艾默生電氣 (EMR) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Emerson third-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 opened for questions. (Operator Instructions). This conference is being recorded today, Tuesday, August 2, 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, Ms. Lynne Maxeiner, director of Investor relations. Please go ahead.

Thank you, Britney. I'm 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 third-quarter 2011 results. A conference call slide presentation will accompany my comments and is available in 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 2 of the conference call slide presentation. Third-quarter sales were up 16% to $6.3 billion, with increases in all segments. Underlying sales growth was 10%, led by strong emerging market growth. Operating profit margin declined 30-basis points to 18.1% and was negatively impacted by acquisitions made in the last 12 months and growth investments versus minimal levels in the prior-year quarter. Earnings per share was $0.90, up 17% compared to $0.77 in the prior-year quarter. Strong operating cash flow of $903 million and free cash flow was $708 million. Our free cash flow to net earnings conversion was 104%. Our balance sheet continues to strengthen. Operating cash flow to total debt is strong at 62% and we've increased the pace of share repurchase in Q3. Emerson is well positioned as the global economic environment becomes more uncertain and we will deliver record operating margin and earnings in fiscal 2011.

Slide 3, the P&L. Again, sales increased 16%, with underlying sales up 10%. Currency added 4 points and acquisitions added 2 points. Operating profit up 14% to $1.135 billion, or 18.1% of sales, the increase driven by volume leverage and cost reduction benefits, partially offset by higher material costs, acquisitions and growth investments. Earnings from continuing ops up 18% to $683 million. We repurchased 6 million shares for $329 million in the quarter, which gets you to an EPS of $0.90.

Next slide, underlying growth by geography. In the third quarter, the US was up 6% and total international increased 13%, with Europe up 9%, Asia up 12%, Latin America up 17%, and Middle East-Africa up 26%. Again, total underlying sales up 10%, currency adding 4 points, acquisitions adding 2 points, gets you to the consolidated sales up 16%.

Slide 5, some income statement detail. Gross profit of $2.498 billion, or 39.7% of sales. Higher material costs were partially offset by cost reduction, price increases and volume leverage. SG&A of 21.6% gets you to operating profit of $1.135 billion, which includes the impact of acquisitions and growth investments. Other deductions, net of $87 million, includes increased amortization of $20 million. Interest expense of $56 million gets you to pretax earnings of $992 million, or 15.8% of sales. Taxes of $294 million for a tax rate of 29.6%. We still expect full-year fiscal 2011 tax rate of approximately 31%.

Slide 6, cash flow and balance sheet. Operating cash flow of $903 million, up 29%, driven by higher earnings. Capital spending of $195 million gets you free cash flow of $708 million, an increase of 22%. Trade working capital balances are noted at the bottom of the slide, which does include some inventory due to Japanese supply concerns. We continue to strengthen the balance sheet as the recovery continues.

Next slide, business segment P&L. Business segment EBIT of $1.097 billion, or 16.9% of sales, up 13%. Margin declined 40-basis points. We saw benefits from volume leverage, price increases and cost reductions, which were more than offset by material and wage inflation, increased amortization from acquisitions and growth investments. Difference in accounting methods of $60 million, corporate and other of $109 million, we had higher stock compensation expense of $13 million, interest expense of $56 million gets you to the pretax earnings of $992 million.

We'll review the business segments next starting with Process Management. Sales in the quarter of $1.789 billion, up 18%, underlying sales were up 13% and currency added 5 points. By region, the US was up 16%, Asia up 17%, Europe down 1%, and Latin America up 6%. We continued to see broad strength across the segment. EBIT of $366 million, or 20.4% of sales, up 18%, with cost reduction benefits and volume leverage offset by cost inflation, business development investments and unfavorable foreigncy -- foreign currency impact of $7 million. Backlog for process was $3.4 billion, up 27% from the prior year quarter.

Slide 9, Industrial Automation. Sales in the quarter of $1.391 billion, up 24%. Underlying sales were up 18%, currency added 5 points and acquisitions added a point. By region, the US was up 11%, Europe was up 21%, and Asia was up 20%. Continued broad strength across the portfolio and very strong growth continued in the power generating alternators business. EBIT dollars of $230 million, or 16.6% of sales, an increase of 43%, driven by volume leverage and cost reduction benefits. Material inflation was offset by price increases. Revenue growth will continue to moderate from these very high levels as comparisons get more difficult.

Slide 10, Network Power. Sales in the quarter of $1.683 billion, up 19%. Underlying sales were up 7%, acquisitions added 9 points and currency added 3 points. By region, the US was up 5%, Asia was up 7%, and Europe was up 4%. Network Power Asia resumed double-digit growth and the global network Power Systems business was strong, including strong growth in our global UPS and precision cooling, which we up over 15%. EBIT of $176 million, or 10.4% of sales, a decrease of 3%. We had decreased Chloride amortization of $16 million. Also, unfavorable price, China labor-related inflation, embedded computing volume decrease and technology investment spending, which was partially offset by volume leverage. Our EBIT margin did improve sequentially 110-basis points from second quarter. EBIT margins are expected to continue to strengthen sequentially from third quarter to fourth quarter as our aggressive actions start taking hold.

Slide 11, Climate Technologies. Sales in the quarter of $1.171 billion, an increase of 6%. Underlying sales were up 3%, currency added 2 points and acquisitions added 1 point. By region, the US was down 3%, Europe was up 7%, and Asia was up 9%. We saw a weaker North American resi market due to a cooler and wet May and July -- I'm sorry, May and June, and inventory in the channel. Our China business was up 10%, but is expected to weaken in Q4, due to government fiscal tightening. EBIT of $229 million, or 19.6% of sales, an increase of 3%, driven by benefits from cost reduction actions. We saw significant material inflation, which was substantially offset by price. The US market is expected to remain weak for the remainder of the year.

Slide 12, Tools and Storage. Sales in the quarter of $472 million, an increase of 4%. Underlying sales were up 3% and currency added a point. By region, the US was up 2%, Europe was up 8% and Asia was up 4%. We saw growth in the non-res construction-related businesses and a decrease in the consumer and residential-related businesses. EBIT of $96 million, or 20.2% of sales, up 1%, driven by benefits from cost containment actions. Consumer confidence remains low and recovery in consumer and residential end markets continues to be pushed out.

Next slide, the summary and outlook. We had a strong third-quarter performance, with underlying sales growth of 10%, operating profit margin of 18.1%, and strong cash flow performance. We are entering a period of more macroeconomic uncertainty in the second half of calendar year 2011. However, Emerson is well positioned for the uncertain climate, with a strong global footprint, a good mix of businesses and end markets and financial strength. For fiscal 2011, guidance remains unchanged as follows. Earnings per share of $3.20 to $3.30; underlying sales up 10% to 13%, and we are tracking to the lower end of that range; net sales up 15% to 18%; operating profit margins, 17.4% to 17.6%; operating cash flow in the range of $3.3 billion to $3.5 billion; and free cash flow in the range of $2.7 billion to $2.9 billion.

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

Thank you very much, Lynne. I want to welcome everybody for joining us today on our third-quarter conference call and our results. The quarter came in what I would say strong. Not as good as we had expected just 60 days ago; however, still very strong results with sales up 16%, earnings up 18%, strong cash flow, and high levels of operating margins in excess of 18%. After nine months, our sales at $17.8 billion are up over 16%, our operating profit of $3 billion up over 20% and a record OP level at 16.8%, our net income at $1.8 billion, plus 21% and a 9.9% margin and EPS at $2.26 at 22% growth for the first nine months. Those are outstanding results and based on the investments we've been making the last couple years and based on the performance of a strong operating team.

I want to thank the global team for getting the job done. These are extremely uncertain and challenging times, with the Japanese earthquake and tsunami, a global material inflation, dysfunctional governments in the US and European not able to deal with the tough issues of debt and excess spending, and I want to thank the business leaders and the operating leaders for getting the job done in very difficult and un -- and challenging times.

Now, why did we call out last week in our orders that things are getting weaker? Because they are, they are weaker. We have always been very open in our communication to our shareholders and to our investors and when we see fundamental change, we call it out. There's no reason to hide it. It's the facts and we did it. Our underlying orders grew only 6.5% for the last three months. That is outside the range that I have been talking about for several months, in the 7% to 10% range. And yes, it's against tough comps but I saw fundamental weakness happening over the last 60 days.

And then couple days later, they announced GDP. GDP in the US grew in the first half less than 1%. Let's get that said; less than 1%. You look at all the facts that have been coming out the last couple weeks and the economics have been weakening. It's not new news. We have to deal with it. We have to position the Company to deal with those things.

Then we have a government situation. Their inability to deal with the real gut issues of excess spending and debt. All we hear out of government is we're going to raise taxes, we don't like corporate planes, we're going to sue Boeing, one of the most strategic companies we have in this country for building a new plant in South Carolina. We have no desire to really go after corporate tax reform, which would fundamental change this country and encourage people to invest and reinvest and create jobs in this country, but rather demigod and go after people that actually creates those jobs, be it corporations and people that are successful. We have a difficult issue right now to deal with in this country and the same is going on in Europe. They are in no better condition.

So as I look at what's coming at us in the second half this year, I do not see the catalyst that would say the economy will be fundamentally different in the second half than we saw in the first half. Maybe the gross GDP will grow a little bit more in the second half but fundamentally there's nothing going on in the US right now that would encourage corporations to ignore the excessive regulations coming at us, not to mention the new Dodd-Frank bill relative to whistleblowers or producing or mentioning what we have to do with minerals. We have to publish now what minerals we use. You look at the new healthcare bill. You look at the last week we decide in Washington to raise the CAPA standards for the second time within three years on the day that we announce less than 1% first-half GDP growth in the US economy. I would say Washington is arranging the chairs on the Titanic the way I look at it.

So we're dealing with realism here in this Company. We're looking at slower growth. We don't know exactly what that growth is. We will manage accordingly. Our orders in the industrial world will stay up. I can't tell you right now what the second half will be, I can't tell you what 2012's going to be so don't bother to ask me, because I will not tell you. If you tell me wa -- you ask me what 2012 is the first thing I'm going to ask you is, what is your forecast for the second half of GDP and what is your forecast for GDP in the first half of 2012. Let me know and I'll tell you what my forecast will be.

As a Company we have strong operating cash flow, our balance sheet's in great shape, we've made strategic acquisitions, we are integrating those acquisitions. We don't have a lot of acquisitions under way right now. I do not see a lot of acquisitions under way ri -- in the near term. We're using our cash to pay back a dividend. We just announced a record 55 years of increasing dividends. We've increased our share repurchase. We're now on track to do over $900 million of share repurchase, returning cash back to our shareholders. And we will continue to generate the earnings and the best growth we can in a very difficult market on a global basis and reinvest for future growth and creating shareholder value.

The Company will perform in a very difficult environment, as we have. We'll set record levels of cash, we'll set record levels of earnings -- margins and we will continue to drive forward. That's where we are right now. We are dealing with very uncertain times and we will manage those accordingly. I feel good about where the Company sits right now. We are performing at very high levels. All companies have issues we have to deal with but we're dealing with them. Our price cost is close to being equilibrium and we will be there in the fourth quarter. Our margins right now are running at very high levels and we will set a record this year. And our earning growth is good, as is our cash. So I want to commend the operating executives and the corporate executives for what they're doing in this very difficult time period and we will play with the hand we're dealt with and we will play the best hand we can and that's where we sit.

So now we can open up for questions, but I will not talk about 2012 because I have no visibility into 2012 at this point in time, given what's going on around this world, both in Japan, in the US, and in Western Europe, and that's where I sit. Thank you very much, the floor is yours.

Thank you, sir. (Operator Instructions). Our first question comes from the line of Julian Mitchell with Credit Suisse. Please go ahead.

Thanks a lot.

Hey, Julian.

Hey, how are you?

Okay.

Good. I guess the first question was, on your own business, as you see the order growth decelerate, I noticed that your SG&A growth accelerated year on year from March to June, even though your revenue growth went from 18% year on year down to 16%, so could you talk a little bit about how you guys are managing your own hiring and your own plans on investment? Obviously your investment's been going up, but if you're seeing orders decelerate, why are you pushing up investment so much and at what point do you start to scale back those investments --

I think that --

-- because the order flow is deteriorating?

It's very good relevant. We had an OCE business leader meeting about 10 days ago, private meeting on this iss -- very issue. We will modulate our spending right now. We already started it. I think that our underlying growth rate will modulate downward a little bit and I would have thought for the whole -- for the second half, we would have been double digit. We're basically around 10% right now. We could be anywhere between 9% and 12% in the fourth quarter. So right now, we're already modulating and putting things on hold relative to our spending as I look at the weakening global economies, and we will keep it that way for the time being.

On the industrial side, the Process side, we're not doing that yet because the growth rate is still there and we still feel -- our backlogs are at record levels. I just -- more, I would say, on what I saw the near-term, mid-term cycle type businesses I'm starting to modulate spending back. Here at corporate I'm actually modulating back. As Frank Dellaquila knows, I've asked [Sky] to take a relook at the last couple of months of the budget and as we move into 2012 I want to have a more conservative budget plan. So, Julian, to your point, we are starting to modulate that back. You just look at the facts around the world and the growth rates are slowing and you need to get ready for that.

Sure, thanks. Then just a follow up just on the sort of the current order intake rates. Is it the case that your -- the stand-alone month, July, will be materially a lot worse than what had in May, or is it more sort of a gentle decline but you're seeing more later on the decline will intensify, or is it actually the case that the July itself growth rate will be a lot lower than what you had in May?

No, I don't see that at all, Julian. I don't see it accelerating down further. I just don't see it -- I would have thought we've been riding the 7% to 10% range and I think right now you're going to see a general weakening. I don't think it's going to go -- it's not going to drop dramatically. Based on what we saw in July, we had a call around in the board meeting so that I'm talking to the business leaders, it's pretty much trending now in this probably now 5% to 8% range from an underlying order standpoint. I think that's where it's going to go. I think we shifted down, let's say, 1 or 2 percentage points in growth sooner than I thought and I think that's where we are right now. I don't see where the reacceleration happens in the economies around the world in the second half of the year. There's no motivation for that as I see it right now.

Okay, thanks very much.

You're welcome, Julian.

Thank you. Our next question comes from the line of Steven Winoker with Sanford Bernstein. Please go ahead.

Good afternoon.

Hey, Steve.

Hey, just a quick follow up, first on the last question. The growth investments you had talked about for accelerate 2012 I think were in the $40 million range, sort of --?

They're still protected. They are still protected. I think we'll -- right now we're on a pace just trying the right people we'll probably be closer to the $30 million and we will carry it over into the first quarter and I may add to that next year. These are very strategic relative to technology and emerging markets and some of our growth markets so we will not curtail those. I'm being more selective in other areas, what I would call non-strategic growth investment areas that we really can cut back on.

So these are -- just because you guys already are known to run lean elsewhere, are you talking -- what ki -- just additional G&A that's volume based or --?

No, we just won't spend -- rather than spending 5% increase, I'll try to cut people back to 3% to 4% type increases.

Okay, all right.

We're not talking about draconian cuts because we're still growing.

Okay. And then secondly, on the point around order rate starting to decelerate, on the pricing impact of that, inside your market, are you yet seeing any lack of pricing discipline as things start to decelerate? Remember last -- this last cycle we didn't see as much pricing deceleration as we thought we might and if we're heading into a slower environment again I'm just wondering would that hold up again? Are you seeing any weakness here"

We're not -- I really haven't seen any weakness yet at all relative on price and our ability to get price. As you know, we went out after the last quarter and raised prices in a couple areas and we're already seeing the impact of that relative to our order pace. We're walking away from business, so that hurts our orders. So we're able to get the price we need and if we don't get it, we walk away from the business.

Okay. On Network Power, maybe you could go a little bit into the actions, these aggressive actions that you talk about, particularly on the DC power, outside plant, China, India and mobile chargers, any change in dynamics over the last couple of months there, competition too?

No, no change. I don't think the competition on that has changed at all. The business is moving forward. We are actually taking the necessary price actions that we need. We're making sure we win where we want to win and we're going to walk away from the business we don't want. Basically what we laid out at EPG and during the conversations in the last conference call, we're executing right now. It's going to be over the next, as I said, three to four quarters. We're already seeing the initial work impact relative to our order pace and some sales in some of the early cycle, what I call the embedded power area, but nothing unusual. We're moving forward. Our margins were better in the third quarter and they'll be better in the fourth quarter. The volume will drop off a little bit and so we expect that but we'll get our profitability back in line where it should be.

Last thing, just put myself out there for. You said you're not going to give anything on 2012 but what multiple of GDP since you're just saying we should pick the GDP number so that means you're picking a multiple. What multiple --?

No, I'm not picking a multiple. I don't know where it's going to go. I don't -- right now, the reason we don't know, it's really hard to pick 2012 because where is the underlying growth going to be for the US economy or the European economies. They are definitely decelerating right now and the question is where does that go. You're in a -- what I would call transition mode right now in the two biggest economies in the world, be it the European economy or the US economy, so it's extremely difficult to say, okay, where 2012's going to be. I think it's a mistake for us to sit here and say, okay, I think the growth next year is going to be 2% or 3% in underlying GDP and based on that I know our GFI will be this, this and this. I think what I want to see is where this economy goes this quarter and in the fourth quarter and then I'll have, obviously, a much better view of what things are going to transpire as we go into 2012. I'm just basically grabbing stars right now and I don't think that's appropriate for me to do it. I'm running a business based on what I see right now and I don't want to try to sit here and try to forecast 2012.

Thanks, Dave.

You're welcome, take care, Steve.

Thank you. Our next question comes from the line of Christopher Glynn with Oppenheimer. Please go ahead.

Thanks. Hi, Dave.

How you doing?

Good, thanks. On the Network Power with the customer selection, wondering if you could talk first about what the impact on sales and orders was? And then also, it was mentioned as having an impact on the operating margin with the lower volume, but it's a strategic move so I'm thinking there's a pathway that by eliminating this business it's ultimately positive to margin?

Correct. I'm not going to sit here and quantify the dollar level, how much it is, but from the standpoint of we will see a margin improvement. Part of our margin improvement as we go into fourth -- our fourth fiscal quarter will be elimination of customers that have low margin business and the customers that do take appropriate pricing for the cost structure and what this product should be, that obviously will help us too. That's where we are right now. It will have a minor impact in sales. It will -- short term it obviously always has an impact on your cost structure, but over time we will adjust and by the fourth quarter we'll start getting that back in line and the margins will start coming back up. It's part of our improvement that we're expecting sequentially as we go from third to fourth quarter, but I'm not going to sit here and tell you how much it is.

Okay. And then just update on the Chloride integration. Looks like the sales were a little lighter than last quarter, so just wondering how that's all trending?

Within our -- within the Chloride Liebert-related businesses our orders and sales were up very nicely, up versus prior year. They were up over 15% so they -- that business was not worse off from that standpoint. If you look at the Chloride Liebert business we had a very strong orders and sales quarter and that business continues to trend pretty well on a global basis. So the integration's going well there. The businesses that we're modulating back that would cause the lower growth would be in the telecom space and some of the mobile space and embedded power and computing space where, as we realign our portfolio of businesses we find unacceptable margin. That's where the drop off in sales is, not on the reliable power and Liebert and ASCO switch or the Chloride business.

Got it. Thank you.

Okay, you're welcome.

Thank you. Our next question comes from the line of Eli Lustgarten with Longbow Securities. Please go ahead.

Good afternoon.

Good afternoon, Eli.

A couple of quick -- one quick clarification, the $16 million Chloride amortization step-up that's permanent, I assume, for a few years, or --?

That will be over --

That's correct. That was year -- that was quarter over quarter but there's a permanent step-up in the amortization.

Correct, but that will scale -- that will step down after seven or eight years.

But we have to factor that in for the next couple of -- for the rest of the quarters in this year and next year.

This year.

Yes, for all this year, yes, exactly right, Eli. And as you go forward, I think it probably steps down in year seven or eight or something like that. That's one of the big benefits of this new approach is that you do step down some of your goodwill and amortization out there.

Absolutely.

One general question, I guess I'm not used to seeing Emerson with negative margin comparisons in four out of five sectors.

Correct.

So I assume -- we know some steps that are being taken to improve sequential -- that we just talked about -- Network Power, but can you go through what's going on across the division, as far as stabilizing and improving profitability, especially with next year being uncertain I assume you want to have favorable margin comparisons next year?

The big issue, Eli, is the fourth -- the third-quarter margins last year were pretty much an all-time high. The third quarter last year we grew. That was the first quarter. Our underlying growth rate was 7% so we took off and clearly coming out of it we had not added any costs. What you have this year is you have a third quarter -- this is ignoring the fact -- impact of Chloride, which is a big chunk of the margin in the Network Power business, but we had a quarter this year where if you look at the third quarter last year they're down a tad, but if you look at the first half this year, our third-quarter margins are running substantially ahead of the first half of this year. So you've got to be careful as you look quarter over quarter because last year was a very unusual quarter. You're exactly right. We talked about it in the full board today about where we see this going and we want to get ourself back in line as we go into the fourth quarter, but there's not -- it's not because there's a cost issue here. Clearly, we have a little bit of price cost from -- material is still negative around $15 million, Frank, from the price cost in the quarter?

Right, during the quarter.

$15million. That as I said, we will get that back. We start getting positive as we go in the fourth quarter. Not for the whole year but for the quarter we'll get it back positive. There's a lot of things going on. We're running at very high levels operating profit in that third quarter. Operating profit was still 18.1%, absorbing a very large acquisition, which we made about six or seven months ago. So I -- would I be happy if they're all up, yes, but they're up over the first half and they will -- we will end up this year at very level -- high levels of profitability and we will drive forward to make even more records next year. So one quarter I wouldn't get too nervous about, Eli, but I -- we do watch it very carefully.

And just a follow up. Nobody wants to talk about forecast for 2012 but parts of your business should have some visibility into 2012, particularly Process.

Correct.

Where you can look at -- forget GDP. Process should have a better year and, of course, we're still looking at a double-digit gain in Process next year and even further strength in profitability and that's the kind of thing that I think it's important that we find out about it at this point in time without worrying about (inaudible) take care of.

If you take a look at the big backlog businesses between Process and Industrial Automation, we should have another good year going into 2012. Our backlog has -- in Process is at record levels, the order pace remains as -- even in last month and this month remains solid in the 12% to 15%, 16% range on an underlying basis. We will go into next year looking at a very good growth rate. My opinion in Process, assuming nothing -- you don't have a sudden surge of cancellations, which I see no reason for that. So from a Process standpoint you are exactly right. I would expect us to have very strong underlying growth next year in Process, the order pace is still there and I would expect our profitability will continue to improve. Though, as you know, when I get to a certain level I want to make sure we're not jeopardizing our long-term investment growth because we do run a very profitable Process business, the most profitable in the industry.

And then Industrial Automation, based on their order pace, comparisons are getting tougher. I would expect the Industrial Automation sales and orders to do reasonably well as we go into 2012, so I would say those two segments will do pretty well. I would expect our Reliable Power business to also have another very good year, as we've got the integration under way and we see that going forward. The big issue for me is, though, the difference between a very good year and what I would say above average year right now is really based on what happens to the underlying economy more than anything else. But there is fundamental parts of Emerson that will still have a very good year next year, but I just don't want to get into, are we going to grow this Company next year 7%, 8%, 9%, or 10%. I'm not into that mode right now.

That's fine, thank you very much.

Take care, Eli.

Thank you. Our next question comes from the line of Terry Darling with Goldman Sachs. Please go ahead.

Thanks. Good afternoon, everyone.

Good afternoon, Terry.

So, Dave, can you talk a little bit about China across your businesses from a top-line perspective, a lot of concerns about slowing growth there? There was a comment in the Climate -- on the Climate slide about expectation for weaker growth in Q4 on fiscal pricing, maybe take us through some of the other businesses, as well.

From our perspective, China's still performing very well in total. We had a very good quarter. We were up 11%, which was higher than we were in the second quarter, and we're expecting a very strong solid double-digit growth in the fourth quarter and again for the whole year. We are -- the Climate issue you have to understand, Climate issue had a huge surge growth last year. They were growing 30%, 40% in China last year because the government had picked on changing the standards and -- energy standards and we got a big growth surge last year. So from my perspective, right now as I look across the businesses, our businesses will still do reasonably well.

If you look at what they're trying to slow down and where we are impacted, I would expect us to grow this year somewhere between 13% and 14% -- excuse me -- totally and I would expect us to have 12% plus -- let's pick a number, 12% to 15% in China next year. A lot of our strategic A12 investments are very much focused on that, a lot of now products are coming out. The economy in China, yes, it will be slower, but maybe it's going to grow between 8% to 9%. I'll tell you what, I'd take that in the United States in a heartbeat right now. The China marketplace has clearly slowed. There are pockets of slowing and the governments are slowing. Right now where we're sitting right now and our new product program and our investments, we're still doing okay and I would expect us to have another good year in 2012 relative to China.

And just a little bit more color there, Dave, in terms of your expectations on 2012 through the segment. Presumably you've got some easy comps in the Network Power. Process remains strong, as you've talked about.

The backlog's there.

What do you see in some of the other businesses in China, Industrial Automation and Climate?

Industrial Automation's running the best it's ever had because of the productivity investments going on in China right now, so I would expect Industrial, Network Power, Process, I would say the Climate one would be a little bit uncertain about where that goes, but I would say that has the most uncertainty right now. But industrial, Network Power, and Process should be pretty good in China next year.

Okay. Then when you look at your CapEx plans for next year at this point, have you got any additional color there? And then on the other side, how are you thinking about restructuring at this point, just overall levels of restructuring in 2012 relative to 2011?

Okay. Relative to capital, our capital will be -- this will stop this year. Our capital's going to be up a little this year as we made some strategic investments. The Middle East has held up and continued to expand. If you noticed we had a very strong quarter, I'm expecting another good year. So we've had to add two facilities and we're building them ourselves. We've also -- we're expanding in Brazil and I've just built -- we're building -- or buying and retrofitting a new building down in Austin. So capital this year will be up in the mid-$600 million range, maybe a tad higher, based on where things stand.

Right now I would expect our capital will be up -- if we finish this year around $640 million I would add $100 million for next year. I think that's where we're going to be. We're probably around -- the number you want to use, if you think of our sales, I would use somewhere around 2.8% of our sales. We are in that cycle right now. We're going to grow next year. I don't know exactly what rate we're going to grow, but our capital spending is going to be around that 2.8% level. When we start growing the way we are we'll have two or three years in that 2.8%. This year, Frank, are we at 2.8% or 2.7%?

Just right around 2.7%.

2.7%. So I think if you look at that, Terry, think around 2.8%, which would probably put us about $100 million, that's where I'm thinking next year.

Okay, and the just lastly on restructuring then I'll get off the call here?

I think -- restructuring this year is going to probably be at the low end of the range we've given, and then next year we're -- as I've told people, we going to -- we have the Chloride, so I would say we'd go up a little bit from this year. But it's not going to be -- we're not going to go from -- let's say it's $85 million to $150 million, we're going to go from $85 million to $110 million. Okay?

Okay, thanks much.

That gives you a ballpark.

Thank you. Our next question comes from the line of Shannon O'Callaghan with Nomura Securities. Please go ahead.

Good afternoon, guys.

Good afternoon, Shannon.

Dave, on the comment about growth getting cut in half from the budget discourse and European debt, it sounds like this was sort of last 60 days for you in terms of deciding what we're going -- we're going to throttle back the spending, we've seen enough. What particularly triggered you and what have you heard from customers to support seeing others do the same thing?

I just look at the order pace. I think the biggest issue that I'm watching right now is they're not really -- either in the US or Europe really addressing the gut issues. The US have enormous regulations coming at us right now. There's -- the incentive to invest in the United States is negative and from my perspective -- people talk about we want clarity. I've got all the clarity I need. They're spending, they're regulating us, the tax rates, they're talking about raising the tax rate. Our tax rate this year will be around -- in the US will be around 36%. We'll pay in US taxes this year over $500 million, actually pay the US government over $500 million, and they say they want to raise it even more. And so I'm looking at that as a -- I run a Company, I have a lot of money to invest and I look at that and I say I'm not going to invest it here and I think customers -- I think a lot of customers have the same concern.

And then when you have a company like Boeing, you're talking about one of the iconic US companies gets sued by the federal government. If that doesn't get your attention, nothing will. They get sued for investing $2 billion in South Carolina. Last time I saw South Carolina was a part of the United States of America and you get sued for that. I tell what you, the CEO, you get my attention. And so from my perspective, I think people are very nervous about all the regulations. We have no idea how much more healthcare costs we're going to get thrown at us and all I see every day, things come at me.

Just take the new whistleblower rule, or you take the new commodity rules, or you take a look at everything that's coming at us and it just -- you're sitting there going, how much can you burden companies that do invest and try and create jobs and the answer is I guess it's never ending because they think that we're going to take it all and we're going to sit around. I think the environment right now is not very good and I think Washington doesn't understand how to create jobs. They're talking about basically raising taxes, or getting rid of corporate planes or -- it's amazing, or doubling the CAPA standards, that's going to create a t lot of jobs. That's my opinion. I have to control a lot of money to invest in this country and we employ 140,000 people worldwide, including 35,000 people in the United States.

Okay, thanks for that. And just a little more on Network Power. I know it still sounds obviously UPS and cooling still looking good, Network Power did okay in the quarter, but when you try to fit that all with organically like 1% order growth it seems like it's more than just pricing yourself out of some of this business. Are there other parts where you've seen pauses in spending?

No, I think right now there's -- on the -- what I would say the reliable power side of the business is very good and very strong and improving. You have parts of the embedded power side that we're backing down because of aggressive pricing. And also the other issue there is the material time -- material availability is back in line so the lead times are dropping off so people are more careful about how fast they order things. You just have pockets of the telecom industry that come -- one quarter will be very strong, the next quarter will be very weak, it just -- I would say generally, we're trying to back things down in certain businesses right now that we find strategically aren't acceptable for us and margins and returns and that has an impact. As I told you in June -- or May, it would have a very quick impact and we're starting to impact that already and that will flush out over six to nine months. It will happen and we'll have a more profitable and healthier segment, which to grow off of as we go into 2012.

Okay. And just as you -- factoring that in, I know it takes time to play out, but do you expect Network Power to improve from the organic rate you saw in June even accounting for that or no.

I would say -- that's a tough call. I would say it's going to be -- it's possible that in the three-month roll, if you look at the orders, because we bring them out every month, it's possible that we'd have a positive underlying growth rate in the three-month roll, but I would say it's going to stay around zero until we flush it out over the next couple of months.

Okay.

That's what my gut tells me right now. I don't know that, but just my gut.

All right, thanks a lot.

You're welcome.

Thank you. Our next question comes from the line of Rich Kwas with Wells Fargo Securities. Please go ahead.

Hi, good afternoon.

Hey, how you doing, Rich?

All right. On Process, how are you thinking about incremental margins as we move forward? You did about 20% this quarter with project picking up, MRO toning it down. How should we think about that as we move through the next few quarters?

My feeling is where we are in the cycle right now in Process, we should run anywhere between 20% and 25%, depending on the mix of projects could go as low as 18%, but it should be running 18% to 25% incremental margins. The big issue for me is, our Process business is going to probably hit $7 billion this year in sales. The key thing for me is we're now getting to a critical mass, so if you look at some of the facilities we're having to expand globally right now, I'm having to build expansion of my European operations, I'm doing one in -- I'm doing a big expansion in Brazil, I'm doing expansion in Texas, I'm having to put some infrastructure back into it as we set ourself up to make a run for $8 billion. We're in that phase right now that I'm going to have to make investment, both in people and infrastructure, as we go from this $7 billion to $8 billion. So we're still going to be very profitable, but I wouldn't be surprised if you see us having to put more money into that as we go to the next level of the size of the business. That's where I think we are right now.

Okay. And then I assume something similar for Industrial Automation as we think about that business moving forward?

Well, one of the things about Industrial, we are going to probably have to put some capacity in, in particular in Asia and we have been doing that, but you also understand that we actually had added some capacity right before the downturn came, and so I think we'd flush out some of the capacity there. So I would say we're going to have to continue to add capacity in some of the emerging markets, but we are in better shape relative to the infrastructure, I think, in IA than we were in the Process.

Okay. And then on pricing, how do you feel about the businesses? Do you feel -- in Climate you had to put another one through. What are you seeing in the other businesses with material inflation toning down a little bit?

Material inflation's definitely toned down but the issue really boils on, as you look at it, we're going to still have a situation as we go into 2012 where pricing's going to have to be somewhere around 1% positive as a total corporation. So net pricing is still going to have to be positive as we go into 2012 at the current levels of commodities. If you look at the global commodities, there are toning down from where they were three or four months ago but they're still running at pretty high levels and I would say based on what I see right now, material -- net material inflation's going to be there and we're going to have to have somewhere around 1% pricing as I go into 2012, looking at it today. Now that could change in three or four months depending how much the economy slows down around the world.

Is that Network Power that's dominating that or is that just pretty much spread across --?

We spread it across the Company, it's pretty well spread. Some are going to be higher than others, in total -- if you think about Emerson we're going to have around 1% this year, I would say we're going to be pretty close to 1%, maybe a tad less next year but not huge less.

Okay, great. Thanks so much.

Good, you're welcome. Thank you.

Thank you. Our next question comes from the line of Deane Dray with Citi Investment Research. Please go ahead.

Hello, Dean.

Hey, Dave, good afternoon.

How you doing? How's your new job doing?

They're treating me very nicely, thank you.

How long you been there now?

Just over a year.

Over a year. Time flies. That means I'm a year older.

No fooling. The Climate, can you update on the issues in temperature controls? You called that out, I think, back in May as an issue, just can you take us through the dynamics there?

We have a -- we have some customers that when we started moving out of, let's say, our appliance components business we have some situations where some of our customers they're not -- let's say they're not strategic to us anymore so they look at that and say hey, we're going to move on to a different location and move -- and that's basically what's going on there. We anticipated that but it's not some -- we have to manage that over time so that's what's going on from that standpoint as that customer shifts supply away from us. That's something that happens in this industry from time to time.

(Inaudible) until that anniversaries?

Pardon.

We just have to wait until that anniversaries?

It's pretty much -- it's almost done now. It will be done by the end of the fiscal year, isn't that right, Frank, the shifting of --

Okay.

Yes, it'll be done by the end of this fiscal year.

And then you called out in Japan the effects of you carrying a bit more inventory, could you just --

Correct.

Has that run its course? Can you size the inventory and --?

Well, it's around $50 million. It's around $50 million, Deane, and we'll have to work that off over time. Clearly, one of the things that -- based on my communications so far, I would say our -- if I look at our sales right now and as we said in our press release, at one time I thought we'd be closer to $24.8 billion in sales, now I think it's going to be closer to $24.4 billion. So we have two things working against us at this point in time. Sales, the economies are a little bit weaker, in particular in the mature countries, and we had actually to protect our customer base we had brought inventory on and so now we're going to have to eat some of that off and that'll take us -- it'll take us probably the rest of the calendar year to do that.

Great, thank you.

You're welcome, Deane. All the best to you.

Thank you. Our next question comes from the line of Jeffrey Sprague with Vertical Research. Please go ahead.

Hello, Jeff.

Hey, Dave, it's actually Nicole and I'm sitting in a conference room with a large number of investors.

Okay, I'll try to be very careful then. I'm holding up my sign, remember, do not swear, do not swear. (laughter)

I'm glad you're listening.

Darn.

First, how would you rate your organization's execution at Network Power this quarter?

I'll give them 7 out of 10. It's better than last quarter, but 7 out of 10.

Where'd they fall short relative to your expectations?

I think that from the standpoint of getting some of the efforts done relative to just sorting through, let's say, the consolidation between our acquisitions recently, also sorting through some of the issues relative to getting product gone and out the door, I just think we've had a slow execution relative to operations, both from a product standpoint and the consolidation standpoint at this point in time. It should be -- I don't grade peoples at 10 very often so I would say 7 and my feeling is right now we're running higher than that. I think that the team is really getting their act together. We had several one-on-one sessions and I think the team now is running better. As I move into the fourth quarter, they're running better and we need that to happen.

And then think about the challenges in that business over the next six months, is the biggest challenge extricating yourself from the embedded power business successfully? Is it the consolidation of the acquisitions?

The most value creation for our shareholders is the execution of the integration of Chloride and Liebert and the Kenora and the whole Avocent. That is the number one issue for creating value for my shareholders and it's the number one priority for the business leaders in that area; both Scott Barber, who's taken over, and Ed Feeney and all the guys, Steven Lange. Everyone around the world that is the number one issue, number two issue, number three issue, that's how we'll create value.

I think we may have another question in the room.

Okay.

This is [Martin Tanke] today.

Hey, Martin.

I know you don't wish to give any (inaudible) 2012 (inaudible), but it's clear as we've gone through the course of conversation during the conference call that there are some businesses that you have a few worries about than others. But most importantly, where do you see the pressure points in terms of businesses or geographies as we go into 2012?

I think that's a good question, Martin. The pressure points -- first of all, I think the longer lead time businesses as we right now sit with the backlog and the order pace holding up, those businesses I have less pressure points given where we sit right now. The pressure points I see right now are fundamentally in the US and fundamentally in Western Europe. I think those marketplaces are still uncertain. The governments are having to struggle with this question of the debt and struggling with the spending and there's huge ramifications on investment profile relative to how long will business continue to invest with that type of uncertainty and concerns going around those two key marketplaces. So I would say the number on issue for me is what happens relative to the investment profile in Western Europe, what happens to investment profile in the US.

My global emerging market business I think will have a very good year next year. It will be impacted by what happens in the US and Western Europe but I think overall I believe quite strongly the emerging markets will continue to do well and that will drive a lot of our growth. As you know, emerging markets right now is quickly approaching 40% of our sales. My pressure points are what happens in the US and how do the people get scared and do they start curtailing spending and investment in this country and the same thing in Western Europe. Those are the pressure points that we must watch, both from my standpoint and you as an investor.

A follow on to that. Would it be safe to say you are more concerned about the consumer-facing businesses within --?

The consumer businesses are pretty much dead, there's not been much recovery there. I don't know think the consum -- I don't know how much lower the consumer can go. I'm more concerned about just the overall investment profile. Will businesses continue to invest in expansion, which has an impact? Will businesses still invest in solar energy assets and those are my concerns in the short term. So that's where I am.

We need to cut it off here, folks, and I'm looking forward to seeing people in the coming weeks. I want to thank everybody for joining the call today. One thing you can say about Emerson, Emerson's in a very good position right now. We're extremely strong. We had a great nine months. I believe the Company's operating well. We have some issues but we'll deal with those issues and I feel very good about where we're going the next three to six months. And we'll deal with the uncertainty in the economies and we'll continue to grow and invest where -- appropriately and we'll continue to keep our cost structure and we will set record levels of earnings and we will set record levels of profitability this year. And I want to thank everybody for joining us today.

Thank you. Ladies and gentlemen, that concludes the Emerson third-quarter fiscal 2011 results conference call. If you would like to listen to a replay of today's call, please dial 303-590-3030, or 1-800-406-7325, and enter the access code of 4457238 followed by the pound sign. We thank you for your participation, you may now disconnect.