Lal Karsanbhai
President and Chief Executive Officer at Emerson Electric
Thank you, Colleen. Good morning. Today marks the anniversary of my fourth year as CEO of Emerson. I reflect on this time with tremendous admiration and gratitude for what we have accomplished as a team to deliver on our collective vision. Thank you to the Emerson Board of Directors for your trust and support. To the management team for your commitment and energy and most importantly to the 70,000 Emerson employees around the world for your dedication and deep care for our customers, our communities and each other. All of you make me better. Yesterday, alongside the Emerson Board of Directors, employees, community leaders, local CEOs and Emerson retirees, we held the grand opening ceremonies for our new global headquarters in St. Louis. It was an exciting day. The modern offices align with our work -- aligned our work environment with the industrial technology company we created. An environment that fosters innovation, collaboration and inclusiveness. Thank you to the Emerson leaders who brought our new space to life. I remain as energized as I was on February 5, 2021 about the future of our company.
Please turn to Slide 3. We are excited about our Q1 performance and the outlook for the year as healthy market fundamentals and our Emerson management system have positioned us to capitalize on value-creation opportunities. Our process and hybrid markets continue to demonstrate stable demand as secular drivers propelled continued investment in automation technology to drive efficiency, reliability and safety. Energy security, nearshoring initiatives and energy transition commitments are driving sustained spend in LNG, life sciences, power and metals and mining. We saw sequential orders improvement in our discrete businesses, although the amplitude was a little softer-than-expected as momentum in industrial, semiconductor and discrete MRO was offset by muted performances in automotive and factory automation. We are expecting discrete orders to turn slightly positive in Q2 with a more meaningful orders ramp-in the second-half. We saw robust underlying demand for our software solutions across the portfolio with 10% growth in ACV or annual contract value, led by double-digit growth from control systems and software. Emerson again executed at a world-class level and demonstrated the profitability of our transformed portfolio as margin, leverage, adjusted earnings per share and cash-flow all exceeded our expectations. Q1 underlying sales were inside the guide.
Now I'll go into more detail on the next slide. We remain confident in our ability to deliver our 2025 plans and are energized by the robust operational start to the year and sustained high-level performance. We are pleased to reiterate our guidance for underlying sales, adjusted earnings per share and free-cash flow with outstanding execution offsetting the profitability headwinds from the large movements in FX since our initial guide. Additionally, we are increasing our expectations for operating leverage for the year to the 70s from the mid 40s. The growth and profitability of the Emerson portfolio is evident, supported by our exceptional team, world-class technology and differentiated Emerson management system. Last week, we took a significant step forward in the final phase of our portfolio transformation by reaching an agreement with AspenTech under which Emerson would acquire all outstanding shares of AspenTech common stock not already owned by Emerson for $265 per share pursuant to an all-cash tender offer. You can find our comments regarding the AspenTech agreement and pursuant tender process in our January 27 press release and we will not be commenting further until appropriate. The strategic alternatives process for safety and productivity is still underway, and we will provide an update when appropriate.
Now, I want to spend a few moments to talk about tariffs. In 2018, the United States enacted Section 232 and Section 301 tariffs, primarily targeting exports from China. At that time, we acted immediately to use price and surcharges to protect profitability. And we also embarked on a program to derisk our supply-chain for raw materials, sub-assemblies and finished goods. The impact of those tariffs was de-minimis due to our swift actions and ability to capture price. The current tariff situation is fluid, but based on our supply-chain regionalization strategy, learnings from prior tariff responses and planned price actions, we feel very good about our position. Starting with China, we do not expect a material impact based on actions taken since 2018. Next, we expect the impact from Canada to also be de-minimis as we do not have any material exposure there. Last, the situation in Mexico is evolving and we are prepared for a variety of scenarios. We are ready to implement price and surcharges to protect the P&L commitments of the company.
As these assumptions are embedded in our guide, please turn to Slide 4. Q1 once again showcased Emerson's ability to consistently execute. Underlying orders were up 1% year-over-year, led by healthy process and hybrid markets, which were up low-single digits despite a difficult comp from the prior year, which benefited from the timing of mega project bookings. Orders growth was led by robust demand in the Middle-East and strength in the US, both from MRO business and several project awards. We saw exceptional demand growth in our power business, as well as continued strength in energy and energy transition projects globally. Chemical in the Middle-East and Americas continues to see strong investment from capacity expansion and modernization efforts. Demand in China remained muted as strength in power was offset by weakness in chemical and discrete end-markets. Underlying sales were up 2%, led by sustained strength in our Process and hybrid businesses, which were up mid-single digits.
We saw healthy activity in power and energy markets, globally with sustained capital project momentum as customers are moving to meet the demand for energy security and affordability as well as increasing electricity demand. Robust project activity in the Middle-East offset softness in Asia, and we saw strength in North-America MRO and Latin-America broadly. MRO also performed well in the quarter, representing 64% of sales. Gross profit margin was a record 53.5%, reflecting the value of our transformed portfolio. We also delivered record adjusted segment EBITDA margins of 28%, a 340 basis-point improvement driven by strong operational performance, including price-cost management, mix and the benefits of cost reductions and synergy realization. This profit performance, in addition to the impact of FX, drove our operating leverage significantly above our guide. Adjusted earnings per share exceeded expectations as $1.38 was above the top-end of our guide and up 13% year-over-year. Emerson also delivered strong free-cash flow of $694 million, a margin of approximately 17% and up 89% versus Q1 2024. Additionally, Emerson completed approximately $1 billion of share repurchase in the quarter as guided. Mike Bachmann will provide additional color on our financials in a few slides.
Please turn to Slide 5. Emerson's innovation and differentiated product portfolio continues to be recognized by our customers and industry experts. And I'd like to highlight two recent awards recognizing our Delta V business. In December, Emerson's Delta V Edge environment was one of 10 products recognized as a 2024 Processing breakthrough product. Processing's annual award honors innovative technology solutions that made significant contributions to increased efficiency, productivity, safety and profitability in industrial processing operations. Delta V Edge Environment was selected because it is its first-of-its-kind integrated software solution to help customers access and contextualize data to improve enterprise operational performance. It also enables customers to run AI tools on the edge, moving the compute process closer to the intelligent field to make better use of their data. We also recently released Delta the Edge Environment 2.0, which now supports batch data integration to help life sciences, chemical and other batch processing industries bridge the gap between OT and IT applications. Delta B Edge Environment 2.0 provides secure contextualized DCS data to help customers deploy advanced analytics, AI and machine-learning at the edge or in the cloud to make better operational and business decisions.
This release is another step forward in our vision to boundless automation as it helps to eliminate data silos and drive competitive advantage. Emerson was also awarded the 2025 IoT Breakthrough Award for Industrial IoT Innovation of the year for its Delta V workflow management software. This year's program attracted more than 3,850 nominations globally. And the award recognizes Emerson's next-generation software as a service solution to help life science companies more efficiently develop, scale and manufacture life-changing therapies. Delta V Workflow management provides a cloud-based solution with simple recipe authoring, execution and electronic data capture, which helps life science customers scale and deliver drugs to-market safely, efficiently and quickly. Emerson has been recognized every year-by the IoT Breakthrough Awards since their inception due to our industrial technology portfolio driving innovation across the world's essential industries.
Please turn to Slide 6. We see significant opportunity in front of us for LNG. When we announced LNG as part of our energy transition growth platform in 2022, we expected the current wave to add approximately 250 million tonnes per annum of operational capacity, predominantly across North-America and the Middle-East and Africa. While we are approximately two-thirds through the initial 250 MTPA, we are seeing large incremental opportunities as additional projects are announced to meet the world's growing demand for gas. LNG will continue to play a large role as a transition fuel and will also benefit from a rising demand for power generation. An important milestone in the LNG project timeline is when an EPC is selected because this typically starts the process to award automation, which can take-up to a year. In 2024, only 18 MTPA was awarded to EPCs, partly due to the US moratorium on export licenses.
The LNG project pipeline continues to see significant growth and we have solid visibility into a potential 80 plus MTPA per year being awarded to EPCs over the next three years as the moratorium has been lifted and the LNG wave is proving to be larger than we had initially expected. These are large complex projects in which our differentiated portfolio, global scale and demonstrated project execution capabilities enable a strong value proposition for customers. We continue to see an opportunity for automation content of approximately $10 million per MTPA of liquefaction across our leading valve, instrument and control system and software portfolio. We have continued to see a win rate of approximately 50% for the full portfolio and greater than 50% for control systems in large LNG projects and are seen as a premier automation supplier globally. For example, around 70% of the world's LNG flows through Emerson Valves and we have won control systems on six of the last 11 projects awarded. Given the incremental opportunity for projects expected to move forward in our project scope. We see a potential for greater than $1 billion in Emerson orders over the next few years. We were recently awarded one such key win, Cedar LNG, a floating LNG facility in British Columbia. LNG is a partnership between and the Heidland Nation and is being executed by a leading EPC, Black; Zeach. Emerson will provide our leading technology from across the automation stack, including valves, instruments, control systems and optimization software. Emerson was selected through our demonstrated FLNG expertise and global reach.
Please turn to Slide 7. As we continue -- as we communicated last year, power is an area where we have seen strong orders growth as the fundamental opportunities in this sector continue to accelerate. As such, we are now classifying traditional power as a growth platform for Emerson. Power and renewables represented approximately 10% of sales in 2024 and Emerson is poised to capitalize on positive trends across the power landscape as global project investment continues to increase in response to rising electricity demand forecasts and grid complexity. Installed renewable capacity globally is expected to triple by 2030, taxing an aging grid developed for the runway flow of electrons. It is estimated that over $3 trillion of grid infrastructure investment is required by 2030 to support electrification and renewable energy. Utilities are also making large investments for incremental generating capacity through a mix of greenfield, brownfield and modernization projects. Amerson has leading solutions across the technology stack to serve customer needs for power generation, transmission and distribution, including our industry-leading ovation control systems, control valves and AspenTech's digital grid management software. Our control system technology currently automates around 1.8 terawatts or 20% of the electricity generated globally, including 50% of power generated in the US and we also have a large installed-base in power across our instrument and valve portfolio.
These projects include many types of generation. And I want to highlight our strength in combined-cycle gas plants and nuclear power, including a recent win in nuclear. Ovasian automates 18 of the 20 largest combined-cycle gas plants in the US and approximately 100 nuclear reactors globally also use the ovation technology. Our control valves were the first-ever to receive ASME certification decades ago for use in nuclear facilities and have been installed in approximately 90% of the world's nuclear plants. Emerson has the most complete portfolio of nuclear grade isolation, control and safety valves and has been serving customers in the nuclear power industry for decades with nuclear power sales of approximately $325 million last year. Emerson's expertise in intelligent devices for the nuclear power industry was critical to recently winning an award for the Sizewell Sea project in the UK. Within the project, will deliver two pressurized water reactors that will generate 3.2 gigawatts of electricity, powering the equivalent of around 6 million homes for 60 years. Emerson will provide valves and instruments and was selected for our innovative technology and long history of high-quality solutions.
Please turn to Slide 8. We are in a resilient capital cycle with a healthy strategic project funnel. And I'd like to walk-through some updates to align with our current portfolio and market opportunities. As discussed on the prior chart, we are now reclassifying our traditional power funnel as a growth platform. Additionally, we have owned Tesla Measurement for a year and integrated into our processes, including how we pursue projects and manage the business. While semiconductor has been in a tough cycle, we see it as a driver of future growth, supported by macro trends such as nearshoring, advanced packaging and the ubiquity of chips. We have included the large semiconductor project opportunities currently valued at $300 million and are classifying it as a growth platform. With this addition, our funnel now is at $11.5 billion. Excluding semiconductor, our funnel is $11.2 billion, consistent with last quarter and up 7% year-over-year. Many verticals in the funnel were up double-digit year-over-year, led by life sciences, LNG, sustainability and decarbonization, nuclear and traditional power. Combined with the approximately $400 million of project awards in the quarter that exited the funnel, this showcases a constructive environment in which customers continue to invest and advance projects.
I'll now turn the call over to Mike.
