艾默生電氣 (EMR) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to Emerson's investor conference call.

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

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

(Operator Instructions)

This conference is being recorded today, August 6, 2013.

Emerson's commentary and responses to questions may contain forward-looking statements including the company's outlook for the remainder 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 will now turn the conference over to our host Patrick Fitzgerald, Director of Investor Relations at Emerson.

Please go ahead, Sir.

Thank you Camille.

I'm 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 the Emerson's third-quarter results.

A conference call slide presentation will company my comments is available on members cents website at Emerson.com.

A replay of this conference call &-and-sign presentation will be available on the website after the call for the next three months.

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

Third quarter sales declined modestly to $6.3 billion with underlying sales decreasing 1%.

Sluggish macroeconomic conditions continue through the quarter with cautious levels of business investment globally.

Sales growth was also affected by difficult comparisons from Taiwan's leading recovery in the prior year.

Emerging markets grew 2% more than offset by mature market weakness.

We announced this morning that an agreement has been signed to sell 51% stake in embedded computing and cup power business to Platinum Equity.

This transaction monetizes the business that shifts focus to our core businesses.

Transaction proceeds of approximately $300 million re-patriated cash will be deployed for incremental share repurchase of 600 million.

Charges related to the business recognized in the quarter $0.70 of EPS.

Excluding these charges, earnings per share were $0.97.

Strong cash generating continued with free cash flow of 20%.

Moving to slide three, P&L summary.

As I mentioned the slow macroeconomic environment limited growth.

Gross profit margin was flat as cost containment offset unfavorable volume mix and product deleverage.

Operating profit margin declined to higher stock compensation and pension expense as well as abnormally high leverage in the prior year from the flooding recovery.

A goodwill impairment was recognized and embedded computer and power equipment.

And other deductions increased $37 million non-recurring double duty gains in the prior year.

EBIT decreased sharply due to these items reported earnings per share of $0.27 excluding goodwill impairment of $0.65 and income tax charges of $0.05 related to earnings re=patriation.

Moving to slide four, underlying sales by geography.

By geography, underlying sales decreased in the US by 3%, in Europe by 6% and in Asia by 3%, including a 4% reduction in China.

Sales grew in Latin America by 8% in Canada by 4%, in the Middle East and Africa by 18%.

Total underlying sales declined 1% divestitures and currency deducted 1% reported net sales decline of 2%.

Excluding the embedded computing and power business underlying sales were essentially flat with a modest growth in China.

Next slide, cash flow and balance sheet.

Cash generation was robust with operating cash flow up 17% and free cash flow up 20% which represents conversion from earnings of 121%.

Working capital as a person sales increased from prior year due to higher receivables but improve sequentially by 120 basis points.

Moving to slide six, business segment detail.

Business segment margin declined 130 basis points due to flooding recovery and dumping duties in the prior year as well as higher pension expense.

The increase in corporate expenses due to the previously mentioned impairment and higher stock compensation expense.

Tax rate reflects one-time income tax expense to re-patriate embedded computing and power business.

Excluding this impact the tax rate would've been 29%.

Next slide, process management.

Process management sales grew 3% within approximately 7% point impact from the Thailand flooding recovery in the prior year.

By region, North America decline 4%, Asia grew 8%, Europe was flat, Latin America grew 17%, and Middle East and Africa grew 24%.

Oil and gas power and chemical end markets continue to grow.

Underlying orders were up 8% lead by double-digit growth in systems and solutions, improvement in North America and 13% growth in China.

Segment margin declined 160 basis points which was also affected by flooding recovery comparisons.

Global project activity remains robust reporting solid growth momentum in the next year.

Moving to slide eight, industrial automation.

Industrial automation sales decreased 7% as North America down 5%, Asia flat, Europe down 13%, Latin America down 4%, and Middle East and Africa down 2%.

Industrial goods in the markets remained weak globally especially in Europe.

Weakness was most pronounced in the power generating alternators business that channel inventory destocking is beginning to slow and orders are expected to turn positive soon.

Excluding $37 million dumping duties received in the prior year margin remained unchanged as cost containment offset volume deleverage.

Demand for industrial goods appears to be stabilizing that is expected to be remains low in the near-term particularly in Europe.

Next slide, network power.

Network power sales declined 5%, with North America down 2%, Asia down 13%, Europe down 4%, Latin America up 6%, and Middle East and Africa up 19%.

So demand continued in global information technology and telecommunications and markets.

The network power systems business declined slightly what as growth in data center infrastructure was offset by telecommunications weakness.

Embedded computing and power business declined at a double-digit rate.

Segment margin contracted 220 basis points primarily due to volume deleverage an unfavorable price.

End markets appear to be improving but difficult comparisons from prior years project in Australia limit near term growth.

Next slide, climate technologies.

Climate technologies sales decreased 2 percent with the North America down 4%, Asia down 2%, Europe down 5%, Latin America up 3%, and Middle East and Africa up 21%.

US air conditioning business declined modestly as residential markets paused due to mild weather and inventory destocking.

Asia sales declined as China decreased after double-digit growth in the previous quarter, Europe market conditions remained weak.

The global refrigerated business improved recovery in the transportation business.

Segment margin expanded 80 basis points as cost containment offset favorable mix.

Both is expected to resume in residential and refrigeration businesses in the near-term.

Moving to slide 11, commercial and residential solutions.

Commercial and residential solutions sales declined 2% reflecting a 6% diverse impact on divestitures underlying sales grew 4% with North America up 6%, Asia up 3%, Europe down 4%, Latin America down 1% and Middle East and Africa down 11%.

Residential investment in North America continues to grow more than offsetting slower commercial demand.

Segment margin remained unchanged from the prior year.

We expect growth to continue with solid residential and improving nonresidential demand in the US as well as stabilization in Europe.

Moving to slide 12.

Consistent with previously communicated intentions, today we announced an agreement to divest a 51% stake in embedded computer empowering business to Platinum Equity.

The terms will allow us to immediately [emnetise] the asset and focus on the core businesses while also participating and upside from repositioning the business.

Emerson will receive approximately $300 million in cash and retain a 49% non-controlling interest.

The transaction is expected to close in the next three to six months.

The $300 million of transaction proceeds and approximately $300 million in repatriated embedded computer and power earnings will be used for 600 million of additional share repurchased to offset PPS dilution.

The businesses sales and earnings will be reported and Emerson's results until the transaction closes.

Next slide, full-year outlook.

The economic environment is beginning to stabilize and improve with orders growth resuming in June after declines since February.

We expect near-term business investment will remain cautious but slowly improve.

Specifically, we anticipate energy and residential markets to remain solid with slow but improving demand for industrial goods and information technology and telecommunications infrastructure.

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

Reported an underlying sales growth of approximately 1%.

EBIT and pretax margin approximately equal the prior year excluding the goodwill charge in each year.

Earnings per share excluding goodwill and tax charges trending toward the lower end of $3.48 to $3.55 or $2.78 to $2.85 excluding charges.

Operating cash flow of approximately $3.4 billion and free cash flow of approximately $2.7 billion.

With that I will turn it to David Farr.

Thank you very much Pat.

Welcome everyone to our third quarter earnings call.

And I also want to thank the operating executives out there for delivering what I would call very solid operating margins and strong cash flow and a very difficult quarter from the standpoint of comparisons from last year which we referred to a couple times and press release as the time of floods.

We always knew this is going to be our most challenging quarter given how we recovered last year.

On the negative side, throughout the quarter probably for last four or five months we've seen weakening of the global economies and that weakness really started coming through as we move through this quarter.

On the good news though if you look at where we sit right now, June orders were positive.

Early indication right now, July will also be positive.

So it looks to us that things are starting to shape up with a little bit of an upward trend.

To finish the year with the a strong operating performance in Q4.

To get through what I call a challenging fiscal 2013.

Overall, it was a tough quarter.

We had a lot of moving parts.

Some of the businesses are doing well as you can see coming up in our electrical products group meeting.

The big exception clearly is power systems which continues to see weaker sales coming from a weakening China other parts of Asia Pacific.

Also, very weak IP demand coming out of Europe and the United States.

Companies have not really increased their spending in any significant levels yet to see that market place pick back up.

We also had some very bad mix throughout the quarter different businesses in particular China which is a high margin business for us is very weak.

Our repositioning and restructuring continues to take hold and its starting to pay off.

In fact, I just came back from Europe and we saw our European business stabilizing and actually started to see positive order growth in our network power systems business.

Very important, the sign of all the restructuring and new the management team we put in place, a good first sign that things are starting to turn.

The negative side also in this business was weak government spending.

We have a government spending arm here and that business was down, obviously, with a pullback in the government spending.

Overall, the business did not turn out what we thought it would at the electrical products group.

Clearly, the margin for the whole year will be weaker than we said before, though I'm starting to see, basically as you see in orders.

We are starting to see the network power systems business pick back up and I feel good we will be going out of the quarter, fourth quarter doing better.

And then really going into a stronger 2014 as the economy continues to, I think, moderately improve but not robustly.

Relative to the other businesses, they are all operating pretty much along the lines we talked about EPG.

Process management is seeing continued strong order growth.

With some very difficult comparisons last year, the underlying sales and orders are up close to double digits this quarter, when you take out the impact of the Thailand flood.

We are seeing good business coming around the world.

We're not really seeing any delays at this point in time and the technology investments continue to go forward.

The other good sign there is we are continuing to work a lot of nights both on acquisitions in the space, which will help us again as we finish this year and going into next year.

On the climate technology, it's a little more volatile than we normally would see.

We had a very good quarter last quarter, little bit weaker this quarter.

But net-net, the orders have turned up and what we are seeing coming out of Europe, out of Asia, the United States is the trend line is positive.

And I would expect we're setting up for a pretty good fourth fiscal quarter and hopefully a strong first quarter going into the next fiscal year.

Industrial automation clearly it still continues to be impacted by one of our large customers out there continues to do a lot of inventory destocking.

But overall, again, I'm starting to see a little bit more improvement there and I feel better as we come through this quarter and get into the fourth quarter and go into next year that will eventually turn to positive growth.

Even when you look at the business -- underlying business with the volume down, they were able to protect the profitability once you exclude the impact of the one-time net pickup we had last year from the Byrd Amendment callback.

So, that business is doing reasonably well.

North American business and commercial residential, as we said the housing market is still strong.

People are spending a little bit of money and the business is still growing in that 4% to 5% range, which is very good.

Very positively, over the last six months we've been working extremely hard on trying to come up with an appropriate exit strategy for our computer and power business, which has had four extremely challenging years.

It is good to get this behind us and moving forward.

We've got a solution that's right for the Management team, right for the business, and right for the Company.

And I feel good about where we sit right now and we need to get the approvals from the governments around the world, which should not be a problem but that takes time.

Most importantly, as a Management team and the Board we want to turn back the $600 million that we're getting out of this business and turning it back to our shareholders and a share repurchase.

And that's very, very important from the perspective of giving money back to our shareholders.

From the cash flow standpoint, we're going to have a very strong year.

We had a very strong quarter with almost $1 billion in operating cash flow.

And what we see this year as pretty record levels of operating cash flow, over $3.4 billion and hopefully $2.7 billion of free cash flow.

With the share repurchase of $850 million we already have planned, with $600 million as an incremental number to go back to the shareholders.

So this year we will obviously be doing a lot more share repurchase in the next 12 months.

Acquisitions are very moderate this year, we're only going to be doing about $100 million.

However, with the pipeline and the deals were working on right now, I would expect that number to bump up on bolt-on type acquisitions to about $1 billion level when you get into 2014.

We do not have any large strategic acquisitions at this time on the table, and we are working very diligently on the bolt-on acquisitions in our core space to strengthen our Company.

A tough quarter, but certain things are starting to turn relative to orders.

The cash, I think that you are going to see a stronger operating execution here in the fourth quarter.

And we are setting up for a solid fourth quarter with a good movement going into 2014.

It's good to get this one behind us.

It's really good to get the agreement with the sales of the computer power system business.

And it will be good to see a return to positive top line growth and solid order growth as we go forward here in the coming months.

It's been a very difficult three or four years here, we're very moderate growth environment which has created a lot of pressure relative to the growth.

But the business is in very good shape from the restructuring standpoint, cash standpoint in the position the business is at this point in time.

So, with that I want to open the phone line up for questions.

And I want to thank everyone for joining us today and, again, I want to thank the operating executives for working hard and delivering a good quarter in a very challenging environment.

Thank you, Sir.

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

(Operator Instructions)

Our first question is from the line of Mike Wood with Macquarie.

Hello, thanks for taking my question.

You'd mentioned in the release that you are encouraged by the emerging market investments.

You had 2% growth overall.

Are you able to talk a little more detail in terms of how these investments are paying off so far and what's the GFI backdrop is in the emerging markets that your achieving that 2% growth in?

The reason we said we were encouraged by it because we've seen very good growth in our Latin America business, we're seeing good growth in our Middle East business.

The big issue that we've seen in Southeast Asia, the biggest issue we've seen so far this year is Australia which is not an emerging market, but China.

And from our perspective, investments we make in this markets are continuing to grow.

The China one, we'll obviously continue to see, evaluate how much more we're going to put in there.

But, I would, for the GFI going forward here for the next couple years in the emerging markets is most likely going to be in the 4% or 5% range.

It's not going to be all that strong.

It will be better than you are seeing in the mature markets, but still kind of weak.

But one or two quarters, we have things moving in and out based on what's going on with large projects, but overall it was a reasonable quarter except for what happened in China.

As China weakened significantly throughout the quarter and hopefully that will start turn around here in the coming months and quarters.

And as a follow-up, are you still sing the credit issues in China that I think you had mentioned last quarter?

That has seemed to stabilized a little bit.

I think they tightened up the banks.

I think that's now starting to settle down.

I look at our receivables, I look at our outstanding receivables, that's improving.

So overall, that's okay at this point in time.

We're looking for whether they're going to invest.

And we had a pretty good quarter excluding the embedded power and computing business in China, so overall, I'm looking for a good second half this year on a calendar year basis, this thing has started to stabilize a little bit there.

Great, thank you.

You're welcome.

Our next question is from the line of Steve Winoker with Sanford Bernstein.

Thanks and good morning, Dave.

And, all, congrats on the deal with Platinum.

Thank you much, Steve.

It's afternoon now unless you are some place different than I am.

(laughter)

You're right, I have been working on you since early this morning.

It's all blended.

(laughter) So, the transaction detail.

Just a little bit more clarity on the dilution of this, or on the exit of that 49% over time, and we've seen this with IR and Tyco and others.

They get into these deals, they deconsolidate and promise to get out, and then they get diluted over time and we don't really see a lot happen over time.

What are your expectations, how many years should we think about this?

Is this longer-term for the remaining stake or how are you thinking about it?

We are envisioning, as we talk to the Board, about three to four years.

We will get out of this business, the way we structure from the standpoint of books and residual value.

I think the intention of Platinum and the management team is obviously to transform this business and clearly get their money back out, but it's going to be I would say three to four years that we're looking at this point time.

Okay great.

And just backing up a little bit.

With all the news on Invensys and Schneider going after Invensys.

I know, we know that obviously Emerson is a very strong competitor in these areas.

So, my question is more about to what extent Schneider's reinvestment in the Invensys installed base sort of potentially slows down share gains or impacts the industry more broadly over time.

How are you thinking about that one?

You know, from my perspective, having Invensys going to the hands of Schneider, is I think it will bring some stability to the marketplace to be honest.

I think that Invensys was not large enough to have a critical mass, so I think it's having a another large global customer like we have with Honeywell or like we have with Seimens or like we have with ABB or Yokogawa.

I'm not worried about another one, in fact I think it's a positive time from our perspective.

From the install base point, Schneider doesn't bring a lot a technology to our systems but they bring other things.

So, I think they are going to have to spend time and figure out how to integrate their type of system technology with the control system technology and that will take time.

So, I think that if I look at the opportunity for market share, it's still going to be out there because you're going to have customers wondering about Schneider, how long they've been in the control market space.

Are they going to be right guy you want to back with?

So, I'm not too worried about it at this point in time.

Schneider's a good competitor, we compete against them and look forward to it.

And it could be a lot worse scenarios.

Okay thanks.

I'll pass it on a get back in line.

Thank you very much, Steve.

Our next question is from the line of John Inch with Deutsche Bank.

Thank you.

Good afternoon, Dave.

Good afternoon, John, how you doing today?

Doing well, doing well, enjoying the summer.

There's been some, obviously, some false starts before over the past three, four years.

You've called it out.

Just what gives you the conviction that these markets, nevermind turning up, but were finally at long last at the bottom.

You've done this a long time.

Why do you think now is this inflection point versus simply a pausing before we step down again?

I'm not forecasting robust growth, let's put it that way.

No.

I'm forecasting from my perspective, right now I've seen the disinvestment, let's just take Europe for instance, disinvestment for almost two years in Europe.

And to a point now that businesses need to put some money back in, so if I look at what's going on in Europe, we've been going negative for almost two years.

You're looking at a slight positive, just going from negative 3% to plus 1% type of situation.

I just feel what we are seeing right now is people do need to put the money back into play.

You are seeing some of that same thing happening in the United States and you're going to start seeing that happen in other markets around the world.

I think you've got the money going in Japan right now with the government trying to encourage business investment, and that's going to have a positive impact throughout Asia-Pacific.

So, from my view right now, if I look at the world and I look at where we are relative to the world in GDP growth in GFI growth, I'm looking at basically a moderate growth next year, maybe a slight tick higher but not much more than that.

I just think right now people are going to have to put the money to work here and invest in a capital and reinvest in productivity.

I'm not expecting a sharp turn here but I'm expecting a slight upward momentum and that's what I'm feeling right now.

And that's what I feel and that's how we're planning.

So, I call moderate lift.

But it's a tough market as we talked about, I think this is going to go on for a couple more years.

That makes sense.

Dave, what kind of projects, can you give a little more color on the projects that you are seeing in process?

One of the themes of the quarter has been a resurgence here in oil and gas spending, are you seeing that, too?

Or just anything that might provide your level of how this thing is going to play out over the coming quarters?

We are continuing to see a lot of oil and gas investments, per se.

We are also seeing a lot of investments in power in both Asia and also North America.

Our power orders are pretty good this year and have continued to strengthen.

It's a function of people are having to figure out how to upgrade their power systems, maybe not putting new capacity in place but how to upgrade their systems.

So, were seeing a pretty good area growth of the power.

We are seeing good money relative to downstream work going on right now, too.

The oil and gas Sasol investments that we are seeing a lot in Louisiana, that type of investment.

So, we're seeing the large projects coming off of the oil and gas, we're seeing the oil and gas investments, and we are starting to see a return into some of the power investments.

So overall, I'm very pleased.

Now, we are not seeing, I haven't seen a lot of what I call MRO which we had a lot of last year, which I'm hoping from the capital standpoint that we will see that pick back up here in the coming months, but that's been the weakest part of this recovery in this year versus what we saw last year.

But the practice are pretty broad and they're pretty global and the pipeline is about as big as it's ever been.

And large projects are picking up as well, is that what you just said?

Correct.

Just one last one, Eton called out, I think, large data center improvement for their network power businesses in the second half, or starting in the second half.

You talked a little more constructively on the system side.

Are you seeing that as well as there is something about their mix that makes them perhaps a little bit different?

I know they've got a couple new products, I don't know, maybe there's some channel fill or something?

I don't know.

I think what they're seeing the same thing were seeing.

We're seeing a lot of quoting going on right now and there's the large projects that have been held back for quite some time, and we're seeing that quoting activity happening right now.

Same thing.

Yes.

Thank you.

You're welcome, take care.

Our next question is from the line of Christopher Glynn with Oppenheimer.

Thanks.

Good afternoon.

Good afternoon.

Dave, just wondering what the restructuring is for the year now and for next year?

Because it sounds like you're talking about 2% to 4% organic next year if I'm reading properly.

Yes.

So, I'm wondering how you view the margin opportunity in these contexts?

Were looking at probably $85 million restructuring this year.

And I would say we're going to be looking about the same level next year, too.

In $85 million, $90 million, right around that range.

We're just starting that real process.

From my perspective, what the biggest issue, I think I was just talking to John about it was, if I can get Europe to turn from going negative to positive, the restructuring that we've been making in Europe will be a very positive from the standpoint of getting that margin to pop back up in Europe which is what you need that growth and that cap in there.

So, at this point in time, I think moderate growth about the same on restructuring.

We should do reasonably well next year.

Got it.

Thanks.

And then just looks like a pretty heavy CapEx pickup in the fourth quarter.

Is that just timing?

Timing.

Okay.

Timing and typically right now I would say $700 million is the number.

I bet you it will be closer to last year's number, but like I said, I can't call that plus or minus $20 million in capital.

But I would say right now probably it would be, we'll probably hit $700 million.

I would say the operating cash flow will hit $2 million, $3.4 million, but we won't hit $7 million.

Just won't get done.

Thank you.

You're welcome.

Our next question is from the line of Jeff Sprague with Vertical Research Partners.

Thank you.

Hello, Dave, everyone.

Good afternoon, Jeff, long time no see.

Yes, absolutely.

Hope you're doing well.

I'm alive.

Good.

Keep on keeping on.

Just back on process, you also called out water.

In the strength and power in water that you're citing actually is very different from exactly Solser and Zion, and this and then flow on their water businesses and the power guys struggling.

You said on power it's water retro-fitters, or upgrades, is it coal or nuke?

Does something standout there?

And what is it in water you are actually seeing?

On the power side, we're seeing a mostly gas right now.

We're seeing gas cap gas systems being upgraded, a lot of conversion going on there.

Not much going on in coal at this point in time.

No one's touching that coal.

It's pretty tight.

But they are actually going in and doing power additions for gas and that's been going on, and that continues to go on.

We also seeing a lot of investment going on in security.

There's a lot of new regulations and relative to security of your power plant, and we have very strong security capabilities and systems capabilities which we have being going and upgrading so they can meet the code, which has been a positive thing for us.

Yes.

As you know, when we bought the Westinghouse power business, we actually picked up a water business.

We picked up a water business relative to the system to go into the wastewater systems, new water systems, and we also picked up a system out of our Bristol acquisition, too, which works now we've put that together.

So, there have been investments on upgrade in the wastewater systems, a lot of laws coming out of the EPA, and so we've been getting good what I call medium-small sized projects throughout the United States and throughout the world relative to water, water projects.

And so, we've seen a little bit of pickup there, too.

We don't really talk much about it because it's not the biggest driver of our control systems in that PWS, but we've seen a pretty good recovery along with the power.

Okay, great.

Just on climate, the tower incentive does sound a little better.

I'm wondering if you could just address the competitive landscape and how you feel about where you're at with variable speed compressor product line and rollout?

And, in particular, I just had my eyes on the Japanese.

Wondering if you're seeing any particular emerging threat from those guys, particularly given what's going on with the yen?

Okay.

From the standpoint of the overall system right now, as I look at the roadmap and the under investment in Europe, it's primarily refrigeration.

It's not an AC marketplace, that business does appear to have actually start trending upward which is good to see after a couple tough years.

Asia, the AC system refrigeration investments, that's doing pretty well.

We're starting to see some of the pickup back in, again, transportation as people start an invest back after a couple years of being off.

In North America, the competitive environment really has not changed much in the last three or four months.

We got a very, very strong quarter last quarter.

Then this quarter we backed off.

The orders have been reasonable this quarter and we're starting to see some of the commercial businesses pick back up.

Relative to variable speed and in your case you're talking about Daikin coming out of Japan, obviously everyone's working right now on bringing what I call competitive variable speed to the United States.

We are clearly working with them to do that.

Nothing has changed at this point in time.

I don't think you're going to see any significant product until sometime middle of next year.

Carrier today has a high-end product which is very good, but it's a small part of the marketplace, and we need to get into what I call the midsize marketplace, mid-price point.

But I think we're all working on that right now, but it looks like a reasonable trend here for the next couple of months and hopefully the next couple of quarters.

But it's clearly variable speed is the key issue that we as a Company understands and that's why we are making electronic investments.

And the products are coming out, we've been doing pretty well in Europe.

We're doing okay in Asia and the next game will be in the United States.

Along with Daikin, is there anybody, Toshiba, Hitachi, others that we need to keep an eye on or worry about as a competitive threat?

Toshiba has worked, works obviously they're a close relationship with Carrier.

So, Carrier obviously has an option there working with Toshiba.

But they've always had that and we sort of dueled together.

But I would say on my perspective, Daikin has the most competitive capabilities out there.

Great.

Thanks a lot, Dave.

All the best, Jeff, hope to see you soon.

Take care.

The next question is from the line of Shannon O'Callaghan with Nomura.

Good afternoon, everyone.

Good afternoon, Shannon.

Dave, just on this idea of getting Europe to turn.

You mentioned a couple areas I think, in network power and climate that you saw turning positive.

Getting the whole picture to turn positive, what are the lagging pieces and maybe just fill that thought out a little bit?

Well, from our perspective we been watching this now because for last several months, all the leading indicators in Europe have been pulling consistently now I want to say for three or four months.

I'm taking my chart out, how many months it's bob so.

As I look at the European structure at this point in time, it's been actually from a leading indicator, it's actually been almost six months and the industrial numbers have been up only three or four months.

From my perspective, what were seeing right now is the longer the banks has the ability to access the money, you're going to start seeing the medium and small customers come into play and start investing again.

And so, I think that's the key sign.

From Europe perspective right now, process had a good quarter in Europe.

And we're starting to see some other business, other industrial businesses come along with it.

But again, I want to go back, it's not going to be what I call a robust turn.

What I would envision next year would be probably 1% type, maybe a little better than 1% type of growth, which versus two years of very negative growth, that's going to be like a nice wind to our back.

So, key to me is the financial institutions starting to lend the money out, feeling comfortable lending money out, and I think that obviously the German election coming up, I'm hoping things will stabilize here and will continue to trend upwards.

Right now, though, it's been going on for several months and I would say the indication is that this will lift up the boats and we'll have a little bit more positive view of Europe next year.

Again not robust, but more positive.

Okay, great.

And then, on some of the restructuring benefits, industrial automation you've done a really good job offsetting the volume deleverage with restructuring and cost take out.

You've done, have a restructuring in network power, too, but it hasn't really panned out there in terms of offsetting the volume deleverage.

Is that a function of the mix in network power or the restructuring savings taking longer to show up?

Or just give us a sense of why it's been so much more effective in industrial automation?

Industrial automation, we actually had laid it out a little bit earlier.

We saw the European thing coming down quite rapidly, and so we had laid it out.

The last couple years we had done it incrementally, so we got ahead of this power curve.

And then we got a couple of key last restructurings done in Europe and a couple key ones done in the United States.

Right before the start up here, so that's been helping us cover this.

In the network power, the biggest issue for us has been the European drop off right after we bought Chloride, we started pushing it together.

On the cost of the restructuring, the disrupter restructuring, it's been a more painful process relative to recovering that profitability to the restructuring.

We need to get the growth back, as I said earlier we're starting to see the orders grow, we're starting to see some of that sales grow.

If that trendline continues then we will start seeing positive, but that's been the biggest issue is the timing of the restructuring just as the marketplace started turning down and the sales turned down rapidly, we are behind the power curve because of the downturn.

Where we got ahead of the power curve with IA.

That's our normal game, but we had just done a big acquisition and started it and we got, unfortunately, got behind this one.

And if you've ever done surfing on a surfboard, the wave crashed on top of you.

Got you.

All right, thanks a lot.

Okay, you're welcome.

Our next question is from the line of Deane Dray with Citi Research.

Thanks, good afternoon.

David, I haven't heard you use a surfing reference before, is that a summer activity?

You know, I lived in North Carolina.

When I was a young kid, I used to surf and most people didn't realize that but I'm kind of too old and bad knees and I don't do that anymore.

But I use that analogy all the time, you don't want to get behind, if you ever surf, you get behind that wave, man it hurts when that board hits you on top of the head.

Absolutely.

On the climate side, maybe just expand your comments about the pause and some destocking in the residential HVAC side?

Because you had the OEs posting pretty good high-single digit sales this quarter and just trying to reconcile those comments?

If you remember last quarter, we had a huge recovery.

So, we put the product out there, the OEs started using it and then put it in the inventory and they started selling it through, so we had a very strong second quarter in North America residential.

And then, so, as the OEs started obviously integrating that inventory and starting to sell it, they slowed us down a little bit.

And right now, it looks to me like things are running reasonably well and we've got it back in the sink a little bit more and we're starting to see some pickup back in the transportation area.

So, it took off very rapidly.

You remember how strong were we in the second quarter in North --

It was over 20% North America residential.

So, we were over 20% North America residential in second quarter.

So, we got it basically all in one quarter and then they've been digesting it.

If I look at this quarter right now, I would say we are going to be in mid-single digits, I think were going to be pretty good, right now it looks like that way.

Good.

A then just a couple of follow-ups on the embedded power sale.

Maybe take us through the decisions about did you ever look at selling it in pieces?

And this is probably a sore spot, but take us through the economics on repatriating that cash?

Okay.

Yes we did look at selling in pieces.

But from our perspective, to give the business a chance and also to get the best value for our shareholders after a tough couple years, we felt that doing the total business together gave that enough flexibility to make that a viable Company and to grow it and make a good return on the second-half of this piece.

We looked at all different ways, we looked obviously at strategics, and this was the best option for our shareholders.

Relative to the repatriation, a lot came from Astec which I ran.

Astec has historically been a very profitable business.

And even though we've had a tough couple years here, you look at the run we still have a slightly positive return on our investment, all these investments, but the last couple years has been pretty tough and we've had some write-offs.

We had a lot of cash in earnings per earnings.

Obviously, we never repatriated.

And so, with a transaction like this, we have to bring those earnings back.

That means we have to pay taxes on those earnings in the cash, so we we're going to bring it back and we're going to use that and part of that's going to be going back to our shareholders and that's why we are half the money is coming from.

We had no choice, but we had to do that.

Anything else you want to add to that, Frank?

No, that's clear

That's what it is.

And that was all the cash that would've be coming back related to this transaction?

You got it.

Great.

Thank you.

You're welcome, Deane.

All the best to you, have a good summer.

You too.

Our next question is from the line at Rich Kwas with Wells Fargo.

Hello.

Good afternoon, Dave.

Good afternoon, Rich.

On industrial automation, the margins are holding in pretty well considering the environment.

So, when things start to pick up are you going to have to add some costs back in?

Infrastructure?

How do you feel about incrementals when volume actually starts to come back?

I'm hoping incrementals are pretty good initially and then as they continue to grow, then we will obviously put the money back into it because we've done a lot restructuring.

But a lot of restructuring was taken out what I'd call excess capacity or repositioning it.

And so, it was a permanent.

Obviously, we did do some what I would call incremental type restructuring from a standpoint of personnel that we would have to put back in as business strengthens, but I'm hoping to have good leverage in this as this business as it recovers.

And get that margin back up because it trades a little bit higher than this when the good times are here, so I think we can do a little better and also start investing in the business again.

Okay.

And then just back on climate, you had a couple guys, OEMs, talk about better mix that they are seeing on the residential side in the US.

Are you starting to see that in your order flow at all in terms of the mix of products starting to come through because I know that's been a headwind for little while now?

I don't specifically have the knowledge of that myself, I could find out.

I don't sense any, obviously, we had -- if you look at our profitability of the business, it's pretty good.

So, I would say we probably had reasonable mix this quarter of I look at the margin we just delivered and we're going to deliver probably record margin for the whole year.

But I haven't seen noticeable difference in mix.

If we could get transportation and our commercial business to start picking back up, that would be even more positive mix for me.

Okay, great.

Thank you.

Take care, Rich.

Thanks, all the best to you.

The next question is from the line of Julian Tzolov with Credit Suisse.

Hello, thanks.

Just a question on the network power decremental margins.

They are very high and you call out pricing as a reason.

Is that within just embedded computing?

Or in the past, you've talked about precision cooling as well?

We saw a couple pricings, excluding embedded we saw clearly there's a mix going on right now in the type of cooling and we're having to reinvest in new product line of cooling, which is coming out a different price point.

And there's going to be some aggressive restructuring in this area here as we try to change the cost structure of that business from a cooling standpoint because we are going to have to figure out how to make a couple profitability on the new levels of the cooling.

In addition, we have a mix price mix relative to some of the shift we saw in China as that China business weakened, slowdown we saw a little price pressure there.

But other than that, it primarily was the cooling side that we saw that, like you said.

Thanks.

And within the process management, your US sales were down, they've been down for a couple quarters now, but you talk about orders improving.

So, I wanted to see what's happening say in the after market business in the US within process management?

When you expect that to start showing up in better or an improvement in revenues there?

The after market business and process issuing in the US has not been good.

And the orders have not really, that part of the order pace has not picked back up yet.

And so, we had a phenomenal after market business last year and looked like a lot of business went in, they're starting, they're obviously working on installing it.

Based on where I see where we are in the cycle right now North America, I would not expect our after market sales to pick back up this fiscal year.

But again, I called it wrong last year.

But I would say right now it's been these small projects and not necessarily after market business.

So, obviously not as nice margin wise, but still we've got some good growth out there.

Okay thanks.

All the best you, Julian.

Our next question is from the line of Steve Tusa with JPMorgan.

Hello, sorry.

Hello, Steve.

Sorry, I dropped the phone.

You mentioned Europe quite a bit and just next year you talked about I guess low-single digit or 1%.

Are you referring to your sales or are you referring to some index of the investment there?

I'm looking at my sales right now.

I would say until we get, until we see anything about 2% underlying growth in say the investment environment, we're going to be in that 1% to 2% range.

We've got to get it -- if you go above 2% then we'll start seeing a premium to that.

But right now, I think you're going to see moderate investment growth in the GFI level, and that means we'll have that moderate growth level, it's at 1% or 1.5% or 1.25%.

That's probably the same.

That's great color.

I guess when you think about you talked about emerging markets at a mid-single digit growth rate, over time, would you expect to outperform that?

Or is that something that again is referring to what your business can do?

From my perspective, if we could see a 4% to 5% then we've historically gotten a premium to that into that space.

So, I would say we won't get the same level of premium.

When you go about up to 6%, 7%, 8%, that premium gets wider as you know.

Right.

I would say that we are at 4% or 5%, we should get a point or two on top of that

Okay.

And then finally just slicing it up this year, year-to-date your US business is growing low-single digits.

I know there's a lot of, that's just an average growth rate.

There is a lot of moving parts there with network power and climate.

Ultimately, you guys are going to finish in the low-single digits in the US this year.

You are reflecting somewhat of a little bit of a recovery in resi this year that's now booked.

Would you expect that to accelerate in the US?

Or is US just a solid, is US just more of a consistent rate of what we've seen this year going forward?

No, I think you're going to see our US business should be better next year.

It was extremely strong last year US, and stronger last year in US, and then weakened as I think we saw certain businesses tail off after the strength last year.

I think you will see an improvement both in the US and Europe.

I think this next year you're going to see the mature markets actually be -- do a little bit better from the standpoint of underlying growth.

That's my gut feel right now.

With Latin America being pretty good, I think China will be low-single digits next year, and I think Asia-Pacific will be high-single digits.

I mean Southeast Asia.

So when you say you US a little better, does that mean 3% to 4% or something like that or is it even better than that?

I wouldn't think it's going to be better than that.

I would say 3% in the US would be a good number.

Okay, so that blends you guys into that 2% to 5% range?

I wish, I'd take 5% tomorrow, but I think my mind's probably 2% to 4%, yes.

Okay.

And then, sorry, one last question just on the network power stuff.

So, the cooling business, you're kind of restructuring that.

So, does that mean your restructuring it to make the margin that it made historically?

Or are you restructuring and positioning the business to where the volume is and that may be a lower margin?

I didn't quite understand what this means structurally for the cooling business?

We are intending to restructure to get the margin that we used to make in it.

Okay, great.

Dave, thanks a lot for the detail.

Appreciate it.

All the best you, goodbye.

Next?

Our next question is from the line of Andrew Obin with Bank of America Merrill Lynch.

Hello.

Yes, good afternoon.

Good afternoon, Andrew.

As we look at process into 2014 and specifically North America, how concerned are you guys about your ability to do stuff on time given the labor shortages?

You know --

Labor shortages obviously by people who build this stuff, sorry.

Yes, you're talking about skilled installation base.

Right.

That clearly will hold back.

But we haven't seen a problem with it yet.

I think that probably made a pause this year because of people being working on what they try to work on last year, but we have not seen a problem yet relative to our customer base or our base or even our own selves having to do these projects yet.

It would have to be very, very strong growth to cause that problem at this point in time, so I have not seen that in North America yet.

And just thinking about captial redeployment beyond buyback, I appreciate the focus on smaller deals but what keeps you away from doing deals over $1 billion and what's the framework there going into next year?

Nothing keeps me away from them.

Just from a standpoint I have nothing right now that I find worthwhile from a standpoint of that makes sense for us for the business and strategically.

And so, we can do big deals.

We've got plenty of capital do it.

It's just right now, there's nothing's popped and most of these deals are in the $100 million to $300 million to $400 million levels right now that we're working on.

And nice little bolt-ons in those and that's where the focus is right now.

If the right one came along, we'd obviously work on it.

Thank you very much.

You're welcome, all the best.

Our next question is from the line of Joe Ritchie with Goldman Sachs.

Thank you.

Good afternoon, everyone.

Good afternoon, Joe.

So, just take you backing on Steve's question earlier, he went through some of the regional color for 2014.

What are some of the other puts and takes we should think about?

At this point, it seems like there would be pension tailwind, put perhaps some color on price cost?

And I know that you're spending incremental call it $100 million to $120 million in stock comp this year?

Okay.

Pensions, this is Frank speaking, Joe.

Pension, if interest rates stay where they are now, when we finish up the year September 30 should be in order of magnitude of $50 million pickup next year.

With respect to stock comp and other corporate items, that's probably in the range of $35 million to $50 million as well.

As we come off the overlap year for the stock comps.

So, we should have some tailwinds next year in those areas.

Relative to price cost is the point I got my to executives coming in, I would say that point of selection on price cost is here, sometime in the next quarter or two.

We've had a very strong net return on inflation environment which has been helpful for us.

Materials have really dropped.

If there's some stability around the world, and I'm talking huge growth, but there's some stability around the world we have been seeing, we will start seeing, you should start seeing some I would say less negative net material inflation, so we have less benefit there.

The last couple quarters as we've seen the negative net material inflation come into play, we're starting to see some negative price overall.

And so, what that tells me now we've had a period, we've the net material inflation is helping us, a slight negative price is hurting us overall.

And we're netting out to what we call green.

However, typically what we're watching right now is this point of inflection happening where this thing is going to flip and we got to make sure that we're paying attention to this where the net material inflation will start going the other way.

The price, if you let it get away from you, might get too negative and then you'll go red which we've seen several yeaars back.

So right now, I'd say, Joe, we are at the point of inflection for our Company it's all hands on deck.

Frank and Ed Monser have been talking about this for the businesses, I see it pretty clearly.

If it's not this quarter, it's going to be next quarter.

And so what we're trying to do right now is make sure we get ahead of this and make sure we do not go into a red quarter sometime in 2014.

That's really helpful Dave.

And then specifically on that point as it relates to each one of your businesses, which businesses do you think are going to be most impacted by it?

And maybe talk through some of the actions that you're taking?

Clearly on the network power side, it has historically been the most negative impact to buy that, and so we clearly got to make sure we stay ahead of the net material.

We got to keep driving down that down, that net material.

Getting embedded power and computing out of there will help us from the standpoint because they are a little bit more volatile.

The other area that we obviously have to work on very carefully will be the climate technology area because of the large metal content in there.

So, the metal prices have been depressed and so we have to make sure that we in our pricing as we look forward and we've had the positive net material inflation and we been having it obviously support that, those are the two areas and we have to make sure we keep ahead of that from our price buff.

And we just know it's coming, you have to figure out where you hedge and don't hedge and things like that, so there's a lot going on right now as we go into that mode.

Okay, well thanks for taking my questions.

All the way best, Joe

The next question is from the line of John Quealy with Canaccord Genuity.

Thank you.

Good afternoon, folks.

First, on network power back to Europe and the data center question of it looks like demand is firming and improving.

Can you talk about the competitive situation when you look for growth in the coming quarters there?

Talk about the split versus organic versus share gains?

Also, I know you have got the new Precision air stuff coming up, but just qualify it for us in terms of the competitive growth there?

It's very hard for us to say what winning or losing in a quarter, it takes a long time to see that.

So, right now what we are seeing is we are going back into our install base and going back and upgrading that install base as they spend money.

So I would say, right now, I would say were going to be mining the current core space at this point in time.

It's hard to say until after you get through this period, do you pick it up or lose?

So, it's really hard to say that, John, from that perspective.

And from the standpoint on, I don't break out those individual product lines of that stuff, so that's something I'm not going to do there.

Okay, thanks.

And then my last question, back to the M&A point for next year and your relative some of the targets are unattractive here.

Is a just purely valuation or some of the good properties are spoken for or just give us a little bit more detail about your thoughts about M&A?

I think in the larger deal, I think the valuations are a little too high at this point in time.

I think the smaller bolt-on deals where you can have a little more synergy and just a lot more flexibility, I think that those deals right now are in play and where the large strategic deals are kind of expensive at this point in time.

Great.

Thank you, David.

You're welcome.

Our next question is from the line of Nigel Coe with Morgan Stanley.

Yes, hello, Dave.

How is it going?

Hello, Nigel.

So, when you put together your comments about companies are set on CapEx and investments for a long time and there's some desire to reinvest.

And then you put that together with your more mature comments, it seems a little more bullish than I guess you're GDP type growth forecast 2014.

Turn it around, as you are obviously planning for '14 right now, are you planning to step up investments materially for next year?

I wouldn't say materially but our initial investments will be up into the mid-$700 million range from the standpoint of our capital.

So we, right now, we are planning if we did around 6, let's say we did $685 million this year, I would say our plan is going to be $750 million to $760 million next year.

Yes.

And is that pretty bore based?

Would you expect to pick up investments in Europe, too?

Yes, yes we'll across around the world.

And then going back to cap allocation, you mentioned in the PR this morning the $800-plus million run rate for share buybacks and the $600 million is on top of that.

So, you've always said that next year M&A is going to remain fairly small and bolt--on, probably a bit more than we did this year.

But is the ambition for next year to do the same level of base repurchases with the $600 million on top of that?

Yes, our plan would be next year as we build the plan we showed the Board today, is that we'd do somewhere between $800 million to $900 million next year again.

I'm ignoring the $600 million.

So, this year's base was $800 million to $900 million.

We expect to do another $800 million, $900 million next year, plus we're going to make the special one-time $600 million payback, buyback.

Okay.

One more if I can.

You've talked about mix being an issue for the last couple quarters now, the full key set up is for margins to be in line or better than they were last year.

And 4Q '12 was an extremely good margin quarter.

So I'm wondering, how comfortable are you that the mix is going to work for you in 4Q?

And even if it doesn't, do you feel you've got enough in hand from restructuring savings to offset potential mid-headwinds?

Well, we are planning on that.

That's what the game plan is right now.

And I'm hoping that the volume continues to trend upwards and we've got the cost structures in place.

And typically our fourth quarter, we leverage quite nicely.

So, I'd say right now we are set up reasonably well to have a very good profit quarter and good cash flow quarter.

Okay.

Thanks, Dave.

You're welcome, all the best to you.

Our next question is a follow-up line from Jeremy Capone.

Good afternoon, thanks for taking my question.

Going back to industrial automation, you mentioned the continued negative impact of destocking at one of your large customers for alternators.

Can you give some color here in terms of the extent to which this is impacting your top line this quarter?

I'm not given out specific numbers on this, but it's quite significant from the standpoint it's a very large $1 billion plus customer.

I've never told people how much per quarter, per se, but if you look at what they're been doing relatively to their inventory levels, and they're taking out you can see how much that's impacted us.

But as I said, at EPG I think this trend is getting close to reversing and I would expect that as we end this year and we go into next year, we start seeing some more positive input there.

Okay, that's great.

And as a follow-up, just quickly on the drive, the new drive that you launched earlier this year, how is this having any material impact on the P&L as of yet?

Yes, I would say the drive business is starting to turn.

And they're very European-centric, but right now it's a profitable business so it's starting to get better.

And I'd expect '14 will gain a lot more momentum in that area as those drives take hold, industrial drives.

So, I think that's I like the first 12 months of it and it's starting to have a positive impact there and it's starting to turn.

Thanks very much.

You're welcome.

I want to thank everybody for joining us today.

Appreciate it.

Good questions.

And I look forward to seeing everybody in the coming months here and have a good rest of the summer.

Be safe, take care now, goodbye.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for your participation, you may now disconnect.