艾默生電氣 (EMR) 2020 Q3 法說會逐字稿

Good afternoon and welcome to the Emerson Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Pete Lilly, Investor Relations. Please go ahead.

Good afternoon. Thank you, and welcome, everyone, to Emerson's Third Quarter 2020 Earnings Conference Call. I hope everyone is staying safe and healthy.

Today, I am joined by David Farr, Chairman and Chief Executive Officer; Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer; Lal Karsanbhai, Executive President of Emerson Automation Solutions; and Bob Sharp, Executive President of Emerson Commercial & Residential Solutions. As usual, I encourage you to follow along in the slide presentation, which is available on our website.

Starting with the cover slide. In the era of COVID-19, safety and health have been rightfully brought to the forefront of the global conversation. At Emerson, safety is a core value. And in June, our employees celebrated Global Safety Day to reflect on the importance and personal responsibility of each individual to foster healthy and safe behavior.

Additionally, Emerson has a passion for STEM education and innovative thinking as critical enablers for the needs of business and society both today and in the future. Emerson recently hosted a virtual STEM competition in cooperation with our Impact Partner here in North America, Spartan Controls. The winners designed wearable devices that gave alerts when within a 6-foot social distance barrier. Congrats to the winners, Kaiden and Caleb Manji.

Please join me in turning to Slide 3. I'd like to briefly highlight the Emerson Corporate Social Responsibility Report, which is also available on our website. This document highlights in detail all of Emerson's aspirations and accomplishments within the environmental, social and governance realms. COVID-19 and the ongoing social discussions are catapulting many of these important ESG topics to the forefront. As problem solvers at our core, Emerson strives to advance the discussion, share our own progress and strategies and also to be a valued resource for our customers as they embark on their own ESG journeys. Emerson takes very seriously our role as a critical enabler and partner for digital monitoring, measurement, optimization and efficiency management across our broad customer base.

Please turn with me to Slide 4. Despite the challenges presented by COVID-19 in the quarter, there were also many reasons for cautious optimism. I'd like to briefly share a few. First, Emerson remains steadfast in our commitment to health and safety for our employees, customers and communities. Business continuity, disciplined cost control and positioning to outperform as we emerge from COVID-19 remain our additional key thematic priorities. Our regionalized supply chain and operations remain resilient and stable in the current environment, and we continue to work hard to ensure we can serve our customers and their essential industries.

In the quarter, the team was able to exceed adjusted EPS guidance by $0.20, with $0.16 being attributable to strong operational execution. A lower effective tax rate also contributed to the overall adjusted EPS beat. Cash flow was strong in the quarter, representing 181% conversion of net earnings. Additionally, the team was able to manage decremental margins to the mid-20s level at adjusted EBITDA.

Despite the uncertainty and continuing challenged demand environment, sales and orders finished in line with guidance given in April. As expected, China is leading the emergence from the downturn with positive sales growth of 3%. Additionally, we are seeing trailing 3-month orders starting to stabilize, highlighted by Commercial & Residential Solutions' month of June year-over-year orders turning positive. Finally, based on current recovery trends, we expect sales to turn positive in either Q2 or Q3 of next year.

Moving to Slide 6, which summarizes results of the quarter. Underlying sales growth was within guidance, down 15%. Trailing 3-month underlying orders were also within expectations, down 19%, reflective of the ongoing challenging demand environment. GAAP earnings per share were down 31% to $0.67, and adjusted earnings per share were down 18% to $0.80, which was $0.2 above guidance.

Despite lower sales, both platforms executed well on profitability due to COVID-19-related cost control measures, in addition to the ongoing aggressive restructuring reset actions. Automation Solutions underlying sales were down 13%. However, China sales were up 9% as it emerged from lockdown. Trailing 3-month underlying orders were down 19%. Commercial & Residential Solutions underlying sales and orders were both down 19%. However, as previously mentioned, June orders turned positive, which continued a positive trend in month-over-month orders.

Cash flow performance was solid in the quarter with operating cash flow of $842 million and free cash flow of $738 million. Year-to-date operating cash flow and free cash flow of $1.85 billion and $1.53 billion were up 3% and 8% over prior year, respectively. Lastly, the company continued to build upon its aggressive cost reset plan, initiating a total of $94 million of restructuring actions in the quarter.

Turning to Slide 7, we will bridge adjusted EPS. Beginning with third quarter of 2019 adjusted EPS of $0.97, you will see that nonoperational items of foreign exchange effects, stock price effects and pension detracted $0.09, which was offset by a more favorable tax rate than expected due to R&D credits and other items. The net effect was a $0.01 tailwind. Operations contained the deleverage to $0.20, and share repurchases added $0.02 for a net $0.18 headwind. Overall, we finished the quarter at $0.80, which was $0.20 above previous guidance. Additionally, total segment adjusted EBIT and EBITDA margins of 16.8% and 21.9% exceeded their respective guidance ranges of 15% to 15.5% and 20% to 20.5%.

Slide 8 depicts the key elements and magnitude of operational performance on adjusted EPS. Starting with adjusted EPS guidance of $0.60, we saw both business platforms as well as corporate contribute to the SG&A containment. Automation Solutions contributed $0.10; Commercial & Residential Solutions, $0.02; and corporate, $0.04, for a total effect of $0.16. Additionally, the effective tax rate came in at 11% compared to the guided 18%, which provided a $0.05 tailwind. Subtracting $0.01 for other items, the adjusted EPS winded at $0.80. The leverage was contained to 26% at adjusted EBITDA.

Moving to Slide 9, we will review the P&L. Starting with gross margin, we saw a reduction of 140 basis points to 41.3% as deleverage and unfavorable mix were partially offset by favorable price cost. Importantly, SG&A as a percent of sales declined by 20 basis points as aggressive cost control actions went into effect as volume declined. Adjusted EBIT and adjusted EBITDA margins, which exclude restructuring and related costs, decreased 240 basis points and 150 basis points, respectively. This outcome reflected deleverage from the decline in revenue being offset by restructuring savings and cost-containment actions. Lastly, our effective tax rate dropped from 20.3% to 11.2% driven by nonrecurring tax items, including R&D credits. Overall, the adjusted EPS decline of 18% from $0.97 to $0.80 was in line with the revenue decline.

Turning to Slide 10. We will look at underlying sales by geography. The Americas showed the steepest declines, down 20%, with the United States down 20% driven by broad-based weakness in all industries, except medical and life sciences. Europe and Middle East, Africa & Asia were both down 9%. China, however, grew at 3% as the economy was the first to broadly reemerge from lockdown.

Please turn now to Slide 11, and we will discuss total business segment performance. Total segment adjusted EBIT margin decreased 170 basis points to 16.8%, reflecting aggressive cost-control measures and strong operational execution as sales declined. And as previously mentioned, total segment adjusted EBITDA deleverage was 26%. Stock price-related costs increased $20 million as the stock price improved from lows at the end of the prior quarter. Adjusted corporate and other costs dropped by $14 million as aggressive cost controls, travel restrictions, salary reductions and other measures took effect. Adjusted pretax earnings dropped 270 basis points to 14.1%. However, 180 basis points of that movement can be explained by pension, stock price and foreign exchange losses.

Q3 cash flow performance was solid given the challenging environment. Operating cash flow and free cash flow both decreased by 11% to $842 million and $738 million, respectively. Free cash flow represented 181% conversion of net earnings. Lastly, the drop in net sales resulted in an increase in ending inventory and lower payables.

Turning to Slide 13. We will review the business platforms. Automation Solutions underlying sales finished down 13% for the quarter as broad-based declines in most end markets were only slightly offset by life sciences, medical and food and beverage. North America saw the steepest declines, down 20%. Meanwhile, China led the recovery, growing by 9%. The Final Control and Systems businesses were down high single digits and mid-single digits, respectively. Trailing 3-month underlying orders remained within expectations at down 19%, again reflecting broad-based demand challenges.

Aggressive restructuring actions totaled $80 million across the platform, which brought the total to $192 million year-to-date. The platform delivered on profitability in a very challenging demand environment with adjusted EBIT and adjusted EBITDA margins down 120 basis points and 30 basis points, respectively, reflecting the aggressive cost actions taking effect. Decremental margins were held to 22% at adjusted EBITDA. Of note, sequential backlog was unchanged at $5.1 billion.

Turning to Slide 14. Commercial & Residential Solutions underlying sales were down 19%, also reflective of the broadly weak demand environment due to COVID-19. North America led the declines, down over 20%, while Europe dropped 12% as momentum in the heat pump business was more than offset by declines in professional tools and cold chain. Asia, Middle East & Africa was down 18%, with China down 9%.

Order rates varied dramatically during the quarter from down 35% in April year-over-year to positive 1% in June. Trailing 3-month underlying orders were down 19% driven by weakness across the distribution and OEM-based businesses. In contrast, businesses exposed to big-box retail and do-it-yourself markets fared better and were down mid-single digits. Asia orders dropped by 20%, while China was down 7%.

For the quarter, restructuring actions totaled $12 million, which brought the total figure to $31 million year-to-date. Commercial & Residential Solutions also delivered solid profitability given the demand environment with adjusted EBIT and adjusted EBITDA down 270 basis points and 160 basis points, respectively. Decremental margins at adjusted EBITDA were 32%.

Turning to Slide 16, we will review the updated guidance. The impact of COVID-19 certainly continues to present a challenging demand environment. However, we are raising guidance due to early signs of stabilization and good momentum in cost-containment and restructuring actions.

First, we assume demand will continue to stabilize and gradually improve. There are no major operational or supply chain disruptions, no changes in discrete tax items and oil prices remain in the $35 to $45 range. With those assumptions in mind, we now expect underlying sales to be down 9% to down 7.5% and net sales down 10% to down 9% for the year, only slight refinements from previous guidance.

We are raising expected adjusted EPS to the range of $3.20 to $3.35, an increase of approximately 6% from the previous midpoint of $3.10 to the new midpoint of $3.27. Expected total restructuring spend has increased by approximately $20 million to $300 million, with approximately $235 million coming from Automation Solutions, $55 million coming from Commercial & Residential Solutions and the balance from corporate. Please note that we will review the updated restructuring reset spend and savings plan as well as the COVID-19-related cost savings in detail later during the presentation.

We expect operating cash flow to come in at approximately $2.8 billion, and CapEx spending expectations remain $550 million, resulting in a free cash flow target of approximately $2.25 billion. Lastly, our share repurchase program remains complete for the fiscal year.

And now please turn to Slide 18, and I will hand the call over to Mr. David Farr.

Thank you very much, Pete. Appreciate your inputs. Pete wants to be called Commander Pete, and he's got a new name, come with a military background. I didn't have to deal with this with Tim. But Pete, I do. By the way, I did see Tim today. We had a Board call, and Tim was in Germany with my German Director, and his family has arrived in Germany. He's the President of Professional Tools in Germany. He's doing well, and his family are now there. And his kids will be going to school live. And so it's good to see Tim. He seem to be pretty happy today. And I never had to call him Commander, but again, he couldn't kill me with 2 fingers like you.

With that, I want -- on the order trend chart, as I would say, the trends for orders were pretty much in line to what we thought would happen in the quarter from a month-by-month basis. Clearly, you can see Commercial & Residential has seen -- found the bottom in the month of June. I think you'll see that, that has improved again in the month of July. I'll let Bob talk about that. Lal continues to -- seem to be stabilizing around this bottom. And I'll let him talk a little bit about his businesses. But overall, month by month, we saw the quarter unfold exactly like we thought it was going to unfold relative to orders, relative to sales. Margins came in much better as you've seen from the cost reset actions and to what we call the COVID-related savings. Therefore, cash flow came in better, too. Overall, execution was extremely good.

And I really want to thank the global leaders relative to their strength of operations throughout the quarter. I want to thank the whole team around the world. As you know, the OCE and top 10 or 15 people in this building, at the corporate headquarter, never left the building. We now have the whole building back. We have our campus back. Obviously, from time to time, we might lose somebody, but we're all here. Operations are working around the world. We have not had really many hiccups. We've lost a couple of days here and there in Bob's case and in Lal's case. But overall, great execution by the team around the world as I share that with the Board, and we are acting and running this company live, in person, in our offices as best that we can, not everywhere but as much as we can. And I really thank them for what they have done because it's been a very challenging quarter.

As you know, we laid out our forecast in mid-April. We went out early. We executed around the plans from an order standpoint, sales, manufacturing. And we really, really did a great job around the cost reductions both from the reset actions, which we started last June, which we have accelerated, and we'll talk a little bit more about those; two, the COVID-related adjusted savings from the onetime cuts, the furloughs, delays in salaries, obviously, no travel, entertainment, all those things, and we'll talk more about those. All those came in very well and helped us from a profitability standpoint.

But in particular, what I was extremely pleased to see is, as we laid out that detailed major cost-reduction reset program back in February to the shareholders but to the Board last year in August time period, they really have stayed ahead of it, and they've actually increased the numbers. You'll see that in the charts coming up. And that's not easy to do in an environment where you're not able to travel. You have hard times having meetings, but these guys have done a phenomenal job relative to really driving those programs forward.

We're in a different phase right now. We're in the phase of actual consolidation of facilities, shutdown facilities, new facilities, we're moving stuff at this point in time versus the initial phase, a lot tougher phase. And both of the businesses are on track and I think are doing extremely well, and I'm very pleased with that. With the effort in the quarter, which was better than I thought from the earnings, better than I thought from a cash flow, we have raised the year. We have confidence in the year. And I'll let Bob and Lal talk a little bit about that.

But really, from the execution on operations, we really did a great job. And from that perspective -- but I just was pleased to see from the standpoint of that execution and what we saw, and we'll see as we go into the quarter. I think from my standpoint, our -- I think that we will see some strength emerge from the businesses. I think the profitability will continue to do well. And I think that, look, we're going to have a very good order from that standpoint.

And what I'd like Bob and Lal to talk about briefly here first, about the orders first, and then we're going to go in to talk a little bit about the quarters. But Bob, why don't you give them a little color what you're seeing right now in orders, and Lal, you do the same thing? And then we'll go into a couple of other charts here.

Okay. Thanks, Dave. As Pete mentioned earlier, the front end of the quarter was very much unlike the back end of the quarter. April really dropped severely really everywhere, North America A/C, in particular, with a lot of plant spend down, including customer facilities and professional tools, a lot of the channel basically just shutting down and offices being closed. And then, of course, we ended with June swinging up positive. So quite a dramatic change. And the numbers we have for July right now is right around flat. So we're holding pretty solid again. The 3 months through June was down 19, and that will bring the July 3 months into the 5 to 10 range. So definitely going in the right direction.

Coming out of it -- as going in was broad, coming out of it is really quite broad, too. But again, North America A/C, you all follow a lot of the HVAC producers in North America, clearly, when the heat hit in late June, that made a dramatic difference, and we felt it very quickly. The DIY space continues to be very strong. So the VAC business and InSinkErator in particular, quite good. Pro Tools was very strong. Part of that, I think, is basically branches reopening, and it's kind of a little bit of a channel ballup, I would say, more than the market itself, but June was certainly quite different. And Europe in July was quite strong as well. The European heat pump business is very dynamic right now in total, and we've got some very good relationships with some OEMs and are enjoying some very strong growth right now.

Yes. I think, Bob, one of the key issues we talked about on the lines -- I've had a lot of investors on the line over the last 2 or 3 months is we knew the bounce would happen. The question -- the key issue for us is to keep these factories going. And that's what Bob's right now is very focused because, on a global basis, this demand is coming back, and what we want to make sure is we deliver on that demand and not miss this bounce. And we've gone through these before. And I think that right now, his teams are very much focused on that. I've been to a couple of the sites, and they're all getting ready for a sequential bounce this quarter, and that's going to be a key milestone for us from that perspective.

Yes, factory is very much in focus right now, being able to deliver against these numbers.

Yes. Lal, do you want to give -- obviously a different part of the cycle and -- from that perspective, but you are, I would say, forming the bottom at this point in time, and you clearly have the same issues, relative mix, but you have broad industry capability. So why don't you give them a flavor of what you see relative to your orders right now before we can get into sales of the global businesses.

Thank you, David. Good afternoon, everyone. Yes, clearly, operating around the bottom of this order cycle as we feel it through June. And actually, July came in, on a daily basis, about 4% above the month of June as we saw broad stabilization particularly in Europe and driven by some growth in China and stabilization in North America. So really, there's 3 phenomena, David, as we think about the order rates. Obviously, oil and gas upstream is one. That predominantly impacts our strong upstream markets, North America and Europe to some extent, and has had an impact particularly on the short-cycle businesses to begin with and now extending into some of the longer-cycle businesses. We've seen reduced OpEx, and we've seen deferred CapEx as a result.

Secondly, people are not right back in the plants yet. That's had a detrimental impact in day-to-day KOB 3 orders as plants have been kept open and safe but with less folks in them. And consequently, projects aren't being executed, modernizations aren't happening. And some of that will come back as people return to work, but that's had an impact through the quarter and where we sit today. And then lastly, I'll highlight that China has recovered. And we had a good quarter in China, positive orders and sales, and we're seeing that broader stabilization across Europe and, hopefully, North America here as we go through July as well.

Thanks. As we expected, we would expect Lal to lag in the cycle. He went down slower. He did not have a minus 20% in the early stages. He could easily have that in a quarter and a month here. But he's in a different cycle right now, but I feel very good about where they sit. And we're starting to see pretty good insights around that.

We go on the next chart, Chart 19. If you look at the underlying sales, from our perspective, we were dead-on from the underlying number that we talked about for the quarter, maybe slightly better than we thought originally. You can see that what we're going into now in the fourth quarter, very similar to what we had before but I would say just slightly better. I think Bob's business, he'll talk a little bit about it here in the next chart or 2, was slightly better. I think Lal's business is going to be -- the key issue for him is going to be backlog reduction.

But as we move in this trend line and, directionally, right now, what we're seeing based on the customer input, based on economic trend lines, based on the opening of the world is that we have a chance to go positive in the second quarter in sales, slightly positive. It will be -- everything has to move right. But last quarter, I wouldn't have been able to say that to you. Right now, it looks like that's the case, and things have to go the right way. But overall, the direction and the trend lines of this cycle feel pretty well understood at this point in time, and we're managing around that. And we're having to really allocate a lot of resources because we have businesses -- within Lal's business, were up 20%, like, in life sciences or in power, he's very strong. And Bob's got businesses, too, that are growing right now.

So we're having to move resources around, and we're having to be very careful relative to our plant restructuring and modernization as we see this trend line change. And it's very interesting. I've been around a long time, as you all know, as CEO and at Emerson. I've never seen a cycle quite like this where we've had sudden surges in certain pieces and other pieces drop off. So it's really -- by being together as a management team day to day and looking at each other eyeball to eyeball, no spitting but just eyeball to eyeball, we are -- we have a chance to actually manage this very well. And I feel good about it.

So what I'd like to do is turn to Lal first and give a little bit of update on your chart relative to what you see as underlying growth in China and what you see as your point of inflection right now, but I think he feels very good about what's happening.

I do. I do, David. I think you said it correctly. I mean I think what you said generally applies to automation, to the automation market and our sales performance over the next 6 quarters. But essentially, the story for us in Q4 is going to be stabilization of the book-to-ship order environment in North America and backlog execution. Consistent with the plan that we shared with you last quarter, we have to execute about $300 million of backlog in the quarter. The good news there is that in the month of July, we took $96 million of backlog value. So we're well on that path but works to do in August and September. That will land at somewhere in the 10% to 12% down range. The offsetting there is the book-to-ship. And then we see an additional 2 challenging quarters. We have a shot to get flat in Q2 depending, as David described, how things swing on the order environment. But clearly, we see a positivity in the second half of the year on a global basis on orders and sales, David.

One of the interesting things Lal showed today to the Board, just to give you an information, you had 5 customers, you did a lot of workaround looking at the trend lines of cars, where you can pick up trend line of cars, how many people on the factory. Factories are operating at 30%, 40% levels. And you can directly correlate that to our sales of those individual factories, which was pretty interesting insights that you shared with the Board today.

Yes, sir. We used the Google mobility data and plotted it against our daily order run rates in North America, and there clearly is a linear relationship there, particularly as people are just not been -- they've been working from home, and folks aren't in the plants to place POs and that kind of stuff. So we need those folks to get back in the plants clearly, particularly here in North America.

On the bottom of the chart, we've got China, which was a tough story, down 21% in the second quarter but came back very strongly for us in Q3. We see good activity broadly in China. Orders, on a destination basis, were also positive in the quarter in China. So we see some good momentum there on the order rates. The sales comparisons get very, very challenging in Q4, which is why you see that 2 to 5 down range for us into Q4. It's nothing more than just an incredibly tough comparison to Q4 last year, which was a record on just about every measure for us in China. It will still be a very strong number to execute within that range. And China sales year-to-date are positive, which is helping us. And then we see an environment that's positive as we go through fiscal '21.

Okay.

I'll turn it to Bob.

Bob, why don't you give an update on what you see unfolding in the quarterly sales at this point in time?

Okay. So again, you can see that Q3, we ended up coming in at down 19. Right now, the fiscal year guidance has been updated to 8 to 10. So if you do that math, it puts us in probably in the 5 to 11 range for Q4. So if things keep going the way they're going, we do feel like there's potential upside. Again, June and July single-month orders were a bit stronger. Part of that, again, I think is catch-up on April and May. We're much lower than 19 down. And then -- and they're actually -- we have a small amount of long-cycle business. We do gas compression for recovery, like landfills and digesters and farms and such, for green activity. And that looks actually pretty strong right now. So that'll give us some projects for '21 as well.

So you can see right now, Q1 down, Q2 right now was a bit hard to tell. We expect Asia and do it -- DIY kind of strengths to be kind of leading us out, if you will, and then the other stuff should come in broadly, certainly in Q3, especially with the comp we'll have against this year. So again, feeling -- overall, feeling good about a strong recovery. We've seen that before, like in the financial crisis. And of course, there's still a lot of unknowns what's going to happen in the next 12 months.

Yes. China, as mentioned, that's been a roller coaster for us. We were down heavily in early '19. It was moving up. We had talked about potentially being up in Q4 of last year, and then it kind of stumbled a bit. We did get positive in Q1. And then when COVID hit in Q2, it was very dramatic in terms of the hit. Q3 came in down 9. It's mixed basically is kind of the best description. It's not a broad strength right now for our areas with some of the stuff that's happening, and we look for that to keep going up. Again, it will probably go sideways a little bit for a while here. And then certainly, again, as we get into Q2, with the comparisons, it should be good. And then outside of China, the rest of Asia is a bit of a factor, too, in terms of the total numbers. And hopefully, if we get the U.S. strength that we're looking at in China, it should follow in line with those.

Yes. Thank you. Appreciate that. If you go to the next chart, one of the things we wanted to do is lay out and give you the detail by the first half, second half what we call the reset restructuring. I want to make sure the whole total program is well understood, both what's in it, what's going to be moved around both this year and next year. Also, we want to give you insights relative to what we call the COVID-related savings, which are from actions we took from furloughs, to pay cuts, to bonus cuts, to also no traveling and all the different things that unfolded in the COVID number, which, for this year, it's worth about $150 million to us.

But if you look at the total program that we've laid out over the last -- since February to the outside world, you can see in '19 -- 2019, we spent $95 million. This year, we're spending around $300 million. I believe that's up a tad during the last time we talked, and we're looking at $125 million, which is again up a little bit from what we talked about as we continue to really focus on the programs and the reset programs, which are permanent program actions, which we've got benefit already. We're already feeling it.

As you can see, the savings and the reset program in the first half was $75 million. In the second half, it's going to be $145 million. And if you go into next year, it's going to be $210 million in total. So it's a very important program, and it's actually working. And then we're going to have benefits in '22 and '23 from the initial -- of the actions that are going on right now at the facility levels around the world, which take longer to get done. But overall, our payback, our cost -- total program's going to be around $500-plus million of restructuring. And we'll have over $500 million of savings from the reset program, ignoring the COVID-related areas.

On the chart, you can see what we talk about, as we look at -- we want to give you an estimate. We see, as business does come back, it's a function of how fast business comes back, how fast we can travel again and what we can do. But right now, our best estimate is we have $150 million savings this year from COVID-related, $70 million of that will start flowing back. We're -- the pay cuts we took in place, the furloughs, all those things will start reversing here. And they will start flowing back into the P&L. It will be a headwind for us. But right now, our best guess at this point in time is $70 million to $150 million will flow back in over time in 2021. If growth takes off faster and we're able to travel, clearly, those numbers will shrink, and we'll have more cost coming back into the P&L next year. But it's our best guess at this point in time as we look at it.

But I wanted to make sure you had a distinction between the reset cost-reduction programs, which are really well done by the global organizations, both in Lal's side and Bob's side and also corporate, and then also what we see going on on the COVID-related. So you've got a lot of detail there, and you can track everything that's going on at this point in time. But I think it's necessary for you to understand what's going on. And a lot of hard work, when I look at what the organization got done from a profitability standpoint this quarter, it really paid off all the work we did last year as we started. As we continue to go forward, our margins, our cash flow is better. It's allowing us to stay on track relative to the savings despite sales being down as hard as they are at this point in time.

So I feel as we look at the next couple of months, the next, let's say, next 3, 4, 5, 6 months, I think we have a pretty good vision of what's going to unfold here. I see the savings flowing through. We are obviously going to be very cautious in how we put money back into it as we start seeing that growth happen. But we want to make sure that we are serving our customers, and we're making sure we support our customers around the world as we go forward.

But the organization on a global basis has had to do a lot of things without a day-to-day contact with leaders. I guarantee none of the leaders at the OC level have been able to travel into Europe. We've not been into Asia. We've not been in Latin America. I am starting -- I am traveling. Sorry, I am traveling in North America, as is Lal and Bob, and we're doing site reviews. We're getting out. We're actually -- the first time I got to walk a factory -- the first time I really felt safe walking our factory, one, I didn't want to contaminate people in the factory or them contaminate me, but we walked into a couple of factories here recently. This is important. Our people want to see -- in fact, I've been in 3 factories now in the last couple of weeks. People want to see us. And we're out -- it's important to go out for what they're doing in the factories today is not easy. And I really want to make sure they understand how much we appreciate that, what they're doing.

But that's where we sit. We feel good about it. It was a great quarter execution. I want to thank the team. They did a phenomenal job. I want to thank the OCE for standing by me, coming in the office every day, even though they may not want to go in the office every day, but we were here. And it's important for the people around the world that are in the office working very hard at this point in time. Factories are working well. And now we see the trend lines coming our way in Bob's business first and Lal will follow second. And I feel good about where we sit right now overall.

And let's turn the -- open the floor for Q&A, and let's go from there. Thank you very much.

(Operator Instructions) Our first question comes from Scott Davis with Melius Research.

Can you hear me, David?

Good to hear from you.

I just bought one of your InSinkErators. There's a shortage of those things out there, by the way. I'm sure you know that.

Yes, we do know that. Thank you very much, Scott, nice comment there. We're working on that issue.

Hot topic. Dave, just to think about your own business, the guidance on the restructuring is great. But what else changes as you think about when you get into 2021? I mean your own capital spending, cash flow probably isn't quite as easy. I mean how do you think about ramping up your own spend?

I think that as we look at it right now, to be honest, I think we'll probably spend a little less this year, Scott. So I think we're forecasting around $550 million. I think it will probably be a little lower. The reason for that is the inability to travel and get to the projects and get them organized. And that -- those are very important projects. There's a lot of automation work going on right now. We have the plant repositioning. But what we want to do is use automation now. Because of the whole COVID situation and distancing and trying to get the production out of the facilities, we're going to be putting a lot more automation into these facilities as we relay them out.

So I would say our capital spending will be a little bit higher next year. But we're not going crazy on this because our volumes are still going to be, on average, down in total probably for the next year. And I think that -- but I would expect capital to be coming up as we go in to automate the facilities, as we have several new facilities underway. So I would say overall, betting man right now, slightly less than $550 million capital this year. Next year number, we'll be having a 6 in front of it, in my opinion. And it could be $600 million or $601 million, but I think that's where we are right now.

Our cash flow overall, you're exactly right. I think we'll be up a little bit. The fight -- issue next year is going to be the following. We are -- clearly, right now, receivables are going to start building because, sequentially, we're going to have a very strong fourth quarter. Sequentially, we're going to have a stronger fourth to first quarter because of what's going on here right now is what we feel. That's going to increase our receivables in the first half of the year, which is, from that standpoint, we'll make more earnings, we're going to have more receivables.

So our balance sheet, which we've been liquidating a little bit this year, will be a headwind for us next year. And those things we know, and we're obviously working on that right now. But I would say that we'll generate the cash. We'll be more than 100% free cash flow to earnings, but it will be a little bit tougher next year because of the growth, which is a good thing to have, growth in the balance sheet. So that's how I see it right now, Scott.

Okay. Helpful. And then, Dave, I think I know the answer to this, but I want to hear your view. I mean what is your lowest visibility end market? Is it still oil and gas? Is it -- is there any hope at all in finding a bottom there?

Yes. I think I'll let -- I'm going to answer first, and I'll let Lal answer. First, I would say the toughest visible market is North America oil and gas. And I think we're starting to see some of the formation of the bottom here a little bit. I think you see automation come in. The key issue for us right now is when will they start doing some work around the fields, around the facilities. And that will be the tough decision. We're not seeing it yet. And we've tracked this up day to day to day because this market has not turned up in the month of July, like the rest of the market that Lal saw. So I think that's what we see. I think that will be well into '21. But I wouldn't be surprised if MRO or our KOB 3 business doesn't pop at some point in time, it's so low at this point. But Lal, what's you're feeling on that?

No, I couldn't agree more, David. I think you've said it. We're going to be through '21. But clearly, there are traditional roles in the oil and gas market that are being impacted and some are disappearing as a result of it. And interestingly enough, and you touched on it, David, Scott, this virus has been a catalyst for adoption of automation in the oil and gas industry. And we're seeing operations becoming -- automation and remote operations becoming more prevalent across the board, which poses an opportunity for us as people come back and as decisions on spending occurs.

Yes. So we have a lot of remote automation software equipment, and we see that being a great demand as they automate there. So there's an upside to this. We just got to get through it. And I feel good about where we are right now. I mean Lal's business is going through this trend. He's restructuring the heck out of things. Bob will come through this faster. He will spike faster. But I feel very good about where we are, and I feel extremely good and proud about the organization and having to deal with what's going on with them and not only worry about their families but worrying about being sick and worrying about the customer.

And the big decision right now for North America, Scott, to be very honest with you -- the OCE -- because the OCE gets together several times a week now -- is this whole school thing. We've got a situation where we have a lot of young parents, single parents, 2 parents, 2 parents working, single home parents with kids, and what do we -- how are we going to help them get through the school thing. Our schools -- our government tax dollars are not helping us here. And so business has to pick this up, and that's an important decision because we're not going to leave -- let our kids get hurt again in this environment. And that's a tough call that we're all making right now, one-on-one, looking at each in the mirror, to be honest. So with that, Scott, thank you very much.

Our next question comes from Joe Ritchie with Goldman Sachs.

Dave, first question for you. Just thinking about your guidance for the fourth quarter, specifically as it relates to Commercial & Residential Solutions. It seems like you guys are implying like a mid-single-digit down quarter. Yet the trends seem pretty good, right, like towards the end of June and early July. So maybe talk a little bit about what's kind of dragging the growth there? And if you could specifically touch on resi HVAC in North America, I'd be curious to see what you guys are seeing there specifically.

Good, certainly. I'll comment first, and I'll let Bob comment. I think the key issue for us -- I think you're right, the order pattern is returning. Bob saw in mid-June. We saw it through July. I think it's across all of your business units had a pretty good July in orders. The big issue for us, Joe, is manufacturing output. You're taking the facility that historically would not be doing this much sequentially from quarter-to-quarter. We -- you obviously have attendance issues. You have issues relative to if you have a positive COVID in your plant. All these different things are working through us right now, and Bob and his team had the challenge of actually trying to improve output in an environment that -- where workers can be troublesome for us at this point in time. That's one of the biggest issues he has.

I think from the standpoint of -- we're being cautious relative to the recovery. Things have hit pretty well, the heatwave. So residential HVAC has taken off, and Bob can talk further about that. That's not unexpected when you get this type of heat, which we had the last couple of weeks. But at the same time, we've got to keep the plants up and running, and we've got to be able to serve. And that's the biggest issue we face at this point in time. Keep in mind, sequentially, I think we typically do, Frank, around 250, 300 from third to fourth quarter. This year, we're going to do 500. We're going to do 500. So we could be doubling or sequential growth rate from quarter-to-quarter, which is something that with the plants just getting ramped down, ramp back up is the challenge. But I think I feel optimistic about that. I think Lal will have the plant -- the question is can he get the book-to-ship and can he get the backlog out which, so far, he's done reasonably well in July.

Bob, any comment you want to add, any color on that from that standpoint?

I'll just say right now, there's a lot of bullwhipping or whipsawing kind of stuff going on right now. There's the sell-through. Distribution has been in very different state. E-commerce is going gangbusters. The big box are doing very well. You've got a lot of professional distribution that has had branches closed for an extended period of time. OEMs, just like us, have got challenges at times with plants and absenteeism and other issues. So it's just -- there's a lot of noise in the system right now. Certainly, the June and July orders are very encouraging. We're working our S&OP, our operating plans, to be able to work that. As you mentioned, there can be challenges in some areas like dispose our inventory and including the distribution linkages of our customers. So again, June and July orders, no question, very encouraging.

Pretty broad reporting, I think, in the HVAC, residential being very strong, commercial is still being difficult, refrigeration is still being quite difficult. With foodservice, in particular, we're seeing the same kind of thing. So I think we're -- given -- again, it's a bit of a range for a quarter, I suppose, for us to be talking about anywhere from 5 to 11 or so. We're already in the quarter, but it's just emblematic of what's going on right now.

Yes. Great. Joe, anything else you want to ask?

Yes. No, those are -- that was great color. I guess just my one follow-up. I know last quarter you guys talked a little bit about getting the decremental margins back into the 20s by the fourth quarter. So expecting a little bit better growth out of Bob's business, but a little worse growth out of Lal's business. So I'd be curious to hear from both of them on your ability to get there in 4Q.

I think we did it in the third quarter. I feel very good that we'll do it again in the fourth quarter. The only thing that would be a problem would be a supply chain shock, which is, with Bob ramping up, he could have a supply chain shock. But I think right now, our cost controls, our reset programs, we've got great restructuring done in the third quarter. Obviously, the COVID -- I mean I feel very good that we'll be in the 20s again in the fourth quarter, I think, in the...

Yes. I mean we had several down plant days in April and May either caused by us or caused by perhaps customers not being able to take anything. There's a lot of disruption in Q3 and a good amount of that clearing up.

And you had -- both had plants in Mexico that we're paying people to stay home because the government asks us to make these people stay at home because they potentially could -- a risk. So we're paying people to stay at home.

Yes. And clearly, we've had the impact of the hard restructuring that we went after very hard now a year into the program, as you highlighted, David. We do have a step-up in volume sequentially, Q3 to Q4, which will also help. But we did hit those low 20 decrementals in Q3 already. So we're there, and I think we've got no reason to believe that won't hold us into Q4.

So I think the one thing I'd be worried about out of all the stuff, to be honest, Joe, it's the supply chain. We -- as we start now ramping up here in the fourth quarter, can our supply chain keep up with [our goals basically]. And there's a lot of work going on that. And we've been working on it now for 2 months because we knew this was coming at us, and so we've been getting ready for it for 2 months. Thank you.

Our next question comes from John Walsh with Crédit Suisse.

I also am in the same storm as Scott, so hopefully, I don't cut out. So thanks for all the color on Slide 22. Just thinking about that $140 million net, as you see it today, is there anything related to price cost or productivity net of inflation that you see as a detractor to that number?

Not right now, John. I think that the big issue for us right now will be the balance of -- the net material inflation relative to price. Fundamentally, we see that we're going to have a little bit different environment next year. I think pricing will be tougher. And therefore, the net material inflation is going to be the key issue for us. So pricing will be tougher. That will be in the red. And then, therefore, we need to have positive net material inflation. This is not something that we didn't expect. We expected this to happen. I know both Bob's business, the corporate organization and Lal's business have been focusing on this. It's going to be a very important issue relative to next year because we're trying to get through the year, as we say, neutral, not have a slightly green or slightly positive or red number here. So right now, I think we're in pretty good shape. I feel good about the balance. I feel good about that $140 million number that we talked about there, so nothing really causing a big issue for us at this point in time.

So -- but the plan right now, I'd say, is a little bit red built into the plan. And I think that we're really working hard at the net material inflation at this point in time without stressing our supply chain too much because of what we got to expect in the fourth quarter and in the first quarter. One of the things you're going to see this year, which is a little bit different -- 2 things in the -- from the fourth to first, John, for companies thinking about this. So the year has been tough for companies, for companies like us. If there are programs out there that you get x dollars, you get rebates and stuff like that, no one is going to be earning rebates this year. So our customers are not going to be going and saying, "Let's pull into the quarter." They're going to be pushing. So we're going to -- that's one thing you're going to see. Secondly, sequentially from fourth to first, I think you're going to see consistent demand improvement in Bob's business. And so inventory will continue to be flowing into the channel, which normally we would not be seeing.

So those 2 things would say that we'd have a better first fiscal quarter or fourth calendar quarter because the trend line is what happened to us and the shock in the middle of the year. So there's a lot of things that we're putting on the table right now relative to our own planning, both in sales and also the S&OP, the manufacturing, because we know there's some moving parts relative to the way our customers are going to deal with this. And -- but right now, I feel good about the price cost, I feel good about our savings and just got to keep managing the day-to-day.

Great. And then as a follow-up, maybe digging a little bit more into the margin performance at Automation. You talked about some challenges in the KOB 3 order rate, but can you actually talk a little bit about the mix of KOB 3 year-on-year if that was a good guy? Or -- I'm just trying to understand a little bit behind that margin performance.

I'll let Lal answer that question because Lal's got the facts, I'd be making it up. And you know me, John, I don't want to make it up for you because you'll call me on the math on this one. So Lal, why don't you tell him how year-to-date KOB 3 looks versus KOB 2 and KOB 1? I think it's the kind of business that people don't know.

That kind of business. 3, which is KOB 3 being the MRO, the small order size, it is typically what you see in day-to-day business, so a short-cycle business. That's continued to increase relative to where we finished the last fiscal year as we've navigated through this year. Part of that is a reflection of the size of POs are being issued. Part of it is a reflection of deferments in the larger capital modernization projects. So we're sitting north of 60% as we close the quarter. We don't have the exact numbers yet. There's a little bit of systems work that needs to be done for us to have the final number, but we'll be north of 60%, KOB 3, which is an over 5-point improvement what we finished last year. So it's definitely moved that way, John. But the fact of the matter is there's less of it. But the pie, the percentage has increased.

So one of the key issues here that we are tracking and is very tight on, in particular, going back to, I think Joe's question on the North America oil and gas, what we're watching very carefully is the order intake on a daily basis. This is important to us, in particular, in North America because that's where we're going to see the KOB 3 pop back up first. And when you're running a factory at 30%, 40%, with people in it, you're not doing much. But that's what we're watching because when that rate comes up, I mean it makes -- that tells us that the short-term stuff started kicking in, and our KOB 3 would be very good, and it helps our profitability. And we'd like to see some of that in the fourth quarter. We're not banking a lot in the fourth. We see it more in the first. But this sure would be a nice thing to have for us in the fourth because that would give us better leverage and better margins and better cash.

And maybe just a little color on that, David, in terms of North America specifically, through May and June, across our short-cycle businesses, the number of physical POs that we received was actually equal to last year's.

That's a good sign.

It's a good sign. However, the quantity of units within each PO dropped. And that's reflected in that sequential -- or daily order drop of the 20 million a day to the 15 million a day. We're continuing to drive the POS, but there's just less units in it.

So that's what we're watching, John. And we have that in detail because we can tell you very quickly when these things are going to turn. I mean you could smell Bob's business. Like, we are out talking to his guys, they could smell it. Lal's business, we know it's being brewed right now. So it's coming.

Yes. And then just on the other end, we have not seen any decremental pricing on KOB 3 through this. The price has held, and it continues to be very strong.

Yes. And project-wise, since we're talking about KOB here, KOB 1, you've seen some pushouts, some cancellations, a lot of that new stuff.

Yes, David. Honestly, we've had some wins. We booked a significant amount as we went through the quarter. We've also seen some deferments on KOB 1.

So there's not been a lot of movement in the bubbles or the pipeline. But we do know that what we're going to be living off is KOB 3 and KOB 2 here for the next, I would say, 18 months because the projects are going to be smaller. And we're doing a lot of refresh right now with a lot of inputs. And I think we'll give you more input as to next quarter because there's not enough movement right now even to say it's changed that much. But it's clearly -- there's influx right now, but we don't -- we feel pretty good about where we sit at this point in time because there are new projects and installed projects. Overall, we're holding pat. Our backlog right now is still holding right in there, which is pretty good. It's not being canceled. It's holding right in. Next question. John, do you have another question?

No, I'll pass the baton.

Thank you very much, John.

Our next question comes from Andy Kaplowitz with Citigroup.

So look, you guys seem relatively confident about an at least modest recovery in FY '21. And I know a lot of that is based on your orders turning here. But you also talked, Dave, to a lot of customers. And what we hear from other CEOs is that confidence is pretty mediocre out there. So maybe you could tell us sort of the conversations you're having. And are you hearing more confidence out of the customers you're talking to despite the concerns around the infection resurgence that we've seen?

The answer's yes. First of all, we did put a forecast out there, Andy, and we did hit our forecast from April 24. And so I had enough confidence to put our neck out there in the line, and we hit it, and we actually did a little bit better. Yes, we've had conversations. We are seeing the markets around the world. I would say the more cautious market on the industrial side is the U.S. But as you look into Europe, as you look into Middle East, as you look into Asia, China, we are seeing those markets, there's a lot more confidence of the incremental spending. And we're seeing that business get a little better. And so that's why we feel reasonably confident. Now we're not changing much of our forecast from what we laid out in April relative to the fourth quarter. It's very similar. I think the key issue will be as Bob -- going back to a couple of questions earlier, if Bob's business orders continue to hold, he's able to produce it, then I would say Bob's going to have a stronger quarter, and that bounce is coming back after it's down 20%, 30%, 40% in those -- some of those months.

So Andy, that's why we feel confident about it. We've been here and done this before. This turn is very similar to Bob's financial crisis turn. And Lal's business, a little bit different based on North America oil and gas. But I think we have enough confidence and enough, I would say, conservatism in the underlying sales forecast right now based on what we're hearing from our customers that we can say that. And that's how -- and we're very in tune to our customers right now. We're out talking to them. We're out visiting them.

And so Lal, anything you want to add there?

Yes. Thanks, David. We, myself and the leadership team, has been engaged in this. We've zoomed our way into many customer rooms and participated in many meetings, starting really in the mid-May to early June time frame. We -- our salespeople started to get out and see customers again. Obviously, our service people have been engaged throughout the crisis, engaged in plants. And so the projection really hasn't changed, and the sentiment from the customer base hasn't changed a whole lot, Andy. There's conservatism and concern in oil and gas, as David described. But there's optimism in medical, in life sciences, in food and beverage and in power. Look, we're having a record year in North America power. So it's a bit of a mixed bag there. But oil and gas really is where we're concerned, but that's no different than what we spoke about on April 24.

Yes. Being so broad an industry, we have a lot of industries doing better than other industries and -- so from that standpoint. And Bob said it right, I mean, they cut back so rapidly in Bob's business between inventory and shutdown, couldn't mix stuff, that we knew there was going to be a sharp bounce at some point in time, and that's what we're seeing right now. The question is, is it sustainable? And can we produce? And so that's what we see right now.

Very helpful, guys. Yes, that's helpful, Dave. And let me just ask you specifically then about China because you know that region very well as well. There always seems to be some stimulus tailwinds. You do have some geopolitical issues to deal with, and some people think improvement in production is ahead of demand, but it seems like it's picked up for you guys. So what's the outlook for you initially as we go into '21 in China?

I think the -- what we're seeing right now is Lal's business, on a broad basis, is pretty good. And so I think he's going to see a pretty strong high single-digit growth as we go into 2021. The wildcard for us is Bob's business because the consumer in China has really pulled back in some of the programs. And the question will be when do they start spending money again, feeling confident of spending money. If you look at the air travel inside China, it's back pretty close to where it was before the COVID situation. Now international, no. But so the movement is starting to happen, and that will be a big impact for Bob as that starts happening. So we're waiting for a consistent improvement. I don't know what you saw in June and July, Bob, out of China. But he's being cautious at first. He does know he'll start getting easy comparisons. But what I'm trying to see is the underlying demand. So are you seeing any sense of improvement, from your standpoint, in China?

It's kind of going -- it's in the high single-digit decline right now, 5 to 10 down. Again, the orders have been bouncy. We've gotten some bright spots at times, and then it flips. Like you said, I think the -- on the commercial side, there's a lot of stimulus programs that are being worked. But then on the consumer side, including housing, purchasing and everything, people are being very cautious just like U.S. with savings rate and everything.

Yes. So I think what we're going to see, Andy, is Lal will have a very solid year next year as they continue to make investments both in the life science area, the power area, the energy area, some chemical area. I think Bob will be the wildcard. I mean will he be a 0? Or will he be a 10-plus? And so that will be the wildcard for Bob next year in China. But my gut tells me the spending will start coming as they see some stability in the consumer and some travel and investments. But we're in pretty good shape right there right now.

Yes, but the picture we have on '21 is China gets positive in Q2 and stays positive. But again, the magnitude is hard to say so.

Yes. It's very hard. Thanks, Andy.

Our next question comes from Andrew Obin with Bank of America.

So a couple of questions. Could you just talk about how you guys are doing in Automation Solutions relative to your peers? Do you think it's an opportunity to take market share? I think some of your competitors had some reorg. How is the market share trending in this downturn?

It's pretty hard. We've got 1 quarter on it right now -- or 2 quarters, let's say. I would say if I look at the Final Control business, I would say Ram and his team have done a phenomenal job in Final Control in the last several quarters both in execution -- I think that they'll probably end up down somewhere around 5% or 6% this year, both in orders and sales. That is better than historically. We would -- if you think about the combination of our Final Control and V&C, Final Control, they're doing much better. He's raising his profitability. His GP margins are doing better. His cash flow is doing better. So I would say, on that side of the business, we're winning. And I just had a site review with them, and I like both -- we're making technology investments. On the Systems side, I'd say we're doing pretty well. We had Systems this quarter, which we didn't -- not in there. But I would say in Systems, we're up for the quarter. What are we up overall?

Actually, we were down sales for the quarter, 7%. But compared to the down 11% to 15% on peers.

Okay. So we're down 7% overall. Okay. So we had a decent quarter in Systems. I think in instrumentation, not much movement on that thing from that perspective. So overall, in a quarter, I feel good about where we are, but I'm thinking about the next 2 or 3, 4 quarters, I think we are well positioned. The key issue for us, Andrew, is the execution around the plant moves right now. The technology moves are pretty good, but the plant moves because if we -- that's how we lose share if we're not able to deliver. So the key issue for me right now, if we continue to invest and get the plant moves done, then as the economy gets better, I would say we're going to have a good move in the downturn, and we'll pick up share. But 1 quarter is a good sign, but we got several quarters more to go, but I like where we sit at this point.

And Dave, just to add on to your Systems, on the power side with Ovation, that's been a phenomenal quarter, and they were positive.

They were positive.

They were positive.

That's right. They're positive. I got the wrong one. Okay. Next one, Andrew?

Yes, just a follow-up on facility moves. Can you just give us more color? I mean you had a head start on everybody else because you announced your program several months before that. But what are the challenges of moving facilities in the midst of COVID and this huge sort of whipsaw effect in terms of manufacturing? And how have you adjusted your plans in terms of facility moves?

So it takes a lot of planning, let's put it that way. And we've moved some plans in and out based on the areas of where we can get people in and out. One of the problems we will face is that we're not able to fly resources around the world right now. So we're going to depend on our local resources, both in Latin -- in Americas or Asia or in Europe. And typically, we would be flying resources around. But from our standpoint, we probably -- we planned so that they're going to take a little longer, Andrew. And we have had a couple from the standpoint we might have moved a month or 2: one, as we work with the government; and also two, relative to resources. So on average, I would say they're on track. We've had a couple of slippage. But I think we've planned in -- this COVID thing was something we knew was coming at us. And so as we finalized the plans and we started moving these plans, we have that pretty well in shape at this point in time.

The big issue we would face, Andrew, to be all honest, if we had a huge breakout of COVID in, say, certain parts of the region we have a plan going into, that would clearly slow us down. Fortunately, knock on wood, we have not had that yet. But that's something we actually reviewed with the Board today, the more -- what I'd call the more challenging moves that we have underway, both in Lal's business and Bob's business, to make sure the Board understands the magnitude of what we're trying to do. As you know, we restructure all the time, but this is a much higher magnitude, and we are in the middle of COVID. But so far, the teams around the world have done a great job, and I expect them to execute on them, and I feel good about it.

And if I could just squeeze one more, just that Google mobility data, it does line up with your industrial orders. Is that a fair statement?

If I may, Dave?

Yes, go ahead.

The Google mobility data, what we did, Andrew, is we took -- we segmented purely the commuting hours. It's North America data only. Obviously, as you know, that it is an opt-in location tracking data, the location services data offering with Google phones. But it does track very well to daily bookings in North America.

You've got to pick the location, facilities and cities. And so that's what these guys -- we know where the facilities are. We know the customers. And it does seem to track pretty well.

Yes. Just wanted to clarify.

Yes, it's nice that people are monitoring all of this right now. And so I go back and put the work, it makes me feel real good.

Our next question comes from Steve Tusa with JPMorgan.

What was -- what do you think price cost is going to end up for this year? What are you guys embedding?

I think we have positive price this year. Price cost will be slightly positive. I mean these guys are looking at the chart right now. Frank would be the key for this. It'd be less than 1. I mean less than 1. We've had -- obviously, with a good net material inflation, and we had pricing set in earlier on, I think that will cause us to have to give some of it back next year.

Our second half is in the half to a full point positive.

Yes. So overall, Steve, I think it would be less than...

Certainly positive for the year.

Yes, less than 1% positive.

I mean -- but that's price or price cost?

That's price cost.

Okay. Got it. Got it. So 1% on the margin front is what you're saying?

Yes. Yes. And I think we're tracking pretty well right where we said to you at the beginning of the year. Yes.

So -- and then just on this CR&S business, I mean, these OEMs are obviously talking about like eye-popping order numbers here in June and July. Some guys, up, like, 50%. Are you guys like -- is there -- you're basically saying you guys are having kind of like fulfillment issues. And then beyond that, I guess, into the kind of back part of the year into the kind of the calendar fourth quarter, they're also kind of being a little bit cautious. Do you think the market goes from being a heat-driven market where the consumer is going to do what they have to do to have -- to stay cool to a market in the fourth quarter that kind of recouples more to the fundamentals of the consumer? In other words, high unemployment and weak consumer confidence. I mean is that kind of -- is that what's on the board right now as far as the variables you're looking at? Or is that the wrong way to look at it?

Well, part of the popping now is April was pretty dramatic the other direction. On a dollar basis, our June orders for HVAC in North America were 2x what they were in April. And I think our customers have talked about it, and we talked about it, where there were a number of plants down and sometimes for as much as a couple of weeks.

Our customers.

Our customers and then even us in April as we first kind of learned how to deal with the first COVID incidents inside and cleaning and other things like that. So again, part of this is a makeup. I think the -- I mean you read the reports, I read the reports, distribution has gotten very thin. There's a lot of examples of wholesalers and others considering other brands because one particular supplier can't do it. We supply them all. So we see that dynamic play out. And so it's very strong right now. I think there's a bit of a pent-up both of getting channel back established as well as certainly the sell-through with the heat in June and July. About 35% or so of the units are heat pump units. So they are relevant for the wintertime as well. And you got a lot of people sitting at home and, frankly, sitting on a decent amount of cash with the unemployment benefits, which is probably not skewed to homeowners exactly. So bottom line is, I think the -- I don't think there's a reason this won't stay pretty strong through the season and also to get the channel in play, in step for coming out of the season. It's really thin right now.

So Steve, right now, I think we see a couple of quarters of pretty good demand here, a little bit different. Again, the key issue for us, like with them, when I -- we're shipping right now. We're keeping up with them. It's a strong demand. We're keeping up with them. The big issue to us is, clearly, if all of a sudden you had an outbreak in where our plants are located and their plants are located, a supply chain disruption, right now, we are -- we went from basically not producing much to full out, to what you're talking about. And so that's where we are at this point in time. We are able to keep up with them, and we're working it pretty hard. And the key issue for us is we've got to keep those plants running, and we've got to keep the plants running safely. It's one thing to run a plant full out when you're in a non-COVID environment. When you're in a COVID environment, you have to be very, very careful to not stretch the workforce and also have something get in there and create an environment where you have half the plant come down with COVID.

So we're running hard right now, and we're keeping up with them. But I'm always concerned that one break as we've seen it, both at our customers' level and our level. So this is something I feel the demand is there, and we're going to see it for the next couple of quarters, and we'll keep going at it. And so someone said the housing market's going to be pretty good, and so we're going to see construction and things like that and repair. Just -- we just got to keep the plants running and the supply chain going, which right now we are.

One last one for you just on software. I don't even know if you guys track kind of software sales outside of the Systems business. But any way to give us any color on that kind of line item or that metric? I know you guys don't pretend to be a software company like some others do, but are you seeing growth in those areas? Or is that just kind of like in that Systems and services bucket on the Automation side?

Steve, Lal here. Yes. No, as we spoke about in New York, the software business is predominantly in the Systems side, although we do have a significant and growing amount of software that's outside of that sits in our digital transformation business. The software within Systems is closely tied to Ovation and DeltaV. That's embedded in there. The stand-alone software packages, albeit smaller in scale, over $0.5 billion in size already today, continue to grow and continue to grow not at the rate that we expected, obviously, back in New York, but it continued to be positive there and very -- continues to be very interesting...

Sorry, did you say $0.5 billion for that business?

Yes. The stand-alone software.

Yes, $0.5 billion.

$0.5 billion.

Our final question comes from Julian Mitchell with Barclays.

Maybe just the first question, David, on how you're thinking about capital deployment at this point. The buyback, you've kept a ceiling on it for the past few months now. In general, you're seeing global M&A start to warm up again after a freeze. How are you thinking about acquisitions at this point?

So right now, we're going to keep the hold on the share repurchase for the rest of, I would say, this quarter. And then we reviewed it with the Finance Committee this morning. We'll review it again, the next finance -- coming in at the end of this fiscal year. Right now, we are focusing very much on acquisitions. We have several things underway. As you said, they are freeing up and working that. If we get into a period that we're not able to close acquisitions and we see, obviously, from a cash flow standpoint, that we have the flexibility to do the share repurchase, we'll quickly go to that. But right now, as we talk to the Board, we're focusing pretty hard at some unique opportunities around the acquisition front that we'd like to get done here in the next quarter or so. So that's what we're looking at. But if they don't happen, obviously, we generate cash, then we'll look at, again, reinstituting the share repurchase. Most likely, we will reinstitute the share repurchase in fiscal '21, but I don't know the magnitude of it right now. It really is a function of can we close any acquisitions here in the rest of this calendar year. So that's how we're looking at it, Julian.

And then just a quick follow-up, maybe for Lal on the Automation Solutions backlog. I think you'd said, Lal, that, that was flattish or stable sequentially ending the June quarter. The sales decline is obviously a lot less than the orders decline that you've seen. And so that suggests you're sort of pulling revenue down from that backlog into the P&L. How do you think the backlog trends from here, let's say, the rest of this calendar year?

Yes, sure, Julian. So what we're planning, it's embedded in the plan that I communicated to you, is about a $300 million takedown in backlog, $4.8 billion on a fixed rate basis adjusted for currency.

$4.8 billion.

$4.8 billion at the end of September.

Which is a normal trend for us.

It's a normal trend. We took $96 million out in the month of July. So we're well on that path over the next 2 months, Julian.

Yes. So this is pretty -- I mean it's going pretty well. The orders are pretty well holding up there. The project business is going in there, and it's not cancellation. So our backlog's holding in there nicely. And Lal, and particularly around Final Control and in Systems, they're executing the backlog, and that's a good sign for us. And I think that's going to hold -- it will start building again as we go into next year. But this is...

Good execution in the plants, Dave.

Yes, the plants are up and running well right now. I'm more worried about some of Bob's business. Bob's had some businesses that have been jerked around. When you go minus 40 to plus 20, that's pretty tough to do in a plant level, especially if you've got COVID floating around out there. And so that's the concern we have with Bob.

But overall, I think that, as I wrap it up here, I want to -- again, I want to thank everyone joining us today. Again, I want to thank everybody out there across Emerson who worked so hard to make this quarter happen. We delivered a quarter we laid out. We were one of the few companies that laid it out as we did. We delivered it. We did better job execution around the cash flow and the earnings. And I feel very confident that we are well structured to go through this final quarter and really have a good rest of this calendar year, which would be our first quarter, too. And so it's just a question of where this thing, trend line, goes and just working hard to keep things going, get the restructuring done, generate the earnings and then also make sure we make those long-term investments we have to make.

So I feel good where we sit today. Earnings, cash and momentum is on our side. Organization is pretty strong. And so I look forward to a good finish to the year, and we'll go forward with that. And I appreciate everyone joining us today. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.