艾默生電氣 (EMR) 2008 Q4 法說會逐字稿

Welcome to the Emerson's fourth quarter and fiscal year 2008 results conference call.

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

Following today's presentation, instructions will be given for the question-and-answer session.

(OPERATOR INSTRUCTIONS).

As a reminder, today's conference is being recorded, November 4th of 2008.

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

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

This call Emerson's management will discuss some non-GAAP measures in talking about the Company's performance and the reconciliation of those measures to the most comparable GAAP measures is contained within a presentation that is posted in the investor relations area of Emerson's website at www.emerson.com.

At this time, I would like to turn our presentation over to your host of the conference, Director of Investor Relations, Lynn Maxeiner.

Please go ahead.

Thank you Andrew.

I am joined today by David Farr, Chairman, Chief Executive Officer and President of Emerson, and Walter Galvin, Senior Executive Vice President and Chief Financial Officer.

Today's call will summarize Emerson's fourth quarter and 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.

Fourth quarter sales were up 11% to $6.7 billion with increases in four out of five business segments.

Strong underlying sales growth of 7% led by process management, network power and industrial automation.

Operating profit margin improved 70 basis points to 17.5% of sales, and earnings per share from Continuing Operations in the quarter was $0.88, up 13%.

Operating cash flow of $1.295 billion free cash flow of $1.042 billion in the quarter.

Operational efficiency initiatives continue and the balance sheet is strong as evidence by trade working capital as a percent of sales, improving to 15.9% from 16.2% and operating cash flow to total debt was strong at 73%.

On the next slide the fourth quarter P&L.

Sales in the quarter of $6.696 billion, up 11%.

We had underlying sales growth of 7%, currency added 2 points and acquisitions net of divestitures added 2 points of growth.

Operating profit dollars in the quarter were $1.174 billion or 17.5% of sales.

Good margin improvement of 70 basis points driven by cost containment programs, volume leverage and favorable business mix.

Net earnings from Continuing Operations were $690 million, up 11%.

We repurchased 8.6 million shares for $398 million in the quarter.

Diluted shares outstanding were 781.4 million which gets you to an EPS from Continuing Operations of $0.88.

Again, up 13%.

Reported EPS was also $0.88 in the quarter.

The sale of the European Appliance Motor & Pump business was closed in the quarter on September 30th.

The next slide underlying sales by geography.

In Q4 the United States was up 1%, good international growth up 13% with strength from Asia which was up 17%, Latin America up 25%, and Middle East Africa, 14%.

Getting to a total underlying sales number of plus 7%.

Currency added 2 points and acquisitions net of divestitures added 2 points, bringing you to the total of plus 11% for the quarter.

For fiscal year 2008, the US was up 3% and total international was up 10%.

Again, with strength from Asia, up 17%, Middle East Africa up 17% and Latin America up 18%.

Total underlying sales of plus 7%.

Currency adding 4 points and acquisitions net of divestitures adding 1 point bringing you to the total of plus 12% for the fiscal year.

Next on page five, income statement detail.

Gross profit dollars of $2.474 billion or 37% of sales.

SG&A as a percent of sales of 19.5% as we leveraged the growth.

Getting you to the OP of $1.174 billion or 17.5% of sales.

Other deductions net was $133 million, the increase driven by a $22 million increase related to restructuring and a $22 million charge related to the Appliance Control business.

Interest expense of $41 million, getting you to the pretax line of $1 billion or 14.9% of sales.

Tax rate in the quarter was 31%, bringing the full year rate to 31.7% in line with prior guidance.

Page six restructuring.

Emerson restructures continuously throughout the business cycle with restructuring programs supporting geographic expansion and best cost country programs.

We have accelerated restructuring throughout '08 as 2009 economy looked tougher.

Page seven, operating cash flow and balance sheet detail.

Operating cash flow of $1.295 billion increased 4% driven by increased earnings.

Capital expenditures of $253 million gets you to a free cash flow of $1.042 billion.

Free cash flow was 151% of net earnings in the quarter.

The strong balance sheet with 72.9% cash flow to total debt.

Trade working capital balances at the bottom of the page with the ratio of trade working capital as a percent of sales up 15.9%, a 30 basis point improvement from the prior year quarter.

Next page reviews our liquidity position which remains strong and flexible.

We have had continuous access to the commercial paper markets, high short-term credit rating, A1P1 and we've been able to place paper with 30 day duration or longer at normal Emerson rates.

We have a $2.8 billion backup credit line which expires April 2011 that has never been drawn against.

At the bottom of the page, you'll see we have strong operating cash flow to debt ratio.

Our cash position is in excess of our short-term debt and we have a nice debt ladder going out several years.

Next slide, the business segment P&L.

Business segment EBIT of $1.086 billion, up 6%.

The segment EBIT was impacted by $22 million restructuring increase and a $22 million Appliance Control business impairment charge, as well as the dilutive impact from acquisitions.

Difference in accounting methods of $60 million, corporate and other in the quarter was $105 million, down $19 million driven by lower incentive share expense.

Interest expense of $41 million in the quarter, which gets you to the pretax line of $1 billion, up 11%.

On slide ten, we'll review the individual business segments starting with process management.

A very strong quarter with sales of $1.888 billion, an increase of 13%.

Underlying sales were up 12% with currency adding 2 points and a divestiture net of an acquisition subtracting 1 point.

By region you had had the US up 9%, Asia up 23%.

Europe e up 8%.

Middle East/Africa up 5%.

EBIT dollars in the quarter of $416 million or 22% of sales.

We had good margin expansion in the quarter, driven by cost reduction programs and sales volume leverage.

For the full year, process management delivered another exceptional year with sales up 17%, and EBIT up 23%.

We have not seen an increased level of project cancellations.

Longer cycle projects in process management still provide favorable business outlook as we enter fiscal year 2009.

Next slide, industrial automation.

Sales of $1.28 billion, an increase of 4% -- 14%.

Underlying sales were up 9% and currency added 5 points.

By region, the US was up 11%, Europe up 4%, Asia up 22%.

We continued to see good growth driven by the power generating alternator business and also the fluid automation and materials joining businesses.

EBIT in the quarter of $199 million or 15.6% of sales with sales volume leverage and pricing more than offset by material inflation, as well as an increased level of restructuring.

Fiscal year 2008 was the fifth consecutive year of double-digit sales increases for industrial automation with underlying sales growth up 7%.

The 2009 demand is expected to flow due to slowing global growth, fixed investment and tougher comparisons.

Next slide, network power.

Sales in the quarter of $1.714 billion, an increase of 19%.

Underlying sales were up 9%, acquisitions added 8 points and currency added 2 points.

By region, the US was flat, Asia was up 19%, and Europe was up 2%.

EBIT dollars of $215 million or 12.6% of sales.

Acquisitions had a dilutive impact in the quarter of approximately 150 basis points.

In 2008, we've continued the expansion of our market through strategic acquisitions such as Aperture.

As we enter '09, moderating demand is expected as global growth of fixed investment weakens as '09 progresses.

Next slide, Climate Technologies.

Sales here of $1.013 billion, up 8%.

Underlying sales were up 5%, and currency added 3 points.

By geography, we had the US up 3%, Europe up 13%, and Asia down 3%.

Europe growth was driven by the increase in heat pump compressor sales, which had an easier comparison to the fourth quarter of '07 European sales.

EBIT dollars in the quarter were $138 million or 13.6% of sales.

Price increases were more than offset by material inflation, and we increased restructuring ahead of a challenging '09.

The geographic diversity of this business continues to improve in '08 with 45% of the fiscal year '08 sales from outside the US.

Weak residential markets are expected to continue throughout '09.

Next slide, Appliance & Tools.

Sales in the quarter of $975 million, down 4%.

Underlying sales were down 3%, a divestiture subtracted 2 points and currency added a point.

By region, the US was down 6%, Europe down 4%, and Asia up 26%.

EBIT dollars of $118 million or 12.1% of sales.

There was a $22 million charge in the Appliance Controls business in the quarter that had a dilutive impact of approximately 230 basis points.

The decision was made not to sell the Appliance Control business, but to create shareholder value by integrating this business with the appliance motors business.

Cost reduction programs and pricing were more than opted up by material inflation and volume deleverage in the quarter.

In 2008, we improved the mix of businesses in Appliance & Tools segment through divestitures and restructuring of the businesses.

And excluding the impact of the charges related to the Appliance Control business, EBIT margins expanded in 2008 in a difficult market environment.

We expect market conditions to remain very challenging in 2009.

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

Thank you very much, Lynn.

I want to welcome everybody here this afternoon.

I appreciate it.

We just finished a two-day strategy session with our Board.

I'll bring them up-to-date on close of 2008 and then also, what we see happening in 2009.

First of all, I want to thank all the 140,000 employees around the world who really delivered a strong performance in 2008.

It was a record setting year on many fronts and that's on top of a tremendous five-year time period.

Our people out there that are saying the fourth quarter was weak.

Our fourth quarter was extremely strong, a very solid close, high quality earnings, high quality cash flow, and really a tremendous finish to a fantastic 2008.

If you look at our sales levels, underlying sales growth of 7% this year, 8% for the last five years.

We returned a record setting OP margins of 16.5%, which we told people we would get to in this cycle and we have gotten there.

And we've actually had a tremendous growth in earnings per share the last five years, averaging 19 plus percent with this year's 17% with $3.11 -- $3.11.

And a historical high of 21.8% which is a tremendous performance relative to the profitability and cash flow of this corporation.

And cash flow for the eighth year in a row, free cash flow exceeded our net income.

Free cash flow of $2.6 billion representing 10.4% of sales.

And if you look at the last five years, we have sales increase $11 billion, operating profit of $2.1 billion, employees around the world of Emerson have executed and executed well for our shareholders and had a tremendous fourth quarter, up and down the P&L.

On top of that, the Board has decided today to raise the dividend 10%.

We're working our 53rd year of dividend increase.

We can't say for sure until we do it quarter by quarter but we're one of the few companies that have increased dividends 53 years in a row and we're proud of that and the cash flow in this Company supports that.

If you look at what goes on in the environment right now, we've had a tremendous year and as you look at the last three or four months it's gotten tougher and tougher and more challenging and we've still delivered great results.

And I would say that as we look at the last sixty days, it's been highly unusual, with the financial crisis, with the bailout, with the consumers within the United States and around the world facing loss of market value, wealth, jobs, and uncertainty.

And the governments within the United States around the world.

Just the United States government putting in over $700 billion more likely going to 1 trillion, maybe even $2 trillion to support what's going on from the excesses that we have seen in the US and around the world for the last couple years.

So we've had a tremendous performance up and down the P&L in 2008.

We are leaving this year very strong and feel very good about it.

We have the strength, both from a financial standpoint and a global footprint standpoint to deal with the issues that have been coming at us and we will be highly flexible this year because no one knows for sure what's going to come.

But if we look at our current economic models, our indicators, they're all turning negative.

Our employees, our customers, are all telling us that we are facing uncertain times around the world at this point in time.

Very unclear.

It will take time in my opinion for us to have a certainty on what we're facing.

But if you look at what's going on, with the financial crisis and the pullback in spending, just look at Emerson.

Back in August, September, October, telling you we're going to spend somewhere around $750 million for capital for 2008.

We ended up at 714.

We'll be telling you that we're going to be potentially taking that down to $680 million next year, based on what happens in the economy, when what happens to the economy is a little bit uncertain.

But we will be flexible in that regard.

As we look at our business, you look at our emerging market business, it's still very good.

When you look at what we see today with our key markets here in the US, Europe and the other G7, they have turned decidedly negative.

In my opinion the US economy is in a recession or very close to recession.

Europe is right there, coming behind us.

Japan is right there too.

So we're looking at a situation where the mature markets are facing, in my opinion, a certain recession and the emerging markets are holding up okay and they will weaken but still deliver growth for us as we look at 2009.

If you go forward and look at what we have is our assessment for 2009.

And we look at what I say the uncertain and challenging global economics in 2009.

It's very unusual for us to look at and giving you this type of level forecast this early.

But I felt in discussing with the Board the last couple days that we should tell you that we see as the range of issues and opportunities that we will be facing in 2009.

Again, it's uncertain.

It's not positive.

The treads are heading down.

Our forecast in sales somewhere between 23.5 to $25.5 billion in sales.

Operating margin of 16 to 16.6%.

Key underlying issues here will be underlying sales growth of either plus 4% and minus 4%.

Currency is negative right now.

If you look at the Euro, 1.28.

We will lose approximately $1.1 billion of sales off the top line.

And probably at a ratable margin somewhere around the 15 to 16%, based on the mix of these sales.

We will complete acquisitions.

We're assuming some acquisitions helping our growth about 4% and we had adding restructuring somewhere between 125 and $150 million in 2009.

We've already increased the number of restructuring opportunities within the Company in the last 30 days and we'll keep focusing hard on this and dealing with the changing environment that comes at us.

Our pension expense will be neutral next year, not a big issue.

However, we will be funding our pension plan approximately $200 million, which is built into our operating cash flow forecast, somewhere between $3.3 billion and $3.5 billion.

Our EPS will range somewhere between $2.80 to $3.20.

And as I said earlier, our capital expenditure will be 680 to 725.

If you look at the macroeconomics that we see at this point in time and the trends that are happening, it's quite broad but clear to me, US non-residential will be trending negatively somewhere in the negative 3 to negative 5% after several years of being positive.

US residential will remain highly negative, down 15 to down 20%.

Europe's GFI will be somewhere between plus 2 and minus 1.

And Japan will be somewhere between plus 1 and minus 1.

China will still be positive.

China has decided to invest in the infrastructure, the economy, and they will be putting money into the economy to keep it going.

We look at their GFI somewhere in the 10 to 12% growth range and India 8 to 12.

And Latin America, some where 5 to 7.

Overall, much more challenging economic environment than we have faced the last couple years.

But you should know, the management team is ready for this.

We've been working on this very diligently the last 30, 60 days.

We had our top 400 people inside Emerson, inside St.

Louis about two weeks ago, for two and-a-half days, talking about it.

I was in Latin America last week.

We will be in Asia in about a couple weeks and then Europe as we talk about what we see happening in the environment and how we will react when things change.

I'll also tell you that it is very uncertain.

We will not know clearly, in my opinion, until somewhere in March or April and what we really are facing in this global economy.

We will update our view of this in February, when I have our analyst meeting but as we look at today and knowing what we know about our businesses, our customers, and our global reach, this is what we're facing.

We're entering the year obviously a very strong backlogs, strong order pace in a couple of the businesses, but those businesses in my opinion will continue to weaken as the year progresses and it will cause a weaker second half of 2009 than the first half of 2009.

If you look overall, we have delivered tremendous performance for our shareholders in the last year, in the last five years.

Our businesses and our financial position remain very strong and we finished 2008 with a record year.

The Company is well-positioned to move forward in what I call a very uncertain fiscal year 2009.

Our global footprint, 54% international, 30% emerging markets, will give us the strength to deal with issues that come at us and able to help us grow where we can get growth.

And we have a very good mix of businesses right now and they will obviously deal with the issues that come at us.

The financial strength of the Company is at record levels, extremely strong, and we have the flexibility to deal with what we need to deal with.

The global management team is very good at this point in time and also will deal with any issues that come at us.

Clearly, we would love to have another 2008 come at us with a strong economy but that's not going to happen.

The financial crisis that has emerged over the last 60 days has changed the economic environment for all of us.

For all of us, going forward here for at least the next 12 or 18 months.

Companies like Emerson need to be flexible.

We need to be able to react.

And we need to deal with what we have to deal with and that's the fact.

Now, many people do not want to hear this, and can't handle some of this information but that is what we are dealing with.

And within this Company, we're operating on a plan to deliver value for our shareholders.

Not only for the short term but for the long term.

So that is where we are.

I will open up the lines now to take the first question.

I appreciate your time and I look forward to your questions.

Thank you.

Ladies and gentlemen, at this time we will begin the question-and-answer session.

(OPERATOR INSTRUCTIONS).

That question will come from the line of Nicole Parent with Credit Suisse.

Please go ahead.

Good morning, Dave.

Good afternoon.

I guess, it's pretty clear that things are more challenging from the credit crisis, macro environment.

Could you give us a sense of where you think you have the best visibility by business and where you think you have the worst visibility and then maybe also give us a sense of backlogs versus the third quarter of '08 versus a year ago?

Well, we gave you the backlog information in the slides we just gave.

So that information is on those slides relative the to our process business, industrial business and network power business and those are the three businesses you run off the backlog.

The rest of the businesses are booked to ship basically.

If you look at where our best visibility is, it's clearly in our capital businesses which have held up very well and I think they will continue to do well in the first five, six, seven months of 2009.

And I believe at that point in time you'll start seeing the weakening, as companies around the world will slow down their capital spending.

Companies will react and companies already are reacting.

If I remember correctly, this morning the numbers that came out sort of the capital investment numbers dropped significantly.

You will see companies reacting very quickly just like we're reacting.

Our capital spending numbers have dropped in the last 60 and 90 days internally, ourselves.

As I look at the visibility right now, you're looking at process.

You're looking at industrial automation.

You look at network power but that visibility is only out four, five, six months and then I think you're going to start seeing changing environments.

Very clear to me.

Okay.

And I guess with respect to you kind of quantified the FX benefit or headwind as you look in '09.

Negative.

It's a negative.

Exactly.

So I think when you think about the tax rate and when you think about the contribution of international earnings to driving tax rates lower, how do you guys think about that for 2009 and beyond as you start to see growth flow overseas?

I think our tax rate will stay around the 31.5, to 32%.

You'll see that a lot of countries around the world are working very aggressively to try and get tax revenues from people and you're going to see the same thing happening here in the United States.

There are people in the world that believe that companies like Emerson don't pay their fair share of taxes, even though we do pay.

Last year we paid over $550 million in federal taxes.

I would expect our federal tax rate to be in the 31.5 to 32% range and not really change significantly.

Even though, as we mix our businesses around the world, it's just a function of what we see happening.

Okay.

And just one last one.

Could you flesh out a little bit more within network power, what you saw with precision cooling systems?

What you saw maybe by Telco, by telecom, when you think about the customer base?

The customer base for the network power on -- what I would call the network Power Systems business, the telecom business was holding up.

It's holding up okay right now .

Had a very good fourth quarter.

The trends are still okay right now.

I would expect them to hold up.

Our current forecast is still to have positive growth within that business in 2009, but I would expect that business will tail off as we start getting into the second half of 2009.

As I look at what's going to happen around the world, you're going to start seeing some of the customers slow down their investments and their order pace.

But right now it's holding up and we had a very strong fourth quarter in that area.

The weak areas within the network power would be what I call the embedded power and embedded computing areas which are much faster adjustments from our customer base.

That customer base adjusts within 30 days, 45 days.

It's much

Great.

Thank you.

You're welcome.

We'll take the next question from the line of Bob Cornell with Barclays Capital.

Please go ahead.

Yes, indeed.

A couple of follow-up questions.

In a couple of the segments, you mentioned that there was margin compression because material cost outstripped price.

I know you worked really hard to get the price.

Maybe you could give us some color about whether the materials costs came up more than you thought or whether customers were getting a price pushback?

Maybe what's the characteristic of the price cost issues and the couple of places you mentioned it?

We didn't really have any problems in the fourth quarter.

What we look at is -- we price for the material inflation, the net material inflation and we get those dollars but they still hurt your margin.

We have a sales dollar and we have a cost and in effect we do not cover our margin.

That's what's going on in.

The fourth quarter you have significant net material inflation.

As the trend went up.

So therefore, we had a lot of price and we had a lot of net material inflation and that hurt your margin but we still collected the dollars that we needed to collect relative to our net material inflation.

For the whole year, we did very well.

Our chart was green and it's still green right now.

As we look at it going forward, you're going to also have a negative coming at you in the corporate world.

If you look at the material inflation right now, you know, we were talking this year, the last time we talked about 5% net material inflation.

I now believe that's going to be closer to 2 to 2.5%.

We had underlying price last year of over 2%.

Net price increases.

This year, I think you're going to be down to like in the low ones, the 1, 1, 1,1.2, 1, 3.

From that standpoint, we will have a little bit of a negative impact on our top line and therefore, on your growth because of the pricing.

The material inflation is still going to be positive and we'll still have positive price but it will be less than we thought and it will be less in my opinion than we saw in 2008.

I know it's early, but, you know, you talked about that in three businesses you had the four to six months and then probably weaker business conditions.

I mean, how should we expect the overall margins to perform in the second half, as you start to see some of these weaker business conditions?

I mean, what actions is Emerson taking to make sure the margins hold?

I mean, I understand the second half, not the first half, it's the way out, but maybe what are you thinking?

First of all, you remember, when we set a business model, set the new course in the 2001, we said this is not a quarter-over-quarter EPS game anymore.

We invest in the long-term for above average growth and we invest in technology.

So we will protect technology investments and we will protect core investments and therefore, if the second half starts deteriorating, you you will see some margin degradation.

However, we still believe we can run in the 16% range in 2009 even with the slowdown we're talking about.

We have taken a lot of actions in the second half of '08.

We have done a lot of restructuring the last three years and we're going to have accelerated restructuring in 2009.

So we're already taking action, getting ready for what we think is going to be a challenging second half and maybe midpoint of 2009.

So as I look at it right now, it's not a game to protect margin, it's a game to protect our long-term investment and create value and leverage that as we go up and when this thing returns.

And we would be well-positioned when it returns for growth again.

Just like we were in 2003, 2004.

So we already know, we've already gone through the analysis of what we're going to protect and what programs we're going to stop and we are taking those actions according today.

And there will clearly be people reductions around the world as the volume comes down and there will be restructuring and taking out the costs as that happens too.

We are ready.

We already have the plans in place to do it.

What's the latest on the China and the higher efficiency scroll prospect, a million units, that sort of thing?

I think it will be delayed for 12 to 18 months.

The China government will be looking at certain investments and certain things that -- and they will be protecting all of their -- what I would call their production, their jobs.

In my opinion, these actions will be delayed in 2009 because of that.

But we do also know the Chinese have already made a statement they will invest billions and billions of dollars in infrastructure to keep that economy going at a certain level.

So I do not expect the Chinese economy to get as negative at some people and that -- our GFI forecast was reasonably positive next year because we see the government already going after and making those investments.

I think you're going to see GFI growing somewhere 10 to 15%, 10 to 12% in China next year.

Thanks very much.

Thank you.

We'll move to our next question from the line of Scott Davis with Morgan Stanley.

Good morning or good afternoon, I guess.

Nicole threw me off.

I applaud you guys on the detail you're giving here and conservatist, as well.

The guidance range is obviously wide and needs to be -- I suppose given the visibility but Dave can you talk about what the biggest delta is between the high end and low end are?

Is it emerging markets?

Is it US?

Europe?

It's not emerging markets.

The pundits out there say emerging markets are going to crash.

Wrong.

I hope people pull back on emerging markets because we'll use it to attack.

The biggest delta is going to be here in the US and Europe.

It's the two largest markets we serve.

The US economy will continue to weaken and the European economies are already starting to weaken.

Those are the biggest deltas.

In my opinion, you'll see China growth weakening but still be positive.

India growth weaken but still be positive.

Middle East weaken but still be positive.

Latin America weaken but still be positive.

Our emerging markets are very heavily infrastructure based.

They're not consumer based.

The next nine or 12 months will be pretty good and then what will happen is the weakening will occur within the US and Europe.

The other thing -- you've got to factor in the amount of money you're talking about on the negative of currency.

$1.1billion is not a small amount of money.

You need to factor in the fact I just told you what I think will happen to price.

You start looking at all these factors here, you will have a drag on a lot of global industrial companies, primarily from the mature markets, not the emerging markets in 2009.

Okay.

That's clear.

Now, Dave, how do you -- you talked about making some smaller acquisitions over the next year.

I mean, how do you really balance your $35 stock, which the implied return there is obviously pretty high, versus going out and making acquisitions where particularly where private market multiples still seem to be at least we're being told pretty unrealistic.

We bought back $1.1 billion of our value of stock last year and we're en route to buy at least $1 billion this year.

What I would call the strategic bolt-on acquisitions that we have been working on and courting for the last two years, the environment's changing for us right now, Scott.

It's changing for the global industrial companies like Emerson and right now our deal flow has accelerated because these are companies that we have been courting and trying to convince them to sell and now they will come to us.

I would expect to be honest our bolt-on type acquisitions will be somewhere between 500 and $700 million of value, acquisition dollar value in 2009.

And as we looked at the second half of 2009, I think you're going to see us push pretty hard in a couple of what I call our strategic marquee acquisitions at the same time.

In the meantime, we will invest in our stock, like we have been doing.

But as acquisitions gear up, we will try to dial that back down.

My gut right now says we'll probably do about $1 billion in share repurchase with our 3.3, 3.4, $3.5 billion of operating cash flow.

We do have the flexibility to go back and forth as you know, depending on what happens to us.

Okay.

Just lastly, the comments -- I mean, you made some comments I think, certainly about customers adjusting CapEx levels pretty fast.

How about inventory levels, with commodity prices coming down, is there any feel for maybe customers moving down to maybe below average inventory levels?

Oh, yes.

I think that we haven't seen -- the inventory levels, the customers levels are pretty good.

However you're going to see them drop the levels to what you're saying there.

Rather than keep a million dollars of inventory, we're going to take that down to $800,000, $900,000.

So we are seeing that.

Now, several of our businesses, Scott, have already been in a recession.

If you want to look at the appliance components and the residential businesses we have here, they've been in a recession in the United States for quite some time.

Those businesses are continuing to weaken and you'll see the inventory levels keep coming down there.

But we in total, the inventory levels of ourselves and our customers are in pretty good shape.

But I think you're going to see them dial it back a little bit and my gut tells me you're going to see when we get into December, it's going to be very much like December of 2001, where a lot of customers decided to shut down for a big chunk of December.

That's my bet.

Makes sense.

Thanks, guys and good luck.

Okay, thanks.

Thank you.

We'll move to the next question from the line of Deane Dray with Goldman Sachs.

Please go ahead.

Thank you, good afternoon.

Dave, it would be very interested in hearing your comments on restructuring.

One of the popular themes this quarter was companies announcing big one-time restructuring charges.

You went out of your way to point out the pay-as-you-go philosophy.

You did specify $125 million, $150 million for '09.

And in two businesses were called out for restructuring, climate and industrial automation.

How are you approaching this?

Is there more that you can be doing?

When do you start pulling the trigger to do more and what type of payback are you expecting?

We've already instituted the plans to do $125 million of restructuring with about 29 facilities.

What I call facility can be kind of broad.

Could be a manufacturing, small manufacturing, could be a configuration.

These are facilities around the world.

We've already pulled the trigger on these.

We have been doing this, as you know, on an ongoing basis.

It's slowed down a little bit about 18 months ago, as our underlying volume got very high.

But as we looked at the second half of 2008, we actually started accelerating.

That's where the $70 million came from.

We have right now in place geared up and executing $125 million of restructuring.

And the payback typically in these programs are usually around 18 months.

Some of them are short.

Some of them are long.

But you're looking at some fundamental restructuring of some facilities, which could be in high cost locations which take time and the payback's a little bit longer.

But we don't -- as you know, and within Emerson, we don't wait until the very end and then say okay, let's take a big restructuring charge.

We've consistently gone after this and we've been doing it very aggressively.

To be honest, I think we will struggle.

We will struggle to get much beyond $125 million unless things really, really got really bad out there.

My gut tells me $125 million is the number that we'll be focusing on.

That's what's executed.

That's what's started right now.

Very helpful.

Just in terms of the comment maybe it's a bit surprising, and we may think it's coming soon but no cancellations of any sort of size out of backlog.

No.

Can you talk about that a bit more?

Are you seeing pushouts?

What are your customers telling you about their access to credit?

Are you getting any sort of sense that there's another shoe to fall soon here?

No, we have not seen any significant pushout.

What you're going to see is a slowdown of the order paces.

And we have not seen any issues with our customers from a financial standpoint.

Most of our customers are fairly well capitalized.

They have access to credit lines.

There's been a little bit but we watch it very closely.

My gut tells me that this will accelerate here in the coming months.

It is unusual for us to go out right now and give this type of guidance.

But you all are trying to guess right now and you're all over the place.

So I felt it was really from my perspective and the Board's perspective, I needed to give you a little bit of help from what we were seeing from the real business world.

Not located in New York City, but somewhere in Saint Lois, Missouri.

Somewhere in the midwest, where we actually make products.

So that's why we did it.

My gut tells me that our customers will slow down their order patterns and that the economy will come to a slowdown period here fairly soon and it's already happening.

As I said, I think you're going to see in December, many of our customers will make the decision, we have enough and let's take some early holidays.

So it's not -- you won't see these big cancellations but I think you're going to see a slowdown of the order pattern and we have not seen any pushout but you could see pushouts in the coming months.

Great.

Thank you.

.

You're welcome.

he next question will come from the line of Mike Schneider with Robert W.

Baird.

Good afternoon, Dave.

If we could focus on industrial automation for a minute.

As we try to model this now, during this pending recession.

If you look back, the segment obviously struggled in the last recession.

It was down 25% and revenue basically peaked to trough.

Can you give us a sense now as you look at the components of that division, what's different this time that we should anticipate good or bad in that segment as we try to model the next two years on the down side?

Mike, we are in a recession.

The industrial automation as you know, we have sold some businesses off and we have bought some businesses.

The biggest issue that we have to watch here and there's still strong demand and backlog, is in what I call the power gen side area, the backup power for the global use of power, the oil and gas, the industrial use, the mining.

We have not seen that slow down yet.

That's a long cycle.

My opinion, that will start happening within the next six to nine months.

As we look at this, we're going into an environment with a little bit different mix of business.

It's much more international, has more global footprints and especially in emerging markets.

The last time we started this, the emerging market sales were probably only around 5 or 6%, now it's closer to 17%.

My feeling is that this business will trend negative but not nearly the same level as before.

The other thing you have to know is we made the decision during that downturn to also do a lot of restructuring within that business and do a lost shifting around of capacity.

And that created, I would say, an extraordinary downward margin but it will be, in my opinion, if you look at 2009, as we leave 2009, we'll most likely have negative growth and some deleverage.

But not to the same magnitude that we had last time because we have actually done a much better job of globalizing it and getting the best cost manufacturing since the 2001, 2002, 2003 time period.

But still clearly a wild card from the standpoint you want to watch that one, as you point out.

Okay.

Then just on the business in total, if you look at this quarter, you've posted a 7% organic growth number.

The guidance for fiscal '09 is plus 4 to minus 4.

It implies a fairly steep erosion as you go to the fourth quarter.

I'm curious.

We haven't seen the October orders yet but what do you see in the first few -- or last few weeks of October and early November here that give you those type of fears.

Slowing.

Slowing.

To be honest, the GFI that we live off of right now six months ago, in my opinion the GFI within the US, the FGI within the G7 will start becoming flat or slightly negative as you get into the first couple months, quarters, maybe the quarter of 2009 on the calendar year basis.

But the order pattern right now in our capital related business is definitely slowing.

In the consumer, you know has basically stopped all discretionary spending.

So therefore, if you look at our consumer related businesses, primary here in the US, their order pattern is also slowed down and declined again.

So as I look at October and as I look at what's coming at us and looking and thinking about the last time we faced this and we faced that negative -- that December time period, I think that's where I'm coming from.

I'm using my common business sense and my business experience.

I've been with Emerson now almost 28 years and I did go through the last downturn.

So Walter and I and Ed, I feel very comfortable saying, this thing is trending down and people need to be thinking about what's going to come at them and you need to get ready.

Our message is get ready and get positioned.

But we have not backed down in investment in technologies in new products.

We actually increased it again and that's very important to us.

But it's definitely trending that way.

Even with the current order patterns, Mike.

Most recently, then you've seen it presumably in industrial automation and the embedded power section of network power.

Yes.

Also, tools and storage.

Also, appliance components.

Okay.

Thank you again.

You're welcome.

Thank you.

The next question will come from the line of John Coletti with FTN Midwest Securities.

I have time for two more questions after John.

I have to communicate to all of my employees here.

I have time for Johns and and then also two more.

Go ahead, John.

Sorry.

With respect to process, seen some specific end markets that the utilization levels have dropped a little bit.

Is there something that the customer does at that point that's different from what he's been doing in terms of MRO or projects or -- obviously having been very exposed to that business in your past.

Are there any patterns that change when you go from a high growth environment to let's say a slower growth environment for those guys?

I think what the first thing that they'll change is they'll quickly re-evaluate the projects that they had on the drawing board and maybe had gone out what we call for the feed and valuation, you know, doing the engineering drawing.

So that will be the first thing they look at.

If they've already contracted and started it and got the contract award out there and going to work it.

They're going to keep going with that because the cost of stopping is pretty high.

But what they can do is they'll quickly look if they are going to do a capacity expansion, the facility somewhere, and that's on the drawing board and they're going through the feed analysis right now, they will stop that.

As soon as they see the demand is slowing, you'll see them stop that.

You'll also see them, they will slow down historically and slowdown comes they will also slow down their maintenance and repair and the upkeep.

We haven't seen that yet but that typically will come at us within two or three months of for sure they know that they're going to be hit with a slowdown in demand and capacity needs.

They'll still have to maintain the equipment.

They maintain the equipment but they might do -- they might only do partial shutdowns versus the full shutdowns.

They will scale back in what they do.

You can't maintain equipment because things do blow up.

But I don't think you're going to see a lot of that impact until the mid- to late next year.

That cycle business will be okay for the foreseeable business future.

What you'll have to watch there is the new orders and the new projects which will most likely slow down as the demand slows down for the need for materials around the world.

Okay.

Thanks, Dave.

You're welcome, John.

Thank you.

We'll take the next question from the line of Nigel Coe with Deutsche Bank.

Good afternoon.

Congratulations on a excellent 4Q.

Thank you very much.

Just couple quick ones here.

You know in the past you talked about there's a multiplier of like two times of GFI growth in emerging markets.

Do you think that still holds the next couple years.

Yes.

From my perspective the whole message I've been giving to our people internally.

Yes, GFI in emerging markets is going to scale down but the two times is still the focal point for us.

We need to drive that and we will continue to invest in those markets.

I'm really hoping people will pull back because I think the emerging markets, yes, they will slow down and our tie to Europe and the US but when those infrastructure projects are needed and the governments will fund those and as soon as the US and European economy starts strengthening, you're going to see the emerging markets come right along with them pretty quickly.

The global world is not decoupled.

Remember the theory of decoupling a year ago or so.

It is tied together very tightly.

Just look at the financial world.

The industrial world is the same thing.

You're going to see us moving very quickly, just like we're moving our production very quickly right now.

As we look and evaluate, where the best cost locations are for us right now to produce products.

That is my second question of the FX.

I understand the negative impact of the top line.

But you've got a huge international footprint, especially in emerging markets.

I think the stronger dollar would actually help.

I like it.

I like the stronger dollar.

With our global footprint and the restructuring that we've been doing the last three or four years, a stronger dollar plays into our hands.

So the 5 point headwind on the top line would obviously be less at the EPS level?

I can't say that.

It helps us deleverage less in the downturn, underlying volume.

The underlying volume will decline based on what I see in the economy right now.

So it will help us deleverage less, help us maintain 16% operating margin.

That is a very good margin for a Company like this.

A lot of companies have to bridge to try to get up margins.

We actually delivered up margins.

I agree.

Thanks a lot, Dave.

Thank you.

We will take the next question from the line of Christopher Glenn with Oppenheimer.

Please go ahead.

Under the gun.

Thanks.

You got the last one, Chris, before I go talk to employees.

It's an honor.

Just did a nice deep dive comparing the cyclicality, some of the differences in business and industrial automation versus the last downturn.

Like to visit that on process, you know, by contrast that did very well in the last downturn but we have very different kind of boom that that business has seen this time around.

It's a little early to say how the process will come about here.

I personally believe the long-term secular trend is that investments will continue to happen in the energy marketplace and given whatever President gets elected, they're going to be making some investments here and you're going to see those investment around the world.

So I feel pretty good that the growth will happen in the process world.

In the last downturn, they were still able to grow.

We are going to be coming from 8, 10, 11, 12% growth, in my opinion, as we get going.

Next year will still be good but the next year after that could be 2 or 3% type of growth.

I think you're going to see reasonable growth but it's going to slow down to under the underlying growth rate of what we say the long term growth of that sector which is 6 to 8%.

It's going to go down to low single digits.

After we get into this cycle, which is going to be out sometime in 2010 probably.

Okay.

And just a few headlines like the Saudis doing a big production cut today.

There's a certain number of headlines, where we start to get a little more bearish than what you're talking about right here?

You're going to see the projects, which have already been set and funded to move forward because they're too costly to stop.

That will be okay for the next 12 or 18 months or 24 months.

It's the time after that that you'll start seeing those projects really slow down.

In the process world the visibility is pretty good and so the growth rate's probably laid in for the next 18 months.

But it will be slowing.

The growth rate will be slowing, to be honest.

Okay.

Thanks a lot.

You're welcome.

I want to close it.

I want to thank everybody for your time.

I appreciate it.

I do want to make a comment on.

I don't give quarterly forecasts.

But in the first quarter, if you're still out there.

Last year, we're going to have higher restructuring in the first quarter, somewhere around $30 million.

Last year, we had two large asset sales.

We sold our joint venture.

We also sold some property, which gave us a significant gain, around $80 million.

Also, we sold Brooks, which is in discontinued ops which had a large gain.

So you're going to see a significant loss of other income in our first quarter and also we're going to have higher deductions for the restructuring.

So you need to keep that in mind, as you look at the first quarter.

Go back and look what we had in the first quarter.

That will not repeat and we'll have more restructuring in the first quarter.

Again, I want to thank everybody across Emerson.

It was a phenomenal 2008.

Record setting across the board.

A great close.

A great fourth quarter.

Tremendous fourth quarter.

High quality.

And we're going into 2009 ready for a very uncertain and challenging year and employees of this Company are ready to go and I appreciate.

Thank you very much.

Good night.

Thank you, management.

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