艾默生電氣 (EMR) 2014 Q2 法說會逐字稿

Good day ladies and gentlemen.

Thank you for standing by.

Welcome to the Emerson investor conference call.

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

Following the presentation the conference will be open for questions.

(Operator Instructions).

This conference is being recorded today May 6, 2014.

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

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

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

Please go ahead, sir.

Thank you, Vince.

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

Today's call will summarize Emerson's second-quarter 2014 results.

A conference call slide presentation will accompany my comments and is available on Emerson's website at emerson.com.

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

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

Net sales in the quarter decreased 2% to $5.8 billion with underlying sales up 2%.

Sales were lower than expected primarily due to harsh winter weather and week E&P growth in the US as well as a slowdown of the global project execution in the process industry.

At the same time process customers proceeded with plans for future investment helping drive total Emerson orders up 9% in the quarter with strong acceleration in March.

Gross profit margin expanded 140 basis points to 41.2% while EBIT margin was unchanged from the prior year as currency volatility affected comparisons by $35 million and the Artesyn Technologies equity investment reported a loss of $34 million.

EBIT margin improved 60 basis points excluding the equity loss.

GAAP earnings per share of $0.77 equaled the prior year.

Cash generation was strong overcoming lost cash flow from the Artesyn divestiture.

Operationally there was strong execution in the quarter despite the economic weakness in non-operating items.

Moving to slide 3, P&L summary.

As I stated sales declined 2% and the Artesyn divestiture deducted 5% and acquisitions added 1%, just as underlying sales grew 2%.

140 basis points of gross profit margin improvement was driven by portfolio changes and cost containment.

SG&A expense declined in large part due to lower stock compensation expense.

Significant restructuring costs in the Artesyn investment contributed to an equity loss in other deductions of $34 million.

Additionally, currency volatility [swung] from gains in the prior year but losses in the second quarter, a change of $35 million.

Reported EBIT margin was flat of around 60 basis points due to an equity loss.

3.3 million shares were repurchased for $214 million (technical difficulties) earnings per share of $0.77 was unchanged from the prior year.

The next slide, sales by geography.

By region underlying sales grew in the US by 3%, Europe by 1%, Asia by 4% which includes China growth of 9%, Latin America by 3% and Canada by 2%.

Middle East and Africa declined 9% affected by robust growth in the prior-year quarter.

Total underlying sales increased 2%.

Strong momentum continued in China where all business segments grew for the third consecutive quarter.

Moving to slide 5, business segment earnings and cash flow.

A 2% decline in business segment EBIT includes a $35 million unfavorable impact from currency volatility.

Corporate expense reflects the Artesyn equity loss partially offset by lower stock compensation expense.

Moving down to cash flow, flat reported results overcame loss to operating cash flow from the Artesyn divestiture.

Higher capital expenditures reflected ongoing growth and productivity investments.

Trade working capital improvement improved due to strong inventory and payables performance.

Next slide, Process Management.

Process Management underlying sales grew 1% with North America up 6%, Asia down 1% which includes China up 5%, Europe up 4%, Latin America down 3% and Middle East and Africa down 14%.

Acquisitions added 4% and currency translation deducted 1% but net sales growth up 4%.

Growth momentum continued in energy and chemical industries but more cautious project implementations by customers slowed sales growth.

US strength drove growth in North America with growth in Europe led by North Sea project activity.

Asia declined as softness and difficult comparisons in India and Australia offset 5% growth in China.

Middle East and Africa weakness reflected ongoing political instability in the region.

The decline in margin was primarily due to currency volatility that lowered earnings by $31 million.

Orders increased 12% led by unconventional upstream oil and gas projects.

The robust orders growth reinforced continued strength in process automation markets particularly in North America.

Moving to slide 7, Industrial Automation.

Industrial Automation net and underlying sales grew 2% with North America up 1%, Asia up 6% including China up 18%, Europe flat, Latin America up 7% and Middle East and Africa up 1%.

Demand improved for capital goods especially in emerging markets.

Asia growth was led by China where mature markets were slower.

Modest growth in the fluid automation, motors and drives, electrical distribution and hermetic motors businesses offset modest clients in the mechanical power transmission and power generating alternators businesses.

Orders growth accelerated to a high single-digit rate in the quarter led by double-digit growth in power generating alternators.

The order strength supports the expectation for improved growth in the second half with acceleration in the US and Europe.

Next slide, Network Power.

Network Power underlying sales increased 1% with the US up 2%, Asia up 4% including China up 6%, Europe down 3%, Latin America down 8% and Middle East and Africa flat.

The Artesyn divestiture deducted 21% and currency translation deducted 1% for a net sales decline of 21%.

Growth was solid in telecommunications markets led by US and Europe with China and India also up.

Demand for data center technologies remained slow overall as growth in Asia and North America was offset by weakness in Europe and Latin America.

The margin expansion reflects the Artesyn divestiture benefit partially offset by strategic investment programs.

High single-digit orders growth reflects improving global market conditions especially in Europe.

Gradual recovery in data center markets is expected to continue with the outlook for modest growth unchanged.

Next slide, Climate Technologies.

Climate Technologies underlying sales increased 6% with North America up 2%, Asia up 11% including China up 14%, Europe up 3%, Latin America up 36% and Middle East and Africa down 4%.

The global refrigeration business was strong particularly in transportation along with modest growth in air conditioning markets.

US sales were strongest in the temperature sensors business, up double digits with residential air conditioning up mid single digits and commercial up low single digits.

Strong demand in China drove Asia led by the refrigeration, solutions and sensors businesses.

Europe market conditions continued to improve.

Order trends remained steady led by strong growth in Europe.

And global refrigeration markets are expected to remain strong along with improving working conditions in the US.

Moving to slide 10, Commercial & Residential Solutions.

Commercial & Residential Solutions net and underlying sales increased 1% with North America down 1%, Asia up 18% including China up 23%, Europe up 10%, Latin America down 7% and the Middle East and Africa up 23%.

The strong growth in international markets offset weakness in the US related to the harsh winter weather.

Growth was led by the professional tools, wet/dry vacuums and food waste disposers businesses.

Profitability in the segment remains very strong.

Orders growth acceleration in the quarter reflects recovery from the weather impact.

US Residential & Commercial construction markets are expected to improve supporting stronger growth in the second half.

Next slide, 2014 Outlook.

Robust orders growth in the quarter reflects continued improvement in the global macroeconomic environment.

Large multiyear industrial projects and recovering demand for capital goods helped drive order strength.

At the same time uncertainty persists in some markets as reflected in the anemic US GDP growth in the first calendar quarter.

But recovery appears underway based on March orders with preliminary trailing three-month orders growth in April are approximately 8%.

Based on current market conditions, the 2014 outlook is unchanged with underlying sales growth of 3% to 5%, a reported sales change of minus 1% to 1% reflecting the embedded computing and power divestiture, completed acquisitions and currency translation.

Margin expansion of approximately 0.5% excluding charges in the prior year and an equity loss in the current year and reported earnings per share of $3.68 to $3.80, up 4% to 7% excluding impairment and repatriation charges in the prior year.

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

Thank you very much, Pat.

Thank you, everybody, for joining us today.

I appreciate it.

First I want to also thank (technical difficulties) this quarter with solid margin improvement, a strong cash flow making up for the cash we lost from the sale of embedded.

And then also pressing forward on the strong internal growth initiatives both in the service area, solutions areas and technology to try to drive longer-term growth across our Emerson businesses.

Yes, the quarter sales were much weaker than we anticipated in February as we met in Boston, snowy Boston based primarily on a much weaker US residential marketplace for us.

As I look at the various markets from what we saw in February until what actually finished at the end of the March quarter, Europe was stronger, China was stronger, India weaker, Middle East weaker, Latin America weaker primarily because of Brazil and a little bit of slowdown in Mexico with the election and the changes in the energy programs.

In addition, we saw with the quarter being much weaker just from the general economic view around the world, we saw some of our large process industrial customers really start slowing down with the execution of the projects that we have underway.

Not canceling but just slowing them down, pushing them out.

In fact, orders have continued to be strong so that the confidence is there in our customer base; they are just slowing it down.

As we look at the late March and the April orders on a per-day basis because there is several days moving back and forth with the Easter and the Easter holiday and the various holidays this year, on average right now we are growing underlying orders around this 8%, 9%, a high single-digit basis.

So we had April again looking at pretty good orders.

Again, this is the third month as I look at orders trending upwards.

And so I think the key thing for us right now is orders have turned.

We now clearly need to continue to execute in delivering at the high level backlog we have right now and drive down the backlog and deliver those sales in the second half of the year.

Again, just stepping back and thinking about the markets that we face today versus February when we talked about them, the one real negative is that US residential marketplace.

It is much much weaker than we saw back in February.

On the positive side nonresidential continues to solidify and we are actually seeing that look stronger in the second half of this calendar year both here in the United States and in other markets around the world.

In Europe I feel better about it except for the unfortunate situation between the Russia, Ukraine situation in Eastern Europe and potential slowdown impact on Europe.

But right now Europe continues to look better than it did originally and trending the way we want it to trend.

If you look at the world it has been a very very muted global economic recovery coming out of the 2008, 2009 recovery.

Not much of the typical recovery from business or the consumer or the investment profile.

As we talked about in February we are going against it and we are pushing hard both internally.

We are making internal investments in technologies, we are making investments right now in our capacity capabilities, our productivity capabilities, our new product initiatives.

We are pushing our money that we are generating at record levels of cash flow into the Company to drive higher levels of growth.

We've also stepped up our acquisitions in the first couple months of this year already spending $1.2 billion, targeting $1.5 billion.

And we will continue to push pretty hard at how we can emphasize and increase our acquisitions for external growth going forward here in the next couple of years.

Clearly our balance sheet, our operational performance, our cash flow is at the level that we can invest more aggressively to drive growth and push our way through this, what I call this globally muted recovery, as this continues to happen around us from month to month.

Overall, cash flow very good.

We are increasing our capital spending this year, as you know.

We'll be driving close to $800 million of capital, up from less than $700 million last year, investing in our new products, our innovation, our global capacity utilization areas, investing in productivity and focusing on how we can make the Company stronger and drive a more profitable business and try to drive a little bit faster growth.

So overall, the quarter clearly disappointing from the top-line growth.

I was pleased with the execution with the operations from profitability and cash flow and the recovery around the world continues to move forward but at a very very slow pace.

And it would not take much, unfortunately, to knock back some of the economic recovery in particular in Europe if we saw a situation emerge relative to Russia, Ukraine and the whole Eastern Europe.

So concerns, but at this point in time we are pushing forward with our investments and we will continue to push forward with our investments to drive better growth, better levels of profitability and better returns for our shareholders.

We are still targeting to deliver back to our shoulders this year at least 60% of our operating cash flow.

Right now our trend probably is a little bit about 60%.

Unless we see external investments that we see the opportunity coming back, we'll keep at that level until we see the money needed to grow the Company faster.

With that we'll open the phones up for questions and answers.

Thank you, sir.

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

(Operator Instructions).

Scott Davis, Barclays.

Hi, good afternoon, guys.

Dave, you mentioned in your comments this has been a different type of recovery and I think that's -- I think we'd all agree with that.

But based on the order book that you have, which seems pretty strong and just the backlog and then you look at things like process where there's some pretty big projects coming down the pike, does it feel like to you that we are at the tipping point here where that investment spend is getting ready to really kick in for real for the cycle?

Or do you still feel like that's vulnerable?

My discussions with the customer base, the CEOs out there, is that we are all starting to push forward in spending more money.

I'm not alone.

If you look at our spending pace right now we made the decision a little bit earlier than some of our customers to push forward.

Scott, I feel it is at that tipping point.

The one big negative is if all the sudden you saw the situation really unfold in Europe or the European economy really started to stall again, then I think you would see the CEOs around the world be very cautious again and pull back.

But right now I feel significantly more positive that that tipping point is coming and therefore we are going to push forward.

We are seeing the desire, we are seeing the quote pace.

But people still will be concerned about the world -- things happening.

Today people can react so much faster than ever before when I became CEO back in 2000.

Yes, so I guess the natural, and those are all high-class problems, I suppose, but I think the natural follow-up in that is specifically in process.

If you look at the projects that have been announced in chemicals and oil and gas, in refining, etc., there's a lot of projects in that 2015 to 2018 timeframe.

How do you balance between having a natural level of skepticism that a big chunk of them might get canceled?

To the other side of it where you really need to invest pretty heavily to make sure you are there because there could be some capacity constraints when you get to that time period if not in product but in engineering talent and manpower.

How do you think about that, Dave?

Right now based on the quote activity which continues to be at record levels both in the process world and some of our industrial space too, we are pushing forward.

We are making the investments because I see the order book, I see the projects we're winning.

I saw the projects come down the pike again this month.

And I feel very confident that these projects will go forward.

They may take rather than 18 months to be unfold, they might take 24 months.

I feel quite strongly that they are going to happen because the capacity is needed.

I know where this product is going.

So I feel they will happen and we have to get out in front of that because we are winning clearly a strong fair share of those orders if you look at the order pace coming out of process and the improving industrial for us too.

So we have to be ahead of it and that's why we are doing -- we are investing.

Okay.

Good.

Good luck, Dave.

I'll pass it on.

Deane Dray, Citi.

Thank you.

Good morning, everyone or good afternoon.

Dave, can we go back to -- you're reaffirming the guidance but we are well into the second half and you are baking in some second-half ramp and especially in process.

Maybe just talk a bit more about within the segments what sort of upside you are expecting, how that ramps, is it a question of easier comps, or are there some opportunities that are baked in the second half assumptions?

On the early cycle businesses, the climate technology business and the residential solutions business, some of our early cycle industrial businesses, we are seeing the activities to start picking back up again.

So we're expecting them to get a little bit stronger in the second half of the year.

Right now climate technology is still looking at a very good year on a global basis.

They have had a good first half.

I think they will personally have a better second half.

On the industrial space the process guys, the Industrial Automation guys, the Network Power guys have the orders.

It's a matter of getting execution around his orders and getting some, what I would call, incremental book to ship type businesses.

Our backlog right now has the capability to deliver in the second half of the year.

We need to execute around that backlog and we need some of the early cycle guys, which we are starting to see, as we've seen in the last 45 days of orders, we need to see those orders being booked and shipped and I think that's where we are coming from right now.

Profitability wise we have the capability right now, our cost structure is in good shape.

The price cost is in good shape.

It's just a matter of getting that sales booked, which we are, and taking the backlog down and then getting out the door.

And then I fundamentally believe going back to the question from the previous person asking, based on what I see right now if things are stepping up you're going to see going into 2015 with a strong pace of business for us.

Great.

That's very helpful.

Just to go back on one of the comments you've made on process particularly.

And maybe just reconcile because it seems a bit contradictory.

One, you said some of the customers are pushing out projects, but project implementation is slowing them down.

Meanwhile you have seen a pickup in what you call robust order growth.

Are these separate parts, separate end markets within process but it would seem that you wouldn't see the same customers making both actions.

Well, yes you do because some of these proctors are getting much larger and they are more complex.

And obviously we have more than two customers in process.

So from our perspective we are seeing customers around the world, some will slow it down and try to spread their capital around a little bit longer to make sure that they don't get ahead of what -- from a capacity standpoint.

And secondly, you'll start seeing also from the standpoint of customers have long-term projects, they want to get them going, they want to get the engineering work done and get it in the queue.

So you're seeing both.

The activity level in the global process world by industry is sitting at record levels and we have not seen that curtail that much.

It may be a slower growth rate this year but it's still a pretty good -- it's still running at pretty high levels.

So yes, they got one foot on the gas pedal one foot tapping the break and they are doing both right now, which is not uncommon for us.

Great.

That's helpful.

Thank you.

Julian Mitchell, Credit Suisse.

Hi, thanks.

I just wanted to follow-up on the 8% to 9% run rate you talked about on orders.

Is that a run rate that you expect to continue for some time, or is that 8%, 9% really just reflecting the one-off big boost you had in the March standalone month, or do you think you can see 8% to 9% as a daily orders increase for some time?

The word sometime is a longtime.

I would say that generally as I looked through the last six weeks it's growing this 8%, 9%.

I think you could see a couple months of that at this point, my visibility from that standpoint.

If you saw a solidification of the residential marketplace and start seeing that pick back up, which some people are saying it is going to improve as the year progresses on a calendar year basis, and you continue to see the European recovery continue and not have a hit from what's going on in Russia or Eastern Europe, then I think you could see this go on for several more months after that.

But right now I think I'm a little bit nervous in saying is that residential going to come back after how much it weakened and also what is the side effect of what's going on in Russia, Ukraine and Eastern Europe?

So I think that I am looking right now I see at least two months of pretty good underlying daily run rate of orders.

And if I see things continuing to improve in residential and Europe then that could go on for a couple more months.

Got it.

Thanks.

And then in Network Power, the margin was about 8%.

I think you are looking at over 10% for the year.

So you got a decent jump up in the back half.

Is that sort of a leverage game of year-on-year growth or is it just a release of a lot of cost savings coming through at the same time?

It is a function of our growth.

If you look at our network, our business historically we have a stronger second half and then also some of the cost savings is starting to come through.

But we typically have built quite a good backlog the last couple of months here and now it's a matter of just executing in the sales level there.

Our normal second-half Network Power is usually a better margin if you look back over time.

Thanks.

And then lastly, very quickly, Middle East, Africa had a very big swing from December quarter organic growth to what happened in March.

Just wondered what you are thinking for June or the next six months in that region for organic sales?

I'm more nervous about the Middle East at this point in time given the turmoil going on in the Middle East.

We have a lot of projects underway in the Middle East.

We have a lot of orders going on in the Middle East right now.

I am a little bit nervous as the general business environment, if you look at what's going on in the Middle East, I am a little bit concerned about that both of the Middle East and Africa, so we expect it to be positive second half of the year.

I think when we get done with the other regions will be better and the Middle East will be not as good, that's my general feel right now.

Great.

Thanks.

Christopher Glynn, Oppenheimer.

Thanks.

Good afternoon.

Dave, was just wondering with the pronounced orders surge of process if you had a sense what sort of concentration of large projects drove that and what was -- in what part maybe was it a general broad acceleration and pickup in activity?

We are seeing the pickup in orders coming out of our what I call downstream business in our North America.

We are seeing some of that.

We are also seeing some very very large projects happening around the world right now that we've been working on for a while and we saw the last couple of months we have seen them book.

But it's a very broad group of orders right now.

It is not focus on one or two customers.

It's very broad based and a lot of large projects coming around Asia, coming out of the United States and some downstream.

So from my standpoint that's why I feel pretty good about the second half and going into 2015 in process because they are building the backlog, they are building the order base to be able to deliver that.

And the question is will we see more confidence in the OEM, or the MRO type of business early on here?

So I like the mix of the large project, medium projects in process right now.

It's a good mix.

Okay.

And then just looking at the 2016 Network Power target of 12% to 14% margin, what would it take to enter the bottom of the range in fiscal 2015 in terms of how much is volume dependent versus realizing some of your self help?

Right now I would say most of that would be volume that is dependent because we are investing right now in Network Power to get through some of the next-generation technology, some innovation in the service area.

So if we could see continued good improvement in our orders in particular, right now we have seen a recovery in orders in Europe, we have seen recovery in Asia, what we need to see is recovery in North America.

So if we see a very much stronger North America then you will see that profitability come in faster.

North America is the key one to watch.

Okay, and then just lastly on the cooling side, you've weathered a mix down in that space.

To what extent do you think that's run its course, or remains a dynamic to contend with?

On Network Power side, or the Climate Technologies side?

Network Power.

I think from the standpoint of what we are seeing right now the mix and our faith that we have the complete offering, I think we have weathered that and we are starting to see that trend upward.

I feel good about where we are right there now.

Thank you.

Nigel Coe, Morgan Stanley.

Yes, thanks.

Good afternoon, Dave.

I just want to pick up on the process orders and I think you know the answer, I just want to clarify.

Do you think that from here on we see larger orders hitting the backlog and longer duration orders?

So therefore we should expect to see a bit more volatility in the order pace going forward?

And perhaps a correlation between order growth and revenue growth gets a bit more extended?

The answer to that is yes.

The projects are definitely, as you and I have talked about, are definitely much larger, they are more complex.

We are booking them sooner and we are having to manage those over time.

So I would say based on the type of businesses and the type of projects we are doing, they are much larger projects, there will be a lot more volatility within that both from a sales standpoint and a profitability standpoint within a quarter of a year.

Okay, great.

And again you talked about some of these projects getting pushed out a little bit.

What is your sense that maybe there is some sensitivity on the macro volatility maybe in Ukraine, etc., Middle East?

Or do you think it's just a bit more of a push towards capital efficiency from the majors?

There's two things going on.

One, my large customer base is being asked to slow down some of their expenditures and redirect some of that money towards shareholders, both on a broad basis, the big capital projects guys.

They are not stopping the projects, they may just, rather than a project taking 14 months it's going to take 16 months.

And so they are having pressure on them to spread their cash and to allocate more cash back to the shareholders.

But the projects still have very high paybacks so they are going to do them.

And then from the standpoint of projects because of some of the large complexity of projects it just takes sometimes they take longer than anticipated.

And with the uncertainty in certain things around the world both the Middle East turmoil, like you said Eastern Europe turmoil, some of the questions coming in say Australia, they said okay let's slow this down a little bit and take a little longer.

So you got two things going on right now working on our large customer base.

The projects are going, they are just going to take their time and use that cash a little bit longer.

Okay, that's really helpful, Dave.

And then just one more.

On Artesyn, we had the $0.03 this quarter.

I think a lot of that was restructuring.

I think you've got about $17 million for the full year, which suggests another $35 million the second half of the year.

Is that correct?

Is that more restructuring or was that more a run rate going forward?

For the whole year, aren't we doing, Frank, we're doing $70 million, $80 million?

No, you are looking at -- he's looking at that reconciliation probably.

Where are you seeing (multiple speakers)

On the restructuring.

The 30 bps in the appendix.

30 bps margin from JV.

If you look at the reconciliation at the back of the slides, no, the $34 million, $35 million that we took this quarter should be all there is.

We are not expecting any more for the year.

It's really 1.4 points and both the Artesyn and whatever rounding is in their as a result of us using ranges for those estimates all got jammed into that 30 bps.

So the answer is no, there's no more behind it.

I see.

Thank you very much.

If you are looking at internal restructuring, which we do on an ongoing basis, yes, we are still talking about $70 million, $75 million for that.

Absolutely.

I thought your question though was strictly on the Artesyn piece.

It was and thanks for the answer.

Shannon O'Callaghan, Nomura Securities.

Good afternoon, everyone.

Hey, Dave, on the gross margins, so up 140 basis points.

You have the benefit there from the exit of Embedded but maybe break that out if you could and what other factors drove the gross margin improvement and then are there any headwinds coming in the second half to that?

From the standpoint of our GP margin obviously Artesyn did help us and as you know we talk about 50 basis points at the EBIT line.

It's probably about, we have 60, 70 points -- 90 basis points -- 90 basis points at the GP line, at the GP line.

So the rest is just operational improvements and mix going on, so I expect our GP margin to be pretty good for the year.

We actually forecasted a pretty good GP margin for the year and then we are looking for underlying operating performance only mild underlying operating performance but investing more in the Company.

That's why you're seeing not as much spread improvement between GP and OP as you normally would see.

We are investing internally right now.

Okay, and then you have mentioned a couple of times about executing against elevated backlog.

Is that unusually backed up because of some of these project delays or what's sort of behind that comment and how soon do you think that will get released?

The comments, one, it's both for you guys but also my own operating people are on the phone right now.

They all listen to what I say.

So the key issue is our backlog is sitting at very high levels.

With the orders the last 45, 60 days we have been building backlog, so the key issue for us is to execute as much as we can on the backlog.

Clearly some of this is in the process world, the Network Power world and the industrial world is a little bit longer lead time but anything that we can work on execution.

Our operations are fine.

It is just a matter of what can we execute with our customer base and figure out how to get it done and work that backlog back down.

I don't like carrying that much backlog.

Okay.

Thanks.

Steven Winoker, Sanford Bernstein.

Thanks and good afternoon, gents.

On the gross margin point, just following that up and given what I think this is the highest gross margin ever for this quarter, right?

From my knowledge, yes.

What's the price cost dynamic and can you give us a sense of the green versus red comfort level you have there as you are looking forward?

Right now, Steve, let's go back let's stop at February.

We thought from a price cost standpoint that we would be pretty much neutral this year, maybe slightly plus or minus 0.1, just very much neutral.

Right now we are doing pretty well.

What has happened is our net material inflation as the economy has been weaker, or actually our net material inflation has gotten more negative.

And so right now we are definitely green from a slightly positive green so we are probably going above the line.

I would expect that that will hold for the rest of the year and then we will start going -- if net material inflation continues to become more negative because of the weakness around the world and the excess capacity then you will see us have more pricing pressures next year.

But right now we're in pretty good shape from a price cost standpoint, finishing this year and going into 2015, so I like where we are right now.

It sounds like a sweet spot, actually, on that front?

It is a sweet spot right now.

But you get sweet spot for about three months and then you get whacked.

Okay.

And on the acquisition point that you made, well actually acquisition and CapEx, on the acquisition point you made about your spending level, you are looking at environment where it feels like some of the prices being paid are moving into frothy territory particularly in some of your end markets.

How is that impacting your placeholder for that?

For this year we will get pretty close.

We may not quite get to 1.5 billion but we are going to be pretty close.

From my perspective right now we are actively working trying to figure out how to build our pipeline of acquisitions.

I would like us to see us do more acquisitions given our strength of cash and our profitability state and our capabilities globally.

But at the same time we have to be very very careful that we don't get too aggressive on the pricing and pay too high a price.

Right now my operations from the standpoint of the places we want to go, I like where we are and I think we are ready to handle some more.

But nothing is say, imminent, but I really turning up the heat internally both on operations and our corporate people to see if we can identify more, but you are right the pricing is the key issue.

You can't get carried away.

And just laxly on CapEx, that $800 million number, how much of that is sort of growth CapEx versus maintenance, versus maybe you can even think about productivity, I am not sure you put that one?

I would say the big increase this year for us is twofold.

Productivity, so if you look at the $100 million plus that we are putting, I would say one-third of that is probably productivity increase as we are trying to drive our plants more efficiently and then the rest would be capacity.

We are adding capacity around the world and we have continued to expand.

And we took a lot of capacity offline in the last downturn and before the last downturn and now we are replacing that capacity in what I would call in more appropriate areas, in areas I want it.

And it's going to be much more efficient capacity.

So we're adding capacity and getting geared up for the continued growth of our customer base around the world.

And is that in process, this capacity, or multiple places?

It's across the board.

It's both in process, it's industrial, it's also in our residential solutions area.

So it's around the world we are seeing this around our basis, all the companies.

Thanks.

Rich Kwas, Wells Fargo.

Hey, good afternoon, everyone.

Dave, your comments on residential, what are you seeing -- new construction was weak in the first quarter and most people expect that to come back.

But what are you seeing on the replacement side that would give you more cause for concern?

Because it seems like you are a little more cautious but some of this should come back due to its weather related but just a little more color on there.

I would say the underlying, just the demand, the numbers coming out are very concerning to me.

And the fact that if you really start cutting down the employment numbers and looking where the jobs are being created and a lack of employment, lack of hours, I am very very nervous about will people spend?

The residential recovery has been very very short lived.

Bam, like what, five quarters?

And so I'm a little bit nervous about the fact will people get concerned about their incomes, spending, the cost of living has gone up and so how much more money are they going to allocate towards the houses?

Will they move and then refurbish?

That's the key issue for us, will they refurbish or will the upgrade?

And right now I think people are being very cautious relative to that.

And my concern is we see it should get a little bit better in the second half, but it doesn't, that will be a problem.

Okay.

It is not a good sign out there right now.

Those job numbers last week were not good.

Okay, and then on Network Power, just with Chloride in Europe, the orders are picking up here.

How much of this is improvement in underlying demand versus just the comparables are favorable and they continue to be favorable?

How confident are you in the European piece?

We are seeing -- we've got our act together through the integration so we've made a lot of changes both from an operational standpoint and a leadership standpoint.

And so I'm seeing better execution within the leadership and within a space that we had actually lost.

And then secondly I am seeing some of our core markets actually do a little bit better where they have underinvested for quite some time.

In particular the UK which we are very strong in the UK and we are starting to see some good improvement in the UK.

So from my perspective I think we are seeing the momentum and the question is now can we keep that going?

As the European economy continues to progress, our programs are continuing to kick in.

I feel better about Europe as we go forward here.

Okay.

And then just a last one for me on process.

With the project activity picking up how should we think about incrementals?

That would seem to have a dampening impact on incrementals beyond this year.

It will hold them down.

It will hold it down.

Our process business is going to run high levels of profitability in any quarter.

As I talked about earlier you could get some good MRO type of business or small what I call brown type, brown expansions versus a greenfield.

So right now we are running on an average about 20% operating margins, or EBIT margins within process.

And I think we're going to stay around that level but because the big projects will hold us back -- leveraging that a whole lot.

Okay.

All right, thank you.

Jeremie Capron, CLSA.

Thank you, good afternoon.

China clearly 9% growth, third consecutive quarter of pretty good growth there and this despite weaker macro indicators.

Could you give us some color on what you are seeing in that country?

In the market space we are serving right now we are seeing pretty good continued investment.

The process world, the industrial productivity world, some of the refrigeration stuff we're working on, some of the core spaces, a lot of investment going on again in their telecommunication infrastructure in China right now, these are the markets we play in.

We are not into the big infrastructure type of projects which have slowed down.

But we continue to see pretty good opportunity here.

I would expect for us to see pretty good high single-digit growth this year throughout this year.

I am obviously watching it very very closely relative to the business pace.

And both Ed and I are spending time there because it's an important marketplace for us.

But we have now seen several good quarters and I expect it to go forward.

I do not expect to see an acceleration and I do not see a deceleration at this point in time.

I see pretty good high single-digit growth for us and all coming off a pretty good base.

Okay, so when you look at your order intake in March and so far in April are you seeing the same trend unfolding?

Yes, in China, yes.

Great.

Thanks very much.

At this time there are no further questions.

I would like to turn the conference back to management for any closing remarks.

Good.

I want to thank everyone for joining us today.

I appreciate your support and look forward to seeing many of you in the coming weeks.

And hopefully things will continue to improve around the world so we won't have any more shocks to the world be it from Eastern Europe or be it from the Middle East or wherever it's going to come from.

I wish you all well.

Thank you very much.

Thank you, sir.

Ladies and gentlemen that concludes our conference for today.

Thank you for your participation.

You may now disconnect.