艾默生電氣 (EMR) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Emerson second quarter fiscal 2009 results conference call.

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

Following the presentation, the conference will be open for questions.

(Operator Instructions).

As a reminder this conference is being recorded today, Tuesday, May 5, 2009.

And Emerson's commentary in responses to your questions may contain forward-looking statements, including the company's outlook for the remainder of the year.

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

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

I would now like to turn the conference over to our host, Ms.

Lynne Maxeiner, Director of Investor Relations.

Please go ahead, ma'am.

Thank you, Mitch.

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

Today's call will summarize Emerson's second quarter 2009 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.

Second quarter sales were down 16% to $5.1 billion, and underlying sales declined 11%.

Underlying sales in process management remained positive, up 3%.

Operating profit margin was 14.1%, and pre-tax earnings margin was 10.8%, impacted by restructuring expense of $64 million in the quarter.

Earnings per share from continuing operations was $0.49, down 35% compared to the prior year quarter.

Operating cash flow was $499 million and free cash flow was $359 million.

Capital spending was down 22% versus prior year quarter.

Our balance sheet remains strong and we've made progress on trade working capital.

Inventory dollar levels were reduced by over $200 million from the first quarter fiscal year 2009.

We saw dramatic weakening of the global economy in our second quarter.

Next slide, the P&L.

Again, sales down 16% to $5.087 billion.

Underlying sales were down 11% and currency subtracted five points.

Operating profit was $718 million in the quarter, or 14.1% of sales.

The decline driven primarily by deleverage on lower sales volume, unfavorable product mix and our aggressive inventory reduction.

Net earnings from continuing ops for the quarter were $373 million, a decline of 38%.

Diluted average shares in the quarter were 756.9 million and we repurchased 8.2 million shares for $263 million in the quarter, which leaves you with an EPS of $0.49.

There was higher restructuring in FY 2009 which negatively impacted EPS by $0.04.

The next slide, underlying sales by geography.

In the United States, sales declined 19%.

Total international was down 3% with Europe down 10%.

Asia up 1%, Latin America down 1%, and Middle East Africa up 3%.

This gets you to a total underlying sales number of negative 11%.

Currency subtracts five points for consolidated sales decline of 16%.

Emerging markets are holding up better than mature markets, declining only 1% in Q2.

On the next slide, some income statement detail.

Gross profit of $1.837 billion or 36.1% of sales.

The decline was driven by volume deleverage, unfavorable mix and our lower production levels to drive inventory reduction, which was partially offset by cost reductions.

We also had lower mark-to-market benefit in Q2 2009 relating to commodity hedging, which decreased gross profit by $20 million quarter-over-quarter by comparison.

SG&A was 22%, which gets you to operating profit of $718 million or 14.1% of sales.

Other deductions net were $121 million, up $54 million in total.

The increase was driven by a $48 million increase in restructuring.

We also had a favorable $25 million impact in other deductions from increased gains, which was offset by various other deductions.

Interest expense of $50 million, this gets you to the pretax line of $547 million or 10.8% of sales.

Taxes in the quarter were $174 million for a tax rate of 32%.

The tax rate is expected to be approximately 32% for the fiscal year.

Next slide, the cash flow and balance sheet.

Operating cash flow in the quarter down 33%, driven by lower earnings and net pension funding.

Capital expenditures of $140 million gets you to the free cash flow of $359 million.

Free cash flow was 96% of net earnings in the quarter.

Trade working capital balances are at the bottom of the slide.

We continue to aggressively pursue our working capital initiatives and we reduced our inventory balance $275 million from the prior year quarter and more than $200 million from December 31, 2008.

Since the beginning of the calendar year, we issued $1.25 billion in long term debt at very good rates and repaid $250 million of mature debt.

Slide 7, the business segment P&L.

Business segment EBIT of $587 million or 11.2% of sales, down 37%, impacted by volume deleverage, negative mix and increased restructuring.

Difference of accounting methods of $47 million, corporate and other of $37 million, which is down $22 million in the quarter, with lower incentive compensation subtracting $23 million, a gain from an asset sales subtracting $25 million, and a lower benefit in the quarter from commodity mark-to-market, adding $20 million.

Again, interest expense of $50 million getting you to the pre-tax line of $547 million.

On slide 8, we'll review the individual business segments starting with process management.

Sales in the quarter down 4% to $1.53 billion.

Underlying sales remained positive, up 3% and currency subtracted seven points.

By region the US was down 7%, Asia was up 21%, Europe was up 1%, and middle east Africa was up 5%.

International sales on an underlying basis were up over 9% in the quarter.

EBIT dollars of $258 million or 16.9% of sales.

Unfavorable mix in the quarter was partially offset by cost reductions.

Our investments continue in new products and globalization.

EBIT margin excluding restructuring was 17.3%.

We continue to see the power market showing strength for process management.

The acquisition of Roxar was completed in April.

Roxar is a great adjacent expansion in oil and gas exploration and production.

On slides 9 and 10 a little more information on the Roxar acquisition.

Roxar is the leading global supplier of measurement solutions and software for reservoir production optimization, enhanced oil and gas recovery and flow assurance.

They are headquartered in Norway with 821 employees and operations in nine countries.

Their business consists of flow measurement products, which are 77% of the business and software solutions, which are 23% of the business.

Next slide,Roxar has annual revenues of approximately $200 million and 11.5% operating profit margin and will be reported in the process management segment.

The acquisition provides significant market position in oil field equipment and services portion of the exploration and production market.

The market dynamics of exploration and production favors strong growth.

Roxar is a market and technology leader in this space and this acquisition broadens our oil and gas presence and provides early visibility to projects.

Really a great acquisition for Emerson and we are excited about the opportunities that Roxar brings.

Next slide, Industrial automation.

Sales in the quarter of $960 million, down 18%.

Underlying sales were down 15% with currency subtracting five points and acquisitions adding two points.

Geographically, the US was down 18%, Europe was down 14%, and Asia was down 16%.

We expect global GFI to be down sharply in 2009 and also 2010.

EBIT dollars of $97 million or 10.1% of sales negatively impacted by volume deleverage and negative product mix which was partially offset by cost reductions.

EBIT margin was 11% excluding the restructuring impact.

In Q2, we completed the acquisition of Trident Power, a power generating alternator manufacturer based in india.

Trident Power strengthens our global leadership position in the alternator business.

Slide 12, network power.

Sales in the quarter of $1.28 billion down 16%.

Underlying sales down 10%.

Currency subtracting four points, and acquisitions subtracting two points.

By region the US was down 22%, Asia was up 6% and Europe was down 15%.

We saw broad weakness in the uninterruptible power supply, precision cooling and embedded computing and power businesses.

EBIT dollars of $105 million or 8.2% of sales.

The deterioration primarily driven by increased restructuring of $25 million and volume deleverage and the dilutive impact from an acquisition.

The margin excluding restructuring was 10.5%.

Our China Power Systems business has remained strong, driven by telecom infrastructure and wind power demand and we continue to make penetration gains in this market.

We continue with aggressive restructuring to further strengthen our competitive positions.

Next slide, climate technologies.

Sales in the quarter of $733 million, down 23%.

Underlying sales were down 21% and currency subtracted two points.

By geography we had the US down 21%, Europe was down 6% and Asia was down 31%.

EBIT of $66 million or 9% of sales, the decrease driven by lower sales volume and price cost pressures.

EBIT margin excluding the restructuring was 10.2%.

We recently completed the acquisition of Dixell, a European manufacturer of electronic control solutions for AC industrial and refrigeration markets.

Slide 14, appliance and tools.

Sales in the quarter of $727 million, down 24%.

Underlying sales were down 23% and currency subtracted one point.

By region we had the US down 24%, Europe down 23%, and Asia down 6%.

EBIT of $61 million or 8.4% of sales, the decline driven by volume deleverage and increased restructuring of $10 million partially offset by cost reductions.

EBIT margin was 9.9% excluding the restructuring impact.

Recent order patterns indicate some stabilization of the consumer related businesses in this segment.

Slide 15, the summary and outlook.

Market conditions deteriorated sharply in the second quarter.

Our underlying sales declined 11%.

Our operating profit margin was impacted by our decision to reduce our production levels more than the sales decline, in order to reduce our inventory levels which we did, and we have seen underlying order trends improving from February to March.

As inventory corrections, backlog liquidation and reduced lead times appear to be getting through the system, we believe orders are becoming more reflective of end market demand.

Today, we reaffirmed our fiscal year 2009 guidance of underlying sales growth of negative 9 to negative 11% and reported sales down 13% to 15% to $21 billion to $21.7 billion.

Restructuring expense in FY 2009 of $200 million to $250 million, full year earnings per share of $2.40 to $2.60, and full year operating cash flow of $3.1 billion to $3.3 billion, capital expenditures of approximately $0.6 billion and free cash flow of $2.5 billion to $2.7 billion.

So with that I'll turn it over to David Farr.

Thank you very much, Lynne.

I want to wish everyone a good afternoon and thanks for joining us today.

We had a very interesting board meeting today as we've reviewed all of the actions we're taking across this company.

As you can see from the numbers we reported today and the commentary, we have now entered the heart of this global recession, with approximately 11% underlying sales decline this quarter, and as we look at the second half of this year, down 12 to 15% on average, somewhere in that range, for underlying sales, and most likely down 10% in the first half of next year.

The management team has taken the actions necessary to position this company for some extremely tough waters ahead, some tough quarters and tough business environment.

As I look at it today, we will be facing some very challenging times for most if not all of 2010, but as I discussed with the board today and the OCE discussed with the board today, we feel very comfortable we're taking the actions necessary to strengthen this company from the standpoint of our global positioning, our new products, our technology, the businesses that we have both through acquisitions and through divestitures, the management team is taking the necessary actions to strengthen this company.

It's not easy taking some of these actions where you have somewhere between $200 million and $250 million of restructuring.

We've already impacted 20,000 people across this company around the world.

It would be a benefit for us in the second half as we move into that second half.

I would expect to be another 10,000 people around the world over the next nine months are impacted by this global downturn.

We have actions underway at 46 locations around the world, as we position the company, making tough calls, fixing the cost structure of this company, and positioning this company for what I consider a very strong recovery to be able to set record levels of sales, profit margins, cash flow, and returns when that upturn comes sometime in 2011 and 2012.

Just like we did after the last downturn.

Our focus is to make the company stronger and position the company stronger both from an underlying sales growth rate and profitability standpoint.

The management team around the world are taking extremely tough actions.

It's not easy.

It would be real easy not to take inventory out.

It would be real easy not to shut down facilities, but that's not what we get paid to do.

This quarter we took out over $200 million of inventory from the end of the first quarter to the end of the second quarter.

That causes enormous deleverage and under absorption in the facilities, but it's the right thing to do because we're looking at a very difficult environment out in front of us.

We will be doing the same thing the next six months.

I would expect our inventory dollars by year-end to be close to $2 billion and maybe a little bit under $2 billion when we finish this.

But by taking these actions now, as we move into the second half of this year, our underlying sales volume will be up a little bit, underlying production volume will be up a little bit from the seasonality, and we have less people in our facilities, therefore we'll get the natural benefit of better volumes and better profitability.

As we estimate it today, it's worth about $100 million to us in the second half of this year from a profitability standpoint, based on the actions we're taking and based on a little bit more output through our facilities as we look at those ratios.

We will continue to work on those ratios as we talked about.

If the business continues to weaken, we will continue to take the necessary restructuring and job actions and inventory reductions to position this company for a stronger company going forward.

Protecting the cash flow and the balance sheet is very important to this company, and we're working on that very hard.

As I look at the second half this year and I look at the benefits from the restructuring that we started late fiscal 2008 and very aggressively in the first half of 2009, we will get the benefits to drive a little bit higher profit margin in the second half, and I still feel very comfortable looking at what I see today delivering a 15.6% to 15.8% operating margin for the corporation.

Some people say the free cash flow was not very good in the second quarter.

It still was 96% coverage.

We had a dramatic drop off in our net earnings.

We funded our pension plan.

We'll fund more in the third quarter, but we still had 96% coverage on our free cash flow and net earnings.

Based on what I see right now in our restructuring, based on the inventory reduction, I still believe we'll deliver somewhere between $2.5 billion and $2.6 billion of free cash flow for the whole year.

We still feel good about that.

The third quarter will be key for us as we drive our improvement in our operating leverage and also the asset management.

Acquisitions, we are now targeting somewhere between $1 billion and $1.2 billion of acquisitions for the year.

The opportunities are still out there.

We are closing on what I call small and medium sized acquisitions, very strategic acquisitions for the businesses that we've been going after for years, strengthening this company, and we will continue to do that in the second half of this year.

As we talked about in early April, I anticipated that our order pace would be less negative.

It's still negative.

I do anticipate that will continue.

We did have in the month of March our underlying orders were less than negative 20%.

I would anticipate that will happen again in April, and we will continue to see that as comparison get easier and as also we see some of the earlier cycle businesses start to cycle back into some normal production.

They will still be negative, but a lot less negative as I look forward to it.

In discussion with the Board today, I feel that things are trending around the world as we expected.

The non-res, the gross fixed investment around the world is going to be very difficult for the second half this year and will be negative again next year, both North America and in Europe are two very, very challenging marketplaces right now and there for our focus is very much on those areas for restructuring.

In this cycle, we're trying to go after some of our European facilities and our European cost structure more than we did the last cycle, because I believe that Europe is going to stay down much longer than they did last time.

So as we look at it today, the company has continued to move forward relative to a very aggressive restructuring, to strengthen the company going long term.

We feel good about the trends and orders and what we're seeing around the world, a stability in the economic forecast.

That doesn't mean they're getting better.

I think they are locked into a forecast now for the last couple months which gives us a pretty good indication of where things are going to trend here as we go forward the next six to 12 months.

There's always a lot of challenges around the company.

The company is extremely strong right now.

We're making money.

We're generating cash.

We are able to raise almost $0.75 billion a couple weeks ago at very favorable rates.

Our balance sheet is strong and I feel that we'll have very good momentum as we go into the second half of the year.

Yes, the numbers will be down, but they're going to be very good come comparisons from the standpoint of what we saw in the first half.

So as I look at it we feel very good right now.

We're dealing with a very difficult environment but we're positioned to win in a very difficult environment.

You go take a look at a lot of companies we compete against in this most recent quarter, and I think we did pretty well with only 11% negative underlying growth rate, and we delivered pretty good margins and we delivered pretty good cash flow.

That's because the hard work that the management team around the world, the operating management team did around the world and I want to thank them for taking the actions necessary.

With that, I want to open the phone to answer people's calls, because I'm sure they have some questions relative to the quarter, and with that, operator, please let's field some of the questions.

Thank you, sir.

(Operator Instructions).

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

Go ahead, please.

Thank you, afternoon, Dave.

Good afternoon, John.

Let me start with process.

The underlying sales up 3% but the margins eroded a little bit more than perhaps I was thinking.

You guys called out mix.

Could you flesh that out a little bit?

What exactly do you mean by mix?

Is it project specific?

Is it systems?

What exactly does that mean and what's the outlook there?

A couple things going on.

First of all we did also go after the inventories in the facilities so we have a situation there where some of the facilities will deleverage as they take inventory down.

You'll also see that I think we mentioned in the April call that the chemical initiative in particular has taken a very dramatic downturn in purchases and therefore some of our instrumentation businesses have been hit early on and as this cut back in capital spending in some of these chemical industries.

They will also come back as those industries start stabilizing and you start to see the improvement from a sales and a profitability standpoint, they will start spending money again so we saw a mix relative to certain industries in particular the chemical industry which really dropped off.

We saw an area where we cut back our own inventory and production and we also saw some completion on some very large projects around the world which are lower margin relative to the systems and solution side, but you're going to see this fairly rough patch here as we go forward, it's mix around these businesses and a mix within the instrumentation and systems business, but still will have very good profitability for the whole year as I look for it.

Dave, does the fact that margins are coming down with the revenues still going up though imply because of mix that proportionately more of the kind of profit degradation if you will, happens up front and then as you roll into sort of down revenues you don't get as much of the degradation just because of the higher end has already been skimmed off the top so to speak?

It's hard to say that's the case, John.

I think after running the process business, you see some of the early cycle guides within the process of the cycle guides, that work our heavy instrumentation, in particular the flow, measurement flow side, they go after it first.

They will come back but I don't think you can make that statement and say okay we'll have more profit degradation now and it will stabilize later.

I still think you'll see this business cycle down as I believe I said in April, and the profitability will cycle down, but it will stay at higher levels than it did in the last cycle, and we hit 20% operating margins, EBIT margins here and I would expect us to go back down and take 200 or 300 basis points off that as we cycle.

Is the rising price of oil change the outlook in 2010 or is sort of 2010 already in the cards and maybe it becomes more of an 2011 issue?

I think 2010 is in the cards but if you go on top of capital spending and MRO spending and chemical industry spending that could help us.

Rising oil will help us from the standpoint of spending and the customer base also is quickly taken action relative to their inventory and their capital spending, but as soon as they start delivering higher levels of profitability you'll start seeing them spend money and I think that will happen later this year going into the early year, but we are still forecasting a down process business for 2010.

That will be the issue in my opinion.

It will go down because it's coming off very high levels both from a sales and profit standpoint.

Just lastly, what was the $25 million in gains?

We actually had a long time ago our leasing business we owned part of a Mazda Ford plant and we sold it back to Mazda Ford.

For $25 million in gains?

You got it.

Congratulations.

We wanted to get out while we could.

Thanks very much.

It's been there for how long, Walter?

At least 19 years.

Yes.

Long time, John.

It's when we had an active finance company.

Thank you.

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

Go ahead, please.

Thank you, good afternoon, everyone.

Good afternoon, Jeff.

Could we get a little bit further into kind of these cost delta issues?

You mentioned kind of the $100 million, I believe it's second half versus first half, but taking a little bit different cut at that, when you look at the restructuring that you did in 2008 and what you have under way in 2009, what kind of savings do you expect from those actions in 2009 separate and apart from the seasonality issue.

Not going to give it to you.

And the $100 million you gave us was a combination of seasonality and restructuring benefits?

Yes.

Primarily restructuring.

The reason I'm not going to tell you, I mean it's not something that you can nail down by quarter.

It's not that easy to do, but let me give you some numbers.

In February we talked about restructuring around $175 million to $200 million.

It's now up to say $200 million to $250 million, pick $225 million as the mid point.

We gave you average annual savings of $125 million to $140 million in February and now the numbers more like $135 million to $190 million and say $160 million mid point.

The issue that Walter and I are struggling to giving this out is, we are going after what I would call longer term projects from a savings standpoint so the average return is going to be longer for us this time, because I'm going after projects that cot it's more money up front and the pay back is going to be slower but it will fundamentally change the cost structure of the company two years from now.

I could tell you what we've been doing since say July, August, September time period all the way up to this period and I look at the savings, I look at our 20,000 less people and I could see we're going to get a benefit of around $100 million in the second half this year.

It's very difficult for me to sit here and give you forecasts because of the other things, and not something I want to get tied down to, but we will get the savings because we're going after the projects and we see the headcount coming down and we see the facilities coming off line.

Can you help us actually frame the margin impact of the inventory reduction in the quarter?

Not really.

It's a function of where that inventory is coming out.

It's $200 million.

We know if you look at the operating margins of the company they came down significantly from the standpoint of the sales and the production.

We know that we deleveraged, Walter for the quarter what was the number?

35%.

35%, so we know that as we come off of that, we will deleverage less so let's say we'll move down towards the 25% to 30% level.

So that means the reduction of the inventory would be more like 20% delevered.

That's about the average right there.

Exactly.

That's very helpful.

Just to hit good old appliance and tools which gets ignored a lot, if you break that apart was the performance in appliance and tools similar or is there some divergence in the performance of those businesses now?

I wouldn't say divergence.

I would say those businesses are what I would say stabilizing because of the massive inventory reduction that's happened in those businesses over the last 18 months, and so you're going to still see negative sales comps in the second half of the year but they will be less negative, and I think we'll see pleasantly some upside potential as they move forward and so if you look at the numbers, they aren't that much different apart.

Lynne is showing me between tools and appliance, they are about identical from a negative standpoint, so you'll see them get easier comps and I think you'll start seeing some positive as some of the inventories are replenished back out there in the second half of the year.

Thank you.

You're welcome.

Thank you.

Our next question comes from the line of Eli Lustgarten with Longbow Securities.

Good afternoon.

I have a probably rather tough question to ask you.

With the way the second quarter come in, in order to meet your guidance, you have to get basically $0.65 a quarter in the second half and right now you have a consensus that doesn't believe that the 240 plus and actually a bit of declining schedule next year if you look at the consensus, how do I bridge the gap from the $0.49 in the quarter with restructuring equal or greater in the second half of the year and maybe a $0.25 gain in volume, how do I bridge the gap to get the biggest step up from $0.49 to $0.65 a quarter?

What's driving that or can you help me bridge that gap to hit those kind of numbers which seems difficult on the surface with the volumes continuing to be soft.

The issue really boils down is maybe what we're forecasting internally, the improvement in operating profit in the second half based on the restructuring and slightly higher volume and the fact that we, our plants will have less people producing a little bit higher level volume because we have the actions undertaken, we believe we'll be able to improve the operating profit in the second half of the year versus first half and most of the people out there do not believe that, and so most people do not believe that we'll be a runoff 15.6 to 15 .8% operating profit for the whole year based on what we just performed in the first half so that is the difference.

So that hundred million number that you quoted is just sort of the tip of the iceberg of what you're expecting?

Yes.

Eli, one way to look at it might help you.

If you look at the absolute level of sales volume first half to second half, even though it's still down versus the prior year, the actual run rate using your estimate would probably be sales would be higher by about $300 million.

On that $300 million higher sales volume, you would probably leverage say around a third or about $100 million.

As you look at what Da've told you with regard to the headcount being down, already the actions completed, as well as additional actions, you'll have a reduction on the average headcount both hourly and salary between the first half of the year and the second half of the year, where the average will be down in round numbers at least 10,000 people.

If you say that just pick a number, say the average, because it's hourly and salary around the world is $20,000, that means you have a difference of about $10,000, because it's a half the year and that gives you $100 million.

We've also commented on, in different segments, that we were behind in price cost in the first half versus the prior year, we will get that back in the second half versus the first half, which will be a favorable impact of about $100 million.

Another way to look at it would be, if you look at normally over the last couple of years, second half profitability versus first half profitability for a number of seasonal reasons, seasonal pattern reasons, is generally higher by about 150 basis points.

Now it's more than that this time, but the other contributing factors on catching up on the price cost issues in certain segments and the reduction in the headcount because clearly, the drop between the first quarter run rate of being flat to the second quarter run rate, I'm thinking organically underlying to being down 11%, you deleverage more when you get the shock in the first 90 days as you get those costs out.

I hope that answers the questions.

Very helpful because it explains some of the gap and is there any part of the business at this point that you think didn't see probably relatively trough margins in the second quarter versus the rest of the year?

Industrial automation.

I would say Industrial automation is going to have I think a very difficult second half because of Europe, and our number one customer in that segment is Caterpillar and they'vere continuing to cut back, so I would say that they are going to struggle the hardest in the second half of the year and in addition, they have more inventory reduction than the other businesses because of the way they are in the power curve right now.

So you expect this 11% to get down to the mid to high single digits is sort of the target?

It will definitely go under 10.

Well, with caterpillar, we should have a lot more than that.

Thank you.

We're a little bit quicker.

Thank you.

Thank you.

Our next question comes from the line of Steve Tusa, JPMorgan.

Go ahead, please.

Hi, good morning.

Good morning, Steve.

Or good afternoon.

I'm not quite sure what day or what time it is.

It's been a long nine months.

Just starting partner.

Sorry?

We're just starting.

On process, so you made a comment about down 200 to 300 basis points.

What's the base you're talking about?

You think the trough is 300 basis points from here or from the peak?

I'm just curious--

I would say from what we saw the peak last year which was around say 20.

Okay, so you're there?

Well, yes, one quarter.

I mean you think a quarter is the whole year?

Okay, got you.

Got you.

You got to watch, we might have a couple tough quarters here with these guys but these guys are still going to do pretty well this year from a process standpoint and they are going after the action right now.

I think over the next couple years you're going to see a more challenging process marketplace, but if we saw some stability in the entry market and recovery in the economy you'll start seeing that process guy come back pretty quickly.

Okay, great and you keep I'm not sure if this is just maybe I'm missing something you're talking about but you keep saying 15.6 to 15 .8% operating margins?

What I said, 15.6 to 15 .8%

Okay, so but is that the same as 15.7 to 16, or is that a different metric we're referring to?

The guidance provided is 15.7 to 16% for operating profit margin for 2009.

Okay, and then just one more.

You keep talking about these comps getting better in the back half but if you look--

Easier.

Easier in the back half.

When you look at the order rates that are clearly running ahead of where you were, the revenue comps on the second quarter at least from a downside perspective, and you basically had pretty consistent organic growth throughout 2008.

I think organic was 7% throughout 2008, so how do these comps get easier?

Are you talking about for appliance and tools or for the whole business?

I just want a little clarity on that.

I think you'll start seeing some of the earlier cycle business, appliance and tools and the climate technology comps, because of how much they went down before the cycle started back last year.

They will get easier to compare against, so it will be less negative.

From the capital side I don't think you'll see any easier comps going forward here until we get well into 2010, so I'm just saying as we look at the various businesses and where they'vere coming from, the comps from a standpoint of how far they are going to go down and how negative they are, it gets easier.

So it's generally housing related?

Housing and some spending, yes.

Okay, and then one more thing, just on pension, is there any update on where we stand for 2010?

Yes.

We talked about in February I thought it would be $100 million or a little bit over $100 million and right now it's somewhere between $50 million and $75 million.

Okay, great.

Thanks a lot.

Worse.

Steve, one thing when you talk about comps, you have to keep in mind that orders in 2008 exceeded sales by quite a bit.

So when you look at the delta, you're looking at orders you can have a higher percentage than when you're looking at the sales impact.

So the book-to-bill was high so you're coming off an elevated book-to-bill?

Yes.

Great.

Thanks a lot.

Thank you.

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

Baird.

Go ahead please.

Mr.

Schneider, please make sure your phone is not on mute.

There we go.

Good afternoon, guys.

Hi, Michael.

Maybe we can start with climate.

We haven't touched on it.

I'm curious about what you've seen at least heading out of April and into early May now because clearly, the season hasn't been strong, but I'm curious if there's a potential at least for the orders in the seasonal period to be concentrated now in the months of May and June rather than starting back in March, just given the distribution figures out there and the distribution destocking going on?

Michael, I think that the inventories in the channel and everywhere are extremely tight, and it appears and everyone has because of the lower volumes, everyone has the manufacturing capacity and flexibility right now to react very quickly, so I think you're going to see a quick bang, so if you get a little heat and any improvement they are going to have to replenish some of this channel and it's going to happen pretty quickly, so we're getting ready for that.

We don't know if it's going to happen, but we're ready.

We have the flex and we can go, but my gut tells me this could be a very quick season, and where you could have come May, June and july, boom boom boom, three months and it's going to be they need the product and you have to ship it tomorrow.

That's what's going to happen I think.

And are the OEMs telling you guys that that they understand that you guys have excess inventory so they are basically relying upon you to take that risk?

I think they are pushing it back to the channel.

The answer is yes, but I wouldn't say we don't have excess inventory.

What we have is flex, and we'll have to flex very very quickly up and down our channel, and we're making sure that's the case, because I think the season is going to be quick quick this year and we have to be ready so we don't miss it.

And from what I understand, pricing has remained fairly firm in that channel.

Is that one of the reasons because you do have that leverage at this point?

The pricing remains fairly firm because the commodities, like copper have already started seeing a bottom and come back up again already so I think people are worried about the inflation, so they are being very careful here, and so people are being prudent relative to what they are trying to do from a price cost situation, because we're all worried about the fact that commodities could right roaring back so we're being very careful and disciplined as I would say.

Okay, and then just curious in Asia, it remains extremely strong for process.

I guess what do the backlogs look like there and do you expect that, or I guess what have you seen most recently out of China with the stimulus money already hitting?

Have you booked new orders, just any update on Asia process?

I would say Asia process is still very strong and has continued to do well from a book-to-bill.

In Asia, our network power business has been very strong.

The stimulus is very aimed at those two businesses.

When you go into our Industrial automation, or our climate or the other businesses, it's been weak, so what we've been seeing is our network power China and Asia business and process has held in there quite nicely and our China business was up for the quarter and I would expect our China business to be up somewhere around 5 or 6% for the whole year.

Down from what I said originally but I think we'll see our China business hold up and I'm still believing that they'vere going to maybe actually put some additional stimulus in there which will help us significantly as we move into 2010.

And then the energy efficiency rebate, the Act, everything centered around that domestically.

Can you just look across your businesses now and give us an update as to whether you've seen any benefit from these initiatives, whether the stimulus bill or the Energy Act, etc.?

No.

I have nothing.

The only place I've seen any effect of the stimulus is in China.

Europe has no flexibility from stimulus.

US stimulus is very much based on what I would call transfer payments.

Paving of runways and airports and things like that doesn't do much for us and I have not seen any stimulus from the standpoint of telecom or power or anything in the United States that would say that has helped us.

Have you even seen a benefit though as some of the appliance rebates at least prompt people to trade up in ratings?

Has that helped your mix?

Not seeing that.

Oh, the mix is fine because the movement of 13 sears already happened but I haven't seen anyone out there trying to go out and buy new air conditioners or new appliances for higher efficiency.

If you don't have money to spend you aren't going to trade up to a higher efficiency.

The pay back will be 20 years.

Okay.

Thanks again, Dave.

Okay.

Thank you.

Our next question comes from the line of Terry Darling with Goldman Sachs.

Go ahead please.

Thanks.

Walter, wondering if you could call out the FX headwind in the quarter at the EPS line?

Do you mean just the, let me just, do you have another question?

Yes, I was trying to think about the translation the second half versus first half, presumably that gets a little less of a head wind and I wonder what your expectations are.

Now, a point-of-sales, because that's how we track it, give me a second.

Dave maybe I'll ask you one while he's looking on that.

You had mentioned expectation for pick up in Q3, Q4 kind of sequentially from Q2 in the appliance and tools business as the inventories have kind of worked their way to tighter levels.

Can you talk a little bit about how significant a pick up sequentially you're thinking there?

Historically, we would pick up a couple hundred million, $200 million or $300 million of sales so I'm looking at a little bit of pick up and we're seeing replacement from the standpoint of inventory and some programs and some of the channels as these guys are starting to replenish and start selling, so we'll see in the second half this year somewhere between $200 million and $300 million higher levels of sales just from a seasonality but I also believe that we'll be close to $300 million because we'll see replenishment of inventory both on the appliance side and also what I would call the tool side.

Plus $200 million to $300 million just in the appliance and tool?

No, no, I'm talking about the total company and I think it's going to be close to 300.

Normally it would be around 200 and I think it might be closer to 300 because of the pick back up we'll see in some of the businesses the second half of the year.

Wondering if you could talk a little bit about expectations for Roxar in terms of growth rates and your goals for getting those margins up and it does look like a little bit of a move upstream for you in that business into the realm of the Schlumbergers and the Halliburtons, you're talking about long term strategy too.

The underlying growth of this business is high single digit.

It will have, I think the next 12 months should be okay because we look at their backlog and I think the late 2010, early 2011 could be more of a challenge and then it will come back on.

The profitability of that business, there's no reason why the profitability of that business can't be in the 16 to 20% range within five to six years and as we look at our own instrumentation business from within a technology base within that industry today I think we can deal with that.

What we're looking at right now is to be able to serve from an instrumentation and software capability to help the big oil companies deal with finding and improving their oil productivity in the deepwater area, Roxar brings that to us, we didn't have that so the profitability is going to move up towards our average in that 16, 18, 19, 20% range over five or six years, and I think the underlying growth rate of that business will be for us through cycles in the high single digits.

Should we look for you to try to continue to move upstream or is this about as far as you think you'll go?

I think it's about as far as we'll go.

Okay.

And just finalizing on the FX question?

Yes, he's got it now.

Got the calculator and his little green shade and everything like that.

The average impact in the first quarter is about four points of growth.

Second, third and fourth, each five points of growth, so the impact for the year is about five points of growth which is about $1.2 billion year to year.

That at our normal foreign margin impact is about $180 million or about $0.16.

Okay and it's got to be pretty consistent second half versus first half so that's not a major factor in terms of the improvement in EPS second half versus first?

No.

Correct.

Thanks very much.

Okay.

Thank you.

(Operator Instructions).

Our next question comes from the line of Nigel Coe with Deutsche Bank.

Yes, thanks, good afternoon.

Good afternoon, Nigel.

Just want to dig into the seasonality question a bit deeper.

Typically with management we see a fairly pronounced pick up in the second half versus first half.

Given that business is going down, do you think that will be essentially flat through the quarter this year?

Yes.

It will be a little bit but I think it will be flatter.

We won't see as much pick up there.

Okay so the seasonal second half versus first half comes from a little bit of appliances and tools and climate?

Climate, yes.

Okay.

Secondly--

The other one Walter and I will point out is network power will be in the second half too.

Okay.

And then secondly, temporary cost savings have been a pretty big driver of margin upside for industrials and we've heard about furloughs and pay cuts for executives, et cetera.

We haven't heard so much of that from you, it's much more headcount reduction and structural cost savings.

Are you doing these temporary cost savings and is that a factor?

We did them in the fourth calendar quarter of last year, we already did them, and I don't typically put out PR releases on things like that, but we have across this company, my compensation has been taken back and my base salary has been taken back to the 2007 level, EOC went back one year.

We have freezes around the company, delayed six months, 12 months, we're doing everything everyone else is doing but I don't think we need to put press releases out and tell what we're doing.

This company is very aggressive in doing the right things for the shareholders.

Sure and finally, just want to touch on tax.

It's been a little bit of a few headlines about the White House plans--

Going after-tax cheaters?

Exactly.

Yes, I love that one.

But the tax rate, it doesn't seem like you've pressed all the buttons in terms of minimizing your tax rate, so have you thought about the implications of maybe if these changes are made what that might do to your taxes?

It doesn't sound like it's a big change for you guys?

It will.

It will impact us.

We'll have to see what happens.

I'm not going to give you a number yet, but it will impact us because we are a company that has a very strong global reach.

We have global manufacturing, and we manufacture to go after marketplaces like China or India, and we manufacture in those marketplaces and they have lower tax rates than we do in the United States.

You can see in our footnote for the 2008 annual report how much money we make in the US and how much money we make on a pre-tax basis, outside the United States, and we're still a large US tax payer with the normal effective US manufacturing tax rate.

We pay our fair share of taxes.

I get a little bit pissed off when I'm called a tax cheat.

I agree.

I'm not saying that but the US tax rate is 35%, your tax rate is this year, and other industrials with a similar mix of sales of 25% or below.

It doesn't feel like you always are exposed as some of the other industrials.

Depends how they structure it but the answer is we've always paid our fair share of taxes and we will be impacted by it though, Nigel.

You have to look at the relative profitability of the US business.

Okay I'll do that.

A lot of headwinds coming from both the economy and Washington.

I don't want to get too much into that.

Thanks guys.

Well I just said it.

Thank you.

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

Go ahead, please.

Hi, everybody.

Hi, Bob.

Hi.

Let's clear up a couple things on process.

Way back when John asked his first question you mentioned as part of the answer that part of the margin issue was a function of project completions.

Does that mean you had some adverse variances when you closed some contracts over meaningful and depressed the margins below a normal rate?

No.

The answer is no.

Okay.

And then the other question is in terms of the 2010 outlook for process, you're looking for a down 10 to 20 and we should assume margins come down a bit for process in 2010.

I would say from a sales standpoint, I'm looking down more in the 10 to 12% and 20 might be from an order standpoint.

I think that's what was confused from last time.

I'd say you'll be down 10 to 12% right now in sales as I see the process marketplace in 2010.

I think the orders will be down more than that because of just the way this thing works, but we're working off a backlog and start having mix changes, but right now if I'm going to put a forecast down, stake in the ground, you're probably looking at 10 to 12% down next year.

And margins for process?

Will be down.

I don't know how far yet based on the mix but they will start cycling down, yes.

Also I think everyone would like to know, do you guys think about a cycle time between orders and sales, your orders have been running down 20 and now down less than 20 and maybe April better than that.

I mean, when typically would the orders, obviously backlog is an important part.

Is there a way do you think the average cycle time between orders and sales?

Yes, we do but each business is different.

Yes.

Each business is different.

So if you take appliance and tools and the cycle time is extremely fast.

If you take a look at climates pretty fast.

Typically a month to two months, and if you take a process, it had gotten its way out say 9 to 12 months and now it's going to work its way back, Bob.

It's until you get some stability in our order pace and that backlog, we haven't seen a lot of massive cancellations, but we've seen push outs so it's going to take us some time to dial that in.

It's going to be hard for you.

We're not trying to be stubborn, but it's hard for us to get a feel for it.

It appears to us in talking to Ed Feeney and the network power on the systems side, there seems to be some stability in the orders so that tells me we're starting to cycle into maybe a six-month cycle there right now which is pretty good so that's a good sign and starting to see some stability there so we'll see, I think as we've closed out this year we'll have a better view of how things are stabilizing in that regard.

Another question, you mentioned Europe, you thought would stay down and in this quarter, US was down 19, Europe down 10.

I mean, where do you see Europe troughing in terms of declines?

Is there lagging us by three to six months that type of thing?

I think you'll see Europe go down 10 to 15%.

I think you'll see the European economy as we look at our own internal forecast and look at what's going on in Europe right now, you're going to see a second half as we go into the next, you'll start seeing numbers go down just like we saw in that second quarter for the US, 15 to 20%.

Europe does not have, I'll say it again, does not have the financial flexibility that they had before, you've had Eastern Europe struggling right now because of all of the investments and the bad investments in the banks and you have the western European economies that don't have the financial flexibility to do short-term things in the economy.

It's going to be tough in Europe for a while.

I was confused by a question actually you gave earlier, Dave.

I get confused too myself.

I am confused all the time, especially about this market.

You get up there in age so it happens.

It does happen.

In climate tech, you said in the official part of the presentation that you had pricing pressure, yet you answered a prior question seemed like you weren't having price pressure, so what's the story?

The first half this year, we had some situations, we were out of sync between price costs and we are now back into sync in the second half of this year in the price cost situation.

So that will help us in the second half of the year.

In the first half of the year we got hurt by it and the second half of the year we'll be helped by it.

That industry is typically six, nine, 12 months type of pricing and takes us a while to get everything back in sync.

And as Walter said, our pricing changes more in January and February and so that's what's going on right now.

That's why you heard Lynne say one thing.

See you accused me of saying it, Lynne said it, and then I said something different which is true.

You did catch that one.

Well I'm just surprised that at this point in the cycle you don't have more people talking about price cutting.

You've gone through the earnings season.

Why is that?

Because as I told the Board, people saw that it did no good in the last down cycle to cut prices.

The volumes around the world are bad.

The demand is bad, so trying to get an extra two widgets sold right now when your widgets are down 20% is bad to try to cut prices.

It doesn't do you any good, so people are being very smart in all parts of this channel, and that's a smart way to go and I'm glad to see that, and then also as Walter keeps pointing out to me, there's also inflation coming, so people are looking out of the right eye to see inflations coming so they are very very careful here.

Final question from me.

Why are payables down so much?

What's going on there?

Because our inventory is reducing and our capital is going down so you buy less and you pay people less.

We're not changing our payment terms.

What we are doing is we're just buying a lot less raw materials to bring down our inventories, because the dollars of inventories went down plus the output of our materials because cost of sales are down also went down so you have a double impact on accounts payable.

You also have the reduction in capital spending in the quarter that you reduce capital spending, and that also reduces your payables.

And we're getting ready to reduce another $200 million of capital between now and year-end as I said earlier.

Okay, that's all for me.

Thanks guys.

Take care, Bob.

Hope to see you soon.

Thank you.

Our next question comes from the line of Christopher Glynn with Oppenheimer.

Thanks, nice inventory turns there.

Thanks, Chris.

Just to clarify on that point, Walter, did you suggest that the decrementals excluding that impact would be running around 20%?

No, because you can't say one-to-one for that.

You have entirely different dollars amount on the numerator than what you multiply it by.

What I'm saying is are you saying the inventory reduction I said was 20%, that's on a much smaller dollar than the overall sales volume was down, is a much bigger number.

Oh, okay.

You can't average those two.

They'vere different calculations.

The impact on absorption on the inventory decline is less than the significant decline in sales volume.

Got you.

And on the process, David, it sounds like you're talking about a tough couple quarters here but decent for the year forecasting, I'm reading at a pretty strong margin in the fourth quarter.

Is that kind of the fluctuations in the instrumentation side of that?

Yes.

And then just lastly--

Instrumentation and also restructuring kicking in.

Okay, and what kind of a read will we get on the climate tech from the April orders given the kind of cycle times, the lag there, and it almost sounds like you could have a pretty vastly looking year-over-year comp in the third quarter with the inventories in the channel pretty cleaned up?

I think you're not going to see much happen here until May.

I mean, I know what the weather was like in April so April is done and so just looking at the weather I would say that May, June will be the time, we're going to have a May, June, July season I think this year and depending on how hot August gets but there's not a lot of inventory out there so we have to move very quickly so I do not expect to see anything happening in August though I do see the US getting their position, the inventories are lean and we're moving with them right now very quickly.

As in the retail you have to keep in mind that the holidays in this year April are different than last years April.

Therefore, if you have one less workday, that's 5% in the month, so you have to look at those things as well but April heat was not high.

I noticed.

Thanks a lot.

Okay, good.

Okay I want to thank everybody for joining us today and we're looking forward to seeing people down in Florida at EPG, and I appreciate everyone's patience.

Right now, we're in a period, we just entered the storm.

Not easy reading on what's going to happen relative to the various pieces but the company's taking the necessary actions, we're trying to keep the balance sheet strong as possible and trying to position the company to truly have a strong recovery when that happens in 2011 and 2012, so with that, I thank everybody and I hope you all have a great rest of the week.

Thanks.

Bye.

Ladies and gentlemen, this concludes the Emerson second quarter fiscal 2009 results conference call.

You may now disconnect and thank you for using ACT Conferencing.