艾默生電氣 (EMR) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to today's Emerson investor conference call. During today's presentation by Emerson Management, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. This conference is being recorded today, May 5, 2015.

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, Craig Rossman, Director of Investor Relations at Emerson Please go ahead.

Thank you, Robert. This afternoon, I am joined by David Farr, Chairman and Chief Executive Officer of Emerson, and Frank Dellaquila, Executive Vice President and Chief Financial Officer. Today's call will summarize Emerson's second quarter 2015 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 for the next 90 days.

I will start with the highlights of the quarter, as shown on slide 2 of the presentation. Net sales in the quarter decreased 7%, to $5.4 billion, with underlying sales flat. As a result of lower oil prices, capital spending reductions by global customers in oil and gas markets, particularly upstream, were faster and more significant than expected.

A broad slowdown in industrial spending, particularly in North America and China, and most pronounced in energy-related markets, affected order rates and resulting sales in the quarter. The strength of the US dollar continues to be a significant headwind.

Order rates reflected economic conditions -- difficult economic conditions in the quarter, beyond oil and gas. Continued weakness in European short cycle spending impacted demand. However, Europe is beginning to show signs of improvement, benefiting from the depreciation of the Euro. We expect European competitors to continue to use the weaker euro to their advantage.

Global telecommunications customers continue to cut capital spending across all geographies, and climate technology order rates were affected by the US Residential air conditioning pre-build in the previous two quarters.

Turning to slide 3. Gross profit margin declined 110 basis points to 40.1%, driven by volume deleverage resulting from the sudden drop to flat underlying sales growth after two quarters of moderate growth, specifically in the US, which turned negative after two quarters of 8% underlying sales growth. Gross profit margin also reflected unfavorable business mix and higher costs related to increased strategic investment in 2014.

Reported earnings per share increased 84%, to $1.42. Adjusted earnings per share decreased 16%, to $0.65, excluding a $0.77 gain on the sale of the power plant transmission solutions business. Current market conditions will require more focus on the execution of strategic programs.

Turning to slide 4 for the second-quarter P&L summary. As mentioned, net sales decreased 7% versus the prior year, while gross profit margin was down 110 basis points. Included in the results was a $932 million gain on the sale of the power transition solution business, and a restructuring spend of $44 million. 15 million shares were repurchased during the quarter.

Turning to slide 5, underlying sales growth in the quarter was flat, excluding unfavorable currency translation of 5%, and an impact from divestitures of 2%. By geography, demand was mixed, with the Middle East and Africa up 8%, Europe up 2%, Asia up 1%, while the US was down 3%, and Latin America was down 7%.

Turning to slide 6, business segment margins declined 260 basis points, to 13.2%, primarily due to volume deleverage and unfavorable mix. Operating cash flow decreased, due to lower operating results and investment in working capital. Operating cash flow will take a couple of quarters to recover. Trade working capital performance was also affected by the business slowdown.

Turn to slide 7 for the Process Management segment results. Process Management underlying sales grew by 2%, with a 5% reduction from currency translation, resulting in net sales decrease of 3% in the quarter. Upstream oil and gas activity slowed as a result of industry capital budget reductions, while downstream activity continued to be a bright spot, particularly in the power and chemical and petrochemical markets.

Demand in Asia was up 6%, with strong growth in India and other emerging markets, offsetting a slight decline in China, while Europe was up 7%, with double-digit growth in emerging markets. The Middle East and Africa was up 3% reflecting favorable activity levels across the region.

Margins were down 350 basis points due to unfavorable mix, the impact of the stronger dollar on operations, higher levels of investment spending and increased restructuring. Demand is expected to remain [weak] for the next 12 months.

Turn to slide 8 for the industrial automation segment results. Industrial automation net sales decreased 16%, as currency translation deducted 6%, and divestitures deducted 8%, resulting in an underlying sales decline of 2% versus the prior year. Second-quarter results were affected by weakness in short cycle European demand, upstream oil and gas, and industrial spending in energy-related markets.

Geographic demand was mixed, with North America down 1%, Europe down 2%, and Asia up 1%. Reductions in upstream oil and gas spending continue to negatively affect order rates in the power generating alternators and electrical distribution businesses. Margins decreased 130 basis points, reflecting volume deleverage, unfavorable mix and a 40 basis point impact from divestitures. We expect market conditions to remain mixed, with some improvement in Europe, and continued weakness in energy-related markets.

Turn to slide 9 for the Network Power segment results. Network Power sales decreased 9%, as currency translation deducted 5% and divestitures deducted 1%, resulting in an underlying sales decline of 3% versus the prior year. Demand for global -- decreased global demand for telecommunications power business continued, while the data center business decreased moderately, reflecting continued weakness in infrastructure investment. Geographic results varied, with Europe up 4%, benefiting from hyper-scaled data center project revenues in Sweden, while North America was down 7% and Asia was down 5%.

Margins decreased, reflecting volume deleverage, unfavorable mix and increased restructuring. In the second half of the year, we expect improving data center market conditions, with continued weakness in telecommunications power spending.

Turn to slide 10 for the climate technology segment results. Climate technology net sales decreased 6%, as US air conditioning customers worked through pre-built inventory from the previous two quarters. Underlying sales declined 3%, as currency translation deducted 3%. Asia was down 2%, as growth in India, Australia and Southeast Asia air conditioning and refrigeration businesses was more than offset by slowing demand in China.

In other regions, Europe had slight growth of 1%, Middle East and African was up 35%, and Latin America was down 19%. Modest underlying growth in the second half of the year will be led by the HVAC and refrigeration businesses.

Turn to slide 11 for the Commercial and Residential Solutions segment results. Commercial and Residential Solutions underlying sales grew 3%, with a 2% reduction from currency translation, resulting in net sales growth of 1%, led by favorable market conditions in the US. Growth in the food, waste, disposers, storage and wet/dry vacuums more than offset declines in the professional tools business.

Recent softness in the professional tools business reflects reductions in oil and gas-related spending. Favorable trends in US construction markets are expected to continue, supporting an outlook for moderate growth in the second half of the year.

Turn to slide 12 for the 2015 outlook. The global macroeconomic environment will continue to be challenging for the remainder of 2015, as strong headwinds with lower oil prices, strength of the US dollar, and a broad slowdown in industrial spending, particularly in North America and China, will place downward pressure on underlying sales growth across most of our businesses. Visibility is limited in this environment, so our focus will be on controlling what we can.

Near-term profitability will be negatively affected by volume deleverage as a result of the rapid decline to lower underlying growth expectations. Therefore, restructuring will continue to be accelerated, and will now be expected to exceed $140 million for the year. Based upon these market conditions, we now expect 2015 net sales to decline 7% to 5%. Underlying sales growth is expected to be 0% to 2%, excluding a negative impact from currency translation of approximately 5%, and a 2% deduction from divestitures.

Reported earnings per share are expected to be $4.17 to $4.32, including a significant reduction from currency translation, the power transmission solutions divestiture gain of $0.77 per share, and accelerated restructuring costs of $0.09 per share. I will now turn it over to Mr. David Farr.

Thank you very much, Craig. I want to welcome everybody, and thank you for joining us today, both shareholders and investors. I will probably be a little longer than normal. I had some things I want to get out and discuss with my shareholders.

Clearly, we had a very challenging, tough quarter, and the market headwinds that we are facing today have become much stronger, and this over the last 60 days. But as you know, we know how to deal with it. We have been here before, and the necessary actions, reviews, executions are underway, and there will be more on this in a few minutes.

We will continue to execute the tactical and strategic actions required to create long-term shareholder value of this Company. The Board, the OCE, and the senior management team fully understand, and fully debate what needs to be done, the timing, the actions, and when and how we will go about it.

Our actions clearly have been underway since February, when we talked about this at the investors conference. But given the stronger and broader headwinds, we will now need to be deeper, broader, and even more properly measured against where we are trying to take the Company long-term. April underlying orders appear to be shaping up to be down 5% to 8%.

So let's step back and review where we have been, what we are up to, the actions and that discussions that we are having internally, and basically how I see this, as we are going forward. Now, consistent with what we've been seeing in our monthly orders, we had a tough second quarter, after underlying sales for the corporation being nearly 5% the last six months, before this quarter hit us. The dramatic slowdown, for the precise accountants out there, is probably 4.75%, but for [Dave], it is nearly 5%.

The slowdown in the capital spending in the oil and gas industry and related markets has been faster and deeper than we anticipated. This has had a significant effect on the sales and profitability of our process business, resulting in deleverage and some unfavorable mix, and actions will be needed to improve that at the proper speed.

The overall impact has been a sharp drop in demand across most of our industrial businesses, across the US. There is a lot of business around the oil and gas that is being impacted. It is just not oil and gas spending.

Capital spending in telecommunication equipment has decreased sharply -- sharply -- since early this calendar year, as key cut companies and space reduce investment levels, due to slow-downed economy, due to regulations, due to laws, whatever, being put upon them in our customer base.

The sharp decline and continuing transition of the data center designs have negatively affected the results of our Network Power business, but there is nothing new and different from what we are seeing, and we are taking the actions there, also, to protect ourselves.

Overall, now, the trailing three months with April, are going to be around negative 8%. This tells me that third quarter will be challenging. Third-quarter sales could be negative, slightly negative, underlying. Clearly, with the dollar, they will be, but slightly negative underlying, unless there is a turn sometime in May and June.

We have been through down cycles before. This is my third as CEO of Emerson Electric. We are confident the businesses will come back strongly when the investment environment stabilizes.

In 2009 and 2010, underlying sales in our process business declined for five consecutive quarters, and then recovered strongly. Now, we have no visibility on when that happens again, but we do know investments will rebound. And we need to make sure we take the cost actions needed to temporarily fix the profitability. But also, keep in mind, we're not going to jeopardize our core technologies or market share.

As we have done in the past, in this type of environment, we will be intensely focused on the leverage we can control. Over the last several years, we have made meaningful strategic investments to serve our customers and strengthen our market positions, and now we need to refocus, given the environment that doesn't look like growth, but flat at best. The markets change, and we need to react.

We are taking the necessary target actions across this corporation, across this world, both at the business level and the corporate level, to get the costs in line for an environment we could be facing for many quarters -- maybe multiple years -- of tough growth.

The bottoms up approach, each business unit, is evaluating where we need to have the investments, and where we do not need those investments. Where we need the capacity, and where we do not need the capacity. How we deal with a stronger US dollar. How do we compete against our dollar -- or Euro-based competitors, coming out of Europe, our Yen-based competitors coming out of Japan, who have created, through currency movements, a significant competitive advantage on a price-cost situation.

We will continue to do the necessary restructuring. It will continue for the rest of this fiscal year, and as I discussed with the Board, most likely through the first six months of FY16, as we take the actions necessary to compete, improve profitability, and protect our market position in a world where the dollar is much stronger than it was just 12 months ago. Our current field, with the current actions we identified to be 3,000 people, across Emerson, to achieve cost reductions of at least 150, and hopefully more, on an annual run rate basis.

There will be more actions needed, given what I see today, and given the continued negative underlying growth rates that we have seen over the last three or four months. As you know and debated with me, both friendly and unfriendly, we have been actively repositioning and evaluating our portfolio.

To improve the profitability, to improve the core growth opportunities and to improve overall quality of this Company. We have divested 12 businesses with $3.5 billion in sales over the last seven years. These divestitures have improved profitability and improved our growth rate.

We've communicated previously that we will continue to evaluate the portfolio, and we have, underway today, the divestiture of the [international] storage business, which will happen sometime before the calendar year is done. We continuously discuss, with the Board, the actions necessary, both on acquisitions, and restructuring, and portfolio management, necessary to make Emerson a stronger, more profitable, faster-growing business. The Board, nor the management team, are afraid of taking the tough actions, and we will do what is necessary to improve our profitability, our earnings growth, our cash flow, in a very tough environment.

We will continue to be very disciplined with our capital allocation. We will continue to look for the right acquisitions. We took one small one to the Board today. I am hoping, over the next 12 months, we will see more assets available for us to invest in. The current focus is on improving profitability in a no-growth environment. Our current focus is to improve our cash flow, after we get through this dramatic down-shift in our marketplace, and take that money and invest it in the portfolio that will give us growth and profitability going forward.

We will continue to aggressively look at the portfolio. We will take actions that are smart and disciplined. We will not take knee-jerk reactions at this Company. It is not the way I operate.

We intend to return approximately $3.8 billion to our shareholders this year, through dividends and share repurchases. Over the last three years, we have returned a total of $6.5 billion, or 63% of our operating cash flow, through dividends and buybacks.

We will continue to focus on high levels of cash returns to our shareholders, improving our portfolio mix, driving value, and doing what we can do best in this type of environment. We have been dealt a challenging hand; I am not afraid of that hand. We are taking the necessary actions across this corporation.

The Board is fully engaged. The Board fully understands what needs to be done, and is supporting the management team to the tune of getting these things done.

We clearly see the next six months as very challenging to us, and we can clearly see the impact of the dramatic drop-off in spending in many of our core businesses, the much stronger dollar. And I am not talking about translation impact. I am talking about the fact that our global competitors, coming out of Europe and Japan, now have a unique advantage. So we need to take the necessary actions to protect our position and improve our profitability over time.

There is no quick fixes here. This is hard work, and this management team knows how to do it, and we will do it. I do not like the quarter we just reported. But unfortunately, it happened, and we will take the necessary actions to go forward from here.

I appreciate the support of our shareholders. I appreciate the support of our investors. And I truly appreciate the support of the Board and management team, as we work hard here, over the next six to nine months, to improve the position of this Company, and earn back the respect of our shareholders and our investors.

So with that, I will open the floor for questions. Thank you very much.

(Operator Instructions)

We will take our first question from Julian Mitchell with Credit Suisse.

I can't wait for that first question. I have got my baseball bat out, I have got my rally monkey here, and I am getting the sword out. Who is first, Julian?

Yes. It's just a question, first, on the operations. Because I guess your revised fiscal year guidance implies operating margins bounce back quite a built, in Process and in Network Power, in the second half, from Q2. Just wondered if there was some one-off or mix issues that hurt margins, in those two businesses, that you think go away?

The big issue, Julian, is if you step back and look at what hurt the second quarter in a big way -- and we obviously have some hills to climb in the second half -- is that our underlying US sales were over 7.5% the last nine months. Process was very strong in that time period. We went from underlying US sales of 7.5% to negative 3%, in one quarter. We clearly -- as we announced in February, we knew things were getting weak, but they happened very quickly in a couple key markets: US and China and Latin America.

We are sitting in a situation where our facilities have been repositioned, in the last couple years, in the US, we moved position production into the US. And now, with a stronger dollar, we are having to move things around. And we are sitting absorbing some fixed costs that we have to deal with, which we have started initiating in early February. And we will start getting some payback on that in the third quarter and the fourth quarter. But still, we will be facing this headwind, because of the dramatic drop-off in some of our core businesses here in the US, and the market mix.

So what we are banking on right now is that we are quickly tacking the fixed cost, we are quickly tacking the costs, and what we're seeing is, we will see some profit improvement as the year goes on. That is the measure that we are going after right now. And (inaudible) got it exactly right, or we've got it (inaudible), that really depends on how fast things drop off. But right now, that fixed cost hit us real hard in the second quarter, and we are aggressively going after it. We've spent, I think, around $45 million in restructuring in the second quarter.

We are talking about spending another $65 million to $70 million in the third quarter. So we will start getting payback on that, as we go forward, Julian. That's where the game plan is, is we've got to absorb that deleverage. The other issue we've have got going on is, we're going to quickly attack the working capital, which means we take the production down, and that will have a deleverage impact, too. So we're playing this game. We know how to play this game, but I know that it's going to take us three, six, nine months to get through there, to get that back.

But we'll get the profitability back. There's nothing wrong with the core business that the profitability can't come back on.

Thanks. You talked, on the call and the release, about tactical and strategic actions. And at the same time, the need to avoid a knee-jerk reaction. So maybe just clarify the timeline of how you are looking at businesses like Network Power in that regard, please?

I put my sword in the ground, I think, almost 2 1/2 years ago, I said 3 years, so I don't think the time frame has changed one iota. I just think that what we tried to do at the board level is talk to the day-to-day, how do we get our costs in line quickly, to deal with the price cost issues, to deal with the lower volume. And then strategically, you just don't want to ignore the strategic uses that we face as a Company, from a portfolio mix. And we will do that on a systemic approach that makes seasons.

As you well know, my focus is, if we're going to decide to get out of a business, I want to get out of a business that creates value for my shareholders. I am not going to cut and run just to cut and run. I think that is the wrong thing. I think my shareholders would be very mad at me if I did that. They expect me to manage the assets that we have here profitably, and to create that value the best we can -- or to realize that value. And that's -- I am no different. Genetically, that is how I am built, and you know that.

Right. Thank you.

And we will take our next question from Shannon O'Callaghan with UBS.

Good afternoon.

Good afternoon, Shannon.

Hey, David, on the process, maybe a little bit more on what you are seeing in the different geographies, North America obviously has gotten a lot of the identity highlights, but China, Lat Am. What are you seeing? And what is your current view on where this might hit?

You know, I do. I can give you a sense of that. Generally, from the businesses worldwide, the US looks, for us, as shakier for the next -- from an industrial standpoint, for the next two or three quarters. Europe is slowly getting better. We had a better Europe, as you know. The one place that I am really concerned about is China, and the lack of investments, and the slowdown. And I will get to the specific business in a second.

But clearly, overall macro right now, US is a concern to me, China is a concern to me, Latin America is a concern to me. Europe's getting -- I think is getting -- slowly getting better, and then outside of China, we are doing pretty well. And then Canada continues to invest, as they are trying not to lose market share in the oil and gas market. But if I look at the various businesses, and I am trying to get the chart here, which has it broken down by world area, I would say Process right now is seeing a tougher time in China.

They are seeing a tougher time in the oil and gas companies in southeast Asia. They are doing a better job in India. The Middle East has held up for us, because we had a lot of orders, and they have not backed off, and orders have held up, which surprises me a little bit. Process, outside of western Europe, is seeing an improvement. And I think we're going to start seeing an improvement out of the western Europe export business, so I think that will get better.

Latin America, I think right now, is going to be a tough year for Process Control. Just Mexico, Columbia, Brazil -- so that is right now how I see it. I think we haven't reached bottom in certain markets, and that includes the US. And I think that we haven't reached bottom in probably China, or we haven't reached bottom in Latin America. The rest of the places seem to be stabilizing, and the nose seems to be coming up a little bit.

Okay, great. And then just on this Telecom piece. Obviously, it is hitting you very hard right now. Maybe just is that net neutrality-related stuff? Or what else are you seeing there? And aside from -- it seems like that is the near-term driver. Are you happy with the way the data centerpiece of the business is performing? Just maybe a little split between the pieces?

Yes, I think, from my perspective, what's hit us really hard, in the last four months, is the dramatic cut in spending from the standpoint of the impact of net neutrality. And also, there's some shifting going on in the industry around the world, in where money is being spent and not being spent. That's hit us pretty hard. And that one, to be honest, really caught us a little bit surprised, in the dramatic cutback, and how fast these guy can cutback, as they re-shift their priorities, and that hurt us quite dramatically. And we're going after the fixed cost there, and taking the capacity out, and [down-size], but that takes us a couple quarters.

On the -- in Europe right now, our network tower data center enterprise business, I like the improvement we are seeing. I see a slow, gradual improvement. I would say in North America, right now, there has been very little improvement. It goes up and down, quarter-to-quarter. The customer base is not really moving forward, relative to spending money.

And a big part of the customer base, also, excluding the Telecom power, but also the enterprise side of that, we sell a lot into the Telecom space on the enterprise side, too, and they have really cut back on spending. And then the other place we have seen a dramatic cutback is in China. The rest of that part of Asia is doing pretty well. So there has been another hit here, and we are significantly taking restructuring across Network Power, from a technology, and the products we have today, I like what we have; that's not an issue. It's just a fact of where we see it coming at us, at this point in time.

Okay, great. Thanks a lot.

We will take our next question from Nigel Coe with Morgan Stanley.

Thanks, Dave. Dave, I appreciate all the extra detail on the actions. You mentioned, a number of times in the prepared remarks, that you have seen European and Japanese competitors using the currency advantage. It sounds like they're starting to cut price, or starting to be more aggressive on price. Is that true? And how are you responding? Are you having to respond with discount? Or maybe just describe a bit more on that, Dave?

I think it -- the short term -- in the second quarter, the price cost issue, other than price cost maybe issues around outside the United States, have been minimal. There has been some price cost issues relative to, say, the eastern European businesses, just because where we are sourcing, and the movement on that. The price cost issues coming out of Europe, and the Japanese competitors, we see that hitting us more in the second half, and going into early next year. So that is why we have got to get ahead of this curve, because we know they will. We know that -- we have been here in this case before.

It wasn't, in my first two or three years as CEO, that we had the euro at parity, or we actually went down to [85]. And I saw how the European competitors acted at that point in time. And I would say they're going to pick up the competitive nature of this. The amount of project opportunity out there is still shrinking, so it's going to be more competitive. And they have the advantage with the euro and the yen, where it is right now. So we know their actions will be very, I would say, sharp on the pencils, and sharp on the price.

And we obviously will do what is necessary to protect our share. But we're also not going to do stupid things, from the standpoint of having to give away price where we have unique technology. So over the last several years, we had -- the dollar helped us quite a bit. And now, we have it flipped. And we have to get our costs back in line, relative to where we source things, and where we position stuff, which we will do, to be able to compete and protect our margins, but it will take us six to nine months.

Don't be surprised. It will take us six to nine -- we know how to play this game. And in the meantime, we will see them coming at us. It will be more on the second half of year, on the pricing actions.

And where do you think you're going to see the bulk of this pressure? Do you think it is pretty broad based? Or do you think it's more centric, within power and automation?

I think it's going to be broad based. I think you'll see it across the industry. I think you'll see it -- US countries have had a unique situation, where I would say, if you go across the US -- I don't care what company you talk about, the industrial or consumer. US companies have done very well in the last ten years, in gaining market participation in the US marketplace. And I think you're going to see some of the foreign competition taking advantage of this dramatic shift in the dollar/euro, dollar/yen situation. No doubt about it. It's not just going to be Emerson Electric, trust me.

No, I think you are right there. And then just a quick one on process margins. It seems like your guidance is baking in a sequential impressive in process margins, which is what we normally see seasonally. But as process goes negative in the back half of the year, which creates a bit more volume pressure, you mentioned you had to cut the inventories. Do you think that process margins have bottomed in Q2? Or do you think there is a bit more pressure in the second half of the year?

What did the margins face in Q2? I would say they got hit pretty hard this quarter. I'm hope -- based on what I see, they normally would come back up. We're taking -- we -- Steve Sonnenberg and his whole management team have worked extremely hard, very early on in restructuring. So I would say they're going to get a little bit better. From my perspective, I want to figure out how to get their margins back up, and so they have, for the whole year, get back more in line to where they should be. But there are a lot of things moving in that first -- in that second quarter, even relative to settling a litigation suit.

So I think that -- we will get the margins back up in the third and fourth quarter, but clearly, these guys are taking action. Right now, I would say, of the actions underway, Process Management and Network Power have been the big, big spenders of the restructuring, both in the second quarter and in the third quarter. So Steve and his team knows what it needs to get to that margin. They're going to get it.

Okay, Dave. Good luck.

Thank you very much. Appreciate it.

We will take our next question from Steven Winoker with Sanford C. Bernstein & Company, Inc.

Good afternoon, Dave, Frank. I like that enthusiasm. Is there any reason to come to New York? You already asked all the questions.

There is always more, Dave. We can really get into it, right?

I'm going to allow you to take two questions from you, in the whole hour we're going to talk, okay? And you know I am very slow in answering questions.

Bring the baseball bat, okay?

Right here, partner.

(multiple speakers) There was a time when you used to talk about the strength of the dollar being good for Emerson, or a stronger dollar being good for Emerson.

The stronger dollar being good for the country, I said.

Okay. I just want to talk about the cost base, though, for you, as you've gone international here on the dollar. What are the things that you can do, beyond just the restructuring on the material side? Are there other things you can do that could actually change the margin story a little bit, and help you on the pricing front, as well?

One thing Emerson does have, as you all know, we have a very global manufacturing base, say, for Process. So we can shift where we make the product, either into Mexico, either into eastern Europe, either into Asia, and re-balance that to take advantage of where the currencies have weakened, along like with the euro or like the yen. So we have very strong manufacturing facilities in Mexico, and we have very strong manufacturing facilities in eastern Europe. So you'll see us already -- and the capacity is sitting there. So you'll see us immediately moving it.

We had just gone through a process, over the last 12 months, of moving manufacturing back into the US. And now, with the capacity we have in certain -- and like all best cost locations versus the dollar and the euro, we're going to quickly move there. The other thing, we have to start moving our sourcing from the standpoint of both internally and externally. And that takes six to nine months. But there, we can get our costs back in line, to get our margin back up, both through the restructuring effort and moves, but it takes us time. And then -- and that allows us the pricing flexibility necessary to compete against countries that are playing the currency game against us.

We do, as a nation, we the nation, that is why I believe in a strong dollar, I think you cannot have a nation as a weak currency. I believe quite strongly that we will take the actions necessary to move stuff around the world, and we had to have the flexibility to do it. And we will do it. And it is already underway.

And what is baked into your planning and thinking, your best thoughts about trough volumes here? What are you thinking about oil prices? How important is that, at this point, to your calling volumes starting to get better in two or three quarters? Or what are you thinking on that front?

My plan right now is that there is no growth. And you can say two quarters, three quarters, four quarters, five quarters, six quarters. And what it takes for us to have increased earnings, as we move our into that 2016 time period, is what I am focused on. What actions do we need to fix the cost structure to compete, in a no growth environment, to allow us to show earnings growth, and make 2015 the bottom of this one? That is the game plan.

But when are you thinking things don't get any worse, maybe? Maybe that is way to say it, from a volume perspective.

I wish I was -- if I was that good, I would not be a CEO anymore, because I could go out and bet. And you wouldn't get quite the same publicity that you have every time you open the newspaper about how overpaid we are, and how we try to hurt people -- and I don't know. From my standpoint right now, I think, as I look at the US, I look at what is going on, and I look in Europe, I think you are probably talking early 2016, before you start seeing -- you can say things are turning back up, even on the underlying volume basis.

Thanks, Dave.

You are welcome.

We will take our next question from Mike Wood with Macquarie Research.

Hi. Thanks for taking my question. Just at a high level, you spoke about oil prices a bit, but WTI crude did fall as low as 45, and now it's back above 60 today. Curious what type of lag that you see, when you're talking to customers, with bidding or quoting activity? And how you might think that recent improvement could impact orders?

I think the people -- I don't think that our customer base will move much in the thought process, in going from 40 to 60. I think these guys, our customer base, is now they have been shocked, they have been hit. They are reallocating capital. They have their own thing. They are looking at -- I think there is going to be probably consolidation in this industry. So some capacity could be coming out. So I think the space right now is set at a price expectation that it could easily get hit again.

And so these guys are managing their capital allocation, such that they're going to cut spending probably for at least 12 to 18 months. And that is my view of it right now. And I think there is more downward potential on the price of oil, given what is happening in the world to slow us down, what happens maybe in the Middle East, if there is an Iranian deal. And let's say that there is more potential of oil coming on the marketplace. So I think they need to be very cautious, and I think they will be very cautious.

Great. And then the $0.09 of restructuring that you have cited, should we think about that paying off on a one-on-one dollar ratio? And have you taken a look at your CapEx R&D goals? Or any area you can respond there, as well?

Historically, when we -- our restructuring is one to one. And so right now, the number we are looking at is about 140 million. I would say, as the year goes forward, that number is going to move towards 150 million to 160 million for the fiscal year. Most likely, as you look out beyond that, in total price of the cycle, we'll probably end up spending over $200 million in setting the cost structure of this corporation.

And capital right now, based on what I see we're going to try to curtail a little bit. But I have set in motion some redeployment of capital that we had started about 18 months ago in eastern Europe, and also in Mexico. And I also have what I would call risk hedging and capital, from a standpoint of where I manufacture things. So I don't see our capital taking a dramatic drop-off. But I would say, as we get into 2016 and 2017, that capital number as a percent of sales will come down.

Thank you.

You are welcome.

We will take our next question from Christopher Glynn with Oppenheimer.

Good afternoon, Chris. How is that baseball team of yours doing? I want to go back two years ago. You got any starters you can send our way? We need a couple pitchers. We lost our ace.

Sorry to hear that.

That didn't sound very real, Chris.

The trade deadline is a ways out. You've got some time. (laughter) Dave, in the past and today, you've described the accordion aspect of your global cost structure and ability to respond to things like currency. I am guessing, maybe there is a pretty big magnitude of opportunity to leverage that in Process, but wondering if you could describe the scope of what can be done there?

From our perspective, we can move it around. And it takes us time. We can -- not only Process, but Network Power. Network Power has the same flexibility, both in Mexico, as they do in eastern Europe, as they do in China. And so Network Power has the same capabilities as Process, as does Climate, as does most of all the industrial businesses. So from my perspective, we're going to go after that moving where we source. The biggest opportunity for us is actually sourcing, where we know the dollar base sourcing has become very competitive for us, for about two or three years.

Now, we're going to start shifting out, and that will create non-dollar based sourcing, which means there are probably less job in the US, and more jobs other places around the world. So we are already underway here, and our cost of goods sold pressures, our SG&A pressures, we can deal with those things. And it is a game plan we know how to play. We also know that it's going to take us six to nine months, and we will slowly get some benefits as we move into the second half of this year.

It's -- that accordion is still -- is very workable, we have had a lot of tactical meetings here within the corporation, in the last five or six days, and as we try and expand this things and taking a real serious look at what we think is going to happen in the next three, four, five quarters. So the accordion is moving right now, and it's going to be moving pretty rapidly.

Okay, and then just going back to March. It seems like April didn't get anywhere, or maybe a touch better. You mentioned some things, the nose turning up. But what about what happened in March was maybe one time in nature, whether it is channel flush or something else?

Don't believe that.

Okay.

I don't believe that. I think if you look at the underlying, I think -- my personal opinion is, I think inventories in the US are still too high, given the pace of business. I heard numbers this morning, from one of my directors, that imports took a surge in the month of -- I don't know if it is March or April. And that tells me imports are already starting to come in. And so -- you want to borrow a pen? (multiple speakers) He is shaking his pen.

But I think that this thing has got some legs to go here. Because I think there is a shift going on, as people adjust relative to weaker demand, and they also adjust, as we look at this whole issue relative to imports going up, and also the impact on the sourcing, which we just talked about. So there's two or three layers here that you've got to go through, and I think that will have an impact on US operations of all companies.

Got it. Thanks. Have a good day.

You are welcome. Take care.

We will take our next question from Deane Dray with RBC Capital Markets.

Thank you. Good afternoon, everyone.

Good afternoon.

Hey, Dave, I am actually at the OTC show in Houston today, that's the offshore technology conference. And I was just at the Emerson booth. There was good traffic there. But what I did notice was a big emphasis on reliability consulting. Maybe less on trying to sell equipment, but more on a differentiated sell, regarding efficiency, energy savings and so forth. Is that going to be part of the go-to-market strategy for Process over the near term?

110% correct. The issue here is, there has been such a strong expansion in the oil and gas industry that the capacity went in very quickly, not necessarily looking at optimization. And now what we see, with our capabilities and the people resources in our technologies, is that we can optimize what they have already invested in. And we see the focus from the customer really shift hard that way.

And you clearly are seeing that in that trade show, and you're going to see that across not only the oil and gas, but also the chemical industry and the power industries in a big way. So you're seeing this -- this is going to be the game plan on the solution organizations, and Jim Nyquist is totally focused on that. In fact, one of the acquisitions that we took to board today is very much focused in that same area. That is where the game is going to be.

That is helpful. And with downstream being one of the brighter spots, maybe you can comment on how resilient your MRO business for Process has been? I know we had some refiner strikes. Are you seeing deferred maintenance? And what is the expectation for the MRO side of Process?

We haven't seen any deferred action yet in the MRO. And that is another reason why we have a big third quarter, typically, third and fourth quarter, because we see more MRO action around that time period. So right now, we have not seen any slowdown of that. That would be the key issue for me, relative to how our margins come back. If we get into the second half of the year, and then that day-to-day MRO onesie-twosie business really disappears, then we'll have a lot more pressure, versus the big projects. But right now, it is holding up from the perspective of day-to-day sales, so I feel okay about that.

Thank you.

Try not to hit anybody. You are not supposed to be driving around at the same time you are talking to a CEO of Emerson.

No, no. I am stationary. I am outside the conference.

Don't walk across the street and get hit or something like that.

Yes, sir.

See you later.

We will take our next question from Scott Davis with Barclays Capital.

Good afternoon, guys.

How are you doing, Scott?

I am doing okay. I am trying to figure out the world, and a lot of you are comments are pretty bearish, so I am a little concerned. One of the things you mentioned, Dave, this is the third down cycle since you have been CEO. And the Fed is still providing plenty of stimulus out there, and you see it in the lending data and such. Are we walking into a recession here? Or is there some -- or it this a -- how do you define this? And it sounds like things are sequentially not getting better, or in fact maybe getting worse, with the exception of maybe Europe.

I think free money has run its course. What are we, in the eighth year of free money? Free money doesn't do anything for us. There is plenty of cash out there. Cash is not the issue. The issue is trying to figure out how to get a sustainable type of demand. I think that what really is going on here is, we have had a couple of major, major shocks to this industrial space that we operate in, with the price of oil dropping off dramatically, with all that spreading going on, with that shift in the dollar.

And then also, basically, there's better jobs out there, but the jobs numbers are really not that exciting, relative to employment levels that we have seen just 10 or 15 years ago. The work force participation is not all that exciting. And then you have seen the global China growth show down. And Europe is getting better, but Europe is getting better at a tune of 1%. So I don't think we are in a recession. I just think we are in this economic slowdown. And if they are not careful here, you could bump this thing into a pretty tough period.

And that is my standpoint. I am calling it the way I see it right now. I am dealing with an issue where business has dropped off dramatically, and we're going to have to deal with that. And I don't worry about calling recessions or not calling recessions. I am taking action now. And so we are where we are. And I'm not walking away from market share that we've gained over the years, and we're going to figure out how to win that and protect it. So that is what I am calling.

(multiple speakers) I don't call it a recession. There's a Fed that does that. (multiple speakers)

I guess I was trying to get my arms around sequentially how much worse things get? And are you the only guy who has the guts to call a spade a spade? Or is everybody else just not seeing it yet or something? But I guess that is for another conversation.

I just happen to be a little bit straightforward, honest guy.

Yes, historically, that is correct. If you look at your stock price, Dave, based on your commentary, it sounds -- you could make an argument assets are over-valued, because earnings need to come down, still. But based on your stock price, it is pretty depressed. And how do you think about that versus M&A? The M&A markets are still a little pricey, right? And it's going to be a while until prices come down, but your stock is acting a little piggish here. At what point do you say, buybacks may be a better plan, and we will buy our stock when nobody else wants it?

We've been buying, as you well know. We are buying well over $2.5 billion this year, and we will continue to buy next year, not probably not at that level, but we will continue to buy. Clearly, I don't -- I think the stock has been hit pretty hard, and there's reasons for that. And people are challenged, relative to our underlying growth. But I can't worry about that, day-to-day. I don't like the fact that stock have been hit hard. I'm just dealing with the facts right now.

And the facts show that the underlying demand out there is weak, and may stay weak for several more quarters. And we're just going to get the cost back down the line, and to compete against our international competitors. And if other companies don't want to do that, that's fine. Maybe other companies have better magic formulas, maybe they are doing a better job. So be it. But right now, I know what I'm dealing with, and I know where I am competing, and we are not losing. And I have no intention of losing, and we are going to get across the lines, and make sure that we can compete and drive the levels of profitability.

Even in a tough quarter, we still had a very strong underlying profitability in this quarter. A lot of companies would love to have that underlying profitability in the quarter. But that is not what Emerson finds acceptable.

Well said. Okay, Dave. Thanks, and good luck, guys.

You take care.

We will take our next question from Jeff Sprague with Vertical Research Partners.

Hey, Dave. Good afternoon.

Good afternoon, Jeff.

Hey, also just thinking big picture here, about the portfolio, and how you do drive growth going forward? If 2014 was peak cycle for Emerson, you just grew earnings 3% peak to peak, over a six or seven year period of time. And obviously, a lot of different stuff happened, but that is the nature of my question.

(multiple speakers) That type of growth is not acceptable. It's one of the issue to why our stock is sitting where it is right now. And I am not a fool. I understand that. I don't need to be told that. I fundamentally -- we are a premium company, and I do not like what we face right now. So we're going to figure out how to get premium underlying growth, both in the top line and the bottom line, both through acquisitions, repositioning and restructuring. That is the game we are playing. I can't get any more specific than that.

So then just shifting to Network Power then, you did say in February that the business is restructured. You now just need to figure out how to drive profitability. Obviously, you just keep getting fresh curve balls in this business. What -- other than the passage of, for lack of a better term, probation period that the business may be under -- what is it that you are looking to see there, in terms of a decision point?

I think that, from my perspective, and what we are underway right now, I have everything I need at this point in time to deal with what I need to deal with. But it is a function, as I said, if we are going to get out of the business, I want to figure out how to create the right value for our shareholders. I am not going to just dump and run, if that is the decision. So I think pretty much have a good understanding of the marketplace. I see what's -- I think what we can drive the profitability level to. Yes, we had a tough quarter, but a lot going on there. So I think it is a pretty straightforward decision, at this point in time. Now the question is, what is best way of, within the execution, to create the right value for my shareholders?

Just one last one on this FX, and the price. It may be wishful thinking, but we hear a lot of other companies say, the Japanese and European guys aren't going to do that, because they have got global footprints like we do, and what goes around comes around on currency. Do you think there is any merit to that? There is clearly nothing wrong with being girded for them to come after you. But do you think global footprints have changed enough that maybe the behavior does not get as egregious as you fear on price?

I have one simple answer. No. I do not believe they have changed enough.

All right. Thanks, Dave. Appreciate it.

We will take our next question from Rich Kwas with Wells Fargo Securities.

Good afternoon. This is (inaudible) for Rich Kwas. How are you today?

Good afternoon. How are you doing?

We hear you on right sizing your optimizing cost structure and M&A, and return of capital. But the question is, do you have any thoughts on actual rating share buybacks, at this point in time, given where we stand right now, with growth or CapEx, or lack of opportunities in M&A?

At this point in time, no. We're going to spend $2.5 billion in share repurchase this year. I would expect right now, we are probably getting into the $1.5 billion range next year. Our focus is, we are hoping to figure out how to find some assets, if this marketplace is slowing down from a industrial space, are there some assets out there?

And we are obviously working that real hard, to be able to try to do more acquisitions as we get into 2016. Our preference is to figure out how to -- if we are going to position -- move out of certain assets, how to also try to get some acquisition. So we're working that pretty hard right now. But at this point in time, the $2.5 billion of share repurchase this year is set, and I do not see us changing that. And I see next year being somewhere in that $1 billion to $1.5 billion range.

Okay. Question on Network Power margins. I know it's been talked about in Q&A. But you put it at 3% this quarter. I know the target still remains 12% margins, for the medium term. But how realistic is it that we model for high single digit margins for the full year -- for you FY15? Or you think it's --

From my perspective, given the significant restructure underway at Network Power, they're going to get hit at the EBIT line. And so it's going to be challenging, but we still believe that 10% to 12% is doable, as we reposition this cost structure, and we get some kind of underlying improvement, particularly in the telecom space. Which they'll come back within the next three to six months. So the business model hasn't changed. You just got in and out of a quarter, so I don't think it's going to change.

Last question for me. Tax rate for the full year, do I -- what's it, on a normalized basis? Is it more 31% or 32%? Or 34% or 35%, like last year?

Operational basis, we're looking at around 31%. The tax rate is inflated because of the gain on the divestiture. Operationally, we should be the same, within a percent of so of where we were last year.

Okay. All right. Thank you very much.

Thank you.

And we will take our next question from John Inch with Deutsche Bank.

Good afternoon, Dave.

Good afternoon, John.

I want to ask about -- I want to go back to the currency issue. And we have been in this environment where the yen has been weak for a while. And it didn't seem as if the Japanese ever stepped up to try, for perhaps various reasons, stepped up to try and do much about it. And then in a relative perspective, the euro has only collapsed in a short period of time.

So I'm just curious, what do you think is going on, around the world, to all of a sudden have this increasing price-based competition? Which I don't believe is unique to you, all of a sudden happen? If it didn't really happen for so long in Japan, why is it happening more rapidly, given the relatively shorter duration of the euro's decline?

From the yen standpoint, it is just a function of, in the early stages of the Japanese recovery, there was more internal focus for investments, as we saw, inside Japan. And as that recovery has petered out, from the standpoint of the (inaudible), and if you look at underlying growth rates in Japan are not that strong right now, they have had a turn externally. And we have seen a ramping up, in the last three to six months, as they become much more aggressive, and around Asia and Europe, and then also here in the United States.

And it is just a function, I think they did one internally, and now they are coming back out quite strongly. The European thing is a situation that, we have been here before. We know what it is like. We know it takes them a while to gear up. And they have been in a situation where they have not had real underlying growth in western Europe for a while. So now, all of a sudden, you're going to see those European EPCs, the European small businesses, the European large businesses, now be competitive, so they can go out and compete against all the US companies or other companies around the world.

And I think that is their natural behavior to do that. They're going to go, and we have seen that before. And I know everyone keeps saying, they are re-balanced, they are not going to do that. But I don't they re-balanced that much. And from my perspective, you can see why they would play that hand. You, all of a sudden, got a 25%, 30% competitive advantage, just on a pure translation side. I think the games have been played before, and I think it will be played again.

Yes, no, especially it a slow growth work, it makes perfect sense. I want to ask you more of a strategic question around restructuring. If you back to the last recession, lots of companies were able to very successfully preserve their profitability, despite the steep downturn, because they all advanced their play books of restructuring. One of the questions or concerns I have -- and it's maybe less to do with Emerson, but I would like to get your thoughts on this, is that, as we go into what could amount to another downturn -- obviously, probably won't be nearly as severe -- but is there as much action to take, to be able to preserve profits?

Like very simplistically, haven't a lot of American industrial companies already down-sized and implemented lean and other tools, to the point where there just isn't as much opportunity to cut costs, if in fact we go into a more protracted slowdown? What are your thoughts?

I think the answer is, again, no. I think there are opportunities. I think there has been a lot of new technologies. There's been new ways we can share technology and innovation around the world, and I think that company can take advantage of that. And given the fact that the currencies don't move, and the cost structures don't move, eke all together, allows companies that -- someone said earlier, on the phone that we're -- the balance, I think that there is opportunities. We see it today.

And so I don't think the game is over with. I think there is always room for this. It's maybe not China play this time, where last time it was a lot of China play. This time, you are playing with different spaces, and different locations, and different approaches. So my fundamental belief is, the answer is no. There is room to fix your cost structure, and there is room to improve your profitability.

And one more, Dave. Do you believe your cost structure is more variable today, given this technology and globalization versus past years? Or it is not really that clear? Because obviously, if it were more variable, you could preserve your profits far better than perhaps anyone anticipates, right?

I think we are less manufacturing-based than -- historically bean. So there's more -- people underestimate that our software, they underestimate our systems and solutions capability. I think they all think that we are just a pure manufacturing company and misread that. I think the Company has more variable costs than in the past. For us, we are dealing with this pretty quickly. I think we have a lot more variable versus a pure old fixed -- large, fixed manufacturing plants.

Got it. Thank you very much. Appreciate it.

Take care, John. All the best to you.

You, too.

From our perspective, again, I want to reiterate, it was a tough quarter. I appreciate it. I appreciate your patience. Thanks for all the excellent questions. And I look forward to seeing everybody.

And again, we are very much focused on execution right now in the company, and the discussion at the Board level is, the last two Board meetings are very much based on the short-term tactical issues. But also, at the same time, strategically, we want to return to a premium value growth company, and we're going to figure out what it takes to do that. And in the meantime, we have other issues we deal with, and we will deal with those. So thank you very much. I look forward to seeing all of you in the near future.

And this does conclude today's conference call. Thank you again for your participation, and have a wonderful day.