emerson electric (emr) earnings report: q3 2015 conference...
TRANSCRIPT
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q32015EarningsCallMarketCapasofEventDate:34.30BPriceasofEventDate:49.64
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EmersonElectric(EMR)EarningsReport:Q32015ConferenceCallTranscriptThefollowingEmersonElectricconferencecalltookplaceonAugust4,2015,02:00PMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
CraigRossman;EmersonElectricCo.;DirectorofIRDavidFarr;EmersonElectricCo.;ChairmanandCEOFrankDellaquila;EmersonElectricCo.;EVPandCFO
OtherPart icipants
JoeRitchie;GoldmanSachs;AnalystRobertMcCarthy;StifelNicolaus;AnalystMikeWood;MacquarieResearch;AnalystJohnnyWright;Nomura;AnalystStevenWinoker;Bernstein;AnalystJulianMitchell;CreditSuisse;AnalystNigelCoe;MorganStanley;AnalystJeffSprague;VerticalResearchPartners;AnalystChristopherGlynn;Oppenheimer&Co.;AnalystRichKwas;WellsFargoSecurities,LLC;AnalystDeaneDray;RBCCapitalMarkets;AnalystShannonO'Callaghan;UBS;AnalystSteveTusa;JPMorgan;AnalystGautamKhanna;CowenandCompany;AnalystJohnInch;DeutscheBank;AnalystJeremieCapron;CLSA;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
Goodday,ladiesandgentlemen.Thankyouforstandingby.WelcometoEmerson'sinvestorconferencecall.
(OperatorInstructions)
Thisconferenceisbeingrecordedtoday,August4,2015.
Emerson'scommentaryandresponsestoyourquestionsmaycontainforward-lookingstatementsincludingthecompany'soutlookfortheremainderoftheyear.InformationonfactorsthatcouldcauseactualresultstovarymateriallyfromthosediscussedtodayisavailableatEmerson'smostrecentannualreportonForm10-KasfiledwiththeSEC.
Iwouldnowliketoturntheconferenceovertoourhost,CraigRossman,DirectorofInvestorRelationsatEmerson.
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q32015EarningsCallMarketCapasofEventDate:34.30BPriceasofEventDate:49.64
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CraigRossman (DirectorofIR):
Thankyou,Tim.I'mjoinedtodaybyDavidFarr,ChairmanandChiefExecutiveOfficerofEmerson,andFrankDellaquila,ExecutiveVicePresidentandChiefFinancialOfficer.
Today'scallwillsummarizeEmerson'sthirdquarter2015results.TheconferencecallslidepresentationwillaccompanymycommentsandisavailableonEmerson'sWebsite.AreplayofthisconferencecallandslidepresentationwillbeavailableontheWebsiteforthenext90days.
Iwillstartwithathird-quartersummaryasshownonpage2oftheslidepresentation.Netsalesinthequarterdecreased13%to$5.5billionwithunderlyingsalesdown5%.Thecontinuedpressurefromloweroilpriceshasresultedinfurthercapitalspendingreductionsbyglobaloilandgascustomersparticularlythoseinupstreammarkets.
Industrialspendingremainssluggishonaglobalbasisbutmostsignificantlyinenergyrelatedandcommoditymarkets.ThestrengthoftheUSdollarcontinuestobeasignificantheadwindforourbusinesses.
Thethird-quarterorderratesreflectedthecontinuationofdifficulteconomicconditionsasthetrailingthree-monthunderlyingorderrateshavebeendowninarangeof8%to10%overthepastfourmonths.Orderrateswereunderpressurebythesustainedheadwindsfromloweroilpricesandgasprices,capitalspendingweaknessacrossmanyofourglobalmanufacturers,weaknessindatacenterandglobaltelecommunicationsinfrastructureinvestment,andtheaffectoftheUSresidentialairconditioningcustomerpre-build.
Turningtoslide3.Grossprofitmargindeclined120basispointsto40.6%drivenbyvolumedeleverageasweadjustproductionandinventorylevels,unfavorablebusinessmixandtheimpactofthestrongerUSdollaronoperations.Overall,profitmarginsremainatasignificantlypositivelevel.
Restructuringexpensetotaled$36millioninthequarterand$89milliononayear-to-datebasis.Asignificantlevelofrestructuringexpenseisexpectedinthefourthquarter.Reportedearningspersharedecreased18%to$0.84.Thecurrentmarketconditionsrequirefocusonexecutionofthestrategicprogramsincludingglobalcostreductionactions.
Turntoslide4forthethird-quarterP&Lsummary.Asmentionednetsalesdecreased13%versustheprioryearwithunderlyingsalesdown5%.EBITmarginreflectstheimpactfromacceleratedrestructuringcosts.Inthequarter,approximately11millionshareswererepurchased.
Turningtoslide5.Underlyingsalesgrowthinthequarterwasdown5%excludingunfavorablecurrencytranslationof5%andtheimpactofdivestituresof2%.GlobaldemandwasmostlydownwiththeMiddleEastandAfricabeingtheexception,up3%.Acrosstheotherregions,theUSandAsiawerebothdown7%,Europewasdown2%andLatinAmericawasdown10%.
Turningtoslide6.Businesssegmentmarginsdeclined220basispointsto15.5%primarilyduetovolumedeleverage,unfavorablemixandincreasedrestructuringexpense.Operatingcashflowinthequarterdecreasedduetoloweroperatingresultsandtaxespaidonthegainsinthedivestitureofthepowertransmissionsolutionsbusiness.
Tradeworkingcapitalperformancewasaffectedbytheoverallbusinessslowdown.Overthenextthreetosixmonths,theglobaloperationsteamswillbeundertakingadditionalactionstoaligntradeworkingcapitalwithbusinessconditions.
Turningtoslide7fortheProcessManagementsegmentresults.ProcessManagementunderlyingsalesdeclinedby4%witha6%reductionfromacurrencytranslationresultinginanetsalesdecreaseof10%
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q32015EarningsCallMarketCapasofEventDate:34.30BPriceasofEventDate:49.64
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inthequarter.O ilandgascapitalspendingremainedweakasaresultofloweroilprices.Upstreammarketsremainedunderthemostpressurewhiledownstreamactivityinchemicalandpowermarketscontinuestoprovidegrowthopportunities.
DemandintheMiddleEastandAfricagrewby5%reflectingfavorableactivitylevelsacrosstheregionparticularlyinmidstreamanddownstreammarkets.WhiledemandinAsiawasdown7%withgrowthinemergingmarketsoffsetbyslowingconditionsinChinaandcontinuedweaknessinAustralia.Europewasdown1%withstronggrowthinemergingmarkets,offsetbydeclinesinmatureWesternEuropeanmarkets.
Marginsweredown250basispointsduetovolumedeleverage,unfavorablemix,theimpactofthestrongerdollaronoperationsandincreasedrestructuring.DemandisexpectedtoremainweakthroughatleastthefirsthalfoftheFY16,andgiventhecontinueddownwardtrendincommodityprices,asignificantrecoverywillnotbeexperienceduntil2017.
Turningtoslide8fortheIndustrialAutomationsegmentresults.IndustrialAutomationnetsalesdecreased23%ascurrencytranslationdeducted7%anddivestituresdeducted11%resultinginanunderlyingsalesdeclineof5%versustheprioryear.Thethird-quartersalesreflectedcontinuedsoftnessinEuropeandemand,upstreamoilandgasandindustrialspending,specificallyinenergyrelatedandcommoditymarkets.DemandwasdowninallregionswithNorthAmericadown11%,Europedown2%andAsiadown1%.
Margindecreased80basispointsreflectingvolumedeleverageandunfavorablemix.MarketingconditionswillremainchallengingwithagradualimprovementinEuropeandsustainedheadwindsfromupstreamoilandgas.BusinesscapitalspendingplansareexpectedtoremainweakgiventhesoftnessintheglobaleconomiesandglobalGDPisexpectedtobelessin2015thanitwasin2014.
Turntoslide9fortheNetworkPowersegmentresults.NetworkPower'snetsalesdecreased17%ascurrencytranslationdeducted5%anddivestituresdeducted1%resultinginanunderlyingsalesdeclineof11%.ThethirdquarterreflectedcontinuedweaknessintheglobaldemandfordatacenterinfrastructureandtelecommunicationsinvestmentwithNorthAmericaandAsiatelecommunications'spendingdownsignificantly.
ThedifficultconditionswerefeltacrosstheregionsasdemandinChinawasdown28%,NorthAmericadown10%andEuropedown4%.Marginsdecreased510basispointsreflectingvolumedeleverage,lowerprice,unfavorablemixandincreasedrestructuring.Weexpectdemandtoremainmixedintheneartermwithareasofopportunityindatacenterinfrastructureandtelecommunicationspower.
Turntoslide10fortheClimateTechnologiessegmentresults.ClimateTechnologiesnetsalesdecreased6%ascurrencytranslationdeducted3%resultinginanunderlyingsalesdeclineof3%.DemandinNorthAmericawasdown6%drivenbyadouble-digitdecreaseinUSresidentialairconditioningcompressorsascustomerscontinuetoworkthroughremainingpre-builtinventory.
Asiawasup3%asgrowthinIndiaandSoutheastAsiaairconditioningandrefrigerationbusinessesmorethanoffsetslowingdemandinChina.Segmentmargindecreased130basispointsprimarilyduetovolumedeleverage,higherwarrantyexpenseandunfavorablemix.WhennormalizingfortheNorthAmericanresidentialA/Cpre-build,the12-monthrollingsalesgrowthisinlinewiththeindustry.Weexpectfourth-quartersalestobedownmodestly.
Turntoslide11fortheCommercialandResidentialSolutionssegmentresults.CommercialandResidentialSolutionsunderlyingsalesgrewby1%witha2%reductionforcurrencytranslationanda2%deductionforthetransferofaproductlinetoanothersegmentresultinginanetsalesdeclineof3%.
SalesgrowthinthequarterwasdrivenbyfavorabletrendsinUSconstruction,growthinthefoodwaste
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q32015EarningsCallMarketCapasofEventDate:34.30BPriceasofEventDate:49.64
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disposals,andwetdryvacuumsmorethanoffsetdeclinesinprofessionaltoolsandstoragebusinesses.USconsumerspendinghasbeenlacklusterasrecoveryhasbeenmuted.ModestgrowthisexpectedinthefourthquarterasfavorabletrendsinUSconstructionmarketsareexpectedtocontinue.
Turntoslide12forthe2015outlook.Littlechangeisexpectedinmarketconditionsfortheremainderofourfiscalyear.Underlyingsaleswillcontinuetobeaffectedbyreducedlevelsofcapitalspendinginoilandgasmarkets,mostsignificantlyinupstreamprojectactivity,acontinuedbroadslowdowninindustrialspendingparticularlyenergyrelatedandcommoditymarkets,ageneralweaknessincapitalspendingbyglobalmanufactures,andsluggishgrowthincertainemergingandmaturemarkets.
Asaresult,underlyingsalesexpectationswillbelowerplacingcontinuedvolumedeleveragepressureonprofitability.Restructuringexpenseisnowexpectedtobeintherangeof$160millionto$180millionfortheyear.Basedonthecontinuationofthedifficultcurrenttrendsandtheirincreasinglynegativeimpactonresults,werevisedour2015outlookasfollows.
Netsaleswillbedownapproximately9%witha5%deductionfromcurrencytranslationanda2%deductionfromdivestituresresultinginunderlyingsalesthatwillbedownapproximately2%.Reportedearningspershareareexpectedtobe$3.97to$4.07whichincludesadivestituregainof$0.77pershare.AndwiththatI'llnowturnitovertoMr.DavidFarr.
DavidFarr (ChairmanandCEO):
Thankyouverymuch,Craig.ClearlyextremelytoughquarteranditgottougherasthequarterwentonaswegotintoJune.ThebignegatesurpriseforusinthemonthofJunewastheextremeweaknessinChina.WesawChinadropover$100millionfromprioryeardown14%plusversusprioryear.ThebottomfelloutinmanyofthecoremarketsinChinaandwedonotseethatrecoveringanytimesoon.
Ouroilandgasinvestmentscontinuedtoweakenasthepriceofoil,thepriceofgashascontinuedtoslide.Wenowexpectprettyweakordersinthisspaceforatleastthenext12to15monthsandwe'reabitconcernedaboutthepaceofrecovery.Sowhatwe'refocusedonrightnowisgettingourrestructuringdone,gettingthecompanyright-sizedtoaslowerpaceofbusinessandmakingsurethatwecanimproveprofitabilityevenwiththelackofunderlyingsales.
AsCraigmentionedyear-to-daterestructuringisaround$90million.Operationshavegearedupandareveryactiverightnow.Iwouldexpectthenumbertobeonitsomewherebetween$70millionand$100millionintheforthquarter,whichwillprobablybeinthe$160millionto$180millionmaybealittlebithigherifwegettheworkdone.There'salotunderwayfromaroundtheworld.
Frommyperspective,therestructuringfromwhenwestarteditbackinearlyFebruaryfromthestartofthistowhenwefinishthissometimeinearly2016,you'regoingtoseeSG&A,personnelheadcountdown8%to10%frombeginningtoend.Soamajorundertakingaroundtheworldaswecontinuetorepositionthecompanyforaweakmarket.
NotmuchIcandoaboutthemarketatthispointintime.Wefacetheotherissueofobviouslystrongcompetitioncomingoutoftheweakercurrencymarkets,inparticularoutofEuropeandJapan.Thosethingswehavetodealwithandthat'swhywehavetogetourcoststructureinline.
Asyou'veseen,theordershavecontinuedtostayweakinthenegative8%to9%range.Iwouldexpectthattocontinueforthenextquarteratleast.Wehavenotseenanyindicationtosaythatthingsaregoingtogetmuchbetter,sowe'refocusedondealingwithweakorders,weaksalesandobviouslyweakerproductionthroughoutourfacilities.
Soproductioniscomingdown,inventorieswillbeadjusted,wewillgetthecashflowback.Mostlikely
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q32015EarningsCallMarketCapasofEventDate:34.30BPriceasofEventDate:49.64
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cashwillbetoughaswegointothefourthquarterbutwe'llgetthatintothatfourthcalendarquarterourfirstfiscalquarter.We'llstartrecoveringthataswegettheproductionbackinlineandwestartliquidatingtheinventoriesthathavebuiltupoverthelast12to18monthsastheslowdownshappen.
Theglobalteamsareactingfast.Theglobalteamsobviouslyclearlyfocusedontheshorttermandtherestructuringnecessarytogetourcostsbackinline,togetourproductionbackinlineandtomakesurethatwecanimproveourprofitabilityevenwithanenvironmentthatwe'reseeingrightnowthatwe'regoingtoseeminimal,ifany,typeofgrowthfortheforeseeablefuture.
AtthesametimetheteamsareveryfocusedondealingwithwhatweannouncedattheendofJunefromNetworkPower.AlsoourIndustrialAutomationLeroy-Somercontroltechniquesbusinessandthecontinueddivestitureofourmetrobusinessaswecontinuetostructurethecompanytofocusonsegmentsthatwewanttoinvestandgrowoverthelongterm.
Intheshortterm,we'reverymuchfocusedonexecutionaroundcosts,executionaroundgettingourbalancesheetbackinshapeandthenwe'llcontinuetomoveforwardattherighttime,therightpaceasweseethecoremarketsrecoverandasweseesomeotherinvestmentopportunitiesinthetwobusinesssegmentsthatwe'refocusingongoingforward.
Net,netobviouslynotapleasantquarter,onetodealwithandonetoreport.Fourthquarterisgoingtobeequallyaschallengingaswe'vehadsessionswiththeoperatingleadersherethelastcoupleofweeks.Andagainwe'regoingtobemeetingwiththemagainonThursday,Fridaythisweek.It'sallaboutgettingtheactionsnecessarytogetthecostdownandgettheproductiondownanddealwiththemarketplacethatwe'redealingwithrightnow.
Fromourperspective,we'renotlosingthismarket.It'sjustatoughmarketforusandthere'snowaytocoloritotherthanthat.It'stoughandwe'redealingwiththattoughnessatthispointintime,andthat'swhereweare.Andsowiththatopenthefloorupforquestions.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)
We'lltakeourfirstquestionfromJoeRitchiewithGoldmanSachs.
JoeRitchie (Analyst-GoldmanSachs):
SoDave,look,thefundamentalsjustcontinuetogetworse,themarketisnotgettinganybetter.I'mwonderinghowdoyoufeelcomfortthatyouguysaredoingenoughfromarestructuringstandpointatthispoint?
DavidFarr (ChairmanandCEO):
Yougiveityourbestshot.Aswelookattheforecast,aswelookatwhereweseethingsgoingandwebiteoffasmuchaswecando.Andwhat'sunderwayrightnowisalotandweimpactingabigchunkofthiscompanywithalotofcostsandit'snotreallyfacilities,we'redealingwithanoverheadstructurerightnowtryingtogetitdown.
Andatthesametimewe'regoingtohavetodealwithanoverheadstructureaswegointoasmallercompanyaswemoveoutof2016.SoIprobablybelievewespendalotoftimeonthis.Ifeelthatwehavetherightactionsunderwayandwe'retakingtherightamountofcostout.
JoeRitchie (Analyst-GoldmanSachs):
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q32015EarningsCallMarketCapasofEventDate:34.30BPriceasofEventDate:49.64
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Okayandthe$225millionthatyouexpecttospendbythefirstquarterofnextyear,Iknowyou'vetalkedaboutapaybackof1to1.Canwesee--willweseeallofthepaybackbyFY16orissomeofthatgoingtobleedinto2017?
DavidFarr (ChairmanandCEO):
We'rehopingtogetcloseto$200millionintheFY16.Ourgameplanhereistogetourcostsdowninaverydifficultvolumeenvironmentsowecanimproveprofitability,improveearningsinatoughmarketplace.That'swhywe'retakingashardandquickactionwe'retaking.
You'redealingwithpeoplehereandthisis--we'renot--there'snotalotoffacilitieswe'rerationalizingtherebecauseourfacilitiesareprettywellrationalized.Whatwe'redealingwithisanoverheadstructure,tryingtogetthecostoutsowecandrivethatprofitabilitytothebottomline.Thathowyougetthat--thesavingssofast.
JoeRitchie (Analyst-GoldmanSachs):
Okay,fairenough.MaybeonelastquestionandI'llgetbackinqueue.Iknowit'sstillearlybutanythoughtsyetonyoujustannouncedthestrategicalternativesforafewofyourbusinesses,anyprogressyet,anyinterestonthosebusinesses?Justanycolortherewouldbehelpful.
DavidFarr (ChairmanandCEO):
It'searly.We'vegot--we'veobviouslyhadsomeinterestbutit'stooearlytodealwiththat.We'reworkingdownthespinrouterightnow.It'stooearlytotalkabout.Ithinkit'sgoingtobeworkedforthenextthree,four,five,sixmonthsandwe'llspendfromthatstandpoint.
[Therearemetro]actionmostlikelywillbedonesometimebeforetheendofthiscalendaryear.We'retargetingsometimeinOctober.
JoeRitchie (Analyst-GoldmanSachs):
Thanks,I'llgetbackinqueue.
Operator :
We'lltakeournextquestionfromRobertMcCarthywithStifel.
RobertMcCarthy(Analyst-StifelNicolaus):
Goodafternoon,everyone.Dave?
DavidFarr (ChairmanandCEO):
Yes.
RobertMcCarthy(Analyst-StifelNicolaus):
Yes,sothefirstquestionisreallychallengingnumbersacrosstheboardglobally,doyouthinkthere'sanissueofsharelosshereinadditionbecausewehaveseenveryweaknumbersgloballybutnottotheextentmaybeinthisvarianceforthequarter,sohowdoyouspeaktothatorcanyouspeaktothe--areyouleveragedtoaparticularendmarketorsubendmarketparticularlywithrespecttoChina?Anything,anynarrativearoundthatwouldbehelpful.
DavidFarr (ChairmanandCEO):
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
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OurChinabusinesshasheldupreasonablywellforthelast18months.Butwe're--andChina,wedon'tfirmlybelievewe'relosingbusinessatthispointintime.Wedon'tseeanyindicationofthat.Butwe're--inChinawehaveverystrongmarketsrelativetothestrategic-ownedenterprises--thestate-ownedenterprises,whichare--havereallycutbackonspendinghereinthelastthreeorfourmonthsasthatgovernmentratchetbacksomeoftheissuesthey'redealingwith.
SoifyoulookatourProcessbusinesses,youlookatourenterprisebusinessinChinaandifyoulookatsomeoftheotherclimatebusinesses,we'reseeingthesewherethestaterunenterpriseshavereallycurtailedstockspendingandtheydiditverysuddenly.Sothisissomethingnewfromourperspectivetoseethattypeofdropoffthatquickly.
AnduntilweseesomekindofstabilizationwithintheChinamarket,theChinaGovernment,I'malittlebitnervousaboutChinaandarecoverythere.Sowe'reexpectingthenextcouplequarterstobeprettytoughthere.Butthat'swhereitis,it'saroundthatChina--thosespendingatourkeycustomerbase.
RobertMcCarthy(Analyst-StifelNicolaus):
Andthenasafollowup,David,Iknowit'searlyandyougottherestructuringandtherestructuringbenefits.Butconceptuallythinkingabout2016,doyouhavethevisibilitytosayhey,wecouldbeclosetothebottomhereintermsofEPSdegradationortooearlytotell?What'syourviewof2015versus2016?Isitpossibleforyoutogrowin2016?
DavidFarr (ChairmanandCEO):
Ithinkthebigissueformerightnowiswehadaverystrongfirstfiscalquarterof2015.Wewereupalmost5.5%underlyinggrowth,wewereupverystrongearnings,double-digitearnings.AndIthinkthevisibilityrightnowisverychallengingbecauseIknowIgotthatbighillIhavetoclimbsittingrightoutinfrontofme.Andthatthefourthquarterisverystrongforuslastyearandourfirstfiscalquarterisverystrong.Soit'salittleearlyforustoseehowwecomeoutofthataswegetthroughthenexttwoquarters.(multiplespeakers)
That'sthebigissuerightnow.Thenexttwoquartersarelookingathugewallsthatwehavetogetthroughandseewhatwe--orfromanorderstandpointandbacklogcanwegetuptheretogetsomekindofgrowthinthesecondhalfofnextyear.
RobertMcCarthy(Analyst-StifelNicolaus):
HowdoyouthinkaboutM&Ainthisenvironmentwiththeprospectsofacyclicalrolloverandbidaskmaybewideningbetweensellerexpectationsandbuyerexpectations?DoyouthinkthiscoolsyourpotentialappetiteforM&Aoryourcapabilitytogetthingsdoneofsize?
DavidFarr (ChairmanandCEO):
Iftherightthingcomesalongwehavethecapabilityofdoingit.Rightnowwe'relookingatdivestituresandspend.Iftherightopportunitycamealongfromanacquisitionstandpoint,we'djumponitprettyquickly.Idon'tthinkthathasanyissueforusandweunderstandthat.
RobertMcCarthy(Analyst-StifelNicolaus):
Thanksforyourtime,Dave.
DavidFarr (ChairmanandCEO):
Okay,you'rewelcome.
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
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Operator :
We'lltakeournextquestionfromMikeWoodwithMacquarie.
MikeWood (Analyst-MacquarieResearch):
AnotherquestiononthesharewithEmerson.SpecificallywithNetwork,thathighsingle-digitunderlyingorderdeclinethatdoesseemworsethansomeofthepeers.Morepeersexposedtopowermanagementnotseeingseveredeclines.Canyoumaybespeaktoisitthedatacenterandtelcospecificallyorhowyourpowermanagementsubbusinessisholdingup?
DavidFarr (ChairmanandCEO):
Thecorebusinessisholdingup.Wehadaverystrong--wehadsomebigprojectwinslastyearatthispointintime.Wealsohad--wehaveaverystrongpresenceinChinawhichisuniqueinourtelcospace.InChinaandNorthAmerica,telcoreallyhave--havereallycutbackinspending,sothat'swhyyouseethosenumbersarealittlebitmoredrasticthanourcompetitors.Underlyingbusinessisprettymuchinlinewiththat,butthetelcospendbothinChinaandNorthAmericaverydifficult.
MikeWood (Analyst-MacquarieResearch):
Allright,veryhelpful.Andthencanyougiveusanupdateontheinventoryontheclimatesideandwhenthatmightbeworkeddown?
DavidFarr (ChairmanandCEO):
Becausewelookthroughthecyclefromthestandpointwelookat12months,it'sprettywelltrending.Iwouldsayrightnowourestimate,notestimateweknow,1.1millionunitswerepulledforward.Iwouldsaythey'reprobably80%throughthatrightnow.WeshouldstartseeingsomeNorthAmericarefillingproductionisreally--ourinventoriesrightnowproductionlevelsarelowsoweexpecttostartseeingthatflowthroughinthefourthquarter.
However,theissueforus,thecomparisonmaybeverydifficultbecauselastyearwaswhenweweresellingitbothinthefourthandfirstquarter.Butwe'reseeingitcomebackinifyoulookattheunderlyingIwouldsaypaceasimprovinginNorthAmerica.SoI'dsaythey'regettingthroughitprettyquickly
MikeWood (Analyst-MacquarieResearch):
Thankyou.
Operator :
We'lltakeournextquestionfromJohnnyWrightwithNomura.
JohnnyWright (Analyst-Nomura):
JustneedacommentDavearoundthecompetitionoutofJapanandEurope.Isthatpartlyreflectedinthepricingenvironmentandisthatontheprocessside,whatareyouseeingtherefromcompetitivepricingperspective?
DavidFarr (ChairmanandCEO):
WehavetheJapaneseandEuropeancompetitorsonmost--acrossmostofourbusinessesbothontheProcesssideandIndustrialsideandClimateside.Andclearlywiththeweakercurrenciestheyhavetheopportunitytopricetodrivethatbusinesstheirway.
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We'reworkingextremelyhard,oneofthereasonswe'reworkingsohardonthecostisbecausewedonotwanttoloseanypositioninthissituationwhereweareatahugedisadvantagewithastrongerdollaragainstourEuropeanandJapanesecompetitors.Sothepricingisdefinitelytougherandfromourstandpoint,we'redealingwithit.
Theoneeventwedohaveaswegetintothe2016environmentiswiththeweakercommodityenvironment,theweakermaterialenvironment,wewillstartgettingbenefitfromthataswegetintothefirsthalfofnextyear.Andthat'sabigadvantageforusandhelpusoffsetthispricecost.RightnowI'dsaywearestill--asyouunderstandwelookatthispriceandcost,we'restayingprobablyprettyclosetobeingneutralorslightlygreen.Andthekeyissueformeistostayaheadofthispowercurve.
Yeswehavepricerefreshersinparticularfromour--theweakercurrenciesoutthere.Butour--thecommoditysupplysideguysareworkingextremelyhardrightnowtogettherespectivecostreductionstohelpkeepuspricecostgreenaswegetintothistougherpriceenvironmentin2016.Sothat'swherethewarisrightnowandIfeelgoodaboutthebattleandIfeelgoodaboutwhereweare.
JohnnyWright (Analyst-Nomura):
Okaythanks.AndthenI'mgoingtostickwithProcess,fromaverticalperspective,obviouslyupstreamoilandgasarestayingprettyweakbutsomeofthedownstreambusinesseslikechemicalandpoweractuallyseemstobeholdinguprelativelywell.Maybeyoucantalkaboutwhatyouseethereintermsofquotingactivityandhowyouseethoseverticalsholdingupinto2016?
DavidFarr (ChairmanandCEO):
Thedownstreaminparticularpowerhasheldupextremelywell,andcertainchemicalssegmentsheldupextremelywell.Theorderpaceisatrecordlevels,itcreatesalittlemixshiftforusalittlebitbutpressuresandprofitability.Butthatactivityisvery,verygoodrightnowandwefeelgoodaboutthat,andinparticularbothinNorthAmericaandinEurope.Asiaisnotthatgood.Indiaisgoodforusrightnow.
Butdownstreaminpoweranddownstreaminthepetrochemicalareaonthechemicalareaweseegoodpricing.We'realittlebitnervousrightnowrelativetothere'sbeenalotofactionsbymajorglobaloilandgascompaniesherethelasttwoweeksandthatwillobviouslystartflowingbackastheycontinuetogetpressureintheircapitalspend.
AndthatcouldpossiblyhaveanimpactonwhatwewouldcalltheirMRO,theirrepairbusinessiftheygetalotofpressureoncuttingtheircapitalevenmore,they'llcutbackincertainareasintheMROareaandwe'llstartfeelingthat.That'sanotherconcernIhaverightnowwiththecontinuedweaknessofthepriceofoilandgas,withwhereisthepriceofoiltoday,down$45?It's$45sothatbothersmealittlebitthere.
JohnnyWright (Analyst-Nomura):
Okay,allright,thanks,Dave.
DavidFarr (ChairmanandCEO):
You'rewelcome.
Operator :
We'lltakeournextquestionfromStevenWinokerwithBernstein.
StevenWinoker (Analyst-Bernstein):
Dave,ifwegoto2015justfollowuponeofyourearliercomments,ifinfactrevenuedidgonegativenext
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
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yearandwassaydownIdon'tknow1%orso,couldyoustilldrivemarginexpansioninthatenvironmentwithalloftheputsandtakesthatyou'retalkingabout?
DavidFarr (ChairmanandCEO):
That'sthegoal.(multiplespeakers)That'stheaim,that'swhatwe'retryingtodo.Everyoperationguyistryingtofigureouthowtodeliverimprovedprofitabilitywithnogrowthorslightlynegativegrowth.
StevenWinoker (Analyst-Bernstein):
Rightandifwethinkaboutwhat'spossibleinthatgoalgivenalltherestructuringthatyou'redoing,you'recallingoutrestructuringitsoundslikethroughthe,atleastthefirstquarter,butclearlyintheenvironmentthatyou'redescribingit'shardtoimaginethatyouwouldn'tberestructuringthroughmuchoftheyear.Isthatafaircomment?
DavidFarr (ChairmanandCEO):
Whatwe'retryingtogetdoneiswe'lldosomeinthefirsthalfofnextyearbutwe'retryingtogetitdonesowecanstabilizethebusiness.Andwe'veidentifiedwherewewanttogowithrestructuring,identifiedthecost.Wehaveamapwherewethinkthingsaregoingtoheadoutandthat'swherewe'refocusedrightnow.Myobjectiveisgetthis--themajorworkdoneaswegetintothatsecondfiscalquarterofnextyear.
StevenWinoker (Analyst-Bernstein):
Right.AndIguessifIalsocompareeverythingthatyou'regoingthroughrightnowcomparedtowhatyouwentthroughin2008,2009,onedifferenceitseemsmaybe,Idon'tknowifIcallitabrightspot,isthatatleasttheorderratesarenotgetting--deceleratinganyfasteritseemsfromthe--butisthatjustatemporarythingbasedonwhatyou'reseeinginthefrontlineandallthesequotingactivitiesthattherecouldbeanotherstepdownfromhere?
DavidFarr (ChairmanandCEO):
I'mgladyousawabrightspotinthere,Steve.
StevenWinoker (Analyst-Bernstein):
I'mlooking.
DavidFarr (ChairmanandCEO):
Ioweyouaglassofwinewiththatone,Idon'thavemanybrightspotshere.
StevenWinoker (Analyst-Bernstein):
Igotmymagnifyingglassout,Dave.
DavidFarr (ChairmanandCEO):
You'regettinghalfaglassofwineonthatone.Okay,atthispointintimewedonotseeitsteppingdownontheorderpace.Welookatthetrendlinesandwelookatthevariousbusinesses.Itlookslikeitsbouncingaroundthisbottom.Thequestionisthereanythingthat'sgoingtopullitbackup.Weknowwhatthecomparisonarelikeforthenextcouplequarters,butIdon'tseeastepdownatthispointintime.
Itlookslikeit'stryingtobottomhere.AndI'vecalledthisbeforeandI'vegotmyasskickedtobehonest
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q32015EarningsCallMarketCapasofEventDate:34.30BPriceasofEventDate:49.64
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andthat'snotaswearword,Steve.It'skickboxinghere.I'vebeenkickedaroundtheringacoupletimesherethisyearanditlookslikeit'sforming.Idon'tseeanotherstepdownatthispointintime.
Nowunlessyousawasuddenbreakinoiloryousawasuddenbreakincommoditiesdownintosayinthe30sorbelow,thenthatwouldcreateanotherproblem.
StevenWinoker (Analyst-Bernstein):
Okayandthenfinallynonres,youspokeabouttherespressure,whatareyouseeingonthenon-resside?
DavidFarr (ChairmanandCEO):
Non-resNorthAmericais--we'vehadadecentenvironment,it'scontinuedtoweaken.TheactualwhatIwouldcallthecapitalspending,thetypeofproductsthatwesellhavenotbeenallexciting.There'sbeensomenon-resconstruction,butthebasiccapitalspendingenvironmenthasnotbeenverygoodinNorthAmericaandintheindustriesweserve.
Wedon'tservetheautomotiveindustryandsoitsbeenveryanemicatbest.Andthere'sbeenverylittlerecovery.Andthenyou'llseealotofdropoffasalltheindustrieshavesupportthebroadoilandgasindustrybothhereinNorthAmericaandLatinAmericaandaroundtheworld.Soitsbeenprettybroadandit'sbeenbusinessbybusiness.Ifyoulookatthesegmentsthatwelookat,thisisprettybroadacrossverymanybusinesseshere.
StevenWinoker (Analyst-Bernstein):
Okay,great.Thanks,Dave.
DavidFarr (ChairmanandCEO):
Thanks,Steve.Ioweyouhalfaglassofwineforthatpositiveyougavemethere.
StevenWinoker (Analyst-Bernstein):
Nextweek.Coupleofbeers.
DavidFarr (ChairmanandCEO):
Okay.
Operator :
We'lltakeournextquestionfromJulianMitchellwithCreditSuisse.
JulianMitchell(Analyst-CreditSuisse):
Aquestiononthegrossmargins.Iguesstheygotuptoabout42%secondhalfoflastyear,they'renowdownto40%.Maybepauseoutbetweenmixandvolumedeleveragingwhichonewasmoreimportantwithinthat?Andthenwhenyou'relookingahead,howdoyouthinkabouttheabilitytoholdthegrossmarginataround40%consideringpricecostandyour(inaudible)?
DavidFarr (ChairmanandCEO):
It'sabout50/50onthedegradationthere.Westillfeelverygoodaboutaswe--recoverystructureandstufflikethatthatwe'llgetthisthingmovingbackup.Istillbelievethere's2--fromthe42%Istillbelievethere'sabout200basispointsimprovementintheGPmarginforthecompany.
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q32015EarningsCallMarketCapasofEventDate:34.30BPriceasofEventDate:49.64
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Sowe'reclearlygoingthroughalotofrestructuringrightnow,there'salotofmixgoingonandthere'salotofdeleveraging.ButtheunderlyingfundamentalGPmargininthisbusinessisstillprettygoodandit'llmovebackupintothat44%rangeaswegetthere.
JulianMitchell(Analyst-CreditSuisse):
Thanks.AndthenjustwithinIndustrialAutomation,obviouslyaverybigdropinNorthAmericathereinthequarter.MaybejustremindushowmuchofthatbusinessgloballyorNorthAmericayouthinkisdirectorindirectoilandgas?
DavidFarr (ChairmanandCEO):
InNorthAmerica,it'sprettyheavyoilandgas.NorthAmericait'svery,heavybecauseit'sCaterpillar.AndsotheCaterpillarbusinessisoffsignificantlyandthat'sprimarilyaNorthAmericabusiness.Sothat'swhat'sdrivingthatdownbothfromthestandpointifyoulookatwhatthey--whatweserveintotheirsolartypeofbusinessandalsotheirgenerationoftheoilandgasplatformsintheminingarea,that'soffsignificantlyastheycontinuetotakeinventoryoutastheycontinuetotaketheirproductiondown.
Soweexpectthatthatwillrun,keeprunningthiswayforthenextcouplequartersastheykeepdoingwhatthey'redoing.Butthat'swhatthatisprimarily,it'sveryheavyoilandgas.
JulianMitchell(Analyst-CreditSuisse):
Thankyou.Andthenjustlastly--
DavidFarr (ChairmanandCEO):
Andit'senergyrelated.
JulianMitchell(Analyst-CreditSuisse):
AndthenquicklyonProcess,youtouchedonMROearlier,soIguesshaveyouseenMROholdupuntilnowanditsallbeenCapExthat'sbeencomingoffintheordersandsales?
DavidFarr (ChairmanandCEO):
Yes,wehavenotseentheMROcomeoffyetbutI'vegonethroughenoughofthesecyclesasyouguyswellknow,I'malittlebitolderthanyou,andwhenIseetheoilcompaniesreallyunderthepressurerightnowtocutcapitalevenmorefromtheirshareholderbase,Iknoweventuallywhatthatmeansisthey'llcutintothecoreMRO.
AndsoIwouldexpectthenextsixmonthsforourProcessbusinesstostartseeingsomeoftheMRObusinessgetcutbackwhichwon'thelpus,itwouldbeanotherlittleheadwindforus,butwehavenoindication.Ijustknowwhathappens.Theseguysaregoingtogetpressuretocutcapital,weknowthat'sgoingtohappen.
JulianMitchell(Analyst-CreditSuisse):
Understood,thankyou.
DavidFarr (ChairmanandCEO):
Youtakecare.
Operator :
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q32015EarningsCallMarketCapasofEventDate:34.30BPriceasofEventDate:49.64
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We'lltakeournextquestionfromNigelCoewithMorganStanley.
NigelCoe (Analyst-MorganStanley):
WanttogobacktoChinayourcommentsaboutJunesoundsquitefranklyquitedisturbing.WhatdoyouthinkcausedthatdropoffinJune,Dave?Isitliquidity,isitthegovernmenttellingyouyeswehavetopullbackonspending,whatdoyouthinkcausedthat?
DavidFarr (ChairmanandCEO):
Themajorstateofownedenterprisesisthere'sbeenalotofcontinuedcrackdownontheethicalissues,thearrestingandreplacementofmanagementteam,people--alotofpeopleareafraidtomakedecisions,they'regoingtomakebaddecisions.Sowe'veseenthisonabroadbaseandalotofourcustomerbaseacrossChinathatthere'sbeenacurtailmentofspendingastheyfigureoutwhat'sgoingtogoonrelativetotheleadership.
AndthiswholeuncertaintyrelativearoundChinaandtheleadershipofwhoseincharge,whosenotinchargerelativetothebusinesses.Andsothere'sbeenabigpushinthisareaagainandit'sobviouslyreactedverystronginsomeofourcustomerbasewhichwehavealotofstate-ownedenterprisesandcustomersinboththeProcessworldandtheNetworkPowerworldinparticular.AndtheygothitrealhardinChinaandIexpectthat'sgoingtocontinueuntilweseesomecleardirectionofstabilityintheleadershipofthevariouscompaniesoutthere,there'salotofthosecompaniesarehavingalotofmanagementchangesrightnow.
NigelCoe (Analyst-MorganStanley):
Soyou'veseenabigdivergencebetweentheSOEsandprivatecompanies?
DavidFarr (ChairmanandCEO):
Yes.
NigelCoe (Analyst-MorganStanley):
Okayandthenbasedonyourcommentsaroundordersthenextthreetofourquarters,Ithinkyousaidthatthey'regoingtoremainquiteweak.Andthengiventhatyou'retellingyourManagerstobasicallyaimtorestructuretogrowmarginson(inaudible)sales,wouldyousuggestthatwebaseourmodelsonthatbasis,Dave?
DavidFarr (ChairmanandCEO):
Ithinkit's--partofmybeliefisyou'vegottowaituntilIgetthroughthese--I'vegottwobigmoundsthatwe'vegottogetthroughhereboththefourthquarter,whichwasaprettystrongforuslastyearandthefirstquarter.We'vegottoseehowwegetthroughthesemounds,howweseetheunderlyingorderpace.HasitreachedthatbottomandIthinkit'salittlebittooearlytobankonthat.
NigelCoe (Analyst-MorganStanley):
Okay,fairenough.AndfinallyDave,ontheProcessmarginsrecoveredfromQ2intoQ3upabout3pointsQtoQex-structuringwithverylittlehelpfromvolumes.SoI'mwonderingwhatdrovethat,wasthatcostsavesfromrestructuring,wasthereamixbenefitQtoQ?
DavidFarr (ChairmanandCEO):
We'regettingthecostsout.
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
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NigelCoe (Analyst-MorganStanley):
Okay,thanksDave.
DavidFarr (ChairmanandCEO):
Thankyou.
Operator :
We'lltakeournextquestionfromJeffSpraguewithVerticalResearch.
Jef f Sprague (Analyst-VerticalResearchPartners):
DavebacktothisMROandOpExversusCapExdiscussion.We'veheardfromalotofcompaniesactuallyalittlebittheoppositethattheOpExhasbeencutbecausethat'swhattheircustomerscaneasilycutandperhapstheCapExcomeslaterdowntheroad.Isthere--doesthatintuitivelymakesense?Istheresomethingdifferentinyourbusinessmix?
DavidFarr (ChairmanandCEO):
WhatIsaidisthatuptonow,they'vebeencuttingtheprojectspending,theircapitalspending.Andnowmyconcerniswiththemostrecenttwoweeksofwhatalltheannouncementscomingoutofthemajoroilandgascustomerbaseouttherethatthey'recuttingcapitalagain,they'recuttingprojectagainandmyconcernisthey'regoingtostartcuttingintotheMRObasewhichhasheldupuntilnow.I'mjustgivingyoumygutfeelforthisthing,that'swhyIwastellingpeople,thatastheycontinuetogetpushedbytheirshareholderbasetocuttheircapitalspendingandprotecttheirfreecashflow,thatthey'regoingtostartgoingintoMROhereintheProcessworld.We'veseenitinthepast.
Jef f Sprague (Analyst-VerticalResearchPartners):
HowmuchdoyouthinkEmersoninternalCapExdeclinesin2016?
DavidFarr (ChairmanandCEO):
Dependswherewefinishthisyear.It'llgodownnextyear.Iwouldsaythatwe'regoingtobedownto2.8%ofsaleslevel.
Jef f Sprague (Analyst-VerticalResearchPartners):
Andthenjustlastoneforme,Dave,sharerepoyoudohaveafairamountofliquidityyouexpressedthewillingnesstododeals.Butjustwonderyoufeelliketheorganizationcouldtakeonalargedealinthemidstofallthischangeandwouldyoupreferrepooverdealsoristhereanyparticularprioritizationthere?
DavidFarr (ChairmanandCEO):
Iftherightstrategicdealcamealong,wewillslowdownrepoanddothedeal.Inthemeantime,rightnowwe'rebankingonprobablyaround$1billionrightnowfornextyearinsharerepurchase.Andsothat'swherewe'regoingtofocusbuttherightdealcomesalong,we'lldoit.
Jef f Sprague (Analyst-VerticalResearchPartners):
Thankyou.
Operator :
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q32015EarningsCallMarketCapasofEventDate:34.30BPriceasofEventDate:49.64
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We'lltakeournextquestionfromChristopherGlynnwithOppenheimer.
ChristopherGlynn (Analyst-Oppenheimer&Co.):
Dave,thethirdquarterrestructuringwaswellbelowplan.Nowyouhaveabigtargetforthefourthquarter,sojustwonderingwhatwerethetimingfactors,someoftheprioritizationthatcausedthattomovearound?
DavidFarr (ChairmanandCEO):
Itisfunctionaroundannouncingincertainmarketsandgivingoutthedual--thepropernoticeinparticularoutsidetheUnitedStates.Andsoittookusalittlelongertogetapprovalsandnowwe'removingforward.Wehavethoseandweprettywellhadthisinsinkrightnowaswemoveintothisforthquarter.
Sometimesyouguessalittle--notguess,youplanalittlelongandifittakeslongertodothediscussionsandnegotiations,thenyoumissitby30daysorso.Andthat'sbasicallywhat'sgoneonthere.Butit'sinthepipeline,it'scoming.Andthequestionishowmuchcanbeannouncedanddiscussedwiththeorganizationsaroundtheworld.Andthat'swhyIthinkwehadsuchabroadrangehereforthefourthquarter,it'safunctionofwhatcanbeformalizedwiththediscussionsandnegotiations.
ChristopherGlynn (Analyst-Oppenheimer&Co.):
Okay,makessense.AndtheninNetworkPower,couldyougointoalittlemoredetailonthenegativepricethere?Idon'tthinkthatwasmentionedlastquarter.
DavidFarr (ChairmanandCEO):
China.It'sreally--itwasvery--asthatmarket--themarketsdroppedoffandthebigenterprisesusingitsleveragetodrivepricedown.Thelocalproducersarealllookingforbusinessrightnow.Themarketsweakenedandtheirexportabilityhasweakenedbecauseoftheirmarketplacesandsothereforethey'relookingatdroppingpricestotrytoprotectandthat'sgoingto--we'regoingtohavethatsituationgoingonhardandinthePowerareaandinparticularacrosstoChina.
ChristopherGlynn (Analyst-Oppenheimer&Co.):
Okay,thanks.
Operator :
We'lltakeournextquestionfromRichKwaswithWellsFargo.
RichKwas (Analyst-WellsFargoSecurities,LLC):
OnProcesssoat$45to$50oilrelativetotherestructuringyouhaveinplacenowifthiscontinuesdoyouenvisionhavingtodoalotmorebeyondthat?
DavidFarr (ChairmanandCEO):
Ithinkwe'reprettywellsizedinthe$40to$50rangerightnowandmynextthresholdisitpossiblethatthatwillcreate--thatthat'sgoingtocreatesomeverydifficultchallengesthatwe'regoingtohavetolookathowwereorganizeandtotakecostsouttoprotectthatprofitability.
RichKwas (Analyst-WellsFargoSecurities,LLC):
Okaybutinthisrangeyoufeelokay?
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
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DavidFarr (ChairmanandCEO):
Yes,wefeelokayhere.
RichKwas (Analyst-WellsFargoSecurities,LLC):
Okay,okay.AndthengoingbacktonotthispastInvestorDay,theonebeforein2014,soyouhadthisbiginitiativearoundspending.Iknowthatprobablyaffectedsomeofyourbusinessesthatarebeingseparated,butwhat'sthelatestonthat?AndIassumethatthat'sbeencutbackinameaningfulfashionhere.
DavidFarr (ChairmanandCEO):
It'sbeencutbackinaverymeaningfulfactor.Clearlytheopportunitiesforgrowthrightnowarenotthere,sowe'recurtailingthatspendingandwhereitdoesn'tmakesenseandit'sbeencutbackquitesignificantly.
RichKwas (Analyst-WellsFargoSecurities,LLC):
Isthereanythingthatyou'redoingspendingoninthisenvironment?
DavidFarr (ChairmanandCEO):
Yes,westillhavefromatechnologystandpoint,someinnovationstandpoint,we'restillspendingmoneybutwe'rebeingveryselectiveandalotofprojectsbeingpushedoutanddelayedandsloweddown.Soyes,includingsomeoftheOracleinvestments,otherthingslikethatthatweevenhavesloweddownthatstuff.
RichKwas (Analyst-WellsFargoSecurities,LLC):
Okay,andthenthelastone,quickmodelingquestionfornextyeartypicallyyourunonathree-yearincentivecompwhereitgetsthere'sadoubleupeverythreeyears.Soaswethinkaboutnextyear,usuallyit'saprettybigrampwhenyougetintoayearlikenextyear,soisthatstillthecase?Idon'tknowifFrankcancommentonthat?
FrankDellaquila(EVPandCFO):
Yes,there'llbetheoverlapnextyear.Rightnowwe'relookingat[50to75]butit'searly,yettotellexactlywhatthat'sgoingtobe.Butyou'rerightaboutthestructureofit,there'llbeanoverlapnextyearandthatwillbethebiggestyearforthat.
RichKwas (Analyst-WellsFargoSecurities,LLC):
Okay,great,thankyou.
Operator :
We'lltakeournextquestionfromDeaneDraywithRBC.
DeaneDray(Analyst-RBCCapitalMarkets):
IwashopingtogetalittlemorebycalibrationontherestructuringintermsofyousaidheadcountandSG&Acouldcomedownbetween8%and12%.
DavidFarr (ChairmanandCEO):
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q32015EarningsCallMarketCapasofEventDate:34.30BPriceasofEventDate:49.64
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8%and10%,I'msorry.
DeaneDray(Analyst-RBCCapitalMarkets):
8%and10%,okay.Isthat--howdoesthatcomparetothepreviousrestructuringactionsthatyou'vetakenandhowquicklydoyouthinkyoucangetthatdepthofcutsdone?
DavidFarr (ChairmanandCEO):
Onasalarybasisheadcountthat'sprettynormallywhatwe'vegonethroughbefore.Yougobackinthe2003,2004timeperiodbecausemostofthisrestructuringiscomingfromnotmanufacturing,it'scomingfromasalarybase.We'renotclosingfacilitiesdown.Wehaveacoupleminorones,butthey'revery,verysmallaswemovethemaround.
Sothisisinlinewithothersignificantprogramswehadacrossthiscompany.AndIwouldsaybasedonhowwestartitandwherewearerightnow,ourgoalistohavethisdoneaswegetintothemiddleof2016.
DeaneDray(Analyst-RBCCapitalMarkets):
Andthiswasn'tclearorImayhavemissedit,doesthisincluderestructuringactionsinNetworkPower?
DavidFarr (ChairmanandCEO):
Thisincludes--yes,NetworkPowerwillbe--isgoingtobewithusin2016,yes.
DeaneDray(Analyst-RBCCapitalMarkets):
Andyoualsomentionedthattherearechangesneededtothebalancesheet.Isthisrelatedtothespinanddivestituresorwasthereanythingelseyou'rereferringtowhenyoutalkedaboutbalancesheet?
DavidFarr (ChairmanandCEO):
WhatIrefertothebalancesheetwasIwanttogetthebalancesheetstrengthenedandfromthestandpointofasthisvolumeisdroppedoffwehaveworkingcapitalcapturedonourbalancesheetrightnow,bothfromourreceivablesandourinventorystandpoint,andwewanttogetthoselevelsdowntoanappropriatelevel.ItusuallytakesusacouplequartersoncewestabilizeandweexpectthattobedoneIwouldsaysometimeearlyinthecalendaryearof2016.That'sonpathlooksatitandwherethetrendlinehasgonerightnowthat'swhereI'dsayit'sgoingtobe.
DeaneDray(Analyst-RBCCapitalMarkets):
Gotit.Thankyou.
DavidFarr (ChairmanandCEO):
You'rewelcome.
Operator :
We'lltakeournextquestionfromShannonO'CallaghanwithUBS.
ShannonO'Callaghan (Analyst-UBS):
Dave,justontheideaofordersortryingtofindthebottomhere,atleastgeographicallyitdoesn'tsoundlikethat'sgoingtobefromChinaright?Thatstillsoundslikeit'sgettingworse.Isthereeither
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
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geographicallyorbybusiness,doyouthinkthere'sanoffset?IsEuropefeelingmuchbettertoyouorwhatwouldbetheoffsettoChinagettingworseinthatstabilizationoforders?
DavidFarr (ChairmanandCEO):
Fromourperspective,thestabilitywillcomeinfromtheEuropeandIthinkthere'snotbeenarobustrecoveryinEurope.IthinkEuropehasmuddledalongatalowpacebutthat'swhereIwouldseesomeimprovementversusourChina.IwouldexpectustoseesomeimprovementinNorthAmericaaswecomeintothistimeperiodandthat'swhereI'mseeingitrightnow.That'swhereI'llseeit,we'renotgoingtoseeitinChina,you'reright.
ShannonO'Callaghan (Analyst-UBS):
AndthenspecifictoNetworkPowerobviously,thebusinessthereisunderatonofpressureandChina'sabigpartofthatbutjustbroadlyprettyweakandyetyousaydemandisexpectedtoremainmixedandyoutalkaboutopportunitiesindatacenterandtelecom.Istherealightattheendofthetunneltherewhereyou'reactuallyseeingthingsyou'rebiddingandopportunitiesfororderimprovementinthatpiece?
DavidFarr (ChairmanandCEO):
Idon'tthinkyou'regoingtoseeanythinginChinauntiltheSpringof2016relativetonewopportunitiesofsubstance.Ithinkyouseedaytoday.Ourday-to-daybusinessisokayinthosemarketplaces,butIthinkuntilyouseesomebigopportunities,Ithinkit'sgoingtobeintotheSpringof2016.
ShannonO'Callaghan (Analyst-UBS):
Okay,thanksalot.
DavidFarr (ChairmanandCEO):
Welcome.
Operator :
We'lltakeournextquestionfromSteveTusawithJPMorgan.
SteveT usa(Analyst-JPMorgan):
OntheProcesssideinthemargins,soIguessshouldwestillthinkofthismixdynamicasMROgood,projectsalittlebitweaker?Isthatsomethingyou'replanningonsightingthroughifthisMROdropsofforisthat--doesthat--whenthingsgodownlikethisit'smoreabouttakingthebluntactionsonrestructuringtooffsetthat?
DavidFarr (ChairmanandCEO):
AcouplethingshappenSteveonthistypeofbusiness.Whenthelargeprojectsslowdownwehavetypicallywhatwe'llseeisasmallertypeofprojectbusinessandthatbusinessisusuallybetterprofitabilitywise.Soifyouthinkabouttheprofitabilitythehardestforusislarge,thesmallerprojectsaregoodandtheMROisevenbetter.
Andsorightnowwe'reseeingasthelargeprojectsarecutback,they'restilldoingsmallerstuff,mediumsizestuffandthat'sgoodprojectbusinessforus.SoIthinkthemixrightnowisstillhelpingusalittlebitinprofitabilitybutit'snotabigmovement.Westillhavethepressureofsomeofthebigprojectsmovingawaythroughandsomeofthatmix.
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
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Butwe'regoingtohavetogetthecostouttodealwiththeissueofageneralslowerdownpaceofbusiness.ButIthinkit'sgoingtobealittlebitofbothbutit'snotjustMROandlarge,there'ssomegoodandmediumsizedprojectswhichthere'sagoodpaceofthatgoingonoutthererightnow.
SteveT usa(Analyst-JPMorgan):
Okayandthenwhat--onyourmindset,Iaskedaquestion--Iaskedasimilarquestiontoanotheroneofthecompanieswecoverlastweekaboutrestructuringinthisenvironmentbutacknowledgingthecompetitivethreatsthatoutthere.Howdoyouweighthatbecauseyoujusttalkedabouttrimmingsomeofthoseinvestments,howdoyoukeepyourguysfocusedonthemindsetofdefendingorevengrowingsharewhilereallybatteningdownthehatchesanddeliveringforguyslikeusonthecostside?
DavidFarr (ChairmanandCEO):
Youhavealengthydebatewitheachofthebusinessleadersonthisveryspecificissuethatnoonewantstojeopardizethelongerturnopportunity.Soyou'regoingto--we'regoingtolookatthingsthatmaybearen'tascriticalandthat'swhereyou'regoingtocut.Andyou'regoingtofigureoutweredcircle,wecircle,weringfencedareasthatwemustprotectforthosestrategicreasonsandthenwe'llgodeeperontheotherside.That'showwegoaboutdoingthat.
SteveT usa(Analyst-JPMorgan):
Allright,onelastquestion.The--Ithinkyouissuedsomedebtinthequarter.NetdebtisupIthinklike$600millionor$700millionquartertoquarter.Willthat--howwillthattrend?Iknowthefilingssaidyou'lluseitforcorporatepurposes.Howdoesthattrendoverthenextcouplequarters?Willthatbegintocomedownoristhatnowuseditforsomebuyback,maybesomecashmanagementdynamicsbecauseofyourforeigncashthat'soverseas,what'sgoingonwiththedebtlevelsoverthenextcouplequarters?
DavidFarr (ChairmanandCEO):
It'snotgoingtochangemuch.Itwon'tchangemuchifwe'reeffectiveofgettingoutthecashbytheendofthesecondfiscalquarternextyearthenthedebtlevelswillcomedownalittlebitbutit'snotgoingtochangemuch.
SteveT usa(Analyst-JPMorgan):
Okay,greatthanksalot.
DavidFarr (ChairmanandCEO):
You'rewelcome.
Operator :
We'lltakeournextquestionfromGautamKhannawithCowenandCompany.
GautamKhanna(Analyst-CowenandCompany):
Youmentionedadesiretobringdowninventoryandtheresultingabsorptionthatyou'regoingtohavetotake.Isthatgoingtobeconcentratedinaprocessorareyoutalkingacross-the-board?
DavidFarr (ChairmanandCEO):
Across-the-board.ImeanobviouslyProcessandNetworkPowerhavethebiggestdollarsofinventorybutit'sacross-the-boardandnoone'sreallyoutofline.Justthatwhereweseethepaceofbusinessgoingwhichisgoingtobeweakforseveralquartersnow,weneedtogetthatinventorybackdown.
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q32015EarningsCallMarketCapasofEventDate:34.30BPriceasofEventDate:49.64
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Sowe'lldoitverysystematically.One,nottoshocktheheckoutofoursupplybasebutalsoworkitdownoverasix,seventimemonthtimeperiod.Andwe'vebeenworkingitoutforthelastcouplemonths.Butclearlytheordershavebeenweakerherethelastseveralmonthswhichcreatesasituationwherewehavetolowerthatwaterevenfurther.Sowedoitverysystematically.Wedon'ttrytoshockit,that'sdangerous.
GautamKhanna(Analyst-CowenandCompany):
Okay,thanks.Andjustanotherfollowup.Inyourmonthlyordersthatyougiveus,haveyouhadanymajordebookingsatProcessorIndustrialAutomationorelsewhere?Andthatit'samplifiedthenegativityinthenumbersorhasthatnotreallybeenabigpartofthestoryyet?
DavidFarr (ChairmanandCEO):
It'snotthatbig.It'snotthatbig.We'venothadanythingthatwoulddrivethatthingbigtimethatwe--ifwedidwewouldletyouknow.
GautamKhanna(Analyst-CowenandCompany):
Okay.(multiplespeakers)Andlastly,seasonality,normallyfiscalQ4wegetanicelittleplusupinmarginsatProcessandelsewhere.Givenwhat'sgoingonrealtimeinthemarkets,whatkindofbounceareyouexpectingsequentially,ifatallatProcessspecifically?
DavidFarr (ChairmanandCEO):
Weareexpectingprofitabilitytobouncepositivelyinthefourthquarterforvariousreasons.One,restructuring.We'venowgot$90milliondoneinthelast2.5quartersandwe'restartingtoseeapaybackofthat.Andsowe'reseeingthatandalsotypicallythetypeofmixofbusinessandwherethebusinesscomesfrom,soweseesequentiallywehaveabitofimprovementfromsalesandwearegoingtoseeabouncebackinthefourthquarter.
GautamKhanna(Analyst-CowenandCompany):
Okay,thanksalotguysandgoodluck.
DavidFarr (ChairmanandCEO):
You'rewelcome.
Operator :
We'lltakeournextquestionfromJohnInchwithDeutscheBank.
JohnInch (Analyst-DeutscheBank):
WhatisyoursenseofMiddleEastbeingabletocontinuetoberesilientinthefaceofoilprices?Thereseemstobealotofpoliticsthat--andemploymentissues,right,thatarecontinuingtodrivetheseprojectsandit'sobviouslyasourceofstrengthforyouandothercompanies.Butdoyouthinkit--doesitcontinuetoholdin,isthat--shouldwejustthinkofitasaplaceholderorwhat'syoursense?
DavidFarr (ChairmanandCEO):
Iwouldn't--Icallnothingaplaceholderbut--
JohnInch (Analyst-DeutscheBank):
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q32015EarningsCallMarketCapasofEventDate:34.30BPriceasofEventDate:49.64
©2014TheStreet,Inc.Al l R ightsReserved Page21of23
Relativeplaceholder.
DavidFarr (ChairmanandCEO):
Okay,John.Ithinkyou'reexactlyright,theyhavetheissuetheyhavetoproduceoil.theyhavetomaintain,that'swhattheirincomeis,sothey'regoingtohavetoproducemoreoil.They'regoingtoneedtoinvesttoproducemoreoilandthey'reinvestingforotherjobsacrossadiversegroup,soweseen,noteverybusiness,butcertainbusinesseshavedonereasonablywellintheMiddleEast.
Onthedatacenterbusinessside,inwhatIcallnon-resconstructiontypeofdatabaseside,itsbeenverypoor.ButontheProcesssideitsbeenprettygoodandClimatesidehasbeenprettygood.Sorightnowit'sholdingupandtheorderpaceisholdingupsorightnowI'dsaywe'regoingtoseemoderategrowthagainin2016asofrightnowbasedonwhatI'vebeenseeingfromtheorderpace,whichit'ssurprisingtome.
JohnInch (Analyst-DeutscheBank):
Yes,yes,thatmakessense.CanIswitchgearstoNetworkPowerhere?Wonderingdoyouthinkthere'sanissueperhapsthatwouldbefleetingortemporarybutoneperhapsnonethelessthatmaybethere'ssomedistractioncostsgoingonposttheannouncementyou'regoingtospinthebusiness?AndwhereI'mgoingwiththis,I'mthinkingintheoldendayscertainlyIndia,China,employeeswould--itwashabitualbutemployeeswouldbouncearoundcompanytocompany,alotofcompanieshadveryhighturnover.
I'mwonderingposttheannouncementifperhapstherehavebeenextraworkerlossesaunplannedatthemanageriallevelorwhatnotthatmaybecouldbeexacerbatingtemporarilytheNetworkPowerresultsinChinaorelsewhere?
DavidFarr (ChairmanandCEO):
John,itsbeenactuallytheopposite,it'sbeenverypositive.Peopleareveryhappyaboutit,soit'sapositivenote.It'ssafe--they'vehadsome--they'vehadatoughcoupleyearshereanditgothitagainreallywiththetelecomspendbothhereintheUSandinChinaandenterprisespendinChina,sotheyjustgothitagain.Butwithintheorganization,itsbeenpretty--it'sbeenwellreceived.AndIndia'sstrongforusrightnow.
JohnInch (Analyst-DeutscheBank):
Yes,sothere'snotreallymuchthatyoucandoaboutthemarketsforthatbusiness?Itsoundsalmostlikethatifthereishypotheticallyfurtherdeterioration,you'rejustgoingtogoaheadwiththespinanyway.Soinotherwordsasanalysts,investorsthere'snothingthatfundamentallyislikelytodetractyoufromtheplantostrategicallyspinthebusinessorarethereotherthingsweshouldconsiderabout?
DavidFarr (ChairmanandCEO):
Idon'tseeanythingstoppingusrightnow.
JohnInch (Analyst-DeutscheBank):
Gotit.Thankyou.
DavidFarr (ChairmanandCEO):
You'rewelcome.
Operator :
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q32015EarningsCallMarketCapasofEventDate:34.30BPriceasofEventDate:49.64
©2014TheStreet,Inc.Al l R ightsReserved Page22of23
(OperatorInstructions)
We'lltakeournextquestionfromJeremieCapronwithCLSA.
JeremieCapron (Analyst-CLSA):
FollowingupontherestructuringmostofitseemstobehappeningrightnowandyoujustsaidthatitwouldcontinueintotheDecemberquarter.Doyouexpectrestructuringtocontinueatasimilarpaceinthefirsthalfofnextyear?Howshouldwethinkaboutthetotalcostthatyou'retakingoutofthebusinessbetweenFebruaryofthisyearandthemidpointofnextyear?
DavidFarr (ChairmanandCEO):
Total,I'mstillholdingtoaroundthat$225millionto$240millionfromtheFebruaryatthebeginning,whenwestartedthisprocesstoitsfinishit'sgoingtobeinthat$225millionto$240millionrange.
JeremieCapron (Analyst-CLSA):
Okay,sobasicallywe'relookingatanother$70millionintonextyear,isthatright?
DavidFarr (ChairmanandCEO):
We'llseewhatcomesdownthepikehere,whatkindofpacethebusinessis.Butwhenallissaidanddonewedid$90millioninthefirstthreequarters.Let'ssaywedoanother$90millioninthefourthquarter,that's$180million.I'mlookingsomewherebetween$40millionand$60millionprobablynextyear.
JeremieCapron (Analyst-CLSA):
Okay,thanks.
DavidFarr (ChairmanandCEO):
Doesthatworkforyou?
JeremieCapron (Analyst-CLSA):
Yes,absolutely.
DavidFarr (ChairmanandCEO):
Ididn'thaveacalculator;Iusedapieceofpaperandapenonthatone.
JeremieCapron (Analyst-CLSA):
Thatworkswelltoo.I'malittlebitsurprisedtoseenegativemixacrossyourfivedivisions.Isthatanythingtodowithpricemorethanmix?Andthenifyoucouldcommentontheoverallpricelevel,howmuchofadropinpriceyou'veseensofarthisyear.
DavidFarr (ChairmanandCEO):
Yes,we--fromthestandpointwedon'tmeasurequitethataccurate,Iwouldsaythegeneralpricetrendisslightlynegativeacrossthewholecompany.Wethenoffsetthatfromourcostreduction,thatmaterialinflation.Iwouldexpectournegative--we'llhavenegativepriceslightlynegativeagainnextyear.
Whatwe'vebeenseeingismixwithinthebusinesssomeofourmoreprofitablebusinessesarehavingatoughquarterlikeProcess.Andsowehadthisunfortunatesituationwhererightnowwehavealotof
CompanyName:EmersonElectricCoCompanyTicker:EMRSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q32015EarningsCallMarketCapasofEventDate:34.30BPriceasofEventDate:49.64
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businessestrendingdownquitehardwhicharethemostprofitablebusinesses.Andsometimesthathelpsusandsometimesthathurtsusandrightnowit'shurtingus.
JeremieCapron (Analyst-CLSA):
Okay,andwhenyoulookatyourorderintake,anyshiftintermsofpricingherehappeningoverthelastfewmonths,isordersjustatsimilarslightlydownwardbias?
DavidFarr (ChairmanandCEO):
It'sfrommyperspectiverightnowthepricingisobviouslygettingtoughereverymonth,withparticularwiththeeurowhereitisat$1.10andtheyenwhereitis.Butit'snotnoticeablymuchdifferent.Ithinkwe'regoingtohavethesameissueaswegointo2016too.That'swhyourcosts,ourworkonthematerialcontainmentstuffisvery,veryimportanttous.We'regoingtoneedthatbecauseweknowthepricingenvironmentisnotgoingtobeeasyunlessweseethedollarstartweakeningwhichIseenoindicationthedollarisgoingtostartweakening.
JeremieCapron (Analyst-CLSA):
Okay,wellgoodluckwiththat.
DavidFarr (ChairmanandCEO):
Thankyouverymuch.Appreciateit.
Withthat,Iwanttothankeverybody.Againitclearlywasextremelychallengingquarter,andnotpleasingtosee.Wearefacinganotherextremelychallengingquarteragainprobablyforthenexttwoquarters.Theorganizationisverymuchfocusedongettingourcostsandourproductiondowninlinerelativetothepaceofbusinesswe'reseeingrightnow.Andwe'remakinggoodheadwayandwewouldexpecttoseeimprovementinprofitabilityhereinthefourthquarterwhichwillgiveus--setuswellaswemoveintothatfirstquarter.SothankyouverymuchforyourtimetodayandIappreciateyoursupport.Bye.
Operator :
Andthatdoesconcludetoday'sconferencecall.Weappreciateyourparticipation.
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