艾默生電氣 (EMR) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Emerson third quarter fiscal year 2006 conference call. [OPERATOR INSTRUCTIONS] Emerson management's commentary and responses to your questions may contain forward-looking statements, including their outlook for the remainder of the year.

Information on factors that the could cause actual results to vary materially from those discussed today is available in Emerson's most recent annual report on Form 10-K as filed with the Securities and Exchange Commission.

During today's call, Emerson Management will discuss some non-GAAP measures in talking about the Company's performance.

The reconciliation of those measures to the most comparable GAAP measures is included in the back of the slide presentation or within the slide presentation that is accessible by a hyperlink posted on the Investor Relations main page of Emerson's corporate website at www.gotoemerson.com.

I would now like to turn the call over to Mr. Chris Tucker, Director of Investor Relations for Emerson.

Please go ahead.

Thank you, Michael.

I'm joined today by David Farr, Chairman, Chief Executive Officer and President of Emerson, and Walter Galvin, Senior Executive Vice President and Chief Financial Officer.

Today's call will summarize Emerson's third quarter 2006 results.

The conference call slide presentation will accompany my comments and is available in the Investor Relations section of Emerson's corporate website.

A replay of this conference call and slide presentation will be available on the website after the call for the next three months.

I will start with the highlights of the quarter as shown on Page two of the conference call's slide presentation.

Third quarter sales were up 17% to $5.2 billion, with increases in all segments.

We had strong underlying sales growth in the quarter of 12%, and four of the five segments had double digit underlying sales growth.

Operating profit margin improved 20-basis points to 15.7%.

Earnings per share was $1.18, up 18%, excluding the impact of repatriating foreign earnings of third quarter of 2005.

Operating cash flow in the quarter was $620 million and free cash flow was $480 million.

We continue to make good progress with our operational efficiency initiatives, with improvement in both the average days and cash cycle metric, and trade working capital as a percent to sales.

We also posted strong operating cash flow to total debt ratio at 57.5%.

Turning to the next chart, you can see the sales at $5.217 billion, again up 17%.

Operating profit of $819 million, up 18% or 20-basis points, with good leverage on sales volume and cost reduction efforts more than offsetting material inflation and the dilutive impact of recent acquisitions.

Net earnings in the quarter was $486 million or 9.3% of sales.

Diluted average shares outstanding in the quarter was $412.9 million, and we did purchase 3.7 million shares during the quarter.

Earnings per share on a reported basis up 37%.

And again, excluding the $0.14 tax impact of foreign earnings repatriation, earnings per share was up 18%.

If we go to the next chart we can see the underlying sales growth by the major geographies of the world.

Strong growth again in the United States, up 10%; a nice acceleration in Europe, up 8%;

Asia up 19% and Latin America up 24%;

Canada down slightly, with total international growth of 13% and again, total underlying sales growth of 12%.

No impact from currency in the quarter.

Acquisitions again adding five points to growth, which gets you to the consolidated sales of 17%.

Next chart is more income statement detail.

Gross profit dollars of $1.856 billion, up 16% or 35.6% of sales.

SG&A at 19.9% of sales, which gets you down to the operating profit of 15.7% of sales.

Other deductions in the quarter were $54 million, up $11 million with the gain on the MKS stock of $12 million, but unfavorable FX of $18 million.

Interest expense of $51 million gets you down to pretax of $714 million or 13.7% of sales.

Taxes of $228 million or 32% in the quarter.

We're now expecting the full year tax rate to be approximately 31%.

Next page, cash flow and balance sheet.

Operating cash flow, as mentioned earlier, of $620 million, a 2% increase in the quarter, driven primarily by higher earnings.

We do have increased working capital dollars given the higher sales levels.

Capital expenditures in the quarter increased as planned to $140 million, which leaves free cash flow of $480 million, down 2%.

Again, you see the cash flow to total debt ratio with significant improvement over the prior year.

And at the bottom of the page you see the trade working capital detail, where we had a nice improvement of 50-basis points on the ratio of trade working capital to sales, so we continue to have a strong balance sheet and good liquidity to invest for future growth.

If we go to the next page, we have the business segment P&L.

The segment EBIT at $798 million, which is an 18% increase.

Again, benefits from cost reduction activities, sales volume leverage, more than offsetting the inflation and also dilutive impact of acquisitions.

Difference in accounting methods of $46 million, up $7 million.

Corporate and other up $15 million, as we had some litigation and acquisition expenses offset by the MKSI gain, interest expense of $51 million, down slightly, which gets you back to the pretax number of $714 million.

Now we'll walk through the individual businesses.

Next chart first is Process Management.

Another strong quarter here.

Sales of $1.233 billion, a 16% increase.

Underlying sales were up 11%.

Acquisitions added nearly five points of growth and currency added a little less than one point of growth.

By geography had the U.S. up 13%, Asia up 16%, and Europe up 3%.

If we look across this segment, we had strength across all the businesses in the segment and EBIT dollars of $221 million with an increase of 20%.

Nice margin performance here on good leverage from the sales volume increases and, also, material containment programs and cost reductions more than offsetting inflation.

A very strong first three quarters for this business, with year-to-date sales up 15% and year-to-date profits up 25%.

We continue to have a positive outlook for our key end markets in this business.

Next chart is Industrial Automation.

Sales in the quarter of $968 million, up 17%.

Underlying sales were up 11%, acquisitions added seven points of growth and currency subtracted one point.

By geography we had the U.S. up 11%, Europe up 14%, and Asia up 8%.

Continue to see strength from the key Alternator and Electrical Distribution business, driving growth here.

EBIT dollars in the quarter of $142 million, up 19%. 20-basis point improvement, as we had sales volume leverage and price increases more than offsetting material inflation.

We continue to see broad, global industrial demand here, driving order growth for the business.

Strong pace in the quarter with 10% to15% order growth in the third quarter.

We go to the next page, Network Power.

Sales here of $1.155 billion, up 38%.

The underlying sales growth was 21%, with acquisitions adding 16 points of growth, currency adding one point.

By geography we had the U.S. up 20%, Asia up 40%, and Europe up 5%.

Strong growth from the core UPS and Precision Cooling business and also strength in the core Embedded Power business.

EBIT dollars of $139 million, which is an increase of 41%, and margins for the business up 30-basis points, a nice improvement, given that the acquisition has diluted margins by 160-basis points.

We continue to have good growth from our Network Power China business, which is really driving growth throughout all of Asia.

We also closed the Artisan acquisition during the quarter.

That integration is under way and ahead of plan, and we continue to see a strong pace of business here with another quarter of 20%-plus of order growth.

Next chart, Climate Technologies, very nice quarter here.

Sales of $923 million, up 10%.

Underlying sales were also up 10%, with no impact from currency or acquisitions.

By geography, we had the U.S. up 12%, Europe up 21% and Asia down 4%.

We continue to see the growth from the residential air conditioning markets, as the industry continues to move to the higher-efficiency 13-SEER production, which drives market share gra -- gains for this business.

Nice margin performance here with EBIT dollars of $155 million, a margin expansion of 120-basis points, driven by nice leverage on the sales volume and also cost reduction programs driving the improvement.

A good pace of business continues in this quarter -- in this business as well, with 20%-plus order growth during the quarter.

Next chart, the last segment Appliance and Tools.

Sales in the quarter of $1.099 billion, up 6%.

Underlying sales were up 5%, currency added one point of growth.

By geography we had the U.S. up 5%, Asia up 34%, and Europe flat.

The growth was led by the Tools business and also the Hermetic Motors business.

EBIT dollars of $141 million were down 2%.

Margins decreased 80-basis points, excluding restructuring.

We continue to see significant material inflation not offset by price increases.

We did launch a new high-end line of disposers in the quarter, which was a nice adder to growth, and we also acquired the Flo Healthcare business, which will go with Emerson's storage solutions.

We go to the last chart, basically a strong first nine months of the year.

Sales up 15% and earnings per share up 33%.

Order trends have remained strong, with 15% to 20% order growth during the quarter.

We now expect full year earnings per share in the range of 433 to 438, with underlying sales growth in the range of 10% to 12%.

Full year reported sales are approximately $20 billion and restructuring spend in the range of $80 to $90 million.

We've maintained our cash flow targets for full year operating cash flow of $2.5 billion and capital expenditures of approximately $600 million.

We're now looking for a return on total capital for the full year of approximately 18%.

So, in summary, as we look at 2006, shaping up to be a very nice year on all the key financial metrics after a couple of great years in '04 and '05, as well.

So with that, I'll turn it over to David Farr.

Thank you very much, Chris.

As Chris mentioned, as we look at this year, we've had a very strong quarter here.

I have to say, Walt and I have been around a long time; this is one of the strongest we've seen in quite some time, and in the first nine month of this fiscal year are outstanding.

And I have to say that I want to first of all thank the entire team who's I consider performing and executing flawlessly at this point in time, and all of the key initiatives and all of the operations out there, from the OCE of Walt and Ed and Charlie and to all of the business leaders.

They've done a superb job this year in I think some very difficult environments with material inflation as it's been and the changing economics and the changing mix of our business, they continue to execute and we're going to perform at record levels, and I think the operations are in great shape.

And as with all companies, we have issues we have to deal with, but what I like about this team is they deal with them, and they deal with them hard and they get on with it. .

If you look at the underlying sales growth performance, the companies have been outstanding.

We're running at record levels.This is our third quarter in excess of 10%.

We will be well north of 10%, between 11% and 12% for the whole year.

Sales quickly approaching the $20 billion mark.

If we're not there, we'll be darn close; we'll average around up to that.

And excellent margin improvement in a year that we have underlying material inflation that's quite significant in the raw materials, and also in the quarter we had the margin dilution of 50-basis points from the recent acquisitions.

We've offset that and still had increased margins.

As we continue to perform at our working capital, we're generating record levels of cash flow.

We will generate close to $2.5 billion of operating cash flow this year, a record for the Company.

And as I look at the underlying returns from total capital, hitting the 18% mark is a target we had set up for ourselves for 2008 and we're hitting it early.

Tremendous performance and we have not seen an 18% ROCI in this corporation on a report basis for some time, so the team's done a great job there.

The earnings per share growth we're seeing this year in the 22%, 23% range, we're going to have on average three years in a row now close to 20% earnings per share, so all in all, the Company is performing quite well.

As I've mentioned on numerous times here in the last several months, the economy is shifting from fourth gear to third gear.

It is not shifting to zero gear.

We're not going backwards.

We see very good performance out there.

I'm very optimistic of what we see at this point in time.

Our backlog's sitting at record levels.

Our underlying order pace picked up this quarter, so I expect the Company to continue to perform and out perform our key competitors in this space.

The world is not coming to an end, as some people out there think.

We are just shifting to a different gear, and it's a good gear.

So with that, I'll open it up and take on questions.

But I want to say again, I want to thank the management team that worked with me around this Company has done a superb job and this is a very strong first nine months.

We just need to bring this ship into dock here for the last three months, and we'll do that to close out fiscal year 2006.

With that we'll turn it over for questions.

[OPERATOR INSTRUCTIONS] Just one moment for our first question, and that's coming from Michael Schneider with Robert W. Baird and Company.

Please go ahead.

Good afternoon, guys.

Hi, Mike.

Congratulations.

Thank you very much.

I'll first tackle Copeland.I'm wondering if you could address just your expectation now in the second half of this calendar year.

Weather's been reasonably favorable.

It sounds like inventories in the channel are below where people would like them.

Just -- have you raised your expectations for the next two quarters at Copeland and then maybe you could address pricing there, as well?

The weather's more than favorable.

The weather's hot and there is not a whole lot of inventory, in my opinion, out there in the channel at this point in time.

So from our perspective. if you look at our order pace, I think we are up quite strongly on a three-month roll in our Climate Technology business, so our expectation for Copeland has increased.

And I would expect we had -- because you asked for calendar quarter, we had a huge fourth calendar quarter last year, which is our first fiscal quarter, was up 50% plus?

Well, 20-plus organic.

20-plus% organic.

Production was way up.

I would expect to still to have a negative growth in the fourth calendar quarter. but it will be less negative, because as I look at the market place now, they continue to build and build inventory and build a product all the way through that fourth calendar quarter to replenish some inventory, so that'll be good news for us.

So at this point in time, I expect us to have a good fourth quarter at Copeland in the Climate business, and I expect us to have a better fourth calendar quarter, still negative but still better.

Relative to pricing and the material area, we have had, obviously, continuing material inflation, and we've been working with our customers to price accordingly.

But that's a long-term project, and we work with our key customers to smooth in that pricing at the appropriate time.

And it's not one month or two months.

It's over a 12-month time period.

At this point in time, as I look at our Climate Technology business, our price cost ratios are solid.

We're in line where we should be, but it's an issue.

I think the ball is moving and continues to move, because of the material inflation, so we're in pretty good shape there.

And I'm extremely pleased with the profitability of this sector has come back, as it's gone through a very difficult transition.

And I would say that we had very nice profitability in this quarter, contrary to some people talking to me i last quarter.

And some quick follow-ups on that.

Just in terms of productivity, do you believe now that the transition is behind us that you're actually running at full productivity at Copeland?

At Emerson, you never run at full productivity.

We can always do better, Mike, even the CEO.

And so the simple answer is yes, we are running much better productivity at our plants up and down the Climate Technology, as we stabilize the transition for the product mix.

The key issue right now is as our customers change mix amongst themselves as certain products selling better than other products across their catalogue, that's the biggest issue we have to deal with as they change their own mix.

But productivity's pretty well right now.

And in terms of deliveries, have you been able to fully deliver during the quarter or are lead times and backlogs actually up at Copeland?

From the standpoint of lead times and backlogs, there's not much significant change.

We will have a mix change and any point in time, any day, maybe we miss a shipment or two, but we're in pretty good shape right now.

Okay.

Thanks again.

You're welcome.

Alright, thank you.

John Inch with Merrill Lynch.

Please go ahead with your question.

Thank you.

Good morning, Dave.

Hi, John, afternoon.

Afternoon, sorry.

Wondering first, what are you thinking on your U.S.

Automation business?

You gave us the overall, but it looks like the growth slowed a little bit.

Just wondering how we should be thinking about U.S. in Automation versus perhaps other parts of the world?

I think you're seeing the whole, what I'd say the gross fixed investment in the U.S. market place shifting down, as I said in a different gear, a little bit lower gear.

Still a good rate of growth, but at a slower pace than we've seen over the last couple of years.

It's still pretty strong, but it will definitely shift down a notch.

The comps are getting tougher and tougher.

Now we've had two and a half years of good growth in Industrial Automation.

I'm expecting the underlying growth rate to be good next year, but clearly at a lower pace.

You know, Rockwell's selling its power systems business.

Is that business attractive to you guys in any manner?

We looked and the answer is no.

We're moving on.

I notice, by the way, just in terms of Network Power, maybe considering the back drop of tech markets, at least domestically are kind of mixed, this business, isn't it going to run into pretty tough comps next year?

Maybe you could talk a little bit more about sort of what's sustainable.

I guess you got China, but maybe what else -- why should people not be nervous about the comps heading into next year for Network Power?

Network Power -- excuse me, I've just been talking to the board meeting all morning -- Network Power is going through its normal cycle, as I've talked about.

As I look at the underlying business, when it comes out of a trough and goes -- grows and takes off like it has the last 14, 15 months, you would expect to have strong 15%,16% top-level growth.

And then you'll see it run like that, in my opinion, for 12 to 15 months, and then you'll see it shift down into the -- I think in the eight, nine, ten, 11, 12% range.

It's a function of what's going to happen, but say the 9% to 11% range, that's a normal cycle we would see.

So we would still see a shifting down.

Next year we would expect it to be above the long-term trend line, and the long-term trend lines in the sector are eight to ten, so we think it'll still be above it next year.

Yes, the comps are tougher, but we still expect to have pretty good growth and we're going in with good backlog.

And we do not see the overheated market space, as we saw in the 2000, 2001 time period.

And did some of the tech markets that have kind of been spotty in the states, that's not cause for any kind of forward-looking concern at all?

No, I don't think so.

I think the tech markets -- I mean share shifts, product shifts, development shifts around the world and we have not -- we play with those markets, and if one loses, the other guy wins, and we play in all areas.

So right now, I still feel pretty good about the underlying Network Power business.

We will have spaces in there that will struggle next year, but on total, we'll have a very good year next year.

Just lastly, you guys called out on the order of $500 million of smallish divestitures coming.

Just wondering what the horizon is for that, and I'm presuming that Appliances, or pieces of Appliances don't factor into that, based on the way you described it.

Could you maybe just update us on your thinking on Appliances?

First of all, I'm not going to pick on one specific piece along those lines, but as I look at the -- as I look at several smaller units, it could be one of those sectors pieces could come out of the compliance -- Appliance Components piece.

We evaluate all the businesses, and so you can't tell from that comment where it's coming from and neither am I going to tell you.

So from my standpoint across the Company.

And we look at the pieces that are struggling from underlying growth rate standpoint, a return standpoint, and if we don't think they can get back to acceptable levels of return, then we will take a hard look at divesting those businesses, and that includes Appliance Components pieces.

But, Dave, is the $500 million sort of a set-in-stone amount, or should we be thinking about this as kind of a round one of what might be coming down the pipe?

Well, yes.

What I talked about, and I think I talked about it in January -- I'm sorry, I missed it -- we talked about $1 billion to $1.5 billion and we would do it over time, and we're working on about $500 million, maybe a little bit more, of those right now.

So it will be a continuing basis and what we do, they take time, so at this point in time, we're working on this piece.

And I would say it'd be -- you know, we'll have another round in a year or so or maybe the second half of next year.

So the question is we time them out and as we work with our own acquisitions and a divestiture takes time too, so we're going to continue to do it.

And we're looking at the $1 billion to $1.5 billion piece right now in our Company that we would consider questionable assets.

But you mentioned these could be dilutive.

Is it premature -- maybe Walter knows the answer to this.

Is it premature to try and scope out what you're thinking in terms of annualized dilution?

Dilution, when we say dilution, I think they're dilutive to our margin and return.

Will they be dilutive to our earnings?

I think they'll be -- it's going to be rounding.

It's going to be very close to zero.

Okay, thank you.

Thank you.

Thank you.

Jeff Sprague with Citigroup has the next question.

Please go ahead.

Thanks, good afternoon, everyone.

Maybe we could pick that up with the other side of the coin, Dave.

The acquisition activity has picked up enough to really start meaningfully move the needle, but there's a lot of capacity here to do more.

You've eluded to the possibility of a new leg in the past.

Where's your thinking on that and what should we expect on the deal front?

I would say the deal front, we're in a mode right now of digesting.

We bought close to $1 billion in the last 12 to 14 months.

We're in the mode of incorporating and integrating those acquisitions.

The deal front ma -- the space -- the quality of assets out there in the market place is not very good right now.

The pricing is pretty high.

Therefore, that's why I'm looking at selling some assets right now.

So at this point in time, I would say the deal flow is at lower levels than they were back in January, and I would anticipate that to be the case probably into the second half of 2007.

We will continue to look at acquisitions.

We continue to look at acquisitions to reposition the Company.

And based on our underlying growth rate in the last I would say the last year and a half we've had a pretty good underlying growth rate, so we are doing a good job of mix in the business at this point in time.

And I was wondering if you could elaborate a little bit more on Network Power?

Chris's comment was pretty much everything was strong, but can you give us a sense of what was leading the pack?

And when you mentioned there will be a couple of pieces that struggle next year in Network Power, what would those be?

Yes, I think that, as I look at -- the pieces are real strong right now, if you look at going into the data centers and what I call the Uninterruptable Power Supply business, our Position Air business.

I look at our Embedded Power business as quite strong.

The Telecom business is good, Telecom DC Power business, but I'd look at that business starting to slowdown.

We've had some significant mergers going on in the space, both with equipment, you know, with the whole Lucent-Alcatel.

And then off the end markets between AT&T, SBC and then BellSouth.

I think you're going to see, in my opinion, next year a pause, as these guys sort out what they are going to invest in.

And so it looks good right now, but I think that space will slow down.

The Telecom Power space will slow down next year.

I do not see the space in what I call the Uninterruptable Power, the Position Air or the Embedded Power business or the Connectivity piece slowing down.

That's what I see at this point in time, Jeff.

And, Dave, could the Appliance Component business grow in the quarter?

Walter, the Appliance Component business grow in the quarter?

I think it did.

Yes, it did.

Just actually, two follow-up math questions for Walter, maybe.

Dave, you took the range from ten to 12 to 11 to 12, but you need to do five in Q4 to do 11 and about eight in Q4 to do 12.

Do you actually see an abrupt slowdown like that in the fourth quarter or something in the backlog, or are you just being conservative?

For the underlying growth rate, if you look at last year's fourth quarter, I believe our underlying growth rate was probably around 8%, 9%, and so we're now starting to come off -- 9% Chris just said -- we're starting to come off at a higher growth rate.

And I still feel very good with our backlog and our order pace for the fourth quarter.

It's just you've got to start looking at the comp of that 9% underlying growth rate we had in the fourth quarter.

I've always been individual at -- let's say as a reasonably conservative.

I don't want to set expectations out there to get crazy.

So I feel very good about what's happening in the fourth quarter, as we move actually into the first half of next year, too.

But it's clear the comparisons relative underlying growth rates are getting to get tougher and tougher.

And then just one final thing, Walter, I think your pension measurement date is 630.

Can you give us an update on where things settled out and what the early look is on pension, going into '07?

The early look would be that the discount rate will be moving up.

Well, we know that.

I wasn't trying to give you too much information.

It's going to be favorable.

It would be reflected in the operation, as we finalize that improvement.

You can look at what the AA industrial rate on a ten-year base is.

We have a slightly longer duration than that.

That moved up just over 100-basis points, which you can look up on Bloomberg as public information.

It's going to be slightly positive.

It's going to be a tailwind for us next year, but it's not a big number on it -- you know, millions of dollars.

Thanks a lot.

Thank you.

Deane Dray with Goldman Sachs, please go ahead with your question.

Thank you, good afternoon.

If we could just go back to Network Power for a moment, that 21% organic growth.

How does that split out between price and volume for this quarter?

I would say for that quarter, on net-net price for Network Power, the way we measure it would be negative.

So it's all volume?

It's volume.

Well that's impressive.

Now when you talk about price being down, is that just part of the life cycle?

That's the life cycle.

Dean, to be honest, you know that's a very difficult sector to say, okay what's the price cost?

I mean pricing is -- it will be slightly negative in this space here and, therefore, our underlying growth is quite significant.

But it's just the way -- you know, when you bring out new products, they're just a whole different generation.

We cost reduce the product and, therefore, the price point might be slightly lower.

It's just -- it's the market -- you know, the economic electronics market space.

But it's not that big of a negative, so we put a pretty strong underlying volume there.

We'll disclose that as you read the 10-Q, when it's published.

Okay.

And then on -- within Network Power, with that kind of volume, are you running into any capacity issues or any issues in lead time backlog and so fourth?

From the standpoint of components, we are starting to see some issue in components, but we've been able to fight through those.

It's hurt us a little more just in the inventory -- the inventory we've had to bring in, as we try to balance our production you.

But we fought through that pretty well and we've worked with our suppliers, so we're in pretty good balance.

It's not as good as it was six months ago, so our purchasing guys are having to work a little harder right now.

Okay, and then how about some color on June orders?

June orders?

Didn't we just publish June orders?

No.

Just in terms of you said you're expecting continued double-digit orders.

No.

I didn't say Ju -- I mean June orders, we published June orders this morning and they're double digit, they're 15% to 20%.

And the expectations for double digits, going forward?

I didn't say that.

I said I expected solid -- I said solid orders, and I don't know what July is yet.

July just finished yesterday, so I don't know what July is.

But I see from the comparison standpoint they're getting tougher and tougher and tougher, but I still see pretty good underlying growth rates for the Company, which will drive solid growth rates for us next year.

And geographically, in Europe in particular, any comments there?

Europe is performing at about what I thought it would.

It's having a very good year, and I think Europe will have a good 2007.

Okay, thank you.

You're welcome.

Thank you.

Nicole Parent with Credit Suisse, please go ahead.

Good afternoon.

Hello, Nicole.

Congratulations on delivering such strong broad based organic growth.

You touched on Network Power when you answered Jeff's question, but as we look at the secular trends by business rolling into '07, Kind of big picture, how are you feeling about things?

Still feel pretty good.

I think that, as we look at '07 right now, we were significantly above our true to cycle growth rate for the 5% to 7%.

With 11 to 12, we're way above it.

I would expect us to be moving into that zone and that 5% to 7%, with hopefully at the high end of that number, as we go into 2007.

And I guess by business, I mean, can you just talk about longevity in the cycle within process and oil and gas, and some of the other businesses [inaudible]?

I would expect that the process is going to have, as we -- you know, this is our third year of the cycle and I expect the process to have pretty good growth rates for the next several years, and several years might be two to three years.

As huge investments go into the oil and gas and to power and to refinery, we see no slowdown in that space at this point in time, and I expect that to continue.

Climate Technology, next year'll be an interesting year.

We've had a very strong year.

We're going in to end this year probably with what I would call pretty good inventory paces, so next year should be a pretty good year, as we continue to gain with our new 13-SEER product, and I expect next year to be a positive year for us.

The other industries, from the standpoint of Industrial Automation, I still think it'll be above the long-term trend, but will definitely be slower next year than it was this year.

And I do think the consumer will continue to slow and then the second half of 2007, you'll see consumer picking up.

And I guess when you think about kind of consumer exposure, which businesses do you feel first?

And then kind of juxtapose that with where you're seeing strength in the nonres construction picking up?

The Number one issue we see consumer is obviously in our Appliance Components business, and that's where you see it first and you feel it first.

And then the next place you typically would feel it would be in our in Incinerator business, which is the disposer business.

But we have a whole new generation of product coming out right now, so that business is not slowing down.

And from the standpoint of the consumer, it's not a big part of our Company, and it does have an impact and we feel it right now and you'll feel a little bit next year in the residential air conditioning product that we sell to those guys.

So I would expect the consumer will be a little pull on us next year, but it's not going to be huge.

And I do expect -- you asked me a question about what was was --

Nonres.

Nonres -- nonres touches most of our capital guys, both in the Tools side and obviously the Process and Industrial Automation, and I think that's going to continue to be pretty good, as we move into 2007.

Great.

And then just one last one.

What was the litigation expense that you mentioned in the slide?

We always have litigation, and we have one issue we're dealing with at our vac product that we wanted to increase our reserve on.

That's all.

Not a big number.

Okay, thank you.

Thank you.

Bob Cornell with Lehman Brothers, please go ahead with your question.

Yes, thanks.

Hey, Bob.

Hey.

Clearly a great quarter, as you say.

I'm -- in process, how about the backlog, the order rates, maybe some further look into the size of projects, the strength of business around the world?

Bob, in honesty, the backlog continues to go up because our order pace has been, obviously, in excess of what we've been delivering sales.

Sales been around a 11%, 12% range.

At this point in time, the projects around the world are still very strong and the really issue is -- in the process world is what can be done at the customer level.

The customer's working full out, relative to the individual projects.

So I don't see any slowdown in the project bidding and I do not see a slowdown in the near term in delivery, only from the function of what the customers can actually do with the product when we ship it to them.

But it's a pretty good market now and it's a fair steady marked right now, which is very good.

Are we starting to see the BP, you know, big win in the sales earnings results yet or is that still out in front of us?

That's still coming.

You have -- you've seen a little bit, but not much.

Is that going to make a meaningful impact on the growth in the next couple of quarters?

When are we going to start to see that?

I don't think you'll have -- I don't think it'll have a meaningful impact, because we have a lots of stuff around the world, so it's part of the ability for us to sustain at high levels for longer time period, that's all.

Any change in the way competitors coming at you in process?

Is it still gaining market share, for example?

It's always a tough market place, but I'm not too afraid of them.

Switching gears to Network Power, the core margins were up -- I imagine Jim Bird is listening to this call.

If he is I'll remind him I asked the question about getting margins up over 13% this year and he said, probably not.

But it looks like core margins were touching 14%.

What's driving that margin gain and can you get it higher or what's going on?

Fundamentally what's driving our margin gain right now is all the restructuring Jim did with his team during the downturn.

And then we have a very good mix going on at this point in time, with our Precision Cooling and our -- and I would -- I mean the Precision Cooling and also the UPS business.

And we've seen a continued good leverage point out of our Embedded Power business to this point in time.

So, overall, the restructuring Jim and his team did is paying off and we're having a good year.

But now we have a large acquisition we have to integrate and that will take us some time to get that margin back up.

So, I don't think we're going to change our targets any higher, just because we're six or seven months ahead.

How far along are you into the Artisan integration?

I think you said you're going to push hard to get that done quickly. [inaudible] you're ahead of the plan?

Of the $0.02 to $0.03 dilution you said for the year in Artisan, how much occurred in this quarter?

Probably slightly over a penny.

So you only had about a month and a half, and so you'll have higher restructuring charges in the July, August, September time frame, Bob.

In this quarter you had the impact of the finished goods write-up and write-off that you need to do in the fair evaluation.

Right.

That was impacted this quarter, and then you just have the nor -- the operations less the interest expense.

I'd say it added dilution slightly higher higher than a penny for the period that we owned it in the third quarter.

The key issue for us, Bob, is not this year.

It's we're trying to get ourself positioned to have a positive impact in the first quarter. and that's what we're trying to do.

Positive impact in the first quarter total Company, or what do you mean?

First quarter earnings from Art Artisan.

Okay, --

I don't know if we're going to get there, but we're working it.

Just a final thought for Walter, while you're on the phone.

Take us through the other deductions, other income.

You know, you had the -- rationalization went down to 19, the amortization and intangibles up to 13, I guess that's partly some of the comments you just made.

We talked about -- you talked about the gain on the sale of stock, and then other, other went from ten to 34.

Again, is that part of what you were just talking about with regard to these -- write-off of items?

Well, no.

The inventory write-off we had would be in cost of goods sold.

The other, other item of going from ten to 34 was principally -- we commented briefly when we said FX.

In the third quarter of '05, we had an FX lo -- gain, excuse me, of about $11 million.

This time we had a loss, so you had a swing of about $18 million.

And you also had -- which we commented about -- was some litigation provisioning, and that was also in OIOD.

Those would be the two larger items that would explain the majority of the delta in the $10 to $34 million number, 18 of which was the FX.

Thanks, Walt.

And Dave, let me ask you one question before I get off the phone.

You talked about the economy switching down to a different gear.

People worried about, and your consumers, as Nicole was mentioning, and interest rates.

How enduring do you see the capital spending cycle in elis and broadly?

And maybe give us some anecdotal evidence about how it's been impacting Industrial Automation and Process Management?

I have not seen any indication that the capital spending cycle's slowed down yet, and including our capital spending.

I know.

So we're a microcosm of what's going out there from the standpoint of -- you know, we've gone through a major restructuring back in the 2001, 2002, 2003 time period.

We've taken a lot debt capacity off.

We're now -- we've grown quite significantly the last couple years, as you know.

And now we're to the point that we're having to invest in our next level of capacity and also productivity and new product programs, so I have not seen a slowdown.

So I see a pretty good pace of growth in capital and moving -- and over -- for the next six to nine months.

I have not seen a slowdown at this point.

Good.

Thanks, Dave.

You're welcome.

Alright, thank you.

Scott Davis with Morgan Stanley, please go ahead with your question.

Thanks, guys.

Just to follow-up on that a little bit, I think you were probably referencing more of U.S.

Capital spending and U.S. consumer.

Can you -- and maybe I'm wrong in assuming that, but looks like, based on your charts, that Europe's become finally a tailwind.

Can you make maybe the same comments for Europe?

Is there a chance here that, even if U.S. slows down, that Europe is strong enough to back fill for you?

Yes, it's not uncommon.

As I step back and look at the total world -- and I need to step back and think about this for a second -- Europe -- it's not uncommon that Europe could actually be stronger than the U.S. in our type of growth rate.

It's not unusual when we have that type of period, where our Europe -- let's say Europe could grow a point stronger than the U.S.-underlying growth basis in our sales.

The other places we're continuing to see major investments is Latin America.

We had a tremendous quarter.

We had a tremendous year-to-date number down there.

I do not see that slowing down, and we worked through the whole political unrest when people are investing there.

And we've seen a very good investment environment in Asia.

Not just China, but across Asia.

In fact, our Asia business is much stronger than our China business, at this point in time.

So we have a very good mix around the world right now.

And as I think Scott, as we sat here last year, I saw that mix change and I saw Europe kicking in and helping us.

I see a mix changing again.

That's why I feel pretty good about our underlying growth rate being well into that zone next year, which is very good for us to have, given where we are at this point in time in the cycle.

Yes, that makes sense.

Want to move back a little bit to pricing.

In your -- and I can't remember whether you guys normally answer this question or not, but --

Probably not.

Probably not, right!

In the 12% volume growth that you guys post, is there certain price component of that that you can reference or quote for us?

Less than 1%.

Really?

Yes.

And so in the order number -- the accelerated order number that you have the 15% to 20%, there's no material price increase built into any of that?

No.

I mean, the price increase -- I mean, as we finish this year out -- last year I think we told you it was around seven-tenths for the total corporation, 0.7.

I think you'll be looking at the same level, 0.7, 0.8, for the total Corporation again this year, and so I don't see anything meaningful different as we finish this year out.

We've been able to work very aggressively and time it such that we can get the price in place to help us offset the materials and we've not been able to do that across the board.

We've had some divisions that are -- that can not get the material price increases into place to offset that material inflation but, in total, the corporation, we're doing pretty well this year.

Scott, when you said the underlying orders 15 to 20, that includes currency, and when you said the underlying sales in the third quarter was 12, that's without currency.

Okay.

You follow that?

Yes, now I do.

Yes, be he's thinking about a big price kick, like a three point price kick here.

I know, but I just wanted to --

Yes, I mean, my assumption would've been that there would have been 3% to 4% of price in there, so I'm surprised to hear you say less than 1%.

Our margins would be a lot higher.

Okay.

Now is it safe to assume, though, you have hedges rolling off here?

You're probably going to be in for another round of price increases overall?

We'll continue to price in this environment, because underlying material costs continue to be at high levels or increasing, so we will continue to price.

We need to be -- we do not gouge people and we do not over price, but we will need to continue to increase prices, as this material inflation rolls through the economy.

Well what about the price mix issue?

I mean I know you guys are using fancy software to kind of price your contracts and you talked a little bit about that, I believe, at a meeting some time last year.

Are you seeing benefit from really having more price discovery out there with your sales force?

Yes.

The answer is yes.

So the 0.7% may be a little bit deceiving, because on an average basis your pricing's a little bit better?

Yes.

Okay, that's what I thought.

Last question just on Climate Technologies.

I assume this is the one business where price is a little bit more tangible, just given that we've moved up to SEER 13.

The up 10% in revenues, can you quote me a price component of that?

We will break that out in the Q, but I would say that underlying -- let me look at the sheet here, because we do have an estimate right now, and the price here -- the price basic, it's slightly negative in the quarter.

Less than one.

Oh, less than 1%, I'm sorry.

It's less than 1%, and so what you see in the underlying climate is primarily real volume.

We've had pretty good penetration gains as we've gone into the 13-SEER.

And so, I mean, our contracts in Climate is more of a -- you know, we look at 12 months and 24 months, so we're talking right now with customers in future pricing action than we are looking at what we have a lot of price in right now.

And this is probably -- this is my last question, it's probably a tough one to answer, but you quote on the slide market share gains drive growth.

When you think about what the underlying market grew -- and we can get the U.S. numbers but I don't have the global numbers -- what do you think you out-grew the underlying market by?

In which --

In Climate.

Just in Climate.

Oh.

When we started this transition, we talked about gaining ten points of market share.

We've got it.

Ten points over what time period?

12 months.

Wow.

Okay.

Got you.

Thanks, guys.

Congrats.

Thank you.

Thank you, sir.

Steve Tusa with JPMorgan, please go ahead with your question.

Hi, good afternoon.

Good afternoon, Steve.

Just getting back to Climate and maybe the same question, but on the margin.

I was a little bit surprised at how that came back from a relatively disappointing first half.

I know there's a lot going on there.

You had some efficiency issues and raw materials, you know, headwinds in the first half, but that really snapped back.

How much of that is mix?

Is this kind of a preview of things to come with your new 13-SEER related compressors?

Or could you just break down kind of the -- what impacted the margin?

Yes.

I think we talk about this in the last conference call and the conference call before that because of what was going on, but the biggest issue we did -- we felt, as a supplier compressor to this industry, is we had to go run plans at the old product and the new product, and that's very in efficient in your plant.

And we also had a lot of material shortages, because of the production in the fourth calendar quarter last year was significantly higher than we were told it was going to be from our customers, so we ran very in efficiently through the first fiscal quarter and the second fiscal quarter.

So a lot of of the mix issue for the profitability was because of inefficiencies and because of the strong inflation in the materials before we could get a little bit of price into play. and now that we've got things stabilized, we know the products -- what products are being produced and we have, I think, a more stable environment, relative to the material and we could have a little more [inaudible], those efficiency numbers make a big difference relative to our plant profitability.

And so I think that you look at this -- you know, we don't look at each piece but the biggest chunk has to be we've gotten through the transition, our plants have stabilized on the new products and now they're running at much more efficient run rates.

So this is kind of your clean, new product type of margin, but you still have -- you know, I would say is this right to assume that kind of the pricing benefits that you talk about when you go through those cycles of offsetting the raw materials?

That's still on the come?

Yes, that's still -- we have periods we'll run a quarter or two what we call in the red and then a quarter we run in green.

It's a give and take.

You have to price properly in the market place.

Our customers know what material costs are out there, so it's not something you can say okay, we're raising prices 20% just because we can raise -- that's not what happens.

We look at our material cost, we look at material inflation, and we price accordingly so we have a balance, and the customers know what that is.

We share that with them.

So we'll go a quarter or two in the hole and then we'll figure out how to make it back up.

The key issue for us, the way we make our profitability is the fact that we win market share and the fact that we can produce the product more efficiently than anybody else.

Have there been -- and obviously you don't like to mention your customers -- but have there been, from your point of view, shifts in share from this transition?

At the OEM side?

I don't comment and, Steve, you know that.

I don't comment on that.

Okay, great.

Thanks.

Ask our customers.

They know better than I do.

I just make a compressor.

What the [inaudible] do I know.

Well they all gain share, apparently.

Well, that's just like the U.S. automobile industry.

Everyone gains shares and everyone adds up to 110%.

Got you.

Thanks a lot.

Thank you.

Dan Jenkins with the State of Wisconsin Investment Board, please go ahead with your question.

Hi, good afternoon and good quarter.

Thank you, Dan.

I was curious, you know there's a new regulation went into effect in Europe on the restrictions on use of hazardous substances.

I was wondering if that had much impact on you, as far as design and supply chain and that kind of thing?

Nothing significant.

We've been working on this for two years and so, it cost us some money and it cost us some investment and maybe it hurt us because we didn't get some new products out, but in the end we've gotten through it and it's part of doing business.

So, Dan, it really hasn't had anything meaningful, other than, in my opinion, it's a good way for European Union to put up barriers, trade barriers.

Okay.

On the share repurchases, you mentioned 3.7 million shares in the quarter.

What was the dollar amount of that?

Do you have that?

I'm sure we do have it.

I mean --

We don't have it right in front of us.

We would definitely file that in the 10-Q.

The draft of the 10-Q says it was --

We're checking right now for you.

One second, Dan.

That's satisfying your question, Mr. Jenkins?

Yes.

The average price was about $81.75.

Okay.

You multiply that?

Right.

And then so -- do you have plans for the fourth quarter?

We told people that throughout the year we would be somewhere between $600 million and $700 million of share repurchase for the whole year and so if you take -- in the Q we show how much we've done in the first nine months.

I mean, that's what -- we're still saying -- we showed finance committee today somewhere between $600 and $700 million of share repurchase for the year.

Okay.

And then I was curious on Climate.

You mentioned in the orders with the hot weather in the U.S. added air conditioning demand, but -- and you look at Europe being up 21%, how much of that is driven by the hot weather they've been seeing there?

Two things.

Europe definitely has been helped a little bit by the hot weather, but there's not much -- there's not a huge air-conditioning market in Europe.

Europe's more of the commercial and then also the refrigeration, but Europe's definitely been hot and that's helped us.

We've had a good recovery.

Europe was struggling last year in this area, and it's had a very nice recovery.

But it's new products, heat, and a recovery.

Okay.

And then just when you look at your geographic sales, Canada is a negative.

Is there something going on there different than the rest --

Huge, huge process sales last year in Canada.

We're doing well in Canada.

Orders are -- I'm sure are still pretty good, but we had very significant process sales last year in Canada.

Okay.

That's all I had.

Thanks.

Thank you very much.

Alright, thank you, sir.

Chris Kotowicz with A.G.

Edwards, please go ahead with your question.

Chris Kotowicz `: Good afternoon.

Good quarter, guys.

Thanks, Chris.

Chris Kotowicz `: Question on the margin and Climate.

Did you get a richer mix of 14-SEER sales than maybe you would have thought when you started the year?

Is that part of the strength there?

No, I don't think so.

I think the biggest improvement, Chris, is the fact that things stabilized.

We've got the old product [inaudible] on the product.

We've got the new product coming in, the 5-G product coming from 13-SEER, and we were able to run the plants a lot more efficiently, and we didn't have orders doubling on us as they did in the fourth calendar quarter.

Plant efficiency makes a big difference in a highly capitalized plant like that, and the fact that we could have more stable material ordering patterns, so we weren't having to do as much spot buys for material.

Chris Kotowicz `: Okay.

That's a big issue there.

Chris Kotowicz `: And I know this is mostly residential business, but do you have any comments on how that business or how the scroll is penetrating the nonres market, which a lot of people are saying they 're seeing signs of improving?

Our scroll in the commercial side is continuing to grow quite significantly.

We're doing extremely well there.

And in fact, our commercial business, nonres business and refrigeration business in scroll is very nice this year.

Chris Kotowicz `: Okay.

A bookkeeping question, on the tax rate at 31% going up.

How much of that is the R&D tax credit not going through versus, maybe, something else?

Is there anything else that would have impacted that?

No.

The amount -- you know, if you look at the year-to-date, we're rounding that off.

It's an estimated number.

It's no impact of any significance for the R&D tax credit issues.

Chris Kotowicz `: Okay.

So is 31 a good number to use for next year?

Yes.

Chris Kotowicz `: For now?

Yes, for now.

Assuming congress doesn't change the tax rates.

Chris Kotowicz `: You never know.

You never know about those guys.

They might pass something. [expletive], miracles do happen.

Alright.

Thank you, sir.

We have time for one last question, that's a follow-up with Michael Schneider with Robert W. Baird.

Please go ahead.

Dave maybe you could address just the Process business.

You mentioned you're looking for several years of strong performance there.

The margins are running at 18%, now at record levels.

I'm just curious, though, as the mix changes more towards project work, should we temper our expectations on margins, because it looks like this quarter's incremental margin was probably the lowest in the last nine quarters and I'm wondering if that's a function of mix and if we should expect that to continue?

I think you're going to continue to see -- you know, we had a good first half of the year, as we had a lot of MRO business coming from the south and we had the hurricane repair.

I think that there's a lot of big project wins going out there.

I think we will see profitability improvement next year, but we're not going to go 18 to 20.

I Think you'll continue to see a little bit of improvement, I'd say 40 to 50-basis point type improvement.

I think you're going to start seeing this mix come to play like you just talked about, Mike.

And Copeland, specifically, to attack this price issue or question in a different manner, can you give us a sense of what unit growth was at Copeland on the residential side?

Can we tell you?

I don't have it.

I mean we have all --

I'm just trying to dissect how much was mix, because you said price was less than 1%, but presumably mix in units account for the 10% growth.

And I'm just wondering if Copeland may have actually have been down in units --

No.

No, no no no no no.

Copeland was up in units for the quarter.

I know that for sure.

I mean, it's less -- a little bit less than 5% is the number I've seen.

Okay.

Okay, thanks again.

You're welcome.

All right.

Thank you again, management, there are no further questions.

Please continue with any closing comments.

I want to thank everybody for being with us.

We had a -- it was a really outstanding third quarter and we're looking forward to having a strong fourth quarter as we close out this year.

Again, I want to make sure people understand I still feel very good about what's going on.

Clearly, things will be -- I see us shifting into a slightly lower gear, but we also see us having to have very strong relative to performance against our competition in the market place.

So I feel good of where we are right now, and the management team, the OCE and the business leaders do an outstanding job, and I commend them on what they accomplished in the third quarter.

So with that, thank you very much.

Thank you very much, Ladies and Gentlemen.

This does conclude the Emerson third quarter fiscal year 2006 results conference call.

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Have a very pleasant afternoon.