艾默生電氣 (EMR) 0 Q0 法說會逐字稿

Good day, ladies and gentlemen.

Thanks for standing by.

Welcome to Emerson's fourth quarter fiscal 2010 results conference call.

(Operator Instructions).

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 results to vary materially from those discussed today is available on Emerson's most recent interim report on Form 10-K, as filed with the SEC.

And I will give it to our host, Lynne Maxeiner, Director of Investor Relations.

Please go ahead.

I'm joined today by David Farr, Chairman, Chief Executive Officer and President of Emerson,

Nope.

I'm no longer President

Oh, I'm sorry, that statement is -- Chairman and Chief Executive Officer of Emerson, and Frank Dellaquila, Senior Vice President and Chief Financial Officer.

Today's call will summarize Emerson's fourth quarter 2010 results.

A conference call slide presentation will accompany my comments, and it is available in the Investor Relation section of Emerson's corporate website at Emerson.com.

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

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

Fourth quarter sales were up 14% to $5.8 billion, with increases in all five segments.

Underlying sales growth of 12% in the quarter, with all geographic regions resuming growth.

Gross profit margin of 39.9%, which was up 100 basis points from the prior year quarter.

Strong operating profit margin of 17.4%.

Earnings per share of $0.98, up 46% compared to $0.67 in the prior year quarter.

This includes the positive impact of $0.23 from divested businesses.

Operating cash flow was $1.27 billion, and free cash flow was $1.046 billion.

Our balance sheet remains strong, and operational efficiency initiatives continue.

Our trade working capital as a percent of sales improved to 15.5%, from 16.6% in the prior year quarter.

Actions taken over the past two years are paying off, and we are well positioned for accelerated growth globally.

Slide three, the P&L.

Again, sales up 14% to $5.841 billion.

Underlying sales were up 12%.

Acquisitions added three points, and currency subtracted a point.

Operating profit of $1.019 billion, up 14%, the increase driven by cost reduction benefits and volume leverage.

Earnings from continuing operations up 14% to $572 million.

Diluted average shares of 757.4 million, with 0.6 million shares repurchased for $28 million in the quarter, which leaves you with an EPS from continuing Ops of $0.75, up 12%.

This includes a $0.04 negative impact from the Chloride acquisition, and $0.02 negative impact from Motors being reclassified to discontinued operations, a $0.23 from the impact from Motors and LANDesk gets you to the EPS of $0.98.

Slide four, this is a summary table we had in our press release today, that provides additional detail of the impact from Chloride acquisition and Motors and LANDesk divestitures.

The next slide, slide five, underlines sales by geography.

In the fourth quarter, the US was up 9%.

Total International was up 13%, with Europe up 15%, Asia up 14% Latin America up 11%, Canada up 21%, and Middle East Africa up 2%.

Again, total underlying sales up 12%.

Currency subtracting one point, and acquisitions adding 3 points, bringing you to the consolidated sales, up 14%.

For fiscal 2010, the US was up 1%, and Europe declined 7%, Asia was up 7%, Latin America down 2%, Canada down 9%, Middle East Africa down 10%.

Total international declined 2% for the year.

Total underlying sales were down 1% for the year.

Currency added 2 points, and acquisitions added 4 points, getting you to consolidated sales, up 5% for the year.

Emerging markets now represents 34% of total sales in 2010.

Slide six, some income statement detail, gross profit dollars of $2.331 billion or 39.9% of sales, up 100 basis points from the prior year quarter.

The improvement coming from aggressive cost-reduction programs, buying leverage, restructuring benefits, and acquisitions.

SG&A of 22.5% of sales, gets you to operating profit of $1.019 billion or 17.4% of sales.

Other deductions net of $116 million, which includes lower restructuring of $78 million, and higher amortization of $22 million, and deal costs of $14 million gets you to a pretax line of $838 million, or 14.3% of sales.

Taxes in the fourth quarter of $254 million for a tax rate of 30.2%.

Next slide, the cash flow and balance sheet.

Operating cash flow of $1.27 billion, down 6% versus a strong Q4 in 2009.

Our working capital is still positive cash.

Capital expenditures of $224 million gets you to a free cash flow of $1.046 billion.

Free cash flow conversion in Q4 was 140%.

Trade working capital balances at the bottom of the slide show solid improvement in trade working capital to sales ratio, improving to 15.5% of sales in the quarter.

Slide eight, the Business segment P&L.

Business segment EBIT of $1.056 billion or 17.6% of sales, up 31% or 230 basis points, with benefits from volume leverage, cost containment programs, and lower restructuring costs.

Difference in accounting methods of $53 million.

Corporate and other, up $91 million.

We had a negative impact from the increase in stock price and overlap for retention purposes of two stock compensation programs of $50 million, and Chloride one-time costs of about $30 million.

We expect Chloride one-time charges to be at a similar level, $30 million in the first quarter of fiscal 2011.

Earnings from continuing ops before interest and taxes of $903 million, interest expense of $65 million, gets you to a pretax earnings of $838 million.

Next we'll review individual business segments, starting with Process Management.

Sales in the quarter up 5% to $1.701 billion.

Underlying sales were up 5%, acquisitions added a point, and currency subtracted a point.

By region, the US was up 8%, Asia down 3%, Europe was up 4%, and Middle East Africa down 4%.

Order rates are strong globally, up over 20% in the trailing three month average.

EBIT dollars of $325 million or 19.1% of sales, up 14% driven by significant cost containment actions and restructuring benefits, which were partially offset by wage inflation and lower restructuring expense.

Backlog at the end of September 2010 was $2.9 billion, an increase of 10% from the prior year.

Also Emerson Process Management wireless solutions are successfully operating in more than 1,400 sites globally.

We had $76 million in orders booked in fiscal 2010.

Slide ten, Industrial Automation.

Sales in the quarter of $1.169 billion, up 23%.

Underlying sales were up 26%.

Currency subtracted 4 points, and acquisitions added a point.

By region, the US was up 24%, Europe was up 30%, and Asia was up 25%.

We've seen broad base growth across businesses and geographies.

Capital end markets are recovering, and businesses are beginning to spend again.

Results for 2009 and 2010 include the hermetic motor business.

EBIT dollars of $196 million(Sic-see presentation slides) or 16.3% of sales, up 96%, driven by volume leverage, cost reduction benefits, and lower restructuring.

The September 30, 2010 backlog of $691 million increased 80% from the prior year.

And order trends in the quarter continue to be strong, up more than 20%.

Next slide, Network Power.

Sales in the quarter of $1.678 billion, up 23%.

Underlying sales were up 12%, and acquisitions added 11 points.

By geography, the US was up 6%, Asia was up 20%, and Europe was up 14%.

Avocent and Chloride contributed $153 million in sales in the quarter.

We saw strength in the uninterruptible power supply, precision cooling, embedded computing, power and inbound power businesses.

EBIT dollars of $255 million or 15.2% of sales, up 41% with positive impacts from leverage, cost reduction benefits, lower restructuring, partially offset by unfavorable price and mix.

The September 30, 2010 backlog was $1.4 billion, an increase of 33% from the prior year.

The Chloride acquisition was completed in the quarter.

This acquisition enhances our global reach, product and service technologies, and integrated data center management solutions.

Slide 12, Climate Technologies.

Sales in the quarter of $1.003 billion, up 10%.

Underlying sales were up 11%, and currency subtracted a point.

By region, the US was up 5%, Europe was up 13%, and Asia was up 28%.

Strength in our refrigeration and commercial businesses, was partially offset by a decline in the US residential business.

EBIT dollars of $193 million or 19.2% of sales, up 26%.

The margin improvement was driven by volume leverage, increased electronics and value-add solutions, benefits from cost containment actions, and lower restructuring expense.

Geographic balance for climate technologies continues to shift internationally.

We had 46% of fiscal 2010 sales outside the US.

Slide 13, Tools and Storage.

This was formerly called Appliance and Tools.

Sales in the quarter of $447 million, up 2%.

Underlying sales were flat, and acquisitions added 2 points.

By region, the US was down 1%, Europe was up 3%, and Asia was up 15%.

EBIT dollars of $93 million or 20.7% of sales, up 1%.

Material and wage inflation was offset by cost containment, volume leverage, and mix.

US consumer demand is still tepid, and consumers are still stressed.

We have completed the divestiture of our appliance motors and US commercial and industrial motors businesses, and it creates a leaner and more profitable segment.

Slide 14.

Overview of the full-year results.

2010 was a very good year for Emerson.

Sales for the year of $21.039 billion, up 5%.

Underlying sales were down 1%, emerging markets were 34% of sales, and international sales were 57%.

Nice operating profit margin expansion.

We had profit of $3.509 billion or 16.7% of sales.

EPS from continuing Ops for the full-year $2.60, up 15%.

This includes a $0.04 negative impact from Chloride, $0.05 negative impact from the Motors reclass to discontinued operations.

Net EPS of $2.84.

Fiscal 2010 was our 54th consecutive year of increased dividends, and the Board of Directors voted today to increase the quarterly dividend to $0.345 per share.

Strong operating cash flow of $3.292 billion, and record free cash flow of $2.768 billion.

We have very good momentum entering fiscal 2011.

Orders continue to be strong, and capital goods end markets are improving.

The next slide, in summary, Emerson executed and delivered solid results in a challenging fiscal 2010 economic environment.

We generated high levels of operating cash flow and free cash flow.

Our operating profit margin was strong at 16.7%.

Gross profit margin increased 200 basis points to 39.6%.

Our restructuring efforts have fundamentally changed the cost structure of the business.

We remixed the business portfolio for higher growth and higher margins, and continued investment in new technologies and next-generation products.

Emerson is well positioned, as we move to fiscal 2011.

The current business momentum and global economics are favorable.

And we will continue to make key investments in new products and technologies, and in emerging markets.

We're increasing incremental investments by $40 million in emerging markets, in people, technology, new products, and research.

For fiscal 2011, we expect underlying sales of 7% to 10%, operating profit margins, 17.2% to 17.5%, operating cash flow in the range of $3.4 billion to $3.5 billion, and restructuring costs of $90 million to $100 million.

I know many of you have asked me about the business segment restatements for the quarters in fiscal 2011.

We're working on those, and we'll work to get those out some time this week for you.

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

Thank you very much, Lynne.

I welcome everybody on the phone call today.

I appreciate everyone joining us.

I also want to thank, all the people across Emerson, the Board, especially the OC, the business leaders and the operation presidents, for what I call a great job in 2010.

A tremendous performance relative to operations, relative to the restructuring that's been undertaken the last couple years.

We have continued to invest, at the same time we've restructured both internally, and our growth programs.

We have done acquisitions.

And now we're executing along all the things we have been working on for the last couple of years.

As you know, our underlying order pace has been strong, as we continue to expand in key emerging markets and key technologies.

And our underlying sales have improved the last couple quarters, from 7% in the third quarter to 12% in this fourth quarter.

And our total year was basically flat.

So from my perspective, we have momentum, pretty good momentum, as we leave this year, going into 2011.

Our operating profit margins, our GP margins, are all set at record levels right now.

And we are set to go to 40% plus GP, and we are set to go to 17% plus operating margin through all the tremendous work, as we restructured the Company, as we made investments, and as we discontinued businesses, and divested businesses.

As I look at our free cash flow, we set a record level this year at $2.8 billion.

And over the last two years, we have set a target to exceed over $5 billion, which we did beat at $5.4 billion, over the last two years which allowed us to do close to $4 billion of acquisitions.

We paid back close to $2 billion in dividends.

We did share repurchase over the last two years around $800 million.

We divested companies around $800 million.

We have strengthened the balance sheet, both from a standpoint of liquidity and capability.

And we have the ability to do what we need to do in the next several years.

And I feel very good about where we sit at this point in time.

The restructuring programs which we initiated, as the downturn happened in the middle of 2008 are basically done.

We still have a few left we have to get down, but we will be dialing these back to our normal level, based on what we have been undertaking the last couple of years.

We started to invest as you know.

We started investing incrementally at higher levels in February of 2010.

The OCEs made the decision, in addition to our normal investment profile, that we have increased our investment in strategic areas.

And we put $40 million on top of what we normally do at the $15 million level, at the corporate strategic programs.

They have been identified.

They have already been started.

The business leaders worked with Craig Ashmore and the OCE to identify these programs.

And they are being funded.

They are all about making investments in emerging markets, in technology and new products.

An investment that would have eventually been done, but now we're going to pull forward and get them done this year, in early 2012, to make sure that we have a stronger underlying growth profile, as we come out of this recovery and continue to grow.

I think this is a strong indication that we feel very good about where we sit today.

And we feel that with our increased profitability, our record levels of margin and GP, and the cash flow, that the time has come to step up our investment, and to accelerate our growth rate.

You'll remember that in February of this year, we talked about the five-year profile would be slower, because the economy would be slower.

I still believe that, but with incremental investments and the restructuring that we've done at this Company, I now believe that we have a chance to slightly exceed 7% in the next five years.

And this investment we're doing right now, and improved profitability, and the globalization of the Company is allowing us to do this.

When I look at where we're driving the Company, we are going to be somewhere in the 40% to 45% emerging markets.

Our international will exceed 65% in the next five years.

We have a very strong foundation.

And in talking to the Board today, we're talking about accelerating our investments, because I think the visibility is there.

I believe that we can see what's going on in this world today.

And we know that we need to take the initiative to grow, and to invest.

And we are doing that where we believe the growth opportunities are in the markets around the world, and the technologies.

And we're making those investments.

It's very clear to me.

There is not uncertainty.

I know what's going on.

And we're making those investments.

And we're going to put that investment out there, to grow this Company, and improve the profitability.

If you look at what's going on inside the Company right now, we're sitting at record levels of cash and margin.

Our free cash flow as per share this year, set a record level at $3.65 per share -- $3.65.

That's the value driver of this Company, how we generate cash and returns.

And we'll set records again, I think, as we look at 2011.

Right now, we're in the mode of execution.

Restructuring is done.

The big acquisitions we've undertaken the last couple years, we are now in the mode of executing.

The divestitures, we've got some big ones done.

We are now in the mode of settling the Company down.

We have one small acquisition -- a divestiture we will do this year, one divestiture, around $100 million.

And I would look at our acquisition profile right now, of somewhere around the $500 million, $600 million, $700 million.

Not a big number.

We're about executing what we have accomplished already.

We have restructured.

We have positioned the Company.

We are now focusing on investments in strategic areas for growth, growth, because we know the GDP and around the world is going to be slow.

We know it's not going to accelerate fast.

The US government and European governments need their own restructuring.

They have wasted money.

They have spent, overspent.

They need to restructure, not only their cost structure, but their balance sheet before growth will return in these mature markets.

Companies like Emerson have already done it.

We're positioned, and so we need to invest for pockets of growth around the world.

Visibility is very clear to us, where we need to put our money.

And we're making those bets right now.

So as I look at where we sit today, I want to thank the Board.

I want to thank all the business leaders, the OCE, the operating executives.

They have executed over the last two years.

The Company's foundation is strong.

We have the growth potential.

We are all about accelerating growth in 2011, and look, and try to control our own destiny and drive value for our shareholders, and for the people that have invested in this Company over the years.

I feel very good about where we sit today.

I feel very good about what we are going to see in 2011.

Clearly, there is always issues that could surface at any point in time, but I believe that Emerson is well positioned to have extraordinary growth for the next 12 to 18 months, set record levels of profitability, set record levels of cash flow, set record levels of returns for our shareholders, and deliver for what we have invested in.

And that's what it's all about.

It's execution.

It's execution.

It's execution.

And there is nothing else that we have to do, at this point in time.

So with that, I want to turn it over to answer questions.

And I'm sure there's plenty of questions out there.

But again, I want to thank everybody around the Company, that had an extraordinary year, thank you very much for what you have done.

You have positioned this Company to really be able to perform, and have a great 2011.

Thank you.

Thank you.

(Operator Instructions).

Our first question comes from Jeff Sprague with Vertical Research Partners.

Please go ahead

Good afternoon, everyone.

Good afternoon, Jeff.

What can I do for you today?

I was wondering if you got out, and had a chance to vote also?

I voted twice already.

(Laughter).

I'm flying my dad here to vote here too.

Of course, I voted.

I believe we're going to have a change in direction, relative to what makes this country great, and stop wasting money, and spending money in the wrong places.

Amen to that.

So my question is really on the balance now between profitability and growth.

Clearly, you have done a lot to get the portfolio into great shape.

Profitability and cash flows is obviously always central about what Emerson is about.

Do we think about trading a little bit of profitability for growth as we move forward in the slower growth environment?

And I'm thinking about it kind of implicitly, looking at the guidance construct that maybe suggests incremental margins are in the 20s next year.

Some of that is kind of the noise from Chloride and the like on the top line.

But just give us some color on how to kind of put that into perspective.

Yes, I think it's a very good question, Jeff.

What's going through our mind right now at the OC level and the Board level, is that we are looking at a lower growth environment, particularly 2011, as there's a global stimulus is pulled back, and people have to seek underlying growth.

We have made the decision to increase our -- what I would call incremental investments both in people and technology.

As I look at the Company today and we drove the Company, we could get to an 18% operating margin pretty quickly.

I feel that would be a mistake.

I fundamentally believe that I would like to see us make investments right now, in particular some of the emerging markets where the growth opportunities are there for us.

If we get ahead of the game plan, and given the strength of our financials, I would expect our flow through profitability this year to be more in the 25% to 30% range.

Now we have been running ahead of that, but I think it's important right now that we invest at this point in time, to try to figure out how to -- not have a 5% or 5.5% underlying growth rate going forward for the next five years, to make it more like a 7% or 7.5%.

And I believe we have identified through our programs this year, at our strategy sessions unique opportunities.

That's why the OC decided to put the $40 million on the table, and get on with it.

We already started investing the money.

So I think we are well positioned to do that.

And if we get the growth, our profitability will obviously continue to grow with that, and I think we'll do pretty well.

So that's exactly what's going on.

You're right on the mark there

And how do you feel about price cost in 2011?

Did you finish up here in the green?

Are you getting some price?

We finished up green, slightly green this year.

We see material inflation as a negative right now.

It's pulling back.

I think right now, what we see the year, it's going to be plus or minus 0.25%.

We have had a couple very good years, relative to price cost relationship.

There's a lot of commodities moving around, it's sort of extraneous right now.

We have component shortages still.

I feel that we'll be very close to being zero.

But if I was going to put a mark down right now, I'd say we could be plus 0.25 to minus 0.25, sort of in that range right there, but close to that zero level.

But clearly something, we're working on very carefully right now.

Because there is definitely inflation coming at us.

And as the US government continues to do it's quantitative easing, that will create even more inflation, and particular on the emerging markets which is really our key growth area.

If I could just sneak one more in.

Go ahead.

IA looks great obviously on a year-over-year basis, but sequentially it was off the charts too.

Just wondering if something in particular really kicked into gear there in the quarter?

A couple things happened there.

Jean-Paul and his operation guys, really got hit hard as you well know.

And they took a lot of restructuring head on early on in 2008 and 2009.

The volume has started coming back for them, Jeff, and they are really leveraging.

And I give a lot of credit to Jean-Paul and his team, because this is a very European-based company.

And they took these cost restructures right on, and that is what you are seeing.

And there's nothing fun or games going on.

There's nothing unique.

It's just pure solid execution.

And Jean-Paul came to me for some growth investments, and we are giving him the people he wants to invest for his emerging markets, because of pure execution.

They did a great job.

Great.

Thanks a lot, Dave.

Thank you, Jeff

Thank you.

(Operator Instructions).

It looks like a couple people got cut off, so you may have to call back in on the questions, folks.

Thank you.

And our next question comes from the line of Steven Winoker with Sanford Bernstein.

Please go ahead.

Good morning, or, good afternoon.

Good afternoon, Steve.

It depends where you are.

I know I hit some part of the world that way.

Just trying to get a little bit better handle on the whole price costing you talked about with Jeff just now.

Particularly in industrial automation, where you actually saw it go the other way.

Given where margins are, where do you see the biggest risk across the business units there, and what are you doing on price specifically?

I know Charlie and company have done a lot, and have put a lot of effort into that.

Are you seeing continued traction in your ability to get price regardless of the material side?

The answer is yes, yes.

We are continuing to have positive traction in relative to price.

The biggest issue we see right now, is we have some underlying commodities that have taken off.

Steel has backed down, which is good news.

But copper is now running close to $4.

We had an electronic component issue going on from our perspective.

So I think there is a lot of moving parts going on.

As I look at it right now, I think we're going to end up with slightly positive price this year, and a slightly negative net material inflation.

And we're going to end up probably pretty close to zero.

The commodities are the biggest issue right now for us.

From our standpoint, the labor and those cost structures we are in very good shape, and the productivity programs are there.

Hence, we're investing in capital right now to offset that type of cost.

But my issue right now, is we're starting to see some price cost issues -- or cost issues on commodities and certain electronic components, and certain other components which are a little bit short supply.

So we are able to get price.

Charlie's programs have really helped us, but in this tactical mode right now, we are going to have to get a little bit of positive price.

We have not seen it accelerate, or get out of control.

But I'm very nervous about that issue, because of all the quantitative easing going on in the United States, and the other parts of the world.

But I think it's under control right now.

I feel pretty good about it.

What are your comments around investment for next year, which are mostly, it sounds like expense R&D based, labor based.

How about on the capital side?

How are you thinking about that?

I know those have already been in place for a while.

Our capital spending will be close to $600 million.

You notice that our capital spending did accelerate in the fourth quarter.

And the reason for that, is we were able to accelerate the new productive initiatives, and we clearly wanted to start getting ahead of some of our emerging market investments, so we had to make some investments there.

I would expect to us is spend $600 million, plus or minus $20 million next year again.

And it's already underway.

It's going to be primarily in capital investments for productivity.

So it would be equipment to drive down -- to drive up productivity.

And also we're making some capacity investments in emerging markets.

And we'll be making those investments and just basically around our new product areas, in particular around our emerging markets at this point in time.

And that's where the investments are going.

Any particular business units there, that you'd highlight?

No.

I don't think.

There's nothing in particular.

There's nothing out of whack, from that standpoint.

I don't have any.

There's not a big compressor of that expansion, there is not a big process of expansion.

You're going to see pretty normal capital by each of the businesses.

And just like the restructuring, restructuring has gone through its way.

There's nothing extraordinary going on there either, so it's pretty normal.

I'm going to sneak in one last one.

As long as it's quick, go ahead.

Well, just Q1 color, any thoughts around Q1?

Not really.

At this point in time, it will be easiest comparisons relative to our growth.

It will -- we do have as Lynne mentioned, Chloride, we still have some underlying costs that we have to amortize.

You said, around $30 million in the first quarter?

And from that perspective, that's going to come through.

We have the close out of our performance share base, this quarter.

We're paying that off.

I think it's going to be a good quarter, but it's going to be a toughest quarter for us to deliver from the standpoint of a lot of moving parts still going out, but still good momentum as we go into the quarter.

But nothing really other than that.

Great.

Thanks

I don't manage quarter to quarter.

We sort of manage as a year now, you know that Steve.

Yes.

We get that.

Thank you.

Thank you.

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

Please go ahead

Thanks, Dave, good afternoon.

Good afternoon, Terri

I'm wondering first, on a bigger picture item.

If you might comment on what you're seeing in the US, shorter cycle businesses.

I think a lot of folks were surprised by the strength in the ISM, and I guess, I'm wondering your views on the US in general.

But specifically on your shorter cycle businesses, but do you think that some folks are trying to get ahead of price increases that might be coming because of the raw material dynamic.

Did you see the kind of acceleration through October that the ISM suggested others saw?

No, we did not.

From my perspective, the short cycle business is going to be very challenging.

Where we're seeing investments going on, are the capital related, where people like us had really backed off capital spending.

We're seeing that type of investment coming in from a standpoint of productivity or capacity.

Issues where people have scaled it back.

They don't want to bring -- hire people at this point in time, because they are a little bit uncertain at what type of growth they are going to be looking at in 2011.

I'm very cautious and nervous about the short cycle businesses in the US.

From my perspective, our divestiture of the appliance motors and controls is pretty good timing wise.

I think that business had a nice little pickup, and I think it's going to struggle next year.

From my perspective right now, I don't see much growth in the US, in the short cycle stuff.

I see a pretty good growth next year in our industrial capital related businesses, and I believe they will -- we'll have a good year both in the US and in Europe, as those companies invest again coming out of this recovery -- as the recovery takes hold.

Okay.

And then I'm wondering, just kind of a guidance question.

The interest expense and other deduction item of 670 to 700.

Can you take us through kind of the changes in the pieces within that number, that you're thinking about for 2011 versus 2010?

Can we come back to you?

And we'll talk to you.

Let Frank look at that for a second, and talk about it.

Yes.

And then we'll come back on -- stay on the phone.

We'll answer that question.

Let's give Frank a second to dig through that, okay?

Maybe then just quickly, the $40 million of incremental emerging market investment real quick, should we think of that as a one timer in 2011, or should we think of that as ongoing?

And any color in terms of where you may be overweighting that investment by division?

For instance, I think the $40 million will hit us this year.

We'll probably continue part of that next year.

My fundamental belief is we'll see the growth, they will be able to cover this as we move into 2012.

I believe the OC will say, let's keep part of it going, and help them as they get into 2012.

But I expect that the divisions will get the growth of the business, and will get the growth, and will be able to cover this incrementally as you go into 2012.

I most likely wouldn't be surprised if I invest $40 million this year, if I don't invest $15 million or $20 million next year on top of that.

We'll have room to do that.

Primarily, the big dollars, the biggest areas you could imagine where they are going to be, they are obviously in process, industrial automation, and network power, are the three big areas.

Every business is getting it.

But this will run through the corporate P&L, the corporate line.

But it's primarily what I see in the strategic areas, where we have unique technologies, and we want to get ahead of the power curve.

We want to really push forward right now in this market.

I think the window is open, and the people that take aggressive actions now will succeed in the next 12 to 18 months, and I want to be one of them.

Okay.

And we'll come back, and we'll answer the question.

Frank will work that up and look at it, and will come back to you before you go off the call.

Okay, thanks much.

Thank you very much.

Thank you.

Our next question comes from Scott Davis with Morgan Stanley.

Please go ahead

Thanks.

Good afternoon.

Hi, Scott.

A couple things.

First on process.

A couple great quarters in a row.

In many ways the business has come back a lot faster than probably most of us thought it would.

I was wrong on that they've, yes, you are exactly right.

Well it is certainly different than past cycles, for sure.

When you look out to 2011 a little bit, I would assume that there is some mix shift to more project related business.

Or do you still think it's going to be more the day by day, kind of higher margin business that you have had the last couple quarters?

What we're seeing now is that orders have expanded.

We're starting to see medium, large, and larger projects booking, Scott.

So it's actually started to shift.

What we're going to see early on in the first half of this year, I think will be more of the productivity, the MRO, as people are investing and improving the plans at this point in time.

The smaller projects, the incremental capacity, which are smaller projects, they are starting to hit now.

As we leave and move to the second half of 2011, and move out towards 2012, you're going to start seeing the larger projects start hitting us at the sales line.

The orders should accelerate this year because of the larger projects which are now being bid on, and I think will continue to go forward, but they won't really hit our sales level until late 2011 or early 2012.

Right now, it is going to be medium, small, small capacities and MRO type of stuff.

So our profitability, what we're focusing on right now is, I would expect our underlying profitability in the process business to improve next year.

And we are going to have accelerated investments and processes, both internally and in the money I put on the table here.

I'm setting up for the growth in 2012 and 2013 in that business.

As you know, it's a very profitable business for us.

Sure.

Does that help you?

Does that help?

Yes.

That helps a lot.

A lot of it is just timing.

Right, just trying to figure out when the big stuff comes in.

And none of us -- we're not that smart, Scott.

I can't -- I mean I was wrong in the cycle.

And these guys have done a very good job here.

And I thought the MRO investment would have come earlier and now it came earlier than later.

It's a tough call.

It's timing.

But we're back.

We're strong.

I totally understand.

I want to come back to the earlier question on industrial automation.

Because the incremental margins this quarter were so just phenomenal.

I can see this being kind of difficult for those of us on this side of the world to model out in 2011, as it relates to incrementals, plus you got hermetic motors.

I mean how -- I'm kind of begging for modeling help here.

Begging from Scott?

Begging?

Groveling for modeling help.

How do we think about incremental margins in 2011 this business, or how do we at least think about modeling with a hermetic or without hermetic, or what's the new normal, I guess is the question?

Hermetic, it's not going to have a huge impact relative to the -- You think about the size of the whole IA area, hermetic will have a little impact, but in reality what you're seeing right now is this business.

I'm trying to think.

Do you know what it peaked at?

Can you help me with what it peaked at in, say 2008?

What did that margin peak at in IA, Lynne or -- can you guys tell me?

I think -- we're going to go back, and we are going to go by the peak in 2008, --

The peak was at 15.6%.

You're going to see this business come up, I think it's going to be coming up to that 17% 18% range.

Again, I want to give credit to Jean-Paul.

Jean-Paul and his operation team, really some very significant cost restructuring went underway.

And so I - they peaked at 16%.

I believe these guys are going into the 17% or 18% range here, as we move into 2011.

I don't know what the model --.

16.

Okay.

But it's not going to get that high next year.

So I think you are going to see continuing to go towards that.

But the model number you should be thinking at for this business is 17% or 18%.

It may take two or three years to get there.

But that mentally, I think Jean-Paul made fundamental changes to the cost structure, and hermetic motors does help a little bit.

But that's not going to drive that 17% to 18%.

What John Paul and the operational team did.

And a little volume and significant restructuring and these guys hit it.

And boy, they hit it well.

Yes.

Clearly.

The structural shift there for sure.

Okay.

I'll pass it on to the next guy.

Thank you.

Thank you very much, and any time you want to beg, just send me an email.

Thank you.

Our next question comes from Deane Dray from Citi Investment Research.

Please go ahead

Thank you.

Good afternoon.

One of the pleasant surprises this quarter was Europe.

It wasn't that long ago there was a lot of handwringing going on about whether Greece was going to create a domino effect, and here you put up 15% for revenue growth.

Just take us through the mix geographically and the outlook for 2011

We talked about this Deane.

And I think you've been here when we were talking about it.

Europe went through a period here, where they from the standpoint of underinvested.

Then when the euro got weak, and you saw Germany take off, and you see some of the investment profiles, both coming out of Europe and Africa and the Middle East, we're starting to see that benefit right now.

We knew it was coming.

And I believe we're going to have a very good year.

I wouldn't be surprised if Europe doesn't outgrow the US next year.

I make crazy calls like this all the time, in my business, in Emerson's business.

I wouldn't be surprised if Europe does not outgrow the US next year.

It's because Europe is working very hard in the industrial side to restructure.

They are actually ahead of the US from that perspective.

You think about the government standpoint.

And therefore, you're going to see some of the growth coming out of Europe into the emerging market.

And we benefit from that, from the process world and the industrial automation world and the network power world.

So I feel that we're going to have pretty good underlying growth for Europe next year, because of what the countries have done, and then what our business has done, and the unique businesses we're in.

That's what's going to happen.

I think it was a pleasant surprise.

I feel pretty good that, like I said I think Europe could actually outperform the US next year in underlying growth, or be close to it.

That's helpful.

Just over in network power, one of the numbers that jumps out is the 33% increase in backlog.

How much of that is organic?

So was there a contribution from Avocent and Chloride?

I'm assuming some of the backlog is Chloride.

From the Chloride.

I believe it is (inaudible) pull-back.

--the pullback.

So some of it would be.

I couldn't tell you some of it.

The business has started to pick back up.

I would expect the network power business in particular to start picking back up in the labor Chloride side, in early 2011, the spring calendar 2011.

The early stages of the backlog right now are more of an embedded power and computing area, where the growth has been strong.

The component shortages have been a big issue for us.

That backlog is built there.

But overall, the momentum has shifted to network power both in Jay Geldmacher's side and obviously at(inaudible)side.

And Chloride coming in helps us, but that's not a huge backlog business.

But it's definitely -- we see a momentum shifting there, which is very good.

Thank you.

You're welcome

Thank you.

Our next question comes from the line of Shannon O'Callaghan with Nomura.

Please go ahead

Good afternoon.

Just a question on network power first of all.

I mean good margins there on the quarter.

Can you give us an update on the Chloride integration, and how we should think about network power profitability kind of through the quarters of 2011 as you bring that in on a full-term basis?

The integration of Chloride is going extremely well.

From my perspective, there's not going to be a whole lot of restructuring in that business this year.

Because we're right now working from the standpoint trying to understand what we can do and not do.

From our standpoint, we're looking at a period that restructuring would be more in 2012, 2013.

I would expect the profitability of this segment would start to improve quarter-by-quarter-by-quarter as the underlying business improves.

I would expect the business to continue to improve profitability-wise.

As I think I talked about, I think that in total, the network power business is moving towards that 15% 16% level.

I think that these guys will make progress each quarter this year as we go forward here.

I look at the network power business.

I think that they are going to have a good 2011 as they move into that 15% plus, which we have never hit.

So we're not going to quite get there, but it's still going to be a nice improvement as we go forward here.

Sequentially, into 1Q, as you bring it in full term, do you expect them to decline a little bit sequentially from where you were in 4Q?

Sequential, they are going to decline, and then we should start seeing an improvement as we go forward for the year.

The Chloride impact obviously is going to be there for a full year.

And Chloride is a lower margin.

We have a good -- we obviously have amortization going on there, forgot about that.

So it's going to take us a while to get back up to that 15, but I think this segment is going to be a 15% segment again.

We'll probably be more like that -- we are going to be approaching that by the end of the fiscal year.

So we should be approaching 15%.

And we go down, and we start working our way back up.

But these guys are doing the right things.

Then we'll do restructuring more in Chloride and network power in 2012.

So that's where I sit right now for that business.

Okay.

Then just on some of the resi business, the inventory correction in HVAC, and then the storage business kind of weak.

How do you see those playing out, as it moves through the fiscal year?

As I said earlier, consumer businesses right now are really going to struggle in 2011.

The consumer is still stressed, they are going through deleveraging.

The job market is still going to be very challenging for them right now.

And so I think that the residential consumer business for our AC business is not going to be all that strong next year.

We had an issue that there were some incentives put in place to help.

So I think that will be a challenge for them.

I don't think the tools and storage business will see much growth.

Discretionary spending is not all that exciting relative to the consumer at this point in time.

So I'm looking at moderate growth and low single digit type of growth in that space.

Our capital guys are going to be the improvement.

And what we're investing there, in the tool and storage area is basically some of the emerging market growth that we need to start investing for them.

But that's not going to be a big driver of growth.

It's not going to hurt us, or not going to help us.

I would expect that profitability to be up a little bit next year.

Okay.

Great.

Thanks.

You're welcome.

Thank you, our next comes from the line of Julian Mitchell with Credit Suisse.

Please go ahead

Hi, Julian, can we hold off?

Frank is now ready to answer that question.

I can't remember who --

It was Terry.

It was Terry, so just stay put for one second.

Frank, why don't you go ahead and answer the question.

Hello, I believe the question was on the last chart, the interest expense, the deduction is 630 this year.

And the range we gave is 670 to 700.

Basically we expect modest decline in interest expense as we work off some of the acquisition debt, and the decline as well in the restructuring in the order of $15 or $20 million.

Then we have about $80 million to $100 million going the other way, which is essentially the result of acquisitions, mainly Chloride, higher amortization, and some of the one-time items like revaluation of backlog and things of that nature.

So that gets you -- brings you to a range of 670 to 700.

Thank you very much.

If you have any other questions on that, you can follow up with Lynne.

Okay.

Julian.

Your point, it's your floor.

Julian?

Yes, hello, hi?

Hi, Julian.

Thanks for holding off, we wanted to get back to that question.

Sure, of course.

In terms of the organic growth outlook for the 7% range for the year ahead, when I look at your 12% that you did in the quarter just finished, it sounds like you're quite positive on Europe for the year ahead, the growth rates for Asia and Latin America put up in the low teens, don't seem crazy of us, the GDP growth expectations there.

So I just wondered which region -- is it really all in the US where you think you're going to see a slowdown over the next sort of nine months versus the 9% underlying growth you had in Q4?

Yes, I think Middle East isn't going to come back, it's going to be kind of slow.

I think US will still grow, but I'm concerned about what level we're going to see them grow.

I think a lot of our customers right now are looking to invest outside the United States.

Now clearly, if we have continued momentum on orders, Julian, it would be clear that maybe we have more upside on our underlying sales growth.

But from my perspective right now, we have had strong orders.

I'm also very concerned about what's going to happen in the US.

I could be wrong relative to Europe.

But I feel that it behooves us right now to obviously push internally, but also be very cautious in what we think we can do underlying growth.

Statistically, if you look at it right now, and look where we are coming out of it, it should be a strong -- it should be a double-digit number.

It should be more than 10%, as you are pointing out.

But I want to see us get some months and a quarter or two behind us, before we say, okay, let's make that 10% or 12%.

There are things that could go wrong.

There are people that as you well know, said that 2011 is going to be stronger than 2010.

Well, a lot of people right now are saying 2011 is going to be weaker than 2010.

So I want to be very cautious.

We have positioned ourself in things looking good.

We could be stronger, but I also want to be very cautious, it behooves me to be cautious from that standpoint too, so people don't get ahead of me.

Okay.

Thanks.

In terms of the cost growth, you mentioned some CapEx moving up.

In terms of things like head count or R&D or specific, say, sales force expansion programs in different regions, can you give any more color on that?

Our investment for instance, in the $40 million part, we will be hiring 1,000 people.

And these will be high-end salespeople, marketing people, technology people.

And they will be going around the world in that perspective.

That's just focusing on technology and sales and marketing.

And from my perspective, our hiring, we are increasing our head count at this point in time, in particular, outside the United States, and particular, outside western Europe.

So the investments you're going to see from a capital standpoint, and a technology investment are all increasing.

As a ratio, if you look at our capital spending, I think we are going to be somewhere around 2.5% and 2.6% next year.

So we're going to be very tight.

There's nothing I need to make a major investment.

But if I look at our technology investment, we're probably within a tenth of what we did this year.

A lot of this is emerging markets, it's a lower cost type of structure.

So there's nothing crazy, but it's going to be a tenth higher here, a tenth higher there, two tenths higher here.

It's all about investing.

And we have the margin room, because we actually did a lot of aggressive restructuring, and it gives us the capability of doing that.

That's where we are right now.

Okay.

Thanks

Thank you very much.

And good call on the capital, Julian.

Congratulations.

Thank you.

Our next question comes from Nigel Coe with Deutsche Bank.

Please go ahead.

David, good afternoon.

Good afternoon, Nigel.

How are you doing?

I'm good thanks.

Obviously you are going to provide a lot more color on the segments forecasts, in (inaudible) next year.

But I wondered would you-- are you prepared to give us a bit more color in terms of how you expect the five segments will play out versus that 7% range next year?

Say that question again, Nigel?

Any color in terms of how the five segments will play out, in your -- the 7% range?

I'm not going to give you the specific numbers right now, but clearly if you look at industrial automation, you look at process, you look at network power, those three segments right there will be the strong growers.

Climate technology will have the issue relative to the North America business, which was a huge grower this year.

Now they have to overcome that.

And so from my perspective, climate technology growth is going to be Europe, Latin America, and Asia Pacific.

And that one will be down, I believe, this year versus last year.

And the drivers are definitely going to be industrial, network power, and process.

I think they will all end up being, in my opinion, double, 10% plus process, network power, and industrial automation before the year is out.

And the climate and tools will be low to medium single digit type of growth rates.

Okay.

And clearly, the order rates, the process implied, double digit growth pretty soon, do you think that happens as soon as 1Q?

No.

I think it goes back to the conversation that I had -- I can't remember if it was Deane Dray or Scott Davis asked me on the process.

I think it was Scott.

We're starting to book right now, Nigel, some of the medium-size projects, which we'll not start executing until later this year or early next year.

I think you're going to see the underlying improvement maybe high single digits, maybe it sneaks over to 10%, but you're going to see this build as the year goes on.

But still given the restructuring and the mix of business, it should be a very good business segment for us this year, as you can imagine.

One more for me.

You gave the pretax margin range, but not a post tax margin range.

Is there any variability in the tax line this year?

I think the tax rate is going to be around 30%.

Okay.

Thanks

We've had nothing extraordinary.

Obviously, the pressure is upwards based on what's going on around the world right now.

And hopefully, with the right election, and the right focus on restructuring corporate tax rates, we pay a lot of taxes as you well know.

Hopefully we'll get a more balanced rate for us going forward, but we're going to be paying around 30%.

Okay.

Thanks, David.

It's a good number to use.

Our next question comes from Rich Kwas from Wells Fargo Securities.

Please go ahead.

Good afternoon, Dave.

Two quick ones.

Electronics components.

You talked about that as a problem earlier in the year.

It's still there.

Other companies have talked about it.

You see any relief in sight here?

No.

Not yet.

We still have some issues with IGBTs, with some issues in some of the components coming out of Japan.

The capacity is taking longer to come on board.

I don't think the yields have gone well.

We are still seeing some shortages.

That's not a good sign.

That will obviously create a cost issue for me, as we have to pay premiums to get those things.

I thought we'd be really stabilizing by now and actually see an improvement.

My gut now tells me based on what I'm hearing from my people, it probably will be early 2011, calendar 2011, before we see some stability there.

That's not a good thing.

I think our suppliers did not do a good job getting ready for this.

If I treated my customers this way, my key, global top ten customers, they would be on my door in about two nanoseconds, camped out.

I guarantee it.

Right.

Okay.

Great.

Thanks.

Then on the process just housekeeping question.

Fourth quarter margins declined from third quarter.

Usually you see a sequential uptick.

Anything going on there?

I know Q3 was very strong.

Was it just the comp in Q3 was very strong or was there a mix issue in the quarter?

We had a big pickup in currency mix in the third quarter.

And the currency transaction helped us, it was $19 million to $20 million.

That helped us.

We knew this was going to come.

So it just flowed through, that as the dollar, the European currencies moved around, that helped us in the third quarter, so that really helped that margin.

The 20%, I think we had 20% in the fourth quarter.

I the fourth quarter it was like 19.1.

19.1.

Okay.

There's nothing extraordinary.

You're right.

Sequentially, they would improve but because of the currency impact in the third quarter, there's nothing funny or weird going on there.

It's just sometimes these currency things hit you or something like that.

Nothing unusual.

Okay.

Great.

Thanks so much.

Thank you.

Our final question comes from Steve Tusa with JPMorgan.

Can you hear me okay?

Yes.

Where you calling from?

I'm calling from Chicago.

Chicago?

Ok.

In a car or taxi?

What are you doing?

I'm huddled in the corner of this satellite phone booth thing.

So I apologize.

I'm going to get my GPS out, and we'll send a scud missile out there or something, ok?

You're close to my back yard.

I could get you.

(Laughter).

Just trying to snoop around and figure out what's going on.

I'll take your word for it today.

Obviously, a question on climate for me.

Your fiscal year has a lot of stuff going on, given you would have seen the benefit from the R22 channel loading at the end of last year.

I'm just curious.

What was your resi business for the year, what was your US resi business?

Where did that finish from a growth perspective?

Our US resi business for the year, because we have a very strong replacement market.

I would say we're up 10% or 12% in the US.

Thinking about what's going on there, it was a very good year for us.

Obviously, we're going to be facing a much more challenging US business as we go into 2011.

There's a lot of things going on.

As you well know, you know this industry extremely well.

There's been a shift going on.

Obviously, the incentives have disappeared from the government standpoint.

I think you're going to see this fourth quarter here, this calendar quarter, is going to be tough as our customers look at maybe doing some inventory reduction which will hurt us.

I think as we get into the calendar year 2011, we could see some growth return.

But I think it's going to be very challenging for us on the residential side, after a very good year this year.

So, you did see those replacement compressors grow pretty fast?

So people are actually not just letting their systems sitting there or buying window units or fans or going without air conditioning?

No.

I think we'll have some pretty good replacement business again in the first part of the year.

But I think the underlying -- the housing market is not good.

The upgrades in housing is not good right now.

I think there's some [bill] ups.

I'm expecting some, what I would say, some pretty tough comps for us as we move into the first part of 2011 for the climate guys.

On the positive side, we're seeing the refrigeration business, the non-res business, the container business, and the global business is doing much better.

So the residential side struggled, but we're seeing the other side improved.

It will be an interesting year.

The climate guys could be surprising to me.

I said they'd be low, medium underlying growth rates for the year.

They could surprise me because of the other businesses coming back.

But the residential is tough.

Do your guys tell you anything about the demand destruction from the (inaudible) high price systems?

If those systems came down dramatically in cost, do you think that would help drive people to go back to replacing more of the systems as opposed to just buying a compresser?

Is it really --Obviously, since they are replacing a compresser, there's a cost issue versus what they used to do, which is just replace.

(Multiple Speakers)

There's no doubt about it.

Yes, we do talk about it.

It's not something I'm going to publicly talk about, but there's no doubt about it.

I think the biggest issue to me and I've been involved in this business quite long -- is the size.

I think the astronomical size of the new units is a big problem.

The technology they use is they made them bigger.

I can tell you right now, many people cannot fit them into the house or outside.

They just don't have the space.

They need to figure out how to get the efficiency without making them bigger.

Our compressor is not bigger as we move to efficiency.

But for some reason, as the air conditioning guys, the heating guys made these things so much larger.

You have seen them, Steve.

They're massive.

Two more quick ones.

If we went back to R22, do you think that would be an impact?

And then second of all, how are you thinking about price increases to your compressor customers?

For many people on the phone, that probably don't understand what you're talking about going back to R22.

I personally, I don't think it will have an impact on us per se.

The units will be sold.

But I hope the government doesn't go back to R22.

We made the decision to go forward with relative to energy efficiency and a change in the refrigerant.

I think going back is a big mistake at this point in time.

That's my opinion as a person.

I don't think that on the pricing standpoint it's all commodity driven right now.

If the price of copper or the price of aluminum, the price of those components continue to increase, we'll have to pass some increases on.

We're working with our customers.

We know we have an issue relative to already the costs going higher because of efficiencies.

The government passed these efficiency standards.

As you know, we have one coming again in 2015, which we really don't need, but they are going to pass another one.

The OEMs right now are struggling with this issue from our standpoint.

That's why we're investing in the electronics area to try to figure out how to get the efficiencies without making these units larger and more costly.

It's (Multiple Speakers) for the industry.

Sorry.

One more.

Has the consensus look about right for the first quarter?

You usually give us some sort of color on first quarter?

I haven't really looked at it.

I have not looked at consensus, Steve, to be honest.

Typically, who knows what's going on in there.

It will be an interesting quarter from the standpoint -- it should be an easier comp at the topline, but as I say, we have other things flowing through there.

We'll try to give some more color.

What we might do is look at our next order release.

I'll try and look at that and put some input in that, okay?

Why did you release orders last month -- earlier this month?

There's two reasons.

First of all, I asked Lynne.

I've been doing this.

Why did we release them the same time?

We have them.

And two, I did want to get them away from all the changes we had going on relative to the divestitures and acquisitions.

I wanted to get that information out ahead of that.

I knew there would be a lot of discussion relative to the restatements.

I wanted to get it separated.

There's no reason why I can't put the orders out before I put the P&L out.

We'll go back and do that from now on.

There's no reason.

I don't know why I did it historically other than it's always done that way and that's not a good reason.

Okay.

Thanks for all the color.

Way to go.

I just wanted to make you guys work twice.

That's all.

Thank you.

And I will hand the call back to management for any closing remarks.

I want to thank all of the people across Emerson for working so hard the last 18 months.

Your effort has really paid off.

We had a great finish to 2010.

I feel very strong about where we sit relative to 2011.

I feel very good about the investments we're making that position the company as we globalize the business.

I look at what we have accomplished.

And from my perspective, we are extremely strong and the foundation is strong and look forward to an exciting 2011.

I also want to thank everyone being on the call today.

I look forward to seeing everybody as the year progresses.

We'll see people here in St.

Louis in February.

I promise there will be no snow.

That one I wouldn't bet on, but I promise.

Take care, everybody.

Thanks

Thank you, sir.

Ladies and gentlemen, this concludes Emerson's Fourth Quarter fiscal 2010 results conference call.

If you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 and entering the access code 4370601.

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