艾默生電氣 (EMR) 2012 Q2 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.

(Operator Instructions)

This conference is being recorded today, Tuesday, May 1, 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 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.

Now, I'd like to turn the conference over to our host, Patrick Fitzgerald, Director of Investor Relations at Emerson.

Please go ahead, sir.

Thank you, Vince.

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

Today's call summarizes Emerson's second-quarter 2012 results.

A conference call slide presentation will accompany my comments and is available on Emerson's website at Emerson.com.

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

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

Second-quarter sales increased slightly to $5.9 billion, with mixed results across businesses and geographies.

Underlying sales were up 2% led by strong recovery from the Thailand flooding supply chain interruption and process management.

Climate Technologies had another difficult quarter, but recovery appears under way in the US and China.

Gross profit margin expanded 10 basis points from the prior year, and expanded 80 basis points from the first quarter.

Operating profit margin of 16.5% increased 330 basis points from the first quarter, which was a decrease of 40 basis points from the prior-year quarter.

Earnings per share of $0.74 increased 48% from the first quarter and 1% in the prior year.

After robust sequential profitability improvement in the quarter, Emerson is well positioned for a strong second half of 2012.

Next slide, P&L Summary.

Net sales increased 1%, underlying sales increased 2% despite continued product line rationalization in the Embedded Computing and Power business.

Operating profit decreased 1% as volume deleverage, unfavorable product mix and other cost increases exceeded cost reductions and price increases.

We repurchased 1.7 million shares for $84 million in the quarter, and earnings per share increased 1%.

Next slide, Underlying Sales by Geography.

Underlying sales in the US grew 3%; Europe decreased 4%; Asia grew 2%, with China down 4%; Latin America grew 11%; Canada grew 10%; and the Middle East and Africa was up 5%.

Total underlying sales increased 2%.

Currency translation deducted 1% with total net sales growing 1%.

We expect Europe to remain weak in the second half, but order trends suggest China sales will improve.

Next slide, Profitability Detail.

Gross profit margin of 39.5% expanded 10 basis points as cost reduction benefits and price increases offset unfavorable product mix and other costs.

Price cost was favorable in the quarter.

Operating profit margin of 16.5% decreased 40 basis points from the prior year and expanded 330 basis points, sequentially.

Net other deductions reflected higher restructuring and lower gains, partially offset by lower FX losses and amortization.

Pre-tax earnings declined 2%.

Moving to slide 6, Cash Flow and Balance Sheet.

Operating cash flow decreased 25% on lower earnings and higher investment and working capital to support second-half growth.

Capital expenditures increased 25%, reflecting investments in technology, growth programs and capacity.

On the balance sheet, inventory peaked in February and is expected to continue to decline.

Next slide, Business Segment Earnings.

Business segment margin of 15.3% decreased 20 basis points from the prior year and expanded 260 basis points from the first quarter.

Corporate expense increased $19 million, primarily due to the gain in the Fisher Sanmar JV buyout in the prior year.

Moving to slide 8, Process Management Results.

Process management net sales grew 13%, and underlying sales grew 14% as currency translation deducted 1%.

By region, the US was up 24%; Asia was up 10%; Europe was up 4%; Latin America was up 33%; and Middle East and Africa was up 5%.

Strong demand in oil and gas and chemical end markets continued in the quarter with underlying orders up 18%.

Segment margin of 18.3% improved 40 basis points from the prior year and 590 basis points from the first quarter, as volume leverage and cost reduction benefits offset unfavorable product mix and other cost increases.

Delayed sales from the supply chain disruption should be recovered by the end of calendar year 2012, as we balance recovering the sales with ensuring product quality is not compromised.

Acceleration of backlog conversion and continued strength in new orders will drive sales in the second half.

Next slide, Industrial Automation.

Industrial Automation net sales declined 2%, and underlying sales declined 1% as currency translation deducted 1%.

By region, the US and Asia declined 1%; Europe was flat; Latin America decreased 5%; and the Middle East and Africa grew 14%.

The Electrical Distribution and Ultrasonic Welding businesses reflected strong growth, and demand in the global power-generating alternators business remains at a high level.

Electrical drives, food automation and HVAC-related hermetic motors businesses were weak, and solar and wind energy end markets remain challenging, as well.

Segment margin of 15.8% declined 20 basis points from the prior year as volume deleverage and materials cost increases were partially offset by higher selling prices and cost reduction benefits.

Price costs was favorable and margin improved 100 basis points sequentially as restructuring benefits have started to flow through.

Europe's softness will persist into the second half of 2012.

The capital goods and market should remain stable in other regions.

Moving to slide 10, Network Power.

Network Power net sales declined 4%, and underlying sales declined 3% as currency translation deducted 1%.

Geographically, the US was down 4%; Asia was up 3%; Europe and Latin America decreased 13%; and Middle East and Africa was down 3%.

Telecommunications and IT end markets remained weak, but second-half improvement is expected.

The Global Data Center business was up with strong growth in the US and solid growth in Asia.

Europe pressure continued.

Segment margin of 8.6% declined 70 basis point from prior-year as volume deleverage, unfavorable mix and higher restructuring was partially offset by cost reduction benefits and materials cost decreases.

Embedded Computing and Power business returned to profitability, and Network Power Systems expanded margin from the prior year.

Sequential margin improved 40 basis point despite increased restructuring, continued end market weakness and aggressive product line rationalization.

Next slide, Climate Technologies.

Climate Technologies net and underlying sales decreased 9% with the US down 11%; Asia down 9%; Europe down 12%; Latin America up 25%; and Middle East and Africa down 3%.

US residential end markets were weak, but growth in commercial and refrigeration markets was solid.

China was soft, but other Asia sales growth was robust.

Economic conditions remain challenging in Europe.

Segment margin of 17.1% declined 130 basis points from the prior year as volume deleverage and material cost increases were partially offset by higher selling prices and cost reduction benefits.

Price costs was favorable, but not enough to maintain margin.

US and China markets appear to have bottomed, and should improve in the second half of 2012.

Moving to slide 12, Commercial and Residential Solutions.

Commercial and Residential Solutions net sales grew 4%, and underlying sales grew 8% as the divesture of the Heating Products business in 2011 deducted 4%.

By region, the US increased 8%; Asia grew 3%; Europe was down 3%; Latin America grew 25%; and Middle East and Africa grew 85%.

Commercial construction in the US drove demand across the segment with very strong growth in the Storage businesses.

Segment margin of 21% improved 90 basis points from the prior year as price increases, volume leverage and cost reduction benefits offset higher materials and other cost increases.

Price costs was favorable, and aggressive restructuring programs over the past two years are paying off.

Growth should remain solid in the second half of 2012 as US residential end markets improve.

Finally, on slide 13, the 2012 Outlook.

The significant sequential improvement in the second quarter supports our expectation for record sales, profitability and earnings per share in 2012.

Recovery of HVAC and telecommunications end markets remains likely, but the pace of improvement is occurring slower than planned.

While US economic growth is positive, it is anemic compared to past recoveries.

Europe remains weak and has no economic momentum.

China, while stabilized and strengthening, has been softer than expected, as well.

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

Underlying sales and orders grow 3% to 5%.

Reported sales and orders grow 2% to 4%.

Operating profit margin 17.5% to 17.8%, and pre-tax earnings margin 15.0% to 15.3%.

Restructuring expense approximately $125 million.

Tax rate approximately 32%.

Earnings per share $3.35 to $3.50.

Operating cash flow $3.4 billion to $3.5 billion, and capital expenditures approximately $700 million.

And, with that, I turn it over to David Farr.

Thank you very much, Pat.

Thank you, everybody, for joining us today.

I appreciate that.

First, I would like to say that on behalf of the OCE and myself and the business leadership, we are clearly not very happy or pleased with our first six months of this year.

We've had a fight, as you all know, several both internal and external issues as we've gone through the first six months, and yet the second-quarter results were not as strong as our expectations just three months ago.

The first issue, I would say looking at it, Emerson Process Management, we had -- we have begun a recovery.

The order pace has been very strong.

We have actually added to our shortfall, relative to what we built in the first quarter on the loss of the Thailand boards and the supply chain, another $50 million, primarily because in the month-end of February, early March we had to put several of our businesses back on hold as the supply chain basically had some quality issues that we refused to ship, and we had to deal with those.

By the end of the month, and as we've gone through the whole month of April, we are back up and running full out, and we will recover.

As we look at it right now, we'll recover the sales, which is approximately $300 million that we've missed in the first half of this year.

Most of that will be recovered by the end of this fiscal year, and we should recover the remaining part of that by the end of this calendar year.

The key issue for me is, we will not ship and create quality issues out there.

So, we're going to make sure that maintains the highest quality integrity of the product, but we are running at very high levels right now, and should see a very strong third quarter.

Just coming back from Europe and China, our European business has continued to weaken.

Other than Process business, I see continued weakness in Europe, and I see no momentum.

In fact, I see continued deterioration in the core market space until we see some action in the -- I would say in the marketplace relative to the governments trying to get some economic growth back into Europe.

But we've been looking at a recession all year.

The recession I think is a little bit deeper now and continues to impact us across our business space.

In particular, some of our Export business, which some of it would have been going into Asia and other parts of the world.

That business is also very weak.

China has had a very difficult first six months.

We do expect that to recover.

However, I do not see it to be the same strength as we've seen in previous years, and Brazil has also slid back a little bit this quarter and has actually had a weak second quarter, though should start turning around as project business starts shipping.

And, there has been no recovery at all in the Climate Technology business in the second quarter.

We did anticipate a little bit of recovery.

We are now starting to see the order pace come back from North America.

I'll comment further on that in a few minutes.

But still, for the last nine months this business has really struggled, and hurt us both at the top line and at the profitability line, as we've had to manage that cost structure with volumes being as low as they have been for the last nine months.

But, we did make progress on the positive side going from Q1 to Q2.

Not as much progress as we wanted, not as much progress as we expected, but we did make progress.

The big issue that we face here, I think, in the next 6 to12 months is the global economy continues to slide, slide a little bit downwards, a little bit weaker.

The US economy is holding in at what I call very moderate growth, maybe 2%, 2.5%, and certain segments are not seeing much growth, but the US economy is growing.

It is the global engine of growth right now, and I don't see the rest of the world coming back too much in the second half.

Some recovery in a couple of markets but much weaker international growth than we have seen in the last several years.

In particular, Europe, China and Brazil, with some recovery in China and Brazil, but very, very little recovery, if any recovery.

In fact, I expect negative growth in Europe outside of Process in the second half of this year.

On the positive side, as we look at the business pace today, Process Management orders have continued to be strong.

Their shipping has continued to ramp up.

They are making excellent progress, and we have continued to make progress relative to the quality and a global supply chain, and I feel much better where we are today than just 45 days ago.

Industrial Automation is starting to see some of its core markets recover a little bit after last year.

Industrial Automation was up extremely strong, 20% to 30%.

We were ahead of the recovery and now the order pattern has stabilized, and I think the order pattern is starting to give us a little bit of growth in the second half of the year, in particular in the North Americas -- in the Americas and in Asia-Pacific, in particular China, and we're seeing that.

I see no recovery in Europe in Industrial Automation.

The Commercial Residential Solutions continues to grow nicely.

The residential numbers and nonresidential numbers in the US continue to support that, and I expect that will continue for the second half of this year as those numbers continue to firm.

Climate Technology, which has had a very difficult nine months, will start seeing, and we are starting to see, some recovery.

I personally believe the recovery will not be as strong as you would expect after nine very difficult months.

I believe the marketplace only has so much growth in it right now.

I think people are going to be very cautious.

We do see the recovery, but it's not going to be anywhere close to the type of recovery you would expect after being down as where they are, but the recovery is happening.

I would expect recovery in Climate both in the US and in China, which we're already seeing for the last 45 days.

So, that parts are very positive.

From my perspective, I would expect the Network Power Systems will continue to make progress.

They made progress this quarter.

North America, our Data Center business was good.

Our Asia Data Center business was good.

Our European Data Center business was not good, and that market is driven primarily because of the weak European economy.

The Embedded Power and Computing continues to make progress in their turnaround.

They went from a break-even loss position the first quarter to making money.

The pruning continues.

It's our estimate it's around $25 million in each of the quarters.

That's what we can give at this point in time, but they're continuing to make progress.

They've got control of, I would say, the order and sales pattern right now, and the profitability has continued to improve and will continue to improve in the second half.

As we look at it right now, our orders, our current backlog, the recovery within Emerson Process Management, which has begun quite strongly and has continued well in April, will continue.

We're looking at around two $7-billion quarters, and relative to delivering our profitability in the second half of year, we need incremental profitability of basically 40%.

We just delivered 45% in the second quarter.

So, we're looking at much higher sales volume, around 40% incremental possibility.

The company is geared up to that.

I believe that we have the capacity right now.

We have the capability and, you know, there's obviously issues coming at us around the world, but I feel we have, based on the new underlying sale growth of 3% to 5%, because of the weaker Europe and China, and the profitability based through flow-through in our cost structure and the restructuring efforts underway, which will continue to be positive, I think we have this well in focus to where we think the year is going to be at this point in time, both from an earnings standpoint, underlying growth standpoint and a margin standpoint.

I feel we've gone through this in great detail as we closed out the quarter, looking at the pluses and minuses and looking at the momentum through April, so I feel after reviewing this report today that we have this pretty well boxed and focused at this point in time.

Again, I want to say that myself and the OCE and the business leaders are not pleased with the results in the first six months.

No one is happy.

We do not like to hurt our shareholder base.

We take our shareholder base very seriously, and we take this company very seriously and the performance of this company very seriously.

We did have good, good improvement in the second quarter, but it wasn't as strong as we wanted, and we will continue to improve as we go into this third quarter, and we already see it in the month of April.

Relative to our cash management, we are online to generate somewhere between $3.4 billion and $3.5 billion of operating cash flow.

You know, from my perspective, the inventory performance is actually improving.

We're sitting at pretty close to record levels of days on hand already.

The inventory dollars are starting to climb or reduce, so that's good news, and we have from our standpoint, the rest of the asset management in pretty good shape.

Payables will continue to from decline in days, will continue to get weaker because we are cutting inventory and we're actually starting cutting spending.

And, we have been cutting spending both in capital, one, for I see, a weaker global economy, and two, to make sure we keep or costs in line with the uncertainty of what's going to come at us in early 2013, both in Europe, with very little recovery in sight, I think China will continue to weaken and the uncertainty of North America, with what potentially could hit all of us companies here in the US with uncertainty relative to the fiscal and monetary policy coming out of Washington.

Capital spending will continue to be a little bit under $700 million or around $700 million in that range right there.

So, pretty much from the standpoint where we sit right now, we see what we have to get done.

I feel confident, the business leaders, the OCE feel confident we will deliver the second half, again after a very challenging first half.

But we have things in line, things in order where we need to be at this point in time, and we know exactly what has to be done from restructuring, from shipments, delivery backlog, getting inventory down and the cash management.

And from the standpoint of Emerson executives, we know what has to be done, and I feel confident they will get it done.

So again, I want to apologize for the questionable results in the first half of this year, and I look forward to answering some of the questions and comments coming at us here on the phone and with that I will open the line.

Thank you.

Thank you, sir.

Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions)

Steven Winoker, Sanford Bernstein.

Good afternoon, Dave

Good afternoon, Steve.

Could I just start off with a question around the extra costs you actually had in the quarter on the supply chain and inefficiencies.

That -- how much was there really in that result, and how much do you expect going forward?

So, in terms of expediting air freight, line ramps, things like that?

It's a number we have.

I don't have it on the fingertips of my hand, but I mean I would -- [Frankie] what did they say?

Around $35 million?

Around $35 million, so between $30 million and $40 million in the quarter.

Well, it's more than that.

For the whole -- I'm sorry.

It's about $12 million for the second quarter, I apologize I [about looked] at the number there first quarter.

Frank's just showing me the numbers, and about $5 million.

I'd say around $40 million for the whole year.

We're going to be running around $10 million, $11 million for second half of the year per quarter.

We'll be eating that cost.

Okay.

So $10 million or $11 million run rate for the next two, and then, presumably, you're saying you're finished at that point, right

Right now, based on the fact that we put some things on hold, there's no way I was going to allow quality problems.

We already hurt our customers once.

I'm not going to hurt them twice, and so I would say that we'll probably have that probably somewhere between $5 million and $10 million in fourth calendar quarter.

It will take us all the way out to the calendar year to get this done.

It's pretty even now.

We already get the biggest chunk out in the third and fourth, and we'll get some left over in the first fiscal quarter next year.

Okay.

And then the second question is on the underlying core growth assumptions you've talked about.

My math tells me somewhere between 6.5% to 10% implied underlying growth for the second half to hit the 3% to 5% for the full year.

So, I'm not sure how close that is to what you're thinking, but if that's true, that's telling me I've got to have, or you've got to have, a pretty big pickup in Climate and Network.

PM has got to continue growing strongly, and IA has got to be positive, I think.

So how are you -- maybe you could just walk through your expectations, then.

Frank, you got your chart there?

I'll get the number here.

I'm looking at underlying sales chart from today's board meeting, right there.

Give me one second here, Steve.

Sure.

Okay.

You're approximately right.

It's going to probably be somewhere between -- it's going to average between 6% and 8%, depending which quarter.

One quarter it's going to be probably 7%.

One quarter will be about 8%, something like that.

That it's our current expectation, so let's say 6% to 8% per quarter.

And across the business units how you're sort of thinking --

The big drivers are going to be, from our standpoint, you have Commercial and Residential Solutions has been averaging about 7% in the first half of this year.

Climate Technology does go positive, and we see the order pace has it go positive.

I'm a little bit concerned about how fast and how sustainable, so you're looking at mid-single digits there, from my perspective.

Industrial Automation is going to be low- to mid-single digits.

Network Power will actually stabilize and be in that mid-5%, 6%, 7% type of range, and Process is going to be obviously very strong in the second half of the year, above where it was in the second quarter.

So, in the second quarter it's around 14%, so its going to be above that.

It's going to be somewhere around 15% and 20%, somewhere in that range there.

Okay, and I guess I'll sneak one last one in.

Just thinking about the last 60-plus days, and what is it that's sort of -- what's been the most surprising to you both on your internal information flow and externally, if you think about where you sat then and where you're sort of sitting now, that short of changed?

From my perspective, there is two things that happened.

One, I did not plan to have to shut down some of my Process business again for a quality board issue -- we moved a lot of boards and the boards to go into some of the instrumentation business was in, and when I moved that board, we had a very strict quality control on it, and unfortunately, we had some time there that they were producing bad boards.

I did not anticipate that, unfortunately.

We've got that corrected, but you move that many boards that quickly, one would have to expect that, but that hurt us.

That was a surprise to us internally.

And secondly, I did actually expect to see more -- I actually expected to see some recovery in the month of March.

You know, typically this industry is always built a little bit ahead of time, but there has been no build at all.

In fact, this continued in liquidation almost all the way up to the end.

So we're obviously operating in a different norm now.

We're basically going to be operating as orders, book and go.

There's not going to be any build at all in this industry, in the climate industry, around the world.

So, those are the two different things really impact us in the second quarter, and that's where we are.

Just a fact of life of that climate business has had a very difficult year, and you would expect it, with the consumer spending that we've seen, more business spending in the climate area, which we have not seen, and now we're starting to see some.

But the automotive -- if you look at where there's support in the second quarter, half the US GDP was automotive sales, AKE, not housing or air conditioning for housing.

Right.

Okay.

Thanks, Dave.

Deane Dray, Citi.

Thank you.

Good afternoon, everyone.

Dave, in Embedded Power back in February you talked about launching a fix or exit strategy and hoping you could give us an update.

We saw on those slide comments about aggressive product line rationalization, but any color in terms of where you are in that evaluation would be helpful?

There's no change.

The strategy right now is we or an aggressive restructuring fixture business and that's where we are at this point in time, and there will be nothing other than that focus internally and with that operation, and so there's nothing new to add there at this point in time.

The key thing for me is to fix this business, and I saw progress in the quarter, which is a positive, and I expect to see continued progress here as we move into this quarter here.

And so, we will start seeing a better result within that business as we get into this quarter.

That's where we are.

Great.

And then on the Process side of the recovery out of Thailand, while there's -- just to clarify have there been any cancellations of size in that backlog?

No.

In fact, our backlog and order paces continue to be very strong.

We've been working with our customers.

We're spending an extraordinary amount of money to make sure we support our customers and shift stuff around and expedite.

It's really difficult.

Even though we have an estimate of $35 million, $40 million for the year of cost for doing this, it's really hard to estimate that though.

The key issue to me is, and that's why we put the word out very clearly, any question on quality, you shut it down and confirm it.

You do not want to have two hiccups here, and we have not had any, and from my perspective, that's very important in our backlog, and support happens to be very strong at this point in time.

We got to keep executing

And, last question for me.

On China, you had talked earlier about an expectation of a soft landing, but then perhaps a reinvestment by the government in the second half.

Are you seeing any of that?

There's been some discussion about some investment in non-resin energy.

Be interested if you're seeing it and how you might be positioned for that?

We are seeing some improvement in the business environment spending right now, Deane.

It's not nearly the type of recovery that we had seen historically when they turn this on.

I think there's still a lot of issues relative to the government.

There's a lot of issues internally going on in that country right now.

I think from the perspective of how much money can be reinvested and try to revitalize a weaker economy, I've not [been] the magnitude of investment.

Though, we are seeing from Industrial Automation the Process stand, the Climate standpoint and the Network Power standpoint the orders for the last 45 days, and continued this month, have been good.

So, I do anticipate a stronger second half, though I do not see the same second half that you would normally expect in the type of mode that we would see from a recovery standpoint in China.

So, it's better.

It's still growing, but it's not going to be anywhere close to where I thought it would be.

That's another the reason we take an underlying sales [die].

I can't bank on this at this point in time.

Any lift on the energy investments they're making?

Yes.

We see that.

We do see that benefit right now in the Process and also in the Climate area.

So, the answer is yes, but it's not going to be -- the investment that's going in is not anywhere close to the magnitude of investment that we've seen historically.

Great.

Thank you.

You're welcome.

Julian Mitchell, Credit Suisse.

Hi.

Thanks a lot.

Yes, I guess the first question is really on the incremental margins.

I mean you mentioned, sequentially, those were about 45% in the March quarter.

That was a similar run rate, incrementally and decrementally in the prior two.

So, I guess if we think about the June and September quarters, you're guiding for that to be about 40%.

Yes.

When you look at the next two quarters versus what you had seen in March, you know, just looking at page 3 of your slides, you call out a bunch of factors there around the operating profit line, volume deleverage we know goes away from the order book, other cost increases you've already quantified that around $10 million, $11 million a quarter, so there's no big change there, cost reductions, those are sort of in the bag from prior restructuring.

So, I guess the two things that are left are unfavorable product mix and the price increases.

So, could you talk a little bit about those two points, and how you think they're going to affect the second half versus -- (multiple speakers) we just had.

In the certain businesses we have from a price increase standpoint, it goes in in the middle to early part of the second quarter, so their out price increases are holding at this point in time, and they're in.

So, we should start seeing the benefit of those in the second half.

I feel very good about that at that point in time, if the volume holds up.

Clearly, if you don't get volume, you don't get the price.

Relative to, from my perspective, mix at this point in time, we are starting to -- if you look at the various businesses that are going to start coming into play here, the Climate Technology turns positive given the fact it's around an 18% profitability margin.

That will help us from that standpoint, the fact that they've been negative and they've held their deleverage reasonably well in those [modest scales] they've been down, but that's going to be a positive standpoint.

Commercial Residential Solutions are going to be a positive for us from that standpoint, and the Process Management will continue to be a positive for our standpoint.

On the cost reductions and restructuring and the Industrial Automation, that benefit is starting to flow.

We saw that in March, and I feel better that we will continue to see improved profitability in Industrial Automation in second half of the year, which we forecasted and will continue to forecast.

I will update everybody relative to an EPG relative to the underlying sales and profitability of the segments when we're together in EPG, and where we stand relative to where we said in February.

Sure.

Thanks, and then just a quick follow-up, keeping it at the overall sort of Emerson level.

Your sales are about flat year on year, your earnings about flat year on year.

When you see that, does that make you want to accelerate, the restructuring or accelerate portfolio change because I guess you don't want to be a company that's just relying on volume leverage.

You know, with flat sales it would be good to have some sort of, earnings growth through price or cost savings.

Are you sort of thinking about the restructuring and maybe trying to accelerate that?

From the restructuring standpoint, we are accelerating already.

We're trying to do as much restructuring as we possibly can, in particular in western Europe and we've got some underway here in North America, but I think from a restructuring standpoint, we've now got it geared up at a level as we go into -- finish the second quarter, go into the third quarter, as high as level as we can handle at the company.

Relative to repositioning assets at this point in time, we've just gone through what I would call two or three very challenging quarters.

I want to see this thing stabilize before -- I mean get a better sense of the underlying business before I make any more shock treatments.

But, I still believe the mix of our company still has a very good underlying growth rate, and we've just gone through a couple shocks here, so I'm not ready to over react based on one or two quarters, Julian.

Okay.

Thank you

You're welcome, take care.

Shannon O'Callaghan, Nomura.

Good afternoon, Dave.

So, on Process how far from optimal would you say it was operating in the quarter?

You talk about it being at full strength again in April.

One, how far were you from optimal in the March quarter, and what's your confidence that this April rate can sustain?

You look at optimal, we were probably $50 million to $75 million below where we should have been in the second quarter.

It was a pretty good quarter.

We're up 14%, and we had pretty good profitability.

From my perspective, if I look at the second half of the year, if I look at third quarter, I feel very confident based on what I see right now, based on the plant structure, based on the input going in the order pattern, which again continues to stay at high levels, I feel pretty confident that these guys are going to be running pretty close to full out.

I don't think they'll be running 100% full out, but I think they're going to be running a lot closer than they did in the second quarter.

I feel everyone is focused on this, and we've got the management team focused and the quality of the boards have held up and the quality supply chain -- we don't make them in Thailand anymore.

We're out of Thailand, but we've got them spread around different places around the world, and so that chain is working pretty well at this point in time.

Okay.

Hey, want to ask you a question about taxes.

Your tax rate has gone up another point, so you're at 32%.

You're now about 7 points above the peer group average.

Do you have any updated views on corporate tax reform, or if you plan to, do anything to work on the tax rate?

What's going on right now is our US business is stronger, and from a stand point of if you look at our mix of business our US actually had a couple of very good quarter here relative to our profitability and some of the -- we've given China, given some of the other marketplaces a lower tax rate, like Europe.

That's hurt us.

Right now we're very eagerly working with tax reform because we clearly are a player that has been impacted by this, and we do not have offshore deals.

And right now, we'll work with that, and we're going to keep working that, and that's where we are.

Okay.

Thanks a lot.

Mike Halloran, Robert W.

Baird.

Afternoon, everyone.

So first on the guidance and just trying to parse out the downside from this quarter versus the outlook side, certainly sounds like you're expecting still the acceleration in the back part of the year.

How much of the downward guidance move is really just part of the 2Q underperformance versus actually pulling that down the back half of the year?

From my perspective in the Q2, the underperformance depends what you call -- people have forecasts out there for us in Q2.

I don't give guidance forecasts, and I didn't necessarily would have picked an 80% -- $0.80 guidance for the second quarter.

So, I would say that a couple pennies on average are from the first quarter -- from the second quarter, and the remaining comes from the second back of the year as I pulled down both China, Europe and a little bit of Latin America.

Makes sense, and then on the Climate Tech side of thing obviously saw the improvement.

Could you just talk a little bit about the inventory levels and then also whether or not you're seeing similar trends in the hermetic side on your Industrial Automation business.

The inventory levels in the channel are extremely low.

Our inventory levels are extremely low.

The order pace is picking up and we'll see -- this is going to be now a one-month thing.

We've got to see sustained improvement in North America.

I'm very concerned about how sustainable that is given the fact that the residential numbers have been improving, but it hasn't been improving all that well, and it actually has been kind of choppy.

So, we'll see what happens here.

And what was the other part of that question?

Just whether you've seen the same trends on the hermetic motors side.

The hermetic motors move exactly with our compressor business because that's what it is, one and the same.

That's what I figured.

Appreciate the time.

You're welcome.

Scott Davis, Barclays Capital.

Hi, good afternoon, guys.

Dave, we haven't talked about cash reinvestment at all.

You've got a stock that is probably at the level now where share repurchase starts to make some sense.

Where do you -- what are you thinking there?

We talked -- we've been doing share repurchase.

As you know, we have a set formula type based on where the stock price goes.

As the stock price goes down, we buy more, and as it goes up, we buy less, so much right now based on our communication working with the finance committee today, we will be increasing it, and we will be increasing it here as we go into the second half of this year.

Okay.

Dave, I'm still trying to get a feel for how you feel about guidance, and maybe this isn't fair, but you viewed it as realistic, conservative, optimistic.

It still feels like there's a back-half recovery baked in that, particularly in China, that may or may not come to fruition.

So, how do you think about that?

I think I've told you this before.

My level of guidance -- I do not set guidance out there so low that my dog Zorro can jump over.

I set out a guidance that I believe based on talking to my business leaders and the OCE that I feel is a realistic, balanced guidance.

That's the way it is, and I'm not a CEO -- I have never been a CEO that sets guidance so low that anyone can beat it.

That's not the way I do it.

I run the company based on pushing the guidance as hard as we can.

Sometimes we make it.

Sometimes we don't make it, and so that's where we sit.

And, yes, the forecast is second half -- has a second-half recovery.

Our business always has a second-half recovery, and so from my perspective, it is a little bit more this year than normal, but I do not feel uncomfortable with this based on where I see the global economies both from China, Europe and the United States at this point in time.

So, we have to execute, and so, do I feel comfortable I give you a guidance that we can make?

Answer is yes.

Do I give you guidance that I think that I could trip over?

The answer is no.

I believe that we have a fair balanced guidance right now.

That's the way I am.

[I offered it the] same way for 12 years.

Yes.

Now, I get it.

Hey, can we just real quickly move to Climate in China?

There's been -- I think you guys and most of your competitors added a fair amount of capacity, and then the growth rate hasn't come through.

Have you seen any price leakage or any kind of structural changes there that make you nervous for the recovery?

No.

There really hasn't been.

From a price standpoint, our pricing stays in line with inflation, and we price accordingly.

Our product is not a commodity, and so from our perspective right now, I see nothing that's changed in the fundamental business model proposition that we have in China, and it continues to be a very good business for us.

Okay.

Thanks, Dave.

You're welcome.

Nigel Coe, Morgan Stanley.

Thanks.

Good afternoon.

So, Dave, I get the comment about the guidance being fair and balanced, but, the achievability of targets is important for a lot of the investors.

Where do you feel most confidence in your guidance?

Is it top line acceleration, or do you feel most confidence in achievability of your margin targets?

I feel obviously, I feel very confident that we'll deliver the margin target.

I feel pretty confident that we'll deliver within that -- obviously margin is more confident than sales, but within the range they gave me for the sales, I feel very confident we'll deliver that.

Okay.

In second half, margins -- my calculations suggest that margins need to be 19.5% or above at the OM level.

You know, we haven't seen that level fortunately, before.

What is driving that?

I understand, the Process Management is going to have a very strong second half of year, but it seems Climate needs to be in that range as well.

Did you endorse that Climates in that 19% range and Process Management in the low 20%s?

I've not sat there and calculated the 19.5% range, so I can't tell you that's the right number or not the right number.

I do know that profitability will be strong in the second half of the year because of the mix and because we're running basically $7 billion quarters.

So, from my perspective right now the 40% incremental margin looks fairly realistic, and I think that -- and so, I feel very good that we'll deliver that number.

Okay.

That's great to hear, and then finally, Dave, you talk about inventories in the climate business.

Can you maybe talk about where else you're seeing inventory headwinds.

Sounds like power has been an area we've seen some of that there as well, but if I look at Industrial Automation, US down 1%, this is [IP] growth of above 4%, sounds like that you got some industry issues there as well, can you maybe talk about that as well?

From the standpoint out there in the Industrial segment, I think they are working some inventories off.

You know, some of the issue has been that it was such a strong growth last year, and I think now that the slowdown -- it's been a very spotty recovery and certain industries have done well.

Certain industries have not done well.

I don't sense a lot, a lot of it in inventory and industrial areas, but there is some, and I think that that's being worked off.

You know, from my standpoint in the Network Power business, I think to that you're seeing -- we had a strong, strong business in North America.

We had a strong business in Asia-Pacific.

Europe is really -- is very weak and continues to weaken.

I think that there's probably a little bit capacity issue we have here in North America where people build up, and if the economy continues to muddle along in this 2% to 2.5% range, I think you could see some issues relative to, what I would think, capacity in that industry at that point, too much capacity.

The inventory levels are starting to come down across North America.

I think they were build -- if you look at GDP in the first quarter, inventory did help GDP.

I think industry will continue to bring some inventory down as we go into the next two quarters.

Okay.

Thanks and good luck.

Josh Pokrzywinski, MKM partners.

.

Hi.

Good afternoon, guys.

To dig in on -- not to dwell on US HVAC, but it seems like some of the OEMs there have been pretty positive exiting March and entering April.

I understand there's a bit of a delay, but some of them have been talking about orders, order of magnitude strong double-digit 20% or more, and you seem to be talking about a more tepid recovery than that and inventory still being lean.

Are you guys still waiting for those orders to come through further down in the supply chain, or is there still an inventory draw at the OEM level?

No.

There's no inventory draw at the OEM.

From our perspective, we work day to day with our OEM customers, and you can go for a week, strong 10%, 20% growth, but then you could go for a week where there's no growth.

So, I want to see sustained growth in these order pattern.

Two weeks doesn't make a quarter to me of based on after just the last nine months we've gone through with the OEMs.

So, from our position, we have a very strong position in North America, and the industry based the performance, and we'll be performing right with it.

So, I know what's going on in the industry, and from my perspective right now, the order pattern has picked up.

It's gone positive, and we'll see that sustained through, May, June, July.

The year is now shorter with March gone.

What I'd call the AC year has now gotten shorter, and that's one of the negative take-away that we did not see any recovery in March.

We saw the last couple days going into early April, but we'll see how that -- those orders sustain as the whole quarters goes forward.

.

Great.

You mentioned that the analysts say maybe a bit of a pinch on that supply chain if the OEMs wait too long is that still a concern of yours?

The only concern I had was that they try to turn around from 0% to 50%.

I don't think -- from the capacity, they have a lot of extra capacity, and we have lots of extra capacity.

They are bringing it up, and we are communicating with them.

They communicate with us very nicely, I commend them on -- towards the end of March they start talking to us about, you know, they're bringing line rates up, which is very important, and we start adjusting with them.

So, I think we've been in sync.

We've had our discussions.

We're in sync, and we're going up very nicely together.

There's lots of capacity out there in North America.

The housing market and the investment in the housing market has got a long way to go before it comes anywhere close back to where it was just four or five years ago.

Understood.

If I can sneak one more in on Process Management, should we expect kind of normal seasonality in the 3Q to 4Q margin bump or --

No.

We're going to be screwing up here for -- I explained this to my Board, if what's happened to us in the first quarter is what's happened in the second quarter it's going to happen in the third and fourth quarter.

Seasonality, comparisons, unfortunately, again, I apologize for our mess-up in the first half, but it's going to be very difficult, and so you're going to see extraordinarily high profitability coming through because as we've got things ramped up both on the Process side and our total consolidated numbers -- I think somebody, Scott, just pointed out to me or somebody else just pointed out to me in the question, and so you can't pattern seasonality here right now.

It's very difficult.

Okay.

So, I guess does that mean that in Process, margin 3Q and 4Q should look similar, or I'm guess I'm just trying to understand.

Right now I'm looking at -- the fourth quarter typically will be a stronger quarter for Process.

I still think that will be the case, and the only thing that will be different in the profitability would be the mix of any big systems or big projects to ship out the door, but typically, Process has a stronger fourth quarter, and I would expect that would still be the case, but it's going to be very difficult to pattern out a seasonality.

Typically, the fourth quarter, profitability for fourth-quarter sales for Process is bigger.

It's the way it's always been.

That all right.

Thanks, guys.

You're welcome.

Terry Darling, Goldman Sachs.

Thanks, afternoon, Dave.

Thanks for the detail, appreciate that.

I'm wondering if you might talk a little bit in terms of the second-half improvement in organic revenues at Network Power, a little bit of color between what you're expecting for data center versus embedded versus telecom, and any color in terms of the visibility you have on that acceleration, whether it's backlog in data center or just comps in the other businesses or whatever else is giving you the confidence there?

Well, as I look at the embedded, we are looking at some moderate growth from the standpoint -- one, we've got some of the pruning done, and we actually have some underlying business as some of our customer base actually sees a little bit of growth.

I'm looking at what I would say low single-digit type of growth there.

As I look at the telecom, we are starting to see some orders, though it's not been really strong.

As you look at the telecom spend in the quarter that we just went through, around the world it was not good.

We are starting to see some stability and some improvement there.

So, again, we're looking at some recovery in the telecom, and I'm hoping it's going to be north of 5%.

Right now, we don't have a lot of visibility.

That business -- it's pretty tight from the standpoint of, what our customer base does for us there.

So, it's very tight relative to 30-day, 60-day type of numbers.

That's about all we get there.

On the data center marketplace, I think that the US will continue to do reasonably well.

I think Asia will continue to do reasonably well.

I think Europe will continue to weaken, and so we're looking at what I would say, you know, solid single digits in the space with the data center being our best, telecom probably being the next best and embedded being the weakest of the three.

The telecom right now, we need to make sure the telecom customers continue to order and bill out their inventory of their infrastructure and then -- they're just starting to do it.

That's the wild card there.

That's helpful.

Just a couple follow ups there.

Is there any inventory dynamic here in any of these three businesses, probably not data center but maybe in telecom or embedded, that, you know, is in the context here.

The inventory has been worked out in both those spaces.

The telecom was worked out over the last nine months, and embedded has been worked out over the last nine months, big time worked out.

So, I think the inventories are in pretty good shape in both those space, and the data centers, too.

The data center capacity comes in place if they get ahead of what their needs are in the corporate world, and they say slow it down, we don't need anymore.

That's where inventory comes in.

Can you remind us how big Europe as a percentage of the data center business is now?

Is it just the old Chloride business, essentially?

No.

We have -- if you look at our European -- let me get a number here.

I'll give you an idea.

Give me a number for the whole -- do you have the European number in Network Power?

Our European business is, I would guess, about one-third, but yes, it's still pretty significant.

When you say getting worse, in terms of rates of change, are we going, from single digits to double digits?

No, no.

I think you're looking at -- I mean if you look at -- Network Power is about $200 million plus Embedded.

Net was $200 million.

It's a significant piece of our business.

$200 million in the quarter.

And you asked the question on -- pardon -- (multiple speakers)

Just where you see those rate in Europe going.

From my perspective, we were looking at some improvement.

So, we're looking at moderate growth there.

I think we're going to be looking at probably flat-type of growth.

There's been no improvement at all, and it's been slight negative.

I think Europe right now, you're going to be looking at from 0 minus 5 to plus a couple points in a couple of our space outside Process.

It depends on a couple orders, depends on exports and stuff like that, but it's not magnitude change if that's what you're trying to get at.

Okay.

In your prepared remarks, you threw out a $25 million number.

It sounded like that's where you saw profitability, operating profits for the Embedded Power business in 3Q, 4Q?

No.

What I threw out there is what I call pruning.

I look at what I would call underlying pruning in the second quarter of Embedded Power and Computing sales.

That was about $25 million.

Okay.

Just quickly shifting over to Industrial Automation and again, the same question.

If we get a little bit of color on the segments with regards to the second-half acceleration growth, that would be helpful.

I mean from our perspective right now, we're seeing our second-half improvement in North America, Latin America and Asia and in Industrial Automation.

We had a very strong first half last year, so, the comps are very difficult.

There's a little bit easier comps now, and we're starting to see a little bit of over momentum.

I look at Europe being down in the second half in Industrial Automation.

I see no recovery from that standpoint.

I was thinking about more of the businesses, so electrical distribution versus power gen versus food automation, et cetera.

I'm not going to give you numbers for each of those businesses, but I would say the power gen business is going to continue to be pretty strong both in North America and in Asia and electrical distribution is okay because of the channels.

I would say it's going to be mid-single digit number, and then the automotive [topic], the way business goes in automotive, that's doing pretty well, too.

Europe is the one area that it's going to be negative.

The rest of the world is going to be positive.

So, I think it's going to be okay.

Okay.

Thanks very much.

Eli Lustgarten, Longbow Securities.

Good afternoon, everyone.

Just a question.

I'll ask us to play with numbers you took guidance down by a dime, of which it looks like the tax rate is $0.05.

You gave us $40 million of costs associated with trying to catch up, which is another $0.03 to $0.04.

You've got pruning of inventories and restructuring of businesses.

Is it basically the whole guidance change reflecting these ongoing side costs and better US profitability given your tax rate --

Eli, I don't know where you come up with numbers, but that's not how we built that.

Our tax rate did not move that much to create $0.05.

Well, you went from 31% to 32% as guidance and that's a $0.05 on the year.

We didn't move a full point on the tax rate.

The numbers you're talking about, where the guidance changed, gained and by the embedded costs, we actually had been looking at that cost ever since we started recovery, so we had embedded in some of that costs already from the profit standpoint, primarily is the underlying sales, the lower sales and with that lower sales a tad lower underlying profitability from the business and a little bit of disruption of the business, that's how we got that, and maybe a tad a little bit from tax rate.

There wasn't $0.05 from tax rate.

So, these are more rounding as opposed to major changes?

Yes, exactly.

Excluding Process, how much of the business is European across the company, excluding process, how much --?

Okay

So, we know Process Europe is not a real threat, but the rest of the business --

I wouldn't call it threat.

I just don't see the recovery.

The European business was down in the first half of the year.

I think excluding Process will be flatter, slightly down.

Our total European business is how big, I'll get your total number.

$6 billion approximately and Process is -- $5 billion, and Process is 1.8 Europe?

And that 1.8 is in the $6 billion.

1.6 of the $5 billion is Process, and so if you look at the second half of the year.

I think outside of process it will be flat to down, and it was in the first half, too.

I just don't see any recovery.

We did see some recovery, but I see no momentum and I see nothing that Europe going to give us that.

Can you make some comments on Latin America, particularly Brazil.

You said it was down, but that's the one market that looks like should accelerate in the second half of year

We have a lot of big projects that were held back, and we do expect those projects to come forward.

The economy in Brazil has definitely weakened, and obviously, the impact of so much raw materials is definitely weak in that economy.

So I do expect -- Latin America we had a very good quarter, and I expect to us have another good quarter, but I don't think Brazil is going to be playing as strong of role as it originally was, so that's all.

I think Brazil's economy is weak right now, and I don't see it strengthening all that much.

Thank you.

Rich Kwas, Wells Fargo Securities.

Hi, good afternoon.

Dave, on the European outlook, at the beginning of the year you talked about sales growth in Europe and the market is worse than what you originally thought.

Based on, I know some other people have asked a lot questions and you've given some color around it, but it sound like, though, the market share gains that you were expecting in Process and to a lesser extent in Network Power, those materialized and, you know, are you thinking just Europe's going to be flat for you for the year at this point?

I can't tell you the market share gains in the quarter.

I think you got to wait a year.

You got to wait for a little bit after the year to see if you actually gained share, but right now, if I look at Europe in total, I do expect a little bit of growth because of Process, but not much.

I mean I expected some of our businesses that were export driven to have a little bit of growth coming out of Europe.

That has not materialized because of the overall weaker economy.

So, right now, I would say we still are expecting some moderate growth in Europe and -- but not anywhere close to where it was I originally thought because I thought there would be more export, but that's where it is right now.

And then on Network Power are you seeing, in Europe specifically, are you seeing any more competitive pressures there or is this just a function --

No.

The competitive environment has gotten extremely challenging and tough since we bought Chloride, and that is expected.

You know, when Schneider bought APC, everyone mobilized against them.

The same thing this industry when someone does a movement like this, that's the window to open up the attack, and that's what's going on.

It will take a couple years for this thing to stabilize again.

We're going through restructuring right now in Europe.

So, I think the European market is unfolding for us and Network Power, which I thought and it hasn't been any big change

Okay.

Thanks.

Your welcome.

We have time for one more question.

Jeff Sprague, Vertical Research Partners.

Hey, Dave.

Just a couple things, you know, a lot of questions about guidance.

I guess the way to ask it is what kind of dog is Zorro?

Zorro is a King Chow, 10 years old.

(Laughter) Okay

And he can jump, but he's not a big dog.

Okay.

He's not a Chihuahua, either.

Just two things, and the prior question caught it a little bit.

You know, there's so much moving around obviously with macro and then these internal issues, but there is an element, though, that it feels like there's share loss going on, and it is hard to pinpoint in a quarter or anything, but your comments on Industrial Automation sound tougher than Eaton and Parker, the electrical drives comments sound tougher than Rockwell and ABB.

Telco TI sounds a little bit better.

It just kind of feels like there's a bunch of stuff moving around, and maybe there's too much noise in all the macro to really ascertain exactly what's going on, but just stepping back and kind of thinking about the portfolio and what's going on competitively, do you feel like you're holding your own?

Are you seeing some fresh competition from people that, are stepping it up also to what you might have seen historically?

I don't think it's changed that much.

I don't think you can look at a quarter or six months.

You know, those businesses, all those businesses you mentioned had extremely, extremely strong 2011 numbers.

Different customer base from the stand point of what we serve, and all those other guys you mentioned serve.

I do not sense based on our business performance looking at the underlying macro or individual market spaces that we've had competitive issues different than we've had before, and I don't sense when it's all said and done, that we'll have anything changed dramatically from what the market is doing.

So I don't sense that, Jeff, and as you know, I'm pretty close to that stuff, and I don't sense that.

Okay.

And then just one last thing, your comments on China were pretty clear.

I think you also said, though in your opening comments, that you expected China to continue to weaken in 2013.

Correct.

So just some thoughts on that, that you're expecting a little bit of a stimulus bump, and then you think it might fade in the next year?

Yes.

I think that if you look at the global marketplace, if you look at their export markets, and there's not a whole lot of recovery and it's basically stagnant type of growth, I think that China will continue to have a weaker fundamental economic pace as we go into 2013.

If the US stays at a very moderate growth in the 2% to 2.5%, Europe stays basically at no growth or a negative growth, those are very, very important markets for China.

And yes, I know there's a lot of talk about turning this into a consumer-lead economy there, but from the standpoint the capital spending, the export business is still very, very important for the China marketplace.

So, as I look at the one-time money they put back in there, they still have some structural issues they have to deal with.

So I think -- I firmly believe they're going to allow the growth to modulate down a little bit more again next year to allow working off some of these issues that have built up over several years, Jeff.

That's my call.

That's my feel, and I have a pretty good feel for China.

That sounds logical.

Alright, good luck.

We'll see you in Florida.

Thank you very much, guys.

Again, I want to thank everyone for the call, and I appreciate the questions, and hopefully, we gave you some insight.

And if I confuse people, I'm sure Pat, he wrote everything down, and he'll unconfuse you, or try to.

So, thank you very much, and take care.

See everybody soon.

Thank you, sir.

Ladies and gentlemen, this does conclude Emerson's investor conference call.

Thank you very much for your participation.

You may now disconnect.