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Emerson Electric Co. (NYSE:EMR)

Q1 FY08 Earnings Call

February 05, 2008, 02.00 PM ET

Executives

Chris Tucker - IR

Lynne Maxeiner - IR

David N. Farr - Chairman, CEO and President

Walter J. Galvin - Senior EVP and CFO

Nicole Parent - Credit Suisse

John Inch - Merrill Lynch

John Baliotti - FTN Midwest Securities

Jeff Sprague - Citigroup Investment Research

Mike Schneider - Robert W. Baird

Deane Dray - Goldman Sachs

Christopher Glynn - Oppenheimer

Stephen Tusa - J.P. Morgan

Scott Davis - Morgan Stanley

Analysts

Robert Cornell - Lehman Brothers

Operator

Good afternoon or good morning ladies and gentlemen and thank you for standing by. Welcome to the Emerson first quarter 2008 results conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. [Operator Instructions] This conference is being recorded today February 5, 2008. Emerson's commentary in responses to your questions may contain forward-looking statements including the company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available in Emerson's most recent Annual Report on Form 10-K as filed with the SEC.

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

I would now like to turn the conference over to Mr. Chris Tucker. Please go ahead, sir.

Chris Tucker - Investor Relations

Thank you, Joshua. I am joined today by David Farr, Chairman, Chief Executive Officer, and President of Emerson, Walter Galvin Senior Executive Vice President and Chief Financial Officer, and Lynne Maxeiner my replacement as Director of Investor Relations. I am moving on to my next assignment as the Vice President of Finance for White-Rodgers Division of Emerson Climate Technologies. Lynne has been with Emerson since 1997 and is coming to the IR role from Emerson's Leroy-Somer division part of the Industrial Automation business segment. Lynne is going to review the first quarter results. Lynne?

Lynne Maxeiner - Investor Relations

Thank you, Chris. Today's call will summarize Emerson's first quarter fiscal year 2008 results. A conference call slide presentation will accompany my comments and is available on the Investor Relations section of Emerson's corporate website. A replay of this conference call and slide presentation will be available on the website after the call for the next three months. I will start with the highlights of the quarter as shown on page 2 of the conference call slide presentation.

First quarter sales were up 12% to $5.6 billion with increases in four of five business segments. For the quarter, we had underlying sales growth of 7% led by strong international growth. Operating profit margin improved 60 basis points to 14.8% and earnings per share from continuing operations came in at $0.66, up 20% compared to the prior year quarter. Operating cash flow in the quarter was $423 million and free cash flow was $296 million, an increase of 29% and 44% respectively. The company's balance sheet remains strong. Average Days-In-The-Cash-Cycle improved to 66 days from 67 days. Trade Working Capital as a percent of sales improved from 19.8% to 19.7% and operating cash flow to total debt remained solid at 64%.

Next slide. And now we’re here on the income statement. Sales from the quarter were $5.637 billion, again up 12%. The underlying sales growth was 7% and currency added 5 points of growth. Operating profit was $832 million in the quarter or 14.8% of sales. The 60 basis point improvement was driven primarily by cost reductions and volume leverage. Net earnings from continuing operations for the quarter were $522 million, up 17%. Diluted average shares in the quarter were $796.5 million, which gets to an EPS from continuing operations of $0.66, again up 20%. We had a $43 million impact from the Brooks Instrument Divestiture in the quarter, which resulted in an additional $0.05 from discontinued operations. This brings the reported EPS to $0.71.

On the next page, you can see the underlying sales by major regions of the world. First, in the United States, we had growth of 5%. Total International was at 9% with Asia at 16%, Latin America up 10%, and Middle East/ Other up 24%. That gets you to a total underlying sales number of plus 7%, currency adding 5 points for a consolidated sales growth of plus 12%.

Slide number 5 provides some additional income statement detail. Gross profit of $2.022 billion or 35.9% of sales with cost reduction benefits driving the gross profit improvement. SG&A was 21.1% which brings you to an ope of $832 million or 14.8% of sales. Other deductions in that were $5 million, as we had $22 million in increased gains driven by the sale of the IMC joint venture. Interest in the quarter was $49 million, which brings you to a pre-tax of $778 million or 13.8% of sales. Taxes in the quarter were $256 million for a tax rate of 32.8%. The higher first quarter tax rate was driven by the sale of the IMC joint venture. We still expect the tax rate to be approximately 32% for the year.

The next page has the cash flow and balance sheet. Operating cash flow was $423 million, up 29% in the quarter driven by strong earnings performance. Capital expenditures of $127 million gets you to $296 million in free cash flow, up 44% versus prior year quarter, again the strong flow to total debt ratio of 63.6%. The Trade Working Capital balances are at the bottom on the page with the Trade Working Capital as a percent of sales at 19.7%, an improvement of 10 basis points versus the prior-year quarter.

On page 7 we will discuss the business segment P&L. Business segment EBIT was $847 million or 14.6% of sales. The improvement was driven by cost reductions and volume leverage, price increases were offset by wage and material inflation. Difference in accounting methods $53 million, up $5 million. Interest expense was $49 million, down $9 million due to lower interest rates and strong cash generation, which gets to you to a pre-tax line of $778 million, up 22%.

Going through the individual businesses. First, Process Management, sales here of $1.436 billion, up 18%, underlying sales were up 12%, currency added 5 points and acquisitions 1 point. By geography the U.S. was up 13%, Asia up 20%, Europe up 5%, and the Middle East up 28%. EBIT dollars were $258 million or 18% of sales. Margin improvement was driven by leverage on increased sales and cost reduction benefits offsetting inflationary pressures. The acquisition of the Automation Group closed in December '07. This acquisition brings high-level project management, engineering solutions, and systems integration capabilities.

Next slide, Industrial Automation, sales in the quarter $1.125 billion, an increase of 13%, underlying sales growth of 6% with currency adding another 7 points. By geographic region the U.S. was up 5%, Asia up 15%, and Europe up 6%. EBIT of $171 million or 15.2% of sales, a decline of 150 basis points versus prior year quarter. There was a decrease in funds received under the U.S. Continued Dumping and Subsidy Offset Act from $24 million in Q1 ‘07 to $3 million in Q1 ’08, which had a negative 190 basis point impact. Industrial infrastructure spending continues to be good as demonstrated by the solid sales growth of our businesses in industrial automation.

Next chart, Network Power, sales in the quarter of $1.406 billion, up 17%, underlying sales growth of 12%, currency adding 4 points and acquisitions an additional point. By major region the U.S. was up 14%, Asia, up 14% and Europe up 2%. EBIT dollars in the quarter, $180 million or 12.8% of sales with volume leverage and cost reductions driving the margin improvement. Strong order growth continued during the quarter and end markets remained favorable. Also the acquisition of Motorola’s Embedded Communications Computing business closed in the quarter. More details are in the next slide.

The transaction closed December 31, 2007, the expected financial impacts for '08 includes sales of approximately $400 million, estimated dilution to earnings per share of $0.02 to $0.03 due to non-cash charges for amortization of intangibles and process R&D and inventory write-off, $15 million of in-process R&D cost were recorded in the first quarter 2008. This business is a complementary fit with Emerson’s Embedded Computing business and should be accretive to earnings per share in 2009.

Next slide, Climate Technology, sales in the quarter up 11% to $766 million, underlying growth of 7% and currency adding 4 points. Geographically, the U.S was up 11%, Asia up 16%, and Europe down 16%. The decrease in Europe is primarily due to lower heat pump sales in Europe versus a high prior year quarter. EBIT in the quarter was $102 million or 13.4% of sales, volume leverage and cost reductions drove margin improvement partially offset by negative mix. Price increases in the quarter were offset by material and other inflation. The U.S growth is expected to moderate as we move through 2008 as housing is still soft.

Next slide, Appliance and Tools. Sales here were $1.049 billion for the quarter down 4%, underlying growth down 4%, currency added 2 points, and divestitures and acquisitions subtract 2 points. By geography, the U.S was down 6%, Europe was down 5%, and Asia up 20%. EBIT was $136 million or 12.9% of sales, good margin increase of 70 basis points driven by cost reduction activities and favorable margin impact from divestures. Price increases were offset by commodity and other inflation. The Professional Tools business remained strong driven by non-residential demand and strength from Europe.

Looking at the last chart, summary and outlook. We had a good start to the year with 7% underlying sales increase. Operating profit margin showed a strong improvement of 60 basis points and good order trends with 10% to 15% growth in the quarter. We expect full year underlying sales growth of 5% to 7%, reported sales growth of 9% to 11%, and operating margin improvement of 40 to 60 basis points. That drives our expectation for full year earnings per share from continuing operations in the range of $2.95 to $3.05 and 11% to 15% growth including $0.02 to $0.03 dilution from the Motorola ECC acquisition. We also expect full year operating cash flow of $3.2 billion with capital expenditure of approximately $800 million and free cash flow of $2.4 billion We will review 2008 expectations and long-term initiatives at the Annual Investment Community update this week in St. Louis on Thursday and Friday, February 7 and 8.

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

David N. Farr - Chairman, Chief Executive Officer and President

Thank you very much Lynne. And first of all I want to thank all participants for being here today. We are really looking forward to seeing all of you on Thursday and Friday this week we have, I believe an exciting program to present you in our new auditorium and we are looking forward to seeing you. And I think it's an exciting opportunity to… for you all to see the strategies that we were working on today and what we see unfolding here in the coming years. I also want to thank Chris… Chris Tucker, he's done an outstanding job.

I really enjoyed working with Chris over the last two years. He will enjoy his next assignment, he will still be in St. Louis as a CFO of White-Rodgers working for Mark Bulanda who some of you may know ran Strategic Planning for me a couple of years back. It’s a great assignment for Chris continuing to develop him as a leader, which he already has a lot of leadership capabilities. I am looking forward to see him grow and develop. He's done a great job except for this last 35 days, duly noted in his performance rating that he is walking out from… taking the stock from 58 down to 52 and it might take a couple of years work, we’re going to work that off but that's where he is right now and I wish him well. You may see him Thursday, Friday; you may not depending on what happens here the next couple of days.

I am also looking forward to working with Lynne. It’s a fun job to try to train Investor Relations people, Walter knows, he's been around a long time and we are looking forward to it. Lynne has been with us for quite sometime working with Jean-Paul Montupet in many different areas including working at Corporate. She has a lot of good operating experience and she brings a different perspective to this job and we are all looking forward to another training and not my last and I am looking forward to that.

We had our shareholders meeting today, it was well attended, we had a record voting at 89%, it's a very high level, 89% of our shareholders’ voted today and we had a 97% plus ‘Yes’ vote for all the Directors, the four of us, including myself and Charlie and then also the KPMG. So, well attended, good vote and it came out quite nicely. We also had a Board meeting for the last time today in talking about 2008 and then talking strategically where we are investing right now to take advantage of the global opportunities and potentially disconnecting this marketplace that's going on right now. So this company is financially very strong, we are very liquid, we have been working hard and reposition the company and we are well positioned to take advantage of what unfolds here in the coming years.

I also want to thank all the operating executives including the corporate executives here for the work they did this quarter. It was a solid excellent execution especially in the strong capital businesses, they had great quarter, did extremely well, both in underlying growth, margin, and our returns and cash and even the businesses where clearly we are in a recession in Appliance Components and the Residential Tool businesses. They have executed in down sales to improve the profitability in the quarter and that is not easy to do. But we anticipated this last year, we could see it coming, it was not a surprise, nothing surprise me right now what's going on here in the U.S. and from our standpoint, Pat Sly and Jim Lindemann have done a great job in a very challenging situation working with these people so I commend them. It's always too easy to grow but these guys executed in a very tough market so I appreciate that.

As you have seen in the numbers, we have had an excellent underlying growth in the first quarter of 7%, our three-month rolling average orders have continued to be very solid in a 10% to 15% range, underlying orders have continued to be obviously strong in the capital side and weaker in the consumer related businesses. For our global positioning, our right market segments truly have benefited this company in the last six months and will benefit this company here for the next 12 to 18 months. Our international sales are trending towards the 54% level and our emerging market sales are trending towards the 30% plus levels for this year. These are also very important investments that we've made at the corporation and continue to leverage and continue to do extremely well as we go forward here in 2008.

As you saw from the operating profit margins, we executed on the restructurings and the cost reductions, the new products programs which are coming at a higher margins, the operating guides delivered and clearly you can see that in the margin performance we had in the first quarter. And we will be talking about Thursday, Friday this week about delivering a 16% plus percent op margin for 2008 getting back to that number that we decided to let go back in 2001 when we went through the major restructuring reposition the company. And we climbed back and we feel very strong this year that we will reach that 16% plus level and get back to those levels and moving forward for record levels.

On the new product front, I was very pleased in the last three or four months, as the new products are holding in, coming in and really helping us add more value for our customers and clearly as our customers get more value, we get more value. And that has continued to deliver the performance that we need as a company want to grow faster and deliver high levels of profitability. You cannot cost reduction yourself to [inaudible] as we know. So new products are very important and they are doing well in that area.

The other key that we execute well in this quarter is acquisition integration. We made several acquisitions last couple of years they are integrating well. We are getting the synergies both from the sales and the profitability and the cash, which is very good [inaudible]. And we are embarked upon another very important one, the Motorola Embedded Computing business, which we are going through a very significant integration here over the next 12 plus months with Jay Geldmacher leading that. Jay will talk about that later this week in his presentation but the first 30 days has gone well. We reported back to the Board today what’s underway. There’s a lot of integration work to be done here but we feel very good and we have a track record to do it. And so I feel good about where we stand with the first 30 days and I do want to thank any of the Motorola Embedded Computing people out there, they are out there listening this call for joining us is a great team and I am looking forward to the value they're going to create for the Emerson shareholders as they work well with Jay's team across Astec and across our Embedded Computing business and Power business and then across Emerson.

As we look forward to Thursday and Friday, I am looking forward to setting the platform and the foundation of what I see as the economic view of 2008, 2009. My view of what's going on is not changed at all from what I've been talking about in the late fall or in November. Clearly we are dealing with economic environment that in some places is very strong, and in some places reasonably weak. It's changing and what you need to expect from Emerson is and you will get from Emerson is that we will execute, we will move rapidly to deliver what we need to deliver on the restructuring front, or the growth front, on the new product front to deliver the underlying growth that we see this year which as we said in the 5% to 7% range and deliver sales in the 9% to 11% range for the consolidated company.

As we look at our business today, our global position, our global team, how we are executing the first three months of the year, our order pays, the cash flow that we have right now I feel very comfortable that we'll deliver that sales the margin of over 6%, brought the trending north of 20 leading…moving towards 21% and operating cash flow, $3.2 billion range and 55% to 60% of that going back to our shareholders in dividend and share repurchase.

So there’ll be more on that on Thursday and it's going to be myself talking Thursday afternoon. I have Charlie Peters talking, Ed Monser, John Berra, Tom Bettcher, Jean-Paul Montupet, Ed Feeney, Jay Geldmacher talking about where we are taking this company to create value for our shareholders both in 2008 and 2010 and hopefully our shareholders will show up and want to engage with us and we feel very good about this company right now and we feel very good about where we are sitting on a global basis and look forward to working with everybody in the next Thursday, Friday time factor to show why we feel so excited about the company.

With that I am going to open the phone to take questions but I do want to remind you we will get into more details on Thursday and Friday in particular in economics. I am not interested in getting into a lot details here without the opportunity to really debate it with you. So, I'm willing to talk about what's going on the quarter and I am looking forward to seeing you on Thursday and Friday. Thank you.

Question and Answer

Operator

Thank you. Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] Our first question is from Bob Cornell, Lehman Brothers. Please go ahead.

Robert Cornell - Lehman Brothers

Yes, I have got couple of questions Dave. You said to lay off the macro components but...

David N. Farr - Chairman, Chief Executive Officer and President

We’ll meet Thursday Bob.

Robert Cornell - Lehman Brothers

Well, I am not talking about the quarter you just reported I mean, did you see any sort of late you know fall off in any of your businesses sort of the end of the quarter like you suggested the [inaudible] that came out today?

David N. Farr - Chairman, Chief Executive Officer and President

No.

Robert Cornell - Lehman Brothers

And, you mentioned that in the process market, you had some market penetration gains, may be if you spend on that point a little bit.

David N. Farr - Chairman, Chief Executive Officer and President

I think you have seen us in best quiet significantly both on the systems and the solutions and instrumentation side. You seen us doing extremely well in the Middle East right now on a lot of oil and gas investments and you are seeing us gain significantly right there. The investments we've been making have really... are paying off. To be honest on a quarter-to-quarter basis to say here we have gained a significant level of market share it’s extremely hard to say. I just know the trends, I know what's going on in the industry, I see our sales Bob and I see what's the industry trends are.

And so… I feel comfortable saying that we've gained in the last couple of six or eight months and to say it's specifically what quarter it's hard to do but we've seen very strong pace in oil and gas, the power marketplace and we have a very global network and I am sure John will talk further about wireless, which has been introduced and it's been well accepted and taken off. So, you can’t say okay discount, discount, discount, but I say overall we are extremely strong at this point in time.

Robert Cornell - Lehman Brothers

I'd like to extend my thanks to Chris for the work he put in last couple of years helping me and welcome Lynne to the fray.

David N. Farr - Chairman, Chief Executive Officer and President

Yes, we’re going to miss him and it depends on what happens this week, how much how I miss him but I appreciate that and I'll see you Thursday. Okay?

Robert Cornell - Lehman Brothers

You bet.

David N. Farr - Chairman, Chief Executive Officer and President

All the best.

Operator

Our next question is from the line of Nicole Parent, Credit Suisse. Please go ahead.

Nicole Parent - Credit Suisse

Good afternoon.

David N. Farr - Chairman, Chief Executive Officer and President

Good afternoon, Nicole.

Nicole Parent - Credit Suisse

Thanks [ph] a lot to Chris in his new position. He did a terrific job. With respect to Industrial Automation Dave, we saw an acceleration in orders in December can you give us a sense of where the strength was, U.S. versus international?

David N. Farr - Chairman, Chief Executive Officer and President

I would say I don't have the specific details with orders. I would say there had to be probably primarily international, Nicole.

Nicole Parent - Credit Suisse

Okay.

David N. Farr - Chairman, Chief Executive Officer and President

This... the business in the U.S. did pretty well for the quarter and…but I would say the orders are coming more from the international ranks in particular around power area. Based on the economics will be talking about later this week, I would expect that the U.S. business will be okay this year, but we will continue to be at a lower level than we see internationally.

Nicole Parent - Credit Suisse

Okay and I guess with respect to total European sales I think you said they were up 1% in the quarter, obviously Climate Tech was depressed by the heat pump, I mean when you think about that sequentially versus the fourth quarter up 5%, if you were to add back kind of that anomaly in the first quarter, do you feel good at where Europe is, is it pretty much inline with your expectations?

David N. Farr - Chairman, Chief Executive Officer and President

I would... I am disappointed with how far the Climate Tech and the heat pump related businesses was wrapped off in Europe. It's pretty clear to us now where we are having 25%, 30% growth rates last year at this point time there was a lot of, as I say, inventory being built, there is a lot of market put... product being put in the channel and so obviously we got to digest that right now. I think it's going to take two or three quarters for us to do that. My view right now as I look at this out there folks is that I believe Europe will still be a higher underlying growth rate than the U.S. this year, my current view. It will not be as far part as last year but I just think that our European businesses are still pretty good except for the Climate Technology piece and I feel we're okay this year in Europe even though we will be at lower growth rate.

And I would say that one of things that we're going on the heat pump is last year there was a lot of tax incentives for the heat pumps in the marketplace. They were pulled. And I think the Europeans are trying to sort of what they are going to do relative to incentivising the environmental... more environmentally friendly type of product. It will come back and… but I think it’s going to take two or three quarters. And comfortable I feel okay about the quarter in Europe I would have hoped they would be more like to 2% or 2.5% to be honest.

Nicole Parent - Credit Suisse

Okay. Great. And one last one just you talked about kind of being opportunistic in this market as we move forward could you give us a sense on M&A, what you are seeing out there, or your view of the market is?

David N. Farr - Chairman, Chief Executive Officer and President

My view of the marketplace is, last year we were talking about in EPG, I pretty much said it was pretty weak for us. As we've gone forward here now, and we look at the assets… available assets are going to be coming both from the... they are going private and the ones also from corporations looking to sell assets off. Our opportunities are increasing and I would expect here for the next 12 or 18 months to see companies like Emerson, other companies in industrial space we will be actively looking for companies. Things are not going to be bought cheap here, you have to buy very carefully, but we have the unique opportunity right now as we talk to our Board about picking up some selective assets, which have not been available for the last five or six years and we are going to be going at that and I would think that you will see that both at our place and other companies at this point in time. It's a good time for companies like Emerson. Financial crisis maybe bothersome for people in New York, our private equity firms, but as I look at them right now, those are unique opportunities for good companies to attack and go get some things.

Nicole Parent - Credit Suisse

Super. Thank you.

David N. Farr - Chairman, Chief Executive Officer and President

All the best Nicole, see you on Thursday.

Operator

Our next question is from John Inch, Merrill Lynch. Please go ahead.

John Inch - Merrill Lynch

Thank you. Hi Dave.

David N. Farr - Chairman, Chief Executive Officer and President

Hey John.

John Inch - Merrill Lynch

So, couple questions in Network Power. We saw the order trend. Given the economic backdrop Dave, how are you thinking about this business in the context of say the computing versus telecom side? And I guess part of the context of my question if you look at the recession of '01, '02, I mean this business really struggled so may be you could frame it in the context sort of what has changed in the mix sense then just how you are feeling about the outlook of the business?

David N. Farr - Chairman, Chief Executive Officer and President

We are going to talk quite a bit about that on Friday, both Ed Feeney and Jay Geldmacher will talk about that. But let me give you my sense. In the 2000 time period, you probably remember we kept on some people that this thing is growing way out of line relative to the underlying growth rate and what was going on is you saw a lot of the [inaudible] come in those are the private… the telecom guys you saw a lot of these outsourcing data centers being built. You saw a huge bubble being build at that point in time which they... obviously we got crushed as we came into late '01 into earlier '02, and '03.

We have not seen and will show you this... we have not seen any emerging of a bubble created this time, not in the financial centers or any other places and you are seeing a lot of data processing investment going on around the world. It's broad, it’s not focused on one market segment and you'll see that as we show you the pieces it's very diverse right now and it’s fairly steady. So, we look at a market space that we did not see an accelerating bubble being emerging here last two or three years on the data side or what we call the labor side. So we are very comfortable with that right now. Now I've also realized things cycle but right now the cycle is good.

On the telecom, we see investments going on at this point time and we'll talk about that but again it's not going to be fast. It's going to be fairly steady. I would see more of the power, the power… the reliable power investment being stronger growth in the data telecom side at this point in time. But there has been no bubble, we are watching this like a hawk. I mean I still have scabs and scars on my backside from what happened, Walter and I went through this in '01 and '02. And so we are watching it very closely right now, we do not see it all John at this point in time but we'll talk some time on that, we'll spend so time on that on Thursday.

John Inch - Merrill Lynch

Okay I’m looking forward to it. And then just right now in the business I think there is some storms in China and there is, maybe issues, the Chinese New Year has come up in the past sometimes for some of these tech companies. Are either of those events going to be an issue and so far as the quarter we are in today?

David N. Farr - Chairman, Chief Executive Officer and President

Well, I don't worry about quarter-to-quarter you know me but I'm assuming that we never do a good job forecasting, most companies forget about Chinese New Year, it comes every year. I would say... I haven't heard of any issues right now, the snowstorms clearly are causing problems in the short-term. I would say that you will see... depends how fast we cover here on February... late February early March. Clearly we are going to be hurt by this because of the delivery and the movement of goods and services. So my gut tells me right now there will be a slight impact but we won't be able to finalize that until we get out of the quarter. It's not going to be huge but I bet you’ll hear a lot of companies talking about it. I even had an e-mail coming back, Walter you had a lot e-mail in this, no Walter is shaking his head. So I tell Walter as you... so I think it will be okay but I'm sure there will be something pops up.

John Inch - Merrill Lynch

Thanks very much.

David N. Farr - Chairman, Chief Executive Officer and President

I’ll see you Thursday John.

John Inch - Merrill Lynch

Yes, see you Thursday.

David N. Farr - Chairman, Chief Executive Officer and President

Okay.

Operator

Our next question is from John Baliotti FTN Midwest Securities. Please go ahead.

John Baliotti - FTN Midwest Securities

Dave, given, you still have records levels in cash despite first quarter being seasonally slow for free cash and last couple of years you've done $800 to million to $900 million on buybacks, is the capital deployment, is your hierarchy move around a little bit with the market trading the way it is today?

David N. Farr - Chairman, Chief Executive Officer and President

Yes, it does. I would say that... I would tell you we showed the Board that more money was allocated towards share repurchase today than it was in November.

John Baliotti - FTN Midwest Securities

Okay great thank you.

David N. Farr - Chairman, Chief Executive Officer and President

I mean, wants to go private since no one liked this.

John Baliotti - FTN Midwest Securities

Okay, thanks.

Operator

Next question is from Jeff Sprague, Citigroup Investment Research. Please go ahead.

Jeffrey Sprague - Citigroup Investment Research

Good afternoon gents.

David N. Farr - Chairman, Chief Executive Officer and President

Good afternoon Jeffrey.

Jeffrey Sprague - Citigroup Investment Research

I guess on that last point Dave when you said you want to address the disconnect in the marketplace, so you kind... is that along the lines of your stock versus your view of the fundamentals or is it also just kind of this whole frenzy that everyone is in about recession and just the macro environment in general you think?

David N. Farr - Chairman, Chief Executive Officer and President

I'm more talking about the macro environment in general Jeff. I look at... as you know I always look for discontinuity and I look for when those people are panicking and you take advantage of that situation and go. We are fundamentally very strong, as John just pointed out and as you point out from our cash flow and balance sheet standpoint, industrial companies right now are very strong relative to what these opportunities we can take and go after, because of our cash position. So I look at this as a way to invest in new products, ways to invest in maybe potential acquisitions and to push forward right now where people maybe hesitate.

And so from my standpoint, are we going to change fundamentally our structure relative to share repurchase? Not big time. As I said to you, I gave the range of 55% to 60%. Now would we go higher up to 62% or 63% by operational cash flow from the standpoint of turning back to shareholder the answer is yes. If I felt that we were not getting the opportunities to invest, we will take that cash and give it back to the shareholders. So, I just feel very good right now that we have the opportunity and the wing span to go out and do something additional in this economic environment where people are getting a little bit nervous and pulling back.

Jeffrey Sprague - Citigroup Investment Research

Dave, you called out power a little bit when you were talking about process, I mean, is there a clear shift beginning to take place in your activity from oil and gas towards power gen? I am sure oil and gas leads, but is there a little bit of different complexion in demand starting to take place?

David N. Farr - Chairman, Chief Executive Officer and President

We have seen a pretty good improvement in power. We had a good power. I would say the power is going to be good for the next couple of years here. I just came back from the Middle East I was there four days. India four days, very good power demand. Asia, China, China is right now again back on power shortages. The infrastructure in Eastern Europe and Western Europe is very weak right now in power, they need investment. Everywhere we go, we see people investing in power right now, because they need to for the next five, eight years or so. I would say the environment right now for power is very good, both for upgrades to be honest and also new capacity. There is a lot of work going on right now in getting more out of an installed base and that's where we play extremely well in our capability. So, I like the power market here for the next two or three years and we have a very good hand in power as you know.

Jeffrey Sprague - Citigroup Investment Research

Sure. All right, we will see you Thursday.

David N. Farr - Chairman, Chief Executive Officer and President

Yes, Thursday. Looking forward to it, travel safely.

Jeffrey Sprague - Citigroup Investment Research

All right, thanks.

Operator

Our next question is from Mike Schneider, Robert W. Baird. Please go ahead.

Michael Schneider - Robert W. Baird

Dave and Walter, can you just address pricing for a second, maybe what it was in the quarter? And then in this environment, I guess, weaker demand, at least from the macro numbers, is it your expectation that actually pricing may not offset raw materials this year?

David N. Farr - Chairman, Chief Executive Officer and President

I am glad you could get off your conference call to talk to me, Mike, but right now the quarter is about 1%, 1% price. And as we look at our pricing, price cost environment right now, we are slightly green. As you and I talked about, I know the fed is doing everything possible to keep the economy going from the standpoint and help her recover in late '08 going into '09 and the consequences of that can be a little of inflation. So I would expect us to see inflation in some material cost increases go forward as one as this economy starts going again and you see some of the material shortages continue to flow through. I would expect material upward pressure is going to be there, but not going to be extraordinary, Mike. And so right now, I feel comfortable on the price cost, but we are going to be very careful and watching this because it's potentially, in the second half here, we may have to go back out and get a little bit more price to cover the cost.

Michael Schneider - Robert W. Baird

But, as you enter the calendar year, did you hear anything from the field that would indicate your ability to push through price in this market is getting tougher?

David N. Farr - Chairman, Chief Executive Officer and President

No.

Michael Schneider - Robert W. Baird

Okay.

David N. Farr - Chairman, Chief Executive Officer and President

And as you talk about, we use new products. We have a lot of innovation and when we bring out new product, it is basically how we get, go out… innovation creates, it is not like trying to sell the same thing for higher price. We try to bring out new products and innovation, and that allows us to get that price that we need.

Michael Schneider - Robert W. Baird

Okay and then just one detail on Climate. Asia being up double-digits again this quarter, are we just entering the phase now where the new labeling and seal requirements in Asia are beginning to drive that business for you?

David N. Farr - Chairman, Chief Executive Officer and President

Correct.

Michael Schneider - Robert W. Baird

And what are the...

David N. Farr - Chairman, Chief Executive Officer and President

For the next two years.

Michael Schneider - Robert W. Baird

Okay. So, you would expect these type of mid teens growth rates to continue?

David N. Farr - Chairman, Chief Executive Officer and President

Yes. I would say so. Quarters move around Mike and we're going to have a quarter it's up 20% and the next quarter could be holding up 5% or down 10%. So, this business is a little bit more lumpy from sometimes when especially in the Asia and the U.S. marketplace but I feel pretty good about where that demand is going to coming from here in the next couple of months, quarters and years.

Michael Schneider - Robert W. Baird

Okay. Thanks again. See you Thursday.

Operator

Our next question is from Deane Dray, Goldman Sachs. Please go ahead.

Deane Dray - Goldman Sachs

Thank you. Good afternoon. I would like to circle back on the comment Dave in your prepared remarks, when you talked about challenging situation in the U.S. but you still did 5% organic revenue growth, which is pretty solid. Could you comment on... what is the most forward-looking activities or indicators within Emerson on productivity that would suggest how you're acting today versus expectations a couple of months ago?

David N. Farr - Chairman, Chief Executive Officer and President

Okay. Good. First of all Dean I don’t want to hurt you a little bit but actually... my prepared comments... I don't have prepared comments I actually talked from my heart. So there is no typist here.

Deane Dray - Goldman Sachs

All right, during your monologue.

David N. Farr - Chairman, Chief Executive Officer and President

Okay. Thank you. Yes. From our standpoint, the North America, one thing you got to remember. Last year, we had a terrible climate in North America in the first quarter. So, you have an extremely low base. From that standpoint that helps us significantly on a comp basis. So, they were up, North America Walter, what double-digit, what was climate in North America.

Walter J. Galvin - Senior Executive Vice President and Chief Financial Officer

11%.

David N. Farr - Chairman, Chief Executive Officer and President

11%. So, that really helped us from that standpoint and if I will help us again this quarter here. On the capital side the pace of business has been pretty consistent in North America and so if you look at the capital bid in the process area, the capital capacity and productivity... those businesses have trended pretty well in North America and we’ve seen a pretty good steady rate.

I would expect as the year goes forward and we will talk about in this Thursday in North America you will see our North America business has slowdown a little bit from the standpoint, where the cycle is and rely very much on our international base at that point in time but right now the North America order pace is driven by our capital guys, and Climate is pretty solid, and obviously clearly that residential guys are really hurting at this point in time. So, I think the pace of business North America is expected, except for maybe Climate is a little bit better and I would have to say probably a little bit of that... because of inventory guessing from the standpoint, what, where our inventories are going to go. So, I feel pretty good about that.

Deane Dray - Goldman Sachs

How about on the emerging market side, I think... I heard you say the number is 34% for 2008?

David N. Farr - Chairman, Chief Executive Officer and President

I would say 30% plus, okay.

Deane Dray - Goldman Sachs

Okay. And one of the points that you have made not long ago was an expectation in China that could see a post Olympic slowdown. Have you got any more data points from the field that would suggest that before you call it a hunch, and I was curious whether that has turned into anything more in terms of your planning for '08?

David N. Farr - Chairman, Chief Executive Officer and President

Still a hunch, at this point in time no I believe our… I just came back from like I said certainly big emerging markets and I will be back over there next month. I would say that emerging markets will continue to do well. I would expect China to be have a weaker year this year, strong first half, weaker in second half, but all in all I still believe I look at Asia-Pacific this year which will cross the $4 billion mark for us this time, first time. We'll be up somewhere between 12% and 15%.

China will clearly I think will be some uncertainty. It's just a hunch, we will watch it, we watch it very closely right now, but I think we will still be okay. In our emerging markets as you know sales, we have very strong... we do more business outside in Asia-Pacific, outside China we do inside China, and we also have very big nellies [ph] in Latin America and Eastern Europe. So we are really broad based in this and which makes a good thing for us from the standpoint of emerging markets.

Deane Dray - Goldman Sachs

Great. Thank you. And now weather forecast for the Thursday.

David N. Farr - Chairman, Chief Executive Officer and President

The snow has melted. It was raining today. I think you might get a little overcast, a little rain, but we are setting up such you get in here around noon and you can have a coke and then get the meeting started. We will get you out here in time on Friday. I don't think we are having snow like we did last year, last week, I am sorry last week.

Deane Dray - Goldman Sachs

Thank you.

Operator

Our next question is from Christopher Glynn, Oppenheimer. Please go ahead.

Christopher Glynn - Oppenheimer

Thanks. Orders quality meaning backing out the currency looks to be the best the in a long-time strength drop-off in the currency impact in the December orders from November. So just wondering how that grabbed you. Any surprises and color within the segments?

David N. Farr - Chairman, Chief Executive Officer and President

They were. The long time may be six months I would not say long time as six months if you call long time six months I usually speak a littler longer than that, but it was good. I would say the good part about it was our strength in Asia and particularly Climate and our strength and Industrial business is holding up here in the U.S. and the economics would say they should hold up here for a couple more quarters. So, net, net they have been balancing pretty tightly here but it was a little bit better not hugely surprising to me, it's good to see it tells me we have a strong base for the second quarter and we should have pretty momentum as we go into the second quarter. So we'll see what happens here, but nothing real surprising.

Christopher Glynn - Oppenheimer

Okay, thank you.

David N. Farr - Chairman, Chief Executive Officer and President

You’re welcome are you going to come out Thursday?

Christopher Glynn - Oppenheimer

I'll see you there.

David N. Farr - Chairman, Chief Executive Officer and President

Good. Look forward to it.

Operator

Our next question is from Steve Tusa, J.P. Morgan. Please go ahead.

Stephen Tusa - J.P. Morgan

Hi, good afternoon.

David N. Farr - Chairman, Chief Executive Officer and President

Hi, Mr. Tusa.

Stephen Tusa - J.P. Morgan

In Industrial Automation, you talked about the power business, what percentage are you referring to? I know that there are different chunks that's selling the different parts of power, so what percentage of that segment is actually what you’re referring to in the slide there?

David N. Farr - Chairman, Chief Executive Officer and President

I don't have that on top of my head, our power piece, I mean, could you wait till Thursday to find out on that. I mean Steve, I don't have that.

Stephen Tusa - J.P. Morgan

I guess I can wait till Thursday.

David N. Farr - Chairman, Chief Executive Officer and President

I mean I don't... Jean-Paul can tell you, we have a pie chart that shows the business so that we can figure out. It's a... if you look at the overall what I call power distribution business in our 8% to 15%. It is pretty good 15% so it's quite large.

Stephen Tusa - J.P. Morgan

So I mean what kind of comps are you talking about here when you say it's strong, what does that mean?

David N. Farr - Chairman, Chief Executive Officer and President

I would say that in our power and that's power space we are still probably up, 10% to 20% there.

Stephen Tusa - J.P. Morgan

Okay.

David N. Farr - Chairman, Chief Executive Officer and President

It’s my gut, I’m not asked every month, but I would say that will be a strong number for us. for us.

Stephen Tusa - J.P. Morgan

Got you. And obviously implied in your forecast for core growth you know there is deceleration in the back half and you know talk about China may be softening a little bit, U.S. there may be some more uncertainty, non-risk construction who knows. Is there anything that's that has a chance to accelerate in your mind in the back half?

David N. Farr - Chairman, Chief Executive Officer and President

I would say.

Stephen Tusa - J.P. Morgan

They are acknowledging that there are already pretty strong growth rates in Network Power and Process.

David N. Farr - Chairman, Chief Executive Officer and President

The one business that has potential acceleration would be our Climate Technology business.

Stephen Tusa - J.P. Morgan

Okay.

David N. Farr - Chairman, Chief Executive Officer and President

That business could potentially have a very good second half and it could be both Asia and our proved bit North America, I do not expect Europe to do that but I'd... that business has become very global and some of the new products coming out. There is potential that business would give us the upside that you are taking... your comments about the price. I think we pretty much on the process business, we excelled in, I pretty have good dial-in on Industrial Automation. I have a very good dial-in in the Network Power business from where it is sitting right now. And I think the consumer related business of Appliance Component and Tools I would not be in a strong second half. Walter, any comments on that.

Walter J. Galvin - Senior Executive Vice President and Chief Financial Officer

I totally agree with that.

David N. Farr - Chairman, Chief Executive Officer and President

Okay. Walt agrees. That is two times that Walt agreed with me.

Stephen Tusa - J.P. Morgan

Right. And then one more question, I have to ask an H-back [ph] question. The Ingersoll trained merger, any implications there for your business?

David N. Farr - Chairman, Chief Executive Officer and President

They are both very good customers and I'm looking forward to a long healthy relationship with Herb [ph].

Stephen Tusa - J.P. Morgan

Great.

David N. Farr - Chairman, Chief Executive Officer and President

Which we’ve already have.

Operator

Our next question is from Scott Davis, Morgan Stanley. Please go ahead.

Scott Davis - Morgan Stanley

Hi, good afternoon guys.

David N. Farr - Chairman, Chief Executive Officer and President

Good Afternoon, Scott. You’re going to come on Thursday or you are going to be skiing somewhere.

Scott Davis - Morgan Stanley

I wish I was skiing somewhere but I will be out there instead.

David N. Farr - Chairman, Chief Executive Officer and President

Good.

Scott Davis - Morgan Stanley

But any way looking forward to it. I have a couple of clean up questions. One, and forgive me if I spaced out during the non-prepared comments. But looks like your receivable were up kind of 17% and your payables were up 12%, sales were up 12% what was the disconnect there?

David N. Farr - Chairman, Chief Executive Officer and President

One reason on receivable is going out more is you had a greater growth rate in our international businesses than our domestic business. And that's just organically when we said that our underlying growth rate for the U.S. was 5%, the international was 9%, total 7%. The international businesses carry higher receivable. Additionally, we picked up 5 points of growth because of the currency difference year-to-year and that currency is obviously all international and that also hurt our receivable position. And so those would be the drivers, we don't see any collection or other issues going on but it is just a mix of our business as the U.S. slows, we would see receivable days just because of mix increasing.

Scott Davis - Morgan Stanley

Okay makes sense. And on currency, do you guys still have hedges that are on, or they have rolled off or you have some sort of a constant hedging program?

David N. Farr - Chairman, Chief Executive Officer and President

Yes. We have a constant hedging program that we hedge. The price cost relationships and we also hedge that’s put forward and we also hedge with options on the translated impact. We also hedge major commodity constantly rolling them out 18 to 24 months.

Scott Davis - Morgan Stanley

Okay. Last question going back to…

David N. Farr - Chairman, Chief Executive Officer and President

There were three Scott.

Scott Davis - Morgan Stanley

I am on a roll here, I am going to keep it going.

David N. Farr - Chairman, Chief Executive Officer and President

That is it partner.

Scott Davis - Morgan Stanley

On pricing, it's been a while... I know someone earlier asked about pricing, but I know about a year or two ago you guys were putting together a pretty interesting initiative that I think Charlie was working on, working on kind of price maximization software, contract maximization. I mean you've seen a nice improvement in your margins. I mean is this partially... I mean you see some traction there or is that kind of not working?

David N. Farr - Chairman, Chief Executive Officer and President

It is working and where you really see it is on your new product effort as we introduce the value what we try to do is create the value…. you have to talk to Charlie and Charlie will talk more about this on Friday. The value pricing for a new product to make sure we're getting paid of our technology. We are creating a lot of value for our customers. It's very important that we get our fair share of that value and that really comes in the play as when we bring our new products also coming at higher profitability that is a score of ours. I don't create technology, just to create technology throughout the window. We create technology to get paid for it and that's where the big focus is on and the company's name [inaudible] that you are talking about?

Scott Davis - Morgan Stanley

Yes. Sure.

David N. Farr - Chairman, Chief Executive Officer and President

And so Charlie will talk about that, but Scott it's got traction, it's working extremely well and it will continue to role across this company, we are very pleased about it.

Scott Davis - Morgan Stanley

Is there kind of secondary...

David N. Farr - Chairman, Chief Executive Officer and President

No, that's it Scott.

Scott Davis - Morgan Stanley

Yes, I'll save it for Thursday.

David N. Farr - Chairman, Chief Executive Officer and President

Save it Thursday.

Scott Davis - Morgan Stanley

Charlie has got all the answers anyway.

David N. Farr - Chairman, Chief Executive Officer and President

Morgan Stanley is so aggressive, I tell you what.

Scott Davis - Morgan Stanley

You’re a figurehead, Charlie is doing all the work there anyway. So...

David N. Farr - Chairman, Chief Executive Officer and President

You got to ramp up on me, you’re damn right I’m a [inaudible].

Scott Davis - Morgan Stanley

See you guys.

David N. Farr - Chairman, Chief Executive Officer and President

See you.

Operator

Our next question is a follow up question from Bob Cornell, Lehman Brothers, please go ahead.

David N. Farr - Chairman, Chief Executive Officer and President

Bob Cornell stayed on the conference call.

Robert Cornell - Lehman Brothers

Let’s do some work….Walter some work here. The OIOD [ph] Walt, where is that number going to be for the year may be you can give us some guidance. Are there this quarter, I think included the in-process R&D write-off, could you give us some color around where that's going to go for the year?

Walter J. Galvin - Senior Executive Vice President and Chief Financial Officer

I would say we do not anticipate any additional gains like we had in the first quarter. In the first quarter of this year, we’ve identified that we had the gain on the sale of IMC and we also had some other gains that favorably impacted the OIOD more income than expense. As I look at the full year, also this year restructuring was down from last year and the other thing that went the other way this year was also the dumping duties, the Byrd Amendment.

Robert Cornell - Lehman Brothers

Was that in OIOD? No, that's in. ..

Walter J. Galvin - Senior Executive Vice President and Chief Financial Officer

That is in OIOD. Yes, we have been putting it there in OIOD because we thought it was temporary, we thought it would go away eventually, which it did and we have been disclosing it in OIOD for several years. So yes, it's in OIOD.

Robert Cornell - Lehman Brothers

So go back to the question, I mean as we tried to model out this line over the balance of the year?

Walter J. Galvin - Senior Executive Vice President and Chief Financial Officer

As to the balance of the year if I were to do a top-level schedule for what I would expect the full year to be I would expect the one-time gains to be slight to be about the same as this year for the full year. But I would expect with the slowdown in the economy that the restructuring might be a little higher I would expect that with the acquisition of Motorola as of December 31, the amortization of intangible would be higher.

David N. Farr - Chairman, Chief Executive Officer and President

OIOD will be slightly higher this year than last year. Is that a fair statement?

Walter J. Galvin - Senior Executive Vice President and Chief Financial Officer

Yes, it would be slightly higher that could have an impact of few cents.

Robert Cornell - Lehman Brothers

How about interest expense for the year assuming no further big deals?

Walter J. Galvin - Senior Executive Vice President and Chief Financial Officer

That, I will turn to the number. It would be pretty flat assuming no additional acquisitions, no additional divestitures and these share buy back that we've outlined.

David N. Farr - Chairman, Chief Executive Officer and President

A couple of penny's would probably sense for the OIOD and interest would be… no change.

Robert Cornell - Lehman Brothers

Just again just to cross check that comment, the corporate expense in the segment break down $73 million, you have a guidance for the that corporate expense line and that consolation for the year?

David N. Farr - Chairman, Chief Executive Officer and President

We don’t give guidance on corporate expense, I mean the Board has to decide my bonus so it could be nothing and could be big.

Robert Cornell - Lehman Brothers

We'll dial in then, we'll talk to you more on Thursday or Friday.

David N. Farr - Chairman, Chief Executive Officer and President

Thank you Mr. Cornell. We’re looking forward to seeing you.

Robert Cornell - Lehman Brothers

Yeah, absolutely.

David N. Farr - Chairman, Chief Executive Officer and President

All the best. I'm looking forward to see everybody out there and thank you for the questions and again, I want to thank everyone for joining us today, I appreciate it, look forward to seeing you Thursday, Friday. I think we have a very exiting program and hopefully you'll have a chance, we’re going to have a nice trade show and people will have a chance to get to know more of our products and again thanks for your support and I look forward to seeing you in later this week. All the best now, bye.

Operator

Ladies and Gentlemen, this does conclude the Emerson first quarter 2008 results conference call. If you like to listen to a replay of today's conference please dial 303-590-2000 or 800-405-2236. Once again the numbers are 303-590-3000, 800-405-2236. The pass code for the conference is 11106457 pound. Once again the pass code is 11106457 pound. ACT would like to thank you for your participation. Have a pleasant day. You may now disconnect

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Source: Emerson Electric Co. F1Q08 (Qtr. End 12/31/07) Earnings Call Transcript
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