艾默生電氣 (EMR) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to Emerson's investor conference call. During today's presentation by Emerson management, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. This conference is being recorded today, February 2, 2016.

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 by the SEC. I would now like to turn the conference over to our host, Craig Rossman, Director of Investor Relations at Emerson. Please go ahead.

Thank you, Alicia. I'm joined today by David Farr, Chairman and Chief Executive Officer of Emerson, and Frank Dellaquila, Executive VP and Chief Financial Officer. Today's call will summarize Emerson's first quarter 2016 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 the first quarter summary as shown on page 2 of the slide presentation.

Net sales in the quarter decreased 16% to $4.7 billion with underlying sales down 9%. Our results reflected a continuation of the difficult economic conditions that were experienced during most of FY15. We continue to find ourselves in the midst of a global industrial recession and recent economic data suggests that capital spending by industrial businesses weakened during the course of the fourth calendar quarter. In the energy sector, lower but equally as important uncertain oil prices continued to impact both operational and capital spending by our end customers.

Reported earnings per share in the first quarter decreased 29% to $0.53. Adjusted earnings per share, which exclude $24 million in separation costs, were better than our previous expectation of $0.50. These separation costs relate to our portfolio repositioning actions, specifically the planned spinoff of Network Power and the potential divestitures of the motors and drives and power generation businesses. Overall, the first quarter results were slightly better than our expectations and the Company remains well positioned for a challenging 2016.

Turning to slide 3. Gross profit margin in the quarter decreased 70 basis points to 40.1% primarily due to volume deleverage and unfavorable mix. EBIT reflects the impacts of unfavorable currency transactions of $27 million and portfolio repositioning separation costs of $24 million. Additionally, the aggressive restructuring actions initiated in 2015 are beginning to have a positive impact on profitability. During the quarter, approximately 12 million shares were repurchased for $554 million. The Company still plans for fiscal year share repurchase to reach approximately 1.2 billion.

Turning to slide 4. Underlying sales were down in all regions except Europe, where our Euro-based businesses are become more globally competitive.

Turning to slide 5. Business segment margin declined 170 basis points to 13.3% primarily due to volume deleverage and unfavorable mix partially offset by the savings from restructuring actions. Operating cash flow was down 15%, reflects the impact of lower earnings. Similar to many industrial manufacturers, capital spending was reduced due to lower global demand. Capital spending was down 30%.

Turning to slide 6. Process Management underlying sales declined 11% in the third quarter. Energy sector spending remained at challenging levels as lower and increasingly uncertain oil prices further pressure spending, particularly in upstream market. Upstream projects under way will continue to completion but new projects are facing potentially further delays. Downstream markets remain favorable in the US, Europe, and Middle East mainly in small to medium size projects in the chemical and power markets. We will continue to shift our resources to capitalize on more favorable business activity levels in downstream and life sciences markets.

Turning to slide 7. Industrial Automation first quarter underlying sales declined 15% reflecting continued weakness from a global industrial recession and reduced levels of spending in upstream oil & gas customers. These conditions are expected to continue into the second quarter with improvements expected in the second half of the fiscal year.

Turning to slide 8. Network Power underlying sales declined 1% in the quarter as global demand for data center and telecommunications infrastructure spending was mixed. From a regional perspective, Asia had growth in Australia, India, and Southeast Asia while Latin America reflected favorable data center activity levels, particularly in Mexico. Segment margins increased 90 basis points to 8%, benefiting from restructuring actions. Recent order trends have reflected improving conditions in both data center and telecommunications investment.

Turning to slide 9. Climate Technologies underlying sales declined 10% as global air conditioning sales decreased driven by higher US residential demand in the prior year resulting from regulatory changes. Global refrigeration markets grew modestly as growth in the United States and Asia was partially offset by softness in Europe. Demand in the air conditioning and refrigeration markets remains favorable supporting our outlook for modest levels of growth in 2016.

Turning to slide 10. Underlying sales in the Commercial and Residential Solutions segment were down 2%. Favorable activity levels in US construction markets resulted in growth in both the wet-dry vacuums and food waste disposer businesses. Segment margins improved 20 basis points to 21.7 from the favorable impact of the divestiture of the InterMetro business. The favorable trends in US residential and commercial construction continue to support our outlook for modest levels of growth in this segment.

Turning to slide 11. As we have indicated, we expect difficult market conditions to persist throughout the fiscal year but we do still see a bottom forming in both sales and earnings by the middle of 2016. We will continue to execute on our operational plans while diligently working to complete the important portfolio repositioning actions that were announced last June. Taking into account our first quarter results and recent order trends, we are reaffirming our FY16 guidance. 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. We continue to expect adjusted earnings per share of $3.05 to $3.25, excluding estimated separation costs of approximately $250 million to $350 million, which are approximately $50 million lower than our previous expectations.

For the second quarter, underlying sales are expected to be down approximately 4% to 6%, excluding negative currency translation and a deduction from completed divestitures of approximately 2% each. Adjusted earnings per share of $0.60 to $0.65 are expected excluding estimated separation costs of approximately $75 million or approximately 11% -- or $0.11 per share. Our longstanding commitment to return cash flow to our shareholders will be supported by an expected increase in 2016 operating cash flow to approximately $3 billion. And with that, I will now turn it over to Mr. David Farr.

Thank you very much, Craig. Thank you very much for everyone joining us today. I appreciate that. We are looking forward to seeing our investors and analysts in Austin next week, and we'll talk a little bit more about that in a second, but looking forward to seeing everyone down there and sharing our plans and ideas to the group. I also want to thank everybody across Emerson relative to the execution in the first quarter.

Clearly, this is only the first quarter and we have a very detailed undertaking ahead of us relative to sequentially improving our sales, our profitability, our earnings and cash flow for the remaining part of this year. And as I look at the plans we started back from restructuring back in February and I look at the announcement of repositioning that we announced in June, we continue to make very good progress but it is clearly all about executing around those plans that we put in place and making sure we get it done from a standpoint of driving costs, standpoint of repositioning this Company, and looking forward to how as we go through a very challenging global economy, very challenging industrial recession that we see today and coming out of this a stronger Company and one that can continue to add assets once we reposition to a new Emerson platform.

Looking forward to giving you insights of how we see the 26 unfolding from an economic standpoint, how we see the numbers happening from the cost of the repositioning, how we see the issues that we may see from a risk standpoint and what we're going to have to do about those if we see additional risk, those are all things that we'll be talking about. I will defer those until we get together next week. Also looking forward to having Bob Sharp and also Steve Sonnenberg talk about the two key business segments, business platforms that we are moving into, the Commercial Residential Solutions, and then also the Automation Solutions. Those two individuals will give you insights to what we see, the strength of these platforms, what we can do with those platforms, and where we're going to invest going forward.

Clearly, we have a challenging oil and gas industrial marketplace right now, but it's nothing new. We've been there before, we know what to do to deal with this issue. That's why we started the aggressive restructuring last year. And as we talked amongst the business leaders, the OC and the Board, if the market continues to get challenging, we will continue to do additional restructuring. We will continue to make sure that the cost structure of this Company stays competitive and that we can deliver the highest level of profitability that our shareholders expect from us. That is what we are all about right now, executing around that and getting things forward.

As I look at our current marketplace, the last 30 days have been what I would call the most unusual in my time at Emerson. I've never seen a marketplace go so volatile from the standpoint of the end markets, the stock markets, the interest rates, I guess the attitudes. It's just a very amazing marketplace right now and one that clearly global CEOs like myself have to deal with and be prepared for whatever comes at us.\ But we are now basically in our fourth quarter of the recession. I see -- as we'll talk about next week, I see at least one more quarter, maybe another quarter, but sequentially our game plan is to improve the business, cycle the business back up, and start to improve the profitability and that's what we're all about here.

So, with that, I'll open the floor. I'm glad to have the first quarter behind us. I want to again thank the organization. They did a great job executing around the plans we put out there. We're making great progress and clearly it's only one quarter, we know that. Our game plan is to sequentially improve the sales, the profitability, the earnings, and the cash flow to our shareholders and establish the premium valuation that this Company deserves. With that, I open the floor.

Thank you.

(Operator Instructions)

We'll go first to Jonny Wright of Nomura.

Good morning, guys.

Good afternoon.

Sure, I think on the earnings call, Dave, you talked about process order stabilizing but if oil moved below kind of $30 or backed off, words to that effect, so here we are oil is around $30. I'm just wondering how you see that playing out the process if oil stays at these levels for this year and kind of into FY17?

Let me see. Chevron reported a loss, BP reported a loss, so I would say the market is stressed. So, from my perspective right now I'd say the capital market in Oil & Gas is going to be lower. Our expectation for our process business will be lower and we'll have to do additional restructuring. We are looking at a situation in my opinion in the Oil & Gas marketplaces that will not recover until well past the middle of 2017, maybe late 2017.

Fortunately, we have 75% of the business that doesn't serve the Oil & Gas marketplace, so even though we'll talk about this next week, Oil & Gas spending is down. It's not going to zero. It will be a tougher marketplace and we'll have to work harder at it, and clearly there's a lot of uncertainty around this, but the game is we'll have to figure out how to get the sales, how to get the business and get our cost down, and it will clearly be a tougher year in 2016 than we thought. That's the game. Pretty straightforward.

Okay, great. And then I guess in January you guys announced a big project with Korea petro chem, I think $150 million. I am just interested to see you taking a preferred equity investment in that customer. I am just wondering is that reflective of the competitive environment where alongside price you are now thinking of other ways to win business or how do you think about that and how should we think about it going forward on other kind of big, large projects?

We've done similar things in the past. This is unique. This is very strategic for the country of Egypt and we felt that, as did other people, we aren't the only one that did this. We are probably the only one that went public with it, but I think that you'll see this happening from time to time. It is a huge opportunity for us and it really is all about forming a relationship because I think once this project is done and it's successful, there will be future projects and it will happen, but it's not for every customer.

It's not for every marketplace, but this one we worked on a long time and I met with the CEO and we had a long conversation, and I feel this makes a lot of sense for us relative to strategic relationship going forward. So I don't think that it's not -- it's just our commitment to making sure that these guys are successful and we're going to have a lot of business with them for many years to come.

Okay, great. Thanks, Dave. See you next week.

We'll go next to Josh Pokrzywinski from Buckingham Research.

Hi. Good afternoon, guys.

Good afternoon.

So, Dave, just looking at the order trends here and process in December. Obviously the month to month can be volatile with different project activity and what stays and goes (inaudible). But maybe just comment on how that month looked and any kind of body language you've gotten just with the last $10 move? Obviously projects don't go forward a day, a week, or even a month of oil prices, but maybe what the psychology has been with this last move down.

To be honest, I think the psychology is very nervous and tense within the big Oil & Gas investors at this point in time. I think that we see from our perspective what we're looking at is that we'll talk to you next week we'll try to encompass what the downside will be relative to the Oil & Gas in the process businesses, but I would say the December quarter for orders for process were not that bad.

We pretty well had that factored in, in what's going on. I would say that my concern is the psyche of Chevron or psyche of Exxon Mobile, the psyche of these Shells and the BPs and things like that are going to kind of freeze up some of that spending.

It can't go to zero, but I think it's going to make it tougher. So my gut tells me that it is going to be more challenging in the near term and our whole process order pace will be a drag in this and the other businesses will start pulling back up, so that's where we are at this point in time.

I think I've always -- we'll give you an update on what I think the process segment is going to do, but it will be more negative based on -- because the first question I did say that when the price of oil got down to that level there would be an impact, and I think right now our underlying sales will be more negative in the process than we thought originally and hence that we are going to have to go after more costs there.

But the psyche is not good in that space right now. Fortunately, there's more investments going on in the other parts of the marketplace and it's a big part of the marketplace, but the Oil & Gas investment area is not very good right now and I think it's going to hurt us for the second half of this year.

Obviously you'll touch more on this next week, but looking into the last quarter the expectation on being able to hold the line on price somewhat and being able to hold the line on margins this year, assuming all that plays out what we're seeing today I would imagine those two items are also part of that discussion that maybe goes out the window as well?

It's not gone out the window. From the standpoint of the pricing right now, when we make a forecast, we look at ranges, we have ranges. There's a reason why we go two to five or other ranges in underlying sales. We look at also pricing and environment changing, too.

The pricing environment today is still within the range that we laid out when we put our plan together back in August and September and to talk to you all in November. The net material inflation has continued to drop down, so we're going to give you a forecast. We'll give you a range of what it looks like right now, but it's well within a range.

I would say the one negative will be the sales, underlying sales or process will be more negative and the profitability will still be very good. And we're going to have to take some additional restructuring for 2016 and 2017 in that space because the recovery will be longer and we're going to see what our customer base does right now. As you said, they don't move that fast but I know the psyche is not good. You just have to look at a report that came out in the last three or four days relative to two major oil and gas providers.

Got you. Understood. I guess we'll learn more next week. Thanks, Dave.

Okay. Good. Thanks.

We'll go next to Andrew Kaplowitz from Citigroup.

Good afternoon, guys. Dave, so on last quarter's call you talked about the expectation that we might see one more quarter where inventory in the channel could be worked down and then by 2Q destocking could be behind Emerson. I assume you saw continued destocking in the quarter. Do you think inventories in the channel are low enough where the destocking for the whole Company should end as we go through fiscal 2Q and second half of 2016?

I would say what my knowledge is right now, inventory levels within the channel include ourselves our levels that their pretty good level is low, and so in the pace of business right now and the run rates where I see, I would say the inventory levels are pretty good for us. I don't see much of a downward draft on that.

Now, I think it's pretty well over with, probably very minor downward draft. I think it's pretty well there around the world. I've been in Asia, around the world, and I don't see the inventory being a big issue for us right now, so that's a good thing.

Got it. And just asking about China. You talked about China in 2016 maybe being down mid single digits on your last call and maybe down 15% in 1Q, but you actually did down 13%, so do you think China has stabilized a little bit for you in terms of the decline and are you still expecting mid single digits for 2016 to hold down in mid single digits?

First of all, I called down 15%, down 13%, I would say that's a pretty good forecast call right there without knowing what was going to happen, so I know if I could do that maybe I should go into investment mode, just joking clearly.

I think that China, in my opinion today, the forecast when we put that out there, I still think that it's going to be that mid single plus digit. I think it's going to be in that 5%, 6%, 7% range negative. I don't see it changing.

I would say my China organization is more optimistic than that. They are less negative, but I think that looking at what I see going on in China and the marketplace around the world I think that's going to be a tough one for them to do, though they are working through the inventory that was built up in the first part of 2015. But my gut tells me that I would not be surprised if we don't finish that minus 7% or 8% in China when it's all said and done.

Thanks.

Write that down so you can see how good of a forecaster I was.

We'll hold you to that.

I know you will. You guys always do.

We'll go next to Joe Ritchie of Goldman Sachs.

Thanks. Good afternoon, guys.

Good afternoon.

And, Dave, I'll welcome you over as an analyst any time you want to come.

I didn't say Analyst, I said investor.

Oh, investor, got it.

You know I'm not that good of an analyst. You know that. I'd fail. I'd be fired within one week. An investor, that's a whole other story.

We'll let you keep your day job. So maybe focusing a little bit on your commentary about the last 30 days never being so volatile and just taking a look at the order trends. It's interesting, as you look at the trends you think about the last 30 days it's interesting that you haven't really updated your guidance for the underlying growth rate for the year.

Recognize that comps are going to get easier as we get through the year, but why not maybe be a little bit more conservative with the underlying order trends or with the underlying organic growth trends for 2016?

Because I think that when we put our plan together we had certain assumptions relative to the volatility of the marketplace and what the market was going to look like, and as I look at all analysis and I look at the upside and downside I think right now we're still well within that boundary and to come out and to widen that boundary right now is not what I find acceptable.

I think our organization at this point in time we're well within that. Even with a 30-day risk. That risk in the 30 days is more around one piece of the Company and the standpoint. Europe is not that case. It's primarily around the oil and gas, the price of oil and gas investment, so it's not the whole economy but it's definitely -- we encompass what we thought could possibly happen to us. Now, it could get worse and I'll talk a little bit about that in Austin, but right now I think we're well within side the boundaries of what we put out there.

All right. Okay. Fair enough. Maybe--

We got ahead a little bit in the first quarter so it did help a little bit there that we made progress better than I thought, so clearly it helped me a little bit, but it's obviously our easiest quarter. I'm not a fool, I know that.

Sure, that makes sense. Maybe talking about the cost actions then for a second. I just want to make sure I've got my numbers straight. You spent a little over $220 million in restructuring in 2015. I think there was another $13 million in 1Q.

Can you talk a little bit about the benefits that came through this quarter? Clearly they're helping the margins a little bit, and maybe your expectations on cadence as we progress through the year?

Yes. What we see right now, around $80 million improvement came through in the first quarter. From the standpoint of restructuring, there's still a big number in the second quarter. My gut tells me that we'll probably be around restructuring around $20 million in the second quarter and then we're going to be increasing this.

The question is can I get it done in the third or fourth quarter or is it going to be more in the early part of next year, but clearly I think you're going to be looking at the 20 [pace] for each quarter now as we start pushing anticipation of concerns that we may have in the marketplace out there.

Savings wise, you're going to be building from this 80 incrementally coming up towards I would say the 90 level by the time you get into that fourth quarter and that's basically how we see that happening per quarter.

Helpful. Thanks, guys.

You're welcome.

We'll go next to Mike Wood of Macquarie Securities Group.

Hi. Good job executing in a very tough back drop.

Appreciate that.

In earlier question on the price, have you actually began to see the increased price competition in process and has that been rational, and just given the fact there's very little project activity out there, I'm just curious how you actually measure that price change?

We measure the price change obviously on the contracts. We also measure the price change that we have to give on short-term actions from the standpoint of a day-to-day business, so it's very measurable because we can see the average pricing within the structure of the business but you're right. There's not been a lot of big bids around what I would say the oil and gas or other big projects, so the pricing has been rational.

The other issue is right now, like our European competitors, we are also major player in the process out of Europe and so we get the benefit of that, too. So, what I see going to happen is we are going to be seeing sales shipped to our European operation because we've been working for this the last 12 months.

The dollar really started appreciating last year, a little over a year ago, so we've been working to get our re-balanced cost structure, which we'll continue to do. So our European organization right now is seeing the benefit of the lower cost structure, so they are winning and I would say you'll see other regions of the world lose.

So, we're pushing around the world just like our European competitors do and that's one of the benefits we do have relative to a broad manufacturing of bases in all these businesses. So I feel reasonably comfortable on the forecast we're going to give you for price. We track this extremely hard.

I don't know how long you've been following us but I'll be the first one to admit in the early 2002-2003 timeframe, I can't remember exactly when that was, we got side swiped on how fast this thing moved, but now we've created a lot tougher tracking process and so I can tell what's going on across this Company.

It's tracking -- it's going to be a little more negative this year than last year, but well within what I thought we were going to see and well within the net material inflation level, so people are acting rational. It's going to be an interesting year to see.

A lot of people are trying to improve their profitability on down volume and dropping price in a down volume to try and improve your profitability does not work. Economics 101, it does not work.

Understood. And given the recent volatility you mentioned in crude, how does that impact the downstream businesses and MRO and your investments that you're making?

Two things. I am concerned. That's why we're talking about we need to get our action together and think about if it takes longer to recover as we go into late 2016, early 2017 on the process side because I personally think what will happen is there will be a freeze, a little bit right now relative to a lot of our customers as they say, okay, we're reallocating capital. We're cutting capital again 10% and where that number is going to be we'll see here in the next 30 to 60 days.

That will create a pressure on, I know our base relative to smaller projects and the MRO projects. So, the initial reaction is I think we're going to see a slowdown and then hopefully as we get into the year we'll start seeing that capital freed back up again.

It can't go to zero, it's not going to go to zero, but they're clearly going to reallocate and they're doing that really fast right now from our customer base. So, my concern right now is we're looking at downward pressure relative to our total sales underlying process.

We need to take capacity off line, so from my perspective right now the initial phase for the last 12 months is very much focused on people, on restructuring the overhead cost, and now what I want to look at is, if we are going to look at a longer recovery here in this particular part of the process world we've got to look at taking fixed assets off line.

So now that's Frank and Ed Purvis and the business leaders at the upcoming reviews which start a week or two from now look at what extra capacity that we may need to take off permanently if we're looking at a different environment and where should that capacity be and not be. So I think that will lead to a higher level of restructuring later this year, early 2017.

Thanks for your insight.

You're welcome.

We'll go next to Julian Mitchell of Credit Suisse.

Hi, thank you.

Hi, Julian.

You mentioned earlier that you thought process would lag a recovery in some of the other businesses, but I guess if we look at Industrial Automation, it does seem as if its got pretty bad there. So maybe just comment on how you'll see IA playing out and related to that any color you can give on orders in January?

I don't have orders for January yet. This is February 2, so I don't have that yet. It's a little bit quick for me and the Company.

But relative to the IA, I think IA got hit harder, sooner relative to the space they're in and so there might be a little downside risk in IA, but not that much. I think these guys are sitting really down pretty far right now and things can always go down further, but my gut tells me they're pretty close to that cycle right now.

The process guys, because of the type of business they have, they're still coming off some of the wins and things they've won the last couple years, so I think they will continue to slide a little bit here. And that's my biggest concern right now. If I look at the 2016 forecast, I always have a little IA concern, but my biggest would be the process guys at this point in time.

Thanks. And then Network Power. Orders look a little less bad than a few months ago. Margins are up. You have a big project in Europe you're working on, but outside and beyond that do you think you've succeeded now in sort of stabilizing the earnings in Network Power and the rest of the year we should see that stable margin play out?

Yes. Yes. I think if you look at the underlying order pace of our Network Power business is actually nose is up and as of right now even -- I was talking to Scott Barbour today and his team is doing a great job out there. The nose is up, continues to move the right way, profitability continues to move the right way.

These guys took some serious actions, hard actions the last 12-18 months and right now I feel good about it's a broad base and I feel good these guys are heading the right way. As of today that's how I feel and so I feel good about that. I think they had a very good first quarter. It's a long way to go, but the nose is up right now and that's a good place to be in any business, as you know.

Great, thank you.

Thank you.

We'll go next to Steven Winoker of Bernstein.

Good afternoon, guys.

Good afternoon, Steve.

Dave, given all of the commentary and sort of how obvious the volatility is right now, what's going on with the process, the capital deployment process or sales process for Industrial Automation some of those assets and the separation activities for Network Power, now is that delayed in any way?

The Network Power, there's no delay going on. We have a dual path looking at strategic buyers within that business, we also have the dual path of moving right down towards the spin, so that path is well under way.

On the industrial automation assets, I would say that based on what we see right now we're probably two to three months behind where I want to be relative to the discussions with strategic buyers, so I would say Network Power had an okay. Industrial Automation given potential customer base a lot of my customers are buyers are clearly seeing tough times, too, so I would say that one is a little bit delayed by a couple months, but that's as of right now today as I report to the Board.

Okay, Dave. And then also the combination of process in industrial, in other words the future structure of the business, the future Emerson here, are you taking actions already to combine overhead or other elements of those two businesses yet or is it standalone frankly until you get the other process done and then you'll go down this one?

We are, I'm being very careful here. Relative to this business we are taking some actions early on the combination not totally across the board but in certain select areas in preparation of it, so that will be -- by the time we get into the middle of this year, those actions will be well underneath the way.

On the commercial residential solutions business we are embarking upon that as we speak and so I think both are well under way. I made a commitment to the Board, I made a commitment to the individuals, and I think probably even told you guys that by the end of the second half way to the third quarter we are going to have these things structured properly. Now, it doesn't mean everything is done, but that's what the game plan is at this point in time.

Okay. I'll pass it on and see you next week. Thanks.

We'll go to Eli Lustgarten of Longbow Securities.

Good afternoon, everyone.

Good afternoon.

One quick question on the process side. You talk about the upstream projects and some on completion new projects. What portion of the business at this point still relates to the upstream project being completed and how much does that disappear and what does that go to as you look through the year? Does that basically got a very minor part of -- how do we handle that?

I don't have those exact numbers. I can't break it out that way. I know what our Oil & Gas percentage will be this year in upstream. I know it's still going to be a significant percentage of our total business and it will be next year, too, because it's not going to zero. People just don't stop it.

We will give you our best feel for it next week. I'll have some ideas where we think the segment is going to go, but they don't move that fast. So it's really hard to say because what we talk about and what you think about are not necessarily how everyone looks at this business on a day-to-day business standpoint. So I can't give you that information to be honest.

Just trying to sense is that the point of disappearing or are you trying to say are we closer to the bottom of that impacting or indicating middle of the year?

You talk about having to do more restructuring in process because of the market that's quite easily understood, but can you talk about whether you're starting to look at Industrial Automation in the same way? It's a very weak market with conditions or so there's more or second level of restructuring there to try to hold profitability better because profitability can be under a lot of pressure if it stays in the current way.

Well we've laid out the restructuring that we have and tend to do this year relative to the Industrial Automation business and that's well under way. I'm also in the process of selling that business. So from my perspective I will leave. If there's more additional restructuring most likely from the potential buyer of the Company.

I have a plan laid out which is being worked on right now. I don't see anything at this point in time. Now, if we make the decision we aren't going to sell this Industrial Automation asset, then it's all another story. But right now we're down a path that we're going to sell that asset.

All right. Thank you. See you next week.

We'll go next to John Inch of Deutsche Bank.

Afternoon, Dave.

Good afternoon.

So last quarter you called out in general incremental concerns possibly about Middle East. Has your thought process changed because there's obviously been some conjecture around possible efforts to curtail production and you called it volatile. I'm just curious, has anything changed in the last few months with respect to your perspective on Middle East?

No. My perspective on the Middle East hasn't changed. The risk I see today in the world for spending, and you're talking about say the Oil & Gas and type of spending that goes on and just the process spending, North America, China, and Latin America. Those are the three concerned areas I have relative to the spending around that industry.

I just came back from the Middle East. The national economies have to spend a certain level of money and they've been cutting back, and I think we probably had that built in, so I feel okay there as of right now.

Now, obviously some major crisis could erupt in the Middle East with things blowing up and stuff like that, but right now I feel good about that. But my concerns are North America investments and the concerns we're going to have on companies that may not make it or get consolidated. And then China clearly I've got my forecast is worse than probably most people say out there, so I'm a little concerned about that one.

That makes sense. Dave, a year ago at the analyst meeting you made comments that you thought Canada's petroleum industry was probably going to be better than people expected because there were a lot of obviously reasons for it, efforts to support domestic businesses, that sort of thing. Do you think that's changed?

The dollar has collapsed a lot and I guess debateably it makes that country a little more export competitive or what not. I'm just wondering if you think because it's such an important trading partner with the United States if you think the outlook for Canada is kind of sort of where you thought it was before? It's sort of a similar question on the Middle East, only for Canada.

I'd say it's worse. One, they have a new type of government there that doesn't necessarily care for this industry and, secondly, the price where it is right now is not good. So I would say from our perspective what we've been doing is we've been restructuring and downsizing in Canada, so it's an important market but strategically it's going to be a tough market for the next two years.

Lastly, Dave. You obviously touch an awful lot of verticals, lots offer different things, so kind of ex-petroleum do you think that -- are you guys tracking maybe some end markets or verticals or other things within Emerson that actually could be contributively positive or surprise kind of to the upside let's call it in the next 6 to 12 months?

We're going to give you a different view of the verticals and growth rates next week and I think the answer is yes. I think there's several verticals that will do better than people think and that's where we started talking about this last summer. We've been reallocating our resources, really pushing hard to reallocate our resources. We had a very, very good run in Oil & Gas upstream and we gained a lot of growth, a lot of market share, and now we're refocusing those resources and so we'll talk about that next week because what you just said is exactly right and there are markets out there and the whole organization within the process management is focused on how they can (inaudible) markets and re-energize their workforce and go after that.

Got it. See you next week.

We'll go next to Robert McCarthy of Stifel Nicolaus.

Good afternoon, everyone.

Hi, Rob.

Yes, maybe we can just go back to kind of a question I asked on the last call, but just given what you see in process and obviously your commentary throughout the last 30 days, I think implicit in your guidance for FY16 was some firming of order trends in terms of kind of the March/April timeframe. I'm not trying to put words in your mouth, but I think it was to that effect.

That's (inaudible) exactly what I said and I'll tell you again today I'll show you a chart next week I'm saying we will -- I'm saying right now the call is April 1 our orders go positive.

Okay.

And that last time on the call I'm still saying that.

Okay so --

Whatever, you know what, but I'm making that call and I will stand by that call.

All right and you don't want to move the call to April 2 maybe?

That's April fools day so I can get you.

Okay.

I made that call back then and I'm standing by that call.

Okay, fair enough. I guess the only other question I have is you did mention, and this dovetails with the question I just asked, but I think you did mention like we've come through four quarters of what looks like an industrial recession. You think there's one to two left. Are you seeing anything in the GFI or just the order patterns, trajectory absent kind of process management vertical where it's obviously dynamic and tied to the commodity price where you can kind of point to an upward trajectory or reason for recovery there in terms of the macro?

Yes. The answer is yes and the call is April 1 -- I'm talking about the April orders, you know that. And right now Frank and I will sit here and tell you we believe that our underlying sales will go positive in the third quarter. We made -- I felt that all year long and Frank's crossed his fingers over there. He's right behind me with a gun to my back but, no, I still believe that.

And the key issue -- now keep in mind, if you're paying attention we said that first quarter sales will be down probably 9% to 10%, we finish a little bit under 9%. Last time I talked on the phone I said underlying sales will be down 5% to 7% in the second quarter. Now Frank and I believe that our order line sales will be down 4% to 6% in the second quarter.

So the key issue for us is as we map out and we get together, we'll give you an insight on orders when we're together next week. We're trying to get orders. Someone asked me a question about January. We will try to get those so we can have at least have a sense when we're together next week if (inaudible) would stop going to play basketball so much and watching Lebron James maybe we could get them. I think right now I'm standing behind that. The chart is going to say April orders go above positive and the second and third quarter sales will have a plus in front of them, underlying sales.

Well--

You will not be standing there talking to me.

We've got our line in the sand. I'll see you next week.

I like to draw lines, you know me.

Take care.

We'll go next to Scott Davis of Barclays.

Hi. Good afternoon, guys.

Afternoon, Scott.

I'm trying to reconcile I think like everybody else. You're bearish but you're still calling things getting better in April. I think the angle I want to take, and there's a good and bad here, and the good is that you mentioned the comment fixed assets off line and we've been writing and we think the entire industry needs to do this. But you are the only ones that are really doing it.

So how do we get out of this mess if you're one of the only companies that's willing to admit that it's a, for lack of a better word, a bit of a side-show out there, how do we get out of this mess to where even if your orders turn call it slightly positive, I mean it's probably more flattish than positive to be more realistic, but how do we get out of this?

It will be above the line. I've actually got my nose above the water, Scott.

Well, what's it going to take to get us out of this mess is my question really, Dave, because again unless everybody capitulates, which we saw in 2002, we saw it in 2009, doesn't it just start to bleed into different components of the economy and different businesses that you sell into that aren't being impacted right now start to see impacted as we get later on in the call it cycle?

I can't speak to other people. They've got to be looking at the same issues from the standpoint of too much cost, too much capital, investments invested. They've got to be looking at that and so eventually they are going to have to say, look, we've got to take action. A good leader -- now, if they don't take action there will be some other people coming and working on that issue, but from our standpoint I feel quite strongly, as you know.

We're trying to deal with this issue. We make calls, I make a calls. You've known me for a long time. I make a call. Sometimes I call right, sometimes I call wrong, but you have to make calls and say that we've got too much capacity, things are down longer, you've got to deal with it.

We started seeing this happen last year and I think other people are now maybe just starting to see it and starting to deal with it. If you don't have the capability of dealing with it sometimes you just sit there and tread water and watch your profitability get hit.

I think there are several companies out there in my opinion right now that are doing a good job in dealing with this issue. There are several companies that are not and you know that. You can see it.

And I don't have that magic call, I just can tell you what we can do. And so I know right now that certain things are going the right way. I have a feel for what things are, but I do know that given right now where the price of oil and gas is and potentially where it could go, we will fundamentally will have a capacity issue on that industry which we didn't have say 12 months ago.

So we have to think about how do we deal with that issue and that as you know that also takes time. That's what's on the table right now and no one wants to deal with that because that's a really hard thing to deal with, but you have to deal with it period.

Understood, and I'm encouraged by your comment on price being relatively rational. It was in the last cycle as well but there's always little tidbits out there. Caterpillar has been talking about the alternator contract they have with you guys and trying to drive price down. Do you view that as more of a one-off or do you have multiple situations going on like that but you've been able to hold on price because the competing bids haven't been any better?

From the standpoint, I think most people are being rational on this thing. Our contract with Caterpillar is a contract and the contract is set and they have the right to do what they want to do, but the contract is set.

And so from the standpoint of the overall industry, I would say the biggest issue right now is because volumes are dropping for people and they have excess capacity, trying to fill a plan up with a lower price is not a very smart thing to do because it doesn't work for you. That's why I think its been more rational here.

And so far we mapped it out and Frank and Ed Purvis laid out a plan what they thought last summer, early fall and we will look at it again right now on the pricing and it's pretty well in line and I feel good about it but, like I said, 10 years ago I think it was or 12 years ago I got really side swiped and so that's why we spend more time on it than probably the average Company.

Understood. Good luck, guys. I'll see you next week.

See you next week, Scott.

We'll go next to Shannon O'Callaghan of UBS.

Good afternoon, guys.

Good afternoon.

Dave, just within the process spending that you are seeing, we went through this period which seems like in a lot of cases seemingly everything was getting cut upstream, mid stream, downstream, maintenance spending. The spending that you are seeing happening, whether it's some of the downstream stuff or the chemical, what are the projects exactly? What are people willing to spend on right now?

On the big projects that are say upstream the projects to a certain point in time they see that spending, I'll make a number up, $1 billion more to get cash flow. The customer has got to move forward with that because if you're stuck 75% into a project and you stop it, you have got a problem because the project won't be that good by the time you come back to it within five years so. Most people you're seeing those moneys will get spent.

Now, every time they go through a process of having to cut capital within that industry that will fine tune that, but most people are taking advantage of the environment right now to go out and improve I'd say the efficiency the facilities are spending on small capital projects, upgrades that will help get more out of the facility, higher quality, higher yield so that's what they are spending right now to get more out of each facility.

I see them still spending money, it's just an interesting process. They're going through the process of being very selective where when things were going their way they threw a lot of money and everything.

The money is still being spent, but it's definitely going to be a lot more selective and it's going to be much more on how can I improve the investments we made over the last 10 years to get me more money out of that given the fact my oil prices are down or inputs are down so what can I do.

So being a lot more selective around those lines which is a good business for us but clearly you don't have the big projects which give you a lot of top line growth with a big bang, but there's money being spent out there.

Okay. And then on Network Power nice margin result, it's been awhile since Network Power margin was beat by expectations. Is that a function of having kind of cleared any major part of the restructuring or just a lag of getting this stuff to kind of show up in what you're shipping in terms of the numbers or is there a reason why it sort of finally came through now?

I think that across Network Power from the standpoint of the actions they started undertaking last summer and started flowing through and systematically been working them, it's starting to come through in the final P&L. So it started actually around the last month, last year, fiscal year September and it's proceeded each month.

So our expectation is that this will continue to take hold based on what we see happening in that market, so we should see sequential type of margin improvement in that business which is good because Scott and his team really attacked this. They are getting out of certain businesses, they're investing in other businesses.

I think they've done a great job evaluating where they want to be and the cost structure they have and now they are executing around that flexibility and my hats off to that team in a very dynamic marketplace. So I think they are heading the right way and I feel good about that, and they did a great job executing the first quarter.

Okay, great thanks.

Thank you.

We'll go next to Rich Kwas of Wells Fargo.

Good afternoon.

Good afternoon, Rich.

So, Dave, just broadly speaking, given what's going on in Oil & Gas here in North America, are you seeing signs in your other businesses of meaningful contagion in CRNS or climate, anything that you would point out here? You talked about the last 30 days being volatile. Just any thoughts there because obviously there's a lot more concern in the market in the last 60 days or so?

I'd say the -- we have not seen it yet, Rich, from the order pattern that we saw in December. I don't know -- even the forecast for January I didn't see anything, but it could take a little while but we don't see it yet. I think the marketplace has definitely been very volatile. I think the marketplace is starting to see numbers we've been seeing.

If you look at the fourth calendar quarter, the third calendar quarter they were pretty tough quarters for companies like Emerson, and so the market is now digesting that news as they saw it come out in the earnings report and the comments people are making right now and let's say a little bit more negative about 2016.

So I would say that we sort of have been trying to get ahead of that and at this point in time I feel that we've got that size. I don't see the knock on effect of what we saw in the volatility in the marketplace and also commodity place in January.

We'll have to watch it very carefully unfold, but if I look at the residential construction, the residential spending, the consumer spending in the areas we are, they're still holding up pretty well right now. We'll see. Thirty days is pretty short. You've got to give us a few more days here.

Understood.

I know you're very quick compared to me but man.

On process in terms of M&A, you talked about deploying some capital there for this year. With what's happened here, incrementally more interested or less interested? How should we gauge that over the course of 2016 in terms of the opportunities you're seeing right now?

I'm interested. Higher interest. You can never call what time to buy and from my perspective right now I think there are unique assets out there that I would like to buy. Our cash is going to -- Frank is over here working on how we're going to get cash back to the United States with the spin in the divestitures and we're going to talk a little bit about that next week.

So for my fundamental standpoint I look at this as a buying opportunity and talk to my Board today and the Board is right there. They are on me to make sure we execute and we execute as hard as possible around this repositioning or restructuring and then spend that money to make Emerson a better company long term and you've got an opportunity here to figure out how to play with it, so that's what we're all about.

Okay, thanks. By the way I thought Rossman was up for the [cavs] coaching job. I guess it didn't play out.

He just missed it. They called me on it. They called me and I said he was questionable with his leadership capabilities, and I also thought he would have a hard time coaching a guy about seven foot tall.

See you next week.

See you next week.

We'll go next to Deane Dray of RBC.

Good afternoon, everyone.

Good afternoon, Deane.

Just thought it was interesting how in a period of significant volatility we have been questioning you about what you're seeing here, but you're also giving quarterly guidance. That's not really what -- Emerson didn't used to be in the quarterly guidance business but where is the additional confidence, where's the additional visibility? It's certainly welcome, but it's a change.

It's a change. I may go back -- you know me, I've been around a few years. It's all about right now that we are on a detailed plan that we started executing last June and I want to make sure you guys understand where we are relative to that transition and I want to make sure there's clarity around what I see sequentially happening each quarter.

The management team is working very aggressive right now. We discussed with the Board and I think it's very important for you all to understand what I see happening each quarter -- we see each quarter and that clarity.

Now, once we come back to normality in the marketplace, we may go right back to -- I don't believe in quarterly guidance, but we might just go right back to the old way, but right now I think we're through this transition period. I think it's very, very important you understand what's on our mind and where we see standing forward positioning each quarter. And so we're actually going to give you clarity on things next week on a second quarter which you'd probably normally never get from us. I just think it's important we stay joined at the hip here. Some of you are right there with me. Some of you don't necessarily agree with us.

It's all about execution. Can we execute, and I'm telling you what the road map looks like and what the [band] looks like each quarter and I will get through this quarter and tell you a third quarter.

It's a great perspective and it is a change and in a period of uncertainty to have your line of sight on this is appreciated. And then just have a followup on commercial and resi. It was interesting for professional tools you wanted to blame that also on upstream spending and I just never thought professional tools was as tied to that but maybe I'm wrong.

Now you're talking to one of the former presidents of Rich Tool and the former president of Rich Tool that went through a last recession, a really tough recession we had, we have a significant part of that business that sells specialty tools and equipment to the Oil & Gas producers and users upstream and downstream. And it's this whole industry stop spending and the first thing is it dries right up around the world and that is a big chunk of our business there.

It's significant enough from the standpoint that it's big and also profitable. And all I can tell you is I thought I was going to be fired as division president within my first 12 months when I came in here as Oil & Gas hit me back in early 1990-1991. I thought I was surely gone. It's tough, that's what it is. It's not made up but trust me it's there.

Understood. Will see you next week.

Look forward to it, guys. I have to get going. I apologize. I know we have a lot of questions. I have got to cut some people off. I don't have any idea who I cut off. I didn't look at the list. There was no selection here.

I want to appreciate everyone calling and I appreciate the questions, and I'm going to try to be open and honest as possible in the situation and give you an idea where we are trying to go. But clearly I'm giving you clarity that I see with my management team right now and it's our call and that's what we're going to do up here this year to make sure we're all on the same journey together as we come out of 2016. Thank you very much. Bye.

That does conclude our conference for today. We thank you for your participation.