Emerson Electric Company (EMR) — Q1 2015 Earnings Call Transcript

Before Craig starts, this is David Farr. I just want to make sure that everyone realizes this is Craig's first day on the job here and first quarterly announcement. So go easy on him out there and just try not to get too upset and write nasty comments. You can pick on me. You can pick on Frank. But go easy on Craig and his first time. We'll get him next time. Craig, it's all yours and congratulations and welcome aboard.

Thank you, David. Today's call will summarize Emerson's first quarter 2015 results. A conference call slide presentation will accompany my comments and is available on Emerson's website at Emerson.com. A replay of this conference call and slide presentation will be available on the website after the call for the next 90 days. I will start with the highlights of the quarter, as shown on slide 2 of the presentation. Net sales were unchanged at $5.6 billion with underlying sales up 6% in the quarter. Underlying sales increased in all business segments with Climate Technologies being the strongest, up 17%. The Americas exhibited strong growth in the quarter with mixed results in other regions. Emerging markets grew by 5%. Gross profit margin increased 90 basis points to 40.8%, while segment margins were up 60 basis points to 15%. First quarter earnings per share were $0.75, representing a 15% increase over prior year and a 4% increase above the consensus. Share repurchases accelerated to $518 million in the quarter and the previously announced divestiture of Power Transmission Solutions closed on January 30. The first quarter was a solid start to the year, despite an increasingly uncertain macroeconomic environment, due to a strong U.S. dollar, the significant decline in oil prices, and the continued weakness in Europe. Turn to slide 3 for the first quarter P&L summary. Net sales were flat to prior year while GP improved 90 basis points including the effect of portfolio repositioning and efficiency gains. EBIT increased 210 basis points which included favorable currency transactions of $19 million. Turning to slide 4, underlying sales growth in the quarter was up 6%, offset by 3% declines from both currency translations and divestitures. The United States and Canada reflected strong market conditions, up 8% and 21%, respectively, while trends in other regions were mixed. Turning to slide 5, business segment margin expansion was led by Climate Technologies and Process Management, while also including the effect of portfolio repositioning. Favorable comparisons in corporate expenses resulted in a $74 million decrease versus the prior year. Lower operating cash flow reflected primarily timing of working capital investment to aid underlying sales growth in the quarter. Trade working capital improved 50 basis points versus the prior year. Turning to slide 6 for the Process Management segment results. Process Management underlying sales grew by 6% with a 3% reduction from currency translation, resulting in net sales growth of 3% in the quarter. Sales growth was strongest in North America, up 9%, led by downstream and maintenance, repair, and operations investment. Demand in Asia was mixed, up 1% with growth in India and China offset by weakness in Australia and Southeast Asia. Europe grew 4% as double-digit growth in emerging countries offset modest declines in mature markets. Latin America reflected robust growth with sales up 26% in the quarter. Conditions in the Middle East/Africa were mixed with sales down 1%. Segment margins improved 40 basis points, reflecting favorable currency transactions. Order trends have remained solid and backlog is strong, despite an uncertain outlook in the process industry. Turn to slide 7 for Industrial Automation segment results. Industrial Automation underlying sales grew by 4% in the quarter offset by a 4% reduction from currency translation, resulting in net sales that were flat to prior year. Strength in North America was reflected with sales up 13%. The increase was led by growth of over 20% in the HVAC-related hermetic motors business. The electrical distribution and power transmission solutions businesses reported strong growth with the fluid automation business down modestly. The declines in power generating alternators, motors, and drives businesses reflected continued economic weakness in Europe which was down 8%. Overall, Asia grew by 5%, benefiting from robust growth in Japan coupled with solid results in China. Order rates in power generating alternators are expected to slow further as increased pressure from lower oil prices reduces spending in the upstream oil and gas market. We expect market conditions to remain mixed in the near term with favorable trends in North America and continued weakness in Europe. Turning to slide 8 for Network Power segment results. Network Power underlying sales grew by 1% in the quarter, offset by a 3% reduction from currency translations and a 12% reduction from divestitures, resulting in net sales decrease of 14% versus the prior year. The data center business was up slightly, reflecting mixed market conditions with strong growth in Europe, benefiting from a hyperscale project in Sweden, while growth in North America was offset by Asia, Latin America, and the Middle East/Africa. The telecommunications infrastructure business declined at a double-digit rate with growth in Asia offset by weakness in other regions. U.S. telecommunications customers have curtailed spending referencing uncertainty surrounding potential changes in federal regulations. The margin increase of 70 basis points reflects the impact of divestitures. Demand is expected to remain mixed in the near term with favorable data center market conditions and reduced levels of telecommunications investment. Turn to slide 9 for Climate Technologies segment results. Climate Technologies underlying sales grew by 17% with a 2% reduction from currency translation. Net sales increased 15% as U.S. regulatory changes that went into effect on January 1 drove residential HVAC customers to build inventory ahead of the deadline. Commercial HVAC grew at an upper single-digit rate which was led by North America. Global refrigeration had modest growth as strength in the U.S. and Asia was partially offset by a decrease in Europe. The demand for sensors and controls businesses was flat. Segment margins increased 40 basis points primarily from leverage on the increased sales volume. Second quarter order trends in the U.S. will be uncertain until customers consume inventory that was built in the current quarter. Market conditions are expected to remain favorable, driven by end-user demand with continued momentum in North America and Asia. Turn to slide 10 for the Commercial and Residential Solutions segment results. Commercial and Residential Solutions underlying sales grew by 4% with a 1% reduction from currency translation resulting in net sales growth of 3%. Market conditions were mixed with increased demand in the Americas and the Middle East/Africa, while Asia and Europe were down. Increased sales were led by solid growth in professional tools with moderate increases in wet/dry vacuums and food waste disposer businesses. The commercial and residential storage businesses decreased modestly. Segment margin remains strong at 21.5%, up 10 basis points versus the prior year. As we continue to assess our portfolio, we recently initiated the evaluation process of a potential divestiture of the Intermetro business. We expect favorable trends in the U.S. residential and commercial construction markets to continue in the near term. Slide 11 contains our 2015 outlook and guidance. The current state of the global macroeconomic environment is mixed with favorable trends in North America contrasting weakness in Europe and other emerging markets. As we consider the outlook for 2015, we note three main concerns. First, the strength of the U.S. dollar which will continue to be a significant headwind. Second, the continued weakness in Europe which has not recovered from the global recession of 2008-2009, as well as weakness in other emerging markets. And third, the rapid and sustained decline in oil prices which will be primarily felt in the second half of our FY ‘15. Given our concerns, we have decided to accelerate a restructuring to approximately $100 million which will allow for a selective repositioning of our cost structure. Based on these current business conditions, the following is expected in 2015; underlying sales growth of 3% to 5%, a net sales decline of negative 1% to negative 4% reflecting a 4% to 5% deduction from currency translation and a 2% deduction from divestitures. Profitability is expected to continue to improve modestly from favorable mix and accelerated restructuring. The expected range of reported EPS is $4.50 to $4.60. This guidance includes a significant reduction from currency translation, an estimated divestiture gain of $0.75 per share and accelerated restructuring costs of $0.05 per share. Additional business segment guidance will be provided at our annual investor conference on February 19. Now, I'll turn it over to Mr. David Farr.

Thank you very much, Craig. Great job. Much smoother voice and delivery than Craig who Fitzgerald, who's, by the way, doing a great job in one of our process businesses now in Louisville and having a fun job back into operations. I'm sure he's enjoying that today. Again, I want to thank everybody for joining us. I appreciate your time. We had a very solid start to the new fiscal year with 6% underlying sales growth. But as I say, the challenge is now beginning. With the dramatic drop-off in oil prices and the resulting capital spending which we'll talk about when we meet in later this month in February, continued weakness in Europe and their only address at this point in time is to weaken the currency relative to doing real structural reform. The global weakening currencies in emerging markets as these currencies are trying to adjust to figure out how to get growth in a global slowdown. And clearly, a stronger dollar are going to hurt a lot of our exporting customers here in North America as they have problems competing around the world with a stronger dollar. Consequently, we decided to accelerate restructuring. The world's clearly changing from the last conversation we had in November with a lot of moving dynamics, but fundamentally as we see it today, we see a much slower global growth and we're concerned that there's not a lot of momentum relative to turning that growth around potentially for a couple of years. So we feel it's very appropriate to rebalance our SG&A headcount on a global basis. We balance our global manufacturing and get our cost structure in-line with what we see as a slower marketplace and a changing marketplace as the whole world rebalances with the relative currency changes, the lower energy costs and the uncertainty relative to some of the major economies in the world, be it Europe, be it China, or be it Brazil. We know how to do restructuring. We had built in $50 million originally in our plan and we feel quite significantly upping this to include another at least $50 million, maybe a little bit more, and to get on this right away, to help our second half of calendar year 2015 margins. Also, to help 2016 which is very important to get on with this and we're taking action today and we will continue to accelerate this. From my perspective, we will continue to drive the necessary investments to accelerate our growth, to improve our growth. Growth will be still challenging, but we're going to grow. I still feel comfortable saying our underlying growth rate's going to be in the 3% to 5% range. Clearly, it's not as strong as we thought it was just six months ago with the global dynamics, but we still feel it's pretty solid. We have a strong backlog. Our profitability is running at record levels. The restructuring's going to allow us to help us protect some of that profitability in the dynamic economies around the world. There are some pluses out there in the world that I think with lower energy prices, you're going to see some of the emerging markets accelerate growth late 2015 and going into 2016. In addition, a lot of these emerging markets have actually lowered their currency valuations to make themselves more competitive. So repositioning right now makes a lot of sense because you're going to see some of these markets, like India, and China, and other parts of the world where lower energy costs are going to help them be more competitive at the same time they have reduced their currency value which will give them the ability to be more competitive. As you know, we're extremely strong in the emerging markets position today already from a manufacturing standpoint, a selling standpoint, and our ability to compete. So I feel it's very appropriate to take action and deal with the issues facing us right now and figure out how to drive growth, at the same time to protect our profitability in the uncertain world. We will have the benefit of lower commodities which helps us from a net material inflation standpoint in the near term. Potentially in the long term that will start reversing as we'll start seeing other pricing pressures. We have the benefit of some of our emerging market positions to be able to accelerate and be competitive on a global basis from an export standpoint and be in our strong position there. So a very strong position from which to protect our growth and protect our profitability. From a cash flow standpoint, for the year, we're still looking at the range of $3.7 billion operating cash flow. This does not include the impact of a loss of cash and the divestiture of the power transmission business which is done, also the tax impact of that which will have an impact on the cash flow on a reporting basis. Cash flow is generally going to be solid again this year. Capital spending is going to be around $800 million as we continue to invest in new products, as we continue to invest in our global footprint and make sure we stay competitive. We'll get into the segments and what we see in each of the segments in our February meeting coming on February 19 in New York City, but from my perspective right now, we had a good start to the year. We see some issues out there. We're dealing with these issues. We're accelerating restructuring. We're making sure our cost position stays at the right level and taking those actions allowing us to address some issues that had built up in the last several years and we're going to deal with those. At the same time, I feel we still have some strong underlying growth opportunities. We just have to be very nimble and very quick and figure out where those are and make sure we can see growing the company. The company is very strong at this point in time and we're going into the second quarter in a decent position, but the winds clearly have shifted and we'll talk a lot more about that on February 19. I want to thank all the businesses out there for delivering a solid first quarter and I want to thank the businesses for taking very strong action so quickly on the restructuring which a lot of it is going to occur over the next two or three months which is very, very important, impacting 1000 SG&A people and impacting at least 1000 hourly people around the world. So with that, open the line up to take questions and look forward to seeing everybody on February 19th in New York.

Dave, could you dig in a little bit to China business trends? You guys are a pretty good read on a lot of those puts and takes in that market and the macro suggests slowing. Certainly, construction doesn't look great. You guys had a tough compare. Just what are you seeing and what's your outlook there?

My expectation in China right now is that it will be slower in 2015 than it was in 2014. We had a very good year in 2014. Obviously, the underlying economics have weakened. China started out very slow. We did have some tough comparisons, but just the overall pace of business was more challenging. I do think that it's going to grow low single-digit. I still believe that looking based on the order pace and based on the project list that we're seeing right now, but I do expect China to be weaker this year than last year and I believe the government is taking actions necessary to, again get their house in order and figure out how to keep that growth going and trying to continue to let air out of what I would call the bubble in certain sectors of the economy. But overall, I just got back from meeting with my Asia people and they're pretty still positive about China. But my assessment is even though they would think that they're doing as well as last year, I think they're doing a little bit worse than last year, but still okay, still positive growth, still at the growth rate.

Dave, a couple of years ago I think you had called out a trend of Emerson pursuing more automation as part of your facilities in China. Where do you stand with respect to your operating footprint? Are you happy with the cost structure, where you're positioned there? Do you think there's a little more action you'd like to take just in light of the pending slightly softer outlook?

Still on path, John to continue to rationalize our manufacturing footprint in China and I would say that part of the actions we're taking in this acceleration will be to continue to do more of that. So the automation part is continuing to happen across the businesses. I think we pretty much got that done. But right now, what I'm going through is a rationalization of the manufacturing footprint and do we need that capacity or not need that capacity? But you also have to take into consideration the renminbi right now is continuing to devalue again and so we have to watch that. But we're continuing to rationalize that and I would say that the footprint is still declining.

Just lastly, the PTS gain, I think you said $520 million, I think previously we thought it was going to be about $1 billion. Was there something about the final closing that made that adjustment?

Pretax number John, the 520 is an after-tax number.

Okay. So it was just pre versus post-tax.

$1 billion gain. Pretax gain. You had the right number.

Dave, you made some pretty cautious comments regarding the macro, I think for somewhat obvious reasons, but your guidance still implies some acceleration year-over-year. You just came off a pretty good quarter. What is it that you're seeing out there that's changed and maybe it's the month of January that's caused some concern, but if you back out currency your orders have been pretty good. Just give us a little bit of color on why you've been more cautious, despite the fact the 3% to 5% core growth, if you take the midpoint, would still be your best year in three years.

From my perspective Scott, the big issue right now would be what I'm seeing happening to our major oil and gas customers and they are definitely starting to cut back and we're starting to see that. As you know we're very strong in that sector. We have good strength in North America, and the North America guys are going to be cutting back with the price of oil where it is and the pressure point relative to the demand around the world. I have a pretty good understanding of the process industry. My gut tells me right now that we're going to see a deceleration of orders and sales in the process business that could cause us problems in the second half of this year and also 2016, hence the need for acceleration. I'm being very cautious because I am nervous about that.

How do you see upstream oil facing challenges? How will the chemical sector perform in the latter half of the year? You are also very strong in that area, as well as in utilities.

Yes, I think that there are a lot of puts and takes with the lower price of oil and gas as you well know. Upstream is clearly going to be hurt. National oil companies will keep spending, going in my opinion, around the world. Downstream with the lower feedstock going in both the oil and the gas, will be helped. The question is how fast do they go make those investments? The question is, I think it's going to be later, maybe late 2015 on the calendar year basis, maybe early 2016 that we would see that type of acceleration. They have to go through the process. They have to think about the world and the rebalancing. They have to think about the world's demand. So I think there's going to be a lag to be honest, Scott. Based on what I've seen in the past when we've had this dramatic drop-off in the oil prices, you see a lag. I think there eventually will be a benefit and you're right, but I wouldn't be surprised if there's not a hole there for six or nine months or eight months for some of our businesses as the shift goes between downstream and upstream. We're strong in both bases. We're going to talk quite a bit about that, but clearly there is a hole opening up. No doubt about it. Hence, we're getting ready for it.

Just a question on the portfolio, you mentioned divestment sort of potentially underway in Commercial and Residential Solutions. It's sort of the fourth year now of maybe low, mid-single digit earnings growth. Does that make you want to accelerate portfolio change in divestments or does it make you want to kind of slow them down because you're not getting as much organic earnings growth as you may have expected a couple of years ago?

From my perspective, we laid out a plan of what we want to undertake in the restructuring a couple of years ago and we have a couple of pieces left and they are businesses that don't fit us strategically and we're going to get that done. One of them is we announced we're evaluating Intermetro right now and we will continue to look at acquisitions and when they come up and I think they will come up in this marketplace that potentially could get a little sloppy in late 2015, early 2016 from an acquisition. We're clearly looking for acquisitions, but we're also not going to go crazy. I understand that divesting has an impact on the company, but I'm also repositioning this company for the future. Sometimes transition takes time. The company's extremely healthy right now through this transition. We're investing. The quality of the earnings, the quality of the assets are very high. I expect my shareholders to stay with us as we make this reposition and then we will continue to figure out how to accelerate our top line growth and earnings growth coming out of this. We know what it takes to grow this company.

And then just on the currency hit to earnings, wonder if you could quantify that at all for this year or say what the hit was in Q1 to earnings from currency?

So from the perspective of the way we look at currency, as we look at the way we're balanced around the world, both the inputs and outputs. If we lose $1 of sales, we lose about $0.15 of profits, 15%, and so if we lost 3 points of growth in the first quarter, you can calculate that and you can then calculate what that means on average. We lose about $0.15, $0.16 with the current structure and the current currency makeup. So can tell you how much earnings we lost in the first quarter. Those things help us sometimes and hurt us sometimes and I'm a big believer in a strong dollar. Right now obviously, it's hurting us, but I'm a big believer in a strong dollar and our objective is to figure out how to grow this company and deal with the fact that we have a headwind, but who cares, we've got a headwind. So from my perspective, we're going to deal with it. And so the same thing happens through the year. We just lost, as you know, we're going to lose probably 4 to 5 points of currency growth for the year. You can do the same calculation what that means in EPS.

Very quickly, just a clarification on your comments about pricing. Your gross margins have been very strong in Q1 and the last fiscal year. Do you see any potential for that gross margin increase to plateau because pricing may become more challenging?

From our perspective right now, the comment I made is we look at the price cost and we're green. With the movement of commodities where they are right now, it's going to help us in the next couple quarters. I know that we will have pricing actions necessary over time and typically, what happens is pricing will catch up and so we'll lose some of that green. But at this point in time, our ability to manage the price cost and stay slightly green or within that around zero has been very good and I don't see that changing here in the next couple of years. Stability will come in commodities and we'll probably have to give some price back, but that pressure probably won't build into 2016, but I still believe that we can maintain our green capability. We have the infrastructure and management team to be able to do that. So we clearly are mapping it out right now and we have a benefit going, but I also know that benefit will come against me at some point in time, too.

Dave, you talk about increasing the restructuring, but you've also had the foot on the gas with some of these growth investments that you've been increasing recently. What happens to those in this sort of changed environment? Do you keep speeding on those or pull back on a few? Maybe a little color there.

From our perspective, we're going through a quick evaluation of some of those growth investments based on the segments, based on what we see happening here in the next couple years. I would say there is going to be a fine-tuning, but we're going to continue to invest and protect the key growth investments to drive that growth, and re-evaluate our cost structure elsewhere, and so we're going to do a balancing act here. Clearly, one of the things we're going to look at is if we have a segment that's under a lot of pressure and downward trend line for the next couple years, we may pull back on that from a growth investment standpoint and not spend that money. But we're going to keep most of it going forward and rebalance cost structure elsewhere.

All right. In process, we've got kind of the end market look, upstream, downstream. As you look across the different product lines, the valves, devices, systems, is there any difference you expect or you're already seeing or that you expect to see in terms of what parts of that are going to hold up better than others?

It's a little bit hard to tell right now. All I can tell you is, someone asked me the first question about why we have insight in the business quite a bit. We have some segments in the process world that lead this change when the cycle changes and they've been changing now for 60 days and they've been changing the wrong way, down. So I think that the early cycle parts are already starting to impact and we're seeing that, and we're going to redirect our organization to figure out how to make sure we protect our maintenance, repair, and operations business, how to protect the small brownfield investments and I think that it's hard to say which one's going to do worse. All I can tell you right now is the leading places within the process world have already started turning and directly tell us that we're going to have a slowdown. It's coming.

I guess first question on the backlog, how much visibility do you think you have? And then I guess in conversations with your customers, I think to follow-up on the question from last quarter, how long before they start thinking about cancellations in addition to incoming order weakness?

Right now, the backlog is holding. As you know, we reprice our backlog every month with the currency and so when you see our orders turn down, a lot of times when the currency impacts those orders down and up and so right now, we're repricing, but the backlog's sitting at higher levels than it was this year last time. Right now, it's at $6.8 billion so we have not seen any pushback on the backlog. I think what's going to happen is you're going to see a push out in maybe some of the execution of them. If the project's been awarded and they're procuring materials, there is a lot of cancellation impact there. I think you're going to see a rebalancing from a customer perspective. What's going on right now is they're evaluating where they want to spend their money, which projects they want to go forward which projects they want to slow down which projects they only want to do half of. This is going to take time, but it's pretty clear to me, based on the grinding we're seeing at the customer level and the feedback we're getting and also the early indications that there is going to be a slowdown and a push out. As I said earlier, there is going to be some holes emerging in the process order and sales book and our objective is to figure out how to gain penetration around the world to try to protect our growth. But I know it's going to slow down and be slower and we're going to have some quarters that potentially go negative in the process world. So it's pretty clear what's happening. It will take about six months to unfold and our customer base is clearly working it right now. Most importantly for us is we're getting ready. We're redirecting our organization around the world where we think we need to go to make sure we can maximize our growth potential in the marketplace.

To think about the magnitude of that, I understand it's early, there's a lot of balls up in the air, still not all determined yet, but presumably in your career, you've seen big CapEx downturns by some of your larger customers. Do you find yourself moving at a fraction of that or a multiple of that or kind of on a one to one basis? If you had an E&P CapEx by 20%, do you guys feel it dollar for dollar or maybe less so?

It's not a direct dollar-for-dollar impact. I've asked Steve Sonnenberg to explain the mix of our business in February and what it means if capital spending in oil decreases by 15%. We'll provide details and calculations on that. Current indications suggest that the global marketplace will be negative, particularly in the process world for the next 12 months. Historically, we have managed to outperform the market, but we recognize that with reduced spending, the process world is likely to turn negative. Our strategy now is to find ways to achieve growth despite facing a negative marketplace for the next 12 to 18 months. That is our plan.

If I could sneak in a non-oil question which I'm sure you're longing for.

I like oil. I love oil.

On the HVAC business, I guess the climate side, related in IA, are you guys able to quantify what the benefit was from pre-buy and how we should think about that versus 2Q and 3Q?

The market has talked about 1 million units being pulled up. 1 million units. I can't remember off the top of my head, but it's pretty significant. I couldn't tell you, if you go out I'm sure it's out there, they can tell you who it is and you can go out and find out how many units are out there. One million units were pulled up and clearly that is not for one quarter. That's a pull ahead, they have 18 months to use that buildup. So the way I look at it right now as we put in the press release, we won't get a feel for this until March, April, what units are being sold and what other type of market dynamics we have out there. We're going to see pretty sloppy North America order pace for climate for the next three, four months. I'm of the opinion that it is going to bounce back and we're going to see a recovery there and we'll get back to some normality. Clearly, that inventory build is not for one quarter. It was meant to be for 18 months and we'll see what happens there.

On slide 3, I may have missed this, the favorable currency transaction at $19 million, was that a year-over-year or was that a comp? What was the factor there?

Yes, so that's the year-over-year.

Was the impact a year ago? What would have been my expectation? I'm not used to seeing currency trends being favorable in this environment.

This is a cost that is a different type of.

In transactional currency, we have the number of contracts, long-term contracts mainly in process that get marked to market for currency. Given that they're heavily into some currencies that are depreciating where we have strong currency contracts, those get marked to market. It's called embedded derivatives. We had a big pickup there in embedded derivatives in the quarter and you're right, it is unusual to see it go in that direction.

What will happen is that will zero out over a time period, typically within 12, 18 months it will zero out. One quarter, you'll get it. Next quarter, you lose it. It will zero out. That's why say flag it, so you see it because we know we're not going to keep that forever.

Now, in the comment on slide 5 regarding higher working capital needs, so with the expectation of some of the softening maybe you can just point to which business specifically you'd see the higher working capital.

That was for the quarter because we had underlying growth of 6% and so one of the things we saw was a little bit of higher working capital. As our underlying growth comes down, we'll start taking capital off the balance sheet. So that's not unusual for us to go up and down in a quarter, but that's what he's referring to. He's referring to higher underlying growth rate in the first quarter. That 6% level we actually built a little bit of working capital typically. Even though we had good conversion, it still went up dollar-wise and hurt us in the quarter, that's all it was.

Just last question, I don't want to front run too much of your Analyst Day.

I'm working on that, I'm really starting to get it fine-tuned here. I don't want to give all the facts to you, yet.

Not looking for facts, but just in terms of thematically, it sounds like you'll give us more color on the oil exposure. Is there anything else thematically you might be touching on?

I think we will be breaking down the process side. We’ll explore how we can grow in what seems to be a negative market period lasting for 12 to 18 months, and we will discuss this in detail. We will also look at international matters; I’ve asked Ed Monser to provide insights. Given the recent currency devaluations, there will be shifts in the competitive landscape, leading to changes in production locations worldwide. We will address how we are positioned and identify areas of growth. Additionally, I will have Charlie discuss the Internet of Things and our ongoing investments aimed at evolving our business models over time. While changes in this industry are gradual, Charlie will share some exciting developments. We are making investments and are focused on how to grow the company, and there are positive things to discuss.

So just back to process, I think someone, perhaps Shannon, was trying to get at this a little bit, but I'm just trying to understand kind of the mix effects in the business. And in particular, I believe, although I'm not 100% correct, that kind of the strength in North America oil and gas has been very, very mix positive for you. Maybe in general, things have been mix positive because the big projects have kind of been looming but not really kicking into gear. Is that right? Should we be thinking about a kind of meaningful mix down as we roll forward here the next, I don't know 3, 4, 5 quarters?

You're exactly right. We're very strong in North America, we're very strong in oil and gas and we've had a good run in North America. Our North America percent of sales for process has gone up the last couple of years because of the oil and gas investments. Clearly, one of the things we're dealing with right now on restructuring and the process guys will be restructuring is how to protect our profitability with the changing mix. Steve's going to go through that with you relative to what we see happening. But clearly, things are going to go on in North America on a negative side, but also things on the positive side. If we have less oil and gas investment in North America, we think, at the appropriate time, you're going to see improvement in downstream investments which are also very good for us in North America. The problem is not going to be synced up properly. You're going to see a slowdown in the oil and gas upfront. We're not going to see a pickup in the downstream later on. We have to figure out how to get our cost structure in-line, protect our profitability and process with the changing mix. That is, hence, one of the aggressiveness we're trying to take right now from a restructuring standpoint because we've had a benefit in this the last couple years. You're exactly right.

That strength you saw in Latin America and Canada, is that all oil patch related too or is there a little bit of diversity in that strength?

In Canada, the focus is mainly on oil and gas. The important point for us is that Canada is likely to maintain its spending on safeguarding its oil and gas sector, as that revenue is essential. We had a strong quarter, and while I anticipate some weakening, it remains to be seen how much support the oil companies will provide in Canada. Currently, we expect Canada's economy to grow this year. Mexico also performed well, with investments continuing, primarily in sectors outside of oil and gas. The big question for us is whether Mexico will continue to be a strong performer in 2015. Overall, we had a positive start in Latin America, which has been beneficial. Many may be surprised by the strength of our process business in the first quarter, and our backlog in that area did not decline during this period. We executed well in our business, resulting in a strong first quarter.

Just one quick one, if I could. On climate, the margins are not as high as I would have guessed given the volume surge. Did that pre-buy or prebuild cause you a lot of inefficiencies in overtime and the like? Any color there?

No, it didn't cause us a problem there. The issue is just a mix business within the type of pre-buy, the type of product that our customers were buying would be at the lower end of our mix and so, therefore we didn't get as much flow-through in the profitability. We still made decent money because we did get some profit improvement, but you're right it was not what I would call in the sweet spot of our compressor type of business.

Dave, so the $50 million serve up in restructuring, it sounds like process is going to account for the bulk of that. Is that the right way to think about it?

No, we're examining the entire company, with a particular focus on Europe, which may impact our network power segment. I'm also looking into industrial automation and process areas. I have some concerns about Europe due to significant underlying cost issues that I feel are not being adequately addressed by their governments. Devaluing the currency will not substantially improve their cost structure, as there are many inefficiencies present. The lack of growth in that region worries me. Therefore, we will implement some measures across the board, particularly affecting all business areas, with network power and process being the most significant impacts, followed by industrial automation.

Which leads on to Network Power because if we adjust the prior year for normalization, then margins are still down year-over-year. I'm wondering obviously your restructuring, additional restructuring will help in the back half of the year, but what is your line of sight in terms of mix or other factors to drive margins back into expansion?

There are two main issues. We are restructuring our costs while also launching new products, which are selling well. The primary focus for me at this moment is to continue adjusting our organization to align with the new business model and marketplace. This process will be ongoing throughout the year as we work on the cost structure for our new products and organization to support the business effectively. We're currently going through this transition and need to reevaluate the entire business. We have the products and capabilities, but the challenge lies in modifying the cost structure to achieve desired profitability levels. Scott Barber will elaborate on this in New York. The key concern for me moving forward is understanding how to ensure acceptable profitability in this evolving marketplace.

A quick one, Dave on Russia. Sounds like Russia was still up for you in process which is remarkable given all the news flow in Russia. Is that correct? Maybe just a bit of color in terms of what you're seeing over there.

Russia was still good for us. Now, we got hit pretty hard with the ruble. But we have a very strong local manufacturing capability and service capability in Russia and given the fact that we have this local capability, it's given us a pretty good competitive advantage. So we're seeing the company still spending money and so our business in Russia has held up and we had a decent quarter. The question, will that continue to be able to do that from the standpoint of where can they come up with the money? But right now, we had a very good start to the year and we see our customers' spending money.

Given how many questions we're getting from investors on process, can you just give us a sense of what declines you're expecting particularly in the upstream business and how you're thinking about it from a sensitivity standpoint versus even periods like 2009 when you saw pretty significant declines in that business?

I would prefer to discuss that on the 19th. Currently, we anticipate market declines in the 2% to 3% range overall. This is slightly less than the previous decline, influenced by changes in downstream investments and other global investments. We will provide more details on this later. However, the decline in the oil and gas sector is expected to be significantly greater, and although we will address that, I believe the overall market will decline by 2% to 3%.

I'll wait to hear more on that, then. Just regards to your balance sheet, how are you thinking about where your leverage is now? Why not take a more aggressive balance sheet stance through buybacks or more aggressive, larger M&A given just the share performance over the past few years?

I'm not pleased with our share performance over the last couple of years. Currently, we plan to buy back at least $2 billion worth of stock this year. We're also preparing our balance sheet in case a suitable acquisition opportunity arises, though we haven't found one yet that would create value. We're keeping our balance sheet in mind and may increase our share repurchases at the appropriate time. However, I don't plan to alter our company's leverage right now, as I want to ensure we can pursue a significant acquisition if the right opportunity presents itself.

And then just finally, can you give us any more color on the Intermetro size of the business?

It's a little too early to talk about that, but it's more than $200 million.

Dave, can you talk about some more of the challenges in China? For you, are they more general economy specific to certain market exposures? Frankly, which segment has the most China exposure?

We're pretty strong in China on all segments, but clearly process, network power, climate, and then industrial. Network Power is number one, then Process is number two, Climate's number three and Industrial's number four, off the top of my head. I think it's market. There is a general slowdown as they look at where they want investments to happen. We had a very good period last year across the board and I think right now, what we're seeing at the highest level in China is sort of re-evaluation of where money's going to be spent and how they're going to fund it. So what we're expecting is a step back up as you get into the springtime in China and so we'll get a better feel. Right now, we're still pretty optimistic based on the type of transaction and bidding going on that we're going to see growth this year, but albeit I think it will be a little lesser growth. It's all about where money's being spent and not being spent right now. That's what it is.

Okay. And then on Network Power, the big project in Sweden, how much did it help you in the quarter? Is there still some leftover, still over into say the second quarter? Does this imply maybe that Network Power is flat to even maybe down underlying by the time we get to the back half of the year?

The product is going to spread out over the year. Actually, some of the project might go into next year. I think from our perspective, the project's spread out and the key issue for us is we've got the capability to win. The question is how do we change that cost structure to win the type in the marketplace we see today. That's what Scott Barber and his team is all focused on at this point in time. We know how to sell. We know how to make money. The question is how to make acceptable levels of profitability. That's why we have them take a hard look at the restructuring. Given the products, given what we need, let's deal with this issue now and get on with it.

Listen, on the slide 11 when you talked about guidance, you talked about modest profitability improvement. We've talked around that a lot. But just the puts and takes, if restructuring sounds like $100 million or call it 180 basis points, I've got FX which sounded like you said 15%, so $25 million or $30 million. I've got price versus commodity which sounds still positive and then productivity and then you've got normal incremental leverage on the volume which is something like $67 million or so. So I'm just trying to understand what am I missing or how are you guys thinking about the puts and takes? Frankly, what I really want to know is just what is the modest profitability improvement you're looking for all-in, net?

1/10th, 2/10th that will be the chart. With the puts and takes we've got going on right now, we're going to be fighting for profitability and that's the game plan.

Okay. Regarding restructuring, Emerson has undertaken a significant amount of restructuring and cost reduction both before and during the downturn. I strongly support lean operations and ongoing cost reduction; it’s a continual process. That said, we are anticipating a considerable number this year. How do you differentiate between essential and non-essential costs in this context while still safeguarding growth?

Any company as large as Emerson, you do acquisitions, you make investments, you can get a little less lean. We're going after this pretty hard. We're looking at all the capital investments we make in the last couple years, sort of which ones can we get more out of it productivity-wise? We're not going to cut anything that's crucial to growing this company, but we have the ability to lean this company out and I fundamentally believe we could be facing extended time period where I want to lean it. We're going to lean it. You're right, we know how to do that. The business leaders have done a great job of reacting to this. I came back from a trip to India in the middle of January and I met with the OC. I said, we need to lean out. That's what we're doing. So Ed Purvis takes over and it's all he's talking about right now is figuring out how to lean this thing out, working with Frank and other guys. We're not going to damage ourselves. There's always room to get better. Always room to get leaner and meaner just like you are, Steve.

One more thing, you talked about downstream chemical opportunity. And I understand the feedstock point, but the spread between oil and gas matters a lot with regard to ethylene and ethylene linking to butadiene, propylene, benzene, et cetera. What are you guys seeing? You're not concerned about the shrinking gap between oil and gas inputs potentially putting new investments on hold?

We haven't seen any of that, yet, but that's obviously clear. It's clearly a key issue. I think that's why there is going to be a pause here where people evaluate where everything's going to stabilize, that's why a gap's going to open up. It's pretty easy to put things on hold on upstream. I think they're going to take a little longer to evaluate downstream. We do know some of the gas liquefaction and those types of materials are going to move forward and things like that at this point in time. Clearly, there is a lot of evaluation going on and I'm very concerned about it, that's why Steve Sonnenberg and his team are going to be pretty aggressive here to rebalance their cost structure knowing they could be facing an 18-month headwind. So you're right, Steve, we don't know exactly yet, but we do know that it's going to be tougher and we do know there's still going to be huge capital out there being spent. How do we get more of that capital? How do we use our people to get more of that capital? I want to thank everybody for the call. I appreciate it. I look forward to seeing you guys in a couple of weeks in New York City. Hopefully, the snow, and we won't have snow again, whatever that thing was called. The mayor called it, was going to be the worst snowstorm ever in New York and I must have missed that one. But look forward to seeing everybody and hopefully everyone stays healthy. Take care now. Bye.