艾默生電氣 (EMR) 2019 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to Emerson's investor conference call and webcast.

(Operator Instructions) This conference call is being recorded today, November 5, 2019.

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 Mr. Tim Reeves, Director of Investor Relations at Emerson.

Mr. Reeves, the floor is yours, sir.

Okay.

Thank you, Mike.

I'm joined today by David Farr, Chairman and Chief Executive Officer; Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer; Lal Karsanbhai, Executive President, Automation Solutions; Bob Sharp, Executive President, Commercial & Residential Solutions; and introducing Pete Lilly, the incoming and upgraded Director of Investor Relations, who will surely not mispronounce Frank's name.

Welcome to Emerson's Fourth Quarter of 2019 Earnings Conference Call.

Please follow along in the slide presentation, which is available on our website.

I'll start on Slide 3 with the full year performance report card.

2019 required our organization to be nimble and responsive to a slower-growth environment than we had expected a year ago, and we did respond.

On our second quarter earnings conference call, we began talking about additional restructuring actions, and we did so again on our Q3 call in August.

In total, we executed $35 million of additional actions in the second half.

And on October 1, we announced our Board's review of further actions appropriate for the lower-growth environment we see over the next couple of years.

Underlying sales finished the year up 3% versus our initial guide of 4% to 7%.

We saw slower-than-expected growth across both platforms.

Automation Solutions grew 5%, which was mostly driven by efforts targeting our broad installed base.

We saw large capital projects start to push out in Q2, and that trend continued through the second half.

Commercial & Residential Solutions saw a sharp decline in Asia in the first quarter and was a headwind to growth all year.

Cooler weather hampered residential growth in North America, and professional tools and cold chain markets began to slow through second half as nonresidential investments slowed.

Despite slower growth, we delivered just above our EPS guidance, helped by a lower tax rate and lower corporate costs.

Importantly, we had a strong cash flow year, delivering free cash flow of $2.4 billion, which was up 6% and reflected 105% free cash flow conversion.

This drove dividends as a percent of free cash flow down to 50%, a critical milestone.

In 2019, we completed our 63rd year of consecutive dividend increases and returned $2.5 billion to investors, including $1.25 billion of share repurchases, which was above our initial target of $1 billion.

Today, we announced a $0.04 dividend increase in 2020.

Please turn to Slide 4. Fourth quarter results were above the high end of EPS guidance discussed on the third quarter conference call, helped by a $0.09 discrete tax benefit.

Automation Solutions was in line with guidance, with 5% underlying growth in Q4 and full year EBIT margin of 16.0%, spot on with guidance.

Trends in the business continued into Q4 with slowing global discrete markets and soft North American upstream activity.

Demand in global process and hybrid markets remained stable.

Commercial & Residential Solutions end markets were slower than expected, and the business deleveraged on lower growth.

Q4 underlying sales were down 2% compared to our expectation that the business would be up slightly in the quarter.

Our fourth quarter free cash flow generation was up significantly versus prior year, and we completed the $250 million of additional share buybacks announced on our Q3 call.

Turning to Slide 5. Fourth quarter gross margin was up 70 basis points to 42.8%, and full year margins were 42.5%, demonstrating strong price leverage and cost disciplines.

SG&A cost as a percent of sales fell 180 basis points as our businesses effectively controlled costs.

Operational SG&A spend was lower compared to the prior year and also lower sequentially compared to the third quarter.

Lower corporate expenses also contributed to this improvement, lower stock compensation as the favorable -- and the favorable impact of the prior year onetime 401(k) contribution.

Reported EBIT margin was up 140 basis points.

In 2020, we will report adjusted margins, which excludes the impact of restructuring charges, consistent with our new adjusted EPS framework, which we'll discuss in detail shortly.

2019 adjusted EBITDA margin was up 210 basis points to 22.8%.

The quarter benefited from discrete tax items similar to the prior year.

Fourth quarter EPS was up 20%, excluding these discrete tax items from both years.

Turning now to Slide 6. From a geographic perspective, we saw mixed results in Q4.

In total, mature markets were down 1% underlying in the quarter and up 2% for the year.

U.S. industrial activity softened a bit in Q4, somewhat offset by a stronger Western Europe.

Emerging markets were up 8% underlying in Q4 and up 4% for the year.

Strong fourth quarter emerging market investment activity was led by China, up 9%; Latin America, up double digits; and Middle East and Africa, up 8%.

Turning now to Slide 7. Total segment margin was up 10 basis points, including recent acquisitions.

Total adjusted segment margin was up 50 basis points to 20.2%.

This improvement reflects greater than 40% year-over-year and sequential leverage.

We've updated our reporting of corporate and other costs.

Previously, we showed 2 numbers: the differences in accounting methods line, which included a management charge to the operating segments and certain pension and postretirement costs; and a corporate and other line that included corporate operations, total company stock comp expense, acquisition and related -- acquisition-related costs and other items.

Going forward, we will present 3 lines to more clearly show the pension and post-retirement costs at corporate, the stock compensation expense, and a corporate and other line, which includes the costs at corporate net of the charge to the businesses, acquisition-related costs and other items.

We believe this presentation provides greater clarity and is more in line with how our peers report.

Q4 cash flow was strong.

Free cash flow of $1 billion was over 20% of sales and free cash flow conversion to the quarter was 140%.

Turning to Slide 8. Automation Solutions' underlying sales were up 5% in the quarter and up 5% for the full year.

September trailing 3-month underlying orders were up 4%, excluding 2 large nonrecurring power projects in the prior year.

Strong demand continued across MRO spending and brownfield projects, supported by primary demand growth programs focused on our installed base.

We continue to see long-cycle bookings with the September backlog for Final Control and Systems businesses up 6%.

However, our large-project funnel continues to stall as customers' capital spending plans push out due to trade tensions and geopolitical uncertainty.

North America underlying sales were down slightly as discrete and upstream markets continue to soften.

Strong growth continued in Latin America.

Demand in Europe was stable in the quarter, and underlying sales growth accelerated on strong backlog conversion.

Asia underlying growth was broad-based, led by China, which was up 18%.

Strong growth in Middle East and Africa was driven by long-cycle investment activity.

Automation Solutions' segment margin was up 70 basis points, including significant restructuring investments executed in the quarter.

Adjusted segment margins was up 140 basis points to 19.5%.

For the full year, excluding the dilutive impact of acquisitions, Automation Solutions delivered over 30% leverage on an adjusted basis.

Turning to Slide 9. Commercial & Residential Solutions' underlying sales were down 2% in the quarter and down 1% for the year.

September trailing 3-month underlying orders were down 2%.

North America underlying sales were down slightly, with cooler weather affecting key HVAC markets.

Additionally, slower industrial markets weighed on professional tools and cold chain demand.

Latin America demand remains solid.

Underlying sales in Europe were down slightly, reflecting weaker trends in cold chain markets, somewhat offset by steady growth in heating and commercial air conditioning markets.

Asia, Middle East and Africa was down 7% underlying, with China down 9%, primarily reflecting modest declines in commercial air conditioning and cold chain markets, partially offset by steady growth in professional tools.

Commercial & Residential Solutions' margin decreased 120 basis points, and adjusted margins decreased 110 basis points.

Lower profitability primarily reflected deleverage on lower volume and unfavorable mix, partially offset by favorable price/cost.

Let's turn to Slide 10, which outlines our 2020 guidance framework.

With a slowing macroeconomic backdrop and continuing geopolitical tension, we are planning for a low- or no-growth environment in 2020.

For the full year, we expect underlying sales growth of down 2% to up 2%, with Automation Solutions down 1% to up 3%, and Commercial & Residential Solutions down 3% to up 1%.

We expect reported sales to be slightly down with 1 point of FX headwind on the stronger dollar.

As Emerson has consistently done during economic slowdowns throughout our history, we have shifted our management and investment focus from a growth mindset to cost.

We started this process in Q2.

And in total, we increased restructuring investments $35 million in the second half of 2019.

As announced on October 1, the Board initiated a review of operations, capital allocation and portfolio initiatives.

The 2020 outlook framework presented here does not include any potential implications of the Board's review.

At our February investor conference, we expect to present in detail the outcome of the Board's review and its updated 2020 framework -- outlook framework.

Although we anticipate significant restructuring investments in 2020 as a result of the Board's review, our adjusted guidance framework excludes restructuring charges entirely.

That is, we have 0 restructuring charges built into the outlook.

Adjusted EPS guidance also excludes significant discrete tax items.

We expect adjusted EPS for 2020 in the range of $3.48 to $3.72 against a 2019 adjusted EPS of $3.69.

The guidance focuses on operational improvement and margin expansion to drive earnings growth, which is more than offset by $0.29 of headwinds related to tax, unfavorable FX, higher stock compensation due to higher stock price, and higher pension expense due to lower discount rates.

In 2020, we anticipate another strong cash flow year as we continue to drive operations execution and incremental cash flow from recent acquisitions.

2020 operating cash flow is expected to be $3.1 billion, and free cash flow conversion, north of 100%.

Please turn to Slide 11, which bridges our 2020 adjusted EPS guidance.

The starting point for the bridge is 2019 GAAP EPS of $3.71, and walking across to adjusted 2019 adjusted EPS of $3.69 by excluding $0.14 of favorable discrete tax items and adding back $0.12 of restructuring charges.

And now walking from $3.69, we discuss first the $0.29 of headwinds next year.

First, tax.

The 2019 adjusted tax rate is 21.6%, excluding the discrete tax items last year.

This is 1.4 points better than expected 2020 rate of 23%, resulting in a $0.06 EPS headwind.

Second, FX.

The stronger dollar results in an FX translation headwind next year.

Assuming October 31 FX rates hold for the remainder of 2020, we anticipate a $200 million unfavorable impact to net sales, resulting in a $0.04 EPS headwind.

And finally, stock compensation and pension.

Stock comp is up due to higher stock price, and pension costs increased this year due to lower discount rates.

Partially offsetting these headwinds, we expect to drive $0.08 of operational improvement on flat to down sales, which reflects 30 to 50 basis points of improvement in adjusted total segment margin.

We also expect $0.12 of EPS from our improved debt cost structure and strong balance sheet, with $1.5 billion of share repurchases.

Please turn to Slide 12, which bridges our first quarter 2020 adjusted EPS guidance.

For Q1 last year, we add back $0.01 for restructuring charges to $0.75.

There were no discrete tax items in the quarter last year.

The 2020 bridge for Q1 looks a lot like the full year bridge.

Nearly half of the headwinds we discussed in the full year impact the first quarter.

This is because Q1 last year benefited from lower stock compensation due to the decline in our stock price in late December as oil prices fell.

In total, we face $0.13 of headwinds, which are partially offset by a $0.02 contribution from operations and $0.03 from shares and interest.

These items provide $0.05 of EPS contribution, which is proportional to the $0.20 we expect in the full year.

And now, please turn to Slide 13, and I will hand the call over to Mr. David Farr.

Thank you very much, Tim, and thank you very much for your service as Investor Relations.

It's -- you're going out sort of with a bang.

It's an interesting time we've been having here.

But I want to thank all the employees around the world for their support through fiscal 2019.

They did accomplish a lot in a very challenging marketplace.

And I want to welcome everybody on the call today as we talk about what we're seeing in the marketplace and what we see going here going forward.

But it's been a very dynamic time period, as we all know.

It's a challenging time period.

But the management team across this company, both here in St.

Louis and around the world, is very, very focused on delivering increased operational margins in a 0% underlying growth period.

If growth is better, better for us.

If it's not, we're ready for it, and that's what we're doing.

I also want to thank all the sell-side analysts and the shareholders that have met with Tim and I over the last 60 days and talked to us as we -- we sought your inputs, which we conveyed back to the Board as we've gone through this process to make sure the Board understood where our shareholders stood today and what they expected of us.

So if I look at where we're going right now, and you see the order pattern on Chart 13, preliminary numbers for October.

If I look at Automation Solutions, they drifted down a little bit, but not much.

Running around, I think, around 3% underlying growth rate.

Bob's business is sort of flat-lining here around this negative 1% to 0% growth rate the last couple months.

And overall, we are, as a corporation, looking at 1% underlying growth rate right now.

As we know, we believe we're facing a very challenging time in 2020, and we are getting ready for that.

And I'll have more comments on that as we go forward here.

If you look through the Chart 14, the history of Emerson from the years that we've gone through different cycles, through periods that I've been leading the company as a CEO, from 2000 to 2019.

We have continued to change the composition of the company.

We've continued to invest in the company.

We've divested close to 55% of the company's assets since I've become CEO.

We repositioned and invested in new companies in our automation business, invested in new companies in our commercial and residential business.

And we've driven our gross profit to very good levels.

Our target is to get the number back into that 44-plus-percent range over the next couple years.

But we -- from an industrial operation standpoint, we know what we're doing here.

We know how to invest in technology to drive higher gross profit and to drive what I would call a renewable type of business model as I look at our aftermarket business going forward.

We've had very good true underlying growth rates throughout the economic cycle.

Yes, there are cycles.

And yes, we're facing a cycle right now, and I believe this team is focused on how we're going to improve the profitability and drive as much growth as we can for our shareholders going forward here in the next couple years.

If you look at Chart 15, from the EBITDA margin standpoint over the time period, Emerson, 21%.

Our weighted average peer is around 16%.

Our Commercial & Residential Solutions business, a very profitable business, a business that runs through cycles a little bit different, a little less cyclical, runs around 25% EBITDA versus our peer group around 15%.

Automation Solutions business, also a very, very good business.

It's been built up over a long, long time.

I ran it many, many years ago.

I'd say the current leadership team is far better than I ever was back when I was running it in the late '90s.

But running an EBITDA around 20% versus our (sic) [peers] 15%.

But we believe we have opportunities here to drive these EBITDA margins back up to those peak levels and to enhance our profitability as we go forward in the next couple years, and we'll be talking about that a little bit more.

If you look at our digital transformation capabilities today.

We now have a very large installed base, close to $120 billion in the automation world.

We have the capability with -- our digital capabilities today, both from a hardware standpoint and a system standpoint.

And we're driving a unique business model around that while creating a new business within that to focus specifically on those higher tech transformation opportunities.

And we have a very good start in this business today.

You're going to hear more about that as we now start talking about what we're doing, what we have to offer here, but it's really a truly unique differentiation that we have.

And really, from the standpoint of our $120 billion installed base, it's quite unique to come off of.

And I -- we're very, very excited about it, and we'll continue to invest in that.

Even through a tough time, we will continue to invest in that.

I also want to thank Lal and Ram and his whole team in the first couple years of the Valves & Controls work.

It's really created unique shareholder value for us.

From an EBITDA standpoint, the pro forma of 2017.

If you look at 2019, there are now over $600 million of EBITDA.

The EBITDA margins are now up to 16%.

We fundamentally have room to go.

We made a commitment to our shareholders that we would get to 20%.

We will get to 20%.

We are doing the necessary actions to get to that level.

It is a step-by-step basis, we're underway right now.

We've decreased the number of facilities.

You'll see more of that in 2020.

We've driven out working capital on a combined basis.

When we took over V&C, that number was close to 50%.

And on a combined basis with Final Control it was 35% total, and we're now down to 26%.

We're doing a lot of different things here to drive value, both from a customer perspective, but equally, just as important, from our shareholder perspective.

And a lot more to go here with Ram and his team and Lal as they go forward with this integration process.

And we'll continue to accelerate that in 2020 and '21.

We've also continued to drive a lot of cash back to our shareholders.

If you look at our Emerson capital allocation over the last 10 years, we've paid back to our shareholders in $10 billion of share repurchase; 1 -- $12 billion of dividends; acquisitions, we've done $10 billion worth; capital spending, we've done about $6 billion worth.

So we continue to invest in the company, continue to invest in the technology, and we continue to give back to our shareholders.

For the last 10 years, that number is 57% of our cash flow goes back to our shareholders.

This year, we were over 60% as we grow back our dividend and as we grow back our share repurchase.

We clearly had money to give back to the shareholders.

We did not have as many acquisitions.

And our intention is to give the money back if we can't use it internally.

On a return basis, as a company, over the last 10 years, our return on total capital has been 18%.

It is a number that goes up and down.

As we make acquisitions, the number would drift down.

As we integrate those, the numbers will drift up.

And over the time, if you look through it, it does go up and down, but we drive at very high levels of return on total capital.

A very important metric for us, both from a cash standpoint, from a sales standpoint and margin standpoint.

But returns on our investments from the shareholders' perspective is something that's high in our mind at all times.

If you look at the Chart 19, the only thing I want to point out is you go through the different cycles.

You look at Emerson, and you look at our G7 or G7 with China, the numbers cycle around.

We are definitely in a downward drift right now.

The concern I have as I look at 2020 is I look at the GFI numbers right now, they're under 1%.

That tells me we are facing a very challenging time period.

I'm waiting for the catalyst to cause that to turn.

There are a lot of people that believe that we'll see a second-half recovery.

We are not planning on that.

We're planning on getting the costs out, getting our margins moving upward in a no-growth environment.

If we get growth, then we'll leverage nicely.

But right now, what I see, and I've been in this game a long time, as you all know, I see a very challenging environment for at least 12 months, it could be 18 months, and we'll see what that catalyst is to drive that.

I fundamentally believe there will be a bounce back up.

This cycle has been artificially depressed through the geopolitical issues, the trade issues, and I'm looking at what does it take to bounce it.

But my standpoint, we're betting on a slow global growth for the next year, a challenging growth for us, and we're adjusting accordingly.

We are going through the repositioning review with the Board right now.

We have a lot of work to do.

The effort is underway.

It has been underway for several months.

We'll come back out to the shareholders later after the first quarter and getting into that in February investors call.

But I'll tell you what I'm thinking right now.

We're trying to aggressively advance our restructuring effort.

You're going to see in the first quarter, restructuring number around $70 million.

Basically, what we see at this point in time between Lal's business, between corporate and Bob, we're looking at around $70 million of restructuring on top of what we just did in the fourth quarter, incrementally it was $35 million higher.

As I look at the total plan from the late '19 to '20 to '21, early '22, I would say, right now, you should be factoring somewhere between $200 and $300 (sic) [$200 million and $300 million] of restructuring as we go back to drive our EBITDA margins, our EBIT margins to record levels, to high levels, and that focus is underway.

The work will be done and reviewed with the Board in the coming months, and then we'll share that with the outside investors.

But we're well underway, and we're going to take a significant hit in this first quarter as we really action around things that should be done and to get going on this.

And that will come through as we report our final GAAP numbers.

It's not in the numbers that we presented to you today, but it will be around $70 million, and I would expect that number -- obviously, you never hit exactly.

It's going to be plus or minus.

But that's what we're talking about in the first quarter, up from what we just spent in the fourth quarter of our fiscal year.

So if you look at what's going on right now, the Board has us looking at operational review, looking at total cost structure across the company, both in Bob's business, our corporate organization, and Lal's business.

How can we optimize the cost structure to get back to driving record levels of EBITDA margins, EBIT margins.

We've hired an outside global consulting firm to work with us to look at the pinch points to make sure we're not missing something.

We consider ourselves very good operating people.

But having a different perspective is something that's very valuable, and that's why we brought in somebody to look at this, and that's underway.

Again, we will review that with the Board.

The Board wants engagement in this, and we're going to make sure that we take a hard look at that with the Board in early February.

We're also looking at the capital structure.

We're looking at our capital allocation, where we see spending money the next couple years.

How much we see at acquisitions, how much we see going back at dividends, how much we see going back in share repurchase, how much we see going back into capital spending.

Again, we're looking at where we're going to spend the money as we go forward here.

I know that we're going to put more money into capital as we rebase some of our cost structure.

I also know that we will continue to drive operating cash flow and free cash flow, which will allow us to increase our dividend as we drive down towards 45% of dividend payout versus free cash flow.

We're at 50% this year.

We want to get back down to 45% level.

And finally, we're taking a look at all of the portfolio of Emerson.

What assets make sense, what assets don't make sense; what are we going to do, if anything, what are we going to do with some of these assets, some of the businesses.

This is something we do all the time, but we've really put a little bit more effort into it.

We like to look at this, especially when we go into a downturn.

Allows us to remix, and it also allows us to have a chance to say, where do we want to invest from an acquisition standpoint?

So everything's on the table.

We had a 2-day Board meeting this week on Monday and Tuesday.

And we're looking forward to sharing a lot of this insight with the shareholders in our February investor conference, which is, I think, February 13, in New York City at the famous Stock Exchange, which everyone loves to go to.

But it's a good price point from the standpoint of cost.

And so that's why I'm looking at it from that perspective.

But I want to know -- let you know that the Board and the senior management are very focused on how we can drive improved profitability, improve profit margins, and also drive growth.

We're not walking away from growth, but we know we're facing a challenging market.

I know the entire organization around the world are focused on that.

We're also making the right investments for the next-generation technology, the next-generation areas that really will drive growth.

And we're getting ready for, what I would say, a bounce back in the marketplace when it does happen.

In the meantime, we're very, very much focused on driving that value for our shareholders through that margin improvement, the cash flow.

And we're very much focused on driving that cash and paying back more money to our shareholders in 2020 through the higher dividend increase of $0.04 this year, assuming we continue that, and also share repurchase of $1.5 billion this year.

So our forecast right now says we're paying back more money to our shareholders in 2020, and we also are looking to drive higher operating cash flow.

With that, I'm going to open the mic and allow the first questions, and we'll go from there.

Thank you very much.

(Operator Instructions) And the first question we have will come from Julian Mitchell of Barclays.

I wanted to say thanks to Tim for all the help over the past several years.

In terms of maybe the first question, David, there's been a lot of sort of back and forth between DE Shaw and Emerson, and we saw their press release this morning.

How would you characterize where you stand vis-à-vis DE Shaw right now?

And also, when you're thinking about the Board changes -- we saw the Mark Blinn announcement.

Should we expect further Board changes in the quarters ahead?

Thank you very much.

So what I'd like to do here is sort of deal with this issue right up front here and then not have that question come at me for the rest of the day.

I want to focus on Emerson and what we're trying to do here.

But first of all, we get input, as you all know, from every shareholder.

It's been a part of our Emerson DNA for a long, long time.

It's how we operate.

And the Board review announced in October was the culmination of discussion with the Board over the last 6 months and consistent with how Emerson addresses challenging macroeconomic slowdowns.

The Board's decision was shaped by input from all our shareholders.

That's why I went out and I asked so many of our shareholders.

I talked to nearly 40% of our shareholders over the last 2 months.

Board members have joined me on several of these phone calls and meetings.

It's important for them to hear it.

The Board understands our strong position as a company, and the Board supports that we have heard from our shareholders.

And the Board will continue to make the right decisions for the long term for all of our shareholders.

We appreciate the inputs, as I said earlier, from everybody that I've talked to over the last 60 days.

It is important that we -- the shareholders know that we are in control of our own destiny here.

We are in control of what needs to be done with our strategy.

Now as I look at what we announced this morning with Mark Blinn, what we've been looking at for the last couple years is we have 2 directors that will be retiring in early 2021.

The Board, Corporate Governance Committee, have been looking at candidates for quite some time.

We've had 2 candidates that we've been working on.

We had an input from a shareholder.

The Board took a look at him.

He was a very interesting person from the standpoint.

Every Board member met this individual, he went through a very rigorous process.

And we made a decision as a Board to move him to the front of the line versus the other 2 candidates we have at this point in time.

Mark has unique skill sets.

He has a unique experience in the industry.

He took a company through a major repositioning effort, a restructuring effort.

He has enormous Board experience being on the Texas Instruments Board as a lead Director.

He has an interesting background also from a CFO standpoint.

He's on the Board of Leggett & Platt.

He's on the Board of other companies, which really do bring value to us.

So the Board made a decision that Mark fits exactly what we're looking for, and he moved to the front of the queue, and we brought him on.

And from my perspective, at this point in time, I think he's been a fantastic addition.

Mark is -- I've known Mark for several years, and I'm looking forward to his inputs relative to what's going on in the industry.

And I think that, obviously, we listen to shareholders, and we are totally in control of our destiny at this point in time.

Our objective right now is to execute, execute around what I've been talking to the Board about and what I've been talking to my shareholders about.

We are in total control of our own destiny, and I want to say Mark was a very good addition to our Board.

Don't be surprised if I don't add another director in 2020, late 2020, because I do have this director that will be retiring in late -- or early '21.

And I need to make sure that I find a replacement for her at the same time.

I'm looking for a diverse candidate there, and the Board is looking at that at the same time.

So Julian, I appreciate that.

And why don't you -- another question you might want to ask me, go ahead.

Sure.

Maybe looking at some of the other investor suggestions that have been floating around, I think on the portfolio, you've made it clear that sort of many things are on the table.

Maybe on the restructuring aspect, how do you and the Board think about balancing that need for cost efficiency against also the need to keep investing, given a lot of changes that are going on in the automation world right now?

It's a very important point for the Board at this point in time.

The Board is very focused on trying to make sure that we're not jeopardizing the future of this company.

We've done several large acquisitions over the last 2 or 3 years.

We're taking a very strong focus on how we can integrate those businesses, how can we get our cost structure improved there.

We're taking a hard look at the touch points between the corporate and the businesses.

And as I committed to the Board, both Bob and Lal had to commit to the Board yesterday because they asked them the question, the same question you just asked us: How are you making sure you're not jeopardizing the future of the company just because you're trying to get to short-term type of goals?

That's not something Emerson does.

We, over the time, have been a technology leader.

We've been an industry leader, a steward of the industry, and we have not -- have no intention to damage that going forward.

And when these guys talk later on, you can ask the same question.

But these guys are very much focused on their key strategic areas.

We have opportunities inside this company to take our costs down and do things better.

We have some excess facilities through acquisitions.

We have the unique opportunity to do some best-cost job moves by building some new facilities.

So Julian, it's a very important issue for the Board because they do not want to make sure that Dave Farr, in his last 2 years, does things short term-oriented, and then hands it over to the next generation and say, "Oh, (expletive)." And so I guarantee that's on the forefront of the Board, and they will be challenging me, they'll be challenging Bob and Lal to make sure that they do that.

Bob, you guys want to say anything?

Or Lal, you want to say anything along those lines?

Yes, David, thank you.

This is Lal Karsanbhai.

We've been looking at this weaker environment for some time now and operating in a world that's changed since we last spoke in February.

And we've been accelerating restructuring across the platform as we executed through Q3 and Q4.

And as we look at the opportunities today, we are focused around structure across the enterprise.

We're prioritizing enhancements in speed and execution.

And the key priority for my management team is around protecting our customer touch points and protecting our technology, and that's how we're thinking around the opportunity.

Bob, anything you want to add there?

Yes, I'd say when we do our investor call again in February, we'll talk more.

I'll show you several examples of programs we're driving and we continue to drive, both to expand the served market that we have and get growth.

And it is a challenging trade-off when you get into situations like this, but we are continuing to fund those.

And from a restructuring and a cost standpoint, we're very heavily focused on the gross profit side of things in the plants and product costs and such.

So we're going to use that to also help fund some of the key sales programs.

Yes.

I think that's an important point, Julian.

Anything -- Julian, anything else before I pass it onto the next person?

Maybe just one last one.

You talked about slowing growth in North America, I think on Slide 6. Just wondered if you could give a bit more update on -- within Automation Solutions specifically, is all the weakness in North America still focused on upstream and discrete?

Or do you see it spreading?

I'll let Lal answer that question since he's an expert in this, and I'm just a peon CEO.

I doubt that.

Thanks, David.

And Julian, the weakness that we experienced in the second quarter leading through the year on discrete continues and has continued through the fourth quarter and into what we currently see in the environment.

Likewise, we continue to see stresses around the upstream and midstream oil and gas value chain in North America with very little spending and more acceleration of spending in the -- in those markets.

I have not yet seen a broader slowdown in process, particularly as it relates to MRO spend.

Having said that, the North America capital environment slowed down.

It's been delayed.

It's been impacted by the geopolitical and general economic situation.

Thank you very much, Lal.

And the next question we have will come from Steve Tusa of JPMorgan.

Just on the organic guidance.

I mean, you're starting the year up

(technical difficulty)

for the first quarter.

On organic, you're

(technical difficulty)

negative 2% to positive.

I would think, in climate at some point in the next, I don't know, like 10 quarters, you guys will have somewhat of an easy comp at some stage of the game.

What is really bugging you within Automation Solutions, especially given you have -- I mean, process is kind of a backlog-related business, and you should -- the MRO business shouldn't be that -- the lack of visibility there shouldn't be that bad.

What exactly is the driver that kind of gets you to below the flat line for the year on organic?

I think, Steve, it's a fair question given where we are in the -- from the backlog standpoint and the order standpoint.

I'll give you my perspective, and I'll let Lal and Bob give you 2 seconds on this, too.

From my perspective, what's scaring me is I look at -- the last couple months started -- I started talking about concern about 2019, late 2019, early 2020, back in April.

But in the last 2 or 3 months, I've seen the global GFI numbers really roll off.

And when I see a number that goes -- now, GFI forecast for 2020 dropped now below 1%, it scares me from the standpoint, okay, guys, the current pace we see maybe says it doesn't do that, maybe it should be better than that, as you say.

But I'm more concerned about the fact that the trend line between the geopolitical, the tariffs, the trade, all these different discussions right now are driving this much weaker gross fixed investment number.

When I see a number go below 1, historically, we move really quickly towards a 0 or a negative number on underlying sales.

So what -- so from my perspective, what I'm doing right now is say, "Guys, we're driving to a 0 or negative number underlying growth." I understand there's investment opportunities out there, but we've got to figure out how to get the cost structure set at that 0 standpoint, Steve.

Because I am concerned that something is going to happen here, from an election standpoint or Europe or something that happens in the Middle East, and the GFI forecast numbers are really going to happen.

If that happens, we're going to be looking at very low growth.

So I would say we're -- I'm being driven by that caution.

And I think that until we see that catalyst that drives that back up, you're right, it should be, from a catalytical standpoint, at some point, a bounce.

But I'm not willing to say we're going to see that bounce yet until I start sensing the underlying economic numbers get better or stabilize.

I don't see that yet.

So that's where it's coming from.

At the low end of that range, what does that imply for your short-cycle discrete business, which I would assume is going to be the leader of that kind of negative view in the context of your other businesses?

What do kind of the lower (inaudible) look like for the clients in discrete?

Yeah, I think -- Lal, why don't you -- Lal, go ahead.

Yes.

On the broader process issue --

Yes.

And don't forget the discrete question.

Yes, and I will.

I'll come back to that, Steve.

The capital discipline that we see out there, the spending disciplines, the way our customers are looking at where they put that dollar today is where we've got to really assess how that look goes forward.

We've seen that slowdown in North America in oil and gas.

We've seen it in the discrete globally.

I have not seen, and likely will not see, tied to this economic cycle, a turn in the discrete markets [as we go].

They're very closely tied to GDP and GFI trends, and we are yet to see a recovery across the broad discrete markets, whether that's automotive, semiconductor, packaging, textiles, et cetera.

And I don't foresee that coming back.

So as I think about discrete, in that mix, it's somewhere in the mid-single digit negative.

At the low end of the forecast.

At the low end of the forecast.

Anything else -- you want anything from Bob?

Anything you want to ask Bob on?

(inaudible)

I'll just take 2 questions.

I'll leave it there.

Bob will make a statement here then, Tusa.

Since you won't ask him a question.

Bob, why don't you -- you can make a comment, because Tusa doesn't like you enough.

Well, I'll just say I think he knows that my order of visibility gives me about 12 to 14 days of outlook.

And so it's hard to see beyond that.

The challenge right now is the softness is just so widespread, whether it's general industrial, commercial, AC's pretty weak right now.

Cold chain, as you watch the industry numbers right now, they're challenging.

So it's hard to build a 2020 plan right now on a recovery of any sort.

If it happens, that will be great.

If it doesn't, what we're dialing in to do is improve margin without the growth, and that's really where the focus is right now.

Thank you very much, Steve.

I appreciate it.

That question will come from Nicole DeBlase of Deutsche Bank.

So maybe just starting with a follow-on on the restructuring slide.

Let's say we do get like a $200 million to $300 million cost of restructuring framework.

Should we think about that like mostly dropping to the bottom line?

Or would there be offsets?

Kind of going back to Julian's question, but in a little bit more detail.

It's going to be, from our standpoint, we typically -- what we're trying to target here based on the final numbers, we're trying to get back to our record level of EBIT, which was a little bit over 19%.

We're trying to get back to our record level of EBITDA, which was around 22.3, 22.4.

So some of the investment will be longer-term, the payback is a little longer.

But I think that what we're looking at is a mixture of the long-term impact, the short-term impact that allow us to drive that profitability back to those peak level margins with very moderate growth of underlying sales.

So I would say, historically, when we look at it, we get back a dollar for a dollar.

It may be over an 18-month period, but it's typically a dollar for a dollar.

And we'll let you know as we lay this out.

There are going to be some capital investments which will be a little longer because we're going to -- we need to build some best-cost facilities as we consolidate some of our manufacturing.

And that will be a little bit different payback.

But it's definitely -- we still always look for dollar-plus for that type of investment, and that's what we're seeing right now.

Okay, that's really helpful.

And then just one on the first quarter.

Just if you could talk a little bit about what you're embedding in that $0.02 of operational performance accretion?

Maybe like looking at underlying sales growth and expectations for margins in 1Q.

Yes.

So we're looking at basically about 1% underlying sales growth, and we're looking at probably a couple tenths operational margin improvement.

The key issue here, though, is -- now that does include the 70 -- we're banking on a recovery on the cost investments, the acceleration we did in the fourth quarter.

If we get a decent mix and a different growth, hopefully, we'll have a little bit better margin improvement there.

But in reality, what we're really trying to get geared up for right now, Nicole, is we're trying to get the -- so as fast as the cost reduction is done in this first fiscal quarter, that's why we're trying to do $70 million, which will allow us to start getting some margin improvement underlying as we get into that second and third quarter.

So we're trying to get this game going faster.

I think right now, we're ahead of the wave.

And I'd like to get a little bit further ahead of the wave.

And that's how you should feel about us right now.

And next, we have John Walsh of Crédit Suisse.

Good afternoon.

Good afternoon, John.

I guess maybe a clarifying question first.

So the $70 million of restructuring in the first quarter, is there any benefit associated from that restructuring in the current guidance construct for '20?

No.

No.

So what we've built in is no benefit improvements from the acceleration of the restructuring.

So when we -- as we start doing this and we lay out the plan, we will tell you what benefit cost is going to be coming in for the cost structure and what benefit we'll get from profits in this year.

Because we will -- by getting going in the first quarter, like we're doing right now, both Bob's business and corporate and Lal's business, we will get some benefit from incremental EBIT dollars this fiscal year.

And so that's why we're pushing really hard to get as much done as possible in this first quarter.

It gets tougher and tougher as you go into that second and third quarter.

So that's why we're trying to front-load as much as possible.

So the answer is no, we have not booked any cost nor the benefits, which there will be benefits.

Okay.

And then looking at the free cash flow.

I mean, obviously, there are some moving pieces on the EPS guide, but free cash flow of $2.5 billion came in line with us and The Street.

I mean can you talk about some of the levers you have to pull to drive that $2.5 billion of performance and then expectations for that to grow going forward from here?

I know you mentioned some capital investments maybe to drive the larger restructuring program there.

So from the standpoint of this next 12 months, I think the best lever we have is from an operational standpoint, can we get our inventory back -- I think our inventory has room to come down a little bit in 2020.

As we slowed in the sales growth, our inventory levels did not come down as much as I thought.

They did do pretty well, but they didn't come down as much.

So I think we still have up to $100 million inventory we can get out of the company in 2020.

As you go forward, the key issue that's going to drive this is a continued working capital performance in Lal's business as he continues to integrate his 2 recent big acquisitions.

I think Bob's business is running pretty well tightly right now.

I think he's got his tools business running pretty well after the first 12 months.

And then, obviously, if we drive our profit, profit drives that cash flow.

So we're trying to drive that free cash flow level back up.

Because what we're trying to get back to is we're trying to get back to that $4 billion operating cash flow, which allows us to spend the capital that we need up to $675 million, $700 million.

We will be also altering our capital spend as we get to understand the restructuring programs.

We may have to spend a little bit more than $600 million, which is embedded in that forecast.

We may have to spend $625 million.

But we're also going to keep trying to push the operating cash flow up.

Because I really do want to get our free cash flow to dividend payout back down towards 48%, 47% as soon as possible in 2020 or early '21.

And so there's a lot of things going on right now, but we're very focused on that cash because we know that that's how we drive value.

Thank you to Tim for all the help.

He's been a decent guy.

I'd say, well, we're going to find a good job for him.

He's really done a yeoman's job in the last 60 days.

And fortunately, we'll -- I think we'll find a really good job for him to recast his skills.

He can work out in the gym or something like that.

I'm kidding.

Next is Andrew Obin of Bank of America.

Yes, good afternoon, gentlemen.

Good afternoon, Andrew.

I would say that gentlemen is very loosely described.

So we don't -- we're from the Midwest.

I wouldn't call us gentlemen in the Midwest.

Oh boy.

Well, first, I do want to thank Tim for all the help.

And I do have a question from Mr. Sharp.

Are you guys...

Are you still in Suzhou or have you left the property?

Oh, you're in China?

Yes.

I am in China, yes.

Yes, I am.

Very exciting over here.

What city are you in?

I was in Shanghai yesterday seeing your guys.

Okay.

Good.

I saw [Hocker] yesterday.

Well, yesterday my time.

Okay.

Just a question on lower end of C&RS guidance.

What kind of macro scenarios -- and maybe we can walk what's happening -- in North America and Asia would it take for you to sort of hit the lower end of your guidance?

Because comps seem to be fairly easy in Asia, and to Steve Tusa's point, that North American comps are not that hard either.

All right.

I think to hit the lower end of the scenario, Asia would have to keep going down.

And it's a little bit hard to tell right now.

I think you're getting a good read right now in the market.

It doesn't feel like that's going to happen, but it's really hard to tell right now month-to-month.

And U.S. would have to be very difficult.

And that would probably be the broader industrial kind of a picture, hitting the pro tools business, commercial, it would be something more than just like a residential thing.

Got you.

And then a question for Lal.

Just a couple of details.

A, do you include -- have you gotten orders?

I know that the Saudi facility was an Emerson facility.

How much of the impact of the repairs was in Q4?

And how much, if any, work you've got for first half of next year?

And the second question, I think there was some talk about sort of a large KOB 1 order slipping from Q4 into Q1.

Is that correct?

And are we going to see sort of any recovery from Q4 in Q1?

Or it's just steady rate from Q4 to Q1 on Automation Solutions?

Sure, Andrew.

So the Saudi facility is largely an Emerson facility, both from a control system perspective, instrumentation and valves.

We saw repair activity, replacement activity through Q4 as that facility came back online very quickly.

Within 4 weeks, the facility was essentially back online.

And -- but the volume that it took in terms of our equipment to get it back online was not material to the quarter.

Having said that, the modernizations that are going to have to take place within [AFKEG] and their sister facility to get that facility modernized and safe with redundancies will have an impact to us.

Those projects are not fully defined yet, Andrew, as we've gone through.

Those got to be multi-million dollars projects.

They're going to be very large.

As far as the KOB 1 order that slipped, we had talked about one specifically.

We're still working that.

It's very much in the works.

I'm trying to close it here with the team in Asia, Jamie and that team, here in November.

It may spill into November, but we'll see how it looks into Q1.

So it did not happen in October, we're still trying to get it the first (inaudible)

Still working it.

You'll see it because there'll be a big order pop here (inaudible)

And next, we have Joe Ritchie of Goldman Sachs.

Thank you, Tim.

Welcome, Pete.

First...

You're not in China, are you, Joe?

You're not in China, are you?

I am not.

No.

I'm in New York City.

I'm going to make it to China sometime soon.

So -- but let's -- maybe just talking China for a second and this potential trade truce impact.

Our guys have been writing about peak trade pain today and, basically, that being behind us.

If we get -- if we move forward and sign Phase 1, how long do you think it'll take to kind of re-kickstart the CapEx engine to start seeing a little bit better growth rates across your business, Dave?

I think that -- I'll just take Bob's business first.

I think there'll be a fairly positive impact pretty quickly for Bob, just from a spending attitude standpoint.

So I think that you would see a good business bounce in China.

Bob has a lot of business in China.

He's very strong there.

So I think that would probably within a couple months, I would say, would bounce pretty quickly for him.

The capital side, I think the CEOs would start, I would say, within a quarter, they'd start reevaluating.

I think you'll start seeing some incremental spending starting to flow.

A lot of the work has been done.

I mean, as you well know, Joe, we -- our booked but not entered now, or won but not entered number is how big?

Over $1 billion.

Over $1 billion.

So a lot of those projects are based around a China export type of market.

And so I think that you'd see some of those move pretty quickly.

So I think that both Bob's and Lal's business would see a pretty good bounce.

We're not -- obviously not assuming that right now because there's a lot of uncertainty.

But that would be one that would be the catalyst, as I said, that would create that second half recovery that would change us, obviously, to the plus 2 type of range and higher from that perspective.

But that would be nice to see.

In the meantime, we're focused on the cost, but that's a good positive, if that would happen.

The channel would move quickly.

The channel would move quickly, as Bob said.

I guess, Dave, then in that context, right, you guys have said, call it like a flat guide for the year, your order trends are maybe kind of slightly above that.

I guess in what scenario do things kind of get worse from where we are today?

The scenario will get worse is that -- going back to my GFI numbers, is that if this -- if we do not get an agreement with some improvement to get that tension out of between the U.S. and China, and it keeps grinding, I think you're going to see CEOs really continue to curtail spending.

And that would drive obviously the GFI number down, that would hurt us in the day-to-day spending.

The other thing that would also -- that I'm really concerned about is the European economy does not see a recovery and the actions they're trying to do with the new European leadership to try to get spending and investment going.

If this thing is still a malaise in Europe, that's a concern that we've built into that thing.

So that's -- we don't see the catalysts yet being triggered.

We know what they are, but we don't see them being triggered.

If you're right, Joe, and what you guys are talking about in that we do see some realistic change in the discussions between the U.S. and China, we do get some realistic movement coming in Europe, that will be 2 positive catalysts that would change the momentum of the curve and move it upwards and obviously move that thing from 0 to a positive number and growing from there.

But until we see that, I mean, I want my guys to focus on getting the costs down.

And if we get it down fast enough and this recovery happens, then obviously, we'll make pretty good leverage.

Got it.

That makes sense.

And maybe just one quick one for Bob.

Bob, in just thinking through the margin profile this quarter in your business, can you just kind of parse out what really drove the decremental margins this quarter?

What were kind of the key drivers among mix, pricing?

What affected the business this quarter?

Right.

Price/cost was positive for us as it was in the second half.

It turned a lot through the year.

The deleverage of the sales and then with that, you had some plant issues around productivity and turnover and stuff.

When you don't have the growth to work off of, it gets compounded.

That's part of it.

And then as Tim said, for mix, resi versus commercial and AC.

In cold chain, the transport and some of the more profitable food retail was off against other things.

And then on the pro tools and the [disclosures] in the tools area, very high-margin product.

So it was a number of things kind of lined up on the wrong side of mix in the quarter.

We don't see that as any particular long-term trend or something like that.

It's just sometimes, the stars align and then sometimes things work against us.

And this quarter was just things just did not line up well at all.

And next, we have Andrew Kaplowitz of Citi.

Dave, so when you look at Asia, Middle East, Africa, Automation Solutions, the growth was 10% in Q4, which did accelerate versus Q3.

You mentioned it briefly, but it does seem like it reaccelerated here.

So what markets are contributing to the reacceleration?

And is your confidence level increasing that China is still going to grow 5% to 8% or 6% to 8% in FY '20 in Automation Solutions?

Yes, I think that from our perspective, we saw some very good international growth in -- late in the second half of the year.

It was really good to see.

The product -- I think the opportunities in China are pretty still significant as they continue to invest in technologies, in areas that are allowing them to become more self-sufficient.

They are clearly investing in next-generation digital technologies.

And so we're seeing that, and that's a positive.

So we had a very good year last year and the year before in China.

And so I think that we still feel very confident we're going to see sales and orders in this 5% to 10% range.

So I think we'll still see that.

Now going back to, I think, Joe's questions, if we did get some kind of settlement and the relationships did improve, I think that would be a big positive to us because of our presence and the quick investment opportunity.

But we've got to see that because it's just something that -- it soured and we need to obviously fix that relationship.

If you look at the Middle East, I think the Middle East has a huge opportunity.

What concerns me about the Middle East primarily is the fact that -- are the geopolitical, the turmoil, the other actions that are going on there, I wouldn't call it war, but the skirmishes that are going on.

And so I'm very concerned about this period right now, and that's why I'm probably more cautious than the average person relative to the Middle East, because I'm really concerned about all the activity underway in the Middle East and the concern that I have around does that disrupt the projects and that standpoint.

Now the bookings would say not, but I am a little bit concerned.

So I'm a little bit cautious in those 2 marketplaces.

And the other one I would say is Latin America.

We've had a good run.

And the question is does the whole Argentina thing, the Brazilian thing and the lack of money, does that thaw as we go into 2020.

So Lal, why don't you give your view of it?

Yes.

Thanks, David.

The China team did a phenomenal job serving what is, for us, a larger than $1 billion market with very relevant customers who are willing and using our technology today.

And they want the latest and greatest technology, whether it's digital transformation, control systems, final control or instrument devices.

So a phenomenal job by the team to drive mid, low teens type of growth in China this year.

And as David said, our expectation today, given the environment, is in that mid-single-digit type of growth, 5% to 10%, in that range based on what we see in the space today.

The only one I would add -- David, I think you're right on in the Middle East and Africa.

I think Latin America is a concern right now given the skirmishes and the unrest we have just basically across the continent.

We had a phenomenal 2-year run in Latin America, and we're a little bit -- we're going to watch that one very carefully as we go forward.

And then just staying with China actually and the Asian heating and cooling market.

It does seem like the issues there for you guys have dragged on a bit longer than you expected.

Is there a competitive issue there at all?

And then you do have much easier comparisons coming up in Q1.

If I remember correctly, China heating and cooling fell off quite significantly in Q1 of this year.

So would you expect Asian sales to shift now to positive growth despite continued lethargic markets?

Yes, it was improving.

Like you said, it was down 30 actually in the first quarter last year, and then it improved and then getting pretty flat.

But then in Q4, it was down 9% again.

So it's still been bouncing around a bit.

We do have an easier comparison in Q1.

October data point was solid.

So you could see a scenario where China is positive in Q1.

And again, the question is what kind of stability that has and keeps throughout the year is a little bit hard to tell right now.

I mean, it's not been a competitive issue.

I think, Bob...

Yes, sorry, I missed that.

Money, it's made a lot of money.

The mix -- and from the standpoint of the [driving] right now, the commercial side of the business, it's frankly not Chinese competition.

It's pretty specific competition that we know in detail and we're doing well there, especially with the new 25-horse product we have, and then on cold chain as well.

So no, we don't see it as a competitive thing.

It's heating really fell away, the heat pumps and stuff.

There's still the green air policy and stuff like that, but I wouldn't say it was as actively being worked for a while.

And as that funding and activity plays out, as that recovers, that's also a big part of the story.

I think if you think back, and for the people on the phone, and Andrew, you talk about -- I think there are a couple of big wildcards.

You guys have -- it's China, clearly.

China could be a very strong play for both businesses this year.

It could be a dud, but it could be very positive.

If favorable discussions happen between the 2 presidents of the country and we do come to some kind of terms of initial phase agreement, that would create a positive moat, both in China and also in the U.S. for us.

And so those are 2 wildcards that I see have the biggest impact potential for us on the upside as we look at the company today, and that's why we're trying to work as quickly as possible on the cost, because if we get this thing going and get that cost down, that will be a nice bounce for us.

But those are the 2 wildcards you guys are focusing on pretty hard in the questions, and I agree with you on both of them.

Tim, appreciate all the help.

Next, we have Robert McCarthy of Stephens.

Thanks, Tim, for everything, really appreciate it.

I think a couple of questions.

First, if Bob wouldn't mind just talking a little bit longer-term about the HVAC markets from what he's seeing.

Clearly, at a competitor conference this week, some admittedly smaller cap players have been talking about perhaps a flattening out of trends, particularly in housing or housing-related consumer replacement, like HVAC, water heaters, et cetera, where you could be seeing some pronounced weakness that could point to kind of an end or pause in the eco boom of housing that we saw in the late 2000 timeframe.

I didn't know from what Bob's seeing over the longer-term and the installed base of what he deals with, with the players he serves, whether there is some concern that we could be seeing a longer-term secular step down in what has been a very strong market over the past, call it, 10 years.

Yes.

I'd say, I think, for 2020, our outlook on the U.S. market is quite modest.

And the commercial -- probably a little bit of different dynamics within the residential and the commercial side.

You see it now, I think I just saw the report last week.

The average person is hanging onto their house 13 years now.

So they're not turning over as much, which triggers a lot of the remodels, and 80-or-so percent of the HVAC sales are on replacement as opposed to the new stuff.

So I mean, housing starts has been lumbering along in the low 1s.

And I don't -- we don't really see anything different about that.

On the replacement cycle...

Yes, I -- let me give two cents.

Yes, Bob, I've been involved in this business for a little longer than Bob has here.

And I would say there are a couple of things going on.

I think there is a fundamental flattening, and there's -- one of my concerns is -- these guys have been dealing with this issue.

It's a cost of the new efficiency standards and the fact that people are now replacing units or repairing units versus replacement because -- to avoid the efficiencies change-ups and the price points of those units.

So this trend has been going on for some time.

I personally believe, and as Bob's company structured this thing, I think this is going to continue and it's not going to be unit growth, you're going to be price growth or the dollar value to growth.

And that's what we're going to see as you guys go forward with your new replacement.

But that's what's going to happen here is, it's going to be a technology value play because I think the cost of the new efficiency units, the new refrigerants, are going up, and it drives down the underlying unit volume.

And that's what we've been seeing for quite some time.

And I think that's going to continue, to your point.

And as you move into the next refrigerant standards for 2023 with the mildly flammable, that's going to also require some mitigating stuff on the systems because of the flammability.

And they'll probably prolong some of the place -- or...

I think people are looking at replacements in 20 years, I think, Rob.

I think they're going to try to drive these units as long as possible.

To your point, I think that's what's going to happen.

I mean, between the refrigerants and efficiencies, I think people are going to try to hold on to the units as long as possible, and that's going to drive a unit -- so therefore, you're going to have to make it up in cost, you're going to have to make it up in price points.

Okay.

That's very helpful.

I think the only other question I would have is just in terms of the free cash flow, I think, if my math is correct, which is often wrong, we're talking about $4 in free cash flow for next year.

And from that standpoint, what do you think you could drive it in the out years?

And obviously, given what's occurred in terms of the global economic environment and other issues, I don't think we need to talk about the target of 4 50 in earnings per se for fiscal '21, whether that's on or off the table.

I think more importantly, what could we be expecting to see in kind of that free cash flow number in the out years?

What do you think could compound that?

And maybe just talking to the segment leaders, what can they kind of tweak up or control, whether through the continued Final Control and valves integration or other parts of the business, to improve cash going forward so that you think you can continue to compound [out here]?

The pretty high rate gives a -- a key differentiator to the story is clearly your free cash flow conversion.

So we're going to (inaudible) this thing because these are things that we -- as we look at the profitability, as we're changing our capital mix, as we do the capital allocation, Rob, as we look at the capital investments and the change in the structure of the company, that's going to have an altering to the free cash flow.

So we'll make sure that we will cover that at the February meeting because that is one of our objectives.

Can we -- we, as a company, have always been a very good cash flow generator.

The question is as we drive our margins, as we rebase and we look at excess capital employed in the company and we take that out, can we make that capital -- or cash flow number even better.

So I'm going to push on that until we finish our work here because that's one of the outcomes of the work we're doing, and that is clearly one of our objectives because we believe strongly cash will drive the value of our company and also allows us to give money back to our shareholders.

And next we have Jeff Sprague of Vertical Research Partners.

A question for me.

Are you in some place in the East Coast?

China?

Are you in Antarctica?

Where are you?

I'm in the city that works, Stamford, Connecticut.

The city with taxes, or did you say work?

I can't even say it.

It's taxes or work.

Go ahead.

So Dave, the $0.08 of EPS growth for 2020, the operational improvement, that's effectively, I guess, on 0 organic growth, right?

Correct.

Correct.

So implicitly, that's restructuring savings.

So that $0.08 is $65 million or so.

Is that carryover from 2019 actions?

You said earlier you had no benefit from Q1 in your guide, but it would seem like perhaps there is some restructuring coming through.

Yes.

I mean, there's a couple of things going on there.

It does the carryover for the second half because we accelerated restructuring in the second half of the year.

That's helping us in a big way, and we'll see that in the incremental margins.

Two, the price/cost has definitely helped us in this scenario, a little bit better, more favorable from a price/cost, that's helping us.

And we clearly look at the different type of mix.

And we had some tough mix in the second half.

So we're basically -- we always go back to normal mix.

We don't plan on same tough mix.

So I think that those are 3 things.

But clearly, the biggest chunk of that would be the restructuring benefits we got from the acceleration from June, July, August, September.

And I would say that's the biggest benefit.

And then when we flow out the restructuring in the first quarter, we tell you what that number is, we'll start laying out the benefits, and you'll start seeing those incremental benefits come forward in the second half of 2020.

But what should we expect, Dave?

You haven't put them in your guide.

But there should be some payback from that $70 million.

Yes, this is going to mean -- yes, there will be some payback.

And I mean, I don't think it's going to be dollar-for-dollar because it's -- we're not in a full year.

But I would say at least $0.50 on the dollar would be my estimate right now in this year.

And then just thinking about -- right, in this year.

And then just thinking about what we might hear in February.

So it sounds like you have full Board approval for this restructuring, right?

You know what you need to do.

You're going to do $70 million in the first quarter.

That's, call it, 30% of a grand total of $250 million or so.

So you're coming out of the gate with apparently Board approval and company buy-in on the whole restructuring.

So putting aside kind of portfolio questions, I mean, is there some further deeper discussion on cost or other metrics?

Or regardless of the portfolio changes or not, this is the restructuring number?

So I do not have full Board approval yet on everything we're trying to do.

What I told the Board is that we are still working the broad plans at each of the businesses.

I've had first passes.

I also have some of the initial work looking at it from a corporate standpoint and what we can do at the corporate, but it's not done yet.

So what I told the Board is there's $70 million of activity we can do pretty quickly in this quarter, and I want to get on with it and they need to trust me as a long-time CEO, as the leader of this company, that we are not doing things that are damaging the company, going back to one earlier question.

So I do not have full Board approval on the total plan.

But what I push these guys pretty hard is what can we get done in the first couple of months of this year to really give us some headroom and some flexibility if things get sloppy.

And so that's what the $70 million is.

And you're right, I push pretty hard, but the Board does trust me that I'm not going to do something stupid.

And then they'll see the whole review of all the plans as we go forward here.

So they have not approved it.

They just allowed me to take a big chunk and jump on the first start here based on my credibility and leadership of running Emerson for the last 19-plus years.

So that's what it looks like, Jeff.

Yes.

So that makes sense.

And so that would then mean that if you do the 2 -- the full $250 million or $300 million, there is a heavier structural lift that these actions would clearly carry into 2021.

You would not be able to get all that stuff started in 2020.

Well, the stuff we -- the stuff upfront right now are very quick.

These are very quick actions, both Bob, Lal and we at corporate are doing.

So the stuff that we're trying to do right now will be quicker and faster payback.

And the really structural things will take longer in the second half of the year and more into '21.

So what I ask the guys is find me the things that we could get on to very quickly, that we -- that make a lot of sense from -- that we would definitely do normally, but let's get them done as quickly as possible, and it gives me some time to deal with the longer structural issues and how we go about looking at that.

We want to prove the -- I want the Board approval on those things.

And so I think that's how we're looking at it.

For the first 3, 4, 5 months, I'm looking at quick things we can do by going after some of the quick cost structures, which don't really take a lot of the Board approval process from the standpoint of going forward.

So that's what we're looking at.

I'm trying to get things quicker, and it gives us a little headroom from the standpoint of what's going on in the economy.

Next, we have Josh Pokrzywinski of Morgan Stanley.

Josh, you're going to be my last guy here, and I apologize to everybody else, but it's longer questions.

I have more people on the phone today.

So I apologize for that.

I will work very, very hard to get the rest of the people next time.

I'll work it around.

But we've been already past 1.5 hours -- an hour and 20 minutes.

So -- but I want to -- Josh, you got your 3 questions, take your time, you're closing it.

You're standing between all of us from getting a drink.

Don't screw it up now.

Come on.

Dave, just on the restructuring, if you could kind of help us with maybe the framework that you're adopting or as you bring in some of these external folks to look at the organization.

Is it more kind of looking at some of the structural costs, things like G&A, where maybe they're duplicate functions?

Or is it more on trying to benchmark businesses to say, like, oh, Final Control could take it to the next level, we can compare that to a competitor or something like that?

Is there a specific track that this is going down?

Or is it a little bit of all the above?

It's more that we're looking at G&A expenses that maybe that we don't need to do and we have duplication.

We're looking at things that both the 2 businesses do and the corporate do, are the things that we do from a frequency standpoint and in the process, are we -- we're sort of overdoing them and maybe we're spending a little bit more money.

As we shrunk the company into 2 platforms and we trade off back and forth, where can we go after from a G&A standpoint.

The structure stuff that we're working on very much is around the structure between the individual businesses, our facilities and maybe where we have too much capacity, too many facilities or maybe where we have too much of overlap from an organization standpoint, we may want to put organizations together.

So we're looking at more of a structural from that perspective, and then we're looking at the cost structures in between all the G&As, benchmarking what we do as a company and what other companies do, and we make sure that we are -- we consider ourselves best-in-class, but are we doing things too much and can we look at costs we can take out.

I mean, fundamentally, we run very high levels of profitability, as I pointed out, but I think we can run higher levels of profitability.

And how do we make sure we do that without jeopardizing the control and the discipline, our planning process and the credibility and -- that we have as a company.

So those are the things we're looking at, Josh.

Got it.

That's helpful.

And then shifting over to the demand side.

And David, the last time we had a slowdown, you had a big set of customers in oil and gas that kind of learned capital discipline for the first time.

So maybe there are levers that got pulled that wouldn't get pulled again.

How would you compare some of the decisions your customers are making around timing or curtailing spending and kind of how rational those seem in the current environment?

Or how sustainable some of those decisions are?

Well, first, Josh, this cycle has just barely got started, and I don't think there's been any level of excess spending or capital that we've seen.

From my perspective, I think they've been very rational.

What they're doing right now is they're spending more money on short-term paybacks, sort of the KOB 3 to KOB 2. So I think there's a lot more discipline within the segment, and I'll let Lal talk here in a second.

But I think it's a better process for us.

And if they get some clarity around what's going to happen in China, some clarity on what the, let's say, the trade discussions are going to be, I think you'll see some of that capital flow out.

And I know they have pressures on them relative to their capital allocation, but I also think they have the capital flexibility to invest for the future.

And so I think the discipline standpoint has been much better here in the last 2 or 3 years, and this cycle has been truncated and pushed down, and I think it could pop back up in a nice way.

So Lal, anything you want to add there?

No, I think that's well said, David.

The discipline around the capital is there, the discipline around the operational dollars are there as well.

But ultimately, the plants have to run safely, the fuels have to run safely, and there's a degree of investment that goes along with that.

And that $118 billion type of installed base that we do have leads us to gain -- continue to gain customer relevance and trust as we go through the slower periods of time.

I want to thank everybody.

Tim is not going to go away.

He'll be still with us.

I think you'll still be with us in early February.

He may be in a transition mode, but he's not going anywhere any time soon.

So you guys will at least have a chance to be nice to him one more time.

I wouldn't overdo it, but I appreciate everyone's patience.

And I also want to thank all my shareholders and the sell-side analysts for giving me the time to talk about issues, what's going on, what you think about the company and what the Board should be thinking about.

Those are very, very important inputs to us, and the Board truly appreciate them, and they were summarized by Tim, Mark and myself, and they got them, and they read them, and I want to thank everybody.

And I look forward to seeing you guys real soon.

Thank you.

Bye.

Thank you, sir, also and to the rest of the management team for your time today.

Again, the conference call has now concluded.

At this time, you may disconnect your lines.

Thank you again, everyone.

Take care, and have a great day.