艾默生電氣 (EMR) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by.

Welcome to the Emerson investor conference call.

(Operator Instructions) This conference is being recorded today, November 4, 2014.

Emerson's commentary and responses to your questions may contain forward-looking statements including 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 SEC.

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

Please go ahead.

Thank you, Danny.

I'm joined today by David Farr, Chairman and Chief Executive Officer of Emerson; Frank Dellaquila, Executive Vice President and Chief Financial Officer; and Craig Rossman, who will be succeeding me as Director of Investor Relations in the coming weeks.

Today's call is to summarize Emerson's fourth-quarter and fiscal 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 will start with highlights of the quarter as shown on page 2 of the conference call slide presentation.

Net sales were unchanged in the quarter at $6.8 billion with underlying sales up 4%, reflecting increases in all segments with Climate Technologies strongest.

Growth was strong in North America and modest in Asia, while Europe was flat.

Emerging markets improved to 5% growth after 2% growth in the third quarter, but remained mixed across regions.

Profitability improvement continued with a gross profit margin of 42.4%, up 120 basis points, and segment margin up 70 basis points to 20.2%.

An impairment charge of $508 million was recognized in the Chloride business, which has been impacted by protracted economic weakness since its acquisition in 2010 and a deteriorating outlook in Europe and Middle East/Africa over the next two to three years.

Earnings per share of $1.30 increase 10% excluding charges in both years.

With a strong close in fiscal 2014 with margin earnings and cash generation exceeding expectations.

Slide 3, P&L summary.

As previously stated, net sales were flat while underlying sales grew 4%, reflecting the impact of currency translation and divestitures.

Gross profit margin expansion benefited from improved business and technology mix, which enabled funding of strategic investments as reflected in higher SG&A expense.

The decrease in other deductions was properly driven by favorable currency comparisons of $43 million.

Excluding charges, EBIT margin expanded 160 basis points to 20.1% with strong contribution from segment margins and favorable stock compensation expense.

Share repurchase of $267 million contributed EPS of $1.30, up 10%.

Next slide, sales by geography.

In the fourth quarter, sales growth was led by the United States, up 8%, while Europe was flat; Asia grew 2%, including unchanged sales in China on challenging comparisons; Latin America increased 3%; Canada was up 10%; and Middle East and Africa was up 5%.

Total underlying sales increased 4% and acquisitions added 2%, while divestitures deducted 5% and currency translation deducted 1% for flat reported sales.

For fiscal 2014, 4% growth in the US and 7% growth in China drove the majority of the underlying sales increase.

Europe and Canada were up 1%, Latin America was up 2%, and Middle East and Africa declined 1%.

Full-year underlying sales grew 3% and acquisitions contributed 1%, while divestitures deducted 5% for reported sales in 2014 down 1%.

Strong market conditions in the US and improvements in emerging markets drove growth acceleration in the fourth quarter, the highest quarterly rate of growth of the year.

Slide 5, segment earnings and cash flow.

Segment margin expansion of 70 basis points (technical difficulty) improvement in process management and industrial automation.

Lower corporate expense was primarily driven by favorable stock comp comparisons of $54 million.

Reported pretax earnings reflected a previously mentioned charge.

Cash generation exceeded expectations with strong conversion and working capital management to finish the year.

Trade working capital improved by 10 basis points.

Next slide, Process Management.

Process Management underlying sales grew 5% in the fourth quarter with North America up 13%, Asia up 1%, Europe flat, Latin America up 3%, and Middle East and Africa up 5%.

Acquisitions added 4% and currency translation deducted 1% for net sales growth of 8%.

Momentum continued in global energy and chemical industries with growth strongest in North America, driven by robust investment in oil and gas, production, and processing projects.

Asia was slow as strength in Southeast Asia and India was offset by challenging comparisons in China and Australia.

Europe reflected improvement in Russia, offset by lumpy project timing in the North Sea region.

Market conditions in Latin America and Middle East and Africa were mixed.

Margin remained strong, up 130 basis points in Q4, driving 20.9% margin for the full year.

Robust order trend have resulted in double-digit year-end backlog growth, providing strong momentum in 2015.

Slide 7, Industrial Automation.

Industrial Automation net and underlying sales increased 5% in the fourth quarter with North America up 12%, Asia up 5%, Europe and Latin America down 2%, and Middle East and Africa down 9%.

Demand for capital goods continued to improve with mix trends across markets and geographies.

All businesses grew except for motors and drives, reflecting short-cycle economic weakness in Europe.

Strength in North America was led by over 20% growth in the hermetic motors business.

Asia benefited from continued strength in China, particularly in the power transmission and electrical distribution businesses.

Strong interest has been received in the power transmission business and a decision is expected by end of calendar year.

Varied market conditions are expected in the near term, with favorable momentum in North America and Asia and soft demand in Europe.

Next slide, Network Power.

Network Power underlying sales increased 1% with North America up 1%, Asia down 3%, Europe up 7%, Latin America down 2%, and Middle East and Africa up 9%.

The divested artisan and connectivity solutions businesses deducted 20% and currency translation deducted another 1% for a reported sales decrease of 20%.

Data center markets have gradually improved globally.

Strong growth in Europe benefited from a large project in Sweden, along with better market conditions in North America and modest growth in Asia.

Telecommunications infrastructure investments slowed in all geographies, declining at a double-digit rate for strong growth in the third quarter.

There was a solid finish to the year on margin for the segment, up 400 basis points sequentially.

As mentioned previously, we have taken a cautious economic outlook in Europe and Middle East and Africa for the next two to three years, and as a result, we have recognized an impairment charge in the Chloride business that is not reflected in the segment results.

Business conditions are expected to remain mixed with gradual improvement in the data center business and inconsistent demand in telecommunications markets in the near term.

Slide 9, Climate Technologies.

Climate Technologies net and underlying sales increased 7%, with North America up 7%, Asia up 8%, Europe down 3%, Latin America up 17%, and Middle East and Africa up 25%.

Growth was strong globally in the air-conditioning business, led by strength in the US, with residential up over 20%, reflecting demand driven by upcoming regulatory changes.

US commercial markets improved as well.

International air-conditioning demand was mixed with strength in Asia, Middle East/Africa, and Latin America partially offset by declines in Europe.

The refrigeration business grew moderately, led by continued strength in transportation markets.

Demand for sensors and controls declined moderately.

Segment margin declined due to unfavorable mix, higher investment spending, and customer accommodation expense related to a manufacturing process improvement.

Market conditions are expected to remain favorable, with growth momentum in North America and Asia, while regulatory demand will slow.

Commercial and Residential Solutions on slide 10.

Commercial and Residential Solutions net and underlying sales grew 5% with North America up 7%, Asia up 3%, Europe down 2%, Latin America down 5%, and Middle East and Africa down 22%.

Strong demand in North America more than offset a slight decline in international markets.

The growth was led by the professional tools, wet/dry vacuums, and food waste disposer businesses.

Sales increased slightly in the storage business.

Segment margin remained strong at 23.2%.

Solid trends in residential and commercial construction markets in North America are expected to continue, spurring a moderate growth outlook for the next year.

Next slide, 2014 summary.

Fiscal 2014 net sales declined 1% and underlying sales increased 3% with emerging markets up 4% and mature markets up 3%.

Gross profit margin again reached a record level and EBIT margin of 16.5% expanded 50 basis points.

EPS, excluding charges of $3.75, came in above previously communicated expectations on the strong year-end close.

Emerson completed the 58th year of consecutive dividend [increases] (technical difficulty), as stated by record operating cash flow, with a payout ratio over 60% for the fourth consecutive year.

Next slide, 2014 performance versus plan.

Most financial targets were achieved or exceeded in the year with gross profit margin and operating cash flow ahead of plan, EBIT margin meeting plan, and earnings per share just above the midpoint of the range.

The solid operational execution of returning lower-than-expected macroeconomic growth as emerging markets, excluding China, struggled to maintain economic momentum falling short of expectations.

Next slide, 2015 outlook.

Underlying orders growth of 9% in the fourth quarter drove year-end backlog to a record $6.7 billion.

The global macroeconomic trends mixed, but gradually improving.

There continues to be solid momentum in the NAFTA region and China with the balance of increasing uncertainty in Europe and some other emerging markets.

We are planning cautiously for global gross fixed investment of 3% to 4% growth next year.

Based on current business conditions, the following is expected in 2015.

Underlying sales growth of 4% to 5%; reported sales changes of zero to 1%, reflecting a 2% deduction from currency translation and a 2% deduction from the potential power transmission divestiture.

Modest profitability improvement is expected as well.

Business segment and other financial metrics forecasts will be provided at our annual investor conference in February 2015.

Additionally, the first quarter 2015 dividend has been increased 9% to $0.47 a share, equivalent to an annual rate of $1.88 and representing 44% of 2014 free cash flow.

With that, I'll turn over to David Farr.

Thank you very much.

First, I want to thank everybody for joining us today.

We truly appreciate your interest and your support as we continue to invest, grow, and enhance the value of Emerson's long-term, sustainable value.

And as you all know, I have a strong focus at this Company on giving money back to our shareholders.

In 2014 we ended up passing back to our shareholders almost $2.3 billion, $1.2 billion in dividends and $1.1 billion in share repurchase.

A focus in this corporation on generating cash, invest that cash for growth, and give the money back to shareholders that we do not need.

Today the Board did increase our dividends per share, as Pat just stated, to an annual run rate of $1.88 versus last year's $1.72.

We had a very strong cash flow year, and as our targets are set up for dividends, we look at 40% to 50% of our dividend payment coming out of free cash flow.

And last year's three cash flow at almost an all-time record, we made a decision to pass back more money to our shareholders and increased dividends to $1.88, starting our 59th straight year of dividend increases for our shareholders.

As I look at it, I want to thank the operations for their strong operational performance across the board.

As in any company of this size and complexity, you have some pluses, you have some minuses, but in total the team worked hard and they delivered.

They delivered a very strong sales growth.

They delivered a very strong orders growth, strong cash flow, and conversion relative to their programs that we've been investing in the last couple of years, so we see good momentum as we move into 2015, which we will talk about.

But the business leaders, the presidents, the global operational leaders, and the corporate executives that make things happen here at Emerson got the job done and I believe, in a very uncertain global economic environment, delivered record levels of profits and earnings and cash for our shareholders.

As Pat mentioned, he has given up on me and he will be stepping aside here at the end of this calendar year, moving to Asia, working for Climate Technologies.

Pat has been a lot of fun to work with.

Pat has had the joy of going through ups and downs of this marketplace and my moods up and down and managing shareholders.

We truly appreciate what he has done for us and his insights, and we wish him well as he moves on to his next role with Climate Technologies located in Asia.

With that, we are bringing a senior-level player in, a relief pitcher, Craig Rossman, almost 20 years with the corporation.

Craig worked for me at one time in the process world, then moved him over somewhere else, a couple other divisions.

Came out of Therm-O-Disc.

He is coming in from a business perspective, so he will have a lot of background in business.

He's not quite used to the corporate people here and he will have a fun time learning what it's like to work in St.

Louis.

But we welcome Craig.

He will do a great job and he will bring a different perspective to the business world, given all the business that he has been involved with in his job at Emerson for the last 20 years.

As I mentioned, as we look at the Company and look at the performance this year, obviously we can always say there's some good things and I can equally say there's some bad things.

And I know my shareholders out there and investors who are out there will gladly point out the goods and the bads.

They are real good at that.

But I look at the Company today from where we are and where we started, and I'd say the Company is in a stronger position today than when we started this fiscal year.

We grew orders nicely.

We made strategic investments.

We did a couple strong acquisitions, got a couple divestitures done.

We are in the middle of one right now and hopefully we will get it done sometime in the second fiscal quarter of 2015 on power transmission solutions.

We have improved the order run rate.

We've improved our margins.

We improved our profitability.

We had -- without the Chloride charge, we had ROTC, return on total capital, over 20% after-tax.

We had a record level operating cash flow and we had a near-record in free cash flow.

So operationally, yes, some good, some bad, but in total they got it done and they did a great job in creating a stronger company as we go into 2015.

2015 is going to be an interesting year.

We go in with a record level backlog.

We go in with strong orders.

We go in with record levels of profitability.

We go in with strong investments.

We have a very good US, Canada, and Mexico marketplace.

The NAFTA region looks very solid right now.

However, this year versus last year we are going into a situation where Europe is weakening.

Europe is clearly heading down, potentially for its third recession since the 2008 peak, which is a concerning issue for global companies like Emerson and global leaders like myself.

One of the reasons why, as I looked at the Chloride acquisition we made several years ago, it was hard to justify the goodwill out of there given the fact that I am really concerned about the European environment for the next several years.

So concerned about Europe.

A little bit concerned about Eastern Europe, Middle East/Africa.

They have a lot of issues going on in those regions right now and I would say the wind has turned from our back to our face in the last six months and I would expect those to be in our face for the next six to 12 months.

In South America I'm concerned, driven by concern over Brazil and Venezuela.

Chile, Argentina -- concerns there.

I think those economies are still struggling and will not give us a whole lot of growth in 2015, but will give us some growth.

But not to the level I would expect in a normal economic cycle down there.

Asia-Pacific, in general, we had a decent year.

China was very strong for us.

China we grew 7%.

I would expect China to grow again next year, but not at the same level, probably closer to 5%.

I expect Southeast Asia, India, and then also Australia to have a decent year for us in growth.

But, net-net, a slightly more positive global economic environment for us to operate in, though there is also more uncertainty as I look at today's economic environment than we face as we started fiscal 2014.

I look at underlying sales to be up slightly in the 4% to 5% range.

I see improvement in our profitability and I see probably most likely cash flow being flat, more a function around what happens with our growth rates and also what happens relative to just the overall performance of the growth around the Company around the world.

But clearly running at record levels, high levels of cash flow.

We will clearly give a lot more color in the markets, as we always do in February, where we breakdown and give you different underlying growth rates of what we see out there.

But in general, total see a little bit better growth.

I see a lot more concern than I did last year at this point in time, but I feel good about where we are going into with our programs, investments.

And I feel good that we will start 2015 on a good, positive foot and clearly we will talk about that as we get into February time period.

We will clearly give you a lot more inputs in February.

We don't always give guidance in November, contrary to what people believe.

We sometimes give you pieces of the action of what's going on, but clearly with the uncertainty that we see around the world, in particular right now in Europe, Eastern Europe, Middle East, and Africa, we are being cautious.

We are being concerned and we are being careful about what we are going to say.

We will get better clarity as we move into the next calendar year as we move into that February time period, albeit we see better underlying growth at the top.

We see margin improvement; therefore, we will see some impairment in earnings.

And we'll talk about that in February.

But in the end, a solid year.

Got there a little bit differently than I would originally thought, but in the end it finished very nicely, very strong.

Good earnings per share, good cash flow.

You also noticed on a cash flow conversion, free cash to earnings, we did 110% this year on top of last year's 115%.

So good, high-quality earnings and from the cash flow generation and net earnings standpoint.

So I feel good about what the operations delivered; I want to thank them one more time.

We will turn over the call to the shareholders out there.

I'm sure they have questions, they always do.

I'm sure they'll have questions that I'm not going to answer, but we will obviously talk a little bit about those.

So with that, I'm going to thank everybody for delivering a strong finish to 2014 and looking forward to a strong start to 2015.

Thank you very much.

(Operator Instructions) Josh Pokrzywinski, Buckingham Research.

Good afternoon, guys.

Dave, did you remember to vote today?

I voted absentee three weeks ago.

I have a Board meeting yesterday and today, so I've already voted.

I hope you voted.

Yes.

So first then -- I guess, first and foremost, on the correction in oil prices that we've seen, obviously you guys are carrying high levels of backlog.

Order intake remains strong.

What kind of feedback are you getting from your customers on any sensitivity to some of these projects if oil stays down, and what kind of duration would it need to stay down before you see risk or your customers see risk to some of these bigger projects?

Clearly, there's not one simple answer here on this, Josh.

It is a concern to us.

It's a concern to my customer base when I talk to them.

There's not just one number, but clearly as this price of oil drops down into the $70s, there is a concern that they will start slowing down some of the incremental new projects from the standpoint of what they do next.

My concern will be, as their concern is, if the price of oil continues to slip down into the $60s, into the $50s, if it goes that low, that clearly that would cause them to really start pulling back on their spending, which will obviously impact us in a significant way.

We will see it -- we will start seeing this in the, I would say, early 2015 calendar quarter if the price of oil stays down.

I think it needs to stay down for at least 30 days to 60 days, depending on the type of -- the oil and gas, which they are going after.

But clearly right now with this downward slope in the price of oil, it is a concern relative to our core businesses and where the money is being spent.

So a little bit nervous about that at this point in time and a lot of volatility.

Flags are up and we're going to watch it very carefully, and if we have to modulate our spending and things like that, we will obviously clearly start doing that.

But it won't take long.

We will know early on in that first calendar quarter where things are trending.

Got you, that's helpful.

Then you mentioned in your prepared remarks about capital return to shareholders.

I guess one thing that you guys have always wrestled with is some of the trapped cash.

Been discussion that if certain things go right politically tonight that maybe there's some tax holidays and repatriation.

Have you guys thought about what you might do if you get better access to the international cash?

We bring it back and I would say the number would have a 2 in front of it with a B in the back side of it.

And so we'd take that money.

We'd bring over $2 billion back into the United States and we invest it here in the United States.

Will give some of it back to our shareholders and internally we invest it.

And so clearly that would be a positive, positive source of cash for US companies if we are able to bring that back at a reasonable tax rate.

Let's say they have a 5%, 6%, 7% tax rate on that, you would see that money come back into the United States and get invested in this country and pass back to our shareholders.

Do you think bulk goes to internal investment or back to shareholders, or is that a nebulous question still?

That's a nebulous question.

I will be very -- some of it will go internally.

Obviously what we see right now is a stronger North America, which means there's going to be more investments.

And so if I had that cash versus going in a commercial paper market, clearly I would use that cash to invest.

It's not going to drive incremental investment, per se, but it will obviously -- we know that money will go to use here in the United States because of the strong US environment we see right now for both growth and investments.

So it would be a good thing for the US economy because, you invest the dollars and capital, it's going to create jobs.

Got you.

All right, thanks, David.

Rich Kwas, Wells Fargo Securities.

On process, what's the profile of the order base at this point (inaudible): upstream, midstream, downstream?

How would you characterize that?

I couldn't give you a number off the top of my head.

It's not a number I see.

Clearly, we -- we're involved in all aspects of that, but I don't have the number off the top of my head.

I mean some of the large projects obviously upstream from an investment standpoint relative to going to get the gas and going to get the oil, but right now, I would say we are predominantly downstream across the board.

Okay, all right.

Then when you look at CapEx, the almost $770 million this year, are you expecting a slight increase next year?

How are you thinking about spending?

We are looking at right now -- our target all year long was going to be somewhere around $775 million to $800 million.

We got a little bit under $800 million at $776 million.

I would say next year the target is going to be somewhere in the $800 million, $825 million.

We still have some investments we are making on our global reach and other investments, so at this point in time we're looking to spend around $800 million to $825 million.

That is about as close as I can call.

Okay.

Then on climate, with the pull-forward here with regulatory stuff, I assume that's going to hit mostly in the fiscal Q1, maybe a little bit into calendar Q1.

But how would you characterize the growth rate?

I would assume you would see a pretty strong growth number here in the fiscal Q1 number -- quarter.

The pull-up due to the efficiency change is going into place on January 1. The production has to be produced by our customer -- the Carriers, the Tranes, the Lennoxes.

It has to be produced by 12/31/14.

So we will see all our pull-up impact will be done with -- by the end of November, early December, so it will be all finished.

And then we will start seeing the payback, some of that -- of the drop off in our second quarter and our third quarter as we go into the 2015, which would be the first and second calendar quarter.

That is how we are going to see it at this point in time.

Is there going to be (multiple speakers)?

We will talk about it, but the overall growth rate right now we are looking at -- if you look through this cycle, it looks to me I think it's going to be mid to upper single-digit for North America this year.

The best I can tell.

It's a function of what happens to some of the housing, but right now I would say the 5% to 10% type of range.

Okay.

Then that helps your leverage here in the fiscal Q1 in terms of climate, right?

You should get some pretty good offerings out of it?

That will clearly help us from a cost absorption standpoint.

We are usually -- at this point in time our plants are at the lowest level and then we are sort of -- now we are going to be running at the highest level.

And then, unfortunately, we will give some of that back in the second and third quarter because of what happens as demand goes down, but that's what is going to happen.

It's going to be a little bit different forecast and view of Climate Technologies in 2015.

Okay, great, thanks.

I will pass it on.

Mark Douglass, Longbow Research.

Good afternoon.

(technical difficulty) years of starting.

Go ahead and say it.

I didn't know -- I thought I might've lost you, but go ahead.

Okay.

After a couple of years of starting the year thinking we are going to go one direction and then it tends to slow, you said in your prepared remarks that your 3% to 4% GFI growth is considered conservative.

In light of what we've been seeing and your comments on Europe, it doesn't feel particularly conservative.

Can you kind of square that circle a little bit?

If you look -- forecasts out there are still higher than those numbers and so we've been trying to figure out how to make adjustments.

So if you look at our forecast right now for what I would say the fixed investment around the world, the number would still be higher than that number.

So that's where I come from.

Obviously, Europe is definitely weakening and I have concern about that, but just the underlying forecast that I see right now is a little bit lower than the economists would say.

Okay, thanks.

Looking at Process in the margins, a couple things.

On the acquisitions, Virgo, Enardo, were they dilutive in the year and, if so, by how much?

Then next year, qualitatively, do you think your investment spending keeps pace with sales growth, or would we expect at least a little bit of margin expansion?

I'm going to let Frank -- Frank's got it.

Mark, the acquisitions were not dilutive.

They actually were slightly accretive, even after the purchase accounting charges that we took when we first acquired them.

So they were good, high-margin companies that we bought.

What was the second part of the question, the capital spend?

No, no, no.

On your investment spending within process, would you allow Process margins to expand next year or do you think the investment -- you have had a lot of investment spending in Process and --.

I would say right now Process is running -- they are running at pretty good margin level.

We are going to -- we will look at -- obviously the mix comes into play a lot here, what markets are up and down, but their growth investments were going to be pretty well -- I would say their growth investment is going to be a little less than the sales growth.

And then function of the margin, slightly plus or minus about the same.

There's not going to be much change there.

It's really a function of what mix; is North America good, you have a couple big projects.

So it's always hard to dollar the margin for Process, but Process is going to be running at higher levels of margins with your growth investments trending down just a little bit slower than the underlying sales growth.

Okay, that's helpful.

Thank you.

Julian Mitchell, Credit Suisse.

Thanks and wanted to say thank you to Pat for all the help.

In terms of the overall kind of incremental margins, you have said before that at 4% organic sales growth you should get a very good operating leverage.

And I guess your guidance for the year ahead is for 4% to 5% organic growth, but the leverage it doesn't sound as if it's quite there.

So maybe just explain what's happening there to drive only kind of modest earnings improvement.

One, we are looking at continuing to invest in the businesses across the Company and, secondly, right now when I talk about stronger leverages you get little bit as you get forward and you get obviously greater as you go up towards 5%-plus.

So right now, Julian, I'm a little bit nervous going back to the questions we've had about some of the mix around the world and some of the oil and gas investments.

So we are just being very cautious about what type of level of profitability we see at this point in time and not make commitments on our profitability that we don't feel we can deliver.

It's just a cautious outlook and concern about what we are seeing out there as we go into 2015, which is a completely different world, in my opinion, than what we saw when we saw going into 2014.

Got it, thanks.

Then in terms of the overall incremental investment, six to 12 months ago you talked about a $110 million step up companywide in 2014.

Just wondered where did that number end up for the year as a whole and what are you initially thinking for fiscal 2015 on that extra spend.

It was within a couple million dollars.

We don't track it that tightly.

It's about the same level when I look at where the money was spent, and I would say that that number is going to go up pretty much in line with what we are saying right now for sales.

So if sales are going up 4% or 5%, we are looking at probably increasing that number 4% to 5% next year incrementally.

We're looking at some key programs which are multiple year programs to make sure that we invest in those programs at this point in time.

And we move it around the various businesses to make sure we are making the right investments.

Thanks.

Then lastly, just thinking about the earnings growth year-on-year, you have given us sort of an indication of where you are thinking for the year as a whole, but is it fair to say that you will start the year at a much stronger rate than for the full year and then you're kind of embedding some tail off in the second half?

I would -- right now we are expecting the year to be -- I would hope to see in the first half that we would be a little better than the total year, but I do expect a slowdown in some of the businesses.

I'm a little bit nervous relative to some of the longer cycle business if the price of oil continues to go down, if we start seeing the knock-on effect of some of the economies around the world continuing to weaken.

My concern is that we will have a better growth rate in the first half and it will definitely weaken in the second half.

Great, thank you.

Andrew Obin, Bank of America Merrill Lynch.

Good afternoon.

Just a question, so you outlined how 2014 played out versus plan by geography.

And I was just wondering, given that you are repositioning the Company to sort of focus on new areas of growth, the fact that US continues to be one of the fastest-growing areas, does that accelerate anything internally in terms of how you are thinking spending money internally and which businesses to push forward?

It did last year.

We started accelerating in North America spending about 18 months ago and we will continue to invest more in North America.

Therefore, if we are able to bring some cash back in, you would see a lot of that cash get invested in North America.

So I would say what I see right now the NAFTA region looks very good here for the next couple of years and so we are continuing to increase our investments in the NAFTA region.

And some regions we are actually scaling back and slowing those growth rates down or maybe what I would say dis-investing a little bit.

But the question in North America, are you thinking about accelerating versus the original plan or are we still on track versus what we thought?

We are pretty well on track.

I don't think North America is -- North America is trending pretty much like we thought it would trend.

We saw this coming and I still think it's going to keep trending that way, so from our perspective we are not going to accelerate any faster than we are ready had laid out the last couple years.

So we are pretty well right there.

Can you --?

I don't know if you can talk about it, but what is your underlying assumption about the run rate of business in Russia over the next year?

Are we assuming it's -- and I'm not asking you to comment what's happening in Russia, but what is built into your forecast?

Our forecast is Russia will be down next year.

We have had a decent run, but obviously clearly our business will be impacted by what's going on from all of the restrictions being put on Russia.

So our forecast right now is Russia will be down in 2015.

But do you make any assumptions about the run rate of the projects in Russia or this is just your compliance with the sanctions?

Or maybe we can just simply take it offline, it's getting too complex.

But any more color (multiple speakers) beyond that?

We look at where the money investment is going and what is going to happen, and we know what projects we are involved with.

We can figure that out.

It's nothing to do necessarily -- just we see what's happening in our customer base and the lack of cash and some of the restrictions and sanctions.

And so we have a feel for what our business is going to do next year and it's going to be lower.

That is exactly the answer I was looking for, thank you.

Jeremie Capron, CLSA.

Good afternoon, Dave.

This is [Grace Lee] sitting in for Jeremie Capron.

I have -- we have a question for Network Power.

It seems that Network Power seems to have the weakest outlook for 2015, not so surprisingly.

So I am wondering whether you could tell us how you think about the attractiveness of that asset and going forward basis.

Also, it would be great if you can share some of the metrics that you track in order to evaluate that business.

We track -- the same metrics we track that business we track all businesses: growth, profitability, cash, and returns.

So those metrics are the same ones.

And from my expectations right now, Network Power has continued to make progress.

There's clearly not as much progress as we would like to see.

We have certain markets which are struggling, and in particular I'm very concerned about the European and Eastern Europe Middle East.

So that I'm concerned about.

I look for decent growth next year, and I look for improvement in profitability.

So right now, I have solid expectations and as I've told the outside world, we continuously evaluate that.

And at this point in time, I still believe over the next couple of years we can create incremental value for our shareholders from where we are.

So that's where we sit.

I see, just one follow-up.

If the business doesn't pan out in a way that you would expect it at this point, would you consider some aggressive changes in the portfolio structure?

The answer is yes.

Yes, we do that at Emerson.

We do look at businesses getting out of businesses.

And if we feel like they cannot create the value for our shareholders, Emerson is not reluctant to do that.

We have divested a lot of businesses under my 14 years as CEO leadership, and I guarantee you that we will continue to evaluate that and we will continue to evaluate all businesses.

If they are not going to create value for shareholders, we will get out of them.

It's part of doing business.

Thank you.

Steve Tusa, JPMorgan.

Good afternoon.

So just first on Climate, could you just describe what you mean by customer accommodation expense?

Yes, very easy.

We changed a coating on our motor to reduce rust inside the compressor.

And by doing that, we created a chemical reaction within the new refrigerant and the new process.

And with the new electronic expansion valves it created a clogging, so they had some failures out in the marketplace.

So we have had to work with our customer base to figure out how to compensate them.

So that is what we do.

And we had to take a charge in the fourth quarter in anticipation of what that's going to cost.

But it was done around actually a quality improvement in the product and it clearly -- it backfired a little bit with the new expansion valve, electronic expansion valves, and also the new refrigerant chemicals.

So it's one of those things we tested for and we missed it.

And then that's a resi dynamic?

Resi-related?

Yes.

Okay.

Then just on the geographic guide, you talked about China being a little bit weaker, Southeast Asia being a little bit better, Europe being weaker.

It looks like that incrementally.

There are not too many geographies that are actually getting better this year.

So to get from the 3% to the 4% to 5% underlying, is that just backlog conversion?

Just trying to reconcile that.

I think the NAFTA region, which last time I saw North America was still our largest market, I'm actually having a little bit faster growth rate next year.

So that's how I square the circle.

I got it.

And then one last question just on the order flow here.

You talked about Process potentially slowing down.

You're obviously going to have the tougher comps in Climate.

Is it possible -- the orders have been pretty strong, up kind of high single digits here.

Is it possible that in the second quarter that those orders could go negative because of those comps, or is there enough going on in the rest of the business where the orders can kind of hold up here in a reasonable way?

It's always possible, Steve.

It's hard for us to map out the trendline of orders, but if you look at the order trend last year, I would say that there is a chance that we could have a negative three-month role or negative quarter.

I'd say the answer is always positive, Steve.

Always potentially, yes.

(multiple speakers) I haven't mapped them out, per se, but if I look at the trendline, knowing where it came up, I would say there's a chance you could see that just like you potentially could see it in the -- next fourth quarter could have a problem, too.

One last quickie.

You gave an EPS range last year of 4% to 7%.

The margin comment is slight improvement.

Could you maybe just provide a little bit of context around kind of EPS dynamics since there's some moving parts here around pension and there is a little bit of share count benefit, all that kind of stuff?

It will grow next year.

Earnings will grow next year?

Earnings will grow next year.

I'm not going to give you anymore, Steve, on that.

Earnings will grow next year.

Okay, thank you.

You're welcome.

Good try.

John Baliotti, Janney Capital Markets.

Good afternoon.

Haven't talked to you for a long time.

Well, earnings have been pretty clear, so --.

I just had a -- if we kind of go up in altitude, I was just -- if we take a step back.

I know we, as a practice, take out one-time charges, nonrecurring events to look at the underlying business.

But, as you pointed out, being CEO for 14 years there has been a number of these I guess events over the last couple of years, deals that were done before you were CEO.

I'm just curious in terms of going forward what kind of governors have you been able to put in place to mitigate the risk?

Obviously global things change, there's not a lot you can do about that.

Currency moves around.

But given what you've learned over the last 14 years, what have you added to the due diligence process as you look to deploy capital going forward?

I think a couple issues from the standpoint of -- I would say from different technologies.

We are looking today at more of industries that will be obviously less volatile.

And from technology standpoint there's always been a trade-off of how we try to figure out how to drive a little bit faster growth, sometimes you take a little bit more risk.

And so I think we've spent a lot more time around that issue, John, after the impact of the charges which have been very painful for the management team, including myself and the Board.

We spent a lot more time around that risk and volatility and the reward, or downside from that standpoint on the charge.

Secondly, I would say that if you look at where we have been making acquisitions the last several years, we have been focusing more on the Industrial, the Climate, and the Process side.

So I think we've changed our profile a little bit to where we've been making our acquisitions.

Okay, great.

Just as a follow-up, on -- obviously currency is beyond your control, but what kind of --?

Just academically, what do you think on a reported revenue base -- if we use the context of modest improvement in margins, what would you see as a, let's say as an inflection point in reported growth that would -- given the investments you've made in the businesses over the years that would kind of step that up?

In terms of what kind of (multiple speakers).

Not from a currency standpoint.

You're just thinking an underlying margin profitability standpoint?

Yes, so if you're saying 4% to 5% core growth obviously currency is nothing you can control so you lose a couple points there.

You're going to lose a couple points in divestitures.

But, if including those things, you are able to have a reported growth of a couple points higher, how much higher do you think -- would you need to get to the 4% to 5% on a reported basis to get a nice -- a more significant improvement in profitability, or could it be a little less?

It's going to be more on the 5% range for us to get that type of leverage point from the standpoint of what we see at this point, given where we are, given that we are running at profit margins that I would say last time I saw were record levels.

So I would say that we have to get above that 5% range to really have a nice leverage point.

But it's -- just from the standpoint of making -- unless I wanted to dial back the long-term investments, which we have not done because we feel quite strongly that over the long-term making those investments will strengthen our position in the market leadership, which we are today.

We are a stronger company today.

(multiple speakers) in the short term thinking I could cut, I could cut, I could cut and I think then I would have a much weaker company and then you have a whole different situation in your hands.

Right.

And so obviously the working capital comes down through that; your cash flow, all those things positively benefit from that.

Yes.

Okay, great.

Thanks, Dave.

Stephen Winoker, Sanford Bernstein.

This is Peter Lennox-King on for Steve.

Just a couple of questions, the first one being on -- could you talk about the release of your backlog in terms of timing across the segments and how that links to expectations for revenue growth, given that you were talking about H1 probably being a bit stronger than H2 in 2015?

From the perspective of Network Power backlog, it is historically within -- we expect that backlog to come out in the first and second quarter.

Obviously we also expect the order rate to keep growing, too.

We see Network Power growing next year.

And if the order rate keeps growing I wouldn't be surprised if the backlog doesn't keep growing, because backlog will grow with the orders if you have a vibrant business.

On the Process side, historically you would start seeing that backlog be eaten away here in the first half of the year and I would expect that to happen this year.

And then again it will start building back up if the order pace picks back up in the second half of the year.

Those are the two big backlog players.

Industrial Automation and Climate are smaller backlog and those typically will come out within -- Climate comes out within two or three months and Industrial Automation usually within three to four months, five months.

Great, thanks.

Could you talk about -- have you been seeing any changing in pricing, price versus raw?

In the order book.

No, pricing has been pretty consistent all year long from the standpoint our price cost has been pretty consistent all year long., our net material inflation.

That tells you that the marketplace is not growing all that rapidly and I would say with the price -- on the flipside the oil price dropping that will obviously put -- help our net material inflations.

And so right now we are slightly positive in price and slightly negative on net material inflation, so we are doing okay.

The price cost is fine and we haven't seen any changes there.

Then, finally, do you have any early returns on order trending by segment through October that you could share with us?

No, nothing yet.

Nothing yet at this point in time.

Okay, great.

I will hop back, thank you.

Nigel Coe, Morgan Stanley.

This is Jane filling in for Nigel.

Thanks for taking my questions.

One just quickly on the power transmission divestiture, would you guys use the proceeds to buy back shares at what you usually do?

And if so, do you expect to fully offset the dilution by year-end 2015?

The answer is, yes, we are expecting to do that and it will -- based on the expectations that we will eliminate those dilutions by the time we finish the fourth quarter.

So yes and yes.

Okay, great.

That's helpful.

The second one, just a quick follow-up on Climate margins.

In the press release you call [out] some unfavorable mix impact.

Just wondering if that's related to the 13 series pre-build.

And if so, should we expect this headwind to continue into 1Q 2015?

No, there's two things going on in the margin in the fourth quarter.

We had -- our Asia business was very strong and it is slightly lower margin, and our North America, obviously with the customer combination, that hurt us from a margin standpoint.

So assuming we've got everything sized like we believe we have it sized, that has been -- that is behind us now in the fourth quarter.

So I think from a profitability standpoint for climate next year, we will probably look at getting back to where we were trending in a positive way and so we should be fine.

Maybe a slight improvement in profitability at Climate based on a total year number.

Okay, great.

Just lastly, can you share some initial thoughts on gross investment in restructuring spending for fiscal 2015?

The growth investments will probably be up from the -- I think it was 110 last year, probably about like 4% or 5%.

Restructuring spending will be down slightly.

I'm talking about, I mean nuance, what did we finally spend last year, Frank?

$52 million.

$52 million.

So I would look at -- if I was picking a number, I would pick $50 million, nice round number.

Restructuring extra would be $50 million.

I mean it could be -- if we had something pop up it may go to $60 million and so right now maybe $50 million to $55 million, something right around there.

Okay, great.

That's really helpful.

Thank you very much.

Jonathan Wright, Nomura Securities.

So in the release you called out significant favorable currency comparisons in the Process Management segment.

I was just wondering how much of the 130 basis points of margin improvement there was from the currency.

It was pretty significant portion of that in the quarter.

We had a lot of transactional currency inside of the businesses, so it was a significant portion of that improvement.

Was that related to the weaker euro?

What drives that?

Possibly it was the weaker euro, but it has to do with various contracts they have in place with customers.

So it's really a number of currencies, not even predominately the euro, but the [A] dollar, the Sing dollar, Brazil.

It's a number of currencies were they have contracts denominated in the third currency.

It's kind of a complicated accounting thing, but it is -- it just flushes through to be a positive in the fourth quarter.

Sometimes it was a negative.

If you go back and look at it, if you go back and look at the quarter, Q2 was a big negative.

So it moves around and it's almost impossible to forecast.

And that's a one-off impact and we shouldn't expect stronger US dollar into the -- over the first three quarters of next year to have a similar impact on process margins?

I don't think so.

We don't plan on it.

It really is a function -- as Frank was saying, it's a function of where we get the contracts and which currencies move against us or positive both ways.

Some years it hurts us, some years it helps us.

Some quarters it helps us; it hurts us.

It just happened to be one of those quarters where the contracts flipped the right way for us and it's almost impossible to forecast.

Okay, great.

Then on the corporate line, the first half of 2014 you had a number of one-off items in there -- the acquisition costs and Process acquisitions, the Artesyn restructuring charge.

Is there any reason or are there any offsets to sort of a $50 million reduction in corporate in 2015?

Yes, we will have some headwinds that partially offset that in 2015.

Pension will be slightly higher.

We will have equity comp, which will be slightly higher.

So we would expect to see all of that flow through in 2015 versus 2014.

Okay, great.

If I just squeeze in one more if you don't mind.

In Industrial Automation, you called up the hermetic motors business up 20%-plus, but overall motors and drives down.

Is there any -- I know that business is more levered to Europe, but is there anything else going on there?

Any sort of competitive dynamics that are weighing on motors and drives as a whole?

No, it's primarily driven via the Middle East and Western Europe.

They have a very strong presence there and it was a very difficult marketplace for them.

And that is what caused it.

All right.

Again, thanks, guys.

At this time we have no further questions in our queue.

I would like to turn it over to our speakers for any closing and additional remarks.

Thank you very much.

Again, I want to thank everybody for joining us today.

Again, thanks, Pat, for the last several years working with us and looking forward to working with Ross.

Appreciate everyone joining us and thank all the operational people out there delivering 2014 and looking forward to have another strong 2015.

Thank you.

Ladies and gentlemen, this does conclude today's presentation.

We appreciate everyone's participation.