Release Date: August 04, 2026
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Emerson Electric Co EMR delivered an outstanding third quarter with underlying sales growth of 6%, exceeding expectations, and adjusted EPS of $1.71, up 13% year-over-year.
- Underlying orders grew 7% in Q3, with broad-based growth across all business groups, led by software and systems up 10%, indicating strong demand momentum.
- Growth verticals surged 27% in the quarter, with semiconductor up 53% and power up 37%, driven by secular tailwinds and participation gains.
- Adjusted segment EBITDA margin expanded 140 basis points to 28.5%, reflecting strong volume leverage, favorable mix, and disciplined price cost management.
- The project funnel grew to $12.4 billion, up 8% year-over-year, with significant increases in power and LNG, providing strong visibility into future growth.
- Free cash flow was robust at $1.3 billion in Q3, up 36% year-over-year, with a margin of 27.1%, exceeding expectations.
- The company raised its full-year guidance for sales growth to 5% and adjusted EPS to $6.55, reflecting confidence in continued strong performance.
- Software ACV grew 9% to $1.68 billion, with expectations to exit the year at 10%+ growth, supported by strong performance in AspenTech and digital grid management.
- The Middle East performance was better than expected, with field service engineers back to pre-conflict levels and new opportunities emerging for energy security and resiliency.
- Test and Measurement orders grew 19%, with semiconductor up 70%, and the company sees robust demand through 2027, particularly in production and validation applications.
Negative Points
- The Middle East conflict continues to impact results, with an approximately $25 million revenue headwind in Q3 and a similar expected impact in Q4, as the Strait of Hormuz remains effectively closed.
- China remains soft, with sales down 3% year-over-year, though improving sequentially, and the company expects only low-single-digit growth in 2027.
- Europe is weak, with sales down 1% in the quarter, and while orders turned positive, the recovery is expected to be gradual.
- Software and Systems margins decreased 30 basis points year-over-year, with a 1.5-point drag from software contract renewal dynamics and a higher mix of lower-margin projects.
- The company faces ongoing supply chain complexities in the Middle East, limiting customer operational capacity to approximately 75% and constraining revenue recovery.
- Safety and Productivity growth remains muted at 2%, with softness in European and automotive markets, and the company expects only 1% growth in Q4.
- The full-year impact from the Middle East conflict is modeled at approximately $100 million, representing a 0.5-point headwind to revenue growth.
- Intelligent Devices growth is suppressed by the Middle East impact, with full-year growth expected at only 2%, though orders suggest a recovery ahead.
- The company faces uncertainty in the Middle East, with customers needing a stable agreement between the U.S. and Iran before normalizing orders, which could delay recovery.
- Price cost is green, but the company received $82 million in tariff refunds in Q3, which were largely offset by other inflation, indicating ongoing cost pressures.
Q & A Highlights
Q: Can you unpack the growth opportunity in semiconductor and power, which were standout performers at 53% and 37% growth? How much was the underlying market versus share gains or new product contributions?
A: Ram Krishnan (COO): The underlying market in both semis and power is very strong, but we are also driving significant participation gains. In power, this includes Ovation fleet modernizations and behind-the-meter opportunities from data centers. In software, our Digital Grid Management (DGM) business with AspenTech is a key driver. In Test & Measurement, we see a very strong market in RF and mixed signal, complemented by participation gains from new products.
Q: The project funnel grew to $12.4 billion. Is this activity increasingly long-dated, and is there any change in the conversion of funnel to orders?
A: Lal Karsanbhai (CEO): We continue to see a consistent level of awards, with approximately $400 million won in the quarter, similar to Q2. The significant change is the increase in the number and value of projects, particularly in LNG (up 19%) and power. We now have almost 1,000 individual projects in the funnel across those two markets alone. This is a 3- to 4-year view, and we are actively working on conversion.
Q: Where are we on price cost, and can you provide an update on tariff refunds?
A: Mike Baughman (CFO): Price cost remains green. We are tracking to about 2.5% price for the year, potentially reaching 3%. We received $82 million in tariff refunds in Q3, which we account for on a cash basis in cost of sales. This contributed to the improved GAAP margin and cash flow. The net benefit from tariffs was largely offset by other inflation, so we are tracking as expected.
Q: With Ovation orders up 31%, what are the lead times now? Are you taking orders into the back half of 2027?
A: Lal Karsanbhai (CEO): Yes, that is exactly right. We are currently sitting in the fourth quarter of 2027, reaching into 2028 for deliveries, which provides high visibility.
Q: You mentioned positive comments on chemicals. Have we turned a corner there?
A: Mike Baughman (CFO): The positive chemical comment was specific to the Intelligent Devices business, particularly in Final Control. While chemical markets in China and Europe remain slow, the United States and Middle East are doing very well, leading to growth in the quarter.
Q: With the Middle East repair work underway, does the $25 million headwind flip to a tailwind in the first quarter of 2027?
A: Lal Karsanbhai (CEO): It is touch and go. The challenges with the Strait of Hormuz will likely continue. We expect conditions to remain relatively the same through Q4 and perhaps into Q1 of fiscal 2027. Conditions may improve in the second half of 2027.
Q: Can you provide more detail on the power demand? Is it still mostly brownfield, and what is the visibility in the Test & Measurement business for 2027?
A: Ram Krishnan (COO) & Lal Karsanbhai (CEO): Power demand to date has been mostly fleet modernization (brownfield), but we are starting to see greenfield opportunities in gas-fired power in North America, data centers (behind-the-meter), and nuclear. For T&M, we won't guide to 2027, but the order momentum is tremendous. Our growth is differentiated as we play largely in the validation and production side, which has a different cycle dynamic than the laboratory segment. We remain robust on semiconductors through 2027.
Q: What are you seeing in MRO activity, and can you comment on the regional growth outlook outside of North America?
A: Lal Karsanbhai (CEO): MRO is stable at about two-thirds of the business. We are seeing some delays in shutdown turnaround activity because facilities are being run hard. Day-to-day MRO remains strong. Regionally, the US is very strong (up 10% in sales). Europe was down 1% but better than expected, with positive orders. China improved to down 3%, and we expect it to continue improving sequentially into next year. Other Asia, powered by Japan, India, and Southeast Asia, was very strong.
Q: Can Intelligent Devices return to historical peak growth levels without China picking up? And what is the through-cycle growth rate for Software and Systems?
A: Ram Krishnan (COO): Yes, absolutely. The sales impact from the Middle East is mostly in Intelligent Devices, which will unlock in Q4 and next year. Our long-range framework is 6% to 9% growth for Software and Systems and 3% to 6% for Intelligent Devices. China is improving sequentially and we expect it to reach low-single-digit growth in 2027. In an upcycle, businesses like T&M can exceed the range, as seen with this year's 14% growth.
Q: How much of the project funnel is greenfield versus brownfield, and is there a pricing differential?
A: Ram Krishnan (COO): The bulk of the $12.4 billion funnel is greenfield. Brownfield modernization is tracked separately. We typically get better pricing on modernizations than greenfield, and better pricing on MRO than brownfield.
Q: What kind of stability do customers in the Middle East need to see before normalizing orders, and how quickly could orders come through once a resolution is found?
A: Lal Karsanbhai (CEO): Customers are wrestling with challenges, as some products like LNG cannot be easily transported via pipeline. They need certainty, likely in the form of an agreement between the US and Iran. However, we are seeing good quotation activity for large petrochemical and LNG expansions in Qatar, and we expect orders to be released relatively quickly once a resolution is achieved.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
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