艾默生電氣 (EMR) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to Emerson's investor conference call.

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

Following the presentation, the conference will be open for questions.

(Operator Instructions).

As a reminder, this conference is being recorded today, May 7, 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, Patrick Fitzgerald, Director of Investor Relations at Emerson.

Please go ahead, sir.

Thank you, Angela.

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 second-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.

Second-quarter sales grew slightly to $6.0 billion with underlying sales increasing 2%.

Results were mixed across end markets and geographies.

A slow global economic growth lowered confidence and suppressed business investment, especially in mature markets.

Gross margin expanded 30 basis points to 39.8% and EBIT margin of 14.9% improved 20 basis points led by 50 basis points of business segment margin expansion.

Earnings per share of $0.77 increased 4% and free cash flow grew 18% to $477 million.

Second-quarter results reflected solid execution in a business environment struggling for certainty and momentum.

Next slide, P&L summary.

Net sales of $5.960 billion grew 1% limited by macroeconomic sluggishness.

Operating profit decreased 3% as an increase in gross profit was offset by higher pension and stock compensation expense.

EBIT increased 2% with 20 basis points of margin expansion helped by lower restructuring and currency gains.

Earnings per share grew 4% to $0.77 benefiting from $156 million of share repurchase in the quarter.

Next slide, sales by geography.

Underlying sales in the US grew 1%; Europe decreased 3%; Asia grew 2%; Latin America grew 8%; Canada was flat; and Middle East and Africa was up 19%.

Total underlying sales increased 2%.

Currency translation and divestitures each deducted about 0.5% such that net sales increased 1%.

Strong growth in emerging markets of 6% offset slow market conditions in mature markets.

Moving to slide 5, cash flow and balance sheet.

Operating cash flow increased 6% and free cash flow grew 18% reflecting strong year-to-date cash generation.

Working capital as a percent of sales increased 50 basis points from prior year, but improved 140 basis points sequentially after a slow start to the year.

Next slide, business segment earnings.

Business segment margin improved 50 basis points, including a 30 basis point headwind from higher pension expense.

Corporate expense increased $20 million primarily from the stock compensation program overlap.

Pretax was up 2% and the tax rate received a small benefit from the R&D tax credit.

Moving to slide 7, Process Management.

Process Management net sales grew 8% and underlying sales increased 9% with the US down 1%, Asia up 14%, Europe up 7%, Latin America up 13% and Middle East and Africa up 36%.

Solid investment continued in oil and gas, chemical and power end markets and growth was led by the systems and solutions business.

Underlying orders grew 3% led by Asia up 16%.

US demand has slowed due to higher natural gas inventory and robust growth in the prior year.

Margin expanded 170 basis points benefiting from volume leverage, cost containment and currency gains.

Unfavorable mix remained a headwind due to lower maintenance investment in the US.

The rate of growth is moderating, but should remain solid in the near term supported by a near record level of backlog.

Next slide, Industrial Automation.

Industrial Automation net underlying sales decreased 6%, the US down 1%, Asia down 3%, Europe down 15%, Latin America up 11% and Middle East and Africa flat.

Industrial goods market conditions remain weak, especially in Europe with the power-generating alternators business the most challenged.

Industrial motors and electrical drives demand remain soft as well.

Growth was solid in the hermetic motors business driven by HVAC compressor demand.

Margin contracted 140 (sic-see slide presentation slide 8) basis points as volume deleverage more than offset cost-containment programs.

Nonrecurring dumping duties received in the prior year resulted in a 30 basis point headwind as well.

We expect weakness in global capital goods in markets to continue in the near term.

Moving to slide 9, Network Power.

Network Power net and underlying sales declined 4%, for the US down 2%, Asia down 6%, Europe down 3%, Latin America up 8% and Middle East and Africa down 10%.

Weakness continued in global telecommunications in IT end markets.

Underlying sales in the Network Power systems business declined slightly due to sluggish data center markets.

Demand in Europe continues to be a headwind.

Sales declined at a double-digit rate in the embedded computing and power business.

Margin declined 110 basis points as volume deleverage and other cost increases offset cost-reduction programs.

Data center and telecommunications infrastructure spending is expected to remain slow until macroeconomic growth accelerates.

Next slide, Climate Technologies.

Climate Technologies net and underlying sales grew 7% with the US up 8%, Asia up 4%, Europe up 8%, Latin America down 5% and Middle East and Africa up 26%.

Growth was strong in residential air conditioning markets with US up 23% due to residential construction and favorable comparisons.

The commercial air conditioning and refrigeration businesses were soft with transportation particularly weak.

Comparisons eased in Europe as well.

Margin expanded 60 basis points as volume leverage and cost-containment offset unfavorable mix from lower margin residential growth.

Residential air conditioning markets are expected to moderate, but grow steadily in the near term.

Commercial and refrigeration demand is expected to remain slow.

Moving to slide 11, Commercial & Residential Solutions.

Commercial & Residential Solutions net sales declined 4%, while underlying sales grew 2% as the Knaack business unit divestiture deducted 6%.

The US was up 5%; Asia declined 5%; Europe declined 3%; Latin America grew 3%; and Middle East and Africa decreased 39%.

US residential markets continue to reflect steady demand.

Growth in the residential storage business was particularly strong.

Margin expanded 30 basis points benefiting from cost reductions and a divestiture mix impact.

Modest growth is expected to continue in North America residential end markets in the near term.

Finally, slide 12, 2013 outlook.

After weaker-than-expected end-market demand in February and March, April orders continued to trend downward with trailing three-month underlying orders expected to be negative 5% to 0%.

Business confidence continues to deteriorate and global economic growth lacks strength to drive an increase in business investment resulting in a productivity trap.

We do not see an obvious catalyst to improve economic growth in the next six to nine months.

Based on current conditions, the revised 2013 outlook is as follows.

Reported and underlying sales growth is now expected to be only 1.5% to 2.5%.

EBIT and pretax margin are expected to be approximately equal to prior year and earnings per share are expected to be $3.48 to $3.58, up 3% to 6% from prior year.

An updated outlook by segment will be provided at the Electrical Products Group Conference on May 20, 2013.

And with that, I will pass it over to David Farr.

Thank you very much, Frank.

Welcome, everybody, to the conference call.

I appreciate you joining us.

I also want to thank the tremendous support of all the OC members, the business leaders and global presidents and all the corporate key staff members as we drove through this first half and the second quarter.

Yes, we delivered growth of sales earnings and cash flow this quarter, but clearly not at the pace that we wanted to see as we left the quarter, in particular March.

Late March and all throughout February -- late February and throughout March, we saw orders weaken and now we have seen April orders in the last couple days and they have continued to weaken.

The second half of February and on, we have seen a significant change in the pace of business spending around the world.

Yes, there are pockets of growth like US residential, Middle East oil and gas, Latin America oil and gas, but other parts of the world clearly have taken a step back and are waiting to see where they want to spend their money.

In April and particularly in the last couple days, we went out and really pushed hard to find out where things were coming and the orders came in worse than expected and we quickly got to realize that, based on March, based on April and what we are seeing with also the pushout of improvements in gross fixed investment, forecasts in the most recent quarter and also the next quarter, we clearly see there is going to be a slowdown on our sales and potentially actually a negative sales quarter here that we are facing this quarter.

Over the last 30, 60 days, this GFI slippage really has bothered me given the words you keep hearing that things are getting better and now all of a sudden, you are seeing businesses are holding back and are pushing out their spending.

They are spending money, but they are being very cautious just like us.

Our capital spending in the first half of the year is slower, just working the replacement, new products and smaller increments of new capacity as I referred to that productivity gap.

Basically our underlying sales growth right now is less than our productivity improvements and hence, we don't have to spend nearly as much capital and I believe every business out there, based on the levels of profitability and productivity, are seeing the same thing.

We are not alone in that area.

Therefore, after seeing the March and the Q2 close results and now the weaker April orders and the GFI spending improvements being pushed out, we've had to reset our earnings and sales expectations.

Underlying sales now -- we were talking about being in the 2% to 5% range -- now will be in the 1.5% to 2.5%.

EBIT margin will be basically flat plus or minus a 0.1.

EPS will be in the $3.53 -- going from $3.53 to $3.63 down to now $3.48 to $3.58, basically $0.05 of our forecast that we had presented in February.

It clearly is a stepdown in the pace of business.

Still growing, still delivering profitability, but the activity level is significantly lower than you would expect just 60 days ago.

Our asset management and cash flow remains extremely strong in the first half and we do anticipate record levels of operating cash flow and free cash flow.

With our current capital allocation, about $1.2 billion going to dividends, about $0.5 billion into acquisitions, we now have increased our share repurchase into the $800 million to $900 million range, probably closer to $900 million this year for fiscal 2013.

It is our intention to return a minimum of 60% of our operating cash flow to shareholders in 2013 given the slow growth environment and given that we do not see any significant acquisitions that we must accomplish this year.

The same fundamental issues that we have been working on and discussing in February are still there, but we are dealing with a much slower growth market.

Europe has continued to weaken, more negative than before.

We most likely will be at -- our sales will most likely best be flat; most likely slightly down.

Brazil has weakened, but still growing and China has weakened, but still growing.

Again, we are seeing pockets of growth in what we are going through right now as we drive toward this 2% underlying sales growth, which is less than last year's 2.6%.

We are having to go and reallocate where we want to put our money for those growth programs and for the investments we want to see that drive the improving growth as we go out in the later years.

We are driving record levels of profitability, EPS and cash flow, but growth will be the big issue.

We will continue to focus on improving Network Power and also to continue to free up resources for the rest of this year to set up and invest in other areas for future growth and improve our profitability as we go forward ending 2013, going into 2014.

Net net, second quarter was not nearly as strong a quarter as we wanted, but the first half came in almost exactly where we thought.

The big issue for us right now is, based on orders and based on the current expectations to GFI in the next two quarters, we cannot deliver the 2% to 5% underlying sales growth.

Therefore, we are going to have to pull back our earnings per share growth and our second half will not see that strong a pickup that we had initially forecasted.

Overall, it will be a good year, but the growth is going to be the key issue for all of us in the business world and we are not seeing it right now.

The consumer spending business is being very cautious.

Our cost structure is in good shape.

We are reallocating some of our cost reduction and restructuring efforts, but fundamentally we are in good shape from a profitability standpoint and we feel good about what is going to happen here.

As we go forward though, it is going to be lower growth.

I mentioned back in November that I actually did expect one negative growth or EPS growth this year and I said most likely it would be the third quarter.

I believe it will be the third quarter.

I believe that we will be at best flat, most likely slightly down in sales based on a three-month rolling underlying order pace, which will again be more negative when we get April numbers finalized and present them in the next couple weeks and that will drive most likely lower sales or flat sales and because of the very difficult comparisons of profitability last year as we recovered from Thailand, the third-quarter profitability is an extremely tough hurdle and I would say that we most likely will have a down third-quarter earnings per share and then recover as we go back in the fourth quarter.

I said the same thing back in November and now that we are here in the order pace, that is what's going to happen as I look out at this point in time.

So with that, I want to -- again, I want to thank all the people around Emerson for the hard work they have put into the first half.

Clearly, growth is a big issue for us and we are having to redirect our resources to deliver that growth and find that growth.

And with that, I will open the lines and take questions.

(Operator Instructions).

Julian Mitchell, Credit Suisse.

Hi, thank you.

So firstly, I guess, on Network Power, you called out other costs being a drag on the earnings year-on-year in Q2.

The decremental margins in Network Power have been pretty big, sort of 40% or 50% for three quarters in a row now.

Can you just talk a little bit about those other costs?

What is going on in the mix and if you think that we can get a year-on-year growth in EBIT in Network Power in any quarter this year?

Yes, I mean, from our perspective, as we look at it right now, if you look at this quarter in particular, we did have some very challenging mix from the Network Power systems business in particular as they looked at a slowdown here in projects in North America and furthest deterioration in Europe.

We have gone out and launched, as this quarter finalized, some new incremental restructuring effort that will have an impact for us in the second half of this year.

That will drive an improvement in the second-half profitability, but as I look at the basic Network Power systems business profitability, I mean it will improve as it has historically in the third and fourth quarters and we will see a little bit of improvement in the sales as it historically has done.

That's the way that seasonal business works.

But we do expect continual improvement as the year goes on and the restructuring has already been launched and that will help us in the fourth quarter.

Got it.

Thanks.

And then within Climate Tech, you talked about some moderation maybe in some of the stronger markets recently like US residential.

Is that just in comparison to the 23% growth number you called out or are you saying there is a general kind of market slowdown as well in HVAC?

From our perspective right now, what we are seeing is with -- April was cold and wet and so we are seeing -- we had a good three or four months in US residential and now a slowdown is occurring because of the weather more than anything else.

So our customers are keeping their inventories very tight and they are driving back and forth based on the pace of what is going on in the weather in the near term and it has not been very good.

Overall, Climate Technologies had a good couple months in orders and I now expect their orders to actually be negative as we get into this month and next month because of more of the weather-related than anything else.

Thanks.

And just lastly, quickly on process, you have a -- you called out the mix from US aftermarket being weak.

Is that something you think can come back?

It's just a short-term thing and as long as the facilities are running, aftermarket should snap back soon or there is no visibility really on when that could happen?

Historically, it does go in lumps and we had a very long -- and it stayed up longer than I thought last year on the North America MRO.

There was a lot of investments here.

Remember, our process business last year was up well north of 20%.

I would expect that we will start improving as the rest of this year, maybe not this quarter, but the next quarter, the fourth quarter and going into next year as our customers digest what money -- the capital they did bring in and are putting in place.

And so this is pretty normal.

You had the surge and then all of a sudden they back off and they surge again.

So I would expect probably another quarter of tougher comparisons in the OEM or the aftermarket and then maybe the fourth and first fiscal quarter next year getting better.

Great, thanks.

Steven Winoker, Sanford Bernstein.

Thanks and good afternoon.

Dave, could I just make sure I understand also in terms of how you articulated the change over the last couple of weeks?

The thing that really moved you to lower guidance relative to where you were a couple weeks ago, was it really the April -- just what you were seeing in April quarters?

I think there are two things that could cause me to change.

I watched the close and seeing how things closed, as we closed in early March and then the April orders, and the third thing.

As I looked at the pushout of the forecast by quarter as we are seeing the economics come in the last couple of weeks, what is happening is that they keep saying GFI around the world is going to improve, but they keep moving it a quarter.

And so they did the same thing to us here in the second quarter, so there wasn't any incremental improvement and actually second-quarter GFI that we look at and there was going to be an improvement in the third quarter.

Well, that third quarter has now been pushed out again.

They haven't changed the year much; they just keep pushing it.

And therefore, it's a combination of those three things.

As I sat there and after we put out our K, 8-K, said look, this thing is not coming back and then when the orders came in, I said it is pretty clear to me that we have, in the next couple months, the next couple quarters could be challenging and we better address these issues.

That is why.

Okay.

The second question is around the margin expansion on the volume.

So the reported number was 20 basis points, but then thinking about pension and the industrial automation issue and the stock comp and all of this, what were you thinking you achieved on kind of a more normalized basis in the quarter and what does that make us think going forward, particularly as I recall you talking about those price cost tailwinds that you currently and used to have and the question of whether those will continue.

I mean how does that come out and how are you thinking about it?

I don't really -- Steve, we don't go normalize and take stuff in and out because what happens is things hit us from time to time and so we have to absorb that and so I don't look and say, hey, we really did 5/10 improvement, but clearly we had a little bit higher margin improvement, EBIT margin, if you take those things out.

But the way I look at it is I am trying to figure out how to improve my EBIT margin all in and so that is the way I look at it.

So I don't sit here and peel things back to make myself feel good about a higher margin.

We finally deliver to our shareholders this EBIT margin for the quarter and that is how we looked at it.

It was a 20 basis point improvement and that is how we looked at it.

(multiple speakers).

If I parse this thing, I can make myself feel real good all the time.

Okay.

So how about the price cost side of it then?

The price costs right now -- the price costs -- the costs are coming down.

There is no doubt the input commodities right now, what we call our net material inflation, has actually continued to get better for us or lower so therefore the issues are our costs coming in are better and therefore the price environment for us at this point in time, the gap is okay and I most likely will have a situation, as the material stay down there, I am going to have -- pricing will be tougher for us to get and to hold because we expect the net material inflation to start getting higher as the year went on and now it is starting to be more negative.

So we will be fighting that as the year goes into the second half as people look at the pricing for some of the commodities.

So right now, it is okay and I would rather deal with the more negative net material inflation than trying to hold back price than trying to deal with a higher inflation environment from my perspective right now.

Does that make sense?

Yes, it does.

And your typical leadtime when you start seeing that material inflation steadying and the price leadtime or lag time for that is -- usually you can hold it for a quarter or two or a couple of quarters?

You are looking at one quarter typically.

Some businesses, it's one quarter; some businesses, it's two quarter.

So it's, on average, let's say three to four months.

Okay, great.

I will hand it off.

Thanks.

Mike Wood, Macquarie.

Hi, good afternoon.

Can you talk about your China and other emerging market trends, the 6% growth that you reported there?

Do you think about that as a function of the market growth or is this your investments that are leading to outperformance there?

And if you could just talk about the outlook for those markets.

Emerging markets look pretty good to us right now.

We have continued to make investments.

The emerging markets, you could have a good quarter, bad quarter and you move back and forth, it is a little bit more volatile.

I could say the same thing about Europe.

Right now, when we look at our emerging markets, we see China continuing to grow.

I mean we will probably see China grow somewhere between 4% and 5% this year and across the board based on the markets we serve doing pretty well.

A little bit less, I would've thought we were going to be more like 5% to 8%, but I think the general underlying economic environment in China is a little bit weaker.

Southeast Asia continues to grow nicely for us high single digit.

A little bit weaker because obviously China impact there a little bit.

India is a marketplace that is holding up, but I am very nervous about it, but it is still holding up for us as is the Middle East and Latin America.

So overall, I see pretty good growth in emerging markets for the rest of this year.

What we are concerned about is obviously now we are going to have a negative out of Europe, which we thought maybe would get us to breakeven in sales growth, but it is going to be a negative and I expect a weaker US marketplace.

So the actual, from my perspective right now based on recovery in the US, which has been pushed out and muted a little bit and then obviously Europe continuing to weaken.

So emerging markets are going to do pretty well based on investments we have been making over the last couple years.

Okay.

And then you also mentioned the rationalization in embedded.

Is this just procedures you are going through before selling the business or is this something that you might decide to hold onto with trying to improve the profile of that embedded business?

No, we started this process last year and as the market continued -- we thought the market stabilized as we started our fiscal year, but that was a fake and it is continuing to drop down as you see in the near term in the embedded customer pace.

So what we've continued to do is take out productlines and customers that just do not support what we consider the profitability and cash flow needs of that business.

So we have continued to take out business and therefore hurt our sales that we think that just makes no sense long-term for this business.

We are making decisions in this business that are right decisions for either us or whoever the future owner is going to be.

Okay, thank you.

Christopher Glynn, Oppenheimer.

Thanks, good afternoon.

Good afternoon, Chris.

I have a bigger-picture question stepping back on Network Power.

If we look at the CAGRs you had laid out in February for '12 to '15, you would be backing into Network Power, having the strongest performance in '14 and '15.

And I was wondering just if that remains reasonable or if some of the data center growth drivers of the past have kind of played themselves out and maybe take a cycle off?

I mean, in the last 60 days, I haven't done a new forecast for '14 and '15.

But clearly the spending needs of this industry are still out there.

I just think people are being very cautious right now.

I still believe it will come back and it has and there is a lot of trends going on, but we try to take those into consideration, both the positive and the negatives.

So I haven't really looked at '14 or '15 again in 60 days, but I mean my feeling is that business will return to growth and as we move out of the embedded power computing business, we will see some reasonable growth in the Network Power systems business.

So I still say it will come back.

Okay.

And are you more positioned now as agnostic between transformerless and more hardened data centers?

Oh, yes.

Our transformerless product is out and has been now since six, seven months ago, so we are in very good shape there now and we have that capability around the world.

Thank you.

Jeff Sprague, Vertical Research.

Thank you.

Good afternoon, Dave.

Good afternoon, Jeff.

Hey, what you said about kind of your deal placeholder and share repurchase kind of explicitly suggests deals are not a priority and that is obviously not a new statement relative to what you said in the last few months or so.

But just stepping back and looking at the portfolio, I mean there are some things you maybe have to do -- change the complexion of IA is probably kind of the biggest one.

I mean how should we think about how you address that if there is urgency to do it or even if there is kind of a practical way to get at that relative to what the targets might be?

I don't think it is changed anything we have said in the past.

I mean we continue to explore different ways to try to add to that space be it through ventures or going to acquisitions.

But at this point in time it is not my priority at all.

My priority is to continue the sale and finish the sale of the embedded power computing business and then stick -- finish the stabilization of the network power systems business and get a return for my shareholders.

So at this point in time we are doing small productline acquisitions.

We are continuing to work on those and we will continue to work on those.

Those are primarily focused right now on our Process Management climate technology and that will be the focus for the next six to nine months.

And as we generate the cash we are going to pass it back to the shareholders at this point in time.

Our balance sheet is extremely strong and if one of the opportunities that we discussed in IA comes forward and opportunity comes up, I discuss this with the Board a couple times a year, we will move forward.

But right now that is not where we are focusing on.

And then just thinking about this share repurchase announcement then, Dave, so 70 million shares, call it roughly $4 billion or maybe more than that at today's prices, you are doing $900 million this year, should we assume this is kind of a four or five-year process then to get that much stock out or --

Yes.

-- given the liquidity you appear to have, why wouldn't you step that up?

Because right now from my perspective it is going to be a four- or five-year process just like it took us almost -- not quite five years for the last time.

I mean we did one five years ago, same thing.

If we see -- I will make one change in that, if we see that the market stays moderate growth and we do not see the acquisition opportunities and we continue to generate the cash, then clearly we can look at taking that up a little bit higher in accelerating that.

But at this point in time I still believe that you are going to see some acceleration improvement in the underlying market growth and we will continue to push acquisitions and one of them will pop as they always do.

So our plan basically says four or five years.

It can be faster.

But right now it is four or five years.

Okay, great.

And then just one other final one if I could.

So it sounds like the process backlog is still pretty strong.

I guess near record means it is down a little bit, but more importantly what does kind of the margin mix look like coming out of backlog the next year or so between projects and aftermarket and how should we think about margins?

I mean the process margins right now are going to be -- they are going to operate this year at about the same level they operated last year.

It is not that much change.

We will have a quarter -- the flow-through this quarter was not that exciting, but I mean we had less North America.

Obviously if we had a strong North America you would have a higher margin.

But right now I would say their margin for the year at the EBIT level is going to be very close to what it was last year, probably up slightly.

And the backlog looks pretty good.

The backlog actually -- if you just look at pure backlog was actually -- was flat with last year if you adjust for it.

And so our backlog versus last year is down slightly versus the first quarter it is up slightly.

So we have the backlog right now, the question is executing it.

And so from my perspective, our backlog did improve slightly in the second quarter across the board and it is still a little bit down versus last year when we had -- we are absorbing that -- obviously, the Thailand flood across the whole Company.

So we had the backlog.

My concern is the last five or six weeks, this underlying order pace and it is not just one.

If you look at the order trend chart, all the businesses are trending downwards and they have been quite significantly.

And so -- and with the GFI moving out, it is pretty clear to me in the near term, we are not going to overcome that and it is just the fundamentals of what is going on at this point in time.

Does this feel like 2008 to you?

No, we are not coming off that high a level, no.

There has been very little recovery in the market space since.

This is like -- if we get a couple good months or maybe a couple good quarters and then things soften up again.

So it is a very tough world out there right now.

And we are trying to flex around our resources for growth and our restructuring based on what is going on in our capital, so we are all -- just a lot going on, a lot of moving parts.

All right, thanks.

Good luck.

You are welcome.

John Inch, Deutsche Bank.

Hey, Dave, good afternoon.

Good afternoon, thanks.

Wondering how do you think you performed in the quarter versus your markets that you serve?

Are there areas where you think you did better and others where you think end markets maybe performed a little faster than Emerson?

If I look at -- I mean, as you know, my feeling is, about a quarter, it is very difficult.

I feel like overall in the -- excluding embedded power and computing -- we did very well this quarter.

I mean I know in Climate, we did very well from a growth standpoint.

I know the residential guys did very well this year.

I know that, on a global basis, Network Power systems did very well and process obviously I think did extremely well again this quarter.

So I look at those trends.

I feel very good about -- I look at more -- you have got to look over -- as you know, I don't count out performance against anything unless you're looking at 12 months because one quarter doesn't make much difference.

But, overall, the underlying growth of 2% in total is pretty good given what we face as the macroeconomics out there.

So it is not enough to drive, I would say, incremental margins and incremental higher margin and incremental growth for us at the bottom line because we are running at high levels of profitability right now.

We are running at high levels of cash flow and we are fighting trying to find that pocket of growth and as soon as you find one, you start mining it, you lose another one.

So overall I feel pretty good about it.

(multiple speakers)

Go ahead.

Sorry.

And I would say the other big issue is our largest customer has been in a huge inventory reduction now for two quarters, Caterpillar.

And they have taken -- and that has taken significant growth out and we understand that and we participate in that and we are a close associate of them and we deal with that issue.

But that has hurt us a lot in the industrial -- in that whole industrial segment because of what they have done with inventory and that will come out and they have taken a lot of inventory out of that company in the last two quarters.

Well, you mentioned orders slowing since the end of February.

Is it -- and you mentioned that it is broad, meaning it is touching all your segments.

Did you see kind of an accelerated pace of project activity being pushed to the right or was it --?

It's not projects; it's more day-to-day.

And it started really -- we felt it towards the end of February and really fell hard in the second half of March and we have seen it throughout April.

It is not projects.

The projects are moving pretty well as we anticipated.

The project wins, the project closed, the project scope.

What we see is they haven't changed.

It is the day-to-day spending that we are seeing, people being very cautious.

If I am going to add some kind of incremental capacity, am I going to do this, I am going to do half of it and I am going to slow it down and it is no different than the way I am acting with inside Emerson right now too to be honest.

Yes, it makes sense.

So what happens if we get to six to nine months out and the world hasn't really changed from Emerson's standpoint?

Would you consider -- I mean you guys have a lot more flexibility than other companies, right?

Your balance sheet and so forth?

Would you consider more of a say broader action solution to try and perk things up?

Could be say a bigger restructuring action in Europe or something else?

No, I don't think so.

From the standpoint of [picking the thing up], trying to go out and do some big acquisition, the answer is probably not.

I don't see any -- unless I can figure out how to create value or two, from a restructuring standpoint, we have been restructuring quite heavily, as you know, from 2008 or late 2008 until early this year.

And I think, from my perspective, our cost structure is in very good shape.

We are running at very high levels of profitability right now.

The cost structure, our repositioning around the world is very good and so we are going to be trying to mine for pockets of growth and try to figure out how to get some growth and I think that game is going to be playing out here.

It could play out for a couple years; you are right.

If we see no fundamental improvement in demand or underlying growth, then we are going to be looking for those pockets of growth out there.

That makes sense.

And just lastly, how did your China business do sequentially?

It looks -- I see it had an easier compare year-over-year, but what happened to China as the quarter progressed?

I mean they are going to look at the hard numbers.

My gut tells me China did better in the second quarter -- yes, we did slightly better in the second quarter.

Okay.

Great, thank you.

Richard Kwas, Wells Fargo Securities.

Good afternoon, Dave.

Good afternoon.

Industrial Automation, how are you thinking about the business?

I know you took a fair amount of restructuring out.

Just from a margin standpoint, you have got the Cat issue right now and that will play itself out.

But when you start to see them grow, how do you think the leverage plays out there?

It seems like it is running pretty lean, your position for some pretty decent leverage once you start to see some growth.

I mean you saw last year we leveraged as we came back and I think that we will leverage right back up again.

It is a business that has a -- from a restructuring standpoint, we have got a few things we are doing this year and they will be done and our cost structure is going to be really finely tuned.

So I think from a standpoint -- as we see Caterpillar come back on, which they will, they will get their inventory out and correct it, as we see some of the industrial base pick back up, we will see that profit margin will pick back up again.

I feel good about that.

Our cost structure right now -- I mean they are holding their deleverage pretty well right here with the cost structure they have.

So I feel good about that.

So we will come back up like we historically --.

And just back on the M&A, you talked potentially about doing bolt-ons, $500 million or less.

What is your view on that now?

We took a deal to the Board today for a little bit over $400 million bolt-on.

Okay.

So that is still intact as you look out the next several months?

Yes, the number of ones -- we have been working -- we have a pool and we work a lot, a lot, a lot, a lot.

And in this environment right now, we have not been (inaudible) a lot have broken free, but we have several in on the Process world, one in the Climate world we are working right now and not anywhere else at this point in time.

So from my perspective, we are going to continue to try to find the bolt-ons and court them and work them because that is -- I think in this marketplace, that would be the best chance for everyone to get unique technology and new market space and add more value from our shareholders.

Okay.

Then last one for me.

What is the updated CapEx number for the year?

Right now, we didn't change it.

It is $700 million, but, last year, I think we did around $665 million to $700 million.

One of my directors asked me today what do you think and I said it's going to be somewhere in between there.

Okay.

They are trying to make sure that I am not stripping out capital unnecessarily.

So there is no reason.

I think our plan is pretty well set.

My gut tells me it will be less than $700 million and it will be more than $665 million.

Okay, got you.

Thanks so much.

You're welcome.

Take care.

Thanks.

Deane Dray, Citi Research.

Thank you.

Good afternoon.

Dave, I was hoping, when you talk about the color regarding April orders, it was interesting you didn't want to blame it on one geography and a lot of people have been finger-pointing at Europe.

But could you just give us a sense of how the falloff in orders trended from the major geographies?

I don't have that detail.

I mean I will be very honest; I don't have that.

I went out early and got them because, first of all, I had a Board meeting yesterday and today and we also wanted to announce the earnings and set the quarter up for the year.

I mean I can't guess.

I know what it was like in March, but I can't -- I mean it is hard for me to say and I will have that by the time we get down there at EPG, Scott.

Give me some more days for that to come in.

They won't be coming in here for another -- formally coming in here for another two or three days.

So I don't have that.

Qualitatively, does it feel like it is broad-based or is it more centered in Europe?

I'll tell you what.

I would say based on what I saw in March, I would say April is the same and it would be Europe, it would be some of my US industrials.

I wouldn't be surprised if I didn't see some weakness in Latin America and Brazil, but I think -- I think China is okay.

I think Southeast Asia is okay based on what I am hearing from people, but Frank and I -- Frank Dellaquila and I just came back from Europe and man, that is not doing very well at all right now.

And I just want to go back to your answer to Jeff's question regarding whether it felt a little bit like 2008.

And I was thinking that would be a question that was along the lines of the pace of the deceleration, the types of orders that are falling off.

Instead your comment was we are not coming from that high a level.

But maybe you can just talk about how much this feels like 2008 or whether it doesn't.

And it didn't sound like big CapEx projects are getting pushed out, but more of the short cycle.

But just could you clarify that?

Yes, I mean I look at -- 2008 -- keep in mind, 2008, we had a very strong economic environment coming at us from '07, '08 and then just the bottom fell out from our perspective as you looked at that.

This one here -- we just started coming back up.

The industrial business had just started coming back up since late 2012 as I look at the businesses and they came back up at a moderate level and they sort of flattened out and now they have rolled.

Nothing I see or feel says you are going to have a sharp -- I don't see a sharp drop-off.

I see us fighting at low levels of growth and if you even look at the indicators will tell you you don't see a lot of excesses; you are going to be just fighting -- some negative growth and some positive growth.

That is what we are seeing right now, but not a sudden drop-off.

I do not see that contraction.

2008, the markets contracted very rapidly as all of us ran scared about money and so we all stopped spending so rapidly.

That is not the same thing right now.

We are being cautious.

I am still spending money, but I am spending at a pace a lot less than we originally thought.

It's a different feel for us.

Okay, that's real helpful.

And just the last one from me maybe for Frank is that a lot of the companies this quarter have been showing a bigger benefit from the R&D tax credit, but yours did not look as meaningful.

Was there anything going on there?

No, nothing; it is just the usual.

It is just not as big for us as it is for some.

Yes, we got moderate pickup.

We probably did as much offshore as we did onshore, so it's very moderate.

Okay, thank you.

Shannon O'Callaghan, Nomura Securities.

Good afternoon, guys.

Good afternoon, Shannon.

Hey, Dave, you mentioned freeing up resources to invest in other areas for future growth.

I mean can you maybe fill that out a little bit in terms of what you mean by freeing up and what you are kind of viewing as the priority areas to deploy?

From my perspective is if I see the market improvements delaying in some of the industrial space or even certain pockets of climate space, Climate Technology space base, we are taking some of that money and redeploying it from some of the incremental growth programs back over to Process or back into some of the emerging markets space at this point in time.

So the business leaders, we set out that $45 million, $40 million of strategic money pool every year at the beginning of the year and the business leaders meet with the OC members and Charlie, Frank, myself, Ed and Craig all will debate with the business leaders and we reallocate, we will pick some money back out of one area, to the guy say, hey, we are not going to spend nearly this year.

Things aren't picking up; we should just hold off on that and we will reallocate back over -- maybe into some of the other emerging markets or some of the other technology plays.

So that is something we have learned how to do the last couple of years is this what I call the start/stop type of marketplace and we are going through that right now as we get ready for the second half of this year and as we get ready for the beginning of next year.

And then things move again, we will push the money back over.

So that is what we are doing right now, Shannon.

That is what I am talking about.

So Process and emerging markets kind of the two big areas that you would --?

I would say those are the two guys right now getting it.

Okay.

And then I understand the productivity trap, but I guess just from a macro standpoint, I mean there has been so many things weighing on business confidence, what do you think the current priority list is in terms of things that are really holding people back?

In the US, it is primarily the onslaught of regulations coming at us and things that we are all trying to digest both from I think a customer standpoint and my standpoint and most likely the customer standpoint.

In Europe, I think that the fact that money for the small, medium-sized businesses, which are a lot of our customers, it is still extremely hard to get and they are being very cautious at investing because they can't get the money from the banks, so that would be the European scenario.

China, I think the big issue is they have plenty of excess capacity and going back, Frank, just pointed out to me, he said the two things that all of us are a little bit struggling with our customer base is the healthcare costs that are coming at us.

It is already starting to hit us and some of my customer bases right now are starting to say they are going to have to spend a lot more money there.

And then finally I think would be the tax policy.

I think people are still -- people still have been hoping that we would get some kind of clarity on tax policy relative to where we invest and how we maybe can reallocate our cash flow around the world.

But, right now, we are getting no clarity on that, so I think businesses are going to be extremely tight with their money.

And a lot of the businesses are going to send that money back to the shareholders and the balance sheets are getting stronger.

Okay, great.

Thanks, Dave.

You are welcome.

Josh Pokrzywinski, MKM Partners.

Hi, good afternoon.

Good afternoon.

Josh -- is that what you said?

Yes.

Just a follow-up on the process margin comment from earlier.

I understand you said that, for the year, you'd still expect to be up a little bit.

How does that frame out in the second half?

Obviously, the margin comps there are a little bit tougher and then the top line a little distorted by the makeup from Thailand as well.

Yes, but even on a normal basis, as we look at our normal process trendline, they historically have higher sales in the second half and so we expect that to happen even though -- if you try to look at comps last year -- Dellaquila is dying on me in here -- if you look at -- coughing on me -- if you look at the first half/the second half, typically we would see incrementally higher volume and therefore, we leverage it.

So if you look at our first-half EBIT, we ran a 17.6 -- is this correct, Frank?

17.6 and then a 20-point quarter quarter.

And then -- so we are going to be running in the low 20s and a little bit higher 20 -- mid-20 -- toward the mid-20 by the fourth quarter.

That is just based on the normal volumes that we see in this business.

So I don't see any change there.

Okay.

So maybe flattish margins year-over-year in the second half?

Oh, oh, you are looking at that.

Okay.

No, the third-quarter margin last year was phenomenally strong.

We do not see that at all.

I think you are going to see more of the normal type of margin.

Typically, we see a slight margin improvement from second to third.

And so, if we did 20%, you are going to see -- let's say you are going to be around 21% for the third quarter and then typically volume picks up -- we usually have a fourth-quarter volume pickup as things happen in that industry in the fourth quarter.

And then you see a couple more points pick up.

So that is what's going to happen.

Last year, we had a huge pickup in the third quarter.

That is not going to happen this year.

I'm sorry.

I misexplained it to you.

My fault.

No, completely understood.

And then just to follow up on the resi A/C, up 23%, is there any share gain in there?

I think one of your quasi competitors in this space had some business loss.

I wanted to see if that was coming (multiple speakers) you guys or if that plus 23% was just pure organic.

It was real growth; let's put it that way.

I don't comment on shares, but we did well in the quarter; let's put it that way.

I know people think we are going out of business in our HVAC business in North America, but it's not.

We did okay; let's put it that way.

Fair enough.

All right, thanks.

John Quealy, Canaccord Genuity.

Hi, good afternoon.

Thanks for taking the question.

(multiple speakers) . Have I ever met you, John?

I don't think so.

I look forward --.

Where do you reside?

I reside in Boston.

Good.

They recently initiated on us.

They just -- okay.

So I have not met you.

I look forward to meeting you.

Yes, I look forward to meeting you.

Sorry about the bad situation that happened up there.

I hope your city recovers nicely.

Thanks very much.

Maybe the Red Sox and the Cardinals will play in the World Series again this year.

Well, I'm not so sure about that.

Process Management, if I could, in the back half when you are looking at growth remaining stable, can you break that down for us by end market specifically?

Oil and gas obviously, we know the dynamics, but utilities especially domestic, internationally.

Have you seen any softness?

We have heard a lot of chatter out of Europe on utilities just shutting down, CapEx in some process.

So can you break down a little bit for us?

Actually our utility business is doing pretty well.

We are not the major player in Europe, so we have two companies that are a little bit stronger than we are and you could probably name who those two companies are in the utility industry.

We are doing pretty well in Europe, but we are not the major player.

Our Asia business is extremely strong right now.

In China, we are very strong in China and Korea and we have a very good presence in North America and we are seeing pretty good pace of business in North America right now.

So we have not seen any slowdown in our utility business in the key markets we serve.

So I expect us to have a very good year in the utility markets and then when we sell that system, we get obviously the instrumentation goes and the control valves go along with it.

And the oil and gas, we see that continuing to grow.

Right now, I think -- I look at Latin America still do well this year.

I still think we are going to see a very good business environment for Middle East and Africa.

That has been very good for us.

I think that China is going to continue to be very good for us in the second half.

Our book orders in China were very strong in the first half.

We had good sales growth, but I expect our China to be driven by our Process business and Southeast Asia has done well.

So I think the actual two weakest markets for us for Process are going to be Canada and the United States because we had such strong growth last year.

I think I will see some recovery in both Canada and the United States second half, but I think you are going to see our international business driving our Process Management in the second half of this year.

All right, thanks.

And then a follow-up, did you talk about ex-embedded what Network Power margins were or what we can sort of calibrate them to be?

No, we have not said that yet.

Are they consistent with sort of the February update of what it would be if you stripped out embedded?

Yes, yes, that is true.

Okay, thanks, guys.

Hope to see you soon, John.

Scott Davis, Barclays.

Hi, guys.

Sorry I messed up earlier.

You didn't mess up.

I had to quicken the button.

I probably cut you off.

I have a button here --.

No, I don't really know how to use a phone yet.

My fault.

(multiple speakers)

I do have a button here, so be careful.

I do want to just ask a couple things.

At the Investor Day, you talked a bit about receivables and having some concerns about days outstanding extending out and some of your customers taking their time to pay their bills.

Has that stabilized at all, Dave?

It has improved.

The business leaders -- Frank, Ed Monser and Charlie Peters, all the guys -- we have got a task force put out and part of it is our own fault, to be honest.

With the mix in some of the projects and the paperwork you have to deal with projects, we have created some of that problem.

And then some of it is just our customers using us as a bank.

But our receivable actual what we call pass-through receivables have come down from their peak and we expect that to continue to come down.

So it was part of our cash flow improvement from Q1 to Q2 and I think that will continue to be the focus for us in Q3.

We reviewed it in detail with the Board today and I had said to the guys I called out here are doing a great job.

And we had a call to action and they did it and I feel very pleased with them.

Okay, that's helpful.

And then just as a follow-up, I mean you had talked also at the Investor Day about competition in China in Climate and I think one of the comments made, offline comments was just that it wasn't clear how share shifts would move around in China.

But your numbers were pretty good.

So should we kind of -- does that imply that you have really fended off competition there and that you guys have won the battle, if you will and it's all stable or is there still some volatility there ahead?

We did very well in the first six months this year.

We have several new products out within the Asian marketplace both in variable speed and some of our new compressors -- variable speed is on the fixed speed stuff, so that is helping us.

So we did gain in China in the first six months.

Relative to China, I never count my chickens or eggs until we have got them into the oven and so we are going to keep working it.

From a technology standpoint, we have got to stay ahead of this and make sure we do well.

But we did well, as you saw, in the first six months.

Purvis and his team did a great job there.

And now, in North America, we obviously had a very strong start.

The inventories were low.

We did pick up a couple new accounts and we see some new technologies come into play on the HVAC side.

My concern right now is the weakness in transportation and non-res and we are hoping to see that come back late this calendar year, which will help us get into 2015.

But, right now, execution wise, on the residential, on a global basis, it was a very good six months.

And now we have got to keep it going.

Okay.

And then last, Dave, do you think we will expect -- or do you expect at least to have some finality to embedded in the next 60 days, 90 days or is it more a couple quarters out?

We want to drive this to consummation before this fiscal year is out.

So yes, that is the way we are moving.

We updated the (inaudible); we are moving that way.

We want to bring this to finalization, so we can take our manager time and address it somewhere else.

Okay.

Thanks, guys.

I appreciate you letting me (multiple speakers).

All the best to you, Scott.

I hope to see you soon.

Alan Strauss, Schroders.

Thanks for taking my call -- my question.

You guys have been known to give aggressive guidance.

Would you consider the guidance you just gave out for the rest of the year, give the ability of your dogs (inaudible) to even jump over?

I have gotten in the mode now, this is the first guy who asked me about Zorro.

We try to give guidance so Zorro can jump over it.

And since a couple of years ago when my dog got a little older, so we try to make sure we can get guidance we can jump over, yes.

The key thing for us is we have got to get some underlying growth going again here in this global marketplace, which I think is out there; it is just a matter of getting it done.

Okay, thanks.

You are welcome, Alan.

Take care.

(multiple speakers).

I appreciate everyone calling today.

I appreciate the questions.

Again, I am sorry that we had to revitalize or reset the guidance for the year for both sales, but we have to be realistic with what we are seeing right now in the near term and deal with that.

But the Company is running very well from an operational standpoint and cash standpoint and marketing standpoint and we intend to keep that going and give more money back to the shareholders in the second half of this year.

Thanks.

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

Thank you for participating.

Please disconnect your lines.