艾默生電氣 (EMR) 2001 Q2 法說會逐字稿

EMERSON'S SECOND QUARTER FISCAL 2001 EARNINGS CONFERENCE CALL

Welcome to the Emerson's Second Quarter Fiscal 2001 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following today's formal presentation, instructions will be given for the question and answer session. Should you require assistance on today's conference, you may press the "*" followed by the "0" for an operator. As a reminder, this conference is being recorded Tuesday May 1, 2001. At this time, I'd like to turn the conference over to Bob Sharp, please go ahead Sir.

Thanks Matt. This is Bob Sharp, director of investor relations, I am joined today by David Farr, chief executive officer, Jim Berges, president, and Walter Galvin, executive vice president and chief financial officer. In today's call we will summarize Emerson's second quarter and first half of fiscal year 2001. You should have already received the press release, which explains a lot of what went on in the quarter. Before I begin, let me remind everyone that we intend to discontinue the use of faxing, as our primary means of communicating with investors. Please sign up in the investor relations area of our website, go to emerson.com for automatic email alerts, regarding our earnings announcements, SEC filings, and other events. We'll continue faxing for a while to ensure things are working properly, but to keep receiving faxes after that, you will need to call us and express that preference. First a quick Safe Harbor statement, our commentary in response to your questions may contain forward-looking statements, including our outlook for the remainder of the year. Information and factors that could cause actual results to vary materially from those discussed today is available in our most recent annual report on form 10-K which is filed with the SEC. For the quarter, consolidated sales increased 5.4% with diluted earnings per share increasing 1.2%, and EPS, excluding goodwill and amortization, increasing 2.2%. Highlights for the quarter included, the electronics business realized a 44% sales increase, organic growth was 20%, and sales were very strong across all major geographic regions. Underlying sales for the process business increased over 13% with double digit increases in all major regions. EBIT margins for the quarter expanded 220 basis points, driven by strong increases in the valves, systems, and solutions businesses, as well as the Daniel operations, we acquired in 1999. And underlying operating margins increased 0.4

points, driven by a sharp reduction in SG&A cost. The geographic sales, underlying domestic sales increased 0% to 5%, electronics based sales increased to over 20%, and process sales increased 15%. The industrial automation and appliance and tools businesses experienced mid single digit decline due to the weekend markets, and HVAC in the US was essentially flat. In international, currency had a negative impact of over 2 points on the consolidated sales. Total underlying international subsidiary sales, without currency, increased to over 10% with a 10% to 15% increase in Europe, a 15% to 20% increase in Asia, and a 20% to 25% increase in Latin America. At the operating profit line, consolidated operating profit margins declined 0.3 points to 16.1%. The underlying OP margin improved 0.4 points. Underlying SG&A improved 0.6 points, but this was more than offset by unfavorable business mix and dilution from acquisitions. Changes in the P&L statement below the operating profit margin lines are as follows, interest expense increased from $69 million to $79.3 million, and net deductions increased from $29.5 million to $36.1 million. Increase in interest expense is primarily associated with higher debt as a result of acquisitions. The increase in net deductions is associated with unfavorable currency impact, higher restructuring in reaction to the current business environment, and other items. As the underlying SG&A performance shows, we have taken several actions in this area, and we incurred restructuring charges as these actions were taken. As we have previously communicated, we view fluctuations in net deductions, whether they are positive or negative, as a normal part of operating a major

global corporation. Tax rate improved from 34.5% to 34.2% for the quarter. Diluted average shares outstanding was $431.4 million versus $430.7 million in 2000. Let's turn now to consolidated second quarter sales by business, as I mentioned earlier, currency translation had a negative impact of a little over 2 points on consolidated sales for the quarter. The following comments refer to performance on a fixed rate basis. Electronics reported sales increase of 44%, underlying sales restated for the Jordan Telecom and Ericsson's Energy Systems acquisitions to 20%, with strength across all major areas. As our press release indicates, we believe the product, customer, and geographic diversity of this business is what has helped us to continue growing faster in the overall market. However, virtually all areas of the US market, in particular, have softened dramatically in the past few months, and our second half sales forecast at this point reflects only modest underlying gains. Process [business achieved] 12%, driven by underlying sales growth of over 13%. The US, Europe, Asia, Latin America, and the Middle East all achieved double digits underlying growth. We believe the competitive dynamics within this industry have changed substantially in Emerson's favor over the past few years, due primarily to the investments we have made in this business. While the key industry players in general, were cutting technology investment during the market downturn, or focusing on other initiatives, we continued to invest in new software and devices technology. We also assembled and acquired the resources necessary to make Emerson a full service and solutions provider to deliver this technology in the market. Our customers have embraced these changes, and as they return to investing in capital projects, we are realizing the benefits

of this. HVAC reported sales increased 1.8% with underlying sales growth of 2% to 4% dampened by currency. Flat sales in the US dampened double digit increases in Europe, Asia, and Latin America. In the US, we believe the excess preseason inventory that was caused by the cool Northeast summer last year has been worked through, and we expect solid sales gains for the second half of the year. Industrial automation sales declined 5% with underlying sales essentially flat. On a fixed rate basis, upper single digit increases in Europe and Asia were offset by similar declines in the United States. Appliance and tools sales declined 2% with a 0% to 5% underlying decline. Tools and storage product sales were flat, while appliance and fractional motor sales, each declined 5% to 10% in line with the current market dynamics. Underlying orders from March are trailing 3 month calculations, decreased to down 5% to 10% with business results as follows, electronics orders decreased over 20%, industrial automation and HVAC orders decreased 0% to 5%, process orders increased 15% to 20%, and appliance and tools orders decreased 5% to 10%. At this point, we view this across the board decline as an unusual event versus the trend of any sort, and our near term sales outlook is better than these numbers would suggest. Finally, some highlights for the balance sheet and the cash flow statement, the company ended the quarter with net debt to net capital of approximately 40%. Operating cash flow for the quarter increased 3%. Our days in the cash cycle, which we use as an indicator of working capital efficiency and which includes receivables, inventory, and payables improved by 6 days versus March 2000, declining from 102 to

96 days. Capital spending for the quarter declined 18% versus last year which led to a 19% increase in free cash flow, defined as operating cash flow less capex. We currently expect capex to sales for the year to be approximately 3.8% of sales versus 4.5% reported in 2000. That concludes the quarter summary. Matt, we will be happy to answer any questions now.

Thank you Sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press the "*" followed by the "1" on your touch-tone phone. If you are using speaker equipment, please lift the handset before pressing the numbers, one moment please for our first question. Our first question comes from Bob Cornell, please state your company name followed by your question.

Good afternoon everybody. Hi guys, I guess the key question certainly from me and I am sure lots of people has, the comment attributed to Dave Farr that Bob probably [_______________] talked about earnings dynamics in the second half similar to the second quarter, I mean, what you guys are really talking about there?

I guess Bob, this is Dave speaking, given the difficulty lot of our customers are having right now, [_______________] forecasting what's going on, and we see fairly low growth in sales and some uncertainty relative to the US economy, what that can happen around the world, and we are basically seeing very modest earnings growth until we see a recovery at this point of time. And I think, when we call on the typical Emerson session, we're watching every penny and every cost.

So the comment relates, Dave, though to gains in the second half earnings over the second half of the prior year.

That's correct.

You know, some of your competitors in the electronics and telecom are coming out and saying that things for them are looking more severe in terms of the second half than you are intimating, I mean, and I think after the December quarter you guys admitted that visibility wasn't so great. How has the visibility improved and how comfortable are you with the visibility in the second half of the year, to make these kinds of comments about the earnings growth?

Bob, this is Jim. You've heard it from our customers, their visibility is not very good, and as a result, our visibility isn't all that great. We have had, as you know, significant order cancellations, which were reflected in the average 3-month numbers that Bob gave you. We do continue to carry a backlog, however, in spite of those cancellations, that is approximately equal to what the backlog was at this time last year. So, the new orders coming in have not been totally depressed, they are not as robust as they were this time last year, but we have seen more and effective cancellations than we have of an absolute collapse of new orders. And our visibility is no better than anybody else's, but we take some solace in the fact that our backlog is still relatively good compared to last year's, it is about at last year's level. But at this time, we also got to keep in mind that some of these guys are talking about sequential quarters, and not quarter-over-quarter. We are anticipating much softer orders in the second half of the year and have built our plans around that being the case, and I'm not sure that where that falls out of line from the people you're referencing.

Okay. I'll let that be the last question, I'll get back.

Bob, let me add to that, I guess the other issue is clear that the visibility in the whole electronic telecom area, it is clear that the top is [_______________] right now, but also as you saw in the quarter, our process business continues to strengthen around the world, and in addition, HVAC has continued to strengthen, and so with those two businesses, the one that's part of Emerson, the diversification, we are seeing that benefit from that. And clearly as we saw things get weaker in January, February, March, we've gone out very aggressively across this company to take appropriate action at the salary level, and in the cost level, to ensure that our cost structure going into the second half of this year is significantly lower than it was in the first half.

Yeah congrats to you Dave, for setting that process business up and then to John and everyone else, and you know, those of us who watched Emerson firms for many years have admired, their performance really is great.

Thanks.

Thank you Sir. Our next question comes from Michael Regan. Please state your company name, followed by your question.

Michael Regan from First Boston. Dave, to your point on process, sequentially through the quarter sales or certainly order growth continues to improve. Can you talk, sort of dynamic by market software relative to hardware kinds of things?

I guess, as we look at the market place right now, Mike, and the strength clearly as you can imagine is in our oil and gas and also our power business, and the pharmaceutical, and obviously some of the acquisitions which we made in the last couple of years with Kenonics and Solutions, and also with Daniel has clearly been helpful for us to recover this and see a nice strong growth. But as I look at our businesses, I look at very strong, what we would call device business, the instrumentation, the valves, the instruments with transmitters and built that type of equipment in the recent quarter has helped these companies to start and spend some maintenance money, where they had neglected for years, and we are seeing good business growth relative to our whole DeltaV in the software and the systems area, but it is pretty much across the board, driven very strongly by some of our instrumentation business and then our systems business, and right now a lot of them are obviously coming back and also the longer term of the oil and gas projects which are obviously in the power projects. So it is pretty much across the board, and we've seen that momentum continue in the last several months.

Can you put some perspective, Dave, on Bob's comments relative to orders. We've seen orders getting worse sequentially through the quarter January, February, March, and yet I think, Bob's comment was, we shouldn't read that as the trend relative to sales. Can you just reconcile why that is?

Yeah. It's clearly what you see going is a lot of dynamics going on relative to what made them book last year at this time, also relative to look in your backlog, and some of these businesses, like Jim mentioned, electronics, telecom, we have a good backlog. The other area is that if you look at some of these businesses, the business page relatively it's really a book-and-ship type of situation, and the order page is not important. So we are looking up at a pretty good backlog in certain areas like the process and the electronics and telecom, and then we're also looking at probably a very strong comparison last year in the February, March time period, where some of the US economy was pretty heated at that point of time.

Right. Jim could you followup on that relative to order cancellations. Are cancellations, kind of, across the board over time, or are we running into the impact where our customers are canceling orders just as they're about to go into production or in other words, is this a rolling thing that we need to be concerned about, or are cancellations, sort of, through the whole order book.

The cancellations, Mike, we are seeing more in the longer cycle, what I call the longer cycle products, particularly the Leibert stuff, the large UPS, and the large air conditioners, where we had gotten our lead times after 35-36 weeks. We saw orders in the fourth calendar quarter that were 80-90% over prior year. Now we never realized sales levels, we were shipping at that rate, so the backlog clearly went way up. And as things started to soften, those were the orders that got cancelled, as we analyzed them, many of those orders were placed for delivery in 2002. People were reserving space out in next year. So, that's the stuff, that's not all of it, I mean, we have seen some near term cancellations too, but a big chunk of the cancellations has been of stuff way out in the future. So our backlog ballooned way up, the order rates ran well in excess of our sales rates for 3-4 months, and now the comparisons, as you do this rolling 3 month thing, show these big negatives, but it is negatives off of levels that we weren't shipping to. So that's why Bob says, you can't read those negatives as falling due to sales, because we never got the sales up to an 80% kind of growth rate.

Got you. Okay, thanks for the clarification.

But Mike, clearly as Jim said, you are going to see weaker sales growth in that business in the second half of this year.

No, that's understood. I get the picture. The concern is just that suddenly people are canceling stuff just as it is about to be manufactured or shipped and that would be a bigger concern.

Right.

Thank you.

Thank you Sir. Our next question comes from Jeff Sprague. Please give your company name, followed by your question.

Hi, its Jeff Sprague with Salomon Smith Barney. Just a few more things on the backlog, and I'd like not to beat a dead horse here, but

Yes, Jeff, it is dead.

Yeah, it is dead, I'll kick it one more time. I guess, along the lines of Michael's question, do you feel you have a good sense of your efforts, just kind of, scrub down the backlog and make sure the customers have got the wherewithal to order what remains on the order book, or purchase what remains on the order book, or is there still some uncertainty about, kind of how the backlog might be delivered over the next couple of quarters?

Are you talking specifically about telecom?

Yeah.

Yeah. Jeff, I went up to Liebert personally, two and a half weeks ago, and participated in a review of the backlog and the forecast for orders going forward, and we substantially, in that exercise, downsized their expectations for incoming orders to reflect the pace of new orders we had seen. First of all, we scrubbed the backlog, and I'm comfortable that we've gotten all the risky stuff out of there. Secondly, we recast the year going forward based on the new order input, we've been seeing pre-cancellation, to make certain that they were, early on in February, they were a little bit in denial, and they were showing the thing coming back, and we have instead flattened that out at the pace we were seeing of new orders before cancellations in February, March, and the first two weeks in April, and substantially downsized their forecast, and have therefore taken significant salary headcount and expense control actions to get ourselves in line. I know we'd be hopeful that we can do better than that. But I'm pretty comfortable that the backlog has been scrubbed, and that we've got a new order input forecast that is reflective of the current pace of business for the remainder of the year. I think Jeff, Jim and his team really up there spent a lot of time starting back in January on this issue, because we saw the first signs in January, February, and they've been working at it pretty hard and not only that, just look at the incoming material to make sure we did not get caught short with a lot of incoming material and write off like other people have done. You know, it's been a very aggressive management relative to that because the last thing we want to do is get stuck with a lot of work in process and material sitting there that will take us a long time to work off, so this is something that they've been working on not just one month here. They have been working real hard here for the last 3 or 4 months.

Actually along those lines, I mean, the working capital improved in the quarter but it was more on liability side, higher payables, and things like that as opposed to inventories and receivables, and to what extent do you have a bit of a bubble to work through there as you move to the second half, and what impact might that have on absorption rates and the like?

Well, it is clearly understanding manufacturing [_______________] and absorption that we understand that and as things slowed down quite dramatically in the second fiscal quarter, we did see the inventory not go out as fast as we had hoped, but I think, the guys did a great job relative to receivables and payables and inventory, and cash is cash as I look at it. So from my standpoint, we are going to work through this; we have a plan; we have a very aggressive plan for the remaining part of this year to work that inventory down but be very careful not to take it down too rapidly because of that absorption issue. But to make sure we have positioned ourselves, as we move out of this year going into the next fiscal year, and we still have some businesses obviously they can do it a little bit easier without getting that big absorption hit, but we are going to work this cash flow both total days in the cash cycle, plus as you saw we've really cut back capital to generate more free cash flow, and we feel that that's very important relative to our whole debt position and also generate that cash flow for the shareholders.

And then just one other thing, I actually took Bob Sharp's comment about not applying the orders to sales to mean kind of all the orders we saw in March, not just the electronics orders, was that, I guess, really my question is...?

That's true.

You know, do you have an early read on what April looked like in the order book?

No we don't have an early read on April yet. I think it just closed but no we don't, but you are correct, it is relative to all of the company, because last year there were several businesses that were running quite strong on a comparison basis, but at this point, we don't have any readout on April at all.

All right, so you are basing that more on comparisons than tangible evidence on April at this point.

That's correct.

Okay thanks.

Thank you Sir. Our next question comes from Scott [_______________], please go ahead with your question. Please state your company name.

Yeah, hi, [_______________] Capital, I just want to try to clarify something here. As far as the question earlier and your comment in the press release in Emerson earnings dynamics similar to second quarter, you said earnings will be similar to second quarter or is that similar to second quarter because earnings will by comparable year over year.

We're looking comparable year over year.

Okay.

I think that's what the question was.

Comparable year over year not comparable to second quarter earnings?

No, it's comparable year over year.

Okay, and then when you went through your March numbers, you said process was up 15% to 20%.

In the second quarter, I mean, look at the number.

Numbers for March. When you were running through your March remarks.

That was a quarter.

That 3 month order number.

Three month order number was up 15 to 20.

Up 15 to 20. Okay, thanks.

Thank you Sir. Our next question comes from Lawrence Horan, please state your company name followed by your question.

Hi, it's Larry Horan from Parker Hunter. In terms of your other net deductions, about how much of that was currency and how much of it was restructuring?

We really don't give out details. We've said that the increase in net other deductions, the year to year amount from the 29 to the 36 approximately, was more than explained by the increase in currency on that line, as well as the increase in higher restructuring, those two cover more than that increase. There were other pluses and minuses.

But I also thought in your comments that you mentioned that there would be further restructuring in those numbers in the next quarter, in the current quarter.

Yes, we continue to say that as we previously had communicated, we view that the restructuring actions we handle as a pay-as-you-go basis, and we will continue to have restructuring in the third and fourth quarter, as we have done for many years. We have never taken a large restructuring hit. We have always just pay-as-you-go, take specific action and expense those specific actions in the quarter that we are in.

What I'm trying to get to is, it looks like it might be because of the slow down in demand that the restructuring charges might be a little bit larger than your usual annual run rate.

A little bit larger but not much, I mean we are taking salary headcount now which we are not going to put a big number out there because I don't see them right across the board, we are clearly adjusting and that's anywhere from low single digit to double digit percentage in headcount based on that business environment, and we've always paid as we go on these restructuring. We don't take a big write off.

I understand, okay thanks a lot.

There is people coming out.

Thank you Sir, our next question comes from Nicole Parent, please state your company name followed by your question.

Banc of America Securities. Hi, guys. I was just wondering if you could comment a little bit on margins in telecom and electronics, and as you see the implications of lower volumes, I mean how are the Jordan and Ericsson business doing on the margin side, and also what are the pricing trends in that business looking by products?

All 20,000 products, Nicole?

Generally speaking, how bad it is.

I'd have to say that to date, we have not, to answer your price question first, we have not seen a dramatic collapse in pricing in most of the businesses. There are exceptions, I would say that Duraline, which is the duct business have seen some significant price pressure, I mean, their volume in the US is down 45%, and there is a lot of capacity around in the industry, so we are seeing some price pressure there. But in the electronics part of the business, the pricing has been surprisingly good, and I compare that to the 1998 period now. In 1998, a lot of that was driven by the collapse of the Asian currencies, and many of the Asian manufacturers immediately passed through the effect of their devaluation to customers in the US and Europe, and of course that's not going on this time, and I've been pleasantly surprised in terms of the price. I was at Astec last week and their pricing remains pretty good. In terms of margin, we did struggle a little bit in the second quarter in margin, and on the two companies you mentioned, about the Jordan and the Ericsson piece, they went through a dramatic slowdown in a couple of their higher margin pieces of their business, but we have taken action and fully expect both of those companies to be at record margins in the fourth quarter, and forgetting the acquisitions for a minute, the base company, their margins were very strong, up about 2 points.

Okay, great. Now I guess also just in terms of thinking about the EPS guidance, as we look at the delta between the consensus at 345 and kind of the implications of what you're saying to our 341 net numbers there, could you just walk us through the businesses, and what I'm also trying to figure out is, if there are gains associated with the sales of one of businesses that do happen in the second half, will they be completely offset with restructuring or is there a potentially upside to the number?

Yeah, I guess, let me walk through the businesses which I just did for our Board a few minutes ago. Nicole as I look at the second half, I guess, we are going to continue to see a good process growth, and I think we will see the process growth in the second half very similar to that we saw in the second quarter. The industrial automation, I feel will continue to be very sluggish, and as you go into the second half, the US industrial production is way down, and we clearly don't see this improving in the short term. Electronics and telecom growth rates, we believe will get much weaker than we saw in the first half, we see it in the flat range, and then what we're seeing in the HVAC, we're seeing a good strength in the HVAC driven by Copeland, you remember last year, in the second half there was a weakness in many markets in the US, because it was really a cold summer, and we are also seeing Copeland being very strong in Asia and Europe this year, so we see a pretty good growth there. In the appliance and tools business, we see product being weak for the next quarter with potential output strengthening, as we go into that fourth quarter because of a weak comparison last year. But overall, we are looking at in total, we are looking at weaker sales growth in the second half of the year, on a fixed rate basis. In addition, the currency continues to eat at us with the euro at 88 cents. But right now, if we do sell the divestitures, we're looking at doing a lot of restructuring as we position ourselves to get into 2002, so we would look at that being offset at this point in time, clearly what we are focusing at is trying to drop our underlying profit margins for improvements, and we're going to use those restructuring opportunities wherever we can.

Great, and one last question, just on European trends. Your trends in Europe actually seem pretty good, could you just comment on the outlook for some of the businesses over there?

We have been pleasantly surprised with the strength in Europe, and we had a very strong double-digit second quarter. We do see that starting to slow down for a couple of reasons. One, there were pretty good comparisons in last year, and secondly, we are although obviously getting concerned that Europe may start slowing down with the US economy slowing down, so we see the businesses lot of it's process, lot of it's HVAC and electronics continue to do well there, but we expect that to start slowing down, as we get to the end of the second half of this year.

Great thank-you.

Thank you Ma'am. Gentlemen our next question comes from Cliff Ransom. Please state you company name followed by your question.

I will do it offline, thanks.

Thank you Sir. We will move on to the next question, and the next question comes from Tom [_______________]. Please go ahead with your question.

[_______________] Capital Group. I just want to go back to the, when you were talking about earnings guidance with regard to the, or rather sales guidance with the telecom group, and you said you guys haven't really had a look overall into your April book. I am just trying to get an understanding, does your backlog now give you enough visibility to look at the quarter of the year, or what kind of confidence do you have in the guidance that you are giving specifically for the electronics and the telecom group, at this point.

Well, this is Jim, I think, again the backlog is relatively significant. Unfortunately, it is not all for shipment in the current quarter, although again the horizon on the backlog, it has got a lot shorter than it was. When polling around with the guides, I think everybody felt pretty good about making their April numbers. We have not seen the booking numbers, as Dave pointed out. I think the shipment numbers are okay for April, and I think we did poll a couple of the larger units, and they are standing by the numbers that they have given us for the third quarter. So that's the best I can say right now. We have as you know a couple of large OEMs out there, in Nortel and Ericsson, who can swing us around in the very short term, if they decide to shut their factories down for a week or something. We'd take a non-planned week out, because they are not moving stuff through that's always something that can happen. That happened to us in the second quarter of Ericsson, a bit of a surprise to ourselves, we got backlog in the long cycle stuff. In the short cycle stuff, the things we shipped to the OEM factories, it is almost a book and ship kind of business, as Dave was mentioning, and we don't have a lot of visibility there and could get surprised, although, we have seen order kick ups in a couple of Astec power OEM's. We have seen increases in orders in the near term from a couple of those guys.

Great, thank you very much.

Thank you Sir. Our next question comes from Sheelagh McCaughey. Please go ahead with your question. Please state your company name.

Good afternoon everybody. Morgan Stanley. Jim, I was wondering if you could just take us briefly through, kind of, by product category and end market in electronics and communications where you are seeing, sort of, the biggest weaknesses and biggest strengths, is there a difference by end market.

Okay let me give it you the best I can. Currently, the US demand for large UPS and air conditioners, which were going into web hosting sites has slowed dramatically. That affects Liebert. The web hosting site activity in Europe and Asia continues to be good. We keep hearing reports that other people are slowing down in that area, but our order book and shipments continue to be good relative to large UPSs and air conditioners sold specifically to the web-hosting guys. Business to data centers, financial companies like your own and their data centers continues to be okay. It never went through the bubble that we went through in this other thing, and business there continues to be good. We continue to win big orders for data centers and feel pretty good about that. On the telecom side, the systems business, the stuff the large rectifier systems that we ship to the users, both at Ericsson and at Nortel continue to be pretty good. The portion of the telecom that is very soft is the portion that we ship to Ericsson and Nortel factories for inclusion in their equipment and that's where we have seen some pretty significant weakness in demand at both of the Nortel EPS business and the Ericsson power systems business. Ericsson in particular has continued to see strengths in Latin America, Mexico in particular, and Brazil, and they have seen good orders in, for systems now, in Spain and in Asia, and then finally if you look at Astec power, of course they are tied closely to the personal computer manufacturers, and they began to see slowdown in the fourth calendar quarter of last year and have continued to see slow orders, although again as I mentioned when I was out there last week they had an order uptake in a couple of locations, and we have gained some share there with some new wins at a couple of the large OEM's. So it is kind of spotty, one of the things that you might want to look at for your own reference is to dissect Ericsson's numbers and separate out the handset business from the systems business.

Right.

Because we do not supply anything to the handset unit, and we are closely tied to their systems business. And I believe that you will see that their system business continues to be pretty good, and therefore reaping the benefits that are, our business will supporting the Ericsson's sales around the world with these big rectifier systems has been pretty robust. Now we are slowing down but it is not going negative on us.

And Jim what about capacity? Are you having to take down capacity, where are you in terms of capacity in the electronics business.

As you know, we discussed this previously on the way up. We have been relatively cautious in adding capacity to the degree we could. We outsourced and I will give the specific Liebert story. I repeat what I told you earlier, we have entered into some short term leases on some buildings, some of the capacity we added was in Mexico that we would have put on any way to move jobs out of high cost places in the US. So if we kind of accelerated our facility we are putting in Mexico, and we intend to go ahead and fill that up in spite of the slowness, so we will get a cost reduction from that, and we have done significant outsourcing of stamp metal parts, of transformers, of copper tubing, and we are now in the process of bringing a lot of that in. We were paying almost 40% premium on the outside to have that stuff done, so we are getting a cost reduction if we bring it in. And we were also working significant overtime both in the hourly and in the salaried ranks. We worked almost every Saturday and Sunday in the fourth calendar quarter at Liebert, and now as we slow down, we are going back to normal workweeks there, and again getting a big cost reduction, because we are not paying the premium. So I think our caution on the way up is helping us maintain and actually improve margins as things slowdown.

That's great and I have just one final question. David, can you comment on what you expect in terms of operating cash flow. Will you be able to grow operating cash flow better than earnings growth in the back half of the year based on what you are doing with capex and working capital?

Operating cash flow does not include our capex.

Oh I am sorry but including capex.

Including capex, our cash flow or free cash flow will be stronger growth than our earnings per share growth.

And in terms of operating cash flow.

It is still the same. We have continued focus as you know Sheelagh in this area here to drive cash.

Great, thank-you.

Thank you Ma'am. Our next question comes from Martin Sankey. Please state your company name followed by your question.

Hi, this is Martin Sankey from Goldman Sachs & Company. Since electronics has been beaten in to submission, can we look at the industrial, tools, and appliance businesses on a little bit more granular form particularly industrial with Leroy-Somer versus the industrial components businesses?

Martin I appreciate you recognizing we've beaten the hell out of the electronic and telecom. Jim's voice has gone bad. He has got a cold. He wants to save it for a while. But industrial automation is sort of a mix bag, as you saw in the quarter, we had negative growth in the sales line. The biggest issue there and the reported currency, with a strong Leroy-Somer presence, but if you look at the businesses, Leroy-Somer is up right now. On a fixed rate basis, they had a good year. The control technique is up and they are having a pretty good year. The big issue there is our US power transmission business EPT, which is driven very much by the whole industrial capacity elevation, which is down significantly for the last 6-9 months. That's the big driver there. That caused the sales drop off, that's caused the de-leverage, because that is a very profitable business, and one that has a lot of fixed cost of manufacturing. But Leroy-Somer is doing well and the big issue there is some previous loss of currency.

Lets see, ASCO switch is also in industrial automation.

ASCO valve is up by year to date. Again they are doing very well in Europe, and we would expect that they have also losses, because of the strong presence in Europe. We have lost currency there, but they are doing okay this year. The biggest issues in that segment are really two. You have EPT, Emerson Power Transmission very mechanical product here, primarily US, and then Commercial Cam again selling to the automotive industry is also struggling this year too and they are down significantly. You know, they are both very, very profitable businesses and driving this drop-off in sales, the drop-off and the de-leverage accordingly. And we're taking very significant actions in both those places to recover some of those profits during the second half of the year.

Okay and in tools, you mentioned that this has been struggling a little bit, but you have new programs, how does that rollout?

We are seeing the tool business, from the standpoint of tool business, we are seeing our Home Depot sales continue to grow, and we see the inventory from that standpoint, the home centers are in pretty good shape. They struggled in the first of the year, but we see them picking back up, as we go in to the fourth quarter. The big issue in this segment was the appliance industry which is the motors area. The Whirlpool [_______________] and the Electrolux, you have seen those sales are down in the first several quarters, and we see that recovering as we move into the later part of fourth quarter. The other segment in that motors area, we have in there our, what we call, our commercial and industrial motors which is down significantly that's again driven bulk of the industrial production level, that's driving the big negative in that market segment. But the tools businesses, I think, at this point of time are pretty well stabilized, and we see with the home centers picking back up, interest rates coming back down, we should see the year progressing a little better for us going in to fourth quarter.

Okay, lets see, that's it from me.

Thank you Martin.

Thank you Sir. Our next question comes from David [_______________]. Please go ahead you're your question. Please state your company name.

Hi, ARG. I would like you guys to give us the percentage trends again by product line and I hear with an accent sometimes I don't write it down right. Industrial automation?

What do you want? Which one? Do you want to hear the quarter or what do you want to hear?

Well the March first 3-month moving average like you have in your 8-K.

The order strengths?

Yes please.

The order numbers were industrial automation was down 0-5, HVAC was also down 0-5, electronics and telecom was down over 20, appliance and tools was down 10-15, process was up 15-20, and the total was down 5-10.

Okay very good and now I don't want to beat the electronics and telecom either, but 3-month average being down 20%, March must have really been a disaster for that average to go from +30 to -20, do you have any estimate of what March would have been alone and have you seen that recover in April?

I think the important thing to understand is when you do a 3-month moving average, December and even November, but December was huge. I mean, the orders in December I think were up 85% over the prior year. When we go to a 3-month moving average, that number drops out when we slide over and pick up March and drop that one out, and a lot, as it turns out, as I mentioned earlier, lot of those orders were placements for [_______________] sometime that have now been canceled. So the number you are seeing reflects the delta from that big increase we had in December, and furthermore, a cancellation of a lot of the orders that were placed in the fourth calendar quarter.

Okay thank-you.

Thank you Sir. Our next question comes from Joe [_______________]. Please state your company name followed by your question.

My question has been answered. Thank-you.

Thank you Sir. Our next question comes from Bob Chamber. Please go ahead with your question.

Thanks fellows. I have a couple of questions for you Dave. First, in terms of the growth and the process piece, do you see yourself close to or any concerns about capacity constraints in that business?

No, not at this point of time.

Based on your growth that you have projected this year, do you think it could happen this year at all?

From the capacity standpoint, we have not seen any issue here.

Okay, and Jim I hate to do this to you; your voice is I guess, is not that good, but one more question on this if you could. You talked about your backlog being the same as last year, what I wonder about when you say that is, the business is obviously growing. So is it the same on an absolute dollar basis, or is it the same on a percentage basis? How do I view that is it...?

It's an apples and apples comparison of the same companies that we were measuring last year to this year. The backlog is approximately the same as it was at this time last year. On a dollar basis, and Dave has mentioned that our outlook for the second half of the year for this business is approximately flat, so I think those two things are consistent.

When you say flat just so I understand it, were all the acquisitions now annualized or not?

Yes we closed on Ericsson on April 1, 2000, so going forward we will be, we are on a comparable basis.

And then when you say the difference in short-cycle and long-cycle, what percent of the business is short, what percent is long?

Oh boy! I don't know if I can tell you that. I'll have to go do some math, but it's, when I talk about that it is the large systems business at and I really can't give you that cut, you know, the big stuff at Liebert and the rectifier systems business at both Ericsson and at Nortel, right at this minute I couldn't tell you how big that is.

Okay, and my last question is, as the cash flow improves a little bit and your debt comes back in to line where it has been historically, I noticed this time in the press release that you actually mentioned share repurchase as an option. I am wondering what your thoughts are on share repurchase going forward?

We have continued to do share repurchase. We have been doing it for several years now, and we will continue to do that relative to our whole debt position, and we balance that between the acquisitions and our whole free cash flow, so we are planning to continue buying.

Okay thanks.

Thank you Sir. Our next question comes from Alex Mitchell. Please state your company name followed by your question.

Hi, SAC Advisors. First on the earnings dynamics comment, you are talking about pretax operating earnings there, right?

What was it on the earnings dynamics guidance or earnings per share?

Yes. That's EPS. Okay, so it's not necessarily the same as pretax or operating?

It varies. I mean, sometimes the operating I mean, it depends in the acquisitions in there, impact of goodwill and interest, your pretax margin, and your pretax growth and tax rate it does [_______________].

Okay and two questions about the electronics and telecom, sorry to dwell on that because I am asking my question towards the end of the call? You brought up the difference between the US, European, and Asian growth rates, are you able to split out just how much Europe and Asia contributed to the overall sales line in the electronics and telecom and probably comment on the actual growth rates?

Again just give us a second here.

It's approximately the overall increase we gave you was about 20 plus percent underlying core growth rate for electronics in the second quarter, that is, it was slightly stronger than that in the US, slightly stronger than that in Europe, quite a bit stronger than that in Asia Pacific, and in Canada it was down, you can guess on the customers where it was down. Overall, it was up about half of the overall growth rate, which was printed about 44%, I believe in the segment disclosure, half of that came from the impact of acquisitions, and the underlying fixed rate growth rate was in the 20.

Okay and a lot of your competitors are seeing payment terms stretched up by the customers or have written off on non-collectables, have you would have any experience there?

None whatsoever, you look at the receivables and our days outstanding I think went up this versus last month, and the primary reason for that is the mix of our business. It is more of an international and which is a strong percentage of our business this quarter, and also the process, which though the term typically is pretty international no longer, but we have had good collectables, that's why we watch the days in the cash cycle and it is showing pretty good trend.

Yeah, historically we've had.

Thank-you.

Thank you Sir. Gentlemen our next question comes from Ken Newcombe. Please state your company name followed by your question.

My question was answered thanks.

Thank you Sir, we got a followup question from Michael Regan. Please go ahead with your question Sir.

Thanks, Jim, is it fair to say that the roll back in caps spending for the year basically comes out of telecom? It seems like a lot of that for the capital was gone.

No, we are cutting capital across the board and Dave can speak to you a little better than I can, but we had increased the capital spending on electronics and telecom to keep up with the growth and we have ratcheted it back there, but we have fared back across the board.

Yeah, all the segments were down.

We are focusing on cash flow Regan, and you preach that to me.

Thank you so much.

That would be nice.

Thank you Sir, our next question comes from Brian Langenberg. Please state your company name followed by your question.

Thank you Brian Langenberg, with First Union Securities, just a question, part A and B for process control, on the core growth of 13% could you differentiate a little bit between your hardware sorts of business and the systems like the DeltaV, and the second question is how much of this you think is end market versus taking some share at least near term from competitors who might be getting consolidated.

Okay number one, I had already talked about the, what I told, instruments versus the software, but it is pretty much across the board, the instrument business and the systems business were up both strongly, I think the issue we are seeing right now is, as I mentioned earlier, there is a lot of MRO maintenance repair work going on, the cut back for years and years in the oil and gas industry and some of the other areas, and so we see a lot of growth there, but if you look at the balance, you look at our instrument business, the regulators all those businesses are seeing pretty good growth rates and when you come down to our solutions business which I know many people out there question that we ever do this, but we are seeing significant growth there both through internal growth and through acquisitions, we get into the major projects. But we see a pretty good growth across the board in our process areas.

So the level of growth is similar between the two.

Yes, pretty much, as I look at it, it varies, but it's pretty close. Now the other issue related to the marketplace, clearly, we have pretty good strength in oil and gas, and the power area. The market, in total, is growing as rapidly as we just grew the last couple of quarters, and as we expect, I think, we are doing a pretty good job. We've invested a lot of money in new technology, advanced technology, the intelligent devices in our new systems and we are starting to return those benefits right now around the world.

Okay, thank-you.

Thank you Sir, our next question consists of a followup question from Bob Cornell. Please go ahead with your question Sir.

Yeah, just an update on some of the internal issues you guys are pursuing the Lee Manufacturing, outsourcing, purchasing.

[_______________] Bob. That's a pretty general question.

All right, take Lee in then.

Well, lets take Lee, I mean, the efforts have continued clearly with the slowdown, but we are focusing very hard to make sure we keep driving the inventory upward, more investing in that program. As someone pointed out earlier, as the business has slowed down, the turnover has not improved, but we are working on that very hard. I would say that the effort Lee Manufacturing all the new facilities that are going in are going to be Lee and we have continued efforts across the board and focusing hard on that. I mean the initiatives have continued to work well for us, and I think it's a big driver. We have driven cash flow even positively in a down type of graph we are seeing in a couple of our businesses I think it is pretty important to us.

Thanks.

Thanks Bob.

Operator, we can have one more question.

Okay Sir, our next question comes from Matt Collins. Please state your company name followed by your question.

Edwards Jones, can you just give us an update on your operations in China, and what kind of contributions you are going to have this year, what does the capacity look like, and plans for growth?

We will do this year, in China, our expected sales in country are $450 million, that's up, without acquisitions that's up 30%, a significant growth, and then if we add acquisitions in there it is probably up 50 or something like that, but organically roughly about 30% in China, and so we are on a great growth trajectory there, we actually produce another $350 million worth of products in China that we export to other markets around the world. So our total activity in China is about $800 million.

And is that primarily HVAC or what else is it?

It's well distributed industry. It's distributed pretty evenly between HVAC, process, and the electronics and telecom business. The other tools and motors and appliances and industrial automation are relatively small in China. So the bulk of that is split almost a third, a third, a third between the process, HVAC, and electronics and telecom.

Okay, thanks.

Thank you Sir. Gentlemen, please continue with any closing comments.

Thank you everybody for joining us, and as always, you can give me a call afterwards if there are more questions.

Thank you. Ladies and gentlemen, this concludes the Emerson's Second Quarter Fiscal 2001 Earnings Conference Call. If you would like to listen to a replay of today's teleconference, you may dial 303-590-3000 and inter access code 322338. Once again, the replay number for today's teleconference is 303-590-3000 and access code 322338. Thank you for participating you may now disconnect.