艾默生電氣 (EMR) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the Emerson second quarter fiscal 2011 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).

This conference is being recorded today, Tuesday, May 3, 2011.

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

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

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

Please go ahead.

Thank you, Christina.

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

Today's call will summarize Emerson's second quarter 2011 results.

A conference call slide presentation will accompany my comments, and is available on the Investor Relations 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.

We saw strong second-quarter sales that were up 18% to $5.9 billion, with increases in all segments.

Underlying sales were strong, at 14%.

Gross profit margin of 39.4%, down 20 basis points in an increasingly challenging material inflation environment.

Our operating profit margin increased 160 basis points, to 16.9%.

Earnings per share was $0.73, up 38% compared to $0.53 in the prior-year quarter.

Strong operating cash flow in the quarter of $753 million and free cash flow of $627 million.

Our free cash flow to net earnings conversion was 113%.

Our balance sheet remains strong and flexible.

We have returned 51% of operating cash flow to shareholders in Q2, through dividends and share repurchase, and we have room to increase share repurchase in the second half of fiscal '11.

We had a very strong first half of fiscal 2011.

Slide three, the P&L.

Again, sales increased 18%, with underlying sales up 14, acquisitions added three points, and currency added one point.

Operating profit up 30% to $991 million, or 16.9% of sales -- the increase driven by volume leverage and cost reduction benefits, partially offset by higher material costs.

Earnings from continuing ops up 36%, to $556 million.

We repurchased 2.2 million shares for $132 million in the quarter, which gets you to an EPS of $0.73.

Again, very strong growth on all key measures in the quarter.

Slide four, underlying sales by geography.

In the second quarter, the US was up 13%, and total international was up 15%.

Europe was up 17%; Asia up 10%, including growth in China of 9%.

Latin America up 26%, Canada up 22%, and the Middle East/Africa up 13%.

Again, total underlying sales up 14%, currency adding one point and acquisitions adding three points, gets you to the consolidated sales up 18%.

Slide five, some income statement detail.

Gross profit up $2.306 billion, or 39.4% of sales.

Higher material costs and unfavorable product mix partially offset by volume leverage, higher prices, and cost reduction.

SG&A of 22.5% gets to you to operating profit, again, of $991 million, or 16.9% of sales.

Other deductions net of $101 million includes lower restructuring of $20 million and gains in Q2 of $19 million, which were offset by increased amortization of $19 million and favorable mark-to-market from currency transaction of $20 million.

Interest expense of $57 million gets to you pretax earnings of $833 million, or 14.2% of sales.

Taxes of $266 million, for a tax rate of 31.8%.

We still expect the full-year FY '11 tax rate of approximately 31%.

Next slide, cash flow and balance sheet.

Operating cash flow $753 million, up 19%, driven primarily from higher earnings.

Capital spending of $126 million gets you to the free cash flow of $627 million, an increase of 15%.

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

We added some strategic inventory during the quarter, due to Japanese supply concerns.

Next slide, the business segment P&L.

Business segment EBIT of $934 million, or 15.5% of sales, an increase of 20%.

Margin expanded 30 basis points, driven by benefits from volume leverage and cost reductions, partially offset by material inflation.

Increased amortization from acquisitions was offset by lower restructuring.

Difference of accounting methods, $56 million, corporate and other of $100 million.

We had lower stock compensation expense in the quarter, $33 million, and positive impact from the gains of $19 million, primarily related to the Fisher Sanmar JV buyout.

Interest expense -- again, $57 million, down $10 million, primarily due to lower debt balances gets you to the pretax earnings of $833 million.

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

Sales in the quarter, up 16%, to $1.653 billion.

Underlying sales were up 14%, and currency added two points.

By region, the US was up 13%, Asia was up 13%, Europe up 16%, and Latin America up 20%.

We saw broad strength across the measurement valves and systems businesses.

EBIT of $296 million, or 17.9% of sales, up 23% -- driven by volume leverage, cost reduction benefits, and lower restructuring, partially offset by the unfavorable mark-to-market impact from foreign currency transactions, which was a negative $20 million impact.

Orders remain strong, but are moderating from peak levels, as the comparisons are getting tougher.

Next slide, Industrial Automation.

Sales in the quarter of $1.308 billion, up 30%.

Underlying sales were also up 30%.

By region, the US was up 30%, Europe was up 30% and Asia was up 22%.

We continued to see broad growth across the portfolio, and very strong growth in the power generating alternators business and electrical drives.

EBIT dollars of $210 million, or 16% of sales, an increase of 61%, driven by volume leverage, cost reduction benefits, and lower restructuring.

Revenue growth will moderate from these very high levels in the second half of fiscal '11, as comparisons will be tougher.

Next slide, Network Power.

Sales in the quarter of $1.616 billion, up 20%.

Underlying sales were up 8%, acquisitions added 11 points, and currency added one point.

By region, the US was up 5%, Asia was up 6%, and Europe was up 4%.

Network Power Asia resumed slight growth in the quarter, and we expect double-digit growth in the second half of 2011.

The China telecommunications business is struggling after two strong years in '09 and '10.

EBIT of $150 million, or 9.3% of sales, a decrease of 5%.

We had increased Chloride amortization of $16 million, and other Chloride acquisition-related costs of $9 million.

We also had negative product mix on favorable price, material inflation, and technology investment, which were partially offset by volume leverage.

The Avocent and Chloride acquisitions are on track, and the integration of these acquisitions will accelerate in the second half of fiscal 2011.

EBIT margins for Network Power are expected to strengthen sequentially, as we move through the second half of fiscal 2011.

Next slide, Climate Technologies.

Sales in the quarter of $1.014 billion, an increase of 12%.

Underlying sales were up 11%, and acquisitions added a point.

By region, the US was up 14%, Europe was up 5%, and Asia was up 6%.

Our North American residential sales were strong, compared to a weak preseason last year.

Global transport sales were also very strong.

Our China business is falling, as the government is reducing investments in residential and light commercial sectors; and we also have a very tough comparison to 2010.

EBIT of $187 million, or 18.4% of sales, an increase of 15%, driven by cost-reduction benefits, volume leverage, and favorable mix from higher technology products.

Our revenue growth is tracking nicely in fiscal '11, increasing from a strong fiscal '10, which was up 19%.

Next slide, Tools and Storage.

Sales in the quarter of $455 million up 8%, underlying sales were up 7%, and currency added a point.

By region, the US was up 6%, Europe was up 8%, and Asia was up 15%.

We saw strong growth in the non-res construction-related businesses, which continued to outpace the consumer and residential-related businesses.

EBIT of $91 million, or 20.1% of sales, up 3%.

We had benefits from cost-containment actions and material inflation and freight costs, which were partially offset by higher selling prices.

Residential housing remains challenged, and the forecasted recovery continues to be pushed out.

Next slide, the summary and outlook.

Second quarter was a very strong quarter on most levels.

We had underlying sales growth in the quarter of 14%, and our operating profit margin increased 160 basis points to 16.9%.

As we've discussed, material cost inflation remains a headwind.

We've been working on price initiatives aggressively.

Overall, capital goods on markets remain favorable, and order rates continue to support our expectations, building for a good start for fiscal 2012.

We are on track for a record 2011, and the foundation of Emerson is strong.

For fiscal 2011, we expect earnings per share of $3.20 to $3.30; underlying sales, up 10% to 13%; net sales, up 15% to 18%; operating profit margin, 17.4% to 17.6%; operating cash flow in the range of $3.3 billion to 3.5 billion; restructuring costs, $80 million to $100 million; and capital expenditures, $0.6 billion.

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

Thank you very much, Lynn.

Welcome, everybody, this afternoon.

First, I would like to say that I personally believe this was an excellent quarter, in total, for the Company.

Sales of 18% growth, underlying sales of 14%, record operating profit margin of 16.9%, net income up 38%, EPS up 38%, operating cash flow up 19% to $753 million, free cash flow up 15% to $627 million, the balance sheet was greatly strengthened at all levels.

And, in our Board meeting today, the finance meeting this morning, we made the decision to increase our share buyback, given the strong balance sheet and cash flow, and given the fact that we're modulating back and acquisitions given all the acquisitions we've done over the last two years.

However, we will continue to do bolt-on acquisitions.

Secondly, I would like to recognize the 133,000 people around the world that, through their efforts, in delivering an outstanding quarter in a very challenging and, I would say, uncertain global environment, I want to thank them.

I also want to recognize the employees and families that have had their lives torn up and turned upside down in the recent tornadoes that went through the south, through Arkansas, Mississippi, and Alabama.

We've had three facilities very negatively impacted, one of them totally destroyed.

Families have lost homes.

Fortunately, we've not lost any employees there or family members.

There's a lot of rebuilding, and our hearts and our prayers are going out to these people, as they rebuild their lives in the Mississippi, Alabama, and Arkansas area.

We had three facilities, one of them torn down completely, and two of them right now continue to have no power; and clearly, we'll have interruptions.

We don't know exactly how long and how much, but the most important thing is that none of our people were lost or their families were lost, and we can rebuild over the coming months.

But, it was quite a devastating week last week, relative to our own people here across the Company.

And, I want to thank them for everything they've done, despite all the turmoil going on out there.

Third, yes, it was a strong quarter.

But, as always, we have issues.

I would say the Company, as I told the Board this morning, is hitting eight out of 10 cylinders.

Clearly, the Network Power business is an area that, from an execution standpoint, we haven't got the job done.

We have major new challenges coming at us in this area, some different than we thought just a few months ago.

But, we know how to deal with these, and we will deal with these.

And, I will try to give you some color around these areas, and -- to make sure you have an understanding where we're coming from.

But, most importantly is, the fix is underway.

And, we will deal with it, given the history of Emerson, we know how to deal with operating issues.

Relative to Network Power, Network Power China particularly had very strong telecom business in 2009, 2010.

That business has come down quite rapidly.

And, with the slowing of demand, in fact, negative demand, we're seeing significant price pressures, and we're seeing some hits at the top line because of those price pressures, and obviously at the bottom line as it comes down.

At the same time, we are seeing significant inflation in China, driven by the commodities, also driven by employee inflation.

And, that will have to dealt with as we go forward and restructure our whole China operation across the whole Company, but in particular Network Power China, which we will deal with.

At the same time, we are continuing to invest aggressively in new product and new next-generation products across Network Power, even with the pressures we're seeing relative to the price costs within Network Power China, we have continued to invest for the future of the Company and not worrying about a quarter or two.

This is very important to the long-term growth of this Company, and we have continued to deliver value to our shareholders over time by investing.

The Chloride integration is going well.

We are now moving into second gear -- higher gear.

After March 31, when the final payment was made relative to the employees that stayed with the Chloride acquisition, we are now fully moving forward with a very strong integration, an aggressive integration across the Company.

The Chloride integration -- the Chloride business is doing very well, and we're pleased with the acquisition to this point in time.

And, we continue to believe it's going to be a tremendous value creator for our shareholders.

The key that issue that we deal with right now in Network Power is primarily relative to some of our pricing pressures in the China telecom marketplace; some of the price/cost pressures coming out of the actions within China, relative to inflation, relative to materials; and also relative to the fact that the Chinese government has been backing off relative to some of the incentives and some of the tax benefits that we've had for many, many years.

And, that has backed down and hurt us in the most recent quarter.

Relative to the other part that I was concerned about is within the Tools and Storage business.

Tools and Storage clearly is not coming back.

The US residential market has continued to struggle.

It is at record low levels, and I do not see when it's going to recover.

Our profitability is doing very well there.

However, with the price/cost issues that we're facing -- in particular, material inflation, we're going to have to go out and raise prices in a challenging marketplace, which is never easily done.

But we will also get that job done.

The other area that obviously we're dealing with right now is material inflation.

It's nothing different than what we've been talking about since November.

The only issue is the Japanese disaster, which was a terrible disaster for that country.

And we're having to deal with the shifting of our supply base and lock up our supply base.

We have been able to do that.

We are in good shape relative to the third quarter, relative to the fourth quarter.

I still say we're not out of the woods.

I still believe there will be speed bumps.

But, with that, we have been buying in material, we've been shifting material around, and we are paying premiums for this material.

I firmly believe we need to support our customers here, and taking a hit short-term is more important and we can deal with that over time.

But, material inflation is not going away.

As I look at it right now, our net material inflation is now over 3%.

Our pricing actions are going to have to be stronger in the second half of the year, and I personally don't believe it's going die as we go into 2012.

And, as I look at it now, I think our net material inflation will be in the 2% to 2.5% range in 2012, which again means we're going to have to have strong positive pricing action going across the Company.

At this point in time, if you look at the fourth -- the first quarter, which, as Lynn told me, we had communicated that we had a negative price cost of about $40 million, it is less this quarter.

It's around $30 million.

We are going the right way.

We are continuing to raise prices, and we will continue to raise prices.

At one time, I thought we would be in balance in our price/cost situation by the fourth fiscal quarter.

Now, with the China -- not the China -- but the Japanese situation and the premiums we're having to pay there and the fact that we're having to go out, I now believe it will be more like the fourth calendar quarter.

And, the actions are going in, they're taking place.

But, clearly, the Japanese disaster and the unfortunate situation there has caused us to have to go out and do things which are causing our material costs to go up.

And, we will get that recovered, as we go forth here in the coming year.

But net-net, net material inflation is much larger.

It's going to take longer, because of the Japanese situation.

And, from my perspective, we have the process in place and we're making headway.

Given the fact that the net cost between fourth and -- I'm sorry, the first and second quarter was less, we will make that less as we go forth here in the second half of the year.

But, it's still a challenge and a big issue for us.

The other issue that we could not control was, unfortunately, currency.

Within our process business and a couple of other businesses, we take long contracts relative to projects, we price them out in dollars, and, unfortunately, with the dollar/euro movement, we have to mark-to-market these agreements.

And, this is a big movement this quarter, relative to the dollar.

It's an unfortunate situation.

And, the new rules put forth by Congress a couple years back and put forth with the SEC, we had to mark-to-market on these currency transactions and basically pull this hit forward into the quarter, which is quite significant from the process level.

The process business is operating at peak performance, and if you take out that currency impact, they continue to perform at extremely high levels and continue to invest in the future and new products and innovation.

And, I feel very good about it.

Currency does happen, not much I can do about it.

And, from that perspective, we have to move on.

As I look at the Company today, we continue to invest aggressively around the world, international and emerging markets.

We have continued to invest significantly in our mid-tier project programs in the -- especially around China, India, and Russia.

Ed Monser and I just finished an 11-day trip where we went into Romania, Russia, and China.

We're viewing our key strategic engineering centers and the key programs relative to where we stand.

We are doing better than I thought we would at this point in time.

We have a lot of investments going on.

We have hundreds of people going into these engineering and sales and marketing, and we're continuing to really accelerate this program.

And, it will start paying dividends for us as we move into 2012.

I want to thank the employees for the work they're doing there and putting up with us and the intensity that we went through for 11 days.

But, it was very productive to get firsthand experience on what's going on, and making sure everyone understands where we want to go.

So, as I look at it, we have operating issues.

But, you have to understand, I'm an operating executive.

I've been around here for 30 years.

We have a couple of issues; we will deal with them.

We will fix Network Power.

We will continue to improve the profitability in Network Power.

We've had a couple of new wrinkles come at us, but we'll deal with it.

One thing Emerson can do is fix operating issues.

And, we can do it.

But, don't lose fact -- sight of the fact that we just put up a tremendous quarter.

I'll repeat it.

Underlying sales of 14%.

Operating profit, record margins of 16.9%.

We are telling you that we're going to hit a record 17.5%-type for the whole year.

Net income for the quarter, up 38%.

Operating cash flow strong, and we're talking about operating cash flow, free cash flow, at record levels for the whole fiscal year, and our EPS at record levels for the whole fiscal year.

It was a tremendous first half, a tremendous second quarter.

We have a couple issues; we will deal with them.

We have the processes in place, and we have strong underlying growth going into 2012.

As I look at the global market today, yes, there are issues going on out there.

But, I still believe that we will see strong underlying growth, based on our order pattern and based on the new product investments and based on our emerging market investments that we're making across this Company, that we'll have another strong 2012.

So, as I look at it right now, and we'll -- I'll -- one of the things I will do at the upcoming May EPG is I will update the segment -- what I would say, expectations of sales and profit margins.

Clearly, there are some of them moving around.

Some will be better, some could be slightly worse.

But, in total, if you look at what we presented in February, I still believe our underlying sales will be good; they'll be at the high end of the range, in my opinion, of what we communicated.

We will exceed $24.5 billion of sales.

We will set a record margin, OP margin, of around 17.5%, and we will have free cash flow, if -- very close to $2.9 billion.

Maybe a tad less.

But, a record level.

And, our balance sheet will be sitting at extremely strong levels after we did the acquisitions the last couple years.

So, the Company is strong.

The Company is dealing with the issues we need to deal with.

And, I feel very good about where we sit today and about getting the things fixed that need to be fixed across this Company.

But, again, I want to thank the employees around this Company.

I especially want to thank the employees that have gone through basically extremely challenging tornadoes the last couple -- the last couple 10 days or two weeks.

And, they're still working.

I had one group of employees that went back into the factory and pulled out all the working inventory, despite their homes being destroyed.

Now, that's [Indiscernible -- audio disruption] dedication.

And, with that, I will open the floor and take questions.

And, again, I want to remind people I do not give quarterly forecasts.

I haven't since 2001.

I have no intention to do it.

I give you my forecast for the whole year, and those numbers are still in line with what we communicated to you back in February.

So, with that, open the table.

Thank you.

Thank you.

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

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

Please go ahead.

Hello, Mr.

Davis.

I -- Dave, you kind of -- you're calling them operating issues in China.

Is it specifically kind of -- is it truly operating issues, or do you have some competitors that have been irrational over the last quarter or so, and you're responding to something that's going on there?

Just -- if you don't mind clarifying.

From my perspective, in the China telecom market space, it's a very aggressive space.

And as the market growth -- and this is the telecom space -- as the market growth really came down, as the government backed off the incentives, I would -- clearly, the market pricing got very competitive.

And we've had to protect some of our base, and some base we had to walk away from.

So, I never call a competitor totally irrational.

Obviously, there's a reason why they do things.

But some of our competitors -- local competitors got extremely aggressive and caused some significant price erosion.

And at the same time, we did lose some business, because we walked away from it.

And from my perspective, where we are right now is, we're retuning where we want to aim our guns here, and we're also retuning in -- what type of cost structure and where we want to grow forth -- forward.

So, it's nothing unusual for us, but I -- it did accelerate quite rapidly here in the last three or four months.

Okay.

I think you spent a lot of time explaining that, so I'll move on to something more positive.

And that's the Industrial Automation business, which is just showing phenomenal numbers.

I think we all know that the alternator business is great, but what is surprising me is the strength of the drives business.

Can you talk about that?

Is there something out there?

Obviously, there's an OpEx cycle here, and there's demand, because things are getting running again.

But it seems like it has to be more than that, to be driving these kind of growth numbers.

Is it energy efficiency?

Replacement?

Yes.

You -- you hit nail head.

There's two -- there's three things going on, Scott, and you hit them all three perfectly.

Number one, clearly, there's an operating investment going on, from the standpoint of people looking at their factories and the productivity element of that factory.

And given where you are, be it in China, costs going up, or the US or Europe or whatever, as you upgrade that factory, you're looking at new automation -- in drives, clearly, is one way to do it.

Energy efficiency is clearly another thing that's going on right now.

So, people, when they go in and look at their upgrades, you are going to see energy efficiency is clearly one of these key things, including China.

Now, this is one case where our China investment is truly paying off, and it's been a good growth for us, relative to our drives business.

And the third thing would be, just from the standpoint of the investments we've made over the last couple years, and particularly trying to leverage it across our whole Industrial Automation and our Process business.

And so, we're getting into new segments that we've never gotten in before.

I think fundamentally, if you look at the drive market right now, it's a good business, and we have a very good cost structure with our new product platform underway there.

Right.

So, it's fair to -- I think you're outgrowing the industry by at least 10%, as we see it.

But, so, it's more adjacencies moving in adjacencies that's getting you there, or -- ?

I think -- I think that I would look at adjacency.

I think we've expanded our -- what we would call [C], our vision of what the adjacent market is.

You don't move share that much, as you know, in a quarter.

Yes, that's why I asked the question.

It's just such a big number.

So, obviously -- (multiple speakers)

We have a lot of new products -- so, it -- that's where it's going on right now.

Okay.

Thank you.

I will pass it on.

Okay, Scott.

Thanks.

Thank you.

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

Please go ahead.

Thanks.

Dave, another question on Network Power, but just looking at it strategically, a lot of acquisitions in the past, and you have highlighted that you would like to do more over the next couple years.

Just wonder if there are any specific technologies there that would benefit the portfolio, particularly?

Or if it's more in Process R&D-type properties that you'd look at?

From my standpoint right now, Network Power, I don't see anything that we need to do right now.

We have what we need for the current market I see out there, and currently what we want to do.

I would say that I would be probably rationalizing more, that as I look at some of the segments we want to go after, Network Power, I will continue to rationalize that as we look at the pieces we have here.

We've made a lot of acquisitions, and the business will recover here as we come through that.

But I don't see anything big I want to do at this point in time.

Okay.

And then, a little -- maybe conceptual preview of what you are going to talk about at EPG.

But, it looks likes the guidance for underlying growth allows for similar second-half growth as in the first half.

So, just wondering if you could address where some of the acceleration versus deceleration might be, or at least the sequential ramp might be more pronounced.

Some pieces are obvious, but not all of them.

Yes, let me grab the pieces here by business.

I'm just grabbing something here.

I know we have it in here.

From my perspective, as I look at it right now, I think Industrial Automation is going to stay pretty strong.

Network Power is going to pick back up.

The comps will be easier from the standpoint of our -- that a lot of China growth last year.

So, Network Power will be a pretty good growth basis.

I think the Process business will be a little bit stronger in the second half than they were in the first half.

I don't know about Climate Technology.

It could be slightly better.

It's a tough call.

It depends -- a lot depends on North America and the inventory, what happens.

Inventories are very low right now.

If you have a little heat, I don't see the residential market coming back, but Climate Technology could do a little better.

And I don't see much moving in Tools and Storage.

So, I think the positives right now are going to be Process and Network Power, Industrial Automation.

And the wild card will be Climate Technology, and I don't think much will happen with Tools and Storage.

Sounds good, thanks.

You're welcome.

Thank you.

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

Please go ahead.

Maybe coming back to China for a second, I guess China nominal GDP was up around 15%, 16% in the quarter.

So, it makes me wonder, if you take out Network Power, what were you guys up -- I know you said 9%, including Network Power.

But what if you took it out?

The other-- the pieces -- the industrial pieces did very well there.

I would say that Climate Technology, which was more than doubling last year at this time in China, had -- I bet you, had to be flat or slightly down in the quarter.

The industrial business -- we're grabbing it here, by the very businesses here.

But the two businesses that did not do well would be Climate and then Network Power.

So, we're grabbing --

And the reason I'm asking is just -- you're in niche -- (multiple speakers)

Yes, we're -- and Climate was down, too.

Because Climate was up 40%, 50% last year at this time.

And so, we have some -- we have two things, where the government was really stimulating in residential, non-residential, and telecom in 2009, 2010.

And now, they backed that off.

And so, we had that going the other way.

So, those two guys are down.

The other businesses were up quite significantly.

So, as you look forward, given the niche, you're in more attractive niches, in general -- in GDP growth, normally, right?

Yes.

You're viewing this as an aberration, and a very significant one.

You should be growing at a multiple of GDP -- nominal GDP in the country, no?

Well, we look at -- I wouldn't look at nominal.

I would look at fixed.

But we would -- we have been certainly growing around -- we've been growing close that 20% mark.

And so, we have our $3 billion of sales in China now.

So, we've been growing close to that 20% mark.

And we do have segments that will go in and out, based on what's going on in the government.

And right now, with the -- where the focus is at this point in time, we're trying to slow certain segments down.

I still think we're going to have good growth this year, but it's going to be a little bit different mix.

Right.

And maybe also, coming back to your comment where you talked about the local competition, in answer to Scott's question, and those -- you've walked away, you had pricing issues with those guys.

What -- other than retuning your own strategy, what makes you believe that the industry structure and competitive dynamics are going to change -- turn more positive?

Are you going to get guys going out of business, are you going to get -- why would this have been a one-time thing?

I think there's two things going on.

I think that what we'll do is re-aim where we want to play in the telecom space, and what type of product.

And we'll retool our product offering to be a little bit changed, which we can do within a 12-month time period.

So, I would say that we will be less and less focused on telecom in China in the coming 12 months, which will allow us -- we're not going to go back and start a war, like a battle.

We're going re-aim where we want to play and put our resources.

Which we can do in this space.

All right, Dave.

Thanks.

I'll pass it on.

You're welcome, Steve.

Thank you.

And our next question comes from the line of Rich Kwas with Wells Fargo Securities.

Please go ahead.

Question on Process, given strong order growth rate there.

How would you characterize the MRO business right now?

And then, are we transitioning into the --

White hot.

Okay.

Still hot?

White hot.

Okay.

And then, when do you think we transition more into the project-type stuff?

And then, when margins start to -- the leverage starts to maybe not be as robust?

The margins will start -- I'm sorry, the margins -- the big project business will start shifting in the second half of this calendar year, based on the way the order [case] is going right now.

And -- so, the game for us right now is to clearly continue to do our normal cost reduction, our repositioning, and things like that, so we can try to offset that hit we're going to get there.

But if you watch our margins in this business, we'll run them up there towards the 20%.

The big projects will come in and we'll bounce back and forth in this 19% to 20%, a little bit -- 20% plus.

That's what's going to happen.

Okay.

And then, are you surprised how strong MROs held, or were you kind of expecting it?

No, I think that, Rich, I blew it probably 18 months ago.

I thought the MRO would come in faster.

It didn't.

And given the fact that -- going back to the question, I think it was Scott asked, or brought up, there's a -- in the US, in particular, people are -- have really curtailed investment for so long.

They need to invest in their plants.

And with the price of their natural gas being so low and the whole logistics cost going so high, people are reinvesting in, let's say, the plants here in the US.

But also, you look in our European business, they're doing the same thing there.

So, this is something that's been expected for quite some time.

And I think it could hold up for -- as I think I pointed out in February, I think it could hold up for all of this year and maybe even a little bit going into next year.

The pace will obviously change, but it would still be a pretty good MRO business out there for us.

Okay.

And then, just a bigger-picture question.

In Industrial Automation in February, you talked about maybe shifting the mix longer term in that business.

Given companies with a lot of cash out there, is there anything that you're looking at from a divesting standpoint, that you're getting close to?

We only have one divestiture underway right now, and it's not in Industrial Automation.

It's in our Appliance Components business.

It's heating products -- I mean, people know that's on the marketplace.

And we would expect that to be done before the end of this fiscal year, and I don't see it at this point in time.

I'm not -- in the acquisition mode, the price has gotten much higher, so we're doing bolt-ons right now.

And strategically, we're backing off and getting our balance sheet strong again.

And we'll come back out at the right time.

Okay, great.

Thanks.

You're welcome.

Thanks.

Thank you.

And our next question comes from the line of Jeff Sprague with Vertical Research Partners.

Please go ahead.

Good afternoon, everybody.

Hi, Dave, how you doing?

Oh, not too bad.

Great.

Hey --

Where are you, driving around in New York or something?

Yes, sorry if it's a bad connection.

First, just on Avocent and Chloride.

The way it's worded in the press release, the additional restructuring or integration, however you characterized it, it sounds like it's something different than the original plans.

Is that the case -- ?

No, I mean, let me tell you what happened.

When we did the deal, I struck a deal with the board and Tim Cobbold that we would keep Chloride separate so they could do their March 31 close and bonus payout.

And that was the deal that we struck with the board.

And so, from my perspective, when March 31 came, we paid out the bonus for their whole fiscal year, and then we made the decision of how we're going to -- which people are going to be doing what.

So, we've had a lot of organization changes here over the last couple weeks, and now what we're doing is we're accelerating the integration, which we had held off.

And I didn't want to go public and talk about that, because I felt that would be unfair to the employees of that organization at that point in time.

But we made -- I made the decision with the board of Chloride to keep them standalone until the end of March.

And now that that's the case, now we're going about doing the integration of Chloride; Knurr, which we had done a couple years ago; and Avocent.

So, that's what that was.

It's not, we're going to spend any more money, there's not going to be more restructuring.

I just want to let people know that we're now picking up the pace.

And that's what it was.

Great.

And I didn't want to talk about it previously.

Understood.

And then, on China, your comment about retooling manufacturing.

It sounded like maybe you're talking about something even more broad than Network Power.

Is that the case?

Is there some reevaluation about how much footprint you want in-country, or where it's at in-country?

Yes, what we have -- what we're doing right now, and have been underway for the last 12 months across all of Emerson, is evaluating -- we have a significant presence in China.

We probably employ well over 40,000 people in China these days.

And what we're looking at, Jeff, is we're looking at our various manufacturing facilities and we are repositioning them -- and I've explained this to the government -- within China, where some -- we'll be moving further west, and we are actually going to be moving some out of China, because of the cost structure.

So, this is underway, and will go underway for the next 18 months.

There won't be any big announcements, we'll just start working it very carefully here.

And at that point in time, it's across the board.

And so, where we look at capacity and where it's going to be in China, given what I see the economy is going into more a costly mode, that we need to figure out where we're going to be.

We're not walking away from this market, because I think this market is going to be a $6 billion market for us within five years.

But we are going to have to refix where we're manufacturing.

And then, on inflation, the debate so far is really still just around price, cost, and getting caught up in that balance.

But are you seeing any demand destruction anywhere, any behavior change by people, because of what's going on with inflation?

And if so, where?

And you're talking from a customer perspective, Jeff?

Yes, from a customer perspective.

You know, I haven't seen any -- any of that.

I mean, there's clearly, in certain market segments, that -- where the consumer could be very sensitive and unwilling to pay the higher prices.

But most of our customers are facing the same issues we're facing, and they're going to have to go out and raise prices.

We're all going through the process right now -- do we want to be in this segment or not be in that segment, product line, or something like that?

But I think that from the standpoint of the whole price/cost situation, we are in a mode here for inflation for a couple of years.

And people are gearing up, and -- how do you adjust to that, and how do you take the necessary actions?

But I haven't seen any demand destruction yet.

I've seen more demand destruction from the global economy, from the Japan situation, from the war in the Middle East, from -- all those things going on around the world, than anything else.

And then, finally from me, can you give us some sense overall how quickly the power quality-related businesses are growing, how Chloride did on a pro forma basis, and the like?

I can't do it right here, but I'll do that down at EPG.

It's very good.

It's a better growth than they're performing than the total business is performing.

But I'll have to -- I mean, I'll have to look at that and get an underlying growth rate for you, so I just don't take a stab.

But I'll do that so we can have that at EPG.

Great.

Thanks a lot.

You're welcome.

Thank you.

And our next question comes from the line of Ajay Kejriwal with FBR Capital Markets.

Please go ahead.

Just following up on China -- so, obviously, a very important component of revenues and your long-term strategy.

You talked about wage inflation and obviously, that's more related to Network Power and Climate.

But I would think that has broader implications for other businesses.

So, maybe share your thoughts on what you're seeing.

Is that isolated, or is it a little more broader?

It's across all the -- it's across all the board.

And I think what it will do is, it will accelerate the investments by companies in China, into productivity and equipment, rather than using low-cost labor.

So, as that labor pool gets more costly, you are going to start making those trade-offs, relative to using more automation versus labor.

And I think that you -- we will continue to see that.

So, this issue is going across -- it's not just Network Power, Climate.

The Network Power and Climate thing was based on the government trying to draw back the demand, more than anything else.

And then, inflation is just happening across the country right now, and it's one of the things that the government is trying to get back under control.

But it's very difficult when they have national wage increases of 20% plus.

So, I think this is across all business segments.

And you would expect to move manufacturing out to other countries, that you would have lower cost there?

Yes, we will do some, we are going to reposition some.

We still will have a very (inaudible) presence in China.

What I would say is, and there are some segments I'll look at, as I look at -- if I have 100% capacity of a product, I might look at taking 80% and leave it in China, I might take 20% and move it out to a different country within the region.

I'm doing more of a strategy where our manufacturing now is going to be China for China, and then sort of a North Asia and a South Asia type of strategy for manufacturing.

And we're going to start dividing up that way, from the standpoint of just -- from a diversification, but also from a cost structure standpoint.

Good.

And then, in Europe, very nice pickup -- 17% growth, easy comps obviously helping, but 17% is a very solid number.

So, what's driving that?

Is it any specific businesses, countries that stood out?

No, it's pretty much across all the businesses.

All businesses are coming back quite nicely.

The industrial businesses, in particular, are doing better, given the fact that they [hinder] investors for a while.

And I expect Europe is going to have a continued -- I mean, I have -- I put a forecast out earlier this year that Europe would outgrow the US.

Now, the US is doing extremely well right now, so it's given Europe a run for it.

But I still think that Europe is going to have a very good growth in the second half; it won't be the 17%, but I still believe it will be double-digit in the second half of the year.

Good.

And maybe one modeling question, if I could.

On the corporate and other line, that moves around quite a bit; so maybe if you can help with how we should think about the second half.

Is $100 million kind of the run rate, or is it a different round number?

That's right.

What we have moving around within the quarters is the incentive comp, where we had a pickup this year versus last.

And then, we will have a pickup on a net basis for the balance of the year, but it will not be even through the two quarters.

That's the major item that's moving around on us.

Right now, are we going to be more than $100 million, or are we going to be less than $100 million?

We will be --

These guys look at it differently that you look at it, I know that.

Yes.

No, no.

The one thing to keep in mind, Ajay, is that on the corp and other line, as Frank was saying, with the stock comp expense, that can be a little lumpy, even though it's going to be a tailwind for the year.

So, we had $33 million favorable in this quarter that we just reported.

Next quarter -- I don't want to get too technical on this -- next quarter, which is our third quarter, you have to remember, if I compare it to a year ago, the stock price went down $7 from the end of March to the end of June.

And so, our stock comp --

Well, we're losing quite a bit today, so maybe we'll make up for that [son of a gun].

Well, hopefully, we get some of that back.

But -- so, it's not likely to be a tailwind like we saw in the second quarter.

So, you're likely to see that higher, and you are also likely -- obviously, gains don't repeat.

So, you have $19 million favorable on gain; so just between those two, you're talking about $50 million, give or take.

That should give you some color.

Got it.

That's helpful.

Thank you.

Thank you.

And our next question comes from the line of Dean Dray with Citi Investment Research.

Please go ahead.

Good afternoon.

This is Jessica Mullin for Dean.

That was a nice sequential uptick in Climate Technologies.

Can you give some more color on the pricing increases and the realization?

The realization, it happened.

And we'll be -- we're about to embark on our third price in this area sometime this summer.

The issue relative to our price is not what's driving the margin up.

It's -- we -- our price/cost situation, when we deal with our big OEMs here in this area is, we pretty much stay in balance, in a quarter, out a quarter.

Within a quarter, we're pricing every six months, back and forth.

So, that didn't drive our margin.

What drove our margin here was the investment and the new innovation in the electronics businesses we've been investing in.

And also, several new products that we've brought out.

So, at this level here, our profitability should stay pretty good, given the current mix.

We are getting the price necessary to cover the cost, so it's not a headwind, nor is it a tailwind right now.

We're neutral.

And so, that's where it's coming from.

Okay.

Okay, thank you.

And is there any color on the top line, for revenue growth?

What pricing was?

Well, the overall price -- yes, the overall -- we can give you that.

I think it's in the Q.

So, what's -- do you know what's about -- point of growth from pricing?

From Network?

I would say it's -- we -- I'll tell you in a second.

One second, hold on one second.

But I think it would probably be about one.

One point from Climate Technologies in the second quarter.

Okay.

It's in the Q.

All right, thanks.

And any other noteworthy surprises in pricing?

Industrial Automation seems strong.

Anything going on in Process?

No.

We're raising -- we're having to go after price increases across the board, because of material issues, and then a couple cases in -- from the -- all the businesses are going to have to raise prices.

And we -- in the Q, it's going to show two points of the growth was from price.

For Climate.

For Climate.

To go -- we said one; it's two points.

All right, that's helpful.

And you said Climate, again, would be a wild card for the remainder of the year.

And orders have upticked nicely.

Do you expect lead times to get longer, and how would that compare to Process and Industrial Automation?

Climate lead times are very short.

We have the capacity; we deal with it, unless there's a -- now, we do have one of the facilities that got hit was a Climate facility in Alabama.

So, that's a wild card for us right now.

I don't know what that's going to do, but they are still down.

But I think that, the key issue for us -- there's two things going on.

The orders are pretty good in Climate.

China is definitely -- right now, it continues to drop because of the demand and the comparisons are tougher, and the Chinese government have been raising interest rates.

So, I expect China to be pulling down on it.

And then, in North America, if we get any heat at all, the inventories are very, very low out there; that we'll obviously have to raise production.

But, you'll see that pretty quickly.

If our orders tick up within 60 days, we're going to be shipping.

In fact, it's typically 45 days.

Okay, perfect.

Thank you so much.

Okay.

You're welcome.

Thank you.

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

Please go ahead.

Good afternoon, everyone.

Hi, Shannon.

Hey, on the challenges/kind of wrinkles that you didn't expect in the quarter, Dave, we spent a lot of time talking about this China telecom situation.

Were there other things?

You had the Japan disruption.

Any other things that you were talking about when you made that comment?

I think there are a couple of things that are coming at us right now -- one, the fact that the government has pulled back on the tax incentives and the rebates that they had been giving -- we had been working with for quite some time.

And those are significant numbers.

That causes us both to lose some operating profit, and we also lose at the tax rate too.

That's hurt us a little bit.

And, I would say that the pricing intensified as the quarter went on, as -- further than I thought.

And I -- not much we can do about that at this point in time.

But those are the two big things there.

The inflation thing, I think is -- I thought would be more tapped down, but the government is trying -- but I don't see it having any impact at this point in time.

And so, the China inflation is a situation that's a concern of mine, and clearly will have an impact on the whole economy there, if they don't get that back under control.

Okay.

And then, in terms of the fixed being in on Network Power, as you think in terms of exiting 2011 and out into next year, what's your view on how long this fix is going to take, and when you feel like you're going to get Network Power margins back up to something you view as more normal?

Well, I think it's going to be -- we'll start making headway as we move into that -- into our fourth calendar here.

But from my perspective, I won't be happy with them until -- we're going to be -- we're not going to be getting up into where I'm comfortable with, probably until we get into the first part of next year.

They're going to get sequentially better as the year goes on; but they should be closer to 15% EBIT margin, and we're not there -- and we're not -- and obviously, we're not going to be quite there as we finish this year.

I thought we would, but we're not going to quite be there.

And so, that's where -- at this cycle, that's where they should be.

And I think it's going to be more into 2012 before we get there.

Okay.

And can you just size, sort of, the China telecom business for us at this point?

I couldn't tell you off the top of my head.

It's -- we've been shifting away from it for -- ever since -- for quite some time, but it's still out there and it still plays around with us.

And we'll still be a player, but we're going to be less and less a player.

Okay.

Thanks a lot.

You're welcome.

Thank you.

And our next question comes from the line of Julian Mitchell with Credit Suisse.

Please go ahead.

Good afternoon.

It's Alex (inaudible) for Julian.

Hey, Alex.

Hey, Dave.

I was just wondering -- could you give us some idea of where you expect order run rates to fall for IA and Process toward the end of the year?

Just in terms of what you talked about -- you talked about a good foundation for 2012.

Where do you see that sort of -- the trend moving in the remainder of the year?

I mean, it's --

I mean -- no, you -- we have orders right here?

I want to see where they're trending right now.

What I'm looking for is a graph, but I don't think I have that graph.

I mean, these -- I mean, I have to look at this, Julian, and we'll talk further -- I'll look at it and think about it when we get down to EPG.

But right now, as I look at where we're trending, it would have to be trending in the solid -- I'm looking on a fixed-rate basis here, not a GAAP, because the GAAP, obviously, is going to be inflated with the weaker dollar.

But I still think it's going to be in the 15% plus range, let's say 14% to 16%, 17% range, as we leave this year, for those two particular businesses.

Okay, (inaudible).

Great.

And in comparison, it's going to be tougher and tougher to go forward here.

But I'll take a look at that and see those comparisons.

But I think they're going to still look at double-digit growth for those two businesses, as we start out the year next year.

Thanks.

And Network Power?

Can you do the same for Network Power?

No, I can't -- that one is far more challenging.

You have a lot -- too many moving pieces.

The Process business, Industrial Automation business, is a lot easier.

The trend's easy -- or pretty steady, once they go into mode.

Okay, great.

Thanks very much.

You're welcome.

Thank you.

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

Please go ahead.

Thanks.

Hey, Dave, wondering if you could just maybe give us a little bit of color on what happened with the embedded business.

And then, as you think about the Network Power top line improving in the back half, what are the drivers there?

Is it just the comps get easier, or are there some businesses that really, you expect to pick up sequentially?

The comps are going to get easier, but I'm also expecting in the precision cooling area -- or, not precision, but the reliable power area, that those will get -- those orders and the sales will get better as the year progresses here.

Because the order pace is coming already, and we see the quotes out there.

So, that business -- and that's normal cycle.

It should be stronger the second half of this year, and then really strengthen as we move into the early part of 2012.

So, that's where that cycle is going right now.

And it's pretty much where I thought it would be.

And the embedded business, is that the one you're talking about improving sequentially?

And then, can you talk about what happened there from a cost perspective, as well?

The embedded business will -- should improve sequentially.

And the cost that's in embedded -- right now, it's in pretty good shape, other than -- we're -- our manufacturing is both split between China and the Philippines there.

We're obviously dealing with some inflation in China, but it's not that bad right now.

And more of my concern with embedded is from the standpoint of the component inflation, the component points, the premiums that I have to pay for certain components right now.

That's the biggest issue for me, at that point in time.

Okay.

And then, just to clarify on Network Power margins getting better.

Are you saying it should get better 3Q versus 2Q, and 4Q versus 3Q, or are you just saying, exiting the year, we feel it will be better?

No, I feel that, at this point in time, based on the plan, we should see sequential improvement in the Network Power margin.

We're taking the necessary action.

The level that -- I'm not sure.

We're redoing our forecast right now, based on the first half of the year.

That's clearly -- one segment is a little bit weaker, and I have some other segments that are going to be a little stronger.

But I would expect that the best margin will be the fourth quarter, as we leave that quarter -- as we leave the year.

Okay.

And then, just lastly -- at a high level, Dave, you obviously -- you have a track record of having very conservative guidance.

I'm narrowing in on the fact that a lot of issues -- a lot of different issues and some uncertainty on timing and resolution, Japan is still a wild card, and the fact that maybe you're a little bit south of the cash flow number, as you talked about earlier.

How would you like us to think about this new range on guidance now?

Do you still feel like it has the normal level of Emerson conservativeness in it?

Or, really as it sounds here, more likely the high end the range is sort of -- not best case, but very good case?

Yes.

I mean, from my perspective, if I look at where we are right now, the guidance I'm giving you, I feel, is pretty solid.

I don't have an element of conservatism in here.

The issues -- that if we didn't have issues going on out there relative to the material inflation issues, relative to the China sourcing issues, relative to the very things that we discussed on the conference call here, maybe we'd be a lot easier.

But right now, there's a lot of things tugging at us at this point in time.

We're going to have a very, very good year, and -- with strong underlying growth and good earnings growth.

But from my perspective, there's a lot of things pulling at us, from the standpoint of the whole material and the pricing action, and some of the pressures we're seeing in the telecom, and some of the fixed.

So, I'd say the guidance I've been giving you is tight, and it -- you should not be looking in that as, Dave is trying to sandbag us.

That's not what's going on here.

That makes sense.

Understood.

Thanks very much.

You're welcome.

Thank you.

(Operator Instructions)

I'm sorry, I thought there was a couple other people in queue.

We lost our connection, but I remember there were a few other analysts in queue.

Do you not see them?

Yes, ma'am, I do.

Okay.

Why don't you go ahead and put them in?

Okay.

The next question is from Eli Lustgarten with Longbow Securities.

Please go ahead.

Thank you, good afternoon.

I've probably gotten cut off a bunch of times.

I'm not sure what's happening with the phone.

Just a couple of clean-up questions.

One, we now have two points of currency benefit.

Do we have any currency earnings built into the second half of the year?

Yes, we've built in -- we've added, as we've raised the sales, the report sales level, we put in currency.

We flow in at a -- it's around a 15% rate.

That's basically what we flow in at.

So, one of the questions that everybody seems to be driving at is, you have a consensus estimate at $3.29, $3.30, which -- and I think it [has to do] -- we just don't really want to cut estimates today, or something like that.

Yes, I mean -- my forecast has been $3.20, $3.30, since I did the forecast, and it's still there.

Oh, I know.

I've never cut estimates.

I mean --

Oh, I know.

But the analysts -- (multiple speakers)

-- the street -- the street ran up -- they ran right up, Eli.

That's what they did.

And I --

I understand that.

I guess my question is, what kind of -- in order to get to the other part of the range, is it just strictly the volume levels that will come through?

Would that get you there?

Would all the problems that -- if you had that, if you had the stronger volume levels, would it put you at the upper end of the range?

Is that all we have to worry about at this point, [if you factor in all the other stuff]?

From my perspective, as I look right now -- and I'm looking at the volumes, I look at the orders, I look at the margins.

I look at -- we'll be at the upper end of that range, if everything comes through at the higher volumes, yes.

Okay.

And do you hear anything or talk about -- we have a unique tax -- you talk about the tax situation in China.

We do have the 100% depreciation write-off in this country, at least for this calendar year.

Are you seeing anything that is helping drive demand, are people talking about it?

Because one of the things we hear is that it's easier to justify, if I have to take the pricing, at least I can write it off this year.

So, maybe I want to make sure I get it.

Are you hearing anything being driven by that tax incentive, or that's just still in the background?

No, I don't hear anything like that.

No, don't hear anything like that.

All right.

Thank you.

You're welcome.

Thank you.

And our next question comes from the line of Steve Tusa with JPMorgan.

Please go ahead.

Hi, good afternoon.

Hi, Steve.

Just on Network Power, there's been a lot of discussion around China, but your US growth rate slowed to up 5% versus up 9%.

There's also the dynamic around the recent orders being flat to down.

So, I'm just curious, question number one is, could you just talk about the different moving parts in the US and what's going well, and maybe not as well there?

And then, secondly, given -- you expect this kind of comeback in the next couple of quarters.

How should we jive the kind of order rates over the next couple quarters?

How would you -- would you expect to see a nice pop in those in moving in the next quarter?

Or should it be much more of a gradual move, from flat to kind of that double-digit rate that you'd probably be talking about for next year?

I -- my standpoint's going to be gradual.

I don't see a pop, I don't see a pop.

We had a strong pop a year ago on the embedded power and computing, and that's what's dragging down the North America orders at this point in time.

Because those -- at this point in time last year, those things -- the orders in embedded power and computer were extremely strong; and now, we're working through that comparisons, and those have been very weak.

And those are starting to pick back up.

So, I -- from my perspective, I would expect a gradual improvement.

I don't expect a pop here.

And I would expect that improvement to go across the board, as the year progresses.

Okay.

And then, just a comment on a lot of moving parts here.

You guys actually are one of the few companies that actually said you built inventories, as kind of a safety stock here.

Right.

How much do you think either your customers or suppliers, how much of that is going on, given that a lot of companies have been surprised by their revenue growth in March?

Do you think that's having a -- whether it's pre-buy ahead of price increases, or just kind of a land grab to buffer from impact from Japan, is there enough going on here to have a pronounced positive impact on shorter-cycle businesses across the globe?

Do you see that going around a lot?

Well, I think that -- one of the things, I think people were going to try to grab and bring in more inventory.

We didn't get as much in as we wanted to, because obviously, sales were stronger; and I think that's a natural tendency.

But I think that there probably is a little bit of pop going on right now, but it's not going to go away, because the pipeline is going to have to be replenished.

So, I think that this is going to go on here for at least six to nine to 10 months.

So, from my standpoint, in this quarter -- in the current quarter we're in right now, our third quarter, we'd like to build a little bit even more inventory, relative to around these commodities, as we try bring them in.

Okay.

And then, one more question.

I'm not sure I read the comments on Process.

You basically said that some of the bigger projects are coming through.

Does that mean we're kind of at a peak level for Process margins, over the next year or so?

Year or so -- I mean, I would say that our margins will -- probably will not peak in Process within 12 months.

I mean, they could go up -- we could work our way up a little bit next year.

Again, I mean, we have -- the projects are coming in, but they don't -- they sort of work their way in over time.

In my opinion, the MRO is going to stay pretty strong out there; so, through early parts of 2012.

So, the margins will continue to look pretty good for Process.

You're going to have quarters go up and down, based on mix; but right now, I think our Process margin will continue to trend upwards.

Okay, great.

Thanks for a lot of great detail.

Appreciate it.

Okay.

You're welcome.

I think that was the last person in queue.

So, I think we're over time, so we won't have time to repoll.

Okay.

Thank you very much for joining us today.

Bye.

Ladies and gentlemen, that does conclude our conference for today.

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