Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Emerson Electric Co. (NYSE:EMR)

Q3 2014 Results Earnings Conference Call

August 06, 2014 02:00 PM ET

Executives

Patrick Fitzgerald - Director of Investor Relations

David Farr - Chairman and CEO

Frank Dellaquila - EVP and Chief Financial Officer

Analysts

Steven Winoker - Sanford Bernstein

Julian Mitchell - Credit Suisse

Nigel Coe - Morgan Stanley

Jeff Sprague - Vertical Research

Christopher Glynn - Oppenheimer

Rich Kwas - Wells Fargo Securities

Steve Tusa - JPMorgan

John Inch - Deutsche Bank

Grace Lee - CLSA

Mark Douglas - Longbow Research

Jonathan Wright - Nomura

Andrew Obin - Bank of America Merrill Lynch

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to the 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 questions. (Operator Instructions). This conference is being recorded today, August 5, 2014.

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 at Emerson's most recent Annual Report on Form 10-K as filed with the SEC.

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

Patrick Fitzgerald

Thank you, Vickie. I am joined today by David Farr, Chairman and Chief Executive Officer of Emerson and Frank Dellaquila, Executive Vice President and Chief Financial Officer. I will summarize Emerson's third quarter 2014 results. A conference call slide presentation will accompany [Technical Difficulty] that 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 will start with the highlights of the quarter as shown on page two of the conference call slide presentation. Net sales decreased 1% to $6.3 billion, with underlying sales up 3%. Global economic conditions were mix as areas of softness continued, matured markets improved up 3% led by the U.S. and Europe, and contract and emerging markets slowed 2% growth reflecting political instability and economic uncertainty in certain regions.

Backlog is at a record level up more than 20% year-to-date driven by underlying orders growth of 5%. Margin expansion was strong as portfolio changes and operational efficiencies more than offset growth investment. Earnings per share of $1.03 increased 6%, cash generations remained strong exceeding our expectation.

Moving to the next slide P&L summary. As I mentioned underlying sales grew 3% with orders and divestitures deducting 5% and acquisitions adding 1% or net sales down 1%. Gross profit increased 3% with a 130 basis points of margin improvement EBIT excluding charges in the prior year grew 5% up by lower restructuring with margin expansion of 90 basis points.

Operationally the tax rate was higher compared to the year impacting earnings per share by $0.03. repurchase of 2.8 million shares in the quarter contributed the EPS of $1.03 up 6% excluding charges in the prior year.

Next slide sales by geography. Underlying sales grew in the U.S. by 5%, Europe by 4%, Asia by 3% including China up 8% and Latin America by 1%, Canada and Middle East and Africa declined by 3% and 9% respectively, such that total underlying sales were up 3%.

Strength continued in China and mature markets improved, while emerging markets were softer, especially in Brazil and the Middle East.

Next slide, segment earnings and cash flow. Segment margin expanded 50 basis points with improvement in Industrial Automation, Network Power, and Commercial and Residential Solutions. Pretax earnings were substantially higher due to lower corporate expense and charges in the Artesyn business last year. Cash generation remained solid up 4% year-to-date, overcoming the Artesyn divestiture impact. Trade working capital performance remained steady for the most part at about 10 basis points.

Moving to slide six, Process Management. Process Management underlying sales increased 2% with North America up 7%, Asia down 2% including China up 7%, Europe increased 5%, Latin America was up 5%, and Middle East and Africa down 11%. Acquisitions added 4% for net sales growth of 6%.

Global energy and chemical industries continued to drive growth, but project execution remains slow, as customers continue to proceed cautiously. North America was strong, as U.S. unconventional oil and gas offset softness in Canada related to project timing.

Asia decreased reflecting market softness and difficult comparisons in Australia that offset continued strength in China. Europe growth was led by emerging markets and Mexico drove Latin American growth. Political instability remained disrupted in the Middle East. Margins remain solid about 20%. Continued momentum in North America, anticipated recovery in Asia and record backlogs put outlook for solid near-term growth.

Next slide, Industrial Automation. Industrial Automation underlying sales were flat with North America unchanged, Asia up 3%, Europe down 5%, Latin America up 6%, and Middle East and Africa up 4%. Demand for industrial goods continued to recover slowly with mixed trends across markets and geographies. North America was stable in total and varied by business with growth in the U.S. offsetting weakness in Canada. Europe slowed as economic momentum stalled while strength continued in China.

Fluid automation, electrical distribution and materials joining led the growth offset by declines in power generating alternators and motors and drives. Auto recovery is expected to continue but improvement will be slow due uneven economic trends and demand, especially in Europe and the Middle East.

Next slide, Network Power. Network Power underlying sales increased 2%, with North America up 2%, Asia up 6%, Europe up 10%, Latin America down 22%, and Middle East and Africa down 16%. Artesyn divestiture deducted 20% for a net sales decrease of 18%. Growth was strong in the telecommunications infrastructure business, led by double-digit gains in Asia and North America. Data center markets were stable globally but mixed across geographies. The robust growth in Europe benefited from a large project in Sweden and modest market improvement. Strength in Asia was led by China and India. North America remained slow and Latin America was weak impacted by the exit of non-strategic businesses in that region. The margin from the reflected portfolio changes and continued strategic investments in Network Power. Backlog strength and improving market conditions support the outlook for modest growth and improving profitability into next year.

Moving to slide, Climate Technologies. Climate Technologies net and underlying sales grew 6% with North America up 4%, Asia and Europe both up 9%, Latin America up 16% and Middle East and Africa up 2%. Growth is led by double-digit increase in the global refrigeration business with China and Europe particularly robust. The U.S. air conditioning business grew moderately, with double-digit growth in service, mid-single-digit growth in residential and single-digit growth in commercial. International air condition demand was mixed with stronger growth in Europe and flat market conditions in Asia. Favorable market conditions are expected to continue globally led by improvements in the U.S. air conditioning business.

Next slide Commercial & Residential Solutions. Commercial & Residential Solutions net and underlying sales increased 4% with North America and international sales both increasing 4%. Market conditions improved sequentially benefiting from recovery from harsh winter weather North America the previous quarter. With the strong growth and the professional tools in residential storage businesses with modest growth and wet/dry vacuums and food waste disposers, segment margin was strong expanding 170 basis points. Recovery momentum is expected to continue in the near-term benefiting from improvement in U.S. residential and commercial construction markets.

Moving to slide 11, 2014 outlook. Despite areas of ongoing uncertainty global economic momentum continues to improve gradually in overall mixed environment. Mature market momentum is encouraging and should continue to improve. Geopolitical tension and economic challenges in some markets continue to work against [Technical Difficulty] and is not expected to improve in the near-term. Orders growth is expected to accelerate increasing to between 5% and 7% in the fourth quarter. On a preliminarily basis July trailing three month orders are approaching 7% growth with the standalone month of double digit.

With the slower than expected growth year-to-date, financial performance is trending to the low end of the previously communicated guidance ranges of underlying sales growth 3% to 5%, reported sales change minus 1% to 1% reflecting divestitures completed acquisitions and currency translation. Reported earnings per share of $3.68 to $3.80 and operating cash flow 3.5 billion due to an increase from prior expectations.

With that overview of results I will turn it over to David Farr.

David Farr

Thank you very much, Pat. I also want to welcome Frank Dellaquila who is joining us in the conference room. First I would like to thank all the investors for joining us today on this call, we appreciate it. And next I would like to also thank the global operating leaders for delivering a very strong profitable and cash flow quarter, despite an actual weaker sales with the underlying sales of only around 3%, even with a very unstable global geopolitical environment.

Operations along the corporate organization continue to execute in a challenging environment to deliver top-line growth, good earnings, margins, very strong cash flow and very good return. As Pat mentioned, we had our first cut at July and good orders for the month of July, now three months average looks like around 7%. As we said in the press release we think coming in the 5% to 7% the key for us now is to execute and increase our sales momentum, reduce our record levels of backlog, continue and convert sales orders or the orders to come in relative to sales in the fourth quarter, key focus backlog conversion of current orders.

As we look at the world today, lot of uncertainty, U.S. economy continues to improve slightly for us, Mexico continues to good for us, Western Europe, Southeast Asia, China running at very strong levels for us, hopefully that will continue the next couple of year. India, Japan all trending very nicely and with good solid orders and good solid sales growth at the same time.

Clearly the other markets around the world with the geopolitical environment are very stressed and also are very concerning to me, given what we're seeing today and have been for the last several months and then certainly that would create in any business environments for our customer base including myself.

Profitability remains at record levels for the company. Our cash flow was very strong. We are very much focused as we view the report today on investing in innovation, investing in the programs, the solutions organization, the service organization that will drive longer term premium growth and premium valuations and cash flow for this company.

Clearly, the underlying growth rate is not what we expected in the first nine months of this year. Orders remained at very good levels, but somewhat choppy relative to our customer base, but still at good level. The pace of growth is not above what I would call the acceleration rate around 4%, but we are slightly better this quarter versus last quarter, but not as strong as we thought when we entered the quarter.

Growth is the challenge, quality growth is very important. The pace is improving and we're clearly looking to try and accelerate this in the fourth quarter. But from standpoint of true operations and when I look at from the conversion of our cash flow again looking at conversion of our cash flow at over a 100% again this year. A 20% plus return on total capital after-tax based on what we see right now. Our cash flow giving back to our shareholders at over 60% plus again this year between share repurchase and dividend. And a deep level of orders but the key issue for us is converting, getting orders out and to bring all the sales and profit and cash.

So as I look at the quarter from my perspective the quarter clearly did not meet our expectation to sales growth, profitability and cash flow are actually better, on a margin return and cash conversion standpoint, growth is the key issue. However, there is slight improvement momentum and the key issue for us as we go into the fourth quarter and this year is to make that happen and convert.

So where we sit today, we’ve got to convert, we’ve got to get the orders, we’ve got to reduce the backlog and then deliver profitability which I believe we’re set up to do for the remainder part of this year. But again I remind everybody around the world right now the geopolitical situations are probably some of the worst I’ve ever seen and relative to what we pay to the global company for every good market out there having the market that concerns me and that’s something we have to deal with as a company and something I could be able to see as a CEO and we will see how to deal and we’re dealing with that. But it is a concern.

So, I’ll do that open the floor for the people ask questions, but again I want to thank the corporate executive that did a great job this quarter as we brought the quarter end and also thanks all the operating executives out there delivering a very strong profit and return quarter for our shareholders.

So with that, I'll turn it up. Frank, let’s will take some questions

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question today will come from (inaudible) with Cowen & Company.

Unidentified Analyst

Yes, thank you. I was hoping you could talk a little bit about what you're doing at network power to kind of improve the margins now with the new portfolio. And is it realistic to assume kind of double-digit margins in Q4 and throughout fiscal '15 based on what you're doing? And I have a follow-up?

David Farr

Yes. I think the keys or us is the order paid continues to be good for, the key issue for us at this point in time is a new products coming out, is this function of converting that and getting across the line. I still believe that we'll see double-digit margins in the fourth quarter. And from my perspective, we're seeing the growth pickup, we're starting to see a better mix of the business, we're starting to see what I call the more transaction business start to improve and we've had some very good large projects around the world which are obviously little bit lower margin for us, but the growth rate starting to build. So I feel from a standpoint of the product, our solutions organization and the management focus on this the underlying value of the business is continuing to improve and we'll continue move towards to learn higher margins and reaching our double-digit margin as we go into 2015.

Unidentified Analyst

Okay. Just a quick follow-up, you up the share buyback a bit. If you could jus talk generally about your cash deployment kind of priority as we look for the next fiscal, you are a little higher on share buyback than you were (inaudible) is that sort of what we should expect going forward? Thanks.

David Farr

First of all, I don’t think there is going to be much change relative to the mix relative to the ratios I’ve given back to you. Our actual acquisitions were actually higher than our share repurchase. We did about $1.4 billion acquisitions and we are going to be doing about $1 billion of share repurchase. We paid back $1.2 billion to our shareholders in dividends; we just announced our 48th year of increased dividend to our shareholders, 58 I am sorry, didn’t count anymore. And then I think internally we have raised our capital. Our capital spending will be over $800 million this year, up strongly from last year’s around $700 million as we continue invest in innovation and new products and our global footprint.

As I look at next year assuming the same type of improvement in cash flow generation, you are going to see us buying back stock level around the same, maybe little bit higher if we complete the divestiture of PTS, as we committed, if we do sell PTS, we will take that cash flow season and return that to shareholder and share repurchase which would cause us to actually deal a lot more in share repurchase. So right now, I would say the acquisitions as we are planning, it’s going to be somewhere between $1 billion to $1.5 billion. The dividend, as I anticipate, I see no reason given our earnings and cash flow capabilities will increase our dividend next year, we will make that decision in November and our capital investment internally is going to be somewhere in the $800 million to $850 million range. So that’s where we look out right now, not much a big change from this year.

Unidentified Analyst

Thanks a lot.

David Farr

You’re welcome.

Operator

Our next question will come from Steven Winoker with Sanford Bernstein.

Steven Winoker - Sanford Bernstein

Hey, good morning.

David Farr

Hey, Steve.

Steven Winoker - Sanford Bernstein

Or good afternoon I should say, good morning in some place right, a couple of things. Can you maybe talk a little bit about that backlog conversion that you referenced so many times? What are the hurdles to actually getting that done; is it operational or is it customer released some orders? How much of this is dependent on Emerson and how much is dependent upon your customers at this point?

David Farr

From our perspective right now, we have the capacity and ability to produce, that's not an issue. There is no bottleneck, we have made the investments on a global basis to produce, it's very much industrial, process and Network Power focus.

It's a function of to clear the customer, continue on spend the money and complete the projects or investments we're making. So right now, we are not the gating item relative to this, it's a function of our global customer base and it's very broad, it's not one or two customers.

Our backlog, typically we would not have as big of a difference between our order pace, which is running over 5% year-to-date and our sales which is running less than 3% year-to-date. So, this is little bit unusual from my perspective, the order pace again this month was very strong and it's a function of okay, now let's get the orders converted and shipped to our customer base. And we're not a gating out of that area

Steven Winoker - Sanford Bernstein

But Dave, can you dive into that even a little bit, is it the customer, what's the general sentiment, is that just they are moving slowly with projects and then putting the brakes on or because of the global macro situation? What's your sense for why that conversion is slower than historically?

David Farr

The conversion is the uncertainty around the world, via from a geopolitical situation and the fact that the underlying growth of the world are substantially below what people thought they were going to be just six months ago, Steve. I mean just look on what they watch 9on CBNC right now; we have a map of Africa with people sick.

Steven Winoker - Sanford Bernstein

Right.

David Farr

Okay. So the world is talking about negative things.

Steven Winoker - Sanford Bernstein

Okay. And that I guess as a follow up, you are spending past, not so much on the CapEx side, but on the expense side, you've been investing for growth pretty aggressively and have been very vocal about it coming into this year. Any early read on how that pace progresses as you transition to 2015?

David Farr

I think it’s going to be a function of what we see happening over the next two to three months on the order pattern. Do we see the underlying economic trends continue to improve which they are improving but very gradually. And we’ll look and see where we stand relative to where we’ve got down this year and we’ll go through that internally. But a lot of these investment programs are not one year type of programs, these are investments we’re making for the longer-term. So we’re going to continue to raise our profitability next year and we’ll continue to invest and continue to figure to out how to position the company for faster growth in a more challenging environment around the world for the next couple of years.

Steven Winoker - Sanford Bernstein

Okay, great. Thanks Dave. I appreciate, I’ll pass it on.

David Farr

Take care, Steve. Thanks.

Operator

Next we’ll hear from Julian Mitchell with Credit Suisse.

Julian Mitchell - Credit Suisse

Hi, thanks. Just on the margins, even with the sales falling short, it looks like the gross margin you’re kind of on track to hit that 100 bps improvement this year, so the culprit seems to be more around SG&A. Is there anything unusual that in that number this year that should reverse?

David Farr

What we -- as you well know, we’ve raised the levels, we’ve talked about in February for our internal investments relative to certain programs from the new products, the innovation and our investment in the solutions and service organizations. We’ve maintained that even though underlying sales are slightly below what we thought they would be year-to-date that is fundamental we believe in what we’re doing for the long-term. Therefore we’re obviously converting GP and we’re putting money back in the company and not quite giving as much back to shareholders at this point, even though the GP is going up and an EBIT margins are going up, they’re not going up as much as you’d expect that we had higher sales growth. So, the key issue for me is as we get into the next year planning cycle. What we modulate continue investment and then we see continue GP and expansion which I do believe we'll see and the question is do we see continued improvement in the underlying business spending environment which we've been seeing for the last three or four months and now we've just can make sure it is converted as we go into 2015. That's what I look at right now Julian.

Julian Mitchell - Credit Suisse

Thanks. And then I guess if we look at process management. The last few years margins are pretty stable going back to 2011, do you think when you get the mix of backlog and the sort of investment requirements from here the margins are probably like to be flattish sort of to medium them as well?

David Farr

I would expect as to build into a very flattish margin for 2015 for process management. I would expect even all the growth rate will be little bit better next year given the backlog in the pace of business we see out there. I do expect this continue to make some significant investment and some of the capacity that we're putting in place right now for our international business relative to process and also even in the U.S. will be coming online which we'll create obviously somewhat negative margin pressure but I think the growth will offset. So at this point in time, we continue to invest, we're trying to invest the technology and capacity that’s necessary to grow the business nicely and also make sure we invest in the future and not just melt the profitably others business, which is you all know very strong.

Julian Mitchell - Credit Suisse

Great. Thank you.

David Farr

Take care. Thank you.

Operator

Next we'll here from Nigel Coe with Morgan Stanley.

Nigel Coe - Morgan Stanley

Thanks. Good afternoon, Dave.

David Farr

Good afternoon, Nigel.

Nigel Coe - Morgan Stanley

Just wanted to turn your attention back to network power. And I'm just wondering that if you know the pressure you seen on margins. Is price a factor or is the sharp decline you’ve seen in Lat-Am and Middle East is that the bigger factor for those margins?

David Farr

The lack of more margin improvement in the third quarter would be two reasons, one the direct drop off in Middle East and secondly would be the fact that there was more larger projects big project wins in there with the new business versus what I would call the day to day transactional the core business which had slowed down in parts of North America those were the two things that cause that margin pressure in that third quarter not see as much expansion I don’t see the Middle East turning around and the key thing right now will be as we go forward here is the continued mix we have seen in some of the core business you are seeing a little bit of that already improvement in North America but that’s clearly what has been the key to us relative making improved margins as we go in the fourth quarter and we go into 2015.

Nigel Coe - Morgan Stanley

Okay. No that’s great and appreciate the color on July orders Dave, the acceleration to I think you said double digits within the month of the July how broad base is that acceleration was it primarily within purchase management or was it a bit broader than that?

David Farr

Well it’s pretty across the board everyone has at least a five in front of their name.

Nigel Coe - Morgan Stanley

Okay, great. And then on the backlog finally obviously a lot of it depends on when customers actually wanted to have their orders shipped but any visibility when you expect to see purchase management to accelerate in terms of sales?

David Farr

I would expect the process to have a little bit better quarter this quarter in sales we there is couple of things go on in our business we are fiscal year ending September, there is obviously a lot of things happen relative people driving to make targets and bonuses and they actually have the orders so I would expect to see a little bit improvement this year the fourth quarter and process I expect the first half to be better growth rate than we saw last year. So, I think that's what we see at this point of time, it's really a function of what happened in the North American and European business pace as we go forward in the next couple of months in orders right. I think the next three quarters should be better growth for the process business.

Nigel Coe - Morgan Stanley

Okay. Thanks a lot Dave.

David Farr

You welcome. Take care.

Operator

Next we'll hear from Jeff Sprague with Vertical Research.

Jeff Sprague - Vertical Research

Thank you, good afternoon everyone.

David Farr

Good afternoon Jeff.

Jeff Sprague - Vertical Research

Hello. Could we come back to the investor [Technical Difficulty] No, I'm in the office. Can you hear me okay?

David Farr

Yes, we can hear you. Yes, it’s a fair line.

Jeff Sprague - Vertical Research

I just wanted to come back to the investment spending date on are you guys tracking to that 110 incremental you talked about the February Analyst Day. And when you say we will look at modulating as we kind of plan in the year ahead. Does that mean you are planning a lower rate of growth or an actual decline in that number. How do we think about that going forward?

David Farr

I think, we are tracking towards the 110. We've held very, very tightly. We might move pieces around, but we've held very tightly to the incremental programs. What I'm looking at right now, what I try to express that as I look at the underlying global industrial environment, it continues to improve and we continue to see the underlying growth rate slowly continue to move backed up, which is then we've been convert into sale.

And I see a momentum that figure, they get this, try to get this above that 4% underlying growth rate. And we may actually increase this slightly, but I'm trying to keep it in line to where we can grow the business and have some margin from the next year and 2015.

So, if I'm going to look at, what's working, what's not working. The other key issue for me right now is Jeff, in certain markets, the emerging markets around the world as I discussed in my board today. The markets we've made some investments for last several years, even going way back 10 years ago we’ve made even more in the last couple of years. If I think those markets are going to really struggle for the next 12 to 18 months I will pull back the range. And that would obviously that’s the function of my concerns or as concerns about certain emerging markets, let’s put that way, not the total emerging market, pieces of certain emerging markets.

Jeff Sprague - Vertical Research

And conversely then Dave what you just described maybe you could you say is a potential shift from offense to defense where we’re going to expect the structure to go up but came in a little later than I thought here in Q3. What do you think about the structure going forward?

David Farr

I don’t think I am moving to go to defense quite yet. I am still offense Jeff. I think that from my perspective I am just talking about I may go back and not we’ve already made a lot of investments for instance India the class example. We’ve made significant investments in India last four years. India had a very difficult 18 months as, order patterns up nicely just starting to turn around and therefore do I need to really put to a lot more into India, we’ll put some but it’s not going to be as aggressive as we have been doing.

I am not definitely not (inaudible) defensive mode right now and I do not anticipate restructuring to be higher next year than this year. I just don’t feel we’ve gone through massive restructuring, where we’ve been investing and I think the world from a stability standpoint from what we need to get done what we’ve got done at a couple of places but I would guess right now my restructuring will be less in 2015 than it is in 2014.

Jeff Sprague - Vertical Research

And maybe just finally Dave I don’t know if you want to address or maybe Frank would have a quick comment, but any early read on how to think about pension into next year for Emerson on the P&L?

David Farr

Pension. Pension.

Frank Dellaquila

Pension, well when we look at it right now the discount rate is down about 50 basis points from where we ended last year so if that holds we’re going to see pension is a little bit of a headwind next year.

Jeff Sprague - Vertical Research

Okay. Thank you.

David Farr

You're welcome.

Operator

Moving on we'll here from Christopher Glynn with Oppenheimer.

Christopher Glynn - Oppenheimer

Thank you, good afternoon. Dave on the backlog, excuse me up 20% year-to-date, I think you typically have some pretty good build to this point in the year. What sort of the normal range of builds from the beginning of the year into entering the fourth quarter?

David Farr

I would say the 20% is abnormal. I would say typically and we had discussion with the board today, the directors are asking a very same question. I mean you all know I am guiding this thing and what's going on the world right now is not that easy. But typically if we're growing our orders 5%, 5.5%, 6%, we typically would see only 1.5 of that basically going into backlog. We would see backlog building and we give a very little bit more. So that's the order of magnitude normal, right now it's a little bit higher than that.

We've had some bigger larger projects which are, we have the only multiple years, which are build in the process area and we also have customers who have higher growth expectations, we're still down those fact. So there is a little bit of difference going on here, I don't have any sense. The cancellations are not an issue for us this point in time and we've got see indication of that. It is just I think people are being stretching, their investment dollars right now on us and therefore that's what costs in this delta.

So delta is, I would say about a point, the point 150 basis points higher than normal.

Christopher Glynn - Oppenheimer

Okay. And do you have a year-over-year growth number for backlog?

David Farr

I do not on top of my head what we were in end of July last year. You are talking about I mean June-to-June, correct?

Christopher Glynn - Oppenheimer

Yes.

David Farr

I don't know, I don't know that top of my head. I mean frankly look into book right now.

Christopher Glynn - Oppenheimer

Okay. That's good to hear.

David Farr

And I am passing Frank, he is calculating right now. And Frank's going to oh my god pass can give a number out visited by the CFO.

Christopher Glynn - Oppenheimer

Well we got to keep you busy while they are busy.

David Farr

Here we go we got right here.

Frank Dellaquila

It’s just about 11% year-on-year.

Christopher Glynn - Oppenheimer

Okay and then Dave…

David Farr

That’s how we historically reduced it in the fourth quarter.

Christopher Glynn - Oppenheimer

Right. And then if you could even just big sort of handicap the segment versus the multi-year CAGRs you laid out earlier in the year for ‘15?

David Farr

Okay. Want me to say versus our long-term growth rate for the segment. I would say right now the old February he is talking about the February number I gave you for process is what do you remember?

Christopher Glynn - Oppenheimer

5 to 7.

David Farr

I would say the process is going to be in that -- I would the process will be in the next -- probably the next three year I think I had there three years is that what that was what I got there. Right here. We said 5 to 7, I would say the next -- I would say they are going to be in that range right now, they are still in that range. I think climate is going to be in that range, right now commercial residential will be in that range. Now where power I think will the potential being slightly above the range I gave you 3 to 5 and industrial, I mentioned I think will probably in that range at this point in time.

Christopher Glynn - Oppenheimer

Great thanks for that.

David Farr

I think the progress we are going to make at network power on the global reach and the technology of the product is really starting to playout.

Christopher Glynn - Oppenheimer

Thank you.

David Farr

You are welcome, take care.

Operator

(Operator Instructions). Next we will hear from Rich Kwas with Wells Fargo Securities.

Rich Kwas - Wells Fargo Securities

Hi, good afternoon.

David Farr

Good afternoon Rich how you are doing.

Rich Kwas - Wells Fargo Securities

Alright industrial automation here in the next couple of quarters with caps numbers down on a powergen side over the last few months. How do we think about that playing out near term for the business, assume there is some deceleration here expected, but if you could provide some color that would be great?

David Farr

Yes. Caterpillar is not only a customer in the space and our non-Cat business has still been doing pretty good. We've gained some other market space around the world. So that we've seen a better non-Cat environment, Cat is still working through its inventory issues. But the key thing for me right now is continued improvement in our European business space for Industrial Automation. But right now, the Cat is always a concern, but right now I'm more interested in other non-Cat and the alternate space than anything else, which is okay.

Rich Kwas - Wells Fargo Securities

Alright. So the momentum in the non-cat stuff is there to at least be a decent offset to what you are seeing on the cat side. The way we should think about it.

David Farr

Correct.

Rich Kwas - Wells Fargo Securities

Okay.

David Farr

And also the Cat stuff, Cat typically, what they are doing right now may impact us further maybe in three months or four months versus today. Typically they don't react us like, okay they have a bad month this month adjust that quick though, they may make take a couple of months. Because they’re volatile, so they have to be very careful, they don't turn things up or down that rapidly.

Rich Kwas - Wells Fargo Securities

Alright. Okay. And then just on staying on IA, just what do you see in terms of assets for that business? I know that's a focal point for M&A dollars. And what are you seeing in terms of attractiveness of assets and trying to bolster the portfolio there?

David Farr

We continue to look for assets. We honestly have not made or found anything of substance this year in the asset. It's been mostly a process and a little bit Network Power, nothing in the Industrial Automation. And I would say right now we have nothing going on in Industrial Automation, even though that asset space is very interesting to us, in fact it’s a pretty high at this point time. So, we're still looking, we're not in a big hurry here.

Rich Kwas - Wells Fargo Securities

Okay, alright. Thanks.

David Farr

You take care. Have a good one.

Rich Kwas - Wells Fargo Securities

Thanks.

Operator

Next we’ll hear from Steve Tusa with JPMorgan.

Steve Tusa - JPMorgan

Hey, good afternoon.

David Farr

Good afternoon, Mr. Tusa.

Steve Tusa - JPMorgan

So just on Network Power, can you give any [of these] numbers, previously the margin in the third quarter of ‘13 ex embedded was what? And it’s a lumpy business in the second half, so I just want to make sure that I was looking at that the right way.

David Farr

About the same, about the same.

Steve Tusa - JPMorgan

So 8.1?

David Farr

Yes, about the same, around 8%.

Steve Tusa - JPMorgan

Okay. So, for the year in Network Power where do you now think that that margin is going to come in? I think the prior guide was 9.7 to 10.

David Farr

I would say it’s going to low of that, it’s not going to be 10 for the year. And so it’s going to be, the low end around 9, little between 9.2 somewhere around there.

Steve Tusa - JPMorgan

Okay. And so I guess in the context of is something going to a little bit here, again you’re kind of down year-over-year in the margin even though kind of I think the core revenues are flat to up. So, is this -- these big projects, are these kind of like the mix impact from the big projects, is that something that will you going forward or how does that dynamic change to improve profitability there over the next year?

David Farr

I think the key issue for us as we had a slowed down in the core what I call the traditional space in the last three or four months and that business has started to pick back up. The project business, there was a bigger mix this quarter and that happens from time-to-time as this marketplace has changed. We see that happening and as we continue to work on the cost and new product. So, I see this business getting in a solid 9% EBIT margin for the year as we finish this year and then move on up from there as we get 10 plus percent as we go into 2015. It’s that how I see at this point in time. And you're always going to have a big project mix coming out but the key to me is getting that installed base and then getting our service organization and to create value for us the long-term.

Steve Tusa - JPMorgan

Okay. And then just one last question more detailed. You mentioned pension in the last couple of years, there has been ERP investment, incentive comp, there has been a lot of kind of non-fundamental stuff moving around. Anything else now for [Technical Difficulty] do you want to highlight with regards to the non-fundamental type of stuff?

David Farr

No we’ll continue the investments in the ERP as we go in the soft network power and climate. The pension interest rates continue to drop and will have that issue there, but I don't think it’s new big headwind for us next year. And there is not -- I don’t see us having a comp going to drop a little bit next year. So it's nothing big at this point in time, restructuring probably -- the adds are pretty, slightly less than this year. So no, I don't anything big moving next year Steve, plus or minus.

Steve Tusa - JPMorgan

Okay. Thanks a lot.

David Farr

All the best to you, Steve. Thanks.

Operator

Next we'll here from John Inch with Deutsche Bank.

John Inch - Deutsche Bank

Hello everyone.

David Farr

Hi John.

John Inch - Deutsche Bank

Hi, Dave. So, I'm just thinking about next year. So it sounds sort of like we’re building some momentum in some of these businesses, we're going to do maybe 3% organic this year, hopefully a little bit better than that next year. If you put it all together, how are you thinking about the prospects perhaps doing double-digit earnings per share growth in 2015 fiscal?

David Farr

I’d like to really talk about that John. I think that it's a function of -- we've got, I guess it's definitely to really talk about that. Because I got to see how the underlying business spending environment continues improve as we finish this calendar year. I would say that we've been a little bit unusual. We increased our spending this year because we are making some strategic investments. And the collection -- some of our other customers have not so the question is will they start turning it on. I think they are going to have to turn it on because they have been under investment in certain areas. So really a function can we get above. For me I need to get this above 4% underlying sales growth you all know to really start seeing acceleration. And I am not ready to make that call yet. So I mean it’s too early to call John.

John Inch - Deutsche Bank

Yes that’s fair. It sounds like if it’s going to happen though it’s probably will be fair to say it’s more likely to be a backend loaded year, is that the way you are thinking about it or is that also turning itself?

David Farr

Sure. I am hoping that there is good momentum going out of this fiscal year going into the calendar year but it’s too early to tell. It’s really a function, okay as we -- they just put a GDP number out there it’s pretty decent number, now how real is that number and is there a momentum coming around that and can Europe sustain this improvement and does the whole thing in the eastern Europe, Russia situation does that get worse and then also can China -- continues to improve for us, can that maintain. So there is a lot of things going our way but there is also some concerns I have as I said, in other parts of the world. So I think it’s a little bit early to see; there is too many what I would call question marks out there.

John Inch - Deutsche Bank

Yes. No, that’s fair. The down Middle East numbers were processed; is that being driven by presumably to a degree some of the political strive you are seeing in the region but is it also a function of I think if some of the energy companies redirecting perhaps some of their own CapEx dollars back to North America or is there -- is it more of an Emerson specific timing issue or what’s really going on there?

David Farr

Not really a redirection of capital spend from U.S. companies back to this country. the countries are investing and really typically are going to experience that. It’s just a function, our customer in the Middle East basically are redirecting where they are spending their money, how they are spending their money and have really slowed down their spending on oil and gas and chemical and gas for Middle East. And I think as long as the turmoil continues in the Middle East, I think that will be continue to be a concern for our customer base and obviously for me.

John Inch - Deutsche Bank

Okay. So it's not a question of redirection. You are saying your customers you think are slowing in the Middle East simply because of the political turmoil that's kind of happening. It's like an uncertainty climate or whatever, is that what you think?

David Farr

That's what we're seeing, that’s exactly we’re seeing. They are spending money not with us, but with other people.

John Inch - Deutsche Bank

Understood. Okay and then let me just…

David Farr

Other industries.

John Inch - Deutsche Bank

Other industries. And then just lastly right, so we've had pretty soft industrial markets, a little while, the pull back in industrial company share pricing. I mean are you considering possibly some larger portfolio actions on the acquisition divestiture side or possibly even raising more debt perhaps, you seem to have a lot of debt capacity to repurchase your shares?

David Farr

Not at this very point of time. No, let's see other things unfold.

John Inch - Deutsche Bank

That's fair. Thank you.

David Farr

Okay. Thank you John. All the best to you.

John Inch - Deutsche Bank

You're welcome.

Operator

Next, we'll hear from Jeremie Capron with CLSA.

Grace Lee - CLSA

High, thanks for taking our questions. This is Grace Lee sitting in for Jeremie Capron. We have a question on China. Hello can you hear me fine?

David Farr

I can hear you fine.

Grace Lee - CLSA

Okay, so, our question is on China. Just wondering the prospect of growth in China noted that Emerson has an good growth from China for the past couple of quarters. Do you expect this growth could continue toward the fourth quarter and fiscal 15? A need of weakening of construction market as well as tight credit environment in China?

David Farr

What we've seen so far Grace is as follows. We've had four very strong quarters and back, if you take the last four, we have the average over 8% over the last 12 months on underlying sales growth in China. Our orders have been in that range too. We had a very strong fourth quarter. So, I’ll expect our fourth fiscal -- we have strong fourth for last year I’d expect our fourth fiscal quarter this quarter to be positive but not as good as we’ve seen in the last two or three quarters. It’s just a comparison to next year and so I just think we’re going to have a good number for us China for the fourth quarter.

As I look at 2015, our investment profile right now is still decent. I expect it to see between 5% and 8% growth coming out of China next year based on what I am seeing from our new products, based on our customer base and based on the industries we serve. So as of right now as I look at the current expectation from my (inaudible) and where we are right now China looks like it’s going to be growing forward and it might be growing slightly less or above in line what we saw this year.

Grace Lee - CLSA

Great. Thank you.

David Farr

You’re welcome.

Operator

Moving on we’ll hear from Mark Douglas with Longbow Research.

Mark Douglas - Longbow Research

Good afternoon everyone.

David Farr

Good afternoon Mark. Where are you sitting today?

Mark Douglas - Longbow Research

Oh, in Cleveland.

David Farr

Are the Indians going to make the playoffs this year?

Mark Douglas - Longbow Research

There is a good chance but unfortunately I am a Cub’s fan.

David Farr

How can you be a Cubs fan in Cleveland?

Mark Douglas - Longbow Research

I grew up in Chicago.

David Farr

Okay, okay. I am Cardinals fan and Frank’s a Yankee fan, and Pat we can’t figure out exactly what he is, but he is a football fan.

Frank Dellaquila

He is a football fan.

David Farr

He is a football fan, but Yankees and a Cardinal fan here. I think did we win last World Series against Yankees or did you guys us Frank?

Frank Dellaquila

That’s been 50 years ago.

David Farr

50 years, you and I are both 50 plus years, so we both were alive back then. I heard a game; I watched it. Go ahead. Enough about baseball Mark, go ahead.

Mark Douglas - Longbow Research

All right, yes. On Europe and industrial automation, I'm assuming that would've been a little better just in some of the macro date out of Europe substantially Northern seems to be a little bit better. Was it a broad pullback for you in industrial automation there or sort of regions or products that hampered the growth?

David Farr

Three things. We are very strong in industrial automation in France that economy still negative. Next key market for us is Italy, I can't say how much how fair either. And the third key issue is our often our alternator business with Caterpillar, it’s still pretty weak in Europe. Those three things where the three issues that hurt us in industrial automation. If we take those three out, we did very well, but unfortunately the three big things.

Mark Douglas - Longbow Research

Yes related to the mix and where you have to be exposed?

David Farr

Got it. We need France to comeback. We are very strong in France.

Mark Douglas - Longbow Research

And the Tour didn’t help you out there did it?

David Farr

No, it did not. Nor did the World Cup.

Mark Douglas - Longbow Research

Our network power. How is Trellis doing in network power? Are you getting the results you’d expected with the improvements there and is that point to help margins, we still margin dilutive right now and what are you seeing right now (inaudible) expected?

David Farr

I would say the trend line is still positive, it's not as fast. Because of the North America projects have been weaker for us the last six months but it’s still positive, still doing better than last year not doing as well as we wanted to do but still doing better than last year. It's got good momentum, the profitability is good, it's not profitability from that perspective. The key issue for us is continue to try to get the North America spend and particularly financial industry which is often very good to come back up. So I would say we are still pleased with the progress we are making in Trellis. It’s not as far and long as we want it to be but we are still pleased with it.

Mark Douglas - Longbow Research

Okay, thank you.

David Farr

Take care have a good one, and good luck with the Cubs. It looks like they are building a pretty good farm system right now.

Mark Douglas - Longbow Research

Yes let’s hope.

David Farr

Yes we always like playing the Cubbies.

Operator

Next we’ll hear from Jonathan Wright with Nomura.

Jonathan Wright - Nomura

Hey guys a question about industrial automation for a second so I think we covered up the geographies just in February you highlighted a lot of the new product launches you had rolling down over the course of this year I see motors and drives still struggling, I would’ve thought you maybe a bit of impetus from that bit of a business can you just talk about the how those products have been received I mean just tell me what you expect to see sort of going forward?

David Farr

The motors and drives part of our are doing very well on the order side. We have a lot of lock up and orders have not converted the orders in industrial automation in particular and what I call in the control technique side have been very good we just have not converted on yet the customer base is slowly converting this thing just in placing in their project they slow them down so the conversion and acceptance of their product and order run rate is very, very it’s just right we got to get our end customers to convert.

Jonathan Wright - Nomura

Okay and may just sticking with that I think we have talked little bit about why people aren’t converting and you have mentioned sort of a political risk and the general sort of climate of nervousness around economic growth why do you see in the order growth is remaining so robust given those concerns kind of understand the weakness on the conversion side but the order growth seems quite strong considering that?

David Farr

I think a lot of it is relative to our investments and programs we have going on as we invest in sales organization and as we invest in our service and solution organization. So we are actually expanding what I would say our see and get, got and find it and get it and convert it and just the customer base is taking a little longer to convert, because I think they are little uncertain, but what I like right now is the momentum relative to the new products, the momentum on the sale side is very positive. And now we're just got to make sure the customer base continues to take the product. And I think that side 10 points very good and I can understand why the customers are getting nervous about falling things down. But I like the fact that, I would say we're increasing our penetration and we are increasing our position on a global basis, based on my order pace, that's a good sign, very good sign.

Jonathan Wright - Nomura

Okay, great. Thanks guys.

David Farr

Take care Jonathan. All the best to you.

Operator

Moving on, we'll hear from Andrew Obin with Bank of America Merrill Lynch.

Andrew Obin - Bank of America Merrill Lynch

Yes. Good afternoon.

David Farr

Good afternoon, Andrew.

Andrew Obin - Bank of America Merrill Lynch

Just a question on your CapEx spending. Where are you spending your incremental CapEx, where are you adding capacity by geography or product wise? And what are the areas that you are downsizing as long as you want that?

David Farr

Okay. Relative to capacity right now, I don't think I'm taking much capacity offline. From a capacity standpoint, we’re adding capacity quite a bit in Process Management and we're adding capacity in Process Management both in North U.S., U.S., Mexico, Eastern Europe and China. And then not much expansion on Industrial Automation and then in Network Power, we've been repositioning some of our North Asia assets to South Asia and then also in the Eastern Europe and probably next couple of months in Mexico.

Andrew Obin - Bank of America Merrill Lynch

Are you guys expecting to see any impact from Russia sanctions in the energy sector?

David Farr

If they continue to ratchet them up eventually that eventually hurt our Process Management business. And I mean as we've said in the past, we do about $0.5 billion in Russia and very much oil and gas centric, if the sanctions continue to go up and actually we’re going to see, we’ve been seeing our business weaker as it is anyway, so we’re already starting to have the impact on in this quarter last quarter it was negative on us and I expect that to continue.

Andrew Obin - Bank of America Merrill Lynch

And just a follow-up question on climate Europe actually seemed to be pretty good, how does it square with your comments about Europe slowing?

David Farr

Well Europe, essentially Europe I think..

Andrew Obin - Bank of America Merrill Lynch

Got it.

David Farr

Now climate strength is primarily North Europe and so from the perspective of the customer base for climate, the North Europe and some of the further parts East it’s been pretty good for them and they’re now strong in Italy and strong in France. So the marketplace for those guys has been pretty good and the technology investments we’re making for efficiency and some of the changes we’re making in refrigerants have been positive for us. So different dynamics, unfortunately not all the markets were acting the same way within our company right now.

Andrew Obin - Bank of America Merrill Lynch

Terrific. Thank you very much.

David Farr

You’re welcome Andrew. Take care now.

Operator

We’ll take a follow-up from Steve Tusa with JPMorgan.

Steve Tusa - JPMorgan

Hey sorry, just a…

David Farr

You snuck in the back door, Tusa. What are you doing, are you trying to steal apples or something?

Steve Tusa - JPMorgan

Yes, that’s my style. The Climate Tech margins are pretty good obviously 21% and you’re going to end up being kind of flattish this year annually, is that a process similar the process where are you investing a lot of money there and so should we think about kind of 19%, 18.5% to 19% is a good kind of longer-term run rate?

David Farr

I think for the next couple of years, I think that margins can stay about where it is right now, it could start inching up. We have a couple of major investments going on right now and variable speed, we have a couple of major investments going on the, for there is a new refrigerant and we have a major investments in some very important new product launches in the commercial states spoken China and North America that have increased our investment profile. So I think that will continue for this year or next year and potentially product fixed (inaudible). I would expect the business continues to turn well, we should be improve our profit because our mix is getting stronger, stronger towards commercial, the industrial and service space and that start to pay off as you can see some profitability.

Steve Tusa - JPMorgan

Okay. So modest improvement with investment offsetting better mix.

David Farr

You got it.

Steve Tusa - JPMorgan

Okay. And then one last question restructuring for this year. I don't think you mentioned a number it seems like it's going to be coming in lower than the 75 million…

David Farr

Up a little from 65, 70.

Frank Dellaquila

65, 70.

Steve Tusa - JPMorgan

Okay. 65,70. Okay, great. Thanks a lot.

David Farr

I would, if I would looking to next year Steve. I would think things you came in back door, I'd say 60 to 70.

Steve Tusa - JPMorgan

Okay, great. Thanks a lot.

David Farr

All of that and I want to thank again everybody the phone today really appreciate. Also want to thank, again operating people the deliver to quarter. Now we have to deliver for the final quarter for the year and convert that backlog and continue to grow the business. So with that, I thank everybody I wish well all the best and see you soon. Bye.

Operator

And that does concludes today's teleconference. Thank you all for joining.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Emerson Electric's (EMR) CEO David Farr on Q3 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts