Lal Karsanbhai
President and Chief Executive Officer at Emerson Electric
Thank you, Colleen. Good morning.
Please turn to Slide 3. I'd like to thank the 65,000 Emerson employees around the world for delivering another solid set of result. Your commitment to our vision and passion for our purpose comes to life every day. I am moved by our customer focus and the deep care you have for each other, and I am proud and honored to work alongside each of you. Thank you to the Board of Directors for your support of the management team and to our shareholders for your trust in us.
Since I became CEO in 2021, we have talked openly about the transformation of Emerson, driven around the three pillars of culture, portfolio and execution. We have moved rapidly to improve across all three. And before we discuss the quarterly financial results, I want to highlight the results of our latest employee survey to show our employees are with us on this journey as our culture continues to evolve. Our latest Company-wide engagement survey, inclusive of test and measurement, had a participation rate of 89%, up 1.4 points from our 2023 survey. We had an engagement score of 79%, a 1 point improvement and only 1 point from world-class levels of 80%. While this is an evergreen journey and we still have work to do, I am excited about the tangible steps we have taken to create a more inclusive and engaged organization.
Now, let's jump into the operating results. Q3 was another solid quarter for Emerson. Orders in the quarter returned to growth and were up 3% year-over-year, driven by strong project activity in our process and hybrid businesses, especially across life sciences, energy and power. Notably, we won several large life science projects in North America and Europe, focused on expanding production capabilities for advanced medicines. The Middle East and Latin America saw exceptional demand, and we were awarded several large projects in each. As we expected, process and hybrid markets remained steady at mid-single-digit growth, as we continue to see investment, particularly in LNG, life sciences, energy and sustainability.
While capital project investments continue to progress, MRO orders were slightly softer than expected in the quarter. Discrete automation orders were softer than expected, down low-single-digit both year-over-year and sequentially, as factory automation end markets remained weak. The green shoots we were beginning to see through April and May took a step back in June. And we are now expecting a slower recovery, though we expect discrete automation orders to be flat to slightly positive in Q4 on a low base of comparison. Excluded from underlying, test and measurement orders remained soft, down 11%. Additionally, for total Emerson, we saw a weaker demand environment in China across most of our business segments. We now expect low-single-digit underlying order growth for the second half and for the full year.
Emerson delivered strong operating results, with margin, leverage, adjusted earnings per share and free cash flow, all exceeding expectations. Sales came in at the low end of our guide, and I'll provide additional color on the next slide. Due to weaker orders, test and measurement sales also came in slightly below expectations. However, profitability met expectations as we are seeing the impact of our synergy realization. Transportation and semiconductor markets remained weak, while aerospace and defense performed well, and we saw continued government spending and research. The European market was softer than expected amid lingering EV demand concerns, and China remained sluggish across most test and measurement segments. Due to this, we are looking into second half of 2025 for recovery in this business.
With softer orders, we are adjusting our full year sales to be $1.45 billion to $1.50 billion, but the accelerated synergy actions we have taken will help protect profitability and position the business well for a return to growth.
We continue to be excited about the value creation potential of our differentiated portfolio. Emerson's strong performance through the first nine months and resolute focus driven by our Emerson Management System gives us the confidence to execute on our 2024 plan. We expect underlying sales of approximately 6%, and are increasing the midpoint of our adjusted EPS guide to $5.45 to $5.50 and we are raising our free cash flow guidance to approximately $2.8 billion. We look forward to a strong finish to 2024 and are energized to deliver continued value creation for our shareholders.
Please turn to Slide 4. Underlying sales growth was 3%. Life sciences and power markets continue to perform well, both up double-digit as we executed key projects across North America and Europe. Europe is seeing continued strength in energy, power and sustainability markets, as well as their MRO business, particularly in Western Europe. In the Americas, broad-based, healthy growth across Latin America was slightly offset by slower MRO in North America. Robust performance in the Middle East, driven by strong project activity, was offset by broad-based weakness in Asia.
Continuing the exceptional gross margin performance from last quarter, gross margins were 52.8% in Q3, a 230 basis point improvement from the prior year. Our gross profit percentage year-to-date is 50.6%, even with the acquisition and integration costs incurred in Q1. This gives us confidence in our expectation that this portfolio will deliver greater than 50% gross margins as we look forward. Operating leverage was 67%, significantly stronger than expected due to better performance from AspenTech, project mix and realization of more cost reductions than expected from actions taken throughout the year. Adjusted earnings per share exceeded expectations at $1.43, above the top end of our guide and up 11% from 2023.
Emerson generated robust free cash flow of $975 million, up 27% year-over-year and with a free cash flow margin of 22.3% for the quarter. Mike will walk through additional details on our results in a few slides. We are pleased to deliver another strong quarter and are excited to continue demonstrating the value creation potential of our transformed portfolio.
Please turn to Slide 5. We continue to see strong capital project investments, with our strategic project funnel now at $11 billion, up approximately $200 million from Q2. The funnel growth demonstrates the strong, sustained capital cycle aligned to our growth programs, as the increase predominantly came from projects supporting energy transition, life sciences, sustainability and decarbonization. In the third quarter, Emerson was awarded approximately $350 million of project content, consistent with prior quarters. We had wins in large, traditional energy projects, as well as additional awards from offshore vessels in Brazil, as mentioned last quarter.
Our growth programs also performed well in the quarter, accounting for a little under half of the awards, and I want to highlight a few key wins. Emerson was selected to automate Nemaska Lithium's Whabouchi mine at the Becancour Lithium Conversion Facility projects in Quebec, Canada, based on our proven ability to provide a differentiated solution, including a common control platform across sites. This mine is one of the largest high purity lithium deposits in North America. Fueled by hydroelectric power, the Becancour facility will convert the spodumene concentrate to lithium hydroxide. This is the first such conversion in Canada, and Nemaska Lithium projects will play an important role in the North America battery value chain.
Emerson will provide much of our leading technology to automate both facilities, including DeltaV control systems and software, reliability solutions, valves and instruments. This example highlights the breadth of the Emerson portfolio and demonstrates how we are well-suited to serve this emerging market.
Next, I'd like to highlight Emerson was selected to support one of the largest renewable energy park projects in India, spearheaded by one of India's largest and most prominent renewable energy companies. Emerson will provide our Ovation Green SCADA solution, including pitch control and park power management for the wind turbines. Emerson was chosen for our scalable automation software and technologies that enhance wind turbine performance as well as our comprehensive local support capabilities, including engineering, fuel support and production.
Finally, Emerson was chosen to automate a key green hydrogen project in Uzbekistan, which will use a 52-megawatt onshore wind farm to produce 3,000 tons of green hydrogen annually, which will be used to manufacture 500,000 tons of ammonia fertilizer. ACWA Power, a first mover on green hydrogen and part of the NEOM Green Hydrogen Project, will operate the plant, and HDEC will design and construct the facility. Emerson was selected for our advanced technologies and domain expertise, and will provide several technologies from our hydrogen portfolio, including instruments, control valves and our Ovation Green control system.
Turning to Slide 6. We remain focused on driving our strategic priorities, including accelerating innovation for profitable growth and enhancing our position as a global leader in automation. One of our breakthrough innovation priorities is software-defined automation. Our industry-leading Ovation Automation platform just launched a software-defined, AI-ready platform for the power and water industries. The Ovation Automation platform 4.0 builds upon our Boundless Automation vision to bring a unifying data fabric across the organizations to optimize operations, from device to enterprise. Ovation 4.0 brings customer focused innovation, such as secure Generative AI models to offer prescriptive operations and maintenance guidance, together in a robust solutions portfolio. It also offers integration with our Ovation Green software to improve holistic awareness across traditional and renewable power generation and storage to eight customers who have an increasingly complex mix of generating assets.
Customer-focused innovation as a hallmark of Emerson, and I wanted to highlight one of the key methods we have for formal engagements. Our Ovation business recently held their 37th Users Conference in Pittsburgh, Pennsylvania, with 70% of U.S. power utilities participating in a multi-day event focused on the power and water industries. This conference featured interactive technology exhibits, customer case studies and collaborative industry sessions focused on emerging technical and business topics. Ovation Users Group creates a world-class engagement as users provide direct input for potential project -- product enhancements which helps inform a strategic product development plans.
We also took a key step forward in our transformation and simplification journey in Q3, as we announced a definitive agreement to sell our remaining interest in the Copeland joint venture. Private equity funds, managed by Blackstone, will purchase the equity stake, while Copeland repurchased the seller's note. The transaction involving the Copeland note receivable closed on August 2, with pre-tax cash proceeds of $1.9 billion, which will be used to pay-down debt. We expect the equity portion to close by the end of August.
With that, I'll now turn the call over to Mike Baughman to walk through our financial results in more detail.
