艾默生電氣 (EMR) 2015 Q4 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)

Following the presentation, the conference will be open for questions. This conference is being recorded today, November 3, 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, Sir.

Thank you, Carolyn.

Today, I'm joined by Dave 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 fourth-quarter and FY15 results. A 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 the fourth quarter and fiscal year summary on page 2 of the slide presentation.

Net sales in the quarter decreased 15% to $5.8 billion with underlying sales down 7%. Net sales for the fiscal year decreased 9% to $22.3 billion with underlying sales down 2%.

Both the quarter and the year were significantly affected by a number of economic headwinds. The continuation of lower oil prices resulted in both capital and more recently operational spending reductions by our global oil and gas customers. General industrial capital spending was slow throughout the year, particularly in energy-related markets.

Emerging market growth is sluggish with weakening conditions as we exited FY15. In response to the weakening demand, we accelerated our restructuring programs in the fourth quarter with a total spend of $128 million, which exceeded our August conference call guidance by just over $40 million, or an impact of approximately $0.04 per share. For the fiscal year, total restructuring expense was $221 million.

During the quarter we also incurred $52 million of costs and taxes related to the spin-off of network power, $10 million for transaction costs, and $42 million of income tax expense for planned repatriation of our earnings in 2016. On September 30, we announced the completion of the divestiture of the inner metro business, resulting in a gain for our shareholders.

Reported earnings per share for the fourth quarter increased 69% to $0.98. Earnings per share adjusted for the divestiture gains and network power spin-off costs decreased 29% to $0.93. Reported earnings per share for the fiscal year increased 32% to $3.99, while adjusted earnings per share decreased 15% to $3.17. During the fiscal year, the Company returned $3.8 billion to shareholders through dividends and share repurchase.

Turning to slide 3, gross profit margin in the quarter decreased 170 basis points to 40.7%, primarily due to volume deleverage and unfavorable business and product mix. EBIT margin reflects the impacts of the accelerated restructuring, the network power spin-off costs, and the benefit of divestiture gains. Fourth-quarter margins were up 270 basis points on a sequential basis versus third-quarter EBIT margin of 15.2%. During the quarter, approximately 9 million shares were repurchased for $460 million.

Turning to slide 4, global demand was mixed during the fiscal year with underlying sales in the Middle East and Africa up 3%, Canada up 2%, the US down 2%, Europe flat, and Asia down 5%.

Turning to slide 5, business segment margin declined 450 basis points to 15.7%, primarily due to volume deleverage, unfavorable mix, and increased restructuring expenses. Operating cash flow reflected solid conversion of earnings and working capital.

Turning to slide 6, process management underlying sales declined 10% in the quarter, capital and operational spending remained at reduced levels within the oil and gas industry. Upstream markets are under the most pressure while downstream activity in chemical and power markets continue to provide growth opportunities. The Middle East and Africa region grew 2% with mix of generally favorable activity levels across the region.

Accelerated restructuring activity resulted in spending of $52 million in the quarter, an impact of 230 basis points. Demand will remain under pressure for most of FY16 as the expectation for longer oil prices will keep industry spending at reduced levels.

Turning to slide 7, industrial automation fourth-quarter underlying sales declined 12% reflecting the continued weakness in industrial spending, upstream oil and gas markets, and European demand. Demand was down in all regions with North America down 20%, Europe down 2%, and Asia down 8%.

We will continue to evaluate the potential divestitures of the motors and drives and power generation businesses during FY16. Market conditions will remain challenging in the near term with an expectation of improvement in the second half of the fiscal year.

Turning to slide 8, network power underlying sales declined 4% in the quarter as global demand for data center, infrastructure, and telecommunications investment remain mixed. Within the geographies, Europe was up 10% while North America was down 10%. Asia was down 5% as strong growth in India and Australia was more than offset by demand weakness in China. Accelerated restructuring activities resulted in spending of $33 million in the quarter. We continue to expect the spin-off of network power to be substantially complete by the end of FY16.

Turning to slide 9, climate technology's fourth-quarter underlying sales were down 5%. North America was down 3% as results were impacted by challenging year-over-year comparisons stemming from the US residential air conditioning industry pre build in 2014. Asia was down 10% as slowing demand in China more than offset growth in other regions.

Segment margin increased 10 basis points, primarily supported by cost reductions and favorable materials cost containment, which more than offset increased restructuring expenses of $12 million. We expect modest growth for the climate technology segment next fiscal year as global demand in the air conditioning and refrigeration markets is expected to remain favorable in 2016.

Turning to slide 10, commercial and residential solutions fourth-quarter underlying sales were up 3% benefiting from favorable trends in US construction. Growth in the food and food waste disposers and wet-dry vacuums was substantially offset by decline in the professional tools business which continues to reflect spending reductions in energy-related markets. Segment margins were down 100 basis points, but up 10 basis points when excluding the impact from the increased restructuring expense. The favorable trends in US construction markets are expected to continue, supporting our outlook for moderate levels of growth in profit improvement in 2016.

Turning to slide 11, we expect difficult market conditions to remain in effect through at least the first six to nine months of FY16. The continuation of the headwinds faced in our key served markets during 2015 will reduce underlying sales growth across our businesses, resulting in an expectation that net sales will decline 6% to 8% in 2016. Underlying sales are expected to be down approximately 2% to 5%, excluding negative currency translation and a deduction from completed divestitures of approximately 2% each.

As previously discussed, the sales in the first quarter will be challenging when considering current market conditions and difficult comparisons to the prior year. We expect first-quarter underlying sales to be down approximately 10%, excluding negative currency and divestitures of approximately 6% in total.

Cost structure alignment and the strategic portfolio repositioning will remain key focus for Emerson in FY16. Restructuring expenses of $50 million to $70 million are expected in 2016 with most of the activity during -- occurring during the first half of the fiscal year. We also estimate that we would incur expenses of approximately $300 million to $400 million related to the spin-off of network power and the potential divestitures of the motors and drives and power generation businesses.

The level of activity surrounding the evaluation of an acquisition of key strategic assets will also increase next year. For EPS guidance, we expect adjusted earnings per share to be $3.05 to $3.25 when excluding the portfolio repositioning costs.

Finally, in support of our commitment to returning cash to Emerson shareholders, the Board of Directors has approved an increase to the first-quarter dividend to an annualized rate of $1.90 per share and a new program authorizing the repurchase of 70 million shares.

And now I will turn it over to Mr. David Farr.

Thank you very much, Craig.

Welcome, everybody, this afternoon. Frank, thanks for joining us today. Glad to be with you and glad to get this fiscal year behind us. It's been a very challenging year.

And as we know, we are in a global industry recession for our businesses right now. We just incurred our third negative underlying sales growth and we will have two more, and I'll talk a little bit about that.

I want to thank all the global corporate and business teams for their support and efforts throughout this year as we dealt with a year that started out very strong with underlying sales growth in the first quarter of over 5% to immediately going into extremely tough marketplace throughout the year. Restructuring efforts, the cost savings, the announced sale of two businesses getting done in one year, the announcement of our repositioning with Network Power being spent or sold, and/or the sale of Leroy-Somer CT this year. A lot going on.

As I look at the effort in the performance in the last several months, we're starting to see the stabilization of some of the markets. We're also seeing the benefit of the restructuring which we started back in February aggressively and ended up spending over $221 million as the year got more challenging. We're starting to see the benefits flow through. We had a fourth quarter of over 20% operating margin and a very difficult year with a lot of down sales and a lot of challenging currency and price costs.

As I look forward here, I see the underlying order pace running around this 10%, 11% negative probably for the next several months. As Craig highlighted, I firmly believe, as we've talked about for several conference calls now, a very challenging first quarter. We had a very good first quarter last year with strong top-line growth, strong margin, and strong cash flow, and strong earnings per share.

This year we'll be facing negative, probably negative 10% underlying sales growth with negative 7% currency divestiture impact with a lot of issues around that because of the price cost, because of the global trends and all the issues, and I firmly believe a lot of other companies are starting to struggle and the question will be how much they will do in the month of December. But we're ready for it. We've been getting ready for this tough time period for several months now. The restructuring is really starting to take hold.

We have about $60 million to $70 million more restructuring to get done that will benefit 2016. It will be front-end loaded. It's worked extremely hard program by program. We will get it done in the first five or six months, and we're ready for, what I would say, the first negative quarter and then the second negative quarter, which I believe underlying sales could be down somewhere in the 5% to 6% range, and then we'll start coming out both from an easy comparison but also seeing some stability in the markets we serve.

So right now, in the industrial recession that Emerson faces, we will have down five quarters. We will then have the restructuring kick in, really starting to improve profitability as we get into the second and third and fourth quarters. We will start seeing the improvements of the global markets we serve.

We will continue to drive hard to get the spin or the sale of Network Power done within the fiscal quarter, FY16. We will continue to drive hard to finish the divestiture on Leroy-Somer in the fiscal year, and then we'll come out of 2016 with a very strong core business, turning up with very high levels of profitability.

Again, a lot of work across this organization to deal with the challenging economic environment we've been facing, and I'm very pleased to see the work done. I'm very pleased to see the effort relative to the cash flow and the balance sheet. The balance sheet will be what I would say in acceptable condition. It's strong today, but even better when we get into the second quarter as we continue to manage the balance sheet and get what I would say a little bit extra working capital built up on that balance sheet from the back downturn.

But we are transacting very hard right now in this tough environment. The organization is focused on generating the earnings and the cash we need and repositioning this Company to have a strong case of growth when the economic recovery happens.

In the meantime, acquisitions, we're very strongly focused on the two core markets and the opportunities, working those acquisition opportunities the best we can, and we're under way to hopefully consummate several acquisitions throughout 2016 as the opportunities come about. But we're going to be facing a challenging next six months. We know that. The business leaders know that. The Board knows that. And we're taking the actions necessary to protect the Company overall from a technology and profitability standpoint and the financial capability and positioning ourselves for a strong underlying growth recovery and a strong acquisition recovery once the repositioning effort is under way.

We chose to increase the dividend slightly this year. We have the cash flow. As you look at the new business or the new Emerson when we come out in late 2016 or early 2017, the cash flow generation of the Company is very strong and we can support the dividend at the same time supporting any acquisitions or share repurchase necessary. So right now we're very focused on getting through this time period the next six months, getting the nose back up and getting the Company positioned to recover strongly for our shareholders, both the top line profitability and cash flow.

At the same time, yes, we had a very difficult year last year. Yes, our underlying sales were down over 2%. Yes, our reported sales were down 9%. But we did generate nearly $3 billion of operating cash flow when you adjust for the extra taxes we paid for the divestitures and we generated over 17% operating profit margin in a very challenging environment, and our goal is to again generate that same 17% as we go into another down year in 2016.

The environment is what the environment is. We deal with it. But we're going to try to control what we can control and we're going to control our profitability, our cash flow, our return, and any acquisitions we can get done. And we will get the spin sale done, if necessary, as quickly as possible and we'll get the sale of CT Leroy-Somer done as quickly as possible.

That's where we sit today. And I want to thank the global organization for what they have done and where we're positioned. We'll give you a better insight around the segment as we get into our discussion in February, which I believe is in Austin, Texas. There's no snow in Austin, Texas. Maybe a little rain, but not typically in February. So hopefully I'll see a lot of shareholders down in Austin, Texas, so they can see the core process business we have down there and explain to you what we're going to do as we come out of this industrial recession we've been facing here for the last several quarters and will face for the next two quarters.

With that, I'll open the line to take some calls and I appreciate everyone's support and engagement as we go forward here in the coming months and year. Thank you.

Thank you.

(Operator Instructions)

We'll go first to Julian Mitchell with Credit Suisse.

Thank you.

Good afternoon, Julian.

Good afternoon. Just a question on the notion of organic sales maybe turning back up again in the June quarter of next year. As you said, that's after five quarters of declines, so are you just taking the template of prior downturns that lasted around that long and applying it this time, or are you seeing something specific in the orders in either energy or broad emerging markets that you think support that improvement?

First, we look at the pace of how fast we came down. We look at historical trend lines. At that point in time, I see nothing that early, that far out relative to the pace. I look at what we've gone through, through some difficult economic downturns over the years. Sometimes it's four. Sometimes it's five. The more challenging ones typically are five. I am not assuming there's a global recession. I'm assuming the global environment is very similar to what we are facing today, challenging, and certain markets doing okay, certain markets not doing okay, but you get to a point that you get low enough and our pace of business and the type of marketplace we serve, they will start investing in certain space again. That's where I come from, Julian.

Thank you. And just around Network Power, the clean profits stripping out restructuring I think was still down about 40% for 2015 as a whole, down 30-something exiting the year. So I just wondered how that plays into the spin decision and at what point you think we might start to see the earnings in Network Power stabilize?

From the standpoint of spin, I think what's unfolding in Network Power is still within what we planned. When we look at 2016, it's still well within its plan. We can either spin or we can look at a potential strategic sale. From my perspective, as I look at the pace of orders and what's going on right now, we're starting to see some stability and I would expect to see that nose turning up as we get into the early 2016 calendar year based on what we're seeing trend line for these guys at this point in time.

Thanks. Just a very quick follow-up. Any color on the price net of raw materials impact on margin in 2016?

The price cost is pretty neutral at this point in time. My gut tells me we'll -- it will be slightly -- potentially be a negative what I call red, as we get into 2016. It's always a function of pricing pressures and the currency trends we see and the net material inflation. Right now, it's pretty close to being neutral, but, I would say this year probably could end up being slightly negative as we get into 2016. Just based on what I see out there from a competitive standpoint.

Great. Thank you.

Something we can manage, to be honest.

Thanks.

Thank you.

Next we'll go to Johnny Wright with Nomura.

Good afternoon, guys. Hi. For me, just kind of following up on that question on the inflection second half of the year. Thinking of the slides, you talked about expectation in improvement in industrial automation. What gives you confidence on that sitting here today and what really are the key risks to that coming through in 2016?

It's really a function around how much people have cut back spending for the last 18 months and looking at that, looking at the trend lines and the customer base and looking at some of those reinvestments that we'll start having. People are not going to keep -- they are going to eventually have to reinvest some money and we do have a pretty good install base out there. So that's where it comes from.

We're not talking about a very strong recovery. I mean, after you go down for three tough quarters, after we go down 10% this quarter, after we go down 6% the next quarter, it's not unusual to see historically a company like Emerson, who is globally well established with install base quite significant, to have a little bit of recovery coming in that fixed type of quarter. I'm not looking at anything unusual from a marketplace standpoint. And again I'll say, we are expecting the economic environments around the world to be slightly weaker or about the same as we're facing right now. So the risk would be if we truly went into a global broad recession, then you clearly say, okay, the industrial space will be a little bit weaker than I'm thinking. I don't see any indication we're going to go to a global broad recession at this point in time.

Okay, great. And on process management margin for next year, clearly a lot of the restructuring has been focused there if you've got a tail wind from that. Can you talk about some of the other dynamics, particularly on the pricing front, and where you see margins coming out next year in the process?

From my perspective, the restructuring under way, the work that Steve Sonnenberg and his whole team have done has been extremely good. And we will have, clearly, I would say the most price negative pricing environment we've seen from those guys in a long time. However, we do have a unique install base, so basically our day-to-day MRO small project business will help us there. With the restructuring effort under way, we expect our margins to be trending upward and process based [obviously after a] shocker this year with restructuring, but we expect our margins to move back up on a comparison basis versus this year even with down sales because the efforts, the restructuring, the efforts these guys have undertaken to get the costs out and assuming a negative price environment which we are assuming would process, we are expecting our underlying profitability to improve next year in process management obviously, relative to this year, but even at pretty high levels relative to historical levels.

Sure, and when you say that you're talking in terms of reported margins, so including the restructuring in both years?

Yes, exactly.

Okay.

The process management team, if you look at the restructuring they got done this year, they got a lot of restructuring done this year and they have some left and the $60 million or $70 million next year. But they have got the big part of it behind them as of right now, which is a good position to be in. So what was the total restructuring process, Craig, for the year? What did they do? You got the chart there?

I'll have to pull it out.

Rossman, he already gave his little speech, he's -- have a beer, and then Farr hits him with a question.

90.

90 million. So they got $90 million. They got a lot of restructuring done in this year and so of the $221 million, they got $90 million. I think they are in good shape going into next year. It's going to be a very difficult first half process. They had a very strong first quarter. I feel really good about what they got accomplished from the restructuring standpoint and the costs taken out.

Great. Thanks for your time, guys.

Thank you very much. Appreciate it.

Next we'll go to John Inch with Deutsche Bank.

Good afternoon, Dave, Craig.

Good afternoon, John.

Good afternoon. So I want to start with, you expect $250 million of savings from actions that you took in 2015, which was 221. How do you get more restructuring benefit than what you actually spend? I'm not suggesting you would. I just want to understand how that's going to work.

Depends on the costs we take out and what kind of programs, what type of cost layers we take out. We went in pretty hard to get overhead costs out and some redundancy costs out and we typically got a good payback from that.

David--

We went after it.

This restructuring, do you think it can hold? In other words, it's a little bit of a question of say the mix of variable adjustment versus structural and how -- you have to give some back to the customer. Does some creep back as the business trend's better? Maybe you could just help us peel the onion a little bit in terms of what you've done, because it was obviously very aggressive in the quarter. So just trying to understand.

It's been aggressive the whole year. We just didn't do it all last month. I know people think that, but it actually worked its way through and a lot of it's been planned since starting in February. I'm not going to go back and tell you exactly what we did. It's clearly that's what I would call our own information. We did spend the money. We will get the savings built into it and there will not be -- we have built into plans, we know the pricing will be tough in certain marketplaces next year but that's why we work in the restructuring as hard as we've done. It will stick and from a standpoint of profitability we generate very high levels of profitability and I'll say it again, despite, despite a very challenging year in 2015, we did generate 17.3% operating profit on down sales and we're planning on trying to generate 17% operating profit next year on down sales. So we know what we're trying to do here relative to the profitability, John. This is one I'm not going to give you any more details. You've got to trust me. We know how to manage our cost structure at Emerson.

Just lastly, Dave, can I ask you, what was the spend of Network Power? I realize you've also made comments that you're looking to pick up the pace of M&A a little bit, but in theory, right? [Most of the] Spin of Network Power, then Emerson's a smaller footprint. Do you modify then the dividend accordingly? So you say we're now sort of four-fifths of what we were, so we'll modify the dividend in some manner by that? It's not really a leading question to be negative, it's more trying to understand how this is going to work with respect to dividend, because dividend is very important.

I've been very clear on this. We will not be reducing our dividend. The new company, the new Emerson that comes out, when it comes out in 2017, let's say it's around $15.5 billion in size with margins of over 19% margins, generate very good levels of cash flow, more than enough cash flow to justify the current dividend payment and continue to increase dividend and doing share repurchase and doing acquisitions. So, the business that stays behind is a very strong operating performing return company that can generate enough earnings and enough cash to pay the dividends restructure right here. We are not going to be adjusting our dividend payout for the new Emerson.

Got it. Thanks much.

You're welcome, John.

Next we'll go to Stephen Winoker with Bernstein.

Thanks, and good afternoon, guys.

Good afternoon, Steve.

Dave, what are the actual underlying GFI growth rates then that are embedded in your guidance for 2016?

On the global G7 basis I've been betting around 2 1/2 basis [points] growth. This year is around 2, 2.1, slight improvement on a global basis, so slightly -- about the same on GFI. This is the G7, the bigger markets, so that's what we're looking at. If you look at the overall forecast out there, it's much higher than that right now and I don't believe -- I don't believe it at all. I think we're going to be trending in the low 2s.

Right, but you still have that picking up during the pace of next year, right?

Yes, as you go into the first half of the year you're probably looking at what we saw in the last six months in the low 2s, around the 2.2, 2.3s, and then you start moving that up in the higher 2s in the second half of the year as people start turning back. They got the stability, they got the restructuring, they got the needs. They need to start investing again. I'm not looking for a big sudden spike. I'm looking at start trending up toward the mid to higher 2s.

Okay, and you talked about--

By the way, that's not what the economics forecast is, as you know.

Yes. That's why I'm asking you and not a bunch of economists right now.

I'm a dumb, like CEO. What the hell are you asking me for?

You mentioned increased activity in evaluating acquisition of strategic assets. You talked about consummating several for 2016. Where is your head in terms of current thinking in terms of the size and directionality in process and industrial versus commercial and resi? What kind of expectations should we have on what these things look like?

Most of them are going to be -- right now what we're pushing pretty hard are what I would call more of a private companies out there. We're looking -- I really would like to consummate, even though we're talking really about -- I really like to consummate over $0.5 billion within industrial process, industrial automation area. And I would like to consummate maybe $100 million, $150 million over on the commercial residential area as I look at 2016. These are actions that we're going out and encouraging.

We've been talking to private shareholders and companies that we've been courting for some time and given the tougher marketplace right now they are much more receptive to it. I don't see any -- at this point I do not see any big strategic safe public transaction under way. But we're going to keep working the nips around the corners and in particular I'm going to start working pretty hard in Asia, too, because I think Asia's got some opportunities that with their markets being stressed right now that we want to go after, too.

Okay.

We've got the businesses working real hard. Primarily I would say 90% will end up in industrial asset base over the process world.

Great. I know -- one more thing, I know you don't give quarterly guidance but just given your commentary in this call and you talked about basically 20% year-on-year decline, which is more -- higher sequential than the usual amount and decrementals I'm assuming about 30%, and then you've got the restructuring offset; it sounds to me like we're certainly in the tough comps, certainly should be having a number down here well less than $0.45 to $0.50, but just directionally?

I would directionally, I would be more, I would be more around the $0.50 range. I mean, last year we reported $0.75. The year before that, we reported $0.65. Our sales, if you think about 2014, coming off that 2014 where we had $5.6 billion in sales and we had OP margin around 14% and $0.65 EPS, we're going to be about $1 billion below that in sales, but we've got restructuring under way and helping us. I think we'll get pretty good flow-through. I would be thinking around $0.50 number for that first quarter.

Okay, guys. Thanks. Good luck.

You're welcome. Now, I'm doing that one time. That's it. I'm not giving quarters out.

And our next question will come from Mike Wood with Macquarie Securities Group.

Hi, Dave. I applaud the aggressive restructuring actions. Just a question first on the process. You've mentioned downstream providing growth opportunities. Curious if you're seeing growth there and if you can give some color in terms of what subsectors are growing on the downstream side?

What we're seeing is continuing to -- the investments going on in some of the petrochemical areas, the chemical areas, some of the pharmaceutical areas, areas that people are making investments using the lower cost of energy both in the oil side, the gas side. We've been seeing the process go further. Not as large as we thought originally, but they are still going forward. I don't see people backing off on that. The projects that [staff] has under way going down Louisiana, which is a big customer base for us, that's moving forward. The opportunities are out there.

And I anticipate as we get into the spring and early summer of 2016 some of the companies that have been cutting back on capital and cutting back, on what I would say necessary investments, are going to have to let the money go. They have got other costs adjusted. So I think that, I think you're going -- I think our underlying MLO, which is a good business for us, will improve and get better as we get into 2016. It's not totally dead out there. The big oil and gas projects, obviously are struggling, but the other investments are on the chemical and petrochemical are still happening for us.

Okay. And you mentioned the restructuring, I may have missed this. Did you quantify how much you do in the first half of next year?

We're going to -- let's say we're going to do $60 million to $70 million. I think, Frank, we're going to do 60% of it?

60% to 70% of it in the first half, yes.

70% in the first half.

Great. Thanks, Dave.

You're welcome.

Next we'll go to Scott Davis with Barclays.

Good afternoon, guys.

Good afternoon, Scott.

I'm trying to get a sense -- I was in China a few weeks ago and I walked back pretty darn bearish. It seems like sequential slow downs there. If you look at your numbers it shows exactly what we saw. Do you have any sense of I guess a couple (technical difficulty - audio cut out) as much of an inventory de-stock as anything else or are things sequentially getting worse there and that concerns you as you go into 2016?

Well, we are planning for a down 2016 in China. From my perspective, we've had two very challenging quarters. I firmly believe there has been destocking going on. Basically what we can tell, Scott, right now I think the worst is behind us. I do believe we will have a challenging first quarter because we had a very good first quarter last year. So, it could be strong double digits down in sales, but I don't think -- I personally don't think it's getting worse. I think they are trying to reposition, and I expect that we will have a down year next year, but we'll manage our way through it, get a little bit better as we go forward as they start reprioritizing their investments.

But right now we had down 18% in the fourth quarter. We're probably going to be down around 15% again the second quarter -- the first quarter. And I think we'll probably be down around 10% in that second quarter and then we'll start getting better as we go forward. We're going to be down somewhere around 3%, 4%, 5% for the whole year in China. It is going to be a tough year. I'm not looking for any sharp bounce back there. I agree with you.

And just as a followup, is that the region you cited some price risk versus raws next year? Is that the region where you are the most concerned about asking price?

I'm not concerned about that as much there. My price risk comes into play in the large global projects where monies are being spent. There are projects being done out there and clearly the pricing risk will come into those projects and you clearly are trying to protect your customer base, you're trying to protect them. So that's where I would see the pricing pressures on the industrial side. On the commercial residential, I would say Asia would give me the most price pressures but I also typically have the most price opportunities there. My price pressures, I don't worry about China next year as much as I worry about the big global projects that --there are not that many out there and people are going to be hungry fighting for those projects.

Okay. Good color. Good luck, guys. Thank you.

Thank you, Scott. All the best to you.

And next we'll go to Gautam Khanna with Cowen and Company.

Yes, David. To follow up on that last comment you made. Have you seen any of this price pressure yet in the orders you've been reporting or is that something that's still on the comp?

We see it today and we have continued to see it. Our net material inflation has clearly been helping us from that standpoint because the inflationary environment we have been feeling for the last three years has been negative on materials, so that's helped us; but at the same time I have had three years of what I call, a negative price. I think that the pricing pressure is already happening on the bidding. Our customer base knows that the global marketplace is a challenge. They know that commodity prices are coming down and they are utilizing that and obviously we work that very hard. We're aware of that.

And from my cost structure standpoint, we've been able to make that up, but I would say we'll probably have in the end when we add up all the numbers next year, my gut tells me we'll have a slightly negative net price material inflation, not big but slightly. I think it's all going to be there as we all work this issue into the next six months or seven months to get through this transition. So it's there.

Okay.

And it's happening. That's what's going on.

Okay. And you already addressed the China question. I was just curious. Elsewhere, are there any regions where you're actually worried about another leg down, a more significant step down in demand where things could get substantially worse?

The only place I see right now on the markets is, we're already seeing the impact in eastern Europe and Russia, we've already seen that. I'm a little bit worried in the Middle East as our big Middle Eastern customers both in oil and gas and petrochemical investments, if they cut back even more to protect their cash flow for various reasons, whatever they need the money for, so I would say that market for us, you're talking about a billion dollar marketplace. I would say that has the biggest risk at this point in time. I think we've taken a big hit in Latin America, and Brazil, and Mexico. I still think that will be negative next year. I think we've taken a big hit. My concern is the Middle East. I think there's a risk for bigger down than -- we're planning it down, but I think it could be a bigger one.

Got it. And one last one. Climate tech, do you expect to start to comp positively as early as the March quarter as you lap this year 2014 prebuild or when do you expect that business to start to be positive comps?

I would expect the comps to turn positive in the second quarter.

Okay.

So you just watch -- we watch all the -- our customer base report and we know they are working through that inventory. They have done a great job of managing that inventory and getting it out and getting sales. I would say that we will -- we'll have a negative first quarter and then we'll start comping more favorable in that second quarter.

Okay. Thanks a lot, guys.

You're welcome. Take care. Have a good afternoon.

Next we'll go to Nigel Coe with Morgan Stanley.

Thanks. Good afternoon, Dave.

Good afternoon.

You mentioned something very interesting. I think this -- when you mentioned the bulk of the channel destock is behind you, I think you're talking about China specifically.

Correct.

Can you maybe just broaden that out in terms of what you're seeing globally on inventory destock and when you think that might be behind you?

My inventories in Europe are -- I look at our channel as pretty good. Because of the channel partners and the channel you sell into, the money was hard to come by. So European channel's in pretty good shape. I look at my channel in North America. I would say it's in decent shape right now on the businesses we sell into. The last piece of this working through would be the climate areas, is all the prebuild we have there, but I would say the channel's in decent shape.

Probably as we get through this calendar year it will be in really good shape. And so we saw the inventory's being built and people anticipate the second half being stronger. We saw destocking happen this quarter. I think the plan we have built into our plan for this quarter where underlying sales might be down say 10%, I think that will work its way through it on the destock from my perspective, as I see the channels.

Okay. So as we get into calendar 2016, we should -- that should be behind us?

Yes, I would say yes unless you had a step down in overall recessionary environment. Right now, I think people are planning for very, very low growth and they are getting their inventories down and they are working it very hard. It's the same thing we've been doing as a company here. I would say we have one more quarter basically of getting our inventories down and then typically we're no different than the global distribution channel anyway. So I think that's exactly right.

Okay. Very helpful. Then just on some of the (inaudible), Dave. Clearly the MRO spending is pretty tight with the oil and gas companies. Any sense on when we might start to see some of that action coming through?

I don't think you'll see any action in that space until the second half of calendar year 2016. That's why I think process will have, will be down in growth next year.

Okay. Thanks, Dave.

You're welcome.

And our next question comes from Shannon O'Callaghan with UBS.

Good afternoon.

Good afternoon, Shannon.

Dave, just a follow-up on the climate. So in terms of returning to growth, when you get past your comps, which make sense. But China was down 27%, climate. Is that going to be an offset to that or can you explain a little bit what you're seeing in climate in China right now?

Well, climate had a very strong first half of the year in China as they built inventory up in their channel going back to one of the previous questions and they are quickly taking it out right now. So I think what will happen is the typical plan in China is they will rebuild, they take it back down, and then they start building back up again. So I would expect that China will start seeing some improved second half numbers, most likely still negative for the first two or three quarters and then getting up and positive in that fourth quarter. So, the destocking's still under way. I think the major destocking will be done by the end of that first quarter in China.

Okay. And then obviously, the pressure is significant across the business and a lot of restructuring to do. But typically when times are difficult like this Emerson likes to invest and take share and come out of the downturn even stronger. Is that happening? Are there examples you could give for us, for your portfiolio where you feel like you're playing offense, even though there's obviously, a lot of restructuring to do as well?

We are continuing to play offense. I will share a lot with you in February on this issue. We are not cutting back in certain strategic areas where we think we have unique opportunities to gain share. So -- we're restructuring but we're restructuring in areas where we feel that are not strategic relative to gaining that growth opportunity and so we're continuing to invest and restructure at Emerson. Very good at this gas pedal and brake at the same time. So we're playing that game because what we want to do is come out of this and continue to grow our core markets, in particular on the two strategic businesses we're going to have when we finish this in 2016.

So the Board has been keenly interested and in tune to what you're saying there. They do not want us to get to the point that we're cutting really strategic growth opportunities and opportunities we see out there. So, we're working it very hard. We'll share some ideas with you in February, but suffice it to say that our game plan is to get the costs down, which we are right now, very quickly, and then take advantage of those opportunities when they come back at us.

Okay, great.

Thank you very much.

Next we'll go to Robert McCarthy with Stifel.

Good afternoon, Dave. How are you doing?

Good afternoon, Bob.

I guess the first question I have with respect to monthly order trends -- and obviously, you're not disclosing those anymore, but you're still tracking them. Could you speak to what kind of month you would see as critical to think about whether we would see the kind of growth that you're talking about for the plan for 2016 versus potentially something worse? In other words, when does that comp appear in terms of the backlog, in terms of the order trends where you can declare victory or think about something incrementally worse?

Okay. First of all, we will continue to disclose our orders once a quarter and so the next time we'll disclose will be in --

December.

-- in December. So we will be putting orders out there. This month-to-month stuff, given that we are the only ones doing it, it was kind of crazy. We'll disclose it in December and then we'll true them up in February when you we report the quarter. So you'll still get access to them. What I'm looking at as I map out the year I unfolded for you all on the phone earlier is, what I expect is that we should see on a comp basis in order for us to have second half underlying sales growth I have to see my order pace start getting above that line, across that line, the zero line, as we get out of that second quarter.

So when we report orders in the end of -- say the March quarter, March timeframe, you should start seeing that number approaching that 0% range. If not, if it's still negative 5% or 6%, then we'll go back to that conversation I had earlier that we will not see the positive recovery in that third quarter and then we'll have a [sixth down] underlying sales force, so that's the benchmark you need to look at.

Understood. Then just moving to process management and just given what you've seen, and this has been picked over a little bit, but given what you have seen about what you expect in terms of behavior across the board in terms of potential cuts, and you mentioned the Middle East as a potential negative there, do you feel like you have a good sense that we're going to see a bottom here and the implications for margins here? In other words, what is baked into your current plan?

I think right now we expect the market we see today is going to continue to be weak in front of us for at least two quarters. That's what's baked in our plan. And then some stability and we will have down underlying sales in the year of 2016. The restructuring effort is based on down underlying sales. I believe I've talked about down 3%, 4%, 5% with process underlying sales. And so, we baked in that type of down, say down 5% underlying sales, into the cost expectations and trying to get the restructuring done so we can try to deliver improved profitability in 2016 and continue to make the strategic investments we need to make.

So I expect process to be facing some pretty challenging headwinds for the next couple quarters. We are -- we will start seeing, as I get out in February or I get in January and talking to investors, I'll be able to start seeing some of the early parts of process on the MRO, the instrumentation side. If I start seeing that improve, that will give me a good feeling that we reached that bottom and we have a clear visibility in that second half as we leave 2016.

The final question real quick is just in terms of the network power in terms of this parallel process, obviously there's limits as to what you can say about it. But I guess how do you think about the decision around price, timing, et cetera, versus going the spin route versus a potential sale in strategic? What are the qualitative factors that you are stressing? Is it speed in terms of exit or is it valuation? How should we think about it?

From my perspective, I have one perspective. It's called valuation, fiduciary responsibility to my shareholders, maximize the value for my shareholders as I look at and the Board looks at, do we do a spin versus if we have a strategic alternative with a buyer coming in. That will be the key issue for me. A strategic valuation for my shareholders. We think we can make more money for shareholders doing a spin versus sale, then we will go that route or vice versa.

If we're going to have this done by the end of this fiscal year, then we'll have to make this decision sometime in late spring, which way we're going to go left, are we going to go right; and so that's the type of timeframe that we're heading on. We just reviewed this with the Board, the time line and approaches and keep them up to speed. But that is the decision-making process. It's all about maximizing the value for my shareholder, which I am one of.

Thanks for your time, Dave.

You're welcome.

Next we'll go to Jeffrey Sprague with Vertical Research Partners.

Thank you. Good afternoon, Dave.

Good afternoon, Jeff.

One quick point of clarification before my question. You said in the earlier question you've had three years of negative price. Did you mean three years of negative costs?

I think the price -- if you look at the underlying pricing, I believe we've had, we've reported three years of negative pricing as a company.

Okay.

This has been unusual. We're about to go into the fourth year, I think, with 2016. We are -- even though the fed is giving free money to everybody, the environment out there has basically been pretty tough on overall pricing, of the total company, total company, and so I've had negative pricing, basically. And net material inflation has helped us protect our profitability and I think that we're going to see, next year, I think the negative pricing will be slightly higher. But my net material inflation will be higher because of what opportunities out there. That's what I see. That's the type of market we've been, the industrial world has been facing for a while.

Right, but you were not in the so-called red in 2015, but you will be in 2016 by your estimation, right?

Right now, we're not red. I think there's a good chance we could have a slight red to that, Jeff, to be honest. My gut right now is all it is. I play this by feel. I know the pricing environment is out there. I know the net material environment's out there. You can have a couple things go the wrong way and you could have a slight negative net material price pressure, but it's going to be very, very slight, if at all.

The main thing I wanted to touch on is cash. We haven't really talked about that yet on the call other than the opening remarks. So historically, your cash flow has actually been a lot less cyclical than your earnings, not surprisingly. We didn't really see that play out in 2015 and you made a comment about getting the balance sheet ironed out by Q2 of next year. Obviously, you had the [Sear] build and all that going on. Can you give us the lay of the land on how you expect cash and the working capital dynamics to play out for next year?

Historically, we get hit like we got hit in the second half of the year, it typically takes us two to three quarters once that hit happens. And so we had a very good fourth quarter from a cash flow standpoint. I'm starting to see -- if I look at the overall inventory levels, I look at where we sit this point in time. Trade working capital is now starting to get back into the line where it should be, where the normal progression to see what I would call the healthy -- what I look at the 11% to 14% sale, percent of sales of cash flow.

I think right now we're in pretty good shape. It was a tough year last year. We also had -- the extraordinary thing last year, we had some tax payments that we had to make in the sale of the divestiture which goes in the cash flow which mucks that up a little bit. But overall (inaudible) we did -- as I look at the cash flow last year, we did -- operating cash flow, we did $3 billion and we had 22.3 sales - 23.3 sales. So we were around 13.4%. I look at next year, we're going to be, we're going to be around that 14%.

So we're, we're moving back up to where we need to be next year. I think it's well under our control. I think Frank and Ed did a good job, got the businesses focused. We've pretty well got a forecast in front of us right now that makes sense, which I laid out to you, and that allows us to really work in a balance sheet.

And in that construct, Dave, are you including the cash repatriation you're expecting from Network Power?

No, we're not. We're not. That will unfold. First of all, that's cash flow that's already inside the company that's been earned over the years. We have not incorporated movement of cash flow which is quite significant from both the sales spin of Network Power and/or Leroy-Somer CT, so there's going to be cash flow moving around. We will be repatriating cash flow in 2016 and probably early 2017 on this whole process, which will bring money back into the United States and will end up paying the taxes.

Then one last one, same topic, is just the cash cost of what you're trying to execute in repositioning, you've got this $300 million to $400 million marker. I'm assuming some of that might just be asset impairments and the like. Can you size that for us?

No. If we had an impairment, we would have to take the impairment now, Jeff. Accounting's pretty straightforward. If I thought we would have an impairment, I would have to take it now. The cash flow, that number is what we're going to spend on transactions, some of it's tax, some of it is advisors. That's true cash flow that's going out. There will be another bit of cash invested in some of the investments we may have to make in IT, with some of the investments we have to make in other areas, but that's not a big number overall. Probably we're looking at another $100 million to $150 million of additional cash investments we might have to make on top of the expense spend to the point you're getting at.

Okay, great. Appreciate it, Dave. Thanks.

You're welcome. Thank you, Jeff.

Next we'll go to Christopher Glynn with Oppenheimer.

Thanks. Just wanted to dive into understanding another one of the numbers used. The $250 million benefit to the global cost structure, is that just the savings or does that also incorporate some of the benefit from lower structuring expense?

It's the savings. It's the savings.

Okay. So there's another tail wind from the lower expense then.

We're trying to protect our operating profitability at 17%, around that 17% range despite the fact that our sales will be down again next year on top of this year. So that's what we're trying to protect right now.

Okay. And then from a very broad high level view on the energy markets, how is consolidation phase of that cycle shaping up from your perspective, either on the supply chain where you play or in the producer complex, and is that kind of as expected so far or how is that staging up?

On the customer base, it's still early. There's some action going on right now, but I still think there's more to come based on what unfolds when you see that, when you see what happens to the pricing and demand out there. From our perspective, supplier in the marketplace, I think it's really early. I think you'll start seeing more opportunities happening in 2016 and maybe all the way into 2017; early stages still.

Okay, thanks.

You're welcome.

Next we'll go to Rich Kwas with Wells Fargo Securities.

Good afternoon, Dave.

Good afternoon, Rich.

Industrial automation, should we think as it's currently constituted, should we think of margin improvement similar to the cadence and process that you're anticipating on a year-over-year basis? I know you didn't do as much restructuring last year NIA, but just how should we think about that?

We are -- right now because of our industrial automation, the makeup of where those assets fit, there's a lot more international, so there's a lot more being done here in the first and second quarter but we do anticipate margin improvement next year. From the standpoint of what's been accomplished and also what we're doing, we're already executing right now here in the first quarter. Do we anticipate -- we actually do anticipate underlying proven, margin improvement in industrial automation.

I do not expect top line growth to be negatively impacted as the process as these guys have gone through a lot of the shakeout and build out and so a lot of their basic day-to-day business will stabilize. I think industrial automation will face a better top line marketplace, not quite as negative. And the restructuring they have got done will help them pick up their profitability in FY16.

That would be back half weighted probably?

Yes. That's a good way to think about it.

Alright. And then just on US construction, you had a comment there for CRNS around good construction markets. It sounds like you think resi and non-res are still going to be pretty good in 2016. What's your latest on that, considering there's been some moving data points out there on the macro front?

I think that resi, residential market, will continue to continue to progress at a good pace. The way I look at the GFI, it's been in the last couple quarters, been 8%, 9%. I think that's going to continue to be that 8%, 9%, 10%. I personally think that the non-res investments on the gross fixed investments has been trending downward. I think that trend will continue to come downward and stabilize in the low single digits. It will still be positive, but I still think that the trend line is not up, but down, even though I think people think it will turn around in the second half of 2016. I am not of that opinion. Our forecast is built on the fact that it bottoms out and stays there.

Is that energy contagion influenced in your --?

Yes, it is energy contagion.

Okay. Thank you.

And next we'll go to Steve Tusa with JPMorgan.

Hi, good afternoon.

Good afternoon.

So you said $300 million to $400 million in the costs. Does that include the assumed taxes you would pay on the, not the Network Power stuff but the other stuff you're selling out of industrial automation or is that a different bucket?

We have -- if we sell the assets of Leroy-Somer CT and we have a tax gain, that will be separate based order what we sell the price for. That is not included in the numbers. What we're talking about is all the reorganization of trying to get these assets repositioned either for spin or sale and network and also reposition for LSCT. That does not include that. If we have a good, we got a good value for the sale of Leroy-Somer CT, then we'll have incremental taxes, but also have cash and gain at the same time, too.

Can we use the power transmission sale as kind of a guide for the book value dynamics on those businesses or was there something unique about the taxes that you paid on that divestiture?

I think that this asset -- people do want this asset. It is a unique asset from the standpoint there's a couple things that will make it different. One of them being that you have -- the alternate business has a strategic -- one large strategic customer. I don't see the multiple as the same type of multiple, though it would still be a good multiple, it will not be the same dynamics that we had. We bought these assets later in, say the life of Emerson. The power transition assets were bought in the '60s and '70s, a little bit in the '80s. If you look at Leroy-Somer, that acquisition was done in 1989 and then a lot of the alternative business was done later, say in the 1990s, 2000 time period. I would say the basis is probably higher.

One last quick one on the network power side. I look at the EBIT contribution and the EBITDA contribution and it looks to be around 10% to 12% of the total. A few people I've talked to say the free cash flow generation of that business is higher than average. It out punches its weight relative to EBITDA and profit. Is that correct? Is there something unique about their ability to generate cash over and above what they do on EBIT versus the other segments for any particular reason?

One of the issues on network power business, there's amortization going on there which is not cash flow. They do have because of that, so what you see, there is good cash flow generation, you are exactly right, there is good cash flow generation better than you normally see because there is amortization. It is a good cash flow generation business.

Okay.

We take that into consideration when (inaudible). It is different than most people would think because of that issue.

Right. Makes a lot of sense. Dave, thanks a lot.

You're welcome.

We have no further questions.

Okay. Thank you. I want to thank everybody for calling today. Good questions. And I appreciate your input and support and I try to give you a little bit more clarity on what we see here for the next two to three quarters. Hopefully, you have a better understanding to that. Look forward to meeting with you in Texas. I guarantee you we will not have a foot of snow in Texas like we had a foot of snow in Boston a couple years ago. But I'll look forward to meeting you down there and I wish you well and have a safe holiday and Thanksgiving vacation. Take care now. Bye.

And that will conclude today's conference call. Thank you, everyone, for your participation.