艾默生電氣 (EMR) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Emerson first quarter fiscal 2009 results conference call.

(Operator Instructions).

This conference is being recorded today February 3, 2009.

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

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

In this call, Emerson's management will discuss some non-GAAP measures in talking about the Company's performance.

In the reconciliation of those measures to the most comparable GAAP measures is contained within a presentation that is listed in the Investor Relations area of Emerson's web site at www.emerson.com.

I would now like to turn the conference over to Lynne Maxeiner, Director of Investor Relations.

Please go ahead.

Thank you, Nicole.

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

Today's call will summarize Emerson's first quarter 2009 results.

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

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

I will start with the highlights of the quarter, as shown on Page Two of the conference call slide presentation.

First quarter sales were down 2% to $5.4 billion.

Underlying sales were flat with strong international and emerging market growth.

Operating profit margin contracted 20 basis points to 14.8% of sales.

And earnings per share from continuing operations were $0.60, down 8% compared to the prior year quarter.

Operating cash flow was $319 million and free cash flow was $187 million.

Restructuring costs in the quarter were $43 million.

The balance sheet remains strong and flexible as evidenced by our solid operating cash flow to total debt ratio at 60%.

On the next slide, the P&L.

Again, sales down 2% to $5.415 billion.

Underlying sales were flat.

Currency subtracted 4% and acquisitions added 2%.

Operating profit in the quarter of $803 million or 14.8% of sales.

With cost reductions and restructuring benefits helping to offset volume deleverage and price cost pressure.

We also had lower incentive compensation and commodity mark-to-market.

Net earnings from continuing operations for the quarter were $458 million, down 12%.

The diluted average shares outstanding were 767.9 million, and we repurchased 12.8 million shares for $431 million in the quarter which leaves you with an EPS of $0.60.

There was higher restructuring in FY '09 and lower gains versus the prior year which negatively impacted EPS comparisons by $0.08.

Going to the next slide, underlying sales by geography.

In the US, sales were down 7%.

Europe was up 4%.

Asia up 8%.

Latin America and Canada both up 16%, and Middle East-Africa up 4%.

Total international was up 7% in the quarter, which gets you to flat total underlying sales.

Currency subtracting 4% and acquisitions adding 2% gets you to a consolidated sales of negative 2%.

Next slide some additional income statement details.

Gross profit dollars of $1.996 billion or 36.9% of sales.

SG&A was 22.1% of sales which gets you to an OP of $803 million or 14.8% of sales.

Other deductions of $91 million driven by $60 million of lower gains and $34 million more in restructuring in Q1 '09 versus the prior year quarter.

Interest expense of $43 million, which gets you to a pre-tax earnings of $669 million or 12.3% of sales.

Taxes in the quarter were $211 million for a tax rate of 31.5%, and we expect the full year tax rate of approximately 31.5%.

Slide Six, the cash flow and balance sheet.

Operating cash flow in the quarter down 25%.

Our first quarter cash flow tends to be the lowest of the year.

We also had an $81 million dollar margin deposit for commodity future contracts which had a negative cash flow impact.

We expect this negative cash flow impact will be gone by the end of the year.

Again, cash flow to total debt remains strong at 60%.

Trade working capital balances at the bottom of the slide were 19.9% of sales in the quarter and will be challenging until the April-May time frame as we reduce capacity to real underlying demand.

We did issue $500 million in ten-year term debt at 4.875% in January '09.

Next slide, the business segment P&L.

Business segment EBIT was $736 million or 13.3% of sales.

The deterioration driven by volume deleverage and price cost pressures and dilution from acquisitions.

Difference in accounting methods of $50 million.

Corporate and other relatively flat at $74 million with Q1 FY '09 having lower incentive compensation and mark-to-market offset by the one-time gains in Q1 FY '08.

Interest expense of $43 million which gets you to the pre-tax earnings of $669 million, down 14%.

On Slide 8, we'll start going through the individual business segments.

First, Process Management.

Another strong quarter with sales up 8% to $1.553 billion.

Underlying sales were up 14% with currency subtracting 6%.

By region, the US was up 10%.

Asia up 23%.

Europe up 12%, and Latin America up 29%.

We saw continued strength in the worldwide oil and gas and power markets, but expect it to weaken as the year progresses.

EBIT dollars of $302 million or 19.4% of sales, with the margin increase driven by leverage on higher sales and cost reduction programs, which offset inflationary pressures.

Strong new product sales mix benefited the segment, and our continued investments in next generation technologies will position us well for 2011 and 2012.

Our industry leadership continues as evidenced by the 25 first place awards in Control Magazine's Readers Choice Awards including a First Place in Wireless Infrastructure.

Next slide, Industrial Automation.

Sales in the quarter of $1.103 billion, down 2%.

Underlying sales were up 2%.

Currency subtracted 5% and an acquisition added 1%.

By region, the US was up 1%.

Asia up 7%.

Europe flat.

But overall, orders show weaker rest of 2009.

EBIT dollars of $153 million or 13.9 % of sales, down 10%, impacted by price increases which did not offset volatile material costs and other inflation and also a negative mix impact.

We acquired System Plast in December which strengthens our global position -- our position in the global material handling market.

Next slide, Network Power.

Sales up 2% in the quarter to $1.435 billion.

Underlying sales were flat, currency subtracted 4% and an acquisition adding 6%.

By geography, the US was down 9%.

Asia up 9%, and Europe down 6%.

We've seen a slowdown in capital spending patterns, especially in the embedded power and computing customer base.

EBIT of $149 million or 10.4% of sales, negatively impacted by unfavorable mix and dilution from acquisitions of 200 basis points, including related restructuring.

The restructuring efforts underway will position this business for strong recovery.

Slide Eleven, Climate Technologies.

Sales in the quarter of $692 million, down 10%.

Underlying sales down 7%, and currency subtracted 3%.

By region, the US was down 13%.

Asia down 21%, and Europe up 30%, as the US and Asian residential air conditioning and refrigeration businesses slowed.

We had higher heat pump compressor sales in Europe off of low levels in prior year.

EBIT dollars of $53 million or 7.7% of sales.

The deterioration driven by volume deleverage, volatile commodity inflation, increased restructuring which was $14 million in this quarter, and negative currency transactions due to the stronger US dollar.

We believe the demand for energy responsible solutions will continue to benefit Climate Technologies.

For example, in the US, our 410A refrigerant transition is a benefit for later in 2009.

Slide Twelve, Appliance and Tools.

Sales of $771 million, down 17%.

Underlying sales were down 16% and currency subtracted 1%.

By region, the US was down 19%.

Europe down 18%, and Asia up 15%.

EBIT dollars in the quarter of $79 million or 10.2% of sales, negatively impacted by deleverage on lower sales volume and pricing actions that were substantially offset by material and other inflation.

Customers' facility shutdowns and inventory reduction programs negatively impacted Appliance and Tools.

Looking at the last chart, Summary and Outlook.

Emerson is well-positioned as we move through a tough 2009.

We have a strong global footprint with international sales 54% of the total business and emerging markets at 30%.

We have a good mix of businesses.

We are stepping up global best cost repositioning and increasing strategic technology and breakthrough next generation new products to position ourselves for strong breakout growth when the global economy recovers.

We have the financial strength to invest internally and do acquisitions where appropriate.

We will review our 2009 expectations and long-term initiatives at Emerson's Annual Investor Conference this Friday, February 6th, in New York City.

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

Thank you very much, Lynne.

First of all, I want to welcome everybody joining the call today.

I appreciate you taking the time to learn more about Emerson and learn more about the Company.

As you know and Lynne has referred to, we will have our Annual Investor Conference on Friday in New York City.

And, I invite people to join us either in person -- I hope you join us in person or by phone where we'll get into a lot more discussion on our short-term and long-term strategies and issues that we'll be facing.

The operating team across Emerson have been here before.

You understand that the top executives in this Company -- the top ten or fifteen executives -- have close to 30 years on average experience.

The team is operating.

They are very focused.

We reviewed with the Board today in great detail the difficult actions we are taking across the Company right now.

I refer to these as challenging times.

We have entered very rough white water rapids.

They will be in -- we will be in the midst of these white water rapids for at least four, five, or six quarters.

We will have to take the actions necessary to protect our business, our profitability, our global market share, protect our cash flow.

The one thing that we do and you know very well relative to my strategy and this Company's strategy is that we attack in times like this.

We have been getting ready for this for the last couple years.

We've invested in significant technologies.

We've invested in the global footprints, and we know where to go from here.

And, we'll continue to be very strategic in our investments, and we will also be cutting back where it's not critical for the lifeblood of going forward of Emerson in the near-term.

We have increased what we call restructuring actions and costs to the $175 to $200 million range.

We reviewed that in great detail with the Board today.

We're talking about it on Friday.

And giving details where we're going with this Company.

But from our standpoint, we are in very difficult times, very challenging waters, and we're moving on.

We're not sitting here pouting.

I'm not turning to Washington for help.

I'm dealing with Emerson's issues that we need to deal with, and we have the senior management team to get on with it, and get it done.

Again, this is nothing new.

Order trends were tough in December.

Order trends are very difficult to forecast at this point in time.

I give you -- we give you our best estimates based on what we've seen in the past, based on inputs from the customers, based on economics.

But again, these are best estimates in the white water rapids we are in today.

I believe our order trends for the next several months will settle into the negative 5% to 10% range.

Many people doubt that I know what I'm talking about, but these are our best estimates based on what we've been hearing relative to customers destocking or slowing down inventories based on economic trends, and based on the fact that this is a recession that we've been through before back in 2001-2002, '91-'92 or '80-'81-'82.

All of the senior managers have been through those three major recessions.

As we look at it today, we expect the next four or five or six quarters to be very challenging.

We have a global footprint that allow us to see certain growth in certain industries around the world.

Some will weaken.

Some will strengthen.

We'll have some businesses trend in, trend out.

Fundamentally, we're looking at four or five or six tough quarters.

As we said in the forecast, our sales will be down for the year.

We are being more aggressive in acquisitions.

Our balance sheet is strong.

We expect to increase our free cash flow both in dollar terms and as a percent of sales like we did in the last downturn.

The operating team is very focused on that right now because we know with that money we can invest in technology.

We can make the long-term investments in new products.

Our long-term investments in the global markets that we need to serve, and the long-term investments for breakthrough technologies that will help us break out of this downturn very aggressively like we did in the 2003-2004-2005 time period.

Our profitability will be impacted as we deleverage throughout the reduction in plants.

We have a favorable mix from the divestitures we made the last couple years -- the shutdown of businesses and the restructuring we did the last couple of years.

We have a very favorable mix relative to our Process business.

We know that will deteriorate as the year goes forward.

The year will definitely get weaker as it goes forward.

We are not banking on a second half recovery here at Emerson -- not banking on it.

We are, in fact, banking on the next four, five or six quarters to be very challenging.

Focus is cash.

The focus is aggressive acquisitions to improve our strategic position and our core businesses adjacent space and to improve our global footprint.

The management team is highly focused right now, and we'll talk about this on Friday with some very specific areas which are not new to our shareholder base.

But as we look at it today, we're facing a very difficult 2009.

But, we believe as we map out this year, we have a pretty strong, clear vision of where this is going to go and what needs to be done to protect our profitability and to position this Company for aggressive global market penetration against our weaker and less capitalized competitors.

Times like this separate the average companies from good companies.

In this management team, are looking forward to the next four to six quarters.

Because this is what makes Emerson different from the rest of the world.

We will take some tough actions across this Company.

We have been taking some tough actions across this Company.

The operating management team have been doing a very good job of making sure that we deliver on the commitments to the Board and the commitments of the shareholders.

And, we take very seriously what we tell our shareholders what we're going to do.

So as we look forward to our Friday meeting, we'll talk further about it.

And, we're looking forward to the next four to six quarters as we strengthen the foundation of this Company to position it to grow aggressively around the world when times get tough.

Yes, things cycle.

We are in a cycle.

We can deal with cycles.

We are dealing with cycles.

We feel very good about where we are right now, and we feel very good about what we need do in the next four to six quarters.

So, I open the floor to ask questions.

I will tell you right now that a lot of the detail economic stuff I will not get into today.

I know many people want to pick my brain along those lines.

We will have that opportunity on Friday when we talk about it live.

I want to be able to use information and charts, and so you will have to wait until that point in time.

I gave you a lot of information today in the press release to help set the foundation of what you need to understand as we go into Friday, but I will also make sure that we not cover everything on a phone call today.

But, basically get into the core, basic strategies when we get together on Friday.

Thank you very much.

With that, open the line.

Thank you, sir.

(Operator Instructions) Our first question comes from the line of Scott Davis with Morgan Stanley.

Please go ahead.

Good afternoon, guys.

Good afternoon, Scott.

I think this is the first call I've heard you, Dave, talk about breakthrough technologies.

And, I'm purposely not asking about the macro, because I know you don't want to talk about it until Friday.

But, can you talk a little bit, we've heard a lot about wireless technology in Process, but I can't really think of anything in your other segments that I've read about as far as new technologies.

Can you maybe talk about some of the things you're seeing out there?

I think, from our standpoint, the work we're doing in some of the energy efficiency efforts we're making in the Network Power area with Liebert.

When we look at how we can generate -- use 20, 30% less energy relative to cooling the data space rooms, the data rooms.

As we look at the stuff we're working on, the next generation systems and controls in the Process industry.

As we look at those areas, and we'll talk further about them.

You're going to look at the investments going on right now in those type of situations that allow us to change the game again, in Process, allow us to change the game in Power Conversion, which is a core technology in this Company.

So, we stepped back the last couple years, and we've been increasing our investments.

You are going to see us increase our investments again in this area here.

I'm not going to get into specific products, but I'm telling you -- we are doing that right now in a couple key areas that will change the game relative around energy efficiency, relative to control, relative to instrumentation, and relative to what I would call just the whole data center infrastructure and the management of that data center infrastructure and will help our customers who have to deal with this issue have a better solution long-term.

So this is -- we have a chance here to again do that.

We're stepping back and do that just like we did in a couple areas.

Just like we did with Scroll, like we did in Process Management, and things like that.

We'll talk a little bit more about that on Friday, too.

Makes sense.

Then as a follow-up, Dave, I know you have a specific view on the Process cycle.

It's a business that you used to run so you know well.

Has your view on the timing of that cycle changed at all just given the rate of change negative rate of change out there on the macro front?

I would say that part of the -- we extend the downside in our forecast is Walt and I and John [Vera] and Steve Sonnenberg who's running it now, and also Jean-Paul Montupet sat down late last week.

What I'm seeing right now is that there is a dramatic slowdown.

We're living off a fairly significant backlogs right now.

I would expect that the slowdown to be quicker in 2009 than I originally thought.

So what I would expect is to start seeing, rather than a strong, high single digits or double digit growth we've been seeing, that starts moving down into the mid-single digits and the weaker single digits throughout the rest of 2009.

What we're seeing right now is definitely a slower Process marketplace, and that's what's causing us to take our forecast down both the underlying and also the earnings growth rate.

So I would say that we're still believing we'll have positive growth in 2009, but not as strong as we thought originally.

And it will weaken as the year progresses.

Okay.

Thank you.

I will address the rest on Friday.

Thank you.

I look forward to it.

Thank you.

Our next question comes from the line of Jeff Sprague with Citi Investment Research.

Please go ahead.

Thank you.

Good afternoon.

Good afternoon, Jeff.

Certainly agree, Dave, a crisis is a terrible thing to waste.

Unfortunately, a lot of companies out there can't take advantage of it.

You addressed it to some degree with Scott's question, but maybe a little color on what you're seeing in the M&A environment.

If you are seeing competitors kind of backpedaling a little bit.

Just kind of the change in the competitive landscape if there has been one visible yet.

O,r if it's just something that you're on the hunt for?

First of all, I wouldn't define this as a crisis.

In the industrial world, we are clearly being dealt a different environment.

It's no different than any other economic cycle we've seen.

Maybe it's going to be a little deeper and a little longer because of the -- what I'd say the liquidity issues in the marketplace.

But, I wouldn't call it a crisis.

I would call it very challenging times.

Relative to acquisitions, what we're seeing right now are the early stages of the small, medium-sized -- a lot of private companies are now willing to sell.

Obviously, the market's peaked.

These are companies that we've wanted for years, and those assets are out there.

We've closed three already this year.

We have three more probably closing this quarter as we reviewed with the Board today.

The pricing has reduced a little bit, but these are assets that we clearly want.

They fit us quite nicely.

So there's still what I'd say a higher value premium to mixture that we get that asset.

What I think is going to happen as we move in to further into 2009, is you're going to start seeing the larger assets of both private and public become more available.

You know, Emerson, we're not alone.

There's also companies out there that have a lot of capital, a lot of cash, a very strong balance sheet, and I can imagine that the CEOs and the Board are having the same conversations that we're having.

You need to take advantage of this opportunity over the next twelve, eighteen, twenty four months and pick up assets both on the private and public marketplace.

I think you're going to see that happening.

I also believe because of the environment, you'll have somewhat less competitors.

But there's a lot of good companies in our space out there that have the cash and the capital to do what they need to do.

I still think you will see them.

I think the prices are slipping down a little bit.

Expectations are slipping down a little bit, but there's still going to be higher than what would you look at the multiples today in the marketplace for something like an Emerson trading at.

It's definitely loosening up right now, as I see it.

Back to Process, and your comment about protecting margins.

In broad strokes on annual margins, Process went peak to trough 13%, 9% margins, and now we've [clean] let's call it.

Maybe just a little color on how the mix has evolved, and how you work on protecting the margins on the way down?

I assume they go down, but you would be targeting a higher low.

But -- .

Yes.

How do you work through that process, and what are really the key levers on the mix that you're worried about and keeping an eye on?

The key areas here this is where I believe Scott talked about wireless and some of the new technologies which are of more value-add for our customers -- that allow to us have a higher price point.

There's no doubt, we've had a very good run profitability-wise, sitting in our Process business.

I believe our Process business will do okay this year in profitability.

We are still forecasting.

You'll see the details both in sales and margins on Friday, but we're still forecasting a slight increase, maybe a worst-case, a slight decrease as we were increasing restructuring.

The key issue for us right now in profitability is getting ahead of restructuring.

So, we're going to start encouraging the process [boys] and start restructuring.

And our MRO business, the repair business is going to start increasing.

We will see margins start evolving downward.

They will be at higher levels than they were last time because the current mix of instrumentation and the technologies will help us.

But, I would expect us to see that margin starting to weaken as our business weakens.

As we move in the later part of 2009 and into 2010.

It really is an area that we're trying to get ahead of from our cost structure, and we are also making sure we're investing at the same time.

We're not expecting to hold margins in the Process business at the levels they are today.

That would not be a smart thing for to us do long-term.

Alright.

I'm just wondering if I could sneak in real quick for Walter -- any rough ballpark on OIOD for the year?

We're giving that on -- .

We will give that on Friday.

Thanks.

You're welcome.

Next?

Thank you.

Our next question comes from the line of Bob Cornell with Barclays Capital.

Please go ahead.

Hello, guys.

Hello, Bob.

Looking forward to seeing you Friday.

Looking forward to it.

You said you don't want to talk about macros, but maybe just in the context of the quarter was reported.

Orders were down 9% to 14% just through December, which suggests December itself is a pretty weak month.

I'm guessing January was soft as well.

What was really driving the orders down?

And then, how do we transition to the negative 5% to 10%?

The -- as I said in the call, I could be wrong.

It could be 6% to 12%, but my feel right now, Bob, is that we have a lot of customers really start taking inventory very aggressively toward your end to do what I call "balance sheet window dressing".

So I look at that, and I'm going to see some standpoint of that will slow down a little bit.

We also had some of our businesses from a comp standpoint that were down significantly last year -- started weakening last year so it gets a little bit easier from a comp standpoint.

As I look at the current underlying economics from my customers' standpoint -- as I look at our just the whole customer base, and also as Walter points out to me, short lead times from the customer standpoint.

I think we're going to see that band be around that 5% to 10%.

Maybe like I said, maybe it's 8%, maybe it's 10%, maybe it's 11%.

But, it's going to be around that range here for a while.

That's just our business best estimate and cast right now knowing what we know about the business.

Thanks.

We'll talk Friday.

Yes.

Also in this press release, there was more comments around price cost issues in a couple of businesses.

Maybe can you just expand on that point a bit?

One of the issues we're dealing with right now, going back to my white waters -- you think about the turbulent times we're dealing with right now from materials from the material costs starting to decelerate.

We have some of the contracts we have in our materials that we had locked up last year.

We're having to deal with that.

We have the pressure relative because materials are coming down.

Your customers are hitting you relative to pricing.

You have the whole situation of, as your business starts winding down with less production, you have excess material at higher costs.

So you're going to see this, what I call choppy operational results here for companies, industrial companies for a while.

As I told the Board, I think it will take us well in toward May to get through that.

That's what's going on right now.

I still believe you're seeing our net material inflation going down toward negative.

You'll see our pricing will be slightly, slightly, slightly positive.

But, we have to go through that transition time period.

That's very difficult to do.

Just like it was very difficult as we went up like that, too.

Final comment from me.

Restructuring, ramping it up, to this $175 million, $200 million.

How is that going to layer in over the course of the year?

I thought you might do more than that in the first quarter than $43 million.

Yet how is that going to pencil in?

You're going to see it's going to be between $45 million and $50 million per quarter.

We will show you.

We started ramping up the second half of last year, too.

The Company has restructured continuously, Bob.

It's not something -- we don't go from zero to $100 million.

We've been doing it as we went along.

So, we'll show you by quarter what we think is going to happen.

We'll show you the top of the number programs.

It's something that we've been dealing with.

You can only do it so fast.

And our cost structure -- the Company is pretty competitive right now.

Okay.

We had good profitability this quarter.

I think we did reasonably well profitability wise.

Hey, man, thanks.

Okay.

Thank you.

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

Please go ahead.

Good afternoon.

Good afternoon, Nicole.

Dave, could you give us a sense of where you think you have the least visibility from a revenue perspective?

And then maybe conversely, the most visibility from a profit margin perspective as we roll through 2009?

Start with the easy one.

The most visibility right now is clearly Process with a backlog.

The trends -- we know what happens there.

We know the cost structure, and where it sits right now.

The Process business we know the best -- the best right now.

If you go on the other side, I would say the business is starting to change the most right now is the Network Power business.

First, it was the Embedded Computing business which started going down in late last year, and we're going through aggressive restructuring there right now.

You're now starting to see a weakening in what we call the Network Power Systems business.

That is now gone into the mode of a negative orders.

So I think that, right now, is our least visible.

The consumer-related businesses like Compliance Components and Tools and Storage.

Those are acting pretty predictable right now.

You actually could have some periods where -- I think I mentioned in the last call.

You could have some, what I call "hip fakes".

You could see a little bit of pick-up where inventories have been taken down too far.

The two extremes right now are Process and Network Power, and the industrial guys are pretty predictable what's going to happen here right now.

We know where they are in the cycle, and what's going to happen to them.

Within Network Power, how much was the uninterruptible power slide business down, same thing with embedded?

Uninterruptible power supply business was up for the quarter.

I don't have the exact numbers, but I know it was up.

I can follow up with you after the call.

And we'll have to get that down, but we are up.

Okay.

And the embedded business?

The embedded business was down and Walter could tell you.

I don't have the rough number off the top of my head.

We have it.

Give us one second, Nicole.

It was down.

I give that you much, it was down.

Embedded power?

Yes, embedded power.

Was it down more than 15%, Walter?

Okay.

It's down 14%.

I guessed wrong, Nicole, it's down 14%.

Got it.

I don't think anyone would ever accuse you of pouting, Dave.

Me, pout?

I don't pout.

I love times like this.

The only guy that loves it more than me is Ed Monser.

Thanks.

See you guys, Friday.

See you Friday.

Next?

Thank you.

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

Please go ahead.

Thank you.

Welcome, Mr.

Inch.

Afternoon.

I wanted to ask you -- the consolidated OP margin, the 14.8% -- is that generally consistent with a steady state run rate to get to the 15.9% to 16.4% for the year?

Sort of assuming some seasonality, or are you banking on a little bit of demand improvement?

Or, is there something else going on that we need to think about in terms of bridging that first quarter versus the guidance?

As you look at it, our first quarter historically is our weakest quarter, from the standpoint of both sales and profits and cash.

And the way our structure and the timing of our end-marketplaces, the seasonality.

That is not unusual for us to be down.

So, I look at the underlying rate right now is actually down a little bit from that.

But as we look at the quarter, and the vines come up, and as the mix changes within the Company -- it is not unusual for us to have our profitability move up as we go forward.

And typically, our fourth quarter has always been our most profitable business with a mix of businesses.

So, as we map out the year right now, and we give the 15.9% to 16.4% OP?

Yes.

I think it's pretty clear for us what's going on.

The other thing going for us, and we'll -- we do not have a pension headwind this year.

We'll have that issue next year, John, for us.

Right now as we map out the year on operating profit and what's going on -- and the restructuring that got underway in the middle of last year, I feel pretty good about where we are with this profit margin right now.

And the volume we're talking about.

Just to switch gears, Dave.

You called out strength -- continued strength in China the Network Power business?

Correct.

Some of those Chinese telecom companies though look like they have got CapEx budgets that are set to roll off.

Why do you think that business continues to do very well, like your business?

Or, what's sort of the outlook there?

Part of the stimulus for the Chinese government is very much focused on not only telecom but some energy efficiency areas, some transportation area.

Both trains and airports.

If you look at where our power switches, our UPSs, and precision cooling goes into, we have enormously broad coverage relative to that stimulus package going on in China.

We have -- Ed Monsor and I were over there about two weeks ago.

We went through case-by-case.

We have a pretty good market here for 2009, relative to where the money's being spent in China.

We map on to it nicely.

On the reverse side of that, if you look at tall buildings.

You look at high-rises.

You look at housing -- I think that's going to be a tough marketplace for us.

I don't expect any recovery in that marketplace in 2009 in China.

It's going to be very difficult.

Dave, just lastly.

Why wouldn't you consider a larger acquisition?

Shouldn't now, given your balance sheet sort of the learning curve you have been down with respect to a lot of the Network Power deals and the legacy of Emerson, why wouldn't now be the opportune time to create a new platform into a bigger deal?

Given what is going on in the marketplace?

I think you'll see us work on adjacent space.

I didn't say we wouldn't do a big deal.

I fundamentally believe in the next twelve to eighteen months we'll have one or maybe even two marquis top acquisitions.

Thanks much.

Those are significant acquisitions.

Right now, we have very good opportunities right now in what I call the small, medium-sizes.

The larger acquisitions will come along as the year progresses throughout 2009, and also in 2010.

I think you'll see that happening.

Are you defining a big deal, Dave?

I'll talk about it on Friday, yes.

See you then.

See you, John.

Thank you.

Our next question comes from the line of Mark Douglass with Longbow Research.

Please go ahead.

Good afternoon, everybody.

Good afternoon, Mark.

Nice quarter.

Thank you very much.

I have a question about the Process underlying orders in December.

If you will indulge me.

If appears that --

They were negative.

Yes, they were negative.

Okay.

How are you seeing that in your backlog?

We will start seeing some pushouts, some cancellations.

That's not unusual.

We expect that.

So you are going to -- we will start seeing some fairly sloppy orders in the Process area as the year progresses.

That's why I think earlier -- I can't remember which analyst talked about it -- Scott or Bob.

But one of the analysts asked me about Process.

My assessment of Process right now based on the last couple months, including this month order trends.

tells me it's getting tougher and tougher and the year will weaken with the Process business.

That's where we are right now.

I mean, there's certain companies -- you look at certain -- Chevron kept their capital budget up.

Others, like ConocoPhillips, cut it by 20%.

So, we're seeing some cuts and some investments in power.

We are seeing investments in alternative energy.

We're seeing some mixed bags right now.

Net-net, the underlying opportunities for the Process business are still very good.

Though it will weaken, and we know that will weaken.

Remember in the last downturn, we did not go negative on sales in the Process.

I don't know if we will be able to hold that this time, but we were able to do that.

Are you anticipating being able to take some market share perhaps?

I'm always working on that issue.

Okay.

I would say that we're doing reasonably well right now.

The System Plast -- what made it attractive to you?

Is it you can leverage your business with other businesses or taking more global than they already are?

Just what was it that made it attractive to you?

It's a business that -- two things -- one, we can leverage with our power transmission business today.

From a global standpoint, we can take it around the world.

And, the third thing is their focus is food and beverage.

That is our weakest market segment.

They have a very strong capability in that area.

And one, they will be able to help pull us into that.

And secondly, we'll be able to take them global.

They have no presence in China.

We immediately take them into our China operations, and we immediately take them into our China sales force.

So, it is a very strategic acquisition.

Clearly buying on a marketplace it's going to be tough.

But, it's an asset we've been trying to get for a long, long time.

We are very fortunate that the family wanted to sell.

It's one that's going to be very good for us long-term.

Sounds like it.

Thank you very much.

See you Friday.

Okay.

Thank you.

Our next question comes from the line of Mike Schneider with Robert W.

Baird.

Please go ahead.

Good afternoon.

How is your [baseball] recruiting going, Mike?

We need a bigger budget.

Don't look to Emerson to do it.

I'm spending my money on technology and things like that.

We could use a new sponsor for the stadium.

The danger in this market is to extrapolate what we've seen really in December throughout 2009.

Some companies are doing it, and some are not.

Based on your guidance, it doesn't look like you are.

Just a couple questions on that theme.

First in Climate, could you do a walk from basically 13.5% a year ago to 9.7% today because that margin in particular seemed to be the most surprising in the quarter?

Why should we expect it to improve as the balance of the year unfolds?

Because it seems to be a pretty big stair-step that needs to occur to hit the guidance.

EBIT without restructuring.

Mike it's a couple things going on there.

One, they really got hurt hard relative to the whole price cost material.

Disconnect here at this point in time.

It will stabilize as we go more into the new year.

Secondly, this CEO made a call relative to investments on a new facility down in Mexico.

An expansion for the China efficiency standards, and this CEO is wrong.

I have saddled the management team with too much capacity.

We will work through that.

What we'll do is we'll be shifting having doing some line changes around the world as we change that capacity.

So unfortunately, Climate will have to deal with that issue until the demand picks back up.

The one good thing going for us as we move forward in the second half of this year is the conversion of R-22A to 410A, and we are the leader in this space.

This is something that we've been working aggressively with our customer base.

As you know when it comes to transitions, we do very well relative to our penetration and capabilities when these transitions go underway.

But it's, right now, the Climate Technology guys are struggling because of that investment we made.

It will be the smart thing to do long-term, and it will give us a chance to optimize the structure.

But, you blame me on that one, and I'm the one who made that call.

So, the sequential improvements now, I imagine climate took the hardest hit from shutting down the plants -- your customers weaning inventory during the quarter?

Correct.

Yes.

What are you seeing in January?

Have these H-backed OEMs started plants back up?

Yes.

Our OEMs have gone back into -- I would say still we have-- it's going to be a weak demand trending downward.

I still say the OEMs have taken a lot of correction already.

Now, they are going through the whole -- in the US -- 410A situation.

China, I think, still will have inventory corrections.

You're going to see, I think, a weaker India, so that will happen.

Then I think Europe will be okay here for a while.

There's so much energy efficiency and heat pump stuff going on.

The near-term trends will be, I think, challenging.

I personally believe as the year progresses, you start seeing underlying demand come your way, just in the US from a residential standpoint and the whole 410A conversion standpoint will help us.

Okay.

Somewhere in the line of questioning in Process, project activity's clearly going to slow down with the credit prices.

Your MRO business, you said, you expected to pick up.

I'm just curious.

When you look at your customers' budgets for MRO activity, have they been cutting those as well?

Or indeed, is money being diverted to that type of work?

I think you are going to see money being diverted.

I am going to show the MRO of our Process business on Friday.

I think you are going to see the last downturn the ratios went up.

I expect the ratios to go back up again in this downturn, and we're coming up a much stronger position than we did last time.

So, there's a very dynamic marketplace going on right now in the Process.

I think you're going to see us take advantage of that.

And the good thing about it is that they are going to take an opportunity here to upgrade from the technology which is good for them and also good for us.

You mentioned you didn't go backwards in Process during the last recession.

It seems to me -- I think you were in Number Four or Five in that market at that point.

So, there was a huge market share that you've gained since then.

Now looking at your leadership position clearly on a global basis, are you more going to match the market rates because of that position?

No.

I don't find matching market rate positions acceptable.

Okay.

See you Friday, that's it, Mike.

We've got to cut you off unless you give me -- send me one of your good baseball players down to the Cardinals.

Thanks again.

See you later.

Thank you.

Our next question comes from the line of John Baliotti with FTN Equity Capital Markets.

Good afternoon, Dave.

Good afternoon, John.

You going to be there Friday?

Sure.

It's only a couple of blocks away from my office.

I think I can make it.

I figured maybe you couldn't walk that far.

We got 3 inches of snow.

We can work through it.

You seem more on the offense than a lot of companies we've been listening to this quarter.

I guess if we follow your white water theme -- can you go back -- I know you've been through a number of cycles as well as your colleagues there.

Walter?

Over the years.

36 years.

How many years, Walter?

36 years.

I know you guys aren't that old, you started in high school.

So, if you go back and recall events that have triggered adjustments in each of those cycles that gives you a better line, or better feel to work through this year?

You know, the one thing that -- it was a very painful experience for this management -- the current management team in the '01-'02 time period.

And I believe, from our standpoints we have looked at -- we have better economic indicators and trends around the world in what's going on relative to our business and our customer.

We've done a lot of work, and I give this credit to Charlie and Craig Ashmore.

A lot of work on the customer side.

I think we have from our standpoint, John, a better understanding of where our customers are mapping out, and what does that mean to us?

And how that translates into the cycle.

We are just entering the cycle.

This cycle will get progressively worse as the year goes on.

So we see that, and we therefore have been quick to react starting late in our last fiscal quarter.

As I look at where we are in the cycle and look at how our customers are trending, and I look at how we have trended in our various businesses.

We have a lot of confidence in that we know where we sit at this point in time and what actions have to be taken.

The reason I'm so aggressive is I am more aggressive in this type of cycle because we are much quicker reacting, and we have the financial and balance sheet strength to deal with things a lot of our competitors don't have.

That's why I have a tendency to pick up my aggressiveness, if you know me in a cycle like this, because this is where we can make a difference for our shareholders.

Right.

And on the side of them, you obviously have pointed out several times that M&A is going to be an important part of 2009.

I wonder, have you added a layer of maybe check and balances given acquisitions through other cycles that may not fit at this point?

Yes.

I would say we are -- the acquisitions we're going after, and we've been reviewing with the Board now for almost six months are what I'd call very specific core adjacent space acquisitions that we have vetted.

We understand what they can and cannot do, and we're not reaching out.

And, I think, being as aggressive relative to what I call new markets and maybe making too risky of a bet.

We are going to stick very close to some of our core and adjacent space which we understand from a technology and a market and a manufacturing.

That's been something we have learned in the last downturn when we made acquisitions that really hurt us badly.

So, the Board makes us vent through that now because as a CEO, if you have to go through and tell you're writing off $0.5 billion like we did with the Jordan acquisition.

That is not a very fun thing to do in front of a Board.

Right.

They're making us vent and go through what's worked and what's not worked very carefully.

Good.

See you Friday.

See you on Friday, John.

Thank you very much.

I have time for one more question here.

I have to get going.

I have an employee communication I have to go to.

I had shareholders today.

Had the Board and now you all.

And now, I have employees have I to deal with, which are very important to me.

Next?

Thank you.

Our next question comes from the line of Steve [Zirle] with Conning Asset Management.

Yes, two quick questions.

I see your pace of share repurchases picked up this quarter compared to the last couple.

Given your acquisition focus, should we see that tail off some, or what do we expect there?

We are going to slow it down.

We reviewed that with the finance committee.

We have a basic formula we go through.

It's not something Walt and I sit down and say, let's buy 20,000 today or 50,000.

We have a formula we go through.

When the stock dropped off significantly last quarter, it obviously triggered a higher pricing mode.

As the stock goes down it, goes up.

The price goes up as the stock goes up.

The amount of shares go down.

We're going to stretch it out a little bit right now.

Our target is still $1 billion for the year.

Given what we've done here in the first five months, our pace will slow down a little bit as we go forward here.

The Board is keeping a very close eye on that on a month-to-month basis.

Because of the acquisition issue.

Okay.

Just a clarification.

You call out an $81 million margin deposit for commodity futures?

Correct.

Can you just elaborate on that a little bit?

We use a lot of copper, and we have hedged out twelve or fourteen months.

And obviously, when the copper was sitting at what, $3.50 or $3.25?

We wanted to hedge our copper because we have customer commitments relative to pricing.

So, we hedged it.

And the agreements are, when the copper price is going up, our partners have to put money on call for us.

When it goes down, the money goes the opposite way.

We will use the copper.

The hedges will be used, and the money will be taken care of.

That's a deal we have set in place to make sure that we protect ourselves and the shareholders in the long term.

Thank you.

Bad call.

Right up there with my Climate Technology.

Thank you.

Again, we have to wrap it up here.

I want to thank everyone for joining us today.

I want to thank the operating Board out there for doing a great job this quarter.

We have a lot of work to get done in the next three quarters.

As I said, the white water rapids are out there.

We know what we're dealing with, and we'll be very aggressive with our restructuring.

And, we will be talking about that.

We have increased restructuring from $175 million to $200 million, and that was included in the forecast we put out today.

Thank you very much, and I look forward to seeing everyone later this week.

Bye.

Thank you, ladies and gentlemen.

That does conclude the Emerson first quarter fiscal 2009 results conference call.

Thank you so much for your participation.