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Emerson Electric Company. (NYSE:EMR)

F4Q09 (Qtr End 09/30/09) Earnings Call

November 3, 2009 3:00 pm ET

Executives

Lynne Maxeiner - Director of IR

David Farr - Chairman, President and CEO

Walter Galvin - Vice Chairman and CFO

Analysts

Bob Cornell - Barclays Capital

Rich Kwas - Wells Fargo Securities

Michael Schneider - Robert W. Baird

Christopher Glynn - Oppenheimer

Steven Winoker - Sanford Bernstein

Eli Lustgarten - Longbow Securities

Deane Dray - FBR Capital Markets

Steve Tusa - JPMorgan

Steve Searle - Conning Asset Management

John Inch - Merrill Lynch

Gautam Khanna - Cowen and Company

Bob Cornell - Barclays Capital

Operator

Welcome to the Emerson fourth quarter fiscal 2009 results conference call. (Operator Instructions) Emerson's commentary and responses to your questions may contain forward-looking statements, including the company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available in Emerson's most recent annual report on Form 10-K as filed with the SEC.

In this call, Emerson's management will discuss some non-GAAP measurements in talking about the company's performance and the reconciliation of those measures to the most comparable GAAP measures is contained within a presentation that is posted in the Investor Relations area of Emerson's website at www.emerson.com.

I would now like to turn the call over to Lynne Maxeiner, Director of Investor Relations. Please go ahead ma’am.

Lynne Maxeiner

Thank you. I am joined today by David Farr, Chairman, Chief Executive Officer and President of Emerson; and Walter Galvin, Vice Chairman, and Chief Financial Officer. Today's call will summarize Emerson's fourth quarter 2009 results.

A conference call slide presentation will accompany my comments and is available in the Investor Relations section of Emerson's corporate website. A replay of this conference call and slide presentation will be available on the website after the call for the next three months. I will start with the highlights for the quarter, as shown on page two of the conference call slide presentation.

Fourth quarter sales were down 21% to $5.3 billion. Underlying sales declined 20% with mature markets down 24%, and emerging markets down 13%. In fourth quarter, four out of five business segments increased revenues sequentially from the third quarter.

We delivered strong gross profit margin of 38.1%, up from 37% in prior year quarter with significantly lower volume and inventory reductions in this quarter versus the prior year quarter. Operating profit margin was 16.9%, up 220 basis points sequentially from Q3.

Earnings per share were $0.67, down 24% compared to $0.88 in the prior year quarter. Operating cash flow was strong at $1.352 billion and we delivered record setting free cash flow of $1.209 billion in the quarter.

Our balance sheet remained strong and flexible. We continued our progress in reducing inventory. Operational inventory was reduced $250 million in the fourth quarter. While the shape of the recovery is uncertain, Emerson is well positioned with a strong best cost position and significant new product efforts launched.

Next slide, the P&L. Again, sales down 21% to $5.322 billion, underlying sales declined 20%, currency subtracted two points and acquisitions added a point. Operating profit in the quarter of $897million or 16.9% of sales, the decline primarily driven by deleverage on lower sales volume, unfavorable product mix and inventory reductions which was partially offset by benefits from rationalization, cost reductions and material cost containment.

Net earnings of $506 million in the quarter, diluted average shares of $755.3 million, no shares were repurchased in fourth quarter '09, which leaves you with an EPS of $0.67. We have established good momentum in the fourth quarter and our aggressive actions are taking hold.

The next slide, underlying sales by region. In Q4, the U.S. was down 21% total international in the quarter was down 20%, with Europe down 29%, Latin American down 20%, Canada down 30% and Middle East/African down 16%. This gets you to a total underlying sales decline of 20%, currency subtracted two points and acquisitions added one point, which brings you to the consolidated sales down 21%.

For the fiscal year 2009, the U.S. was down 18% and total international was down 13%. Asia declined only 2%, Latin America was down 7% and Middle East/Africa and Canada each down 6%. Total underlying sales were down 13%, currency subtracted four points and acquisitions added one point, which gets you to our consolidated sales down 16%. Emerging markets now represent 32% of total sales.

Next slide, some income statement detail. Gross profit dollars of $2.028 billion or 38.1% of sales, a 110 basis point increase from the prior year quarter. We are seeing the benefits from rationalization actions and cost reductions.

SG&A was 21.2% of sales, which gets you to operating profit of $897 million or 16.9% of sales. Other deductions net were $117 million. We had a $62 million in restructuring which was partially offset by $22 million one-time impairment charge for the appliance control business that was recorded in the fourth quarter of '08.

Interest expense of $63 million gets you to the pretax line of $657 million or 12.3% of sales. Taxes in the fourth quarter were $151 million for a tax rate of 23.1%. Resulting from planned restructuring of international unit to utilize a net operating loss benefit and international pretax income mix was favorable.

Slide six, the cash flow and balance sheet. Operating cash flow in the quarter of $1.352 billion up 4%. Capital expenditures of $143 million gets you to a free cash flow of $1.209 billion up 16% and a record level of free cash flow in a quarter for Emerson.

Trade working capital balances are at the bottom of the page, we have aggressively been reducing inventory. The inventory balance has been reduced more than $200 million sequentially from 6/30/09 and more than $600 million from 12/31/08.

Next slide, the business segment P&L. Business segment EBIT of $791 million or 14.5% of sales, excluding restructuring in the quarter for both years, business segment EBIT margins were flat. We had a positive impact from cost reduction programs and rationalization benefits and volume deleverage was partially offset by material containment and price.

Difference in accounting methods was $41 million, corporate and other $112 million up $7 million, and interest expense $63 million up $22 million primarily from the change in debt mix and lower interest income gets you to a pretax earnings of $657 million or again 12.3% of sales.

Next, we'll review the individual business segments. First, we'll start with Process Management. Sales in the quarter down 13% to $1.645 billion, underlying sales were down 13%, currencies subtracted three points and acquisition added three points. By region, U.S. was down 6%, Asia down 9%, Europe down 21% and Middle East/Africa down 7%.

EBIT dollars of $286 million or 17.4% of sales, a decline driven by volume deleverage, unfavorable mix, and increased restructuring expense of $25 million. We did see a sequential margin improvement of 260 basis points from the third quarter. Inventory for Process Management was reduced approximately $85 million since June 30, '09 and approximately $180 million since 12/31/08. Process Management introduced the next generation Delta V process control system, as well as new wireless devices as we have continued to invest in new technologies.

Slide nine, Industrial Automation. Sales in the quarter of $822 million down 36%, underlying sales were down 37%, acquisitions added three points and currencies subtracted two points. By region, the U.S. was down 42%, Europe was down 36%, and Asia was down 27%. We’ve seen broad based weakness across the segment with power generating alternator business down substantially.

EBITDA of 63% or 7.7% of sales, negatively impacted by volume deleverage, including inventory reduction and higher restructuring of $14 million. We did see a sequential margin improvement of 270 basis points from Q3 on essentially flat sales. We have seen order trends stabilize at very low levels for Industrial Automation.

Industrial Automation also aggressively reduced inventory by approximately $50 million since June 30, '09 and about $220 million since 12/31/08. We expect end market conditions will remain very challenging in the near-term for Industrial Automation.

Next slide, Network Power. Sales in the quarter of $1.338 billion, down 22%, underlying sales were down 20%, acquisition subtracted one points and currency subtracted one point. By region, the U.S. was down 20%, Asia was down 8%, and Europe was down 36%.

EBIT dollars of $178 million or 13.3% of sales. Margin increased 70 basis points from the prior year quarter driven by cost reduction savings from repositioning efforts and material cost containment, which was partially offset by volume deleverage.

Network Power had restructuring spending of $118 million in FY'09 focused on improving the operational efficiency and strengthen the global competitive position of the business segment. We recently announced the Avocent acquisition. Avocent will significantly enhanced Emerson’s solutions portfolio for the data center infrastructure management.

Slide 11, Climate Technologies. Sales in the quarter of $913 million, down 10% with underlying sales down 10%, currency subtracting two points and acquisitions adding two points. By region, U.S. was down 11%, Europe was down 20% and Asia was up 4%. The growth in Asia was driven by China's stimulus program and growth is expected to be strong in China in early 2010 for Climate Technologies.

EBIT dollars were $147 million or 16.1% of sales, a margin expansion of 250 basis points impacted positively by cost reductions and effective management of price/cost exposures. Order trends have stabilized for Climate Technologies and we’ve seen modest improvement. We expect the U.S. Residential GFI to be positive in the second half of fiscal year 2010.

Next slide, Appliance and Tools. Sales in the quarter of $760 million, down 22%, underlying sales were also down 22%. By region, the U.S. down 21%, Europe was down 25% and Asia declined 6%.

EBIT dollars of $117 million or 15.4% of sales. Margin increased 330 basis points driven by cost reduction benefits and effective cost/price management which was partially offset by volume deleverage and negative mix. We also had a $22 million charge in the appliance control business last year in fourth quarter of '08. We expect residential and consumer markets to recover gradually as we progress through 2010, but the last couple months have been very tepid.

Slide 13, overview of the full year results. Sales for the full year of $20.915 billion, down 16%, underlying sales were down 13%, emerging markets were 32% of total sales and international were 55% of total sales. Operating profit of $3.167 billion or 15.1% of sales, the decline driven by volume deleverage and aggressive inventory reduction.

EPS from continuing operations of $2.27, down 27% from the prior year. Dividends per share increased 10% and fiscal year '09 was our 53rd consecutive year of increased dividends. The Board of Directors voted to increase the December dividend to $0.335 per share. Operating cash flow of $3.086 billion, down 6%, and free cash flow of $2.555 billion or 12.2% of sales essentially matching the 2008 level.

It's been a very tough economic environment as we all know, but Emerson is fundamentally a stronger company on all key metrics, which will drive stronger operating performance when the recovery starts happening in 2010.

So with that I will turn it over to David Farr.

David Farr

Thank you very much Lynne. It’s good to be here this afternoon. I appreciate everyone waiting to the end of the day for this call, but as you all know, in November we always have a two day strategy Board meeting all site to talk about what's going on within the business when we are going to try take the position or the company.

First of all, I want to thank everybody across Emerson from the operating units to corporate for the tremendous efforts in what I would call extremely challenging economic environment around the world. A lot of actions have been taken and I’ll talk a little bit that in a few minutes, but a lot of tough actions have been taken. These are permanent actions and actions that will firmly change the underlying cost structuring and positioning of the company as we go forward into 2010 and 2011 and 2012, but a very difficult time period.

As I look at today and talking to the Board it's pretty clear to me in this last 18 months we are fundamentally on change relative to the markets we serve around the world. There is the financial shock, the economic challenges we are facing here both in the United States and in Western Europe. I fundamentally see the mature markets struggling for the next several years relative to generate the normal level of underlying investment growth. I think it's going to be a very challenging time period.

However, I think the emerging markets will continue to grow and offer very solid growth opportunities for companies Emerson, and because of that as we’ve been looking at our restricting effort here, we have been making some fundamental changes that will truly impact this Corporation for a long time.

If you look back in the 2001 time period, when we started the last downturn we were about a $15 billion company. We had about 15% of our sales in emerging markets. We had around 360 manufacturing places around the world and 21% of our manufacturing located in best cost locations.

If you look as we come out of this in 2010 and where we are going to go in 2010, we are going be, as I said, around the $21 billion level, let's say, this sales level. We will have over 33% of our sales in emerging markets. We will have 250 manufacturing locations and we'll have 36% of our manufacturing in best cost locations.

If you roll forward a couple of more years, I think you're going to find the company will be over 40% in emerging markets and over 40% in emerging markets from our best cost locations for manufacturing. So, you’re seeing the footprint changing for Emerson into a very positive way from a cost structure standpoint and a growth standpoint.

So, if you look in what's going on inside this company right now, it’s not just trying to figure out how to get through a recession, we are firmly trying to figure out how to reposition this company for strong growth with higher levels of profitability and higher levels of return in cash generation when the market start growing again, which they will as we all know. I don’t think that’s next week, but it will start growing again.

If you look at what’s been done this year, to be able to generate within $25 million of our a record setting free cash flow last year, with our sales down $4 billion, and our operating profit down $900 million was a testament of some very strong efforts by our operating people. They made our balance sheet so much stronger and allows us to go out into the acquisitions and allows us to increase our dividend again working on that 54th year, not quite there, but we got to work through this year. That is execution by the operating team that I am extremely proud of.

At the same time, we reduced our inventory by over $500 million across this company. So we had a goal to get down under $1.8 billion of inventory by year-end and did do that relatively to our base company. So that’s a tremendous accomplishment at the same time that we able to protect our profitability at the gross profit line. Our GP margins were flat year-over-year even with all this restructuring and all this inventory reduction.

The other key thing that we looked at is, are we are investing in the future? It’s one thing to sit here and say, okay, let’s cut, cut, cut, cutting will not create a long-term viable growing valuable company. If you look at what we are investing in this year as a percentage of sales, we increased our R&D and we focused very much on a lot of major new product introduction, which are now starting to rollout, which will be the building blocks of growth as we go forward in the 2010 and 2011 which is the whole game plan.

My fundamental belief is, you gain your biggest chunks of market share in upturn, in the first 18 to 24 months of an upturn. So fundamentally I believe the company is extremely strong at this point in time. We have two extremely challenging quarters left, as I talked about in August, we're ready for that. Our cost structure is ready for that, our inventory is in line for that and now we just need to continue execute from day-to-day as this business goes forward.

So as we move into 2010, the economics will continue to be struggling for us relatively to U.S. and to Europe and we will see them turning around as in the second half of the calendar year of 2010.

I just came back from China and the economics there have continued to improve. Our business has continued to improve, so I again see China and I also see Asia growing for Emerson in 2010 as those key emerging markets have turned around and got the worse behind them.

Fundamentally, the company finished the year strong. We had committed to everyone in this fall that as we got a restructuring done in the first half and the second half of the year, the profitability will continue to improve and that has come forth as you see that fourth quarter and even the third quarter, but if you move into 2010 what you are going to see is we still believe our underlying sales will be down next year because of our fiscal year in September, not a calendar year, but it is a September and so we have those two tough quarters ahead of us.

Our profitability in a situation we believe that will be flat or slightly down on the current business that we have today and that is a tremendous accomplishment given what we are going to be seeing underlying sales again being down for the whole year.

On a total basis, if you look at consolidated sales right now, our feeling is today we are going be plus or minus 2% within the sales level that we currently see as we finish the fiscal year 2009. So I like where we are right now, the battle is not over with, a global positioning of the company has continued and you are going to continue to see as we move forward that we will continue to add companies to our portfolio and we will now start moving into position where like we did in the last downturn as we started coming out we would sell some of our assets off as that market place comes forward.

Before we open up for questions, again, I want to thank all the operating people, the corporate people for the work they did this year. A lot of tough work, you do not go about restructuring the company to the tune of around $300 million and we did have over 20,000 people leave the corporation in the last 12 months. We closed 25 facilities. Before fiscal year 2010 is out we will have another additional say number 10 facilities that we will impact and we will have continued our restructuring at half the level about half the level did this year.

So we have not finished the job in this downturn relative to restructuring and getting the job behind us from the standpoint of making this company stronger and ready to grow again. I mean that the foundation of the company would be rock solid and really strong relative to where we want to go as we move into the second half in 2010 when once again we could see our top line growing like we have in the past.

So with that I want to open the lines and offer up the lines and answer some questions for the various people out there.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from the line Bob Cornell with Barclays Capital.

Bob Cornell - Barclays Capital

Yes thanks. Good to hear Dave you sound little tired, a tough year.

David Farr

A tough year, two days of tough board meetings in Las Vegas and [China] weekend, for that we had two days of planning from our side. I have talked a lot Bob, lets put it that way.

Bob Cornell - Barclays Capital

Yes. Then you just said something and I want to clarify. You said the profitability will be flat to down on the current business basis I mean In fact what does that mean talking about 2010 on that basis I mean…

David Farr

It doesn't include Avocent.

Bob Cornell - Barclays Capital

Okay. So forget Avocent, are you saying that our profit is going to be flat in 2010 before Avocent is that what you said?

David Farr

I said they will be flat or slightly down, yes. Which will be a major converse given our underlying sales will be down somewhere in that 5% to 7% next year.

Bob Cornell - Barclays Capital

Okay.

David Farr

I mean Bob, as you well know the restructuring and the actions we have been taking for the last 18 months are preliminary actions. We are fundamentally changing the cost structure of this company. So, we will be delivering pretty good levels of profitability even on underlying sales.

So, one thing, Walter pointing out to me is that, in that assumption, we are assuming pension cost will be a little bit less than $50 million hit to us this year and we did, as you will see in the proxy we did this award in October.

The next tranche, the next four year program for our performance-year program, which is a long-term program which will hit us about $100 million on a Delta basis versus last year. So, we are going to be hold our profitability even with those two headwinds coming at us.

Bob Cornell - Barclays Capital

I understand that corporate America is going to play out to a 100% of profit of bonuses and stock.

David Farr

Not…

Bob Cornell - Barclays Capital

Just kidding.

David Farr

Not this company.

Bob Cornell - Barclays Capital

Okay. Just wanted to, I'm sorry Dave, I want to go back that you were saying so that in 2010 that operating profit will be flat or slightly down in exception.

David Farr

The margin. I'm sorry the margin.

Lynne Maxeiner

The margin percent.

David Farr

Percentage?

Lynne Maxeiner

Not the dollars.

Bob Cornell - Barclays Capital

Okay. Margin percent?

David Farr

I'm sorry and maybe I said dollars. I apologize. If I said dollars it's my fault. I meant margin…

Bob Cornell - Barclays Capital

That's why I kept asking. Okay. The margin percent.

David Farr

Okay.

Bob Cornell - Barclays Capital

Okay. Just another couple of questions, I mean, what's going on out there with destocking/restocking?

David Farr

Not much going on right now. I would say, from the standpoint of the inventory levels, we still see a drifting down in total. If you think about the slope, Bob, it’s less severe right now, it's flatting out. From our perspective, we got to where we want to get our inventories by end of the fiscal year. So we are pretty steady right now and I would say you’d probably see a little bit more decline of inventories in next two or three months as based on the order pace that we are seeing from our customers, but it’s not a drastic number right now.

Bob Cornell - Barclays Capital

Final question for me. I can say, our E&C analyst is talking about some big projects coming to life around the world, some things that weren’t even on the board or being put on the board, I mean, are you starting to see any activity on that side, big projects that would benefit process anytime soon?

David Farr

We are. I think the projects are being put forth and being bid on. I think you're going to see some projects that have been shelved to be reinvigorated, so let's say, rebid and we looked at. I don't see that's going to help us at all in 2010 and I think that'll be more of a 2011 type of benefit for us, because by the time they get out there and get going, it’s going to be a lot before they get under way.

Bob Cornell - Barclays Capital

One final question, sorry. I mean, your quarter is saying the company have down sales for next couple of years, I guess you meant down in ‘09 and ’10, is that what you meant?

David Farr

She didn't understand me. I mean the only thing she got right was Emerson, spell it E-M-E-R-S-O-N. So, no I did not say, that I said, I expected our underlying sales to be down in 2010 and then we’d start recovering in late 2010, I don't now where she got that from.

Operator

Our next question comes from the line of Rich Kwas with Wells Fargo Securities.

Rich Kwas - Wells Fargo Securities

Question on process, you accelerated the restructuring there recently, it seemed to have paid some handsome dividends maybe a little faster than expected. Could you give us a little more color on how you see margins play out over the next few quarters, just briefly?

David Farr

Process profitability will be down again next year as we've said. On a quarter basis, you have to be very careful to process, it’s a functional mix of our systems solution business and our product business and we had a very strong mix in that fourth quarter. I would expect process of, I think, I would say all year long to be down 12%, next year underlying sales would be down 12% and I would expect their margins to continue to slip down and operate profit level into that 16%, 18% range next year and it’s going to slip back down again.

I would say that, I don't have a forecast for the next six months. I just look at the total year, but I would expect them to really struggle in the first half. They had a record, record first quarter last year and they were up, I think 12% or 13% in sales in the first quarter. So I think that from my standpoint I’ll look at the operating profit margin, it’s good to be at 16% to 18% next year and I expect them to be down 12% NOI.

Rich Kwas - Wells Fargo Securities

Okay.

David Farr

Not a bad business.

Rich Kwas - Wells Fargo Securities

Okay, great. Then in terms of Climate that you mentioned, you talked about Chinese orders being pretty strong here or at least helping the overall order growth rate, just earlier you talked about growth in China for the first quarter from stimulus. How do you think the sustainability of the growth in China is going to play out over the next several quarters and then how do you think about American reinvest and recovery act and the benefits in the U.S. So it seems like you are not really seeing much now, how do you think that plays out

David Farr

Relative to China I fundamentally believe the economies have turned and you will see for the next 12 to 18 months a pretty good underlying growth in China, which will allow us to continue see pretty good growth progress for the next year. I don’t think my management team is focusing and forecasting that yet but I believe it's common. I think it's, given the infrastructure tough investment we are involved with, the environment is much better. I have been there twice within the last 60 days I think and may be 75 days. I have noticed a continuing positive trend. I don't see an issue there.

Relative to North America, the US stimulus, you have to understand from first day, I pointed it should never been done. I think it's a waste. From my standpoint we are seeing a slight benefits but I don't think it's, if I look at what's going on in Asia and I look at what's going in the United States, there are two different approaches. One is to actually create long-term critical mass infrastructure, wealth creators and one is the transfer of payments. So which one is going to win in the long-term, China.

Rich Kwas - Wells Fargo Securities

Okay

David Farr

Got that picture

Rich Kwas - Wells Fargo Securities

Last question. Material cost for the early cycle businesses, Climate, Appliance either its moving up and some other commodities moving up, but how concerned are you about that in terms of margin?

David Farr

Not concerned. I think what you are going to see here fundamentally you are going to start seeing a shift going on, we had a pretty good price cost relationship. It's been slightly green this year. It was a little bit less than 1% underlying price across the whole company and that material inflation in line with that, but we are still slightly green. As I go into the first half and we actually and I think the commodities are such that were probably little bit negative price. We are net mature inflation right now, that's actually negative, so we will still be green. I think that will shift as you move into the second half of the year and worth talking about and showing the company is getting ready because we are going to start raising prices a little bit, but net-net next year, I think we'll be close to zero to slightly negative on price and our net material inflation will be slightly negative. So, we'll be okay. There is not that strong of underlying demand out there yet. I mean I know people keep thinking that is, but, if you look the actual results of people reporting, it is yet beating what people think. That the last time I look at my underlying sales for the quarter, they were down 20%. I think they still are down 20%. If I look at the next quarter of my underlying sales they are going to be down somewhere around 15%. That is not what I call strong demand.

Operator

Our next question comes from the line of Michael Schneider with Robert W. Baird.

Michael Schneider - Robert W. Baird

Climate in fiscal 2010, is it possible that given the order trends are flat to down, five already, that in the calendar Q4 or fiscal Q1 that Climate could actually be the first business that turns flat to up in revenue?

David Farr

Yes.

Michael Schneider - Robert W. Baird

Okay. Then R-410A…

David Farr

It's a possibility, Mike. It's a possibility, it's possible, if I was a betting man that would be good bet.

Michael Schneider - Robert W. Baird

Then how much of that and what's your, I guess latest read on R-410A? Is it going to be as larger catalyst as you had once thought?

David Farr

It's still, we're still seeing some benefits there with a couple of the customers here in North America for the people that are going out while there is a refrigerant change going on and effective December 31 of 2008 going from our R22 to 410A and it's not the same thing as the as the 10th year to 13th year Mike because people do not want to have the (reforge) out there. There is going to some pull up and we are seeing. It’s more of a mix change for us, so we are higher price point, but we are still seeing some pull up of product and pre-build for the older product. So we are seeing a little bit of both and I think it’s still going to be net-net positive for us. So when you ask me could they possibly be the one they has the first positive, the answer is, yes, because of that.

Michael Schneider - Robert W. Baird

Then the proposals by the HVAC industry to go to regional?

David Farr

Yes.

Michael Schneider - Robert W. Baird

See your standards. I imaging it’s good for you as everybody migrates higher, but what does that do to your production capabilities and does it ultimately challenge you to deliver different product at different regions?

David Farr

I don’t think it’s going to be a big issue for us, because we think it’s going to go down to two probably major regions, regions there won’t be more than two, I think it’ll be two. So we can deal with that, I mean, we have more than that today. So, I think we can deal with that, I think, my thing is concerned with that whole transition is that it will negatively impact the underlying unit volume, the prices will be higher, but the underlying unit volume will be lower, because the cost of the end-market will be higher. So I think that will cause a little bit of repair business, which will be okay for us. So, I think that fundamentally could change the underlying volume of the market here in North America during that time period.

Michael Schneider - Robert W. Baird

Okay. Then just looking the year-end now, we’ve had a very tough year. I doubt anybody is going to want to be aggressive here in the final quarter in terms of production. If you look at HVAC specifically and than across your other major businesses, what are you hearing as far as shutdown schedules and holidays schedules at you’re marketing customers?

David Farr

Nothing yet, it’s a little bit early. I do anticipate that people will do some shutdown, Mike. So I think going back, I think, it was Bob Cornell asking me about the inventory that came a little [last] asked about the inventories. I think the inventory levels in most of our customers are in a very, very good shape. So, they have a pretty well mapped out at this point of time, and they’ve already got their shutdown build in. So, I think based on the forecast, I am giving you the underlying sales growth for that first quarter, we have that mapped in and the wildcard will be is, will there be any demand that people have gone too far and they need a bundle schedule back up, but I'm not anticipating that’ll get worse.

Operator

Our next question comes from the line of Christopher Glynn with Oppenheimer.

Christopher Glynn - Oppenheimer

Comments on your outlook for the first part of the recovery being the best point for share gain, looking at the Delta V process launch, next gen and last cycle you had some really good share gain, is this more in the area of defending that prior share gain, people responding that or how do you see the different areas really of opportunity in the first 18 months or so I think you said.

David Farr

I think, I look at across the business, what we fundamentally try to do and I think we talked about this in the last couple of conference call, maybe a year ago now is, between the OCE and then also the businesses we setback last summer in the July, August time frame. Okay, now what are the 25, 30 key products in development effort, that we’re going to make sure we protect as we go into this downturn.

What we want to do is launch those projects and there will be a significant level of sales in the years, second half of 2010, 2011 and early 2012. So we look at across the company, not just process. So you'll see a lot of different programs which are very critical relative to say energy efficiency or other some kind of solution effort right now, growing on with the megatrends that will to take advantage of when the customers often start spending money.

So we spend a lot of time thinking through when the recovery comes, where is that money going to be spend first? Do we have the right new technology and innovation to get that dollar? So we did that last time and it really helped us outperform our competitors and if you look at where our spending was at December, you would do the same thing and our percent of new products, it went up in the last 12 months. Our E&D as a percent went up.

You look at the spending on a global basis it went up because as we repositioned that so you are going to see that across the board. It's really the best times, the first 18 to 24 months of recovery to go after and gain that market share. It's not relative to price, it's all about innovation and technology and new products and we have them, we don't want to wait.

Christopher Glynn - Oppenheimer

Okay. Then any comments on book to bill in general, may be Industrial Automation specifically and also just some general thoughts on FX in the first quarter and for the year.

David Farr

The book to bill, I mean from the standpoint I don't it's changing that much. I mean it's, we have about two or three months I would say lag from GFI to our shipments and if you look at our orders right now and I think it's four of the segments are getting better. So from a trend lines they are getting better and one of them is pretty well stabilized. So our business, as I would say, as I told the Board I think our business is, yes we got tough quarter coming ahead of us right here, but we have got the worst behind us from the standpoint of getting things. The question is how fast that will come back up and how sustainable will when it comes back up. All the GFI numbers are trending up, their leading inter-traders are trending up, but when you get out into late 2010 and early 2011, you are not looking at very high levels of growth relative to the GDP or levels of GFI at this point in time and there are lots of reason for that. So as I look at the first quarter, I think we are very well got it dialed in right now and we are probably looking a couple of points of currency benefits. What do you say Walter?

Walter Galvin

Yes.

David Farr

A couple points of currency benefit.

Operator

Thank you. Our next question comes from the line of Eli Lustgarten with Longbow Securities.

Eli Lustgarten - Longbow Securities

These wonderful quotes on [currency] drivers, very decent plan.

David Farr

Yes.

Eli Lustgarten - Longbow Securities

All right. What is the clarification? Tax rates for 2010 is going stay in the 28% range, that we had for the year or what do we look at?

David Farr

Approximately 30%.

Eli Lustgarten - Longbow Securities

Its still about 30% despite the benefits your NOLs have done?

David Farr

Yes. I mean we have got a little bit left but we have been trending more like 31% in the last couple of years. With the NOLs and restructuring we got a lot up behind, we will get a little bit next year, but I would use just a good number, we can't call our tax rate to be honest plus or minus 30 basis points, but I would say 30 is a good number to use for your modeling, Eli.

Eli Lustgarten - Longbow Securities

All right. As we look at, you talk about Process down 12% in the year and it's up this quarter. Industrial Automation looks like very difficult probably down 27% in the first quarter and a lot more for the year. Can you give us some guidance and what we are seeing in Industrial Automation and Network Power which are the big two negatives that we got based on this quarters and the year?

David Farr

Yeah. I think if you look at the Industrial Automation they had a record quarter relative to the Alternator business in the fourth calendar or the first fiscal quarter last year. So that correction is still underway as our customers still correct their channel and also their own inventories.

So I think Industrial Automation if you look at this overall indicators both from Europe and the United States, where they are very strong in those marketplaces are not looking at much recovery at they would stabilize. Then you got the Alternators driving it down probably for the next two quarters and then you will start to see some improvement in the second half of the year in Industrial Automation.

Both Process and Industrial Automation are still in the later cycle and they are still going to struggle for the next six months and then you're going to see our Climate Technology, our Tools and Storage and you're going to see Network Power, that would be the fourth one coming back, that will come in the middle of 2010.

Eli Lustgarten - Longbow Securities

Then can we hold the profitability of Industrial Automation anywhere close to the fourth quarter, or improve it given the stabilization that we can [finish] that exist at this time?

David Farr

I got to the fourth quarter profitability with Industrial Automation loss, okay.

Walter Galvin

7.7 I think it is?

David Farr

Yes, you know better than I do. Since you’re looking the numbers, I am not. For the fourth quarter they did about 7.7. Okay. They did 7.7%. I think we’ll get for the full year. Yes, yes.

Eli Lustgarten - Longbow Securities

Given your [full-year] EBITDA, first part of the year will be tough.

David Farr

I think it will be tough in the first part. The first quarter, our production plants are still down 30%, 40%. They still have some inventory, I want to get out of there and their customers are still taking some inventory out. In total, I think we are pretty stable, but they in particular still haven’t finish their downturn.

Eli Lustgarten - Longbow Securities

Then the same thing with the Network Power, we know it should be able to hold this profitability growth as what we see for the most of the year?

David Farr

Yes. Network Power’s restructuring, I mean, we’ve gone through some of the massive restructuring in that segment and I would say that their profitability should be good for next year.

Eli Lustgarten - Longbow Securities

So we’re still on track with the Avocent acquisition by the end of the year?

David Farr

We are hoping to close, as I said, by January 1.

Operator

Our next question comes from the line of Steven Winoker with Sanford Bernstein.

Steven Winoker - Sanford Bernstein

First question I have is on restructuring spending, how are you thinking about that for 2010, what are your expectation? Dave.

David Farr

I think the last call, Lynne remind me that we said around 125 to 175, if I was going to a modeling number, I’d use 150.

Steven Winoker - Sanford Bernstein

Okay. Then as you think about pricing issues, particularly within Industrial Automation given the excess capacity that’s still out there. What are you expectations for pricing sort of stability in the environment over the next year?

David Farr

I don’t think price is a big issue. Everyone around the world has going through a major restructuring effort, some more than others and I think we have done a significant amount of restructures, I talked about earlier. From a price pressure standpoint I think that we are in pretty good shape. I think you are going to start seeing commodities start picking back up and you'll see a little bit of inflation. It’s not going to be very fast in 2010 maybe picking up as you go into 2011.

So net-net I think, our net material inflation will negative next year because of what's going on with our businesses around the world and as our shift away outside the mature markets and you'll see a slight negative price, maybe zero to slightly negative versus this year we are closer to one positive.

Steven Winoker - Sanford Bernstein

Okay.

David Farr

We are not talking about big numbers, there is not some price war going on out there that's a fools game.

Steven Winoker - Sanford Bernstein

Just a last question on Asia. I know you talked about the longer term, but in the quarter as I looked at trends for IA was down 27% in the fourth quarter, Network Power was down 8%, was there something specifically going on in Asia in those businesses that we should be aware of?

David Farr

No. I mean you guys, around the quarter I don't think there is not much going on. I actually thought that we actually turned positive in the fourth quarter underlying, we did turn GAAP underlying. GAAP was positive, but we are starting to see some of the businesses come back and engaging in order and the inventory reductions there are going down. India is doing pretty well, we’re seeing China coming back. I just think you've seen a normal course of a start-up just like you’re going to see in United States; you have some pieces come back sooner than other pieces and I think that's what's going on.

Operator

Our next question comes from the line of Deane Dray with FBR Capital Markets.

Deane Dray - FBR Capital Markets

I think this is first time that you’ve laid out a strategy or goal regarding your percent of revenue from emerging market and you already the lead among your peers. So this and I can almost call this your 40/40 club call so what's the timing and what is optimal?

David Farr

Within five year.

Deane Dray - FBR Capital Markets

Within five year. What's optimal?

David Farr

Within five. I know [Mesa were Deane], if you think about what's going globally right now, if you think about the mature market in the US and Western Europe, which are continue to increase their debt loads and they are going to have a much more challenging time in try to grow in these marketplaces because of the structural [proms] we are seeing in this country. You are going to see these emerging market to be the growth place. We already are very, very strong and what we have done with this last 18 months is strengthen that position and so what I was telling you how much we have changed in the last 18 months and the next 12 months we are going to make it even bigger. You are going to see this company go… when I first started to run the company around 20% emerging market manufacturing 20%, emerging market sales, we are going to go up to 40, 42, 45 in the next five, six, seven years. It's where the market is going and we are player and we do extremely well as you know.

Deane Dray - FBR Capital Markets

Great and then within the two day meeting that you have just been through and the strategy, what can you share with us in terms of key things and how does the tone differ from where were a year ago.

David Farr

The tone differs fundamentally its the fact that you heard me talk about emerging markets, that we want to include they must be key thing for me. So it was a key thing, I think the key tone to me is that the mature market growth in the next five, six, seven years will be 100 to 150 basis points lower than we have seen for the last 10 years, if I look at those market and I think emerging markets are going to be key level of growth, opportunities are still there. The growth rate will be slightly less but it will be still strong enough to drive that percent change that I am talking about and you are going to continue to see a mixing change of our business was as we take into from a technology and market space we got from an acquisition and we are going into the mode here in the next 12 to 18 months, 24 months that we will start selling some assets off, that we are in that [pole] period where the things start recovering here and we are going to do that. So, you are going to see a little shifting going on here in the company, which is the thing that I talked with the Board about for the last days.

Deane Dray - FBR Capital Markets

What's the higher priority the acquisitions side or divestiture side?

David Farr

We have underway already in this fiscal year $1.4 billion of acquisitions. I think as I look at the rest of this fiscal year we would like to do another $500 million or $600 million of acquisitions. So, that's one thing and that's timing vise and I would like to get a couple divestitures underway in this fiscal year, closing towards the end of the fiscal year or hopefully in the mid or towards the end or as we roll into 2011, somewhere around that time period. So, that will be starting up. That's the timeline and that's the priority.

Operator

Our next question comes from the line of Steve Tusa with JPMorgan.

Steve Tusa - JPMorgan

You mentioned the net inflation price inflation for the year. Could you just talk about maybe what it was in the quarter? So price for the year as a percent, that means in the quarter was probably a little less than 1% and then what was the, you mentioned a few other segments Materials Management, what was that benefit in the quarter area?

David Farr

I don't think it's much changed. I don't it was much changed from the price impact for the quarter versus the year. I think we are pretty much inline. I mean it's a little bit slightly positive and flat for the quarter. So, we have got more pricing upfront. So, it's slightly flat to slightly positive for the quarter.

Steve Tusa - JPMorgan

What was the net impact?

David Farr

The net impact was positive, slightly positive.

Steve Tusa - JPMorgan

Okay. Can you quantify what that inflation number corresponds you? What is the size of your buy that you are talking when you talk about material inflation?

David Farr

We won’t do that, but we’ll talk a little bit more about this in February, but I don’t quantify that.

Steve Tusa - JPMorgan

Then lastly in the quarter, which segments were above that 1% price and looking to through that, which ones are below?

David Farr

From a net-net standpoint, from a net positive to the whole year, I would say, that only one would be our, some of our Network Power guys were probably a little bit below that. I would say the Industrial guys, the Process guys were all slightly above it.

Steve Tusa - JPMorgan

Okay.

David Farr

It does not move around that much in a quarter-to-quarter, so I am looking at the Climate Technology guys, the Process guys were all above Industrial guy. So I would say Network Power is slightly negative.

Steve Tusa - JPMorgan

So that will be in your 10-K, so we can check that out when that comes out, I guess.

David Farr

Yes.

Steve Tusa - JPMorgan

One last question, when it comes to the Climate business next year, there is a little bit of buzz about perhaps a pent up demand in the U.S., you tend to take a more conservative approach than most out there when it comes to these HVAC stories. What’s your sense as to that we have likelihood that there is some pent up demand out there in the U.S.?

David Farr

Every indicator tells me that you are going to see a strengthening as we move into the spring, Steve. As you know my opinion, I want to see the whites of the eyes of this recovery before, I believe it. The North America HVAC marketplace has had three down years that is the new record, maybe since the depression. I don’t know if we’ve had some depression. Three down year, so I’d like to see the recovery, but every indicator tells me that we are going to see a second half spring, when I talk of second half Emerson, a spring type recovery there, so I would bet there is going to be one. The magnitude of it, I don't know, and I am not a big pent-up demand guy at this point in time.

Operator

Our next question comes from the line of Steve Searle with Conning Asset Management.

Steve Searle - Conning Asset Management

Did you have any commercial paper at the end of the fiscal year?

David Farr

No.

Steve Searle - Conning Asset Management

You paid it all off?

David Farr

Yes, yes.

Steve Searle - Conning Asset Management

Okay.

David Farr

You want to buy some?

Walter Galvin

It's at relatively good interest rate, if you are selling it.

Steve Searle - Conning Asset Management

Well, I was just curious if you’re planning to use some CP to fund Avocent or you planned to issue term debt or just pay it out of cash?

David Farr

We will worry about that in January 1st.

Steve Searle - Conning Asset Management

Okay, and can you give us an update on where your pension stood at the end of the fiscal year?

David Farr

You'll see in the K, we are slightly underfunded. I want to say 300 million, is that right Walter.

Walter Galvin

About $300 million.

David Farr

Okay, as long time as we are unfunded and we will continue to put money in next year like we did this year. I think we will forecast but $200 million.

Walter Galvin

$200 million and $300 million.

David Farr

Like we do in the last couple of years and so we are in pretty good shape right now. I am not too worried about it.

Operator

Our next question comes from the line of John Inch with Merrill Lynch.

John Inch - Merrill Lynch

I want to ask a question on different tax. If demand were to actually begin to come back much more quickly, first, are your factories positioned to handle that sort of a near-term ramp up? Secondly, what about the supply chain, like I mean, less Emerson and more to do with your own suppliers. Are you planning for that as a sort of scenario and sort of what could be kind of an outcome?

David Farr

We at this year's strategy assessment in September reached we went through that scenario that, what happens given the significant restructuring and we had to get the restructuring done and the plans repositioned, which we have in most cases. Can we handle a different upturn and the answer is yes. We can. I think we can handle from our own facility standpoint. Then quite quickly what are your top 10 component supplier issues and because that would be that, as you pointed out that will be the key issue for us. Who are suppliers who also have cut way back and they come back and recover.

I think this is going to be, we are in a period right now between now and the spring of 2010 that you as an operating company need to stay extremely close to what's going on from a customer standpoint and your production standpoint and keeping your entire op as high as possible. We talked about that at the Board level today yesterday and the business leaders all gave in their assessment of the same situation because I would say right now that is our number, number one key issue because we have got our operating levels to where we want to be right now. We got inventories where we want to be right now. Now let's see what happens when we have sudden surges, because you will have in early stages John as you well know, early stages you will have some sudden surges and things and you have to be able to react. I think we can, the key thing is our suppliers.

John Inch - Merrill Lynch

Yes, I am just thinking aloud I mean this what characterizes this recession was the liquidity crisis and presumably a lot of the smaller suppliers and still be having financing issues. So you have been…

David Farr

No, we have gone through their process. Our Board requested and we have done that and we keep a very close monitor on that because we are concerned about that very issue, we are in pretty good shape, we have multiple suppliers and our suppliers liquidity-wise are in a pretty good shape. We have doing a lot of testing on that to make sure of the case. What I am worried about from my suppliers standpoint is, have they taken their capacity down too rapidly and not able to come back up within the weeks that we need them to comeback up.

John Inch - Merrill Lynch

I guess, your factories presumably?

David Farr

I think we are in pretty good

John Inch - Merrill Lynch

Okay. So, your factories presumably, you could [unfurl] some of those workers or do some other things that in fact you needed to use?

David Farr

Yeah. We got Walter. We've got Lynne. We've got me, and Ed Monser. A couple of other people we get to still in there.

John Inch - Merrill Lynch

Yes.

David Farr

We are pretty productive.

John Inch - Merrill Lynch

Well. I'm pretty busy, so.

David Farr

Well. I didn’t mention your name.

John Inch - Merrill Lynch

Oh I know thanks. Okay. So another question here, as you see your mix increasingly shifting to emerging markets Dave? You mentioned the targets over the next few years. What are your thoughts towards possibly either creating or carving out a platform that maybe more sort of emerging markets specific or you let's just say as a client are you happy with the existing four, as you sort of have this big anchor into the Western countries transcending into the emerging markets?

David Farr

I don't think, you're not going to see a platform change relative to just pure emerging markets. I think what our platform structure is going to be, as we're going to move toward transition towards here in the next several years in five years or six years is that you're going to have three or four global type of platforms with a very strong emerging market presence in those three or four global platforms.

John Inch - Merrill Lynch

Thanks. Then last, which of the businesses do you think you've taken or could still take the most of amount of market share?

David Farr

I don't know. I mean I think we opportunities, I don't think there is any one business unique in that regard. I think we don't have a 100% of market anywhere. So we've got plenty of room.

John Inch - Merrill Lynch

Now but in the last cycle you took a ton of share in Processes. Is there any one business that's positioned to sort of benefit similarly kind of on the somewhat unique basis?

David Farr

No I think all the all the major businesses are pretty unique including Process. I think we are staging ourselves for a nice run here when we come back out from a lot of technology innovations that's coming into the marketplace.

Operator

Our next question comes from Gautam Khanna with Cowen and Company.

Gautam Khanna - Cowen and Company

Given the strong cash generation this year, the low pension funding requirements next year etcetera, I mean how do you think about share buyback at this point?

David Farr

I think, as we look at what we have going on right now. We've already committed $1.4 billion in acquisitions and we're talking about another $500 million or $600 million. Our share buyback next year will be less than $100 million at this point in time, will be a small number.

Gautam Khanna - Cowen and Company

Okay. Then with IA, Industrial Automation the margins ex the restructuring were actually quite high, 10% plus it look like. Is there anything unique in the quarter that explain to that margin strength or should we look at that as sort of a basis going forward?

David Farr

The underlying margin of that business historically is a solid double-digit margin. If you look at the competitors around the world and you look at all of us, it's a fairly stable business from the standpoint of profitability and then when you go through a dramatic downturn like we have here with huge inventory liquidation and things like that and restructurings, you see the margins get hit. So, but historically you're looking at a 12%, 13%, 14% 15%, 16% type of EBIT margin with those companies, so 10% in the quarter is not unusual.

Gautam Khanna - Cowen and Company

Right. I guess I’m just looking Q3 to Q4 on relatively flat sales ex restructuring?

David Farr

The restructuring benefits, I mean we’ve spend a lot of money in restructuring, the benefit start flowing through we've got the inventory, from the Delta standpoint is still dropping, but it's coming back in line from that reduction slowdown a little bit. So, the restructuring has been helping. Things are starting to get in place for everything we’ve been working on for the last 12 months there. That’s not unusual, that’s why we do the things we do.

Operator

Thank you. Our next question comes from the line of Bob Cornell with Barclays Capital.

Bob Cornell - Barclays Capital

For modeling purposes, you said the restructuring gets cut in half, Dave, but does it stay high in the first half and trail-off and how are we going to model that?

David Farr

I would model front-end loaded. We are going to be pretty high in the first two quarters. I mean it's hard, I'm not an expert, I run Emerson's how to mitigate that close by quarter, but I would say if you model it with more upfront and I put more in the first than I put in the second. So what do you Walt?

Walter J. Galvin

I think that's a good direction to go.

Bob Cornell - Barclays Capital

Yeah. That's why you had -

David Farr

We've got two guys here who probably got 60 some odd years with the company, so that's what we do.

Bob Cornell - Barclays Capital

You haven't talked about Avocent, being for our modeling purchases they have something that we hit Jan 1 I mean what the sales should we thinking about OP, I mean, how do you get to the $0.10, $0.11 dilution we are talking about.

David Farr

I don't really want to talk about that until we get the deal close. I mean we don't own this company, but we’re talking about approximately $400 million for nine months that's what we said in sales. It’s the reasonably profitably business and so I'm not going to give you anymore as I said before so, you can look at the transcript from the last time, but we'll talk about it in February.

Operator

Management, I show that there are no further questions at this time, please continue.

David Farr

Thank you very much. Again, I want to thank everybody for joining us today. I apologize we are still in the late afternoon, but we had a long board session today and I appreciate your support this year. It’s been a very difficult year. What I'm really pleased about is, as we've done aggressive restructuring in the middle of 2008 and going all the way to where we are right now. The operation boys have got this done, both from the restructuring standpoint, now the cash standpoint, the balance sheet standpoint, so we are in a very good shape.

We know we have a six more challenging months here, but from my perspective, as I look at that next six months from where I was looking six months ago, I mean a lot stronger position and I’m much happy about where we are. So I am looking forward to growth as we come into the second half of 2010 and I am looking forward to once having some positive things to talk about with our shareholders on the phone. I want to thank for all your support there. I hope you are happy we did give another dividend. We are not a company that cuts the dividend this year. Amen.

Operator

Ladies and gentlemen, this concludes the Emerson's fourth quarter fiscal 2009 results conference call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 and for international participants, 1-303-590-3030 and enter the access code, 4169116 followed by the pound key. The replay will be available until November 10, 2009. ACT would like to thank you for your participation. You may now disconnect.

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Source: Emerson Electric Company F4Q9 (Qtr End 09/30/09) Earnings Call Transcript
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