艾默生電氣 (EMR) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, thanks for standing by.

Welcome to Emerson's Investor conference call.

(Operator Instructions)

This conference is being recorded today, November 5, 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 like to turn the conference over to our host, Patrick Fitzgerald, Director of Investor Relations at Emerson.

Please go ahead.

Thank you, Marissa.

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 fourth-quarter and fiscal 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 the 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.

Fourth-quarter sales grew 2% to $6.8 billion, with underlying sales increasing 1%, which was 2% excluding the embedded computing and power business.

A slow economic environment continued, especially in mature markets.

Growth was also hampered by difficult comparisons from the Thailand flooding recovery, and a large network power project in the prior year.

Market conditions were varied, but have been improving modestly overall, as underlying orders excluding embedded computing and power grew 4% in September.

Profitability was strong, with a record level of segment margin at 19.5%, up 70 basis points from the prior year.

Earnings per share were $1.18, up 6% from the prior year excluding impairment from repatriation charges.

Cash flow remained robust through the quarter, completing a record year performance.

All businesses closed the year with strong execution, providing solid operational momentum into next year.

Next slide, the P&L summary.

As I mentioned, slow economic conditions limited sales growth to 2%.

Despite the sluggish growth, gross profit margin expanded to a record level.

Operating profit margin contracted 30 basis points, as stock compensation increased $63 million, and pension expense increased $12 million.

A goodwill impairment was recognized for the connectivity solutions business, which is reported in the network power segment, separate from the network power systems business.

EBIT margin was unchanged excluding impairment charges.

We repurchased 10.1 million shares for $623 million in the quarter, reflecting accelerated buybacks from cash anticipated to become available from the embedded computing and power divestiture.

Excluding one-time impairment and tax charges, earnings per share increased 6% to $1.18.

Next slide, sales growth by geography.

In the fourth-quarter, underlying sales grew 1%, with the US down 1%, Europe up 1%, Asia up 4% including China growth of 7%, Latin America up 10%, Canada up 4% and Middle East and Africa up 1%.

Currency translation added 1% for a reported sales growth of 2%.

For full-year 2013, underlying sales increased 2%, with the US flat, Europe down 3%, Asia up 2%, Latin America up 11%, Canada up 4%, and Middle East and Africa up 13%.

Currency translation and divestitures together deducted 1% for reported sales growth of 1%.

Emerging markets continue to lead growth, increasing 5% with, and 7% without, embedded computing and power in 2013.

Moving to slide 5, cash flow.

Strong operating cash flow growth was driven by working capital improvement and earnings growth.

Free cash flow also increased at a double-digit rate, reflecting a robust conversion from earnings.

Trade working capital as a percent of sales improved 90 basis points, helped by the slower market conditions, and efficient balance sheet management.

Cash generation remained strong throughout 2013, reaching $3.6 billion for the year.

Next slide, business segment earnings.

Business segment margin expanded 70 basis points, despite $12 million higher pension expense and the flooding recovery in the prior year.

Excluding impairments, the corporate expense increase was primarily related to higher stock compensation which increased from the third-quarter due to the higher fourth-quarter stock price.

The tax rate included $37 million in repatriation taxes related to the embedded computing and power divestiture.

Moving to slide 7, process management.

Process management underlying sales grew 6%, with North America down 1%, Asia up 9%, Europe up 10%, Latin America up 21%, and Middle East and Africa down 2%.

Currency translation deducted 1% for a reported sales growth of 5%.

Energy and chemical industry investments remained elevated globally, supporting the continued growth.

Sales growth was tempered by the Thailand flooding recovery in the prior year, which reduced sales growth by about 6%.

Growth was balanced across the portfolio, led by high single-digit growth in the systems and solutions business.

Strength in Asia driven by 8% growth in China, and Europe supported by North Sea projects, more than offset slower market conditions in North America.

Process management's solid growth momentum is expected to continue into next year, with project activity in North America expected to accelerate in the second half.

Next slide, industrial automation.

Industrial automation underlying sales decreased 4%, with North America down 8%, Asia up 6%, Europe down 7%, Latin America up 1%, and Middle East and Africa up 21%.

Currency translation added 1% for a reported sales decline of 3%.

Demand for industrial goods remained weak throughout the quarter, especially in North America and Europe.

The power generating alternators business declined the most, as channel destocking continued but at a slower rate, and renewable energy projects were also particularly week.

Solid growth in Asia was led by the industrial motors business.

Order trends have been improving, with growth in the quarter after protracted weakness.

End markets are improving particularly in Asia and Europe, and we expect modest sales growth to return in the near-term.

Moving to slide nine, network power.

Network power reported an underlying sales decline of 3%, with North America down 2%, Asia down 3%, Europe and Latin America down 6%, and Middle East and Africa up 9%.

Sales growth was unfavorably impacted by about [3]% from a large Australian project in the prior year quarter.

Global information technology and telecommunications end markets remain weak.

Data center demand declined modestly, with growth in Asia and Europe offset by weakness in North America.

Telecommunications infrastructure investment decreased globally, but recent orders suggest improvement particularly in China.

Embedded computing and power declined sharply, reducing total segment underlying growth by 1%.

Margin expanded 110 basis points, benefiting from cost containment and restructuring savings.

Positive orders are expected to continue in the network power systems business, as market conditions improve modestly in Europe and Asia.

Next slide, climate technology.

Climate technology underlying sales increased 5%, with North America up 4%, Asia up 10%, Europe up 3%, Latin America up 12%, and Middle East and Africa down 11%.

Currency translation added 1% for a reported sales growth of 6%.

The US air conditioning business increased modestly with double-digit growth in residential, partially offset by slow commercial demand and service weakness.

China's residential business was up double-digits, leading growth in Asia.

Northern Europe benefited from a modest market recovery and favorable comparisons.

The global refrigeration business reflected strength from industrial and transportation market improvement.

Moderate growth is expected to continue in the residential and refrigeration businesses, with modest improvement in commercial markets.

Moving to slide 11, commercial and residential solutions.

Commercial and residential solutions reported and underlying sales grew 4%, with North America up 4%, Asia up 6%, Europe up 5%, Latin America down 3%, and Middle East and Africa down 10%.

Residential investment in North America continues to increase steadily, with growth led by the professional tools and food waste disposer's business.

Margin expanded 150 basis points, primarily due to cost containment and return on restructuring investments over the past two years.

Momentum in North America residential markets is expected to continue in the near-term, with modest support from non-residential markets.

Next slide, fiscal 2013 highlights.

Sales growth of 1%, was led by 5% growth in emerging markets, which increased to 37% of total sales for 2013.

40.3% was a record gross profit margin, reflecting continued technology and cost repositioning investments.

EBIT margin, excluding charges was essentially flat, impacted by a stock comp increase of $121 million, and a pension expense increase of $55 million.

Share repurchase of about 20 million shares or $1.1 billion contributed to EPS growth of 4% excluding charges.

2013 completed the 57th year of consecutive dividend increases, which contributed to a total payout ratio of 63% of operating cash flow.

Moving to slide 13, 2014 outlook.

Economic indicators remain mixed, but are trending slightly favorable with the underlying orders growth in September of 4% excluding the embedded computing and power business.

We expect a global economic environment to improve modestly versus 2013, with improving market conditions in Europe and Asia in particular.

Based on global gross fixed investment forecast of 2.5% to 4% growth, Emerson's 2014 outlook is as follows.

Underlying sales growth 3% to 5%.

Reported sales change of minus 1% to 1%, which reflects the embedded computing and power transaction expected to close before the end of calendar 2013.

Slight operational margin expansion, with acceleration of growth programs to invest ahead of improving global economics.

Earnings per share growth excluding goodwill and tax charges of 4% to 7%, with reported earnings per share growth of 33% to 38%.

The Board of Directors voted to increase the first-quarter dividend 5% to $0.43 per share.

Other business segment and financial metric forecast will be provided at the Annual Investor Conference in February, 2014.

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

Thank you very much, Pat.

Appreciate it.

I want to welcome everybody to today's call.

I wanted thank everybody across the operation of Emerson, both at the corporate and operating levels, for a strong performance in the second half of this year, in delivering what I believe a very good global performance and operating performance.

It was a very unusual year, as we all know, with a lot of turbulent economies out there, a lot of things happening.

But as our business slowed down in the second half of our fiscal year, the organization rallied around what needed to get done.

They delivered some incremental sales, and they delivered very strong profitability and cash flow.

And I owe a debt of gratitude to all of this operation across this Company, in showing our Emerson can execute and do it well.

As I look at what we did this year, with solid EBIT margin on a consolidated basis, strong operating EBIT margins at a segment level, record levels, excellent free cash flow, operating cash flow, and a great job on getting this operations running the way they need to run, and we truly appreciate that.

Unfortunately, we had to take another charge as we sold EC&P.

That is not a good thing, and honestly, not a great situation for us as a Company.

But we are getting behind the EC&P, with the divestiture being done some time, the end of this fiscal quarter.

We have repatriated the cash that had been sitting over there in Asia and China.

It has been brought back, and we have actually started buying back about two-thirds of the stock, that with that additional funds that we want to return back to shareholders from EC&P divestiture.

So I am very pleased to say that.

We also took another small impairment charge on a business, a small business left over from the Jordan acquisition of about 10, or 12, 13 years ago, and one small part of an acquisition we have done in the connectivity area.

And we are teeing this up to sell this business.

It is just not strategic to us, and it is a business we don't want to focus or go on -- or do any additional acquisitions there.

And we will sell that sometime in this fiscal year.

As I look at the global economy right now, and I am not going to get into a lot of specifics here, because I will do that in February, when we get into more, I mean, strong guidelines, what happens, as the end of this calendar year unfolds.

But as we look at the global economy right now, we are seeing the growth fixed investment improving a little bit, to that 2.5% to 4% range.

Fundamentally, what we are seeing at this point in time, is a modest improvement in Europe.

We believe that Europe is going to grow someplace around the 1% to 2% range.

Not a lot of momentum, but it has turned positively, positive from the growth standpoint.

We had a positive growth actually in Emerson for the fourth-quarter in our European business.

The key issue for us though, is that must continue.

If it does not continue, and slips back into recession or no growth then, we are going to have a more challenging 2014.

We believe that the US will continue to improve moderately, not a very strong recovery, but modest growth.

And we have seen continued improvement in our China business over the last couple months, and quarters really, and so we expect that to continue.

Relative to our Latin America business, we believe that we will still continue to have another good year in Latin America.

I am a little bit more concerned about the Middle East, and the turmoil, and the fact that there has been a lot of investments there.

And with the price of oil coming down a little bit, it could be a slow down, maybe seeing at high levels of investment, but not growing like we saw the last couple years.

Relative to Southeast Asia, I still think see we will have pretty good growth there.

So overall, when you put all together, we see decent top line growth this year, which is important for us.

But I am not going to get into specifics of Emerson, when I break down Emerson sales by various regions until that February time period.

So I know you will ask, but I am -- I will bow out now, and not say anything about that until February.

As you know, we have seen very weak, global fixed investments the last 2.5 years.

We worked very, very hard to protect certain technology investments, certain growth investments.

We have worked very hard to strengthen our global competitive cost structure.

And given the record levels of profitability we see this year, and what we are going to forecast next year, at the EBIT margin line, we are in a good cost position.

The last three or four months internally, the Company has been focusing very hard on prioritization, where we think the growth opportunities are across Emerson.

And we have decided to increase our investments, reinvestments in these growth opportunities.

And the reason for that, as we review with the Board for the last two days, is we believe the wind is starting to shift to our back.

We believe that after 2.5 years of, really keeping things really tight, and looking where things happen, the time is to pivot, and to increase our investments.

And that is what we are doing.

We believe very strongly that we have a lot of growth opportunities, both from a technology standpoint, across our service organization as we roll them out, across our solutions capability.

And equally important, we are going to invest incrementally over $50 million in upgrading our Oracle systems, which are very, very important for us relative to our network power systems, and also within our climate technology business, as we grow forward as a global franchise.

We need to continue that integration, and make that investment in the controls of Oracle for the next couple years, very important for us.

As I look at opportunities relative to our technology investments to really move our growth curve ahead, and I look at the disruptive technology opportunities out there, that we want to invest in, we have more today than we have had in a long, long time, and the time is now to pivot.

We believe we will be facing moderate growth on a fixed investment around the world, the next several years.

We see nothing fundamentally, saying that it is going to be huge surge, but moderate growth.

And you are going to see some economies doing well, some economies not doing well.

And you are going to see this rolling moderate growth, I think -- could see this for four to five years.

So what we are trying to do right now is take our selective investments, and try to drive a little bit premium growth to that.

We have a very strong cost structure, and make those investments to strengthen this Company for the future -- the near-term future being two, three, four years out.

We need to make sure that we can drive as much growth through these internal investments which are high-quality, and we have the cash.

We have the balance sheet and that is what we are going to focus on.

That is what we review with the Board for the last couple days.

And I feel very strongly as we focus those issues, and we will talk about some of those issues in February.

I am not going to share those ideas with you right now on a conference call.

We are focused very much on trying to drive premium levels of top line sales growth, with a moderate global growth fixed investment environment.

So before I open it up for questions, we kind of wanted thank the global operations for their strong operating performance the last five or six months, both at the corporate level getting the job done, and at the operational level, getting the job done.

We closed strong as a Company.

Our orders -- our underlying orders are starting to improve a little bit, the wind is shifting.

And it is time to pivot, to make some incremental growth investments that will give us incremental growth, as we come out of this, what I call moderate growth period here for the next couple of years.

With that, I want to open the floor for questions.

Again, thank you very much for joining us today.

Thank you.

(Operator Instructions)

And our first question comes from the line of Scott Davis with Barclays.

Please go ahead.

Hi, good afternoon.

Good afternoon, Scott

Dave, I wanted to dig -- and I know you don't want to comment on the specific businesses -- but on guidance a little bit, it was, and you mentioned Oracle is being a growth, as an investment you need to make.

But when I look back at other time periods, where you have had mid- single-digit core growth, like 2005, 2007, 2008, you put up pretty big conversion rates, nice operating profit improvements off of that.

I mean, what makes this, what makes 2014 different to that extent, or you don't think you can still drive that kind of incremental profit?

I think the difference is, if you look at the underlying gross fixed investment that we saw at that time period, they were higher levels.

So we are looking right now, maybe GFI can be growing to be growing 2.5%, 3%, maybe getting up, a little bit close to 4%.

That is the difference.

If you look at it, the GFI on a global basis is not mixing up as strongly as it was historical.

We need to make these investments.

We have been really keeping things tight.

We have delivered good levels of profitability.

And fundamentally as I look at it and shared with the Board, we actually have unique opportunities to increase these investments, to try to grow little bit faster.

And if we get a better GFI, then we clearly will do better.

But right now, as I look at those global fixed investment, we are looking at moderate recovery, and we have not seen -- if you go back in time and look at it, you would be seeing 4%, 5%, and 5.5% types.

It makes a big difference, than 2.5%s and 3%s.

That is what the difference is, Scott

Okay, that's fair.

And a little bit of a cleanup question, and I will pass it on.

I mean, if we go back about a year ago, there was some challenges with your receivables.

And now we have seen a pretty big pick-up in cash conversions.

Does that mean that the receivable issue has been largely fixed?

Yes, hello, Scott.

This is Frank.

We had very good improvement in the receivables issue.

We had about $100 million improvement in the past due receivables, and good improvement in the underlying performance as well.

So the receivables were a big contributor to the strong cash flow.

Yes, they did a great job, the whole team.

And I think that one of the issues there, as -- with just the stress points around the world right now, you would think that -- you would -- people would pay with low cost money -- but the people are making -- actually making it tougher to pay.

They are working everything, angle they can on that one.

But they did a great job.

We -- if you look at it, we have probably got close to $100 million out of inventory, $100 million out of receivables, and that really helped us from -- setting record levels of operating cash flow and free cash flow.

Good job by everybody out there

Okay.

Very helpful.

Thank you.

Thank you.

Our next question comes from Christopher Glynn with Oppenheimer.

Please go ahead.

Thanks, good afternoon

Good afternoon, Chris.

Good, thanks.

Just riding the wave of the Red Sox World Series here in Boston

Oh, man, that could have gone a whole few minutes off that one.

Okay.

Congratulations, they did good job, They outplayed us.

They put it together -- just had a question about the pervasive sensing press release that you got out, doubling the traditional $16 billion sensing market over the next ten years.

Is that kind of the direct read on how you expect your -- that 45% of process to track?

Yes, from our perspective, that part of sensing process, and that actually is one area we are putting a significant investments in, coming, talking about the pivot point, that' is one area we really want to do well.

Because we have done extremely well on our wireless business, and we now have set the target to $1 billion number for our wireless business.

One thing has happened as we look at the global process market, and even industrial market, they want more sensing out there, because of all the environmental rules, regulations, safety rules.

And so, we are spending an additional monies in our instrumentation process world and also industrial world, to come up with a better level of sensing.

And that is why we think the number of points assessment are going to double over a long time period here.

And that is a very good thing for us, given our presence and our technology capabilities.

But that is clearly one area that we have pivoted, and put a lot of money in right now, and will be for the next couple of years.

Great.

And then on, industrial automation sometimes things can move pretty quickly there.

So with orders certainly have inflected.

Any sense that this could tick off a bit more of than the tone that you want to project at this point?

I think the key issue for us is Europe has started to turn positive.

Unfortunately, France's economy has not turned yet.

That is a concern, and we are very strong in France.

Asia has turned for us, which is a good thing.

The thing to watch for us in this business is Caterpillar.

If Caterpillar starts seeing more, what we call the (inaudible) -- the power industry, their power business starting to tick back up, and you will see the business take off.

But until that happens, you are not going to see any strong pickup in that business.

But it definitely --all the dynamics are turning positive, which are a good sign.

And they have had a couple of tough 2.5 years here, after a very strong 2011.

So I think that you are going to seeing the second half be a little bit better for those guys.

Got it.

Thanks.

You are welcome, thanks.

Thank you.

Our next question comes from the line of Shannon O'Callaghan with Nomura.

Please go ahead.

Good afternoon.

Good afternoon, Shannon

Dave, just one more on the growth investment.

So, you have the over $50 million for Oracle.

I mean, do you have an overall number for what you have in mind, for this ramped growth investment?

Not really.

Not that I would share with you, but it's definitely -- when you think about -- if you look at what we things we had to deal with this year, obviously, we are clearly not -- we are not putting that in that P&L.

We are going to offset with increased investments, so that gives you a good idea.

If you look at the positive.

We had the headwinds with the stock price last year.

We had the headwinds with pension.

We had the headwind -- or what other the headwind we -- we those are the two big ones.

So what we are doing is, I want to put the money back into the business.

We are healthy from a financial standpoint, put the money back in the business, and really try ramp up our technology window here, as we try to figure how to drive a little bit more growth.

Because we are very profitable, internally if we could get a little bit more growth through these technology programs, as you know, we will deliver high levels of profitability.

Yes.

No, that make sense.

And actually, when you are calling that your record gross margins, you talk about technology.

As you get these investments in there, I mean, is there more room up on the gross margin line?

Yes I think we have set a number -- and help me -- correct, did we talk -- trying to get 42%, is that the number I talked about?

Yes, as a 2015 -- Yes.

We are looking -- the number at the back of my mind, based on the investments we are making, based on the mix of business is around 42%.

Yes.

And do you still feel good -- ?

I feel real good because that allows us -- technology, that' is how we drive our profitability is technology.

And we have done everything -- we have done -- we do a lot of stuff on a cost standpoint, but really technology, what that we allow, to develop our customers, and gives us a real competitive edge.

And so we will update everyone in February on that.

But I think the number remember talking is around that 42% level that we are trying to target for GP, as we continue to mix this business up.

And then, just one quick one on these process acquisitions, the two that closed.

Are those in the revenue guidance yet?

And are we going to have some kind of acquisition accounting related to them kind of in 1Q here, that we have to think about?

Yes we have got -- it is a little more than 1 point of growth in the revenue guide.

And yes, we will have purchase accounting on them in the first quarter in particular.

So we will -- we will have some drag in the first quarter actually from those acquisitions.

And profitability will be pretty modest as a result for the full year, because it's pretty significant purchase accounting the first quarter

Yes.

But I mean, that is the normal set up there.

But they are going to be good growth business.

They are good margin businesses, so they will start coming through.

And I would say by 2015.

I mean, if you use this commercial paper obviously they contributes, but that is not how we would look at things, we look at our cost of capital.

And so, from that standpoint, it is not going to be much contribution this year, and it will start kicking in 2015

Okay, great.

Thanks.

You're welcome, thank you

Thank you.

Our next question comes from the line of Mike Wood with Macquarie.

Please go ahead.

Hi, this is Adam in for Mike.

I just had a quick question.

We have heard some electrical equipment guys talking about pricing being a little bit more challenging.

Can you talk about -- sort of I know you touched on this on your Analyst Day last year or early this year.

But can you talk about what you are sort of seeing now, and what is embedded in guidance?

Yes.

And what type of people did you hear that up from?

You said, intellectual?

What did you say, who?

Just some peers, we heard --

What companies did you hear this from?

Oh, just sort of broadly, in speaking with some companies.

Nothing major, but just sort of challenging.

I thought you mentioned some kind of industry, I am sorry.

He said electrical equipment.

Electrical equipment, okay.

From our standpoint, pricing as we did talk in February, you are exactly right -- and I have talked in conference calls.

With net material inflation continued to stay I would say slightly negative and not really turn up yet, you are seeing pricing, our pricing power soften a little bit.

It still slightly positive, less positive this year than last year.

And now this year, I am talking about 2014 versus 2013.

We are still slightly green.

I expect that to happen.

As we get into this I am really concerned about this pivoting, but we have not seen any level of inflation, therefore net inflation.

Our material costs have continue to come down a little bit, and our pricing obviously, follows that down behind it.

But we are trying to make sure we stay ahead of that.

But right now, I would agree those other comments.

Pricing is a little bit softer out in the marketplace, but it is still slightly positive, less positive than 2013.

That is a very good observation

Great, thanks a lot

You're welcome

Thank you.

Our next question comes from the line of Julian Mitchell with Credit Suisse.

Please go ahead.

Yes, this is Charlie for Julian

Charlie for Julian.

What happened to Julian?

He is in China right now, so I am not sure --

Oh man, I hope he getting business for us.

Did he take an order book or something like that?

I hope so.

Me too, Mike.

Just had a question about the cash.

Almost $3.3 billion in cash, 13% of your sales.

Net leverage, I don't know -- a half turn.

You feel like the tailwind are at your back, and you are making some growth investments.

But what do we do with the cash?

I mean, this is the biggest cash balance I have seen ever for you.

You talked about stepping up M&A in the press release.

How does the pipeline look, which segments do you like, maybe just some color there?

Yes, I mean, right now, we are definitely stepping up, and review that with the Board the last couple days.

As we have done a couple already -- in the first month out of the box, in the New year.

We are really trying to figure how to get about $1.5 billion done this year.

We definitely have the cash flow.

I mean, we like generating the cash.

At this point in time, there is not to be any, what I called big, big deal out there.

We are looking at small deals in the $400 million, $500 million, $600 million type level deals.

The pipeline looks pretty good for us.

There is very much focus on process, focused on industrial space, focused on the climate space.

We might be doing some joint ventures too.

But right now, we are focusing on those three key areas, relative to our deal transaction.

If we do not feel -- see the deals unfolding, then obviously what we will do, is we may pivot to more share repurchase.

Right now we have already put -- booked -- we are try to bank what, $900 million for the --

$900 million.

$900 million for the year.

But if we see that -- obviously, we are not getting the deals done, and we have very strong cash flow generation.

Then you are going to see us -- we will probably take the share repurchase back up.

But that is way we are right now.

And we probably will sell one or two businesses this year at this point in time.

So we, as you well know, we like to focus on cash, because without cash you can't do anything.

And we have had a very good 12 month period here with cash generation

So is there a number that you are comfortable running the business with?

Just the cash number on the balance sheet?

Not really.

I mean -- we don't have a -- we don't pick a number like that, it is not -- I don't pick a number.

I mean, we go through periods where we generate more cash.

We go through the periods we generate -- we spend more money in acquisitions.

The last couple of years, we passed more money back to our shareholders.

We are running, I think -- the last couple years in the low 60% of operating cash flow back to shareholders.

We are comfortable right now with the level of deals and the cash generation, to be in that low 60s.

And that is where we are comfortable with.

I don't look at a number per se on my balance sheet, how much cash I have on the balance sheet.

It is what I see, where we need to spend the money, how we spend the money internally.

And then if we have money leftover, we send back some around the 60%, 62% to 63%, 64% back to our shareholders

Great.

Thanks a lot.

You're welcome.

Thank you.

Our next question comes from the line of Andrew Obin from Bank of America.

Please go ahead.

Hi, yes.

Just a question in terms of leverage from the fixed investment growth, to your top line.

I thought it historically was more like 1.5.

And maybe I am splitting hairs here, but it seems like it's more them 1.2, and I am just wondering if this is just rounding, or is it a mix issue as to which geographies are growing this time around?

(Inaudible) look at the GFI.

The issue really boils down to as follows, if -- when I communicated over the years.

As we go above [3%], we start getting a little bit on the spread, relative to, is it 1.1, 1.2?

As we get -- as we go above [4%], the number gets above 1.5.

As we start getting about 4.5%, 5%, sometimes we can start getting 2. So it is a function of where that level is.

At the level right now, when you are looking at 2.5%, 3%, basically that is not enough to drive a higher leverage growth for us.

And what we are trying to do right now, if we are going to be running GFI at this say, 3% or 3.5% range for multiple years at 4%, 5%, 6%, I am going to figure out how to widen that spread, by some technology, or sort of like constructive technology type investments, that allow us to get a little bit more growth in a slower GFI environment.

That is what we are going to play out here, because I do not see GFI going up to 5% to 6% range like we saw on most recoveries around the world in the last -- we usually -- that is what you normally see, but we don't see that now.

Thanks.

And for your growth, do you get more of a boost if it's emerging markets growth versus developed markets?

Is that the right way of thinking about a?

That is more of the spread in the EM?

There is definitely more spread in the emerging markets than we do in the mature market -- because we -- because of the market share potential.

You look at our mature markets, the US and Europe, we have a higher level of market penetration already.

So in the emerging markets, when we get GFI and we get a little bit more growth from a -- penetration, that' is why you see a little bit higher spread.

You are exactly right.

And just a follow-up question.

What is the margin in network power, ex embedded?

We will give you that number, Frank will take a look at it.

We will tell you something in the second.

I don't want to tell you off the top of my head, because I don't have it off the top of my head.

We can take it offline, don't want to take your time.

We will give it to you off -- we will say it to you -- I mean, as soon as he tells me, I will tell you.

Thanks a lot.

Next question.

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

Please go ahead.

Thanks.

This is actually Chip Moore for John.

On network power, you talked about some weakness in the North American data center space this quarter.

Maybe if you could just expand on similar trends there, versus what you are seeing in some other geographies?

I think that, in North America, there is definitely been a slowdown in what I would call IT spending in the second half this year.

We have seen it across market space.

We are seeing a little bit of pickup in Europe.

We are seeing pickup up in Asia.

The real spread -- slowdown has been in North America.

And I think there is going to have to be a little bit -- I think there has to be a more [resolutional] a bit, as to what's going on with the government, what's going on relative to -- little bit of the financial institutions, where there is a lot of IT spend typically, before you see that marketplace pick back up.

And I don't see that happening in the very near future.

So I am -- we are going to be very cautious relative to underlying growth in the network power system space, until we see North America pick back up.

But right now, it is pretty weak.

And then for -- someone asked about network our assistance for the whole year EBIT.

The number is around 10.5%, network power systems for the full year in '13.

Okay?

Next question?

Thank you.

Our next question comes from the line of Stephen Winoker with Sanford Bernstein.

Please go ahead.

Thanks.

Good afternoon or good morning from here in China actually.

Oh early, early riser, Steve.

Way to go, What city are you in?

(Inaudible).

We don't mess around, especially when you put up some of those growth numbers.

Listen, so the first question is -- remember the $50 million or $100 million that you used in -- accelerate -- I think it was accelerate 2011 or '12 programs?

Are you going to give us some detail, as you think about spending this new $50 million in February?

Or any high-level now, how that program ended up faring out in light of the overall end market weakness, as we think about handicapping the additional investments that you are now putting into the business?

We will definitely did I think the key issue for us we start in 2011, 2012 and early 2013.

When you think about it, we went through probably, a two period -- two-year period there with GFI was under 3%, and we actually grew historically.

If we were down this 2%, 3% range of GFI, we would not have top line underlying sales growth.

So the programs actually did give some incremental growth.

But I will give you more clarity in February.

Obviously, I want to be very careful about it.

How much by, I will give you more clarity, and I will give you some feel for how the other programs work, Steve.

Great.

And, in terms of your assumptions for 2014, we have talked in the past about cheap gas impacting US petrochemical demand, or overall chemicals, and how that is particularly or should be good for Emerson versus some of your peers.

Can you give us some thoughts about how you are looking at that?

Is that much longer time frame or is that part of your thinking for '14?

It is part of our thinking for '14.

And the process business around the world has had a very good investment -- you take Middle East, Latin America, Asia, we see, in the second half of 2014, some of those programs kicking in.

So you are going to see process, we had a basically down US business this year, because of the strong 2012 they had.

We expect them to grow, and grow very nicely in the second half of 2014 as these investments start kicking in late '14 early '15.

As you know these are long cycle investments.

These are fixed plant and equipment investment these companies are making.

A lot of permitting comes through this.

They are moving down the path right now.

We are winning the projects.

We are getting the business.

We would expect some of that money to start being spent in the second half of our fiscal year in 2014, and really starting to build out, as they get more and more approvals across the United States.

I mean, it is definitely coming, and we see it happening.

And just a cleanup question on that.

On the price cost commentary you had --

Yes.

A little more clarity on the fourth quarter itself, and what your material inflation roughly was versus the actual pricing you realized?

I don't have the numbers off the top of my head right now.

It was positive.

It was definitely green.

I mean, I don't -- I mean, positive pricing and net material inflation was negative.

But I don't have a positive -- I don't have the number right now.

Do have a number there, Pat?

We are looking for it.

We should take a look at -- why don't you ask Pat?

It was definitely positive.

But clearly as I said earlier, I see that -- the spread is definitely getting tighter, it is still positive green because of the net material inflation continues to go down, and obviously our pricing is going to be pulled right along with that.

So, yes, so positive price -- I mean for the whole year, I mean, we -- it's a positive price cost at this point in time.

Not a big number, but it is a positive price cost

Great, thanks a lot

You're welcome.

Thank you.

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

Please go ahead.

Thanks good afternoon, and other greetings from China.

Oh you are from China too?

Hi, Deane.

That's good.

I didn't find out where -- Steven didn't tell me what city you guys are in?

Hangzhou.

Oh, how is the pollution?

Horrific.

Did you say terrific or horrific?

No, horrific with an H.

Okay.

That is why you are with Honeywell, then?

Well, they are part of the solution with their respirator mask now.

(Laughter).

Well, give my best to all my Honeywell friends there then.

Will do.

Dave, on underlying revenues outlook, I know we shouldn't get too euphoric about 100 basis points, but it is better than what we talked about last quarter, going at 3 to 5. So can you comment on what the swing factors are, in inching that up?

There's really two factors.

One, I feel a little bit more positive about Europe, because we now have, we have had positive The second one now, is we have seen for the last five or six months, within China our business actually started improving.

We had underlying growth for the quarter over 6%.

And so I feel with a base -- the order trends I am seeing, based on the customer feedback I am seeing right now, I feel a little bit more positive on China.

Those are the two reasons why that number has moved up, Deane.

Got it.

And then, can you size for us the piece of Jordan that you are planning on selling this year?

I should tell you, its about $100 million.

So it is small, less than $100 million

Okay.

And then, you said you could be selling two businesses.

Was Jordan one of those two, or are there -- or are there is -- or are there actually three?

There is another business I don't want to talk about yet, but there is another business that I am looking at in -- a business that -- I mean, this space is not going to grow for us, and I am not going to make a strategic investment -- and what I would rather do is take the money off the table, off our balance sheet and pass it back to the shareholders.

And approximate size of the unnamed business?

I am not going to give you that right now.

If I gave you a approximate size, there would be a lot of speculations out there.

I understand, thank you

Okay.

Thank you.

Our next question comes from the line of Rich Kwas with Wells Fargo Securities.

Please go ahead.

Good afternoon, Dave.

How is it going?

Are you in China too?

I'm not.

That's good.

Are you a Cardinals fan or a Reds fan?

Neither.

You are a Yankee fan.

I am, yes

Frank is a Yankee fan too, he is still depressed.

I know we are -- it was a long year so.

Well, looking forward to the lawsuit now, that is going to be interesting one.

Two questions, non-res outlook for next year, it seems like some other companies are little more favorable about North American in non-res.

What do you think?

How do you think that plays out in '14 unwinds for you?

Every indication says that non-res will be more favorable.

It looks to me right now, it might be more rear-end loaded for our fiscal year, so we won't get much of a positive kick back.

If it started happening sooner in the calendar year of 2014, and we get more kick back -- positive input.

Right now, it looks to me like it is going to be later into '14.

But it definitely looks to me that inter carry space in our customer base is that it is starting to pick back up.

And I am just looking at my own North America bricks and mortars and expansion stuff, and I see us having to spend more money in the second half of '14 too.

So my own indicators inside of Emerson say the same thing.

So that would be ultimately a more positive mix for climate, et cetera, probably maybe later into next year but more in '15.

Climate, industrial also process -- we would see a pretty good lever point there.

If it happened quickly, clearly that would help us, both from a sales growth standpoint and a profit standpoint.

That' is something that would be up a positive surprise for us

Okay.

And then, the other question is on pension and the incentive comp, the tailwind I think Frankie talked about a combined $0.08 to $0.10 tailwind in fiscal '14 last quarter.

Is that still intact, or did those numbers change?

Yes, it's $0.10 and maybe a little bit higher, as we closed out the year on the pension, it's probably about $70 million in the pension, and the incentive comp is about $40 [million] to $50 [million].

Okay.

Great.

Thank you

You're welcome, thank you

Thank you.

Your next question comes from the line Jamie Sullivan with RBC Capital Markets.

Please go ahead.

Good afternoon, thanks

Good afternoon, Jamie.

A question on process management, you have talked about North America, the MRO side being a little bit soft.

Just maybe your thoughts on that inflecting in 2014?

Yes.

It -- based on what we are seen, based on what is being done across the businesses, again I still think we are going to see an improvement, not in the first half of this year, but more in the process business starting sometime March, April, May time period.

That is what we see, based on talking to our customers right now.

They are still digesting the huge investment they have made in 2012.

So I think that it is definitely is being discussed out there.

Our customer base has got the money to spend, is a question of, are they ready to take on new projects.

And I think they are going to start doing that, as they get into the spring time of 2014.

So we see that coming at us, but it is more the second half type of thing for us, than a front half

Okay, thanks.

And then just a quick cleanup on the buyback.

The $900 million you mentioned, does that include the remaining $200 million?

Yes.

Okay.

Yes, it does.

Yes, it does Jamie.

And the -- and CapEx still in that -- I think you said $750 million to $760 million range?

Yes, Jamie, that is about as close as I can call -- that is exactly right

Okay.

I mean, just like someone asked me recently, we need to make some investments and that is why I think non-res is going to -- we all have kept it pretty tight here the last couple years, and I think if we want deliver for our customers, and we want to maintain our quality, and have the capability that we need in a Company, we are going to have to make some investments.

Which is a good sign for us, from a standpoint of our sales eventually, but it is also, it definitely needs to happen across this industry.

Thank you.

You're welcome.

Next question, please.

Thank you.

Our next question comes from the line of Mark Douglass with Longbow Research.

Please go ahead.

Good afternoon, gentlemen

Good afternoon, Mark

I am a Cubs fan, so I have been waiting a 100 years.

Well, not me personally.

All of us.(Laughter).

I hope not.

I think you are going to have to wait for 101 years.

(Laughter).

There is always next year, right?

That's the way I look at it.

There's always next year.

We always like playing Cubbies -- they are good -- its a good team to play, we respect each other, you know that

Right.

Okay.

On the [employment], you are up double-digit in US resi, It seems to be outpacing the market in your orders.

Was it an inventory build, something temporary?

And then, does that give you a lot of confidence going into '14 here?

It would seem so.

Yes, there is definitely not an inventory build in our customer base.

There was -- actually the pipeline had been so -- had been taken down so low, that there was a pretty good surge.

There is obviously some new transition going on to the next-generation product, which we are participating in.

So we saw pretty good recovery there, in the late in the year, which is very good.

I like where we look at this point in time, going into the next year.

I expect our climate business to have a good growth year, both here, Europe and in Asia.

And so I am looking forward to that.

So are these new -- are the new products that helped drive in this quarter, there is going to be some carryover into next year too?

Yes, definitely.

Definitely.

Okay.

I mean, typically this business does not go one or two quarters and then stop.

It typically cycles pretty well.

So, I think we are due.

They have had I think, about 2.5, 3 years of flat growth, and now they are due.

There is not --inventory is pretty tight out there, but it is a very cyclical business.

Our customer base waits to the very last second to start building

Right.

Okay.

And then final question on capacity.

Your ex dividend are going to pay in '14, the share repurchases, what is your expected capacity over the next 12, 18 months seeing your free cash flow, and levering up?

What do you mean by capacity?

I mean, how much free cash flow we are going to generate year, what do you mean by the capacity?

No, how much could you -- have available with leverage, free cash flow to put towards M&A?

Oh, several billion dollars.

I mean, from our -- if you look at our year-end financial statement, and our cash generation, you are looking at $3 billion, $4 billion, $5 billion we could do.

Easily, we have got strong --

Yes, we are -- (Multiple Speakers).

-- flow and debt capacity, more than we are going to need.

Yes, more than we need at this point of time.

Exactly but its -- but we have got the capability out there, and as we look at the interest rates been as low as they are, we will take a hard look at the second half of next year, do we want to do anything more relative to our ladder, our debt ladder, which we have kept in pretty good shape, as these low interest rates have been happening for a while now.

And your comment on M&A is basically, you don't really see enough to spend all of that at this point?

No.

No.

No I don't

Okay, thank you.

You're welcome.

Thank you at this time I'm not showing any further questions.

I would now like to turn it back to management for any closing remarks.

Please go ahead

Again I want to thank everybody for joining us today, and hopefully all the people in China are safe, and don't get too much smog in their lungs.

And I do want to thank again all the operating people, both at the corporate level and the divisional level for the excellent performance they did in the second half of this year, as they brought home a very good fiscal 2013.

And I feel very good about returning a very decent growth, and a very good earnings growth, as we look into 2014.

Thank you.

Bye,

Thank you.

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

Thank you for your participation, you may now disconnect.