艾默生電氣 (EMR) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to Emerson's investor conference call.

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

Following the presentation the conference will be open for questions.

Instructions will be provided at that time for you to queue up.

This conference is being recorded today, Tuesday, February 7, 2012.

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 can cause actual results to vary materially from those discussed today is available at Emerson's most recent Annual Report on the Form 10-K as filed with the SEC.

I would now like to turn the conference over to our host, Patrick Fitzgerald, Director of Investor Relations at Emerson.

Please go ahead.

Thank you, Luke.

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 first quarter 2012 results.

Conference call slide presentation will accompany my comments and is available in the Investor Relations section of Emerson's Website at Emerson.com.

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

I will start with the highlights on the quarter as shown on page 2 of the conference call presentation.

Fourth quarter sales were down 4% to $5.3 billion caused by several near-term challenges.

A supply chain disruption caused by the Thailand flooding impacted results by approximately $300 million.

US telecommunications carriers deferred investments, awaiting the outcome of potential industry consolidation.

HVAC OEMs in the US and China pushed inventories very low on economic uncertainty.

And there was broad European economic weakness.

Operating profit margin declined 220 basis points from the prior year quarter to 13.2%, which is primarily driven by volume deleverage.

Earnings per share of $0.50 was down 21% from the prior year quarter.

Operating cash flow increased 4% versus the prior year quarter to $334 million.

Our balance sheet strength continues to enable us to invest in growth opportunities.

Despite the pressure on Q1 from numerous near-term headwinds, our outlook for 2012 remains favorable.

Next slide, the P&L summary.

Net and underlying sales were down 4% with negligible impact from currency, acquisitions and divestitures.

Operating profit declined 18% as the magnitude of sales decline and resulting unfavorable mix drove substantial volume deleverage.

Net earnings were down 23%.

We repurchased 4.8 million shares for $226 million.

And EPS declined 21% in the quarter.

Next slide, underlying sales by geography.

Gross performance was affected by the previously mentioned challenges.

Underlying sales in the US decreased 4%.

Europe was flat.

Asia was down 8% with China down 13%.

Latin America increased 3%, Canada increased 6%, and the Middle East and Africa was down 4%, resulting in underlying and net sales down 4%.

Slide 5, profitability detail.

Gross profit margin of 38.7% declined 40 basis points.

A favorable price and material inflation relationship partially offset the volume deleverage and unfavorable mix.

Operating profit margin of 13.2% decreased 220 basis points.

Currency transaction losses of $14 million and higher restructuring of $6 million were partially offset by amortization of $9 million.

Pre-tax margin of 10.4% declined 250 basis points.

Slide 6, cash flow and balance sheet.

Operating cash flow increased 4% in the quarter as lower investment in working capital offset the earnings decline.

Investment in technology and growth programs continued as capital expenditures increased to $130 million.

Free cash flow was down 15%.

Trade working capital as a percent of sales increased to 19.1% as inventory performance was affected by the Thailand flooding and sales timing and mix impacted receivables.

Next slide, business segment earnings.

Business segment margin of 12.7% dropped 270 basis points as volume deleverage, unfavorable mix and higher materials costs more than offset price increases and cost reduction actions.

Corporate spend was down $23 million as favorable stock compensation expense and acquisition costs in the prior year offset a $19 million charge to eliminate a retiring medical liability.

Moving to slide 8, Process Management results.

Process Management net and underlying sales declined 1%, with the US flat, Asia down 8%, Europe up 6%, Latin America down 3%, and Middle East and Africa down 6%.

The Thailand flooding supply chain disruption had a broad business and geographic impact.

Strong orders growth in the quarter of 15% across all businesses and geographies as oil and gas investment remains robust.

Segment margin of 12.4% declined 640 basis points as significant deleverage and unfavorable business mix from the Thailand flooding impact, including costs incurred to resolve a supply chain disruption, affected results.

Growth investments were maintained as the business outlook remains positive.

$12 million of unfavorable currency transactions also affected earnings.

The supply chain disruption has been substantially resolved and the full-year impact should be minimal.

Strong backlog and order trends support a favorable outlook for the remainder of 2012.

Next slide, Industrial Automation.

Industrial Automation net and underlying sales increased 2%, with the US flat, Asia up 2%, Europe up 5%, Latin America up 17%, and Middle East and Africa up 14%.

Growth was led by the fluid automation, power generating alternators and electrical distribution businesses.

US results were affected by softness in the hermetic motors business.

Weakness continues in the solar and wind energy business as governments have reduced renewable energy subsidies.

We do not expect recovery in this business in the near term.

Segment margin decreased 50 basis points to 14.8% as the favorable price-cost relationship was more than offset by unfavorable mix and other cost increases.

Demand for capital goods should remain stable across most end markets but we expect increasing weakness in Europe.

Slide 10, Network Power.

Network Power net and underlying sales declined 10%, with the US down 17%, Asia down 6%, Europe down 10%, Latin America down 5%, and Middle East and Africa up 4%.

Sales volume was affected by several factors including deferred spending by US telecommunications carriers, difficult prior comparisons and project timing in the global data center business, Thailand flooding impact on broader electronics components channels, and continued aggressive product line rationalization in the embedded computing and power business.

Segment margin of 8.2% decreased 270 basis points driven by volume deleverage, unfavorable mix and higher restructuring which is partially offset by cost reduction benefits.

We had one-time Chloride acquisition cost of $15 million in the prior year.

Telecommunications carrier investment is expected to accelerate in 2012.

And order trends in Network Power show signs of improvement.

Next slide, Climate Technologies.

Climate Technologies net and underlying sales decreased 9%, with the US down 5%, Asia down 21%, Europe down 11%, Latin America up 23%, and Middle East and Africa down 29%.

US residential markets were down on weak economics and channel inventory reductions.

There was a significant softening in the China air conditioning OEM demand.

Europe was weak, as well.

The global refrigeration business continued stable growth, led by strong improvement in transportation.

Segment margin declined 260 basis points to 13.6%.

Higher material costs were mostly offset by price increases.

And volume deleverage exceeded cost payment actions.

A modest US recovery is expected in the second half of 2012.

Slide 12, Tools and Storage.

Tools and Storage net sales increased 2%, while underlying sales grew 5% and the divested heating products business deducted 3%.

US was up 6%, Asia up 1%, Europe up 1%, Latin America up 17%, and the Middle East and Africa up 12%.

Non-residential construction in the US drove demand across the segment, with strength in the professional tools and commercial storage business.

Segment margin of 21.2% increased 40 basis points as price increases offset higher materials costs, and cost reductions, volume leverage and mix from the divestiture benefited results.

Tools and Storage had solid execution as commercial construction activity increased.

And US residential end markets should improve as we move through 2012.

Next slide, 2012 outlook.

It was a challenging start to 2012 but full-year expectations remain positive, with strong backlog and positive order trends in capital goods end markets and expectations for Q1 headwinds to improve as 2012 progresses.

However, the economy has weakened further with no sign of recovery.

Based on current economic conditions, our revised 2012 outlook is as follows.

Underlying sales and orders up 4% to 6%.

Reported sales up 2% to 4%.

Operating profit margin approximately 18%.

And pre-tax margin approximately 15.5%.

Restructuring expense approximately $125 million.

Tax rate approximately 31%.

Earnings per share of $3.45 to $3.60.

Operating cash flow approximately $3.5 billion.

And capital expenditures approximately $700 million.

We will provide a detailed review of 2012 expectations and strategic plans at our annual investor conference on February 14 in New York.

With that I'll turn it over to David Farr.

Thank you very much, Pat, and I welcome everybody this morning.

I thank you for joining us.

I truly appreciate it.

Yes, we had a very challenging quarter.

And as we discussed in December, there was a lot of moving parts.

We still expect a record year in sales, profit margins, net earnings, cash flow, free cash flow, and a 20%-plus return on total capital.

The management team, the organization, the people across this Company clearly know we have created a huge hole that we have to dig out of the rest of this year.

But we feel confident that we can do it.

We reviewed the detailed plan with our Board this morning.

A lot of discussions around this issue, and we're focused on getting the job done.

Today, I want to do something a little bit different.

We have a very unusual situation with the abrupt start in the first quarter.

So what I want to go through, I'm actually going to take you through slides, which you'll be able to see if you have your computer up.

I'll talk through the slides.

There are not hard copies out there but you'll be able to see it.

We finished the year very strongly in 2011.

The fourth quarter was up to $6.5 billion in sales.

It was up 12% quarter-over-quarter.

The whole year the underlying sales were 11%, and the fourth quarter was 9%.

But clearly as we moved into this first quarter, we had some sudden challenges, extremely unusual external environment.

They hit us very quickly.

I'm not here about complaining.

I just want to give you some insights to what was really going on, just a little more transparency so you have a better understanding of what's going on when we talk next week in New York at our investors conference.

As you can see on the chart, our sales dropped in the first quarter to $5.3 billion from $6.5 billion in the fourth quarter and below $5.5 billion last year.

And historically we always have a seasonal pattern this way.

Our and first quarter is the weakest and we build up and then drop.

This year was an extraordinary drop.

And so let's talk a little bit about that.

As we discussed and mentioned both in August and in November, and then again in December, we see the European environment extremely challenging.

In fact, I would call Europe in a recession for most our businesses.

And it hit all the key businesses from Process, Network Power, Industrial and Climate Technology.

The Thai floods hit us pretty hard within Process Management and Network Power.

And I'll talk a little bit further about that.

The telecom, the attempted merger of AT&T and T-Mobile clearly created a slowdown in spending for many months across our telecom and IT space, which are overlapping a couple places.

And then we had an extraordinary, I would say, inventory slowdown correction in Climate Technology, both from Europe, North America, and then also China.

So we had a lot going on.

Normally we have a couple things but there was an extraordinary amount of time.

And I have to say we saw some of it coming but it was far deeper and more impact to our business than we had anticipated, clearly.

And hence we had the phone call in December to give you some insights into it.

We had clearly three of our businesses down year-over-year with Process Management.

We had Network Power down.

We had Industrial Automation, not down but still impacted by Climate Technologies down.

And our Tools and Storage business go down.

And we had an impact of $300 million from the Thailand flood, the European recession, unexpected HVAC inventory correction.

So we went into the quarter feeling pretty good about it and we got hit pretty hard.

One of the things I'm going to show you, and I'll show you again next week is the leading indicators of G7 have gone quite negative.

Driven primarily by Europe and also by Japan.

The US has held up.

And therefore, what we're seeing right now is we're seeing fairly large segments of our marketplace actually go into a recession type of mode.

And I would say that Europe is, for all intents and purposes, in Europe.

Historically, when this number goes below 1.4% negative, it shows that we're going to have a recession in multiple markets.

Not all markets but many of the markets.

If you take a look at Europe, the European number has gone extremely negative, down 4.8%.

And this has been going on now for several months.

And this is clearly leading, from our conclusion, what we see in our own business, recession in Europe or basically no growth.

But a very difficult environment for Europe.

I finally feel better about Europe today than I did a couple months ago because of the actions being taken by their governments.

And the actions being taken by the banks and financial community to try and bring stability and funding to the marketplace.

So even though we see this today, and we see a recession, we are still going to say that we have underlying growth in Europe in 2012.

It may only be 1% or 3% but we're still expecting some underlying growth as we go forward into 2012.

But take a look at a little bit more detail in Process and Thailand flood.

People ask how could this be such a big impact.

The issue is, you lose $100 circuit board and it goes into our systems business, it goes into our coils, meters, it goes into Rosemount transmitters.

And you can see that we missed sales of $300,000 or $7,000 or $1,500.

Businesses, as you know, were very profitable.

We made the decision to continue to build, run our plants.

You can see the inventory built in the quarter.

Our actual orders were up around 19% for the quarter.

And 15%, 19% for the quarter, around that range.

And we had spent a lot of money to make sure we mitigated this and fixed the supply chain.

We had a mistake clearly allowing one of our key suppliers to be in a floodplain, and that won't happen again.

And we've moved a lot of supply up, it's up and running.

And over the next, I'd say, six to nine months we will recover these sales because the orders were out there.

And we'll recover the sales and we'll recover profitability.

But clearly the deleverage impact of this, we're looking at our more profitable businesses, we actually spent a lot of money to support our customer base.

We are the global leader in process management and we made the decision to spend money and invest to protect our customers even though we were shocking them relative to the overall supply base issue.

So we made that commitment and we spent, we worked with our customers, and we did whatever possible to help them in the short-term to get some of the product out the door.

Even with this disruption, our basically sales in Process Management were basically flat for the quarter, even with a very difficult supply chain network.

In Network Power the same thing happened.

We have many of our customers, less of our supply base, but many of our customers making components and products.

We had people in the IT industry also impacted.

And it created, if you're selling a whole package, it created a whole disruption relative to the Thailand flood impact to our end markets, to our customers.

To our short-term customers and also, in the end, customers down the channel.

So this business, I believe, will slowly come back.

Is it all going to come back?

I think that's the question I have on the table right now and I don't think the answer is yes it all will come back.

Given the slowdown that you're seeing around the world, both in Europe and also a little bit in Asia and China and Japan, I think a part of this unwinding of inventory, and obviously some of our customers took inventory down, it's a function of slowing global economy.

The US, I believe, will continue to go forward and see investments.

And what we saw in some of the delays in what I'd call Network Power Systems business, the data centers, both in the IT world and also in the telecom world, we believe that will continue to go forward.

So we think that that will slowly recover.

On the telecom side, we saw a dramatic drop off in the second half of this year.

In the key telecom areas, the AT&Ts, Verizon, Nokia and Samsung, they cut back their capital.

The issue here is clearly with the merger and the disruption of potential AT&T and T-Mobile.

There's capacity that was coming in and the industry was trying to change and react to that.

That created a basic gridlock stoppage of customer spending, which backed up quickly onto us.

That will also come back as AT&T puts that capacity back online, and they are going to put new capacity online.

I believe that will also take at least six to nine, maybe even 12 months for us to unwind.

And I'm not looking for a huge surge in telecom spending in 2012.

Maybe a slight positive, maybe basically flat telecom spending.

So the market will recover but it's going to take its time.

I think the process market will recover faster because of the actual orders within the industry.

The other impact we saw in the IT industry, as we know we saw PC shipments were down for the first time in 2011.

I expect from quarter four 2011 to quarter one 2012 they were down double digit, 12%.

We look at IT spending still being positive but slowing down.

So I think there's been a negative impact out there.

And overall it's definitely a clear slowing but the growth will return.

And we're already starting to see that in the current orders that we have currently on the books in January.

If you look at Climate Technology, they got hit.

Earth Services business got hit around the world.

The residential business in China, the markets were down 30%-plus as the Chinese government tried to contract investments, and tried to slowdown the economy.

Also redeploying the excesses and maybe some of the real estate and commercial.

And I do not expect that business to come back much in 2012.

I believe the China government will continue to control what's going on in the housing market.

I believe that you'll see stimulus going on in China in certain markets.

I'm not expecting us to see a major rebound, though some improvement in China second half.

But not anywhere close to recovery within the last six months in that marketplace.

Same thing in Europe.

The early stages, our business in Climate goes down sooner than anybody else.

It started going down in the middle of last year and is now stabilized at a lower level.

But the recession in Europe will keep that business, I believe, reasonably weak and with a mild recovery, if anything at all, in 2012.

In the US, we had this situation with obviously the refrigerant issues from R22 the year before.

That's had some changing going on, so the build up last year is not the same as this year.

We're seeing the inventories being taken down, both at the end marketplace and into our customer base, at all time lows.

And we've had a very warm summer -- or winter, I'm sorry, feels like summer, but winter -- relative to the heating season, so that's also impacted that market.

So overall Climate Technology has had a very difficult four-month period.

January orders in Climate Technology have continued to deteriorate.

One of the things we're seeing, in a chart that I was showing here right now, is that we're seeing the marketplace is really continuing to go up from 2006 to 2009 to 2010, is that basically, our customers, the OEMs, are now waiting and waiting and waiting for the very last second to order.

And so this month, January orders were down 22%, again in Climate Technology.

So a very specific number but I just wanted to, they have not improved yet.

You can see that historically around 20% of our sales are in the first quarter.

Five years ago, it was more like 28% to 29%.

Now, it's now under 20%.

It bounces way up and it comes way back down.

So basically with the refrigerant issues coming on, with the energy credits ending at 12-31-11, and also the OEMs really focusing hard on the inventory and waiting until the last second, we have a situation here right now that we are going to have to manage a lot tighter.

And make sure we react to it.

But it's going to definitely be a more seasonal business than we historically had.

We can adjust.

The only big issue is, we will have our plants shut down here for a while.

And the OEMs, if they wait too long, will have consequences relative to what they can get.

Because they're going to wait until the very last second.

And you just don't bring compressor plants up which are reasonably sophisticated, high capital-intensive plants up very quickly and make sure you maintain the quality, which is very important to us.

So as you look at where we are today, our backlog built significantly in the first quarter.

We are sitting at record backlogs right now at $6.7 billion.

We had a positive order month in January.

Our early indication, we got a quick snap of this, is plus 7%.

Approximately 7% on a fixed rate basis.

Our underlying orders for December on a fixed rate basis were down around 4%.

So we've seen a turnaround already in the month of January everywhere except for the Climate Technology.

Network Power Systems, Embedded Power positive, our Process guys still holding well, the Tools and Storage business doing well, even a little bit in IA improvement.

So we have seen a little bit of bounceback.

Hopefully that will continue as we move forward.

As we report later this month on the underlying orders for the three-month roll, it's possible that it could actually be negative on a GAAP basis because of the dollar impact.

And also because we're dropping off a very positive, I believe, October and we had a negative December.

But I'm very pleased to see that we've actually seen an underlying improvement relative to our orders.

And our backlog sitting at the highest level that we have ever seen.

And we've added $800 million to backlog.

So we have the business.

So as we look at next week, I'm talking about 2012, we now look at an underlying growth of around 4% to 6%.

We see the emerging markets will continue to slow down a little bit.

Still grow but slower.

We remain positive about the US, especially in the non-res and an improvement coming on the residential.

I'd expect very little growth in the economic environment in Europe.

I do expect us to see a little bit of growth because of our export through Germany into Eastern Europe.

Also in Asia and also into Middle East.

And our typical European business in Germany looks pretty good right now.

But overall I do not see a lot of strength coming out of Europe.

If you look at the underlying growth right now of 4% to 6%, the currency impact is around negative 2%, so hence that's where the 2% to 4% comes from on a reported sales basis.

So I wanted to give you a little bit more insight.

We'll clearly get into where our strategy is relative to 2012 coming up next week.

We have our challenges here in the first quarter.

We have things in focus.

We are working very hard relative to recovering the backlog and replacing the supply chain issue we faced because of Thailand.

We have seen order pick back up in key markets.

The Climate will come when it comes, and I think it will see improvement in the early stages or the second half of 2012 here in North America.

We are obviously where the businesses are struggling we are taking the cost actions necessary to contain our costs.

We're going to keep costs extremely tight until I really see this recovery happen.

Because we feel, even with a tough start, we're going to go forward and have record levels of sales, profit margins, profit earnings, EPS, cash flow, and a 20%-plus return on total capital.

The management team, the executives, and all of the people around the world, the 130,000-some-odd people are working very hard to get this recovery back on track after a very difficult first quarter.

We are clearly disappointed at our execution in the first quarter.

We're not looking for excuses.

We're not looking for any tears here.

We are who we are and we're going to move forward and deliver what I believe is a record performance in 2012.

Next week, I'm looking forward to seeing everybody at the conference.

It's going to be very crowded, and I think we have at least 165 people.

Hopefully everyone will show up.

Hopefully people didn't order things and have a lot of no shows and only two people there.

But so be it.

I'll talk to those two people personally.

My feeling is, it's an important communication.

We have an interesting strategy.

I want to update the 2010 to 2015 time period.

We are seeing some different approaches to the strategy.

Our insights to what we see changing and what we're going to do differently.

And it's not a same old-same old strategy.

It's the view we see today given the global dynamics that we'll be facing and a slower mature market growth, a slower emerging market growth.

And how is Emerson going to drive its underlying growth, which I believe we can do.

So I lock forward to that.

It's always a lot of fun to debate and to field the questions.

And I look forward to seeing everybody.

And again, I want to thank everybody around the world of Emerson.

It was not a pretty quarter.

It was a challenging quarter.

We made money.

Our operating cash flow increased.

We are continuing investing in technology and to drive our growth.

And I believe that we'll bounce back and deliver a very good year in 2012.

With that, with the few minutes we have left, I'll be glad to answer some questions.

But I wanted to spend time and a little different approach here today by having some charts and explaining those so you have a little bit more of detail as we go into next week.

And you think about what's going on in the dynamic world we live in today.

So thank you very much.

And Pat, let's open the floor.

(Operator Instructions) Jeff Sprague of Vertical Research.

Thanks for the additional info, that was helpful.

I was hitting the print button feverishly but nothing would come out.

One thing about Mr.

Farr and IT capabilities, we have a few things up our hands.

I just wanted to give you insights.

You didn't need to have copies of that stuff.

Just listen.

I know.

So just a question first on Process.

The idea of deleveraging and everything.

I understand you spent some additional money running around, right?

But your sales in Process are actually flat.

So maybe a little more color on how you had such a large profit decline on flat sales.

And is the profit in backlog now somehow hindered by what you had to do to get through this?

I think, Jeff, that's a good question.

It's not easy to understand.

The businesses that we couldn't ship on are businesses that are very profitable for us.

They have very high GPs.

So we ran the facilities, we kept people online even though we couldn't book sales.

So clearly I'm not worried about the profitability in the backlog.

I personally believe that -- we will talk about this next week -- but we will have record levels of profitability across Process, even with a difficult first quarter.

The key issue there is when you continue to maintain the build, you're not shipping some of your most profitable products.

And you're continuing to invest in that technology, you actually have a significant deleverage.

And the numbers make sense from our standpoint, so I don't see anything unusual there.

I do expect them to leverage nicely and come back and deliver a record level of profitability for the remaining parts of 2012.

Could you also just spend an additional minute or so on what's going on in the Embedded businesses competitively and from a price standpoint, where you are on your restructure of those businesses?

Yes, I'm going to give you -- the Network Power segment next Tuesday will be the biggest segment in the talk.

Because I look at the Process strategy, some of those strategies, pretty tight.

We know what we're doing and we'll give you a quick update.

But Network Power business, I'm going to break it down into the three pieces that we look at in this business.

The systems business is doing pretty well.

We had some disruption, and relative to delivery, because of the end customers couldn't get everything so they pushed off, some slowdown.

The telco business was greatly disrupted with what was going on, the AT&T potential acquisition of T-Mobile.

And Embedded we saw dramatic impact relative to the customers not able to build the products.

They just stopped ordering the product.

And we saw a dramatic drop-off in profitability, deleverage.

And we're going through a very aggressive repositioning right now within that business to recover that profitability because I personally do not believe that business will come back much.

I don't see the underlying growth expectation of those customers at all that robust.

So I'm planning a year right now that I think we'll recover some of the growth.

But overall I think we could potentially have down sales growth in that segment.

And we have to get this profitability back to where it should go.

So we're going through a very aggressive restructuring at this point in time.

And you'll see our restructuring number start picking back up a little bit faster here in the second quarter.

We will spend somewhere between $125 million and $135 million in restructuring, primarily around Europe and also the work we're doing in Embedded in the Embedded Power business.

We'll talk a little bit more about this and the whole evaluation we're going through right now, Jeff next Tuesday.

But there's a lot of action going on in that business right now to recover what we really fell behind in the three months.

Okay, thanks, I'll pass it on.

Mike Wood of Macquarie Capital.

Can you provide an update on Chloride and where you are on the restructuring, cost synergies?

And how that's tracking to plan after seeing the softness in telecom, data center and just Europe in general?

The overall Chloride integration is going, I would say, very well.

We have a lot of restructuring underway this year.

We did what I would call the general sales and the overhead last year, and now we're actually getting into the infrastructure part.

I'll show you next week that from a performance standpoint we are slightly ahead of our savings and performance.

I'm very pleased with the Chloride integration at this point in time.

Yes, we have a little bit of slowdown in the marketplace.

That happens at any time.

But overall, the integration and the effort underway, I'm very pleased with.

And I would say both Chloride and Avocent, we are ahead.

The one issue we did get hit real hard on in this quarter, in the first quarter, was Avocent, into the server marketplace which really got hit hard in the fourth calendar quarter, our first quarter.

And Avocent sales really came down extremely hard in the fourth quarter, and they deleveraged quite significantly.

They have actually started seeing improvement already in orders and shipments in the month of January as people have gone back online to start buying again.

So overall, we're very happy with Chloride and Avocent.

The pace is good, and they are getting the job done.

And on the residential side, we've been seeing early signs of potential recovery in the US residential construction market.

Where would that impact your business?

Where might that positively surprise you versus your expectation?

I think that we're going to have, in what we call the Tools and Storage business, you're going to see, they had a pretty good first quarter.

Their order pace is pretty good right now.

They've had good order pace.

I think that will be the continued positive, which we see that primarily in the repair.

We've seen a good recovery in the repair upgrade marketplace in North America.

On the Climate Technology side, we'll start seeing that later this year as the construction, and as people move into the cooling season.

So I would expect that to be more the second half.

Right now we are banking on some recovery but not much a recovery.

And with the level of inventories where they are right now, that could be the one upside we see in the second half.

And I think we'll continue to see momentum and positive performance in the Tools and Storage business because of residential.

I agree, the recovery residential is underway, and I think you're going to see probably 5% to 7% underlying residential GFI growth in the United States this year.

Great.

Thank you.

Steven Winoker of Sanford Bernstein.

Those slides were very helpful, thanks.

Industrial Automation, the margin side, I know you've called it out.

We've got revenue up and margins down.

And you talked about cost containment and relative to pricing and additional investment for growth.

Can you maybe provide a little more color here so I can just think about the what the leverage was here?

There's two things.

One of the big issues on material is when our price increases come through, and it's been a fairly high net material inflation area, time period, we've got the prices to cover the material costs, but it dilutes our margin.

And so this initial phase right here, up-front what happens is the price is gone through and we get that margin dilution, because we don't cover margin, we just cover net material cost.

That hurts us quite a bit.

So from the standpoint overall as a Company, we had positive green price-cost for the whole Company.

Approximately $20 million -- about $18 million positive.

So this is the first quarter, after four quarters of being negative, we've got the price-cost coverage but we don't make margin on the high inflationary time periods.

It's not something we build into our contracts.

That hurt us from that standpoint.

The other area in Industrial Automation is with a drop-off in particular, continued drop off in solar and wind, we see a significant deleverage.

We have a lot of restructuring going on that way because we do not see that market coming back.

Industrial Automation had a record level of profitability last year.

I believe they will set another record level of profitability this year because the cost actions are underway.

We will absorb this price-cost as we go forward here and we get our productivity going.

So I feel very good about Industrial Automation.

Some of their markets will be good.

Some of their markets will not be good.

Again, we'll give you a little bit more insight into that next week, Steve.

Back to that first question on Process.

When you're filling out the backlog now, your capacity utilization in the plant as you go forward, how are you thinking about that backlog fitting in?

Are you just scaling that thing up all across-the-board and running full out?

If you'll notice that one chart, we actually built a lot of inventory in the first quarter.

So right now, from a process automation standpoint, we're going to spend around $700 million of capital this year.

And a big chunk of that's going to be going into Process.

We are going to have to invest in capacity.

We're driving towards an $8 billion Process Management business this year.

Our orders are very strong and we need to increase our global capacity.

And so you're going to see us continue to spend money in Process in capital.

Right now we are okay because we made the decision, even though with the disruption, to go ahead and build inventory.

So you have control valves out there without the electronics in, we have presser transmitters, we have flow devices.

And so we have actually built the product that's sitting in warehouses.

And now we're going to come back later and put the assembly in there.

If we hadn't done that, we would never be able to get caught up this year.

So we made the decision to go ahead and spend the money, cost extra money.

Inventory, as we know, with the orders sitting where they are, and the backlog sitting where it is, we have the capability of shipping that stuff assuming we get the electronic boards in.

And, Dave, how much inventory did you build for that?

We built, in the Process, where I had the chart down -- I'll give you the exact number.

I had it broken out.

You flipped it too fast for me.

I couldn't write it down.

I'm really sorry, Steve.

We built $130 million.

So we had inventory at year-end, I'll give you $575 million, and we are now over 700 million.

That's a lot of inventory.

Okay, that's great.

I'll pass it on.

Thanks.

Shannon O'Callaghan of Nomura.

Just on the electronics pieces, do you now have the components you need?

When do you think you can resume shipping instruments with electronics at a process?

Is this all going to come back in a hurry?

Is it going to spread out through the year?

How do you see it happening?

We are already starting to see the shipments in the month of January, I know the sales in January.

We saw the shipments in some of the instrumentation actually come on.

So we're seeing that in the simpler product, the instrumentation products, the flow devices, the pressure, the temperature devices.

The larger devises, I would say the control valves, the more complicated ones, that's going to take six to eight months.

So we are starting to get a flow of electronic boards.

We are allocating where the boards are going.

They're not all the same boards.

We're allocating based on our customer pressure points, and we're dealing with that issue right now.

So you're going to see continuing improvement.

You'll see our second quarter sales in Process go up unless we have another shock somewhere.

I really don't need another shock.

And then you're going to start seeing the second quarter, third quarter, fourth quarter sequentially getting better, and as we move out.

So they're not all going to show up at one time.

We're staging them out because that's the only way we can deal with it.

But they're starting to flow already.

I saw the benefit of it already in January in some of the easier products to get into.

Great.

And then on the restructuring of Embedded Power, some of this is Thai-related stuff too, but it sounds like you see more of a permanent change there.

Can you talk about some of the nature of the restructuring you're going after and what the payback period is like?

We're going to start getting payback this year and it's going to be within a 12-month period starting right now.

This is a very near-term, short-term things we're doing.

I'm just making a call there.

I listen to a lot of our customers on their conference calls.

Some of them said that the recovery, everything was going to come flying back, some said not.

I am of the opinion right now, given the slowdown in Europe, the slowdown in Japan, the slowdown in Asia, and the marketplace, the dynamics going across the marketplace with some of this customer base, I think the market will be a lot slower for some of this what I'd call core electronic market space in 2012.

And I think a little bit of inventory had been built with the Japanese issue we just had six months earlier.

So I think a lot of that got washed out.

So I don't see all of it coming back.

If I look, we lost about $100 million, what I would say $100 million to $150 million in certain parts of these businesses.

I would say we'd probably get half of that back, and that's it.

That's just my call right now, knowing the space that I know.

Okay, makes sense, thanks a lot.

Deane Dray of Citi Investment Research.

Dave, I was hoping you could take us through Europe in a little bit more color regarding the individual businesses.

Because you're flat for the quarter, you're speaking as though you still could get positive growth.

Process and Industrial Automation both had better quarters in Europe.

So just take us through what the tone is of the customers and your visibility that still gives you a sense that you'll outperform the market.

The Process business did have a decent quarter.

They have a high level of backlog.

That business will continue to start shipping when they get the components, so I think Process will do pretty well.

I am concerned about the underlying industrial business, of Industrial Automation.

I think Industrial Automation Europe is going to struggle this year.

I think that business will weaken as the year goes on.

Within the last two months we actually started seeing the stability in the Climate Technology business in Europe.

It's an early indicator.

They went down last year, so they had a couple tough quarters last year.

The first quarter was tough.

I'm seeing some stability in that order pace.

And based on the fact that Germany is still doing reasonably well, we're seeing that improvement.

And I think Climate Technology will have a better year as it progresses.

The other area is our Tools and Storage.

We're continuing to see some investment going on within the European business in that space.

It's not big.

But I think Process will be good.

I think Climate Technology will start to recover.

I think the Tools and Storage business will do well.

I think the industrial part of Industrial Automation is not going to do well.

I think some parts of Industrial Automation that are export out of Europe will do okay.

But overall, you have to remember, Europe last year for us was 11% underlying growth.

This year I think we'll probably be somewhere around that 0%, 1%, 2% type of growth.

So it's not going to be a pure negative.

We've got the backlog to show some growth there.

And that's the way I look at it and feel it right now.

Got it.

And then, I might have missed this, but on the impact in Thailand, originally it was a $300 million to $400 million hit and it looks like it came in towards the lower end of that.

Was that just being conservative or how did that actually play out?

I made a commitment, and Frank is here with me, we made a commitment to the Audit Committee that we would not just throw everything in the big catch-all and say -- Hey, it's Thailand.

We made a decision.

We looked very carefully at what type of products we're now able to ship.

And our best estimate right now, and the best is $300 million.

The other parts, we believe, from the climate standpoint and the recession slowdown.

So we went through and we categorized it for the Audit Committee because they wanted to make sure that we weren't playing games.

Let's be honest.

They want to make sure we know what we're doing here and not just use this as a big cop out.

So we did the best we could relative to the products, the customers.

And we clearly mapped out, between the Network Power, the Process business, basically what we could see coming from our stuff out of Thailand.

And it worked.

So that's where we are right now.

It's around $300 million, plus or minus $10 million, $15 million.

And the rest came out of just the other activities.

That's why I mapped out that one matrix where we saw the various pieces of the impact around the world.

That's how it is.

Great, thank you.

Julian Mitchell of Credit Suisse.

My first question was, obviously you've had a lot of strange issues, as you say, in your fiscal Q1.

If we look at the gross margin, though, that's been down year-on-year for three or four quarters in a row.

If I look at your guidance for the year of an 18% margin, we assume that SG&A grows about 3% for the year, as it did in Q1.

That implies for the balance of the year, your gross margin has to go up maybe 70, 80 basis points.

So given that it fell when revenues were up, six, nine months ago, and given that it fell when revenues were down in the December quarter, what is it you think that's really swinging on the gross margin that gets it growing again year-on-year from this point?

The biggest issue is price-cost.

Last year we had a very negative price-cost that really hurt our GP margin in a big way.

Even though the first quarter was tough, our GP was not that bad relative to what we lost overall.

So I would say the big issue for us is price-cost.

We were green the first quarter.

That makes a big difference for us.

We expect to be green next year, which will help us relative to our recovery of GP.

And so that's the number one issue, Julian, that we are tracking internally.

If we can deliver that then our GP margin will go towards that 40% GP, and we'll have that recovery.

Last year we got hit very hard at that level and that really hurt us.

So that's the number one issue.

Being green right now, and we got obviously three more quarters, that's the key issue for us.

Number one.

Number one, two, three and four, that's the issues.

Okay.

And then on your cost base generally, looking at your CapEx guidance and what you spent in Q1, that's about flat year-on-year for the next three quarters.

What's going on?

Your restructuring is going up a little bit, I think $30 million versus the previous guidance.

And your OpEx, the SG&A, as I say, that was up in Q1, even with down revenues.

So what's happening on the SG&A line?

Is that going to stay at this $1.3 billion, $1.4 billion or are you going to try and take some of that out?

The SG&, from the standpoint of spending, we started curtailing spending and we'll continue to curtail spending.

I expect our SG&A to be, on a percent of sales, slightly down when the year finishes, as we get their growth coming back.

We are being very careful.

We are taking some cutbacks, I would say, overall in spending right now because of our concern of the slowdowns, particularly in Europe.

And some slowdown spending in Asia.

But overall, nothing directly because our cost structure is in pretty good shape.

It's just that we're going to be very careful of where we increase it.

And for the businesses that are struggling right now, there will be very significant cutbacks,.

The Climate Technology, the Embedded Power Computing, those businesses will have significant cuts relative to their overall spending because their business is not there right now.

Relative to capital, we are going to spend around $700 million.

We actually cut it back a little bit.

In some of the businesses that are struggling, I don't see the growth rate and we've cut back our underlying growth rate.

We're going to be taking some capacity out that we had planned in originally, except for Process which is going to need it.

So here's a little shifting going around relative to capacity.

I would expect us to spend less capital than I thought we were going to spend three months ago, but we're going to be spending around $700 million.

Which is still under 3% of our total sales.

Overall the cost structure of the Company is in pretty good shape, though we're going to trim.

And the capital plans are going to be cut back a little bit.

But overall I think we're in pretty good shape.

Okay, thanks a lot.

Nigel Coe of Morgan Stanley.

You mentioned you still think that this will be a record year for Process Management profitability.

Does that still mean that you think, even though you've got a tough Q1 that you can still do 20%-plus margins this year?

Yes.

Awesome.

Great.

And any way of scaling what the impact of the Thai floods was?

Because if you just look at the sales and deleverage on the sales, you get to about $0.15.

But it sounds like there are other costs as well.

Do you have that number to mind?

No, I've not gone in and spent a lot of time on having the guys track what we had to spend to meet with customers to redirect stuff, airship stuff.

Right now, that business is in a crisis mode.

We are the global leader and I told the guys spend what it takes to get this business back on track, back up in line.

That's far more important to us.

With bookings, orders coming in around 15%,18%, and we're expecting to drive towards an $8 billion number this year, we need to figure out how to get the shipments going again.

So they did a lot of extra spending.

And I have a lot of confidence in that management team that they don't waste and they got the job done because it's important for us to take care of that customer base.

Sure.

And then we spent a lot of time talking about Climates and Power but we haven't spent much time talking about Industrial Automation.

And we did see a big drop off from Q4 to Q1.

And you talked about solar, wind, and I think hermetics as the big driver downside.

But can you maybe just talk a bit more about that, Dave?

How much of this is inventory, how much is CapEx?

From our standpoint, the hermetic business is obviously tied to our compressor business being dropped off that hard.

The big issue for us that we're seeing in Industrial Automation is the slowdown we're seeing in Europe right now in the underlying, what they call the pure industrial, industrial motors and drives.

We're seeing some slowdown in that area in the core business.

We're also seeing a slowdown, we actually saw a slowdown in China in the first quarter.

As China really starts dialing back on spending money, we saw the industrial marketplace really slow down a little bit.

I do expect that to pick back up because that's going to be an area I think the Chinese government will focus their money relative to their stimulus they're going to put in place.

I'm less positive about the housing and residential and the commercial.

But I think in the industrial area, as companies continue to spend, go after that growth, as that stimulus comes in, I think you're going to see that money spending there.

But the overall industrial marketplace, both in Europe and in Asia, we saw weak in that first quarter.

But we're seeing some signs of picking back up so I feel okay.

There are segments in there that are struggling but there are other segments that will do very well.

So it's going to be a mixed bag this year.

Very lower growth but I believe, as we'll talk about next week, they will be setting record levels of profitability.

Thanks, Dave.

And quickly, finally on the shale gas, your exposure there is quite low, right?

We sell into the shale gas market, we sell a lot of equipment.

Anything to do with natural gas around the world, we are a player relative to equipment and measurement, custody transfer.

So we have a lot of money being spent in that area.

Okay, thanks, David.

Terry Darling of Goldman Sachs.

I wanted to come back to the Process Management margin discussion with regards to the implications for the longer term from what you're saying.

The implications are that you're going to be 50% incrementals for the balance of the year.

And there was this earlier discussion as you get deeper into the cycle, you shift more to solutions.

That dampens the incrementals.

We've got a lot of investment to do to make sure we're in position for the long term there.

As we think about the 2013-2014 picture for Process margins, what are the implications of the kind of profile that's really implied by this last three-quarter guidance on Process?

Is it you're just seeing the underlying as stronger?

You're doing a better job on productivity than you thought?

Pricing is a little stronger and that can carry forward?

Or how would you like us to think about that?

I think there's one thing.

The price-cost is turning so that's helping us right now.

That's a slight positive, even for Process.

I wouldn't say we can say we're executing better because we just had a little challenging quarter here.

So I wouldn't say we're executing better from that standpoint, from a productivity.

We have not seen a shift yet into the big projects, which will eventually kick in probably '13, '14, relative to some of the dilution on the overall P&L structures, some of the big projects start shipping.

We have seen a continuing, I would say, upgrading of spending, what we call brownfield type expansions.

And brownfields are less competitive market space than greenfield, which are extremely competitive.

So right now the mix is still going our way.

I think that's what's going to help us in the second half this year.

And we'll see how that order book goes in the second half of this year.

And that will tell me, Terry, how that 's going to look as we go into '13.

But this right now, I see no fundamental reason why we can't maintain fairly high levels of profitability and continuing to make the investments we need.

I don't see any reason why we can't do that yet, but that mix could change in the second half of this year relative to the orders.

We have to wait for those orders to come in.

Okay.

And then the next question is trying to get a feel for the key levers in your mind between the new high end and low end of the EPS guidance range for the year.

And from the standpoint of organic growth around that question, it sounds like, with the January up 7% orders, and some of your commentary to earlier questions that the organic pattern, if you will, over the next three quarters you're seeing is relatively the same -- 6%, 7%, 8% I guess is what you need to get to the high end of the 4% to 6%.

Have we got that about right?

Yes, you do.

The key issue for us is, unfortunately, we ran low to this year and that is not something I like from a growth standpoint.

The key lever for us, right now, Terry, is underlying growth.

From the cost structure we are driving to get the cost structure in line.

We're taking the actions we need to.

And from my standpoint, so we can get that 5%-plus underlying growth then we'll be at the high end.

If underlying growth starts slipping down, we'll be fighting down towards that low end in EPS.

It's going to be underlying growth.

This Company knows how to deliver profitability and getting the costs in line.

It's going to be the underlying growth.

After the first quarter the price-cost is in good shape.

If I can deliver another positive price-cost in the second quarter I'll take that one off the table.

So right now I would say, can we continue the positive green price-cost, and then underlying growth.

Those are the two levers that I'm watching and tracking extremely closely right now relative to this Company.

And then just lastly, maybe give Frank some air time here and save Pat a bunch of time later on.

Frank, can you give us any thoughts on the segment corporate line for the year, how you're thinking about that?

And anything on interest expense as it relates to use of free cash and so forth through the year that you can talk about, as well.

Segment corporate line?

Relative to the $80 million you did in the first quarter.

Typically it comes off as you move into the last three quarters but any other commentary would be helpful.

The first quarter is actually a bit favorable, so that $80 million is not a good run rate.

You need to bump that a little bit for the balance of the year.

And interest expense--

How much is it going to be relative to last year?

What kind of line is it going to be?

Plus or minus, what are you going to be?

We're going to be up a little bit.

Just a little bit?

Up a little bit versus last year.

And I'm talking about the non-interest expense, the other corporate.

Which is mainly incentive comp.

Then in interest expense we should be a little bit better than last year.

But just to be clear, the corporate number you just referenced, you're talking about the $129 million or you're talking about the $80 million from the first quarter?

I'm talking about the $80 million from the first quarter.

Okay, great.

Thanks very much.

Rich Kwas of Wells Fargo Securities.

Follow-up from the December call regarding Europe.

In December, I think you talked about market share gains in Network Power in Europe.

You didn't mention that in one of the earlier questions.

I just want to get your thoughts there.

I don't remember saying that, very unusual for me to talk about market share on a quarterly phone call.

But to be honest, Rich, I don't know if I said that or not, so I'll have to check.

You can talk to Pat on that.

I don't know.

Coming off the top of my head, I don't remember that conversation.

I'll follow-up with Pat, but I thought you said you thought there would be some gains in the business in Europe in 2012.

But I'll follow-up.

We'll go back and look at what I said and try to make sure.

If I messed up, he'll go back and clarify it.

But we'll go back and look at the transcript and see what I said.

Why don't you follow-up with Pat on that one, because I don't want you to leave that out there.

Make Pat do a little work.

He has to earn his salary somehow.

And then just on M&A, what are your thoughts here?

We're 45 days past our last update with you.

What are your thoughts there between share repurchases and then bolt-on M&A?

We'll be talking about that in detail next Tuesday.

Let's leave it to that.

I'm going to give you my thoughts on the capital structure, where we're going to spend our money, and how we're going to shift it.

And I'll have some different thoughts on that.

So I'd rather talk about it in the session next week.

Okay, great.

Thanks, see you next week.

Steve Tusa of JPMorgan.

I know you don't give quarterly guidance, but obviously the last three months quarterly guidance has been a key sticking point here.

And I think to maybe just move beyond the focus on that, is there any way you can give us a little bit of color on how we should think about the second quarter, given all of these multitude of moving parts?

I think that normal seasonality, if you adjust the first quarter, would get you something in the $0.80 range.

Can you give us any kind of over/under on that?

Or just any color on the second quarter would be, I think, helpful for people.

Steve, I think the key issue for us is the recovery in sales, as I think I said to Terry.

I think the key issue for us is the recovery of what our underlying growth is and starting to get after some of that backlog.

We are expecting our sales to be up for the quarter.

And right now, I think from the standpoint of, the question is how fast that recovery happens, and that's going to be the key issue.

And for that, it's hard for me to say what our earnings per share is.

And again unfortunately, we are going to be rear-end loaded this year because of the recovery of the sales and backlog.

And that's going to be a very difficult thing.

I'm going to have to keep my Board updated on a month by month basis from this standpoint.

But all I can tell you right now is it's all going to be coming off of our sales pace.

And if we get a good sales pace, we should start seeing a recovery in our OP margin, and then we'll see an increase in restructuring.

But you should start seeing a recovery in our earnings.

I expect obviously positive growth in earnings, positive growth in sales.

But it's not going to get back into the pace that we need to get that second half done.

So I'm hoping we can do a better job there but that's the best I can give you right now.

That's how I feel.

That just leads me to my next question which is just the visibility you have.

You went through a bunch of fundamental macro issues, whatever you want to call them, in the quarter.

But despite the January order comment, whether it's telecom, whether it's Climate, Process I think is its own animal which is understandable, whether it's Industrial Automation, it still has pretty tough comps in the second half of the year.

It's just unclear to me how you guys envision this ramp in second half sales.

A lot of the telco guys are talking about things not coming back until later in 2012.

So I'm just wondering how do we get to that?

What are you watching for?

Europe you said was going to remain tough.

Is it China that we're really banking on here?

Is it the US economy?

It's just unclear to me what really comes back in the second half of the year.

I'm not banking on much of a telco recovery.

I'm not banking on much of a Climate Technology, although I am banking on some recovery in Climate Technology.

We're expecting recovery plus some growth from the Process guys.

I am banking on some recovery in the Industrial Automation, in particular in Asia Pacific and some of the other markets, stabilizing and improving.

So I do have a little bit of recovery coming on there in Industrial Automation.

I'm expecting an improved performance out of our Tools and Storage business, better than we have been running there, so I expect that to be positive.

But definitely I don't see much telco.

I also expect some recovery in the Embedded Power and Computing.

And we're seeing that, but we're not going to recover back everything we lost.

That's how we see it right now.

There's clearly a lot of moving parts in this thing.

And that's why, as I said to somebody earlier, how do we deal with that range.

If our underlying growth rate starts slipping down, then I will be at the lower range of that EPS clearly.

I think if the order pace keeps coming in by the segments, as we saw in January, and we see that again in February and March, then we're going to see that visibility we need.

But right now, the ball is around execution, getting that backlog down and getting some recovery pace in, I would say, North America residential and a continuing strong pace in non-res in North America.

And then one last quick question, just on the Process side.

I think Jeff asked a good question around the margin being down, despite the flat sales.

You talked about mix a little bit.

But CapEx in that business was running at about 2% of sales, basically for the entire cycle last cycle.

It bumped up to 2.8% of sales last year.

And now you're saying it's a pretty significant part of the healthy increase you're seeing in the first quarter and maybe throughout the year.

Does this get to the point that 20%-plus margin is great this year.

I agree, I think you have to do that to hit your guidance.

But does this get to the point where you have to begin to throw more investment and money at this business, given the competitive landscape is just a lot different than it was last cycle?

Or why are we throwing so much more money at the business early this cycle than we were last cycle?

Because last cycle I took capacity offline, and I took it offline and I did not redeploy it.

I took it offline, because I wanted to move it into where the growth was going to be.

And so now that growth is starting to happen, I'm starting to redeploy that capacity and where that growth will come from.

Middle East, India, Asia, China, parts of Latin America.

That's the issue.

We took capacity offline, and we did not redeploy it.

I used the capacity I had and now I'm putting capacity in.

I don't see that we have to have some extraordinary amount of higher levels of capital spending.

I think the Process guys are probably going to be around that 3% level.

It could run down to 2% but it's not going to be an extraordinary number here.

Okay, thanks a lot.

John Inch of Bank of America.

Dave, just based on your relatively upbeat comments, relatively upbeat comments towards resi construction and then some of what the Tools business is seeing on the non-resi side, aren't these decent lead indicators for Climate.

That all else equal, you could perhaps argue was actually at a cycle bottom?

The business almost seems to be locked and loaded.

I'm just curious on your thoughts.

If you look at the leading indicators, you look at all of the numbers, your statement is 110% correct.

Now, we've got to see it happen.

And the other issue is there's a lot of product been taken off line right now, and we are taking our capacity down at this point in time.

We're taking plants down because the orders are not there.

And so, in order to protect our deleverage the best we can, we are actually taking out costs at this point in time and we're turning lights out.

So our customer base expects us to be able to turn on a dime and hire 500,000 people or whatever it takes.

They better be thinking about that.

That's all I can tell them.

Because I'm furloughing my plants right now.

They've been warned.

I was wondering about that, actually, as it pertains to the rest of the channel.

Does that, to a degree, give you leverage whether it be on pricing or otherwise when the cycle actually turns?

Is it a bit of a compounding effect that you don't necessarily need big turns in these end markets to actually get a big profit contribution for this business?

If we actually get the orders, then the shipment answer is yes.

It's not going to be a pricing standpoint because we lock up agreements with them for a 12, 18-month time period.

It's just a function of, they are playing this so tight right now that they are expecting a large compressor plant that's fairly sophisticated to turn on and get going.

So my warning to all customers out there in this area is they have to be very careful because I'm furloughing my plants right now because their demand has dropped off so dramatically that I have no reason to keep my workers in the plant working.

Period.

They have been warned.

I'm also just wondering, big picture, with respect to lessons learned perhaps from Thailand.

Are there implications, as you look out as CEO of Emerson, and your global operations, you're clearly a very well-entrenched Company in all of these different emerging markets.

Are there implications for perhaps other, call it, geographic supply chain concentrations that you're going to be trying to work through?

Or is really Thailand just an isolated event?

I don't think it's isolated.

I think that we looked at a couple things happen.

One, we shouldn't have allowed a major supplier in a floodplain.

That was one thing, one flag.

We don't allow our plants to be built in floodplains, so why allow one of our major suppliers to have a plant built in a floodplain is beyond me, it's my fault.

I would say, John, we are taking a look at across all of the major suppliers and seeing, going through the back up plan, are the plants in a risky spot.

We don't locate plants in earthquake zones.

We're going through right now.

This is a wake up call for us.

We've had two whacks here.

We got one whack upside the head in Japan.

Then we get a whack up with Thailand.

So now I say, I'm not going for the third one because a third strike and I should be out type situation.

I'm looking at right now from the supply chain, are we setting ourself up in a situation where we're asking for more problems.

We're looking at that from the standpoint of just safety, from an environmental standpoint, a concentration, and back up.

So we're stressing a lot of places around here because I plan to learn from both of these events.

You never can foresee everything but I want to mitigate this because this was a very damaging thing.

And it's not just us.

The whole electronics industry got hit by it pretty hard, and so we as an industry need to think about that.

Thanks.

See you next week.

See you next week.

Thank you, everybody.

Again, I want to thank everybody today.

It was a different approach.

I wanted to give you a little more insight into what's happened the last three or four months.

I hope that helps you.

I want that off the table so when we go into next week I'm looking forward to talk about strategy.

Looking forward to talk about what I see out there right now from the standpoint of our end markets, and how we're going to attack differently.

We are going to have to make some different moves from a strategy standpoint and we'll talk about those.

And then we'll give you some quick insights relative to the various business.

Some of the businesses are just a matter of executing.

Some are stuff, some of them are a little bit more, obviously, insights that we're going to have to spend some time on.

We're looking forward to it, looking forward to seeing everybody booked from an investor standpoint and the sell-side standpoint.

Appreciate it, with all of the patience.

And, again, I want to thank all the employees around the work working their way through this very challenging time for the Company because we intend to recover and have a record year in 2012.

Thank you very much.

Bye.

Ladies and gentlemen, this concludes the conference call for today.

Thank you for your participation and you may now disconnect your lines.