艾默生電氣 (EMR) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Emerson second quarter 2007 earnings conference call.

During today's presentation all parties will be in a listen-only mode.

Following the presentation the conference will be opened for questions.

(OPERATOR INSTRUCTIONS) This conference is being recorded today, Tuesday, May 1st, 2007.

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

Please go ahead, sir.

Thank you, Heidi.

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 second quarter 2007 results.

The conference call slide presentation will accompany my comments, and is available in the Investor Relations section of Emerson's corporate web site 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 2 of the conference call slide presentation.

Second quarter sales were up 14% to 5.5 billion, with strong underlying growth of more than 7% led by strong international results.

Operating profit margins improved 20 basis points to 15.2%.

Earnings per share in the quarter was $0.61, up 17% compared to the $0.52 in the prior year quarter.

Operating cash flow was 548 million and free cash flow was 393 million.

We made progress on operational efficiency measures in the quarter, with average days in the cash cycle decreasing to 68 days from 69 days.

Trade working capital increased slightly from 18.6% to 18.8% as a percent of sales.

A strong quarter and good first half of 2007 against tough comparisons.

We move to the next chart, overview of the P&L, sales in the quarter, 5.513 billion, again, up 14%.

We had increases in all five segments.

Underlying sales, as we said, over 7%.

Acquisitions added 4 points of growth and currency added over 2 points.

We had two segments with double-digit underlying growth, process up 11% and industrial automation up 10%.

Operating profit dollars in the quarter were 837 million, or 15.2% of sales.

A 20-basis point improvement driven primarily by restructuring benefits.

In total, price increases were more than offset by material and other inflation.

Net earnings in the quarter were 494 million, up 14%.

The diluted average shares outstanding in the quarter were 804.9 million, and we repurchased 4.5 million shares for $198 million during the quarter.

So that leaves you with EPS of $0.61, again, up 17%.

Now going to the next chart, the underlying sales results from the major regions of the world.

United States was up 3%, as we've seen moderating growth here domestically, but offset by strong international performance, up 12%.

International growth was led by Europe and Asia, up 11% and 14% respectively.

Latin America added 7%.

Canada was down 1% and middle east and other, up 36%.

So that gets you to the underlying number of plus 7.3%.

Currency again at just over 2 points of growth, acquisition's at 4 points, gets you to consolidated growth of 13.6%.

Going to the next chart, chart 5, some more income statement detail.

Gross profit dollars of 1.952 billion or 35.4% of sales.

Commodity inflation continues to put pressure on gross margins.

SG&A as a percent of sales was 20.2%, as we leveraged the growth nicely.

That drove the operating profit dollars of 837 million, or, again, 15.2% of sales.

Other deductions were 43 million in the quarter.

11 million less than the prior year, driven primarily by the MKSI stock sale gains that were 13 million higher than the prior year quarter, and we have now sold all the MKSI stock that we owned.

Interest expense in the quarter of 58 million, pretax earnings of 736 million, or 13.3% of sales.

Taxes in the quarter of 242 million, a tax rate of 32.8% and we now expect the full year rate to be approximately 32%.

Next chart, the cash flow and balance sheet, operating cash flow in the quarter of 548 million, essentially flat to the prior year.

Capital expenditures of 155 million, up 38%, as we continue the capital investments to add capacity and expand our global footprint.

Leaving free cash flow of 393 million.

We still have a strong balance sheet, as evidenced by the ratio of cash flow to total debt at over 53%.

And on the bottom of the chart, you see the trade working capital balances, which as a percent of sales were 18.8% in the quarter, a nice sequential improvement from the first quarter when the ratio was 19.8%.

The next page is the business segment P&L.

Business segment EBIT was $814 million, or 14.3% of sales.

We had improved margins in four of the five segments.

Difference in accounting methods of 52 million, up 10 million.

Corporate and other of 72 million, down 11 million, and interest expense, again, of 58 million, increased 8 million on the higher debt balances, which, again, gets you to the pretax line of 736 million.

Next chart, Page 8, we'll walk through the individual businesses now.

First, process management, strong quarter here, sales of 1.345 billion, up 18%.

Underlying growth was 11%.

Currency added 3 points and acquisition added 4 points.

By region, we had the U.S.

up 13%; Asia, up 7; and Europe, up 6.

While the middle east/other was up 52%.

Continue to see good growth across the segment from the systems and solution, measurement and valve businesses.

EBIT dollars were 239 million, or 17.7% of sales.

Good margin performance on the leverage of the higher sales volume.

We also had strong order growth in the quarter, double-digit orders, again, as the outlook for these end markets remain strong.

Next page, industrial automation, sales in the quarter of 1.057 billion, up 13%, underlying growth was 10%.

Currency added 4 points of growth and divestitures subtracted 1 point of growth.

As we look at the geographies as the performance here in the segment matches what we saw with the total company with the U.S.

growth moderating, offset by good strength internationally.

We had the U.S.

up 4% on an underlying basis, and Asia and Europe up 21% and 15% respectively.

EBIT dollars in the quarter of 151 million, or 14.3% of sales.

Margins increased 20 basis points, as we leveraged the higher sales volumes.

And we also had good order growth here, double-digit, 10 to 15% and continue to see good growth from our power generating alternator business.

Next page is network power.

Sales here of 1.191 billion an increase of 19%.

Underlying sales were up 6%.

Acquisitions added 11 points and currency added 2 points.

By geography we had the U.S.

up 4%, Asia up 15% and Europe down 3%.

Continued to see strength from the computing end markets on a global basis and also the China power systems business remains strong.

Strong profit performance here in the quarter.

EBIT dollars of 146 million, or 12.3% of sales.

We had good margin performance from the core businesses and also less dilution from the acquisitions.

The integration of the Knurr and Artesyn acquisitions has been successful and will benefit the margins as we move into the second half of '07.

We're also expecting to see the North America telecom to start pick up, which should also help growth in the second half of '07.

Next page, climate technologies, sales here in the quarter of 945 million, up 11%.

Underlying sales were up more than 6%.

Acquisitions added 3 points of growth and currency added over 1 point.

By geography, we had the U.S.

down 3%.

Europe up 28% and Asia up 19%.

EBIT dollars in the quarter of 141 million, or 15% of sales, up 40 basis points, as we had lower restructuring spending in the quarter, but we also had 30 basis points of dilution from the India compressor acquisition.

As we move into the key summer selling season, obviously weather will be important as we look at our residential AC business here in the United States.

Next segment, last one, appliance and tools, sales in the quarter of 1.133 billion an increase of 6%.

Underlying sales was up over 3%.

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

By geography, we had the U.S.

up 2%.

Europe up 9%, and Asia up 26%.

If you look at the end market exposures here, you've seen the non-residential construction-related businesses posting nice growth, which has been offset by softness we've seen in the consumer and residential construction markets.

EBIT dollars here in the quarter were 137 million, or 12% of sales.

Margins declined 210 basis points.

Price increases were offset by material and other inflation.

We had deleverage on the lower volumes in the residential construction and consumer businesses.

We also had some reset costs for our storage business at the big-box retailers, and negative leverage on the new disposer product launch.

Continue to work the price and cost issues here to recover the margins as we go forward.

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

A strong quarter and a good first six months for Emerson.

Underlying sales in the quarter of 7% really driven by good strength outside the U.S.

Solid operating profit margin performance, a 20-basis point improvement there.

And the order trends remain solid at the 5 to 10% range and supportive of our growth objectives for the year.

So we're still expecting full year underlying sales growth of 5 to 7% and reported sales growth of 9 to 11%.

Looking for full year earnings per share in the range of $2.50 to $2.60, which would represent 12 to 16% growth versus the prior year.

And full year operating cash flow of 2.7 billion and free cash flow of 2 billion, which all will drive our return on total capital of approximately 19%.

So shaping up to be a strong year for Emerson in '07 after good years in '05 and '06.

With that, I would like to turn it over to David Farr.

Thank you very much, Chris.

First, I really want to thank all the corporate and operating executives out there, within Emerson that delivered outstanding results for this quarter and second quarter, with sales at $5.5 billion, up 14% and EPS of $0.61, up 17%.

If you look at our first half results, they continue to be very strong, on top of last year's strong first half results.

Many people may not remember that we delivered in the first half last year plus 15% in sales and plus 31% in earnings per share.

This year in the first half, we're delivering 12% growth in sales and 16% growth in earnings per share.

Not bad back to back first half results.

Days like this will remind me of one of my favorite movies, A Few Good Men, if anyone remembers that movie.

Towards the end, Jack Nicholson had a great line when he stood in front of the stand.

Given my mew tone on the conference call, I can't handle saying that line, but if you remember, the line, it said, "you can't handle" and so we'll just leave it at that.

We are very pleased with the improved results in our trade working capital performance in this quarter.

Remember, at the analyst meeting we talked about the end of Q1 where we build inventories, expecting some surge in demand in certain marketplaces.

It didn't happen.

We've been recovering from that and we've got that back under control.

We feel very good about what was accomplished in the first -- in this quarter, with inventories coming down.

If you look at our inventory levels from the end of December to the end of this quarter, they actually dropped, which is not a normal trend for us, but we did take production down to get the inventory back under control ,and we'll continue to do that throughout this year, as we regain the momentum in our trade working capital.

And we feel good about our total year operating cash flow of $2.7 billion at this point in time.

Really delivering great results for our shareholders and allow us to invest that money both in dividends, allowing us to invest that money in share buyback and acquisitions and internal programs when necessary.

The year is unfolding pretty much like we discussed at our February analyst meeting.

The basic economics are pretty close to what we discussed then.

The total year expected, as I look at the gross fixed investment, trends are still positive, maybe slightly more positive.

The U.S.

is a little bit weaker, not unexpected, and our international marketplaces actually have improved in giving us a better total piece as we look at the total year.

So we feel good about the economics right now.

They are driving good growth internationally, and hence, you'll see for the first half over half our sales have come from outside the United States, a very good trend for us at this point in time.

As we look at what's going on in the businesses and we discussed it with the Board today, we feel good about the second half.

We have good momentum going into the second half and we feel good about delivering the $22 million plus in sales, increased margins, earnings per share in the $2.50 to $2.60 range and the return on total capital around 19%.

Again, a very strong start to this 2007.

I feel that we have a lot of momentum going on right now, and I feel good that this year will continue to perform well for us and heading towards the end of 2007 going into 2008.

With that, what we'll do is open the floor and take the questions.

And I look forward to seeing what comes at us.

Thank you very much.

What I would like to comment on last time, and, Chris just reminded me about this, try to hold the questions to two, if possible.

We had people last time asking three, four, five questions and that did not allow us to get to everybody at the point in time that we needed to get to.

I would like to contain people to two questions.

If necessary, you can follow up with Chris later or myself later, too.

Open the mic for questions now.

Thank you, sir.

Emerson's commentary and responses to your questions may contain forward-looking statements, including 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 on Form 10-K as filed with the SEC.

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

At this time, we will begin taking questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Robert McCarthy with Banc Of America Securities.

Please go ahead.

Good afternoon, everyone.

Good afternoon, Robert.

the first question, I think it just around appliance and tools.

Perhaps you could talk about some of the transitory issues in the quarter on the reset costs, and what you saw in terms of inflation, and how do you expect that to play out in the division throughout the back half of the year?

Okay.

The real issue in that business is when you look at the underlying volumes in the residential side they're down.

Residential marketplace is down and we expected it be down this year.

We expect it to continue to be down for most of this year if not all this year well going into 2008.

We're getting the price relative to materials and therefore you're seeing top line growth, but we are deleveraging from the standpoint in manufacturing because of the down volume.

And secondly we did do some significant resets of major big-box stores for the storage.

I'm not about to give the number out on that, but, we had that, had significant costs, which we do from time to time, it comes in quarters.

Sometimes you don't expect it.

It happens, and we have to book it at that point in time.

And the other issue, too, is we've gone through a transition with a major new product launch in our disposer business.

From some of the inefficiencies in the manufacturing as that volume's gone up, and then volume's gone way down, it's caused some inefficiencies there.

I would expect this business will regain its stability from profitability and improve as the year progresses.

As we finish this year, it should be better.

I do not expect the volumes from the residential side to be better, though I do expect the non-res piece to maintain a good growth profile we have been seeing.

Okay.

Rather than digging down, let me switch gears to a bright spot.

Network power, particularly on the organic revenue side.

Could you talk about what you're seeing in terms of the activity, and speaking with some of the analysts I speak to, on the telecom side in terms of wireless network spend and demand for data centers, just seems to be a positive inflexion point, particularly in the U.S.

Maybe you could talk about that a little bit more?

The strong growth that we saw in the total sector was driven by our, the data center, the data center spend for uninterruptible power supplies and our precision cooling.

We saw very strong growth 25 -- 20% plus growth for the first 6 months in that segment, relative to our global business.

We knew that our North America telecom spend would be down and for most of this year, though we're starting to see, as you just mentioned, the expectations and the ordering pace coming back at us, improving as we go into the second half of the year.

And as we finish this year, I would expect it to be better going into 2008.

The telecom integrations are happening.

We expect this to happen.

I think we talked about this in February.

I fully expect that trend to continue.

Nothing is surprising in that sector.

From the profitability, it's the integration work we've been doing with Artesyn and also the restructuring is now starting to flow through.

We expected this to happen.

If we didn't have that improvement in the second quarter, we would have been surprised and that would have been a negative to us, but that organization delivered.

This year's unfolding network power pretty much what we expected to happen.

Thanks for your time.

Thank you.

Thank you.

Our next question comes from Bob Cornell with Lehman Brothers.

Please go ahead.

Yes, follow-up on network power.

What do you see happening with the combination of APCC and Schneider?

Bob--

Anything going there?

Yes, go ahead, sorry.

I was going to say it's way too early to see anything.

We've been together, both APC and Schneider were good competitors before this combination.

I see no reason why they won't be good competitors.

We both have our different segments around the world.

I've not seen any slowdown clearly in our business.

If we've had the type of growth we've had in the first six months of this year, around the world, the market dynamics are good.

Talking to Eaton, I'm sure they are having pretty good pace right now, but it's good marketplace.

I don't think anyone's shifting around, anyone's being that aggressive at this point in time.

We have all we can deliver at this point.

How about an expanded view of climate U.S.?

I mean how is the transition out there in the marketplace, and what was the comp like and how about the normal ramp in the U.S.

resi market relative to normal?

What do you see with with regard to indications of interest and inventory build, the whole perspective?

Well, from our perspective, looking as a major supplier to that space, the, the inventory levels are very, very low.

And the manufacturing group of organizations that we have supplied, the big ACOMs have worked on their manufacturing processes and capabilities, and they are looking at, it would be much faster in execution from the manufacturing.

So they are running with less inventory.

We're running with shorter lead times.

We have not seen a big prebuild.

We have seen a pretty good steady improvement in the pace of business as we've gone into spring.

In certain respects, this is good.

If the industry can get away from the big builds and go to more level load, it would be much better.

But we're seeing reasonable demand.

It's been warm.

It's good news.

It was very hot here the last couple days in the Midwest.

In fact we set a record in St.

Louis yesterday at 91 degrees.

I like heat.

A lot of heat is always good.

As you know, Bob.

So I expect this, the business pace will improve and we'll see pretty good growth, reasonable growth in North America AC in the next two quarters.

Okay.

Thanks, I'll pass the baton.

Take care, Bob.

Thank you.

Our next question comes from Jeffrey Sprague with Citigroup.

Please go ahead.

Jeff, are you out there?

Sorry about that.

Mute button.

Hello.

Very technical challenge there, wasn't it?

Not very good with the phone.

A little more of a deep dive on U.S.

versus Europe and just kind of the whole global picture.

It's interesting to look at your results.

On an aggregated basis, U.S.

is weak, but a lot of that ties your resi businesses, but process was actually stronger than international in the quarter, which really jumps out.

So I'm just wondering if, I guess a couple things.

If you could address this U.S.

strength in process?

And how do you feel about Europe being decoupled from the U.S.?

Do you think Europe can stay this strong if the U.S.

kind of continues to bog down here?

I guess you're assuming I'm some kind of natural brain child in economics, huh?

You are.

You're Mr.

GFI.

Good.

I'm glad to hear that.

As I look at the North America, you have to break down the gross fixed investment.

The residential part of that has continued to weaken.

It is, it is weaker than what I, what I talked about in February, Jeff, when we were, at that point in time.

However, if you look on the opposite side of that, the non-res, the capital side of that business has been pretty good, and it's holding up in total-- at levels of 5, 6% range, which is good for us as we look at our underlying business.

If you talk about process in a quarter, you got to be very careful.

You could have a very large project, biggest shipping, shipping and in out of the United States, and that moves around big time.

You could have a plus 10, down 10.

So you got to be very careful from that standpoint.

There's nothing leading indicator that says, okay, U.S.

process is also going to be much stronger.

There's nothing there from the standpoint it could be a large project that's flowing through at this point in time of being shipped.

Relative to Europe and the decoupling, we were just in Europe about 10 days ago.

Our European business is running at levels, and we talked about this, as you know for the last couple years.

We could see it coming at levels that we have not seen for a long, long time.

There are two things, three things really driving this.

And I'll get to the point as a decoupling after that.

But underlying European productivity investments, capital investments for western Europe have not been very strong since, let's say the recovery coming out of the 2001, 2002, 2003 downturn.

They have been living off the capacity they invested back in the early 2000 time period.

What we're seeing right now is they have eaten through that in western Europe and they need to invest both from productivity and capacity because they have not been doing it for the last three or four years.

Now, the other area that's going well for them is they also have eastern Europe, which are investing quite significantly.

It's their Mexico, let's say, or it's there-- when we do Latin America.

They are investing for capacity, they are investing to go after that marketplace, as those countries join the EU.

We're seeing the same benefit.

It's pulling along our eastern Europe, western European sales.

So they have that going for them right now.

The other issue you have going for you is western Europe serves middle east quite strongly.

So when we serve our western European, our businesses, a lot of our businesses go into west Europe and then get shipped to the middle east.

Some of our customers, we don't know what's going there.

So at this point in time, what we see is a strong western Europe demand.

We're seeing a good eastern European demand and then we're seeing a good middle east and parts of Northern Africa, all helping Europe to have, what I would call pretty extraordinarily strong growth.

Given that, I believe, because of that dynamic right now, you could see the growth in Europe, as we call Europe, decoupled for a while here from the U.S.

I don't think it can stay decoupled forever, but it can have a longer sustained growth, Jeff, than we would have normally seen as the U.S.

came down.

And so as we look at our businesses right now, I'm looking at a very good second half, and I think we're going to have a good start to 2008 because of those dynamics.

Though I don't think it will decouple forever.

Nothing decouples in the economy forever, in my opinion.

That's the way I look at it right now.

That's a great answer.

I appreciate it.

Then just as a follow-up, Dave, could you give us a little color on what the deal pipeline is looking like, your appetite to buy versus sell and what valuations look like.

We are-- we actually have more selling going on than buying, to be honest, perfectly honest there.

The pipeline is not very good.

It's not-- the quality assets, to be honest, aren't very good, the pricing expectation is not, not appropriate in my opinion.

We will do deals this year.

We have already accomplished a couple.

We have a couple small ones we're looking at right now.

But as I look at today, today, Jeff, I look at the level of acquisitions in 2007 will be lower than 2006.

And that could change in two weeks right now, but I would say the quality assets out there are not very good.

Now, what we're doing with our Board right now is we're looking out the next 12 or 18 months and talking about things that are of interest to us, and that's the normal cycle that we go through.

We're getting ready for when assets will come back on the line and letting the Board understand that.

So we're looking today, we're buying stock back when appropriate prices.

We are obviously paying the dividends, we're investing internally, and we're keeping our balance sheet flexible to be able to do something, but nothing big, or anything coming down the pipe right now.

Great.

Thanks a lot.

You're welcome.

Thank you.

Our next question comes from Nicole Parent with Credit Suisse.

Please go ahead.

Good afternoon.

Good afternoon, Nicole.

Just a follow-up on the big picture, U.S.

industrial macro.

How do you think about that playing out for the second half of the year?

Nicole, I would say that the industrial part in the second half of the year will be weaker than we saw in the first half.

And the reason I say that, it will still be good, but I think that we've had very good run rates on the gross fixed investment on the industrial and non-res side and I think it's coming down slightly.

For instance, my feeling right now, let's say it's been running in the pace around the 7, 8, 9% range, some quarters 7, some quarters 8, some quarters 9.

It's moving up and down.

I think it's going to shift down to the 6, 7% range, maybe 5.5, 6.5, 7% range, still above, from my standpoint, above 4% is good in the U.S.

So it's still going to be good, driving pretty good industrial pace for us, offsetting the weakness we're going to see in the residential, like any consumer related public businesses.

And I see that pace staying pretty good for the second half of this year, which will be good for us as we start in '08.

Okay, and then just one last one on CapEx, you're up 30% first half '07 versus first half '06.

Where are you actually adding capacity by business and geography?

Okay.

Very detailed question, I might add, we are adding capacity across, I would say, what I call emerging markets.

We have several facilities going in eastern Europe.

The climate technology has a new facility going in eastern Europe.

Climate technology has a facility going in Mexico they are spending on right now.

We're adding capacity there.

We have the network power adding capacity in Asia.

We're looking at places like the Philippines right now and also Vietnam.

We're adding capacity in our process business, primarily in eastern Europe.

We're adding some capacity in industrial automation in eastern Europe and also in Mexico and in China.

As we've talked about we're building a new shared manufacturing facility and customer service engineering facility in Romania right now, and that's going to be primarily for our non-res/industrial type businesses.

I'm trying to think.

There is nothing really going on in the U.S.

right now and there's nothing going on in western Europe at this point in time.

But we have a lot going on from capacity, if you think about our underlying growth rates for the last three or four years, last year's were 12.5%.

This year in the first half, total year you were talking about 5 to 7.

Year before that we were around 6.

Year before that we were around 8.

We've been eating through our capacity, so we've been putting across the Company.

The only place we're not putting in right now is appliance components, I would say.

Everyone else is pretty much putting some incremental capacity in.

Great.

Thank you.

You're welcome.

Thank you.

Our next question comes from Mike Schneider with Robert W Baird.

Please go ahead.

Hi, Dave.

Hello, Michael.

Two questions.

First on materials, can you give us a sense, incrementally now, really from the start of the year, how much are they, or how much have they grown as a head wind and presumably you're absorbing that in the guidance?

The, from the material inflation standpoint, it has continued to increase.

Commodities, the basic commodities that we deal with are higher today than they were earlier in the year.

And therefore at this point in time, I would say we're reasonably in balance.

We may be slightly ahead, our hedges are in place, so it's helping us right now, Mike.

My big concern is in the second half of '07 going into '08.

As I look at that, given the current pace of material inflation, we will have a strategic issue to deal with here, is that we're going to have to start going back out and increasing our prices to cover that based on copper being back up at $3.60, the price of steel starting to trend back upward.

You know what all these comedies are.

They are moving back up again.

And so we're okay right now.

It did hurt us a little bit, but not major.

It's going to be more in the second half of 2007 on a calendar year basis going into the calendar year 2008.

And presumably that short-term squeeze is embedded in the guidance?

Oh, definitely, Mike.

There will be no surprises along those lines unless there's a major, major disconnect in pricing, and I don't see that at this point in time.

Our hedges, we only have 6 months to go.

We're pretty well in sync.

I'm thinking out beyond 6 months, strategically I'm paid to think longer than 6 months ,and I'm thinking out there in late 2007 and going into 2008, just like we talked about last year.

Just like we talked about last year, we knew that we were going to have a problem this year.

Okay, and then, just the organic growth guidance for the year remains 5 to 7.

You've done about 5.5 in the first half.

It implies some acceleration, at least even to the midpoint in the second half of the fiscal year.

Is it just climate against easier comparisons that drives that acceleration, or what other segments do you expect to actually accelerate?

From the standpoint of our underlying growth rate, that is clearly a big help for us.

Walter's going to pull something here for me to see where those segments.

I would say that network-- I still believe, as I've talked about, I think we're going to be in that mid 6 range for the year, and so as I look at the underlying it's a little bit of acceleration in the next quarter as being driven by the climate in particular.

It's also a little bit in process management of the mix of the business and also in network power.

They see a little bit of acceleration in that third quarter.

So as I look at our year right now, the 5 to 7, I've always said I thought midpoint would be a very good number.

I still believe that.

I still believe between 6 and 7% is going to be the year this year, 6 and 7, somewhere in the middle there.

Great.

Thank you, again.

You're welcome, Mike.

Thank you.

Our next question comes from John Inch with Merrill Lynch.

Please go ahead.

Thanks.

Good afternoon.

Good afternoon, John.

Hey, the point you were making, Dave, about major resets for the storage, I'm sorry, what does that mean?

Is that--

Okay.

Let me explain that for you.

And I won't count that as your first question since I didn't do a good job the first time.

My fault.

Okay.

When we go into a major, like a Home Depot or Lowe's, when we take the space over from another supplier, what we agree to do is that we take back the old equip-- the old product, get rid of it, we destroy it, write that off, and then we go in and reconfigure the store at our cost for our product.

It's a one-time hit that we have.

Now, we have a commitment for them going forward for X number of years to have that space.

There's no guaranteed volume, but historically when we do this, we have this business for several years and it is a good payback for us.

But we have a one-time hit up front when we go through thousands of stores and have to deal with this.

It's market share gain as we look at it, but it costs us to buy that.

That's what that is.

Is that clearer?

And what are the products associated with this?

You're typically looking at closet made metal and wood products, storage.

Okay.

That go into Home Depot and Lowe's.

Okay.

So I guess one question would be just your middle east process order is up over 50%.

Could you talk about, sort of, is that a specific customer, is it an obvious large project?

What's going on there and how should we think about the runway then in terms of process in the middle east?

The-- from our standpoint, the process, the process market space in the middle east is very good, there's not one specific customer.

One of the things that Nicole asked me about increase of capacity, there's two more things I forgot to add.

We are building a new facility in the middle east.

The middle east is a very strong place for us.

We are, soon, as I think I've talked about, we're about to get to the $1 billion milestone for us in the middle east, we're going to cross that in Latin America this year, we have very broad industrial demand, climate technology demand and process demand in the middle east, and I expect that to happen, continue for the next couple years.

That's why we're building and expanding there on several locations.

I mean there's not one customer.

It's across the board and it's looking pretty good right now with all the investment that's going on, both in gas, oil and then also chemical.

And then water, power, basically everything you can think about in the process world is being built.

Tall buildings, non-res, a lot of our equipment's going into those buildings too, like UPSs, switches, and stuff like that, gen sets.

A very good business pace for us right now in the middle east.

My second question then is, industrial automation, Dave, have a considering a pretty tough comp in the states actually did pretty well.

You know--

I would say they did damn well, and I swore, I wasn't supposed to do that, but--

No comment.

You, you called that a sort of weaker industrial macro potentially in the second half.

I'm wondering, how does that square, for instance with Rockwell, that they have this thing they call the front log where they think that automation markets actually begin to accelerate in the states in the second half.

Could you maybe sort of square this all up for us?

I do not do economic forecasts for Rockwell.

I'm looking at, as I'll say it again, the gross fixed investment, industrial investments in the U.S.

have been very good for the last several years, have continued to stay up there.

They come down a little bit, let's say in the 7, 8% range, 6%.

I believe it's going shift down a little bit more in the 6.5, 6%, maybe 5.5% range in the second half this year.

Now, that will impact a little bit of the second half of the year, but not a lot.

It's going to impact more in the first half.

Pretty much a lag effect on this.

So, yes, I think it's weakening, but it's still at levels that are still pretty high and will allow to us have pretty good demand.

That's why the industrial business is holding up for us both in non-res and also in industrial automation.

I see the weakening, but I still think we'll have very good order pace in the second half of this year.

But nothing that leads you to think there's an acceleration per se coming?

I do not see an acceleration, no.

When you come up with very high comp levels for this GFI investments, no, we don't serve the automotive industry.

We don't serve things like that, so maybe automotive industry is going to invest a lot more money in the second half of the year that I don't know about.

We'll see.

Thank you.

Thank you.

Our next question comes from Deane Dray with Goldman Sachs.

Please go ahead.

Thank you.

Good afternoon.

Good afternoon, Dean.

Question in climate technologies, one of the numbers that jumps out is that European business up 28%, and in the release you talk about the new heat pump technology.

Is that all what's driving there, and what's that play?

That's not all that's driving it, it's a big part of it.

The underlying European economy's good.

There's expansion going on both in refrigeration, non-res construction, they're putting air conditioning in.

The heat pump technology is from the standpoint in the marketplace in Europe, what they are are trying to do is get rid of oil burners and gas burners and use scroll technology, which is far more efficient to heat water, and so that's what's going on right now.

And the regulation has been put in place for this type of heat pump technology and there's incentives going in place right now to get consumers to do this to save energy.

And we are a major supplier to that, that heat pump community with our scroll technology.

And that's what's going on, it's not all of it, but it's a big part of it, but just the underlying demand is very strong in the middle east and eastern Europe and all those parts of the world.

So they have had a heck of a run for almost a year and a half now, and I do not see any reason why that won't continue at very good levels.

Obviously running on very peak levels right now, it might slow down a little bit, but it's very strong at this point in time.

Do you care to venture how much penetration so far the heat pump technology has and so is this going to be a year adoption, or is it a couple of quarters?

I think this is years, several years.

Okay.

Good.

There's two reasons for that.

New construction and also replacement.

They are now incentivizing, people going in and replacing the old units.

Sure.

And then just to clarify on the question regarding material cost inflation, if you go back to page, slide 3, if I'm reading this correctly, it said price increases were more than offset by material inflation.

So this meant you were not able to raise prices enough to offset?

No, no.

That means we're green.

That means--

When you combine material and other inflation, it would--

Were more than offset by material--

Yes, so slightly higher other inflation than price.

Inflation in materials and other costs were higher than the price dollars.

Got it.

And what was the price contribution in the quarter?

2 points.

Great.

Thank you.

Thank you.

Our next question comes from Chris Kotowicz with A.G.

Edwards.

Please go ahead.

Good afternoon.

Good afternoon, Chris.

Great quarter.

Thank you very much.

Real quick one on appliance and tools, just for clarity, have you taken most of the big-box hit then, in the second quarter, or do we have a tail of those expenses into the third and fourth quarter?

It's done.

It's all done.

Most of it's done.

We're going to see some better leverage in the second half, then?

We should start seeing some-- the other thing we did is we, the residential, as I've said, has deteriorated, and we have been trying to drive our inventory and production levels down to the levels to be in line with what's going on and I think we have that done right now.

That, that hurts you, too.

But we had to do it.

We wanted to get production and inventory in line to what we think the demand's going to be.

You think demand is probably got nowhere to go but up is, what you're saying?

No.

Okay.

What I'm telling you is I think the residential marketplace is weak.

I don't think we've reached bottom, this is my opinion.

I'm not an economist, you know that, Chris.

I don't think the residential has reached bottom.

I think the rest of 2007 will not look very good and we could be going well into 2008 and not looking very good.

We are structuring ourselves to have a very difficult challenging residential environment in the U.S.

Period.

Okay, and then, I guess my follow-up, separately, the dollar is all time lows relative to the Euro or near all time lows, I guess, are you seeing any indication that the weak dollar is helping U.S.

exports or at least North American exports?

Is that potentially going to provide some stimulus as we start to head into 2008?

It's been helping-- it's helping companies.

We are not as much of an export-driven company as other companies because we have very global manufacturing footprint, but it's definitely helping export.

Obviously very, very competitive against the Euro-based company at these price points.

So, yes, it's helping.

But, again, we are primarily an internationally-based manufacturing company with some, some limited export.

But I think it will help the U.S.

economy in total to that point.

Okay.

I'll take the rest offline.

Thanks, guys.

Thank you very much, Chris.

Thank you.

Our next question comes from Stephen Tusa with JPMorgan.

Please go ahead.

Hi, good afternoon.

Hi, Steve, how are you doing?

As far as climate is concerned, you talk about a very weak residential environment.

I think you were referring to appliance and tools.

I'm just wondering, you seem like relatively optimistic about the residential HVAC environment, is there any concern that housing really kind of dampens the growth or even magnifies the declines there over--?

It will dampen the growth.

If housing unfolds weak as I think it will it, will dampen the growth, but a big part of that is still replacement marketing.

The key issue here is the weather, warm.

If we have a warm summer, the demand will be much better.

If we have a cold summer, the demand will not be very good.

So weather has a key issue there.

The other thing is inventories are extremely low at this point in time.

They are going into the cooling season with low inventories.

Our forecast right now is normal type replacement market with normal type of heat.

And we have easier comps as we go into the second half of the year and we see the order pace and the pace of the business.

I think you-- I remember telling everybody that, as we moved out of February, March and April, you should see our underlying climate technology order pace go from negative to 0, to 0 to 5, to 5 to 10, and maybe even a little bit higher depending on what happens here.

So that's what's going on, and it's pretty much in line with what I thought.

You don't have to have a lot of new housing construction to have a reasonable recovery here in our second half.

Right, so limited risk in residential HVAC from this continued housing weakness?

Based on my [theory] right now, that's exactly right.

Okay.

Thanks a lot.

Thank you very much.

Thank you.

Our next question comes from Nigel Coe with Deutsche Bank, please go ahead.

Thanks, good afternoon.

Dave, can I just clarify the points on the U.S.

industrial weakness, is that just the end market [usage], or is that a comment on the whole complex?

It's when I look at the-- when we break out the residential piece of what I call gross fixed investment and look at the non-res and the capital type cycle, that's what I'm looking at.

I'm not trying to make it very specific to my market.

We serve in the capital side of marketplace, we serve a lot of places there.

So this is a general economy that we serve from our capital goods and non-res, and that's what I see.

It's a slight weakening.

I'm saying that we're running at 7, 8%.

Now we're going to go down to 5.5, 7% range type stuff.

Still very good.

I look at anything above 4% as one marketplace that we can have very reasonable growth rates in, and makes me feel comfortable we can stay in the 5 to 7%.

Clearly, when it was running last year in that 8, 9, 10%, we grew underlying growth rates to 12.5%, that's a very unusual environment.

We like that.

That's pretty good.

You talk about [halogen] alternators being strong for quite a long time now.

Is that starting to soften as well?

We have not seen that yet.

I mean a lot-- it's a very global business.

The comps are going to be getting very difficult because of the strong surge we've been having here for several years here.

So I would expect that business pace to slow down as we finish this year, moving into 2008.

Based on just the normal trends you would see, things slow down a little bit.

It runs for several years very well, very good, then usually drifts off.

So right now we have not seen a major slowdown, but you can expect that sometime here in the next 12, 18 months probably.

Okay.

Second question on the working capital, you talked about inventory, inventory buildup.

Given that international is leading growth by quite some margin, given the payment terms tend to be a little bit easier overseas, do you expect maybe cash conversion to be a little bit softer than we've come to, than in the past until there's a better bounce in U.S.

and international sales?

No.

We, we improved our receivable performance both internationally and domestically now.

The mix is such that we didn't get much in consolidated but we've improved internationally over day, so we look at-- I don't care where you are in the world.

You have to have good cash conversion.

If your customer won't pay you in 60 days, we don't expect you to pay our suppliers for 60 or 70 days, so we try to keep these things in balance.

Our targets are the same around the world.

Our international guys are very good at this.

And one of the issues we dealt with with this quarter, I mean, look at our tax rate, we generate a lot of cash around the world and we're having to move that cash around and we have to pay some taxes on that.

That's one of the things we have to deal with these days.

And so right now we look very good and I don't-- I'm not worried about the second half of trading working capital right now, given what we accomplished this quarter we have a very good momentum going into the third quarter.

Okay.

Thanks, Dave.

You're welcome.

Thank you.

Our next question comes from Christopher Glynn with CIBC World Markets.

Please go ahead.

Hi, Dave.

Couple questions on network power.

You gave an interesting and rather specific outlook for the potential orders ramp as you see the markets developing in climate technologies.

I was wondering if you could give something analogous to how the telecom recovery might unfold?

The telecom, as I look at it here, will be a gradual improvement, probably in our late fiscal quarters.

As I said back in February, I can see the demand coming at us.

Then that will solidify the second half-- late second half of our year here and then going into 2008, pretty good, steady demand.

The big issue we have to deal with this industry is, they go from nothing to 100%, and we're working with them very carefully right now to try to manage this ramp-up.

But we see the orders coming in and we'll manage that.

We have the capacity, but I expect it to be slower at first and then accelerate, and then probably get to a point that it's difficult and then it will slow back down again.

What I look at right now, our fourth fiscal quarter, things will get better and we'll have a pretty good start to next year.

That's how I see them coming at us right now.

Great, and then looking at the normal kind of margin trajectory at network power over the last several years, x-ing out last year, but the few years before that, have a pretty significant ramp in the second half.

And if something similar to that happens, your margin guidance that you gave in February might look, well, would look a little low.

Could you comment on that a little bit?

I think also, people forgot what I said in February, that we'll have some businesses that will do better in March and based on-- I look at change in economic winds right now.

Some businesses will do better.

Some businesses will not do as well.

So as I look at the network power in the second half of the year, I still say that we're going to be, I think I said 100-- 80 to 120 basis point improvement, I still feel that we're going to be in that range, 80 to 120 basis, maybe at the higher end base than what happened in this quarter here, but we do see improvement in the second half of this year.

But I think you're going to see some do better some do worse, and that's not surprising because economic winds are shifting, and what we have do is quickly move to make that change.

And I feel very good about what that organization accomplished this quarter.

They are up sequentially nicely and they were up versus last year, which is very good momentum going into the third and fourth quarter.

So I feel good about what we have going on right now as we enter this third quarter and our total year.

Great.

Thank you very much.

Take care.

Thank you.

Our final question comes from Mike Schneider with Robert W Baird.

Please go ahead, sir.

Good afternoon, Mike.

I think I've already talked to you, but that's okay.

Did the full circle.

Question first on inventory in the Asia-Pac segment.

You mentioned last where you had built 100 million in anticipation of stronger demand.

When you were talking about production cuts, were you specifically addressing that, or has that turned out to be a fruitful effort?

It was a fruitful effort.

I have to say, and I told you-- I made the call with the operating people at Walton that, it's the right call.

I told the Board, and we made this call, I made this call.

Maybe we should only build 50 million, but we had disappointed our customers last year, so we made the decision, until Mexico got going, which it will in the September-October time period of this year, we made the decision to build inventory.

It's the right call.

Did we use all of it?

No.

No.

Demand was a little bit weaker, but that's in the light, this inventory does not go bad and we are now moving that inventory back down as we level low to production, and the demand starting to improve.

So, this inventory is not like bad wine.

It's going to be used and it's being used today and we're in pretty good shape.

I would say the operating performance in the month of January, February, March really gained momentum and we've got those inventories back in line.

Yes, we built too much.

My call, my fault.

I'll take the blame, I told the Board that, but it was the right thing for our customers, because we disappointed them last year and we were not going to do that again.

Okay.

To the extent you took production down across the board, you must have suffered some under absorption.

Right.

Can you quantify the hit to the quarter and will the hit in Q3 be bigger than it was in Q2 or lesser so?

We don't go around quantifying because if we did that, we would give everyone an excuse.

Yes, we took a hit.

We would expect that hit to probably-- the way it happened was probably bigger in the second quarter than the third quarter.

So I would expect the hit in the second half of the year would be less than we saw in the second quarter.

I don't go around quantifying because it's not something you need to do.

We did it.

And yes, it hurt us.

You're right.

And, but I don't want to give the operating guys the excuse.

They don't ever tell you about the times they build and it how much it helps them.

So, yes, we took a hit.

It won't be as bad, in my opinion, as we look at the second half of the year, because, we have the momentum going, pretty much in line with the demand, as I see it at this point in time.

Okay, and the share count, just final question, share count's down substantially year-over-year.

Can you walk us through your updated plans on how aggressive you are in share repurchases, et cetera?

We are-- right now we are in review with the finance committee today.

Based on current stock price, and given the fact that, like I said, in A Few Good Men, we had a tough day here, I would expect us to be somewhere in the 850 to $900 million range, as we shared with the finance committee today on share repurchase.

That's a net, net value.

Now, if the stock price goes up, that number may go down.

The stock price goes down, the net number may go up.

Do you understand?

Yes, fair enough.

Thank you.

Thank you.

Thank you.

I would now like to turn the conference back to management for closing remarks.

Please go ahead.

Thank you very much.

First of all, I appreciate everyone joining today.

Again, I say that we had a very good second quarter and a very good first half.

We have very good momentum going into the second half of this year, and I feel good about where we are positioned right now and the things going on.

But, again we're always keeping an eye on the ball that could come at us, and we're doing the things necessary to protect our profitability and investing for the long-term.

I appreciate your time, look forward to seeing everybody in May.

I will be at EPG this year.

They did not move the conference like they did last year, so I will be there, and I'm looking forward to updating everyone on how things are going at Emerson.

Thank you very much.

Bye.

Thank you.

Ladies and gentlemen, this concludes today's Emerson teleconference.

Thank you for your participation.

You may now disconnect.