Lal Karsanbhai
President and Chief Executive Officer at Emerson Electric
Thank you, Colleen. Good morning. I'd like to begin by thanking the Emerson's global team for yet again delivering very strong operating results. It is a testament of the strength of our people, the culture we are building, the portfolio we have created, and the value of the Emerson management system. I would also like to thank the Emerson Board of Directors for your continued support of the management team. And to our shareholders for the trust you place in us.
The second quarter was characterized by strong operating performance which exceeded our expectations. We continue to have confidence in the underlying market conditions driven by demand, in the process and hybrid markets aligned with secular macro trends energy security and affordability, sustainability, nearassuring and digital transformation. The PNL execution was nearly flawless in the quarter. Underlying sales grew 8%, operations leveraged at 54%, expanding EBITDA by 140 basis points to 26% in delivering 25% EPS growth and 32% free cash flow growth.
2024 is the year of execution, with no major portfolio moves planned. And through the first half, we feel confident and have raised our outlook for the year. We are energized about the power of our differentiated automation portfolio. RNI team led by Ritu Favre continues to drive the integration plan. And have again accelerated cost out activities in response to a slower than anticipated market recovery. We will now deliver $100 million of synergies in 2024.
Further, I'm excited about David Baker's appointment as CFO of AspenTech. Dave is an experienced global automation CFO and a 27-year veteran of Emerson. He will bring a degree of structure, forecasting accuracy, and work with Antonio Pietri to reinforce a diligent management process. Lastly, I remain excited about what we can accomplish at Emerson. Our technology stack comprised of intelligent devices, control and software is highly differentiated in the marketplace delivering scaled value to our customers. Further innovation is alive and well at Emerson, and we continue to stretch the boundaries of the possible in automation.
Please turn to Slide 3. Emerson and our Board are committed to ongoing Board refreshments. And today, we have the privilege of announcing the newest member elected to our board of directors. Calvin Butler is the President and Chief Executive Officer of Exelon, the nation's largest utility company by customer count, and a member of its Board of Directors. As part of Exelon and its operating companies, Calvin has held senior management roles in executive management, operations, corporate affairs, and regulatory and external affairs. He is a passionate advocate for community equity. And his unique expertise in reliable, clean and affordable energy solutions will benefit Emerson as we continue to enable the energy transition and decarbonization for our broad customer base.
He also has a local connection as he was born and raised in St. Louis and graduated with a Law degree from Washington University's School of Law. Calvin will officially join our Board on August 1, 2024. This will expand Emerson's Board to 12 members, half of whom are women or people of color. Having the right skills represented on Emerson's Board is critical to our continued success. And we are excited to have Calvin join us.
Please turn to Slide 4. The second quarter exceeded our expectations and our strong results highlight our continued focus on execution. Sales, operating leverage, and adjusted earnings all exceeded Q2 expectations. Stronger volumes were driven by outstanding operational performance and more backlog conversion than expected. Price, cost and business segment mix were also more favorable than expected. Orders in the first half met our low single-digit growth expectations with a book to build greater than one. For the first half process and hybrid saw mid-single digit growth, while as expected, discrete saw a decline of mid-single digit. The demand environment for process and hybrid markets remains favorable.
Discrete automation orders were down year-over-year on a tough comparison but were up sequentially low single digits. And we now expect their orders to turn positive in Q4, a quarter delayed from our original expectation. While not impacting underlying test and measurement orders, were softer than anticipated in Q2, down 15%. For the second half, we expect mid-single digit underlying growth in orders. And low single digit to mid-single digit growth for the full year, led by process and hybrid resilience with delayed discrete improvement. Capital measurement continues to perform and delivered slightly better than expected future results for both sales and earnings.
The turn to positive orders in this business is now expected in the first half of 2025. True quarters delayed than our original expectation. We are seeing continued softness in transportation and semiconductor demand driven by constrained capex environment, while aerospace and defense is expected to be positive due to continued strength in government research and defense spending. This extended downturn enables another acceleration of synergy actions. And we now expect to realize $100 million of synergies in 2024, up from our prior expectation of $80 million as we pull in additional actions that will begin this quarter, and we're in the plan for 2025. Our differentiated portfolio is driving value creation for our shareholders. While we remain cautious on the timing of a recovery in discrete end markets and were slightly impacted by AspenTech's latest guidance revision. Emerson's first half performance stable process and hybrid demand and additional self-help actions provide confidence to increase our full year guidance.
We are increasing our underlying sales guidance to 5.5% to 6.5%, and raising our adjusted EPS expectations $5.40 to $5.50. We remain focused on execution and integration this year. Leveraging our Emerson management system, and we are energized as we look ahead at the strength of our new portfolio to deliver differentiated results. Our leading technology and exposure to secular growth markets paved the way for continued value creation.
Please turn to Slide 5. Emerson's Q2 exceeded guidance is an unexceeded guidance in underlying sales and profitability. Underlying sales for the quarter grew 8%, with our process and hybrid businesses again exceeding expectations and better backlog conversion than initially expected. Energy security and affordability and sustainability commitments drove strong performance in energy, LNG, chemical and power. Hybrid end market strength continued with Life sciences project Momentum in North America, Europe and Asia and robust metals and mining activity. Factory automation demand remains soft with continued weakness in China. Europe, Asia and the Middle East were particularly strong in the quarter with persistent strength in process markets, driven by energy transition and traditional energy markets. One noteworthy example is India, which has seen double-digit growth in five of the last six quarters, including this quarte, driven by broad economic expansion across multiple segments.
Our growth platforms also continue to perform strongly with underlying sales of double-digit in the quarter. Our profitability continues to reflect the strength of our new portfolio. Gross margin has significantly improved since we started our portfolio journey when I took over as CEO in 2021. Gross margins at that time were in the low 40s. And in this fiscal year, we expect to achieve gross margins over 50%, nearly a 1000 basis point improvement. In Q2 gross margin was 52.2, a 430 basis point improvement from the prior year. Operating leverage was 54% stronger than our expected low to mid 40s, again due to stronger volumes and favorable price cost and mix. Adjusted EPS also came in ahead of plan at $36, $0.10 above the top end of our guid, and up 25% from 2023. Emerson generated free cash flow of $675 million, up 32% year-over-year.
Mike Baughman will go through additional details on our results in a few slides. We are pleased with our Q2 performance. And the persistent strength in our process and hybrid businesses, giving us additional confidence as we look to the rest of the year. Please turn to Slide 6. Our strategic project funnel continues to grow and now sits at $10.8 billion, up approximately $400 million from Q1 with our growth programs up by $300 million and representing nearly two-thirds of the funnel. The funnel growth is in line with the constructive capex environment for our processing hybrid customers. This also reflects our exposure to robust secular trends as the increase primarily came from projects supporting sustainability and decarbonization, and energy security and affordability.
In the second quarter, Emerson was awarded approximately $350 million of project content with the increase in traditional energy stemming from the award of several large offshore vessels in Brazil. Our growth programs continued to demonstrate success, and I want to highlight three key project wins. First. Emerson and AspenTech were awarded an automation pilot project for a large chemical company in China. This is an important synergy win as the customer is developing a pathway to software-driven autonomous operations. The Multiyear agreement is an integrated solution for Emerson and AspenTech software that will provide high-fidelity hybrid models, and control automation for optimizing process operations based on real-time production data to increase product yield and reduce energy consumption. This example showcases the unique ability of the integrated Emerson and AspenTech portfolio to provide differentiated solutions for our customers.
In the energy transition space, Emerson was selected to support Shell's proposed Polaris carbon capture project in Canada. Polaris subject to final investment decision by Shell would capture CO2 from the refinery and chemical plant located at the Shell Energy and Chemicals Park in Scottford, Alberta. Emerson is providing much of our leading technology, including instruments and valves. And finally, Emerson was chosen to automate, a $4 billion manufacturing complex being built in Indiana by a large U.S.-based life science customer. Emerson will provide our leading DeltaV control systems and software portfolio, including a five-year subscription agreement for our DeltaV MES.
Please turn to Slide 7. This is a transformative moment for the U.S. power industry, as data centers are driving electricity demand increases not seen since the early 2000s. At the same time, power producers are retiring carbon-intensive assets in a drive to decarbonize their operations and investing in the resilience and optimization of the growth. The grid is also experiencing an unprecedented shift from the unidirectional grid of the past to a bidirectional intelligent grid of the future, which will be increasingly supported by intermittent power sources. There are multiple factors driving this generational increase in U.S. electricity demand. And data centers alone account for nearly one-third of all new U.S. electrical demand. AI data center racks consume significantly more power than traditional data centers with a search on ChatGPT consuming 6 to 10 times, the power of a traditional search on Google. Hyperscalers are revising capex estimates upward and increasing annual capex significantly in 2024 and build their AI infrastructure.
This is expected to continue for multiple years. The increase in demand is real, and it is happening today. Utilities in key regions across the U.S. are revising load growth estimates upward materially from recent years estimates. Georgia Power issued a revised assessment in which projected loan growth was 17 times greater than previously forecast. Resulting in approximately 30% greater total winter peak demand for the 2030 to 2031 winter. Dominion Energy has been a key beneficiary of traditional data center growth and forecasting another tailwind for AI data centers, more than doubling their 10-year average annual summer peak load growth from 2022. The North American Electric Reliability Corporation recently put out their annual nine-year growth forecast with new demand more than doubling from the prior year forecast.
While Emerson does not have material content in data centers. Emerson is a key player in the power industry for generation, transmission and distribution, all of which are set to be beneficiaries. Approximately 9% of Emerson sales are in power. And while we have a strong portfolio across our technology stack. I want to highlight the softer and control layer, which is relevant across the power landscape from generation through transmission and distribution.
The Ovation automation platform, innovation green portfolio of renewable solutions are purpose built for power generation, greenfield build and plant modernization applications. Together, our Ovation automation technology and green solutions automate approximately 50% of North America and 20% of global power generation. Emerson's strategic project funnel in power is up 45% year-over-year, reflecting the emerging potential. And I'd like to mention a key win from the quarter. Emerson was selected by a large midwest utility to modernize nine sites with the latest Ovation hardware, software, and cybersecurity solutions.
We were awarded based on our demonstrated ability to execute plant modernizations while ensuring safety, quality and reliability, all vital important in the power industry. With the increasing mix of generation sources and rise of distributed resources and microgrids, utilities must now also manage the integration of varying and bidirectional power flows. AspenTech's Digital Grid Management or DGM software also plays a critical role in managing the ever-increasing complexity of today's grid to maintain stability and control through real-time power management and demand side management software. DGM is a strong participant in these markets with approximately 40% share in North America, and approximately 20% globally. The necessity of grid digitization is driving investments in the advanced capabilities this software provides with the market forecasted to grow in the high teens. Emerson's leading products and application expertise across the power landscape make us well-positioned to capture the coming investments, both in the U.S. and globally, and we are excited to watch the future power generation, transmission, and distribution unfold.
With that, I will now turn the call over to Mike Baughman.
