艾默生電氣 (EMR) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by.

Welcome to the Emerson first quarter fiscal year 2007 results conference call. [OPERATOR INSTRUCTIONS] Before beginning today's presentations, Emerson's commentary and responses to your questions may contain forward-looking statements included in the Company's outlook for the remainder of the year.

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

In this conference call, Emerson's management will make discussions, some non-GAAP measures in talking about the Company's performance and the reconciliation of these measures to the most recent and most comparable GAAP measures is contained within a presentation that is posted in the Investor Relations area of Emerson's website at www.gotoemerson.com.

At this time, I would like to introduce today's presentation, Chris Tucker, Director of Investor Relations.

Please go ahead, sir.

Thank you, Andrew.

I am 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 first quarter 2007 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 for the quarter as shown on page two of the conference call slide presentation.

First quarter sales were up 11% to 5.1 billion with increases in four of the five segments.

For the quarter we had underlying sales growth of 4% led by strong international growth, operating profit margin improved 10 basis points to 14.2%, and earnings per share came in at $0.55 up 15% compared to the prior year quarter.

Operating cash flow in the quarter was 327 million and free cash flow was 206 million.

The Company's financial position remains strong, but the operational efficiency measures were mixed in the quarter.

We saw average days in the cash cycle improve to 67 days from 71 days.

Trade working capital as a percent of sales increased to 19.8 from 18.8 and the operating cash flow to total debt ratio remained solid at 55.5%.

Next chart.

The P&L, again the sales of 5.051 billion, as we said up 11%.

The underlying sales growth was 4%.

Acquisitions added 5 points of growth and currency added 2 points.

Operating profit $717 million, up 12%, 10 basis point improvement driven primarily by restructuring benefits.

In total the price increases in the quarter slightly exceeded raw material increases.

Net earnings for the quarter were 445 million, an increase of 12%.

Diluted average shares outstanding were 808.5 million, which leaves you with EPS of $0.55 a share, up 15%.

Chart four, the underlying sales around the major geographies.

First the U.S. down 2% driven primarily by Climate Technologies, where they had a tough comparison because of the prior year 13 SEER impact, internationally good growth up 11%, Europe up 9%, Asia up 14%, Latin America up 11%, Canada down 2, and Middle East and other up 27%.

So that gets you to the total underlying number of plus 4% and again currency adding two points, acquisitions divestitures adding 5 points for the consolidated number of 11%.

Next chart, some income statement detail.

Gross profit $1.795 Billion or 35.5% of sales.

SG&A was 21.3% of sales, which brings you down to the OP percent of 14.2.

Other deductions net was 19 million, a slight reduction from the prior year.

We had higher restructuring of 4 million and amortization of 5 million which were offset by MKSI stock sale gains of 13 million.

Interest in the quarter was 58 million, which brings you down to pre-tax earnings of 640 million or up 12%.

Taxes in the quarter were 195 million for a tax rate of 30.5%.

We're still expecting the full year rate between 31% and 32%.

Next page the cash flow and balance sheet.

Operating cash flow at 327 million was an increase of 2% in the quarter driven primarily by higher earnings.

Capital expenditures increased to 121 million, an increase of 20% driven primarily by capacity expansions for Climate Technologies in Mexico and eastern Europe, which leaves you with free cash flow in the quarter of 206 million.

Again the strong cash flow to total debt ratio of 55.5%.

You can see the trade working capital balances at the bottom of the page and again as a percent of sales we saw it increase to 19.8%.

We are still driving to achieve improvement in this ratio for the full year and to drive the number -- the ratio to less than 18% for the full year.

Go to the next page seven, the business segment P&L.

The business segment EBIT was 723 million or 13.9%.

Difference in accounting methods of 48 million,up 8 million.

Corporate and other of 73 million, an increase of 4 million, and an interest again at 58 million.

Next page we'll go through the individual segments.

First for Process Management.

Sales in the quarter of 1.218 billion, an increase of 11%.

Underlying sales were up 6%, currency added 3 points and acquisitions added 2 points.

By geography we had the U.S. up 3%, Asia up 6%, Europe up 3%, and Middle East and other up 50%.

EBIT dollars in the quarter were 217 million or 17.8% of sales.

We had nice margin improvement driven by leverage on the higher sales, cost reduction benefits and new product benefits.

We did launch the wireless PlantWeb architecture in the quarter.

We also announced in January of '07 the purchase of Damcos Holding, which expands our process control offering into the marine and ship building market.

Next page, Industrial Automation, sales in the quarter of 994 million, up 16%.

Underlying sales added 11%.

Currency added 4 points of growth and then acquisition added 1 point of growth.

By geography we had the U.S. up 6%, Asia up 18%, and Europe up 15%.

EBIT $166 million or 16.7% of sales, margins up 10 basis points, as we had leverage on the sales volume, and price increases in the quarter were offset by material and other inflation.

A nice balanced global portfolio here benefited the growth as we had good strength outside the U.S. and continue to see strong growth from the power generating alternator business on a global basis.

Next chart, Network Power.

Sales in the quarter of 1.199 billion, up 28%.

Underlying sales were up 9%, acquisitions added 17 points of growth and currency added two points.

By region you had the U.S. up 6%, Asia up 21%, and Europe flat.

EBIT in the quarter were $117 million or 9.8% of sales, so we saw the margins decline here as we had deleverage from the North America telecom business, which remained soft due to mergers in the industry.

We also had acquisitions diluting the margins by 120 basis points.

The integration of Artesyn and Knurr remains on track and we expect to see that drive margin improvements in the second half of the year.

The end market conditions remain positive here with order growth in the quarter in the range of 10% to 15%.

Next chart Climate Technologies.

Sales in the quarter 688 million, a decrease of 8%.

The underlying sales were down 11%, acquisitions added 2 points of growth, currency added 1 point.

By geography we had the U.S. down 25%, as stated previously, driven by the 13 SEER conversion in the prior year quarter.

Outside the U.S. we had good growth with Europe up 33% and Asia up 11%.

EBIT of $90 million down 13%.

The margin excluding restructuring was down 40 basis points as we had deleverage on the sales declines and also a 20 basis point dilution from acquisition.

Next page, Appliance and Tools.

Sales in the quarter of 1.088 billion, up 5%, underlying sales growth was up over 2%, acquisitions and currency both added more than a point of growth.

By region we had the U.S. flat, Europe up 5%, and Asia up 26% off a lower base.

EBIT performance in the quarter was strong, $133 million or 12.2% of sales, a 70 basis point improvement as we saw prior cost reduction activities begin to drive margin improvement.

We still continue to do some restructuring in the tools and storage businesses as we move production to best cost regions, but all in all solid performance here for this business.

So if we go to the last chart, the summary and outlook.

A good start to the year for Emerson, underlying sales growth was 4% against a tough comparison.

Operating profit margins improved in the quarter and the order trends have been in-line with expectations posting 5% to 10% growth in the quarter.

So based on that we still expect the full year underlying sales growth in the range of 5% to 7% and reported sales growth in the range of 8% to 11%.

That drives our current expectation of full year earnings per share in the range of $2.50 to $2.60 or 12% to 16% growth.

We also expect full year operating cash flow of approximately 2.7 billion with capital expenditures of approximately 700 million, which would leave free cash flow in the neighborhood of 2 billion, Driving for a return on total capital in the range of 18.8% to 19.2%.

And just as a reminder we will review our 2007 expectations and update our long-term initiatives this week on Friday at our annual investment community update.

So with that I will turn it over to David Farr.

Thank you very much, Chris.

I want to welcome everybody this afternoon.

We've had a busy day.

We've had two board meetings and a shareholders meeting and kind of cold here in the Midwest.

But we sort of like the cold weather.

And we are looking forward to our New York City analyst meeting on Friday, the meeting will start at 8:30 sharp, again, that's 8:30 sharp and look forward to seeing everybody there.

As Chris said as I told the Board today and our shareholders, this is a good start to our 2007.

Business did come in slightly better than planned and we do feel better about 2007 as it is unfolding.

Therefore, the slight increase at the higher end of our range at $2.50 to $2.60 per share for the year.

We will be talking further about that and giving the details by business on Friday and giving you ranges of where we see the growth and the profitability by these businesses.

There really wasn't much surprise as the quarter unfolded versus the November plan that we talked about.

We knew this was going to be a challenging quarter for us, and it looks unfolded pretty much that way.

The sales and profits were slightly better, and again I want to thank the business leaders around the world on behalf of the OCE.

They did a great job executing on the P&L and the restructuring and programs that we have under way today, did a very good job there.

But to be honest, the biggest disappointment was in our trade working capital execution and our cash flow execution.

We had a special business leader meeting on this about two weeks ago.

Fundamentally, as Walt and I look at this and Ed Monser look at this, we missed our plans by $25 to $50 million in the first quarter.

That's very disappointing given how we've executed on this for the last several years.

The business leaders understand that, and we will be driving that over the next several months.

I committed to the Board that we will be getting this back.

We are still committed to the $2.7 billion operating cash flow for the year.

It's not a big issue, we're a little bit behind the plan but we can recover it.

The first quarter is always a slow quarter for us.

Fundamentally you looked at it, we did made the decision to build $100 million of compressor inventory in the quarter.

It was the right thing to do.

We know that the compressor customers will be coming back at us very quickly here in February, March and April, as that inventory in their production comes back up online, and we wanted to be ready for that.

We decided to have a little bit more level loading this year.

It was the decision that we made early on and we stuck to it.

And I still believe that will be the right decision as we get into March, April, May of this year.

We also had, as we talked about in November, we have several facilities that we are going through and doing rationalization and restructuring and moving to other parts of the world.

Our goal is always to make sure we have a seamless move and therefore we typically will build inventory in anticipation of those job moves and those facility moves, not surprising.

We are doing that under way, and we have several facilities that are being built right now around the world and again we'll be talking about those on Friday.

We did have some execution issues, no doubt about it, in a couple places, in the motors and appliance components, Network Power.

Clearly we had some issues in both those places as we built too much inventory, in my opinion.

It is not something that we can't deal with.

It is not because a big customer issue or big changes in the market dynamics, we just did not take our plants down fast enough and we will resolve those here as we go forward in next three or four months.

Again, we are committed to the plan and we reviewed this with the Board this morning.

We're not pleased with the first quarter execution in that area, but we will get it fixed.

As Chris said, we still believe given our sales, profits and cash flow, our return on total capital, OROTC, will be around 19% for the year.

We have some significant restructuring under way in many of our businesses.

You've seen the impact of that and some of that in our P&L's by businesses in the cash.

Particularly Network Power, we have two acquisitions that we're integrating at this point in time that we acquired last year about mid-year.

We have a North America telecom business, which is going through consolidation at the customer base.

We are consolidating and doing restructuring there.

We anticipated a negative impact this quarter.

It is something we expect next quarter also.

We are vesting to position ourselves to better deal with upcoming competitive competition as this industry consolidates in a couple places, which I think people are aware out there and some of the large acquisitions that will be closed probably sometime the next month or two.

But as we see the year unfolding, we're very confident about the year.

We do see that our international sales most likely will be equal to or slightly ahead of our North America sales or U.S. sales.

This is not surprising giving on the global economies, and I am sure I will have a question about my view of the global economies when we get to it, but clearly our international diversification right now is paying off this year.

We had strong international growth in the first quarter and I would expect to see that in the first half the same way.

As we move forward and talk on Friday, we'll get into more details by business and show you the growth rates and what we think about profitability and cash, but again it was a good start to the year.

I am pleased with the operating executives around the world.

I appreciate their support, and they have committed to me, and they have committed to the board that we will get the slight working capital hiccup fixed that we had here in the first quarter.

With that, I want to turn it over to our questions, Q&A, and look forward to it.

[OPERATOR INSTRUCTIONS] Our first question will come from the line of Robert McCarthy with Banc of America Securities.

Please go ahead.

Good afternoon, everyone.

Good afternoon, Robert.

First question, just surrounding Climate Technologies.

Did you see anything in the quarter that surprised you?

Was it on plan?

Was it a little bit below plan?

Could you talk about some of the puts and takes in the quarter?

I think in Climate Technologies the one area that was behind plan was the -- our heating business.

The December was a fairly warm month and so our heating business was not as strong and we sell products into the heating business and so that was weaker than anticipated.

However, our climate business relative to Europe and to Asia was strong, stronger than we expected, so that offset that.

Relative to North America AC business, it pretty much unfolded what we thought.

Our customers laid out a road map for the quarter, what days they were going to work, what days they weren't going to work.

I would say they were very aggressive in driving down inventory in the quarter.

And I think we'll see some of that impact, and as I tell people watch our orders that are going to be published on the three-month rolling average in March and April.

It will tell you how things are coming back up because that will give you an indication of February, March, and that order book fills in.

But right now they're coming back up.

You see the lines coming back up and it is unfolding like we thought.

That's my feel, Robert.

All right.

And then on the Network Power business, perhaps you could talk about what the prospects are for reacceleration in North America in the back half of the year, how confident do you feel about that?

What's the color around that?

The big issue there in North America for the telecom is telecom driven.

Our other businesses are doing extremely well.

The telecom mergers are done now.

I would expect they will be sorting out what they're going to invest and what they're not going to invest in.

So I feel pretty confident that we will start seeing some acceleration in the, I would say, the last four or five months of our fiscal year, so early summer, late spring, we should start seeing that.

We'll get a better feel for that on the next conference call, but I would expect that's going to happen.

This is very typical as we go through that and I would expect us to see that.

All right.

And Dave, why don't you, since you had begged the question, why don't you just talk about your global outlook and view of what you're seeing across the geographies right now.

Good.

Not necessarily beg, usually you guys ask.

I will give you my feel at this point in time.

I just came back from eastern Europe and side line was very enjoyable.

We're in the midst of opening a shared engineering and manufacturing facility in Cruise Romania.

I'm quite excited about that.

We had a chance to review our European business.

As Chris pointed out, we had a very strong first quarter, over 9% growth out of Europe.

I would expect Europe to be growing this year.

The economies are good.

Our position is good.

We're gaining, I would say, market participation.

I would expect us to see growth this year in Europe somewhere between 7% and 8%.

Our eastern Europe and Russian business is very strong and we continue to invest and derive that growth there.

So I feel good about Europe.

As I go to Asia, we had a very good first quarter and I spent the second week of January in Asia.

I feel good about Asia.

I think that Asia is going to have a good year for us, both in Japan and Asia and the rest of Asia Pacific and China.

I would anticipate the growth rates to be above 10%, somewhere in the 12% to 15% range.

It is a tough call right now giving what could happen, but that's my feel at this point in time.

Not as robust as last year, but we're coming off very, very high levels.

As I look at Latin America, we've had an extraordinary year.

We're driving towards our first $1 billion Latin America sales year.

I would expect us to see 10% to 15% growth in Latin America, very good growth year in Latin America.

Middle East is very strong for us and I would expect us to see somewhere between 15% and 20% growth in Middle East.

It basically leads us down to the United States.

The United States is going to start out weak because of the impact of the whole 13 SEER last year.

I would expect the United States to have reasonable growth.

I am going to give you a forecast by -- economic forecast on Friday, but I think that our growth is going to be somewhere between 4% and 6% in the United States in 2007.

So I think this will be our weakest element.

We anticipated that.

And I still believe that we'll come out of this Climate Technology 13 SEER shuffling around, but we won't get a clear indication of that until, again, until March or April time frame.

Right now the economics are shifting globally.

We are well positioned and I feel good about that.

One more question just on industrial automation.

You've seen very nice kind of above planned growth rates there for the past couple of years, because I think you've talked about it in the past being a more of a global GDP type grower.

Have you changed the fundamental growth -- has it changed the fundamental growth outlook for that business?

And then perhaps just as an add-on, what are you seeing in terms of U.S. nonresidential construction right now?

Robert, what I would like to do is, if you don't mind, I'd like -- we're going to talk about that on Friday.

The answer to the first questions answer is yes, and I want to talk about how we've been repositioning that business from both divestitures and acquisitions, but I would like to talk about that in more detail on Friday.

So if you don't mind I would like to hold off on that.

A question too far.

Thanks for your time you.

You always try to push one too much.

Thank you.

Our next question will come from the line of John Inch with Merrill Lynch.

Please go ahead.

Hello, Mr. inch.

Hello.

Question on your margins.

You mentioned that you built 100 million, I think, of inventory in Climate and some of these other extra inventory builds in a couple of the other spots, Dave.

Does that imply the 13.9 segment OP or the 13.8% EBIT margin, we maybe think that's over earned a little bit, we shouldn't really use that as a basis for the rest of the year?

No, I wouldn't worry about absorption versus -- that's not something -- it is not significant enough, John, not significant.

I know you're talking about absorption, both up and down.

It is not significant enough at this level.

You have to have a lot more inventory build and de-build to do that.

It is insignificant.

It is rounding.

Okay.

I would never allow my operating people to get by with that anyway.

No, it's fair, it's fair.

Let me ask you about process.

This is a business that obviously has a pretty long tail associated in terms of backlog, yet it is a little curious that you have a 6% underlying growth rate as U.S. cycle slows kind of industrially.

Is this just a coincidental timing or was there a specific project or two or is it cost?

Maybe a little color there?

There is two things.

Last year at this point in time we had a very strong U.S. rebuild going on down in around New Orleans and Louisiana there's a lot rebuilding was still going on in those facilities.

Secondly, as you know, the process business has large projects, and we've had a lot, several large projects at any point in time.

The key issue we're going to see here is I believe we're going to see sustained growth in the space here.

Our order pace as you know is still very strong, was it 10% to 15%. 15% to 20% Chris says. 15% to 20%.

You're going to see, I think, this thing unfold for many years because, one, we can only do so much, and two, our customers can only do so much at this point in time.

We're reaching a point in place relative to capabilities of our customers both in engineering and absorbing the growth.

So I think this thing is going to keep on going for awhile, and you're going to have quarters where you see good quarters and weaker quarters and it is not surprising to us from a growth standpoint at all.

So, David, that's the outlook.

I mean I know that if we were to go back in time no one would have expected really process margins to be where they're at.

If that's the outlook, strikes me that you're sort of in the cat bird seat to possibly continue to push the margins higher, if you don't actually have to give stuff back to customers or seek out a bunch of new business.

Why couldn't the margins in this business continue to grow over time?

I never said they can't.

I think the standpoint is the pace of that.

We are going to continue to invest very aggressively and we are going to talk about this on Friday.

We're investing very aggressively in a lot of technologies.

My game plan is always to invest very strong in the marketplace right now for when that downturn comes.

We're expanding our capabilities around the world both in people and services, and so we're going to invest as fast as we can.

So from the standpoint of margin, we're not trying to melt the long-term here, because we're investing in that, but there will be as this business continues to grow like it is, I would say at a very sustainable level, you should see continuing margin improvement as we leverage our fixed costs and the mix of business is going well.

So it is a pace of that improvement you're going to get to.

Is wireless PlantWeb going to be dilutive in any context to your margins in the foreseeable future?

No.

Last question, just on your tax rates.

You've called for kind of 31%, 32% effective tax rate for the year.

GE sort of has been a source of debate recently.

They've got an industrial tax rate around 20%.

It strikes me you're as global a Company as they are.

Why aren't you guys able to perhaps plan for a significantly lower tax rate to save some taxes?

I won't comment about GE's tax rate, but I will let Walter comment about how we manage our tax rate properly between the 31% and 32% level.

We've given you the guidance.

It moves around slightly.

It was at a little less than that in the first quarter.

We told you it will be in the range of 31% to 32% for the full year.

There are some small things occurring in the tax rate, for example, the phase-in of the new manufacturing tax credit versus the FFC and other benefits in the past will slightly hurt our tax rate.

By slightly it is less than a point of tax rate change.

So those little things move around.

Other countries are starting to slightly raise their tax rates.

They're still a lot less than the U.S., so you have some of these things going up.

The higher international growth certainly helps our tax rate in any quarter because our international tax rate is lower than our U.S. tax rate.

As Dave said, we're not commenting about other people and what they do and how they do it.

It is just we would expect our tax rate to be in a range of 31% to 32%.

I think, John, to your point you've had an article out there, I've read it, there are pressures on to raise those tax rates because of what's going on both in the U.S., internationally, and we see them coming at us and we plan our structure accordingly.

We feel pretty comfortable we can keep in the low 30's here for some time being.

It's not a big issue and we will have a quarter to quarter move, as you know, based on what happens.

Right.

But is just sounds like there is a ton of room based on your outlook to manage that significantly lower in the coming periods?

No, I do not see that.

We're good corporate citizen.

We will pay the proper taxes.

Thank you.

You're welcome.

Thank you.

Our next question comes from Jeffrey Sprague with Citigroup.

Please go ahead.

Thanks.

Good afternoon, everybody.

Good afternoon.

Dave, just a couple things.

First, I just wonder separate and apart from the HVAC effect on your U.S. business, there is just kind of a general tone out of earnings season that the U.S. is not quite as robust as other parts of the world.

I just wonder if you could put that in a little bit more context for us.

My guess is some of it is just generally the RESI impact rippling through.

I think you made a comment that you didn't bring the appliance plants down quite fast enough and that was part of the inventory equation.

But if you can give us a bit little more color on how you see U.S. playing out and if not there is a marked slow down happening here or not in your view?

As you know, and I shocked a lot of people right before EPG when I said the U.S. economy was slowing down, and people thought I was smoking something, I guess, but as I look at the U.S. economy right now, our leading indicators, and we will talk and I will show you this on Friday, our feeling right now and our indicators feel, that we have, what I would say, bottom out relative to the slowdown in the U.S. economy.

As I look at the U.S. economy, it feels like we're going to bounce around here for awhile.

Hello.

It is a lot easier to execute when they give you a document that says these days we're going to be down, these days we're going to be up.

You don't always get that from some of our appliance customers.

Right now as I look at it, Jeff, I think the U.S. economy, and we'll be talking about this, I think you're going to see our gross fixed investment numbers bouncing around anywhere from 0 to 2% this year.

And that means you're going to be looking at a fairly low growth environment for most of the U.S. manufacturing businesses, unless you have specific sectors which are stronger, but in total you're going to see a much weaker U.S. economy, and we anticipated that.

That is not shocking or surprising to us.

We've been communicating this now for almost six months.

Sure.

I appreciate that.

I will talk further about it.

We'll show you the charts as I see it on Friday.

I just wonder also just to elaborate on the question of process, kind of people's ability to deal with demand.

Is backlog in a sense getting larger than you would really like it to be and are there some things you can do to untap it from a engineering standpoint, whether it is internally your own business or support of your customers in a different way to allow them to do things?

Did you lose it again, Angela?

Hello.

Just one moment, please.

We're coming back in.

Jeff, we lost Jeff.

I am here.

Do you hear me now?

I can hear you.

Okay, good.

You're asking the process question, the capacity issue relative both to the customers, ourselves and can we accelerate that, is that what you were asking me, Jeff.

Is it just people?

Is there something else you can do to untap what must be a growing backlog there?

Definitely the backlog is growing.

Clearly there are -- first of all it is not unusual versus some of these large projects, which are hundreds and hundreds of millions of dollars, you have your backlog growing, and we have been growing the last three years double-digit, 10% plus of the top-line.

The key issue here is the engineering resources and the contractor resources that they're in is a big issue for us and there is not much we can do out there.

There is only so many expertise available relative to process plants and you don't put those together with not knowledgeable people because bad things happen with process facilities if you put them together wrong.

They do blow up and cause problems.

I think that you're going to see a restriction on that from the standpoint there is always a -- I think there is going to be a personnel issue, which is good because that means this process growth will be good for several years.

Relative to ourselves we are adding capacity.

We are adding engineering.

We have a couple bottlenecks right now in our facilities and one of them is in the high-end valves business, the very specialty valve business.

And the reason is these valves are very large and they are made with very unique materials.

That is our biggest bottleneck right now.

Other than that we have plenty of capacity and we can flex up and down and we are adding some capabilities.

We are investing in Iowa right now with a very new lab and facility there to try to improve that.

But I think you're going to see quarters where we have 10%, 12% growth, and I think you are going to see quarters in the process you are going to have 6%, 7%, 8% growth and I think it is going to go like this for awhile.

Great.

We'll catch up with you on Friday.

Thanks.

Look forward to seeing you, Jeff, thanks.

A apologize for dropping you.

Thank you.

Our next we will come from the line of Deane Dray with Goldman Sachs.

Please go ahead.

Good afternoon, Deane.

For the 4% core revenue growth how much of that was price?

Our price for the quarter is probably around 1%.

Okay.

Would it be fair to say if we were to exclude the pre-buy impact on Climate, your organic growth would be something closer to 7%?

I think that's a too little high.

I would think it is more in the 5% to 7% range.

It is right in that 5% to 7% range.

And that's right where you're guiding for the year.

You got it.

Just a couple data points on the trade working capital issue, you said the facility is moving, creating some buffer, setting up some buffer inventory.

How much was that compared to that compressor inventory build?

The compressor thing is by far the biggest number.

I would say that's probably a third of the size of the compressor issue.

We have facilities going into eastern Europe.

We have facilities going into Mexico and we have some facilities going into Asia.

It is probably a third, it is one third the size.

The biggest issue when we made this decision was to build this inventory relative to the compressor and the other operating issues were caused by surprise a little bit and we are just getting our arms around that now.

That's one thing good about looking at things very aggressively every month.

We get to see these things and go take action pretty quickly.

You'll see the benefit from that level loading you said March, April, May.

The key issue there, what you want to watch, Deane, is to watch our orders in the Climate Technology area as they -- we publish the March data which will have February, you should start seeing the three-month rolling average coming up.

And as we publish April you should see that come back up again.

That will tell you that we're getting the orders from the customers, and that means we're pretty in line what we think's going to happen.

Because you are going to start seeing the build of our production increasing in the second half of February and going into March, into April, and that means the order pace will start showing that in the chart that we show on you a monthly basis.

I might have missed this.

When you referenced the geographic for Climate, you have Europe up 33%.

What was driving that?

We have some very good programs under way from the standpoint of what we call heat pump and we're going to talk about that on Friday.

There is obviously a lot of environmental things going on and Europe is pushing this and we have the right product.

It is a scroll-based product and we've been working with the key heat pump guys in Europe, and we are having a major in-roads and penetration there.

We're also seeing very good growth in eastern Europe and some good export business coming out of our customer base in Europe.

So we'll talk about it, but Europe right now is -- we position ourselves from the product base and we are seeing that flow through quite nicely and seeing some good growth.

We have been now for almost a year-and-a-half.

Great.

Just last question.

When you talk about that capacity expansion, was there anything on the CapEx in the quarter that might have contributed to the cash flow shortfall?

No.

I think the capital spending was pretty much in line with what we're talking about.

I think as I tell people our target, point target is 700 million but I can't control capital plus or minus $10 million.

Neither can Walter.

It is going to be somewhere 700 million plus or minus 10 million.

And from a restructuring or capacity issue, if we have to put more money into it, we will, but there is nothing unusual in the first quarter.

Great.

Thank you.

You're welcome.

Thank you.

Our next question will come from Michael Schneider with Robert W. Baird & Co. Please go ahead.

I want to stand corrected.

One thing that Deane just -- I think it was Deane who was just on the phone, Walter just pointed out to me would be closer to 7% on that first quarter when you adjust what Dean asked me, and so I want to make people know -- have people know that.

Dave, Chris, can you hear me?

We certainly can, Mike.

Good afternoon.

Pretty cold up in Chicago, that's what's wrong with your phone.

It is very tough up here.

I will tell you that.

A lot of rain you got in Miami and then you went up there and you probably got frozen.

Climate, speaking of temperatures, 5% to 7% growth.

Did I hear you correctly that that's what you're expecting market growth to be?

For the overall total Company we're looking at 5% to 7% for the whole year [multiple speakers] -- .

Presumably that means on the lower end of that in the U.S., is that right?

Yes.

And has the recent residential data or the controversy about whether we've seen a bottom in residential giving you pause to revise that lower or have your customers indicated any propensity to do so as of late?

No.

I don't see any change right now in my North America forecast relative to the consumer base, the appliance business.

I am waiting for the whites of the eyes.

We got a better year last year than I thought and from my standpoint right now we're going to expect a pretty weak year.

We'll talk about individual segments and what we think about each of the segments on Friday, but I don't see anything right now relative to this pause supposedly and it's been published.

I'll believe it when I start seeing the order pace.

And the $100 million inventory build, that's consistent with this kind of mid-single digit growth rate for the climate business?

Yes.

And that includes a couple points of price, I presume, for fiscal '07?

No, there won't be that much price.

There will be, I would say, the point price will be closer to a point and we, as you know, we talk about, we try to keep our price costs in line and as we've got the price in, I think we'll be somewhere between 1% and 2%, yes.

Okay.

And then switching to process, I guess just to circle around the growth rate there again, 6%, you've been running double-digits now for quite a while.

Were there specific projects that didn't ship at year-end that would have ordinarily been expected to and that's why the growth rate was a little lower than I think some would have expected?

As I said earlier, the number one issue was we were still running pretty good numbers in the first quarter in the Gulf region because of all the hurricane damage the previous years.

And so there is still a lot of our service business, a lot of our on the spot repair business was very strong in the first half of '06 and so we had that, that's not happening again now.

That's been repaired and those things are online.

Secondly, there wasn't really any projects that didn't get done.

I would say we have a couple million dollars and we do that every quarter, where we didn't get things approved by customers or signed off.

But nothing out of the extraordinary.

The quarter, to be honest, in the quarter did not surprise me in growth rate, and I think we'll have a stronger process number in the second quarter based on what's going on.

I think that right now it is that -- as I said, you're going to see quarters where there is going to be good single digit numbers and you are going to see some quarters that are double-digit numbers in the process as are our customer base and our sales weed through this period.

And then final question on Network Power.

You did 6% growth in the U.S. despite the telecom weakness.

Correct.

Can you give us some color as to what markets are driving that growth rate because they're presumably up high single-digits or low double-digits.

Correct.

We're still continuing to see a very strong growth in what we call our data market in the financial marketplace, both with our levered business and the precision cooling and UPS business.

We're still seeing very good growth relative to our Embedded Power business in North America.

That's the combination of the Aztec Artesyn business, those are still doing very well.

The customer base there, the Ciscos, the IBMs, the HPQs, those guys, the DMCs, they're bringing a lot of new products out and we're obviously participating in that, so we saw a pretty good quarter there too.

Other than the telecom space, which we've talked about now for about six months, we anticipate everything else in that space is pretty much where I would expect to be in the cycle. above the range.

But the telecom is going to pull us down to the low-end of the range this year because it is not going to recover until late in 2007.

And can you walk us through maybe the next couple quarters on the acquisition dilution in Network Power?

You mentioned it was 120 basis points this quarter.

When do we start to -- at what point, I guess, do we start to see meaningful decline in that dilution?

You are going to see -- you are going to still see dilution in the second quarter will be less dilution in my opinion.

You should see that stop in the third quarter.

Okay.

Thank you.

You're welcome.

See you Friday.

Thank you.

Our next question will come from Chris Kotowicz with AG Edwards.

Please go ahead.

Good afternoon.

Good afternoon, Chris.

Question on process and I guess this also ties into industrial automation.

Given your comments about human capital constraints in the process business, it sounds like this is a global issue as far as like experienced people to put these plants into play.

Are you seeing new players try to enter the EPC piece of the market as far as you know, engineer procurement construct these plants?

No.

You're not?

We're not.

I met with all the Asian EPC's when I was in Japan early January.

I met with several of the European ones lately and the U.S. guys.

It's the same players, they're big, they're globally, and they have huge backlogs right now, and the key issue is getting qualified people around the world.

And I think that will be the issue for the next several years.

Is that a bigger issue on the labor side or the engineering side or is it the entire -- ?

I would say both portfolio.

You can -- the labor is usually a little bit easier, but you have to have a certain skill labor.

But it is the skilled trades right now on the engineers and people executing.

There is a lot of projects going on around the world and some of these projects, as you know, are not in the, what I would call, the really nice spots that we go for vacation.

Let's put it that way.

That's fair.

You may talk about this on Friday, but how much of your industrial automation strength is one-way or another product that's pulled through by your process business?

In drives?

There is parts of that business that are going to have some pull through, right?

Correct, there are We are not going to talk about it Friday, but -- we don't quantify it, but if you look at a lot of our industrial business relative to drive and some of our industrial business is coming out of China, we do have some pull through.

It is not a big number.

We do have some of that ongoing.

And the other place we do it, too, is, Chris, we actually have this on the UPS side, too.

When you go into computer rooms for the -- the side for process plants they're UPS's.

We'll have that pull there, too.

We try to sell cross Emerson when it goes to those things.

Are there any markets, besides U.S. residential air conditioning, are there any capital spending related end markets where you're seeing weakness?

No, not yet.

Nothing yet?

I guess my last thing is on hedging and price versus cost.

Just so I am clear, when you talk about price increases that are exceeding your cost increases, you're really talking about that net of hedge benefits, right?

Correct.

I am going to have Ed Monser talk -- Ed is going to be talking.

We're going to talk about that and we'll share you where we are right now.

But what we try to do is keep that plus or minus -- we don't try to get too far out and ahead because if you get too far out your customers feel like you're gouging them from the standpoint, so what we try to do is stay in sync.

For awhile there we were out of sync and now we're slightly -- I would say we call it slightly green and typically we look at our costs and we look at the hedge impact and we look at what we need to get in price and we drive that.

So we feel good right now for this quarter and next quarter.

Things change, but we feel like we're in sync and I am going to have Ed talk about that and show you the numbers for 2007.

Maybe a follow-on with that.

I am going to assume that if some of the hedges roll off that there is some pricing that in the absence of those hedges in the past that you would have had to push for.

Are we looking at six to 12 more months of kind of tailwinds in terms of pricing, even if commodity prices remain where they are and don't go up any further?

I would look at positive price right now through 2008.

That is about as far as I could go out.

That would be my gut call based on the trend of material costs and we have certain materials, I've even read articles now the steel companies are trying to figure out how to get more price back into the marketplace.

These guys are managing their capacity and if the economies stay at the levels they are right now, you're seeing consolidations going on in the steel industry.

You can see consolidations going on in all the industries.

I think you are going to see a managed area where we are going to see, I think, positive price because of materials probably throughout '08.

That's about as far as I can go on that one, Chris.

We're not looking at any likelihood in the near-term at least of literally price cuts and that hurts your top-line, that's not in the current outlook right now?

Not in the current outlook.

Thanks.

See you Friday.

You coming Friday?

Absolutely.

Good, take care.

You, too.

Thank you.

Our next question is from John Baliotti with FTN Midwest Securities.

Please go ahead.

Good afternoon.

Hi, Dave, how are you.

Pretty good.

I had a question -- over time we've talked about where you think working capital as a percent of sales will get to and obviously you've highlighted several times your dissatisfaction with the quarter.

I am just wondering is getting back to 18% or below 18%, is that still -- is there anything structural that has changed where that is no longer a target or you still -- ?

I am going to show that number to you on Friday and it is going to be -- we're going to get below 18% for 2007.

And I think long-term our target still is 15% or lower for the Company.

Structurally, I think given the structure of Emerson right now there is no reason we can't do this.

The big issue for us is we have to improve our whole logistics effort.

And I am going to have Ed Monser talk about that.

Given the global nature of our Company and what we have around the world, we have to have much more efficient logistics amongst ourself and to our customers.

So we are going to talk about that.

It sounds like you are going to talk about consolidation maybe of some systems or something just to increase the visibility or efficiency there?

Correct.

Okay.

So you think -- so turns really should start to work their way back.

Do you think something we'll see dramatically change in '07 or do you think that we -- can we get back to the end of where we are in '06?

I am hoping to go get back to where we were and slightly better by the end of this year and then obviously -- right now we've had dramatic movements over the last five or six years and we're now more of the -- we're going now the yard by yard versus the 10 yard chunks.

That's the way it is going to be, I think, until we get to 15%, it is going to be the yard by yard.

It is execution, which Emerson is pretty good at.

From time to time we screw up like we did this quarter.

Okay, great.

Thanks.

I will see you Friday.

Thank you.

Our next question comes from Nicole Parent with Credit Suisse.

Please go ahead.

Good afternoon.

Good afternoon, Nicole.

I guess just first on restructuring expectations for the full year, is it still 90 to 100 or we are running at a run rate a little bit lower than that in the first quarter?

We are going to tell on you Friday that it is 85 to 100, isn't that correct, Walter?

Yes. 85 to 100.

85 to 100.

Will that be a function of macro economic environment?

I think it is going to be a function of we have executed and we've started programs right now and how fast we can get them done.

In some of these marketplaces you have to negotiate and you work with the local government and the unions and so right now I think it is going to be a function of how fast we can move there.

And it is part of macro economics, if things got much stronger, typically you've noticed this before, we actually have backed down.

We have to back down from the standpoint of restructuring because we're not going to disappoint our customers and shut a facility down when things are too hot.

Without ruining John Barrett's punch line for Friday, can you talk about the success of the wireless PlantWeb launch.

I am going to have -- and John is not coming Friday.

I am going to do it and I am still capable of talking process, I believe.

And we are going to talk quite a bit about our wireless launch and what we think we can do here.

But fundamentally we have a whole system architecture approach and we have a lot of new products coming out.

We've already launched some.

It really fundamentally is going to change the game from the standpoint of our customers able to measure more points throughout the plant from the standpoint of accuracy and also standpoint of efficiency and emissions.

You think about emissions as a big issue here.

We're going to talk quite a bit about this, but I believe this is a game changer in the business and fundamentally we have invested quite heavily in the last couple years here.

And the rollout is happening and we've come to play here because we look at this as a chance to make this a significant game.

And we are going to be talking about, I think some point in time, $500 million plus sales coming out of wireless products.

And it is really a game changer thing for us.

Great, thank you.

Thank you, Nicole.

See you Friday.

Thank you.

Our next question will come from Steve Tusa with JPMorgan.

Please go ahead.

Hi, guys, good afternoon.

Good afternoon, Steve.

Dave, could I just get your assessment, I think we can kind of read between the lines, but maybe if you could just give us your assessment of what the unit volume looks like in the HVAC market maybe in calendar '07, if you could do that.

I know you said you start to -- you will start to see things improve in February and March, but is that just a function of the OEMs being really disciplined on their inventories?

There is kind of a lot of cross currents in this industry in 2007.

There are a lot of cross currents in this industry and I do not have them.

I'm going to have to get -- we actually do have a forecast for the units for '07.

I'm going to have to -- I don't have that chart with me and I don't want to take a wild guess on that, Steve.

Can I get that for you and tell you Friday so everyone else has this on the call can get that information, too.

That's no problem.

We do have it but I just don't have it in front of me here right here in the conference room.

Absolutely But would you agree that its visibility here is kind of muddled by housing and everything like that?

I would say right now that visibility is extremely muddled.

I would agree with that.

We believe they took the inventories down, the inventories right now at the end of this calendar year were at historically low levels.

I think it has been four or five years since they've been this low.

The HVAC guys did a great job getting those inventories down.

We are starting to see them build the rates back up and they are going to start building.

Clearly how hot it gets early on is helping rebound.

We believe fundamentally it is still going to be a pretty good business for us in North America.

And from our standpoint I still think that North -- Climate will be a positive in North America and I still think that Climate, obviously, will wide unit positive.

But there is definitely a lot of guesswork and I can give you our best guess at this point in time for the whole year.

But it is going to be positive unit wise.

We'll catch him on Friday.

Lastly, just on the process margins, pretty good improvement year-over-year, good incrementals there.

Is there anything unusual about the mix this quarter that helped that number?

No, in fact, no.

In fact we did not have anything unusual.

In fact we had bad mix because if we had less North America service, which is a pretty good business for us as a kind of negative mix there, on the bad side made the margins lower than they should have been.

The mix is good.

Right now we have, as I talked about, Steve, many times, we have a very strong global presence.

We have global manufacturing, we have global engineering.

Where we get our business, be it China, eastern Europe, wherever in is, in India, we have a cost structure to allow us to make acceptable levels of profitability.

We're not an export driven Company in this regard.

So right now our mix looks very good because our cost structure and our volume leverage, we feel pretty good about it.

I said they had the low 30% incremental margin, that could move up throughout the year?

I would say in the process side I think you are going to be anywhere between 25, 30, low 30s, it is not going to move up higher than that.

That's a -- I would say 25% to 30% is a pretty good number.

Some quarters you could see a 35, but it can mix back down to being a large project in the system.

I think a 30 is pretty good average for process in the cycle right now, but you could have -- don't be surprised if you don't have a quarter at 30, at 35 or don't be surprised you have a quarter at 25.

And one more, just comment on the acquisition environment, what you're seeing out there.

We'll talk again about Friday, but right now the acquisitions -- there are assets out there, I don't think they're a highest quality assets right now and I think the pricing is too high, so we're being very, very disciplined, as I told the Board, and we will talk about our cash flow usage on Friday.

If we can't find the acquisitions we will now press and we will fund more internally and some programs and we will also buy more stock back.

But right now I would say our asset quality is we're not happy about and the pricing is I think also too high.

Thanks a lot.

I appreciate it.

I am looking forward to seeing everybody on Friday.

I appreciate the time today.

As I said it was a good start to the year.

I appreciate the work all the people did around the world.

We had a great shareholders meeting today.

It lasted 28 minutes, it is always exciting when you can keep it under 30 And I am looking forward to seeing people and I wish you a great day.

Take care now, bye.

Thanks.

Thank you, management.

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