艾默生電氣 (EMR) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen; and thank you for standing by.

Welcome to the Emerson 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, August 7, 2012.

Emerson's commentary in response 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.

It is now my pleasure to introduce the host for today, Mr. Patrick Fitzgerald, Director of Investor Relations of Emerson.

Please go ahead, sir.

Thank you, Diana.

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

Today's call will summarize Emerson's third quarter 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 conference call and slide presentation will be available on the web after the call for the next three months.

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

Third quarter sales increased 3% to $6.5 billion, with underlying sales growing 6% as robust growth in Process Management was driven by strong energy end markets and recovery of sales deferred from the Thailand flooding supply chain disruption.

The strong US dollar, particularly against the euro, reduced growth by 3%.

Gross profit margin improved 80 basis points from the prior year to a record of 40.5%.

Operating profit margin of 19.9% increased 180 basis points from the prior year, benefiting from strong sequential operating profit leverage of 55%.

Earnings per share of $1.04 increased 16% from the prior year, achieving a record for the third quarter.

Today, Emerson's Board of Directors approved the fourth-quarter dividend payment, completing 56 consecutive years of dividend increases.

The third quarter reflected solid results with strong operational execution despite slowing of the global economy.

Next slide, P&L summary.

Again, net sales increased 3% and underlying sales grew 6%, with mixed demand among end markets in regions, operating profit margin of 19.9% improved 180 basis points over the prior year, benefiting from strong volumes leverage, cost reduction benefits, and recovery of Process Management sales and profit from the Thailand flooding.

Earnings growth of 13%, along with the repurchase of 4.4 million shares, drove an EPS increase of 16%.

Next slide, underlying sales by geography.

Underlying sales in the US grew 6%, Europe was flat, Asia grew 9%, Latin America grew 19%, Canada grew 10%, and Middle East and Africa grew 5%.

Total underlying sales grew 6%, currency translation deducted [3%] with net sales increasing 3%.

Moving to slide 5, profitability detail.

Gross profit margin of 40.5% improved 80 basis points and achieved a record level.

Lower SG&A, as a percent of sales, drove further margin improvement as operating profit margin expanded 180 basis points.

Other deductions was essentially flat, as higher restructuring of $14 million and currency transaction losses of $11 million were offset by payments received related to dumping duties of $37 million under the US Continued Dumping and Subsidy Offset Act.

Pretax margin reflected an increase of 200 basis points.

Next slide, cash flow.

Operating cash flow decreased 6%, as strong earnings were offset by higher receivables related to sales timing.

Free cash flow was essentially flat to prior year with strong conversion from earnings at 90%.

Trade working capital, as a percent of sales, was even to prior year benefiting from strong inventory performance.

Moving to slide 7, business segment earnings.

Business segment margin of 18.5% improved 160 basis points, reflecting strong volume leverage and cost reduction benefits, as well as the dumping duty payments received mentioned earlier.

Corporate expense declined $14 million, primarily due to lower stock compensation expense, and interest expense decreased 8%.

Moving to slide 8, Process Management results.

Process management net sales grew 19% and underlying sales grew 23%, as currency translation deducted 4%.

By region, US was up 29%, Asia up 25%, Europe up 14%, Latin America up 33%, and Middle East and Africa up 13%.

Robust investment in oil and gas, chemical, and power industries drove growth in all businesses and geographies.

Sales benefited from approximately $130 million of converted backlog related to the Thailand flooding supply chain disruption.

Segment margin of 23.1% improved 270 basis points, primarily driven by volume leverage and cost reduction benefits.

Year-to-date underlying orders have grown 17%, with the US up over 20%, which has driven backlog up 15% from the prior year.

Continued energy end market strength and the high backlog support a strong outlook for the next several quarters.

Next slide, Industrial Automation.

Industrial Automation net sales decreased 1%, but excluding currency translation, grew 3% with the US up 12%, Asia flat, Europe down 4%, Latin America up 9%, and Middle East and Africa down 1%.

Strong growth in the power generating alternators, hermetic motors, and ultrasonic welding businesses was offset by decreases in the fluid automation and motors and drives businesses, primarily due to European weakness.

Segment margin of 18.8% improved 220 basis points, which benefited from the dumping duty payments, as well as cost reduction benefits that offset material inflation, unfavorable product mix and higher restructuring expense.

We expect the European fiscal crisis and euro weakness to remain a challenge in the near term.

Next slide, network power.

Network power net sales declined 6% and underlying sales decreased 4% as currency translation deducted 3% of growth and acquisitions added 1%.

By geography, the US was down 14%, Asia up 6%, Europe down 7%, Latin America up 16%, and Middle East and Africa down 6%.

Global telecommunications and IT end markets remained weak, particularly in the US.

The Asia growth benefited from the NBN project in Australia, while Europe economic conditions were challenging.

Product line rationalization continued in embedded computing and power, deducting approximately $30 million from sales.

Segment margin of 10.3% declined 10 basis points from the prior year, as volume deleverage, unfavorable product mix, and higher restructuring were partially offset by cost reduction benefits and material cost decreases.

Profit margin improved in the network power systems business from the prior-year quarter, and sequential margin improvement continued in the embedded computing and power business.

We expect the aggressive restructuring over the past year to continue to generate incremental cost savings and profitability improvement.

Moving to slide 11, Climate technologies.

Climate technologies net sales decreased 2% and underlying sales declined 1%, with currency translation deducting 2% and acquisitions adding 1%.

By region the US was up 1%, Asia down 5%, Europe down 12%, Latin America up 9%, and Middle East and Africa down 14%.

US market improved, but channel conditions were mixed with strong growth in residential and commercial, offsetting weakness in service.

China improved as well but remained negative, while the rest of Asia was flat.

And, economic conditions remained a challenge in Europe.

Segment margin of 20.2% improved 60 basis points, despite the sales decrease benefiting cost containment and mix.

We shipped our 100 millionth scroll compressor in the quarter, underscoring our broad global install base.

The US and China markets should improve at a modest pace, but weakness in Europe will continue.

Next slide, commercial and residential solutions.

Commercial and residential solutions net sales grew 2% and underlying sales grew 7%, as the heating products business divested in 2011 deducted 4% and currency translation deducted 1%.

By geography, US was up 4%, Asia up 11%, Europe down 1%, Latin America up 5%, and Middle East and Africa up 58%.

Steady demand in the US commercial construction markets continued.

Segment margin of 20.4% improved 20 basis points, as cost reduction benefits drove solid margin improvement.

We expect US construction end markets to remain stable for 2012.

Moving to slide 13, the outlook.

The strong third-quarter results keep us on track for a solid 2012, but the economic outlook is unclear and weakening.

There is no apparent fix for the Europe debt challenges, US fiscal policy crisis, or slower Chinese economy.

The global economic uncertainty has limited visibility, and companies are being cautious with investment.

Based on current conditions, the revised 2012 outlook is as follows -- underlying sales growth 3% to 4%, reported sales growth 1% to 2%, operating profit margin 17.5% to 17.8%, restructuring expense approximately $125 million, tax rate approximately 32%, earnings per share in the range of $3.35 to $3.40, operating cash flow $3.3 billion to $3.4 billion, and capital expenditures approximately $700 million.

With that, I will turn it over to David Farr.

Thank you very much.

First I want to thank everybody for joining us today, and I appreciate our shareholders and their long-term support.

As you know, today is -- the Board did finalize our final dividend increase for fiscal 2012 by the $0.40 to $1.60 for the whole year, our 56th year.

And, along with approximately [$1 million] in repurchase in fiscal year 2012, which is our current target, a strong commitment of payment back to our shareholders in cash, which is very, very important to our focus here as a Company and a management team.

At the same time, we have continued to increase our investments internally for growth and for capital that we need to grow the Company at record levels, and our balance sheet stays strong and liquid, and we have the room to do what we need to do.

We can control our own destiny.

I also want to let you know that [Zoril], my rally monkey, and my baseball bat are here with me today to keep me in line and to make sure I do not lose my focus, thanks to all those helpful tools, as we know.

I also want to recognize the operating executives across this Company, and especially the Process Management operating executives, that got the job done this quarter.

They had a tough hand coming out of the Thailand floods and the situation that we hit early on this year.

They mapped out their course of correction, they kept taking the orders, we didn't lose the business, we supported the customers, and we got the sales shipments done.

This quarter we picked up approximately $130 million of sales from the impact that we had in the first quarter.

We'll have a little bit more of that in the fourth quarter, probably $140, $150 [million], somewhere around that range.

And, a little bit left over in the first fiscal quarter of 2013.

But, the team out there in Process is getting the job done.

Across the whole Company operationally, we're getting the job done.

From an execution standpoint of cost reductions, from shipments to backlog reductions, they are getting it done.

As I look at the pace of business, the last 70 days, it has definitely slowed.

In early May when we had our last communication, we talked about 7% to 8% underlying sales growth this quarter.

We ended up at 6%.

It's a function of the weakening that we have seen around the world, in the US, in Europe, China, Brazil, India.

Clearly, we have seen this continuing weakening in orders.

Our order pace has maintained around 3%.

We expect it to improve a little bit.

It's maintaining probably the month of July, too.

We haven't got the final numbers, but my gut tells me we're probably around 3% on orders and the pace for this month.

The key for us is maintain the order pace, deliver the backlog, and reduce that backlog.

It's the same game plan we just executed in the third quarter.

Underlying sales will be slightly better in the fourth quarter, so our normal pattern.

But, we need to execute on getting the sales out the door.

Operations are focused on that, and we believe that we can deliver.

In addition to the lost sales that we had in the underlying orders and sales this quarter, we also had a stronger dollar which impacted us about $50 million in the third quarter from beginning to end.

And, that pace unfortunately will be even worse as we go into the fourth fiscal quarter, and we have been reviewing those numbers for the last three 8-Ks and the order pace, to keep an idea out there for the shareholders to know what we see happening, relative to the stronger dollar.

I, personally, like a stronger dollar.

It reflects a stronger economy.

I believe in it.

It gives us a lot more leverage relative to demands in a global company, and we are a global company.

We are not an export-driven company.

So I, personally, like a stronger dollar.

I think it's great for this country.

From my perspective, Europe has continued to be a weaker economy.

I do not see any change in that as we go forward here into the next fiscal year.

At this point in time, I would expect negative growth coming out of Europe.

I would expect negative GFI again in 2013 out of Europe.

US has one big issue, it's called fiscal cliff and fiscal mismanagement.

It is causing corporations in the United States to pull back, pull back on the reins, as I refer to it as you hear me talk about this all the time.

It's causing us to pull back on the reins, clearly.

Our capital spending in the third quarter was less than prior year and less than we've been running at from the pace, basically.

However, I still think that that's going to continue, going to be a weaker pull back as we look at going on here in the next couple of months.

I believe that companies out there right now are only spending what they need to spend.

The uncertainty of what's going to go on relative to the US fiscal policy is a big issue; it's a huge issue.

People are only going to spend what they need to spend, and people are cutting back on anything they see for growth, and I think that's going to be an impact relative to the whole rest of this calendar year, relative to underlying US growth.

In China, from my perspective, China has stabilized.

It has not picked up significantly.

The economy is definitely weaker than prior years, and I think the economy in China will continue to struggle.

The political transition is underway.

We will see how that plays out, but I see nothing at this point in time to change the growth profile of China significantly than what we've been seeing for the last 6, 9, 12 months, as we go into fiscal 2013 -- calendar year 2013.

Relative to Brazil, which is impacted clearly by the slowdown around the international markets and exports of their products, that economy has also slowed down, in my opinion, and will continue to slow and struggle from a whole standpoint of their cost structure and also that it's an export-driven material marketplace, which I think will be impacted.

India also has its own issues right now, be it from a political standpoint, a financial standpoint, inflation standpoint, and power standpoint.

India has continued to be a good market for us, but I am concerned about the future in the next 12 to 18 months in India, given what's going on inside that country.

Relative to leverage in the third quarter, it was outstanding leverage.

It's what we expected.

We expected to get some money back from the government on the Byrd Amendment.

That's been around.

We've known about it for six months.

We have had it planned in the forecast.

We had it planned in May.

It will most likely be our final payment, maybe $1.2 million more in the future.

This thing is going on, but it's going to be finalized here, but it's pretty much done for us.

It was well planned.

The rest of the operations have continued to execute on slower growth, leveraging back the cost structure, getting the job done in restructuring, and positioning themselves for, I think, a slower growth environment here for the foreseeable future.

We are doing what needs to be done across this Company to protect our profitability, protect our cash flow, and make sure we have the flexibility to deal with issues that come up, be it Thailand floods, be it embargoes, whatever happens, be it wars around the world, we are taking the action necessary to make sure this Company is strong and able to have the flexibility to get the job done.

As I look at the fourth quarter right now, we have to execute just like we executed in the third quarter.

We need Process Management to continue to reduce its backlog that we build up.

Their order pace has been very, very strong throughout this whole year, as you have seen.

It's not just one or two months, it's been strong now for a long time.

We need to execute getting that order pace, or those orders converted to sales.

We need to get that backlog down.

And, we need to deliver the profitability, just like they did in the third quarter, and I expect that team will do that.

At the same time, we need to continue the restructuring across network power, which had good traction in the third quarter and will have continued good traction in the fourth quarter.

We are dealing with a lower growth environment than we expected, but we've got our costs in line as we started way back three, four, five months ago, as we saw things slowing down.

I feel good that we will continue to execute in this fourth quarter, and I feel that we are ready to deliver a record level of profitability and, hopefully, a record level of sales, given what's going on at this point in time.

But clearly, with the underlying growth rate slowing down a little bit, and given the fact the dollar is continuing to strengthen, that's getting tougher and tougher, relative to the top line sales.

But, we feel good about where we are right now.

We have a good start in the month of July.

We are now into August, and we're executing.

The top 40 executives of Emerson will be in town for the next three days working with the OCE, talking about how we close out this year, talking about what we look at 2013, and basically making sure we're positioned to continue to perform at high levels, even if we have issues coming at us.

From my perspective, again, I want to thank the operating team for what they got done in the third quarter.

We will continue to execute.

We have a fourth quarter challenge.

We must make sure we deliver.

But, I feel good about where we are right now.

And, we're going into a 2013, to be honest, that I think will continue to be very challenging from growth and from the standpoint of what's going to happen around the world.

Companies need to be flexible, they need to be able to adjust very quickly, and deal with the issues that come at them.

There are pockets of growth out there, but there's also pockets of weakness, and it's very important for us to focus on where that growth is and to dial back where the weakness is.

But, we're not looking at anything that's going to, in my opinion, is going to quickly turn around and show a strong growth profile.

We are looking at a challenging growth environment, very similar to what we're dealing with right now, and I expect that will continue throughout 2013 and maybe even a little longer.

So again, thanks for the shareholders being with us today.

Thanks for supporting us, and we will continue to work hard to deliver a very strong finish to this year and to execute like Emerson can execute, as we have done in the past.

With that, we will open the floor for questions.

Thank you.

Thank you.

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

(Operator Instructions)

Christopher Glynn, Oppenheimer.

Had a couple on Network Power.

One -- just how the Chloride Trinergy in the transformerless, when that might start to drive some share reversion?

Second, early thoughts on repositioning budget for that next year -- what kind of headway have you made on what you see is requisite for that segment?

The new transformerless product in the United States has been introduced.

The first wave of it has happened.

Who knows what's going on in the marketplace from a share standpoint?

Who knows what's going on in the marketplace standpoint right now, with the uncertainty?

I think the whole Network Power systems business has had a good quarter, and they continue to make good progress around the world, and they will continue to make good progress next quarter.

My opinion right now -- you're looking at a challenging marketplace that these guys are serving and will continue that way in 2013.

I don't see anything that's going to say that a business environment is going to say that we're going to go out and spend money freely, without some clarity on what's going to happen in Europe from a fiscal standpoint, and what's going to happen here in the United States from a fiscal standpoint.

So, we're planning on very low growth; continue to execute the restructuring; improve the profitability like we're doing; and get the new products out the door.

That's where we are.

Okay.

Lastly, the SGA spend has been very steady, five or six quarters.

Do you start to see any upward pressure on that spend rate?

Annual increases, or what have you?

I think, from my perspective, we are going to continue to keep our costs in line.

We have gone out and pushed pretty hard on making sure that we're spending appropriately.

We are going to be looking at our spending on the big growth investments going into 2013, and look at which ones we want to maintain, which ones maybe I want to curtail.

But from our perspective right now, I think our SG&A is in pretty good shape.

The key issue is we would like to try to drive and have our GP margin hit the 40% level for the whole year.

We're real close to that right now.

We're a little bit shy of that, as you look at the first nine months.

I think we're sitting at, what?

39.9% or 39.8%, somewhere around like that.

So, I think from the SG&A standpoint, we're not big spenders here and we move around from a mix standpoint of point, but I think we've got that pretty well under control.

Great, thank you.

Scott Davis, Barclays.

David, just looks consistently that Latin America was very strong in the quarter.

You did make some negative comments about Brazil.

Can you just talk about maybe some timing issues there in the quarter?

Or what drove that strength, and particularly in Network Power?

From the standpoint of Latin America, there are a lot of projects -- it's more of a project business down there.

And we have had some good orders down there for the last six months, both in Network Power, both in the process side, and we were able to get those businesses out the door.

Right now, I think Brazil will still do okay.

I think Mexico is far stronger than Brazil right now.

Mexico has become a very important market for us, and we have a very strong position there, and it's continued to grow.

So, I think right now across Latin America, I expect another pretty good quarter.

I expect another good year next year, but my concern about Brazil is, they made some big forecasts relative to investments and capital and some, let's say, oil- and gas-type investments.

And the question is, will those continue to go forward, or will they delay those a little bit?

Right now, our business is doing well down there.

We expect it to continue to do well down there.

My focus right now is Mexico, and it has continued to perform extremely well.

We have a new government in Mexico.

I'm very encouraged by this new government, and I'm looking forward to meeting the new President and his team.

I think Mexico is going to be $1 billion market for us in the next couple of years.

Okay, that's helpful.

As a follow-up, just trying to get a sense of how the market's changing or shifting in climate.

When you see tough conditions like this, does it rotate back towards older technologies, like re-ship away from scroll?

Or is that just not an issue anymore?

That's not an issue anymore.

I think the key issue in the climate standpoint is, the consumer is very tight with spending money.

Last year they did a lot of repair work.

This year they're doing the outside unit, and they're replacing the outside unit.

So, it's less service for us, more sales for our OEM customers, which is good for them.

We get the compressor, but obviously at a different price point.

The scroll will continue to do well.

You've got another transition underway that will happen effectively January 1, 2015, so the key North America OEMs right now are going through that process.

How are they going to reach those new standards?

And, obviously, we're working very closely with those, and you're going to see that continue.

The key issue for us right now is, we need to see some stronger housing in North America, we need to see a stronger replacement market, but I'm not expecting much of a big surge here.

I expect some stability.

The key issue, also, is that you are seeing commercial, which is weakening a little bit, and you're also seeing the transportation type of marketplace weaken a little bit.

Fortunately, we're a global business, and we have some pluses and some minuses.

Right now our mix is very good, so we have pretty good profitability, and residential has not been one of the, what I'd say, one of the strengths.

But our commercial business has been very good, and our refrigeration business has been very good.

Okay, helpful.

Good quarter, guys, thanks.

Mike Wood, Macquarie Capital.

Can you give us an update on the mid-tier sales strategy, whether this backdrop is the right backdrop to continue with that?

And in China -- is it the right time to move into second-, third-tier cities, given just 2% growth there?

We've been moving into second- and third- and fourth-tier cities in China for 10 years.

I think, fundamentally, China will continue to be a good growing marketplace.

If you look at quarters from -- a lot of things happen.

You have quarter surges; you have quarter backs off.

Underlying, China will continue to outgrow, in my opinion, the US economy, and we may have a quarter of two, the sales are not that strong.

But, if you look back over the last 10, 15, 5, 3 years, we've averaged well over 15% growth.

We have a tough year this year.

It doesn't mean I'm backing down.

The mid-tier strategy is going to continue.

We started this 18, 24 months ago, a lot of products have started launching.

We have built the organization And, I expect China will have a better year in 2013, from an underlying sales growth standpoint, just because of our businesses and our mid-tier projects, where I think is happening.

I feel good about China-- even though it's still going to be challenging and the economy could be weaker, I think still we are making the right moves at this point in time.

Great.

Can you give us an update on where you think the global [six] investment is running currently, and how you're faring on outperforming that?

The problem is that the information is more rear-view mirror type stuff.

Right now the trend line has continued to deteriorate.

I would say, at this point in time, the forecast I gave in May at EPG is holding pat right now, from that perspective.

So, I don't think it's changed much.

I don't have anything that tells me it's improved, but I definitely think it's weakening, and I don't have a visibility relative to how much it's weakening because it's so rear-view mirror oriented.

I think you've got to wait for things to settle down for a while.

Clearly, economic numbers you're seeing around the world continue to weaken a little bit, and I think the business spending this quarter has been weaker, so that will reflect in the GFI spending.

My feeling is, it's going to be the numbers that I put out there and showed in EPG in May are still holding tight, and I don't have those off my head, but they're out there in the charts.

You can get them.

Thank you.

Jeff Sprague, Vertical Research Partners.

I wasn't sure you knew who I was.

Someone asked me a question, and I was answering the question, you know.

I was multitasking.

I'm eating a banana, I'm drinking a Coke, and I'm petting [Zorro], so be nice.

(laughter) I mean, a CEO has got to be a able to do a couple of things at one time, you know?

And I apologize for not recognizing you in the first 30 seconds.

Sounds like you're chewing gum, too.

(laughter)

I'm chewing my banana.

A couple of questions.

The Network Power margin trajectory looks encouraging, obviously.

Where are you at on the downsize of embedded power, relative to the overall plan?

And, taking that a step further, that margin improvement we saw in the quarter came on very little sequential revenue growth.

Can you give us some context to think about how restructuring saves or other dynamics are coming into play?

And, how we should think about this margin going forward?

Okay.

The embedded power restructuring, we still have a little left, but it's really getting close to finalizing from our perspective.

Pat, you want, something you want to say here?

Okay.

Pat is looking at me like he's afraid I'm going to say something.

From my perspective, they're winding down and they're repositioning.

I think we're about there.

I expect them, our growth rate, to be less negative, let's put it this way, in that space.

So I think that from the restructuring, you're going to see a slower number there.

It will be even less as we go in, starting into 2013.

On the Network Power systems standpoint, we still have a lot going on there relative to Europe, because these programs take on quite some time.

It takes us anywhere from 12 to 18 months for some of the restructuring there.

But that will continue, and that will continue going into 2013.

Overall, I do expect our restructuring dollars to probably end up being a little bit lower in 2013, and I would expect Network Power to spend less money in 2013 in total than we spent this year.

It's a function of what we see happening relative to our European opportunities.

If the window opens up, we'll obviously take advantage of that situation.

Relative to the overall integration where we see right now -- we're in pretty good shape.

It's a matter of continuing to execute.

I believe that we will see continued sequential improvement and profitability in the fourth quarter.

It's a matter of how we're getting our backlog out the door, and stuff like that.

But there's not, I wouldn't say, any robust improvement in the business spaces, it's more of an internal execution at this point, relative to what we have, day-to-day business, getting the stuff out the door, and continuing to finalize the restructuring.

We're really in control of our own destiny at this point in time, and I feel good about it.

How about CapEx?

Are you planning to spend down next year on an aggregate Emerson basis?

Probably not, because, as I have talked about for the last, I think the last couple of calls, process has a capacity that, based on what we see on the underlying demand, based on our backlog, based on continued repositioning of the Business on a global basis, we are going to have to improve our spending and capital as we put on that capacity and that regionalization.

I would say that we are going to be up a little bit next year in capital, and it's going to be primarily driven by Process Management because of the strong growth we've had the last couple of years.

And I think we're going to still see some pretty good growth there.

So, we need to make sure we reinvest for the next wave, and that's where we are right now, is this little cycle.

Just like we did a couple of years ago in climate technology, you have to get ahead of these things.

You can't wait, or you'll miss shipping opportunities.

Finally for me, and I'll get out of the way.

Yes.

What's your feeling at this point, appetite on M&A versus share repurchase?

Obviously a nice bump in the dividend today.

Where is your head at on that now, looking into 2013?

Acquisitions are still -- I consider the acquisitions number one, relative to share repurchase.

It's a function of, can we find the assets out there.

There's not a lot of assets out there, and we're trying to work those assets.

We've had a couple of years of less than $300 million from a spending standpoint.

As you know, it's lumpy; we'll go two or three years at less than $500 million, and then we'll have a big year.

We still are looking for the acquisitions.

I'd rather do acquisitions than share repurchase; but in the meantime, our balance sheet is strong, and we will continue to do the share repurchase if we have the flexibility.

Great.

Thanks a lot.

Steven Winoker, Sanford Bernstein.

Just a quick follow-up to that last question -- given all your commentary that's trending more negative on the macro, even though it sounds more positive operationally, are you thinking about divestitures in the same way, same longer-term time frame, even as the macro deteriorates?

Or has that thinking evolved?

I don't think our divestiture programs have changed from what I talked about, both at [the analyst] Bernstein Conference and/or the EPG, or even last February.

We're looking at a multi-year program here.

Knaack will be finished this quarter.

We'll evaluate some other assets as we close out this year, going to our strategy plan with the Board in November.

There's no change at this point in time.

Okay, great.

On the process conversion, so much of that was on the backlog, and you've got these record margins.

So, as you think about normalizing a normal growth rate without the excessively high backlog from Thailand, how are you thinking about margins evolving in that business as you head into next year?

Or maybe later in next year as that normalizes?

From a total -- on a quarter-to-quarter basis, the profit margin will move around because of the type of mix we have, clearly.

If you look at -- if we finish in the low -- around 20% for this year, we'll probably have a little bit of uptick next year from a profitability standpoint.

I'm not looking at a significant change in the margin of that Business.

Clearly, from our profile we are investing quite significantly in underlying growth programs and technologies, and we intend to continue to do that.

We want to protect that core Business.

It's a very important core Business to us, and we are going to make sure that we protect it and not milk it.

I think that you're looking at low profitability in the 20%s, and we'll mix and match around that level at this point in time.

Okay.

Maybe just sneak one more in on telecom -- how are you thinking of end-user CapEx in telecom as you look at the next couple of quarters?

How optimistic are you on that?

I think the -- I wouldn't say I'm optimistic.

I'll put it this way -- I think the telecom guys are spending money, the question is, it's not can we continue to get a piece of that spending, but they are spending money, and the question will be, what does that do as they go into 2013?

Right now they have a pool of money they're spending, and we have to make sure we get a piece of that.

Process, I'm far more optimistic about capital spending of our customers than I am with the telecom spending, let's put it that way.

Makes sense.

All right, thanks a lot.

Shannon O'Callaghan, Nomura.

Dave, in terms of pulling back on the reins, obviously your customers in Process aren't doing it.

Where, particularly, when you within businesses by businesses are you seeing that specifically at customers?

Well, I haven't personally called every CEO of my customers out there, but if I look at most customers, and from the standpoint of looking at their inventory stockings and looking at industrial customers, I think their people are pulling back and being very careful where they spend money.

And I would say that even the Process guys are being a little more careful about where they're spending money.

I don't know how you say they're not.

I think these guys are going to be very careful about where they put their money.

I think they're going to continue to spend at high levels, but I think they're going to be very cautious.

Across the board last quarter, if I remember correctly, if I looked at the spending in the GDP numbers by business, it actually weakened a little bit, Shawn -- Shannon.

I'm sorry, I keep call you Shawn, Shannon.

So that's my input.

My feel out there talking to CEOs -- they're being careful.

Yes, I just meant with Process, it seemed -- I don't know if it came in stronger than --

I'm not going to tell you business by business.

If you want to go out and call the CEOs, I'll give you some numbers.

You can call them if you want to, Shannon.

But I don't personally do that.

I'll take them.

Okay, good.

I'll give them to you.

One more, on embedded power -- as you've continued to downsize the business there, is that changing at all how you view the attractiveness of the industry structure there, now that you've got a smaller business to operate with, or is it still tough?

It's still tough, and I will make -- I will review our decision on what we're going to do with this Business as we go on this year with the Board in November.

We will be making a decision what we're going with that, as we have talked about earlier.

Right now it's still a very difficult marketplace, relative to profitability and returns and a very dynamic marketplace.

The dynamics haven't changed, and at this point in time I don't see any change relative to how we view it.

Okay, thanks a lot.

Julian Mitchell, Credit Suisse.

Just a quick question on Industrial Automation.

There's a new President of that business.

I just wondered if any of the priorities are maybe changing alongside that, and in particular, I guess, around the outlook for restructuring.

Do you think those are going to be very high again in 2013?

The business is kind of bumping along flattish organic sales growth; there seems to be some risk that maybe margins level off.

So can you talk a little bit about the main priorities in IA right now?

Yes.

As we go through -- Mark will be going through his first strategy session with us in September with the OCE.

I would say the main priorities there are, basically we will be looking at a very low-growth environment, so we know what restructuring needs to be done, it's underway.

Right now, what's the current plan for this year relative to restructuring, Frank?

We're going to get the number here for this Business, approximately.

$25 million.

I think you're going to be looking probably, again, at around that $20 million level next year.

So we're going to continue to restructure where we can, Julian, in that Business.

It's a very, as you know, a very European-centric business, and we're taking our time relative to that.

The key issue for us is we have new products coming out in the drives area; we have new products coming out in a couple of areas there, and that's very important to us relative to re-igniting some growth in that market space.

Overall, I think you're right, it's going to be a low-growth environment.

The question will be, do we continue to get our costs in line to protect that profitability?

That will be the goal for IA next year, you're right.

Okay, thanks.

Secondly, on Network Power, the decline in earnings has shrunk recently, but the earnings have still fallen for seven quarters in a row, year-on-year.

So when we're thinking about the next 12 or 18 months for that Business, how confident are you that we can get some kind of earnings growth there?

For example, is there reasonable earnings growth if we strip out embedded computing and power, so it's just a question of maintaining that if something strategic happens to embedded computing?

The key issue for us to get the earnings growth going forward from here is to stop the weaning out of what businesses we don't want to be in.

And, that process is truly slowing down, and we should start seeing some earnings growth as we go forward here, because the majority of that weaning is almost done.

And the profitability is improving, and we're taking the cost action.

So, we will continue to work on that issue, and I feel good that we will get some underlying growth, and we will start getting some underlying earnings growth in that space.

As we go through that process, it takes time; and obviously a very challenging process, but I feel good that we're making headway there, and as we go into 2013 and 2014, I see that we'll get some earnings growth out of that.

We have done this before, and we will get it back.

Just to follow up on that quickly -- so excluding embedded computing, the earnings in network power --

I'm not going to tell you that.

I'm not going to break --

Sure.

Good try, Julian, nice try.

Thanks a lot.

That's why you're sales-side guy, you want to try something.

Thank you.

Deane Dray, Citi Research.

Start off with a question; I don't know if it's for you, Dave, or Frank.

Can you comment on the increase in the receivables at the end of the quarter?

Was it all just the timing of shipments?

Yes.

We had a $550 million sequential increase in sales, so it's really just the timing that caused the receivables to pop up in the third quarter here.

Great.

So that check for the anti-dumping cleared successfully?

Yes.

(laughter) They took my tax payment, and paid it back to me -- to the Company.

That's good to hear.

Then, Dave, you've got the top -- you said the top 40 Emerson executives are going to be gathering.

Maybe just give us a sense of the agenda?

I'd be curious in hearing, has the agenda changed in what you were thinking maybe a month ago?

What are the key hot buttons you'll be going through, levers, new product introductions, pricing?

What could you share with us?

Good question.

The answer is, yes, it has changed in the last 60 days.

From my perspective, the number one issue is, if you look at the underlying growth rate of both the mature and the emerging markets and you see the trend lines that have come out here the last 12 to 18 months, we have to figure out how we're going to manage in a little bit lower-growth environment here for a couple of years, as we talked about in May.

I think you're looking at some challenging -- it could be three, four, five years here.

The other key issue, from my perspective, we've got to talk about is, talking about where do we want to put our incremental investment dollars?

We've been very strong, as you know, in some of the, what we call our A12, A13 programs; and we're going to continue to investing those dollars.

What big programs we want to invest in, given the type of environment we're in right now, and the market mix we're seeing out there -- where do we want to put those dollars?

And the Business leaders, and the OCE, and the top 40 guys and people, gals, guys, will be discussing that issue.

The other issue will be, in my opinion, is we are now going into, I think, a little bit more of a negative material-type environment.

We've had an environment here, we surged up in material costs and raised prices.

Now, it's starting to weaken.

And, in a low-growth environment, I think you're going to be looking at more of a negative material-type environment.

And how do you maintain our pricing integrity and our green, what we call the net green environment, in that, and try to manage that very carefully.

So, those are things I want to talk about.

This may be rhetorical, but how does that environment compare to the discussions you had with the same team in 2008?

2008 we were looking at -- clearly a lot higher growth, globally.

We weren't looking at the type of debt structure we have out there.

You're looking at a whole different growth profile at that point in time, so it's a more selective, focused growth area.

So that's what we want to get our minds around -- where do we want to put those dollars to make sure we get the returns and make sure that we drive as much growth we can in the pockets out there.

In the areas we don't have that opportunity and growth, what restructuring and what repositioning can we do to protect our profitability?

I still believe the Company can grow.

I think we continue to improve our profitability and deliver high levels of returns in cash.

But the question is then, how do we get that, and where do we invest that money carefully?

That's what it's about.

Great, thank you.

Steve Tusa, JPMorgan.

You don't have your sweater on today, do you?

What's that?

You don't have your sweater on today, do you?

No, it's hot out there.

It's a vest, actually.

It's a vest.

Okay.

Just wanted to make sure.

I had to make sure.

(laughter)

Sweater, that's maybe what they call them in the midwest, but here it's a vest --

Okay, duly touche.

Okay.

(laughter)

Network Power US was down, I think, high-single digits.

Was that just the telecom stuff not coming back as fast as you thought?

Yes, telecom and also some of the embedded stuff that we get out of; it's also a US-based type of business, but that's primarily what was down in the US.

So, the embedded comp actually hurt in the US, not just in Asia?

You got it.

It's a (inaudible) business.

We tried -- even though some of the products are made and sold over there, it's actually -- we look at destination, and destination comes back into the US.

Right.

Then, piggybacking on Jeff's question about the sequential margin -- last year you went from 10.5 to 13.5 from third quarter to fourth quarter, how do we look for the fourth quarter Net Power for this year?

We're still looking at -- last year, that was 300 basis points; we're looking, probably, 0.5 of that.

Okay.

Then --?

So, we're still looking --

And then --?

The key thing for us, Steve, is we've been restructuring, we've got the instability there, and the question is executing around the products, the new products are coming out and getting that job done.

We see the momentum right now, the profitability is improving, and I'm pleased with that.

Got you.

On the Cat side -- on the alternator side, you said Power Generation was strong, but it seems like Cat gen sets have been pretty weak year-over-year.

There's probably less inventory in the channel relative to where it was in the '08, '09 time period, so maybe it's more real time these days.

Is that Business -- is that kind of the source of the concern going forward, when you talk about Europe?

Because I know that's reported to your Europe revenues, I think.

I think from the gen set standpoint, what we do and what Cat does is a little bit different timing difference here, but we are also, as you know, tapper business is non-CAT, too.

From what we see right now, clearly what happened in India is a good issue for us.

The gen sets and we are a strong player in India and Asia.

I'm a little bit nervous about that we're sitting at very record levels of our alternator business right now, so I'm a little bit nervous about that.

I think Europe is weaker.

But, I still think that there's power needs around the world, and if the economy is holed up and we have power issues around the world, we should have a reasonable year next year.

But it is a concern for me because, if you look at the general order pattern, it's not been that strong.

And, you're right, the actual inventories out there are not that big either.

So, that's a plus.

We live a lot day to day in that area.

I'm just nervous overall -- the overall underlying power needs and the economy needs.

So, emergencies out there, like in India, is good news for us.

One last question for you, a little bit bigger picture.

You obviously had a lot going on first quarter of last year, whether it was seasonality in climate, the network air pocket, whatever you want to call it, the Process stuff.

If you kind of model normal seasonality, you've got some pretty easy comps in the first half of the year, but you're talking about how cautious people are in the near term; and obviously the fiscal cliff -- who knows when that gets resolved.

I'm just trying to put those dynamics together.

When you go out and you think about '13, will it be as easy as saying, hey, comps are easy, so we are going to come strong out of the gate?

Or is it, the economy is going to subdue that, so it will be more straight line as we move through the year, next year?

You know, I really haven't thought about that long.

All I know is as I look at the trend lines -- I know next year is going to be a very difficult year for anyone to model because of what -- how disaster first quarter we had, and almost a disaster in the second quarter, and then we started coming back.

It's going to be very difficult, and we're going to have to give some -- we're going to have to help people in this one for sure because it -- a little bit more help than I normally give because I don't give quarterly forecasts, as you know, Steve.

As I look at it here, I'm looking at -- if I'm saying underlying growth rates, it's going to be low-single digits next year.

And, I think -- I wouldn't look at it straight line.

It's not how I'm thinking.

I don't think that -- it's hard for me to say, but right now, I haven't thought about that first, second quarter.

But, I don't think it's going to be, say, easy comps and then we just have a straight line.

I just think we'll have to think about how that first year unfolds, how our backlogs finishes, and the order pace as we go into this, as we finish September.

But, it's going to be a difficult year.

Sorry, did you say low-single digits underlying sales growth?

I would -- yes, I did.

Okay.

That's for '13?

Yes.

Okay, thanks.

Brian Langenberg, Langenberg & Company.

Couple of questions.

First of all, on the Process side, just review -- with this backlog that flowed through from Thailand, were most of the expenses incurred in the earlier periods in the fiscal year?

And, basically wondering what the incrementals were just on that piece that flowed through?

Did it unusually boost the margin in the quarter?

That's my first question.

It definitely helped it, but I'm not going to tell you that.

That's for me to know, and you not to know.

So --

Okay.

Clearly, the way this thing works is, we incurred costs.

We definitely incurred costs as we built the product and put it in inventory.

There's no doubt we captured costs that way.

We also had around $35 million spread evenly throughout the year's costs we were having to incur because of the expediting and just overall costs, customer costs, from that standpoint.

So, if you think about, we had a -- what was the EBIT margin for the quarter for Process, 22%?

23%.

23%.

We've been running around 20% for the whole year, and so -- for our Company, so we clearly had a pretty good incremental flow through on that profitability.

Okay.

I mean, we're -- for us to say what was Thailand, what was not Thailand, it's an exercise of basically left pocket, right pocket, and I'm not going to waste my time on that.

The Process guys have got one thing they have got to do for me this quarter -- they've got to ship a lot of sales, and make a lot of money.

That's where I want them to focus.

But we had a good flow-through, obviously, at 23% --

Clearly.

I'm not trying overly to nitpick.

So, basically, some of it is unusually good growth, some of it is bad, some of it sounds like lower expediting costs, if you will?

Yes.

Okay, great --

And, you are right, we did capture stuff in inventory, there's no doubt we do that, too.

Okay.

Could you just, overall, talk about price for us, of the total Company in the quarter?

Total price net of raw and material.

It's still positive right now because our pricing -- we take pricing actions more early in the year.

So, if you remember correctly, we had probably -- the first quarter was negative.

We went slightly positive in the second quarter, and were more positive.

So, right now we are obviously what we would call green net material price.

We will again have that in the fourth quarter, and then what we'll do is, we'll start working the price increases.

And clearly, as I said earlier, we are looking at more of a negative net material inflation environment.

Therefore, next year it's going to be a different environment.

This year we're probably ending up totally around, let's say 0.5 positive, 0.4 positive price.

I don't know what the final number is going to be.

Next year, we will have to fight hard to hold a zero; but net material inflation is going to be negative, so we'll be working that issue as we go into that now.

It's clear we're going to be going into a different environment, and the key thing I want my management team to be thinking about is, how do we manage it going from a more costly material cost environment to a negative one.

And how you are managing that pricing give-back as you go through that process.

Understood.

The last one, great SG&A performance.

Your sales year-on-year were up $217 million, your SG&A was down $25 million, so there's -- let's just say in terms of normalized SG&A, let's talk it's $60 million or $70 million.

How much of that was just discretionary pullback?

Just put some chunks around what you did in the quarter to manage that, because you clearly played it really tight.

We started about, almost 90 days ago, I think on the last conference call, I may have talked about it.

We really started pulling back on the reins, and we started about not necessarily replacing people.

The restructuring savings have come into play now in the second half of the year, where we took some costs out in the SG&A level.

We are being very cautious relative to our spending levels, so there's a little bit of that going on.

It's just, basically, being cautious and allowing that growth.

We had 6% underlying growth, without trying to increase our spending levels.

We're going to try to do the same thing again this quarter in order to get the leverage, because for us to deliver the whole year, it doesn't take a rocket scientist to figure out what kind of margin I need to have in that fourth quarter.

We're going to keep that spending level really tight right now.

I'm really nervous about what's going on around the world, and so I'm pulling those reins back.

I haven't yanked the reins back, and put the bit in the horse's mouth real hard yet, but I could easily do that, and you could see our costs come down.

Okay.

Thank you very much, Dave.

Thank you very much.

Take care, Brian.

Thank you.

We have no further questions.

I'd like to turn it back over to Management.

Good.

Again, I want to thank everybody for joining us today.

I appreciate the questions.

I appreciate the support.

Zorro, the rally monkey, and the baseball bat are going back on the shelf, and we are ready for the next quarter.

You all take care.

Thank you, very much.

Ladies and gentlemen, that does conclude the Emerson third quarter fiscal 2012 results conference call.

Thank you for your participation.

You may now disconnect.