艾默生電氣 (EMR) 2016 Q3 法說會逐字稿

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

(Operator Instructions)

This conferences is being recorded today, August 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 on Emerson's most recent annual report on Form 10-K as filed with the SEC.

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

Thank you, Renee. I'm joined today by David Farr, Chairman and Chief Executive Officer of Emerson; Frank Dellaquila, Executive Vice President and Chief Financial Officer; and Katherine Button Bell, Vice President and Chief Marketing Officer. Today's call will summarize Emerson's third-quarter 2016 results and also provide an update on Emerson's business transformation. The conference call slide presentation will accompany my comments and is available on Emerson's website, at Emerson.com. A replay of this conference call and slide presentation will be available on the website for the next 90 days.

I will start with the third-quarter summary as shown on page 2 of the slide presentation. Net sales in the quarter decreased 7% versus the prior year to $5.1 billion with underlying sales down 5%. The third-quarter results reflected the continuation of challenging demand conditions in our key served markets.

Oil and gas spending, both capital investment and operational expenditures, remains at significantly depressed levels. Automation markets in North America have been extremely challenging, as anticipated improvements in spending did not materialize as we had forecast. Data center and telecommunications infrastructure demand continued to be favorable, while global air conditioning and refrigeration and US construction markets were mixed.

The trailing three-month orders for June were down 6.7% on a GAAP basis with underlying trends down 4.4%, excluding approximately 2% for currency translation. Adjusted earnings per share, which excludes $37 million of separation costs, decreased 5% to $0.80. Reported earnings per share were $0.74. Operating cash flow in the quarter was $718 million.

Turning to slide 3. Despite lower-than-expected sales, EBIT margin increased 20 basis points versus the prior year, driven by benefits from restructuring actions and solid operational execution within our businesses. No additional shares were repurchased during the quarter and separation costs were significantly lower than expected.

Turning to slide 4. Underlying sales decreased in all regions except Europe. The results by region were similar to the second quarter, as the global environment for business investment remains challenging.

Turning to slide 5. Total segment margin was up 50 basis points to 16%, as three segments reported improved margins. Both the climate technology and commercial and residential solutions segments reported up margins despite lower volumes. An improved cost structure resulted in operating cash flow of $718 million in the quarter. Capital spending continues to be reduced, in line with overall business conditions.

Turning to slide 6. Process Management underlying sales decreased 13% in the quarter. Energy spending, particularly in North America, continues to be reduced as customers evaluate the stability of current oil and gas prices, while power and life sciences markets continue to provide growth. Restructuring programs will be further increased in response to weak demand conditions from global oil and gas customers and the expectation that weaker conditions will continue into 2017. Segment margin decreased 290 basis points, primarily due to a sharp volume reduction and the resulting deleverage, partially offset by savings from restructuring actions.

Turning to slide 7. Industrial Automation third-quarter underlying sales declined 11%, reflecting continued weakness in industrial spending and upstream oil and gas capital investments, while wind projects remain favorable for the drives business. Segment margin decreased 110 basis points, primarily due to volume deleverage and price, partially offset by savings from restructuring actions and material cost containment. Mix demand forecasts among the businesses are expected to result in improved levels of sales and profitability in the fourth quarter.

Turning to slide 8. Network Power underlying sales increased 10% in the quarter as strong order trends in both data center and telecommunications infrastructure markets translated into positive growth. Sales increased in all regions except Europe which reflected a difficult comparison to the prior year from large project revenues. Segment margin improved 550 basis points to 9.1%, driven by volume leverage and savings from restructuring actions. Benefits from restructuring actions and new product programs support the expectation for continued margin improvement in the fourth quarter.

Turning to slide 9. Climate Technologies underlying sales decreased 1% in the quarter as decreases in Asia and the Middle East more than offset increases in other regions. Underlying sales growth in North America and Europe reflected low single-digit growth in both the air conditioning and commercial refrigeration businesses. Segment margin increased 270 basis points to 22.4%, primarily due to savings from restructuring actions and material cost containment, partially offset by lower pricing. The near-term outlook for global demand in our served markets supports the expectation for modest sales growth in the fourth quarter.

Turning to slide 10. Underlying sales in the Commercial & Residential Solutions segment decreased 1% as growth in food waste disposers was offset by declines in all other businesses which were impacted by customer-driven inventory reduction. Segment margin improved 380 basis points to 24.4%, reflecting the impact of the divestiture, savings from restructuring actions and material cost containment. Modest levels of underlying growth are expected in the fourth quarter as we anticipate favorable conditions in US construction to continue and channel inventory reduction should be complete.

Turning to slide 11. Earlier today we announced agreements to sell our Network Power, Leroy-Somer and Control Techniques businesses for a combined value of $5.2 billion which is in line with the guidance we provided at our February investor conference. These agreements represent a significant step forward in the overall portfolio repositioning strategy we announced last year in June. And with these agreements now in place, the strategic repositioning squarely focuses on acquisitions within our core platforms of Automation Solutions and Commercial & Residential Solutions, as Emerson management and the Board determine how best to redeploy the cash proceeds from these divestitures.

Turning to slide 12. The third-quarter results continued to reflect the low-growth global environment facing our businesses today. And the outlook remains challenging, as markets will continue to be impacted by reduced levels of investment spending, weaker global economics, and political uncertainty. Considering these conditions, coupled with the fact that anticipated improvement in order trends did not materialize, the Company now expects fiscal year underlying sales to be down 5% to 6%, excluding currency translation and an impact from completed divestitures of approximately 2% each.

Adjusted earnings per share for the fiscal year are now expected to be $2.90 to $3, excluding $200 million to $250 million of separation costs and a fourth-quarter loss of approximately $100 million related to the agreements to sell Leroy-Somer and Control Techniques. I will now turn the presentation over to Kathy to talk about our business transformation.

Before we do that -- this is David Farr -- I want to first thank Greg for the update on the quarter. Secondly, Kathy -- I'm going to introduce Kathy. Kathy's been engaged for a little bit over a year now relative to what we refer to internally as the new Emerson.

There's a lot of work that has to be done relative to the communication to our investors, our communication to our customers, our communication to our employees. And Kathy's taken on this assignment with her team and several people from the various businesses that will still be part of Emerson going forward. And she's creating a new presentation of what Emerson means going forward.

And so what we want to do today, given the announcement of the transaction to sell Network Power and the transaction to sell Leroy-Somer CT, I wanted Kathy to go through and share with the investors and the outside people what we're seeing as we go forward and will be formally announcing in early October. I've asked Kathy to talk to investors today and give you an insight to that. Kathy, the floor is yours. Thank you.

Thank you, Dave. Good afternoon, everyone. I'm positive you are all anxious to hear from Dave, so I will try to use your incredibly valuable time with great care and sensitivity. It is clear to me that I am merely the warm-up band and you're eager to get to the main act.

Today we're going to briefly discuss how we're applying our marketing expertise to better redefine our great Company, to accelerate change, drive growth and imagine a different future. I believe you've already witnessed some highly tangible efforts of this, this morning.

Go to page 2. Although today is about moving your view beyond our financial pie charts, this particular one holds all the excitement about our new possibilities. This demonstrates how we are adapting to a new reality, utilizing our already industry leadership positions in adjacent markets and driving our single source end-to-end solutions.

Go to page 3. This is not revolutionary for an already well-managed and financially strong Company. We are on a 126-year-old journey of complexity reduction and perpetual integration of our businesses. We are driving efficiencies through a tighter brand which should deliver more collaboration and more customer focus, resulting in more integrated solutions innovations between our businesses. We are therefore more capable of cross-leveraging our remaining portfolio and making it easier for all to navigate our business.

Slide 4. So we need to accelerate past our previous transformations, evolving our business and our messaging from doing many things to concentrating our efforts on the critical challenges facing our customers, specifically in the process, industrial, commercial and residential markets. For Automation Solutions, this means being the most trusted partner and problem solver for our customers during the current business crisis for them. This also becomes a showcase for our internet of things initiatives as we build on our legacy of long-term success of network intelligence in the field, via our ground-breaking plant web technology and our unmatched wireless heritage. For our commercial and residential business, we can focus on the criticality of you human comfort, connected homes, food quality and advancing energy efficiency at home and work, as well as sustainability.

Slide 5. As conglomerates have fallen out of favor, we have quickly transitioned to a more highly-focused enterprise. The best example of this is the new Emerson.com debuting on October 1. But all of our communications, both internal and outside, will reflect and promote our new positioning. Talent acquisition migrates from fragmented business units to an Emerson career-centric approach. Our social media has historically been product-brand focused and now we are trying to expose our deep industry expertise and to humanize our brand. Finally, advertising, which previously portrayed us as wide and deep, now can support two major businesses and their own deep special expertise.

Slide 6. So a great example of this was our truly unexpected foundational sponsorship of CERAWEEK, which as you probably know, is the Davos meeting of the oil and gas industry. As we were developing our new Emerson Automation Solutions positioning, this seemed like a great opportunity to dramatically demonstrate our leadership position in the industry and launch our unique and desperately-needed approach for the oil and gas businesses facing a crucial moment in their troubled marketplace. Top-quartile solutions were a breakthrough approach for a vulnerable industry and we tried to optimize our moment in the sun.

Slide 7. We poured exceptional effort and assets into the Houston-based event, with full immersion media and social media training for all the Emerson executives as we drove a full frontal media approach to city, venue and with all the participants. The extraordinary results are the positive outcome of tightly choreographed messaging strategy, as well as very well prepared executives. This is Emerson at its best, applying full energy and singular focus.

Slide 8. For Emerson's newly combined commercial and residential solutions business, the opening of our new Helix Innovation Center in Dayton offered a similarly tightly focused media and promotional event. It was designed to showcase the advantages of closely aligning those businesses. Innovation Center clearly demonstrates our unique research capabilities around energy efficiency, connected homes and businesses, in a real-time simulated environment. This miraculously includes a fully-built and Ikea-furnished house, a commercial kitchen which serves the entire Dayton campus of catering and a convenience store. This all exists under a single roof and allows for monitoring and research under an exceptional array of climate environments and variable conditions.

Slide 9. From a marketing viewpoint, like CERAWEEK, the opening of the Helix allows for a wildly focused media event. We continued our highly publicized STEM-support initiative with a survey on the issues of STEM education. For you financial guys, STEM is the acronym for science, technology, engineering and math.

We again tapped internet science superstar, Hank Green, on the backdrop of our innovation center on the University of Dayton campus. It was media magic. We showcased our engineering initiatives and allowed Hank to do his story-telling sorcery to millions of network viewers, social media networkers and even thousands of potential investors. This was astonishingly successful for a B2B initiative where media interest was stoked by the authentic connected story of STEM careers, sustainable research, a science geek and a real university setting. This is not just another product launch event.

Slide 10. As we all know, digital access and transparency has changed all of our business lives forever. We also know that an extraordinary amount of research and private exploration goes on long before a salesman is invited to the party. Your website is the window to your Company's soul and undoubtedly has the ability to expose one's capability to better explain as well as execute one's business.

Most multi-billion dollar companies can not unify and face the challenge of reconstituting their digital presence. The unique inflection point of today's divestitures have swung open an opportunity to begin again. We have been working for 12 months on phase one of our new web presence to launch single taxonomy, single product catalog, single technology approach, resulting in mobile always, all glass responsive design. This will result in a cleaner, portable, searchable new Emerson.com.

It will takes us two more years to complete the technology transition, keep, kill, edit and vet. We had over 700,000 pages in our previous environment. But we will be, at the very least, a more nimble unified player. This is the one thing I believe our competitors would not expect from us and would fear the most, a better more fully-integrated Emerson.

Slide 11. Dave has actually allowed me to give you a three and-a-half minute cook's tour of the Emerson.com prototype. This is giving you all a sneak preview into phase one of the new site. I think you will find it is a new vision of our streamlined, tightly focused selves, exemplifying enduring strength and adaptability to change as we rise to the new challenge. Please bear with me, as we thought it was technically safer to videotape the prototype as it is a little jumpy and we didn't want to take you out of the webcast. Here is Emerson.com. Please roll the video.

Welcome to the home page of the new Emerson.com. The site is devoted to a modern, more progressive approach, easy discovery and terrific visitor experience. The front page is dedicated to introducing our clean design inviting customers to explore, career seekers to learn and investors to fall in love all over again. It is meant to be a showcase of our great stories and a window to our values. The new site is an exceptional initiative to bust our silos and unify our businesses. In usability research, our customers said it was useful, complete and visually appealing and that the images highlight the breadth of our industries and humanize our brand.

As we move to About Us, you see we introduce our visitors to our transformation story. This describes how we plan to increase value to both our customers and shareholders with our tight focus on two major business segments. Our realignment is about accelerated cultural change inside, customer joy outside and value creation for all.

As we wind our visitors down the page they will encounter our now social responsibility report, access to our educational I Love STEM page and our much more extensive Join Our Team careers section. I'm also very proud of our more extensive social channels (technical difficulty). You'll see from Twitter to YouTube, we are ready to connect.

Finally, we head to our investors happy home. Our investors page is meant to be a familiar but improved user experience for all of you. Roll-over resources, back-year annual reports, profiles and SEC filings are at your mouse tip. Finally, an up-to-the-minute mergers and acquisition update section will be available but not currently available in our 30 day-old prototype.

Emerson Automation Solutions is the doorway to our ever-broadening offering in the industrial and process industries. We immediately discuss capital projects, operational efficiency and tour our internet of things offering on a global, scalable level. Our site is founded on an industry-centric approach, allowing us to better explain our end-to-end solutions with an industry view. Our world famous signature brands are still prominent and easily searchable so every customer can still reach each SKU by bookmark, new easy search and relatable discovery.

The Emerson Commercial & Residential Solutions business introduces us to the unified concept of optimized performance for connected buildings with energy control. All our products and services form the basis for many cohesive growth opportunities based on connected equipment, home and business monitoring, energy efficient improvements and infrastructure support. World class signature brands like RIDGID, Sensi and InSinkErator form the basis for scalable solutions and are the bedrock of the B2B business and our only B2C Empire.

As I introduced earlier, the Helix is the metaphor for our commercial and residential businesses. Our five simulated environments are almost impossible to appreciate from a distance. As the building offers us the ability to control the external environment, think winter in Alaska, summer in Dubai, in order to measure the energy efficiency or the home or business inside.

Our Innovation Center has been a terrific real-life laboratory, some of Emerson's most impressive sustainable innovations like InSinkErator's Grind2Energy, food waste initiatives to Sensi Wi-Fi thermostats and ground-breaking compressor health control. So thank you very much for your time and attention. And I will hand it back to Dave Farr.

Thank you very much, Kathy. I appreciate your time. I wanted the shareholders to understand, the investors to understand, where we're trying to take the Company going forward. A lot of work will be undertaken here in next 60 days as we get ready to launch this. It's very important for our employees and customers to understand what we're trying to do with Emerson and reposition the Company into these two core business units.

Clearly, a little over a year ago we announced our repositioning efforts. We announced that we were going to sell or spin Network Power and sell the Leroy-Somer CT business. Today we're very excited to announce we found two strong partners to buy these respected businesses. Platinum buying the Network Power business and a great solution for this business and one that we are excited about for Platinum, the management team and long-term even potentially us, given that we will have some potential upside if they're successful and with our 15% equity ownership down the road.

Also, Nidec, a strong Japanese Company that we've known for a long time -- I know the Chairman for years -- buying our Leroy-Somer CT business and managing that business going forward. Again, a great solution for these two businesses with a good outcome for Emerson, with over $5 billion of investment value for Emerson and our shareholders and for allowing us to reposition the Company.

We will have one more transaction in 2017. If you remember, we talked about selling ClosetMaid. We said we'd do that in 2017. In total, we do somewhere between $5 billion to $6 billion in proceeds, so we're well within what we expected back in February. So we look forward to closing these two transactions before the end of the calendar year and moving forward as the new Emerson and trying to drive a stronger valuable proposition for our customers and for our shareholders.

Now to third quarter. Yes, it was a tough quarter, a very tough quarter. June was a very challenging industrial marketplace for us, especially around process. Given the recent announcements of the GDP numbers, it shouldn't surprise any of us. The numbers announced last week from business investment for the last nine months were negative and declining. Restatements for the last couple years made it worse. So we're facing a very tough environment.

And we saw that very quickly in the month of June as our process transactional business really slowed down as our customers continued to protect cash flow and their investments to make sure they have the cash needed to run the businesses or pay dividends or whatever they're doing. Clearly, a very challenging environment.

But an environment where our team across Emerson knows what to do. And we're acting on it very aggressively and making sure we keep our costs in line, making sure we do the right things internally to protect the key investments but also keep our costs in line to allow us to generate the profits, the cash, and the returns we expect at this Company.

In total, profitability with the third quarter was pretty good. We generated operating margins flat with last year at 17.4%, in case you didn't figure that out, 17.4%, with down underlying sales of over 4%. Cash flow was very strong in the quarter. We're strong in cash flow for the first nine months. We will continue to generate the cash flow to run the Company, to invest and pay money back to our shareholders and do what we need to do.

But we have to face the reality what we see today. It's a tough market. We did see a bounce-back in July in our process orders which is a good sign. But in reality we are looking at a marketplace right now where people are being very cautious. They're being very careful what they're spending money on and they're very uncertain relative to what's going on around the world from a political standpoint, relative to just a business environment standpoint and where things are heading.

So we're staying very focused on trying to drive the necessary actions to protect the short-term profitability. At the same time, staying very focused on making the right, relevant, long-term investments to drive the necessary change that we'll see in this business, this industry, when we come out. We will come out. This industry will come out. But clearly a challenging marketplace right now and one that we fully understand that we have to deal with and we will deal with it.

Now, let's think on the positive side of this. We had many people out there doubted that Emerson could take the transaction and the repositioning and get the job done. But the team within corporate, the team within Network Power, the team within LSCT and our external partners did a lot of work the last 12 months and came up with very strong proposition, both for our shareholders and for the buyers of these actions and also the remaining assets that are being bought. Very pleased with the work there, not easy to do in a marketplace, by the way, which is quite challenging. So my hat's off to the entire team around the world for making this happen.

Also want to thank the team for landing a tough quarter, a quarter that was a lot tougher than we started out thinking about it. And in reality it ended up being very challenging but we got the job done and delivered pretty good levels of profitability and levels of cash flow. No, it was not what we expected, but still very good in the environment we're seeing.

From the perspective of the Board and the senior management team, we're very focused on the future of the Company. We have been repositioning the Company and we continue to reposition the Company. It is a very solid Company when we get down to the two businesses that will remain at the end of the calendar year. And we're very much focused on making the necessary investments internally and through strategic acquisitions to build upon these two businesses to once again return it to over $20 billion in sales. Profitable sales and a profitable returns. The opportunities are there and we're working on those.

Yes, it's a tough environment. But there's no problem within Emerson. We deal with those tough environments. That's what we do. It's our DNA. Clearly would I like to have better times? Yes, but that's not what we face today. So we're facing reality. We're very much focused on driving a stronger Company, a more profitable Company, a faster growing Company and remain an industry leader in the two key business units, business segments, that we'll have when we finish.

A tough quarter, fourth quarter is going to be tough too. Wasn't that long ago I thought that maybe we would actually have flat or up sales in the fourth quarter. That's not going to happen. So we're having to deal with that. From our perspective as we continue to restructure and get ready for a challenging 2017, it will be more favorable coming through a very difficult last 18 months, but still a challenging environment for us. But we are well positioned and will continue to be well positioned to drive levels of profitability that will generate great cash flow and returns. And over time we'll continue to return to a growth mode that we know inside Emerson.

Yes, I look back at the third quarter, a tough one. But we've got a lot done. Within 12 months from announcement of the concept of repositioning, of selling our Network Power business, LSCT, we did it, we got it announced. We are looking at how reorganized on the Company drive longer term value, very good. The game is still on. The hard work is still happening.

I want to thank the entire management team globally working so hard here the last 12 months and in this quarter, to deliver what we need to deliver to continue to move Emerson forward, to remain relevant and an industry leader in the spaces we serve today and will continue to serve going forward in 2017 and beyond.

With that, I'll open the floor for questions or comments. Thank you.

(Operator Instructions)

Andy Kaplowitz, Citi.

Good afternoon, Dave.

Good afternoon.

So, look, I know it's early, you don't want to give specific 2017 guidance, but can you talk about the puts and takes in terms of 2017 EPS? You've got dilution from the sales of the businesses --

No thank you. I will not talk about 2017. I will not talk about 2017.

Okay, I will shift --

Wait, Andy, let's be realistic here. We're in the process of selling two businesses. It will happen in our first quarter of 2017. We're in the process of going through what I call a continued restructuring process. We're in the process of going through an environment where people are still cutting back spending. So I'm going to give you a forecast?

I've had a tough time this year. So I have a better view six months ago than I do now. From my perspective, I'm not going to give you a forecast for 2017. People trying to guess 2017 right now, I think it's a pure guess.

I understand. So just shifting gears then. You're guiding to $90 million to $100 million of restructuring expense this year. You've done, I think, $43 million so far.

You mentioned in the past that restructuring takes time. When we look at restructuring going forward, you're seeing process management business have lower decrementals in the quarter than last quarter.

How do we look at margins going forward in process management? Could the decrementals get a little worse before they get better?

From our perspective, yes. I think what we're going to see from a process management standpoint, we'll have a good fourth-quarter process because it's always our best quarter. We have a lot of restructuring under way in process, a lot of things have been announced and we'll be starting to book, we're starting to book already.

We expect it will be close to the $90 million level of restructuring that fourth quarter. Clearly you have timing, when things get pushed and shoved. We're going to continue the restructuring there in the fourth quarter, then also in the first half for process automation.

It looks to me right now that process automation from a profitability standpoint are going to be going down into the operating level probably around the high $17 million, low $18 million, EBIT margins obviously lower because the restructuring. And they'll bounce back into that $20 million level but will not bounce back in 2017 based on what we see right now. I do not see the growth coming in the process world of drive that leverage back up.

We're in the mode right now of trying to protect and minimize the downfall in profitability. And so what we're looking at right now probably from profitability is somewhere between 200, 250 basis points, I would say, deterioration in profitability at the operating level line of the process business for 2016. We'll be able to stabilize that as we get into 2017.

That's helpful, Dave. If you looked at -- remember you gave the order of growth curve to us in May? You talked about it potentially going positive in July. I know you talked about it being delayed.

How do you think about that order growth curve? I know you said it's very hard to forecast but is it fair to say it's pushed out maybe six to nine months? Any commentary on orders as we go forward here?

The order curves that we see today have trended pretty much in line where I thought they'd trend, except for process. On the process segment, we've been bouncing between this minus 12% to minus 14% underlying order rate now for over a year. And we anticipated, including myself, I made the call, no one else did, I made this call, that I thought that would start lifting up toward the minus single-digit. It has not happened.

So based on what I see right now, the rest of the businesses have continued to trend upward and would be pulling us up to positive, or would have pull us up earlier to positive. But until process management starts seeing, I would say, a lift in the order pace, which right now is running in this minus 12%, minus 13% range, until we start seeing that most off that range, and we'll communicate that, so once it goes into this minus 5% to minus 10% then you're going to start seeing the total Emerson lift come. Right now process is such a big piece, it's down at a level that we have not seen the lift to pull us up.

That's what we see right now. I see no indication that we'll see that going into single-digit underlying order pattern in the rest of this fiscal year which is the fourth quarter. Most likely we'll start seeing it as we move out of this quarter, going into the first quarter, second quarter of FY17.

Thanks, Dave.

You're welcome. Thanks, good questions.

Stephen Whittaker, Bernstein.

Thanks and good afternoon. Dave, you invited questions or comments. So I actually am going to take the leap here and say congratulations on getting a sale done which I know we've been debating for a long time. So congrats on that.

Thank you. A lot of hard work by a lot of people out there, Steve, that you should be thanking, not me. The other people did a lot of work on that one. It's not easy. And do it right for the organization which is very important.

You had to still agree to it and get it done. The midpoint for the fourth quarter implied, I think sequentially, is about a 5% -- just over 5% sequential step-up. It is a little bit more than we've seen historically and given all the order rates you keep giving us, it certainly makes me -- I just want to understand a little bit. Are there any bright spots in here that are making us think that this should be just a little bit better than usual from 3Q to 4Q?

Based on the -- if you look at our underlying order pattern, we've been -- on total Emerson -- we've been running underlying around the 4%, the 4.5%, 5%, if you look at the pure underlying order rate. So right now what we're seeing is if that pattern continues what we've been seeing, then we should be able to reach this from the standpoint of sequentially from the sales.

We are also seeing on a positive standpoint, we have some inventory liquidation in some of our channel in the month of June and May and June and some of the commercial residential. We expect that some of that will return in the fourth quarter. We also expect some of our compressor-type of business, which is the heat and the refrigeration markets, we expect a little bit of lift in that which will help us as we go into the fourth quarter.

We're not expecting much from the process automation. If you look at the underlying business, we were down last year in the fourth quarter around 10% in sales for process. We'll be expecting to be down again around 10% again for the fourth quarter.

We're seeing the other businesses are seeing a little lift and that's what's going to pull us up. We are banking the fact that process does not have a leg down. I was very pleased to see process came in, in preparation for today's Board meeting and showed us the July orders -- the way they work, they do a four, four, five.

So we know the July orders. They bounced back up to a run rate that got back into the average that they've been seeing for the last five or six months and way above what we saw in June. So we did see a bounce-back there. So that's how we look at it right now, Steve.

Okay, that's helpful. And then if you look at MRO versus CapEx-type of demand within process and industrial or just overall automation, at least a little more commentary on the MRO side, a little more -- is there any more stabilization there?

Not really. We've seen very weak -- North America has been the real challenge for us. It would be Canada, US and Mexico.

The MRO business, what we call the transactional business, had a very, very weak June. As people really -- some of our customers -- curtailed spending. They're doing the turnarounds, the facilities and changes in the facilities and maintenance, but they're doing it very, very carefully and really cutting back on the extent of how much money is being spent.

That has not seen an improvement. We expected that to stabilize, but it's not yet. That will be a key sign for us and I think that is also a reflection that you see in the GDP, when you disconstruct the GDP in the United States the last three quarters, you'll see that business investment continues to deteriorate. That's one of the areas we're seeing right now is that day-to-day MRO-type of business. That's hurt us in this space.

Can I just sneak one more in?

Sure.

Given your prior commentary about where to deploy the capital going forward, and especially now that you're through this big milestone, are you thinking still -- you talked about a couple, one or two transformational deals versus bolt-on. What should investors -- are you leaning -- do you think we should expect one bolt-on versus transformational? Or it's really up in the air or what? What are you thinking?

We continue to do a little bolt-ons. We've done a couple smaller transactions, unique software transactions in the commercial residential business the last 30 days, 40 days. We are continuing to look for a strategic investment in either the automation business or the commercial residential business.

So in discussions with Board today, we're very much focused on driving what we call a more strategic type of deal, a bigger deal. And clearly with the balance sheet strength, we can do that. But we're still he very much focused on that and our focus is to get that done sometime in the next three, four, five, six months.

We're not going to do anything stupid, but we'll looking at where we can invest to make a stronger core industrial automation business or a core automation solutions business in this tough marketplace. We're going to work it hard. We're not going to step back and wait.

All right, thanks, Dave. I'll hand it off.

Thank you very much, Steve.

Julian Mitchell, Credit Suisse.

Good afternoon, Julian.

Hi, afternoon. Just following up on the issue of the stepped-up restructuring. If we think about the remain-co automation solution segment, is the idea that the restructuring you've announced today, that should be sufficient to keep margins flat in that business over the next 12 months, even if sales decline a single-digit rate?

Our goal is within the automation business -- commercial residential solutions business restructuring is really starting to tail off. Bob Sharp and Jim Lindemann have really done a very good job. They got ahead of this and that business is doing better.

So our goal here is between this year and the first six months of the automation solutions business is to, again, spend restructuring money. We're going to probably spend somewhere between $50 million and $60 million next year and the goal is to maintain the profitability level of this business, plus or minus a tenth or two. That is the goal.

We're trying to find where we could find that bottom without, Julian, without as I tell my Board, I will not jeopardize the future of that franchise, because it is a franchise. But we clearly are working that equation right now relative as the business has continued to weaken, as we look at probably next year as I said, probably a low single-digit negative growth in the automation solutions business, how do we protect that of profitability at the level we finish this year? And that's what the game is and that's what we're trying to structure. That's how we're working the equation right now.

Understood. And then a follow-up around the gross margin's impact from price versus from material cost. I guess for you, for everyone, that's been a tailwind for 12, 18 months in particular. When you looking to the next 12 months where input costs are now and what pricing is doing, particularly for large projects, how do you see the price cost delta shifting, if at all?

From our respect it has been a positive for us. If you look at our GP margins, our GP margin this quarter, was what, Frank, we were up this quarter? I think our GP margin was up this quarter.

Right.

I think we have one more good quarter of it, Julian, to be honest. And then my feeling is, what you've heard me talk about. I think that shift's going to come and the wind's going to come against us a little bit.

I fundamentally believe we're going to start seeing that squeeze and we will not have the positive and we then we'll have to fight pretty hard to maintain a neutral balance. But I wouldn't be surprised if we don't have a quarter or two where the wind goes against us.

But right now we're at a mode where we're still positive. I think there's a period coming, maybe early 2017, where it goes against me for a couple quarters. But we're working that hard because -- yes, we're up -- Frank Dellaquila said we're up 0.2 for the GP margin for the quarter.

So your assessment's right, I think give us another quarter. And then we'll probably get two or three quarters coming at us that will be more challenging. We'll probably be neutral or slightly negative.

Thanks. But pricing itself, you and your competitors, is that changing much? Or not really versus six months ago?

No, pricing's not changing. What's happening right now, the pricing's -- I think we talked about pricing around the point, on average negative 0.5, negative 0.6, negative 0.7 for the year. We're well within that boundary right now.

The net material inflation has been good for us. It's been good for all the people. The pricing is staying well within that boundary.

I think next year, if I took a snapshot right now, Julian, thinking about next year, I think it will be slightly negative, it won't be quite as negative as this year. But our net material inflation won't be as positive. We could have that switch coming on where all of a sudden you get squeezed a little bit.

That's what I see right now. But people are behaving. We've got other issues out there from a manufacturing standpoint like too much capacity and stuff like that.

Agreed. Thank you very much.

Gautam Khanna, Cowen & Company.

Thanks, David. I may have missed it, but could you elaborate on what the tax leakage is from the two divestitures, if any?

I'll let Frank talk about the tax leakage a little bit.

We've got gross proceeds, as we told you earlier today, of about $5.2 billion, the net proceeds will probably come in around $4.3 billion, $4.4 billion. So we've got a bit of tax leakage on both of them.

A lot of moving parts, especially around the Network Power deal, in terms of where we're recognizing gains and losses where we have basis. But that's about the net of it right there.

Thank you. And just one other one. We've heard a lot about the M&A pipeline on the AS business. Can you talk about what you're looking for in the C&RS business, what types of technologies or geographies that you're looking at? Any sense for what the size of some of those opportunities might in fact be?

Most of the opportunities within the commercial residential solution -- I'll use the world names, not the abbreviation. I've got Kathy, my head of marketing, she's beating me over the top of my head with my own baseball bat.

From our perspective, what we're looking for is sensing. We're looking for sensing type of technologies to allow us to create a better solution within our core product that we have there today. We're looking for software; we're looking for monitoring.

We're looking for the transformation that we did in the process world back 20 years ago when we created a very strong component business and created sensing solutions, the software. And that's where we're taking the position for the commercial residential.

The business acquisitions, most of them right now will be probably in the $20 million to $100 million range. There might be another one $200 million. No big significant acquisitions in, what I would say, the next 12, 18, 24 months.

Bob Sharp and his team is driving the solutions strategy around this right now. So the early days of understanding how to create that. One of the things, Bob is coming from the process world and understanding that so I'm expecting him to create more of a solutions type of environment around this and to leverage the core assets, the leading assets, we have in that space.

But it's going to be smaller sensing solution software-type of acquisitions. And companies you probably never even heard of or thought of, to be honest.

Thanks a lot, guys. Good luck.

You're welcome. Thank you.

Joe Ritchie, Goldman Sachs.

Thanks and good afternoon, everyone. Dave, I echo the congratulations on getting the sales done and for the amount that you got them done. As I think about your capital allocation priorities, clearly we've been talking about the M&A.

But can you touch on the dividend once again? I know it's like the holy grail for you. But I'm trying to get a sense for whether you're planning to set aside any of the capital from the net proceeds to fund a dividend going forward and how to think about buyback in that context as well.

Okay, thanks. First of all, thank you very much for recognizing the sale. I appreciate that.

As I've been communicating for over a year on our utilization of cash flow going forward, yes, the dividend's important to us. It's important not to us per se, but to our shareholders. And from our perspective where we are right now, with the shrinking of the Company down to, say, around $15 billion and the cash flow coming down along those lines, we will be protecting our dividend as we've discussed at the Board level for the next couple years.

The goal is obviously to grow the Company, both organically and through acquisitions, to rebuild the cash flow base that we're losing from the divestitures. But right now, as you think about our Company, you think about our free cash -- let's think about our free cash flow next year and let's say we take the dividend up marginally, a little bit like we did this year. Our dividend coverage, our cash flow, the free cash flow of dividend coverage, it's going to go around the mid-60% level.

So our goal is to figure out how to keep that peak at that mid-60%s, maybe higher 60%s an then move it back down in the range of 40% to 50%. As I've told the shareholders, however, let's say that we're not able to find significant strategic acquisitions. We're not able to get the growth necessary to get back up to the size of the earnings and cash flow base that we had just a couple years ago. Then we will, as a Board, will have to consider do we cut the dividend?

But that is not where we sit right now. Right now we have the capability, both in funding internally and doing the dividend, and we'll dial back the share repurchase.

And this year we're going to end up around $600 million of share repurchase. Next year we'll probably be somewhere in the $100 million, $200 million range, just basically covering any stock that we're putting out there for employees. We'll dial that back.

The intention of the Board, as we've discussed a lot over the last 12 months, to use the proceeds that were in our balance sheet to go out and continue to do aggressively make investments within the two core spaces we're maintaining, or keeping the Company. And that's where our focus is going to be.

Got it, that's really helpful.

Thank you.

Maybe one last question. I know it's probably too early to talk about 2017.

No way. Go ahead.

I'm going to ask it anyway. I guess if you're thinking about the underlying trends that you're seeing in process today, if those underlying trends were to hold steady through the year and as we progress into 2017, can you guys grow margins, given the price cost commentary earlier, as well as the restructuring actions that you're taking in that business?

I think let's be very honest here. I think, given the current trends, the underlying growth rate of our automation business, next year it will be slightly negative. We'll be low single-digit negative sales.

From that perspective, with the restructuring we're going to do everything is possible to protect our profitability as we finish this year in that environment. And so that's what I see right now.

Until I see our customer base willing to invest more for productivity, invest for next-generation capacity or whatever it takes, then it's going to be a tough environment. So I don't see that.

On the commercial residential we do see underlying growth and we do see a little bit of improvement in profitability. Next year the focus of that business will be the integration of some of the various businesses.

As we talked about streamlining and creating a very strong global integrated business, and so that's where that focus is going to be. Next year I would say that business will have positive underlying growth and most likely we'll see a little bit continued margin improvement which -- and the business is running at a pretty good level of profitability right now.

Got it. Thank you very much.

You're welcome. Thank you.

John Inch, Deutsche Bank.

Thank you. Good afternoon, everyone.

Good afternoon, Johnny.

Hey, Dave. So maybe a question for Frank, or perhaps you.

In February you gave us a pro forma EPS number of $2.60 and now that we've done these transactions the guidance has come down. With all the corporate moving parts and stuff, what maps to that $2.60 for FY16 pro forma? What would be the number today?

It's going to be lower, I can tell you that. It's a little bit early to say you how we finish up but it's definitely going to be lower than that. It's obviously more closely to the $2.50 range and slightly lower.

Clearly with our EPS now down lower, I think that's the reality what's going to happen right now. But the base is going to be more in that line at this point in time.

And then, pro forma, how much of your free cash -- so pro forma, so these businesses are gone -- how much of the free cash or how much free cash would you be generating in the United States?

Still going to be about 50/50. The profile of the Company from sales, profitability, it does not change much, John, as we operated going into the transformation and as we go to the NewCo. It doesn't change much so it's going to be about the same. We're losing cash flow, operating cash flow, Frank, around --

$400 million to $500 million.

$400 million to $500 million. As you look at the generation of the $3 billion, we lose $400 million to $500 million, it's going to be the same make-up between US and international.

I was trying to bridge -- the dividend's like $1.2 billion and change, right? You raised it a little bit. You've got half of your free cash.

Is it -- the question is almost to Joe's question -- are we generating enough US free cash to pay this? It seems like we're on top of that, right?

We're on top of that. The other issue we've talked about is that one thing Frank and his team's looking at right now is we will be making -- assuming we don't do anything from an acquisition standpoint -- we will be bringing back cash flow at a very low tax cost to us, as we talked about, both in February and this year. So Frank, you might want to mention that.

As we walk through these transactions, as we move toward closing, we're looking at bringing back all the proceeds because we'll receive a significant amount of proceeds offshore. But we'll bring everything back, as well as all the cash that was in those businesses that had been generating over time. So we'll have pretty significant cushion here in the US as we do that.

And then we normally bring back $400 million to $500 million of cash very efficiently every year anyway. We understand the issue on the dividend and the share repurchase. But we think we have it covered.

One thing we do with our finance committees, we very clearly lay out the cash flow needs over a couple years and where that money's coming from. We try not to get ourselves surprised and boxed. It's easier for us to see than you. We understand the issue.

No, that's fine. I think the network power transaction talked about Emerson retaining a subordinated position.

Yes.

What exactly does that mean? Does that mean you have some sort of a minority interest accounting number? Or is that actually pertaining to --

There will not be any of that. There will be no minority interest, we have no Board seats.

What we have, if the business does well and we'll be retaining a 15% subordinated equity piece. If the business does well and something happens and they make their return, then obviously we'll get a piece of that on the upside.

That gives us a little bit of capability if something does go well and a lot of efforts we put in the last couple years, we have a chance of making something down the road. Maybe my successor, or whoever, has a chance to have a little bit more money coming out of that for our own shareholders at some point in time. But no minority interest on the balance sheet in this one.

It's not from an accounting sense an equity position. Coordinated interest which under the right circumstances could be a very good payout for us down the road.

Okay, that makes sense. Lastly, is there a timeline, Dave, where you would say we've accomplished the M&A for this. In other words, you've given yourself a two-year window on the dividend.

Does that imply that the execution of replacing the lost earnings is over two years or -- obviously you would want it to be front-end loaded, right? Except that M&A market, it's a little bit pricey. I'm just curious how you would like us to think about the timeline, perhaps, of deployment of proceeds to do these acquisitions.

From our perspective, Frank and I, we review with the Board and also the finance committee, we see where the two years come from, the fact that we know we have to be in a map, sort of like a road map of figuring out how to get our return, coverage, our coverage from the dividend on free cash flow, coming back down towards the 50% level. So that's why we say two years.

Because if we don't have a road map that through acquisitions or faster internal growth, then the pressure's going to be building both us as a management team, the Board and our shareholders, hey, how long can you maintain that high level of dividend payout without damaging the Company? That's why we look at that and say a two-year window, a nice round number to talk about. That's why I say that.

Okay, got it. Perfect, thanks very much.

Robert McCarthy, Stifel.

Good afternoon, everyone.

Good afternoon, Rob.

Dave, in terms of your comments around process, obviously you talked about perhaps a bounce in July orders. But obviously we're now a bear market for oil again, given recent trading. What gives you confidence that we're not going to see something worse going forward?

I don't have confidence. From our perspective, just go read the transcripts from any of the oil and gas companies who reported. All we do is we look at our businesses. We look at what's going on in transactions, look at the day-to-day order book and what comes in. We have good systems, we can see that.

The fact that I look at the stability and the flattening of certain things and we make a call. So that's the type of confidence level I have. I know of no customers out there saying, oh, things are great, we're looking at increasing spending.

We have a very broad, diverse business, global business, a lot of industries and so that's how we make that call. I am encouraged by the fact we did see a bounce-back in July because June was a knock-you-over-the-head type of month for our process business. That's where I'm coming from. But we'll see.

In terms of the Network Power acquisition, how would you form the basis of your guidance, the performance of the businesses right now, how would you categorize the EBITDA multiple paid on 2016 numbers?

You're talking about -- the number we showed was --

if you look at our trailing 12 months, we're right in the 8 range on EBITDA. We've got the upside.

Okay. The final question is, from a capital allocation standpoint, you're between a rock and a hard place there. And from that standpoint, you got companies that are probably having eroding fundamentals right now and you have to take a look at them in a public equity market that in the main is still rising, still high valuations.

Is there a case to be made to batten the hatches here? Shift capital allocation and get a better sense of where we are on the down cycle before pursuing something more aggressive on the strategic front?

We obviously look at everything. We'll make that call based on what assets are potentially out there for us to make a call on.

I think that if you have unique opportunities, you have to take those opportunities. If you think about our business, an automation business we're involved with, there are few and far between assets you can actually interact with. You do what you have to deal with.

But let's just put it this way. I'm not looking to go out and do something really quick and crazy with the $4 billion which I don't have yet. I think from our perspective we see the opportunity and we see a situation, we're going to take advantage of the situation right now.

It's a tough marketplace out there. You try to find -- you ever try to guess bonds, when to buy stocks or buy things, you're going to lose. That's a loser's strategy.

We're going to buy assets we think we can make money. I look at people that sold the day of Brexit and the day after Brexit, I would call that very short-term thinking.

Congrats on getting the deal done. Talk to you later.

Thank you very much.

Nigel Coe, Morgan Stanley.

Thanks, good afternoon. Hi, Dave.

Good afternoon, Nigel.

Congratulations on getting everything coordinated for today. That was quite a task.

Thank you very much.

So I know you've clarified that you're not going to give any 2016, 2017 guidance, but back in February you talked about $0.65 of lost earnings from the assets to be sold, including ClosetMaid. Obviously 2016, there's been a lot of moving parts on power, probably did a little better than planned. Industrial automation did worse. So are we still on track with our $0.65 impact?

I just said on the phone a couple minutes ago, I think that what we said, the impact would be about the same, a little bit more, maybe about the same. Because the base in 2016 will be lower on that number that we talked about, we talked, I think $2.60 EPS, that number's now going to be lower from the standpoint of the whole earnings came down.

But I think if you look at the network power and realize where we're at, there's about the same number. Delta's about the same. It's just one's done better, one's done worse. That's about where we see it right now.

Okay, so the net impact's about the same. Okay, that's helpful.

Perhaps a question for Frank. The tax rate for the pro forma Emerson, how's that look?

About the same as the old Emerson. It really comes out pretty much the same way as the total Company is today. I don't expect any material change in the tax rate. I think we're going to be in that 30% to 31% range going forward.

Okay. And then finally, obviously the last piece is ClosetMaid. You said probably mid 2017 for that. I'm assuming that proceeds from that would take us right in the middle of that range, the $4.2 billion to $4.7 billion.

Exactly. It's not a huge transaction. Our people have been pretty busy right now on this one. We'll launch that sometime early 2017. I think we talked about $5 billion to $6 billion. We'll be right in that range with this one too.

Great. Thanks, guys.

And then we're done.

Deane Dray, RBC.

Thank you. Good afternoon.

Good afternoon, Deane.

Dave, I was hoping you could expand a bit more on the potential divestitures. As I was going through Kathy's slides, you still have legacy exposure to data centers with Liebert.

I just wanted to hear from you what sort of linkages you think that business has. It certainly does with climate but beyond the climate linkage, where else does Liebert fit within the business on a go forward?

Liebert is part of the Network Power business which is being divested. So there is no -- if you look at our Network Power business, which if you think about the business in that you have Liebert, you have Chloride, you have ASCO Power, you have Avocent, you have Anasys, businesses that we've had for a long time, or maybe acquisitions. That's the composition of the business that are being divested.

Those businesses will make up the Network Power business which is being divested and bought by Platinum today and run by Scott Barber. And then the Leroy-Somer CT business, which was what we call the odd industrial automation businesses that were left out with those businesses we've had for a long time, those are being sold to Nidek in a separate transaction.

So once we're down with that, the only business left that doesn't fit within our automation solutions business is our ClosetMaid business, which is a storage business we bought many, many years ago, did very well with. There's no reason to keep that so we're moving that out.

At that point in time all the businesses will fit in very nicely and have a lot of core strength between commercial residential solutions and automation. Maybe [Craig] come back, come in and see it some time and go through it and so you can see the two business segments and how everything fits together.

That's helpful. Looks as though that slide hadn't been updated because you still have data center thermal management included on the umbrella of the businesses.

Okay, okay. Because that's within -- okay. Okay, now I answer the question. You're right. Within the Helix, our engineering center, we actually have a cooling data center there which we're monitoring. From that standpoint, that was built in, obviously Network Power's part of this.

We'll work with them down the road to help them, but that's part of cooling but it was more of a compression thing. That's all it will be, and a sensing thing. That will not be a core part.

They do have that capability within the Helix today because our customers want to look at cooling, precision cooling, or humidity, whatever it is. That's nothing to do with business we're keeping. That's just within that engineering center there in Dayton, Ohio. Good catch, thank you.

Thanks for that clarification. Just the last question. I don't mean to spin you up but you did bring up the thought that there could be some of the business investment hesitancy because of political uncertainty. And how meaningful do you think that is across your businesses today?

I don't think -- from my perspective, in North America, I'm sure there's some hesitation relative to spending. Really, and you think about, it really boils down to the overall economy's not growing.

1% growth for the last two or three quarters or four quarters is not very exciting. And I think that that's created an environment where businesses are being very, very cautious at spending money.

Political environments around the world is more a function of what's going on in Europe, our elections here, what's going on in Japan. There's a lot of uncertainty relative to, from the government's standpoint, just what -- where the direction is the government.

Are we going to try to create negative interest rates for the world? Are we going to try to invest and grow the world? Right now, I see more of an environment where we want to create negative interest rates and give people free money and there's no incentive to invest. That's the only environment I see.

Got it. Thank you.

Okay. Thanks.

Shannon O'Callaghan, UBS.

Good afternoon, Dave.

Good afternoon.

Hey, just in terms of this June and July stuff with process, there's parts of the oil and gas world that seemed to be stabilizing during that period of time but other parts seem to be still getting worse. As you talked to some of the customers and took some of that feedback in June, were you able to make any sense of parts that were stabilizing versus parts taking another leg down?

From what we're seeing, what we saw, was clearly they're doing the maintenance, they're doing the turnaround situations, but they clearly are being told to spend less on it. And that's what we're seeing right now.

And from the standpoint of June, June's normally a very big month for our process industry because of all the turnaround situations over the summer months. And I think that our customer base that's got a little bit more cautious in that month and hopefully maybe they're getting through that period right now and they're going to feel they can go back to a little bit more of the normal pace we've been seeing.

June was such a shocker to us relative to how much they decided to contract. I think people are being super, super cautious and bosses are probably saying hey, we did it for $1 the last couple years, can you do this now for $0.50. I think that's what's going on this environment right now.

Okay. As you think about investing in the process business, both organically and via M&A, Emerson was a real trend-setter in terms of digital communication and asset management of devices, et cetera, and now there's a lot of activity going on in that space. Do you think there's anything you need to do differently there? Or do you still comfortable with the control platform and you just think you want to add more devices to it? Just give a sense s of where you think you are there.

From the control platform, from diagnostic, sensing, stuff like that, we continue to invest. We continue to buy technologies. We continue to do internal investments in those technologies, nothing real big in that space, as we continue to make sure we stay, keep a leading position as we go forward here. A lot of our investment dollars are still based in that space right there.

We will continue to look at acquisitions relative to offering a broader package relative to our solutions. So bringing more capability to the end market relative to the capabilities, both from control, from instrumentation, from valves, whatever it takes, measurement, out there. So we'll continue to look at trying to add to that capability.

But we continue to be a leading investor relative to your first question, relative to sensing, control and diagnostics. And we'll continue to do that going forward because we have no intention of losing that. So that's the fine line we walk relative to where we slow down our investments and we don't slow down our investments.

Okay, great. Thanks.

Thank you.

Christopher Glynn, Oppenheimer.

Thanks. Question on process. Dave, as you've seen a deeper trough manifest here, how does that inform your view of expectation for a steeper recovery at some point versus just the more absolute baseline reset?

My opinion is the deeper we go, the longer we stay down here, the faster the snap-back. I've been here once before. I saw it.

And so the longer -- the more pain you have, the better in the end. No fun having the pain upfront but the better it will snap back. So it's right now it's a deeper pain going down, a longer pain going down and that tells me one thing, that spending will have to bounce back at a faster rate.

Okay, that's it. Thank you.

Knowledgeable about this industry.

Steve Tusa with JPMorgan.

Hi, guys, good afternoon.

Good afternoon, Steve.

I think there was some cash over in like China or something with Network Power. What's happening with that? Does that go with to the buyer?

I think we worked out contractually a way to get that out of there over time, over and above some reasonable amount that needs to left behind. It's not a worry.

Okay, is that part of the -- this is just basically, this is an earn-out, right? Is what you've proposed with these guys?

No, no, no, Steve, Steve. When they buy the business they'll write the check for $4 billion. And then they're going to run the business and if the business does well and -- we've made a lot of investments in that business and you can see it's been progressing to come back. If the business does well and down the road if things do really well and they have a chance to sell the business or take it public or whatever they do with it, and there's an upside with their returns, then we have a chance to get a little bit more money down the road too, ourselves.

But upfront the day they take this Company, they're going to pay us $4 billion cash right upfront. So we get money. And typically we'll work the cash balances around the world. As you said, there are cash sits around the world and we will leave what we consider adequate cash for business. But the rest of that cash belongs to Emerson and our shareholders.

Okay. And just one last question on the cultural direction here. You guys walked through the website on the conference call which we've never really seen that before.

So obviously you're trying to put a foot forward when it comes down to the transformation of the Company. GE's got these commercials out there even though it's like literally 2% of sales for them.

I'm just wondering like how -- is there like something going on in the industrial world where there's -- is this an internally driven thing? Or is there some consultants running around with -- trying to pitch this story?

It seems like everybody is talking about IoT at the same time to varying degrees. What is your percentage of sales? Because I think you guys have a decent amount in software, better than the other guys. I haven't seen it before.

We have a lot there. We're not buzzing IoT. In reality, there's no consultant running around. I got Kathy and she's got a little minion here and she's right here next to her. It's a dynamic duo team right here. See, there's no consultants.

Why we did this today, it's very important. This webcast is listened to by a lot of our employees too. One of the key issues from our perspective right now, we're communicating to you, we're communicating to our customers and internally.

What's going on right now, our customers are looking for what are we going to look like, how's this thing look like going forward when we come out in October? So I asked Kathy to come in and to talk about it. There's no buzzwords here, we're very much into the internet of things. We have been involved in this for a long time, going back to the initial internet of things called plant web, which I used to present when I was running the process business.

So I think that it's just people like to talk about it. And we felt very importantly for you to understand and for our investors to understand. And then also for our employees to understand, where we're trying to take this in the next two to three months as we unfold this transaction.

Okay, great. Thanks a lot.

Thank you.

Jeff Sprague, Vertical Research.

Thank you. Good afternoon.

Hello, Jeff. Good afternoon.

Hey, hello. I just wanted to make sure I totally got the cash proceeds right. So the $4.3 billion to $4.4 billion net is after tax payments that you make and includes cash that you're repatriating as part of the transaction?

That includes the cash tax payments, Jeff, on the gains, on the taxable gains. There's another couple hundred million depending on what we decide to do on repatriation that we would incur.

We can bring a lot of cash home at a very low effective incremental rate. But it would be another couple hundred million of cash taxes if we bring home all the proceeds, as well as all the cash that was in the businesses.

It's real simple. $5.2billion of proceeds. We pay taxes on the transactions, some losses, some gains around the world. Wind up somewhere around $4.3 billion of cash sitting in our bank account that we'll use to do something with. That simple.

Is there any election, a 338(h) or anything like, that has some negative ramifications for you guys down the road?

No.

No.

And then just one last one, Dave. Your comment about the dividend and deploying the capitals and capital and bringing the cash flow back made sense. I wonder if you'd also, though, consider massive share repurchase to lower the share count and, therefore, lower the cash dividend amount? It seems like you could correct the imbalance that way if you wanted to. Is that something you would consider or not?

Not at this time. Our consideration is invest in growing the business again and not liquidating the business. So investment profile of the Board is such that we feel we have opportunities out there and we'll continue to have opportunities out there over the next couple years.

We've gone through a whole process here, saying where do we want to focus? So our focus is in these two areas here.

We're going to look to go out and buy assets and leverage those two businesses which are two very strong global profitable businesses. That's what we're going to do. I'm not in the mode of buying stock back and taking the Company private.

I'm thinking more further down the road. You suggested if you can't find deals -- (multiple speakers)

I would take the Company private. I would go out and borrow and take the Company private.

All right, got it. Thank you.

Jeremie Capron, CLSA.

Thanks, good afternoon. Question on the underlying sales trend. Do you have an idea of what it looks like, excluding energy markets? I see the huge contraction in Middle East, Africa and Canada here, but Europe and US don't look so bad. I suspect that if we exclude energy markets you should be running positive here.

We don't look at it that way because there's a lot of cross-correlations in there. Obviously the major oil and gas downturn in North America and Latin America and Middle East has definitely pulled it down. To be honest, Jeremie, we don't cut it that way. I don't have that capability of doing that.

But clearly they're down quite a bit. So I would say that there's a good chance if you start cutting out and looking at a smaller part of Emerson, you could say it's growing. But that's not how we think about it. I just don't see the numbers that way.

Fair enough. And you commented on the valuation of the Network Power deal. Any comment on the Leroy-Somer?

Okay. The price that we're talking about is $1.2 billion. We'll end up obviously, for there, we'll have less taxes to pay in that transaction. So we'll end up probably around, a little bit under $1 billion in cash when we're all said and done.

And in terms of the earnings multiple on that?

It's around 10 times. Yes, 10.3.

All right. Thanks very much.

You're welcome. Thank you. I want to thank everybody. We're wrapped up here. Again, I want to thank the organization around the world, in particular around the Network Power team and Leroy-Somer CT team, and the work, working with the Platinum folks on Network Power and Nidek on the Leroy-Somer CT.

I want to thank the organization. You had a very tough quarter but we'll get our way through this and we'll get on into the next quarter and moving on to the next generation of Emerson. So thank you very much, everybody. Appreciate that.

Thank you. This does conclude today's presentation. We thank you for your participation.