艾默生電氣 (EMR) 2007 Q4 法說會逐字稿

Good afternoon.

ladies and gentlemen.

Welcome to the Emerson fourth quarter 2007 results conference call.

(OPERATOR INSTrUCTIONS) This conference is being recorded Tuesday, November 6, 2007.

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 on Emerson's most recent annual report on Form 10(K) as filed with the SEC.

On this call Emerson 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 to the Investor Relations area of Emerson's Web site at www.emerson.com.

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

Please go ahead, sir.

Thank you, Eric.

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 fourth quarter and FY 2007 results.

A conference call slide presentation will accompany my comments and is available on the Investor Relations section of Emerson's corporate web site.

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

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

Fourth quarter sales were up 11% to $6.1 billion with increases in all segments.

We had solid underlying sales growth in the quarter of 7% and Emerson's international presence continues to benefit growth.

Operating profit margins improved 70 basis points to 16.6% of sales and EPS in the quarter was $0.78 up 20%.

Operating cash flow and free cash flow were up 21% and 26% respectively.

We continue to make good progress with our operational efficiency initiatives evidenced by the improvement of the trade working capitals and percent of sales ratios and also good ratios of net debt to net capital and operating cash flow to total debt.

Go to the next page, an overview of the income statement.

Sales in the quarter, $6.134 billion again up 11%.

We had the underlying sales growth of 7%.

Acquisitions, net of divestitures added one point of growth in currency translation added three points of growth.

Operating profit dollars in the quarter were $1.019 billion or 16.6% of sales.

Good margin improvement driven by leverage on the sales volume increases and also benefits from cost reduction activities.

Net earnings in the quarter were $623 million, up 18%.

Diluted average shares outstanding in the quarter were 800 million.

We did purchase 4.8 million shares during the quarter.

That gets you to the bottom of the page, the EPS of $0.78, again up 20%.

We go to the next page and look at the underlying sales performance around the world.

First, in the United States we had growth of 3%.

Total international growth was 11%; led by strength from Asia up 16%, Latin America, up 13% and the Middle East up 28%.

So that again gets you back to the underlying number of positive seven, currency adding three points of growth, acquisitions net of divestitures plus one to get you down to the total of plus 11%.

So the quarter was consistent with what we saw for the first three quarters of the year with the international businesses really leading the growth.

Next page five, a little bit of income statement detail.

Gross profit dollars of $2.259 billion 36.8% of sales, SG&A was 20.2% of sales which gets you back to the .

OP.

dollars of $1.019 billion, or 16.6%of sales.

Other deductions were $62 million.

Higher than the prior year as we had $21 million of lower gains during the quarter.

Interest expense was $50 million, or $6 million less than the prior year quarter.

Gets you down to pretax earnings of $907 million, an increase of 17%.

Taxes in the quarter were $284 million for a tax rate of 31.3%.

In the full year rate was 31.3% which was in line with our prior guidance.

Next page, operating cash flow and BS detail.

Operating cash flow in the quarter, $1.242 billion, up 21%.

CapEx in the quarter of $261 million gets you down to the free cash flow of $981 million, which was up 26% in the quarter.

Very strong cash flow to total debt ratio of 79.9%.

You can see the trade working capital balances at the bottom of the page with ratio of trade working capital as a percent of sales at 16.2%, an improvement of 30 basis points from the prior year quarter.

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

Business segment EBIT was $1.027 billion or 16.3% of sales.

Difference in accounting methods of $54 million, up $6 million.

Corporate and other in the quarter was $124 million, an increase of $66 million.

Again we had the $21 million in lower gains during the quarter and the balance of the increase was due to higher incentive share expense.

Interest expense in the quarter was $50 million, again down $6 million which gets you back to the pretax line of $907 million.

Going through the individual businesses now.

Process management first.

Sales here of $1.665 billion, an increase of 19%.

Underlying sales were up 12%.

Acquisitions added two-points of growth and currency added five-points.

By major region we had the U.S.

up 12%, Asia up 13% and Europe up 7%.

Continue to see balanced growth across the segment from the systems valve and measurement businesses.

EBIT dollars in the quarter were $341 million or 20.5% of sales.

Down 30 basis points as we had tough comparisons to the prior year margins and also acquisitions in the quarter diluting the margins by 40 basis points.

For the full year here really another great year for Emerson process management with sales up 17% and EBITDA up 21%.

We did maintain double-digit order growth during the fourth quarter, as the end market fundamentals here continue to support a favorable growth outlook.

Next page, industrial automation.

Sales here of $1.123 billion up 11%.

Underlying sales were up 9%.

Divestitures subtracted two points of growth and currency added four points.

By region you had the U.S., up 6%.

Europe, up 8% and Asia up 20%.

Continued to see good growth really led by the power generating alternator business and also the electrical distribution business.

EBIT dollars in the quarter of $187 million or 16.7% of sales.

Good margin improvement as we had nice flow through of cost reduction programs and sales volume leverage.

So for this segment as well, also a strong 2007 with full year sales up 13% and earnings up 17%.

Good international presence here has been a key factor in the 2007 performance.

We continue to see a favorable demand environment here with 10% order growth in the quarter.

Next page, network power.

Sales here of $1.438 billion up 15%, the underlying sales were up 12% currency added three points of growth.

By geography we had the U.S.

up 11% Asia up 18% and Europe up 4%.

EBIT dollars of $204 million or 14.2% of sales; an increase in EBIT dollars of 74%, very strong quarter.

The acquisitions were no longer dilutive to the margins and in the prior year we had inventory write offs and warranty costs which did not impact the current year numbers.

Continue to see strong sales in earning performance here in the core EPS and precision cooling business.

We also announced in the quarter the plans to acquire the imbedded communications and computing business from Motorola.

We do expect that to close before the ends of the first fiscal quarter.

Next page, climate technologies.

Sales here of $938 million, up 4%.

Underlying sales were flat, acquisitions added two points of growth and currency added two points.

By geography we had the U.S.

down 5%.

Europe down 4% and Asia up 22%.

We continue to see a soft U.S.

market driven by the residential housing market.

EBIT dollars in the quarter were $133 million or 14.2 % of sales.

As we had deleverage on the volume declines.

The price increases offset by material and other inflation.

Performance for this segment was really driven by growth outside the U.S.

during the full year of 2007.

The full year sales in Europe and Asia were up 18 and 17% respectively.

Next page, appliance and tools.

Sales here of $1.119 billion up 2%.

Underlying sales were flat, currency added two points of growth.

By geography you had the U.S.

down 2% Europe up 4% and Asia up 2%.

EBIT dollars of $162 million or 14.5% of sales, as we had flow through benefits from cost reduction activities with price increases offsetting material inflation and deleverage on sale declines.

Today, see the businesses that are impacted by consumer and residential construction was soft in market conditions.

The professional tools businesses performed strongly really led by nonresidential exposures.

We also announced in the quarter the divestiture of the Western Forge Consumer Hand Tool business as we continue to streamline the portfolio.

Next page 13.

Wanted to take one page just to kind of give a quick overview of the full year results.

Really a good year for Emerson.

Sales for the full year of $22.572 billion; up 12%.

Underlying sales were up 7%, led by International.

And this was the first year that our non-U.S.

sales were more than 50% of total sales.

Operating profit at $3.518 billion or 15.6% of sales, good OP margin improvement on the leverage and cost reduction impact and also the successful integration of acquisitions.

EPS for the full year of $2.66, up 19%.

Dividends per share of $1.05, an increase of 18%.

And we announced that the quarterly rate has increased 14% for 2008.

Operating cash flow of $3.016 billion an increase of 20%.

And $1.7 billion of that, or 56% was return to do shareholders via dividends and repurchases during the year.

Getting to the bottom of the page, return on total capital of 20.1% , a good number obviously and will obviously be focused on maintaining high levels of returns as we go forward.

So, we get to the last page, summary and outlook.

Good momentum for Emerson as we move into fiscal '08.

The order trends have continued to match expectations.

Good end markets in the capital goods and commercial businesses so we expect underlying sales growth for fiscal '08 of 5 to 7%.

Looking for EPS growth in the range of the 10 to 15%.

And we just reiterate that we feel we can perform well in this current environment.

We have growth expectation consistent with our long-term goals.

We have global positions that are important to help us achieve those goals.

We think in this environment we continue to have the ability to increase our cash flow which gives us good financial strength and the availability to invest internally for growth and also do acquisitions where appropriate.

With that I will turn

Thank you very much, Chris.

First of all I want to thank everybody for joining toss as we wrap up our fiscal 2007.

We have just finished, about an hour ago, a two-day strategy session with the board going through all the key strategic issues that we face as a company and basically how we see going forward here the next couple of years.

It was a very good open discussion relative to what's going on over the last three years and where we think we are going to go.

When you think about the momentum the company has had over the last three years, we've gone from about $50.5 billion, over $22.5 billion.

Our operating earnings are have grown from $2.3 billion a 14.6% margin, to $3.5 billion to 15.6% margin.

Operating cash flow is increased nearly $1 billion over $3 billion.

and our ROTC has gone from 14 to over 20% and EPS gone from about $1.50 to $2.66 .

Very strong momentum and the board clearly has had an integral part of our position of the company over the last several years and we wanted to get through and talk to them about what we see going forward here in the next several years.

Second I would like to recognize and thank the rest of the OCE, the business operators and executives around the world and their tremendous strong performance this year in 2007 and over the last three years.

I've been a CEO now for seven years and now just starting my eighth which-- It's amazing how fast it's gone, but this team around me has continued to execute and really done a great job across Emerson in creating a strong foundation and creating value for our shareholders on a consistent basis and paying back a lot of cash to our shareholders as Chris mentioned.

They have performed well and I firmly believe that this team is the best in the world and we have built a very strong global business and I think we are facing a global environment that's still very favorable to us, Emerson, for the next couple of years.

A couple key milestones I do want to mention here.

As I look back at my years at Emerson, the fact that we've crossed the $3 billion operating cash flow and the $2 billion free cash flow and the $2 billion net income are-- they are very significant milestones for this company given the fact that Walter and I have been around here approaching, Walter 30 years and I'm getting up to 30 years.

Those are big numbers and if we look at the ROTC that we created over 20% it's the highest that I can remember in over 20 years.

We've had a very good period.

What's very important to us is that we've positioned this company as a global leader.

As Chris mentioned over 52% of our sales are now outside the U.S.

And emerging market sales this year crossed the $6 billion level.

I still remember my first days in Asia back in early 90s when we had Asia sales were less than $400 million.

Now emerging markets are over $6 billion.

I think as I told the people within the company our next target is $9 billion over the next two to three years.

But we have made major strides in creating our global position with Latin America sales crossing the billion dollar mark, Middle East and Africa crossing the billion dollar mark and we really-- we are well-positioned to what's going on in around the world these days.

As I look at where we sit today and the timing of the-- our reporting and what we do in February, I really don't want to talk a lot about the global economic period.

I'd rather do that in February when I get a better view of what's going on.

I know many people would like me to talk about that but at this point in time as I look out and see the global economic winds are changing.

I still feel good about where we are right now.

I still feel good about the underlying fixed investment environment we will be facing in 2008.

It will be good and it will be acceptable.

It clearly will be less than '07 but giving a clear reading of where these pieces all shake out in my opinion I would like two or three, four more months to look at that.

Needless to say I feel this company is well-positioned.

I feel that we will be able to execute in the changing economic environment we are facing right now.

Just like we did in 2007.

We had things changing around us quite a bit throughout the year.

If you went back and looked at what we talked about in February of '07 and where we are today.

It clearly did change.

But we reacted.

As we laid our plans out for 2008 I feel that we will be able to deal with anything that comes at us and still perform reasonably well as we talked about in the-- in our press release.

Right now our underlying growth rate forecast for '08 is about 5 to 7%.

You'll remember last year in February I talked about underlying growth rate for 2007 would be somewhere around the 6.6 or 6.8 and we ended up at 6.9%.

So we performed pretty well in line with where I thought we would be last year.

I expect our margins to expand this year, continuing our trends back toward the 16% operating margin which has been our goal since this recovery back in the 2002, 2003 time period.

And I expect our EPS as we talk about being in the 10 to 15% range for the whole year.

As we look at our cash flow, I also believe that we will be able to continue to increase it and we will continue to look for ways to invest that money both in dividends and share buy-back but also acquisitions which I believe the environment will be better for companies like Emerson to do acquisitions in 2008 versus what we faced this year as we talked about in, I guess, May down at EPG.

Fundamentally the company is in very good shape.

We are well-positioned for another good year in 2008.

We had-- I look back at the 2006, 2007 time period.

It's like winning two world series back to back.

It's two great years for the company and the team really did execute.

So with that, what I want to do again is thank the team, the employees, the board for their support and execution the past couple years and then open up the lines to answer questions we have out there.

But, again, the team within Emerson had a great year and I want to thank them all for what they did and as the board did today throughout our board meeting.

With that the line is

(OPERATOR INSTRUCTIONS) Our first question comes from Deane Dray with Goldman Sachs.

Please go ahead.

Thank you, good afternoon.

Good afternoon, Deane.

If we could look at the three-month orders, one of the points that jumps out at you, is you seem to be getting a re-acceleration in process going up to the 20% plus.

If you look at the fourth quarter it looked pretty balanced across measurements systems and valves.

So are we seeing accelerate in that market or is it better penetration of maybe the wireless?

What's going on there?

I think what you need to look at-- there's a couple of things.

One, they were definitely very clearly, positively impacted by currency.

And secondly that business has a very lumpy order rate.

And so when you look at a business we can have a 20, $30 million project booked one month versus last month.

At this point in time we did not have it.

I do not see an acceleration in that business environment.

I think it's very steady.

You have to look at it a fairly long time period.

I think that our customer base is building and spending the money as fast as they can and we will get lumpy orders from time to time and that business like industrial automation will be impacted very strongly by the currency movements.

Process control or process management, two-thirds their business is outside the U.S.

now.

So as the dollar moves that business moves quite strongly.

I did not see a significant [what you would say], faster growth coming in at this point in time.

How about visibility on the refinery side, $95 oil?

is that--- how long do you think the cycle will last for process?

I think the cycle lasts, I think the last couple of times, I think the cycle-- our visibility looks pretty good for the next two or three years.

And just last question, on process, we had that analyst meeting in Dallas recently.

As, what's the take rate so far you're hearing on the wireless components that you've started shipping?

It's doing very well.

I don't have a specific number right now.

I will give you an update in February, I will have John because John will present because we are having an analyst meeting here in St.

Louis, but I will give you an update in that point in time in February but I do know the orders right now are doing-- going very well.

We've rolled it out in Latin America, Asia and Europe and we are getting approvals in all those countries.

As you know we have to get approval for the wireless band in all those countries and we are having good progress getting that done.

We have making tremendous head way, our bookings are strong and I think we will have a very strong 12 to 18 month time period here.

Next question comes from , Bob Cornell, of Lehman Brothers.

Please go

Yeah, thanks.

Pretty hard to find a tough question to ask in a quarter like this.

Hang up then, Bob.

I'm not going to do that.

I'll try.

But in process, I mean, what's going on in the power part of that business?

You had the pretty big market share and (inaudible) base domestically.

It's hard to see any orders in the power area that are contributing to the big power order gain in the whole process segment?

If you look at the underlying power segment both here in the U.S.

and Europe and in Asia, that order pace has still been pretty good.

It's pretty steady right now.

We are seeing some improvement in the Asian markets in the last couple of months and I think that's pretty good and the U.S.

is pretty steady and I think we've seen an improvement in western Europe and Eastern Europe.

So from my standpoint as I look at-- what I consider the old WPC business, the Westinghouse business, the order pace is still pretty strong.

I do not see an acceleration or deceleration.

It's pretty steady but I am pleased to see a re-engagement of what I see in orders in particular in China and the power industry at this point in time, Bob.

The next question is, I know you are careful about answering this question but what about your market share in process?

With this kind of order growth it looks like it's probably ahead of the market, I think, maybe a comment, are you still picking up some share here?

I would say the market grew stronger this year than it did last year, but our assessment right now is we did pick up additional share this year in the process business.

And we are moving toward the 20% goal which you know as well as my personal goals relative to this market space and I think that you're going to see that as we report in the K., I can't remember the exact numbers we said in the K., Walter has it is here, what did we say for process the whole year?

We picked up somewhere between two and three-points for the process this year.

Same thing in network power.

You guys I think prepared in term of facility for the North American orders to come through.

Those orders seem to be coming through.

What's the status there and what will be a market share view of that space as well?

I believe right now the market will continue to be pretty robust because of the whole reliable power issue relative to all the investments going on in global infrastructure for IT and I just look at our own internal company and what we are doing, Bob, just from globalizing your assets.

From our standpoint right now we continue to gain in this market space.

I would say probably somewhere between one and two points.

Walter says maybe even close to three points.

We've had a very good two-year period here.

We well position ourselves as you know were with major new product introduction in the downturn and made major investments around the world relative to our infrastructure capability and our delivery capabilities and we've had a pretty good run here.

All boats are rising both in the network power business and in the process business.

So trying to get a clear indication on market participation right now is not an easy thing to do even though we have to do it for our Ks and reporting.

So I would say in both of these segments anywhere between 1.5 to 3 points a share is the best I can give you and it's just not that hard.

But it's positive, let's just put it that way at this point in time.

In the interest of balance, one more question.

I was surprised that climate was down in Europe, up big for the year but down in the quarter.

What's going on there?

Two things, one, I think some of their customer base actually had built too much inventory so they quickly slowed things down.

Secondly you are going to see some of the European Euro impact on that business segment more than any other segment.

Their customers, the climate technology customers, are big exporters and we've known since before when the Euro hit 130 many, not many-- several years back, they got hit the earliest and we saw exactly the same thing when the Euro went to 140, 144, we saw the same thing happen here.

So that's why I believe that you have to be very careful.

There's a lot of economic wind shifting over there.

And as Chris keeps telling us, tough comps.

Chris is getting ready for his division experience, everything is tough comps.

I just violated my language, sorry, guys.

We will bleep that out.

Thanks very much.

I'll pass the baton.

Take care.

Next question, Robert McCarthy, Banc of America Securities.

Dave, I will try to make sure you don't swear at me.

I was swearing at Tucker, I was swearing at Tucker.

You know he's moving over to division.

He's trying to tell me how tough it is to be a division president and all that stuff.

In the interest of not getting yelled at I will give you the mother of all soft balls.

Looking out across the divisions obviously a lot of really good things going on here in terms of cash cycle, in terms of growth, in terms of the margin lift.

What would you call out among the segments in terms of a heroic job on the part of your managers.

Any particular division this year?

Where was the biggest difference maker this year versus your initial expectations.

It has to be in the capital related business.

I will comment on that first and then I am going to come back and hit the other people because other people had to react very aggressively in the downturn.

But I would say the work that the process team did in delivering to their customers in a very fast growing market space at the same time industrial automation really globally had a much stronger year than I thought they would have as-- the as did the network power guys.

The network power team-- we talked about the last couple of years restructuring, getting repositioned the new products and they delivered in the second half of this year relative to the artisan acquisition integration and the new products and as you saw the growth and the profitability improvement.

At the same time, though, those capital guys had a much more favorable market but they executed, they delivered the sales and they delivered the profitability.

On the other side you go over to the compliance components and tools and the climate technology which we thought would be stronger a little bit and then they really tailed off.

They reacted, you saw in the fourth quarter, even though climate had down margins, appliance and tools had up margins in a very difficult environment and the climate technology guys both with the deleverage from the standpoint of the acquisition and some negative currency impact on, they performed extremely well.

So net/net as I look at my operating people I can't complain this year.

They really executed in a very different environment across the company and that's the environment we are going to see in 2008.

They are going to need to move very quickly both up and down and deliver both the sales and the leverage as they go back and forth and I look at the numbers this year and they did it, across the board.

In the process management division in the quarter, it looked like U.S.

was up 12%.

Any commentary there because that was one of the higher growth rates on an underlying basis?

Again you could have a lot of project business from the standpoint I'm sure we are starting to have a comp issue from a couple of years ago where we had some of the rebuilding from the hurricanes and then it dropped off and came back and the service.

I think it's more just large projects.

You have to be very careful in a long lead time business like process looking at a quarter.

We actually trend line in our business we look at process when I ran the process a twelve-month, at a minimum only six months, you never look at a quarter.

You have to be very careful of that business in a quarter.

And then finally, do you think as you had a strong finish to the cash cycle for the end of the year, do you think overall at a corporate level you have a better handle on it to be able to take some of these kind of swings in demand and be able to manage the cash cycle better than you have, because I know definitely in the first part of the year was definitely a challenge?

Well, as you remember last year the OC made a bet and I led that on billings from inventory.

That was a bad bet for me.

I got dinged pretty hard for the board and the board harassed me for about six months on that.

We will not make that bet this year.

We've improved our throughput.

We improved our logistics capabilities.

We have put in the capacity, in particular in a couple of places that needed it, and so we will not have the inventory build we had last year.

Clearly as I look at our performance this year compared to last year it's going to be easy.

What I'm measuring the operating team about is right now, is can they get back to 2006 levels.

Now I'm measuring myself in the operation levels in the first quarter, can I get my operating performance back to 2006.

Cause 2007 comps are a piece of cake as Chris talks about easy and hard comps.

So right now we are focused on having a much stronger first half performance in operating cash flow which will clearly help us perform in the whole year.

But I feel good about our operating cash flow and I feel good about our returns next year given our current mix of business considering no acquisitions or anything like that..

We're in pretty good shape right now and we plan to keep it that way.

Next question, comes from John Inch, with Merrill Lynch.

Please go ahead

Thanks you.

Good afternoon, Dave.

Good afternoon, Mr.

Inch.

So appliance and tools in Asia.

I know it's a small business, but the top line of 2% seems pretty puny relative to still pretty robust in the Asian markets overall.

Any comments as to what's going on there or just tough comps?

It was extremely tough comp.

We had a U.S.

customer that had a major product roll-out early last year and they did a lot of inventory and clearly there was a slow down in the North American market space in the second half of this calendar year relative to appliance components.

You've seen their order pace had just stopped and so that's a big issue.

A big chunk of our Asia business goes into Asia customers that will eventually export back around the world.

And that's what happened there.

We had a significant customer that bought a lot of appliances last year and made a very difficult comp this year.

Okay, that makes sense.

As you guys are thinking about this coming year, Walter, are you facing incremental tax headwinds to any degree?

Some companies are talking about some of EU countries trying to plug some of the tax strategies that other companies have been using to lower their tax rates because of global revenues?

Are you guys seeing any of that or what's your thinking vis-a-vis the tax trend heading into fiscal 08?

We would see slightly higher but still, this year all year long I think I was telling you, meaning 2007 that, our tax rate was going to be in the range of 31 to 32%.

I would make the same statement as I look at 2008.

Currently, inherently, at this part of the year we are looking at the high-end of that range.

So you are seeing around 32%.

But nothing dramatic.

You have the ongoing benefits from mix that tend to be favorable as we grow more internationally than we do in the U.S.

That makes sense.

There's offsets, net/net at the end of the day you are looking at around 32% but I would say broader based, 31 to 32 which is what I said all for '07 as well.

With some of those headwinds.

Yes, in that calculation there is headwinds.

There's some good news as well.

Last question for me, Dave, you talked about the fact that fiscal '08 is likely to be a more active M&A year.

Yes.

Network power is obviously between a couple of deals there has been a focus.

Do you think it's going to remain a focus or would you expect the M&A activity to broaden into some of the other business segments?

As we look out right now and look at our acquisition funnel we have both the process piece, we have industrial automation piece and we have network power.

The network power piece I'll be very careful where we put it because I'll probably look on the reliable power side more and on the imbedded computing and the DC power side we have our hands full right now.

So I'm going to focus more on what I call reliable power side.

Same thing in process.

I would say we'll have a couple of opportunities there to get done and then also on the industrial automation we have a couple of things we are working on there, so--- That's our focus at this point in time as I showed the funnel to the board today.

Are these mostly overseas type of acquisitions or do you see activity here as well?

Meaning, some over here in the U.S.

but the U.S.

companies are very global.

We don't acquire a company that may have 40% of sales outside of the United States.

We look--- Some of them are what I would call very core type acquisitions and some are very strong adjacent type acquisitions for us.

We have been working the last six months extremely hard relative to positioning ourselves and courting and if you look at any time at any economic changes going on you always see more market opportunities opening up.

Thank you.

Next question, comes from Nicole Parent, with Credit Suisse.

Please go ahead.

Good afternoon.

Like the Red Sox, Emerson definitely executed in '07.

Is that a Red Sox, World Series comment, Nicole?

Had to get it in, Dave.

Way to go, Sox.

First one is would you mind sharing some of the key strategic initiatives that you and the board discussed over the last couple of today's for 2008.

No.

Those are for me to discuss with the board and not really discuss openly to the outside world, Nicole.

Not trying to be cute.

That's something we discuss internally and then, as we communicate again to you all in February we will unfold some of the ideas, but some of these are longer term situations that we like the keep internally to the company as you can imagine.

Fair enough.

Next one would just be you expanded the responsibility of several member of the executive leadership team.

Could you help us think about what drove the changes and how this positions you for '08 and beyond?

As I look at it, Craig Ashmore, which many of you know, really has become an integral part of our whole growth focus and trying to help us understand where we can expands our served markets, both adjacent space, core space and also what we call new platform space.

And historically we've always had in the OCE.

our top strategic thinking individual heading up the planned acquisitions and I felt it was time for Craig join the four other OCE members and have him a part of that formal group, which is an important group as we think about long-term strategy.

The other thing is we made changes from the standpoint-- I've been running network power now for a little over 12 months.

That was very important as we sorted through what we wanted to do in network power and get some restructuring done.

And, it was time for me to hand this over and give part of it to Jake [Allmacher] to run what I call imbedded power and computing piece and also the other part of the power systems piece to Ed Feeney, and we will continue to run that as, underneath the network power umbrella that's how we sell told our customers but fundamentally we have two business leaders there now.

As I look at our expanded OC we have the five members and now we have what, Walter, seven business leaders or six business leaders and those are individuals that [will be part of] running the company going forward.

As the company is approaching the $25 billion mark, Nicole, I a really needed to bring some more, what I call quality leadership to help people like Walter and Ed Feeney and myself-- or Ed Monser run the company so that's what we are doing.

One last one, I don't want to front run the February meeting but with respect to the organic growth band that you gave us for 2008 could you give us a sense of how we should think about each of the businesses?

It's a little bit too early for that.

We will do that in February.

Fundamentally there's so much moving around the world right now, Nicole, I'd rather see how this thing unfolds.

I could give you from the standpoint of, from the capital businesses they will clearly be the leaders of the growth this year.

If you look at our clients components and what I call the climate technology businesses they are going to be at the very, very low end of the-- what I would say the underlying growth, if you look at the chart I showed and look at the range of the underlying growth rates, climate, appliance and tools will be at the very, very low end and the industrial capital guys will be in the zone or above the zone.

If that gives you an idea.

Thank you.

Hope you feel better.

You don't sound very good there, sounds like you are in a can somewhere.

Our next question comes from Christopher Glenn, CIBC World Markets.

On the network power share gain a question related to that,.

Is that related to some of the channel consolidation effort of competitors joining up or are there more sustainable things going on there given the comprehensiveness of the portfolio?

I would say that what we have had here is-- some fundamental shift in I'd say underlying market growth or penetration, market penetration where we have made some fundamental change in the share.

Somewhat could be from consolidation going on, but some of it's I think is just from our new product effort and some of our expansion globally in emerging markets.

So I'm not saying-- I'm not saying one person or another person has lost, I just think fundamentally, we've made the right investments in certain technologies and we've gotten a couple positions sooner than other people.

On a global footprint-- we have a very strong global footprint and that's really helped us here as this market's expanded.

Okay.

And then it doesn't look like you're really wanting for market share issues anywhere.

Do you have any under utilized pricing power.

No.

Our fundamental pricing as we talk about we look at our net material inflation and last year the net material inflation drove a positive probably 2.5, 3% if not higher.

And we were able to realized a little over a point in price and so we are able to offset our net material inflation.

As we talk about it and I will share that in February, we would say we were agreeing that our pricing was slightly ahead of our net material inflation but very, very slightly.

So we are in pretty good shape relative to that and we-- we're expecting another challenging year in net material inflation and we are working that pricing to make sure that we stay positive and we do not have that negative impact on us both from the top line and also the profitability.

Okay.

And then finally the appliance and tools margins, they've been pretty volatile over the last few years but maybe some false starts with a few strong quarters there, but the second half finished nicely, especially the fourth quarter.

And going back to your February guidance for '07 margins, I think it was up 90 to 120 basis points, you kind of probably saw some opportunity in the operations there.

Are we seeing something that's more sustainable there in a fundamental kind of shift in how the operations are flowing along?

We are going through a significant restructuring in that sector in the last two years and we are starting to see some of the positive flow of that restructuring, our cost position.

Yes, it's a very challenging market and we've had less volume so we've had to deleverage less volume.

We've actually really sustained stock-based or fixed our manufacturing footprint so it's a lot lower cost, a lot best cost so we are starting to see some of that flow through and that will be a permanent fix for us.

Great.

Thanks very much.

You're welcome.

Next question, comes from Scott Davis with, Morgan Stanley, please go ahead.

Good afternoon.

Scott.

I'm still laughing over a couple of your comments.

What do you mean a couple comments.

I'm a very straight forward guy.

Did you accuse Nicole from making the conference call from the ladies' room.

No, I did not, I said she sounded like she was in a can.

In the can?

From where I come from that's--

A can, a can, a can that's an A.

I thought it was the can.

No, I wouldn't say that.

You must be friends with Craig or something.

It's too good.

One thing that-- if I can get my thoughts back together, what does the weak dollar --

A very above board clean guy for a change.

You are obviously thinking the wrong thing.

Clearly.

What does the weak dollar really mean for you guys, does it change conceptually how you think about low cost sourcing, for example, does it change your ability to go after price or share?

Or is it just--- or doesn't it matter because you are so long-term focused that maybe these dollar strength or dollar weakness maybe doesn't play into your operating plan?

Well, it does play into our operating plan.

I mean as we look at it the dollar relationship runs in the long-term trends typically eight, nine, ten-year type of trends.

Clearly on a weakening trend right now.

As you know, as we look at our operating-- where we manufacture the product and where we try to ship it, we look to break the world down into three pieces and we build the capability to move around the world in these two or three locations to take advantage of the dollar.

If it's something you don't do in one quarter or one month but over time if you see this trends continues you will shift production to different parts of the global manufacturing world that we have, take advantage of the weaker dollar.

So you would actually see us shifting over right now move are more production back into North America to take advantage of the weaker dollar from the standpoint of trying to export certain marketplaces.

That is something we will do and we-- but we do it very carefully because as you can imagine the dollar shifting can happen rapidly and you just don't want to shift at all and shift all the way back.

So it's more of an incremental impact.

The weaker dollar clearly helps us from a translation standpoint.

It will help trust a cost standpoint short term, but over time those things go into equilibrium as our competition also adjusts, too.

I look at it as something that, given our flexibility, the way we structure manufacturing, we are in pretty good shape right now to take advantage of it and have an opportunity to maybe reposition some of our global manufacturing to export a little bit more out of North America for six months or ten months or 12 months, whatever it lasts.

Makes sense.

Let's switch over to network power a little bit.

One thing I still kind of struggle to understand is how much less cyclical have you made this business?

We've had a huge run up and you've had some fairly strong volume tail winds.

But, is the business that much less cyclical now that we don't have to-- if we are walking into a macro slow down, really worry about slashing those forecasts the way the last cycle hit us?

Or have you been able to really change that portfolio enough where it's not nearly as vulnerable?

That business is not less cyclical.

Okay.

You've got to understand.

Fundamentally it drives a higher growth rate for us because of the nature of that creates a little more volatility.

One thing that happened to us last time is it was very clear and we could feel it happening to us as we looked at those growth rates that were happening back in 98, 99 and 2000, that market, way over invested.

We have not seen that this time.

We are watching it very, very closely because we got burnt badly last time.

So we are watching the customer base.

We are watching what kind of investments they are making.

As of this point in time, Scott, we have not seen any of the over building that we saw back in 97, 98, 99, 2000.

However, it could happen as we watch this thing, it could happen over a longer time period and secondly it will turn down.

There's no doubt it will turn down and therefore we are trying to make sure we build into our profile of a manufacturing and our customer support a much more collectible type of manufacturing support but it will turn down and it's still a reasonably volatile business.

But it gives us very good growth and very good return when in the up cycle like it is right now.

And we are very good at managing through that.

We didn't lose money as you know in the downturn and I think we weeded out some of the marginal businesses and I think we are better focused.

But it is still going to be a cyclical business.

And given that how important is it to get ahead of a downturn?

If you think in terms, like, for example, I know on a big vertical in that business would be financial services, for example, and things around our world isn't very rosy today depending, I suppose, which firm you're at, some of us are looking at potential write downs, I can't imagine we are going to be spending a heck of a lot of money on data centers and other things in the next 12 months.

Do you get ahead of that by thinking in terms now of taking down a shift here and there or is it shutting down maybe that incremental facility that,--- or is it just too early for that?

Too early for that.

What we will do, and we'll be very careful about it, is adding the incremental capacity.

We will be a little bit slower which will cause us to be--- to have longer lead times than some of our customers which won't make them happy which we may lose a little bit of share of business from that standpoint.

But we will be very careful right now of adding incremental capacity because of that issue.

We watch the cycles very carefully here, Scott, and right now as I said the economic winds are shifting and we need to make sure that we can adjust pretty quickly.

Because I-- there are reasons to believe that some of these sectors will slow down and the question is, okay, let's make sure we don't get ahead of ourselves from the standpoint of too much capacity.

You don't want to shut it down too early because you will walk away from business, but at the same time you've got to be very careful about getting too much new capacity on line.

Makes sense.

Thanks.

Congratulations on a good year, guys.

Thank you very much, Scott, I appreciate it and I was not trying to take any cheap shots at anybody.

You all take care.

See you.

Thank you very much.

I think, I just want to thank everybody out there relative to joining the call today.

I also want to thank the total management team of Emerson for what they did this year.

This team executed in a very interesting year and I truly appreciate that and I'm glad to have everyone on the call today.

I'm really glad to have a 20% ROTC this year and a new dividends up to $0.30 a quarter.

Everyone take care and I hope to see everybody in February.

Take care.

Bye.

Ladies and gentlemen, this does conclude the Emerson fourth quarter 2007 results conference call.

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