艾默生電氣 (EMR) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by. Welcome to Emerson's investor conference call. (Operator Instructions). This conference is being recorded today, August 5, 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 of Emerson. Please go ahead.

Thank you, Vicki. I am joined today by David Farr, Chairman and Chief Executive Officer of Emerson and Frank Dellaquila, Executive Vice President and Chief Financial Officer. I will summarize Emerson's third-quarter 2014 results. A conference call slide presentation will accompany (technical difficulty) available on Emerson's website at Emerson.com. A replay of this conference call and slide presentation will be available on our 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. Net sales decreased 1% to $6.3 billion with underlying sales up 3%. Global economic conditions were mixed as areas of softness continued. Mature markets improved, up 3%, led by the US and Europe. In contrast, emerging markets slowed to 2% growth, reflecting political instability and economic uncertainty in certain regions. Backlog is at a record level, up more than 20% year to date, driven by underlying orders growth of 5%. Margin expansion was strong as portfolio changes and operational efficiencies more than offset growth investment. Earnings per share of $1.03 increased 6%. Cash generation remained strong, exceeding our expectation.

Moving to the next slide, P&L summary. As I mentioned, underlying sales grew 3% with the Artesyn divestiture deducting 5% and acquisitions adding 1% for net sales down 1%. Gross profit increased 3% with 130 basis points of margin improvement. EBIT, excluding charges in the prior year, grew 5% helped by lower restructuring with margin expansion of 90 basis points. Operationally, the tax rate was higher compared to the prior year, impacting earnings per share by $0.03. The repurchase of 2.8 million shares in the quarter contributed to EPS of $1.03, up 6%, excluding charges in the prior year.

Next slide, sales by geography. Underlying sales grew in the US by 5%, Europe by 4%, Asia by 3%, including China up 8% and Latin America by 1%. Canada and Middle East and Africa declined by 3% and 9% respectively such that total underlying sales were up 3%. Strength continued in China and mature markets improved while emerging markets were softer, especially in Brazil and the Middle East.

Next slide, segment earnings and cash flow. Segment margin expanded 50 basis points with improvement in Industrial Automation, Network Power and Commercial & Residential Solutions. Pretax earnings were substantially higher due to lower corporate expense and charges in the Artesyn business last year. Cash generation remains solid, up 4% year to date, overcoming the Artesyn divestiture impact. Trade working capital performance remained steady for the most part, better by 10 basis points.

Moving to slide 6, Process Management. Process Management underlying sales increased 2% with North America up 7%, Asia down 2%, including China up 7%. Europe increased 5%, Latin America was up 5% and Middle East and Africa down 11%. Acquisitions added 4% for a net sales growth of 6%.

Global energy and chemical industries continued to drive growth, but project execution remained slow as customers continued to proceed cautiously. North America was strong as US unconventional oil and gas offset softness in Canada related to project timing. Asia decreased reflecting market softness and difficult comparisons in Australia that offset continued strength in China. Europe growth was led by emerging markets and Mexico drove Latin America growth. Political instability remained disruptive in the Middle East. Margins remained solid, above 20%. Continued momentum in North America, anticipated recovery in Asia and record backlog support the outlook for solid near-term growth.

Next slide, Industrial Automation. Industrial Automation underlying sales were flat with North America unchanged, Asia up 3%, Europe down 5%, Latin America up 6% and Middle East and Africa up 4%. Demand for industrial goods continued to recover slowly with mix trends across markets and geographies. North America was stable in total and varied by business with growth in the US offsetting weakness in Canada. Europe slowed as economic momentum stalled while strength continued in China. Fluid automation, electrical distribution and materials joining led the growth offset by declines in power-generating alternators and motors and drives. Market recovery is expected to continue, but improvement will be slow due to uneven economic trends in demand, especially in Europe and the Middle East.

Next slide, Network Power. Network Power underlying sales increased 2% with North America up 2%, Asia up 6%, Europe up 10%, Latin America down 22%, the Middle East and Africa down 16%. The Artesyn divestiture deducted 20% for a net sales decrease of 18%. Growth was strong in the telecommunications infrastructure business led by double-digit gains in Asia and North America. Data center markets were stable globally, but mixed across geographies. The robust growth in Europe benefited from a large project in Sweden and modest market improvement. Strength in Asia was led by China and India. North America remained slow and Latin America was weak impacted by the exit of nonstrategic businesses in that region. The margin improvement reflected portfolio changes and continued strategic investments in Network Power. Backlog strength and improving market conditions support the outlook for modest growth and improving profitability into next year.

Moving to slide 9, Climate Technologies. Climate Technologies net and underlying sales grew 6% with North America up 4%, Asia and Europe both up 9%, Latin America up 16% and Middle East and Africa up 2%. Growth was led by a double-digit increase in the global refrigeration business with China and Europe particularly robust. The US air conditioning business grew moderately with double-digit growth in service, mid-single digit growth in residential and single-digit growth in commercial. International air conditioning demand was mixed with strong growth in Europe and flat market conditions in Asia. Favorable market conditions are expected to continue globally led by improvement in the US air conditioning business.

Next slide, Commercial & Residential Solutions. Commercial & Residential Solutions net and underlying sales increased 4% with North America and international sales both increasing 4%. Market conditions improved sequentially benefiting from the recovery from harsh winter weather in North America the previous quarter. There was strong growth in the professional tools and residential storage businesses with modest growth in wet/dry vacuums and food waste disposers. Segment margin was strong, expanding 170 basis points. Recovery momentum is expected to continue in the near term benefiting from improvement in the US residential and commercial construction markets.

Moving to slide 11, 2014 outlook. Despite areas of ongoing uncertainty, global economic momentum continues to improve gradually in an overall mixed environment. Mature market momentum is encouraging and should continue to improve. Geopolitical tension and economic challenges in some markets continue to work against (technical difficulty) and is not expected to improve in the near term. Orders growth is expected to accelerate, increasing between 5% and 7% in the fourth quarter. On a preliminary basis, July trailing three-month orders are approaching 7% growth with a standalone month of double-digit. Due to slower-than-expected growth year to date, financial performance is trending to the low end of the previously communicated guidance ranges of underlying sales growth of 3% to 5%, reported sales change of minus 1% to 1% reflecting divestitures, completed acquisitions and currency translation, reported earnings per share of $3.68 to $3.80 and operating cash flow of $3.5 billion, which is an increase from prior expectations. And with that overview of results, I will turn it over to David Farr.

Thank you very much, Pat. I also want to welcome Frank Dellaquila today who is joining us in the conference room. First, I would like to thank all investors for joining us today on this call. We appreciate it. And next, I would like to also thank the global operating leaders as they bring a very strong profitable and cash flow quarter despite actual weaker sales with underlying sales of only around 3% even with a very unstable global geopolitical environment.

Operations along the corporate organization continue to execute in a challenging environment to deliver top-line growth, good earnings margins, very strong cash flow and very good return. As Pat mentioned, we had our first cut at July and good orders for the month of July. Now the three-month average looks like around that 7%. As I said in the press release, we think it is going to be in the 5% to 7%. The key for us now is to execute and increase our sales momentum, reduce our record levels of backlog and continue to convert the sales orders or the orders that come in relative to delivering sales in the fourth quarter. Key focus -- conversion of backlog, conversion of current orders.

As we look at the world today, a lot of uncertainty. The US economy continues to improve slightly for us. Mexico continues to be good for us. Western Europe, Southeast Asia, China running at very strong levels for us. Hopefully that will continue in the next couple years. India, Japan all trending very nicely with good solid orders and good solid sales growth at the same time. Clearly, the other markets around the world where the geopolitical environments are very stressed and also are very concerning to me given what we are seeing today and have been for the last couple of months and the uncertainty that will create in any business environment for our customer base, including myself.

Profitability remains at record levels for the Company. Our cash flow is very strong. We are very much focused as we reviewed with the Board today on investing in innovation, investing in the programs, the solutions organization, the service organization that will drive longer-term premium growth and premium valuation and cash flow for this Company. Clearly, the underlying growth rate is not what we expected in the first nine months of this year. Orders remain at very good levels, but somewhat choppy relative to our customer base, but still at good levels. The pace of growth is not above what I would call the acceleration rate around 4%, but we are slightly better this quarter versus last quarter, but not as strong as we thought when we entered the quarter.

Growth is the challenge. Quality growth is very important. The pace is improving and we are clearly looking to try and accelerate this in the fourth quarter. But from the standpoint of pure operations, and what I look at from the conversion of our cash flow, again, looking at conversion of our cash flow at over 100% again this year, a 20% plus return on total capital after-tax based on what we see right now, our cash flow giving back to our shareholders at over 60% plus again this year between share repurchase and dividend and a decent level of orders, but the key issue for us is converting, getting orders out and converting those to sales and profit and cash.

So as I look at the quarter from my perspective, the quarter clearly did not meet our expectations in sales growth. Profitability and cash flow were actually better on a margin and return and cash conversion standpoint. Growth is the key issue. However, there is slight improving momentum and the key issue for us as we go into the fourth quarter and finish this year is to make that happen and convert. So where we sit today, we've got to convert, we have got to get the orders, we have got to reduce the backlog and then deliver the profitability, which I believe we are set up to do for the remaining part of this year.

But again, I'll remind everybody around the world right now the geopolitical situations are probably some of the worst I've ever seen and relative to what we face as a global company, for every good market out there, I have another market that concerns me and that is something we have to deal with as a company and something I have to deal with as the CEO and the OC have to deal with and we are dealing with that, but it is a concern.

So [while] I do that, I will open the floor for people to ask questions, but, again, I want to thank the corporate executives that did a great job this year or this quarter as we brought the quarter in and also I want to thank all the operating executives out there delivering a very strong profit and return quarter for our shareholders. So with that, Pat, I will open it up. Frank, let's take some questions.

(Operator Instructions). Gautam Khanna, Cowen & Co.

Yes, thank you. I was hoping you could talk a little bit about what you are doing at Network Power to kind of improve the margins now with the new portfolio. And is it realistic to assume kind of double-digit margins in Q4 and throughout fiscal 2015 based on what you are doing? Then I have a follow-up.

Yes, I think the key issue for us is the order pace continues to be good for us. The key issue for us at this point in time is the new [products] coming out. It is just a function of converting that and getting the costs in line. I still believe that we will see double-digit margins in the fourth quarter. And from my perspective, we are seeing the growth pick up. We are starting to see a better mix of the business. We are starting to see what I call the more transactional business start to improve. We have had some very good large projects around the world, which are obviously a little bit lower margin for us, but the growth rate is starting to build. So I feel from the standpoint of the product, our solutions organization and the management focus on this, the underlying value of the business is continuing to improve and we will continue to move towards delivering higher margins and reaching that double-digit margin as we go into 2015.

Okay, just a quick follow-up. You upped the share buyback a bit this year. If you could just talk generally about your cash deployment kind of priorities as we look to the next fiscal -- you were a little higher on share buyback than you were M&A this year. Is that sort of what we should expect going forward? Thanks.

First of all, I don't think there is going to be much change relative to the mix relative to the ratios. I will give them out to you. Our actual acquisitions were actually higher than our share repurchase. We did about $1.4 billion of acquisitions and we are going to be doing about $1 billion of share repurchases. We paid back $1.2 billion to our shareholders in dividends. We just announced our 48th year of increased dividends to our shareholders -- 58 -- I'm sorry -- 58. I can't even count anymore. And then I think internally we've raised our capital. Our capital spending will be over $800 million this year, up strongly from last year's $700 million as we continue to invest in the innovation in new products and our global footprint.

As I look at next year, assuming the same type of improvement in cash flow generation, you are going to see us probably buying back at a stock level around the same level, maybe a little bit higher if we complete the divestiture of PTS as we committed. If we do sell PTS, we will take that cash proceeds and return that to the shareholder and share repurchase, which would cause us to actually do a lot more in share repurchase. So right now, I'd say the acquisitions as we are planning them are going to be somewhere between the $1 billion to $1.5 billion. The dividend will go -- as I anticipate, I see no reason given our earnings and cash flow capabilities we will increase our dividend next year. We will make that decision in November and our capital investment internally is going to be somewhere in the $800 million to $850 million range. So that is where we look at right now. Not a big change from this year.

Thanks a lot.

You are welcome.

Steven Winoker, Sanford Bernstein.

Hey, good morning. Or good afternoon, I should say. Good morning someplace, right? A couple things. Can you maybe talk a little bit about that backlog conversion that you referenced so many times? What are the hurdles to actually getting that done? Is it operational or is it customer release of orders? How much of this is dependent on Emerson and how much is dependent upon your customers at this point?

Steve, from our perspective right now, we have the capacity and ability to produce. That is not an issue. There is no bottleneck. We have made the investments on a global basis to produce. It is very much Industrial Process and Network Power-focused. It is a function of [declare] the customer, continue to want to spend the money and complete the projects or the investments they are making. So right now, we are not the gating item relative to this. It is a function of our global customer base and it is very broad. It is not one or two customers.

Our backlog -- typically, we would not have this big of a difference between our order pace, which are running over 5% year to date and our sales, which is running less than 3% year to date. So this is a little bit unusual. From my perspective, the order pace again this month was very strong and it is a function of, okay, now let's get the orders converted and shipped to our customer base. And we are not a gating item in that area.

But, Dave, can you dive into that even a little bit? Is it the customer -- what is the general sentiment? Is it just that they are moving slowly with projects and then putting the brakes on or because of the global macro situation? What is your sense for why that conversion is slower than historically?

The conversion is the uncertainty around the world, be it from a geopolitical situation and the fact that the underlying growth of the world are substantially below what people thought they were going to be just six months ago, Steve. I mean just look on what they are watching on CBNC right now. We have a map of Africa with people sick. So the world is talking about negative things.

In that light I guess, as a follow-up, your spending path, not so much on the CapEx side, but on the expense side, you have been investing for growth pretty aggressively and have been very vocal about it coming into this year. Any early read on how that pace progresses as you transition to 2015?

I think it is going to be a function of what we see happening over the next two or three months on the order pattern. Do we see the underlying economics trends continuing to improve, which they are improving, but very gradually and we will look and see where we stand relative to what we got done this year and we will go through that internally. But a lot of these investment programs are not one-year type programs. These are investments we are making for the longer term, so we are going to continue to raise our profitability next year and we will continue to invest and continue to figure out how to position the Company for faster growth in what I would call a more challenging environment around the world for the next couple years.

Okay, great. Thanks, Dave. I appreciate it. I will pass it on.

Take care, Steve. Thanks.

Julian Mitchell, Credit Suisse.

Hi, thanks. Just on the margins, even with the sales falling short, it looks like the gross margin, you are kind of on track to hit that 100 bps improvement this year. So the culprit seems to be more around SG&A. Is there anything unusual there in that number this year that should reverse or --?

Well, as you well know, we've raised the level as we talked about in February for our internal investments relative to certain programs from the new products, the innovation and our investment in the solutions and service organizations. We have maintained that even though underlying sales are slightly below what we thought they would be year to date because fundamentally we believe in what we are doing for the long term. Therefore, we are obviously converting GP and we are putting money back in the Company and not quite giving as much back to the shareholders at this point in time. Even though the GP is going up and the EBIT margins are going up, they are not going up as much as you would expect if we had higher sales growth.

So the key issue for me as we get into the next year planning cycle is, okay, where do we modulate the continued investments and do we see continued GP and expansion, which I do believe we will see and the question is do we see continuing improvement in the underlying business spending environment, which we have been seeing for the last three or four months and now we have just got to make sure it is converted as we go into 2015. That's what I look at right now, Julian.

Thanks. And then I guess if we look at Process Management, the last few years, margins are pretty stable going back to 2011. Do you think when you look at the mix of backlog and the sort of investment requirements from here, the margins are probably like to be flattish sort of for the medium term as well?

Yes, I would expect us to build into a very flattish margin for 2015 for Process Management. I would expect -- even though the growth rate will be a little bit better next year given the backlog and the pace of business we see out there. I do expect us to continue to make some significant investments and some of the capacity that we are putting in place right now for our international business relative to Process and also even in the US will be coming online, which will create obviously somewhat negative margin pressure, but I think the growth will offset that. So at this point in time, we continue to invest. We are trying to invest in the technology and the capacity necessary to grow the business nicely and also make sure we invest in the future and not just milk the profitability of this business, which is, as you well know, very strong.

Great, thank you.

Nigel Coe, Morgan Stanley.

Thanks, good afternoon, Dave.

Good afternoon, Nigel.

I just wanted to turn your attention back to Network Power and I am just wondering, Dave, the pressure you are seeing on margins, is price a factor or is the sharp (inaudible) decline you've seen in LatAm and the Middle East, is that a bigger factor for those margins?

The lack of more margin improvement in the third quarter would be two reasons. One, the dramatic drop-off in the Middle East and secondly would be the fact that there was more larger projects, big project wins in there with the new business versus what I would call the day-to-day transactional -- the core business business, which had slowed down in parts of North America. Those are the two things that caused that margin pressure in that third quarter not seeing as much expansion. I don't see the Middle East turning around and the key thing right now as we go forward here is the continued mix of seeing some of the core business. We are seeing a little bit of that already improvement in North America, but that is clearly what is going to be key to us relative to making the improved margins as we go into the fourth quarter and we go into 2015.

Okay, that's great. And I appreciate the color on July orders, Dave. The acceleration too, I think you said double digits within the month of July. How broad-based is that acceleration? Was it primarily within Process Management or was it a bit more than that?

Well, pretty across the board. Everyone has at least a 5 in front of their name.

Okay, great. And then on the backlog, finally, obviously a lot of it depends on when customers actually want to have their orders shipped, but any visibility on when you expect to see Process Management reaccelerate in terms of sales?

I would expect Process to have a little bit better quarter this quarter in sales. A lot of -- there's a couple things that go on in our business. We are a fiscal year ending September. There is obviously a lot of things that happen relative to the people driving to make their targets and their bonuses and they actually have the orders. So I would expect to see a little bit of improvement this year, the fourth quarter in Process. I expect the first half to be better, better growth rate than we saw last year. So I think that is where we see it at this point in time. It is really a function of what happens in the North American and European business pace as we go forward here in the next couple months in orders. I think the next three quarters should be better growth for the Process business.

Okay, thanks a lot, Dave.

You're welcome. Take care.

Jeff Sprague, Vertical Research.

Thanks, good afternoon, everyone.

Good afternoon, Jeff.

Hello. Could we come back to the (multiple speakers)? What? You're breaking up.

(multiple speakers)

No, no, I am in the office. Can you hear me okay?

Yes, we can hear you. Just barely. It's a bad line.

I just wanted to come back to the investment spending, Dave. Are you guys tracking to that 110 incremental you talked about at the February Analyst Day and when you say we will look at modulating as we kind of plan in the year ahead, does that mean you are planning a lower rate of growth or an actual decline in that number? How do we think about that going forward?

I think we are tracking towards the 110. We have held very, very tight. We might have moved pieces around, but we've held very tight to the incremental programs. What I am looking at right now, what I am trying to -- what I try to express that is, as I look at the underlying global industrial environment, that it continues to improve and we continue to see the underlying growth rate slowly continuing to move back up, which then we will be able to convert into sales. And I see a momentum that tries to get us above that 4% underlying growth rate and we may actually increase it slightly, but I am trying to keep it in line to where we can grow the business and have some margin improvement next year in 2015. So I am going to look at what is working, what is not working.

The other key issue for me right now, Jeff, is in certain markets, emerging markets around the world, as I discussed with my Board today, the markets -- we've made significant investments the last several years even going way back 10 years ago, but we've made even more in the last couple of years. If I sense those markets are going to really struggle for the next 12 to 18 months, I will pull back the reins and that's a function of my concerns or concerns about certain emerging markets, let's put it that way. Not total emerging markets but pieces of certain emerging markets.

And conversely then, Dave, what you just described maybe you could say is a potential shift from offense to defense. Would we then expect restructuring to go up? It came in a little lighter than I thought here in Q3. What do you think about restructuring going forward?

I don't think I am moving to go to defense quite yet. I am still offense -- I am still on offense, Jeff. I think that from my perspective, I'm just talking about -- I may go back and -- we have already made a lot of investments. For instance, India would be a classic example. We've made significant investments in India for the last four years. India had a very difficult 18 months, order pattern is up nicely. It's just starting to turn around and therefore, do I need to really put a lot more into India. We will put some, but it is not going to be as aggressive as we have been doing.

I am definitely not shifting back into defensive mode right now and I do not anticipate restructuring to be higher next year than this year. I just don't see it. We have gone through massive restructuring. We have been investing and I think the world, from a stability standpoint from what we need to get done, we have got done. There is a couple other places, but I would bet right now my restructuring number will be less in 2015 than it is in 2014. (multiple speakers) slow down.

And maybe just finally, Dave, I don't know if you'd want to address or maybe Frank would have a quick comment, but any early read on how to think about pension into next year for Emerson on the P&L line?

Pension, pension.

Pension? Well, when we look at it right now, the discount rate is down about 50 basis points from where we ended last year. So if that holds, we are going to see pension as a little bit of a headwind next year.

Okay, thank you.

Christopher Glynn, Oppenheimer.

Thank you, good afternoon. Dave, on the backlog up 20% year to date, I think you typically have some pretty good build to this point in the year. What is sort of the normal range of how it builds from the beginning of the year into entering the fourth quarter?

I would say that 20% is abnormal. I would say typically -- and we had this discussion with the Board today -- the directors were asking the very same question. I mean as you well know guiding this thing and what is going on in the world right now is not that easy, but typically if we were growing our orders 5%, 5.5%, 6%, we typically would see only a 1.5% of that base going into backlog. We would see backlog building and we would convert a little bit more. So that is the order of magnitude, normal. Right now, it's a little bit higher than that. We have some bigger larger projects, which are going to be over multiple years, which are built in our Process area and we also have customers who have had higher growth expectations, which they are dialing those back.

So there is a little bit of difference going on here. I don't have any sense -- the cancellations aren't an issue for us at this point in time, and we have not seen any indication of that. It is just I think people are being -- they are stretching their investment dollars right now on us and, therefore, that is what is causing this delta. So delta is, I would say, about a point to -- 150 basis points higher than normal.

Okay, and do you have a year-over-year growth number for backlog?

I do not off the top of my head. What do you -- we were in end of July last year. Are you talking about -- I mean June to June, correct?

Yes.

I don't know that off the top of my head. I mean Pat can look it up. He is frantically looking through his book right now and --.

Okay, that's good to hear.

Well, I don't know -- Pat doesn't do anything frantically. He is calculating right now. Frank is going, oh my God, Pat is going to give him a number (inaudible) by the CFO.

Well, we have got to keep you busy while they are busy.

Here we go, we've got it right here.

It's up about 11% year on year.

Okay. And then, Dave (multiple speakers).

We historically reduced it in the fourth quarter.

Right. And then if you could even just vaguely sort of handicap the segments versus the multiyear CAGRs you laid out earlier in the year for 2015.

The multiyear? Okay, right now, okay, yes, I'll give you early, early gut. I am not going to give you numbers. I know what he wants. He wants me to say versus my long-term growth rates of the segment. I would say right now, if you go with February, you are talking about February, you've got the February picture, the February number I gave you for Process is what? Do you remember?

5% to 7%.

I would say that Process is going to be in that -- I would say that Process will be in the next -- that would be the next three years, I think I had there. Three years, is that what that was? What have I got there? Pat has got it right here. We said 5% to 7%. I would say the next -- I would say they are going to be in that range right now. They are still in that range. I would say Climate net 6% is going to be in that range. Right now, Commercial Residential will be in that range. Network Power I think has the potential to be slightly above the range I gave you of 3% to 5%. And Industrial Automation I think will probably be in that range at this point in time.

Great, thanks for that.

I think the progress we have been making in Network Power on the global reach and the technology and the product is really starting to pay off.

Thank you.

You're welcome. Take care.

(Operator Instructions). Rich Kwas, Wells Fargo Securities.

Hi, good afternoon.

Good afternoon, Rich. How are you doing?

All right. Industrial Automation here the next couple of quarters with Cat's numbers down on the power gen side over the last few months, how do we think about that playing out near term for the business? I assume there is some deceleration here expected, but if you could provide some color, that would be great.

Yes, Caterpillar is not only a customer in the space and our not-Cat business has still been doing pretty good. We've gained some other market space around the world, so we've seen a better non-Cat environment. Cat is still working through its inventory issues, but the key thing for me right now is continued improvement in our European business space for Industrial Automation. But right now, the Cat is always a concern, but right now I am interested in other non-Cats in the alternator space than anything else, which is (inaudible) okay.

All right. So the momentum in the non-Cat stuff is there to at least be a decent offset to what you are seeing on the Cat side is the way we should think about it?

Correct, correct. And also the Cat stuff -- Cat typically -- what they are doing right now may impact us further maybe in three or four months versus today. Typically they don't react -- like, okay, they have a bad month this month, let's adjust that quick. They may take a couple months because they are volatile too and they have to be very careful they don't turn things up or down that rapidly.

Right, okay. And staying on IA, just what do you see in terms of assets for that business? I know that's a focal point for M&A dollars and what are you seeing in terms of attractiveness of assets and trying to bolster the portfolio there?

We continue to look for assets. We honestly have not made or found anything of substance this year in the assets. It has been mostly Process and a little bit of Network Power. Nothing in the Industrial Automation and I would say, right now, we have nothing going on in Industrial Automation even though that asset space is very interesting to us. Prices are pretty high at this point in time, so we are still looking. We are not in any big hurry here.

Okay. All right, thanks.

You take care. Have a good one, Rich.

Thanks.

Steve Tusa, JPMorgan.

Hey, good afternoon.

Good afternoon, Mr. Tusa.

So just on Network Power, I think you (inaudible) numbers previously. The margin in the third quarter of 2013 ex-embedded was what? It's a lumpy business in the second half, so I just wanted to make sure that I was looking at that the right way.

About the same, about the same.

So 8.1%?

Yes, about the same. Around 8%.

Okay. So for the year in Network Power, where do you now think that that margin is going to come in? I think the prior guide was 9.7% to 10%.

I would say it is going to be at the low end -- it is not going to reach 10% for the year. And so it is going to be at the low end, around 9%, between 9%, 9.2%, somewhere around there.

Okay. And so I guess in the context of stuff is growing a little bit here. Again, you are kind of down year over year in the margin, even though I think the core revenues are flat to up. So these big projects, are these kind of like the mix impacts on the big projects, is that something that is with you going forward or how does that dynamic change to improve profitability there over the next year?

I think the key issue for us is we had a slowdown in the core what I call the traditional space in the last three or four months and that business is starting to pick back up. The project business, it was a bigger mix this quarter and that happens from time to time as this marketplace has changed. We see that happening and as we continue to work on the cost of new products. So I see this business getting in a solid 9% EBIT margin for the year as we finish this year and then move on up from there as we get into 10% plus going into 2015. That is how I see it at this point in time. And you are always going to have this big project mix come in and out, but the key to me is getting that installed base in there and then getting our service organization in to create value for us in the long term.

Okay. And then just one last question, more detailed. You mentioned pension. In the last couple years, there has been ERP investment, incentive comp. There has been a lot of nonfundamental stuff moving around. Anything else now for (technical difficulty) do you want to highlight with regards to the nonfundamental type of stuff?

No, we will continue -- we are moving -- continuing investments in ERP as we go in and finish off Network Power and Climate. The pension -- if interest rates continue to drop, then we will have that issue there, but I don't think it is going to be a big headwind for us next year. I don't see us having a comp -- comp is going to drop a little bit next year, so it's nothing big at this point in time. Restructuring, probably the odds are pretty high it will be slightly less than this year. So no, I don't see anything big moving next year, Steve, to be honest, plus or minus.

Okay, thanks a lot.

All the best to you, Steve. Thanks.

John Inch, Deutsche Bank.

Hey, Dave. So I'm just thinking about next year. So it sounds like we are building some momentum in some of these businesses. We are going to do maybe 3% organic this year; hopefully a little bit better than that next year. If you put it all together, how are you thinking about the prospects for perhaps doing double-digit earnings-per-share growth in 2015 fiscal?

A little too early to talk about that, John. I think that it's a function of -- I've got to see -- it's definitely too early to talk about that because I have got to see how the underlying business spending environment continues to improve as we finish this calendar year. I would say that we have been a little bit unusual. We increased our spending this year because we are making some strategic investments and the question -- some of our other customers have not, so the question is will they start turning it on? I think they are going to have to turn it on because they have under, in my case, in my opinion, they have underinvested in certain areas. So it is really a function can we get above -- for me, I need to get this number above 4% underlying sales growth, as you well know, to really start seeing an acceleration and I'm not ready to make that call yet. But it's too early to call, John.

Yes, that's fair. It sounds like if it is going to happen though, it probably -- would it be fair to say it is more likely to be a back-end-loaded year. Is that the way you are thinking about it or is that also too early to tell?

It's too early to tell. I am hoping that there is good momentum going out of this fiscal year going into the calendar year, but it is still too early to tell. It is really a function -- okay, as we -- they just put a GDP number out there; it is a pretty decent number. Now how real is that number and is there momentum coming around that and can Europe sustain its improvement and does the whole thing in the Eastern Europe, Russia situation, does that get worse and then also can -- China continues to improve for us -- can that maintain? So there's a lot of things going our way, but there is also some concerns I have, as I've said, in other parts of the world. So I think it is a little bit early to see -- there is too many what I'd call question marks out there. Too many of them.

Yes, no, that's fair. The down Middle East numbers for Process, is that being driven by presumably to a degree some of the political strife you are seeing in the region, but is it also a function of I think some of the energy companies redirecting perhaps some of their own CapEx dollars back to North America or is there -- is it more of an Emerson-specific timing issue or what is really going on there?

Not really a redirection of capital spend from US companies back to this country. The countries that are investing in the Middle East typically are going to continue to invest in the Middle East. It is just a function -- our customers in the Middle East basically are redirecting where they are spending their money, how they are spending their money and have really slowed down their spending on oil and gas and chemical investments in the Middle East. I think as long as the turmoil continues in the Middle East, I think that will continue to be a concern for our customer base and obviously for me.

Okay. So it's not a question of redirection; you are saying your customers you think are slowing in the Middle East simple because of the political turmoil that's happening. It's like an uncertainty climate or whatever, is that what you think happens?

That is what we are seeing; that's exactly what we are seeing. They are spending money not with us, but with other people, other industries.

Understood. Other industries. And then just lastly, right, so we've had pretty soft industrial markets for a little while, the pullback in industrial company share pricing. I mean are you considering possibly some larger portfolio actions on the acquisition or divestiture side or possibly even raising more debt perhaps? You seem to have a lot of debt capacity to repurchase your shares.

Not at this very point in time, no. Let's see other things unfold.

That's fair. Thank you.

Okay, thank you, John. All the best to you.

You are welcome.

Jeremie Capron, CLSA.

Hi, thanks for taking our questions. This is Grace Lee sitting in for Jeremie Capron. We have a question on China. Just wondering the prospect of growth in China, I noted that Emerson has seen good growth from China for the past couple of quarters. Do you expect this growth to continue through the fourth quarter and fiscal 2015 amid a weakening construction market as well as a tight credit environment in China?

What we've seen so far, Grace, is as follows? One, we've had four very strong quarters. In fact, if you take the last four, we've averaged over 8% for the last 12 months on underlying sales growth in China. Our orders have been in that range too. We had a very strong fourth quarter, so I would expect our fourth fiscal -- we had a strong fourth quarter last year. I would expect our fourth fiscal quarter this quarter to be positive, but not as good as we've seen the last two or three quarters. It is just a comparison issue. So I just think we are going to have a good number for China for the fourth quarter.

As I look at 2015, our investment profile right now is still decent. I expect us to see between 5% and 8% growth coming out of China next year based on what I am seeing from our new product base and our customer base and based on the industries we serve. So as of right now, as I look at the current expectation for my folks and where we are right now in China, China looks like it is going to be growing for us and it might be growing slightly less or about in line what we saw this year.

Great, thank you.

That's where we are. You are welcome.

Mark Douglass, Longbow Research.

Good afternoon, everyone.

Good afternoon, Mark. Where are you sitting today?

Oh, in Cleveland.

Are the Indians going to make the playoffs this year?

There is a good chance, but unfortunately I am a Cubs fan.

How can you be a Cubs fan in Cleveland?

I grew up in Chicago.

Okay, okay, well, I am a Cardinals fan, if you hadn't figured that and Frank's a Yankee fan and Pat, we can't figure out exactly what he is, but --.

He is a football fan.

He is a football fan. But I have got a Yankees fan and a Cardinals fan here and I think -- did we win the last World Series against the Yankees or did you guys beat us, Frank?

That would've been 50 years ago.

50 years. You and I are both 50 plus years, so we both were alive back then. I heard a game; I watched it. Go ahead. Enough about baseball, Mark. Go ahead.

All right, yes. On Europe in Industrial Automation, I would have assumed it would have been a little better just seeing some of the macro data out of Europe, especially Northern seems to be a little bit better. Was it a broad pullback for you in Industrial Automation there or certain regions or products that hampered the growth?

Three things. We are very strong in Industrial Automation in France; that economy is still negative. Next key market for us is Italy. Can't say much help there either and the third key issue is our alternator business with Caterpillar still is pretty weak in Europe. Those three things were the three issues that hurt us in Industrial Automation. If you take those three out, we did very well, but unfortunately those were three big things.

Yes, (inaudible) related to the mix and where you happen to be exposed?

You got it. We need France to come back. We are very strong in France.

And the Tour didn't help you out there, did it?

No, did not. Neither did the World Cup.

On Network Power, how is Trellis doing in Network Power? Are you getting the results you expected with the improvements there? And is that going to help margins or it's still margin dilutive right now and then what are you seeing right now in Trellis and expecting to see --?

I would say the trend line is still positive; it is not as fast because of some of the North America projects have been weaker for us the last six months, but it is still positive. It's still doing better than last year, not doing as well as we want it to do, but it is still doing better than last year. It has got good momentum. The profitability is good. It is not a profit dilution from that perspective.

The key issue for us is continue to try to get the North America spend, in particular the financial industry, which has not been very good, to come back up. So I would say we are still pleased with the progress we are making on Trellis. It's not as far along as we want it to be, but we are still pleased with it.

Okay, thank you.

You take care, have a good one and good luck with the Cubs. It looks like they are building a pretty good farm system right now.

Let's hope.

Yes, well, we always like playing the Cubbies.

Because you win.

Jonathan Wright, Nomura.

Hey, guys. If I could just go back to Industrial Automation for a second. So I think we covered the geographies. Just in February, you highlighted a lot of new product launches you had rolling out over the course of this year. I see motors and drives is still struggling. I would've thought you maybe would've got a bit of an impetus from that bit of the business. Can you just talk about how those products have been received? Just tell me what you expect to see sort of going forward.

The motors and drives part of our new products are doing very well on the order side. We have a lot locked up in orders -- have not converted to orders and Industrial Automation, in particular, on what I call on the control technique side have been very good. We just have not converted them yet. The customer base is slowly converting those things based on their projects as they slowed them down. So the conversion and acceptance of the new products and the order run rate is very, very good. It is just right now we have got to get our end customer to convert.

Okay. And then maybe just sticking with that then, I think we've talked a little bit about why people aren't converting. You have mentioned sort of political risk and the general sort of climate of nervousness around economic growth. Why do you think the order growth is remaining so robust given those concerns? I understand the weakness on the conversion side, but the order growth seems quite strong considering that.

I think a lot of it is relative to our investments and the programs we have going on as we invest in the sales organization, as we invest in our service and solution organization. So we are actually expanding what I would say our see and get, go out and find it and get it and convert it. And just the customer base has taken a little longer to convert because I think they are uncertain. But what I like right now is the momentum relative to the new products, the momentum on the sales side is very positive and now we have just got to make sure the customer base continues to take the product. And I think from that standpoint, it is very good and I can understand why some of the customers are getting nervous about slowing things down, but I like the fact that -- I would say we are increasing our penetration and we are increasing our position on a global basis based on my order pace and that is a good sign. It's a very good sign.

Okay, great. Thanks, guys.

Take care, Jonathan. All the best to you.

Andrew Obin, Bank of America Merrill Lynch.

Yes, good afternoon.

Good afternoon, Andrew.

Just a question on your CapEx spending. Where are you spending your incremental CapEx? Where are you adding capacity by geography or product-wise? And what are the areas that you are downsizing as long as we are on that?

Okay. Relative to the capacity, right now, I don't think I am taking much capacity off-line. From a capacity standpoint, we are [adding] capacity quite a bit in Process Management and we are adding capacity in Process Management both in the US, Mexico, Eastern Europe and China and then not much expansion in Industrial Automation and then in Network Power, we have been repositioning some of our north Asia assets to south Asia and then also into Eastern Europe. And probably in the next couple of months Mexico.

Are you guys expecting to see any impact from Russia sanctions in the energy sector?

If they continue to ratchet them up, eventually that will eventually hurt our Process Management business. I mean as we've said in the past, we do about $0.5 billion in Russia and very much oil and gas-centric. If the sanctions continue to go up, eventually we are going to see. And we've been seeing our business weaken as it is anyway, so we are already starting to have the impact -- in this quarter, last quarter, it was negative on us and I expect that to continue.

And just a follow-up question on Climate. Europe actually seemed to be pretty good. How does it square with your comments about Europe slowing?

Well, Europe, depends what part of Europe.

Got you.

Now Climate strength is primarily north Europe and so from the perspective of the customer base for Climate, the north Europe and some of the further parts east, it has been pretty good for them and they are not strong in Italy and strong in France. So the marketplace for those guys has been pretty good and the technology investments they are making for efficiency and some of the changes they are making in refrigerants have been positive for us. So different dynamics. Unfortunately, not all the markets react the same within our Company right now.

Terrific. Thank you very much.

You are welcome, Andrew. Take care now.

Steve Tusa, JPMorgan.

Hey, sorry, just --.

You snuck in the back door, Tusa. What are you doing? Are you trying to steal some apples or something?

Yeah, that's my style. The Climate Tech margins are pretty good, obviously 21% and I think you're going to end up being kind of flattish this year annually. Is that a process, a similar process where you investing a lot of money there and so should we think about kind of 19%, 18.5% to 19% as a good kind of longer-term run rate?

I think for the next couple of years I think that margin is going to stay about where it is right now. It could start inching up. We have a couple major investments going on right now in variable speed. We have a couple major investments going on for the new refrigerants and we have a major investment in some very important new product launches in the commercial space both in China and in North America that have increased our investment profile. So I think that will continue for this year, next year and potentially part of 2016, but I would expect if the business continues to trend well, we should be able to improve our profitability because our mix is getting stronger and stronger towards the commercial, the industrial and service space. And that is starting to pay off as you can see from our profitability.

Okay, so modest improvement with investment offsetting better mix?

You got it.

And then one last question, restructuring for this year, I don't think you mentioned a number. It seems like it is going to be coming in lower than the $75 million.

I think it will come in $65 million, $70 million.

$65 million, $70 million.

$65 million, $70 million. Okay, great, thanks a lot.

If I was looking at next year, Steve, I would -- since you came in the back door, I'd say $60 million to $70 million.

Okay, great. Thanks a lot.

All the best. And I want to thank again everybody on the phone today. I really appreciate it. I also want to thank again all the operating people that delivered the quarter and now we have to deliver for the final quarter for the year and convert that backlog and continue to grow the business. So with that, I thank everybody and I wish you all the best and see you soon. Bye.

That does conclude today's teleconference. Thank you all for joining.