艾默生電氣 (EMR) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to Emerson's Second Quarter Earnings Conference Call.

(Operator Instructions) This conference is being recorded today, May 2, 2017.

Emerson's commentary and responses to your questions may contain forward-looking statements, including the company's outlook for the remainder of the year.

Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson's most recent annual report on Form 10-K as filed with the SEC.

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

Please go ahead, sir.

Thank you, Denise.

I'm joined today by David Farr, Chairman and Chief Executive Officer of Emerson; and Frank Dellaquila, Executive Vice President and Chief Financial Officer.

Today's call will summarize Emerson's fiscal 2017 second quarter results.

A conference call slide presentation will accompany my comments and is available on Emerson's website.

A replay of this conference call and slide presentation will be available on the website for the next 90 days.

I will start with the second quarter summary, as shown on Page 2 of the slide presentation.

Sales in the second quarter were flat on both a net and underlying basis.

The quarter results reflected a continued improvement in our served markets, as evidenced by March orders, which were up 4% on a consolidated trailing 3-month basis.

While the Automation Solutions platform remained down, power and life sciences markets remained favorable and trends in oil and gas MRO continued to strengthen.

Mid-single-digit growth in the Commercial & Residential Solutions platform benefited from favorable HVAC, refrigeration and construction-related markets.

All profitability measures increased in the second quarter primarily due to savings from restructuring actions taken in 2016.

Earnings per share from continuing operations increased 2% to $0.58.

On April 28, we officially closed the acquisition of the Valves & Controls business from Pentair.

Turning to Slide 3. Gross profit margin of 43.6% increased 50 basis points, driven primarily by cost reductions, while EBIT margin was up 30 basis points.

Earnings per share included a $0.13 impact related to the discontinued operations of Network Power, Leroy-Somer and Control Techniques.

Turning to Slide 4. Global demand conditions were similar to the first quarter as growth in the United States, China and Europe was offset by declines in Canada, Middle East/Africa and Latin America.

Turning to Slide 5. Total segment margin was up 40 basis points primarily due to benefits from restructuring actions.

Accounting methods, corporate and other, and interest expense were all lower than the prior year.

Operating cash flow from continuing operations of $601 million was down 5%, while trade working capital improved 50 basis points, led by improvement in DSO metrics.

Turning to Slide 6. Automation Solutions sales decreased 3% on both a net and underlying basis as spending in process automation remained at low levels but continued to improve.

General industrial markets were more favorable, resulting in growth in our industrial solutions products.

Power and life sciences markets continued their positive momentum and are expected to support growth in the second half of the year.

Order rates continued to strengthen during the quarter, which was evident in March orders, which were up high teens on an underlying basis.

MRO spending in energy-related markets continued to improve, particularly in North America, which was driven by shale and downstream customers.

Margin decreased 10 basis points to 15.5% primarily due to deleverage on lower volume and $12 million of higher bad debt expense related to Venezuela.

We expect the second half of the fiscal year to improve, with underlying sales trends turning positive, driven by MRO spending and small project orders.

Turning to Slide 7. Commercial & Residential Solutions sales increased 5% on both a net and underlying basis, reflecting strong demand in global air-conditioning and refrigeration markets and favorable conditions in construction-related markets.

North America, which was up 4%, was driven by solid growth in residential and commercial air-conditioning as well as favorable demand for professional tools by oil and gas customers and do-it-yourself products from big-box retailers.

Sales growth of 13% in Asia was led by mid-teens growth in China air-conditioning and refrigeration markets.

Margin improved 80 basis points to 23.7%, primarily from leverage on higher volume and savings from prior year restructuring actions.

A favorable outlook for global demand within our served markets supports our expectation for the platform to achieve mid-single-digit growth for fiscal 2017.

Turning to Slide 8. Based upon our first half results and an expectation of continuing improvement in second half order trends, we are raising our full year guidance as follows.

Net sales are now expected to be approximately flat, with underlying sales up approximately 1%, excluding unfavorable currency translation.

Within the platforms, Automation Solutions net sales are expected to be down 3% to 4%, with underlying sales down 2% to 3%, excluding unfavorable currency translation of 1%.

Commercial & Residential Solutions sales are expected to be up 5% to 6% on both a net and underlying basis.

Earnings per share are being raised to $2.55 to $2.65 from our previously guided range of $2.47 to $2.62.

This guidance does not include the impact of the recently completed Valves & Controls acquisition.

Our expectation for operating cash flow from continuing operations remains at approximately $2.5 billion.

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

Thank you very much.

Good afternoon, everybody.

First of all, I want to say that we did have a good recovery in the second quarter.

And from the performance level, based on what we discussed on the February conference call, we did slightly beat what we discussed in that call.

Orders for the 3-month roll were 4.5% positive in the 3-month roll for the quarter.

Sales were flat, slightly above what we thought they'd be.

Our op GP, gross profit margin, our operating profit margin, our EBIT margins were all up.

And yes, Automation Solutions margins were up underlying, but we made the decision to clean up potentially future receivable issues, primarily around Venezuela.

And we wanted to make sure that we're perfectly clean coming out of this quarter given what's going on down in Venezuela.

So we made that choice here in the corporate world to make sure that we had no risk relative to potential receivables in Venezuela.

So we made that decision, and we did hurt the margin by 50 basis points relative to that.

From the EPS standpoint, I said that the EPS would be most likely slightly down or, at best, flat.

We did beat slightly our EPS last year.

Our free cash flow was stronger and exceeded our earnings by over 100%.

So a very good quarter, and we have momentum.

As we look at the current order pace, and you remember the blue band that we laid out in February in our presentations, from the standpoint of that blue band, we're now running above the blue band.

It doesn't mean we may not drop back down below the blue band or back in the blue band, and that was a chart that you did get.

You did get that chart.

So don't accuse me of not giving you that chart.

You did get that chart.

We are now running, as of this month, the current month, in the 5% to 6% level underlying orders.

So our order pace continues to do better.

We're starting to see the mix change between shorter-term cycle orders and some medium-cycle orders coming in.

So it will mean that obviously, we're going to start building some backlog as we go forward here in the coming months.

The other thing that you'll see in the third quarter, and I want to talk very openly about the third quarter, we would expect our underlying sales in the third quarter to be up 4% to 5%.

We'd expect our operating margins, the performance at the operating levels, at the operation businesses, up for the quarter.

The big issue that we need to discuss so people don't get carried away is, from the standpoint of the corporate cost this year, we had an artificially low corporate cost benefit last year by the tune of almost about $30 million from the standpoint of things that we -- onetime benefits we got last year, from a Byrd Amendment benefit that we got.

It was a dumping duty that we got a sudden payment, from pension, from other actions.

This year, we're going to be having -- our corporate costs will be over -- I think, on the OID level, will be over $100 million.

It will be higher.

So therefore, we're going to lose a lot of money at the OID level, primarily -- from last year it was $40 million to over $100 million this year.

And it's driven around a couple areas.

It's driven by that we now are booking some of the costs from the acquisition of Pentair Valves & Controls.

We will not have the benefit of the Byrd Amendment this time.

We will have also the incentive comp because, other than today's stock price, the stock price has been doing pretty well.

So we're -- because of the stock price rise, we have a benefit of that.

And with the pension accounting rules changes last year, this year, we have over $10 million of incremental makeup versus last year.

So from the corporate standpoint, we're going to lose some of the benefit from the operation running much higher.

So underlying operations will see sales up, profits up nicely, margins up.

And we will -- I'm telling you right now, we will be, plus or minus, flat, $0.01 or $0.02, flat from last year's EPS.

Our upside, in reality based on the order pace we're seeing right now, resides in the fourth quarter.

We did slightly better than our plan in the first quarter.

We did slightly better than our plan in the second quarter.

We've always felt that we'd be kind of flat here in the third quarter.

And I mean it because of the corporate costs.

Underlying sales will be up, but the corporate costs are going to offset that.

And then the upside, we'd see, as we look at the fourth quarter, if underlying sales continue to move nicely and we continue to see that margin expansion, we should see a pretty good EPS growth, earnings growth in the fourth quarter, giving that range that we talked about, most likely in the $2.55 to $2.65 range, looking most likely around that $2.60 range, plus or minus, to me, $2.62, $2.59.

That's what we're looking at right now with a good fourth quarter.

And it's because of what we saw -- we had a unique benefit last year in the third quarter around operations.

But operations right now are starting to see good underlying growth in the 4% to 5% range.

Good, where I say operating earnings growing up in the 9% to 10%, 11% range, and we have to get through this 1 quarter here relative to the corporate issues, which we face.

So underlying -- from our perspective, right now, the operations are running well.

And I look for a strong operating quarter, and then I look for a really good strong operating quarter in the fourth quarter and a good close to the finish of the year.

So people may think that the numbers aren't moving as rapidly as they want to, but they need to look at behind the curve.

And if you see the underlying performance of the company right now, it's clearly on a very good path.

Our order pattern is very good, and we're ahead of what we thought we'd be in February.

We're ahead of what we said in the conference call last time.

And I feel very good about where we see right now as we go into the second half of the year, as we go into the last quarter of the calendar year and from that momentum standpoint.

So that's where we sit at this point in time.

The only last comment I would make around the world as I look at the world, because someone will ask me, I see right now our North America business has continued to improve, and we see good growth coming in North America now.

Order pattern in North America has been very good and continues to improve.

I continue to see improvement in China and other parts of Asia, very strong growth in that part based on the product lines and the customer base we have there.

I see good momentum continuing in Western Europe.

Eastern Europe and Russia has not really recovered much yet.

I do not see much recovery at all, and I still see a negative in Middle East/Africa.

I still see concerns in Latin America.

I do not see that recovery happening there at that point in time.

I'm starting to see some benefit in the early stages of the MRO and in early stages of sort of uptake in Canada.

So most of the markets I see right now, driven primarily, right, U.S., China, Asia and Canada are coming, and Western Europe, those are the markets doing well at this point in time.

We'll talk a little bit about the Valves & Controls that from the perspective of where we sit at this point in time.

We've owned it now for 3 days.

It's very good to get through.

We're doing a lot of actions.

It's very early to tell what we're going to see at this point in time.

As we've said, back in February, we were going to have some earnings dilution, and from that same standpoint, we still believe there'll still be slightly earnings dilution.

We only have 5 months now versus -- we were planning on a little bit more time.

At that point in time, we're probably -- at that point, we're probably talking about 6 or 7 months.

So it's still earnings dilutions.

We will try to give more clarity around this as we start analyzing where they stand relative to their sales, their profitability and so forth.

So they're still slightly earnings dilution around the incremental restructuring, some of the amortization.

And so still, that's not different than I've said before.

The onetime purchase accounting, which we really are going to have to spend a lot of time on, that number is going to be less than we said before.

I think we told you in the price in the backlog, and we look at the purchase accounting, it's going to be around $0.25 to $0.30 per share.

It's probably most likely going to be half of that -- maybe not quite half of that.

But we need 4 or 5 months to work on that issue and to get that done.

And then we'll come back out and give you some clarity around that.

From a cash flow standpoint, given it's only 5 months, we might have a little bit of positive free cash flow.

It's really relative around how much restructuring we can get done in the next 5 months, and we're just starting.

So we have less cash and less earnings.

So therefore, restructuring might eat up some of the cash flow and the earnings there.

But hopefully, we'll still have a positive free cash flow over the 5 months that we own the company.

Fundamentally, long-term trend hasn't changed.

It's just that we owned it for less -- we have less time, and we've got to get our arms around it.

And as soon as I give you some more clarity or I feel I can give you more clarity around it, I will.

But it will be slightly dilutive in earnings per share, actual earnings, with the incremental restructuring and the amortization.

It will -- we'll have a onetime hit because of the purchase accounting.

And then we'll set out the numbers as we go forward.

But still a very good, fundamentally, deal for us.

We're acting on it.

And hopefully, the cash flow will be slightly positive for the year when it's all said and done.

But nothing different there except maybe probably another $0.01 or $0.02 dilutive in the year because we have less time to manage from a restructuring standpoint and a benefit standpoint.

That's where we sit.

Very excited about it.

If any of the Valves & Controls people are on the phone, we're looking forward to working with you.

It's an exciting acquisition, joining a very strong Automation Solutions business.

And we look forward to working with you and with your customer base and our customer base and really realizing both the growth synergies and some of the opportunity synergies.

So a really exciting opportunity for us and from that perspective.

With that, I'll turn it over to the open line and let people ask questions, and feel free to make comments and any questions you want.

(Operator Instructions) And your first question will come from Andrew Kaplowitz of Citi.

Before I make a comment, I got -- I ask -- I'll also make a comment that this might be Rossman's last conference call because I'm looking for a position for him in some place out there.

So if you guys have any ideas, please call me.

But, no, seriously, seriously.

He has -- running his tape.

And with all the new positions, I'm serious on this, he is -- his name's in play right now, so he may not be on the phone call ever again.

I might be soloing it with Frank Dellaquila here.

So that's a real scary thought that Frank and I are going to be doing Investor Relations, with no one to cover for us.

But that's just one -- I forgot to make that comment.

And, Craig, I know he's laughing.

He doesn't know it yet, but his name's in play.

And it's a fun situation.

So that might be the last time you get to talk to me about this, my friend.

Okay, first question.

Go ahead.

If we've got some opportunities for him, so we'll take care of him.

Oh, you do?

Good.

Okay.

Can you give us a little more color on your Automation Solutions margin?

Just to clarify, you don't see any more risk in South America, but even if we exclude that impact, your margin was down sequentially with rising sequential volume.

Did you see -- I know you talked about, at the Analyst Day, higher inflation pressure versus price.

Did you see that or any other impacts in the quarter?

No, it's nothing to do with that.

It's nothing to do with that.

It's all about -- that's a currency impact from the standpoint -- in the first quarter, we got a benefit of -- we have long-term contracts with customers that are priced in dollars on projects.

And even though the business may not have a lot right now, but we still do.

And the way the dollar moves in some of the pricing of these transactions, it's all function.

We got a benefit, and it went against us this quarter.

Next quarter, it could be positive.

That's why sequentially, they had a problem.

It's nothing to do with operations.

Not to do with price-cost.

So it's nothing to do with that.

It's a form of currency, which as this business gets this flow from time to time.

So that's all it is.

It all works out by the time -- in the year, typically.

Within 12 to 14 months, it all flushes out.

That's what the issue is.

Operationally, the margins were up...

17.1 we're at 18.6.

Yes.

So it's a good margin for the quarter.

Do you think that the margins there could still do 17%, 18%?

I think that's what you talked about at the Analyst Day for 2017.

Yes, I still think -- in fact, it's profitability right now.

So we gave a -- right now, from the standpoint -- you're talking operating or EBIT margins?

You're talking EBIT margins?

EBIT, yes.

Yes, so I think these businesses will beat the number -- yes, it will be the fourth quarter.

I think because it -- those businesses are starting to tick up.

They're going to have underlying growth in the third quarter.

Their margin's come in, so my fundamental belief right now is that margin will be better than we presented to you in the Analyst Meeting.

So right now, we're looking at probably -- from the second to third, we're looking at -- or in the third quarter, we're looking at -- we're over 1 point of margin improvement in Automation.

And probably the fourth quarter, we're looking at close to 2.5 to 3 points of margin improvement.

Overall, for the year, we're looking at over 1 point.

And so we're looking at slightly higher margin than we told you as we go forward here in the rest of this year.

So they're starting to come forward.

The tension will be -- for these guys is where they start investing.

And from my perspective, I want to get back above a 17-plus percent EBIT margin as we finish the year in Automation Solutions.

So my impression is try to get to the midpoint of 17s by the endpoint of this year for Automation Solutions.

So I'd expect us to see continued improvement, sequential improvement and year-over-year improvement in margin in the second half of the year for Automation Solutions.

Okay, that's helpful.

And then, Dave, underlying sales in North America were down 2% in your second quarter, but orders were up in March.

I think you said mid-teens in North America, led by oil and gas MRO and turnarounds.

It seems like you saw a decent inflection in North America in March.

Have you seen that continue in April?

And then if the kind of growth you saw in March could continue, could you see some upside?

When you look at the second half of the year, I think you're guiding to modestly up organic sales in Automation Solutions.

That's what's implied in your guidance, anyway.

Yes, I think that -- and the answer is yes.

In April -- I did tell you that April was stronger orders.

North America has continued on a very good pace in recovery.

We're starting to see -- including Canada now.

And so Canada has started to pick back up, which is a good sign because Canada's been very negative.

I still think they'll be negative for the year, but they were actually starting to see that.

The point, again, I'll repeat, the place we see the improving strength is U.S., Western Europe, China, the rest of Asia, including India, and a little bit of improvement in Canada, I think I said.

But to the rest place, Latin America, Middle East/Africa, Eastern Europe and Russia, we're not seeing improvements yet.

But the key core markets have all started a trend line very strong and have the data points, have been continuing to map along.

Hence, when I made the comment that we're above that blue bar that I presented in February, we now have, I think, 3 months in a row that we're above that blue bar.

And including April, which I haven't -- we haven't put out, but I -- that's where I see it right now.

So the trend line is good.

The mix of business is good, but I -- keep in mind, as I said, in Automation Solutions, as this order pace goes into the 5%, 6%, 7%, 8%, 9%, 10% range, you're starting to see more medium-term and longer-term projects get into that mix.

The MRO is still going to be good, but I still have project mix such that I'm building a good foundation for 2018 at this point in time.

That's where we sit.

The next question will come from Scott Davis of Barclays.

You got any opportunity for Craig Rossman, Scott?

Craig, it's been a pleasure.

I have no opportunities.

In fact, if you're hiring, maybe I'll come work for you.

All right.

Well, now that we have that going, let me bust your chops a little bit, Dave.

What -- give us a sense of what the early -- now that Pentair is closed, the Valves business is closed, I mean, what's the playbook that's different from what the previous 2 owners did?

I mean, neither one of them seemed to really be able to make much out of this business.

You guys have probably more customers in common than they did, for sure.

But is it more of a cost issue?

Is it marketing and sales?

Is it all the above?

I mean, what's really, you think, the playbook that makes this work for you guys that didn't make it work for them?

There's a couple big differences here for us.

One, we are the largest and broadest Automation Solutions house in the world, as you all know, right now, from the standpoint of the systems, the flow, the measurement and now the final control.

We are also a business that's very, very global, where we have as much presence in every region of the world, be it Asia, be it in the Americas, be it in Europe, be it in Middle East and Africa.

We are a business that actually had driven off a technology that we can pull into play into the new world, somewhere around the digital work at that point in time.

We are a business that actually have more mechanical and electrical leverage relative to procurement than anybody that's ever owned this business before.

We are a business that have a customer base and customer reach, where they bring a different customer, but we also bring a different customer.

And we are involved in larger projects, where we can bid on big projects of $100 million, and we can pull all the package along, which they could not do [the drawer].

So we actually have a lot more to do, both from a cost standpoint.

But the most exciting part of this is, from our customers' standpoint is we now will have a broader package to offer up on the projects, both medium and large.

And then also, we could do all the service in the aftermarket, which they really didn't have enough critical mass.

They have a good start, and I have to give credit to Randy and his team.

They started this, but they just didn't have the critical mass that we have.

I mean, if you look at the shift in our business and how we were able to protect our profitability in the downturn -- I mean, our business went down just as hard as their business, maybe theirs a little bit harder, but we protected our margins.

Our EBIT margins in our Automation business bottomed out, what, in the 15%, 16% range.

They got down single digit, and that's because our aftermarket or what we refer to as our MRO 3 business...

KOB3.

KOB3 business, I'm sorry, KOB3 business got up to over 50% of our sales in the downturn.

That's the difference.

That's their game plan.

And the customers, are they generally fired up to have a more, I guess, intimate player in the space own the asset?

Yes.

They're very fired up.

There's a couple of reasons.

One is the function that we actually can support them on the total project, so what I refer to as one throat to choke.

So they have one player to go after, which is -- [might train] in the automation space.

And it's like one of the service thing.

And the technology and the on-time delivery.

Those are all very important to us from the standpoint of how we manage our business.

And we are much more regional.

We play a regional strategy, where we manufacture in the region versus more of a less export-driven strategy.

So yes, they're very excited about it.

And I'm pretty excited about it, too, if you haven't figured that out.

Well, good luck.

If you can make it work, it's going to be a home run for you because you got a good price.

So good luck to you.

Our next question will come from John Inch of Deutsche Bank.

So how much of the $30 million of Byrd and other things you talked about, Dave, were a comparison for the second fiscal quarter?

Or was that for the year?

Just a little more color there.

The third quarter is an unusual year.

If you look at our historical -- other income deduction -- our corporate costs, just look at corporate, the third quarter last year was very, very low.

It was down in the $40 million range.

And historically, we're more in the $60 million, $70 million range.

And now this one was going to be higher because we're bringing the Valves & Controls in, and we have some of the stock price and things like that.

So it's a weird comparison.

Underlying performance of the company is very, very strong, and the margins are expanding and cash are expanding as we go into it.

I just -- I have the big upset -- $60 million, we have to offset in the third quarter, which -- it's a fact.

I mean, I can't hold my breath and have it go away.

It's there.

Okay.

So was any -- maybe this is a question for Frank.

Was any of this relevant to the second quarter as we look at the numbers year-over-year?

No.

No, not really.

Just the bad debt.

But that's back -- pushed back at the operational level.

We pushed that back in there.

That was the only -- Frank?

In corporate, there was no significant delta year-over-year in corporate in the second quarter.

This is the first time I've ever had to tell you on this.

I mean, when I looked at the numbers, it was the biggest one I've ever seen.

Right.

Can I ask you then about the sequential margin?

You gave, I thought, a pretty good answer on sequential margins in Automation Solutions.

I did want to ask, though, if you look at the MRO, right, you had said last quarter MRO was picking up, and that seems to be evident based on growth rates, especially in the U.S. MRO has got to be really rich mix.

Is there some reason that the EBIT margins, Dave, you put up in Automation Solutions weren't a little bit better in the second quarter given the follow-through of MRO and the associated rich mix?

Or is that still on the come?

Well, I think that the North America sales were not -- I mean, hadn't really turned around yet in -- for the whole quarter.

And so we started seeing it significantly in March.

The other issue people forgot, and we -- if you remember, we had a very, very strong fourth calendar quarter, first fiscal quarter this year in Automation Solutions.

And a lot of that was that pent-up demand of MRO that came through, and then it did drop off a little bit.

And now it's starting to come back at a more flowing basis.

So we just had a couple months there it slowed down, and now the MRO is coming in.

And the core profitability of the businesses is very good right now, and I expect it to continue to be strong and sequentially get better.

So we're in a sweet spot.

And the orders now are being fairly consistent from the global markets with 5 months of pretty good North America orders and things like that.

I think that it's on a run.

It's a good run.

Did you say in your commentary you thought the fourth quarter of Automation Solutions was going to be up -- did you say, what, 2.5 to 3 points?

So that gets it close to 20...

Over last year, yes.

Over last year.

So that's going to get it close to 20% in the fourth quarter, and that's based on all the...

It's not uncommon for us.

I mean, we are a profitable company in Automation Solutions.

We actually do run 20% margins.

Yes.

No, no, I just wanted to make sure I heard that right.

And that's -- I mean, that's in lower -- I mean, you think about the sales will be up, but from the standpoint -- they're starting to kick in, and how much additional cost we bring back in, we're going to time this.

I want to have -- I want our profitability to get back to some good levels before I bring in too much additional cost.

A lot of pressure on us right now to put money back in, in some technology and things like that.

But I'm -- I want to get the margins going the right way for our shareholders.

Just lastly, Dave.

This mid-teen order growth that you put up in Automation Solutions, is that -- how to think about that?

Because the MRO business ultimately didn't drop, say, as much as rig counts and stuff like that.

It was dramatically less.

Is that sort of a normal bounce you'd see, and that's kind of a growth rate that's going to peak but hold?

Or does it get better?

Or are you a little surprised at the mid-teens type of number you've put up recently?

No, I think I've mentioned to people before, on the road and out talking to people, I'd expect us to have some quarters just in 15%, 16%.

I expect to have some -- not quarters but months like that.

I would expect us to see, even the rest of this fiscal year, some 10%-plus, 15%-plus type of orders in certain marketplaces on Automation Solutions.

I mean, if the industry is truly starting to turn back and to invest, both in, first, the MRO and then into the small projects, then our order pattern should be -- it should build.

And I mean, as someone asked me on the road a couple weeks ago.

I mean, I wouldn't be surprised if we don't have underlying orders from Automation Solutions north of 10% by the time we get into that 3-month roll, by the time we get to September.

So it's not uncommon.

And coming off a hole, and as you well know, we had a couple quarters there -- a couple years last year -- or during the up-cycle last time, not last year, in the up-cycle, where we were growing sales 12%, 15%.

So I think it's possible.

Just as possible we could have a negative in a month.

I mean, it's -- this is a volatile space right now relative to this market turnaround.

So I think the trend line is good, but don't be surprised if there's some volatility in the month-to-month type of stuff.

Because of projects?

Is that why it would go, all of a sudden, negative?

Yes, yes, projects, yes.

You win a project, you book a project.

I mean, yes, projects.

The next question will come from Julian Mitchell of Crédit Suisse.

Maybe just a question on capital deployment.

Now that V&C has closed, you did a bit more of a buyback in the March quarter than you'd done in the second half of last year.

And obviously, looking around, there was a discrete automation acquisition of some size elsewhere during the last few months as well.

So I just wanted to see what your latest thoughts were on the scope for doing M&A over the balance of this year?

Or if buybacks are more preferable near term.

We -- no.

We continue to bid, aggressively bid and go after the Automation Solutions acquisitions and also commercial/residential.

We obviously were not successful in one of them.

The intention would be is we are still -- we still would like to see if we can get $500 million, $0.5 billion of acquisitions.

I'm not sure we can at this point in time.

We've talked to the board about share repurchase being in the $300 million to $500 million level, and that's where we sit right now, and there's nothing changing that.

We're out working acquisitions.

The opportunities are there.

And the question will be around can we -- is there something that we can land in the next 5 to 6 months?

If not, then we're going to probably be driving our share repurchase back into that $300 million to $500 million level.

We've only done, I think, about $100 million this year, correct, $120 million this year.

So we have some upside there.

Understood.

And then just my second question would be around that notion of what sort of price leverage you think you can get now that volumes have started to come back.

It sounds like you think volume growth will accelerate.

How are you thinking about pricing and capacity in your industries?

What your competitors are doing on price over the next sort of 6 months?

I still think we're in a price-cost window right now that's not good, as I've said the last couple quarters.

I think underlying material inflation and component inflation is to the point that it's increasing.

Our pricing power will solidify as we go through this, the next couple quarters.

But as I look at the first quarter we've done, I think we are probably pretty neutral, maybe slightly red.

I don't know, Frank, what the final numbers were.

I would expect as we close out this -- as we've just closed this quarter out, we'd be slightly red.

I would expect us to be slightly red again.

This is between price-cost in the third quarter, and we'll start pushing -- we're pushing pretty hard.

And hopefully, we can close that to neutral to slightly green by the fourth quarter and clear it by the first quarter.

So we're in that phase right now that we're pushing hard.

Our material costs are working against us.

And so that price-cost volume is working.

But we've gone through this phase before, and I expect by the time we get out of this calendar year, our price-cost ratio will be slightly green or neutral.

So we're back into the sync.

Other -- we've had to offset that pressure with other cost reductions across the company.

The next question will come from Gautam Khanna of Cowen and Company.

So just to follow up on Julian's question.

In the recent project bookings, are those -- have you seen much price erosion if you compare them to what you might have priced these at 1 year or 2 years ago?

Or are these, in fact, accretive to kind of that view of price cost coming back 2 and 3 quarters from now?

Thought it'd be interesting.

There's not a whole lot of big projects going on out there at this point, they're either small or medium-sized project, and the pricing of those are in line with what we'd expected from a price cost standpoint or margin standpoint.

There's nothing unusual here at this point in time.

The bigger projects will be more late '17, most likely into '18.

And that would be a more relevant time period to really discuss what we see in the pricing.

Right now, you're -- people are looking for speed.

They're looking for trying to execute on -- a lot of times, their prices have already been approved, they've already been spec-ed out, and awarded, and now they are going to dust it off.

So it's a little bit early stages to see what the pricing is on the big projects.

And just switching to C&RS, very strong growth for a couple quarters now in China.

What do you -- what's the duration of this kind of upturn we're seeing there?

And if you could just expand on what actually explains it?

Relative to China, historically, I never look beyond 12 months on the surge of growth.

Because then it has a tendency -- then it sort of swings back.

What explains it is, is the new technologies we have around our cooling, our air conditioning, around our refrigeration and some of the new products, the new technologies and so they're trying to focus relative to the environment and trying to clean air and trying to get rid of some of the coal-fired boilers and things like that.

We have technology that we had worked with the Chinese government.

And those projects are unfolding.

And we're one of the major supplies -- there's other suppliers, but we are one of the major suppliers in the China government that has a big focus on this, and particularly in the Northern Asia -- or northern China spot with trying to clean up that pollution.

And this is going to take a couple years.

My gut tells me that we'll have a big year for 12 months this year, over a 12-month time period.

It will die back a little bit.

First of all, the comparisons will be tougher.

But the programs are not going to die when we get into 2018.

They will be just less of an impact.

They're coming off of obviously a higher base.

But right now, it looks like the projects will continue, but the growth rates will slow.

But they'll still be at high levels.

The next question will come from Deane Dray of RBC.

Could you just, for clarification, on the Venezuelan write-off, Dave, you made it sound like it was discretionary or maybe the timing was.

But could you just provide some color there?

We had cleaned up some of the receivable base and asset base last year with the continued deterioration of what we saw in Venezuela since before even things happened with the GM situation here.

We decided that it just -- we got to assume we're not going to get anything back for these assets, and we decided just to take care of it, receivable, so...

This is just reserving the receivables, the remaining receivables we had on the books down there, [get apace of it.]

Yes, that's all it is.

Got it.

And then on -- back on Automation Solutions, you don't often talk or call out, especially in the same sentence, power and life science markets continue to be positive.

So what are the key drivers there?

Well, the power industry is investing and upgrading from around -- if you think about the -- some of the gas industry, you think about using less coal, they're looking at some of the newer technologies to allow the plants to run more efficiently with some of the changes coming out of the EPA.

I think this will continue to work nicely for us in the North American marketplace.

And we're seeing continued power investments throughout Asia Pacific and even parts of Eastern Europe, we're seeing some power investments.

Now life sciences have gone through a period here where that -- if you follow the life science marketplace, we're seeing and have been now for over 12 months an investment period, where they're bringing new drugs in, they're bringing new facilities in, and there we get -- obviously the control systems, we get some of the expectation.

And that's been one of the bigger project area for us.

And we've been -- we're doing quite well there.

Now they're smaller type of projects, but they're still good projects.

And so we're seeing that investment both in Europe, North America.

And we're seeing a lot of investments going on in Asia, both in India, Southeast Asia and also China as they're all trying to create their own life science pharmaceutical industry.

Got it.

And just last question from me would be, we haven't heard any updates on this.

So figured I would ask.

Anything from the 15% stake in Network Power that you're still own?

They've only had it for a little while.

I mean, I think -- no, I mean, I don't think anything is going to happen there for a while.

I think they'll -- historically, I would say it'd be a couple years before anything happens there.

I think something will happen relative to our Artesyn investment before anything relative to Network Power because that's been getting close to 4, 5 years now.

So nothing there.

I mean I wouldn't expect anything out of those guys yet.

No, I was asking in terms of its contribution.

We don't get any contribution.

That's just a net -- we don't getting any earnings or sales off that.

Earnings, no.

It's not an ownership stake.

No, it's just an upside stake.

Upside on the back end.

If they do something well with it, yes.

If they do well with the investment, ultimately.

Yes.

The next question will come from Jeff Sprague of Vertical Research.

Nice to see the MRO turning.

Dave, can you give us a little bit of color on actually how V&C performed in the quarter?

I know it wasn't yours, but any color on revenues...

No, I don't have any idea.

I have no freaking idea.

No.

I mean -- no.

I mean, maybe you [file a plan there], you can look at it.

But no, I mean, how they performed -- I mean, I know where they are relative to the sales.

I know a little bit of the orders.

I know the profitability is down.

But they've been in disc ops now for what, 8 quarters -- 8 months, 8 not -- 8 months?

Yes.

So from my perspective, I'm looking at from May 1 on, that's what I'm caring about.

And we're working it hard.

So we'll talk about them.

I think that the timing is going to be pretty good because I think, within a couple quarters, we'll start seeing some improvement in orders and stuff like that because the marketplace is starting to turn.

And just thinking about how this rolls through your P&L here.

Your guide excludes it, but obviously, we're all going to have to kind of model, trying to get this in.

The dilution that you're thinking about for fiscal 2017, I would assume we see a sizable hit here in the Q3 and then -- I don't know does it go -- does it end up being a little bit of accretion in Q4, getting you to the slight dilution?

Or how do we just think about the staging of that?

I think it's going to be slightly dilutive for both quarters on just a pure earnings basis, excluding the one-time accounting changes, which we'll have to start booking in the third quarter.

So most likely, we'll have a onetime booking in the third quarter.

We may have to true it up a little bit in the fourth quarter as we get some more knowledge on it.

But the underlying earnings, I mean, if we're looking at -- it's going to be a little bit in the third, and a little bit in the fourth.

I mean, we'll do our best to estimate the onetime purchase accounting, but it'll roll through the P&L over the balance of the year and potentially a little bit into next year as well, and we'll call it out.

But I mean, it's basically the backlog and the inventory that has to roll through.

Yes.

So we'll -- as soon as we -- I mean, this is something that takes a little time, and this is something we could not actually do -- that we had to stay away from it.

And so it's really easy for us to look at earnings and look at just what we have to charge from an interest cost or a charge from amortization and things like that or intangible, and we can figure those things out pretty quickly.

The inventory and the backlog will take us several months.

I mean, it'll take us -- I mean, we'll take an estimate in the third quarter and we'll take another estimate in the fourth.

And hopefully, by the time we get to the end of the calendar year, we get everything trued up.

Well just to be clear then, Dave, this $100 million Q3 OIOD does not include Pentair one-offs?

No.

Correct.

The OIOD we have in there for the valves for that piece -- and we'll have some more in the thing -- it's basically deal cost, it's paying cost of doing this deal, legal fees, banker fees, other things like that, we've had tied to that.

Now that we've closed the deal we can run through the P&L, and we'll have some more running in the fourth quarter, too.

That's what that is.

It's nothing -- there's nothing in there other than what we have that we, Emerson, expended in getting this deal closed.

We'll bring in...

That's what I am trying to get at.

Yes, that's true.

So, that's true.

Those bankers fees and stuff don't repeat in the next year or so, I mean, just trying to think about what the real run rate is for OIOD ex the amortization step-up.

Do you have an idea?

Yes, nothing yet.

We'll have to work on that for -- I mean, we're working on it ourselves.

And we'll work on it for you, too.

But the banking fees we'll call out, I mean, we'll have some more in the fourth quarter, we'll do the same thing.

But I mean -- I meant the third quarter.

Third quarter.

So we'll try -- we'll keep you informed.

And then they will be delta-ed out obviously, unless we have some other transaction going on for the -- you won't have that impact next year.

And then just one final unrelated one from me.

I don't think you're suggesting this, but we've heard from some other companies that maybe there's been some over-restructuring in some places.

And now there is a bit of a scramble to kind of catch a demand inflection.

You see anything like that in your business?

Or any down a supplier or 2, down a tier or 2?

Any issues?

No, no, no.

I'm not trying [to round] anything.

No.

The next question will come from Robert McCarthy of Stifel.

I guess, the first question would be in terms of the information on Pentair, should we expect -- kind of following up on Jeff's point, should we expect something pretty definitive at EPG, kind of walking through some refinements of what you've seen and how you think it's going to stage out over the next 18 months?

I mean, we'll then -- by telling you at the EPG, I'll have 3 weeks, so I'll get a sense for a little bit of the business, okay.

And so what's going on inside the business.

And right now, we have a lot of work going on trying to bring the 2 businesses together.

And that's far more important than pulling together stuff to put on a chart.

And then I will give you -- relative to the inventory, relative to the backlog, that information will take us several months, several quarters to finalize.

Relative to what we see from the P&L, the sales and the earnings, then I think we'll have a better feel, I can give you a little bit better range then after 3 weeks.

So that one we can do.

The big number, which is the onetime accounting impact, that's -- we're going to take our first stab at that relative to the third fiscal quarter when we close it.

And as I told you, it's going to be a little bit less than I told you in the chart we gave you in February.

And hopefully, we can get that down even further as we get through it.

But it's a function of what the inventory looks like, a function of the backlog.

And those are things that we have to get in and do all valuations on.

Following up on Scott's earlier question about kind of big customers or channel access, I mean, the obvious point here is perhaps, in the past, the Valves & Controls, the final controls business has been effectively blacklisted in some countries.

And obviously, you're not.

So could you talk about the opportunities on the revenue side, perhaps in Saudi or Middle East or Russia that are just probably more self-evident for you than Pentair?

On the big projects, and we can work with -- from the countries it struggled with and concerns with -- you call it blacklist, and I call sometimes the customer is not quite accepting of some of them.

We can work that issue.

We obviously have great relationships in -- we have a very strong Middle East business.

We have a very strong Eastern European and Russian business.

We have manufacturing in all those sites.

From our perspective, right now, we're starting to bid.

In fact, the Pentair team allowed us to bid on several large projects even before we owned them, and we bid in one on the total package.

So we are going to continue to bring them into markets they were not maybe very welcomed or strong in.

And our organization is very strong globally.

We have better customer relationships, and we have access to big projects because of -- being driven by systems or control, or whatever it is, we can go in and talk to customers.

So I think that's going to be something that we can work pretty quickly over a 2-month -- not 2-month -- 2-year time period, and get them back and engaged, but we need to work on the regionalization and the manufacturing and that supply base so they can make sure they can deliver quickly and support the projects we're winning.

Following up on Julian's question around M&A.

Clearly, and maybe expanding it beyond the initial kind of fiscal '17, but suffice it to say, some of the large properties in automation, it looks like the ship has probably sailed there, at least in the near term.

But could you talk about maybe on the Commercial & Residential Solutions side, I think I was tantalized by some comments you made about maybe getting more into industrial compression.

And obviously, there's some assets out there.

But could you talk about what could be the M&A strategy on the Commercial & Residential Solutions side in terms of what kind of properties?

I mean, I don't think the sale is clearly -- or the ship has completely sailed on the Automation Solutions side.

I think there are opportunities out there.

You're always working projects.

And maybe some of the big, big ones that won't want to happen.

But there are projects out there all the time that you can work on and we're working on some of them right now.

The Commercial & Residential, I think that we'll continue to focus on the application, the software and the measurement censoring side of the business, which really is core to us to deliver, what we're calling the -- sort of plant web of the Commercial & Residential area, which is that industrial Internet space.

So there's some unique assets out there.

Nothing what I would say are large.

A large deal there could be $600 million, $700 million.

But there's -- I think that we're going to continue to buy some software sensor-based acquisitions there and continue to integrate the businesses.

As you well know, it's doing well right now.

We're in the mix of a major global upgrade and upgrade and investment in the capital and delivery capabilities of that business.

We're starting to see some -- as you could see from the profitability standpoint, Bob and his team are doing a good job of leveraging that new cost structure.

And I think we still have opportunities here through the rest of this year going into next year.

So I think the opportunities are out there for us.

It's just a matter of finding the right ones and then getting them on board.

There will be typically, less competition in that space.

The next question will come from Rich Kwas of Wells Fargo Securities.

Since Wells Fargo has got a big position here in St.

Louis, you got any opportunity for Craig?

I'll look.

I'll scout our Internet page.

Go ahead, Rich.

Fire away.

So on orders for Automation Solutions, you talked about a transition to midsize projects and eventually to larger projects.

I know it's early, but as we think about the mix of the sales coming through, it should be pretty healthy, I would imagine, the rest of the fiscal year.

If you could think about '18 from an incremental margin standpoint, would you call out anything right now that we should consider from a mix of the projects within Automation Solutions?

Still a bit early there, Rich.

I mean -- as you know, I watch this pretty closely and can -- that's why I can give you sort of the background and the color into it.

I'm already starting to see some of the projects that had been shelved and iced 2 or 3 years ago come back out.

Those medium, small projects.

So in the early stages, as you saw the orders pick back up, we were starting to see the book to ship in that base business pretty quick.

And so my feeling right now, as I see that order mix and then it changes, as we shift into order, positive growth is going to be there.

But let's say, their order pattern is going to be around the 6%, 7% underlying growth rate, I think they're going to be more in the 3%, 4% real sales growth.

I think that -- as they start building that backlog.

But it's a really -- give me another couple months to watch this.

But that's what I see right now, and that tells me that this will go into some good, medium-sized projects.

The MRO is still going to be there, but it's going to make up the core growth rate of say, 2%, 3%, 4%, 5%.

And then as we start getting stronger growth in automation, that, that will be those medium projects, and the bigger projects will start booking in '18, late '17, and we'll start getting those sales late '18 or early '19.

So it's a little bit early to say the mix.

I expect those guys to have a pretty good margin, assuming the MRO and the order book leaves the year like I think it could leave the year.

We should have a pretty good margin in the first half of 2018 as we go into 2018.

Okay, that's helpful.

And then just on a shorter-term question.

Keep asking the question, because I'll get more visibility as I get into it.

I mean, I won't get any in the next 2 or 3 months -- I mean, next 2 or 3 weeks, but I tell you what.

By the time I get into June, I'll have a better visibility on this.

Okay, will do.

And then on Commercial & Residential Solutions, just shorter term.

You have a pretty easy comp this quarter, then it gets much tougher in the September quarter.

Should we kind of think of mid to high single-digit organic growth?

And then tailing off in the fourth quarter, low singles, something like that?

Yes.

We had last year's third quarter was not good.

So we're going to have a very solid mid-single-digit, higher than 5, mid-single-digit growth based on what I think is going to happen in the third quarter for the Commercial & Residential.

It will then be lower for a couple reasons in the fourth quarter.

It will still be good, in my opinion, in the fourth quarter.

One, if you look at fourth quarter of last year, they grew a little bit over 4.5%, about 4.5% underlying sales.

China starting picking up in the last -- that time -- in that point in time, and we saw some pretty good U.S.-based business.

So I would say we're going to have a very solid upper mid-single digit growth in the third quarter.

And then we're going to have a solid, lower than 5% growth in the fourth quarter.

That's what I see right now.

You're exactly right.

Okay.

Last one on restructuring.

Any change in the $25 million for this year core?

I think -- weren't we saying $50 million?

$50 million, $50 million.

$50 million.

It's $50 million?

Okay, all right.

Great.

$25 million, Pentair, Rich.

$25 million Pentair, $50 for -- okay.

The next question will be from Steve Tusa of JPMorgan.

So on the climate side for next year, you made kind of an ominous comment in the press release about investing now against those high margins.

I mean, can you grow margins next year at climate?

And then when we think about the revenue comps on the back of China, can growth there be more than low-single-digits on the top line?

I'm just trying to kind of understand the profile because it's been a bit of unusual year with very strong China and high margins.

And you made a comment about kind of investing those away.

So maybe just a little bit of color on that kind of progression in the next year.

I did not make the comment we're investing those away.

As you know, I still think we have margin ability to get this to 25%.

As we work the issues.

I think, what I made -- the comment I want to throw in there is that, as you know, this industry -- and you know this industry pretty well, Steve, there are some major changes coming in here in refrigerants and some of the efficiency standards relative to both in North America and in Europe that we need to make sure that we stay ahead of our customer base.

And so we're making sure those investments are happening.

I cannot -- you can't miss a quarter or 2 on that.

I'm not talking about lowering our profitability margins, I just want to make sure that people -- as they see the last couple quarters, the last couple years, they've seen pretty good margin improvement there.

I just want to make sure that they realize that we're going to still have margin improvement in this business in the next couple years.

But I got to make sure we're also investing on this transition that's going to unfold in '18, '19 and '20.

We need to make sure that we take advantage of that and pick up some incremental business, incremental share in that marketplace.

That's the game plan.

Okay, that makes sense.

And just from an overall company perspective, it's good to see the Zorro jumping over the blue line there.

Going forward is just kind of...

He barely -- he definitely barely made it over the blue line, and he doesn't have a whole lot of hop back on those.

I mean, he's now the oldest King Charles Spaniel at 15 years in St.

Louis.

So he is doing well.

That’s almost as long as you've been CEO Dave.

15 years, right?

16 years?

Almost.

Yes

So just on the order trajectory here, anything moving around in the next couple of months?

Or is this -- can this mid-single-digit you talked about in April continue to kind of migrate up into the high single digits over the next couple of months?

Or are there some comp -- just the comps and stuff like that?

It's going to be Automation Solutions.

Steve, it's going to be Automation Solution.

I think that -- as you well know in the commercial and -- I'll step back.

The Commercial & Residential, there's the one wildcard we have here is heat in North -- in the U.S. It was a bad year last year, so comparisons are going to be pretty easy.

But there's always a -- there's an element of risk in that area.

I think the underlying housing, the underlying basics core spending in Commercial & Residential is good around the world.

So that's the one wildcard.

I still think that they're going to have pretty good orders in the mid-single digits.

The Automation Solutions will be the driver.

I mean, as I said, I think that we put the blue band out.

And obviously, we've now had 3 months above that blue band.

I think we'll continue to move on, go through the mid-single digits, probably get into 6%, 7%, 8%, but it's going to be driven by Automation Solutions.

And so right now, as I look at North America, I look at Asia, which is starting to recover, as I look at some of these marketplaces, I would not be surprised, as I said earlier, if that Automation Solutions orders are not 10-plus percent in the fourth quarter on a cumulative basis.

That will pull all this up, unless there's a huge drop-off of Commercial & Residential.

We also start, as you well know, comparisons to more challenging numbers in automations -- or Commercial & Residential in that fourth quarter.

But the trend line's pretty strong right now.

And if I look at the global GFI numbers, they're improving and have been improving.

So we are -- the cycle is going right for us right now.

The next question will be from Andrew Obin of Bank of America Merrill Lynch.

So a question, just going back to automation.

On the Middle East, we are getting quite a mixed message from a lot of your competitors and people in the value chain about what's happening there.

So because your numbers were down.

But can you just talk about your geographical mix within Middle East and what areas in the Middle East are dragging the numbers down and which are actually strong?

I mean, I don't see any -- right now, the Saudi, from an order standpoint, is the best of the best.

I think the rest of the marketplace is pretty weak, Africa.

So, I mean, we're very much project-business-driven there.

And so I'd say right now, Saudi has the best light for us.

Kuwait is doing well.

That's another one that's doing well.

But those are the 2 that we see right now.

So from our business standpoint, there's not a lot of big activity going on.

It's primarily MRO, small stuff.

And the business is basically -- they think they're going to be flat.

I think they're going to be down for the year.

But -- so that's what I see at this point in time.

Got you.

And as the Middle East comes back, do you anticipate any problems with collections in terms of hit to working capital as you grow that business?

Or is it just...

No, we've never had -- our Middle Eastern customers have always paid us.

They pay us on time.

Our business, our products are kind of instrumental to running their plants.

And so if they can't turn the plant on because they didn't pay me, sometimes, it's a problem for them.

And just a different question, slightly different.

ABB bought B&R, and we just got back from Hanover.

And a lot of focus, all of a sudden, industrial controls capability is very important to being this gateway to getting the data on the cloud.

And I know I've asked this question before, but given how the cloud is evolving, has it changed your view on the need to have more presence on the industrial side?

And I know this question has been asked before, but it does seem that IOT is evolving in this direction.

And the Europeans are driving it.

It's being driven very hard by [ABB] in a big way.

We have continued to expand in the hybrid and on the discrete side, so we'll continue to do that.

I mean that's why I show the charts -- we show the charts that we continue to move across that way and we'll continue to buy -- that was a very nice acquisition [for York] and so from that perspective, it's -- I understand where they're going from and it's the same strategy we have ourselves.

I'd like to wrap it up.

I want to thank everybody for your time today.

Appreciate the questions and hopefully, I didn't upset too many people, in my having fun with them a little bit.

And my answer is, Craig is, we're looking at Craig moving on to his next assignment and he will be inside Emerson.

It will be something important.

And then Frank and I will probably be covering for him because he did not do a good job of developing a successor, which is something I am really upset about, but we'll take care of that in his bonus.

But with that, I thank everybody and I look forward to seeing everybody down in EPG.

And I'll make sure I take a sweater when I go to Boston later this month.

Thank you very much.

Bye.

Thank you, sir.

Ladies and gentlemen, the conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.