艾默生電氣 (EMR) 2008 Q1 法說會逐字稿

Welcome to the Emerson first quarter 2008 results conference call.

(OPERATOR INSTRUCTIONS) This conference is being recorded today, February the 5th, 2008.

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 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 website at www.Emerson.com.

I would now like to turn the conference over to Mr.

Chris Tucker.

Please go ahead, sir.

Thank you, Joshua.

I am joined today by David Farr, Chairman, Chief Executive Officer, and President of Emerson; Walter Galvin, Senior Executive Vice President and Chief Financial Officer; and [Lynn Maxiner], my replacement as Director of Investor Relations.

I am moving on to my next assignment as the Vice President of Finance for the White Rogers division of Emerson Climate Technologies.

Glenn has been with Emerson since 1997 and is coming to the IR role from Emerson's Leroy/Samir division, part of the industrial automation business segment.

Lynn is going to review the first quarter results.

Lynn?

Thank you, Chris.

Today's call will summarize Emerson's first quarter fiscal year 2008 results.

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

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

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

First quarter sales were up 12% to $5.6 billion, with increases in four of five business segments.

For the quarter, we had underlying sales growth of 7% led by strong international growth.

Operating profit margins improved 60 basis points to 14.8%, and earnings per share from continuing operations came in at $0.66, up 20% compared to the prior year quarter.

Operating cash flow in the quarter was $423 million and free cash flow was $296 million, an increase of 29% and 44% respectively.

The Company's balance sheet remains strong, average days in the cash cycle improved to 66 days from 67 days.

Paid working capital as a percent to sales improved from 19.8% to 19.7%.

And operating cash flow to total debt remained solid at 64%.

Next slide.

An overview of the income statement.

Sales on the quarter were 5.637 billion, again up 12%, the underlying sales growth was 7% and currency added 5 points of growth.

Operating profit was $832 million in the quarter, or 14.8% of sales.

The 60-basis point improvement was driven primarily by cost reductions and volume leverage.

Net earnings from continuing operations for the quarter were $522 million, up 17%.

Diluted average shares in the quarter were $796.5 million, which gets you to an EPS from continuing operations of $0.66, again, up 20%.

We had a $43 million impact from the Brooks instrument divestiture in the quarter, which resulted in an additional $0.05 from discontinued operations.

This brings the reported EPS to $0.71.

On the next page, you can see the underlying sales by major regions of the world.

First, in the United States, we had growth of 5%.

Total international was up 9%, with Asia at 16%, Latin America up 10%, and Middle East/other up 24%.

That gets you to a total underlying sales number of plus 7%, currency adding 5 points, for a consolidated sales growth of plus 12%.

Slide number 5 provides some additional income statement detail.

Gross profit of 2.022 billion, or 35.9% of sales, with cost reduction benefits driving the gross profit improvement.

SG&A was 21.1%, which brings you to an OP of $832 million, or 14.8% of sales.

Other deductions net were $5 million, as we had $22 million in increased gains, driven by the sale of the IMC joint venture.

Interest in the quarter was $49 million, which brings you to a pretax of $778 million, or 13.8% of sales.

Taxes in the quarter were 256 million for a tax rate of 32.8%.

The higher first quarter tax rate was driven by the sale of the IMC joint venture.

We still expect the tax rate to be approximately 32% for the year.

The next page has the cash flow and balance sheet.

Operating cash flow was $423 million, up 29% in the quarter, driven by strong earnings performance.

Capital expenditures of $127 million gets you to $296 million in free cash flow, up 44% versus prior year quarter.

Again, the strong cash flow to total debt ratio of 63.6%.

The trade working capital balances are at the bottom of the page, with the trade working capital as a percent to sales at 19.7%, an improvement of 10 basis points versus the prior year quarter.

On page seven, we'll discuss the business segment P&L.

Business segment EBIT was $847 million, or 14.6% of sales.

The improvement was driven by cost reductions and buying leverage, price increases were offset by wage and material inflation.

Difference in accounting methods, 53 million, up 5 million.

Interest expense was 49 million, down 9 million, due to lower interest rates and strong cash generation, which gets you to a pretax line of 778 million, up 22%.

Going through the individual businesses, first, process management, sales here of 1.436 billion, up 18%.

Underlying sales were up 12%.

(Audio difficulties start) [Currency added 5 points and acquisitions, 1 point.

By geography, the U.S.

was up 13%.

Asia, up 20%.

Europe, up 5%.

And the Middle East, up 28%.

EBIT dollars were 258 million, or 18% of sales.] (Audio difficulties end).

Margin improvement was driven by leverage on increased sales and cost reduction benefits offsetting inflationary pressures.

The acquisition of the automation group closed in December '07.

This acquisition brings high level project management, engineering solutions, and systems integration capabilities.

Next slide, industrial automation, sales in the quarter, 1.125 billion, an increase of 13%.

Underlying sales growth of 6%, with currency adding another 7 points.

By geographic region, the U.S.

was up 5%.

Asia, up 15%, and Europe, up 6%.

EBIT of 171 million, or 15.2% of sales, a decline of 150 basis points versus prior year quarter.

There was a decrease in funds received under the U.S.

Continued Dumping and Subsidy Offset Act, from $24 million in Q1 '07 to $3 million in Q1 '08, which had a negative 190-basis point impact.

Industrial infrastructure spending continues to be good, as demonstrated by the solid sales growth across all businesses in industrial automation.

Next chart, network power.

Sales in the quarter of $1.406 billion, up 17%.

Underlying sales growth of 12%, currency adding 4 points, and acquisitions, an additional point.

By major region, the U.S.

was up 14%.

Asia up 14%, and Europe, up 2%.

EBIT dollars in the quarter, 180 million, or 12.8% of sales, with volume leverage and cost reductions driving the margin improvement.

Strong order growth continued during the quarter, and end markets remained favorable.

Also, the acquisition of Motorola's embedded communications computing business closed in the quarter.

More details are on the next slide.

The transaction closed December 31, 2007.

The expected financial impacts for '08 include sales of approximately $400 million, estimated dilution to earnings per share of $0.02 to $0.03 due to noncash charges for amortization of intangibles, in process R&D, and inventory write-offs.

$15 million of in-process R&D costs were recorded in the first quarter 2008.

This business is a complementary fit with Emerson's embedded computing business and should be accretive to earnings per share in 2009.

Next slide, climate technology.

Sales in the quarter, up 11% to $766 million.

Underlying growth of 7% and currency adding 4 points.

Geographically, the U.S.

was up 11%.

Asia, up 16%; and Europe down, 16%.

The decrease in Europe is primarily due to lower heat pump sales in Europe versus a high prior year quarter.

EBIT in the quarter was $102 million, or 13.4% of sales.

Volume leverage and cost reductions drove margin improvement, partially offset by negative mix.

Price increases in the quarter were offset by material and other inflation.

U.S.

growth is expected to moderate, as we move through 2008, as housing is still soft.

Next slide, appliance and tools, sales here were $1.049 billion for the quarter, down 4%.

Underlying growth, down 4%.

Currency added 2 points and divestitures and acquisitions subtract two points.

By geography, the U.S.

was down 6%.

Europe was down 5%, and Asia, up 20%.

EBIT was $136 million, or 12.9% of sales.

Good margin increase of 70 basis points, driven by cost reduction activities and favorable margin impact from divestitures.

Price increases were offset by commodity and other inflation.

The professional tools business remains strong, driven by non-residential demand and strength from Europe.

Looking at the last chart, summary, and outlook, we had a good start to the year, with 7% underlying sales increase.

Operating profit margin showed a strong improvement of 60 basis points and good order trends, with 10 to 15% growth in the quarter.

We expect full year underlying sales growth of 5 to 7%, reported sales growth of 9 to 11%, and operating margin improvement of 40 to 60 basis points.

That drives our expectation for full year earnings per share from continuing operations in the range of 2.95 to 3.05 and 11 to 15% growth including $0.02 to $0.03 dilution from the Motorola ECC acquisition.

We also expect full year operating cash flow of 3.2 billion, with capital expenditures of approximately 800 million and free cash flow of 2.4 billion.

We will review 2008 expectations and long-term initiatives at the annual investment community update this week in St.

Louis, on Thursday and Friday, February 7, and 8.

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

Thank you very much, Lynn, and first of all, I want to thank all the participants for being here today.

We're really looking forward to seeing all of you on Thursday and Friday this week.

We have, I believe, an exciting program to present to you in our new auditorium and we're looking forward to seeing you.

And I think it's an exciting opportunity for you all to see the strategies that we're working on today, and what we see unfolding here in the coming years.

I also want to thank Chris Tucker.

He's done an outstanding job.

I've really enjoyed working with Chris over the last two years.

He will enjoy his next assignment.

He'll still be in St.

Louis as a CFO of White Rogers working for [Mark Bilanda] who some of you may know ran strategic planning for me a couple years back.

It's a great assignment for Chris, continuing to develop him as a leader, which he already has a lot of leadership capabilities.

I'm looking forward to seeing him grow and develop.

He's done a great job, except for this last 35 days.

Duly noted in his performance rating that he's walking out from taking stock from $0.58 down to $0.52.

It might take him a couple of years for him to work that off.

That's where he is right now.

I wish him well.

You may see Thursday, Friday you may not depending on what happens here the next couple days.

I'm also looking forward to working with Lynn.

It's a fun job to try to train Investor Relations people.

Walter knows.

He's been around a long time and we're looking forward to it.

Lynn's been with us quite some time, working with Jean-Paul Montupet in many different areas, including working at corporate.

She has a lot of good operating experience and she brings a different perspective to this job and we're all looking forward to another training and not my last, and I'm looking forward to that.

We had our shareholders meeting today.

It was well attended.

We had a record voting at 89%.

That's a very high level, 89% of our shareholders voted today.

And we had a 97-plus yes vote for all the Directors, the four of us, including myself, and Charlie.

And then also the KPMG.

So well attended, good vote and it came out quite nicely.

We also had a Board meeting for last night and today and talking about 2008 and then talking strategically, where we are investing right now to take advantage of the global opportunities and potentially the disconnect in this marketplace that's going on right now.

So, this Company is financially very strong.

We are very liquid.

We have been working hard on repositioning the Company and we are well positioned to take advantage of what unfolds here in the coming years.

I also want to thank all the operating executives, including the corporate executives here for the work they did this quarter.

It was a solid, excellent execution, especially in the strong capital businesses.

They had a great quarter, did extremely well, both in underlying growth, margin, and returns, and cash, and even the businesses where clearly we are in a recession and appliance components and the residential tool businesses.

They have executed in down sales to improve the profitability in the quarter and that is not easy to do, but we anticipated this last year.

We could see it coming.

It was not a surprise.

Nothing surprised me right now, what's going on here in the U.S., and from our standpoint, Pat Sly and John Lindemann have done a great job in a very challenging situation, working with those people.

I commend them.

It's always easier to grow, but these guys execute in a very tough market, so I appreciate that.

As you have seen in the numbers, we've had an excellent underlying growth in the first quarter, at 7%.

Our three-month rolling average, orders have continued to be very solid in the 10 to 15% range, underlying orders have continued to be obviously strong on the capital side and weaker in the consumer-related businesses.

But our global positioning, our right market segments truly have benefited this Company in the last six months and will benefit this Company here for the next 12 to 18 months.

Our international sales are trending towards the 54% level, and our emerging market sales are trending towards the 30%-plus level for this year.

These are all very important investments that we've made as a corporation and continue to leverage and continue to do extremely well as we go forward here in 2008.

As you saw from the operating profit margins, we executed on the restructurings and the cost reductions.

The new product programs, which are coming in at higher margins, the operating guys delivered and clearly you can see that in the margin performance we had in the first quarter.

And we'll be talking about Thursday, Friday this week about delivering the 16%-plus OP margin for 2008.

Getting back to that number that we decided to let go, back in 2001 when we went through the major restructuring, repositioning the Company.

We have climbed back and we feel very strongly this year that we will reach that 16%-plus level and get back to those levels and moving forward for record levels.

On the new product front, I was very pleased in the last three or four months as the new products are folding in, coming in and really helping us add more value for our customers and clearly as our customers get more value, we get more value.

And that is continuing to deliver.

The performance that we need as a Company, one, to grow faster, and deliver higher levels of profitability.

You cannot cost reduce yourself to success, as we know.

New products are very important and they are doing well in that area.

The other key area that we executed well in this quarter is acquisition integration.

We made several acquisitions the last couple of years.

They are integrating well.

We're getting the synergies both from the sales and the profitability and the cash, which is very good for us to see.

And we are embarked upon another very important one, the Motorola embedded computing business, which we'll be going through a very significant integration here in the next 12-plus months, with Jay Geldmacher leading that.

Jay will talk about that later this week in his presentation, but the first 30 days have gone well.

We report back to the Board today what's under way.

There's a lot of integration work to be done here, but we feel very good and we have the track record to do it.

So I feel good about where we stand with the first 30 days.

I want to thank any of the Motorola embedded computing people out there that are out there listening to this call for joining us.

This is a great team and I'm looking forward to the value they are going to create for the Emerson shareholders as they work well with Jay's team, across Aztec and across our embedded computing business and power business and then across Emerson.

As we look forward to Thursday and Friday, I am looking forward to setting the platform and the foundation of what I see is the economic view of 2008, 2009.

My view of what's going on has not changed at all from what I've been talking about in the late fall or in November.

Clearly we're dealing with an economic environment that in some places is very strong, in some places really weak.

It's changing, and what you need to expect from Emerson is and you will get from Emerson is that we will execute.

We will move rapidly to deliver what we need to deliver on the restructuring front or the growth front or the new product front to deliver the underlying growth that we seen this year, which as we said is in the 5 to 7% range and deliver sales in the 9 to 11% range for the consolidated Company.

As we look at our business today, our global position, our global team, how we're executing, the first three months of the year, our order pace, the cash flow that we have right now, I feel very comfortable that we'll deliver that sales, the margin of over 6%, the [ROSI] trending north of 20, leading -- moving towards 21%, and the operating cash flow, $3.2 billion range -- and 55 to 60% of that going back to our shareholders in dividends and share repurchase.

So there will be more on that on Thursday.

It's going to be myself talking Thursday afternoon.

I have Charlie Peters talking, Ed Monser, John, John Ibbara, Tom Boettcher, Jean-Paul Montupet, Ed Feeney, Jay Geldmacher talking about where we're taking this Company to create value for our shareholders both in 2008 and 2010 and hopefully our shareholders will show up and want to engage with us.

But we feel very good about this Company right now and we feel very good about where we're sitting on a global basis and look forward to working with everybody in the next Thursday, Friday time period to show why we feel so excited about the Company.

With that, I'm going to open the phone to take questions.

But I do want to remind you, we will get into more details on Thursday and Friday, in particular on economics.

I'm not interested in getting into a lot of details here without the opportunity to really debate it with you, so I'm willing to talk about what's going on in the quarter and I'm looking forward to seeing you all on Thursday and Friday.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question is from Bob Cornell, Lehman Brothers.

Please go ahead.

Yes, a couple of questions, Dave.

You said to lay off the macro comments but--?

Thursday, Bob.

Well, I'm going to talk about the quarter we just reported.

I mean did you see any sort of late fall-off in any of your businesses, sort of the end of the quarter, like is suggested in the ISM data that came out today?

No.

And you mentioned that in the process market, you had some market penetration gains.

Maybe you could expand on that point a little bit?

I think you've seen us invest quite significantly, both on the systems and the solutions and the instrumentation side.

You're seeing us doing extremely well in the Middle East right now.

A lot of oil and gas investments.

And you're seeing us gain significantly right there.

The investments we've been making have really -- are paying off.

To be honest, on a quarter to quarter basis, to say here we've gained a significant level of market share is extremely hard to say.

I just know the trends.

I know what's going on in the industry.

I see our sales, Bob, and I see what the industry trends are.

So I feel comfortable saying that we've gained in the last couple six or eight months and to say specifically what quarter, it's hard to do.

But we've seen very strong pace in oil and gas, the power marketplace, and we have a very global network and I'm sure John will talk further about the wireless, which has been introduced and has been well accepted and taken off.

So you can't say, okay, this count, this count, this count, but I would say overall we're extremely strong at this point in time.

I would like to extend my thanks to Chris for the work he put in the last couple of years helping me and welcome Lynn to the fray.

Yes, we're going to miss him.

Depends on what happens this week how much I miss him.

But I appreciate that.

That was on Lynn's watch.

See you Thursday, okay?

Go man.

All the best.

Our next question is from the line of Nicole Parent, Credit Suisse.

Please go ahead.

Good afternoon.

Good afternoon, Nicole.

Best of luck to Chris in his new position.

He did a terrific job.

With respect to industrial automation, Dave, we saw an acceleration in orders in December.

Can you give us a sense of where the strength was, U.S.

versus international?

I would say I don't have the specific details in the orders here.

I would say that had to be probably, primarily international, Nicole.

Okay.

The business in the U.S.

did pretty well for the quarter, and -- but I would say the orders are coming more from the international ranks, in particular around the power area, based on the economics we'll be talking about later this week, I would expect that the U.S.

business will be okay this year, but will continue to be at a lower level than we see internationally.

Okay, and I guess with respect to total European sales, I think you said they were up 1% in the quarter.

Obviously Climate Tech was depressed by the heat pump.

When you think about that sequentially versus the fourth quarter, up 5%, if you were to add back kind of that anomaly in the first quarter, do you feel good at where Europe is?

Is it pretty much in line with your expectations?

I would -- I'm disappointed with how far the Climate Tech and the heat pump-related business has dropped off in Europe.

It's pretty clear to us now where we were having 25, 30% growth rates, last year at this point in time.

There was a lot of -- as I say, inventory being built.

There's a lot of market and product being put in the channel, and so obviously we've got to digest that right now.

I think it's going take two or three quarters for us to do that.

My view right now as I look at this out there, folks, is that I believe Europe will still be a higher underlying growth rate than the U.S.

this year, given my current view.

It will not be as far apart as last year, but I just think that our European businesses are still pretty good, except for the Climate Technology piece, and I feel we're okay this year in Europe, even though we will be a lower growth rate.

And I would say that one of the things that we're going on the heat pump, last year there was a lot of tax incentives for heat pumps in the marketplace and they were pulled.

I think the Europeans are trying to sort out what they are going to do relative to incentivizing the environmental, more environmentally friendly type of product.

It will come back, and, but I think it's going to take two or three quarters.

And comfortable, I feel okay about the quarter in Europe.

I would have hoped it would have been more like 2 or 2.5% to be honest.

Okay, great.

One last one, you talked about kind of being opportunistic in this market as we move forward.

Could you give us a sense on M&A what you're seeing out there and what your view of the market is?

My view of the marketplace is last year as we were talking about in EPG.

I pretty much said that it was pretty weak for us.

As we've gone forward here now and we look at the assets available, the assets that are going to be coming both from the -- that are gone private, and the ones also from corporations looking to sell assets off, our opportunities are increasing.

I would expect here for the next 12 or 18 months to see companies like Emerson and other companies in the industrial space will actually be looking for companies, things are not going to be bought cheap here, you have to buy very carefully, but we have the unique opportunity right now as we talked to our Board about picking up some selective assets, which have not been available for the last five or six years and we're going to be going after that.

I would think that you will see that both at our place and other companies at this point in time.

It's a good time for companies like Emerson.

Financial crises, may be bothersome for people in New York, or private equity firms, but as I look at them right now, those are unique opportunities for good companies to attack and go get some things.

Super, thank you.

All the best, Nicole.

See you Thursday.

Our next question is from John Inch, Merrill Lynch.

Please go ahead.

Thank you.

Hi, Dave.

Hi, John.

Couple questions on network power.

We saw the order trend.

Given the economic backdrop, Dave, how are you thinking about this business in the context of say the computing versus telecom side?

I guess part of the context of my question, if you look at the recession of '01, '02, this business really struggled.

Maybe you could frame it in the context of what has changed in the mix since then and just how you're feeling about the outlook for the business?

We're going to talk quite a bit about that on Friday, both Ed Feeney and Jay Geldmacher will talk about it but let me give you my two cents.

Yes.

In the 2000 timeframe, you probably remember, we kept telling people that this thing is growing way out of line relative to the underlying growth rates.

What was going on is you saw a lot of the CLECs come in the telecom guys, you saw a lot of these outsourcing data centers being built.

You saw a huge bubble being built at that point in time, which obviously we got crushed as we came into late '01 into early '02 and '03.

We have not seen, and we'll show you this, we have not seen any emerging of a bubble created at this time, not in the financial centers or any other places and you're seeing a lot of data processing investment going on around the world.

It's broad, it's not focused on one market segment, and you'll see that as we show you the pieces.

It's very diverse right now and it's fairly steady.

So we look at a market space that we did not see an accelerating bubble being emerging here in the last two or three years on the data side or what we call the lever side.

So we're very comfortable with that right now.

Now, I also realize things cycle, but right now the cycle's good.

On the telecom, we see investments going on at this point in time and we'll talk about that, but again, it's not going to be fast.

It's going to be fairly steady.

I would see more of the power, the reliable power investment being stronger growth than the data telecom side at this point in time.

But there has been no bubble.

We are watching this like a hawk.

I still have scabs and scars on my backside from what happened.

Walt and I went through this in '01 and '02, and so we're watching it very closely right now.

We do not see it at all, John, at this point in time.

We'll spend some time on that on Thursday.

Looking forward to it.

And then just right now in the business, I think there is, there's some storms in China, and then there's maybe issues, I know Chinese New Year has come up in the past sometimes for some of these tech companies.

Are either of those events going to be an issue insofar as the quarter we're in today?

Well, I don't worry about quarter to quarter.

You know me, but I'm assuming that we never do a good job forecasting.

Most companies forget about Chinese New Year.

You know it comes every year.

I would say, I haven't heard of any issues right now.

The snowstorms clearly are causing problems in the short-term.

I would say that you will see, depends how fast they recover here in February, late February, early March.

Clearly we're going to be hurt by this because of the delivery and the movement of goods and services.

So my gut tells me right now there will be a slight impact, but we won't be able to finalize that until we get out of the quarter.

It's not going to be huge, but I bet you'll hear a lot of companies talking about it.

I haven't had any e-mails coming back.

Walter, have you had a lot of e-mails on this?

No.

Walter's shaking his head.

That's how Walter is.

I think we'll be okay.

I'm sure there will be something pops up.

Thanks very much.

I'll see you Thursday, John.

Yes, see you Thursday.

Our next question is from John Baliotti FTN Midwest Securities.

Please go ahead.

Dave, given you're sitting at record levels in cash, despite first quarter being seasonally slow for free cash and last couple of years you've done 800 million to 900 million in buybacks, does your capital deployment -- does your hierarchy move around a little bit with the market trading the way it is today?

Yes, it does.

I would say that -- not I would say, I would tell you we showed the Board that more money was allocated towards share repurchase today than it was in November.

Okay, great.

Thank you.

I mean might as well go private since no one likes us.

Okay, thanks.

Next question is from Jeff Sprague Citigroup Investment Research.

Please go ahead.

Good afternoon, gents.

Good afternoon, Jeffrey.

I guess on that last point, Dave, when you said you want to address the disconnect in the marketplace, are you kind of -- is that along the lines of your stock versus your view of the fundamentals, or is it also just kind of this whole frenzy that everyone's in about recession and just the macro environment in general?

You think everybody's just--?

I'm more talking the macro environment in general, Jeff.

I look at -- as you know I always look for discontinuity and I look for windows where people are panicking and you take advantage of that situation and go.

We are fundamentally very strong, as John just pointed out, as you pointed out from our cash flow and a balance sheet standpoint.

And the industrial companies right now are very strong relative to what they -- the opportunities we can go after because of our cash position.

So I look at this as ways to invest in new products, ways to invest in maybe potential acquisitions and to push forward right now, where people maybe hesitate.

And so from my standpoint, are we going to change fundamentally our structure related to share repurchase?

Not big time.

As I said to you I gave the range of 55 to 60%.

Now, would we go higher up to 62 or 63% by operational cash flow?

From the standpoint of turning back to the shareholder?

The answer is yes.

If I felt that we were not getting the opportunities to invest, we'll take that cash and give it back to shareholders.

So I just feel very good right now that we have the opportunity and the wingspan to go out and do something additional in this economic environment where people are getting a little bit nervous and pulling back.

Dave, you called out the power a little bit when you were talking about process.

I mean is there a clear shift beginning to take place in your activity from oil and gas towards power gen?

I'm sure oil and gas leads, but is there a little bit different complexion in demand starting to take--?

We have seen a pretty good improvement in power.

We've had a good power.

I would say the power's going to be good for the next couple of years here.

I just came back from the Middle East.

I was there for four days -- India four days, very good power demand, Asia -- China's right now again back on power shortages.

The infrastructure in Eastern Europe and Western Europe's very weak right now in power.

They need investment.

Everywhere we go, we see people investing in power right now because they need to for the next five, eight years.

I would say the environment right now for power is very good, both for upgrades, to be honest, and also new capacity.

There's a lot of work going on right now in getting more out of the installed base.

That's where we play extremely well in our capabilities.

So I like the power market here for the next two or three years and we have a very good hand in power, as you know.

Sure.

All right.

We'll see you Thursday.

See you Thursday.

Looking forward to it.

Travel safely.

Thanks.

Our next question is from Mike Schneider, Robert W.

Baird.

Please go ahead.

Dave and Walter, can you just address pricing for a second?

Maybe what it was in the quarter.

And then in this environment of I guess weaker demand at least on the macro numbers, is it, is it your expectation that actually pricing may not offset raw materials this year?

I'm glad you could get off your conference call and talk to me, Mike, but right now the quarter is about 1%, 1% price.

And as we look at our pricing, price cost environment right now, we are slightly green.

As you and I have talked about, I know the Fed is doing everything possible to keep the economy going from the standpoint and help it recover late '08 going into '09 and the consequences of that is going to be a little bit inflation.

I would expect us to see inflation and some material cost increases go forward, as one, as this economy starts going again, and you see some of the material shortages continue to flow through.

I would expect material upward pressure's going to be there, but it's not going to be extraordinary Mike.

Right now I feel comfortable on the price costs, but we are going to be very careful in watching this, because it's potentially in the second half of the year, we may have to go back out and get a little bit more price to cover the costs.

But as you enter the calendar year, did you hear anything from the field that would indicate your ability to push through price on this market is getting tougher?

No.

Okay.

And as you talk about -- we use new products.

We have a lot of innovation and when we bring out new products, it's basically how we go out -- innovation creates -- it's not like trying to sell the same thing for a higher price.

We try to bring out new products and innovation and that allows us to get that price that we need.

Okay, and then just one detail on climate.

Asia being up double digits again this quarter, are we just entering the phase now where the new labeling and SEER requirements in Asia are beginning to drive that business for you?

Correct.

And what are the--?

It's a big run here for the next two years.

Okay.

So you would expect these type of mid teens growth rates to continue?

Yes, I would say so.

Now, quarters move around, Mike, and we could have a quarter that is up 20% and the next quarter could be only up 5 or down 10 so this business a little bit more lumpy from sometimes when, especially in the Asia and the U.S.

marketplace, but I feel pretty good about where that demand's going to be coming from here in the next couple, next couple of months, quarters, and years.

Okay, thanks again.

See you Thursday.

Our next question is from Deane Dray, Goldman Sachs.

Please go ahead.

I'd like to circle back on a comment, Dave, in your prepared remarks where you talked about challenging situation in the U.S., but you still did 5% organic revenue growth, which is pretty solid.

Can you comment on what are the most forward-looking activities or indicators within Emerson on quote activity that would suggest how you're acting today versus expectations a couple months ago?

Okay, good.

First of all, Deane, I don't want to hurt you a little bit, but I actually in my prepared comments, I don't have prepared comments.

I actually talk from my heart, so there's no typist here.

All right.

During your monologue.

Okay, thank you.

From our standpoint in the North America, one thing you got to remember, last year we had a terrible climate North America in the first quarter.

So you have an extremely low base.

From that standpoint, that helps us significantly on a comp basis, so they were up North America, Walter, what, double digits?

What was climate in North America?

In the current quarter, 11%.

11%.

See, that really helped us from that standpoint and it probably will help us again this quarter here.

On the capital side, the pace of business has been pretty consistent in North America, and so I -- if you look at the capital, be it in the process area, the capital capacity and productivity areas, those businesses have trended pretty well in North America and we've seen a pretty good, steady rate.

I would expect as the year goes forward and we'll talk about it this Thursday in North America, you will see our North America businesses slow down a little bit from the standpoint of where the cycle is and rely very much on our international base at that point in time.

But right now the North America order pace, driven by our capital guys and climate is pretty solid, and obviously clearly the residential guys are really hurting at this point in time, and so I think the pace of business North America is expected, except for maybe climate's a little bit better.

And I would have to say probably a little bit of that is because inventory guessing from the standpoint of what inventory's going to go, so I feel pretty good about that.

How about on the emerging market side?

I think I heard you say the number 34% for 2008?

I would say 30%-plus.

Okay.

Okay.

One of the points that you made not long ago was expectations in China that could see a post-Olympic slowdown.

Have you got any more data points from the field that would suggest that before you called it a hunch.

I was curious whether that has turned into anything more in terms of your planning for '08?

Still a hunch.

At this point in time, I believe our -- I just came back from -- several big emerging markets and I'll be back over there next month, I would say that emerging markets will continue to do well.

I would expect China to be -- have a weaker year this year, strong first half, weaker second half.

But all in all, I still believe -- I look at Asia-Pacific this year which will cross the $4 billion mark for us this time, first time, will be up somewhere between 12 and 15%.

China clearly I think will be some uncertainty.

It's just a hunch.

We will watch it -- we are watching it very closely right now, but I think we'll still be okay.

In our emerging market, as you know, sales, we do more business outside in Asia Pacific outside China than we do inside China.

We also have very big mills in Latin America and Eastern Europe so we're really broad based in this, which makes it a good thing for us from the standpoint of emerging markets.

Great, thank you.

And weather forecast for the Thursday visit?

The snow's melted.

There's rain today.

I think you might get a little overcast, a little rain, but we're setting it up such you get in here around noon and you can have a Coke and then get the meeting started.

We'll get you out of here in time on Friday.

I don't think we'll have the snow like we did last year -- last week, I'm sorry, last week.

Thank you.

Our next question is from Christopher Glynn, Oppenheimer.

Please go ahead.

Thanks.

Orders quality, meaning backing out the currency, looks to be the best in a long time, strong drop-off in the currency impact in the December orders from November.

So just wondering how that grabbed you.

Any surprises and color within the segments?

They were.

The long time, maybe six months, I would not say long time as six months, if you call a long time six months.

I usually think a little longer than that, but it was good.

I would say the good part about it was our strength in Asia, and particularly in climate.

And our strength in industrial business is holding up here in the U.S., and the economics would say that they should hold up here for a couple more quarters.

So net-net, they have been balancing pretty tightly here, but it was a little bit better, not hugely surprising to me.

It's good to see, it tells me we have a strong base for the second quarter and we should have pretty good momentum as we go into the second quarter.

So we'll see what happens here, but nothing real surprising.

Okay, thank you.

You're welcome.

Are you going to come out Thursday?

I'll see you there.

Good.

Look forward to seeing you.

Our next question is from Steve Tusa JPMorgan.

Please go ahead.

Hi, good afternoon.

Hello, Mr.

Tusa.

In industrial automation, you talk about the power business.

What percentage are you referring to?

I know there are different chunks that sell into different parts of power.

What percentage of that segment is actually what you're referring to in the strength there?

I don't have that off the top of my head, our power piece.

Can you wait until Thursday to find out on that?

Steve, I don't have that.

I guess I can wait until Thursday.

Jean-Paul can tell you.

We have a pie chart that shows the business.

We can figure it out.

If you look at the overall, what I call power distribution business in our 15% -- it's 15%.

It's quite large.

So I mean what kind of comps are you talking about here when you say it's strong?

What does that mean?

I would say that in that power space, we're still probably up 20, 10 to 20% there.

Okay.

That's my gut telling me.

I don't ask it every month, but I would say that would be a strong number for us.

Got you.

Obviously implied in your forecast for core growth, there is a deceleration in the back half and you talk about China maybe softening a little bit.

U.S., there may be more uncertainty in non-res construction.

Who knows.

Is there anything that's -- that has a chance to accelerate in your mind, in the back half?

I would say--.

Acknowledging they are already pretty strong growth rates in network power and process.

I would say the one business that has the potential accelerating would be our Climate Technology business.

Okay.

That business could potentially have a very good second half.

And it could be both Asia and our improvement in North America.

I do not expect Europe to do that, but that business has become very global and some of the new products coming out, there is the potential that business would give us the upside that you, that you're talking in your comments about surprise.

I think we pretty much know the process business where it's dialed in I pretty much have a good dial in in industrial automation.

I have a very good dial in on the power business from where it's sitting right now.

I think the consumer-related business of appliance components and tools, I would not see as a strong second half.

Any comments on that, Walt?

I totally agree with that.

Okay, Walt agrees.

That's two times today Walt's agreed with me today.

One more question, I have to ask an HVAC question.

The Ingersoll train merger, any implications there for your business?

They are both very good customers and I'm looking forward to a long, healthy relationship with Herb.

Great.

Which I already have.

Our next question is from Scott Davis, Morgan Stanley.

Please go ahead.

Good afternoon, guys.

Good afternoon, Scott.

Are you going to come out here Thursday or are you going to be skiing somewhere?

I wish I was skiing somewhere, but I will be out there instead.

Good.

But anyways, looking forward to it.

I have a couple clean-up questions.

One, and forgive me if I spaced out during the non-prepared comments, but looks like your receivables were up kind of 17%, your payables were up 12, sales were up 12, what was the disconnect there?

Well, one reason on receivables going up more is you had a greater growth rate in our international businesses than our domestic business, and that's just organically when we said that our underlying growth rate for the U.S.

was 5.

The international was 9.

Total, 7.

The international businesses carry higher receivables.

Additionally, we picked up 5 points of growth because of the currency difference year to year and that currency is obviously all international and that also hurt our receivable position.

And so those would be the drivers.

We don't see any collection or other issues going on, but it's just a mix of our business as the U.S.

slows, we would see receivable days just because of the mix increasing.

Okay.

Makes sense.

And on currency, do you guys still have hedges that are on?

Are they rolled off, or do you have some sort of a constant hedging program?

Yes, we have a constant hedging program that we hedge the price/cost relationships and we also hedge debts with forwards and we also hedge with, with options on the translated impact.

We also hedge major commodities constantly, rolling them out 18, 24 months.

Okay.

Last question, going back to--.

Number three, Scott?

I'm on a roll and I'm going to keep it going.

This is it, partner.

On pricing, it's been a while.

I know someone earlier asked about pricing, but I know about a year or two ago you guys were putting together a pretty interesting initiative that I think Charlie was working on, working on kind of price maximization, software, contract maximization.

I mean you've seen a nice improvement in your margins.

Is this partially, I mean are you seeing subtraction there, or is that not working?

It's working and where you really see it is on your new product effort.

As we introduce the value, what we try to do is create the value.

You know I'm talking to Charlie, and Charlie will talk more about this on Friday, the value pricing for a new product, to make sure we're getting paid for our technology.

We're creating a lot of value for our customers.

It's very important that we get our fair share of that value.

That really comes into play is when we bring our new products out they'll come in at a higher profitability, that is a goal of ours.

I don't create new technology just to create technology to throw out the window.

We create technology to get paid for it.

That's where the big focus is on, and the company's name is Vendavo that you're talking about, so Charlie will talk about that.

Scott, it's got traction, it's working extremely well, and it will continue to roll across this Company.

We're very pleased about it.

Is there kind of a second--?

That's it, Scott.

I'll save it for Thursday.

Save it for Thursday.

Charlie's got all the answers anyways.

Morgan Stanley is so aggressive, I tell you what.

You're a figurehead.

Charlie's doing all the work there anyway.

You got it right.

I'm a puppet, you're damn right I'm a puppet.

See you guys.

See you.

Our next question is a follow-up question from Bob Cornell, Lehman Brothers.

Please go ahead.

Bob Cornell stayed on the conference call.

Let Walt do some work here.

The OIOD, Walt, where is that number going to be for the year, maybe give us guidance, other than this quarter I think included the in-process R&D write-off.

Could you give some color around where that's going to go for the year?

Well, I would say we do not anticipate any additional gains like we had in the first quarter.

In the first quarter of this year, we identified that we had the gain on the sale of IMC and we also had some other gains that favorably impacted the OIOD, more income than expense.

Right.

As I look at the full year, also this year restructuring was down from last year and the other thing that went the other way this year was also the dumping duties, the bird amendment.

Is that in OIOD?

No.

That's in--?

That is in OIOD, yes.

We have been putting it there in OIOD because we thought it was temporary.

We thought it would go away eventually.

Which it did.

Which it did; and we have been disclosing it in OIOD for several years.

So, yes, it's in OIOD.

So go back to the question, I mean as we try to model out this line over the balance of the year?

At the balance of the year, if I were to do a top level schedule for what I would expect the full year to be, I would expect the one-time gains to be slight to about the same as this year to, for the full year.

But I would expect with the slowdown in the economy that the restructuring might be a little higher.

I would expect that with the acquisition of Motorola as of December 31, the amortization of intangibles would be higher.

OIOD will be slightly higher than last year, is that a fair statement?

Yes, it would be slightly higher, that could have an impact of a few cents.

How about interest expense for the year assuming no further big deals?

That -- I'll turn to the number.

Let me check on his number here.

It would be pretty flat, assuming no additional acquisitions, no additional divestitures, and the share buyback that we've outlined.

Couple pennies would probably make sense for the OIOD and interest fee.

No change.

Again, just to cross check that comment, the corporate expense in the segment breakdown, 73 million, do you have a guidance for that corporate expense line and that compilation for the year?

We don't give guidance on corporate expense.

I mean the Board has to decide my bonus, so it could be nothing and it could be big.

Well, we'll dial in -- we'll talk to you more on Thursday or Friday then.

Okay.

See you later.

Take care, Mr.

Cornell.

Looking forward to seeing you.

Absolutely.

Looking forward to seeing everybody out there.

I think that's it on the questions.

Again, I want to thank everyone for joining us today.

Appreciate it.

Look forward to seeing you Thursday, Friday.

I think we have a very exciting program and hopefully you'll have a chance, we're going to have a nice trade show and people have a chance to get to know more about our products.

Again, thanks for your support and I look forward to seeing you later this week.

All the best now.

Bye.

Ladies and gentlemen, this does conclude the Emerson first quarter 2008 results conference call.

If you would like to listen to a replay of today's conference please dial 303-590-2000, or 800-405-2236.

Once again, the numbers are 303-590-3000, 800-405-2236.

The pass code for the conference is 11106457-pound.

Once again, the pass code is 11106457-pound.

ACT would like to thank you for your participation.

Have a pleasant day.

You may now disconnect.