Emerson Electric's CEO Discusses F4Q 2013 Results - Earnings Call Transcript

Nov. 5.13 | About: Emerson Electric (EMR)

Emerson Electric Co. (NYSE:EMR)

F4Q 2013 Earnings Conference Call

November 4, 2013 03:00 PM ET

Executives

Patrick Fitzgerald - Director of IR

David Farr - Chairman and CEO

Frank Dellaquila - EVP and CFO

Analysts

Scott Davis - Barclays

Christopher Glynn - Oppenheimer Securities

Shannon O'Callaghan - Nomura

Andrew Obin - Bank of America

Chip Moore - Canaccord Genuity

Steven Winoker - Sanford Bernstein

Deane Dray - Citi Investment Research

Rich Kwas - Wells Fargo Securities

Jamie Sullivan - RBC Capital Markets

Mark Douglas - Longbow Research

Operator

Good day ladies and gentlemen, thank you for standing by. Welcome to Emerson’s Investor Conference Call. During today’s presentation by Emerson management all parties will be in a listen-only mode. Following the presentation the conference will be open for question. [Operator Instructions] This conference is being recorded today November 5, 2013.

Emerson’s commentary and responses to your questions may contain forward-looking statements including the company’s outlook for remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson’s most recent annual report on Form 10-K filed with the SEC.

I would like to turn the conference over to our host Patrick Fitzgerald, Director of Investor Relations at Emerson. Please go ahead.

Patrick Fitzgerald

Thank you, Marissa. I’m joined today by David Farr, Chairman and Chief Executive Officer of Emerson and Frank Dellaquila, Executive Vice President and Chief Financial Officer. Today’s call will summarize Emerson’s fourth quarter and fiscal 2013 results. A conference call slide presentation will accompany my comments and is available on Emerson’s website at emerson.com. A replay of this conference call and slide presentation will be available on the website after the call for the next three months.

I’ll start with the highlights of the quarter as shown on page two of the conference slide presentation. Fourth quarter sales grew 2% to 6.8 billion with underlying sales increasing 1% which was 2% excluding the embedded computing and power business. A slow economic environment continued especially in mature markets. Growth was also hampered by difficult comparisons in the Thailand flooding recovery and a large network power project in the prior year.

Market conditions were varied but have been improving modestly overall as underlying orders excluding [embedded] computing and power grew 4% in September. Profitability was strong with a record level of segment margin at 19.5%, up 70 basis points from the prior year. Earnings per share were $1.18, up 6% from the prior year excluding impairment and repatriation charges. Cash flow remains robust through the quarter completing a record year performance. All businesses closed the year with strong execution providing solid operational momentum in the next year.

Next slide, the P&L summary, as we mentioned slow economic conditions limited sales growth to 2%. Despite the sluggish growth gross profit margin expanded to a record level. Operating profit margin [indiscernible] 30 basis points as stock compensation increased 53 million and pension expense increased 12 million. Our goodwill impairment was recognized for the connectivity solutions business which is reported in the network power segment separate for the network power systems business.

EBIT margin was unchanged excluding impairment charges. We repurchased 10.1 million shares for 623 million in the quarter reflecting accelerated buybacks from cash anticipated to become available from the embedded computing and power divestiture. Excluding onetime impairment and tax charges earnings per share increased 6% to $1.18.

Next slide, sales growth by geography, in the fourth quarter underlying sales grew 1% with the U.S. down 1%, Europe up 1%, Asia up 4% including China growth of 7% Latin America up 10, Canada up 4% and Middle East and Africa up 1%. Currency translation added 1% for reported sales growth of 2%. This full year 2013 underlying sales increased 2% with the U.S. flat, Europe down 3%, Asia up 2%, Latin America up 11, Canada up 4% and Middle East and Africa up 13%. Currency translation and divestitures together deducted 1% for reported sales growth of 1%. Emerging markets continue to lead growth increasing 5% with and 7% without embedded computing and power in 2013.

Moving to slide five, cash flow, strong operating cash flow growth was driven by working capital improvement and earnings growth. Free cash flow also increased at a double digit rate reflecting robust conversion from earnings. Trade working capital as percent of sales improved 90 basis points by the slower market conditions and efficient balance sheet management. Cash generation remain strong throughout 2013 reaching 3.6 billion for the year.

Next slide, business segment earnings, business segment margin expanded 70 basis points despite 12 million higher pension expense and the flooding recovery in the prior year. Excluding impairments the corporate expense increase was primarily related to higher stock compensation which increased from the third quarter due to the higher fourth quarter stock price. The tax rate included 37 million in repatriation taxes related to the embedded computing and power divestiture.

Moving to Slide seven process management. Process management underlying sales grew 6% with North America down 1%, Asia up 9%, Europe up 10%, Latin America up 21% and Middle East and Africa down 2%. Currency translation deducted 1% of reported sales growth of 5%. Energy and chemical industry investments remained elevated globally supporting the continued growth. Sales growth was tempered by the Thailand flooding recovery in the prior year which reduced sales growth by about 6%.

Growth was balanced across the portfolio led by high single digit growth in the systems and solutions business. Strength in Asia, driven by 8% growth in China, and Europe, supported by North Sea projects, more than offset slower market conditions in North America. Process management's solid growth momentum is expected to continue into next year with project activity in North America expected to accelerate in the second half.

Next slide industrial automation. Industrial automation underlying sales decreased 4% with North America down 8%, Asia up 6%, Europe down 7%, Latin America up 1% and Middle East and Africa up 21%. Currency translation added 1%, for reported sales decline of 3%. Demand for industrial goods remained weak throughout the quarter especially North America and Europe. The power generating alternators business declined the most as channel destocking continued but at a slower rate and renewable energy projects were also particularly weak.

Solid growth in Asia was led by the industrial motors business. Order trends have been improving with growth in the quarter after protracted weakness. In markets are improving particularly in Asia and Europe and we expect modest sales growth to return in the near-term.

Moving to Slide nine, network power. Network power reported an underlying sales decline of 3% with North America down 2%, Asia down 3%, Europe and Latin America down 6% and Middle East and Africa up 9%, thus growth was unfavorably impacted by about 3% from a large Australian project in the prior year quarter. Global information technology and telecommunications end markets remained weak. Data center demand declined modestly with growth in Asia and Europe offset by weakness in North America.

Telecommunications infrastructure investment decreased globally but recent orders suggest improvement particularly in China. Embedded computing and power declined sharply reducing total segment underlying growth by 1%. Margin expanded 110 basis points benefiting from cost containment and restructuring savings. Positive orders are expected to continue in the network power systems business as market conditions improved modestly in Europe and Asia.

[Audio Gap]…modestly with double digit growth in residential partially offset by slow commercial demand and service weakness. China's residential business was up double digits leading growth in Asia. Growth in Europe benefited from a modest market recovery and favorable comparisons. The global refrigeration business reflected strength from industrial and transportation market improvement. Moderate growth is expected to continue in the residential and refrigeration businesses with modest improvement in commercial markets.

Moving to Slide 11, commercial and residential solutions. Commercial and residential solutions reported and underlying grew 4% with North America up 4%, Asia up 6%, Europe up 5%, Latin America down 3% and Middle East and Africa down 10%. Residential investment in North America continues to increase steadily with growth led by the professional tools and food waste disposers business.

Margin expanded 150 basis points primarily due to cost containment and return on restructuring investments over the past two years. Momentum in North America residential markets is expected to continue in the near-term with modest support from non-residential markets.

Next Slide fiscal 2013 highlights. Sales growth of 1% was led by 5% growth in emerging which increased to 37% of total sales for 2013. 40.3% was a record gross profit margin reflecting continued technology and cost repositioning investments. EBIT margins' excluding charges was essentially flat, impacted by a stock comp increase of 121 million and a pension expense increase of 55 million share repurchase of about 20 million shares or 1.1 billion contributed to EPS growth of 4% excluding charges. 2013 completed the 57th year of consecutive dividend increases which contributed to total payout ratio of [Audio Gap] business, we expected global economic environment to improve modestly versus 2013 with improving market conditions in Europe and Asia in particular.

Based on global gross fixed investment forecast of 2.5% to 4% growth versus 2014 outlook is as follows. Underlying sales growth 3-5%, reported sales change of minus 1 to 1 % which reflects the embedded computing and power transaction expected to close before the end of calendar 2013. Slight operational margin expansion with acceleration growth programs to invest ahead of improving global economics. Earnings per share growth excluding good will and tax charges are 4 to 7%, with reported earnings per share growth of 33 to 38%. The Board of Directors voted to increase the first quarter dividend, 5% to $0.43 per share, other business segment financial metric forecasts will be provided at the annual investor conference in February 2014 and with that I'll turn it over to David Farr.

David Farr

Thank you very much Pat, appreciate it, I want to welcome everybody to today's call, I want to thank everybody across the operation of Emerson both at the corporate and operating levels for a strong performance in the second half of this year and delivering what I believe is a very good global performance and operating performance.

It was a very unusual year as we all know with a lot of turbulent economies out there, a lot of things happening, but as our business slowed in the second half of our fiscal year, the organization rallied around, what needed to get done, they delivered some incremental sales and they delivered very strong profitability in cash flow and I owe a debt of gratitude to all of these operation across this company in showing how Emerson can execute and do it well.

As I look at what we did this year with solid EBIT margin on a consolidated basis, strong operating EBIT margins at segment levels, record levels, excellent free cash flow, operating cash flow and a great job on getting just the operations running the way they need to run and we truly appreciate that, unfortunately we had to take another charge as we sold EC&P, that's not a good thing, and obviously not a great situation for us as a company, but we're getting behind ECP with the divestiture being done sometime at the end of this fiscal quarter.

We have repatriated the cash that had been sitting over there in Asia and China, it's been brought back and we’ve actually started buying back about 2/3rds of the stock that with that additional fund that we wanted to turn back to the shareholders from the EC&P divestiture. So I'm very pleased to say that, we also took another small impairment charge on a business to small business left over from the Jordan acquisition about 10-12, 13 years ago and one small part of the acquisition we had done in the conductivity area and we’re teeing this up to sell this business, it's just not strategic to us and as a business you don't want to focus or go on, or do any additional acquisitions there and we saw that sometime in this fiscal year.

As I look at the global economy right now and I'm not going to get in a lot of the specifics here because I will do that in February when we get into more, strong guidelines what happens as the end of this calendar year unfolds but as we look at the global economy right now, we're seeing the gross fixed investment improving a little bit towards that 2.5-4% range.

Fundamentally what we're seeing at this point in time is a modest improve in Europe, we believe that Europe's going to grow out someplace around the 1-2% range, not a lot of momentum but it has turned positively, positive from the standpoint we had a positive growth actually in Emerson for the fourth quarter in our European business, the key issue for us though is that must continue, if it does not continue and it slips back into recession or no growth than we're going to have a more challenging 2014, we believe that the US will continue to improve, moderately not a very strong recovery but [indiscernible] and we've seen continued improvement in our China business over the last couple of months and quarters really, and so we expect that to continue, relative to our Latin America business we believe that we'll still continue to have another good year in Latin America, I'm a little bit more concerned about the middle east and the turmoil and the fact that there's been a lot of investments there and with the price of oil coming down a little bit could be a slowdown may be seeing that high level of investments but not growing like we saw the last couple of years.

Relative to south east Asia I still see we'll have pretty good growth so overall when you put it all together, we see decent top line growth this year which is important for us, but I'm not going to get into the specifics of Emerson, where I breakdown Emerson sales by various regions until that February time period. So I know you'll ask but I'll bow out not saying anything about that until February.

As you know we’ve seen very weak global fixed investments in the last 2.5 years, we have worked very-very hard to protect certain technology investments, certain growth investments. We have worked very hard to strengthen our global competitive cost structure and given the record levels of the profitability we see this year and what we are going to forecast next year, an EBIT margin line, we are in a good cost position.

The last three or four months internally the company has been focusing very hard on prioritization where we think the growth opportunities are across Emerson and we have decided to increase our investments, re-investments in these growth opportunities and the reason for that is we reviewed with the board for the last two days, as we believe the wind has started to shift to our back, we believe after two and a half years of really keeping things really tight and looking where things happen, the time is to pivot and to increase our investments. And that’s what we are doing.

We believe very strongly that we have a lot of growth opportunities both from a technology standpoint, across our service organizations, we roll them out, across our solutions capabilities and equally important we are going to invest incrementally over $50 million in upgrading our oracle systems which are very-very important for us relative to our network power, so our systems and also within our current technology business as we go forward as a global franchise. We need to continue that integration and make that investment in controls of oracle for the next couple of years; very important for us.

But as I look at the opportunities relative to our technology investments to really move our growth curve ahead and I look at the disruptive technology opportunities out there, that we want to invest in, we have more today than we've had in a long, long time, and the time is now the pivot. We believe we'll be facing moderate growth on a fixed investment around the world for the next several years. We see nothing fundamentally saying this to be a huge surge, but moderate growth and you're going to see some economies doing well, some economies not doing well and you're going to see this rolling moderate growth I think could see this for four or five years.

So what we're trying to do right now is to take our selective investments and try to drive a little bit premium growth to that. We have a very strong cost structure, and make those investments to strengthen this company for the future, the near-term future being two, three, four years out. We need to make sure that we can drive as much growth through these internal investments, which are high quality. And we have the cash, we have the balance sheet and that’s what we are going to focus on.

That's what we reviewed with the board for the last couple of days. And I feel very strong as we focus those issues and we'll talk about some of those issues in February. I am not going to share those ideas with you right now on a conference call. We are focused very much in trying to drive premium levels of topline sales growth with a moderate global gross fixed investment environment.

So before we open for questions, again I want to thank the global operations for their strong operating performance the last five or six months, both at the corporate level getting the job done, and at the operational level getting the job done. We closed strong as a company. Our underlined order just started to improve a little bit, the wind shifting and it’s time to pivot to make some incremental growth investments that will give us incremental growth as we come out of this, what I call moderate growth period here for the next couple of years.

With that I want to open the floor for questions. Again thank you very much for joining us today.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from the line of Scott Davis with Barclays. Please go ahead.

Scott Davis - Barclays

Dave I wanted to dig in, I know you don’t want to comment on any specific businesses, but on guidance a little bit it was and you mentioned Oracle as being a growth -- as an investment you need to make. But when I look back at other time periods, where you’ve had mid-single digit core growth like 2005, 2007, 2008, you put a pretty big conversion rate. Nice operating profit improvements off of that. What makes 2014 different to that extent? Or you don’t think you can still drive that kind of incremental profit?

David Farr

I think the difference is if you look at the underlying gross fixed investments that we saw in that time period they were higher levels. So we're looking right now, maybe GFI can be growing 2.5% to 3%, maybe getting a little bit close to 4%. That’s the difference. If you look at the GFI on a global basis is not mixing up as strongly as it was in the historical. We need to make these investments. We've been really keeping things tight. We delivered very good levels of profitability and fundamentally as I look at it and shared it with the board, we actually have unique opportunities to increase these investments to try grow a little bit faster and if we get a better GFI, then we clearly will do better. But right now as I look at this global fixed investment we are looking at moderate recovery and we've not seen -- if you go back in time and look at it, you will be seeing 4, 5 and 5.5 types, it makes a big difference than 2.5 and 3. That’s what the difference has got.

Scott Davis - Barclays

And a little bit of clean up question, I will pass it on, I mean if we go back about a year ago there was some challenges with your receivables and now we've seen a pretty big pick up in cash conversions. Does that mean that the receivable issue has been largely fixed?

Frank Dellaquila

Scott, this is Frank. We had very good improvement in the receivables issue. We had about $100 million improvement in past two receivables and good improvement in the underlying performance as well. So the receivables were a big contributor to the strong cash flow.

David Farr

Yes, they did a great job, the whole team. I think that one of the issues there; it is the stress points around the world right now. We think that, people would pay with lower cost of money, but the people are making, actually making at top of the payload, they are working everything and usually can on that one, so but they did a great job. If you look at it, we probably got close to a $100 million out of inventory, $100 out of receivables, and you know that really helps us setting record levels of operating cash flow and free cash flow. Good job by everybody out there.

Operator

Thank you. Our next question comes from the line of Christopher Glynn with Oppenheimer. Please go ahead.

Christopher Glynn - Oppenheimer

I just had a question about the pervasive sensing press release that you had out doubling the traditional $16 billion sensing market over the next 10 years, is that kind of a direct read on how you expect that 45% of process to track?

David Farr

From our perspective that part of sensing process, now that's actually is one area we’re putting a significant investment and coming talking about the pivot point that’s one area that we really want to do well because we've done extremely well on our wireless business and we now have set the targets to a $1 billion number for our wireless business. One thing has happened as we look as we look at the global process market and even industrial market, they want more sensing out there because of all the environmental rules, regulations, safety rules, and so we are spending additional money in our instrumentation process world and also industrial world to come up with a better level of sensing and that’s why we think the number of points of sensing are going double over a long time period. And that’s a very good thing for us given our presence and our technology capabilities but that's clearly one area that we have pivoted and put a lot of money in right now and will be for the next couple of years.

Christopher Glynn - Oppenheimer

Great and then on Industrial Automation, sometimes things can move pretty quickly there, so with orders certainly have inflected any sense of this could take off a bit more than the tone that you want to project at this point?

David Farr

I think the key issue for us is Europe has started to turn positive unfortunately France’s economy has not turned yet that is a concern and we are very strong in France. Asia has turned for us, which is a good thing. The thing to watch for us in this business is Caterpillar. If Caterpillar starts seeing more, what we call the Genset, the power industry, the Power Business starting to pick back up then you see that business takeoff, but until that happens you’re not going to see any strong pick up in that business, but it definitely, all the dynamics are showing positive which are a good sign and they have had a couple of tough 2.5 years here after a pretty strong 2011. So, I think that you’re going to start seeing the second half little bit better for those guys.

Operator

Thank you. Our next question comes from the line of Shannon O'Callaghan with Nomura. Please go ahead.

Shannon O'Callaghan - Nomura

Dave, just one more on the growth investments, so you have the over $50 million for Oracle, do you have an overall number for what you have in mind for this ramped growth investment?

David Farr

Not really, not that I'd share with you but it’s definitely -- when you think about -- if you look at what we -- things we had to deal with this year obviously we’re clearly not -- we’re not putting that to the P&L -- we’re going to offset with these investments that gives you a good idea. You look at what -- the positive -- we had the headwinds with the stock price last year, they had headwinds with -- pension we had the headwinds, there was a headwind, we had pension in stock, those are two big one and so what we’re doing is, I want to put the money back in to the business, we’re healthy from a financial standpoint, put the money back in the business and really try to ramp up our technology window here as we try throughout how to drive a little bit more growth because we’re very profitable and internally if we can get a little bit more growth through these technology programs. As you guys know, we will deliver high levels of profitability.

Shannon O'Callaghan - Nomura

Yes that makes sense and actually when you’re calling out your record gross margins you talked about technology, as you get these investments in there, is there more room up on the gross margin line?

David Farr

Yes, I think we set a number, help me correct, did we talk the number trying at 42% is that the number I talked about?

Patrick Fitzgerald

Yes, as of 2015.

David Farr

Yes, we are looking. The number at the back of mind, based on the investments we’re making, based on the mix of business is around 42%. I feel real good because that allows us from a technology -- that’s how we drive our profitability to technology and we do a lot of stuff on a cost standpoint, but really technology that we allow develop our customers and gives us a real competitive edge and so we’ll update everyone in February on that but I think the number I remember talking about is around that 42% level that we are trying to target for GP, as we continue to mix this business up.

Shannon O'Callaghan - Nomura

And then just one quick on these process acquisitions, the two that closed, are those in the revenue guidance yet? Are we going to have kind of acquisition accounting related to them kind of in 1Q here that we have to think about?

Patrick Fitzgerald

Yes, we've got -- it’s a little more than a point of growth in the revenue guide and yes we will have purchase accounting in the first quarter in particular. So, we will have some drag in the first quarter actually from those acquisitions and profitability would be pretty modest as a result for the full year because it's pretty significant purchase accounting in the first quarter.

David Farr

Yes, but I mean that’s normal set up there, but there’re going to be good growth business, the good market business, so those will start coming through it. I would say by 2015, if you use this commercial paper obviously it contributes but that’s not how we look at things, we look at our cost of capital and so from that standpoint, it’s not going to be much contribution this year and it will start kicking in 2015.

Operator

Thank you. Our next question comes from the line of Mike Wood with Macquarie. Please go ahead.

Unidentified Analyst

Hey guys, this is Adelman for Mike. I just had quick question, we've heard some electrical equipment guys talking about pricing being little bit more challenging, can you talk about sort I know you touched on this at your analyst day last year, earlier this year, but can you talk about what you’re seeing now and what’s embedded in guidance?

Patrick Fitzgerald

And what type of people you hear that from you said, intellectual what do you say, who?

Unidentified Analyst

Just sort of broadly and speaking with some companies. It’s nothing major but just sort of challenging.

Patrick Fitzgerald

I thought you met some kind of industry [multiple speakers]. From our standpoint, pricing as we did talk in February you are exactly right now I have talked in conference calls with net material inflation continued to stay, I would say slightly negative and not really turn up yet, you’re seeing pricing -- our pricing powers soften a little bit, it’s still slightly positive, its less positive this year than last year -- this year I’m talking about 2014 versus 2013. We are still slightly green. I expect that to happen as we get into this, I’m really concerned this pivoting but we have not seen any level of inflation therefore net inflation of our material cost have continued to come down a little bit and our pricing obviously follows that down behind it but we’re trying to make sure we stay ahead of that. But right now, I would agree with those comments. Pricing is little softer out in the marketplace but its slightly positive, less positive than 2013. That’s a very good observation.

Operator

Thank you. Our next question comes from the line of Julian Mitchell with Credit Suisse. Please go ahead.

Unidentified Analyst

Just had a question about the cash almost 3.3 billion in cash, 13% of your sales, net leverage I don’t know have turned you feel like the tailwinds are right at your back and you’re making some growth investments but what we do with the cash and this is the biggest cash balance I’ve seen ever for you guys. You talked about stepping up M&A in the press release, how does the pipeline look, which segments do you like? Maybe just some color there.

David Farr

Right now, we are definitely up and review that with the Board last couple of days as we’ve done a couple already in the first half of the year. We’re really trying to figure out how to get about $1.5 billion done this year, we definitely have the cash flow, we like generating the cash. at this point on and there is not could be any, what I call big, big deal out there, we’re looking at small deals in the 400 million, 500 million, 600 million type of deals.

Pipeline looks pretty good for us, it’s very much focused and process focused on industrial space, focused on the climate space, we might be doing some joint ventures too but right now we’re focusing on those three key areas relative to our deal transaction. If we do not see the deals unfolding then obviously what we’ll do is we may pivot to more share repurchase, right now we've already booked out, we’re trying bank what 900 million for this -- 900 million for the year but if we see that, obviously we’re not getting the deals done and we have very strong cash flow generation, then you are going to see us we’ll probably take up the share repurchase backup but that’s the way we are right now and we probably will sell one or two businesses this year at this point in time. So, as you all know, we like to focus on cash because without cash you can’t do anything and we’ve had a very good 12 months periods or good cash generation.

Unidentified Analyst

So, is there a number that you are comfortable running the business with, just the cash number on balance sheet. Not really, I mean we don’t pick a number like that, I don’t pick a number. I mean we go through periods, we generate more cash, we go through periods, we generate -- we spend more money in acquisitions, last couple of years we’ve passed more money back to our shareholders, we’re running I think the last couple years in the low 60% of our operating cash flow back to shareholders. We are comfortable right now with the level of deals and the cash generation to be in that low 60s and that’s where we are comfortable with. I don’t look at a number per se in my balance sheet how much cash I want in the balance sheet.

It’s what I see where we need to spend the money, we spend the money internally and then if we have money that we send back somewhere around 60%, 62%, 63%, 64% back to our shareholders.

Operator

Thank you. Our next question comes from the line of Andrew Obin with Bank of America. Please go ahead.

Andrew Obin - Bank of America

Just a question in terms of leverage from the fixed investment growth to your top line, I thought that historically it was more like 1.5 and maybe I’m splitting hairs here, but it seems like it’s more like 1.2 and I’m just wondering if this is just rounding or is it a mix issue as to which geographies they’re growing this time around.

David Farr

Do you look at [indiscernible]? The issue really boils down to as follows, we have not communicated over the years. As we go above three, we start getting a little bit of spread relative to is it 1.1, 1.2 as we go above 4 the number gets above 1.5 as we start getting above 4.5% to 5% sometimes we are start getting 2. So it’s a function of where that level is. At the level right now when you look at 2.5%, 3% basically that’s not enough to drive a higher leverage growth for us and what we’re trying to do right now, if we are going to be running GFI at this 3% or 3.5% range for multiple years 4% or 5% or 6%. I’m trying to figure out how to widen that spread by some technology or some like destructive technology type investments that allows to get a little bit more growth in a slower GFI environment, that’s what we're going to play out here because I do not see GFI going up to 5% or 6% range like we saw on most recoveries around the world in last -- we usually, that's what you normally see, but we don’t see that now.

Unidentified Analyst

And for your growth, do you get more of a boost if it’s the emerging markets growth versus developed markets? Is that the right way of thinking about it that there is more of spread in EM?

David Farr

There is more definitely more spread in the emerging markets than we do in the mature market because [other markets to your] potential, you look at our mature markets the U.S. and Europe we have higher level of market penetration already. So, in the emerging markets when get GIF and we get a little bit more growth penetration, that's why you see a little bit higher spread. You’re exactly right.

Unidentified Analyst

And just a follow up question, what’s the margin in [indiscernible] embedded?

David Farr

We’ll give you that number. I think Frank will take a look at it. I am going to something in a second. I don't want to tell you off the top of my head, because I don't have it off the top of my head.

Unidentified Analyst

We can take it offline don’t want to take your time.

David Farr

We'll give it to you. [Indiscernible] will tell you. Next question.

Operator

Thank you. Our next question comes from the line of John Quealy with Canaccord. Please go ahead.

Chip Moore - Canaccord Genuity

Thanks. It’s actually Chip Moore for John. On network power you talked about some weakness in the North American data center space this quarter. Maybe you can just expand on some of the trends there versus what you’ve seen in some of the other geographies?

David Farr

I think that in North America there has definitely been a slowdown and what I’d call IT spending in the second half of this year, we’ve seen it across the market space. We’re seeing a little bit pick up in Europe. We’re seeing pick up in Asia. The real spread slowdown has been in North America. And I think there is going to have to be a little bit -- I think there's going to be a more resolution a little bit to what’s going on with the government, what’s going on relative to little bit of the financial institutions where there is a lot of IT spends typically before you see that marketplace pick back up.

I don’t see that happening in the very near future, so we’re going to be very cautious relative to underlying growth in the network power system space until we see North America pick back up but right now it’s pretty weak. And then for -- someone asked about network power systems for the whole year EBIT the number is around 10.5% network power systems for the full year in ’13. Okay, next question.

Operator

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

Steven Winoker - Sanford Bernstein

So the first question is, remember the 50 million or 100 million that you used in accelerated -- I think it was accelerated 2011 or ’12 programs. Are you going to give us some detail as you think about spending this new 50 million in February or any high level now that how that program ended up faring out in light of the overall end market weakness as we think about handicapping the additional investments that you’re now putting into the business?

David Farr

We’ll definitely do that. I think the key issue for us -- we started in 2011-2012 and early 2013, when you think about is we went through probably a two period -- two year period there with GFI was under 3% and we actually grew historically, we were down as 2-3% range of GFI, we would not have top line underlying sales growth. So the programs actually did give some incremental growth. But I’ll give you more clarity in February, obviously I want to be very careful about how much, but I will give you more clarity and I will give you some feel for how the other programs work Steve definitely do that in February.

Steven Winoker - Sanford Bernstein

And in terms of your assumptions for 2014, we’ve talked in the past about cheap gas impacting US petrochemical demand or overall chemicals and how that is particularly or should be good for Emerson versus some of your peers? Can you give us some thoughts about how you’re looking at that? Is it just much longer time frame or is that part of your thinking for ’14?

David Farr

It is part of our thinking for ’14. The process business around the world had a very good investment you take Middle East, Latin America, Asia. We see in the second half of 2014 some of those programs kicking in so you’re going to see process which had basically down U.S. business this year because of the strong 2012 they had. We expect them to grow and grow very nicely in the second half of 2014 as these investments start kicking in late ’14 early ’15. As you know these are long cycle investments. These are fixed plant equipment investments, these companies are making a lot of permitting comes through this. They’re moving down the path right now. We’re winning the projects. We’re getting the business. We would expect some of that money start to being spent in the second half of our fiscal year in 2014, and really starting to build out as they get more and more approvals across the United States. I mean it is definitely coming and we see it happening.

Steven Winoker - Sanford Bernstein

And just a clean-up question on that, on the price cost commentary you had a little more clarity on the fourth quarter itself and what your material inflation roughly was versus the actual pricing you’ve realized?

David Farr

I don’t have the numbers off top of my head right now, it was positive it was definitely green. I mean I don't -- positive pricing and net material inflation was negative but I don’t have the positive number -- I don’t have the number right now. Do you have a number there Pat?

Patrick Fitzgerald

We’re looking for…

David Farr

I don’t know we should take a look at it. Why don’t you ask Pat, it is definitely positive but clearly as I said earlier I see that the spread is definitely getting tighter, it’s still positive green because the net material inflation continues to go down and obviously our pricing is going to be pulled right along with that. So, yes, so positive price -- I mean for the whole year it’s a positive price cost at this point in time, not a big number but its positive price cost.

Operator

Thank you. Our next question comes from the line of Deane Dray with Citi Research. Please go ahead.

Deane Dray - Citi Investment Research

Dave on underlying revenues outlook, I know we shouldn't get too euphoric about 100 basis points but it's better than what we talked about last quarter going to 3 to 5. So can you comment on what the swing factors are inching that up?

David Farr

There is really two factors; one I feel little bit more positive about Europe because we now have -- we've had positive quarter in Europe, the indicators continue to move upward positively, they are not moving rapidly but they are getting up more positive and our customer base fee is feeling much better, and their financial stability is pretty good. So I see that moving along so I feel little bit more confident with that number so I am looking at probably little bit higher growth there.

The second one now as we've seen for the last five or six months within China, our business actually started improving. We had underlying growth for the quarter over 6% and so I feel with on the order trends I am seeing based on the customer feedback I am seeing right now, I feel a little bit more positive on China. Those are the two reasons why that number has moved up Deane.

Deane Dray - Citi Investment Research

Got it. And then can you size for us the piece of Jordan that you are planning on selling this year?

David Farr

It's about $100 million; it's small, less than 100 million.

Deane Dray - Citi Investment Research

Okay and then you said that you could be selling two businesses, was Jordon one of those two or there are actually three?

David Farr

There is another business that I don't want to talk about yet, but there is another business that I am looking at in. A business that's -- at this stage we're not going to grow for us and I am not going to make a strategic investment. And what I rather do is take the money off the table off our balance sheet and pass it back to shareholders.

Deane Dray - Citi Investment Research

And approximate size of that unnamed business?

David Farr

Not going to give you that right now, if I gave you approximate size there will be a lot of speculations out there.

Operator

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

Rich Kwas - Wells Fargo Securities

Two questions, non-res outlook for next year seems like some other companies are a little more favorable about North American non-res. What do you think -- how do you think that plays out as '14 on one for you?

David Farr

Every indication says that non-res will be more favorable. It looks to me right now it might be more rare end loaded for our fiscal year, so we won't get much of a positive kick back. If it started happening sooner in the calendar year of 2014, then we get more kick back positive input, right now it looks to me like it's going to be later in the '14 but it definitely looks to me that [indiscernible] space and our customer base is that it is starting to kick back up. And I am just looking at my own North America bricks and mortars and expansion stuff and I see us having spent some more money in the second half of '14 too. So my own indicators inside Emerson say the same thing.

Rich Kwas - Wells Fargo Securities

That would be ultimately more positive mix for climate et cetera probably maybe later next year but more likely '15.

David Farr

Climate industrial also process, we would see a pretty good lever point there. If that happened quickly, clearly that would help us both from a sales growth standpoint or profit standpoint. That's something that would be up a positive surprise for us.

Rich Kwas - Wells Fargo Securities

And then the other question is on pension and the incentive comp, the tailwind. I think Frank you talked about the combined $0.08 to $0.10 tailwind in fiscal '14 last quarter, is that still impact or does the numbers change?

Frank Dellaquila

Yes it’s $0.10 and maybe a little bit higher as we closed out the year on the pension it's probably about 70 million on the pension and the incentive comp is about 40 to 50.

Operator

Our next questions comes the line of Jamie Sullivan with RBC Capital Markets. Please go ahead.

Jamie Sullivan - RBC Capital Markets

A question on process management you talked about North America, the MRO side being a little bit soft, just maybe your thoughts on that infecting in 2014.

David Farr

Based on what we're seeing, based on what could be done across the businesses. Again I still think that we’re going to see an improvement not in the first half of this year but more in the process business starting sometime in March, April, May time period, that's when we see based in talking to our customers right now. They are still digesting the huge investments they made in 2012. So I think it's definitely -- it's being discussed out there, our customer base has got the money to spend. It's a question are they ready to take on new projects and I think they are going to start doing that as they get into the spring time of 2014. So we see that coming at us but it's more of a second half type of thing for us than a front half.

Jamie Sullivan - RBC Capital Markets

And then just quick cleanup on the buyback, the 900 million you mentioned, does that include the remaining 200 million?

David Farr

Yes it does Jamie.

Jamie Sullivan - RBC Capital Markets

And in CapEx still in that -- I think you said 750 to 760 range.

David Farr

Yes, I think it’s, Jamie, that's about close as I can call right, that's exactly right. Just like someone asked me recently we need to make some investments and that's why I think non res is going to, we've all kept it pretty tight here over the last couple of years and I think if we want to deliver for our customers, we want to maintain our quality and have the capability we need in a company we're going to have to make some investments, which is a good sign for us from the standpoint of our sales eventually but it also it definitely needs to happen across this industry.

Operator

Thank you, our next question comes from the line of Mark Douglas with Longbow Research, please go ahead.

Mark Douglas - Longbow Research

Okay, on the climate you are up double digit in US resi seems that you maybe outpacing the market in your orders, there's an inventory build, it's something temporary and does that give you really a lot of confidence going into '14 here, it seems so.

David Farr

Yes, there is definitely not an inventory build in our customer base, there was -- actually the pipeline had been taken down so low that there was a pretty good surge, there's obviously some new transition going on to the next generation product which we're participating in, so we saw a pretty good recovery there in the late in the year which is very good, I like where we look at this point in time going in to the next year, I expect our climate business to have a good growth year both here, Europe and in Asia, and so I'm looking forward to that.

Mark Douglas - Longbow Research

So are the new products that helped to arrive in this quarter, there isn't going to be some carry over to next year or two.

David Farr

Yes, definitely, definitely, I mean typically this business does not just go one or two quarters and stop, typically it cycles pretty well, so I think we’re due, they’ve had I think about 2.5-3 years of flat growth in how they are doing. Inventory is pretty tight out there but it's a very cyclical business, our customer base waits for the very last second to start building.

Mark Douglas - Longbow Research

And then final question on capacity, your ex dividends are going to pay in '14 to share repurchases, what do you your expect the capacity over the next 12-18 months being your free cash flow and levering up.

David Farr

What do you mean by capacity, I mean how much free cash am I getting during next year, what do you mean by the capacity?

Mark Douglas - Longbow Research

No, how much could you -- have available with leverage free cash flow to put towards M&A.

David Farr

Several billion dollars, if you look at our year-end financial statement, our cash generation, you're looking at 3-4 billion, $5 billion we could do.

Patrick Fitzgerald

Easily, we've got strong own debt capacity more than we're going to need.

David Farr

Yes, more than we need at this point in time. Exactly, but it's -- but we’ve got the capability out there and as we look at the interest rates being as low as they are, we’ll take a hard look at the second half of next year, do we want to do anything more relative to our lateral -- the debt lateral which we've kept pretty good shape as these low interest rates have been happening for a while now.

Mark Douglas - Longbow Research

And your comments on M&A is basically, you don’t really see enough to spend all of that at that point.

David Farr

No, I don't.

Operator

Thank you, and at this time I'm not showing any further questions, I would now like to turn it back to management for any closing remarks, please go ahead.

David Farr

Again, I want to thank everybody for joining us today and I hope all the people in China are safe and don't get too much smog in their lung and I do want to thank again all the operating people both at the corporate level and the divisional level for the excellent performance they did in the second half this year as they brought home a very good fiscal 2013 and I feel very good about returning to a very decent growth and a very good earnings growth as we look into 2014, thank you, bye.

Operator

Thank you ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation, you may now disconnect.

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