艾默生電氣 (EMR) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to Emerson's investor conference call.

(Operator Instructions)

This conference is being recorded today, August 4, 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.

Thank you, Tim.

I'm joined today by David Farr, Chairman and Chief Executive Officer of Emerson, and Frank Dellaquila, Executive Vice President and Chief Financial Officer. Today's call will summarize Emerson's third quarter 2015 results. The conference call slide presentation will accompany my comments and is available on Emerson's website. A replay of this conference call and slide presentation will be available on the website for the next 90 days.

I will start with a third-quarter summary as shown on page 2 of the slide presentation. Net sales in the quarter decreased 13% to $5.5 billion with underlying sales down 5%. The continued pressure from lower oil prices has resulted in further capital spending reductions by global oil and gas customers particularly those in upstream markets.

Industrial spending remains sluggish on a global basis but most significantly in energy-related and commodity markets. The strength of the US dollar continues to be a significant headwind for our businesses.

The third-quarter order rates reflected the continuation of difficult economic conditions as the trailing three-month underlying order rates have been down in a range of 8% to 10% over the past four months. Order rates were under pressure by the sustained headwinds from lower oil prices and gas prices, capital spending weakness across many of our global manufacturers, weakness in data center and global telecommunications infrastructure investment, and the affect of the US residential air conditioning customer pre-build.

Turning to slide 3, gross profit margin declined 120 basis points to 40.6% driven by volume deleverage as we adjust production and inventory levels, unfavorable business mix and the impact of the stronger US dollar on operations. Overall, profit margins remain at a significantly positive level.

Restructuring expense totaled $36 million in the quarter and $89 million on a year-to-date basis. A significant level of restructuring expense is expected in the fourth quarter. Reported earnings per share decreased 18% to $0.84. The current market conditions require focus on execution of the strategic programs including global cost reduction actions.

Turn to slide 4 for the third-quarter P&L summary, as mentioned net sales decreased 13% versus the prior year with underlying sales down 5%. EBIT margin reflects the impact from accelerated restructuring costs. In the quarter, approximately 11 million shares were repurchased.

Turning to slide 5, underlying sales growth in the quarter was down 5% excluding unfavorable currency translation of 5% and the impact of divestitures of 2%. Global demand was mostly down with the Middle East and Africa being the exception, up 3%. Across the other regions, the US and Asia were both down 7%, Europe was down 2% and Latin America was down 10%.

Turning to slide 6, business segment margins declined 220 basis points to 15.5%, primarily due to volume deleverage, unfavorable mix and increased restructuring expense. Operating cash flow in the quarter decreased due to lower operating results and taxes paid on the gains in the divestiture of the power transmission solutions business.

Trade working capital performance was affected by the overall business slowdown. Over the next three to six months, the global operations teams will be undertaking additional actions to align trade working capital with business conditions.

Turning to slide 7, for the Process Management segment results. Process Management underlying sales declined by 4%, with a 6% reduction from a currency translation resulting in a net sales decrease of 10% in the quarter. Oil and gas capital spending remained weak as a result of lower oil prices. Upstream markets remained under the most pressure while downstream activity in chemical and power markets continued to provide growth opportunities.

Demand in the Middle East and Africa grew by 5% reflecting favorable activity levels across the region particularly in midstream and downstream markets. While demand in Asia was down 7% with growth in emerging markets offset by slowing conditions in China and continued weakness in Australia. Europe was down 1% with strong growth in emerging markets, offset by declines in mature Western European markets.

Margins were down 250 basis points due to volume deleverage, unfavorable mix, the impact of the stronger dollar on operations and increased restructuring. Demand is expected to remain weak through at least the first half of the FY16, and given the continued downward trend in commodity prices, a significant recovery will not be experienced until 2017.

Turning to slide 8 for the Industrial Automation segment results, industrial Automation net sales decreased 23% as currency translation deducted 7% and divestitures deducted 11% resulting in an underlying sales decline of 5% versus the prior year. The third-quarter sales reflected continued softness in European demand, upstream oil and gas and industrial spending, specifically in energy-related and commodity markets. Demand was down in all regions, with North America down 11%, Europe down 2% and Asia down 1%. Margin decreased 80 basis points reflecting volume deleverage and unfavorable mix.

Marketing conditions will remain challenging with a gradual improvement in Europe and sustained headwinds from upstream oil and gas. Business capital spending plans are expected to remain weak given the softness in the global economies and global GDP is expected to be less in 2015 than it was in 2014.

Turn to slide 9 for the Network Power segment results, Network Power's net sales decreased 17% as currency translation deducted 5% and divestitures deducted 1% resulting in an underlying sales decline of 11%. The third quarter reflected continued weakness in the global demand for data center infrastructure and telecommunications investment with North America and Asia telecommunications' spending down significantly.

The difficult conditions were felt across the regions as demand in China was down 28%, North America down 10% and Europe down 4%. Margins decreased 510 basis points reflecting volume deleverage, lower price, unfavorable mix and increased restructuring. We expect demand to remain mixed in the near term with areas of opportunity in data center infrastructure and telecommunications power.

Turn to slide 10 for the Climate Technologies segment results. Climate Technologies net sales decreased 6% as currency translation deducted 3% resulting in an underlying sales decline of 3%. Demand in North America was down 6%, driven by a double-digit decrease in US residential air conditioning compressors as customers continue to work through remaining pre-built inventory.

Asia was up 3%, as growth in India and Southeast Asia air conditioning and refrigeration businesses more than offset slowing demand in China. Segment margin decreased 130 basis points, primarily due to volume deleverage, higher warranty expense and unfavorable mix. When normalizing for the North American residential A/C pre-build, the 12-month rolling sales growth is in line with the industry. We expect fourth-quarter sales to be down modestly.

Turn to slide 11 for the Commercial and Residential Solutions segment results. Commercial and Residential Solutions underlying sales grew by 1% with a 2% reduction for currency translation and a 2% deduction for the transfer of a product line to another segment, resulting in a net sales decline of 3%.

Sales growth in the quarter was driven by favorable trends in US construction, growth in the food waste disposals, and wet dry vacuums more than offset declines in professional tools and storage businesses. US consumer spending has been lackluster as recovery has been muted. Modest growth is expected in the fourth quarter as favorable trends in US construction markets are expected to continue.

Turn to slide 12 for the 2015 outlook, little change is expected in market conditions for the remainder of our fiscal year. Underlying sales will continue to be affected by reduced levels of capital spending in oil and gas markets, most significantly in upstream project activity, a continued broad slowdown in industrial spending, particularly energy related and commodity markets, a general weakness in capital spending by global manufactures, and sluggish growth in certain emerging and mature markets.

As a result, underlying sales expectations will be lower placing continued volume deleverage pressure on profitability. Restructuring expense is now expected to be in the range of $160 million to $180 million for the year. Based on the continuation of the difficult current trends and their increasingly negative impact on results, we revised our 2015 outlook as follows. Net sales will be down approximately 9% with a 5% deduction from currency translation and a 2% deduction from divestitures, resulting in underlying sales that will be down approximately 2%. Reported earnings per share are expected to be $3.97 to $4.07, which includes a divestiture gain of $0.77 per share.

And with that I'll now turn it over to Mr. David Farr.

Thank you very much, Craig.

Clearly extremely tough quarter and it got tougher as the quarter went on as we got into June. The big negate surprise for us in the month of June was the extreme weakness in China. We saw China drop over $100 million from prior year down 14% plus versus prior year. The bottom fell out in May, the core markets in China and we do not see that recovering any time soon.

Our oil and gas investments continued to weaken as the price of oil, the price of gas has continued to slide. We now expect pretty weak orders in this space for at least the next 12 to 15 months and we're a bit concerned about the pace of recovery. So what we're focused on right now is getting our restructuring done, getting the Company right-sized to a slower pace of business and making sure that we can improve profitability even with the lack of underlying sales.

As Craig mentioned year-to-date restructuring is around $90 million. Operations have geared up and are very active right now. I would expect the number to be on it somewhere between $70 million and $100 million in the fourth quarter, which will probably be in the $160 million to $180 million maybe a little bit higher if we get the work done. There's a lot underway from around the world.

From my perspective, the restructuring from when we started it back in early February from the start of this to when we finish this some time in early 2016, you're going to see SG&A, personnel headcount down 8% to 10% from beginning to end. So a major undertaking around the world as we continue to reposition the Company for a weak market.

Not much I can do about the market at this point in time. We face the other issue of obviously strong competition coming out of the weaker currency markets, in particular out of Europe and Japan. Those things we have to deal with and that's why we have to get our cost structure in line.

As you've seen, the orders have continued to stay weak in the negative 8% to 9% range. I would expect that to continue for the next quarter at least. We have not seen any indication to say that things are going to get much better, so we're focused on dealing with weak orders, weak sales and obviously weaker production throughout our facilities.

So production is coming down, inventories will be adjusted, we will get the cash flow back. Most likely cash will be tough as we go into the fourth quarter, but we'll get that into that fourth calendar quarter our first fiscal quarter. We'll start recovering that as we get the production back in line and we start liquidating the inventories that have built up over the last 12 to 18 months as the slowdowns happen.

The global teams are acting fast. The global teams obviously clearly focused on the short term and the restructuring necessary to get our costs back in line, to get our production back in line and to make sure that we can improve our profitability even with an environment that we're seeing right now that we're going to see minimal, if any, type of growth for the foreseeable future.

At the same time the teams are very focused on dealing with what we announced at the end of June from Network Power. Also our Industrial Automation Leroy-Somer control techniques business and the continued divestiture of our metro business as we continue to structure the Company to focus on segments that we want to invest and grow over the long term.

In the short term, we're very much focused on execution around costs, execution around getting our balance sheet back in shape and then we'll continue to move forward at the right time, the right pace as we see the core markets recover and as we see some other investment opportunities in the two business segments that we're focusing on going forward.

Net, net obviously not a pleasant quarter, one to deal with and one to report. Fourth quarter is going to be equally as challenging as we've had sessions with the operating leaders here the last couple of weeks. And again we're going to be meeting with them again on Thursday, Friday this week. It's all about getting the actions necessary to get the cost down and get the production down and deal with the marketplace that we're dealing with right now.

From our perspective, we're not losing this market. It's just a tough market for us and there's no way to color it other than that. It's tough and we're dealing with that toughness at this point in time, and that's where we are. And so with that open the floor up for questions.

(Operator Instructions)

We'll take our first question from Joe Ritchie with Goldman Sachs.

So Dave, look, the fundamentals just continue to get worse, the market is not getting any better. I'm wondering how do you feel comfort that you guys are doing enough from a restructuring standpoint at this point?

You give it your best shot. As we look at the forecast, as we look at where we see things going and we bite off as much as we can do. And what's under way right now is a lot and we impacting a big chunk of this Company with a lot of costs and it's not really facilities, we're dealing with an overhead structure right now trying to get it down. And at the same time we're going to have to deal with an overhead structure as we go into a smaller company as we move out of 2016. So I probably believe we spend a lot of time on this. I feel that we have the right actions under way and we're taking the right amount of cost out.

Okay and the $225 million that you expect to spend by the first quarter of next year, I know you've talked about a pay back of 1 to 1. Can we see -- will we see all of the pay back by FY16 or is some of that going to bleed into 2017?

We're hoping to get close to $200 million in the FY16. Our game plan here is to get our costs down in a very difficult volume environment so we can improve profitability, improve earnings in a tough marketplace. That's why we're taking as hard and quick action we're taking.

You're dealing with people here and this is -- we're not -- there's not a lot of facilities we're rationalizing there because our facilities are pretty well rationalized. What we're dealing with is an overhead structure, trying to get the cost out so we can drive that profitability to the bottom line. That how you get that -- the savings so fast.

Okay, fair enough. Maybe one last question and I'll get back in queue. I know it's still early but any thoughts yet on you just announced the strategic alternatives for a few of your businesses, any progress yet, any interest on those businesses? Just any color there would be helpful.

It's early. We've got -- we've obviously had some interest but it's too early to deal with that. We're working down the spin route right now. It's too early to talk about. I think it's going to be worked for the next three, four, five, six months and we'll spend from that standpoint.

There [are metro action] most likely will be done some time before the end of this calendar year. We're targeting some time in October.

Thanks, I'll get back in queue.

We'll take our next question from Robert McCarthy with Stifel.

Dave?

Yes,

Yes, so the first question is really challenging numbers across the board globally, do you think there's an issue of share loss here in addition because we have seen very weak numbers globally but not to the extent maybe in this variance for the quarter, so how do you speak to that or can you speak to the -- are you leveraged to a particular end market or sub end market particularly with respect to China? Anything, any narrative around that would be helpful.

Our China business has held up reasonably well for the last 18 months. But we're -- and China, we don't firmly believe we're losing business at this point in time. We don't see any indication of that. But we're -- in China we have very strong markets relative to the strategic-owned enterprises -- the state-owned enterprises, which are -- have really cut back on spending here in the last three or four months as that governments ratchet back some of the issues they're dealing with.

So if you look at our Process businesses, you look at our enterprise business in China and if you look at some of the other climate businesses, we're seeing these where the state run enterprises have really curtailed, stopped, spending and they did it very suddenly. So this is something new from our perspective to see that type of drop off that quickly. And until we see some kind of stabilization within the China market, the China Government, I'm a little bit nervous about China and a recovery there. So we're expecting the next couple quarters to be pretty tough there. But that's where it is, it's around that China -- those spending at our key customer base.

And then as a follow up, David, I know it's early and you got the restructuring and the restructuring benefits. But conceptually thinking about 2016, do you have the visibility to say hey, we could be close to the bottom here in terms of EPS degradation or too early to tell? What's your view of 2015 versus 2016? Is it possible for you to grow in 2016?

I think the big issue for me right now is we had a very strong first fiscal quarter of 2015. We were up almost 5.5% underlying growth, we were up very strong earnings, double-digit earnings. And I think the visibility right now is very challenging because I know I got that big hill I have to climb sitting right out in front of me. And that the fourth quarter is very strong for us last year and our first fiscal quarter is very strong. So it's a little early for us to see how we come out of that as we get through the next two quarters. (multiple speakers)

That's the big issue right now. The next two quarters are looking at huge walls that we have to get through and see what we -- or from an order standpoint and backlog can we get up there to get some kind of growth in the second half of next year.

How do you think about M&A in this environment with the prospects of a cyclical rollover and the bid ask maybe widening between seller expectations and buyer expectations? Do you think this cools your potential appetite for M&A or your capability to get things done of size?

If the right thing comes along we have the capability of doing it. Right now we're looking at divestitures and spend. If the right opportunity came along from an acquisition standpoint, we'd jump on it pretty quickly. I don't think that has any issue for us and we understand that.

Thanks for your time, Dave.

Okay, you're welcome.

We'll take our next question from Mike Wood with Macquarie.

Another question on the share with Emerson. Specifically with Network, that high single-digit underlying order decline that does seem worse than some of the peers. More peers exposed to power management not seeing severe declines. Can you maybe speak to is it the data center and telco specifically or how your power management sub business is holding up?

The core business is holding up. We had a very strong -- we had some big project wins last year at this point in time. We also had -- we have a very strong presence in China which is unique in our telco space. In China and North America, telco really have -- have really cut back in spending, so that's why you see those numbers are a little bit more drastic than our competitors. Underlying business is pretty much in line with that, but the telco spend both in China and North America very difficult.

All right, very helpful. And then can you give us an update on the inventory on the climate side and when that might be worked down?

Because we look through the cycle from the standpoint we look at 12 months, it's pretty well trending. I would say right now our estimate, not estimate, we know, 1.1 million units were pulled forward. I would say they're probably 80% through that right now. We should start seeing some North America refilling production is really -- our inventories right now production levels are low so we expect to start seeing that flow through in the fourth quarter.

However, the issue for us, the comparison may be very difficult because last year was when we were selling it both in the fourth and first quarter. But we're seeing it come back in if you look at the underlying I would say pace as improving in North America. So I'd say they're getting through it pretty quickly

Thank you.

We'll take our next question from Jonny Wright with Nomura.

Just need a comment Dave around the competition out of Japan and Europe. Is that partly reflected in the pricing environment and is that on the process side, what are you seeing there from competitive pricing perspective?

We have Japanese and European competitors on most -- across most of our businesses both on the Process side and Industrial side and Climate side. And clearly with the weaker currencies they have the opportunity to price to drive that business their way. We're working extremely hard, one of the reasons we're working so hard on the cost is because we do not want to lose any position in this situation where we are at a huge disadvantage with a stronger dollar against our European and Japanese competitors. So the pricing is definitely tougher and from our standpoint, we're dealing with it.

The one event we do have as we get into the 2016 environment is with the weaker commodity environment, the weaker material environment, we will start getting benefit from that as we get into the first half of next year. And that's a big advantage for us and help us offset this price cost. Right now I'd say we are still -- as you understand we look at this price and cost, we're staying probably pretty close to being neutral or slightly green. And the key issue for me is to stay ahead of this power curve.

Yes we have price refreshers in particular from our -- the weaker currencies out there. But our -- the commodity supply side guys are working extremely hard right now to get the respective cost reductions to help keep us price cost green as we get into this tougher price environment in 2016. So that's where the war is right now and I feel good about the battle and I feel good about where we are.

Okay thanks. And then I'm going to stick with Process, from a vertical perspective, obviously upstream oil and gas are staying pretty weak but some of the downstream businesses like chemical and power actually seems to be holding up relatively well. Maybe you can talk about what you see there in terms of quoting activity and how you see those verticals holding up into 2016?

The downstream in particular power has held up extremely well, and certain chemicals segments held up extremely well. The order pace is at record levels, it creates a little mix shift for us a little bit but pressures [and] profitability. But that activity is very, very good right now and we feel good about that, and in particular both in North America and in Europe. Asia is not that good. India is good for us right now.

But downstream in power and downstream in the petrochemical area on the chemical area we see good pricing. We're a little bit nervous right now relative to there's been a lot of actions by major global oil and gas companies here the last two weeks and that will obviously start flowing back as they continue to get pressure in their capital spend.

And that could possibly have an impact on what we would call their MRO, their repair business if they get a lot of pressure on cutting their capital even more, they'll cut back in certain areas in the MRO area and we'll start feeling that. That's another concern I have right now with the continued weakness of the price of oil and gas, with where is the price of oil today, down $45? It's $45 so that bothers me a little bit there.

Okay, all right, thanks, Dave.

You're welcome.

We'll take our next question from Steven Winoker with Bernstein.

Dave, if we go to 2016 just follow up one of your earlier comments, if in fact revenue did go negative next year and was say down I don't know 1% or so, could you still drive margin expansion in that environment with all of the puts and takes that you're talking about?

That's the goal. (multiple speakers) That's the aim, that's what we're trying to do. Every operation guy is trying to figure out how to deliver improved profitability with no growth or slightly negative growth.

Right and if we think about what's possible in that goal given all the restructuring that you're doing, you're calling out restructuring it sounds like through the, at least the first quarter, but clearly in the environment that you're describing it's hard to imagine that you wouldn't be restructuring through much of the year. Is that a fair comment?

What we're trying to get done is we'll do some in the first half of next year but we're trying to get it done so we can stabilize the business. And we've identified where we want to go with restructuring, identified the cost. We have a map where we think things are going to head out and that's where we're focused right now. My objective is get this -- the major work done as we get into that second fiscal quarter of next year.

Right. And I guess if I also compare everything that you're going through right now compared to what you went through in 2008, 2009, one difference it seems maybe, I don't know if I call it a bright spot, is that at least the order rates are not getting -- decelerating any faster it seems from the -- but is that just a temporary thing based on what you're seeing in the front [line] and all these quoting activities that there could be another step down from here?

I'm glad you saw a bright spot in there, Steve.

I'm looking.

I owe you a glass of wine with that one, I don't have many bright spots here.

I got my magnifying glass out, Dave.

You're getting half a glass of wine on that one. Okay, at this point in time we do not see it stepping down on the order pace. We look at the trend lines and we look at the various businesses. It looks like its bouncing around this bottom. The question is there anything that's going to pull it back up. We know what the comparison are like for the next couple quarters, but I don't see a step down at this point in time.

It looks like it's trying to bottom here. And I've called this before and I've got my ass kicked to be honest and that's not a swear word, Steve. It's kick boxing here. I've been kicked around the ring a couple times here this year and it looks like it's forming. I don't see another step down at this point in time.

Now unless you saw a sudden break in oil or you saw a sudden break in commodities down into say in the 30s or below, then that would create another problem.

Okay and then finally non res, you spoke about the res pressure, what are you seeing on the non-res side?

Non-res North America is -- we've had a decent environment, it's continued to weaken. The actual what I would call the capital spending, the type of products that we sell have not been all exciting. There's been some non-res construction, but the basic capital spending environment has not been very good in North America and in the industries we serve. We don't serve the automotive industry and so its been very anemic at best. And there's been very little recovery. And then you'll see a lot of drop off as all the industries have support the broad oil and gas industry both here in North America and Latin America and around the world. So its been pretty broad and it's been business by business. If you look at the segments that we look at, this is pretty broad across very many businesses here.

Okay, great. Thanks, Dave.

Thanks, Steve. I owe you half a glass of wine for that positive you gave me there.

Next week. Couple of beers.

Okay.

We'll take our next question from Julian Mitchell with Credit Suisse.

A question on the gross margins. I guess they got up to about 42% second half of last year, they're now down to 40%. Maybe pause out between mix and volume deleveraging which one was more important within that? And then when you're looking ahead, how do you think about the ability to hold the gross margin at around 40% considering price cost (multiple speakers)?

It's about 50/50 on the degradation there. We still feel very good about as we -- recovery structure and stuff like that that we'll get this thing moving back up. I still believe there's 2 -- from the 42% I still believe there's about 200 basis points improvement in the GP margin for the Company.

So we're clearly going through a lot of restructuring right now, there's a lot of mix going on and there's a lot of deleveraging. But the underlying fundamental GP margin in this business is still pretty good and it'll move back up into that 44% range as we get there.

Thanks. And then just within Industrial Automation, obviously a very big drop in North America there in the quarter. Maybe just remind us how much of that business globally or North America you think is direct or indirect oil and gas?

In North America, it's pretty heavy oil and gas. North America it's very, heavy because it's Caterpillar. And so the Caterpillar business is off significantly and that's primarily a North America business. So that's what's driving that down both from the standpoint if you look at what they -- what we serve into their solar type of business and also their generation of the oil and gas platforms in the mining area, that's off significantly as they continue to take inventory out and they continue to take their production down. So we expect that that will run, keep running this way for the next couple quarters as they keep doing what they're doing. But that's what that is primarily, it's very heavy oil and gas.

Thank you. And then just lastly--

And it's energy related.

And then quickly on Process, you touched on MRO earlier, so I guess have you seen MRO hold up until now and its all been CapEx that's been coming off in the orders and sales?

Yes, we have not seen the MRO come off yet but I've gone through enough of these cycles as you guys well know, I'm a little bit older than you, and when I see the oil companies really under the pressure right now to cut capital even more from their shareholder base, I know eventually what that means is they'll cut into the core MRO. And so I would expect the next six months for our Process business to start seeing some of the MRO business get cut back which won't help us, it would be another little headwind for us, but we have no indication. I just know what happens. These guys are going to get pressure to cut capital, we know that's going to happen.

Understood, thank you.

You take care.

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

Want to go back to China your comments about June sounds quite frankly quite disturbing. What do you think caused that drop off in June, Dave? Is it liquidity, is it the government telling you yes we have to pull back on spending, what do you think caused that?

The major state-owned enterprises is there's been a lot of continued crack down on the ethical issues, the arresting and replacement of management team, people -- a lot of people are afraid to make decisions, they're going to make bad decisions. So we've seen this on a broad base and a lot of our customer base across China that there's been a curtailment of spending as they figure out what's going to go on relative to the leadership.

And this whole uncertainty relative around China and the leadership of whose in charge, whose not in charge relative to the businesses. And so there's been a big push in this area again and it's obviously reacted very strong in some of our customer base which we have a lot of state-owned enterprises and customers in both the Process world and the Network Power world in particular. And they got hit real hard in China and I expect that's going to continue until we see some clear direction of stability in the leadership of the various companies out there, there's a lot of those companies are having a lot of management changes right now.

So you've seen a big divergence between the SOEs and private companies?

Yes.

Okay and then based on your comments around orders the next three to four quarters, I think you said that they're going to remain quite weak. And then given that you're telling your Managers to basically aim to restructure to grow margins on (inaudible) sales, would you suggest that we base our models on that basis, Dave?

I think it's -- part of my belief is you've got to wait until I get through these -- I've got two big mountains that we've got to get through here both the fourth quarter, which was a pretty strong for us last year and the first quarter. We've got to see how we get through these mountains, how we see the underlying order pace. Has it reached that bottom and I think it's a little bit too early to bank on that.

Okay, fair enough. And finally Dave, on the Process margins recovered from Q2 into Q3 up about 3 points Q to Q ex restructuring with very little help from volumes. So I'm wondering what drove that, was that cost saves from restructuring, was there a mix benefit Q over Q?

We're getting the costs out.

Okay, thanks Dave.

Thank you.

We'll take our next question from Jeff Sprague with Vertical Research.

Dave back to this MRO and OpEx versus CapEx discussion. We've heard from a lot of companies actually a little bit the opposite that the OpEx has been cut because that's what their customers can easily cut and perhaps the CapEx comes later down the road. Is there -- does that intuitively make sense? Is there something different in your business mix?

What I said is that up to now, they've been cutting the project spending, their capital spending. And now my concern is with the most recent two weeks of what -- all the announcements coming out of the major oil and gas customer base out there that they're cutting capital again, they're cutting project again and my concern is they're going to start cutting into the MRO base which has held up until now. I'm just giving you my gut feel for this thing, that's why I was telling people, that as they continue to get pushed by their shareholder base to cut their capital spending and protect their free cash flow, that they're going to start going into MRO here in the Process world. We've seen it in the past.

How much do you think Emerson internal CapEx declines in 2016?

Depends where we finish this year. It'll go down next year. I would say that we're going to be down to 2.8% of sales level.

And then just last one for me, Dave, share repo. You do have a fair amount of liquidity; you expressed the willingness to do deals. But just wonder you feel like the organization could take on a large deal in the midst of all this change and would you prefer repo over deals or is there any particular prioritization there?

If the right strategic deal came along, we will slowdown repo and do the deal. In the meantime, right now we're banking on probably around $1 billion right now for next year in share repurchase. And so that's where we're going to focus but the right deal comes along, we'll do it.

Thank you.

We'll take our next question from Christopher Glynn with Oppenheimer.

Dave, the third quarter restructuring was well below plan. Now you have a big target for the fourth quarter, so just wondering what were the timing factors, some of the prioritization that caused that to move around?

It is function around announcing in certain markets and giving out the dual -- the proper notice in particular outside the United States. And so it took us a little longer to get approvals and now we're moving forward. We have those and we pretty well had this in sync right now as we move into this forth quarter. Sometimes you guess a little -- not guess, you plan a little long and if it takes longer to do the discussions and negotiations, then you miss it by 30 days or so. And that's basically what's gone on there. But it's in the pipeline, it's coming. And the question is how much can be announced and discussed with the organizations around the world. And that's why I think we had such a broad range here for the fourth quarter, it's a function of what can be formalized with the discussions and negotiations.

Okay, makes sense. And then in Network Power, could you go into a little more detail on the negative price there? I don't think that was mentioned last quarter.

China. It's really -- it was very -- as that market -- the markets dropped off and the big enterprises using its leverage to drive price down. The local producers are all looking for business right now. The markets weakened and their export ability has weakened because of their marketplaces and so therefore they're looking at dropping prices to try to protect and that's going to -- we're going to have that situation going on hard and in the Power area and in particular across to China.

Okay, thanks.

We'll take our next question from Rich Kwas with Wells Fargo.

On Process so at $45 to $50 oil relative to the restructuring you have in place now if this continues do you envision having to do a lot more beyond that?

I think we're pretty well sized in the $40 to $50 range right now and my next threshold is it possible that that will create -- that that's going to create some very difficult challenges that we're going to have to look at how we reorganize and to take costs out to protect that profitability.

Okay but in this range you feel okay?

Yes, we feel okay here.

Okay, okay. And then going back to not this past Investor Day, the one before in 2014, so you had this big initiative around spending. I know that probably affected some of your businesses that are being separated, but what's the latest on that? And I assume that that's been cut back in a meaningful fashion here.

Its been cut back in a very meaningful factor. Clearly the opportunities for growth right now are not there, so we're curtailing that spending and where it doesn't make sense and it's been cut back quite significantly.

Is there anything that you're doing spending on in this environment?

Yes, we still have from a technology standpoint, some innovation standpoint, we're still spending money but we're being very selective and a lot of projects being pushed out and delayed and slowed down. So yes, including some of the Oracle investments, other things like that that we even have slowed down that stuff.

Okay, and then the last one, quick modeling question, for next year typically you run on a three-year incentive comp where it gets there's a double up every three years. So as we think about next year, usually it's a pretty big ramp when you get into a year like next year, so is that still the case? I don't know if Frank can comment on that?

Yes, there'll be the overlap next year. Right now we're looking at [50 to 75] but it's early yet to tell exactly what that's going to be. But you're right about the structure of it, there'll be an overlap next year and that will be the biggest year for that.

Okay, great, thank you.

We'll take our next question from Deane Dray with RBC.

I was hoping to get a little more by calibration on the restructuring in terms of you said headcount and SG&A could come down between 8% and 12%.

8% and 10%, I'm sorry.

8% and 10%, okay. Is that -- how does that compare to the previous restructuring actions that you've taken and how quickly do you think you can get that depth of cuts done?

On a salary basis headcount that's pretty normally what we've gone through before. You go back in the 2003, 2004 time period because most of this restructuring is coming from not manufacturing, it's coming from a salary base. We're not closing facilities down. We have a couple minor ones, but they're very, very small as we move them around. So this is in line with other significant programs we had across this Company. And I would say based on how we start it and where we are right now, our goal is to have this done as we get into the middle of 2016.

And this wasn't clear or I may have missed it, does this include restructuring actions in Network Power?

This includes -- yes, Network Power will be -- is going to be with us in 2016, yes.

And you also mentioned that there are changes needed to the balance sheet. Is this related to the spin and divestitures or was there anything else you're referring to when you talked about balance sheet?

What I refer to the balance sheet was I want to get the balance sheet strengthened and from the standpoint of as this volume is dropped off we have working capital captured on our balance sheet right now, both from our receivables and our inventory standpoint, and we want to get those levels down to an appropriate level. It usually takes us a couple quarters once we stabilize and we expect that to be done I would say some time early in the calendar year of 2016. That's on path looks at it and where the trend line has gone right now that's where I'd say it's going to be.

Got it. Thank you.

You're welcome.

We'll take our next question from Shannon O'Callaghan with UBS.

Dave, just on the idea of orders or trying to find the bottom here, at least geographically it doesn't sound like that's going to be from China right? That still sounds like it's getting worse. Is there either geographically or by business, do you think there's an offset? Is Europe feeling much better to you or what would be the offset to China getting worse in that stabilization of orders?

From our perspective, the stability will come in from the Europe and I think there's not been a robust recovery in Europe. I think Europe has muddled along at a low pace but that's where I would see some improvement versus our China. I would expect us to see some improvement in North America as we come into this time period and that's where I'm seeing it right now. That's where I'll see it, we're not going to see it in China, you're right.

And then specific to Network Power obviously, the business there is under a ton of pressure and China's a big part of that but just broadly pretty weak and yet you say demand is expected to remain mixed and you talk about opportunities in data center and telecom. Is there a light at the end of the tunnel there where you're actually seeing things you're bidding on and opportunities for order improvement in that piece?

I don't think you're going to see anything in China until the Spring of 2016 relative to new opportunities of substance. I think you see day to day. Our day-to-day business is okay in those marketplaces, but I think until you see some big opportunities, I think it's going to be into the Spring of 2016.

Okay, thanks a lot.

Welcome.

We'll take our next question from Steve Tusa with JPMorgan.

On the Process side in the margin, so I guess should we still think of this mix dynamic as MRO good, projects a little bit weaker? Is that something you're planning on sighting through if this MRO drops off or is that -- does that -- when things go down like this it's more about taking the blunt actions on restructuring to offset that?

A couple things happen, Steve, on this type of business. When the large projects slow down we have typically what we'll see is a smaller type of project business and that business is usually better profitability wise. So if you think about the profitability the hardest for us is large, the smaller projects are good and the MRO is even better.

And so right now we're seeing as the large projects are cut back, they're still doing smaller stuff, medium size stuff and that's good project business for us. So I think the mix right now is still helping us a little bit in profitability but it's not a big movement. We still have the pressure of some of the big projects moving away through and some of that mix.

But we're going to have to get the cost out to deal with the issue of a general slower down pace of business. But I think it's going to be a little bit of both but it's not just MRO and large, there's some good and medium sized projects which there's a good pace of that going on out there right now.

Okay, and then what -- on your mind set, I asked a question -- I asked a similar question to another one of the companies we cover last week about restructuring in this environment but acknowledging the competitive threats that are out there. How do you weigh that because you just talked about trimming some of those investments. How do you keep your guys focused on the mind set of defending or even growing share while really battening down the hatches and delivering for guys like us on the cost side?

You have a lengthy debate with each of the business leaders on this very specific issue that no one wants to jeopardize the longer turn opportunity. So you're going to -- we're going to look at things that maybe aren't as critical and that's where you're going to cut. And you're going to figure out we red circle, we circle, we ring fenced areas that we must protect for those strategic reasons and then we'll go deeper on the other side. That's how we go about doing that.

All right, one last question. The -- I think you issued some debt in the quarter. Net debt is up I think like $600 million or $700 million quarter to quarter. Will that -- how will that trend? I know the filings said you'll use it for corporate purposes. How does that trend over the next couple quarters? Will that begin to come down or is that now used it for some buyback, maybe some cash management dynamics because of your foreign cash that's overseas, what's going on with the debt levels over the next couple quarters?

It's not going to change much. It won't change much if we're effective of getting out the cash by the end of the second fiscal quarter next year then the debt levels will come down a little bit but it's not going to change much.

Okay, great thanks a lot.

You're welcome.

We'll take our next question from Gautam Khanna with Cowen and Company.

You mentioned a desire to bring down inventory and the resulting absorption that you're going to have to take. Is that going to be concentrated in a process or are you talking across-the-board?

Across-the-board. I mean obviously Process and Network Power have the biggest dollars of inventory but it's across-the-board and no one's really out of line. Just that where we see the pace of business going which is going to be weak for several quarters now, we need to get that inventory back down. So we'll do it very systematically. One, not to shock the heck out of our supply base but also work it down over a six, seven time month time period. And we've been working it out for the last couple months. But clearly the orders have been weaker here the last several months which creates a situation where we have to lower that water even further. So we do it very systematically. We don't try to shock it, that's dangerous.

Okay, thanks. And just another follow up. In your monthly orders that you give us, have you had any major debookings at Process or Industrial Automation or elsewhere? And that it's amplified the negativity in the numbers or has that not really been a big part of the story yet?

It's not that big. It's not that big. We've not had anything that would drive that thing big time that we -- if we did we would let you know.

Okay. (multiple speakers) And lastly, seasonality, normally fiscal Q4 we get a nice little plus up in margins at Process and elsewhere. Given what's going on realtime in the markets, what kind of bounce are you expecting sequentially, if at all at Process specifically?

We are expecting profitability to bounce positively in the fourth quarter for various reasons. One, restructuring. We've now got $90 million done in the last 2.5 quarters and we're starting to see a pay back of that. And so we're seeing that and also typically the type of mix of business and where the business comes from, so we see sequentially we have a bit of improvement from sales. And we are going to see a bounce back in the fourth quarter.

Okay, thanks a lot guys and good luck.

You're welcome.

We'll take our next question from John Inch with Deutsche Bank.

What is your sense of Middle East being able to continue to be resilient in the face of oil prices? There seems to be a lot of politics that -- and employment issues, right, that are continuing to drive these projects and it's obviously a source of strength for you and other companies. But do you think it -- does it continue to hold in, is that -- should we just think of it as a place holder or what's your sense?

I wouldn't -- I call nothing a place holder but--

Relative place holder.

Okay, John. I think you're exactly right, they have the issue they have to produce oil. They have to maintain, that's what their income is, so they're going to have to produce more oil. They're going to need to invest to produce more oil and they're investing for other jobs across a diverse group. So we seen, not every business, but certain businesses have done reasonably well in the Middle East.

On the data center business side, in what I call non-res construction type of data base side, its been very poor. But on the Process side its been pretty good and Climate side has been pretty good. So right now it's holding up and the order pace is holding up so right now I'd say we're going to see moderate growth again in 2016 as of right now based on what I've been seeing from the order pace, which it's surprising to me.

Yes, yes, that makes sense. Can I switch gears to Network Power here? Wondering do you think there's an issue perhaps that would be fleeting or temporary but one perhaps none the less that maybe there's some distraction costs going on post the announcement you're going to spin the business? And where I'm going with this, I'm thinking in the olden days certainly India, China, employees would -- it was habitual that employees would bounce around company to company, a lot of companies had very high turn over.

I'm wondering post the announcement if perhaps there have been extra worker losses unplanned at the managerial level or what not that maybe could be exacerbating temporarily the Network Power results in China or elsewhere?

John, its been actually the opposite, it's been very positive. People are very happy about it, so it's a positive note. It's safe -- they've had some -- they've had a tough couple years here and it got hit again really with the telecom spend both here in the US and in China and enterprise spend in China, so they just got hit again. But within the organization, its been pretty -- it's been well received. And India's strong for us right now.

Yes, so there's not really much that you can do about the markets for that business? It sounds almost like that if there is hypothetically further deterioration, you're just going to go ahead with the spin anyway. So in other words as analysts, investors there's nothing that fundamentally is likely to detract you from the plan to strategically spin the business or are there other things we should consider about?

I don't see anything stopping us right now.

Got it. Thank you.

You're welcome.

(Operator Instructions)

We'll take our next question from Jeremie Capron with CLSA.

Following up on the restructuring most of it seems to be happening right now and you just said that it would continue into the December quarter. Do you expect restructuring to continue at a similar pace in the first half of next year? How should we think about the total cost that you're taking out of the business between February of this year and the mid point of next year?

Total, I'm still holding to around that $225 million to $240 million from the February at the beginning, when we started this process to its finish it's going to be in that $225 million to $240 million range.

Okay, so basically we're looking at another $70 million into next year, is that right?

We'll see what comes down the pike here, what kind of pace the business is. But when all is said and done we did $90 million in the first three quarters. Let's say we do another $90 million in the fourth quarter, that's $180 million. I'm looking somewhere between $40 million and $60 million probably next year.

Okay, thanks.

Does that work for you?

Yes, absolutely.

I didn't have a calculator, I used a piece of paper and a pen on that one.

That works well, too. I'm a little bit surprised to see negative mix across your five divisions. Is that anything to do with price more than mix? And then if you could comment on the overall price level, how much of a drop in price you've seen so far this year.

Yes, we -- from the standpoint we don't measure quite that accurate, I would say the general price trend is slightly negative across the whole Company. We then offset that from our cost reduction, that material inflation. I would expect our negative -- we'll have negative price slightly negative again next year.

What we've been seeing is mix within the business some of our more profitable businesses are having a tough quarter like Process. And so we had this unfortunate situation where right now we have a lot of businesses trending down quite hard which are the most profitable businesses. And sometimes that helps us and sometimes that hurts us and right now it's hurting us.

Okay, and when you look at your order intake, any shift in terms of pricing here happening over the last few months, is orders just at similar slightly downward bias?

It's from my perspective right now the pricing is obviously getting tougher every month, with particular with the euro where it is at $1.10 and the yen where it is. But it's not noticeably much different. I think we're going to have the same issue as we go into 2016, too. That's why our costs, our work on the material containment stuff is very, very important to us. We're going to need that because we know the pricing environment is not going to be easy unless we see the dollar start weakening which I see no indication the dollar is going to start weakening.

Okay, well good luck with that.

Thank you very much. Appreciate it. With that, I want to thank everybody. Again it clearly was extremely challenging quarter, and not pleasing to see. We are facing another extremely challenging quarter again probably for the next two quarters. The organization is very much focused on getting our costs and our production down in line relative to the pace of business we're seeing right now. And we're making good headway and we would expect to see improvement in profitability here in the fourth quarter which will give us -- set us well as we move into that first quarter. So thank you very much for your time today and I appreciate your support. Bye.

And that does conclude today's conference call. We appreciate your participation.