Image source: The Motley Fool.
DATE
Wednesday, November 5, 2025 at 8:30 a.m. ET
CALL PARTICIPANTS
Chief Executive Officer — Lal Karsanbhai
Chief Financial Officer — Mike Baughman
Chief Operating Officer — Ram Krishnan
Need a quote from a Motley Fool analyst? Email [email protected]
TAKEAWAYS
Underlying Orders Growth -- Underlying orders increased 6% in the fourth quarter, with Test and Measurement orders up 27% and Ovation power orders up 18% in the same period and 30% for the year.
Underlying Sales Growth -- Underlying sales increased 4% in the fourth quarter; full-year underlying sales increased 3% in fiscal 2025 (period ended September 30, 2025), slightly below expectations due to soft Europe and China book-to-ship activity.
Adjusted EPS -- Adjusted EPS reached $1.62 in the fourth quarter and adjusted EPS totaled $6 for fiscal 2025. Adjusted EPS increased 9% year over year in fiscal 2025, and adjusted EPS of $1.62 in the fourth quarter was at the top end of guidance, while full-year adjusted EPS was consistent with guidance.
Free Cash Flow -- Free cash flow totaled $3.24 billion for fiscal 2025. Free cash flow increased 12% year over year in fiscal 2025, exceeding August guidance by $40 million, with free cash flow margin at 18% for fiscal 2025, up 1.4 percentage points.
Adjusted Segment EBITDA Margin -- Adjusted segment EBITDA margin was 27.6% for fiscal 2025, a 160 basis point improvement year over year in fiscal 2025, driven by software renewals (50 bps in fiscal 2025), price/cost, cost reductions, and acquisition synergies.
Software Annual Contract Value (ACV) -- $1.56 billion at year-end, up 10% year over year in fiscal 2025, with ACV growth expected to exceed 10% in fiscal 2026.
Backlog -- Backlog was $7.4 billion at fiscal 2025 year-end, up 3% year over year at the end of 2025, supporting second-half fiscal 2026 growth through backlog timing.
Fiscal 2026 Guidance -- Total sales are expected to grow 5.5% in fiscal 2026 and underlying sales growth is projected at approximately 4% for fiscal 2026, with adjusted segment EBITDA margin targeted at approximately 28% for fiscal 2026 (non-GAAP) and adjusted EPS guided to $6.35–$6.55 for fiscal 2026.
Dividend Increase -- Emerson Electric (EMR 2.65%) plans to raise its annual dividend per share by $0.11, or approximately 5%, in fiscal 2026, marking the 70th consecutive year of dividend increases in fiscal 2026.
Capital Return -- Approximately $2.2 billion in capital return is planned for fiscal 2026: $1 billion allocated for share repurchases in fiscal 2026 and $1.2 billion allocated for dividends in fiscal 2026.
Regional Outlook -- The Americas, India, and Middle East & Africa are expected to show strong growth in fiscal 2026; Europe and China are projected to remain flat in fiscal 2026.
Software Contract Renewal Dynamic -- A $120 million revenue and $0.15 adjusted EPS headwind is forecast for fiscal 2026, with no cash flow impact and with reversals anticipated in fiscal 2027–fiscal 2028.
Test & Measurement Segment -- High single-digit growth guided for 2026, with Q4 2025 and full-year strength in aerospace, defense, and semiconductors.
Integration Synergies -- $50 million in AspenTech synergies were recognized during fiscal 2025; $100 million in run rate synergies are anticipated by fiscal 2026, two years ahead of plan.
MRO Sales -- Maintenance, repair, and operations accounted for 65% of sales in fiscal 2025, contributing to resilience across the installed base.
Large Project Funnel -- with $2 billion attributed to LNG projects and a $1 billion increase in power market projects.
Innovation Investment -- including the launch of Guardian Virtual Advisor AI and AspenTech subsurface intelligence platform.
SUMMARY
Management cited three consecutive quarters of mid-single-digit underlying order growth from Q2 to Q4 fiscal 2025, supported by strong demand in North America, India, and the Middle East, with continued weakness in Europe and China. Strategic project wins included the selection of Ovation 4.0 by Entergy for three additional power generation facilities and a contract for the Doel nuclear station, alongside key LNG automation projects and pharmaceutical manufacturing deployments in the U.S. Emerson Electric completed its portfolio transformation, restoring prioritization of dividend growth and targeting discipline in both capital allocation and deleveraging in fiscal 2026. Margin expansion was achieved in fiscal 2025 despite a 20 basis point tariff headwind to gross profit, as pricing and a higher mix of software drove advance on profitability. Management detailed $7.4 billion backlog as of fiscal 2025 and highlighted the accounting nature of the $120 million software contract renewal headwind expected in fiscal 2026, which does not affect cash flow and is expected to reverse in future periods.
Operator clarified that the fiscal 2026 software contract renewal headwind is entirely due to timing within multi-year term license agreements, not an accounting policy change.
Chief Financial Officer Mike Baughman said, "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 exists in revenue recognition for these multiyear term license contracts."
Chief Executive Officer Lal Karsanbhai stated, "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."
Chief Operating Officer Ram Krishnan stated, "Of the $11 billion [project] funnel, LNG is about $2 billion . of the $7.4 billion backlog, about $350 million is LNG."
The integration of AspenTech and Test and Measurement exceeded cost synergy expectations in fiscal 2025, with acquisition-related headwinds offset by operational and cost-saving initiatives.
China is forecast to remain flat in fiscal 2026, with muted demand in core markets but resilience in power generation and shipbuilding; no recovery has been incorporated into guidance at this point.
Europe is expected to show no material year-over-year recovery in the automotive, decarbonization, or chemical segments in fiscal 2026, with growth opportunities in LNG, power, life sciences, and aerospace.
The capital return program and deleveraging plan remain in focus, with Emerson Electric targeting net debt to adjusted EBITDA of approximately two times at fiscal 2026 year-end.
INDUSTRY GLOSSARY
ACV (Annual Contract Value): Total annualized value of all active software subscription contracts, reflecting recurring revenue generation and growth potential.
Book-to-Ship: Measurement of incoming orders compared to revenue recognized for shipped products/services in a given period.
LNG: Liquefied natural gas; refers here to large capital projects for liquefaction and export facilities automated by Emerson Electric.
MRO: Maintenance, repair, and operations; recurring services and products for installed equipment bases.
Ovation 4.0: Emerson Electric's distributed control system platform for power generation and industrial automation, highlighted as the selected solution for North American and European projects.
Test and Measurement: Business segment comprising instrumentation, analytical tools, and solutions primarily serving industries such as semiconductors, aerospace, and defense.
Full Conference Call Transcript
Lal Karsanbhai: Thank you, Colleen. Good morning. 2025 marked the 135th anniversary of our company. Emerson Electric Manufacturing Company was established in St. Louis, Missouri in 1890. The development of a reliable electric motor was the vision of two Scotland-born brothers, Charles and Alexander Meston. Made possible by the financial backing of John Wesley Emerson, a former Union Army officer, judge, and lawyer. Throughout nearly a century and a half of economic cycles, the Great Depression, two 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 Electric Co. 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 three. Emerson Electric Co. 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 for Emerson Electric Co. 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 book-to-ship were softer than initially expected. Emerson Electric Co. 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. ACV 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 four. Emerson Electric Co. delivered 6% underlying order 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 modernizations. Test and Measurement orders were up 27% in the fourth quarter with robust growth in all regions, led by semiconductor, aerospace and defense, and the broad-based portfolio business. Please turn to Slide five. Emerson Electric Co. 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 two projects in Power demonstrating strong adoption of our Ovation 4.0 distributed control system. In August, we talked about Ovation winning two greenfield combined cycle plants with Entergy. Ovation 4.0 has now been selected by Entergy to automate three more power generation facilities. Entergy today provides electricity to 3 million customers, and the five 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 Doel nuclear power station in Belgium, unifying the control systems across the site. Doel provides around 15% of the country's electricity, and Emerson Electric Co. will help ensure the delivery of safe and clean baseload power.
Next, Emerson Electric Co. 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 Calcasieu 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 tons per annum with a permitted expansion capacity of up to 27.6 million tons per annum. Emerson Electric Co. is proud to be chosen as a key automation partner for Bechtel Energy. Last, Emerson Electric Co. was selected as the automation provider for three manufacturing facilities being built in Indianapolis by a large U.S.-based life science customer.
A major step forward in their nurturing initiatives and in advancing innovation and efficiency. Emerson Electric Co. will provide our leading DeltaV control systems and software portfolio to enable reliable, scalable, and data-driven automation. Through this collaboration, Emerson Electric Co. will deploy state-of-the-art DeltaV technologies designed to accelerate the time to market of next-generation weight management drugs, enhance 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 two AI-powered applications to unlock productivity and workflow automation.
Lal Karsanbhai: First, we launched Guardian Virtual Advisor to enhance our DeltaV Lifecycle Management software. This solution combines Emerson Electric Co.'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 Electric Co.'s automation platforms to support smarter decisions and operational excellence across the plant lifecycle. We also introduced AspenTech 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, helping customers optimize production and reduce operational silos. Please turn to Slide six.
Emerson Electric Co. 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 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 Electric Co. 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 2026, two 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 Electric Co.'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.
Mike Baughman: Thanks, Lal, and good morning, everybody. Please turn to Slide seven 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 one-point headwind to Emerson Electric Co.'s 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 eight 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. Non-operating items were an $0.11 headwind due primarily to pension of $0.09 and stock-based compensation of $0.02. Please turn to Slide nine 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 near-shoring 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 a 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 Electric Co. expects to grow approximately 2% in the first half and 4% for the full year. Excluding the impact of software contract renewals, Emerson Electric Co.'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. Expect EPS contributions from operations of about $0.50 and non-operating items of approximately $0.40, 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 Electric Co.'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 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 by $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 A2A credit ratings. We ended 2025 with a net debt to adjusted EBITDA ratio of 2.3 times and expect to end 2026 at approximately two times. With that, we will now turn the call over to the operator for Q&A.
Operator: Thank you. Our first question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question.
Deane Dray: Thank you. Good morning, everyone. Good morning, Deane. 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 your contracts are 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 2027 and 2028 that you called out? Thanks.
Mike Baughman: Yes. I'll start with the second half first. Which is to say your understanding is correct. 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 twelve 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 exists in revenue recognition for these multiyear term license contracts.
Deane Dray: That's really helpful. And just make sure I heard it correctly, there's no impact on free cash flow. Is that correct?
Mike Baughman: 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 2027 and 2028, relatively ratably over those two years.
Deane Dray: 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.
Lal Karsanbhai: No, Deane. There's a significant momentum certainly across three categories that I described, semiconductors, aerospace and defense, which has been relatively robust over the last two years to begin with. And 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 in broad-based geography, gives us the confidence that momentum continues and that our guide on test and measurement for 2026 is solid.
Operator: Thank you. Our next question comes from the line of Andrew Obin with Bank of America. Please proceed with your question.
David Ridley Lane: Yes, good morning. This is David Ridley Lane on for Andrew Obin. Just a quick numbers question. Can 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?
Ram Krishnan: Well, I think from an orders perspective, process hybrid 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 reported. S and 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.
David Ridley Lane: And then in fiscal 2025, 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. Correct. But excluding that impact, you had core ops of 110 basis points margin expansion in fiscal 2025. You're guiding for 80 basis points in fiscal 2026. It would seem like you have faster revenue growth, less tariff impacts, further Aspen synergies. Are there any offsets to consider thinking about for margins in 2026?
Mike Baughman: No, I don't think so. You've got it right. As we look ahead, 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 two 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 Electric Co. management process and what we expect to continue into the future.
David Ridley Lane: Thank you very much.
Operator: Thank you. Our next question comes from the line of Andy Kaplowitz with Citigroup. Please proceed with your question.
Andy Kaplowitz: Good morning, everyone.
Lal Karsanbhai: Good morning, Andy.
Andy Kaplowitz: Well, Mike, just digging a little bit more into first half versus second half organic guide for 2026. The software growth mechanics are what they are, but you also talked about the timing of shipments and how they support second-half growth. Are you expecting any sort of larger project order recovery and or change, for instance, in process markets to get you there? Or is it really just you have the visibility already in the backlog and pipeline and everything is just talk about the visibility there.
Ram Krishnan: 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 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 is 6%. 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 two and six. But in reality, it's four and six for a weighted average five through the year.
Andy Kaplowitz: Thanks for that, Ram. And there's obviously a lot of excitement about how our markets you gave us the data up almost 20% in orders in innovation, 30% for the year. But maybe you can give us a little more color on what you're expecting for 2026. Obviously, there's particular focus on nuclear. You guys have pretty good share there. Maybe you could remind us of that. And order growth was a little bit lower in than for the year, but do you expect acceleration in '26 in that end market?
Lal Karsanbhai: Yes, Andy, Lal here. No, certainly we're excited about what we're seeing broadly, not just across generating capacity, but 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 UK. 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 three to five year run -in this segment of the business at high single digits to low double digits growth.
Operator: Thank you. Our next question comes from the line of Steve Tusa with JPMorgan. Please proceed with your question.
Steve Tusa: Hey guys, can you hear me okay?
Lal Karsanbhai: Good morning, Steve.
Steve Tusa: Good morning. Just wanted to clarify. So is the first quarter orders should kind of sustain this, I know, like the five to 6% type of momentum that you saw in the 4Q? Is that the messaging?
Mike Baughman: Yes.
Steve Tusa: Okay. Okay, great. And then just on bridges, 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 45% to 50% kind of core incremental. Am I getting in the right ballpark there? And then in the first quarter, you only have $0.50. Is there a reason why those incrementals may be a little bit weaker kind of putting the software impact aside?
Mike Baughman: Yes. I think your leverage expectation is about right, when you look at the core 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 margin that quarter. I believe was 28%. And so it's sort of a comparison dynamic.
Ram Krishnan: Yes. And Steve, yes, we leveraged at 265% in the 2025, and it just puts us in a it's just a tough comparison, not just even if you take out the software and old dynamics, it's a tough comparison for our base operations. Just given the dynamics might get us right.
Steve Tusa: That makes a ton of sense. Thanks for the details always.
Operator: Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Please proceed with your question.
Julian Mitchell: Hi, good morning. 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 late in the year despite the sort of pretty tough comp there. 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?
Lal Karsanbhai: Yes. Hi, Julian. Lal here and I'll start on that. Ram add some color as well. Certainly, we have a high degree of confidence in what we're seeing in three of the four 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're continuing to see weakness in the packaging machine making business. Which is very Western Europe dependent, Italy, Germany, and of course impacted in China and in The U.S. as well. So that segment, what has been a traditional discrete market, is in the flat to low single-digit range.
And you've got test and measurements in that high range that brings up the all broad discrete orders. Ram?
Ram Krishnan: 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 reach 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.
Julian Mitchell: That's great. Thanks very much. And then just my follow-up question would be around, know in the past you'd mentioned some of the project funnel was tied to elements such as hydrogen, clean fuels, carbon cap and so forth. And 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 push outs there yourselves and if it 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.
Lal Karsanbhai: So 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 perspective, the funnel that we show today at $11.1 billion has approximately $1.5 billion reduction in F and 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, that's a very significant reduction in the value of the funnel. Related to S and D. And that's broad-based across North America, Europe, and Asia.
Ram Krishnan: And then just to add to that, Julian, the reason the funnel stays flat is 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 for the slowness in sustainability and decarbonization project, mostly in North America, but some in Europe as well.
Operator: Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question.
Nigel Coe: Thanks. Good morning, everyone. 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 one-time issue? And just confirm that this is more of first half 2025 renewal issue comping that as opposed to something this year. So that's my main question. And really just maybe talk about the difference in accounting for renewal versus the new contract and why renewals would have this kind of headwind? Thanks.
Mike Baughman: Yes. Nigel, it's not necessarily a one-time event. It's again just how the renewal dates 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, 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.
Ram Krishnan: And Nigel, Ron 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. It's certainly going to be a tailwind in 2027 and 2028 given the reset in 2026, but we want to make sure that going beyond 'twenty eight, 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 Vincent Cervelo and the team at Aspen are driving. But it's a good question.
Nigel Coe: No, it's a dumb question, I'm sure. And then just thinking about that in the plan, the acceleration at within IT 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 markets just driving the acceleration?
Lal Karsanbhai: Yes, Nigel, well 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 sequentially 11% ramp up. It would be 4% growth in the first half and 6% in the second half or 5% 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 plan that we put forward.
Ram Krishnan: And just the projects that you referenced, that are loaded into the second half that we won in the 2025 are in Life Sciences, in Power and 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 2026.
Operator: Thank you. Our next question comes from the line of Amit Mehrotra with UBS. Please proceed with your question.
Amit Mehrotra: Thanks, operator. Hi, everybody. Sorry, I dialed in a little bit late. So excuse me if this has been asked. But I wanted to talk about PowerGen 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 at what point does Emerson Electric Co. enter kind of that power gen life cycle versus, you know, say, a turbine? Good morning.
Lal Karsanbhai: 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, three to four 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 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 boiler controls. To the construction cycle. So we're in those conversations today early with the utilities around the world. As they plan out their investments.
Amit Mehrotra: 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, you know, how software annual contract value is trending versus your installed base. How do you expect that to kind of perform going forward? No. How do we think about, like, attach rate trends? There?
Ram Krishnan: Yeah. It you know, our ACV, we you know, shared the data one 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 Astrotech in.
Operator: Thank you. Our next question comes from the line of Brett Linzey with Mizuho Securities. Please proceed with your question.
Brett Linzey: Hey, good morning all. Just wanted to come back to the power discussion one more time. So you gave some great examples on the traditional side. And talked about nuclear being robust. I know, Emerson Electric Co.'s valve and instrument content is about 90% of the world's nuclear reactors. Is there any way you can you can sensitize the content per new reactor or anything you can add on the aftermarket side that you can capture there?
Ram Krishnan: Yes. So in a nuclear reactor or nuclear power plant, I mean, Emerson Electric Co. typically, you get the full scope, which is obviously the control system, the instrumentation and the valves, we get $40 million of content for a complete greenfield nuclear reactor with an opportunity to deliver more than $40 million over a ten-year annuity from an MRO lifecycle 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.
Brett Linzey: Okay, great. And then maybe shifting back to Ovation, you saw the strength in orders this year, Greenfield modernizations. Is this predominantly the power vertical driving this Or are you starting to see some sales synergies between Aspen and the Emerson Electric Co. as you mine that installed base?
Lal Karsanbhai: 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 walls, the generating walls and the distribution and transmission network that utilities own 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 and the software systems to manage those loads within the grid.
Ram Krishnan: 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 in Monarch to upgrade their transmission and distribution systems. Then from a product perspective, we're developing Ovation, for example, and substation control that extends beyond generation into transmission and distribution and symbiotically works with Monarch to deliver value for our customers.
Operator: Thank you. Our next question comes from the line of Andrew Buscaglia with BNP Paribas.
Andrew Buscaglia: Hey, good morning everyone.
Lal Karsanbhai: Good morning.
Andrew Buscaglia: 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 impact your view of what's likely to move forward in 2026?
Ram Krishnan: Yes. Your first question was what portion of our $7.4 billion backlog is LNG.
Andrew Buscaglia: I was thinking yes, that or the confusing with the 11 billion you put out there?
Ram Krishnan: Okay. Of 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.
Andrew Buscaglia: Yes. The kind of the weakening kinda yeah.
Ram Krishnan: You know, at this point, obviously, you know, when you 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 and M, which has a decent-sized business in China, has seen strong recovery. So there are pockets of opportunity. I would say we're prudently and conservatively planning for a flat China. I think it's a wild card on China recovery. There is a possibility it could recover into 2026.
But we haven't built that into our plan. Similarly, in Europe, I think 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.
Andrew Buscaglia: Got it. Maybe one more on capital allocation in that you know, pretty robust cash flow. You know, your stocks still rather cheap, probably relative to you'd expect. Heading into the New Year. So maybe can you talk about your balance between repo and expectations for M and A?
Mike Baughman: Yes, laid out the $1 billion expectation around repo. As far as M and A, that's offered 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.
Operator: Thank you. Ladies and gentlemen, this does conclude our time allowed for questions and we'll conclude our call today. We thank you for your interest and participation. You may now disconnect your lines.