Emerson Electric Co. - Shareholder/Analyst Call

| About: Emerson Electric (EMR)

Emerson Electric Co. (NYSE:EMR)

February 14, 2012 8:30 am ET


David N. Farr - Chairman of the Board, Chief Executive Officer and Chairman of Executive Committee

Edward L. Monser - President and Chief Operating Officer

Charles A. Peters - Senior Executive Vice President and Director

David N. Farr

Okay. It's live. How much time do we have? We can go. So, I want to welcome everybody. First of all, I want to wish everyone a happy Valentine's Day. For the guys, I hope you got something for your wives or your girlfriends. For the girls, I hope you got something for your wives or your boyfriends. I mean, husbands or boyfriends, sorry. Whatever.

New Jersey is working on these things, so -- I want to, again, I just -- looking forward to. As you can see, we had to expand this year. Well, I think we have up to 200 people wanting in and we start out at 140.

I do have some new members. First of all, before I bring out my new members to go with the typical [indiscernible], but before we do that, I want to invite our newest director, Josh Bolten, to stand up. Josh has joined us in early February. Josh is joining us now, he’s going to be a great director. He wants to hear a little bit about Emerson from investment perspective, so I invited him to come down here or up here -- he lives in Washington -- to join the session today and listen to what's going on.

From the other perspective, I have my typical rally monkey. I have my rally monkey, and if anyone gives me a hard time, you get hit with him. I didn't bring the bat, but my rally monkey is here. He did pretty well for the angels that one year.

But the newest member is a ferret. Ferret was bought for my 30th anniversary at Emerson this year, a gift from my wife. I won't explain why, but it was the rally ferret -- it went to every game I went to in the Cardinals playoffs, and including the big game. He was there watching it with me, and he's been pretty good luck. And he also eats squirrel. When we had the rally squirrel, he eats squirrel. And so I figure I'd bring this ferret along to watch you guys. He does do a good job of ferreting out bad investors and sell-side analysts who give me a hard time. So let's get started here.

What we have here this morning are 3 presentations: My overview, and then some tremendous insight relative to our global manufacturing strategies by Ed Monser. And then also Charlie is going to go inside we call Competing: Emerson Style, sort of like the love thing. But you probably don't -- you might not be old enough to remember that one. So yes, we're going to compete Emerson style. And Charlie is going to give you insights of what we're doing relative to our mid-tier strategies and give you some insights of how we're competing.

So let's get started. The first thing I just want to point out is quickly, we had a very good year 2011. Maybe you might have forgotten that. We did have record levels of profitability, sales, earnings. As you know, we have 4 boxes we look at relative to value creation: Underlying sales, operating profit margins, free cash flow and return on total capital.

In 2011, we hit all of them, from the standpoint of underlying sales were up 11%. We set record levels, operating profit at 17.5%, free cash flow is around 11% of sales and return on total capital is a tad under 20%.

We did a lot of restructuring last year. We're going to do a lot more this year, as we get into, I think, a very challenging global environment. Some markets up, some markets down. We'll talk about that.

As you know, we finished the year very strongly with a good fourth quarter. We started seeing some weakness. Our underlying sales were up only 9% in the fourth quarter, record level of profitability, a very good earnings per share level, and we started to see some initial weakness.

Last week, I showed a chart, these 2 charts here, we saw a dramatic drop-off in our sales. We talked about the Thai floods. We talked Europe in recession. We talked about the telecom, IT, the AT&T situation trying to go after T-Mobile, and then the climate slowdown around the world.

As of right now, what we're seeing from a bounce back, we are not seeing any bounce back from the climate standpoint both in U.S. as the U.S. OEMs are keeping extremely tight; China, very, very tight, down still significantly.

In the telecom space, we have not seen the bounce back yet, but we do expect that spending to unfold as the -- as the North America telco guys start looking to spending money. We also look at some of the spending coming back in Asia as that scene [ph] starts to unfold, in particular in China.

Relative to Thai floods, we're seeing Network Power Systems and process management starting to bounce back. We are seeing the orders coming back in Network Power Systems, and that's a good sign.

European recession, there's no difference than the difference we saw before. Climate, still struggling. Industrial automation sees a little bit of light. Network Power Systems, I would, is going to struggle this year in Europe and process management is seeing some recovery because of the export nature. So overall, we do expect many of these markets to unfold and come back as we progress this year.

Relative to our backlog, we are sitting at record levels as we built the backlog as we couldn't ship, right here is our backlog.

Our underlying only came in at actually plus 6% in January. I said around 7% on the phone call. We've now got the final numbers with eliminations, and it's plus 6% versus minus 4% in December. Right now, I would say, the 3-month roll, because we're dropping off a very, very strong October, which was a double-digit number. Three-month roll will be flat with GAAP and slightly up in a fixed-rate basis. But that's not unexpected as things bounce back and forth, but we are very pleased to see that in Network Power Systems. And as the process guys continue to look strong and, obviously, our consumer U.S. businesses are starting to pick back up, except for Climate Technologies.

Right now, what we're seeing from a forecast, we’re doing 2012, is we're looking at around $25 billion, with the slowdown in Europe, with the loss of business we saw in the, I'd say, Asia, Thailand impact and China -- I'd say China is still, I think, weak but will come back. Emerging markets will remain strong. United States will be very good in our opinion. Europe is in a recession. We will see some growth. I'll show you what we think by region here in a few minutes.

But overall, we're looking at 4% to 6% underlying growth this year versus the 5% to 7%, but we're still looking a reasonable level of underlying growth with a lot of uncertainty, and I'll show you by the regions around the world in a few minutes here. But still looking pretty good relative to our opportunity from top line growth.

We are seeing an improvement in the second quarter. It's not going to snap back as quickly as some people think. I think it's going to take time for the OEMs to get their -- get back up in inventory levels and start to build, but we're seeing some top line growth and some earnings growth. It will be, unfortunately, a rear-end loaded forecast this year which is not a good thing for a CEO, but that's where we are, it's the hand we dealt -- we've been dealt and we have to deal with that as we go forward here. The backlog and the orders are there. We just have to execute around those.

If you look at the economics, this is the gross fixed investment chart that I show you from time to time. You can see, in the United States, we're looking at around 3.5% with residential and nonresidential having pretty good numbers. Residential actually has started to improve. You can see the European numbers, all negative. Germany could maybe have -- a be slightly flat or positive. But generally, Europe GFI, we expect right now to be negative for the year. The magnitude depends really how well the situations with the banks unfold, but definitely a negative year.

Japan is going to bounce back based on the GDP numbers yesterday. I would expect last year's GFI was actually negative when they restate it, but they should see some investments coming back, but not a strong bounce back, I don't think, in Japan given all the other problems they have in that country right now.

Canada, we still see a lot of strong oil and gas investments. But when you get down to the net-net, the mature markets, we are looking at only 1% to 2% underlying GFI growth on a fiscal year basis. So we're looking at very moderate growth with the U.S., Canada and Japan basically driving that growth in the mature markets.

In the emerging markets, we're looking at less than 6% for the first time in a while. China, being reasonably strong, I think they'll probably be more like 7% or 8% with the upside depending on what stimulus they put in place, which I think they will put in place as we go forward here in the calendar year. India, around 3% to 4%. They have their own problems. Eastern Europe, Russia, around 5%. Latin America, around 5%. Middle East, Africa, around 5%. So we're looking at only around 6%. And looking at probably only 3% to 4% underlying GFI growth for our markets. Some markets better, some markets worse.

The key market for us this year in the bounce back will be the U.S., it's holding up. You can see the non-res number continues to be up there. Historically, on this type of cycle, these numbers will be a lot, lot higher. But we're still spending money. We'll still spend money this year higher than we did last year as most CEOs are doing within our company, though we could trigger that back pretty quickly, if we have to.

You can see the recovery now within, finally, the residential which has been promised to us for a long time, and that is starting to happen. So we're looking at 5% to 7% in both areas right now as we go forward, which will help our U.S. business have a very good year.

So what we look at right now, unfortunately, as I said a rear-end-loaded forecast, with a strong backlog, with some pace of business around the world. Our diversification is going to help us. Today, 35%, 36% of our sales are in emerging markets. And the key thing for us is to execute within the backlog.

We've dug ourselves a hole in the first quarter. We're down 4% underlying and on a GAAP basis. Currency is going to hurt us 2 points this year on average assuming around EUR 1.30. It's going to be a 2-point impact for us in our top line sales. We're starting to see recovery from the Thai floods. We've got to convert the backlog. Emerging markets are going to give us a reasonable level of growth this year. And this is Pat Sly's business, which we have now renamed to the commercial, residential and solutions upside -- I mean, commercial residential solutions, and we see some upside there.

And so overall, that's how the year unfolds for us, the 4% to 6% underlying, 2% to 4% consolidated. And after the slow start, we see second quarter being positive and then the subsequent quarters getting better as we go forward here. But we have a situation where we have to manage our backlog, we're going to manage the key markets around the world and we've dug ourselves a hole. And we all know that as I reported last week.

If you look at the individual markets that we serve, as I look at our sales today, here's the 11% last year. We are strong all over the place. U.S. was around 8%; Canada, 20%; Europe, around 11%; Latin America, around 20%; Asia, 11%; Middle East and Africa, 16%. And then this year, what we're looking at is United States, around 3% to 5%; Canada, around 8% to 10%, with oil and gas; Europe, somewhere between minus 1%, 0, plus 3%, hard to tell exactly where it’s going to bounce, but we expect a little bit of growth still out of Europe this year; Latin America is still having a very good growth year this year; Asia, at the low end, probably 6% to 8%, depending on what China does; and then Middle East/Africa, which we are just at looking pretty good relative to 6% to 10% overall; there is the 4% to 6%. So still long term and in pretty good shape. Though it's moving around, and it's obviously slowing down. A very quick cycle thinking that just 2010, we were negative; in 2009, we were negative. So it's a quick comeback and then a slip back down, which is not a normal cycle for anybody.

As you know, we look at the 4 drivers of value, sustainable value: Underlying sales, long-term, 5% to 7%; profitability, 15% to 19% plus operating profit; free cash flow in the 10% to 14% range as a percent of sales; and return of total capital, anywhere between 15% and 25% based on what kind of deals we're doing and based on what kind of strategic investments or restructuring underway.

Last year, we hit all 4. This year, we're going to hit them again. We believe underlying will be somewhere in that 4% to 6% range. We believe operating profits is going to be around 18%. I mean, it's hard to call operating profit within 1/10 or 2/10. So it's going to be 17.8%. It's still going to be up versus last year. It could be 18.1%. It's going to be somewhere around this 18%. That's the pace we can call at this point in time.

Free cash flow, around 11% and return of total capital, based on what I see right now, squeaking back above 20% for us in 2012.

The key thing as we look from a long-term standpoint is structuring the company to drive strong underlying growth, the profitability, the returns in the cash flow. As I look -- we're looking at 2010 to 2015 sales. We're looking at 2010, 2015 performance of the company. Last year, we talked about 7% to 8% underlying sales growth. I still believe in the 2010 to 2015, we'll still have that. We had a strong first year but unfortunately dropped off much faster. I still believe we'll see 5% to 7% or 7% to 8% overall over the 5-year period. In the next 4 years, it's going to be 5% to 7%. We're looking at a slower market growth, and I'll show you that in a second.

We are looking at a couple of businesses facing some extreme dynamic customer landscapes or issues that we’ve been talking to the board about and that we're going to have to deal with here in the next 6 to 12 months. We continue to see a shift in GFI investments, going from basically 50%-50% for mature and emerging to basically going 55%, 60% emerging over the next 5 to 10 years.

And so from our standpoint, it's all about the proper capital allocation, repositioning our portfolio to make sure that we get the underlying growth and the profitability. We will continue to modify this company, both from an acquisition standpoint, the divestiture standpoint, and I'll show you that in a second. It's about driving the strategic investments that we need to drive value and hit those 4 key boxes that drive sustainable value. And we will continue, and you'll see in a few minutes, increase our repositioning our portfolio here over the next 3 or 4 years.

But we're looking at a marketplace of slower growth. We're going to have to be more active to drive growth. We have a strong global cost position. We have strong innovation at this point in time. The key thing for us is to drive that growth through our own investments and set our own course at this point in time and deal with the hands we're dealt with. And they're being dealt with quite rapidly as we know.

One of the key things that I see, though, is I see a slower economic growth period. We also see a more volatile economic growth. I see periods that we could go 1.5 years up, 1 year down. I mean, we're going to see a period, I think, bouncing back and forth from the underlying growth of the markets that we serve driven by a lot by the government. So the governments are having to deal with some core issues. They spent too much money in the last 20 years. And now they got debt up to their eyeballs and they got to figure how to get that debt off, and they got to modify how they get that debt off by cutting spending, by taxing more, getting that revenue. And that's going to have a lot of different variables on global corporations like Emerson or any other company you invest in. And so we're going to have to deal with that as we go forward here.

We're watching it live right now in Europe. We're going to see the same thing happen here in the United States. If not, we will be a Greece. We've got to deal with this issue. We can't just ignore it. We can't just push it out for another 5 years and maybe run our fourth trillion-dollar deficit for the fourth, fifth, sixth, seventh, eighth, ninth year.

We can't do that as a country and stay competitive. That's the type of environment we're going to be looking at.

Last year, I showed you this chart here on the left. 2010 to 2015. We're sticking with that 5-year period because that's how we think about it. We showed a 7% to 8%. We showed acquisitions -- 7% to 8%, underlying. We showed acquisitions in the $4 billion to $5 billion, and we showed about still less than $1 billion of divestitures, around a $32 billion to $35 billion sales level.

Now as we look at this year, the 2012 plan, we're looking at the 7% to 8%, still for the 5-year period because it's a strong start. We're looking at European recession right now, a slower U.S. recovery but recovering and softer emerging markets. So we -- for the next 4 years, we see 5% to 7%, which is a little bit lower than I thought last year, but it's still there. We're looking at acquisitions. We're going to allocate more money to acquisitions to $5 billion to $6 billion. And because of some of the dynamics in the marketplace and some of the concerns that we have relative to creating value with our businesses over the long term, we are upping our divestitures to the $2 billion to $3 billion level.

Now I'm not going to tell you which businesses. We'll talk a little bit about it. But clearly, within the board, and I'll show this in a second, we review our businesses on an annual basis, looking at these 4 buckets of value drivers. And when we start getting concerned, then we start taking actions internally. And then eventually, if we can't deal with it, we will get out of these businesses. That's the way we are. And it's been our history at Emerson, at least it's been my history as the CEO for the last 11 years.

If you look at the forecast today, from my standpoint, we're still looking at the 7% to 8% underlying growth in '10 to '15, slower in the middle here. We had a very strong first year. We're looking at divestitures higher. We're looking at acquisitions higher. So the net impact, about 2% to 4%. So we're looking at somewhere at this time period $31 billion, $35 billion as a company with some ins and outs going on just like we have done the last 11 years. But that's what we see at this point in time as we nick and we think about the strategic investments of this company.

So if you think about the #1 issue, growth, underlying growth GFI. We now look at a marketplace that probably looks at only 4%. Last year, I said 5%. 4%. The mature markets, I think, will be best around 2% to 2.1% GFI. Emerging, 6%, 6.1%, 6.25%, somewhere around there. So a little bit less than we said last year. On average, with our mix continuing going towards 45% in emerging markets, we're going to see a weighted GFI, just pure marketplace around 4%, 3.8%, 3.9%, 4%, 4.1%. You can't call it any tighter than that, but that's the market we're dealing with.

Historically, as you know, we've set our targets in emerging markets to 2x GFI. In mature markets, we look at GFI plus 1%. And we have delivered that over the years. The last 15 years, our GFI in emerging markets has been 1.8x the GFI. As China has gotten larger and larger for us, it's been harder to hit the 2. In the mature markets, it's been a little bit over 2, 2.5 plus points above the mature GFI. Unfortunately, the mature GFI has been negative for many years here in the last 4 or 5 years.

So that's the marketplace we're seeing. We're looking at a little bit less growth. We're going to have to drive our growth through our own internal investments and mix in the portfolio. We're dealing with situation which we have dealt with before, a longer cycle here behind the 8 to 9, 10 next year, of less growth on a global basis as these market shift -- as the competitive nature of these market shifts, and we have to deal with that. As a CEO, it's not that hard to deal with. You just have to deal and get on with it.

If you look at the thing say we have to deal with, number one is driving our cash, which we're then going to employ it. Now this year, we're going to be around $3.5 billion of operating cash flow. Over the next, just basically in 2011, 2015, we're going to generate close to $19 billion of operating cash flow. The key issue for us and the board is where do we invest that to drive growth, to drive value in the 4 buckets of underlying growth, profitability, cash and return? Where do we invest that to create value for our shareholders in the long term?

From our standpoint, that we're going to -- with our balance sheet strengthening, we have actually over $23 billion that we have obviously balance sheet capabilities. And we're looking at on average, our operating cash flow to debt ratio, around 50%. Today, it's higher than that. But when we plan, we always look around 50%, which is a very, very strong single A+ type of balance sheet from our perspective. And that's how we look at it.

So this is what we're looking, where we're going to allocate it. Number one, first priority, is getting money back to our shareholders. We generate cash. We're going to send out to our shareholder somewhere between 40% and 50% of our free cash flow back to dividends. We raised our dividend this year 16%. So right now, it's running on average $1.60. Our 56th year of dividend increases to our shareholders. We will do around at $3 billion of share repurchase, averaging around $600 million per year. That's where we look at. The rest of the money, we'll invest back into the company through acquisitions and internal investments. And because of the strength of the cash flow and the strength of our balance sheet, we actually have what we call flex $3 billion to $4 billion, where we can increase our internal investments for growth, we can increase our acquisitions or we can buy back more stock if necessary.

But we have the flexibility because of our operating capabilities of generating high levels of profitability and good generation of cash to have flexibility to invest wherever we need to, first the shareholders and then internally, for growth because we're going to have to drive growth with this type of marketplace. We're going to have to go out and do it ourselves. The market is only going to give us so much growth. If we want to get 5% to 7% underlying growth, we're going to have to invest. We started it last year. We'll talk a little bit about how much additional monies we put out there and the impact. We did it again. We're doing again this year. And our desire and what we're going to do here basically over the next 5 years, starting with last year, we're going to invest $200 million to $250 million of cash earnings back into this for growth.

As we drive our underlying profitability up towards the 19% level, we are going to reinvest back into the company, build the core of this company, grow it from a technology standpoint, penetrate the emerging markets and invest for that future foundation, so this -- the OCE here can pass this company on to the next generation a lot stronger than we got it to drive that growth. That's the key thing. We're going to have to drive our own growth. We can't sit back and sit on our ass and wait for it to come to us. We're going to have to look for it and drive it.

Let's talk about that. From a portfolio standpoint, the last -- since I've been CEO, we bought 70-plus companies, $6 billion of sales. We sold 20 companies for about $2.5 billion. So from our standpoint, we've remixed the company, both for underlying growth, for profitability, and we will expand it internationally -- now almost 60% internationally. We've exited certain markets like the motors and appliance components business, and we built out Network Power Systems platform. We would have to continue to do this.

If you look at, I already said, the next 4 years, we're talking about buying 5 to 6; selling 2 to 3. So we're going to be mixing this again. A part of revitalizing the core of the company, revitalizing the businesses to make sure that we stay relevant and to make sure that we can grow the company and drive the levels of profitability we need to deliver value over the long term.

One of the big issues we're dealing with right now and we review with the board, on an annual basis, we go through the whole portfolio with the board, we look at the 4 boxes, and we are starting to see some market spaces right now that really bother us and have been bothering us for the last 6 to 8 months.

The customer base is churning. There’s consolidation going on. There's some strategic change going on with each customer base. From my standpoint, there's a huge churning going on from the technology or from the transformations happen on some of these businesses. There's a lack of consistent customer strategy, in certain marketplaces that's very hard to serve as we have seen in the past, where we can drive levels of growth and profitability and cash.

Your customers are churning. You have 3 CEOs within 4 years, 5 new board members. You can imagine what that company is. That's the problem. That's 1 of our top 15 customers. That's the problem.

We have companies splitting up, just one of them being bought off right now, companies going under. The marketplace is churning right now in a couple of our businesses, in the computing, the communications, commercial construction, residential construction, and these are raising concern. As we review with the board, we're going to have to deal with these things. We're going to have to change the business model. And if we can't do that, we're going to have to move on, something we've done in the past.

So the last 6 months, our antenna have gone up. It's really starting to bother us. If we're going to maintain what I say our growth capabilities, maintain the ability to deliver value over the long term, if these businesses are not able to adjust their business models, which they're underway trying to do right now, then we're going to have to deal with them. We can't wait forever. That's where I’ll leave it at.

From my perspective, if you look at the portfolio, 86% of our portfolio is very strong. We have 2%, which we talked about, that's nonstrategic and will be divested. In fact, Knaack, the Knaack box business, the Weather Guard business is now going to be sold off. We've already initiated that. It's about $100 million business coming out of Pat Sly’s business. That will be sold this year.

We have other parts of this company, about 12%, that's within this churning issue. We're concerned about it. And from my perspective, they're on a stopwatch. They have to fix this business, and we have to figure out how we can create sustainable value, how we can create long-term sustainable value, not just 6 months, but long term. If we can't, then we will deal with it as we have dealt with in the past.

This management team is not hesitant to move on and sell businesses. We sold $2.5 billion worth in the last 11 years. We are not hesitant to do that. If we don't see how we can create value for our shareholders. We're not here to be bigger. We're here to create value, to drive profitability, drive growth and drive cash. Size is irrelevant to me. I think we already have the global footprint we need to be competitive today, and we'll continue to be larger, but we will also continue to weed our businesses which are not strategic to us at this point in time.

So as of right now, we've announced internally and are working with outside advisers on how to sell that business. So it’s all about how do we drive these 4 boxes to create sustainable value over time. That's been my focus every day since I've been CEO of this company. That's what I'm paid to do, to drive these 4 boxes to create value for the long term.

Acquisitions. We're going to be focused very strongly on the process. Currently, we have 2 or 3 acquisitions underway in the process, some adjacent, some technology, some what I'd call core.

Network Power Systems, we have one underway with a look at adjacent and technology. We have no focus right here in that area at this point in time. We have to fix this business. Industrial Automation, we have one acquisition underway right now in adjacent space. We're basically looking at some what I call bolt-on size acquisition at this time point in time, 2 or 3 underway. And hopefully, we're going to continue to drive those at a higher pace.

Climate Technologies, we're working on one right now in adjacent space and a geography play, so we're going to be focused here. In the commercial and residential solutions, we're looking at geographies opportunistic. But clearly, the focus of the big opportunities for us right now in the next 5 -- 4 or 5 years is going to be in industrial area, industrial automation process, climate technology and a couple of places within Network Power Systems as we continue to build out the technology base, a broader solution within the Network Power systems business, which we have a strong presence today.

But it's all about value creation, sustainable value creation over the long term. So we have a fairly large portfolio. The opportunity for us within process today around $7 billion. The marketplace is quite large. It's around $37 billion, $38 billion that we serve. There's a lot places we're working right now. As we build out this portfolio, we are already the largest player in the space. If you look at the broader space, which is around $70 billion, there's 3 of us, the Siemans, ABB and Emerson, all about the same size. If you look at our served market, we're clearly larger than anybody else at this point in time with ABB being #2.

Industrial automation, we continue to look to fill out certain spaces here, too, from our perspective. These are the 2 focal points from our perspective right now that we're going to spend the focus and the dollars for growth, internal growth, in building out these platforms.

We invest. The differentiation of Emerson is investing for technology, innovation. We've done it for years. People always say, well, how does Emerson drive higher levels of profitability? We invest. We spend money to create technology and innovation to help our customers, and then we get paid for it. If we don't get paid for it, we move on. Well, we've historically invested and create a lot of technology and done extremely well in this area.

We spent around 3.5% internally on technology engineering. We are very strong technology leaders in many of our core businesses. Last year, we had nearly 1,000 patents, and over -- around 50% of those are in Asia. If you're not getting patents in Asia, in particular China, you are not very smart because that's where the competition is going to be coming from. In the last 10 years, the shift in patent and control has shifted from Western Europe, United States to Asia, and you need to protect yourself, and we do that aggressively.

As I tell people, no one steals our technology. I will hunt you down. And no one ever takes that lightly because I will hunt you down.

Did you ever see the movie Taken? That's me when it comes to our technology. That's shareholder money, and I'm going to get it. So don't go stealing my technology. I will hunt you down.

Here we -- this is where we spend our money. We spent about $800 million last year. We're going to $1 billion, around 3.5%. There's the 1,000 going to 1,500 in patents. You could see, look at the Asia patents as I've shifted just in the last 5 years. We still have a lot of patents here in North America, the actual numbers are up but percent is down. Actual numbers in Europe up, but percent is down. You can see the rest of the world and Asia, in particular China.

We have 4 unique ones. There's a lot going on out here. This is clearly the core of our new process and power systems and the new Electronic Marshalling CHARMS. Here's some down hole measurement technology. Here is Trellis which is now launched, about 6 months late but it's launched and doing extremely well. And here's our -- some technology that we acquired a few years ago, and we're expanding into the industrial space a single screw compressor. Not into HVAC but single screw compressor going after industrial space, a bigger market opportunity for us.

So we continue to invest typically around the 3.5%. This is just what I call internal R&D type investment, not the strategic investment I talked about earlier, the $200 million to $250 million. That's separate. And we're looking at somewhere around 1,000 to 1,500 patents. So a lot of patents within this company and protect our technology investment.

As I've said, what we want to do and we have started, we started last year, is we continue to improve the profitability of the company, which we have now internal goals to get to 19-plus percent. This year, we're around 18%. Last year, we're around 17.5%.

We're going to take some of that money and invest it back in the company. It's not going to be like peanut butter and spread evenly. It's going to be very strategic on very driven programs to drive us up the value chain, enrich business models or solutions or service or new technology that will expand our capability for our customer. We will continue to invest what I'd call the core technology, which really creates a lot of value for Emerson but does not give you the extra growth that you need. It gives you basically type of core type of growth and gives you a leading-edge technology. We're looking at how we're going to keep -- continue to drive up that value chain and drive more value for our customers and obviously, more value for our shareholders.

As we drive the profitability, we're going to take some of that profitability, invest it back in, drive the growth, expand the value of the company, create a stronger foundation of the company to allow the company grow faster at higher levels of profitability. We're not going to spread it evenly. As we talked about, there's $200 million, $250 million. Right now in the second year of this, we're spending around $60 million in total in the first 2 years. We'll obviously increase that as we see more growth opportunities.

We're very much focused on the people in the field, the engineers, accelerating technology, expanding services solutions in each of the businesses but not even, it's not even. I guarantee you, it's not even. You probably can guess who the #1 is, starts with P. Used to be run by a guy named John Berra, had no hair. Is that enough clues? It's got purple on it right now.

Okay. We will continue to drive the profitability from a GP standpoint. We raise the bar in this. From quarter-to-quarter, you'll get hit, there's no doubt about it. But from an underlying standpoint, we're driving towards 40%, and it's hard to be over 40%.

We believe that we can drive the profitability of this business around 19% and continue to up our investments. As we invest more in the technology, we'll drive higher levels of sales and we leverage that from a profitability standpoint. We've done that in the process business for years. We've done that in the climate technology business for years. And now we're going to continue drive that across the total company. This is very, very important relative to raising the growth capabilities of the company, given that you're dealing with a 4% underlying market growth out there. That's what we see probably for the next 5 or 6 years. Maybe 6% one year. Maybe 3% the next year. It's going to be somewhat volatile in my opinion as we look at the markets on a global basis.

As I talked about, this is where we historically put our strategic investments about -- on top of the 3.5% we put every year, we put about $15 million of what I call strategic investments within certain technologies, all to protect our core E&D. But now, what we want to do is where this money is going is up here, emerging markets, in services and solutions, enrich business model.

If you look at the money that we spent last year and this year, it's around $60 million, above and beyond what I'd call our core technology. You can see where it's gone -- emerging markets, services and solutions, enrich business models, a little bit of advancing of product technologies, some market analysis, which Charlie will show you why we're doing this as we pick the markets. We're being very careful where we go after some of these markets, application engineering software capabilities, enrich your value for the customer standpoint.

So this is all about driving higher levels of investment and higher levels of value for our customers, globalizing the business at a faster pace not just based on what I see underlying that growth but driving faster to drive faster levels of growth.

It worked extremely well. In the first year, we had a very strong year. Remember, in first year, we put over 425 sales and engineering people around the globe. This year, we're going to put 340. The last year you could see where people went, the top of the box up here. Yes, we did put some people in the United States contrary to public opinion. Latin America, Western Europe -- not too many people in Western Europe. Eastern Europe, China, India, Southeast Asia, a lot of salespeople and engineering people as we continue to invest in these emerging markets to drive our growth.

We continue to invest in our solutions and services capabilities. In process management, total revenue of 16% now. Network Power Systems is 20%. We're trying to drive more here on Climate Technologies, only 2%. So we're putting in personnel around the world and capabilities, and particularly, in the emerging markets where we have to build out to serve our customers. Right now, looking at process management, 45% is going to be over 50% of sales are within the emerging markets today. So process management already deals with these emerging markets and we have to have the services and solutions capabilities in all of these markets. Very, very important if we're going to be successful.

This is what we're trying to do. What we wanted to do here, we started last year, is say, where do we want to put the money? Where do want to get people? Where do we want to get them now as this marketplace is emerging and invest at a faster pace? This is above and beyond the normal investments, but how do we get there faster? The same thing where a lot of these people are doing work in the mid-tier product and development and sales, and Charlie will show you that in his presentation. But very important relative to driving higher levels of growth, driving a global footprint and driving a strong presence in these key markets.

Two key technologies that we've invested in. This one in particular right now is a new wellhead optimization solution, a total package going after the oil and gas industry on a remote location with our devices around the field, our SCADA system -- OpenSCADA system working with DeltaV. This is a $100-plus million opportunity for us within 4 or 5 years. It's a huge investment going on around the world in oil and gas right now. And they want to monitor, they want to optimize it, they want to do it remotely. A lot of these places are not great places to live and work in, and they want to do it remotely. Use less labor and do it quickly. So we created a solution with our businesses, and we have the businesses both internally from the knowhow of the people but also instrumentation and also a system. So we have a total package here, a unique package across the whole spectrum here in wellhead solutions for oil and gas industry.

As you know, we've been investing, driven by Charlie's area, the ProAct software, which is down the Retail Solutions. We now have a total software suite. We have customers. We have 5,000 stores being monitored and it pulled through our own products. Something we've been talking about for years, and now the product is out and working, and we'll continue the suite. We'll continue to expand and we'll continue to get into larger presence in the Retail Solutions both here in United States and around the world, and we'll continue to pull products through. So not only it will give us software and capability and monitoring, it pulls a lot of product through. Our whole strategy is to create a solution that pulls both our systems and the solutions but more importantly, the products, a lot of products, which we have a very strong presence in around the world.

Emerging markets is a big issue. It will not go away. People always talk about, oh my God, Emerson is so concentrated on emerging markets. They're going to die. No, we're not, and we're going to do well. We have not died, and we will do well.

Emerging markets do go up and down. But we have a broad breadth of investments and broad presence around the world in emerging markets. Yes, when they slow down, they will hurt us. Oh, when Europe slows down, it’ll hurt you. When the United States slows down, it hurts you. But we have a strong presence. And China, U.S. and Western Europe will be equal size in GFI before I retire, and that's not next week.

Those 3 markets are very key. As you know, the GFI, if you look at the growth fixed investment, since 1991, has gone from 19% emerging to today about 50%-50%. It's going to go to 55% emerging, 45% mature. Our sales – we were behind the power curve. I used to talk about surfing and getting your ass handed to you as you got the wave come over at the top of your head from this. We are now ahead of that curve. As we drive 35% from emerging markets, we're going to 45%. We have a strong presence, and we've invested a lot more money into that emerging market to strengthen our presence.

We are not an export-driven company. Yes, we have exports. We are a local company, and Ed will talk about that. We have invested to be a local player, to be quick, to have the technology and have a total package to serve locally. We are a small company from a small part in the United States called St. Louis, and we're not bothered by the coasts. They ignore us. We're irrelevant from the standpoint of the 2 coasts, from the East Coast and West Coast, but we have a nice sweet spot in St. Louis, Missouri, and we do damn well there. We don't have to worry about the coasts, we just fly over them. When I go east, when I go west, I just fly over top of them and wave, or whatever I want to do.

Our initial thrust when talk about this was in the 5 big markets, which represented basically -- if you come over here, the 5 big markets: Brazil, China, Russia, Mexico and India. In 2006, $3 trillion of GFI. Today, it's up to $5 trillion. It's going to $6 trillion. It was the fastest growing. As I look at the other emerging markets, they're only 2 and they were only growing around 4. Now they're starting to grow faster.

So I'm going to show you, we have a very strong presence in the 5, that's where we built out first. That's where Ed and I and the whole [indiscernible] and Charlie spent a lot of time on, the 5.

So you could see, if you look at the blue here, 55% of our sales, 60%, 60%. This is the 5 big ones. And we go to $5 billion and now we're going to $9 billion. But we're now focusing investing on in the additional funds is to go into the other markets, the other top 10 markets, which I'll show you. I'm traveling those markets more and more in addition to the 5, but we're spending a lot more time and investment in dollars in the other emerging markets right now to build out our infrastructure and build out the opportunity. Because the market capability is quite large relative to what we can go after. And I'll show you why.

If you look at the GFI, in the mature markets, there's $7.7 trillion of GFI. Our relevant GFI is around 23%, $1.8 trillion. If you think about the mature market sales that we have today, which represents around 65% of our sales, it's coming from that $1.8 trillion, about 23%. If you look at the 5 big markets, it's along $5 trillion. And we have 52%, 52% that is relevant GFI, very high percent. That's why went up in those 5 markets. Over half the GFI in those markets were relevant to our sales capability and in our capability. That's why we built out the infrastructure and that's what why we're so strong in those markets. There was not a dart throwing contest going on inside Emerson. There were some strategic investments pooled, saying this is where we want to go first, these 5 markets, and that's where we invested, that's where we drove it. and we've got a lot -- we drew a lot of sales.

Now we're looking at the next 10. GFI is lower, it's only about –- it’s 31%, but it's still $400 billion of opportunity for us. So as we look at our marketplace in the top 5, this is how we’re positioned today: Process, Network, Industrial, Climate. Pat Sly’s business, the Commercial Residential. Certain markets Pat’s not very strong on. He’s the north type [ph] player. I don't expect him to be in some of these markets. I don't expect Pat to be in India. However, he does Mexico, he does China and he's starting to do a little bit of Brazil. The Process guys are very strong. Network Power is very strong. Industrial Automation is getting stronger. They’re not very strong in Russia. And we spent a lot of time in that.

If you look at the markets I’ve been to in the last couple of months, I've been to China, India, Mexico, South Korea, Saudi, Turkey is there, Columbia. Next month, I'm going to Malaysia, Singapore, Thailand. I think that's where I’m going to go the next month, and I'm going to be looking at Indonesia, but I won't go over there because I don't want to get killed. So I'll send Ed. I'm sending Ed. That's what a CEO -– he thinks about these things, you know? Ed is going to go.

We've been working -- we have an executive right know very much focused in Indonesia. It's a good marketplace, but I'm going to spend a little bit more time in Malaysia. There's a lot going on in Malaysia right now. So our focus right now is still the top 5. And if you look at our sales growth going back here, it's still to be very strong here, but we really want to drive, we want to double our sales here in the other emerging markets. If we're going to continue to reach our goal of 45%, these markets right here we're going to invest more money into. And that's why you're going to see we're going to be working on this box and making a lot of the strategic investment dollars that we're putting out there in that $60 million, a lot of it is going into these markets. We put a lot more sales people, engineering capabilities into Southeast Asia. For years, China, China, China. But now, spread. Our risk is to make sure we're balanced, always been trying to focus on balance, not have all of our eggs in one basket in case we drop that basket.

So if you look at our growth, the last 5 years, 75% of our growth has been in emerging markets. Emerging markets is now about to the grow in the next 5 years the size of Emerson when I took over. Emerging market sales are going to be the size of Emerson when I took back over in 2000. That's how much emerging market means to us. Mature markets are not going to stop. We still grow and invest in those markets. But our underlying growth and capabilities are going to be in these emerging markets, and both Ed and Charlie will talk about that.

We will look at somewhere around 60% of our growth coming out of these emerging markets the next 5 years as we look at this forecast. A goal that I've set for Ed last year was actually $10 billion in Asia by -- I actually said 2016, but now I've gotten impatient and it's 2015. It rings better, 10 by 15. So Ed is targeted on trying to $10 billion in Asia by 2015. Maybe you’ll remember that I had 4, 4 by 10, spread, $4 billion by 2010, he did $5 billion by 2010. So now in his last 5 years, he's got to figure out how to get me $10 billion by '15. It's going to be very, very much fun.

Overall, emerging markets, our target is at $15 billion with Asia at $9 billion and the other emerging around $6 billion.

So again, the key focus for us is those 5 are important, but we're trying to figure out how to expand our investment, our timing, our capabilities within these other marketplaces to make sure we have a broader capability across all the emerging markets as the global company from Little Town, St. Louis, world champion, 2011.

Oh, I forgot to tell you about that. Thanks to Mr.[indiscernible] here. Very important strategy for us as we go forward. Mid-tier is all part of it, and Charlie is going to talk about how we go at this.

Today, we have about $1 billion in mid-tier focused very much on China, Russia and India. It's a very localized product. It's designed there. It's sold through a local organization, supported through a local organization. It's profitable. We'll tell you how we go after these niches. And we've done very well. We want to double that by 2015. But clearly, it's all about being local. It's not about dropping stuff from St. Louis, Missouri, or Ohio, Columbus, Ohio, into these marketplaces. It's about being local. And how do you be local? You put engineering there and I'll show you in a second how you get the engineering to do this work. In fact, I'll go forward and show you.

In Asia -- in India and China, we have very large engineering investments. Around the country, about 3,000 people, 19 facilities, engineering work for China. In Southeast Asia, China, Southeast Asia. India, for India, around 3,000 people in 5 facilities. For India or Middle East and also China.

We have built out a very strong engineering capability in these key emerging markets and we use it to grow those markets. We work 24 hours a day. This infrastructure build out it's happened over the last 10 years is very, very important and will continue to happen. And why? Because of this, mid-tier. We already have 46 products in the marketplace, driving about $1 billion.

We have 94 coming out in the next 3 years. We’ll have 140 to drive our sales up to basically this $2 billion mark here on a broad basis.

Charlie is going to the markets, focused and looking at it. The charts are not going to be handed out to you. I do not want seeing pictures. I will walk around as a nun at school, and if I see you guys and doing anything I don't like, I will steal your camera.

I wish I brought my baseball bat. This is a strategic competitive advantage for this company, and I do not want to share with anybody else, like competitors or Chinese or Americans or Europeans. This is Emerson. You are shareholders of Emerson, so protect it. I will. It’s a warning.

I told Charlie to do this with his charts, because if you keep going back and forth like this, you can't read anything. He's going to let me have the controller. It's very important and we'll talk about how we chose it, how we're doing it and how we're positioned against the local competition. Very important strategy. We have to win in this strategy.

There is no alternative. If you want to stay a global company and be successful, you have to win with this game, and we intend to win with this game.

And we're putting a lot of money into it and it's being successful. We're growing. And if we win this game, we will continue to be a global leader. If not, we will have Chinese competitors, fierce competitors in some of our core, core markets, which is not acceptable for the management team of this company.

So you think about the growth long term. Underlying growth, 5% to 7%; the 5-year period we're in right now, it’s going to be around 7% to 8%. We will drive underlying profitability up towards the 19%. We may not make it within this 4-year period by 2015 or we may depending on what the marketplace does. We will continue to invest. As we improve profitability, we'll continue to take 1/10 or 2/10 of that off and put it back into the business to drive growth and drive marketplaces, which we believe will drive higher levels of profitability and the payback will be pretty quick within the company.

We will continue to do acquisitions. We will continue to divest, as I said. In this 4-year time frame, we're probably looking at 5 to 6 acquisitions and $2 billion to $3 billion of divestitures. We will continue to buy stock back on average somewhere around $600 million annually. We have the flexibility to do more if we want to. We have the flexibility to do more acquisitions. We have the flex as you saw in that $2 billion to $3 billion of additional capability within the company.

And we'll continue to drive high levels of return in total capital. This year, around 20%. That's all in. We don't exclude stuff. When I show you numbers, it's all in. There's not exceptions. Oh, we're doing 18% if you take out this, this, this and this. God, I can be to 100% if I want to take out this, this and this. These are all-in numbers, including restructuring, anything we do write-off or stuff like that. That's how it works.

So we're looking at driving the company. Underlying sales of 5% to 7%, profitability in this level, acquisitions, driving earnings or our model is at 10% to 13%, returns of that high, free cash flow in this level right here, spending around 3% per year. This year around 2.8%. Driving our work capital down to less -– down to under 12% as a percent of sales. That's the model that we run day in and day out here at Emerson.

Do we execute that every quarter? No. Do we do it over the long term? Yes, and that's how we create value within the company. We control our own destiny within this company.

If you look at our guidance for this year, you've heard many numbers already, but here's the details. There's the sales underlying 4% to 8%, I mean, 4% to 6% reported consolidated 2% to 4% because of negative currency. If you look at operating profit margin, around 18%. Pretax is going to be around 15.5%. Earnings per share around $3.45 to $3.60. Our dividends per share, right now are on pace to do $1.60, which is up 16%. Operating cash flow around 3.5. We're looking at spending around $700 million, up from $647 million, which was up about 15% last year. These are the market growth I showed you earlier. And that we’re assuming within these GFI growth right now, we have built in a restructuring at $125 million. If European continues to struggle, European markets, we will continue to increase our restructuring, particularly around Europe at this point in time.

Currency, negative 2%, around EUR 1.30. Share repurchase around $500 million, $600 million. Our pension expense is unfavorable this year, about $25 million, not a big number. But interest rates are extremely low, so we're going to put more money into the plan to make sure we keep it funded. We’re going to put $160 million in our pension. I think in the last couple of years, it's been averaging around $150 million since I've been CEO. So it's not a much of a change. We're going between $125 million to $175 million in that range. That's where we are this year. And right now, the price cost, we will be green. Frank wouldn't let me put that on there, so we wrote down favorable. We did 18 plus in the first quarter. We're going to be around 100 million green for the whole year on a price cost basis after being negative $100 million last year. So a very, very important relative to our profitability. But this is what we're looking at relative to the whole guidance for the company and looking out at the scenario. We lay out here. Are we going to hit everything? Probably not. But we're going to be close and we’re going to have a very good year. We will have a record year as I see it right now, both in sales and profitability and cash. Not a record year on returns, because I think we hit 21% or 22% one year, but still a very good year for us from an overall standpoint, delivering value and growth for our shareholders. So with that, I want to go through and give you a little update on each of the businesses in my next hour here.

Number one, process. It's going well. It's not much change here. Underlying orders are strong. We're working our way through the Thailand situation. It's going to take us probably 6, 9, 12 months to do that. It takes a lot of time. We've built the inventory, and now we got to make sure we match it up and get the projects out. The marketplace is good as you know. We are very global company. We're well balanced and that’s how we drive our profitability from implementation, system solutions and control valves and regulators. We are uniquely positioned as a very global company. We have our trusted partner in automation area. We have technology. The 2 key ones in the last couple of years are new technologies, both for the Process side and also the Power side. And we've invested quite heavily in intelligent devices capabilities. Our wireless orders right now are up since we launched this, I think about 2 years ago. Our booking up to $280 million in the process world. We are the leader in this space and we continue to grow. It's a very nice growth marketplace. Remember, we talked about being $500 million. We will reach $500 million within the 5 year of the launch here.

Very global, diverse marketplace, and we're doing extremely well. This is what the front looks like. If you look at the competitive front, just the basic serve market we're #1. And if you look at the broader markets, some of the markets we don’t serve, but about $70 billion. You've got Emerson, ABB and Siemens. These are the competitors we see in the various markets we play. The newest one being GE as they bought into this marketplace right now. But these are competitors we've dealt with for our whole life. There's nothing new. We're competing against and we know how to do it. We know how to win. Sometimes we don't lose. Sometimes we lose. But we win on average and do extremely well.

We've invested quite aggressively the last couple of years around the world. North America, a lot of oil and gas investments in the right-to-work state called Texas, and doing extremely well there. Invested in Eastern Europe, Asia, Middle East, Latin America and Africa. We've added over 2,000 people, just to be more local, local. We have a very strong presence, a strong organization and a leader in the markets that we serve around the world.

Our growth and orders have averaged around 19% on a GAAP basis. This is a trend line that's been very strong. We expect that to stay good. It will probably slow down a little bit, because the numbers are getting larger and larger. As I said, 45% of those sales today are in emerging markets. It's well-balanced. It's not just one market. We have a very strong presence around the world and we continue to invest in those markets around the world and we'll continue to do that. You could see in the last 10 years it's gone from 24% to 45%, as this marketplace has really changed. And we have served and expanded our presence around that world.

We have a lot of technology, investment technology is the core, what makes our process the leading position we have from the wireless [indiscernible] market, to wireless acoustic, very important. Plain [ph] detection, new technology, very, very important that we've bought into. And obviously, our new CHARMs technology for the processed world and for also for the power and water world.

We will continue to do acquisitions in this space, as I said. One of the key areas that we're looking in the $5 billion to $6 billion is to do more acquisitions in the process world as we continue to drive this business with a larger and larger presence globally and stronger position within the whole world.

We have the technology internally. We have the capability to do an acquisition. We're working on the geography-adjacent industry solutions and so we will continue to focus that. When I ran this business, it was $1.5 billion. We are now driving to $8 billion. We may not make it this fiscal year but our goal is to get $8 billion by this calendar year. That's a very major growth profile for this business, creating a lot of value and we make money. We make money.

This is what we're looking at right now for the year, not much change in the strategy, underlying sales growth around 12% to 13% reported because of currency, it will be down to 10% to 11%, a little bit lower. Profitability somewhere around the 20.2% to 20.5%, including higher levels of restructuring and that improved profitability. We're restructuring in Europe right now. Even the best business of Emerson are restructuring. You have a situation where you want your key markets, Europe's going down. You have to restructure. We restructure in good times and bad times and we do it continuously. We've upped it -- as Europeans marketplace slows down, we see the window, it's opened up and we want to do more. It's going to be around $25 million this year in restructuring, primarily driven around our European business for profit, which is a $2 billion business.

We have a strong presence in innovation, as you know. I mean we have a very -- a lot of strong momentum going on in the process world. We expect the market to stay pretty good, and we see nothing at this point in time that will stop it. North America, the investments going in North America, the gas which we play in, the marketplace right now is quite strong with the upgrade and they do a lot of productivity. It's the same thing going on in China, so we're targeting to get $8 billion here within the calendar year, a very, very strong presence. And we'll continue to see strong growth. No really big change with strategy here. No big change here other than we got to get the market to start growing again.

In climate technology, we have a very strong global presence. Asia now is the second-largest market for us. And then Europe, from our perspective, it's a very profitable business. We've continued to do restructuring, we’ll actually raise the restructuring a little bit this year as we go into Europe, maybe do a little bit more if that European market even worse than it is today. We have a very strong innovation and technology program underway. Within the companies we drive the next generation of compressing, electronics and measuring capabilities. We are driving in our technology into the industrial markets. We have the leading position in electronics-based platform and we will continue to drive that. We are innovating within the markets to drive more value and more capabilities in this market, to help our customers and also to create more value for us.

Our global investments in technology are strong and will continue to make it happen and we're doing a good job and you will see, they've been investing quite significantly in mid-tier products both for China, Southeast Asia and India. And we have a lot of engineering capability in Asia and this business right now is very, very strong in that area.

If you look at the capabilities, they have very strong capabilities around the world. We've been investing in sales, both in China and Southeast Asia to try to go after that marketplace in a broader case, capability. We've been repositioning and rebalancing the manufacturing and we'll continue to do that. We are now driving new technology of scroll that we feel reasonably comfortable with making that investment in China. We're doing that to make our own new scroll capabilities of patented products in China, which was designed and patented in China. And now we'll be machining the scrolls for that marketplace there.

A little bit different design, a little bit different level of efficiency, not able to export into some of key mature markets but across Asia Pacific, you’ll be able to do a good job there. We continue to expand commercial scroll capability as we go into those marketplaces. And so we have a very balanced position here on a global basis and we can deliver and phase down what the markets do. Right now, the markets in the United States are kind of weak. They have weakened but bottomed out in Europe and China has not bottomed out yet, and India's okay, and Southeast Asia's okay.

The key focus for us has been transport and refrigeration and also industrial as we got into these 2 marketplaces here, we've grown the business and we'll continue to grow. We earned very little in this business 10 years ago and now we've continued to grow and invest and have been working with our partners on a global basis both from a transport standpoint and industrial. Nothing new from there here.

The key issue within our scroll strategy is now Electronics. We make a great compressor but we're adding electronics, monitoring capabilities, allow our OEMs to deal with the standards that evolve around world, and to deal with those standards as they change. Very, very important from that perspective. We have continued to grow our applications in scroll. We've leveraged our large scrolls in the refrigeration and industrial capabilities and we continue to bring electronics and variable speed to our markets in both Europe and Asia Pacific. So we've continued to drive the value proposition in this industry from just basic compressors to total electronic package.

If you look at the products, they look like compressors, but all these compressor now have electronics driving -- monitoring, driving the capability of electronics, of all the compressors. They're not just standalone compressors anymore. So we have the capability to create a system far more value add for our customer and also value add package for us, which drive higher levels of growth and higher levels of profitability for us.

If you look at the business, the key issue for this business is going to be flat sales. That's the best case. It’s going to be a bad first year -- or first half, some recovery, our North America OEMs right now, they're still not ordering. They're being very cautious. They're waiting for the recovery. They're waiting for the whites of the eyes of the recovery within the residential, which we see today already in some of our businesses.

So the recovery's uneven. It's unclear. We continue to invest in technology. We're going to do additional restructuring primarily around Europe. So in a basically no-growth environment right now for this year. We're going to be increasing restructuring and look at flat to slightly up profitability. But from my standpoint, the recovery will start happening both in China as that country invests, but I don't think it's going to be a lot of growth there in China this year because of the -- I don't see residential being the #1 target for the Chinese government as they put those stimulus money in later this spring.

I see Europe coming back, a little bit. As a lot of exports go out of Europe, in particular, our German customers. And I see the U.S. coming back in the second half. Which month? I can't tell you. But the inventories are extremely low and there is some improvement as you know coming on in the residential. Both the upgrading and modification and repairs and spending going on inside the house, those numbers have been increasing for the last couple of months and also a little bit in the residential and new homes too at the same time. So this space will come back. In the meantime, we're investing for the Global Markets, we're investing in our technology and we're repositioning in Europe to get a better cost position. We're very strong in Europe.

Industrial Automation, a very, very strong year last year, as you know. Comparison's going to be tough. We had a strong bounce back, both at top line and profitability level as Jean-Paul did a great job restructuring. This business has a very strong presence in Europe, which is going to be a big issue for them this year. So the window's open for us relative to restructuring even though we had gone through restructuring the last 2 years. We are actually anticipated to have less this year. We are going to have less but most of it's going to be focused right in on Western Europe as we deal with those issues.

We have a strong investment capability in our technology. We are driving emerging markets, you'll see that in a second. With the uncertainty in Europe, we will continue to act to get our costs down in line and get our position, reposition as we come back to the recovery when that does happen in 2013 or 2014. The renewable area has been challenging though it's still growing. It's growing less. Wind and solar have their issues right now as governments had to pull back on subsidizing, especially with gas being the price as it is right now. Natural Gas, why would you put solar and wind in? Doesn't make much economic sense, especially from a reliability standpoint.

The marketplaces are still pretty good. As we look at the markets, they're still growing, in particular in emerging markets. I see the motors and drives are the worst right now. Power Generation is extremely strong, Mechanical Power starting to weaken, but overall still pretty good.

Jean-Paul, we made a huge investment last year and again this year in emerging markets. He had a huge breakout year in emerging markets but with underlying sales last year in Russia and Eastern Europe, 40%. We added 10% new people, 24% underlying sales in China, we've added 27% new people, 23% growth in Southeast Asia, 24%, 9 [ph], added 32% we've invested a lot in India right now. Middle East and Africa, up 49%, invested 23% in new people and engineering and sales capability. South America, 36%, 24%. We continue to build out. The Industrial Automation, emerging market strategy is just starting to unfold if you look at this marketplace. And so we’re going to see our market -- you can see, we're going to continue to grow as a percent of sales. Emerging markets is going to be very important to us. And we're making investments to do that around the world.

We have a strong presence in Western Europe. We have a strong presence in America and now what we need to do is invest around the world to get this the growth and we are doing that, and we're making pretty good headway.

If you look at our Genset [ph] Alternator business, working with Caterpillar and other people around the world. It's on a recovery mode. Here's what it was like last year. It's a little bit –- you have to digest all that. I mean typically as the cycle goes, it goes like this and it goes like that. But that's what it is. That's the hand you're dealt with. We're in this cycle right here, right now. We're looking a little flatten out here as we digest that. We have a strong presence globally, we’re the leader. We are very strong with Caterpillar. Caterpillar's finally making the investments necessary in China and also talking about in India. Now we play in India without Caterpillar, but they really have not made the investments in China and Doug is now starting to make those investments and we're looking forward to participate with them and have a good growth in China.

But we have a strong partnership with Caterpillar. We just renewed our contract through 2017, to do a 5-year rolling contract and we start negotiating it in the last 18 months and get it done. So we don't have to worry about it. We are the market leader. It's already gotten back to last peak. And so we're seeing pretty good growth here. But it does go up and down and from the standpoint of having surges and slows down and surges. That's the way that marketplace goes. We have a very strong presence and we have global manufacturing and technology around the world for our customers.

We're not just a Cat house. I think today, we're probably 50-50 Cat, 50-50 non-Cat. This is China, if haven’t you figured out, it’s red, it's China. We have invested in people and we'll continue to invest in people in China. For the oil and gas, Industrial Motors, fluid controls, mining. Ed will talk about this but the profile is changing. We are going from our manufacturing and we're seeing the other multinationals to using less low-cost labor because the low-cost labor is no longer low cost. To automating. Our strategy for China is for China. It always has been. Our strategy has always been to invest in China for the China market, and invest and then also export a little bit for the Southeast Asia. So Ed'll go through where we're trying to change right now but the automation is a key issue. We're increasing our capital spending in China right now to automate because that's how you win. We didn't build plants, bless you, boy you’re a nice guy, contrary to what people say.

But it’s from the standpoint of China's going to be a critical market. We are over $3 billion today and we're going to double that in the next 5 years. This market's not going away. But the way we serve that market, both from a manufacturing technology and sales capability, engineering capability, it's going to change. And we are changing with that just like we changed the United States, just like we changed in Europe over the years.

That market is changing and we are adjusting. Industrial Automation and other companies like it -- our Industrial Automation [indiscernible] out there, will be positively impacted. We're not about taking stuff and moving it back to other places. The place I would move it to would be Mexico. But right now, our Asia manufacturing is for Asia. That's what it's about. Remember, we are a local player. We're not about shipping stuff around the world. We are localized as best we can and we made the continued investment in industrial automation to take advantage of that. We're well-positioned there. Europe is struggling right now. You can see GFI, this is the green line I believe. European GFI is most likely going to be flat or slightly down, but we're still doing well there. I think we'll still grow this year. The question won’t be that much type of growth. We'll see. But we have certain markets still doing well. A lot of our European customers export, in particular Germany. And with the euro down around to $1.30, they are competitive on a global basis. So our German customers are exporting and we benefit from that. And that's how we serve that marketplace.

From Industrial Automation, we will see some growth this year. The comparisons are extremely challenging for us with the slowdown in Europe, we're going to have to deal with it. We are going to restructure, this was, at one time, going to be very little this year but now we've upped that and it might go higher as we go after our European cost structure. We will continue to see benefits from the previous year's restructuring and mix change of profitability improvement in Industrial Automation.

They already set records last year and they're going to set new records this year. And so the key thing for us is we have a favorable price cost, we have the restructuring benefits coming through, and therefore in a low growth, we're going to see good profitability improvements. That's a key gain from us. And we're going to position ourselves for the growth -- it will come back as this marketplace continue to invest, and Western Europe comes back and China comes back. Right now, China's weak, but I expect the investments to China's going to drive in its own stimulus to be in that marketplace that we serve, the Industrial area, the process area.

Not much in climate, maybe in refrigeration. Network Power, yes. Network power systems, yes. But I would say, the residential marketplace and light commercial marketplace will be weak in China for the next 12 to 14 months based on where I see it today. But we have a strong position, had a great year last year, with underlying sales up 21%. We see some growth this year but tougher comparisons and obviously currency impacting these guys significantly. And good profitability flow-through, as we continue to see the benefits of restructuring in investments we're making.

Commercial, we call the new commercial residential. This is what compliance [ph] used to be called. We sold businesses off, tools and storage, and now commercial, residential and solutions. We're selling part of this out here where Knaack is located. We did not shuffle the pie. It's the same pieces. We just decided to make a more relevant naming to the business from what it is and as we go forward, but Knaack will be sold off this year. It's very much a U.S.-centric business. It's gone through a lot of restructuring in a very difficult time period. As you know, the marketplace has not been good in North America, but it's starting to come back. And the profitability is sitting at very high levels and will get higher this year. Restructuring standpoint's pretty steady around that $6 million, $7 million right now and I don't see a lot of change.

The key issue for us is the recovery's underway. This is residential. This has been an ugly -- ugly market. And then here we are, we're starting to come see. The recovery has been weak, but it's starting to happen. So right now, you see it coming back up. Conservative, optimistic. It's starting to happen. I see more of the investment going into the upgrading and the repair rather than new. That's where the marketplace is, upgrading the home and we see a pretty good marketplace. We've seen good orders in this space in the last 3 or 4 or 5 months. And so I feel good that right now, we're going to see some growth, pretty good growth this year, and the GFI, it looks favorable for both the non-res and the residential where this business is focused. So I would say a very good year for us.

So from my perspective, the restructuring has been done, we do a little bit more this year. Profitability will continue to improve. We look at probably underlying growth somewhere around 5%, 6%, 7%. We lose a little bit of currency. And also what happened in here is we sold heating products out last year. It's not currency, it’s heating products. We sold the heating products for 11 months last year. We don't restate. That we deal with. Our underlying sales will be -- or the reported sales will be impacted because heating products is no longer in there. Impacted also this year, will impact depending on when we get Knaack done. That number will be impacted by Knaack sales coming out too. So if we get 10 months of Knaack will be in there, then we'll lose 2 months of Knaack sales. But overall, we're investing. We have a good presence, and we're starting to recover, and we're having pretty good profitability. And we continue to sell off assets within this portfolio that doesn't make sense for us going forward. But if we tell Pat Sly , this is his year. The year of Pat Sly, we've been waiting for him. And so 2012 is going to be the year, he’s going to start growing and deliver some pretty good cash and pretty good returns and margins for us.

Finally, the last one. Network Power. As you know, we've been investing in Network Power for the last 10 or 12 years. We hit a little problem earlier last year. We got things stabilized in the second half and then we hit a problem here again, and we'll talk about that. It's a very global business. The way it's broken up, this is how it's broken up, I'll show you the way we think about it in a second here. But a business that has historically been pretty good growth, pretty good levels of profitability and pretty good returns.

The end market still remains solid for our Network power systems business. The mature markets were slow, no doubt about it, but telecom space, the 4G, the LTE technology deployment will start happening and we'll get a benefit of that. Emerging markets continued to grow for us. Chloride and Avocent integrations are well underway and doing well. Trellis is now launched. We're about 6, 7, 8 months behind but it's now launched and doing extremely well. It will have an Impact relative to the overall pull through and expand our market space.

We have continued to invest and create integrated solutions now. We'll show you that in a second and then this one, a huge market dynamics for us, like I said, it's under serious evaluation of how we're going to change the business model if we can't then we have issues we have to deal with. No doubt about it.

As we look at the businesses this way, we break it down into 3 pieces. Network Power systems, Data Center infrastructure, the Lieberts, the Chlorides, the Avocents. About $4.3 billion, a very good business. Profitability's very good. Runs in between the levels at or above where we run as a company. We break down the DC power, the telecom space, which we've invested and restructured over the years. Again, also a very good business for us, running at 10 to 15. Right now, we've been hit pretty hard with a slowdown in investment, in particular in North America but that will come back. And then the embedded power and computing, which has been a lower margin business but we've always been able to drive a very good earnings growth and very good cash growth. And we'll talk about each of these segments here.

Number one, top line [ph], the last couple of years, we made a couple of acquisitions Chloride. We are on plan. Even with a tough marketplace right now, we're still doing well relative to integration, and I'll show you what we're doing relative to the products, both in the industrial side and the UPS side. And Avocent, we got hit pretty hard in November, December. It is has bounced back, as the data centers, the server marketplace got hit with a slowdown coming from Thai floods and readjustment relative to spending in IT, Avocent got hit pretty quickly. The channel is liquidated and now they're coming back, and with the Trellis product, it looks pretty good. So I feel good that they are underway and recovering from the hit to the head in the last couple of months. But I feel good about the integration, the team is in place and we're delivering. I'm happy with that. We will create value for our shareholders with these 2 acquisitions.

Relative to Chloride, the technology, as we talked about the key areas, is their new Trellis -- or the [indiscernible], a 99% efficiency unit. We have expanded the product, we’re up to $35 million in sales and we're going to double that in the next 4 years. A very efficient product, a technology we did not have transformerless [ph] product before we acquired Chloride and we've taken this product now and we’re driving it around the world and doing extremely well.

The other area is industrial UPS, which we also did not have. We already have a $90 million backlog within the Emerson process management market space, which we didn't have before we bought it, a little over a year ago. So we've worked the 2 organizations together. Bob Sharp has been driving this. You all know Bob Sharp, he was the Investor Relations guy. He now runs Europe for process. He's been driving this. He's got the process around the world, focusing on how to sell industrial UPS into the marketplace that we serve for the process industry, which we have a very strong presence.

So we've expanded the capabilities of our industrial UPS business already within the first 12 months. I expect this marketplace will continue to grow and be prosperous for us. When I go around world and talk to our process customers and I see the big projects, we always talk now -- we have the industrial UPS, which we didn't have before. Now, we have the capabilities we can sell the whole product. It's been very, very important for us. So we've got the sales are growing and I expect the process side of this to be the most important thing from an overall type of growth. And very, very important for us, and have been a great addition to our network power and also process capabilities.

Trellis is out, as we call, it the universal management gateway. We are 6 to 8 months late. It's changing the way the market looks at us. If you go out and look at the reports, being out on Trellis right now. It's basically going to be a key integration, a capability within data center, gives a lot more capability for the IT players, the facility capabilities. It will help product pull through, which will help us, which is very important. Our strategy is to create the software technology, the system technology, which will allow us to pull more product through within the business. It does a great job relative to optimizing the data center. The data center guys want this and if we continue to roll out, what more we can do with it. We're going to manage all the assets that we offer. We can also manage other people's assets, out there in that data space.

So the product is working. It's working very well. We feel good about it. You're going to start seeing more and more about it as we go forward. Right now, we're ramping up production. Initial phases, as I've heard from Charlie, were sold out. But now we're now ramping up production and trying to get more and more product out there to watch this product work and deliver more value to our customers at the same time start pulling more of our solutions capabilities through and that's very, very important. The solutions capability of our network power systems business today is stronger and broader than ever before, through the acquisition of Chloride, through the acquisition of Avocent, other acquisitions we've been making. We now have a broader package to go out and serve both the data centers UPS market, and the telco UPS market or the data center and also the industrial UPS and data center marketplace. A lot more capabilities.

On the service side, Chloride brought enormous service capabilities across the board. We now have a package across the board around the market, which in our opinion is second to none. We have 65,000 global sites today. We have thousands upon thousands of people managing this today. 20% of our revenues and the package of both Liebert and Chloride and now the Trellis and the monitoring capabilities, we now have a capability to offer to our customer base second to none, in our opinion. And a very strong presence. We’ll continue to grow.

Our Service and Solutions sales last year in this space was 1.5. We're going to drive to over $2 billion in the next 4 years. But clearly, Chloride gave us a lot more, as did Avocent, a lot more capabilities to serve this space now. From a whole [indiscernible] solutions and service capabilities, not just a pure product sales play which we were before. So now we have a much stronger place [ph] position as we integrate the 2 companies and the integration is happening, and continues to happen. We now have a combined capability around the world. And we will continue to drive the integration around the world over the next couple of years.

The other key area is solutions. We build out the product. We have the product, we built this out. That’s what we have here today. We have the integration. Here's where Trellis comes in. We have the capability to go out and do projects. One of the big projects we won this year is down in Australia, the MNN, Australia fiber optic plans rollout, which is over $100 million. It's a total solution package. This business never did this. The process guys, when I took over process, a big project for Process Management was $5 million. $10 million. It's huge. We might have 2 of those a year. Process drove that to a whole solution of service capability over the next 10 to 12 years. We are now doing the same thing here at Network Power systems. A big win is here in Australia. We have other wins happening around the world. But what we're trying to do here is use the package that we have. This for the product –- the integration projects, our project maintenance capabilities, the service and solutions capabilities that we're investing in. So now we can go out and serve the marketplace just like we served process with a solutions service capability, which we did not have before, before we made that Chloride and Avocent acquisition.

And we've invested in this organization. And now we're making acquisitions. You noticed I had Network Power systems on that chart, we are making acquisitions in some of the spaces here to give us even more capabilities. This is how we're going to have to play and continue to win to grow this business and have higher levels of profitability. This is a game plan underway and will be successful in the next 5 to 10 years. And a big project underway and being rolled out already, is this one in Australia. We competed against people like IBM. That tells you what type of competitors we have in this space, that's what we're doing, a much bigger project capabilities.

In telco world, the telco world has continued to invest and will continue to invest. It will be rocky, we know that. We have built a model, we built a structure that's in this profitability level. It's not a huge asset investment but pretty good levels of profitability. The underlying dynamic is not only in the mature but also emerging markets are very good. We have a strong emerging market presence here in Africa, we're doing extremely well, working both with Europeans but also from the Indians coming in because we have a presence in both marketplaces. But we have a strong presence within Africa. We just built a whole new operation, a new headquarters down in South Africa for our organizations in the telco space. We feel good about this. The AT&T investments will start unfolding it. They're just starting to warm up after the shutdown that we saw in the last six months. I think it can take longer to get those unfrozen but I don't expect any pickup back in that space until the second half of this year. Just based on how long it takes, companies like AT&T and Verizon to get that geared up. It's not what I call a fast organization. It's a little bit different than an Emerson organization.

This one is a real troublesome problem for us right now. We have a market space that's changing, becoming more software oriented, less hardware oriented. We have a marketplace where very dynamic capabilities happening, take HP, multiple CEOs, challenges. One day we're doing this, one day we're doing that. It whip saws us, because we've been a supplier of those guys in a big way for a long time. We have a situation right now with some of the telco and space, some of these guys struggling like Nokia Siemens or Alcatel-Lucent. You have Apple changing the game. Within last 2 years, companies like RIM, which has also been a customer, really starting to struggle.

We're seeing a lot of churning here, it's a big issue for us. We see competitors merging, we see people going out of business, with some people going into hardware, some people going out of hardware, the dynamic has changed dramatically in the last 6 to 9 months. We have been in this market, power conversion market, for quite some time. I ran it. I understand it. If we cannot change the business model to deal with these dynamics, we will not be able to -- right now we're not there today in profitability, we will not be able to drive the profitability we need to drive value for our shareholders and then we're going to have to deal with it.

But clearly, as we look at the marketplace today, and we look at the marketplace dynamics and we think forward in the technology changes, many of these spaces don't make sense for us. And we're having to dial back in those spaces. And if we can't deal with it, we're going to have the whole issue. Right now, this management team is focused on changing the business model. How can we serve this market? It hits 3 of the buckets, of the 4 buckets I talked about relative to value creation. Very difficult. But you could see what's going on right now within this market space. I mean Oracle moving into hardware as they bought Sun. Some guys moving out of hardware like IBM. IBM's basically going to software basically.

Cisco's changing his strategy, which was a major customer of ours. It's getting out of certain things and focusing on certain things. It's creating a different environment for us and we have to react to that. Right now, it's hurting us. We have to react to that to fix this or move on, and we understand that. Typically, this business has grown nicely from a both standpoint of profitability and cash. The last 6 to 9 months have been very challenging. Not fun. You know that. You've seen our numbers. They've hurt us. It's been a very difficult situation. You could see the big red here in this quarter. These businesses are doing pretty well in dealing with the Thailand flood and the slowdown in Europe. These Businesses in telco, they’ve done pretty well here. This business got real hard the last 6 months, 9 months and we're having to deal with that issue. We have a massive restructuring underway. A program to either fix this thing or deal with it.

You will see a lot of investments or restructuring underway and happening. We will see improvement in the profitability as the year goes. Our restructuring dollars are very focused on this market space right here. Right now, we have an issue. And Emerson knows when they have an issue, they deal with it. We will deal with this issue, one way or another, we'll resolve this issue. It will be with us or not with us. That simple. We will not carry wounded soldiers. Don't say that, but I did it. We have this thing inside. We did that one year, Ed, I wouldn’t do that, I wouldn’t tell them that. But...

We have a problem, so we're going to deal with it. As a company, that's where we are. Right now, end markets look good, they’re starting to recover, I said network power systems orders pick back up. We have not seen the telco side pick back up yet. Embedded, stabilized, we saw things improve in January, which is a good sign. They have massive restructuring underway. You can see we're spending a lot of money here. We will improve the profitability this year, pretty big second-half recovery. I see growth coming back in this business. You'll see underlying growth, in some cases as we get out of businesses, continue to drop-down. One of the things we're doing short-term is we're weeding very quickly businesses that we no longer want to be in. We'll weed them out and then we'll have to sell parts that don't make sense for us too.

But a lot of change happening within this space right now as we deal with these 3 businesses. One of them is very strong and will continue to be very strong. The telco will recover and doing a good job. It has been doing a good job and embedded powers and computing we'll have to deal with it as we restructure it or deal with it after that, if that doesn't work. And that's a fact. We know where the issues are and we deal with those issues.

So with that, I'm going to turn it over to Ed. And he's going to talk about rebalancing global operations. We want to leave plenty of time at the end for [indiscernible] Q&A and have some wrap up comments. With that, Ed, I'll let you have it. All yours.

Edward L. Monser

Thank you. All right. Good morning, everybody. The rebalancing discussion, we're going to go through really talks to 2 things at the same time. The rebalancing is obviously a big part of the operation strategy, part of our best cost producer actions as we move jobs around the world for best cost and I'll show you that. But in harmony with that or in concert with that, at the same time, it's a big part of our emerging market growth strategy as we continue to reposition the assets. So we're trying to do both things at the same time, and I'll show you the results of the work that we've been doing to reach both of those objectives.

The regionalization, localization that Dave was talking about, we don't set up our supply chains, we don't set up our factories to be an export company. That's not how we set up. For the most part, we're an infrastructure company. 70%, 80% of our sales are what we would call infrastructure. If you're an infrastructure customer, you want your supplier close. You want them close, you want them responsive and you want, and many times, you don't want to have to worry about products coming across the border if you have an issue. So we work very hard to regionalize the company, regionalize the business, regionalize the assets. And I'm going to go through that and talk about how that has improved the profitability and returns, as well as strengthened us in the emerging markets and driving the growth.

So here's the current footprint of where we have our facilities. It's quite a bit of work that's been going on over the last decade and where we have our facilities and how we set things up. A lot of concentration on actually eliminating small facilities that we've had and go to some more critical mass. So that's the mix. This is why I don't get invited to Obama's dinner parties right here. There's fewer factories in there. But they're big and they're strong and actually, over the last couple of years, we've started to add factories as Dave showed you in Texas.

Here's the shift in hourly headcount from mature markets into emerging markets. That does do 2 things for us. That does give us a much better cost position. It also puts resources where our customers are at in terms of where the growth is coming from. So that's very helpful. The other thing, when you're driving profitability, there's lots of levers you can pull. And each of them have different levels of risks that go with it. And sometimes you have an idea and it might work and it might not work or it will work sometimes. These things work all the time. You move a job, the cost goes down, it flows through and you see it in your profitability.

The hourly manufactured and salaried SG&A jobs. Charlie's talked to this column to you many times before and our ability to do a lot of work globally, invest cost, a lot of SG&A kind of work, globally invest cost and I'll show you how that breaks down. You can move a bunch of jobs here and save some money, you move a few jobs here and you save a lot of money. It's a very rich area for overall profit improvement for the business.

Here's the performance that has been delivered with the shifts that we're talking about. And margin last year at 17.5%, as Dave indicated, around 18% this coming year, with the longer-term target in 19%. That is built into all the plans that we have for the profitability of the company going forward. The ability to do that. And then reinvest and accelerate investments in the company. So that looks very good. And here's the return. And as Dave showed, in '12, that should go over 20% again and return in that area, which is almost at a historical high, 2008 was our best. But we'll be right back in there. And plans going forward, that should continue to improve.

So from a profitability standpoint, from a return standpoint, the repositioning of the assets, the better cost locations, absolutely has worked and is working and is built into the plans going forward to deliver outstanding results.

Now, I get different reactions to this chart. Emerson is a Chinese company in China. And really what we're trying to do is, from a customer perspective, if you're a customer in China and you're an infrastructure customer in China, you want to see Emerson as a Chinese company. You want to see that we're invested for the long term. You want to see that we've made the capital investments, the fixed investments, the investments in total employees, the investment in engineers, manufacturing facilities and local senior management that have the authority to make local decisions. Very important environment.

Now, when we go to lunch with the upcoming Premier tomorrow, Mr. Xie, he will know we're from St. Louis. We can't trick him on that part. But he also knows we're one of the very biggest investors here, and he knows that the customers give us a lot of respect and that customer like CNOOC here, the China National Offshore Oil Corporation, very significant customer, overall. They have a strong mandate to buy local. That's the bias that they have. You walk into their headquarters and there's a banner that hangs in there and the banner says buy local. And we're able to overcome that and get a new frame agreement that we just signed in the last few weeks, $200 million, because we make the product in China, we design the product in China, we source it, we patent it and we are going to be there for the long term, to back them up, as they run these facilities within the borders of China and other places around the world. So in China, we're seen as a Chinese company. And I'll come back to that a little bit more later as this year will be about $3.3 billion in China.

Now at the same time, when we're in India, we want our customers to see us as an Indian company. And we work very hard to make sure that, that happens. 8,300 employees, 2,600 engineers, 12 manufacturing sites, 5 engineering centers, 99% local management. Actually our Indian management team is just outstanding. And as Dave had indicated, we actually use our Indian management to manage in India and also to manage outside in the region. A very important and strong team, almost $1 billion, $700 million in 2012. And again, this gives our sales people, as they go out and talk to the customers, the ability to go out and say we are an Indian company. We will be here. We will be here for the long term, as you put in these assets, you don't have to worry about where is this stuff going to come from. The factories are here, the engineers are here, the managers with local authority to support you are here. Then as a result, we get another $100 million contract for VSNL, the largest telecommunications provider in India. And to be a partner with them on large projects and large data centers, very, very important. But we have that reputation and we have that respect in the market.

When we go to Brazil, very important and actually legislated in Brazil what you have to do to be a supplier to the big projects that are going on there. 1,400 employees, 2/3 of the products made in Brazil for the Brazilian market. That local content piece, I'll give you some more statistics on in a second. Very, very important. 230 project engineers, product engineers, working this year about $500 million in sales. Here's the spend profile from Petrobras that was just updated, $212 billion from 2010 to 2014 in all the different projects and where they're going to spend money and what they expect to buy. And they expect and have a mandate that 67% of what they spend needs to be on product that's made in Brazil. So getting the certification and getting the stamp and getting the approvals to say yes, we are a Brazilian company. We make products in Brazil. It meets this requirement, very important. And is key to our ability to win the [indiscernible] project last year. Another $100 million project.

We had to be able to demonstrate to Petrobras that 2/3 of the products would be locally manufactured. And I know a number of you are visiting Brazil in March and a number of you are visiting in June and you'll get to see what we're doing. You'll get to see the product, you'll get to see the product flow, you'll get to see the engineering support and all the things that are going on in Brazil to support this activity.

We say the same thing in Mexico. Mexico's a very important market to Emerson. We have a very strong manufacturing presence in Mexico and we have some outstanding customers there. And we've seen significant double-digit growth over the last few years. And again, this year, we would expect to grow in the 20% range in Mexico once again. This 40% locally produced, the other 60% actually is made in the U.S. and one of the places we do export from our U.S. factories is into Mexico. So North American produced very high percentage, a large number of engineers, 25 manufacturing facilities. Again, very strong local management and sales and marketing. We can go to PEMEX and put together a long-term plan. Here, we have $700 million committed over the next 5 years as we work with PEMEX on their various projects. The product that's necessary, work on applications, looking at their different facilities, on upgrading, how to do that project management. And then the very important after sales and service. And the thing that really drives the need to be local, to be regional, to have these investments in place, is you build the chemical plant. You want to run it for 20 years. You want to have a secure supply from a supplier that has high integrity and who's going to be there for that whole period of time. So they want to see the capital investment, they want to see the investment in people, they want to see the investment in service.

And finally, even in Russia, for us, about $0.5 billion this year. Russia's maybe not the most chauvinistic country on the planet but close, meaning they really want to see Russian product. They want to see Russian steel, they want to see Russian thread cutting, they want to see Russian everything. And I think the level of paranoia, if you're running a refinery in Russia, is pretty high that you want to make sure you have the secure supply. You're always worried about supply disruptions. So we work very hard to support in that area. Right now, 14% of the product in Russia is made in Russia, mainly from the process group. And that group does a very good job. The rest of the product is made in Eastern Europe that serves this market. So it's fairly good but we've got some more work to do. But again, this local management having a Russian team working with that group and doing the things necessary to go out and market ourselves as a Russian company. Here's the recent contract that we just got from Lukoil for $150 million. Same kind of thing. They want to see a Russian source of supply that they can count on for the long term.

All right. That's kind of fundamental to what we've been doing. Making the changes in the cost position to drive the profitability and returns and making the investments in the key 5 markets that I just referenced and Dave talked about in his presentation, to make sure that we are seen as local. And to make sure that we have the investments in place to compete long term in every one of those markets.

Now, let me talk in a little bit more detail on the $10 billion plan for Asia that Dave referenced. Here's the way our markets will set up in 2015. $12.5 billion in the United States, still will be our biggest market. But Asia will be closing in on it. But we like this market. It works very well for us. $1.5 billion in Canada, another really good market, a little bit more activity in Canada going east and west than north and south right now with some pipeline decisions. But it didn't slow down the Canadian spending. They just rerouted the pipeline. And so we see a very significant work there. $2.5 billion plus planned in South America, $1 billion in Brazil and $1 billion in Mexico are what we expect by 2015. Very major investments in those 2 markets, very major infrastructure investments that match up very well to what Emerson does. We'll have a Western European business of $5 billion. Our Russia and former CIS kind of countries, $1.6 billion, a very important market for us. Africa and the Middle East will be $2 billion in the 2015 plan. And then Asia, overall, $10 billion. China, going from $3.3 billion this year to $6 billion in our plans. India, being $1.2 billion and Southeast Asia, overall, including Indonesia that Dave talked about, $1.5 billion.

A very, very significant shift, a very important place for us to pay attention overall in what's going on in Asia. And it was true that Dave said, I want you to have a plan with the group here to get to $10 billion by 2016. We worked on it. We were really excited. We got it up to $10.6 billion in terms of the activities that we felt we could execute to and work on as soon as he saw that, he said fine, $10 billion in 2015 sounds better. So we shifted that. And right now, our 2015 is just a smidge short of that. So we'll be back in Asia in the next couple of weeks, to see if we can boost that a little bit more. But here's what's been going on, in terms of the emerging market mix for Emerson and how important Asia Pacific has been at 47% of the emerging markets, going to 54% to the last year being 58% and being 2/3 of the emerging market activity for Emerson overall in the forward plans.

It's a big part of what we see. It's a huge part of the input structure spending that's going to go on over the next 5 years. And Dave showed where the GFI is spent by region. The GFI is the infrastructure spending and what spending we know of, the projects we're aware of, the budgets that we see, what customers are telling us what they're going to do. This is the way the mix changes as a result. Huge spending on the basic power infrastructure, communication infrastructure, cold-chain infrastructure, all of those things big investments over this timeframe.

When we break down the $10 billion plan and what is needed, here's the growth in China from the $1.4 billion to $3.1 billion last year. $3.3 billion this year, up to the $6 billion in 2015. And each of these numbers are broken down into each of the businesses, each of the divisions, each of the products, each of the services. It's down to the detail of which manager's delivering which dollar. So they're very, very strong plans and sets of actions that will drive that. Here's the growth that we expect in India, and the growth we expect in the rest of Asia, excluding China and India. Here's the 2x GFI performance over the last 5 years. We did really well over here, because GFI was only 0.1 and we grew 9%. The 0.1 is because Japan is in that part of it as well. Korea, Taiwan, Indonesia and other countries like that are in here. But Japan really pulled down the GFI. But overall did pretty well in the mix, well exceeded 2X GFI in India. Did not exceed the 2x GFI in China. As we get bigger, it has gotten tougher, but now is the time to establish the long-term market position. So we're not at all satisfied with that.

Our forward plan looks like this. We've got an 18% growth plan in China for us, which we'll do the 2X GFI, 15% growth plan in India, 11% in the rest of Asia. So very good mix I think, and set of activities overall. These are the levels of investment you have to do to deliver that though. These are big numbers. 59,000 employees in Asia. 2 or 3 years ago, we got to the point where we had more employees in Asia than we did in North America. That was culturally a big deal for us but that's the direction that we needed to go.

More than 50 facilities in Asia Pacific, 5,800 engineers. We get tripped up when we count engineers in Emerson. Everybody's an engineer in some way. But I don't count in that number, Charlie doesn't count in that number, Craig doesn't count in that number, Dave -- these are engineers that are designing and building product. So that's an important differentiation. It's not the people that are in service or sales or management, or anything else. These are the product folks.

The supply chain, a really big deal and to be able to locally source, as I indicated on the other chart, more than 80% of what we need for our factories locally, gives us a speed and cost position that is critical. And then to have service centers and the ability to provide the after service, a very large number. I'll show you some statistics from some of our businesses coming up. A very important set of investments for us.

And then finally, Charlie will give a lot more insight on the mid-tier. And Charlie and I have been working for Dave for a long time. I'm the bulldozer. I go out and push dirt and build stuff and do things like it and Charlie's the brains. So you're going to hear the brains behind the China mid-tier strategy. It is profoundly important. Very, very excellently laid out. These 94 new products, a big deal for us overall and very impactful to sales, but very important as we continue to want to be a regional company and that we serve the broader market and we don't just serve the other multinationals in these different locations. We're working direct to serve the local customer base.

Now, within the emerging markets, there are always challenges, not everything is easy. As a matter of fact, none of it is easy, probably. But here's the labor dynamics, and you've heard about this and maybe fretted over it yourself. There is quite a bit of labor inflation. There's 2 or 3 ways to look at it. One way is to say there are hundreds of millions of people coming out of poverty at the same time. It's really terrific. And as you travel around and get to experience that, and in many of these countries it’s very, very exciting, to see the middle class being built on a global basis.

From a manufacturing perspective, where you're worried about cost and cost per unit and cost per hour and things like that, this inflation and these changes present a challenge to us. These are the inflation rates that we've seen. India, basically, no inflation during this time frame. Very amazing. A little bit in the Philippines. China has really taken off recently. But in Eastern Europe, huge inflation as many of these countries are joining the Eurozone. And just as you might expect, as they join the Eurozone, the wages move rapidly. And we certainly see that. And then here's the problem in Brazil, a lot of work and not very many people, a lot of work and not a lot of skilled workers, and a lot of projects and not nearly enough engineers to support it. And so the wage inflation is very, very profound in Brazil right now.

In China, as well as the inflation, China over this last decade, spent a lot of time on maturing their legal system, maturing their laws in lots of different areas and have done a pretty good job on it. In the labor area, they've been trying to figure this out what they want to do. But every time you turn around, there's something new. They change the minimum wage multiple times a year. Collective bargaining mandated for western companies, a very tough kind of situation. They put in a national housing fund, which you're running along and you've got all your costs lined out and there's a new tax that you have to pick up. And then they change the social insurance law, and then they put in a new maternity legislation and then individual income tax on things show up and how that sets up and child subsidies. And then the one that I just never did figure out was the hot temperature allowance. It gets hot here so you have to pay more tax. Okay. Well, we'll deal with that.

But these kind of changes continually come at you and can be frustrating, as you're trying to make commitments and keep them and have budgets and things like that. But overall, it's designed to continue to improve the overall [ph] country and for the most part, I think the moves are okay. It's just that they're not real predictable. But what's happened to us is in the -- in areas where we have a lot of labor content like Network Power and a low automation level, it can swing the profitability.

In the process group, they already -- they kind of went into China with a high level of automation because of the kinds of products that they make, the finished levels on some of these high-performance sensors and things like that. You can't avoid the automation and get the quality level, kind of made those investments already. But we've seen this change in mix. So what we're doing about it is kind of old-fashioned but as the wages go up, as the cost per employee goes up, you -- look at automation more seriously. Just like we did in North America, just like we did in Western Europe, just like we did in Eastern Europe.

The good news here is we've solved this problem many times before. We already know what the equipment processes and procedures are. And so we can pretty be pretty quick to react and move and change the employment profile as we look ahead.

For example, we make some alternators in our Industrial Automation group in the Czech Republic. We needed to go to automation there and have some very good statistics and processes and procedures. These are the kinds of improvements that we can, and are putting into our plants in Suzhou, that will dramatically change the number of employees that we have or need as we go ahead.

We actually think, as I showed earlier, we're going to increase our factories by about 50% in terms of the total capacity for that China market. And our headcount's going to go down. The number of employees is going to go from 30,000 to 20,000 in those factories, due to the automation that we know we have and we need to put in place as the wages come up.

So on the operations side, a challenge but a challenge we know how to fix. So we're in the middle of doing that. And on the good news side, we have Industrial Automation and Process Management businesses that greatly benefit when customers are moving in this direction. And it turns out to be a very significant growth program for us. So one simple example, our Fluid Control product that we make and have been doing a very good job globally and driving automation equipment in the mature markets, in bottling lines and packaging equipment and all this kind of gear that's needed as you automate factories. We're seeing a very nice ramp up coming from the emerging markets, where people will use this equipment and use this equipment more often.

I actually think the opportunity is much bigger than the concerns on the operating side. The growth as this automation sweeps across Asia to keep the Asian factories competitive. I think it's very profound and will be very good for companies like Emerson and Siemens and some others, as this automation technology is acquired. And it's not just being acquired by western companies that are working there. It's being acquired broadly across all of the competitors in these markets.

All right. Let me talk about the elements of regionalization and the pieces that go into a regional solution. And what you need to do to be successful in these markets and the areas that you need to make investments. The first point I want to make is it's not new for us, we have been doing it for a long time. We found this picture the other day, 1978. And some of you have met some of these folks here. But this is Vern Heath back in 1978. He was the first Emerson executive to show up in Beijing. And we were bidding an oil and gas project set of activities.

There were 6 companies that were invited by the Ministry at that time, to go talk about oil and gas field development. And they were thinking about going to the west in China and working on this. They wanted equipment but they wanted the equipment made in China. They were not interested in importing the equipment. And of the 6 companies, 5 said no. Five said no. We will sell you equipment but we will build our equipment in Germany and send it to you. We will build our equipment in Japan and send it to you. We will build our equipment somewhere else and send it to you. We're happy to do that but we will not build it in China.

But Emerson and Vern, and if you know Vern, those are his crutches, he got polio as a teenager, never slowed him down, said, "Yes. We'll go to wherever we need to go and build the equipment." And so we've been on a regionalization path pretty aggressively in all of our businesses. This is pretty interesting set of history, from my view anyways. And so put the first factory as a licensed factory in Xi’an. They didn't want us on the coast, put us more in the center.

Now John Berra with hair. This is one of the few pictures you'll find. So those of you that know John Berra and love John Berra, you can say that you saw a picture of him with hair back in 1978. Soon after this, his hair went away, I'm not sure why.

All right. In simple form, what we're trying to do as we build out in these markets here, from an operational excellence to sourcing, we want to make sure the product are tailored to meet the market. We've got a lean and responsive and cost effective supply chain and that we can meet the best costs. And so that we can go toe-to-toe with anyone in that market. Nobody has a cost advantage. We have the same source of supply. The same source of labor. The same source of engineering. And hopefully, the good management that is necessary to take care of all that. And invest on the customer care. And this is very, very important in an area that we need to remain very aggressive. But you want to be right next to these locally-based customers and decision makers. You don't want to just drop in once a quarter and ask them how they're doing. You want to be in the same neighborhood. You want to go to the same restaurants. The same schools. All the kinds of things that you know from every mature market you've ever been in. And then to be able to meet and fulfill the customer service requests, it's very important.

So we looked at it under these 6 areas: sourcing, engineering, manufacturing, shared service, sales and service, and I'll give you an example of each of these. Here's how we grade ourselves at the end of last year, red means not so good, in this case. Yellow means we're doing something but we're not quite where we need to be. And green says we're in pretty good shape. Overall, in North America, particularly with the new investments that we have going into North America, we feel pretty good. We did need to expand some manufacturing presence, particularly to serve the Process business in North America with the boom that's going on here. But overall, good here.

Western Europe, overall, pretty good. Some improvement in our sourcing profile. We're pretty happy about that. But the rest of the area, in good shape. Eastern Europe, sourcing is good. Manufacturing is good. Shared service is good. But we needed to put a little more into engineering, improve our sales and our service. Overall, in Asia, it has been a focal point for us. It has been a lot of work and energy. We feel very competitive right now and think that we can work in multiple tiers and win in that market space with the sourcing, engineering, manufacturing, shared service, sales and service.

Really, what you want to do is move to local content, local designs; local manufacturing; regional service centers; target local companies with the sales, not just multinationals; and then have massive investments in service, and distributed to where the customers are, not to a place where they have to send the product.

Here's a good example on the sourcing side, and this is the amount of material that we buy regionally for each of the markets at about 80% in Asia-Pacific, 83% in North America, 75% in Western Europe, Eastern Europe and Russia at 45% and coming up, we've got more work to do there. And then the rest of the world in some of these markets that we do not manufacture. And so it is not the same sourcing profile.

But here's the result. Here's with Climate Technology in. As I look around the world, I recognized the number of you have been in Suzhou, and been to our Climate facility there. 146 suppliers in that ring, supplying that factory, only 11 overseas suppliers needed to run that factory. And then when you have that regional supply, that local supply, you can be fast, you can be responsive, you can ramp up and down with the customers as they ramp up and down, which turns out to be more and more important nowadays. And you can do a really good job managing your assets and the way it sets up.

On the engineering side, here's that 94 products coming out of the mid-tier and the different business groups and where it's coming as we build up that $2 billion-plus market in terms of the mid-tier in Asia over the next couple of years, very important. A broad set of products. One of the easiest ones to talk about is the semi-hermetic scroll that's just recently introduced. We've had scroll technology for a long time. We've had semi-hermetic technology for a long time. We never had the opportunity to put the 2 together so that we could have a high horsepower scroll compressor that is repairable. And in North America being repairable is not really seen as something that's needed. In Asia, and many of these emerging markets, repairability is a huge issue. And customers want to be able to swap out parts and do things and take their stuff out in the field, rather than bring in another new product. And it's designed for that activity. An outstanding set of engineers have developed that, introduced it, met the performance targets, the cost targets and really puts us in a great position in our refrigeration business to continue to expand throughout the country of China and not just in some of the high-cost locations.

From a manufacturing standpoint, again, what we see, what we believe, what our customers value is that we have put our manufacturing footprint close to where our customers are at. Here's one example with our Measurement Division in the Process group. As we built this out and put this in place, the lead times will be reduced by 50%. We get a real price premium because we can deliver a wide variety of products in a very short period of time. And that's what serves the MRO and service capability, so a big payback from that. And again, the ability to support the customers in their language, in their time zones and seen as, for us, as well, a good way to have global risk mitigation as things happen.

On a shared service activity, and this is another one of the key thoughts that came from Charlie as you've traveled and talk to him. And he -- the world is flat, is kind of a trite phrase. But there's a lot of wisdom in it and that we can do a lot of work in better cost areas to serve markets on a global basis. And really have driven that, 1,800 employees in Latin America, 2,300 employees in Eastern Europe, 4,200 employees in Asia serving Asia and the global markets. And this is just one example from our Systems business in the Process group and the number of engineers they have in this shared location. The real thrust of the shared location is to enable our businesses to just worry about customers and sales and growing out and growing the business. And not worrying about buildings and IT systems and security and the 15 other things you need to do to actually do business in any location. So we've done a really good job building out these locations around the world. And then a division like this comes in -- can grow rapidly by focusing on their engineers and getting their engineers in place and focusing on the needs of the customer. Very, very important from the speed of implementation overall. This has been a tremendously successful strategy for us.

And then on the sales side, a few examples. In China, Network Power, a lot of folks on the coast, and you've probably seen this yourself a number of times. You talk to somebody and say, "Are you China?" And they say, "Sure. Yes, we've been in China. We're in China a long time." "Well, how many sales guys you have?" "15." "Where are they?" "They're in Shanghai." Okay. All right, you're right, you're in China. But, as you also know, 95% of the economic activity in China is outside Shanghai and Beijing. The heart of the activity is outside the coast, and you've got to get to these other locations. And we worked really hard to continue to move to the, what's called the second tier and third tier cities. We've got a lot more work to do, and these numbers will continue to expand.

Here's the distributor network for Climate Technology in India. And if you're going to serve refrigeration in the cold chain, the food chain, safety activities needed in India, you really do need to be all over the place. And we have a very good network here. Very broadly serving the market. Very fundamental to the success and growth that we've had here.

Same thing is true in Brazil. And there is quite a bit of activity around Rio, that's nice. And those of you that are going in March and June, that will be in the region, we very much look forward to being able to show you our new activity and facility that will ultimately be over 500,000 square feet of manufacturing space. The first 3 buildings are done. There's another 3 buildings to build. So you're going to go in, you'll see what we finished and where we're moving in. And you'll see the other activity that is coming. A very, very significant, long-term investment for us. A really terrific set of activities out in Sorocaba, which is outside of São Paulo, depending on the traffic. It could be 45 minutes, it could be 3 hours.

And then service. As I indicated before, here's our Network Power systems example. North America, 85 service centers; Europe, 43; China, 31; India, 67; Asia-Pacific, 22; Latin America, 19. Almost 3,000 service engineers in 270 locations around the world. Very important to us. Going out and working on installation, commissioning, maintenance, taking care of the diesel generators. Actually, as we map it out in all the locations, covering 65,000 customer locations with these service centers.

So in conclusion, we feel very good about the rebalancing that we've done. The rebalancing and how it's impacted the operational performance and the improvement in margins. And the near 18% margin this year going to 19% in the planning horizon and taking the ROTCs back up to 20% and above. We like that very much. But really like it the way it set us up to grow the business and participate in all these global markets. And we really expect -- it is something that we've been doing for decades. We really see the benefit of it now, and we're going to press the advantage for a superior 5-year period as we look ahead, as we look at the global GFI spending. It matches up very well to this profile. Thank you. Charlie?

Charles A. Peters

Yes, sir. All right. Good morning. Many of you who interact with me always start with a question, "What have you been working on?" And so I thought I'd structure the presentation around that a little bit today. I think Dave and Ed have done a really good job of introducing Emerson and how it's evolving. But what I want to do is get into really the depth of what it's like to compete in these areas. And I think you're going to find some interesting revelations. Certainly, as I've been involved with it over the last 10 or 12 years, there's a lot of things that I didn't know and I wanted to share those with you.

The unfortunate side of this is it's a lot of confidential information. So we didn't share the charts with you per se. The positive side of that is, I think, it allows us to really show some more detail in this. So what have I been working on? I kind of tried to compile what's happened since Dave took over as CEO and all the things that we've done. And we continue to expand Emerson's capabilities. Hopefully, better than our peers and our competition, because we think this is what really underpins our future successes.

We started a lot in the early years on things dealing with information. You start to see China show up in here around just after the first wave of things that we took on. We started thinking about the mid-tier about 8 years ago, put a lot of research capability in. And what I'm going to show you today is a lot of the outgrowth of those programs.

We continue to do things. I'm going to mention this, an update on little bit on what we call enriched business models, which is a second aspect of it. But generally, as we think about what are the key focal areas for Emerson today, it's dealing with these emerging markets and specifically emerging competitors. How do you compete?

As you listened to Dave's presentation, there was such a tremendous emphasis on the amount of value and the dependence and the opportunities we have in these markets. So when you go and compete in these areas, you start to encounter companies that are very different than the competitive world that I grew up in. So we're going to talk here about China mid-tier, the emerging market and how that evolves into next generation of global competition.

Later in the presentation

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what's happening with this enriched business models, with platform. As you can see, we've started to talk about a Diagnostic Center of Excellence. This is our real technology play. It's around the world of diagnostics using the information we have and then building out services. And finally, I'll touch on price and what's happening with Emerson in that area.

China is critical to compete in for a number of reasons: First, it's a dramatically exciting market opportunity. When you think of Emerson, you think of infrastructure. You think of hard goods. You think of providing people the means to produce and have access to these things. And I look over the 30 years that many of you are going to be involved in business, and just the number of middle-income housing -- households can expand from 25 million to 135 million. 110 million households of middle income are going to be created. And I actually, in doing this analysis, I set a pretty high standard for middle income. When you compare that to the size of the United States market, they're going to create a market that's bigger than the United States.

That's one aspect, just the household formation. The second is the amount of goods they use. If you measure energy consumption in the country, it's going to double over that time frame. So these households use more and more energy. And when households use energy, they use energy that either directly use Emerson products or use products that we play into. If you look at the growth, just in the near term in infrastructure-type things, these are just indexed all the way from oil to gas, to investment and manufacturing capacity. The key message is, China is a key market. Not a lot of revelation, it's a great growth market and that's one reason to compete there.

But if you dig a little bit deeper, there's a bigger reason to compete there. And I'm going to raise the question for you, I'm not sure all of Emerson’s peers or all of the companies that you know and follow look at it this way. And the reason is, the next generation of global competitors may be being spawned in China. And as Emerson, you know we're very granular, you know we're very detailed. We parse our businesses into 40 or 50 business units. And we look at the industries we serve, who we compete with and we get into the gory details of that.

As we look in a macro sense, we see that there are competitors that are being successful globally. Somebody already mentioned Huawei and ZTE. But what we're worried about is, who are the people that we are going to -- or who are the companies that we're going to compete against in the coming years and are they coming out of China. And now, as you look at Chinese markets, you see demand in what we call the high-tier, that's kind of globally specified stuff. The stuff that -- the guy that Ed talked to that has the 10 salesman in Shanghai. This is what they sell. These are the companies that you know and are familiar, they're our peers.

There's also, literally, thousands of small Chinese companies trying and frankly, they're not of that much interest to us. What's of interest to us are what we call these mid-tier companies. And so in Emerson's vernacular, to be called a mid-tier company, you've got to be successful, you've got to be national in scope, you've got to kind of be backed nationally. And backed nationally means that the country kind of aspires to have you evolve into a global competitor. And you got to get your products up to where, at least they're not just low-tier in terms of specification, but they're may be able to meet the more demanding applications. Not up to what the classic competitions that an Emerson or an ABB or a Siemens might do, but still a higher-tier product.

So I want to focus on these types of companies, a company that we call China mid-tier. This is a competitive call to action when you get in and study these companies. They are unbelievably impressive. There's a lot that we don't know about them. And every time we dig in, we are surprised on how much we find out about them.

Now one of the things that's nice about competing in the China mid-tier is, it gives you nice growth. And if you focus on that up arrow there, called success, these people like to make money. This is not -- getting into China and the mid-tiers does not mean you're destined to make less than 5% OP. We looked at the bands and most of our businesses, we can make 15% to 20% OP in these mid-tier products. In industrial products, we look to do even better. So high growth, reasonable rates of profitability, but you've got to get in and compete.

Now when we go in to Emerson market-by-market and we look -- we start to unearth names of companies that no one in this room is familiar with and we delve into them, we find their sales force, their distribution, their product philosophy, we tear down their products, we think through their cost positions, all of this. You start to become familiar with a whole different set of competitors.

And what's interesting, if you array these competitors business by business on these 2 charts, you find that in terms of size, Emerson's kind of a player. Actually, we're one of the bigger mid-tier players in China. We have scale, we have critical mass. If you look at how long we've been there, this is the number of years we've participated. If you go into Process, we participated more than 30 years. So we're kind of the oldest legitimate mid-tier player in the country. So we have the experience to be a legitimate mid-tier player. And in terms of just pure headcount, headcount applied in the mid-tier we, again, we are certainly competitive almost equal. In some cases, the largest in our industry.

So this is a real interesting message. Emerson already is a mid-tier player. We are engaged in this competition. Why is this important? It's not only important because we want that growth and profitability out of the Chinese market. But you don't have to look too far to see that these competitors are going to start showing up in your other markets. They are going to be the next wave of competition. And if you're going to do what Dave highlighted, go compete in the emerging markets, it's actually these types of companies that you have to win against.

And so if you look at where China is investing money, where they're building pipelines, where they're doing EPC or contracting type work, where they're exporting labor to help, they're getting engaged in a lot of the emerging markets, Africa, the Middle East, Latin America. And frankly, we already start to see some of the companies that are on this chart showing up in these markets as our competition -- sorry, showing up as competitors. I've listed many of them are process companies. So as we look forward, we think in 2025, many of these companies are going to be our primary competitors.

Now from a strategy standpoint, what does that tell you to do? You think in terms of preemptive, go engage them. Engage them in their battleground. And that's really the substance of the presentation that I have for you. So we respect that there's a lot of ways, several degrees of freedom that these companies apply to succeed. Some of them do it through innovation and internal development, some of them do joint ventures. You take a company like Lenovo, they actually went out and acquired assets.

But this is a general path people -- these companies follow. They start out as minor competitors in China and they really don't go globally. But as they become -- increase their Chinese penetration, they start to look outside. And like I say, maybe take one of these several paths. But generally, this is the path of the Chinese competitor.

Now what we do as a company as we go to, like I say, the 40 or 50 product lines that we engage. And we ask them to get involved in these types of competition, start paying attention to the mid-tier specifications, start paying attention to the mid-tier competitors. And as they start to do that, they stumble. And what I've tried to list here is, this is kind of where I get involved as they stumble and get confused, how do I do this? What are the issues that arise? What are the themes -- I call these the 6 areas of discomfort.

So the first area of discomfort is, I've got this nice high-tier business, I make good margins with what I sell in the rest of the world. How can I play in the mid-tier and not destroy what I have? We've got a couple of examples of how we do that.

The second thing is, I started in 2004, Ed pointed this out talking about second- and third-tier cities. It's really great to stay in Guangdong, to stay in Shanghai, to stay in Beijing, to stay along the coast. The real action is in the middle of the country in the second- and third-tier cities. So convincing people to get -- our managers to go get coverage is difficult. We like to pay really high salaries and get high level salespeople who speak English. If you're going to go into the second- and third-tier cities and compete against these, you're going to have to reach down and get sales people compensated at their level so you can deal on a local relationship. So getting companies to get full coverage is difficult.

If you go in and sell certain of our products in China, they're going to find their way back into the United States and Europe. So there's -- sometimes, we have difficulties thinking through, how do we rifle shot targeting our middle-tier competitors in China without necessarily creating a whole lot of confusion in the rest of the world? Just as coverage is confusing to our company, the whole concept of intellectual property in China is really difficult. This is the one of the most dynamic spaces in the world. The rise of the legal system in China and how they're dealing with intellectual property. Most Chinese companies are using that as a weapon against western companies. And so we've got to convince our company to go in and defend that space and play the game as if we were a Chinese company.

There are acquisitions available. That's something we know how to do well. You've got to be preemptive and proactive in that. And then finally, what confuses them is, once they master all these things and they get pretty strong at this, they're like, "Maybe I should go sell this product or this capability. I should export it to other countries, the BRIC countries, for example." And we want to do that cautiously because we -- you have to look at each one of these markets and how you compete and the implications of that. And so what we've done is develop the real methodology for helping people think through how to do that.

So what I've got, 7 quick examples I'm going to show you. And I'm going to go through how the real live stuff of how this works and how we compete. First one is control valve. This is one of the big mid-tier strategies that we've got. We've got Fisher, a great company, $1.3 billion globally, 25% share in their global marketplace.

If you look at the Chinese market, over half of it is high-tier. These are very demanding applications. We have 25% of the total market roughly in China and we get almost all of it out of the mid-tier. We're really good in the mid-tier. But when you go and study the range of other control valve competitors, you find companies in the mid-tier making products that look almost exactly what you're selling as high-tier product. And then you start to focus in on some names, the cream that rise to the top, the very successful growing company.

We see Coso [ph] is a big name in Emerson and something we're really focused on. It's got a ton of resources in China, got a sales forces of 300 people. So what we do is -- here's how we do this. We really, really dig in deep to this. We do a lot of market segmentation. Here's a summary of an analysis. This takes the end-industry applications in China and splits them into these 3 tiers. And as you can see, if you go into a power plant, it's almost all high-tier applications. If you go to a steel foundry or a steel making manufacturing facility, it's half low-tier applications. So you've got to deal with that. So low-tier competitors are all trying to get into the mid-tier, and the mid-tier competitors are trying to attack us up in the high-tier.

Now Fisher has a tremendous brand name globally and really strong, what we call, brand promise. And they have very strict requirements for the specifications they'll allow. When we look at Wuxi Coso [ph], the key mid-tier competitor, their specs are lower. Their specs are good. They're demanding. And so this becomes a very intricate spec exercise looking at how do we want to play that protection line? How do we want to get into the mid-tier? What applications? And as you can see, their specs are lower. Sometimes we copy the mid-tier specs. Sometimes we exceed the mid-tier specs. In terms of responsiveness of the valve, in terms of the lifespan of the valve, here, we chose to do more. And so it's almost like a scalpel putting those specifications together.

You go to refrigeration compressors, another key thing. Ed mentioned the cold chain a couple of times, which is refrigeration for light food retailing and the like. Here, you can see the competitive mid-tier compressor. Here, we actually have a pretty high share. We did some acquisitions over the years, but we've been developing our products for this. Got a lot of engineers total over 300 engineers in China. But the real game here is getting them into the second- and third- tier cities. This is our coverage in 2011. As you can see, there's entire parts of the country that lack coverage in this product line, which is kind of ridiculous. Food retailing occurs all over the country. And so this is a game of rolling out -- where we’ll add coverage in 18 cities over the next 5 years of tier-3 cities and another 7 tier-2. So that's another thing that we have to convince people on.

When you get into Industrial Automation, you encounter a totally different problem. Solenoid valves are very low-price point goods, typically sell $10 to $20. We have very strong share here, 100-person sales force. But again, we've identified the mid-tier competitors. This is a game that if we sell a product in China, we don't want it to bleed back into the United States and Europe. And so we go through a great deal of effort to differentiate. Differentiate by brand, how it's packaged, make it very Chinese, use Chinese materials, degrade the spec here, use lower specification wire and then specifically, don't add approvals to that. So that protects our core market.

If you go into the Network Power business, I have an interesting example here, where we compete in a way different from changing the product. Here, we take the global product, and our real differentiation, our way of competing in the mid-tier is through knowledge. Turns out that data centers in China use a lot of the standard air conditioning. They don't really understand the benefits of the technology added into the Precision Cooling equipment that Liebert sold so successfully over the years. So again, we have over 100 salespeople. And this is a game where we take the flexibility of the product and uniquely configure it and apply, and beat the mid-tier competition. It's really convenient. You don't have to change the product. And so sometimes this can work.

Now I guess the theme that comes out of this is, this is not a one-size-fits-all. Every situation is different. The one piece of commonality that I will tell you is, every time we start digging into these mid-tier competitors, they're always bigger, they're more profitable, they're more successful, they have more intellectual property and they have higher aspirations than we ever imagined. And so this is an effort to really engage those.

A product familiar to many of you in the flow area is Coriolis. Micro Motion is having extraordinary success worldwide and really working at competing in China. Now in a product like this that's always been founded very much on intellectual property, on patent protection, you actually face a lot of risk going into China. Because the Chinese intellectual property game can be used by your competitors against you. They can actually stake out intellectual property turf in China that you hold in the rest of the world and prevent you from competing in markets that you've actually mastered. So this is a game of, again, being preemptive. Getting there first and to staking out your territory. And in terms of Coriolis patent, we're up to 140 patents and 3x that of the competition. So again, this is kind of a check-the-box how are we doing on intellectual property. And really paying attention to these mid-tier competitors and what they're doing in this space.

One of the dimensions that's really critical is acquisition. I wanted to illustrate to you just how much an acquisition can mean to being -- as a catalyst to gaining market share in this particular area. If you go to the back of the history of this, if you go back to 1999. The natural gas regulator market in China was $40 million and we had 10% market share. Not bad. We were there. Had a presence. We were marching along here at 10% growth. This is mediocrity.

Now interesting number on this chart. The market from '99 to 2011, over 12 years, grows by 4.5x. Natural gas is exploding in this country as a marketplace. We did this acquisition in 2005. And I remember doing the deal, it was only, I think, a $6 million or $7 million company. But we have now have built a $45 million business. And we have close to 1/4 of the marketplace. I look at this chart as a great news example and a potential bad news. You'd better be astute. And in this mid-tier space, buy the right company. Because they can make or break you in a market. So again, that's a check-the-box type of thing.

Finally, final example is in the Control System area. One that I've actually been working significantly on in the last year. We have been immersing ourselves in SUPCON and Hollysys. You would think we would know everything there is to know about the Process business. It turns out, that SUPCON and Hollysys were bigger than we thought they were. Had, had a lot of success and had very strong governmental relationships, very strong university relationships for technology.

Hollysys, as an example, competes particularly in the Power business. That's really their sole area of strength. So we started digging into this. Now we do extraordinarily well in power in China in the larger power plants. 600 megawatts and above, we are a premier competitor. And we have a globally spec-ed product and we do these projects with our global teams. But we found in this 300- to 600-megawatt range, we had hardly any market share and this was the domain of Hollysys. And so what we did was we conceived the product, targeted and just launched it this year, targeted specifically at this market. The specs are downgraded, the speed 1/10, copper as opposed to fiber, we used local PCs and network switches, lower standard of control. We didn't provide our expertise on startup in tune [ph], we more self-sold in the product. We locally engineered it with our less experienced people. But this is a really critical product for us to succeed in, to keep them contained in this space and try to make it difficult for them to compete. In history, they’ve only won 1 or 2 plants in this particular area.

So in summary, you've got these 94 programs. This whole philosophy moves across all these different product areas. And this is a very, very major activity in Emerson. If you look at the next issue that arises, you've got our ability to compete in China. We look at what the market opportunities there? What are the positives that causes to want to compete there? Is the market large? Do we have share gains? Do we want to confront a competitor? And what are the risks? Are we going to erode our global markets? Are we going to confuse our customers globally? Can we sustain this long term? We take these criteria and these programs, and we apply them to the other markets to decide what the priorities are for moving forward.

So to bring this together for you, we've learned a lot of lessons in these programs. First, the customers in China are actually pretty astute. They're very diverse. Their capabilities, technically, sometimes really surprise you, sometimes really disappoint you. They're very price conscious. But for critical applications, they will reach into the higher-tier product. We're more worried about where they require more minimal features and functions. As Ed emphasized, being local is important in getting those second- or third-tier distribution, and sales forces out there is critical.

Perhaps, we've developed much more compelling respect for the local competitors. They are after the high-tier. And year after year, they develop the skills to go after that. There's a lot of government support, very formal that gives them a lot of advantages. A lot of tie-ins to universities. These companies are first going national, they have some vulnerabilities in product reliability at this point. But currently, these companies win the mid-tier, there's a threat to the high-tier, and as our potential global competitor, it’s really important for us to engage them.

So switching gears, just a few slides on where we stand on these other initiatives. I'm still deeply interested in enriched business models. I think applying information to our technology is a critical thing going forward. If you think of what an enriched business model is, it's taking our classic installed electromechanical product, making them intelligent, building the digital platform middleware, like a Trellis for example, and then building a set of services out. So you have really the entire use or entire solution available to your customers. And then you have the ability to sustain the gains that they receive.

It turns out that to build out these models, we have to create a lot of, really, a multidimensional capabilities. We have to build technology, build out channels, think through the intellectual property, think through software size. Delivering this requires a lot of partnerships. How you price it and how you communicate it is really challenging.

Now I've talked to you about this before. In the last year, we've really worked on this sustaining thing. We think in terms of using big data is a term out there in the world, but using information to give people visibility into what's going on in their processes. These are some of the services that we try to think of that fall into this visibility.

Decision-support is another one. This is where we use our vertical knowledge of the applications and our technology to make better decisions. And then the third dimension we can work on is what we call, after-execution, where we have the premier vertical application knowledge, where we have the largest installed base and we're taking these initiatives. These become really critical, what I call, preemptive value-driven initiatives. And in areas where we can get long-term subscriptions, these are very, very highly profitable things.

I've listed some of the major ones we're working on. Here's 6, they cut across a lot of different businesses. We've launched Retail Solutions. We've talked about Trellis, we get a lot of monitoring and capability out of that. We're working on one for residential, HVAC. The wireless guys have come up with a whole approach to building platforms and plants on kind of the tertiary or the application for things that are not necessarily germane to their processes. And we're working now studying health care, and we're starting in the operating room. And then we did an innovation forum and came up with a very long-term set of opportunities around natural gas. You can see where it's different phases in all these, but some of these have extraordinarily large potential.

Finally, I'll just mention price. Dave threw out these numbers. In 2010, we were green by $40 million, we had significant price deflation and we've contained the down price. Last year, we got a little price increase but it was a year of inflation. And for the first time, since we started the price initiative, we were red by $100 million. We expect to be red -- or green by $100 million this year. We have worked in about 1% of price, and so that assumes a return of inflation the second half of the year. This is the world Producer Price Index. And hopefully, our price increases are baked in and we can contain that inflation pretty well.

So that's kind of the scenario on the near-term price. Long-term price, I'd still work on this as much as ever. We continue to build Emerson's broad array of tools. We're doing about 5 or 6 Vendavo programs this year. We're going to end up with 15 divisions, over 100 market research studies. We keep getting more and more sophisticated in what we call potential and important [ph] analysis and total cost of ownership.

So that gives you a sense of how we're thinking about competition and in particular, our entire suites [ph] for this year around emerging markets, especially the China mid-tier and competing against that global next generation of competitors. And then still working this enriched business model after services and working to build the foundation and to get better price. All right.

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