艾默生電氣 (EMR) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and 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, the 5th of February, 2013.

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

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

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

Please go ahead.

Thank you, Alicia.

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

Today's call will summarize Emerson's first-quarter 2013 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 website after the call for the next three months.

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

First-quarter sales increased 5% to $5.6 billion, with underlying sales growing 6%.

Sales trends were mixed across end markets and geographies with the strongest growth in Process Management driven by robust energy in markets and favorable comparisons from supply-chain disruption in the prior year.

Gross margin of 39.7% improved 100 basis points and EBIT margins expanded 160 basis points to 13.1%.

A strong volume leverage and cost reduction benefits offset mix headwinds.

Earnings per share of $0.62 increased 24% from the prior year.

Cash generation was strong with free cash flow up 115% to $439 million.

The results reflected solid growth in margins amid a tenuous global economic environment and kept Emerson on pace for record financial performance in 2013.

Next slide, P&L summary.

As I mentioned, total sales grew 5% and underlying sales grew 6%.

Operating profit margin of 14.6% increased 140 basis points despite a stock compensation increase of $22 million and a $12 million pension expense increase.

Earnings per share of $0.62 increased 24%, benefiting from share repurchases of 2.1 million shares.

Next slide, underlying sales by geography.

Underlying sales in the US grew 6%, Europe declined 2%, Asia increased 6%, Latin America increased 19%, Canada grew 6%, and Middle East and Africa was up 22%.

Total underlying sales increased 6%.

Currency translations and divestitures deducted 1% for reported sales growth of 5%.

We expect Asia to gain orders growth momentum in the second quarter, especially in China and India.

Moving to slide 5, cash flow and balance sheet.

Operating cash flow grew 66%, driven by strong earnings and lower working capital growth.

Free cash flow was up 115%, reflecting 97% conversion from earnings.

Working capital as a percent of sales increased 90 basis points as strong payables performance for lower inventory was more than offset by higher receivables.

Next slide, Business segment earnings.

Business segment margin, which reflects $12 million of incremental pension expense, improved 130 basis points.

Corporate expense decreased slightly as a retiring medical charge in the prior year was offset by higher stock compensation expense.

Interest was down $4 million and the tax rate was slightly lower than prior year.

Moving to slide 7, Process Management.

Process Management net in underlying sales increased 24% with the US up 26%, Asia up 25%, Europe 11%, Latin America up 44% and Middle East and Africa up 36%.

Oil and gas, chemical and power industries continued strong growth, particularly in Asia, where orders grew 11% in the quarter.

Segment margin expanded 520 basis points as strong volume leverage and cost reduction benefits offset less favorable project mix, especially in the US.

The near-term outlook remained solid, supported by energy and market strength and high backlog.

Next slide, Industrial Automation.

Industrial Automation reported sales declined 7% and underlying sales decreased 6% with the US down 7%, Asia down 7%, Europe down 9%, Latin America up 9%, and Middle East and Africa up 4%.

Global demand for industrial goods remained anemic, which was particularly pronounced in the power generating alternators business.

We discontinued in the electrical drives and industrial motors business as well which was partially offset by solid growth in the hermetic motors business.

Segment margin declined 40 basis points primarily due to volume deleverage.

Industrial automation's cost structure is well-positioned for the expectation for continued sluggish demand for industrial capital goods in the near term.

Moving to slide 9, Network Power.

Network Power reported and underlying sales declined 2% with the US flat, Asia down 3%, Europe down 8%, Latin America up 8%, and Middle East and Africa down 2%.

Softness continued in global telecommunications and IT end markets, especially in Europe.

AC power systems were strong in the US and Latin America, and sales were flat in the embedded computing and power business.

Segment margin declined to 7.2% as volume deleverage and unfavorable mix more than offset the cost reduction benefits.

Order trends have started to improve supported by telecommunications infrastructure investments (technical difficulty) expect solid margin expansion in 2013.

Next slide, Climate Technologies.

Climate Technologies reported sales grew 2% and underlying sales increased 3% with the US up 1%, Asia up 7%, Europe up 2%, Latin America down 4%, and Middle East and Africa up 32%.

Strong growth in Asia benefited from improved residential air-conditioning end markets particularly in China and US growth reflected more favorable conditions in residential end markets as well.

Global refrigeration demand remains weak, particularly transportation.

Segment margin declined 20 basis points, primarily due to unfavorable mix from the residential growth.

We expect demand to remain steady in the near term from continued recovery of residential end markets in the US and Asia.

Moving to slide 11, Commercial & Residential Solutions.

Commercial & Residential Solutions reported sales declined 1% while underlying sales grew 4% as the Knaack business unit divestiture deducted 5%.

By region, the US was up 7%, Asia down 2%, Europe down 3%, Latin America down 6%, and Middle East and Africa down 14%.

US residential end markets remain steady led by robust growth in the food waste disposers business.

Segment margins improved 30 basis points benefiting from the Knaack investiture and cost reductions.

The recovery in North America residential end markets is expected to continue in the near term.

Finally, slide 12, 2013 detailed outlook.

We expect reported and underlying sales to grow 2% to 5%, EBIT margin expansion of 10 to 20 basis points despite pension and stock compensation headwinds and earnings per share growth of 4% to 7%.

We also expect strong operating cash flow growth of 8% to 11%.

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

Thank you very much, Pat.

First, I want to thank everyone for joining us today and appreciate your time and also looking forward to our investor conference next Monday and Tuesday in Columbus, Ohio, where we are going to share a lot more information, relative to our business segments, and also some insight into our Network Power systems business.

I also want to thank all of the Emerson employees around the world for their excellent performance and a strong execution in our first fiscal quarter.

Obviously the first fiscal quarter is always very important, relative to delivering the full year.

Last year we really struggled with a supply-chain issue, but this year, performance is greatly improved and on track to delivering what I think can be a very strong exceptional 2013 at all levels.

As we look at the global economy today and the environment around the world, it is slightly better than 60 days ago but still below trendline and still not a typical recovery that you would see from the typical economies that we face and serve around the world.

We'll talk more about that next week, but fundamentally the trend is positive, but the trend is not going to be a sharp recovery.

And I think that clearly strategic investment is going to be very, very important to drive growth again as we move into 2013 and 2014.

I also want to remind people out there that Emerson presents GAAP numbers.

Which means that we include all pension costs, all intangible amortization, and our performance share stock programs in the consolidated numbers.

We present GAAP numbers.

Also, I want to make sure that people understand in the Business segments, we include the pension cost and goodwill amortization of the businesses, which is also very appropriate given they are making investments and those employees are creating the business wealth for the shareholders going forward.

So I feel it is very appropriate that we hold them accountable for those costs in delivering the profit improvement across those Business segments.

We will be funding our pension plan again this year at $150 million level, about the same number we funded last year, and I think that is very appropriate, given what is going on around the world in a low interest-rate environment.

And to make sure that we keep our pension plan, which is not a huge cost, in line to what I think is appropriate for the employees that have built this Company over 130 years.

Again, I am looking forward to our investor conference next week.

We have a lot of interesting things to share with you, time to spend with the management team and to talk about what is going on across this Company, and the exciting opportunities we see as we move into 2013 and 2014.

One last point before I open up for Q&A, I want to remind the investors, as I said on the last conference call, remind the investors as I said in the last conference call, that 70% to 80% of our earnings this year, EPS delta will occur in the first half.

70% to 80% of our earnings delta will occur in the first half.

We just did the first quarter a delta of $0.12.

Pretty easy to calculate what the second quarter should be in the range of.

So with that I will open up the phone lines to make sure that we answer some interesting questions.

But also I will not get into a lot of great detail about the Business segments now because we will be doing that in Columbus next week on Monday, Tuesday.

We shared with you more detail on that one page, the financial charts that we normally would give you at the conference, but I thought you should have that as you finalize the numbers coming out of our first quarter and look at your own models for the investors out there for the whole year and not have to wait for it next week.

So that is why we gave you that one page with all the detail information in there so you can factor that into your own financial models.

With that, I open up the lines.

Thank you.

(Operator Instructions).

Julian Mitchell, Credit Suisse.

Firstly, just on the (technical difficulty) more positive than what we had heard throughout last year.

Maybe if you could just talk a little bit about what's driven that, if it is something you are seeing in the January order intake or something in a specific region.

As we have been reporting in monthly orders, we have been a little bit more positive on the monthly order statements for the last couple of months.

The last -- since September, October, our order trends have turned up and several of the businesses is now in Climate Technologies, Network Power systems, Residential Solutions have all now become positive and driving on a continuing basis on a three-month roll.

So from my perspective this trend has been improving in what I would say a moderate amount of improvement from that standpoint, but just the global economies have stabilized and feel more comfortable for the financial institutions and I think money is again flowing and people are starting to make those investments.

No, it is not a real robust economic environment out there.

Just look what happened on average in the second half of the United States economy.

And so, in total it is still basically, you are looking at about 2%, 3% type of growth.

And we will get into the various regions of the world next week, but I still see a 2%, 3%, 4% underlying growth in the general economic trends that we will be facing this year.

Got it.

Thanks.

And secondly, the issue of mix comes up a lot in the slides in the different segments and how that affects your margin.

How do you see that playing out over the balance of the year?

As you emphasized, the margin growth is very front end loaded.

Is that because there's mix or something you think will carry on weighing on the margins over the balance of the year?

From my perspective, we -- our business and particularly the Process business or the Climate business or the Residential Solutions business, in a given month or quarter, we could have a surge of sales, shipment from the standpoint of the systems versus our instrumentation.

In the last, I would say the last three quarters, not the most recent quarter, but the last three quarters, we have had pretty good mix and we, from last year as the profitability of some of these businesses, things went our way.

And so, Climate, we only had down sales last year.

We had pretty good mix from the type of business and therefore [there had to improve in] profitability.

Same thing with Process.

If you look at the underlying quarter, profit had a very, very strong systems and solutions orders and shipments in the quarter.

Instrumentation a little bit weaker.

Driven by -- the process came in quite strong a lot and that will create a lower margin in the process world.

Same thing in the Climate Technology.

We expect that mix to come back as we look at our order books right now.

We look at the order pace.

I would expect that margin to come back.

That is why we still believe that we will have 10 to 20 basis points improvement consolidated.

And I will give you the business margins by each of the segments, the forecast next week, but it is not uncommon as you hear me talk, we will have a quarter that the mix goes the wrong way.

A quarter it goes the right way.

And I would say we had good margin improvement this quarter.

It could have been better with the right mix, but we will make that back up as we go into that second quarter.

It just moves around.

That's what happens.

Got it.

Thanks.

And lastly, quickly on the Network Power specifically, the decremental margins have been pretty severe the last six months.

Is that again, mostly just mix-related?

It is mix related and we expect that will start turning here.

It is starting to turn as we see that business starting to recover.

And so I expect that will continue to improve now as we move into the year in the second quarter.

Yes.

Got it.

Thanks a lot.

Mike Wood, Macquarie Capital.

Good afternoon.

Could you elaborate a bit more on the comments about expecting the Asian orders to gain momentum?

And in particular what is your visibility like in front of the Chinese New Year?

We have pretty good visibility.

We have been doing business there a long time.

We see what the order pace is.

Some of the businesses will not have a good couple of weeks before the Chinese New Year.

Then they will come back.

Clearly every year there is a Chinese New Year it just comes out at a different time.

We've just seen -- I mean we, Ed Monser and I, just came back from an Asia trip talking versus just a couple of months ago.

You are seeing a recovery now in China.

Pretty raw across all of our businesses.

The early cycle guides have already started coming into play.

I would say what you'll see for our businesses right now is a recovery will start happening in the second half for the more, the industrial Network Power systems.

And Process and Climate will go earlier and they are starting to move right now.

So that visibility is pretty good, relative to order pace and just what is happening.

So we feel good about that.

Same thing in India.

We see that recovery going on right now.

The one market, I think, is going to be weaker for us, this year, will be Australia because of huge investments the last couple of years.

But overall, visibility right now in China, India, Southeast Asia, pretty good.

The order book, pretty good.

And I think that we will progress, things will get better assuming the economic progression continues to happen as it is.

We will get better as the year progresses.

But I think you are going to see in the second half that really get better.

Much better.

And you also called out in the press release a negative margin mix and process from the lack of higher margin maintenance type projects.

Is that already in the results this quarter?

Or --?

Yes.

So we saw that impact?

What happened is with a lot of discussion and I was just talking to Julian a few minutes ago, same thing.

In a quarter we have things that -- the -- clearly, the MRO business, which had been extremely strong in North America for us prior to last quarter was a little bit, people got a little bit nervous about what was being discussed and concerned about the US economy.

So they really pulled back a little bit.

And I would expect that as we go forward here we will see that turn loose.

But that mix is already built into the quarter.

That's a pretty quick -- MRO is a pretty quick type of situation for us.

Thank you.

[Steven] Winoker, Sanford C. Bernstein.

Dave, you took up the top line, you held -- the bottom and then the top line.

You held EPS.

Maybe just describe a little bit of your thinking on that front.

From my perspective, we are just looking at the general mix and I'm not going to get carried away with my earnings forecast.

All right and as process --

You know, I have barely grown my skin back from what you guys did to me last year.

(laughter)

Is process fully caught up with the backlog?

It caught up pretty well [much as] last year.

If you push and shove last year, and it is hard to track it, but by the time we finished the year, we are there.

So now you are just in a natural demand shipping mode, then?

Correct.

Yes, exactly right.

Projects moving in and out and things like that.

And the key thing for me right now to be honest is the last gentleman asked a good question on the MRO with North America.

That is -- we need that to come back a little bit.

People I think were a little bit cautious in the first three months and I am hoping as we get into the -- deep into the second quarter we will start seeing that MRO business activity comes in.

But we -- if you remember correctly we grew over 20% last year on North America in Process.

And so the question is, do they have to digest some of that and maybe the first six months of this year could be kind of slow?

But that is what we are watching carefully right now.

And then, just on receivables, maybe a quick comment on just the higher level this quarter.

We are still -- versus last year we are still catching up.

We did make headway relative to the receivers we built at the end of the fiscal year.

We will continue to make headway here as we go forward.

Part of the receivable delta is -- about a third of it is basically prepayment from large projects and, basically, that's a good thing.

That means we have got large projects coming down the road in Network Power systems and also Process.

So that creates a balance sheet issue for us.

But that is a good sign.

But we are making good headway.

We had good cash flow.

I feel very good about the cash flow this year and if we have a very -- if we have a strong second quarter, we will set a record year in cash flow in 2013.

See you next week.

Thanks.

Deane Dray, Citi Research.

Good afternoon.

Dave, you don't often talk about hermetic motors, but maybe give us some color about the HVAC market there and how does that relate to the compressor side and how do inventories look?

Well, a hermetic motor goes in every compressor we sell.

So, and we -- basically we are a captive type of business here.

And from that standpoint, you saw in the quarter our Climate Technology business did grow, and we had a good quarter, we had good orders.

Our Climate Technology orders are above the line, as we say, and I expect that when we see the final January numbers they will be above the line.

I do know in January they had another good global quarter book.

So from my perspective, Climate Technology has turned.

And we had two tough years after one really strong year and I expect them to have good growth in 2013 and 2014.

We will talk about it.

We maintained our investments in a big way in that Climate Technology area and we are going to start seeing some payback in that and I think in 2013 and 2014.

I am very positive about that right now.

How do you feel about the compressor inventory in the channel today?

Low.

Low.

And --

And I don't think it, by the way, I think that they expect us to serve them without rebuilding compressor inventory.

I don't (multiple speakers).

I don't think they are going to rebuild inventory.

I think they expect us -- you know we ship within days, they expect us to rotate, move around, change our line and go.

So I don't worry about that so much but I just -- let's put it this way, it's low.

Good to hear.

And any comment update on the sale of embedded power?

How is the process?

We will talk about next week, but it is moving forward and the documentation will be going -- the document will be going out to a select group of people.

And it is a process.

We will take the -- I would say, I would say look at the calendar year.

I don't want to rush, I mean we are going to do this right, and -- but it is moving forward.

And the business had a good quarter and I think they are going to have a very good second quarter.

Great.

Thank you.

Jeff Sprague, Vertical Research Partners.

Good afternoon.

A question on Process.

You characterized the backlogs as strong although it seems like orders have softened and you have had this huge revenue surge.

Is actual physical backlog strong or it's just what you see coming in the pipeline kind of bid and proposal work.

Any color you could share there?

I would say both the physical is very strong and the pipeline is very strong.

One of the things -- and somebody asked me the question earlier, you know, we raised the topline a little bit in sales growth.

We have a little more -- we are going to have currency that is going to help us this [year and finishes] and that does not give you a lot of margin as you know.

So that's one of reasons why I should have said that earlier that we look at that.

The dollar definitely right now is a little bit weaker and therefore it helps us but we don't get a lot of earnings out of that.

The backlog from the standpoint of the Process is still at record levels.

Maybe not quite as high as it was, a smidgen below September and the pipeline that we see is very, very strong around the world.

Not a lot of -- we -- I hear about delays out there from other people but we have not had a lot of delays.

The short-term impact to us has been more than North America MRO business as those guys slowed down a little bit and they are just digesting all they did last year.

But right now it looks pretty good.

I expect to have a good second quarter.

We are coming off very -- we grew [15, 15].

I meant we had $1 billion a year for two years.

Those are big numbers.

And so we still expect solid single-digit growth in the process sales this year.

Solid single-digit.

And I expect pretty good profitability out of them.

And are you seeing the downstream, more gas-driven I guess, but oil and gas-driven projects moving forward on people's drawing boards?

Do you think there's delays there?

It's -- I -- right now we are not seeing delays.

The projects are moving forward.

We are bidding on them, we are winning them.

That is going to help us as the year progresses and as we move into 2014.

In particular, in North America, the oil and gas at downstream projects are enormous.

And that is why I have been so excited about trying to get the pipelines open, why I believe in having natural gas shipping, even exporting natural gas.

We need to have that natural gas flowing out there to make those investments happen.

I mean, I just came back from South Africa, I was just in India and we are all seeing the downstream numbers coming both around the world and then also here in North America.

Which I am pretty good -- excited about.

And maybe just finally any thoughts on M&A versus share repo?

You started to kind of lean into the share repo a little bit more here.

What is the thought for the year?

Any change?

No change.

I expect share repurchase to be in the $600 million to $800 million range, no change at that point in time.

Pretty much in-line with what we did last year.

At this point in time, we will be talking next week, I do not see any big, big acquisitions.

I expect us to spend somewhere around $400 million, $500 million this year.

What I look at the quality of assets out there, it is not very high at this point in time and therefore we are going to generate very high levels of cash.

We will pay the dividend.

We will buy share repurchase and keep our balance sheet ready to go for an acquisition, but right now it is going to be both -- we are going to be passing back close to 60% of our cash to our shareholders in 2013.

Great, thanks.

I will see you next week.

Scott Davis, Barclays.

Good afternoon.

Can you --?

I want to go back and talk a little bit about the drives and the motors business.

I think there was a new product launch that you guys were doing.

I just can't recall the timing and how that may be impacting results.

Can you update us there?

We will talk again about this next week, but the new drives are coming out.

They are [be and enders], we are starting to take orders.

Our motors and drive business right now is being negatively impacted by the strength in Europe.

We are very, very strong in Europe and that has been a tough marketplace but the new drive launch is going.

It is going to be very positive and it is going to expand our serve market.

I would expect we will start seeing that impact more in the second half of 2013 and particularly in 2014.

It started therefore we typically have a lag as people wait for the new drives.

So with the European slowdown and that product launch, it was pretty predictable that we would have about I would say about a five, six quarter slow-down.

That is where we are right now.

That's helpful, thanks.

And it looks like embedded had a pretty good quarter and that is a positive surprise versus I think most of us who are probably expecting it to continue to bleed down for the year.

I mean, is this low watermark?

You said this quarter I expect them to have another good quarter.

And how do you -- and since you are just talking about revenues, what about profits?

Are margins picking up there?

Yes.

Yes.

They have gone through enormous restructuring.

My hat is off to Jay and his team here.

I mean first of all we announced we were going to sell them.

That is hard to do.

We took out a lot of what I call deadwood business.

They have got a few things going on at the customer base like Dell, HP, guys like that, a few things going on out there.

And from my perspective it looks to me like the order pace is actually turned up.

You can't see that yet.

We will show this next week, too.

I think we will actually show you a curve and you'll be able to see that the curve for embedded has actually started to turn up.

It is still negative, but it's getting -- I think it might cross the line real soon.

So I expect growth to start happening and I expect profitability to continue to improve.

That's great.

Still low single digits.

I mean, you are talking pretty low margin business here.

That's all I have.

Thanks, guys.

Shannon O'Callaghan, Nomura.

Good afternoon.

What about your own CAPEX?

It was down a little bit year over year in the quarter, you are talking about taking it up a little bit, but not a lot for the year.

What are you looking for to loosen the purse strings a little bit with your own capital spending, what would you need to see?

Serious topline growth and growth fixed investment on the world.

Which we haven't seen.

I mean it's -- you haven't seen it at all.

And our forecast is for this year global GFI will probably be up somewhere around 3%, 4%, 5% and we can cover most of that, a lot of that with productivity.

So I expect us to have a little bit of an increase.

We will be, if the Climate business continues to trend nicely and other business come along.

We can always increase that as the year goes on.

We have the cash, but I am going to be very careful metering out that capacity that we don't need until we need it.

So that is what it cost me.

We are running at $700 million which is not a bad number.

And I think it is going to stay that way.

If we got the opportunity, the growth -- let's say the growth started coming up nicely, then you would see us maybe pick that up a little bit.

But right now I think at the growth rate we are looking at, we are in pretty good shape.

Okay.

And in terms of thinking about Network Power margin improvement through the year, some of the pickup in orders recently has been in telecom which isn't quite as favorable mix as data center might be.

Are you -- I think you thought the mix would get a little better from here, but is it mix or is it the restructuring benefits from last year following through?

How do we think about what drives the margin improvement through the year in Network Power?

Well, you are going to have to see the restructuring kick in, and we are also starting to see some of the better mix of products.

The telecom business is, yes, is improving, but the other parts of the business is starting to have pretty good standpoint.

The other issue is in the first half of the first quarter particularly last year, our China Network Power systems business was extremely strong.

That is a very profitable business for us.

And it really started tailing off last year including this quarter here and the quarter we just finished.

That business, the order pace is starting to pick back up.

That mix is starting to pick back up.

So I would expect this as you get into the second quarter, third quarter, fourth quarter that business is going to help us and that will help us mix up and also grow.

So there are a couple of things that are starting to kick into gear here that will be -- will really help us as we get into that second half of the year.

I keep reminding everyone we are going to have 78% of our earnings per share in the first six months for a reason.

We had record, record levels last year so this mix is going to come and help us, but I [don't] want a driver -- most of our earnings opportunity really in the first half and we got hit last year with the Thailand flood situation.

So things are starting to mix the right way for us.

Great.

Thanks a lot.

Nigel Coe, Morgan Stanley.

Your comments on GAAP earnings are well taken.

I just want to point out -- I mean a lot of people don't even report segments with GAAP.

Right, okay, we won't (multiple speakers).

Our Power pension cost down in the business is and they don't like that, but that's where the cost is and we also pushed the amortization.

We did the acquisition and I expect them to recover it.

There is definitely a drift away from GAAP in the sector.

So, just interested in your comments on China.

You definitely called the recovery started fairly early in 2013, but I think you have been quite skeptical about the sustainability of the growth beyond 2013.

Do you still feel that way?

I -- we will talk about it next week.

I have a lower growth expectations in China for 2014 and 2015 though I still expect it to grow a very solid single-digit.

I like the way they are unfolding this to be honest.

I think they are not trying to prime the pump way too fast.

I like what they are doing right now.

They are being very measured.

And I like some of the actions being taken by the new leadership team.

So right now based on -- and I will be going back over there early in March.

I am very encouraged by what I see right now and if that continues for the next three or four months, then I will feel better about that '14 or '15.

But right now we are going to have a pretty good recovery here as the year progresses in '13, for sure.

That's great.

And then on India.

I think that is the first time I've heard positive comments on India for at least a year and a half, two years.

So just wondering what you are seeing over there right now.

You call it an election.

Same as the US, I guess.

I think they are going to put money out.

I meant India has been a tough place for the last couple of years.

I think '13, maybe in the first part of '14 for us will be okay.

Then I get concerned again.

But right now, they are priming the pump and their money is being spent and I look at my order pace.

It wasn't great in the first quarter, but I look at what is going on, the activity, the bookings and I think India will get better as the year progresses.

Great.

And a quick one for Frank, perhaps.

(multiple speakers).

The corporate expense, the [120] or so this quarter, is that a good run rate for the full year?

No.

That is going to ramp up on us as we go through the year because the overlap in the performance shares is going to be more back loaded.

Great.

That's fantastic.

See you next week.

Rich Kwas, Wells Fargo Securities.

Good afternoon.

Quick one on the macro.

China.

So last quarter when you gave the initial data as you said China for you would be up 5% to 10% in 2013.

And I've seen the presentation you have a [GFI] expectation of 6% to 7%.

And that assumes maybe growth, a multiple over GFI for you, but is that 5% to 10% change or is that a potential room for upside later in the year depending on what you see?

Right now my answer would be no change.

If it unfolds the way I am seeing it unfold we could probably have some upside.

But right now, it is too early to say from my perspective because I think that the changes we are seeing in China are just starting to happen.

I mean as you know, I try to be very open and I see this and I feel better about it and I will be back there in 30 days.

So if I walk away feeling better about it then the answer would be yes, they should be -- we should do a little bit better as more like toward the 10%.

But we have got to start getting it there first.

Understood.

And then just what is the euro assumption here going forward?

We have been basically looking around 130, 132 and now it is obviously at 135, but it's that's why part of the raise as [I forgot you said] earlier, but we are always talking about 130 originally in the plan and now we aren't out it is a little bit.

What will (multiple speakers) -- start helping us in the second half.

We will not have much currency impact in the second quarter, but it is going to start ramping up at over 1 point in the third and fourth quarter.

Okay but you are not assuming the spot rate for the rest of the year, the 135.

You are assuming 132.

Well, I use -- right now I raised a little bit from 135 for the second half of the year, yes.

Okay, so you got 130, okay.

That's how we look at it.

That is how -- that's one of the reasons there is a 5 sitting in that thing there.

Yes.

That's all I had.

Thanks.

John Inch, Deutsche Bank.

So, Europe kind of continues to disproportionally drag your ops.

This quarter seemed to hit Industrial Automation Network Power.

Are you seeing these markets begin to inflect perhaps more positively any aspect of this?

And I know you have done a lot of restructuring there, I mean presumably when you start to get some of these volumes these margins could ramp back at pretty high incrementals.

Is that a fair statement?

Or maybe we should be thinking about this somewhat differently.

How do you think about this?

I think if we can get -- I mean you have to get reasonable level margin.

I mean -- I'm sorry, growth.

One or two points of growth aren't a lot of ramp to a factory.

Now if all of a sudden I feel better about Europe today than I did 60 days ago.

So, I wouldn't be surprised if we don't grow, our European business doesn't grow in the second quarter.

So, what I -- I think to get the margin improvement, a significant margin improvement in Europe you have got to get above 5% of underlying growth for us.

I've been at 2%, 3%, 4%, that is not enough to really ramp at margin, but if you start getting up above that 5% with a restructuring underway, we should see a pretty good margin improvement.

And that will help us obviously in our overall business.

But that is where you have to get to.

And I don't have a forecast that Europe is going to grow 4% or 5%.

So I think that's the type of growth you'd need to see and I don't see that happening for a while.

But does your forecast assume it starts to get better in the second half?

Yes.

We assumed our European business starts to have growth and like I said I would be surprised if we don't have growth in the second quarter.

But it is going to be moderate growth.

Probably like onesy twos which is not a whole lot of incremental volume.

Right now when there's no growth and there's negative growth that you deleverage pretty hard.

With the cost reductions you re -- because you have cost inflation there.

But with the you get above that 2%, 3%, I start feeling better.

When you get up about 5% it really feels good.

But right now I think we are talking about onesy, twosies as this recovers in the second half.

That is where my gut lies.

That makes sense.

I was going to save the European strategy questions for next week, but I did want to ask you about China restructuring.

You had called out, I think a year ago, your plans to automate in China and as you are seeing these markets turn and you are not the only company that has done this, does that suggest it is a similar question to Europe, because that suggests as China comes back, which presumably can come back a lot more forcefully than Europe that your margins there in terms of contribution benefits do much better than they have historically.

The answer is, yes, they should.

If we got the restructuring and the automation done properly in the right location -- we are pretty profitable in China already, but it should help us be more profitable and more competitive.

So from my perspective, I think profitability and we will talk about this, I think we have room to go in this cycle on profitability.

This year we have got a couple of things we have to overcome, and we are working our way through that from the pension standpoint and then also from the pro forma shares and amortization, but we will work through that and then, if we don't add any additional costs, you are quite to see us continue to de-leverage quite nicely.

So I feel good about upward mobility and profitability as we get into that 2014, 2015 range.

And that is why I'm going to tell you we are going to be setting pretty good margins in '14 and '15.

Steve Tusa, JPMorgan.

Good afternoon.

So, just on Process Management, there is a lot of noise in the numbers here.

What was again the ultimate tail wind, I guess, year over year from Thailand this quarter?

I mean, it is hard to measure because it is not an accounting type of number.

But I look at the overall for the total Emerson, you are looking, the [ROI] growth rate was probably in the 1% to 2% range.

And so how I look at it, we try to keep track, but it is impossible to say what you didn't ship in a quarter or first six months of the year and what we shipped back.

And you just -- I did not want to create an accounting nightmare out there.

So this is sort of our gut and looking at what we look at and so on and so forth.

So, obviously, we didn't grow 24% underlying in the quarter for profit.

But they were still up very solid in the quarter.

Yes, so then you said it was going to be mid-single digits for the year, you are up 24.

I guess your orders are comping flattish right now.

Will there be a quarter this year with a tough comp in the back half where process is negative?

Right now we don't see it.

However what I'm talking for the year I would say that we are going to be up somewhere between I am saying 6% to 8% and right now we do not see -- they get real flat.

Frank is giving me the details though, [Process is Frank].

They get real flat by that fourth quarter.

So if things if they hit a bump in the fourth quarter, you could have a topline underlying negative fixed-rate and then they are point to get currency helping them too.

So I would say the one risk I see right now is the fourth quarter.

That is why I have been so focused on the 7% to 8% because we had, as you well know, a very strong fourth quarter as things clicked in, reductions in the sales and stuff like that and so I get a little bit nervous about our fourth quarter.

Because it is from a profit standpoint, growth standpoint it was a phenomenal quarter last year.

But I think that will be the one quarter that I would be worried about for process.

And the margin there, again a very strong second half.

You had stuff that was shipping.

We did have kind of an unusual benefit to the margins.

I mean it didn't look like it from an incremental perspective.

You are still 35% to 40% incremental there in the back half, which is pretty damn good, but kind of normal.

So is there any weird comp on the margin that we have to think about in the second half at Process?

No, I think Process had a phenomenal -- I am looking at EBIT margins.

They had a phenomenal -- their EBIT margin in the second half was close to 23.5% if I read this correct.

And so what I see going on forward here is that they are going to trend towards, they based it from an EBIT standpoint, they were around 20% last year and I expect them to be slightly higher than that for the whole year.

And clearly they need to make margin, good margin in the first half from an EBIT standpoint and then, they are going to struggle from a comparison standpoint in the second half.

So that's why I watch them right now.

I would expect them to be down in the second half in EBIT margins and up significantly in the first half.

The other thing we had in there last year, the best that we can tell about -- probably about $40 million of costs that we, when we made the decision to protect our customer base at all costs, we spent a lot of money to do that.

And we are having to overcome that $40 million this year.

And so, a lot of that is going -- we'll work our way up, but right now the first half, good margins.

Second half, I think they will be down slightly.

For the whole year they will be up slightly.

Got you.

And then on the Network Power --

You can do a forecast off that pretty quick.

You want me to do it for you?

And then on the Network Power ramp that you guys are expecting, you said it is going to be up year over year, but we are obviously starting from a hole down 100 bps this quarter.

You kind of snapped back last year; I think you averaged 30% to 40% sequential incrementals, a little volatile around that line, but anyway I mean is -- should we think about last year as the appropriate sequential from a margin perspective?

Or is it a little more back end weighted or how do I think about the network?

I expect -- I want to see these guys, to be honest, from an EBIT standpoint I want to see them close to 10% and that second-quarter.

Now they don't want to hear that, but that is where I want to see them.

And then you are going to start moving up from there on a sequential basis like we did last year.

So maybe if you go 10, you go 12, then you are going 14, 15 type stuff in the fourth quarter.

That is basically how I expect them to see that unfold.

But I really would hope they are going to get close.

They may not get quite 10% in the second quarter, but they are going to be closer to 10% than they are 5%.

So that is almost a 300 basis point increase sequentially.

Well, we just did -- what did we do, 7%?

7.2%.

So if you can get up -- yes I am hoping to get to above 9% and close to 10%.

That is what I would like to see.

Yes.

Okay.

Thank you.

We have got to get -- I mean we -- I feel that that is how we have to move it.

We, again our first and second quarter, we have going on right now -- and you have been around a long time, you watched this -- we have driven segments of our business starting to shift into play here, as I always refer to them, horses.

And Climate shift up front now.

I have got Pat's slide business Residential, and I have got Network Power systems and Network Power starting to improve.

And the sales are going to be down slightly probably in the second quarter still as we rake off, but they are going to start improving and get positive growth in that third and fourth.

But I still feel with cost reductions and the right mix that we should have a good -- should have a better second quarter then we had first-quarter profitability.

Thank you.

Network Power guys out there be thinking about that.

(Operator Instructions).

Eli Lustgarten, Longbow Research.

A quick question.

We listened to the Eaton call earlier today and they were sort of talking, bragging, they said the data centers are slow but they have gotten a lot of orders and a lots of wins.

Is there anything going on in the dynamics of that marketplace that Eaton claims they had a whole bunch of wins now, but is it just the timing and particularly for certain contracts?

Just the timing.

I don't think -- I think the marketplace is fairly stable right now and I think we -- I could brag.

I have got a couple of wins too.

So I don't, I mean I don't feel worried about it at all.

I think right now we will present to you guys next year.

I think we have a very strong hand and a recovery plan underway.

And so, Network Power systems orders are green.

They are above the line and that is a good sign.

So I feel good about where we are right now.

We are on a good progression there.

And I want to share next week with how we are building this business and how we are going to make this a very strong value created for our [interest in shareholder] going forward.

And with Climate beginning to turn, one of the big complaints we hear from Ingersoll and the people involved in that part of the business is the adverse shift downward to lower share products that's continuing and not changing.

Is there anything going on in the marketplace or anything you have to do to reflect the big change that seems to be going on and it looks like it is almost semipermanent at this point in that business.

No.

I don't -- we don't have to worry -- I mean I don't -- I mean, we have created the product for the lower tier and the lower performance type of product, but what we have is a pretty broad offering between from the residential to the commercial to the transportation.

So we have a broader offering capability than something like an IR.

So I don't think that -- we are still running pretty good levels of profitability.

I expect us to run record levels of profitability this year even with a mix that we are going to -- I think residential, we are going to be very strong.

But you are going to see a good story.

Where our things are taking off and the investments we are making and the cost reductions that will show that we will have, again, a pretty good growth year and coming back and then also with that some good profitability.

So I think we deal with the mix every day of the week in that business and we work our way through it.

All right.

And I'll see you next week.

See you next week.

With that, I want to thank everybody.

I am looking forward to seeing you next week and, again, thanks for joining us here today and thanks for looking forward to seeing everybody next week.

Take care now.

Bye.

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

Thank you for participating.

Please disconnect your line.