So we're going to own it. We're going to run it. We've made some investment decisions inside of that business.

And we'll see. We'll see as we go forward. The core of the company is automation, as you saw, and we'll continue to run that business as best we can.

Nicole DeBlase from Deutsche Bank. Just wanted to focus a bit on the cross-cycle targets for Intelligent Devices. You said 3% to 6% cross-cycle growth, but that business has grown at an 8% CAGR over the past few years. What was special about the past few years that can't be repeated? Is it the price because of tariffs? Is it strong LNG cycle?

Do you want to take it?

Yes. Listen, I think -- I mean, obviously, we were coming with -- through a COVID recovery, and there were some dynamics in terms of the capital cycle, which was good, and that will continue, but tariff-related pricing. There were -- the COVID -- the electronics supply chain dynamic, which impacted the sensor business during COVID, rebounded in a very meaningful way in the 2 years post-COVID.

We're not baking that into the plan. I think 3% to 6% is a very optimal plan for that business. If the capital cycle remains strong, it could be in the high end of that range. But if I took out the dynamic around the electronic supply chain for sensing, I think if you go back and rationalize the 8%, it's still in that 3% to 6% band.

And the only other color that I would add, Nicole, to that is a geographic lens. The plan that we presented today is predicated on a strong U.S.A., a strong India, a strong Middle East and Africa. It has a relatively softer outlook on Europe and on China. If you go back and you look at that 8% growth, there was a stronger China coming out through the pandemic into '22 and '23.

We haven't planned a high single-digit China in this plan. So think more of a low single-digit to mid-single-digit environment there. That makes a bit of a difference as well.

Okay. That all makes a lot of sense. And then just to dig into the operational improvement piece of the margin plan, 4 points you guys are targeting of improvement over the next few years from that bucket.

Would you say that the bulk of that is related to footprint and supply chain? I'm just trying to get a sense of how impactful the Agentic AI piece could be as well.

I'll take 4 points about hundred million dollars on a -- if you wanted to quantify it on dollar terms. That's actually the way we've built the bridge, the leverage on the volume is in that number. All of the footprint rationalization savings is in that number, plus the ongoing productivity on product cost reductions that we do on an annual basis in that number, plus, I would say, the 30%, the digital transformation of the enterprise functions. If I'll give you a ballpark number, that's probably 10% to 15% of the $800 million.

Yes. I would only add that the 2.5 or 2.4 points of improvement will be split about 50-50 between GP and SG&A. Think of it that way.

Chris Glynn, Oppenheimer. I had a question about how you're thinking about the MRO growth. I think you've talked about low single digits in the past, but nothing today. But if I think about maybe the algorithm, so to speak, you've got price, you've got installed base growth, installed base aging, maybe customer readying for digital transformation. Is there a mid-single-digit opportunity on the MRO side?

Yes. The last part of your comment is captured in the modernizations. So when customers upgrade, it's not a pure MRO opportunity. Technically, you could argue that it is, but we count that as a modernization. When you're uplifting your technology in your facility, whether that's upgrading your control system or your devices.

So we count that as a modernization. Combined, certainly, that's a mid-single-digit market. MRO would be on the lower end, simply because of the -- it's based on certain shutdown turnaround programs, which are very specific in our valve business, but then the rate of utilization of the products and the decay of the products as they're utilized. So I'd say that's on the lower end.

It's Joe O'Dea at Wells Fargo. Can you talk about the adoption curve around software-defined enterprise operations platforms, just how you're thinking about that time line? And then how you think about thresholds and customer size and their ability or willingness to make this kind of transition when you talk about that diversification of customers, the 100th largest is $1 million of revenue for you, just where those thresholds could actually run into a little bit of a choking point on like can they move forward and make these investments?

I'll start and hand it to Ram, if that's okay. You heard from the leader at Total, who is driving the digital transformation journey. And what she's challenged with is isolated siloed data, unstructured data and an inability across the entire fleet of Total from refining through chemicals of driving an enterprise operations model.

They don't understand in live action, the profitability of one plant versus another, the productivity, the reliability, the safety measures. And so the investment they're making is very sizable in the data fabric, step one.

Once that's laid in, then it enables a company like Total at a very large scale to bring in all the additional software tools that start to drive from optimized through semiautonomous ultimately into autonomous.

We need another 5 or 6 early adopters like Total at scale because that's a very scalable opportunity and one that the entire industry is watching, which is important.

Yes. Just to add, I mean, to probably go back in time, if you went back 3, 4, 5 years ago, and you talked about software-defined journeys to autonomous operations or the use of software to drive OT workflows, OT/IT integration, you would argue that there were certain industries that really needed to do that, be it offshore platforms or mining, the life sciences customers were generally more amenable to driving integrated software workflows and moving towards autonomy.

Today, I would say, almost every customer in every one of our industries is really sold on the fact that they've got to crack the data challenge and they've got to go to a software-defined architecture to truly unlock productivity in their operations because it's that trapped data, which is the issue.

So I would say 3, 4, 5 years ago, there were certain segments like air separation, for example, those customers were talking more about autonomous operations. Today, it's across the board and in every one of our industries.

I think it's interesting. If you go back, Joe, and you think about -- we've been talking about digital transformation for a decade. But how many actual definitive revenue or profitability changing digital transformation projects have we seen? Practically none.

And the reason is exactly what he described. The problem was in where the data is and the language of the data. If we don't -- and I think now the maturity has gone to a point where customers realize we got to solve that first.

We have to have commonality and accessibility, democratization, whatever word you choose on data before we can apply the tools that will drive that optimization and that productivity on top. So versus the siloed stuff.

Jairam Nathan with Daiwa. Just I wanted to understand the -- when you talk about the software growth, in the past, you've also talked about how you kind of want to split the DCS revenue between software and hardware. So how much of that is led? And does it require like a change in the contracts? Or how much of that is just led by breaking it up, breaking the revenue stream up?

Yes, that's happening. I mean that is exactly it. There's in that software $2.5 billion, you've got the stand-alone AspenTech capability. You've got NI, obviously, but a lot of the control software, which is a journey we've been driving for the last 3 to 4 years, I referenced a term softwareization.

I'm not quite sure if that's a real term, but that's what we use internally to talk about how we unbundle, unlock software, the DCS software and price it in a subscription model with our customers. And that's been happening in the last 3 to 4 years in our business, and that will continue to happen.

And particularly as we drive the EOP journey, our control systems business, which has traditionally been 1/3 software, 2/3 hardware and services will flip to 2/3 software, 1/3 hardware and services because the EOP will require less services to install and commission and the hardware intensity with marshalling cabinets and controllers in a traditional DCS architecture will be very different with an EOP.

It will be a server in a hyper converged environment. And the hardware footprint would be a lot lower, services would be a lot lower and the value will move towards software, which will be priced in a subscription model.

Excellent. Okay. I think everyone that raised their hand got to ask a question, correct? Thank you for your time. Thanks for being with us this morning. We're excited to share this with you and look forward to [indiscernible] Happy holidays.

Greetings, and welcome to the Emerson Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Colleen Mettler, Vice President, Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining Emerson's Fourth Quarter and Full Year 2025 Earnings Conference Call. This morning, I am joined by President and Chief Executive Officer, Lal Karsanbhai; Chief Financial Officer, Mike Baughman; and Chief Operating Officer, Ram Krishnan.

As always, I 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.

Before we begin the presentation, I would like to highlight our upcoming 2025 investor conference on November 20. We are looking forward to presenting on our transformed company, a global automation leader set to deliver a differentiated value creation framework. We will discuss the drivers of our 4% to 7% organic growth framework, detail our plans for additional margin expansion and outline our capital allocation priorities. Additional information about this event is now available on our website.

I will now pass the call over to Emerson's President and CEO, Lal Karsanbhai, for his opening remarks.

Thank you, Colleen. Good morning. 2025 marked the 135th anniversary of our company. The Emerson Electric Manufacturing Company was established in St. Louis, Missouri in 1890. The development of a reliable electric motor was the vision of 2 Scotland born brothers, Charles and Alexander Neskin, made possible by the financial backing of John Wesley Emerson, a former union army officer, judge and lawyer.

Throughout nearly 1.5 century of economic cycles, The Great Depression, 2 World Wars, significant technology innovations and a handful of iconic industrial leaders who navigated uncertain waters, our company completed 2025 stronger than ever. We have transformed. We have momentum in our markets. We have great people, and we are optimistic about our future.

Thank you to the 70,000 Emerson employees around the world, to our management team, our Board of Directors and our investors for your trust. I am honored to work alongside each and every one of you in our value creation journey.

Please turn to Slide 3. Emerson continues to see resilient demand as customers invest in automation technologies to drive digital transformation and enhance efficiency, reliability and safety in their operations. Underlying orders grew 6% in the fourth quarter, driven by sustained demand in our growth verticals and accelerating orders growth in Test and Measurement, up 27% and exceeding our expectations. We had a robust finish to the quarter, and I will discuss more details on demand on the next slide.

2025 was another solid year from Emerson. Underlying sales in the fourth quarter were up 4%. Execution was strong in the quarter with adjusted segment EBITDA margin of 27.5%, up 1.3 points. We delivered $1.62 adjusted earnings per share in the quarter, at the top end of our guide.

For the full year, underlying sales grew 3%, slightly below expectations as Europe and China were softer than initially expected. Emerson delivered strong profitability with adjusted earnings per share of $6, up 9%; and free cash flow of $3.24 billion, up 12% year-over-year.

Annual contract value of our software grew 10% year-over-year and ended the year at $1.56 billion. For fiscal 2026 we are guiding sales growth of 5.5% with underlying sales growth of approximately 4%, supported by sustained investment in our growth verticals and robust performance in Test and Measurement.

We expect to deliver adjusted segment EBITDA margin of approximately 28% and adjusted earnings per share of $6.35 to $6.55, reflecting strong operational execution. HCV is projected to grow 10% plus, as customers further invest to advance their digital transformation ambitions. We plan to return approximately $2.2 billion of capital to shareholders, $1 billion in share repurchases and $1.2 billion in dividends including a 5% dividend per share increase.

Please turn to Slide 4. Emerson delivered 6% underlying orders growth in the fourth quarter. marking our third consecutive quarter of mid-single-digit growth. This reflects sustained momentum across key geographies, and we are seeing broad-based strength in North America, India and the Middle East and Africa. However, demand in Europe and China continues to be soft.

MRO spend across our $155 billion installed base remains resilient, supporting a healthy pace of business led by strength in North America. The capital cycle remains constructive and large project bookings in power, LNG, life sciences and aerospace and defense contributed to a better-than-expected finish to September.

Momentum in power continues to build and orders in our Ovation business were up 18% in the quarter and 30% in the year, driven by greenfield projects and modernization. Test and Measurement orders were up 27% in the fourth quarter with robust growth in all regions, led by semiconductor, aerospace and defense and a broad-based portfolio business.

Please turn to Slide 5. Emerson continues to see success in our growth platforms. Our technology leadership and ability to deliver differentiated solutions are enabling us to capture large-scale opportunities and drive sustainable growth.

And I'd like to highlight a few key wins from the quarter that supported our 6% orders growth. First, I will highlight 2 projects in power demonstrating strong adoption of our Ovation 4.0 distributed control system. In August, we talked about Ovation winning 2 greenfield combined cycle plants with Entergy. Ovation 4.0 has now been selected by Entergy to automate 3 more power generation facilities. Entergy today provides electricity to 3 million customers and the 5 facilities will provide approximately 3.1 gigawatts of generation capacity.

In another win, Ovation 4.0 was chosen to replace the existing excitation system at the dual nuclear power station in Belgium, unifying the control systems across the site. Dual provides around 15% of the country's electricity, and Emerson will help ensure the delivery of safe and clean baseload power.

Next, Emerson is excited to announce its support to Bechtel Energy and Woodside Energy in the automation of the Woodside Louisiana LNG project. The liquefaction and export terminal in Calasu Parish is a premier LNG project designed for safe, reliable and efficient operations, delivering LNG to global markets. This development can produce 16.5 million tonnes per annum with a permitted expansion capacity of up to 27.6 million tonnes per annum. Emerson is proud to be chosen as a key automation partner for Bechtel Energy.

Last, Emerson was selected as the automation provider for 3 manufacturing facilities being built in Indianapolis by a large U.S.-based life science customer, a major step forward in their near-shoring initiatives and in advancing innovation and efficiency. Emerson will provide our leading control systems and software portfolio to enable reliable, scalable and data-driven automation.

Through this collaboration, Emerson will deploy state-of-the-art DeltaV technologies designed to accelerate the time to market of next-generation weight management drugs, enhanced production performance and ensure regulatory compliance.

These wins reinforce our position as a global automation leader and demonstrate the strength of our portfolio in addressing the challenges our customers face today. Our continued success is driven in part by our industry-leading innovation, and we are consistently investing to advance our technology, including investing 8% of sales in 2025.

In the fourth quarter, we launched 2 AI-powered applications to unlock productivity and workflow automation. First, we launched Guardian Virtual Adviser to enhance our DeltaV life cycle management software. This solution combines Emerson's deep domain expertise and decades of data with conversational AI to help customers quickly resolve issues, optimize system performance and reduce downtime.

Currently available for DeltaV, we are innovating it to expand across Emerson's automation platforms to support smarter decisions and operational excellence across the plant life cycle. We also introduced AspenTech's subsurface intelligence, a cloud-native AI-powered platform that accelerates decision-making for seismic interpretation. This AI platform automates workflows and improves collaboration across disciplines to help customers optimize production and reduce operational silos.

Please turn to Slide 6. Emerson executed well in a fluid macroeconomic environment and continues to deliver excellent operational performance. Growth reflected sustained momentum in North America, India and the Middle East and Africa, offset by persistent softness in Europe and China.

LNG, power and life sciences continue to attract significant investment globally and collectively were up 11% year-over-year. Sales in Test and Measurement accelerated sharply as we exited the year, up 12% in the fourth quarter with broad-based strength. Our Test and Measurement business continues to gain market share, driven by innovation and channel optimization.

MRO for the company represented 65% of sales. Emerson achieved annual records for both gross profit margin of 52.8% and adjusted segment EBITDA margin of 27.6%. Margin expansion was driven by strong price cost, higher mix of software and the benefit of cost reductions in synergy realization, offsetting a 20 basis point impact on gross profit from tariffs.

We made meaningful progress integrating AspenTech, realizing $50 million of synergies in 2025 and now plan to achieve $100 million in run rate synergies by the end of 2026, 2 years ahead of plan. Earlier this year, we completed all the actions to achieve our commitment of $200 million of run rate synergies for Test and Measurement.

Adjusted earnings per share of $6 was consistent with our guidance. Finally, we generated $3.24 billion in free cash flow, exceeding our August guidance of $3.2 billion and in line with our initial guidance, as we offset approximately $200 million of acquisition-related headwinds.

Our 2025 performance underscores our commitment to operating results and positions us well to continue investing in growth and returning capital to shareholders. Emerson's alignment with secular trends, leading technology and improving orders momentum reinforce our confidence in our 2026 plans.

I will now turn the call over to Mike Baughman to discuss our 2025 results in more detail and expectations for 2026.

Thanks, Lal, and good morning, everybody. Please turn to Slide 7. In for a more in-depth look at our 2025 financial results. Underlying sales growth was 3%. Growth was led by Software and Control, which grew 5%; and Intelligent Devices grew 2%. Our Process and Hybrid businesses were up 4% and were resilient throughout 2025.

Our Discrete businesses finished the year up slightly at 1% with lingering weakness in Automotive and Factory Automation. While our Discrete businesses accelerated through the year, year-over-year volume was down and represented about a 1 point headwind to Emerson sales growth.

Pricing contributed 2.5 points to growth as expected. Underlying growth was 5% in the Americas and 3% in Asia and the Middle East and Africa, while Europe was down 2%. Our backlog ended the year at $7.4 billion. Backlog was up 3% year-over-year due to second half orders growth of 5%, which positions us well for 2026. Adjusted segment EBITDA margin of 27.6% exceeded expectations and was up 160 basis points year-over-year. 50 basis points of this expansion was due to a favorable software contract renewal year in 2025 and the remaining 110 basis points of improvement came from positive price cost, the benefit of cost reductions and synergies from the Test and Measurement and AspenTech acquisitions, which more than offset inflation and tariffs.

Adjusted EPS came in at $6, a 9% increase year-over-year, and I will provide more details on the next slide. 2025 free cash flow exceeded our expectations. The free cash flow growth was driven by higher earnings and improved working capital efficiency, which helped offset approximately $200 million of transaction-related costs. Our 2025 free cash flow margin was 18%, up 140 basis points from the prior year.

Overall, these results underscore the strength of our portfolio, the resilience of our end markets, and our ability to execute in a dynamic macro environment.

Please turn to Slide 8, where I will bridge 2025 adjusted EPS from the prior year. Operations delivered $0.62 of incremental EPS in 2025, which included a $0.15 benefit from higher software renewals in the year. Excluding this benefit, solid execution from operations contributed $0.47, reflecting continued margin expansion, segment mix and synergy realization from Test and Measurement and AspenTech. Nonoperating items were an $0.11 headwind due primarily to pension of $0.09 and stock-based compensation of $0.02.

Please turn to Slide 9, where I will discuss our 2026 sales outlook by region. The resilient demand environment we are seeing informs our view for 2026 underlying sales. The Americas, India and the Middle East and Africa are expected to remain strong drivers of growth in 2026 with muted demand in Europe and China.

The Middle East and Africa is planned to grow high single digits, supported by a healthy capital cycle and significant greenfield investments. The Americas are projected to be up mid-single digits driven by sustained strength in our growth verticals and MRO. Asia is forecasted to be up low single digits, led by robust growth in India and momentum in Southeast Asia and Japan offsetting a flat China.

Europe is expected to be flat year-over-year. We expect growth to come from the trends that are benefiting the power, LNG, life sciences, semiconductor and aerospace and defense markets, which comprise approximately $6 billion of our $11.1 billion large project funnel.

Power, including nuclear, is projected to see robust growth as electrification, modernization of the grid and data center trends drive substantial investment. Energy security and self-reliance as well as energy transition commitments are supporting global LNG projects. Life sciences growth is projected to continue across greenfield projects and capacity expansions to meet demand for biologics and GLP-1s.

Semiconductor is also expected to perform well in 2026, with expansions in North America driven by nearshoring investments and government incentives. Lastly, aerospace and defense is set to benefit from investments in new space projects and increased government spending commitments.

Please turn to Slide 10 for an overview of our 2026 guidance. For the full year, we expect sales to be up approximately 5.5% with underlying sales up approximately 4%, supported by a healthy pace of business, meaningful growth in Test and Measurement and approximately 2.5 points from price.

We project Europe and China to remain weak. The year-over-year growth is also negatively impacted by about 1 point due to a software contract renewal dynamic, which I will discuss in more detail on the next slide. Full year adjusted segment EBITDA margin is expected to be approximately 28%, reflecting strong execution and continued margin expansion.

Tax rate is modeled at 21.5% for the full year. We are guiding adjusted earnings per share of $6.35 to $6.55 and free cash flow of $3.5 billion to $3.6 billion.

Turning to the first quarter. Sales growth is expected to be 4%, with underlying sales growth of 2%. Adjusted segment EBITDA margin is guided to be approximately 27%, and we expect to deliver adjusted earnings per share of approximately $1.40 in the first quarter.

Please turn to Slide 11 for additional details on 2026 guidance. I would like to take a few minutes to provide further granularity on sales growth and to explain some dynamics affecting margins and EPS growth rates.

Our Test and Measurement segment is planned to have high single-digit growth in both the first half and full year, while the Control Systems and Software segment is expected to be down low single digits in the first half due to a $110 million headwind from a lower value of software contracts up for renewal in 2026.

This headwind is projected to be $120 million for the full year. The underlying health of our Software businesses remains robust with ACV expected to grow 10%-plus in 2026, but having fewer contracts up for renewal adversely affects GAAP revenues. This accounting dynamic does not affect cash flows and reverses through 2027 and 2028 when we expect to see tailwinds from renewals.

The Intelligent Devices Business Group is projected to grow 3% in the first half and 4% for the full year, with sustained strength in MRO across core verticals. Second half growth is supported by backlog phasing and the timing of project shipments. Overall, Emerson expects to grow approximately 2% in the first half and 4% for the full year. Excluding the impact of software contract renewals, Emerson's growth rate is approximately 4% in the first half, 6% for the second half and 5% for the full year.

Please turn to Slide 12 for additional detail on adjusted segment EBITDA margin and EPS guidance. Our Q1 adjusted earnings per share guidance of approximately $1.40 reflects strong operational execution despite a softer sales growth quarter and a tough comparison to Q1 2025.

We expect EPS contributions from operations of about $0.05 and nonoperating items of approximately $0.04, offsetting a $0.07 impact from the software contract renewal dynamic just discussed. As a reminder, Q1 2025 adjusted EPS of $1.38 included the benefit of several dynamics such as discretionary cost containment and favorable project closeouts in Control Systems and Software.

It's also important to note that lower volume from renewals impacts Emerson's adjusted segment EBITDA margin by approximately 80 basis points in the quarter. For the full year, the renewal dynamic reduces adjusted EPS by approximately $0.15 and adjusted segment EBITDA margin by approximately 40 basis points. Operations is expected to generate about $0.50 of incremental EPS in 2026 with approximately 80 basis points of margin expansion from positive price/cost and the continued benefit of synergy realization from AspenTech and Test and Measurement.

Please turn to Slide 13 for a few comments on cash flow and capital allocation in 2026. As mentioned earlier, we are expecting free cash flow of $3.5 billion to $3.6 billion in 2026, representing approximately 10% growth, which will come from higher earnings and working capital efficiency.

During the portfolio transformation, our capital allocation was weighted towards M&A. Increasing the dividend has been a priority for the last 69 years, but the annual increases to dividend per share were minimal during the transformation. Now that the transformation is complete, in 2026, we plan to raise our full year dividend per share $0.11 or approximately 5%, which is a significant increase compared to prior years.

This raise marks the beginning of our 70th consecutive year of increasing dividends and underscores that long-standing commitment. During the transformation, we consistently completed base share repurchases of $400 million to $500 million per year. 2023 and 2025 were significantly higher because we allocated a portion of proceeds from divestitures to share repurchase.

For 2026, we intend to return approximately $1 billion to shareholders through share repurchase, which we have planned to be ratable throughout the year. We previously communicated our intention to pay down approximately $1 billion of debt in 2026, that is still the plan and reflects our commitment to maintaining our strong AA credit ratings. We ended 2025 with a net debt to adjusted EBITDA ratio of 2.3x and expect to end 2026 at approximately 2x.

With that, we will now turn the call over to the operator for Q&A.

[Operator Instructions] Our first question comes from the line of Deane Dray with RBC Capital Markets.

Maybe just start with some clarification on the software renewal. Is this an accounting change that was impacting the guide here or is it really like the timing of what your contracts were up for renewal? And then related, you called out a benefit in your 2025 bridge of $0.15. Is that related to this or is that separate? Because you are expecting to recoup this in '27 and '28 that you called out.

Yes. I'll start with the second half first, which is to say your understanding is correct, and thanks for the question on this contract renewal issue, it's an important dynamic that I want to make sure everyone understands.

So we have a portfolio of multiyear term license contracts that have renewal dates over several years. And each year, there are so many that are up for renewal. And this year, we had more than normal that were up for renewal, and that's what drove the $120 million increase that we're calling out on the bridges.

Next year, we revert to something more normal, but it represents about $120 million headwind in 2026 and it is an accounting dynamic. And remember, since these are multiyear term licenses, you recognize multiyears of the revenue at the time that you execute the renewal. And that revenue recognition pattern is one reason that the ACV, or the annual contract value, is so important because ACV has the effect of smoothing out that accounting dynamic.

And the other important reason to measure ACV is that it more closely approximates the cash that we can expect out of that portfolio in the next 12 months, so as ACV grows, the cash flows grow. So you have it right, that is the item that we're talking about. It's not a change in our accounting, it's not a change in the accounting rules. It's just an accounting dynamic that exist in revenue recognition for these multiyear term license contracts.

That's really helpful. And just to make sure I heard it correctly, there's no impact on free cash flow. Is that correct?

That is absolutely correct. And you made another point that I would like to reiterate, which is that this is a dynamic that will reverse in '27 and '28 relatively ratably over those 2 years.

Great. And then just as a follow-up on the Test and Measurement. This was above expectations in terms of orders. You called out some of the verticals. Is there anything else in terms of -- have you really turned the corner here because this was an expectation that you would start to see this, and you did highlight some share gains. But just any other color on the dynamics of that business would be helpful.

No, Deane, there's significant momentum certainly across the 3 categories that I described: Semiconductors; aerospace and defense, which has been relatively robust over the last 2 years to begin with. And then most encouraging has been the broad-based portfolio business and that's where the multitude of tens of thousands of customers sit.

It touches just about every industry macro that you can name. And seeing that resilience in that business and the return to growth there gives us -- and broad-based geography gives us the confidence that momentum continues and that our guide on Test and Measurement for 2026 is solid.

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

This is David Ridley-Lane on for Andrew Obin. Just a quick numbers question. Could we get the orders growth by process and hybrid, discrete and safety and productivity in the quarter? And any color that you could give on how first quarter orders are shaping up?

Well, I think from an orders perspective, process fibrin orders, to your point, I mean, they stayed resilient at mid-single digits. Discrete recovered to driven by Test and Measurement, which exposed in the Discrete markets into a high single digit and weights to that 6% orders growth that we that we reported.

S&P orders remained flat to low single digits in the quarter, and we expect good momentum to carry through into the first quarter of this year.

And then in fiscal '25, excluding this timing dynamic, which I completely understand is driven by ASC 606 and was a long-standing driver of how AspenTech's results were reported, but excluding that impact, you had core ops of 110 basis points margin expansion in fiscal '25, you're guiding for 80 basis points in fiscal '26. It would seem like you have faster revenue growth, less tariff impact, further Aspen synergies. Are there any offsets to consider thinking about for margins in '26?

No, I don't think so. You've got it right. As we look ahead, we've got the drag of the renewals that's about 40 basis points. We've got some synergies and the operations continue to drive about 60 basis points, which is what the operations have been driving for really the last 2 years, right in that 50 to 60 basis points range and that's the margin expansion that we consistently talk about driven by the Emerson management process and what we expect to continue into the future.

Our next question comes from the line of Andy Kaplowitz with Citigroup.

Lal, Mike, just digging a little bit more into that first half versus second half organic guide for '26. The growth in mechanics are what they are, but you also talked about the timing of shipments and how they support the second half growth. Are you expecting any sort of larger project order recovery change, for instance, in process markets to get you there? Or is it really just you have the visibility already in the pipeline and everything is -- just talk about the visibility there?

Yes, Andy, Ram here. Yes, we absolutely have the visibility and the momentum that we had in terms of orders in the second half phases that backlog into the second half of 2026. That's point number one.

Secondly, if you take out the software renewal dynamic, as Mike explained, the first half growth is 4%, the second half growth and for an overall growth of 5% minus the software renewal dynamic, which is the core growth you've got to look at and that sequential growth second half to first half versus that is about 11%, which is what we executed this year, albeit with a better backlog phasing going into the second half of next year.

So we feel relatively comfortable around the second half, first half guide and the software renewal dynamic is what shows up as the 2 and 6. But in reality, it's 4 and 6 for a weighted average through the year.

And there's obviously a lot of excitement about power markets. You gave us the data up almost 20% in orders in Q4; innovation, 30% for the year. Maybe you can give us a little more color on what you're expecting for '26? Obviously, there's a particular focus on nuclear. You guys have pretty good share there. Maybe you can remind us of that? And order growth was a little bit lower in Q4 than for the year, but do you expect acceleration in '26 in that end market?

Lal here. Certainly, we're excited about what we're seeing broadly, not just across generating capacity, the transmission distribution investments, which, as you know, impacts our Aspen business. We expect to continue to see investments across combined cycle in the United States, coal and nuclear in China and nuclear broad-based across Eastern Europe and the U.K.

I think the underlying dynamics of demand driven, of course, by data centers and by the age of the capacity that's in place today should give us a good and we project a very good 3- to 5-year run in this segment of the business at high single digits to low double-digit growth.

Our next question comes from the line of Steve Tusa with JPMorgan.

Just wanted to clarify. So is the first quarter -- the first quarter orders should kind of sustain this, I don't know, like the 5% to 6% type of momentum that you saw in the 4Q? Is that the messaging?

Yes.

Okay. Okay. Great. And then just on the bridges, it's hard a bit to parse out the software impact. But I think you have $0.50 of ops for the year, which I think is probably, I don't know, a 45% to 50% kind of core incremental. Am I getting into the right ballpark there? And then in the first quarter, you only have $0.05. Is there a reason why those incrementals may be a little bit weaker, kind of putting the software impact aside?

Yes. I think your leverage expectation is about right. And when you look at the quarter that way. When you look at first quarter, it's really this dynamic of last year being as strong as it was with that discretionary cost and some of the project closeouts and EBITDA merge in that quarter, I believe it was 28%, and so it's sort of a comparison dynamic.

Yes. We leveraged the 265% in the Q1 of '25, and it just puts us in a -- it's just a tough comparison, not just -- even if you take out the software renewal dynamic, it's a tough comparison for our base operations, just given the dynamics, Mike described.

Our next question comes from the line of Julian Mitchell with Barclays.

I just wanted to follow up a little bit more on the trends in Test and Measurement and Discrete, Automation. So I think in Test and Measurement, you're guiding still for high single digit growth later in the year despite the sort of pretty tough comp there. Maybe help us understand the visibility on that business. And then in the Discrete world, any updates on some of the different end market trends, please?

Julian, Lal here, and I'll start and I'll have Ram add some color as well. Certainly, we have a high degree of confidence in what we're seeing in 3 of the 4 Test and Measurement markets: Aerospace and Defense, Semiconductor and then the broad-based portfolio business. However, and this leads over into your Discrete question, the Automotive business continues to be very weak.

We'll continue to see weakness in the packaging machine making business, which is very Western Europe dependent, Italy, Germany, and of course, impacted in China in the U.S. as well. So that segment has been a tradition Discrete market, has flat to low single-digit range and you've got Test and Measurement in that high range that brings up the our broad Discrete orders. Ram?

Yes. And you said it. And I think from a geographic cut on the Test and Measurement side, very, very strong Asia driven by semicon and portfolio; a very, very strong North America driven by Aerospace and Defense, Semiconductors and Portfolio business; and Europe is probably our most muted region because that's where we have a disproportionate exposure to automotive and the EV side.

Though, the Aerospace and Defense piece in Europe as well as the Portfolio business is strong. And then in the core discrete business, as Lal described, North America is probably the market where we have good low to mid-single-digit growth in the core discrete business, but Europe and China remain weak in the factory automation and automotive space, as Lal described.

That's great. And then just my follow-up question would be around, I know in the past, you'd mentioned some of the project funnel was tied to elements such as hydrogen, clean fuels, carbon capture and so forth. I suppose, domestically in the U.S., the outlook there is worse today because of the subsidy environment changing.

I just wondered if that type of activity if you are seeing pushouts there yourselves and if it's represents much of your backlog? Or it was just something that was in the prospective funnel and never really came into the orders or backlog more fully?

No, Julian, thanks for the question. Nothing impacted in the backlog. These were projects that we've been highlighting as part of our funnel. There's been a significant reduction in the outlook of projects in this category on a forward basis. So we have adjusted our funnel accordingly, but none of it has been impacted in any backlog in the business.

So to give you a perspective, the funnel that we showed today at $11.1 billion has approximately $1.5 billion reduction in S&D projects. And so we've removed a large number of carbon capture and energy management projects. We retained those customer engagements that are still relevant at that point, but that's a very significant reduction in the value of the funnel related to S&D. And that's broad-based across North America, Europe and Asia.

And then just to add to that, Julian, the reason the funnel stays flat as we have seen a significant uptick in power generation, certainly LNG, and then continued build-out of the funnel in Aerospace and Defense and certainly Life Sciences. So overall, the funnel remains flat. But to your question, appropriately adjusted for the slowness in sustainability and decarbonization project, mostly in North America, but some in Europe as well.

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

I'm going to probably ask a steeper question on the accounting for AspenTech, so please bear with me here. Can you just explain why this is a onetime issue? And just confirm that this is more of a first half '25 renewal issue comping that as opposed to summing this year. So that's my main question.

And really just maybe just talk about the difference in accounting for renewal versus the new contracts and why renewals would have this kind of headwind?

Yes. Nigel, it's not necessarily a onetime event. It's again just how the renewal date stack up in the portfolio of these multiyear term contracts. And when you go into a particular year, there's going to be a number of contracts that are up for renewal and whatever that is, is sort of the revenue opportunity for that year. And we are certainly, in fact, working a bit to smooth that out, but historically, AspenTech was not concerned with the wrinkles that happened because of this accounting dynamic.

Again, I want to stress it's nothing new and it's not a different accounting. It's just the GAAP that is used on accounting for these contract renewal dynamics.

And Nigel, Ram here. Just to add to that. Now as you rightly pointed out, this dynamic is largely driven by the software renewals within AspenTech, and one of the initiatives we will continue to drive going forward is to manage the renewal dates as we renew these contracts to smooth them out in a fashion where we don't see these dynamics repeat as we move forward.

Certainly going to be a tailwind in '27 and '28 given the reset in '26, but we want to make sure that going beyond '28, we don't have another year where we see these renewals build up in a favorable fashion to reverse in the next year. So it's an initiative now that we're driving the integration of AspenTech that and the team at Aspen are driving. But it's a good question.

No. It's a dumb question, I'm sure. And then just thinking about that in the plan, the acceleration that's within ID from 3% to 5% first half, second half. You called out some backlog timing. Clearly, with that kind of timing, we're talking here about longer cycle projects. So I'm wondering, are these greenfield projects? And if you can give any details on some of the end marks just driving that acceleration?

Yes, Nigel, Lal here. Again, I'll reiterate a point that Ram and Mike made earlier, it's important to note that adjusted for the renewals, the first half to second half ramp is actually consistent with what we executed in 2025, which is a sequential 11% ramp-up, it would be 4% growth in the first half and 6% in the second half of 5% a year.

So that renewal dynamic because it is first half, predominantly first half loaded really impacts and skews that ramp-up on the underlying business. But to your point, we feel great about the backlog situation. We have good visibility in our Intelligent Device business to execute this trend that we forward.

And just the projects that you referenced that are loaded into the second half that we won in the second half of '25 are in Life Sciences, in Power, in LNG. Many examples that Lal had in his script, but these are the very same projects, primarily Power, LNG and Life Sciences that will phase into the second half of '26.

Our next question comes from the line of Amit Mehrotra with UBS.

Sorry, I dialed in a little bit late, so excuse me if this has been asked. But I wanted to talk about power gen, how that funnel is progressing? I imagine there's obviously a lot of electricity demand. Wondering if you could just talk about that and how much visibility you have? And kind of what -- at what point does Emerson enter kind of that power gen life cycle versus, say, a turbine?

Yes, thanks for the question. We are certainly energized by what we see in the power generation, distribution and transmission markets. Just in context of the funnel and the visibility that we have to the business, we added approximately $1 billion of projects into the $11.1 billion project funnel, that is capturing broad-based modernization and new capacity coming online over the next, let's say, 3 to 4 years.

The activity is very robust, not just in the United States but broad-based into Europe and into China in this segment. That's one area of China growth that we did experience in 2025, and we expect that to continue into 2026.

And just to give you a perspective. Ovation today controls approximately 30% of all the power generated in the world, over 50% in the United States, over 30% in China, over 30% in Europe. And we have great visibility well ahead because obviously, we're upstream around turbine and controls to the construction cycle. So winning those conversations today early with the utilities around the world as they plan out their investments.

Great. That's helpful. And just one quick follow-up on Software. I know you have this renewal dynamic happening. But I guess I just wanted to ask, how Software annual contract value is trending versus your installed base? How do you expect that to kind of perform going forward? How do we think about like attach rate trends there?

Yes. Our ACV, we shared the data 1 point -- finished the year at $1.56 billion, up 10%. We expect that to continue into another double-digit year next year. So very, very solid in terms of adoption of Software and the cash flow trends are trending with ACV with double-digit growth, and we're operating at a rule of 45 when you look at cash flow and ACV growth from a software perspective. So very positive trends and consistent with the long-range plan we laid out when we brought AspenTech in.

Our next question comes from the line of Brett Linzey with Mizuho Securities.

Just wanted to come back to the power discussion 1 more time. So you gave some great examples on the traditional side and talked about nuclear being robust. I know Emerson's valve and instrument content is about 90% of the world's nuclear reactors. Is there any way you can sensitize the content per new reactor or anything you can add on the aftermarket side that you can capture there?

Yes. So in a nuclear reactor or a nuclear power plant, I mean, Emerson typically, if you get the full scope, which is obviously, the control system, the instrumentation of the valves, we get $40 million of content for a complete greenfield nuclear reactor with an opportunity to deliver more than $40 million, $40-plus million over a 10-year annuity from an MRO life cycle services perspective. So that is kind of the scope we operate in nuclear, a lot of valves, instruments and control systems as part of that automation scope.

Okay. Great. And then maybe shifting back to Ovation. You saw the strength in orders this year, greenfield modernization. Is this predominantly the power vertical driving this or are you starting to see some sales synergies between Aspen and the legacy Emerson as you mine that installed base?

No. Certainly -- it's a good question. Certainly, as you may recall, in the GGM business, there are absolute synergies between Ovation, which is inside the valves to generating valves in the distribution and transmission networks that utilities owned throughout the world. So we are managing these on a broad account basis, covering both opportunities because very honestly, the distribution and transmission network is in a state of upgrade as well.

And if you're going to put the generating capacity onto the grid that we're talking about, we certainly see the investments going into the SCADA systems, the software systems to manage those loads within the grid.

Absolutely. And I think from a customer perspective, a lot of synergies of the same customers we deal with on the generation side are investing Monarch to upgrade their transmission and distribution systems. And then from a product perspective, we're developing Ovation, for example, in substation control that extends beyond generation into transmission and distribution and symbiotically works with Monarch to deliver value for our customers.

Our next question comes from the line of Andrew Buscaglia with BNP Paribas.

Yes. I wanted to drill down a little bit on the LNG side of the story. Are you able to quantify what portion of that backlog is LNG? And then do your broader comments around Europe and China weakening impacts your view of what's likely to move forward in 2026? .

Yes. Your first question was what portion of our $7.4 billion backlog is LNG?

I'm thinking yes, that the -- computing with the $11 billion you've put out there?

Okay. All the $11 billion, I think LNG is what about $2 billion -- yes, $2 billion is LNG since you asked of the $7.4 billion of backlog, about $350 million is LNG. And then your second question was dynamics around Europe and China?

Yes. The kind of the...

At this point, obviously, when you talk about China, the core business that we do today, chemical, petrochemical refining is really what's muted, but we're seeing pockets of opportunity Certainly, power has remained strong. Our export business in China has remained strong. Shipbuilding and Marine, which is a unique market for us has remained strong.

And then T&M, which has a decent sized business in China has seen strong recovery. So there are pockets of opportunities. I would say, we're prudently and conservatively planning for a flat China. I think it's a wildcard on China recovery. There is a possibility it could recover into the second half of '26, but we haven't built that into our plan.

Similarly in Europe, I think that the concerns around sustainability, decarbonization, bulk chemical, automotive and factory automation remain. We haven't seen a catalyst to indicate that those will turn in Europe. So again, a plan for a flat Europe. But certainly, activity around LNG, which is EPC driven in Europe, life sciences, power and specialty chemical is where we will see the opportunity going forward in aerospace and defense.

Got it. Maybe one more on your capital allocation in that pretty robust cash flow. Your stock is still rather cheap, probably relative to what you'd expect heading into the new year. So maybe can you talk about your balance between repo and expectations for M&A?

Yes. We laid out the $1 billion expectation around repo. As far as M&A, that's opportunistic and there's nothing right now that's in sight that we would say we're going to allocate to. So that's what 2026 looks like.

Thank you. Ladies and gentlemen, this does conclude our time allowed for questions and will conclude our call today. We thank you for your interest and participation. You may now disconnect your lines.

All right. Steve Tusa, electrical equipment, multi-industry analyst here at JPMorgan. In case you don't know, we're very happy to move on with Emerson Electric. Probably maybe change that name at some point, maybe Emerson Automation or think about that. Yes, think about that.

I'll happen. I'll happen, Steve.

President and CEO, Lal Karsanbhai; as well as CFO, Mike Baughman. Guys, thank you so much for being here. I have obviously a bunch of questions but maybe I'll just hand it off to you for maybe an intro and any kind of messaging around what you're seeing out there in your businesses macro-wise or state of affairs.

Yes. Thank you, Steve. Great to be here. Thanks for the invitation. I really have enjoyed the meetings today and thank you, everyone, for attending our sessions. No, look, I -- first of all, maybe I'll begin by just saying that I'm very optimistic about the future of our company. We've undergone a very significant transformation in our portfolio over the first 4.5 years of my CEO-ship. We're now entering a different phase. We've completed that. We now have created a company that I wanted to be CEO of a global automation company with a very differentiated technology stack, serving the world's most essential industries. The growth opportunity for this company is very different from the Emerson of old in a framework of 4% to 7%. We've improved gross margins in the company by 1,000 basis points. We've increased EBITDA margins in the company by 700 basis points. And we have a company that generates phenomenal cash flow and is highly differentiated from a cash flow margin and ultimately getting over to the 100% cash measure as well. So I feel really good about that.

In terms of the environment, secondly, look, this has been a year characterized by geographies and verticals, some of strength that got stronger as the year went on and some of weakness that got -- either stayed weak or got weaker as the year progressed. Most notably, on the strength side, the United States started strong, got stronger as the year progressed. Middle East and Africa, very strong in India. Those 3 markets, those 3 geographies across a cross section of verticals continue to be very strong. On the weak side, we planned a positive China, we end up with a negative China. Europe, we planned a positive Europe. We end up with a weak Europe. So those markets are not de minimis in size for Emerson and they certainly hurt us as we navigated the year. So right now, Steve, as we have a few days left in the fiscal year, thinking about the guide that we gave for the fourth quarter.

On the orders, we guided 5% to 7% on orders. We will likely come in at the lower end of that guide in the fourth quarter. The reason is weakness in Europe progressed through August and into September. China continued to remain very weak. On sales, we guided in the quarter 5% to 6%. We are likely going to come in at the lower end of that guide. And the reason being the book-to-bill that we expected in the quarter did not materialize and came in weaker and we weren't able to convert to the higher end of the sales guide. On earnings, we expect to be at the upper end of our guide because the execution in the company despite the lower sales guide -- lower end of the guide on sales continues to be incredibly strong. So that's how we're seeing it come in at this point in time with, as I said, 14 days to go. Of course, in November, we'll see where everything falls in.

Well, thanks for the color because most companies just say September is a big month and we'll talk to you in October. So...

It is big, though. But again, we have phenomenal -- and Mike can speak to this, visibility in our businesses and our financial processes. As you know, we do close the books of this company every month. And we run processes every week of the month to understand where the quarter falls in, right?

Yes. Absolutely.

Okay. So we can just end there and go get a cup of coffee or something. Let's just dig into the details. So you mentioned the geographies. Maybe if you talk about the verticals and what you're seeing in those various geographies and what's just the incremental rate of change to get you to the low end of the range on sales and orders, what sort of verticals?

The 3 verticals on the upside that continue to be strong for us are power. And you certainly understand all the dynamics around power, particularly in North America, China, that's one of the bright spots, in China. And I think you know the story there in terms of the Ovation growth and the 40% orders that we've seen. Now that's a multiyear type of strength that we see going out as well. If you think about LNG, we continue to see strength in LNG, driven by energy security and just generally energy needs, strong in the U.S., strong in the Middle East. And Lal talked about the strength in those markets. Certainly, LNG is a big part of that. And then life sciences and continue to see good strength in life sciences in the U.S., Europe and one of the small bright spots there. So that would be on the upside. Factory automation continues to be kind of improving but not yet strong. T&M recovering, as we've talked about as well with 20% orders last quarter or 16% last quarter, expecting near 20% this quarter. So -- and that is still going to be around there but perhaps not quite as high as Lal talked about.

And so when you think about the weak spots, I guess, on the -- I guess, some of those would be on the traditional process side, if power, LNG, life sciences are the good guys, factory automation improving but maybe not to the extent, what are you seeing in more of the kind of core process industries, refining, upstream oil and gas, chemical, acknowledging it's not as big of a part of your portfolio as it used to be?

Yes, solid, but perhaps not as solid as we had expected. But still positive.

But not getting worse, you'd say.

No. The one market there that remain -- was weak coming into the year and remained weak was the bulk chemicals. which really impact the U.S., Germany and China. And that's an overcapacity. And honestly, I don't foresee that to turn positive as we go into 2026. Automotive, on the discrete side, very weak, impacts us both in the heritage discrete business at Emerson, but also in T&M. T&M was positive in automotive last quarter but that's really a comparison -- easy comparison basis. There really isn't enough activity in battery test, which is overcapacitized or in ADAS at this point. Beyond that, the refining business for us is an MRO business. It's an -- there's no capital deployment that we see there. So it's really a replacement business. Beyond that, semiconductor showing some good signs of life. That's about it.

And European machine builders, any visibility into that channel getting better? I mean, I know those guys have been destocking for a couple of years and maybe that's over but clearly no real uptick.

Not real uptick. You understand the bulk of what we sell is made to order. So we have some but not much that sits on shelves, made to stock. But having said that, we see the OEM activity on machine makers relatively directly and we have not seen strong acceleration in those markets. If you just think about consumer weakness in China that fueled a tremendous amount of machine building in Germany and Italy, those markets are really weak. And they haven't reflect -- they continue to reflect into the machine making business.

And then I know we don't use this term anymore, the KOB but the MRO seems like it's probably in line and this is more on the greenfield -- really the greenfield than brownfield side.

That's right. That's right.

Okay. Got it. Maybe just touch on -- so I guess, the orders funnel. Last quarter, down a couple of hundred million bucks, I think, because of the sustainability business. Are we -- have we kind of cleared out all that sustainability-related business that could be cleared out? Or does the funnel continue to kind of just fade a little bit here as the bulk of the business that was expected to happen? I mean it's really across the industrial economy. There's this pipeline that people have been talking about and it's not really moving. Do we see that continue to fade? Or is that at kind of more of a stable level?

No. As the quarter went on, I certainly continue to see erosion of sustainability projects at the customer level, particularly in the United States. Now those projects that were in our funnel were relatively small in scale. So these $200 million of projects that came off the funnel last quarter, there were over 50 projects that they comprise. So they're relatively small. These are not large...

Yes. These are mega projects.

Mega projects. But we continue to see erosion in the United States around sustainability and decarbonization. Europe, a little more stable but certainly the U.S.

Yes. That makes sense with the, I guess, the political and tax environment we're in, when it comes to that stuff. Just one more on orders. Will book-to-bill -- will you build backlog? Will book-to-bill stay above 1? Or does backlog -- you eat a little bit into backlog?

Typically it goes down sub 1 and...

Typically and seasonally. Seasonally.

Yes. yes.

Yes, slightly, I'd say, south of 1, right about 2 for the year.

Yes. Okay. When we think about the -- I guess, within T&M though, that sounds like it's more, I guess, in line if semis continues to come back a little bit, aero remains probably pretty strong. Maybe just talk about T&M and how you see that advancing. And the order rates are very strong because of easy comps. But how do you see that advancing?

Yes. What was interesting at T&M, if you look historically at T&M recoveries in cycles, the portfolio business recovers first. That's comprised of over 30,000 customers in a vast segment of the industrial complex around the world. That did recover first, both first sequential -- quarter-over-quarter then sequentially, followed by what was -- stayed strong essentially since -- over the last 3 years, which is aerospace and defense and now a recovery in semiconductor. The mathematics on the automotive, that's the pure math. There isn't any substantive recovery there. But we continue to see that accelerate as we've gone through the quarter. It was every market, every world area in the third quarter and we expect that to accelerate as we go into the fourth.

So that would be the portfolio business or the total orders for T&Ms?

Total orders. Total orders. [indiscernible]

And portfolio is continuing to come along. So that's a pretty good sign.

Very good sign. So we're pretty excited to see what's going on in semiconductors and the overall T&M portfolio.

So what do you think is going but before we kind of like turn the implications maybe beyond this year, what do you think is going on out there in the industrial economy? How are you guys talking about things in the boardroom? Decision-making seems to be pretty slow. Obviously, all these uncertainties.

One of the things that we focused on is, what we're calling the Age of America. And I don't -- I mean that very significantly that there is an opportunity here of investment in the United States that is unprecedented. If you think about the factors that have been implemented and decisions made by the administration around energy policy, power generation, life science and semiconductor near-shoring, corporate tax policy, depreciation on investments. There's a whole collection of things that will drive investment in the United States. And we believe because of population dimensions, just number of people that automation will play a main, main driving factor in those investments. So we feel very well positioned there.

We're also speaking about the position of the company in the Middle East. We've made significant investments in manufacturing in places like Saudi Arabia. We continue to invest in India, which we continue to see as a pathway to $1 billion. And in a world which is going to be very different, Steve, over the next decade, in China. China, which we're in our 46th year of, grew on average high single, low double digits over 45 years for Emerson. But I project that the next 10 years, possibly the time or shorter that I'm CEO, China will be a mid-single-digit grower. And so we have to prepare for what that means for our China structure in terms of cost, how we're organized but also what other geographies can supplement that growth.

Right. I may still be here in 10 years, so we'll have to come back and do this again at that point.

LaI was wrong. It didn't grow.

So when we think about that outlook, what -- your order rates are, I guess, decelerating a little bit. And I know you guys have equated those order rates to what -- how you think about next year. You guys have made some comments about these order rates support that trend line, 4% to 7% next year. Does what you're seeing at the end of the year color the picture at all as far as growth for '26? Is there a little more caution around that growth?

No, to be honest with you, I think process, hybrid profit will come out in the mid-single digits still as we finish the year. Discrete will accelerate. You've talked about T&M here. I believe -- and we'll get to this in November, I'm not going to guide '26 but that we'll guide inside of that framework.

Inside of the 4% to 7% framework. Okay. Okay. One last one for you. You mentioned all these tailwinds. How are you guys thinking about your investments? Are you looking at -- you've obviously got the positives but then you've got the negatives of tariffs and trying to manage that. It seems like corporate America has, that uncertainty is currently outweighing all these positive factors. How are you guys thinking about that in your boardroom?

Yes. So we will continue to spend where we need capacity. And we usually have a handful of big projects every year that accommodate capacity that we need and we'll continue with those. We're -- we've got the confidence to do that and the capital intensity of the business, as you know, is 2%, 2.5%. We expect to continue to spend CapEx at sort of that level. We will have sufficient cash flows to continue to spend on R&D at that 8% level and we'll continue to do that and see good opportunities there. So we are continuing to invest.

But you're not necessarily onshoring, so to speak, whatever kind of minimal capacity needs you have, like you're not onshoring?

No. Look, we're very regionalized as a manufacturing and a supply chain organization, America for the Americas, Europe for Europe, China for China, India for rest of Asia and the Middle East and Africa. So we feel really good about that structure that really has taken us 20 years to build and was advantageous to us through the pandemic, of course, because we're not putting relevant material on boats or airplanes. And it's become really advantageous to us, as you've seen in our tariff exposure in this period of time. So we feel good about that structure. And as long as there's some semblance of a North America trade agreement that is inclusive of Mexico, which -- and our products are generally, as you've seen, comply with USMCA, then we're okay.

Right. Until he decides to pull out a few components and tell everybody that those are not anymore -- I mean it's day-to-day.

we'll manage accordingly.

On the -- one last one on kind of the growth outlook for the core business outside of software. These growth markets, power, LNG, life sciences and then aero, you can throw in there, I guess, as well. Are these kind of the pillars that you look at for the next 3 to 4 years? And then the others are just really much more of a cyclical element as opposed to these that are really sustained multiyear above average.

I would add, I would certainly suggest LNG tied to energy security and affordability, certainly, life sciences, whether that's new drugs, GLP-1 investments, biologics, personalized medicine or nearshoring or reshoring of life sciences, certainly power and that's both the generating and the transmission distribution. So it's a very large swath of market investment, which represents 10% of our sales. And then on the discrete side, I think you're right. I think aerospace is a big deal. I think that's going to continue to drive growth. Semiconductor will be in a very important period of time as well. I suggest those 5...

[indiscernible] something like a stage of cycle. Power is probably early, life sciences, LNG, mid but still has legs. So, yes.

Yes. No, the power business here is underappreciated for sure. It's been always a strength and it's coming back really strong, obviously. Moving over to Aspen and the strategy there. Maybe just talk about how you look at that business, think about, I guess, the performance next year, there's going to be maybe a little bit of a disconnect between ACV and revenue and earnings. Maybe just talk through that a little bit because I think there's still a bit of a lack of visibility for people on how that's trending. And then we'll talk about the strategy there.

Sure. No, look, I feel really good, really good execution this year and we'll continue as we go forward to share with you that visibility through the ACV numbers, which is the best, most credible way that we can put a performance of a software business in front of our investors. And we'll manage through next year's guide when we talk in November as we look at ACV to revenue, what the impacts there are. But certainly feel really good about a very strong asset there.

Absolutely. And the ACV growth, as you know, has been high single digits there. And yes, there is the disconnect, Steve, between the GAAP revenue and the ACV at times. Again, it's $1.2 billion of the total. So it's not quite as big within the $18 billion in total. But certainly, it was a good year for us.

Yes. This year was very good.

Was very good.

Maybe talk about Aspen as part of your Boundless Automation initiative, virtual DCS, maybe in a little bit of a dumb down terms to help explain it. But this is a key part that I think people need to probably pay more attention to as far as your differentiation.

Yes. And I think the best way to think about it is many companies, inclusive of ours but many companies, many of our customers have undergone or tried to undergo digital transformation journeys over the last decade or so. Most of those have failed. And the reason they failed is because the data hasn't been accessible across the enterprise. Data exists. Most of it's not used but it's typically siloed and organized by department. To truly take advantage of a digital transformation journey that will optimize the facility, increase safety, productivity and profitability, you have to first start by having all your data in one place and all your data in the same language. So creating that unified data fabric is at the core of the vision of Emerson AspenTech. The large job that we won with Total is exactly that. Before we can start optimizing performance of an individual plant, I think it's for the enterprise value, important to have that contextualized data in one place.

Secondly, you have to ensure that you have the latest Zero Trust cybersecurity elements around the processes. So that's an element that we're driving into the construct of the data with our Inmation software. And then thirdly, it's the ability to take what has been a hardware-centric DCS control system and turn it into a software-enabled hardware agnostic system. Can you run I/O out of a server? Do you need controller boxes? And the processing capabilities of blade servers versus controller boxes, not only is it significantly lower cost but higher productivity and processing speed. So that's the overall vision. That's what we can do with AspenTech and Emerson and we're very excited. We've been rolling out some of these products already, the edge device, contextualize some of the data already and then, of course, the data fabric with Inmation.

What industries do you expect this to penetrate first? And we're obviously -- just to be clear, an inning [indiscernible]

Yes, we're warming up at the batting cage, I think, on that analogy. But Total is a leader. What they did is there's a visionary in that company, a digital officer. She has a vision for the enterprise. She convinced the CEO and the CEO convinced that Emerson was the best positioned company to deliver on that promise. Everybody is watching our implementation at Total. It's very important, obviously, for us but for the industry as a whole because it's a game changer. We continue to have very high-level conversations with other customers but we're -- that's across multiple industries, the traditional chemicals, petrochemicals, life sciences. And we believe there are opportunities within power generation industries as well.

Yes. Siemens has been talking about this for a couple of years and they did an implementation with Audi. And it's still very -- customers are risk averse. They -- so it takes a little while for this stuff to catch on.

One of the things that we stressed with Total is that we're completely agnostic to the control system. So if you walk into Total and I'm going to make up a number, it's not correct but take it as directionally correct. And across their facilities, they may have 100 distributed control systems. Well, of the 100, less than 20 are DeltaVs. The other 80 are everybody else's. That's okay. That's okay. It doesn't really matter to -- because what we're going to do is, we're not going to ask them to replace any of those. If you take that approach, it's going to create huge barriers to investment and cost. We're going to layer the fabric right on top, utilizing investments that have been made over time, whether that's your [ Pi Historians ] or your DCSs and then use that data to drive the optimization software that sits on top of it in their enterprise-wide clouds.

So moving on to margins. Clearly, from the commentary today, the margins are still -- I would assume the EPS at the high end of the range is a segment margin -- a bit of segment margin upside, not like below the line like tax or something like that, check the box on that question.

There's a mix, but yes, segments are performing very well.

Okay. Any implications from the Section 232 component tariffs that were announced in August? I mean it's probably too late in the quarter but maybe for next year and any moving parts there?

Nothing we see that's significant there, Steve.

So the incremental margin has been fantastic the last 2 years. I think your current guidance is [indiscernible]. Yes, something like that. It's so high, I can't even really contextualize it. But what is the normal incremental margin that we should think about going forward? Your gross margins are fantastic, mid-50s-ish, something in that range.

52-ish.

Yes. So 52-ish. Typically, I think about incrementals as gross margin minus some investment. So maybe just what is the normalized incremental we should think about? Because I don't think it's 70 but [indiscernible]

It's been a phenomenal 4 years for us in terms of the margin. And what's interesting and I'll answer your question more directly. But what's interesting, Steve, is if you look about, I'd say 1,000 basis point improvement in GPs, 600 basis points came from the M&A activity. 400 basis points came from the legacy Emerson GP improvements. If you look at the 700 basis points of EBITDA improvement, $600 million of those came from legacy Emerson EBITDA improvement. The work that we do every day to drive cost reductions, to drive SG&A leverage, balancing the innovation investments and other things we have to do in the company, $100 million of it came from the M&A.

So what's the difference between how you're operating or the former management team was operating before and what you're doing now? Is that a little more price, being a little bit tighter on the costs? What -- I mean, price has definitely been a factor for everybody.

Yes. But we were always price positive in the automation business. It was our HVACR business that had fluctuations in price. I will say that Emerson, you could go back 40 years at this company, has managed costs incredibly well, arguably. The challenge for Emerson was the lack of growth. That's which we try -- we're addressing with the portfolio. But the cost management has always been a unique piece of how this company has been managed.

Yes, the margins have always been pretty.

Absolutely. Absolutely. Now to answer your question more directly, I think an expectation somewhere around the 40% is the right expectation on incrementals.

Okay. Going forward. And that would include, obviously, Aspen and whatever growth, whatever growth you're getting there. That's an all-in segment incremental.

Correct. And we'll -- look, Steve, we have a Capital Markets Day in November, which we've announced. We'll certainly come in and lay out that framework, growth, incrementals, expectations on earnings, et cetera but that's the number to be thinking about.

And as -- can we think about in the near term, a more normal year? Or is there still an unusual amount of tailwinds into next year from a segment margin perspective?

I think next year, you should be thinking about more of a normal year.

Okay. How do you -- this price discussion, what is price in software and in control? And I get what price is in Intelligent Devices and T&M. But in Software & Control, like what is price?

Escalations. So as you sign a contract, there's generally pricing escalations. And so that would be how we think about price in that business.

And if it's a 2- or 3- or 4- or 5-year contract, those escalations are built in by year.

That's right.

Right. And as far as the mix next year, I mean, I would assume that with the brownfield and greenfield, stuff maybe not growing quite as fast, that mix impact should be more -- less of an issue than perhaps if it was inflecting off of the bottom.

Should be still in that -- for MRO business? Yes, still be in the 60s and the low 60s.

Okay. And as far as the different businesses and the degree of margin opportunity, when you look at T&M versus Software & Control versus ID, where do you see the most opportunity? Or is it going to be pretty broad-based across the portfolio?

So Steve, I think the right way to think about it is, we did a lot of work at T&M on profitability. We did $200 million of cost takeout, which has largely been executed by the team. That positions the company now with -- we'll come out and guide the top line sales in November but assuming a high single-digit, mid-single-digit to high single-digit sales growth to leverage pretty strongly. We stay committed to the 31% EBITDA margins that we talked about for Test & Measurement and I think we'll be well on our way to get there. So those are very important.