Mike Baughman
Executive Vice President and Chief Financial Officer at Emerson Electric
Thanks, Lal, and good morning, everyone. We will now go to the next presentation, shifting the call to the earnings press release and discuss our 2024 financial results and 2025 guidance. We will also share with you what we are seeing in our funnel and end-markets.
Please join me on Slide 16. We continue to deliver on our value creation framework. As you can see in this chart, 2024 was another excellent year that met or exceeded guidance. Underlying sales grew 6% and operating leverage was 47%, both in line with August guidance. Adjusted EPS was $5.49 at the high-end of August guidance and free cash flow was $2.9 billion, which exceeded our guidance.
Quarterly underlying orders growth exited the year at 2% and our full-year growth was also 2%. This orders growth was led by our Process and Hybrid businesses, which were up mid-single digits for the year. Discrete automation orders were down mid-single digits for the year, but turned positive in Q4 as we expected. Though not included in the underlying for 2024, test and measurement orders in the quarter were down 7%, but improved 2 points sequentially and we remain optimistic about a recovery in this business in 2025.
Additionally, we executed approximately $435 million of share repurchase above the August guidance as we saw an opportunity to buy our 2025 dilution in advance at an attractive valuation. Our 2024 performance was another year of strong operating results and demonstrates the power of our transformed higher-growth, higher-margin portfolio.
Please turn to Slide 17, where I will provide additional color on our 2024 performance. Underlying sales growth of 6% was led by our Process and Hybrid businesses, which were up high-single-digits for the year. Intelligent devices grew 5%, while software and control grew 8% and price contributed two points of growth. Asia, Middle East and Africa led the growth up 8% with exceptional performance from the Middle East and Africa, led by strong project activity in LNG and chemical. China was down 3% for the year as chemical and discrete were slow amidst weak demand. Europe was up 7% with sustained strength in LNG, sustainability and decarbonization and life sciences. Americas also performed well, up 4%, led by power, LNG, metals and mining and life sciences.
Test and measurement, which was excluded from the underlying metric, contributed $1.46 billion to our net sales, down 12% for the year and within our expectations. Following our typical seasonality, backlog decreased in Q4 from Q3 and we exited the year at $7.2 billion. Excluding T&M from this backlog figure, our backlog grew $150 million, driven by process and hybrid investments that were slightly offset by the decline in our discrete and other businesses.
Adjusted segment EBITDA margin was 26%, up 100 basis points from the prior year due to favorable price cost and cost reductions. Operating leverage, which excludes test and measurement in 2024, was 47%, reflecting the strong operational execution and profitability of our business. Test and measurement delivered an adjusted segment EBITDA margin of 24%, including the realization of $100 million of synergies and a 130 basis point favorable impact from the timing of the acquisitions closed in Q1.
Adjusted earnings per share came in at $5.49, up 24% from 2023. Operations contributed $1.06 [Phonetic] of growth with a $0.01 offset in non-operating items. Test and measurement exceeded our initial expectations and delivered $0.45 as increased and accelerated synergies offset lower than originally expected sales volume. AspenTech contributed $0.35, slightly above our expectations of $0.32 to $0.34.
Finally, Emerson delivered stronger than expected free cash flow of $2.9 billion, up 23% year-on-year, despite a headwind of approximately $235 million from acquisition-related costs and higher capex. Higher earnings and inventory improvements drove the year-on-year improvement in cash. Free cash flow margin for the year was 16.6%, a 110 basis point improvement from the prior year.
Please turn to Slide 19, 18. Before discussing 2025's guidance, I'd like to review the exceptional financial performance of the company over the last three years. Our portfolio transformation began in late 2021 and the gray bar shows the pre-transformation results for that year. The blue bars represent the results for the company we have today, inclusive of safety and productivity from 2021 through 2024. We have delivered three years of underlying sales growth at the high-end or above of our long-range framework of 4% to 7% through-the-cycle, which demonstrates a structurally improved and more cohesive Emerson that is aligned to secular growth drivers. Our differentiated technology and innovation leadership are evident in the remarkable gross margin performance.
In 2024, we delivered gross margins of 50.8% for the year, a record from Emerson and up nearly 1,000 basis points from our pre-transformation portfolio in 2021. We have also significantly improved adjusted segment EBITDA, closing 2024 at a record high of 26%. Our higher margin portfolio coupled with the processes driven by our updated Emerson management system has enabled several consecutive years of outsized leverage performance. All of this has produced three consecutive years of adjusted earnings per share growth over 20%. We are proud of the leading industrial technology company we created and our accomplishments over the last three years. As we take the final steps in our portfolio transformation, we are energized to continue creating shareholder value.
Please turn to Slide 20. I would now like to talk a little bit about our funnel and what we are seeing in our served markets. We continue to see strong project activity with our large project funnel exiting the year at $11.2 billion, up approximately $200 million from Q3. Customers are continuing to invest in areas aligned to our growth platforms. LNG, life sciences and sustainability and decarbonization drove the increase versus the prior quarter. The three-year visibility of projects within the funnel, the size of the funnel and the continued growth give us confidence that we are in a capital formation cycle where our customers need automation content to meet their complex objectives.
We performed well in the quarter, winning approximately $400 million of project content with nearly 60% in our growth platforms. Wins in LNG, chemical and sustainability and decarbonization led the conversion in the quarter, and I'd like to highlight a few notable lens. First, Emerson was selected to provide our leading instruments to Porthos carbon capture and storage project in the North Sea. Porthos will store approximately 37 million tons of CO2 transported from the Port of Rotterdam from customers such as Air Liquide, Air Products, ExxonMobil and Shell.
Next, Emerson was chosen to automate a new world-class petrochemical complex in Saudi Arabia. Emerson will provide control and safety systems and software, asset management software, and valves. Third, Emerson was recently awarded a large enterprise contract for test and measurement software with a semiconductor company that is a leader in the GPU space driving the proliferation of AI. This multi-year contract will support an enterprise-wide semiconductor and electronics production analytics platform to help maximize this customer's production capacity and product quality.
Emerson will provide our OptimalPlus [Phonetic] production analytics platform along with local customer engineering, operations and support capabilities. Both large project and MRO business performed well in the year with MRO representing 64% of sales. Emerson serves an expansive set of customers in diverse industries, demonstrating our relevance across the process, hybrid and discrete landscapes. Our top 20 direct customers made up only approximately 9% of sales with the largest being around $180 million. Emerson has consistently proven it can capture price in the market, driven in part by the long-tail of the customers we serve.
Turning to Slide 21, we will now discuss our outlook for 2025. We expect process and hybrid markets to be resilient with moderating growth, discrete markets to turn positive and sales growth in all world areas. We are seeing customers continue to invest in digitalization and automation technology to enhance plant efficiency, reliability, output and sustainability. We expect sustained demand in process and hybrid markets with the capital cycle remaining constructive as shown in our project funnel with projects continuing to move forward at a healthy pace.
We expect MRO to continue to perform well with stable demand in North America and Europe. The demand in both capital projects and MRO is driven by secular trends of energy security and affordability, sustainability and decarbonization, nearshoring and digital transformation, and we continue to see strong activity across many verticals led by LNG and other energy transition segments, life sciences, power and metals and mining. Overall, we expect our Process and Hybrid businesses to grow in the mid-single digits for the year.
We are still looking for a meaningful recovery in discrete market demand in the first half of 2025, which we expect will lead to a second half sales recovery and mid-single-digit sales growth for the year. The majority of our discrete served markets appear to have bottomed and we have seen positive indicators of early-stage recovery in semiconductor, industrial and factory automation markets. However, automotive markets, particularly EV remain weak and we will continue to watch these closely. Additionally, our test and measurement business will benefit from further synergy actions in the year, and we are now targeting $200 million by year three from our previous target of $185 million due to faster execution of our overall synergy plan.
We anticipate growth in all world areas, led by Middle East and Africa, India, Southeast Asia and Mexico from continued investment in energy and energy transition projects. We expect China to return to growth by the second half after being down low-single digits in 2024, as we expect investments in self reliance programs and sustainability to continue, coupled with recovery in discrete markets as we begin to lap easier comps. North America is expected to grow in the low-single digits aided by LNG, life sciences and a strong outlook for power generation, transmission and distribution due to the significant demand growth for electricity related to AI and data centers. Finally, we expect mid-single-digit growth in Europe from continued investments in the energy transition.
Please join me on Slide 22 for details on our guidance for the first quarter and full-year 2025. It should be noted that our 2025 guidance is based on the current company without the impact of today's announced portfolio actions. We have provided the relevant safety and productivity contribution of the guide to help investors size the potential impact of the strategic review of that business, and we have continued to detail our expectations for our 57% ownership stake in AspenTech.
Underlying sales are expected to grow 3% to 5% in the year. Safety and productivity growth is expected to be approximately flat for the year and because it is only about 8% of total Emerson sales, it is not expected to have a material impact on the overall growth rate for the year when it exits our results. Operating leverage, which now includes test and measurement, is expected to be in the mid-40s. We expect adjusted earnings per share for the year to be between $5.85 and $6.05. AspenTech's contribution is expected to be $0.44 to $0.46 for the year and safety and productivity is expected to contribute approximately $0.48.
Full-year free cash flow is expected to be $3.2 billion to $3.3 billion with approximately $0.2 billion from safety and productivity. For the first quarter, we expect underlying sales to increase 2% to 3% with leverage in the mid-50s. We expect adjusted EPS of $1.25 to $1.30, of which $0.10 to $0.11 comes from AspenTech. As discussed earlier, we expect approximately $2 billion of share repurchase for the year and the current plan is to complete $1 billion in the first quarter. Finally, we expect dividend payments to be approximately $1.2 billion and our tax rate to be approximately 22% for the year.
Please turn to Slide 23. Emerson remains committed to disciplined capital allocation and is increasing return of capital to shareholders in 2025 as we complete our portfolio transformation. We continue to have four primary capital allocation priorities. The first is reinvestment in the business and Emerson spent approximately 8% of sales on RD&E in 2024 and we expect a similar level of spend in 2025. Both test and measurement and AspenTech spent around 20% of their sales on RD&E and growth opportunities in these businesses, which is a reflection of our commitment to realize these growth opportunities.
As discussed previously, we are increasing our share repurchases to approximately $2 billion and expect around $1 billion in the first quarter. We are also entering our 69th year of increased dividends per share. And this quarter, we increased the quarterly dividend per share to $0.5275. Capital returned to shareholders through the dividend and share repurchase is expected to be approximately 100% of free cash flow in 2025.
Over the past three years, we have been focused on portfolio transformation and allocated capital primarily to strategic M&A and paying down debt. We have also returned $6.5 billion to shareholders through dividends and share buybacks during that time. After the successful completion of the actions announced today, we expect our net-debt to adjusted EBITDA ratio to be under 2, and well within the credit rating agency's metrics to maintain our A2A credit ratings.
As we move forward beyond 2025, we plan to maintain our A2A credit ratings. The company's expected future free cash flows and debt capacity within the range of the A2A metrics provide sufficient flexibility to continue meaningful returns of capital to shareholders and execution of strategic bolt-on acquisitions.
Finally, I would like to echo Lal's earlier comments and thank all the Emerson employees whose efforts are the real force behind these excellent financial results. It's your dedication to our company and our customers that will drive our customers' success and our shareholders' returns.
I will now pass the call back to Colleen.
