Emerson Electric (EMR) Earnings Report: Q4 2015 Conference ... · Emerson Electric (EMR) Earnings Report: Q4 2015 Conference Call Transcript The following Emerson Electric conference

CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial

EventDescription:Q42015EarningsCallMarketCapasofEventDate:31.77BPriceasofEventDate:49.64

©2014TheStreet,Inc.Al l R ightsReserved Page1of25

EmersonElectric(EMR)EarningsReport:Q42015ConferenceCallTranscriptThefollowingEmersonElectricconferencecalltookplaceonNovember3,2015,02:00PMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

CraigRossman;EmersonElectricCompany;InvestorRelationsDavidFarr;EmersonElectricCompany;Chairman&CEOFrankDellaquila;EmersonElectricCompany;CFO

OtherPart icipants

JulianMitchell;CreditSuisse;AnalystJohnnyWright;NomuraSecurities;AnalystJohnInch;DeutscheBank;AnalystStevenWinoker;SanfordC.Bernstein;AnalystMikeWood;MacquarieResearch;AnalystScottDavis;BarclaysCapital;AnalystGautamKhanna;Cowen;AnalystNigelCoe;MorganStanley;AnalystShannonO'Callaghan;UBS;AnalystRobertMcCarthy;StifelNicolaus;AnalystJeffreySprague;VerticalResearchPartners;AnalystChristopherGlynn;Oppenheimer;AnalystRichKwas;WellsFargoSecurities;AnalystSteveTusa;JPMorgan;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometoEmerson'sinvestorconferencecall.

(OperatorInstructions)

Thisconferenceisbeingrecordedtoday,November3,2015.

Emerson'scommentaryandresponsestoyourquestionsmaycontainforward-lookingstatements,includingtheCompany'soutlookfortheremainderoftheyear.InformationonfactorsthatcouldcauseactualresultstovarymateriallyfromthosediscussedtodayisavailableatEmerson'smostrecentannualreportonForm10-KasfiledwiththeSEC.

I'dnowliketoturntheconferenceovertoourhost,CraigRossman,DirectorofInvestorRelationsatEmerson.Pleasegoahead,Sir.

CraigRossman (InvestorRelations):

Thankyou.Today,I'mjoinedbyDaveFarr,ChairmanandChiefExecutiveOfficerofEmerson;andFrankDellaquila,ExecutiveVicePresidentandChiefFinancialOfficer.




Today'scallwillsummarizeEmerson'sfourthquarterandFY15results.AconferencecallslidepresentationwillaccompanymycommentsandisavailableonEmerson'sWebsite.AreplayofthisconferencecallandslidepresentationwillbeavailableontheWebsiteforthenext90days.Iwillstartwiththefourthquarterandfiscalyearsummaryonpage2oftheslidepresentation.

Netsalesinthequarterdecreased15%to$5.8billionwithunderlyingsalesdown7%.Netsalesforthefiscalyeardecreased9%to$22.3billionwithunderlyingsalesdown2%.Boththequarterandtheyearweresignificantlyaffectedbyanumberofeconomicheadwinds.Thecontinuationofloweroilpricesresultedinbothcapitalandmorerecentlyoperationalspendingreductionsbyourglobaloilandgascustomers.Generalindustrialcapitalspendingwasslowthroughouttheyear,particularlyinenergy-relatedmarkets.

EmergingmarketgrowthissluggishwithweakeningconditionsasweexitedFY15.Inresponsetotheweakeningdemand,weacceleratedourrestructuringprogramsinthefourthquarterwithatotalspendof$128million,whichexceededourAugustconferencecallguidancebyjustover$40million,oranimpactofapproximately$0.04pershare.Forthefiscalyear,totalrestructuringexpensewas$221million.

Duringthequarterweincurred$52millionofcostsandtaxesrelatedtothespin-offofnetworkpower,$10millionfortransactioncosts,and$42millionofincometaxexpenseforplannedrepatriationofourearningsin2016.OnSeptember30,weannouncedthecompletionofthedivestitureoftheinnermetrobusiness,resultinginagainforourshareholders.

Reportedearningspershareforthefourthquarterincreased69%to$0.98.Earningspershareadjustedforthedivestituregainsandnetworkpowerspin-offcostsdecreased29%to$0.93.Reportedearningspershareforthefiscalyearincreased32%to$3.99,whileadjustedearningspersharedecreased15%to$3.17.Duringthefiscalyear,theCompanyreturned$3.8billiontoshareholdersthroughdividendsandsharerepurchase.

Turningtoslide3,grossprofitmargininthequarterdecreased170basispointsto40.7%,primarilyduetovolumedeleverageandunfavorablebusinessandproductmix.EBITmarginreflectstheimpactsoftheacceleratedrestructuring,thenetworkpowerspin-offcosts,andthebenefitofdivestituregains.Fourthquartermarginswereup270basispointsonasequentialbasisversusthirdquarterEBITmarginof15.2%.Duringthequarter,approximately9millionshareswererepurchasedfor$460million.

Turningtoslide4.GlobaldemandwasmixedduringthefiscalyearwithunderlyingsalesintheMiddleEastandAfricaup3%,Canadaup2%,theUSdown2%,Europeflat,andAsiadown5%.Turningtoslide5.Businesssegmentmargindeclined450basispointsto15.7%,primarilyduetovolumedeleverage,unfavorablemix,andincreasedrestructuringexpenses.Operatingcashflowreflectedsolidconversionofearningsandworkingcapital.

Turningtoslide6,processmanagementunderlyingsalesdeclined10%inthequarter,capitalandoperationalspendingremainedatreducedlevelswithintheoilandgasindustry.Upstreammarketsareunderthemostpressurewhiledownstreamactivityinchemicalandpowermarketscontinuetoprovidegrowthopportunities.TheMiddleEastandAfricaregiongrew2%withmixofgenerallyfavorableactivitylevelsacrosstheregion.Acceleratedrestructuringactivityresultedinspendingof$52millioninthequarter,animpactof230basispoints.DemandwillremainunderpressureformostofFY16astheexpectationforlongeroilpriceswillkeepindustryspendingatreducedlevels.

Turningtoslide7.Industrialautomationfourthquarterunderlyingsalesdeclined12%reflectingthecontinuedweaknessinindustrialspending,upstreamoilandgasmarkets,andEuropeandemand.DemandwasdowninallregionswithNorthAmericadown20%,Europedown2%,andAsiadown8%.Wewillcontinuetoevaluatethepotentialdivestituresofthemotorsanddrivesandpowergeneration




businessesduringFY16.Marketconditionswillremainchallengingintheneartermwithanexpectationofimprovementinthesecondhalfofthefiscalyear.

Turningtoslide8,networkpowerunderlyingsalesdeclined4%inthequarterasglobaldemandfordatacenter,infrastructure,andtelecommunicationsinvestmentremainmixed.Withinthegeographies,Europewasup10%whileNorthAmericawasdown10%.Asiawasdown5%asstronggrowthinIndiaandAustraliawasmorethanoffsetbydemandweaknessinChina.Acceleratedrestructuringactivitiesresultedinspendingof$33millioninthequarter.Wecontinuetoexpectthespin-offofnetworkpowertobesubstantiallycompletebytheendofFY16.

Turningtoslide9.Climatetechnology'sfourthquarterunderlyingsalesweredown5%.NorthAmericawasdown3%asresultswereimpactedbychallengingyear-over-yearcomparisonsstemmingfromtheUSresidentialairconditioningindustryprebuildin2014.Asiawasdown10%asslowingdemandinChinamorethanoffsetgrowthinotherregions.Segmentmarginincreased10basispoints,primarilysupportedbycostreductionsandfavorablematerialscostcontainment,whichmorethanoffsetincreasedrestructuringexpensesof$12million.Weexpectmodestgrowthfortheclimatetechnologysegmentnextfiscalyearasglobaldemandintheairconditioningandrefrigerationmarketsisexpectedtoremainfavorablein2016.

Turningtoslide10.Commercialandresidentialsolutionsfourthquarterunderlyingsaleswereup3%benefitingfromfavorabletrendsinUSconstruction.Growthinthefoodandfoodwastedisposersandwet-dryvacuumswassubstantiallyoffsetbydeclineintheprofessionaltoolsbusinesswhichcontinuestoreflectspendingreductionsinenergy-relatedmarkets.Segmentmarginsweredown100basispoints,butup10basispointswhenexcludingtheimpactfromtheincreasedrestructuringexpense.ThefavorabletrendsinUSconstructionmarketsareexpectedtocontinue,supportingouroutlookformoderatelevelsofgrowthinprofitimprovementin2016.

Turningtoslide11.WeexpectdifficultmarketconditionstoremainineffectthroughatleastthefirstsixtoninemonthsofFY16.Thecontinuationoftheheadwindsfacedinourkeyservedmarketsduring2015willreduceunderlyingsalesgrowthacrossourbusinesses,resultinginanexpectationthatnetsaleswilldecline6%to8%in2016.Underlyingsalesareexpectedtobedownapproximately2%to5%,excludingnegativecurrencytranslationandadeductionfromcompleteddivestituresofapproximately2%each.

Aspreviouslydiscussed,thesalesinthefirstquarterwillbechallengingwhenconsideringcurrentmarketconditionsanddifficultcomparisonstotheprioryear.Weexpectfirstquarterunderlyingsalestobedownapproximately10%,excludingnegativecurrencyanddivestituresofapproximately6%intotal.

CoststructurealignmentandthestrategicportfoliorepositioningwereakeyfocusforEmersoninFY16.Restructuringexpensesof$50millionto$70millionareexpectedin2016withmostoftheactivityduring--occurringduringthefirsthalfofthefiscalyear.Wealsoestimatethatwewouldincurexpensesofapproximately$300millionto$400millionrelatedtothespin-offofnetworkpowerandthepotentialdivestituresofthemotorsanddrivesandpowergenerationbusinesses.Thelevelofactivitysurroundingtheevaluationofanacquisitionofkeystrategicassetswillalsoincreasenextyear.ForEPSguidance,weexpectadjustedearningspersharetobe$3.05to$3.25whenexcludingtheportfoliorepositioningcosts.

Finally,insupportofourcommitmenttoreturningcashtoEmersonshareholders,theBoardofDirectorshasapprovedanincreasetothefirstquarterdividendtoanannualizedrateof$1.90pershareandanewprogramauthorizingtherepurchaseof70millionshares.AndnowIwillturnitovertoMr.DavidFarr.

DavidFarr (Chairman&CEO):

Thankyouverymuch,Craig.Welcome,everybody,thisafternoon.Frank,thanksforjoiningustoday.Gladtobewithyouandgladtogetthisfiscalyearbehindus.It'sbeenaverychallengingyear.Andaswe




know,weareinaglobalindustryrecessionforourbusinessesrightnow.Wejustincurredourthirdnegativeunderlyingsalesgrowthandwewillhavetwomore,andI'lltalkalittlebitaboutthat.Iwanttothankalltheglobalcorporateandbusinessteamsfortheirsupportandeffortsthroughoutthisyearaswedealtwithayearthatstartedoutverystrongwithunderlyingsalesgrowthinthefirstquarterofover5%toimmediatelygoingintoextremelytoughmarketplacethroughouttheyear.Restructuringefforts,thecostsavings,theannouncedsaleoftwobusinessesgettingdoneinoneyear,theannouncementofourrepositioningwithNetworkPowerbeingspentorsold,and/orthesaleofLeroy-SomerCTthisyear.Alotgoingon.

AsIlookattheeffortintheperformanceinthelastseveralmonths,we'restartingtoseethestabilizationofsomeofthemarkets.We'realsoseeingthebenefitoftherestructuringwhichwestartedbackinFebruaryaggressivelyandendedupspendingover$221millionastheyeargotmorechallenging.We'restartingtoseethebenefitsflowthrough.Wehadafourthquarterofover20%operatingmarginandaverydifficultyearwithalotofdownsalesandalotofchallengingcurrencyandpricecosts.AsIlookforwardhere,Iseetheunderlyingorderpacerunningaroundthis10%,11%negativeprobablyforthenextseveralmonths.AsCraighighlighted,Ifirmlybelieve,aswe'vetalkedaboutforseveralconferencecallsnow,averychallengingfirstquarter.Wehadaverygoodfirstquarterlastyearwithstrongtop-linegrowth,strongmargin,andstrongcashflow,andstrongearningspershare.

Thisyearwe'llbefacingnegative,probablynegative10%underlyingsalesgrowthwithnegative7%currencydivestitureimpactwithalotofissuesaroundthatbecauseofthepricecost,becauseoftheglobaltrendsandalltheissues,andIfirmlybelievealotofothercompaniesarestartingtostruggleandthequestionwillbehowmuchtheywilldointhemonthofDecember,butwe'rereadyforit.We'vebeengettingreadyforthistoughtimeperiodforseveralmonthsnow.Therestructuringisreallystartingtotakehold.

Wehaveabout$60millionto$70millionmorerestructuringtogetdonethatwillbenefit2016.Itwillbefront-endloaded.It'sworkedextremelyhardprogrambyprogram.Wewillgetitdoneinthefirstfiveorsixmonths,andwe'rereadyfor,whatIwouldsay,thefirstnegativequarterandthenthesecondnegativequarter,whichIbelieveunderlyingsalescouldbedownsomewhereinthe5%to6%range,andthenwe'llstartcomingoutbothfromaneasycomparisonbutalsoseeingsomestabilityinthemarketsweserve.

Sorightnow,intheindustrialrecessionthatEmersonfaces,wewillhavedownfivequarters.Wewillthenhavetherestructuringkickin,reallystartingtoimproveprofitabilityaswegetintothesecondandthirdandfourthquarters.Wewillstartseeingtheimprovementsoftheglobalmarketsweserve.WewillcontinuetodrivehardtogetthespinorthesaleofNetworkPowerdonewithinthefiscalquarter,FY16.WewillcontinuetodrivehardtofinishthedivestitureonLeroy-Somerinthefiscalyear,andthenwe'llcomeoutof2016withaverystrongcorebusiness,turningupwithveryhighlevelsofprofitability.

Again,alotofworkacrossthisorganizationtodealwiththechallengingeconomicenvironmentwe'vebeenfacing,andI'mverypleasedtoseetheworkdone.I'mverypleasedtoseetheeffortrelativetothecashflowandthebalancesheet.ThebalancesheetwillbewhatIwouldsayinacceptablecondition.It'sstrongtoday,butevenbetterwhenwegetintothesecondquarteraswecontinuetomanagethebalancesheetandgetwhatIwouldsayalittlebitextraworkingcapitalbuiltuponthatbalancesheetfromthebackdownturn,butwearetransactingveryhardrightnowinthistoughenvironment.TheorganizationisfocusedongeneratingtheearningsandthecashweneedandrepositioningthisCompanytohaveastrongcaseofgrowthwhentheeconomicrecoveryhappens.

Inthemeantime,acquisitions,we'reverystronglyfocusedonthetwocoremarketsandtheopportunities,workingthoseacquisitionopportunitiesthebestwecan,andwe'reunderwaytohopefullyconsummateseveralacquisitionsthroughout2016astheopportunitiescomeabout,butwe'regoingtobefacinga




challengingnextsixmonths.Weknowthat.Thebusinessleadersknowthat.TheBoardknowsthat.Andwe'retakingtheactionsnecessarytoprotecttheCompanyoverallfromatechnologyandprofitabilitystandpointandthefinancialcapabilityandpositioningourselvesforastrongunderlyinggrowthrecoveryandastrongacquisitionrecoveryoncetherepositioningeffortisunderway.Wechosetoincreasethedividendslightlythisyear.Wehavethecashflow.

AsyoulookatthenewbusinessorthenewEmersonwhenwecomeoutinlate2016orearly2017,thecashflowgenerationoftheCompanyisverystrongandwecansupportthedividendatthesametimesupportinganyacquisitionsorsharerepurchasenecessary.Sorightnowwe'reveryfocusedongettingthroughthistimeperiodthenextsixmonths,gettingthenosebackupandgettingtheCompanypositionedtorecoverstronglyforourshareholders,boththetoplineprofitabilityandcashflow.Atthesametime,yes,wehadaverydifficultyearlastyear.Yes,ourunderlyingsalesweredownover2%.Yes,ourreportedsalesweredown9%,butwedidgeneratenearly$3billionofoperatingcashflowwhenyouadjustfortheextrataxeswepaidforthedivestituresandwegeneratedover17%operatingprofitmargininaverychallengingenvironment,andourgoalistoagaingeneratethesame17%aswegointoanotherdownyearin2016.

Theenvironmentiswhattheenvironmentis.Wedealwithit,butwe'regoingtotrytocontrolwhatwecancontrolandwe'regoingtocontrolourprofitability,ourcashflow,ourreturn,andanyacquisitionswecangetdone.Andwewillgetthespinsaledone,ifnecessary,asquicklyaspossibleandwe'llgetthesaleofCTLeroy-Somerdoneasquicklyaspossible.That'swherewesittoday.

Iwanttothanktheglobalorganizationforwhattheyhavedoneandwherewe'repositioned.We'llgiveyouabetterinsightaroundthesegmentaswegetintoourdiscussioninFebruary,whichIbelieveisinAustin,Texas.There'snosnowinAustin,Texas.Maybealittlerain,butnottypicallyinFebruary.SohopefullyI'llseealotofshareholdersdowninAustin,Texas,sotheycanseethecoreprocessbusinesswehavedownthereandexplaintoyouwhatwe'regoingtodoaswecomeoutofthisindustrialrecessionwe'vebeenfacinghereforthelastseveralquartersandwillfaceforthenexttwoquarters.Withthat,I'llopenthelinetotakesomecallsandIappreciateeveryone'ssupportandengagementaswegoforwardhereinthecomingmonthsandyear.Thankyou.

QUESTIONS&ANSWERS

Operator :

Thankyou.

(OperatorInstructions)

JulianMitchellwithCreditSuisse.

JulianMitchell(Analyst-CreditSuisse):

Thankyou.


Goodafternoon,Julian.


Goodafternoon.JustaquestiononthenotionoforganicsalesmaybeturningbackupagainintheJunequarterofnextyear.Asyousaid,that'safterfivequartersofdeclines,soareyoujustkindoftakingthetemplateofpriordownturnsthatlastedaroundthatlongandapplyingitthistime,orareyouseeing




somethingspecificintheordersineitherenergyorbroademergingmarketsthatyouthinksupportthatimprovement?


First,welookatthepaceofhowfastwecamedown.Welookathistoricaltrendlines.Atthatpointintime,Iseenothingthatearly,thatfaroutrelativetothepace.Ilookatwhatwe'vegonethrough,throughsomedifficulteconomicdownturnsovertheyears.Sometimesit'sfour.Sometimesit'sfive.Themorechallengingonestypicallyarefive.Iamnotassumingthere'saglobalrecession.I'massumingtheglobalenvironmentisverysimilartowhatwearefacingtoday,challenging,andcertainmarketsdoingokay,certainmarketsnotdoingokay,butyougettoapointthatyougetlowenoughandourpaceofbusinessandthetypeofmarketplaceweserve,theywillstartinvestingincertainspaceagain.That'swhereIcomefrom,Julian.


Thankyou.AndjustaroundNetworkPower,thecleanprofitsstrippingoutrestructuringIthinkwasstilldownabout40%for2015asawhole,down30-somethingexitingtheyear.SoIjustwonderedhowthatplaysintothespindecisionandatwhatpointyouthinkwemightstarttoseetheearningsinNetworkPowerstabilize?


Fromthestandpointofspin,Ithinkwhat'sunfoldinginNetworkPowerisstillwithinwhatweplanned.Whenwelookat2016,it'sstillwellwithinitsplan.Wecaneitherspinorwecanlookatapotentialstrategicsale.Frommyperspective,asIlookatthepaceofordersandwhat'sgoingonrightnow,we'restartingtoseesomestabilityandIwouldexpecttoseethatnoseturningupaswegetintotheearly2016calendaryearbasedonwhatwe'reseeingtrendlinefortheseguysatthispointintime.


Thanks.Justaveryquickfollow-up.Anycoloronthepricenetofrawmaterialsimpactonmarginin2016?


Thepricecostisprettyneutralatthispointintime.Myguttellsmewe'll--itwillbeslightly--potentiallybeanegativewhatIcallredaswegetinto2016.It'salwaysafunctionofpricingpressuresandthecurrencytrendsweseeandthenetmaterialinflation.Rightnow,it'sprettyclosetobeingneutral,but,Iwouldsaythisyearprobablycouldendupbeingslightlynegativeaswegetinto2016.JustbasedonwhatIseeouttherefromacompetitivestandpoint.


Great.Thankyou.


Somethingwecanmanage,tobehonest.


Thanks.


Thankyou.




Operator :

JohnnyWrightwithNomura.

JohnnyWright (Analyst-NomuraSecurities):

Goodafternoon,guys.Hi.Forme,justkindoffollowinguponthatquestionontheinflectionsecondhalfoftheyear.Thinkingoftheslides,youtalkedaboutexpectationinimprovementinindustrialautomation.Whatgivesyouconfidenceonthatsittingheretodayandwhatreallyarethekeyriskstothatkindofcomingthroughin2016?


It'sreallyafunctionaroundhowmuchpeoplehavecutbackspendingforthelast18monthsandlookingatthat,lookingatthetrendlinesandthecustomerbaseandlookingatsomeofthosereinvestmentsthatwe'llstarthaving.Peoplearenotgoingtokeep--theyaregoingtoeventuallyhavetoreinvestsomemoneyandwedohaveaprettygoodinstallbaseoutthere.Sothat'swhereitcomesfrom.

We'renottalkingaboutaverystrongrecovery.Imean,afteryougodownforthreetoughquarters,afterwegodown10%thisquarter,afterwegodown6%thenextquarter,it'snotunusualtoseehistoricallyacompanylikeEmersonwhoisgloballywellestablishedwithinstallbasequitesignificanttohavealittlebitofrecoverycominginthatfixedtypeofquarter.I'mnotlookingatanythingunusualfromamarketplacestandpoint.AndagainI'llsayweareexpectingtheeconomicenvironmentsaroundtheworldtobeslightlyweakeroraboutthesameaswe'refacingrightnow.Sotheriskwouldbeifwetrulywentintoaglobalbroadrecession,thenyouclearlysay,okay,theindustrialspacewillbealittlebitweakerthanI'mthinking.Idon'tseeanyindicationwe'regoingtogotoaglobalbroadrecessionatthispointintime.


Okay,great.Andonprocessmanagementkindofmarginfornextyear,clearlyalotoftherestructuringhasbeenfocusedthereifyou'vegotatailwindfromthat.Canyoutalkaboutsomeoftheotherdynamics,particularlyonthepricingfront,andwhereyouseemarginscomingoutnextyearintheprocess?


Frommyperspective,therestructuringunderway,theworkthatSteveSonnenbergandhiswholeteamhavedonehasbeenextremelygood.AndwewillhaveclearlyIwouldsaythemostpricenegativepricingenvironmentwe'veseenfromthoseguysinalongtime.However,wedohaveauniqueinstallbase,sobasicallyourday-to-dayMROsmallprojectbusinesswillhelpusthere.Withtherestructuringeffortunderway,weexpectourmarginstobetrendingupwardandprocessbasedobviouslyafterashockerthisyearwithrestructuring,butweexpectourmarginstomovebackuponacomparisonbasisversusthisyearevenwithdownsalesbecausetheefforts,therestructuring,theeffortstheseguyshaveundertakentogetthecostsoutandassuminganegativepriceenvironmentwhichweareassumingwouldprocess,weareexpectingourunderlyingprofitabilitytoimprovenextyearinprocessmanagementobviouslyrelativetothisyear,butevenatprettyhighlevelsrelativetohistoricallevels.


Sure,andwhenyousaythatyou'retalkingintermsofreportedmargins,soincludingtherestructuringinbothyears?





Yes,exactly.


Okay.


Theprocessmanagementteam,ifyoulookattherestructuringtheygotdonethisyear,theygotalotofrestructuringdonethisyearandtheyhavesomeleftandthe$60millionor$70millionnextyear,buttheyhavegotthebigpartofitbehindthemasofrightnow,whichisagoodpositiontobein.Sowhatwasthetotalrestructuringprocess,Craig,fortheyear?Whatdidtheydo?Yougotthechartthere?


I'llhavetopullitout.


Rossman,healreadygavehislittlespeech,he's--haveabeer,andthenFarrhitshimwithaquestion.


90.


90million.Sotheygot$90million.Theygotalotofrestructuringdoneinthisyearandsoofthe$221million,theygot$90million.Ithinktheyareingoodshapegoingintonextyear.It'sgoingtobeaverydifficultfirsthalfprocess.Theyhadaverystrongfirstquarter.Ifeelreallygoodaboutwhattheygotaccomplishedfromtherestructuringstandpointandthecoststakenout.


Great.Thanksforyourtime,guys.


Thankyouverymuch.Appreciateit.

Operator :

JohnInchwithDeutscheBank.

JohnInch (Analyst-DeutscheBank):

Goodafternoon,Dave,Craig.


Goodafternoon,John.


Goodafternoon.SoIwanttostartwithyouexpect$250millionofsavingsfromactionsthatyoutookin2015,whichwas221.Howdoyougetmorerestructuringbenefitthanwhatyouactuallyspend?I'mnotsuggestingyouwould.Ijustwanttounderstandhowthat'sgoingtowork.





Dependsonthecostswetakeoutandwhatkindofprograms,whattypeofcostlayerswetakeout.Wewentinprettyhardtogetoverheadcostsoutandsomeredundancycostsoutandwetypicallygotagoodpaybackfromthat.


David--


Wewentafterit.


--isthisrestructuring,doyouthinkitcanhold?Inotherwords,it'salittlebitofaquestionofsaythemixofvariableadjustmentversusstructuralandhow--doyouhavetogivesomebacktothecustomer?Doessomecreepbackasthebusinesstrend'sbetter?Maybeyoucouldjusthelpuspeeltheonionalittlebitintermsofwhatyou'vedone,becauseitwasobviouslyveryaggressiveinthequarter.Sojusttryingtounderstand.


It'sbeenaggressivethewholeyear.Wejustdidn'tdoitalllastmonth.Iknowpeoplethinkthat,butitactuallyworkeditswaythroughandalotofit'sbeenplannedsincestartinginFebruary.I'mnotgoingtogobackandtellyouexactlywhatwedid.It'sclearlythat'swhatIwouldcallourowninformation.Wedidspendthemoney.Wewillgetthesavingsbuiltintoitandtherewillnotbe--wehavebuiltintoplans,weknowthepricingwillbetoughincertainmarketplacesnextyearbutthat'swhyweworkintherestructuringashardaswe'vedone.ItwillstickandfromastandpointofprofitabilitywegenerateveryhighlevelsofprofitabilityandI'llsayitagain.

Despite,despiteaverychallengingyearin2015,wedidgenerate17.3%operatingprofitondownsalesandwe'replanningontryingtogenerate17%operatingprofitnextyearondownsales.Soweknowwhatwe'retryingtodohererelativetotheprofitability,John.ThisisoneI'mnotgoingtogiveyouanymoredetails.You'vegottotrustme.WeknowhowtomanageourcoststructureatEmerson.


Justlastly,Dave,canIaskyou,whatwasthespendofNetworkPower?Irealizeyou'vealsomadecommentsthatyou'relookingtopickupthepaceofM&Aalittlebitbutintheory,right?SpinofNetworkPower,thenEmerson'sasmallerfootprint.Doyousortofmodifythenthedividendaccordingly?Soyousaywe'renowsortoffour-fifthsofwhatwewere,sowe'llmodifythedividendinsomemannerbythat?It'snotreallyaleadingquestiontobenegative,it'smoretryingtounderstandhowthisisgoingtoworkwithrespecttodividend,becausedividendisveryimportant.


I'vebeenveryclearonthis.Wewillnotbereducingourdividend.Thenewcompany,thenewEmersonthatcomesout,whenitcomesoutin2017,let'ssayit'saround$15.5billioninsizewithmarginsofover19%margins,generateverygoodlevelsofcashflow,morethanenoughcashflowtojustifythecurrentdividendpaymentandcontinuetoincreasedividendanddoingsharerepurchaseanddoingacquisitions.So,thebusinessthatstaysbehindisaverystrongoperatingperformingreturncompanythatcangenerateenoughearningsandenoughcashtopaythedividendsrestructurerightnow.Weare




notgoingtobeadjustingourdividendpayoutforthenewEmerson.


Gotit.Thanksmuch.


You'rewelcome,John.

Operator :

Nextwe'llgotoStephenWinokerwithBernstein.

StevenWinoker (Analyst-SanfordC.Bernstein):

Thanks,andgoodafternoon,guys.


Goodafternoon,Steve.


Dave,whataretheactualunderlyingGFIgrowthratesthenthatareembeddedinyourguidancefor2016?


OntheglobalG7basisI'vebeenbettingaround2-1/2basisgrowth.Thisyearisaround2,2.1,slightimprovementonaglobalbasis,soslightly--aboutthesameonGFI.ThisistheG7,thebiggermarkets,sothat'swhatwe'relookingat.Ifyoulookattheoverallforecastoutthere,it'smuchhigherthanthatrightnowandIdon'tbelieve--Idon'tbelieveitatall.Ithinkwe'regoingtobetrendinginthelow2s.


Right,butyoustillhavethatpickingupthepaceduringnextyear,right?


Yes,asyougointonextyearyou'reprobablylookingatwhatwesawinthelastsixmonthsinthelow2s,aroundthe2.2,2.3s,andthenyoustartmovingthatupinthehigher2sinthesecondhalfoftheyearaspeoplestartturningback.Theygotthestability,theygottherestructuring,theygottheneedstheyneedtostartinvestingagain.I'mnotlookingforabigsuddenspike.I'mlookingatstarttrendinguptowardthemidtohigher2s.


Okay,andyoutalkedabout--


Bytheway,that'snotwhattheeconomicsforecastis,asyouknow.


Yes.That'swhyI'maskingyouandnotabunchofeconomistsrightnow.





I'madumb,likeCEO.Whatthehellareyouaskingmefor?


Youmentionedincreasedactivityinevaluatingacquisitionofstrategicassets.Youtalkedaboutconsummatingseveralfor2016.Whereisyourheadintermsofcurrentthinkingintermsofthesizeanddirectionalityinprocessandindustrialversuscommercialandresi?Whatkindofexpectationsshouldwehaveonwhatthesethingslooklike?


Mostofthemaregoingtobe--rightnowwhatwe'repushingprettyhardarewhatIwouldcallmoreofaprivatecompaniesoutthere.We'relooking--Ireallywouldliketoconsummate,eventhoughwe'retalkingreallyabout--Ireallyliketoconsummateover$0.5billionwithinIndustrialprocess,industrialautomationarea,andIwouldliketoconsummatemaybe$100million,$150millionoveronthecommercialresidentialareaasIlookat2016.Theseareactionsthatwe'regoingoutandencouraging.

We'vebeentalkingtoprivateshareholdersandcompaniesthatwe'vebeencourtingforsometimeandgiventhetoughermarketplacerightnowtheyaremuchmorereceptivetoit.Idon'tseeany--atthispointIdonotseeanybigstrategicsafepublictransactionunderway.Butwe'regoingtokeepworkingthenipsaroundthecornersandinparticularI'mgoingtostartworkingprettyhardinAsia,too,becauseIthinkAsia'sgotsomeopportunitiesthatwiththeirmarketsbeingstressedrightnowthatwewanttogoafter,too.


Okay.


We'vegotthebusinessesworkingrealhard.PrimarilyIwouldsay90%willendupinindustrialassetbaseovertheprocessworld.


Great.Iknow--onemorething,Iknowyoudon'tgivequarterlyguidancebutjustgivenyourcommentaryinthiscallandyoutalkedaboutbasically20%year-on-yeardecline,whichismore--highersequentialthantheusualamountanddecrementalsI'massumingabout30%,andthenyou'vegottherestructuringoffset.Itsoundstomelikewe'recertainlyinthetoughcomps,certainlyshouldbehavinganumberdownherewelllessthan$0.45to$0.50,butjustdirectionally?


Iwoulddirectionally,Iwouldbemore,Iwouldbemorearoundthe$0.50range.Imean,lastyearwereported$0.75.Theyearbeforethat,wereported$0.65.Oursales,ifyouthinkabout2014,comingoffthat2014wherewehad$5.6billioninsalesandwehadOPmarginaround14%and$0.65EPS,we'regoingtobeabout$1billionbelowthatinsales,butwe'vegotrestructuringunderwayandhelpingus.Ithinkwe'llgetprettygoodflow-through.Iwouldbethinkingaround$0.50numberforthatfirstquarter.


Okay,guys.Thanks.Goodluck.





You'rewelcome.Now,I'mdoingthatonetime.That'sit.I'mnotgivingquartersout.

Operator :

AndournextquestionwillcomefromMikeWoodwithMacquarieSecuritiesGroup.

MikeWood (Analyst-MacquarieResearch):

Hi,Dave.Iapplaudtheaggressiverestructuringactions.Justaquestionfirstontheprocess.You'vementioneddownstreamprovidinggrowthopportunities.Curiousifyou'reseeinggrowththereandifyoucangivesomecolorintermsofwhatsubsectorsaregrowingonthedownstreamside?


Whatwe'reseeingiscontinuingto--theinvestmentsgoingoninsomeofthepetrochemicalareas,thechemicalareas,someofthepharmaceuticalareas,sortofareasthatpeoplearemakinginvestmentsusingthelowercostofenergybothintheoilside,thegasside.We'vebeenseeingtheprocessgofurther.Notaslargeaswethoughtoriginally,buttheyarestillgoingforward.Idon'tseepeoplebackingoffonthat.Theprojectsthat(inaudible)hasunderwaygoingdownLouisiana,whichisabigcustomerbaseforus,that'smovingforward.Theopportunitiesareoutthere.

AndIanticipateaswegetintothespringandearlysummerof2016someofthecompaniesthathavebeencuttingbackoncapitalandcuttingbackonwhatIwouldsaynecessaryinvestmentsaregoingtohavetoletthemoneygo.Theyhavegotothercostsadjusted.SoIthinkthat,Ithinkyou'regoing--IthinkourunderlyingMLO,whichisagoodbusinessforus,willimproveandgetbetteraswegetinto2016.It'snottotallydeadoutthere.Thebigoilandgasprojectsobviouslyarestruggling,buttheotherinvestmentsareonthechemicalandpetrochemicalarestillhappeningforus.


Okay.Andyoumentionedtherestructuring,Imayhavemissedthis.Didyouquantifyhowmuchyoudointhefirsthalfofnextyear?


We'regoingto--let'ssaywe'regoingtodo$60millionto$70million.Ithink,Frank,we'regoingtodo60%ofit?

FrankDellaquila(CFO):

60%to70%ofitinthefirsthalf,yes.


70%inthefirsthalf.


Great.Thanks,Dave.


You'rewelcome.




Operator :

Nextwe'llgotoScottDaviswithBarclays.

Scott Davis (Analyst-BarclaysCapital):

Goodafternoon,guys.


Goodafternoon,Scott.


I'mtryingtogetasense.IwasinChinaafewweeksagoandIwalkedbackprettydarnbearish.Itseemslikesequentialslowdownsthere.Ifyoulookatyournumbersitshowsexactlywhatwesaw.DoyouhaveanysenseofIguessacouple(technicaldifficulty-audiocutout)asmuchofaninventoryde-stockasanythingelseorarethingssequentiallygettingworsethereandthatconcernsyouasyougointo2016?


Well,weareplanningforadown2016inChina.Frommyperspective,we'vehadtwoverychallengingquarters.Ifirmlybelievetherehasbeendestockinggoingon.Basicallywhatwecantell,Scott,rightnowIthinktheworstisbehindus.Idobelievewewillhaveachallengingfirstquarterbecausewehadaverygoodfirstquarterlastyear.So,itcouldbestrongdoubledigitsdowninsales,butIdon'tthink--Ipersonallydon'tthinkit'sgettingworse.Ithinktheyaretryingtoreposition,andIexpectthatwewillhaveadownyearnextyear,butwe'llmanageourwaythroughit,getalittlebitbetteraswegoforwardastheystartreprioritizingtheirinvestments.

Butrightnowwehaddown18%inthefourthquarter.We'reprobablygoingtobedownaround15%againthesecondquarter--thefirstquarter.AndIthinkwe'llprobablybedownaround10%inthatsecondquarterandthenwe'llstartgettingbetteraswegoforward.We'regoingtobedownsomewherearound3%,4%,5%forthewholeyearinChina.Itisgoingtobeatoughyear.I'mnotlookingforanysharpbouncebackthere.Iagreewithyou.


Andjustasafollow-up,isthattheregionyoucitedsomepriceriskversusrawsnextyear?Isthattheregionwhereyouarethemostconcernedaboutaskingprice?


I'mnotconcernedaboutthatasmuchthere.Mypriceriskcomesintoplayinthelargeglobalprojectswheremoniesarebeingspent.Thereareprojectsbeingdownoutthereandclearlythepricingriskwillcomeintothoseprojectsandyouclearlyaretryingtoprotectyourcustomerbase,you'retryingtoprotectthem,sothat'swhereIwouldseethepricingpressuresontheindustrialside.Onthecommercialresidential,IwouldsayAsiawouldgivemethemostpricepressuresbutIalsotypicallyhavethemostpriceopportunitiesthere.Mypricepressures,Idon'tworryaboutChinanextyearasmuchasIworryaboutthebigglobalprojectsthatarenotthatmanyoutthereandpeoplearegoingtobehungryfightingforthoseprojects.


Okay.Goodcolor.Goodluck,guys.Thankyou.





Thankyou,Scott.Allthebesttoyou.

Operator :

Andnextwe'llgotoGautamKhannawithCowenandCompany.

GautamKhanna(Analyst-Cowen):

Yes,David.Tofollowuponthatlastcommentyoumade.Haveyouseenanyofthispricepressureyetintheordersyou'vebeenreportingoristhatsomethingthat'sstillonthecomp?


Weseeittodayandwehavecontinuedtoseeit.Ournetmaterialinflationhasclearlybeenhelpingusfromthatstandpointbecausetheinflationaryenvironmentwehavebeenfeelingforthelastthreeyearshasbeennegativeonmaterials,sothat'shelpedus,butatthesametimeIhavehadthreeyearsofwhatIcallanegativeprice.Ithinkthatthepricingpressureisalreadyhappeningonthebidding.Ourcustomerbaseknowsthattheglobalmarketplaceisachallenge.Theyknowthatcommoditypricesarecomingdownandtheyareutilizingthatandobviouslyweworkthatveryhard.We'reawareofthat.

Andfrommycoststructurestandpoint,we'vebeenabletomakethatup,butIwouldsaywe'llprobablyhaveintheendwhenweaddupallthenumbersnextyear,myguttellsmewe'llhaveaslightlynegativenetpricematerialinflation,notbigbutslightly.Ithinkit'sallgoingtobethereasweworkthisissueinthenextsixmonthsorsevenmonthstogetthroughthistransition.Soit'sthere.


Okay.


Andit'shappening.That'swhat'sgoingon.


Okay.AndyoualreadyaddressedtheChinaquestion.Iwasjustcurious.Elsewhere,arethereanyregionswhereyou'reactuallyworriedaboutanotherlegdown,amoresignificantstepdownindemandwherethingscouldgetsubstantiallyworse?


TheonlyplaceIseerightnowonthemarketsiswe'realwaysseeingtheimpactineasternEuropeandRussia,we'vealwaysseenthat.I'malittlebitworriedintheMiddleEastasourbigMiddleEasterncustomersbothinoilandgasandpetrochemicalinvestments,iftheycutbackevenmoretoprotecttheircashflowforvariousreasons,whatevertheyneedthemoneyfor,soIwouldsaythatmarketforus,you'retalkingaboutabilliondollarmarketplace.Iwouldsaythathasthebiggestriskatthispointintime.Ithinkwe'veseenabighitinLatinAmerica,Brazil,Mexico.Istillthinkthatwillbenegativenextyear.Ithinkwe'vetakenabighit.MyconcernistheMiddleEast.Ithinkthere'sariskforbiggerdownthan--we'replanningitdown,butIthinkitcouldbeabiggerone.


Gotit.Andonelastone.Climatetech,doyouexpecttostarttocomppositivelyasearlyastheMarchquarterasyoulapthisyear2014prebuildorwhendoyouexpectthatbusinesstostarttobepositive




comps?


Iwouldexpectthecompstoturnpositiveinthesecondquarter.


Okay.


Soyoujustwatch--wewatchallthe--ourcustomerbasereportandweknowtheyareworkingthroughthatinventory.Theyhavedoneagreatjobofmanagingthatinventoryandgettingitoutandgettingsales.Iwouldsaythatwewill--we'llhaveanegativefirstquarterandthenwe'llstartcompingmorefavorableinthatsecondquarter.


Okay.Thanksalot,guys.


You'rewelcome.Takecare.Haveagoodafternoon.

Operator :

Nextwe'llgotoNigelCoewithMorganStanley.

NigelCoe (Analyst-MorganStanley):

Thanks.Goodafternoon,Dave.


Goodafternoon.


Youmentionedsomethingveryinteresting.Ithinkthis--whenyoumentionedthebulkofthechanneldestockisbehindyou,Ithinkyou'retalkingaboutChinaspecifically.


Correct.


Canyoumaybejustbroadenthatoutintermsofwhatyou'reseeinggloballyoninventorydestockandwhenyouthinkthatmightbebehindyou?


MyinventoriesinEuropeare--Ilookatourchannelasprettygood.Becauseofthechannelpartnersandthechannelyousellinto,themoneywashardtocomeby.SoEuropeanchannel'sinprettygoodshape.IlookatmychannelinNorthAmerica.Iwouldsayit'sindecentshaperightnowonthebusinesseswesellinto.Thelastpieceofthisworkingthroughwouldbetheclimateareas,isalltheprebuildwehavethere,




butIwouldsaythechannel'sindecentshape.

Probablyaswegetthroughthiscalendaryearitwillbeinreallygoodshape.Andsowesawtheinventory'sbeingbuiltandpeopleanticipatethesecondhalfbeingstronger.Wesawdestockinghappenthisquarter.Ithinktheplanwehavebuiltintoourplanforthisquarterwhereunderlyingsalesmightbedownsay10%,Ithinkthatwillworkitswaythroughitonthedestockfrommyperspective,asIseethechannels.


Okay.Soaswegetintocalendar2016,weshould--thatshouldbebehindus?


Yes,Iwouldsayyesunlessyouhadastepdowninoverallrecessionaryenvironment.Rightnow,Ithinkpeopleareplanningforvery,verylowgrowthandtheyaregettingtheirinventoriesdownandtheyareworkingitveryhard.It'sthesamethingwe'vebeendoingasacompanyhere.Iwouldsaywehaveonemorequarterbasicallyofgettingourinventoriesdownandthentypicallywe'renodifferentthantheglobaldistributionchannelanyway.SoIthinkthat'sexactlyright.


Okay.Veryhelpful.Thenjuston(inaudible),Dave.ClearlytheMROspendingisprettytightwiththeoilandgascompanies.Anysenseonwhenwemightstarttoseesomeofthatactioncomingthrough?


Idon'tthinkyou'llseeanyactioninthatspaceuntilthesecondhalfofcalendaryear2016.That'swhyIthinkprocesswillhave,willbedowningrowthnextyear.


Okay.Thanks,Dave.


You'rewelcome.

Operator :

AndournextquestioncomesfromShannonO'CallaghanwithUBS.

ShannonO'Callaghan (Analyst-UBS):

Goodafternoon.


Goodafternoon,Shannon.


Dave,justafollow-upontheclimate.Sointermsofreturningtogrowth,whenyougetpastyourcomps,whichmakesense,butChinawasdown27%climate.Isthatgoingtobeanoffsettothatorcanyouexplainalittlebitwhatyou'reseeinginclimateinChinarightnow?





Well,climatehadaverystrongfirsthalfoftheyearinChinaastheybuiltinventoryupmountainchannelgoingbacktooneofthepreviousquestionsandtheyarequicklytakingitoutrightnow.SoIthinkwhatwillhappenisthetypicalplaninChinaistheywillrebuild,theytakeitbackdown,andthentheystartbuildingbackupagain.SoIwouldexpectthatChinawillstartseeingsomeimprovedsecondhalfnumbers,mostlikelystillnegativeforthefirsttwoorthreequartersandthengettingupandpositiveinthatfourthquarter.So,thedestocking'sstillunderway.IthinkthemajordestockingwillbedonebytheendofthatfirstquarterinChina.


Okay.Andthenobviouslythepressureissignificantsortofacrossthebusinessandalotofrestructuringtodo.ButtypicallywhentimesaredifficultlikethisEmersonlikestoinvestandtakeshareandcomeoutofthedownturnevenstronger.Isthathappening?Arethereexamplesyouwouldgivesortofforuswhereyoufeellikeyou'replayingoffenseeventhoughthere'sobviouslyalotofrestructuringtodoaswell?


Wearecontinuingtoplayoffense.IwillsharealotwithyouinFebruaryonthisissue.Wearenotcuttingbackincertainstrategicareaswherewethinkwehaveuniqueopportunitiestogainshare.So--we'rerestructuringbutwe'rerestructuringinareaswherewefeelthatarenotstrategicrelativetogaininggrowthopportunitiesandsowe'recontinuingtoinvestandrestructureatEmerson.Verygoodatthisgaspedalandbrakeatthesametime.Sowe'replayingthatgamebecausewhatwewanttodoiscomeoutofthisandcontinuetogrowourcoremarketsinparticularonthetwostrategicbusinesseswe'regoingtohavewhenwefinishthisin2016.

SotheBoardhasbeenkeenlyinterestedandintunetowhatyou'resayingthere.Theydonotwantustogettothepointthatwe'recuttingreallystrategicgrowthopportunitiesandopportunitiesweseeoutthere.Sowe'reworkingitveryhard.We'llsharesomeideaswithyouinFebruary,butsufficeittosaythatourgameplanistogetthecostsdown,whichwearerightnow,veryquickly,andthentakeadvantageofthoseopportunitieswhentheycomebackatus.


Okay,great.


Thankyouverymuch.

Operator :

Nextwe'llgotoRobertMcCarthywithStifel.

RobertMcCarthy(Analyst-StifelNicolaus):

Goodafternoon,Dave.Howareyoudoing?


Goodafternoon,Bob.


IguessthefirstquestionIhavewithrespecttomonthlyordertrends,andobviouslyyou'renotdisclosingthoseanymorebutyou'restilltrackingthem,couldyouspeaktowhatkindofmonthyouwouldseeas




kindofcriticaltothinkaboutwhetherwewouldseethekindofgrowththatyou'retalkingaboutfortheplanfor2016versuspotentiallysomethingworse?Inotherwords,whendoesthatcompkindofappearintermsofthebacklog,intermsoftheordertrendswhereyoucandeclarevictoryorthinkaboutsomethingincrementallyworse?


Okay.Firstofall,wewillcontinuetodiscloseourordersonceaquarterandsothenexttimewe'lldisclosewillbein--

FrankDellaquila(CFO):

December.


--inDecember.Sowewillbeputtingordersoutthere.Thismonth-to-monthstuff,giventhatwearetheonlyonesdoingit,itwaskindofcrazy.We'lldiscloseitinDecemberandthenwe'lltruethemupinFebruarywhenyouwereportthequarter,soyou'llstillgetaccesstothem.WhatI'mlookingatisImapouttheyearIunfoldedforyouallonthephoneearlieriswhatIexpectisthatweshouldseeonacompbasisinorderforustohavesecondhalfunderlyingsalesgrowthIhavetoseemyorderpacestartgettingabovethatline,acrossthatline,thezerolineaswegetoutofthatsecondquarter.

Sowhenwereportordersintheendof--saytheMarchquarter,Marchtimeframe,youshouldstartseeingthatnumberapproachingthat0%range.Ifnot,ifit'sstillnegative5%or6%,thenwe'llgobacktothatconversationIhadearlierthatwewillnotseethepositiverecoveryinthatthirdquarterandthenwe'llhavea[sixthdown]underlyingsalesforce,sothat'sthebenchmarkyouneedtolookat.


Understood.Thenjustmovingtokindofprocessmanagementandjustgivenwhatyou'veseen,andthishasbeenpickedoveralittlebit,butgivenwhatyouhaveseenaboutwhatyouexpectintermsofbehavioracrosstheboardintermsofpotentialcuts,andyoumentionedtheMiddleEastkindofasapotentialnegativethere,doyoufeellikeyouhaveagoodsensethatwe'regoingtoseeabottomhereandtheimplicationsformarginshere?Inotherwords,whatisbakedintoyourcurrentplan?


Ithinkrightnowweexpectthemarketweseetodayisgoingtocontinuetobeweakinfrontofusforatleasttwoquarters.That'swhat'sbakedinourplan.Andthensomestabilityandwewillhavedownunderlyingsalesintheyearof2016.Therestructuringeffortisbasedondownunderlyingsales.IbelieveI'vetalkedaboutdown3%,4%,5%withprocessunderlyingsales.Andsowebakedinthattypeofdown,saydown5%underlyingsales,intothecostexpectationsandtryingtogettherestructuringdonesowecantrytodeliverimprovedprofitabilityin2016andcontinuetomakethestrategicinvestmentsweneedtomake.

SoIexpectprocesstobefacingsomeprettychallengingheadwindsforthenextcouplequarters.Weare--wewillstartseeing,asIgetoutinFebruaryorIgetinJanuaryandtalkingtoinvestors,I'llbeabletostartseeingsomeoftheearlypartsofprocessontheMRO,theinstrumentationside.IfIstartseeingthatimprove,thatwillgivemeagoodfeelingthatwereachedthatbottomandwehaveaclearvisibilityinthatsecondhalfasweleave2016.





Thefinalquestionrealquickisjustintermsofthenetworkpowerintermsofthisparallelprocess,obviouslythere'slimitsastowhatyoucansayaboutit.ButIguesshowdoyouthinkaboutthedecisionaroundprice,timing,etcetera,versusgoingthespinrouteversusapotentialsalestrategic?Whatarekindofthequalitativefactorsthatyouarestressing?Isitspeedintermsofexitorisitvaluation?Howshouldwethinkaboutit?


Frommyperspective,Ihaveoneperspective.It'scalledvaluation,[producing]responsibilitytomyshareholders,maximizethevalueformyshareholdersasIlookatandtheBoardlooksatdowedoaspinversusifwehaveastrategicalternativewithabuyercomingin.Thatwillbethekeyissueforme.Astrategicvaluationformyshareholders.Wethinkwecanmakemoremoneyforshareholdersdoingaspinversussale,thenwewillgothatrouteorviceversa.

Ifwe'regoingtohavethisdonebytheendofthisfiscalyear,thenwe'llhavetomakethisdecisionsometimeinlatespring,whichwaywe'regoingtogoleft,arewegoingtogoright,andsothat'sthetypeoftimeframethatwe'reheadingon.WejustreviewedthiswiththeBoard,thetimelineandapproachesandkeepthemuptospeed,butthatisthedecision-makingprocess.It'sallaboutmaximizingthevalueformyshareholderwhichIamoneof.


Thanksforyourtime,Dave.


You'rewelcome.

Operator :

Nextwe'llgotoJeffreySpraguewithVerticalResearchPartners.

Jef f reySprague (Analyst-VerticalResearchPartners):

Thankyou.Goodafternoon,Dave.


Goodafternoon,Jeff.


Onequickpointofclarificationbeforemyquestion.Yousaidintheearlierquestionyou'vehadthreeyearsofnegativeprice.Didyoumeanthreeyearsofnegativecosts?


Ithinktheprice--ifyoulookattheunderlyingpricing,Ibelievewe'vehad,we'vereportedthreeyearsofnegativepricingasacompany.


Okay.





Thishasbeenunusual.We'reabouttogointothefourthyear,Ithink,with2016.Weare--eventhoughthefedisgivingfreemoneytoeverybody,theenvironmentouttherehasbasicallybeenprettytoughonoverallpricing,ofthetotalcompany,totalcompany,andsoI'vehadnegativepricingbasically.AndnetmaterialinflationhashelpedusprotectourprofitabilityandIthinkthatwe'regoingtosee,nextyear,Ithinkthenegativepricingwillbeslightlyhigher,butmynetmaterialinflationwillbehigherbecauseofwhatopportunitiesoutthere.That'swhatIsee.That'sthetypeofmarketwe'vebeen,theindustrialworldhasbeenfacingforawhile.


Right,butyouwerenotintheso-calledredin2015,butyouwillbein2016byyourestimation,right?


Rightnow,we'renotred.Ithinkthere'sagoodchancewecouldhaveaslightredtothat,Jeff,tobehonest.Mygutrightnowisallitis.Iplaythisbyfeel.Iknowthepricingenvironmentisoutthere.Iknowthenetmaterialenvironment'soutthere.Youcanhaveacouplethingsgothewrongwayandyoucouldhaveaslightnegativenetmaterialpricepressure,butit'sgoingtobevery,veryslight,ifatall.


ThemainthingIwantedtotouchoniscash.Wehaven'treallytalkedaboutthatyetonthecallotherthantheopeningremarks.Sohistoricallyyourcashflowhasactuallybeenalotlesscyclicalthanyourearnings,notsurprisingly.Wedidn'treallyseethatplayoutin2015andyoumadeacommentaboutgettingthebalancesheetironedoutbyQ2ofnextyear.Obviouslyyouhadthe(inaudible)buildandallthatgoingon.Canyougiveusthelayofthelandonhowyouexpectcashandkindoftheworkingcapitaldynamicstoplayoutfornextyear?


Historically,wegethitlikewegothitinthesecondhalfoftheyearittypicallytakesustwotothreequartersoncethathithappens.Andsowehadaverygoodfourthquarterfromacashflowstandpoint.I'mstartingtoseeifIlookattheoverallinventorylevels,Ilookatwherewesitthispointintime.Tradeworkingcapitalisnowstartingtogetbackintothelinewhereitshouldbe,wherethenormalprogressiontoseewhatIwouldcallthehealthy,youknow,whatIlookatthe11%to14%sale,percentofsalesofcashflow.

Ithinkrightnowwe'reinprettygoodshape.Itwasatoughlastyear.Wealsohad--theextraordinarythinglastyear,wehadsometaxpaymentsthatwehadtomakeinthesaleofthedivestiturewhichgoesinthecashflowwhichmucksthatupalittlebit.Wedid--asIlookatthecashflowlastyear,wedid--operatingcashflow,wedid$3billionandwehad22.3sales-23.3sales.Sowewerearound13.4%.Ilookatnextyear,we'regoingtobe,we'regoingtobearoundthat14%.

Sowe're,we'removingbackuptowhereweneedtobenextyear.Ithinkit'swellundercontrol.IthinkFrankandEddidagoodjob,gotthebusinessesfocused.We'veprettywellgotaforecastinfrontofusrightnowthatmakessense,whichIlaidouttoyou,andthatallowsustoreallyworkinabalancesheet.


Andinthatconstruct,Dave,areyouincludingthecashrepatriationyou'reexpectingfromNetworkPower?





No,we'renot.We'renot.Thatwillunfold.Firstofall,that'scashflowthat'salreadyinsidethecompanythat'sbeenearnedovertheyears.WehavenotincorporatedmovementofcashflowwhichisquitesignificantfromboththesalesspinofNetworkPowerand/orLeroy-SomerCT,sothere'sgoingtobecashflowmovingaround.Wewillberepatriatingcashflowin2016andprobablyearly2017onthiswholeprocess,whichwillbringmoneybackintotheUnitedStatesandwillenduppayingthetaxes.


Thenonelastone,sametopic,isjustthecashcostofwhatyou'retryingtoexecuteinrepositioning,you'vegotthis$300millionto$400millionmarker.I'massumingsomeofthatmightjustbeassetimpairmentsandthelike.Canyousizethatforus?


No.Ifwehadanimpairment,wewouldhavetotaketheimpairmentnow,Jeff.Accounting'sprettystraightforward.IfIthoughtwewouldhaveanimpairment,Iwouldhavetotakeitnow.Thecashflow,thatnumberiswhatwe'regoingtospendontransactions,someofthetax,someofitisadvisors.That'struecashflowthat'sgoingout.TherewillbeanotherbitofcashinvestedinsomeoftheinvestmentswemayhavetomakeinITwithsomeoftheinvestmentswehavetomakeinotherareas,butthat'snotabignumberoverall.Probablywe'relookingatanother$100millionto$150millionofadditionalcashinvestmentswemighthavetomakeontopoftheexpensespendtothepointyou'regettingat.


Okay,great.Appreciateit,Dave.Thanks.


You'rewelcome.Thankyou,Jeff.

Operator :

Nextwe'llgotoChristopherGlynnwithOppenheimer.

ChristopherGlynn (Analyst-Oppenheimer):

Thanks.Justwantedtodiveintounderstandinganotheroneofthenumbersused.The$250millionbenefittotheglobalcoststructure,isthatjustthesavingsordoesthatalsoincorporatesomeofthebenefitfromlowerstructuringexpense?


It'sthesavings.It'sthesavings.


Okay.Sothere'sanothertailwindfromthelowerexpensethen.


We'retryingtoprotectouroperatingprofitabilityat17%,aroundthat17%rangedespitethefactthatoursaleswillbedownagainnextyearontopofthisyear.Sothat'swhatwe'retryingtoprotectrightnow.


Okay.Andthenfromakindofverybroadhighlevelviewontheenergymarkets,howisconsolidation




phaseofthatcycleshapingupfromyourperspective,eitheronthesupplychainwhereyouplayorintheproducercomplex,andisthatkindofexpectedsofarorhowisthatstagingup?


Onthecustomerbase,it'sstillearly.There'ssomeactiongoingonrightnow,butIstillthinkthere'smoretocomebasedonwhatunfoldswhenyouseethat,whenyouseewhathappenstothepricinganddemandoutthere.Fromourperspective,supplierinthemarketplace,Ithinkit'sreallyearly.Ithinkyou'llstartseeingmoreopportunitieshappeningin2016andmaybeallthewayinto2017,earlystagesstill.


Okay,thanks.


You'rewelcome.

Operator :

Nextwe'llgotoRichKwaswithWellsFargoSecurities.

RichKwas (Analyst-WellsFargoSecurities):

Goodafternoon,Dave.


Goodafternoon,Rich.


Industrialautomation,shouldwethinkasit'scurrentlyconstituted,shouldwethinkofmarginimprovementsimilartothecadenceandprocessthatyou'reanticipatingonayear-over-yearbasis?Iknowyoudidn'tdoasmuchrestructuringlastyearNIA,butjusthowshouldwethinkaboutthat?


Weare--rightnowbecauseofourindustrialautomation,themakeupofwherethoseassetsfit,there'salotmoreinternational,sothere'salotmorebeingdonehereinthefirstandsecondquarterbutwedoanticipatemarginimprovementnextyear.Fromthestandpointofwhat'sbeenaccomplishedandalsowhatwe'redoing,we'realreadyexecutingrightnowhereinthefirstquarter.Weanticipate--weactuallydoanticipateunderlyingproven,marginimprovementinindustrialautomation.

Idonotexpecttoplinegrowthtobenegativelyimpactedastheprocessastheseguyshavegonethroughalotoftheshakeoutandbuildoutandsoalotoftheirbasicday-to-daybusinesswillstabilize.Ithinkindustrialautomationwillfaceabettertoplinemarketplace,notquiteasnegative.AndtherestructuringtheyhavegotdonewillhelpthempickuptheirprofitabilityinFY16.


Thatwouldbebackhalfweightedprobably?


Yes.That'sagoodwaytothinkaboutit.





Alright.AndthenjustonUSconstruction,youhadacommentthereforCRNSaroundgoodconstructionmarkets.Itsoundslikeyouthinkresiandnon-resarestillgoingtobeprettygoodin2016.What'syourlatestonthat,consideringthere'sbeensomemovingdatapointsoutthereonthemacrofront?


Ithinkthatresi,residentialmarket,willcontinuetocontinuetoprogressatagoodpace.ThewayIlookattheGFI,it'sbeeninthelastcouplequarters,been8%,9%.Ithinkthat'sgoingtocontinuetobethat8%,9%,10%.Ipersonallythinkthatthenon-resinvestmentsonthegrossfixedinvestmentshasbeentrendingdownward.Ithinkthattrendwillcontinuetocomedownwardandstabilizeinthelowsingledigits.Itwillstillbepositive,butIstillthinkthatthetrendlineisnotup,butdown,eventhoughIthinkpeoplethinkitwillturnaroundinthesecondhalfof2016.Iamnotofthatopinion.Ourforecastisbuiltonthefactthatitbottomsoutandstaysthere.


Isthatenergycontagioninfluencedinyour--?


Yes,itisenergycontagion.


Okay.Thankyou.

Operator :

Andnextwe'llgotoSteveTusawithJPMorgan.

SteveT usa(Analyst-JPMorgan):

Hi,goodafternoon.


Goodafternoon.


Soyousaid$300millionto$400millioninthecosts.Doesthatincludetheassumedtaxesyouwouldpayonthe,nottheNetworkPowerstuffbuttheotherstuffyou'resellingoutofindustrialautomationoristhatadifferentbucket?


Wehave--ifweselltheassetsofLeroy-SomerCTandwehaveataxgain,thatwillbeseparatebasedorderwhatwesellthepricefor.Thatisnotincludedinthenumbers.Whatwe'retalkingaboutisallthereorganizationoftryingtogettheseassetsrepositionedeitherforspinorsaleandnetworkandalsorepositionforLSCT.Thatdoesnotincludethat.Ifwehaveagood,wegotagoodvalueforthesaleofLeroy-SomerCT,thenwe'llhaveincrementaltaxes,butalsohavecashandgainatthesametime,too.





Canweusethepowertransmissionsaleaskindofaguideforthebookvaluedynamicsonthosebusinessesorwastheresomethinguniqueaboutthetaxesthatyoupaidonthatdivestiture?


Ithinkthatthisasset--peopledowantthisasset.Itisauniqueassetfromthestandpointthere'sacouplethingsthatwillmakeitdifferent.Oneofthembeingthatyouhave--thealternatebusinesshasastrategic--onelargestrategiccustomer.Idon'tseethemultipleasthesametypeofmultiple,thoughitwouldstillbeagoodmultiple,itwillnotbethesamedynamicsthatwehad.WeboughttheseassetslaterinsaythelifeofEmerson.Thepowertransitionassetswereboughtinthe'60sand'70s,alittlebitinthe'80s.IfyoulookatLeroy-Somer,thatacquisitionwasdonein1989andthenalotofthealternativebusinesswasdonelater,sayinthe'90s,2000timeperiod.Iwouldsaythebasisisprobablyhigher.


Onelastquickoneonthenetworkpowerside.IlookattheEBITcontributionandtheEBITDAcontributionanditlookstobearound10%to12%ofthetotal.AfewpeopleI'vetalkedtosaythefreecashflowgenerationofthatbusinessishigherthanaverage.ItoutpunchesitsweightrelativetoEBITDAandprofit.Isthatcorrect?IstheresomethinguniqueabouttheirabilitytogeneratecashoverandabovewhattheydoonEBITversustheothersegmentsforanyparticularreason?


Oneoftheissuesonnetworkpowerbusiness,there'samortizationgoingontherewhichisnotcashflow.Theydohavebecauseofthat,sowhatyousee,thereisgoodcashflowgeneration,youareexactlyright,thereisgoodcashflowgenerationbetterthanyounormallyseebecausethereisamortization.Itisagoodcashflowgenerationbusiness.


Okay.


Wetakethatintoconsideration.Itisdifferentthanmostpeoplewouldthinkbecauseofthatissue.


Right.Makesalotofsense.Dave,thanksalot.


You'rewelcome.

Operator :

Wehavenofurtherquestions.


Okay.Thankyou.Iwanttothankeverybodyforcallingtoday.Goodquestions.AndIappreciateyourinputandsupportandItrytogiveyoualittlebitmoreclarityonwhatweseehereforthenexttwotothreequarters.Hopefullyyouhaveabetterunderstandingtothat.LookforwardtomeetingwithyouinTexas.IguaranteeyouwewillnothaveafootofsnowinTexaslikewehadafootofsnowinBostonacoupleyearsago.ButI'lllookforwardtomeetingyoudownthereandIwishyouwellandhaveasafeholidayandThanksgivingvacation.Takecarenow.Bye.




Operator :

Andthatwillconcludetoday'sconferencecall.Thankyoueveryoneforyourparticipation.

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Emerson Electric (EMR) Earnings Report: Q4 2015 Conference ... · Emerson Electric (EMR) Earnings Report: Q4 2015 Conference Call Transcript The following Emerson Electric conference