艾默生電氣 (EMR) 2006 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Emerson fourth quarter and fiscal year 2006 results conference call.

At this time all participants are in a listen-only mode.

Following today's presentation instructions will be given for the question-and-answer session. [OPERATOR INSTRUCTIONS].

As a reminder, this conference is being recorded Tuesday, November 7, 2006.

Emerson's commentary and responses to your questions may contain forward looking statements including the Company's outlook for the remainder of year.

Information [inaudible] differ materially from those is available on Emerson's most recent annual report on Form 10-K as filed with the SEC.

On this call, Emerson management will discuss non-GAAP measures in talking about the Company's performance.

The reconciliation of those measures to the most comparable GAAP measures is contained within a presentation that is posted in the investors relations area of Emerson's website at www.gotoemerson.com.

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

Please go ahead, sir.

Thank you, Eric.

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 fourth quarter and fiscal year 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 slide presentation.

Fourth quarter sales were up 19% to 5.5 billion with increases in all five segments.

We had strong underlying growth in the quarter of 11% with double digit underlying growth from Process Management, Industrial Automation and Network Power.

Earnings per share was $1.29, up 28% which includes a pretax gain of $31 million or $0.05 per share related to the sale of the Buehler materials testing business.

Operating cash flow for the quarter was 1.024 billion, and free cash flow was 777 million, up 16% and 9%, respectively.

We continued to perform well on the balance sheet metrics with trade working capital as a percent of sale dropping to 16.5% for the quarter end, and operating cash flow to total debt strong at 62%.

The next chart is an income statement summary.

Sales again in the quarter 5.516 billion, up 19%.

As we said, underlying sales up 11%.

Acquisitions added 6 points of growth and currency added 2 points of growth.

Operating profit in the quarter of 878 million or 15.9% of sales, a 20 basis point decline as price increases and cost reductions did not offset material inflation and dilution from acquisitions.

Net earnings in the quarter were 526 million an increase of 26%.

Diluted average shares outstanding was 408 million.

We did purchase 5.6 million shares during the quarter.

And earnings per share, again, at $1.29.

The next chart will take a quick look at the sales growth around the different regions of the world.

Another solid quarter from the United States at 7% growth.

Acceleration in Europe, up 12% for the quarter.

And then continued good growth from Asia and Latin America up 23% and 19%, respectively.

That drove total international growth of 17% which brings you back to the underlying number of plus 11%, and again, currency and acquisitions adding in to give a consolidated number of 19%.

Go to the next chart, some income statement detail.

Gross profit dollars of 1.985 billion or 36% of sales, a slight increase from the prior year.

SG&A as a percent of sales was 20.1%, an increase of 30 basis points from the prior quarter and operating profit dollars, again, of 878 million.

Other deductions was 47 million, lower than the prior year, primarily the result of the 31 million gain on the sale on Buehler.

Interest expense at 56 million was 5 million higher than the prior year, which gets you to pretax earnings of 775 million.

Tax rate in the quarter was 32.1%.

So the full year tax rate was 31.3%, which is in-line with our prior guidance.

Next chart, cash flow and balance sheet.

Operating cash flow in the quarter 1.024 billion, an increase of 16%, driven primarily by the strong earnings performance.

Capital expenditures in the quarter were 247 million, an increase from the prior year.

The full year capital at 600 million -- 601 million, pardon me, is in line with prior guidance.

And that gives a free cash flow for the quarter of 777 million an increase of 9%.

Again, the cash flow to total debt ratio is strong at 62.4%.

The trade working capital balances did increase, but you can see improvement on the trade working capital as a percent of sales metric dropping 90 basis points.

So overall, Emerson continues to show strong cash flow generation and a healthy balance sheet which provides flexibility to invest for future growth.

The next chart is the business segment P&L.

The business segment EBIT was $841 million, or 14.8% of sales.

Difference in accounting methods was 48 million, an increase of 10 million on the higher sales.

Corporate and other at 58 million, a decrease from the prior year as this is where the Buehler gain was booked.

Interest expense in the quarter 56 million, up 5 million and, again, the pretax number of 775 million.

So now we'll walk through the individual segments starting off with Process Management.

Very strong quarter here again.

Sales in the quarter $1.402 billion, up 20%.

Underlying sales were up 16%.

Acquisitions and currency both added 2 points of growth.

By region, we had the U.S. up 13%, Asia up 17%, and Europe up 13%.

EBIT dollars in the quarter were 291 million an increase of 43%.

Very nice margin improvement here driven by leverage on the higher sales and also cost reductions and material containment more than offsetting inflation.

For the full year here, another outstanding year for Emerson Process Management with full year sales up 16% and full year EBIT up 31%.

And the end markets here remain strong which provide the favorable outlook as we move forward.

Next chart Industrial Automation.

Sales of 1.008 billion, up 23% from the prior year.

Underlying sales were up 12%.

Acquisitions added 9 points of growth and currency added 2 points of growth.

By region, we had the U.S. up 9% -- up 6%, pardon me.

Europe up 16%, and Asia up 18%.

EBIT dollars were 153 million, an increase of 28%.

Good margin improvement on the sales volume leverage.

So again, another strong year here.

For the full year, sales were up 16% and earnings were up 23%.

We've also seen acceleration in the European growth for this business, which has helped moderate -- helped offset the moderating U.S. growth.

Next chart, Network Power. 1.252 billion of sales in the quarter, up 33%.

Strong underlying growth up 15%.

Acquisitions added over 17 points of growth and currency added 1 point.

By region, we had the U.S. up 10%, Asia up 32%, and Europe up 5%.

EBIT dollars of 118 million were down 11%.

We did have Acquisitions diluting the margins by 220 basis points.

We also had inventory write-offs and warranty costs in North America DC power systems business.

For the full year, we've continued to see strong sales and earning performance from the core UPS and Precision Cooling business.

We also continue to make good progress on the Artesyn acquisition and the integration efforts.

So move to the next page.

Climate Technologies sales here in the quarter of 901 million, up 9%.

Underlying sales were up 7%.

Acquisitions added a point of growth and currency added a point of growth.

By geography, we had the U.S. up 2%, Europe up 22%, and Asia up 19%.

Here we also saw strength outside of the U.S. offsetting slower domestic growth.

EBIT dollars of 141 million up 23%.

Good leverage on the volume increases and also favorable impacts from cost reductions and also good mix in the 13 SEER environment.

A good year here with sales -- full year sales up 13% and 15% on earnings, while we managed through a major industry transition here.

So a lot of volatility and very good results in light of that.

And also during the quarter, we purchased 100% of the outstanding equity of our joint venture in India.

So that will now be reported as consolidated results in our acquisitions.

We would also note that in the first quarter of '07, we expect volumes here to be down significantly due to prebuy activity in the first quarter of last year.

Next chart, the last segment, Appliance and Tools.

Sales here of 1.102 billion, an increase of 8%.

Underlying sales were up 6%.

Acquisitions and currency both added one point of growth.

By geography, we had Asia up 32% off of a small base, the U.S. up 3%, and Europe flat.

EBIT dollars of 138 million, an increase of 1%.

Saw the margins drop 90 basis points here as we have significant price cost impacts and also other inflation.

We also have some new product launch expenses here which dilute the margins.

We continue to work here to drive the price and cost actions to recover the margins and continue to deal with commodity inflation as an issue as we move forward.

Next chart, we wanted to take one chart to just kind of wrap up the full year.

Really a great year for Emerson on all the key measures.

Sales for the year are 20.133 billion, our first time over 20 billion, an increase of 16%, underlying growth up more than 12%, well above our long-term goal for the corporation.

Operating profit of 3.069 billion or 15.2% of sales as we had volume leverage and cost reductions able to overcome significant material and other inflation.

EPS for the full year at $4.48 a share, an increase of 26% from the 3.55 reported last year which excludes the repatriation impact.

Operating cash flow strong at 2.521 billion and we achieved a ROTC this year, return on total capital, of 18.4%.

We had communicated back in February, we targeted achieving this goal by 2008.

So we are very excited to have obtained that a few years early.

Last chart will be the summary and outlook.

Obviously, we have good momentum as we move into fiscal '07.

We have seen our order trends moderate during the quarter, but that's in-line with our expectations.

The end markets for our key businesses remain favorable.

And we continue to see good results from our eight key growth initiatives.

So based on that, we expect underlying sales growth in fiscal 2007 of 5% to 7%, and we expect earnings per share growth in the range of 12 to 15%.

A few things to note in the first quarter comparisons.

We did have lower restructuring spend in the first quarter of last year.

We also had the prebuy in the Climate Technologies segment, which drove unusually strong demand in the first quarter last year.

These two things were favorable to the first quarter of '06 earnings by approximately $0.06 per share.

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

Thank you very much, Chris, and I want to thank Walt for joining me today, and I want to thank everybody out there for joining me.

A very interesting day for me.

I'm going to side track for a second.

Our stock traded -- almost closed at an all-time high today, which is quite exciting.

Had a tremendous two day Board meeting, but something else very uniquely happened to me today that as I got back from the Board meeting -- most of you probably don't care about this, but a friend that I hadn't seen or heard from for 34 years contacted me that looked me up in Google and found out that I was the CEO of Emerson, a good friend of mine that I played basketball with in England.

And I talked to him, and after 34 years an individual pops up that I hadn't found, and I said, you couldn't ask for a better day.

Great stock price.

Great earnings and a great board meeting, a lot.

So I want to thank everybody for joining us today.

And I also want to thank all the [OC] members and the business leaders ana all the operating executives around the world.

This is a tremendous team effort that has within underway for the last five or six years.

The performance that you've seen this year is not something that happens by one person or two people.

It's happened by a lot of people and 2006 was an exceptional year.

As I told the Board, if I could figure out how to repeat it next year, I'd do it tomorrow and just get on with life and play golf for the next 365 days, but it won't happen.

We have to work at it.

And I want to thank everybody out there for making it happen and also we've had some very favorable economics for the last couple years.

You look at what's unfolded here, as I showed the Board today. he last three years, as we reached the 20 billion sales level, our sales have grown 13%, our operating earnings now reached 3.1 billion and grown 16% over the last three years, net income 1.8, 19%.

EPS of 4.48 growing 20% over the last three years, and our ROTC of 18.4%, reaching almost six additional points in ROTC and pretty good return to our shareholders.

On top of that, we've generated nearly $7 billion of operating cash flow over the last three years. 54% of that has been returned to our shareholders through dividends and share repurchase.

That's approximately $3.8 billion.

And then we've done about 1.5 billion of Acquisitions and a little bit over $1.6 billion of capital spending, so we've had a good run.

And as I told the Board, let's celebrate for 30 seconds then move on, because now we got 2007.

So what do we think about 2007?

As I've been talking about since May, the economy has definitely been shifting.

We are still positive about what we see coming at us in 2007, but clearly we have a different environment than we did 12 months ago.

As we look at things today, it's unfolding as we expected, starting back in the May, June, July timeframe.

Our orders did -- we did expect our orders to shift down below the 10%.

It's a little bit volatile right now with the situation with Climate Technologies where orders last year were up probably close to 100% over a quarter of the prior year.

We have to go through that time frame here this quarter.

We understand that, and we'll work through that.

But as I look at the underlying economics and I look at what's happening to us, I feel very good about the Process business.

I feel that we have a lot of strong momentum, strong backlog, tremendous technology, and new products underway and the industries are heading the right way, and so we feel good about Process as we go into 2007.

As we look at Climate Technologies, I feel very good as we've come through a tremendous cycle here from 10 SEER to 13 SEER.

We've worked very close with this industry across the industry, and worked to get through this cycle and now we have six months of challenges as we've worked through from -- on comparisons of what happened last year versus this year as that transition happened.

This is what we expected and we will have to play that month-by-month-by-month, and we'll communicate that in our monthly order communications.

We will keep you informed as this unfolds.

In the Industrial Automation I feel very good.

The marketplace is -- we've had three strong years in the capital spending in Industrial Automation area.

I expect this to continue to be good next year, above the long trend line, but clearly cycling down but still very good around the world.

As I look at our Tools and Storage business, the issue here is the consumer is slowing down.

On the consumer side of that, that will be a concern for us, and than is a wild card that would come into play do we grow 7% on our line this year, or do we grow 5%, but clearly we'll watch that very carefully as we move into this year and move throughout the year.

What does the consumer do?

The consumer's clearly slowed.

Our non-res business is still pretty good, but that will play -- sort of a wild card as I look at that 5 to 7% growth rate that we put out there.

As I look at our Network Power business.

Our Network Power business right now is coming off a very strong year.

We have a situation where in our telecom space we have a lot of consolidation going on that will cause disruption in what I would say a down market space for us for the next at least six months.

I still feel pretty good about the growth rate, and -- but this is, again, one of the sectors of the business segment that could give us the difference between a 5% growth rate and 7% growth rate.

And we will have to see how that unfolds in the space.

I feel very good about it, and I think that we'll have good, strong underlying growth rates, but that will make a difference in where we are relative to that between 5 and 7%.

And if I look at total around the world, the U.S. is shifting.

I've said that.

It's down shifting from fourth gear to third gear.

We'll see what gear it stays into.

I still believe the economy in the U.S. will be good next year.

It will be weaker but still be good.

I still see the European numbers.

You remember we've been talking about his for the last couple of quarters that Europe is going to go into mode where they outgrow the U.S.

They did this quarter.

I would expect that could possibly happen for the next two quarters.

We have very strong presence in Europe and eastern Europe and Russia, and we're doing well there.

I expect Asia to have another good year, and we will -- as we look at Asia we see a lot of momentum.

I still think it's going to be very good.

And Latin America, which is driven a lot by the capital markets by the oil and gas and process markets.

We're doing extremely well.

We had an exceptional year this year, and I see good momentum in Latin America.

And we have gained a lot of presence there because we have been investing and going into that marketplace and aggressively taking position.

As I look at Asia -- and I mean Japan, I say Japan is like the U.S.

It's slowing down, and our Japanese business will be weaker next year but still pretty good.

So net-net, as I look at the underlying economics around the world, the economics that we look at are still pretty good relative to giving us growth in that 5 to 7% range.

They're not as strong as last year but a point that they are still strong enough to give us that 5 to 7% range.

I will update everybody in February when we get together.

But as I look at the year right now unfolding, I feel that, as I've said in the press release, we have a strong momentum going on in the year.

I feel very good about it.

I feel that we can deliver underlying growth rate in the 5 to 7%, and I believe that we can deliver 12 to 15% growth in earnings per share.

But, again, I want to thank everyone out there.

The Board in particular, and all of my top executives for delivering this year.

It was a lot of fun.

I wish every year was like this, but I know that's not the case.

So -- we get paid for tough times, and we're going to get paid a little bit for a little bit more work in 2007.

So with that, I'll open the lines for questions and look forward to responding to what you have on your mind right now.

[OPERATOR INSTRUCTIONS].

Bob Cornell, Lehman Brothers.

Yes.

Pretty remarkable quarter, all right.

Bob, I think it's a hell of a year, personally.

Hell of a year.

How are you doing?

I'm doing well.

The process margins -- I remember the presentation you guys would give and margins were barely double digits and there was this concern about whether they'd ever get to corporate average, and here are you blowing through to 20%.

I mean, what is really going on below the surface there?

Is it the valves and transmitters and the devices or are the systems margins up?

I mean, why are the margins this high and are they sustainable at these levels?

Well, the first point you have to understand is when you and I talked about this I was a business leader.

You now have a much better business leader, John Berra, running the company than me.

That's true.

So that's worth at least four points, Bob.

Yes.

And fundamentally, you know we have invested enormous amounts of money in technology and differentiation and our customers are paying us for that.

And our instrumentation, the valves and transmitters, the flow and our systems and solutions business are all doing much better around the world.

We've made enormous investments to get this Company where it is today in the process business, and with the strong market dynamics we have right now and the movement away from the old way you ran process plants to the new way and power plants and pharmaceutical plants.

It's really paying off.

And you can see a very strong mix from the standpoint of our instrumentation, which is very profitable, but our systems business is growing and improving their profitability also.

Is it sustainable?

From my standpoint, we've ended this year with I believe around 18% profitability.

We will expect this business to continue to improve in the type of market dynamics we're looking at right now.

We've had three good solid runs here where we've gained maybe 250 basis points a year a little more than that.

You cannot expect us to do that.

As I've told all of you before, we intend to invest and continue to widen this gap as we continue to grow this business and really perform on my opinion better than most of our competitors.

And that takes money, both people around the world and in technology and capital.

Today the Board approved a whole new technology center in Marshalltown for control valves.

It'll be the best technology center in the world.

And so we're investing.

We will have improved profitability next year.

It will not be 200 basis points.

I'm not doing my job if we allow that to happen.

A related question, Dave, is I think a lot of us think that as you get into bigger and bigger projects, that the project contribution to revenues is a less profitable contribution on the OP line and that would seem to be -- I would imagine with BP and all of the big jobs you've won, you'd get -- be getting a bigger -- big project contribution on top line and yet the margins are going up.

What's the comment there?

The comment there would be clearly large projects, profitability are typically more challenging than we reported at 20% level or 18% level, but you have to understand the industry is making a major investment in the -- in their infrastructure, they're repairing a lot of the old plants.

They're replacing a lot of our old product that's hasn't been touched.

Just look at what's going on in Texas City and BP.

They are going to spend $1 billion-plus in rehabbing that facility.

They're going to be spending enough money -- they're spending money on products that we make in the instrumentation area.

And the MRO-type of product.

It's not a new facility.

So you see a lot of rehab going on, a lot of rebuilding of old facilities and taking the technology from [pneumatic to field bust and PlantWeb] right from flat.

From here to there, and that is very profitable for us.

It's very profitable for our customers.

I mean our customers get a huge payback by making this investment and we clearly, with our installed base, are getting an enormous benefit from that.

And because of that and because of the growth in the large projects and the mix of our MRO and the rehab we've been able to mix that quite nicely.

Okay.

Got it.

Thanks, Dave.

Thank you very much, Bob.

Hope to see you soon.

Jeffrey Sprague, Citigroup.

Thanks.

Good afternoon, everybody.

Hello, Jeff.

How are you doing?

I'm doing great.

Not as good as you, but congrats.

I tell you what, you couldn't ask for a better day.

I tell you, talking to this guy almost 34 years later just shocked me.

Made my day.

No one can [expletive] me off today, I don't think, but give it a shot.

I could try, but I don't want to ruin your day.

Yes, I'd be [expletive].

But let's go down this path, anyhow.

Maybe APCC.

I mean, apparently you guys were in the mix there.

Obviously, the price got extraordinarily high.

I just wonder if you could tell us what APCC had that you didn't and how far you were willing to go for that asset.

Oh, it's -- when you get involved in acquisitions you sign documents, Jeff.

You guys know this, I'm not allowed to disclose if we were, we're not in there.

But clearly let's just think about this for a second.

APC's involved in reliable power.

We're a major player as was -- as is Eaton, as is [Schnide Air MG] and clearly it would be an asset that we'd be interested in.

And the issue really boils down to as we talk about platforms and I would consider reliable power a platform investment for us.

The way I look at it is at follows.

We make investments for our shareholders.

If we cannot generate a return with a reasonable -- and I would say a conservative level of synergies, that's above our cost of capital, we will not make the investment.

And so when we get to a certain point, if we're involved with a point like this we're making a platform move and we believe that we can not generate a return above our cost of capital, we will bow out.

So from your perspective, what you need to know if we are involved in something like that and I look at significant synergies.

If we were involved I would see significant synergies in that area, we are very careful about the discipline from the Board from a cash flow standpoint and return on our investments for the shareholders.

And if we feel that we go too far, we back out.

And that's the way we're looking at this.

If we look at platform runs, you'll see this in the future.

We will have these days and that's the way we look at it.

But I cannot comment directly we were involved or not involved.

But one could assume that that would be an asset I'd be very interested in.

That's the assumption I made.

What does this -- what does the inability to maybe do that one due to the -- what seems to be the aspiration to create or break out a larger platform out of Network Power maybe around reliable power maybe around somewhere else?

Is there -- is there enough kind of small deals and organic momentum that one day we wake up and the segmentation of the company's different because something's gotten to a certain size?

The answer is correct.

I still believe even with -- even without the opportunity to acquire an APC.

We have the capability to build a critical mass -- a critical space around there to create a $5 billion-plus business in critical reliable power.

And the answer is yes.

And that would not be a foolish assumption that we would wake up one day and you see something like happen.

We have several places within the Company that we would consider that we could invest and expand those platforms and create that and clearly right now in the [inaudible] world, prices are -- what I would say are pretty high, and so I would expect that at this level that companies like us will struggle for a while here because we are very disciplined.

I mean, I'm not focussed on reaching some certain size of the Company.

We're focussed on creating returns for the shareholders and people like Walter and people like August Bush and other people on our Board if they don't see how we can generate a return, they will not support me.

I guarantee you Walter in particular.

And can you give us a little color, Dave, on -- within Appliance and Tools.

Appliance versus Tools.

You called out kind of Tools and Storage in your comments but --

My fault.

I should have said Appliance Tools and Storage.

Okay.

So that -- that all kind of went together.

It all goes together.

I apologize.

From my standpoint, the Appliance, Tools and Storage right now, we are looking at some growth next year in this space driven by our position in non-res and a slight recovery in what I would say the consumer market in the second half of our year.

The wild card in looking at -- do we grow 5% range or do we grow a 7% range underlying is like I said this year.

How does that appliance consumer side do?

Or how does some of our consumer products do in the big box channels of Home Depot and Lowe's.

And clearly right now, it's weaker, but my feeling is that we -- I expect a little bit of pickup as we move into the second half of our fiscal year.

And that could change, and we'll get a read on that again in February and we'll talk about it in February.

And then just one last question, given your comment that it is more of a seller's market than a buyer's market, should we expect to see more coming out kind of in the intermediate term, and could you remind us how big Buehler was in revenues?

Buehler was less than $100 million in sales.

I mean, I'm not going to disclose that.

We had an agreement with our buyer.

We -- I think I remember the last press release, I'm asking Walter how much we put into that.

Did we say 300 -- up to $300 million?

Up to $300 million.

So I -- we still have that underway.

We will sell some -- continue to sell some businesses this year.

I would expect in the next couple -- next three, four months we would have a couple more minor ones sold.

Right now, as we look at them, we do not expect any gains.

They're more neutral.

Buehler had a gain.

I would expect the next one to be plus or minus $0.01.

And so not much of a gain there.

So at this point in time, there's nothing of big gain substance there.

Thanks a lot.

Have a good one.

You're welcome.

Thank you very much, Jeff.

Nicole Parent, Credit Suisse.

Good afternoon.

Good afternoon, Nicole.

Hey, you left one thing off the gratitude list.

The Cards won.

That's right the World Series Cards.

Thank God we beat Boston finally.

We didn't play them, that's right.

No that was a great World Series, and then we did it right in the middle of our planning conference and I got to see the last game because of the rainout.

That was unbelievable.

Our year in '06, and the Cards win in '06.

And -- I tell you, it's been a good couple of weeks.

I guess first on Network Power, can you give us some color on the inventory write-off and the warranty costs you cited in the quarter as a customer-product driven and what the magnitude was in the quarter on margins.

There's two issues in Network Power.

Number one issue is the impact of Artesyn, worth a little bit over of 2 points of margin in the quarter.

The acquisition of Artesyn in the full four quarter, and we are on plan to improve that profitability.

But the first -- we felt for the first three, four quarters that would be dilutive to us and it'll start coming back in the mid part of 2007.

The second one was when we first brought Marconi into the fold, we integrated North America several of their other acquisitions and facilities and operations and we moved quite a bit of our production to Mexico.

And we -- when we made this move, clearly it did not have the systems and the controls and the people to do it properly, and as we closed out the year and we did our -- we were doing our audit work we realized that things didn't quite add up.

And so we went down and we did a complete review of the whole -- our Mexican operation and we quickly found out that the some of the -- the profit that we've been booking throughout the year was not appropriate.

Some of the inventory wasn't there.

And I mean, from the standpoint of the right things in the balance sheet and the P&L we're not tied together properly so we had to correct that.

And that's basically what it was and these things happen from time to time.

We're a global company and we dealt with it year-end and cleaned it up.

And we'll have actions going on here in the next couple quarters as we continue to get this business back under control.

So is that largely behind you?

How -- was it the other 200 basis points or more?

And do you -- I mean, does this cause you to kind of do a review of other acquisition integrations you might have globally?

It -- go ahead.

It's approximately -- about the 200 basis points, but also as this business was more impacted by the telecom consolidation that Dave talked about on that downturn in volume.

There was also deleverage on the volume in the quarter, which impacted that margin that caused the 200 basis points.

So, it was some amount of deleverage.

The overall problem was about 200 basis points and almost half of that was the deleverage and almost half was the inventory and warranty issues that they had.

From the the standpoint of will we go back.

We look at all of them and this is the first time we really had a chance to take a hard look at this Mexican operation since the close -- and since this consolidation, and we clearly look at all operations around the world and we took a very special look after we found this one pop up at all of them.

So we will.

And I -- these things happen, unfortunately, from time to time in a global company like ours, and fortunately we find it quick enough so it doesn't build and get bigger and bigger and bigger and cause a big problem.

Great.

And you just mentioned the outlook for Network Power with the market being down over the next six months.

I mean, is it largely just North American telecom, and I'm assuming --

That's what I said.

I said the North American telecom will drive down.

The overall market's still pretty good except North America telecom.

Okay.

And then I guess lastly, could you just give us an update on the service initiatives, particularly just given the success in the new product introductions you've had over the past, say, five years?

On a conference call, I think I'll beg to push that off until we talk in February.

I will talk about that.

We had a very good year in our service.

We had -- if -- the eight key growth initiatives on total, I want to say, grew in excess of 15% this year.

Well in excess, I think closer to 20%.

And we'll talk about that and all of them had a very good year including service.

I don't have that chart in front of me.

I talked to the Board with it today, but -- and I will share that chart with you in February.

But our key growth initiatives in services, one of them had a -- we had an exceptional year as we continue to invest in that and grow.

I'll -- it'd be the best time to talk about that in February, Nicole.

Great.

Thanks.

You're welcome, thank you.

Deane Dray, Goldman Sachs.

Thank you.

Good afternoon.

Just first -- just to clarify Nicole's question.

On the point on the inventory write-offs, I understand about that was the Mexican situation, you think that's resolved.

How does that affect the warranty costs?

So is there -- have there been warranty issues with this product as well?

We had -- we had some quality problems with some of the production and so we had some warranty issues coming at us and we booked those warranty.

If you know you have a warranty issue, you have to make an assumption what's going to happen over the next 12 months, 18 months or two years.

And so from the material standpoint and production, we had some issues and we recognized that and booked it in the quarter.

You sized that, so how much was the inventory write-off, how much was actually warranty.

And is that warranty reserve or is that -- is actually expense, would you say.

That would be -- it's an expense and we -- it goes on the balance sheet anticipating that we're going to have pay for this fixed in the field.

And, Walter -- I'm not going to break down the difference between inventory and warranty, but in total, the two points that we had in the issue in our Network Power business there, relative to our telecom, about half of that 2 points was tied to the warranty and inventory.

Got it.

You think that problem's behind you.

We always hope it's behind us, yes.

Okay.

And then the question is on your internal growth, 11%.

Very healthy, can you give us a sense of how much of that came from price?

And I know you said you didn't get enough price to offset raw materials, but if you just take us through the extent that you can on the segments and how much did price contribute to your organic growth?

We're going to find -- we're going to talk to you [during the] fourth quarter and we're going to get you that number here in a second, because I think -- we're going to grab a pitch here for a second.

I have a pitch here for that.

In the fourth quarter -- the total year we're less than 1% total price impact and the fourth quarter was better.

In both cases, it looks like approximately 1%.

1% for the fourth quarter.

So would have thought in this environment you would have had more pricing power.

We don't gouge customers.

That's a good answer, but the reality is you're seeing, especially like in the Climate Technologies side, with the kind of 13 SEER transition there has been substantial price increases.

Did we have up margins in the Climate Technology quarter?

Yes.

Okay.

Okay.

Good and then related to this is that pricing was not able to offset raw material.

What was the raw material head wind in the quarter, and what is the expectation --?

We said -- we said it did offset.

In one segment, I think we said -- in Appliance and Tools --

It did not.

It did not.

In total --

-- it did.

It did.

And the other issue that you have if you're looking at core commodity increases that we have a practice of hedging copper, aluminum and other commodities, so that as the commodities go up, we've hedged it.

We pay it at a older cost and that our price increase lags that and they match up in '07.

So, you have that impact also affecting the margins.

The only place it didn't cover it would have been in the Appliance and Tools sector.

In the other places, because materials are hedged, the total Emerson, it did cover it.

I mean, Deane, we're in a very good balance right now.

Our price costs are in sync, and that's what we try to do.

We don't try to be significantly above or significantly below, and every once in a while in a quarter you'll find us a little bit above and sometimes below.

Right now, and we have been probably for two quarters, pretty well in sync and I look at '07 to be in sync at this point in time.

If we get too far ahead of actual underlying commodity cost, our customers are pretty smart people, and if we start to say oh, we're going to raise prices 5% and we say it's because of this material, this material, this material.

They will look at us and say well, you're full of [expletive], and so we have to be -- we're very careful.

This is very honest.

We look at this as a long-term commitment to our customers and we try to stay in balance.

We try to drive our margin improvement not by raising prices people, but improving our mix of products, selling more higher-end products, and selling -- leveraging our plants and productivity that way.

We do not try to raise our margins through price.

That is not a long-term, winning tragedy for us.

And in the period of falling commodity costs, your prices tend to be sticky, or how do you defend those?

We try -- what we try to do is obviously, we have the issue as the commodities start dropping down we obviously start getting that benefit.

We try to make sure we always are ahead of the curve or the wave, and therefore if we can stay ahead of this with the falling commodities, we lower our prices.

We have a tendency to try and stay in sync.

Every so often a quarter gets out of whack because of a big contract or something like that but on an average, if you look at us as we manage this business, we pretty much stay in sync, except for a quarter here or a quarter there.

Your assumption for '07 is to be in sync.

We are -- we showed the Board that we are in sync.

Maybe slightly, slightly ahead, but there's a lot of assumptions in that.

Okay.

Thank you.

You're welcome.

Thank you very much, Deane.

John Inch, Merrill Lynch.

Thank you.

Hey, Dave, I was a little nervous you doing this call at 4:30, you were going to drop a big bomb after the market.

No, I only had good news today.

We had two days of strategy Board meeting with the Board and so it went until mid afternoon and we decided to wait -- it stopped about a half an hour after the market closed, so we decided to wait until after the market closed.

There's no bomb out there.

I thought our -- I didn't think our numbers were that bad, John.

No kidding.

Hey, Automation in the U.S.

You've called out a deceleration.

Rockwell's blamed auto.

Is that what you're seeing, or maybe a little bit more color.

Particularly if you X out the [Genset] business, what kind of trend activity are you seeing?

Well, let's put it this way.

I've been on the board at Delphi for five years.

We don't do much auto.

So the slowing is systemic?

Is the slowing is the industrial spending has been at a high level and I think the percent change is coming down.

Just take for us -- for instance for us.

We spent capital this year, and Walter will calculate this very quickly for me.

We went from 500 to $600 million of capital.

What is that growth rate, Walter?

[inaudible]

And we're going -- next year we're going to go from 600 to 700.

What's that growth rate?

That's 17%.

The 600 over 500 is 20%.

Okay.

So we went from 20% growth of capital spending in this year and we're going down to 17%.

That tells you what's going on in the marketplace.

And we don't really serve -- I mean, we don't sell much into the automotive industry, and if you look at our product, it primarily goes into space outside.

Yes, we have suppliers but not that much.

We're not that automotive delivered -- dependent.

But you just look at our own capital spending, John.

It's coming down a little bit -- the growth rate's slowing.

Yes, I know.

Commendably.

So you're not in auto.

I mean, Dave, are you seeing kind of regional differences as part of that deceleration in Industrial Automation, like is northeast decelerating far more rapidly then other parts of the country, or --?

To be honest I don't get that type of accuracy.

If I look at -- I mean if I look at -- we are very global in this space.

In the U.S. business definitely, if you look at the numbers we gave you slowed down and the European and Asia are now taking over for that and we're very strong in Europe.

Regionally, I wouldn't say that one place is worse or better than the others.

In our industrial space, we're very much into non-res, we're very much into the process industry, too, in our industrial space.

And so we -- I don't get a sense regionally that it's changed yet.

If I -- if I went out and really pushed it, I probably could find out, and I could also find by industry, but that's not something I do on a quarterly basis with these guys.

It's clear that the overall spending pace is still pretty good, as productivity is still out there, people adding capacity, but if you look at the levels we're coming off of now, they're getting higher and higher, so the growth rates are definitely starting to slow down a little bit.

Hey, process, 16% roughly organically.

I mean, how much do you think of that is sort of Emerson-specific versus maybe just industry spending coming off the summer?

We don't -- to try to say a market and we will have to do this for the Q, but to look at a market and it's per se, is that the market definitely was good and I would say we probably gained a point or two.

That's just my initial guess.

We'll have to -- we're doing the work right now for our Q because we break it out in the Q for that statement.

I would say that we've gained about a point or two this year.

The market's definitely growing strong this year, double digit, but I still think we outperformed that market.

Is -- but did you see anything kind of a -- I mean, are we seeing the market kind of pick up --?

No, I think you -- I think the market's been running pretty good all year long.

You have a mix from quarter to quarter, John.

You have to be very good -- I look at a very strong marketplace.

A marketplace that probably is running at a pace they're not going to get much better than this because -- just because the capacity of people and equipment in our -- in capacity out there of our customers and also ourselves and other suppliers.

So I think you're going to look at a situation where the market should stay pretty good at a high level, but you're not going to see the delta of 16 and 18 and 20.

You're going to see -- I think you're going to see good double digit-type of growth around that 10% range in that market, which is good, for this coming year.

Right.

And then just last question.

The -- what kind of -- in the guidance range for EPS, what kind of restructuring deltas are we looking at?

You did 84 million this year.

I mean, flattish, and proportionally any of these business segments get much more incremental restructuring in '07?

We actually have more restructuring in 2007 then we do in 2006, and the reason for it is we actually have, as we look at -- last year we had very strong 12.5% underlying growth rate on top of the year was 6 and the top of the year before that was over 8, and so this -- in 2006 we had to scale back from our restructuring because of the demand for our plants and customers.

We are going into 2007 with more to do, and so we're looking across the Company and raising it -- and the number's 100 million?

Yes.

A little bit -- maybe 100 -- plus or minus $10 million, and as we look at -- because we'll restructure if we need it, so I'd say 100 plus or minus $10 million.

And you're going to see it's pretty well spread across all companies with a pretty strong presence in the Network Power business both in our telecom area and also in our embedded power Astec area as we integrate Artesyn.

Those will be two key areas and those are the two key -- I would say the two biggest areas from my standpoint.

Right.

And also you have a much bigger chunk in the first quarter then last year.

Yes.

And the other -- exactly, good point.

The first quarter last year as we got into a very strong quarter we pulled back restructuring because we couldn't do it.

As I've said before, we will not move forward with closing a plant until we can serve our customers, so we backed off.

And we had a lower restructuring number -- a very low restructuring number in the first quarter as we called out last year, and we'll have a much higher level of restructuring this first quarter because we have a lot underway right now.

And I always like to restructure and as things start slowing down, things get tougher.

And that's what we're doing.

Great.

Thanks.

Congrats.

Thanks very much, John.

Robert McCarthy, Banc of America Securities.

Good afternoon.

Congratulations on a great quarter.

If you could just clarify your comments on non-res commercial construction, are you expecting to see a bit of deceleration '06 to '07 in terms that market?

What are you going to see in terms of its strength?

I would expect our non-res construction to be at a pretty good growth still but at a lower growth rate than this year.

It's still pretty good around the world and it would be, obviously, helpful to us, but I would expect that be at a lower growth rate.

What would you quantify if for this year if you could?

I'm not ready to do that yet.

Okay.

Then moving on to maybe capital allocation because I think that's probably a principal concern, given some of the recent properties that have been put on the market and been bid up, it is a very difficult environment, potentially for you to acquire assets.

Could you just comment on that going forward for capital allocation.

I mean, how are you thinking about that?

Do you think it will be more difficult for you to get acquisitions done now?

Well, as we told the Board today, as we look at next year's -- our operating cash flow that we're setting out there.

We would expect to be around the $2.7 billion operating cash flow level.

We would expect our acquisitions to be in the range of 800 to $1 billion -- $800 million to $1 billion.

If we have the capability of doing more than that, we will do more than that.

We look at our -- I already told you capital spending's going to be around $700 million.

And if you look at share -- at our dividend, you can calculate -- I don't remember the number it'll be with that dividend increase 18% to $2.10 average for the year.

And then we're looking at share repurchase, again, depending on what our acquisitions are, somewhere in that 800 to $1 billion range.

Given the current pace of acquisition opportunities right now, I would expect us to be at the low end of the acquisitions, but things change.

We are out there courting companies all the time.

We might hit one.

So as I look at the Board right now, we're talking somewhere between 800 and $1 billion of -- of acquisitions, and depending on what happens in acquisitions our share repurchase will be between 800 and $1 billion, too.

Conversely, it seems like a pretty good environment for divestiture activity and given the fact that you're going to accelerate restructuring initiatives in '07, do you think that we could see some more divestitures coming across in some non-core assets for you?

I've already said that we are going to -- we have several underway, and we will continue to do that.

They will not be significant numbers.

We have been -- we have been selling for the last five years on average -- I think we sell well over $1.5 billion in sales of assets already, and we'll sell several more this year in hundreds of millions of dollars.

Somewhere in that range.

And so we're going to keep doing it and we're not going to accelerate it.

There's not -- there's not something we're going to rush.

We do this on a very deliberation basis.

Thank you for your time.

Thank you very much.

Chris Kotowicz, A.G. Edwards.

Good afternoon, guys.

Great quarter.

Great Cards win, Chris?

You bet.

I wanted to ask a few questions, I guess, on Process.

You talked about the -- the rich MRO mix helping the margins.

You ha a lot of strength in Asia, and I would think that that's more OEM and project work.

Is that wrong?

We have a lot of project work over there, but we have a large installed base over there at the same time.

And so if you look at the mix of our business -- what people forget sometimes is that there's been a fundmental shift in the way people are investing in the process plants going to the next generation of technologies.

And with that -- those are higher price points and profitability for us.

So we both have good MRO in Asia, but we also have a good mix relative to the type of products underway with the PlantWeb win.

So we have a strong presence, we manufacturer in Asia, so we have a great cost basis.

We're not an export-driven company.

We manufacturer there.

So I look at our profitability around the world as pretty equal.

Now, yes, the U.S. because they're installed base were a little bit higher, but it's not so significantly higher we can't make good profit margins around the world.

Okay.

And you talked about leverage being the major driver for the incremental profitability there.

How much of the benefit in profit do you think came from truly the mix -- the PlantWeb piece and the MRO?

Not going to tell you.

Got to ask.

That's fine.

And then maybe looking forward you've got new technology.

Is this an area where you've invested a lot of money in wireless for instance.

You've talked about that in past investor days.

My impression is that's very unpenetrated at this point?

It's a big deal for us over the next ten years.

It's equal to, in my opinion, some of the PlantWeb launches we've done and DeltaV launches we've done back in -- the last 5 to 8 years.

And that's almost totally unpenetrated, right?

Yes, this is very little penetrated.

The technology.

We've launched it now.

We'll be start -- we will be shipping products in the next -- I would say within the next quarter.

This will take time.

Just like the PlantWeb when we started out in '97, people laughed at us, people said we don't know what we're talking about, and look where we are today.

So I would say that wireless is -- and if I look at it and as I showed the Board, this is a 15-year program that I think will have significant impact on our process business.

And it looks like a market share shift opportunity is what it sounds like.

I look at all technologies as an opportunity to shift market share.

Okay.

On the boost in CapEx spending, the focus there -- I mean, is this really capacity or is it weighted towards capacity or is a lot of this productivity?

It would be both -- I mean, we're looking -- there's significant capacity going in around the world, but we also have some productivity, obviously productivity.

We have -- the Board approved today a new facility in China for our process flow.

Last month, our Board approved a new facility, a joint facility in Romania, and so -- and we also have a new -- as I said, technology facility, advanced valve development technology, that'll be a state-of-the-art facility in Iowa.

And we have a new -- we're working on the capital of a new facility in Mexico, as you know, with [Kolpin], too.

So from our standpoint, we have both from a technology and a capacity standpoint investments going on, but we're also globalizing our assets to serve those markets so we can make acceptable levels of profitability in those markets.

We don't like giving [expletive] away, Chris.

I hear that.

Quick housekeeping question.

Tax rate next year -- or this year, I guess I should say.

Tax rate this year was a little bit over --

I think he's thinking --

'07.

Yes, '07.

Oh, that's right.

You're like us.

We already closed --

-- that's right.

Done.

It would be in the same range of 31 to 32%.

Great.

Thanks guys.

Great quarter, great year.

Thank you very much, Chris.

Go Cards.

Ned Armstrong, FBR and Company.

Yes.

Good afternoon.

Hello, Ned.

With respect to Europe, you mentioned you expected to see some pretty solid growth there over the next couple quarters, are there any issues on the horizon that could be an impediment to achieving that type of performance?

Within the next six months, Ned, I think the pipeline, the order pace looks pretty good.

And what I'm talking about, I look at the shifting and where the investments are going in some of our customer base and the underlying economics.

I just look at it and say, the momentum's there.

The pipeline's there.

The economics are going our way, and so I think the next six months look pretty good relative to what we see in the U.S.

Now, you're going to see -- if I remember correctly, Europe had -- what was the growth rate in the fourth quarter? 12%.

I'm not talking about 12% growth rates here for the next couple of quarters because we start improving -- you remember I -- we actually started improving in the first quarter last year in Europe.

I would expect a high single digits in -- like 8, 9% range -- 7, 8, 9% in Europe for the next six months.

And would expect to be slightly ahead of the U.S.

And then after those six months, you anticipate it slowing just really as more product of just momentum can't last forever?

No, it's a function of all of a sudden our comparisons -- and the underlying economics in Europe are a little different.

You don't have that growth rate -- the economy's not going up to 3.5, 4% underlying economies like we saw in the U.S. as we came out of this downturn.

Remember that.

Europe right now is looking at, what, 2.5, 3% type of growth.

So this is a function of how far that growth's going to be in those marketplaces.

That's all.

Got it.

And you look at our comparisons.

I tell you what, if you gave me 6% growth next year, I'll take it.

Great.

Thanks very much.

Nigel Coe, Deutsche Bank.

Hello, Nigel.

Hi, how's it going?

I'm not making any comment about anything relative to you.

The last time I told you --

Well, I'll tell you now, if you keep on pushing these calls back any further, there will be a drink in my hand.

Just on Network Power, you've been talking about the warning signs on the North America telecom for quite some time now.

Would you say trends in that are worse then you expected, and what -- what do you think that'll [technical difficulties] in 2007?

The answer there is I don't -- that segment is been impacted and has been impacted over sort of the last five or six years by the whole consolidation effort.

And as soon as than happens, there's no forecasting models that can deal with this.

And so you have to deal with what we know is going to happen as the companies merge together.

We give it our best shot right now.

We can see what -- the customer base will slow down as they sort out what capital.

What's going to be employed.

And so it -- I mean, I can't even tell you will the underlying growth rate be down 10% next year, or will be up 10%.

And I won't know that until we watch each quarter unfold and our customer base say, okay, we're ready to [trigger and go forward].

I know at some point in time they will stabilize.

They'll look at where they are relative to their investment, and then they'll turn it on and then we have to go.

So that's the best I can give you at this time, Nigel.

I mean, I know next year the odds are pretty high that our underlying growth rate will be down, and it could be the first half very challenging and the second half could be very strong growth positive.

The one thing we do have going for us in this space -- I mean, we have the telecom but in total, our Network Power's driven -- telecom's just one piece it.

So we have the data centers doing extremely well.

We have the financial centers doing extremely well.

We have our embedded power business doing extremely well.

I've just been signaling to you that the telecom piece is going to take off a piece of our growth this year because of what's going on in that marketplace.

And it could kickback in the second half of this year -- or fiscal year.

Okay.

Okay.

And two quick ones.

Just a quick one on the difference between organic growth and reported growth guidance.

It looks like you're looking for 2 to 4 points from non-organic in 2007.

Is that due to acquisitions that you expect -- you talked about doing between 800 to $1 billion of acquisitions.

Is that the difference?

We already have several acquisitions we did last year that we have a partial year impact of this year.

And we're going to get two strong quarters of Artesyn so that's in there.

And then we also see at this point in time where the dollar year-over-year relationship is that we should have a positive impact in that, and we do not -- we do build in the event that we -- we'll acquire companies between 800 and 1 billion.

We don't know exactly what month or quarter, but we do know that we'll have some.

So that's how we get that -- that delta there between underlying and the reported.

Okay.

So the 2 to 4 points of non-organic.

That's due to phasing of acquisitions and essentially FX.

Correct.

And we already have -- we already have over 1 point of that already with acquisitions we've done.

Okay.

Great.

And just a quick one on Climate's 20 point growth in Europe.

Where is that growth coming from and how long do you think that can -- those sort of rates can sustain for?

Can you repeat that again?

Yes.

Climate was up 20% in Europe.

Just what's driving that growth?

We -- I -- we had a very difficult year in 2005, and as we look at some of the investments going on in the whole refrigeration market -- and there's a -- in addition there's a transition going on from heating of water in a lot of states are going away from gas and oil and they're going to using a scroll compressor -- heat pump to heat water for your homes.

And this is a marketplace that we've developed and has taken off and we've gotten significant growth in the first year out of the box, and therefore I think we're going to have another good year next year, too.

We've got a lot of technology investments.

We've taken that scroll up the -- up the size and into other market space outside of refrigeration and air conditioning, and this has worked quite nicely for us.

If we have time, we'll try to talk about that in February.

But that's been a very significant opportunity for us.

You wouldn't find many companies in that space that grew like that in Europe.

Okay.

Thanks, David.

You're welcome.

Thank you very much, everybody.

I want to close out here and say that appreciate everyone sticking around this late in the day.

This is something I had to do with our Board.

I wanted to have a two day session with the Board, and it was important to keep the Board up-to-date.

As I said earlier, this is a fantastic year.

I want to thank everybody across the Emerson organization out there, and I wish we could repeat it again next year.

And we're intending to have a good year next year, but I'll have to work a little bit harder for it.

You all take care, and I'll see you soon in February.

Bye.

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