Emerson Electric Company (EMR) — Q1 2016 Earnings Call Transcript

Thank you, Alisha. I'm joined today by Dave Farr, Chairman and Chief Executive Officer of Emerson; and Frank Dellaquila, Executive VP and Chief Financial Officer. Today's call will summarize Emerson's first quarter 2016 results. A conference call slide presentation will accompany my comments and is available on Emerson's website. A replay of this conference call and slide presentation will be available on the website for the next 90 days. I will start with the first quarter summary as shown on page two of the slide presentation. Net sales in the quarter decreased 16% to $4.7 billion with underlying sales down 9%. Our results reflected a continuation of the difficult economic conditions that were experienced during most of fiscal 2015. We continue to find ourselves in the midst of a global industrial recession, and recent economic data suggests that capital spending by industrial businesses weakened during the course of the fourth calendar quarter. In the energy sector, lower but equally important uncertain oil prices continued to impact both operational and capital spending by our end customers. Reported earnings per share in the first quarter decreased 29% to $0.53. Adjusted earnings per share, which exclude $24 million in separation costs, were better than our previous expectation of $0.50. These separation costs relate to our portfolio repositioning actions, specifically the planned spinoff of Network Power and the potential divestitures of the Motors and Drives and Power Generation businesses. Overall, the first quarter results were slightly better than our expectations, and the company remains well positioned for a challenging 2016. Turning to Slide 3. Gross profit margin in the quarter decreased 70 basis points to 40.1%, primarily due to volume deleverage and unfavorable mix. EBIT reflects the impacts of unfavorable currency transactions of $27 million and portfolio repositioning separation costs of $24 million. Additionally, the aggressive restructuring actions initiated in 2015 are beginning to have a positive impact on profitability. During the quarter, approximately 12 million shares were repurchased for $554 million. The company still plans fiscal year share repurchases to reach approximately $1.2 billion. Turning to Slide 4. Underlying sales were down in all regions except Europe, where our euro-based businesses are becoming more globally competitive. Turning to Slide 5. Business segment margin declined 170 basis points to 13.3%, primarily due to volume deleverage and unfavorable mix, partially offset by the savings from restructuring actions. Operating cash flow was down 15%, reflecting the impact of lower earnings. Similar to many industrial manufacturers, capital spending was reduced due to lower global demand. Capital spending was down 30%. Turning to Slide 6. Process management underlying sales declined 11% in the quarter. Energy sector spending remained at challenging levels as lower and increasingly uncertain oil prices further pressured spending, particularly in upstream markets. Upstream projects underway will continue to completion, but new projects are facing potentially further delays. Downstream markets remained favorable in the U.S., Europe, and the Middle East, mainly on small to medium-sized projects in the chemical and power markets. We will continue to shift our resources to capitalize on more favorable business activity levels in downstream and life sciences markets. Turning to Slide 7. Industrial automation first quarter underlying sales declined 15%, reflecting continued weakness from a global industrial recession and reduced levels of spending in upstream oil and gas customers. These conditions are expected to continue into the second quarter with improvement expected in the second half of the fiscal year. Turning to Slide 8. Network Power underlying sales declined 1% in the quarter as global demand for data center and telecommunications infrastructure spending was mixed. From a regional perspective, Asia had growth in Australia, India, and Southeast Asia, while Latin America reflected favorable data center activity levels, particularly in Mexico. Segment margins increased 90 basis points to 8%, benefiting from restructuring actions. Recent order trends have reflected improving conditions in both data center and telecommunications investment. Turning to Slide 9. Climate technologies underlying sales declined 10% as global air conditioning sales decreased, driven by higher U.S. residential demand in the prior year resulting from regulatory changes. Global refrigeration markets grew modestly, as growth in the United States and Asia was partially offset by softness in Europe. Demand in the air conditioning and refrigeration markets remains favorable, supporting our outlook for modest levels of growth in 2016. Turning to Slide 10. Underlying sales in the commercial and residential solutions segment were down 2%. Favorable activity levels in U.S. construction markets resulted in growth in both the wet/dry vacuums and food waste disposing businesses. Segment margins improved 20 basis points to 21.7% from the favorable impact of the divestiture of the InterMetro business. The favorable trends in U.S. residential and commercial construction continue to support our outlook for modest levels of growth in the segment. Turning to Slide 11. As we have indicated, we expect difficult market conditions to persist throughout the fiscal year, but we do still see a bottom forming in both sales and earnings by the middle of 2016. We will continue to execute on our operational plans while diligently working to complete the important portfolio repositioning actions that were announced last June. Taking into account our first quarter results and recent order trends, we are reaffirming our fiscal year 2016 guidance. Underlying sales are expected to be down approximately 2% to 5%, excluding negative currency translation and a deduction from completed divestitures of approximately 2% each. We continue to expect adjusted earnings per share of $3.05 to $3.25, excluding estimated separation costs of approximately $250 million to $350 million, which are approximately $50 million lower than our previous expectations. For the second quarter, underlying sales are expected to be down approximately 4% to 6%, excluding negative currency translation and a deduction from completed divestitures of approximately 2% each. Adjusted earnings per share of $0.60 to $0.65 are expected excluding estimated separation costs of approximately $75 million or approximately $0.11 per share. Our long-standing commitment to return cash flow to our shareholders will be supported by an expected increase in 2016 operating cash flow to approximately $3 billion. And with that, I will now turn it over to Mr. David Farr.

Thank you very much, Craig. Thank you very much for joining us today. I appreciate that. We are looking forward to seeing our investors and analysts in Austin next week, and we will talk a little bit more about that in a second, but looking forward to really seeing everyone down there and sharing our plans and ideas with the group. I also want to thank everybody across Emerson for the execution in the first quarter. Clearly, this is only the first quarter, and we have a very detailed undertaking ahead of us relative to sequentially improving our sales, our profitability, our earnings, and cash flow for the remaining part of this year. As I look at the plans, we started back from restructuring back in February and I look at the announcement of repositioning that we announced in June, we continue to make very good progress. But it is clearly all about executing around those plans that we put in place and making sure we get it done from the standpoint of driving costs, repositioning this company, and looking forward to how, as we go through a very challenging global economy and a very challenging industrial recession that we see today, we come out of this as a stronger company—one that can continue to add assets once we reposition to a new Emerson platform. Looking forward to giving you insights on how we see 2016 unfolding from an economic standpoint, how we see the numbers happening in terms of the cost of the repositioning, and how we see the additional risks that we may encounter. Those are all things that we will be talking about. I will defer those until we get together next week. Also, looking forward to having Bob Sharp and Steve Sonnenberg talk about the two key business segments we are moving into—the commercial residential solutions and automation solutions. Those two individuals will give you insights into the strength of these platforms and where we are going to invest going forward. Clearly, we have a challenging oil and gas and industrial marketplace right now, but it's nothing new—we have been there before, and we know what to do to deal with this issue. That's why we started the aggressive restructuring last year. As we talk amongst the business leaders, the OC, and the board, if the market continues to get challenging, we will continue to do additional restructuring. We will ensure that the cost structure of this company stays competitive and that we can deliver the highest level of profitability that our shareholders expect from us. That’s what we are all about right now—executing and moving forward. As I look at our current marketplace, the last 30 days have been what I would call the most unusual in my time at Emerson. I have never seen a marketplace fluctuate so much in terms of end markets, stock markets, and interest rates—it's a very amazing marketplace right now, one that global CEOs like myself have to prepare for. But we are now basically in our fourth quarter of the recession. I see, as we will talk about next week, at least one more quarter, maybe another. Our game plan is to improve the business, cycle this business back up, and start improving profitability—we want to move forward. So with that, I will open the floor. I am glad to have the first quarter behind us. I want to again thank the organization—they did a great job executing the plans we put out there. We are making great progress, but clearly it’s only one quarter—we know that. Our game plan is to sequentially improve sales, profitability, earnings, and cash flow to our shareholders and establish the premium valuation that this company deserves. With that, I will open the floor.

Good morning, guys.

Good morning, John—I'm just trying to find answers because the board meeting just ended, so I had to give something to my body here. Be an on-the-go CEO.

Sure. Back in August, I think on the earnings call, Dave, you talked about process orders stabilizing, but if oil moved below kind of $30 or better off, looking at words to that effect. So here we are, oil is around $30. I'm just wondering how you see that playing out for process if oil stays at these levels both this year and then into FY '17?

Let me see. Chevron reported a loss. BP reported a loss. So I would say the market is stressed. From my perspective right now, I would say the capital market in oil and gas is going to be lower. Our expectation for our process business will be lower, and we will have to do additional restructuring. We are looking at a situation, in my opinion in the oil and gas marketplaces, that will not recover until well past the middle of '17, maybe late '17. Fortunately, we have 75% of the business that doesn’t serve the oil and gas marketplace. So even though we will talk about this next week, oil and gas spending is down—it is not going to zero. It will be a tougher marketplace and we will have to work harder at it. And clearly there is a lot of uncertainty around this, but the game is that we are going to have to figure out how to get the sales, how to get the business, and get our costs down. It will clearly be a tougher year in '16 than we thought. That’s the game. Pretty straightforward.

Okay, great. And then I guess in the quarter, I think January you guys announced a big project with Tahrir Petrochem, I think $150 million. I am just interested to see you guys taking a preferred equity investment in that customer. I am just wondering if that reflects the competitive environment where alongside price you are now kind of having to think of other ways to win business? Or how do you think about that and how should we think about it going forward on other big, large projects?

We have done some unique things in the past. This is unique. This is very strategic for the country of Egypt, and we felt that as with other competitors, we are not the only ones that did this. We are probably the only ones who have gone public with it, but I think you will see this happening from time to time. It's a huge opportunity for us, and it really is all about forming a relationship because I think once this project is successful, there will be future projects. But it's not for every customer. It's not for every marketplace. In this case, we worked on it for a long time, and I have had long conversations with the CEO, and I feel that this makes a lot of sense for us relative to strategic relationships going forward. So it's our commitment to making sure these guys are successful, and we are going to have a lot of business with them for many years to come.

Dave, just looking at the order trends here and process in December. Obviously, the month to month can be volatile with different project activity and what stays and goes. But maybe just comment on how that month looked and any kind of body language you've gotten just with the last $10 move? Obviously, projects don't go forward on a day, a week, or even a month of oil prices, but maybe what the psychology has been with this last move down?

I think to be honest, the psychology is very nervous and tense among the big oil and gas investors at this point in time. From our perspective, we will talk to you next week to encompass what we think the downside could be relative to oil and gas in the process businesses. But I would say December quarter orders for process were not that bad. We pretty well had that factored in what's going on. I would say that my concern is the psyche of Chevron or Exxon Mobil, or those companies, that are kind of freezing up some of that spending level. They can't go to zero, but I think it's going to make it tougher. So my gut tells me that it's going to be more challenging in the near term, and process order pace will be a drag in this, while the other businesses will start pulling back up. So that’s where we are at this point in time. We will give you an update on what I think the process segment is going to do, but it will be more negative based on my previous comments. I did say that when the price of oil got down to that level, it would be an impact. I think right now our underlying sales will be more negative in the process than we thought originally, and hence we will have to cut more costs there. But the psyche is not good in that space right now. Fortunately, there are more investments going on in other parts of the marketplace, which is a big part of the market, but the oil and gas investment area is not very good right now, and I think it is going to hurt us in the second half of this year.

And obviously you'll touch more on this next week, but I think maybe looking into last quarter, the expectation on being able to hold the line on price somewhat and being able to hold the line on margins this year. Assuming all that plays out what we're seeing today, I would imagine those two items are also part of that discussion as well?

It's not gone out the window. The pricing right now—let me make a forecast. We look at ranges; that’s a reason we give a 2 to 5% range on underlying sales. We look also at the pricing environment changing too. The pricing environment today is still within the range that we laid out when we put our plan together back in August and September and talked to you all in November. The net material inflation has continued to drop down, so we are going to give you a forecast and a range of what it looks like right now. But it's well within our expectations. I would say the one negative will be that underlying sales of process will be more negative and the profitability will still be very good. We are going to have to take some additional restructuring both for '16 and '17 in that space because the recovery will be longer. We will see what our customer base does right now. As you said, man, they don’t move that fast but I know the psyche is not good. You just have to look at the reports that came out in the last three or four days from two major oil and gas providers.

Dave, on last quarter's call you talked about the expectation that we might see one more quarter where inventory in the channel could be worked down and then by 2Q, destocking could be behind Emerson. Did you see—I assume you saw continued destocking in the quarter? Do you think inventories in the channel are low enough where the destocking for the whole company should end as we go through fiscal 2Q and into the second half of '16?

I would say, from what I know right now, inventory levels within the channel, including ours, are pretty good and low. The pace of business right now and the run rate I see, I would say the inventory levels are pretty good for us. I don't see much of a downward trend on that now. I think it's pretty well over with; probably very minor downward trends. I think it’s pretty well there around the world. I've been in Asia, and I've been around the world, and I don't see the inventory being a big issue for us right now. So that's a good thing.

Got it. And then just asking about China. You talked about China in '16 maybe being down mid-single digits on your last call, and maybe down 15% in 1Q, but you actually did down '13. So do you think China has stabilized a little bit for you in terms of the decline and are you still expecting mid-single digits for '16 to hold down in single digits?

Well, first of all, I called down '13, I would say that's a pretty good forecast call without knowing what was going to happen. I think that China in my opinion today is on track to hold to that mid-single-digit range. I think it's going to be in that 5%, 6%, or even 7% negative range. I don't see it changing. I would say my China organization is more optimistic than that. They are less negative, but I think that looking at what I see going on in China and the marketplaces around the world, I think that it's going to be a tough one for them to perform. They are working through the inventory built up in the first part of 2015. But my gut tells me that I wouldn't be surprised if we finish at minus 7% or 8% in China when it's all said and done.

It's helpful, Dave. Thanks.

Write that down, and you can see how good a forecaster I was.

We'll hold you to that.

And, Dave, we'll welcome you over as an analyst any time you want to come to the dark side.

I didn’t say analyst; I said investor.

Oh, investor, got it.

You know I am not that good of an analyst. I would fail. I would be fired within one week. As an investor, that’s a whole different story.

All right. Well, just keep your day job. So maybe focusing a little bit on your commentary about the last 30 days never being so volatile and just taking a look at the order trends. It's interesting as you look at the trends you think about the last 30 days, it's interesting that you haven't really updated your guidance for the underlying growth rate for the year. I recognize that comps are going to get easier as we get through the year, but why not maybe be a little bit more conservative with the underlying order trends or with the underlying organic growth trends for 2016?

Because I think that when we put our plan together, we had certain assumptions relative to the volatility of the marketplace and what the market is going to look like. As I look at all analysis and I look at the upsides, the downsides, I think right now we are still well within that boundary. To widen that boundary right now is not what I find acceptable. I think our organization at this point in time is well within that even with the 30-day risk. The risk in the 30 days is more around one piece of the company; the standpoint is that Europe’s not that case. It's primarily around oil and gas and the price of oil. It's not the whole economy, but it's definitely there. I mean we encompass what we thought could possibly happen to us. Now, it could get worse, and I will talk a little bit about that in Austin, but right now, I think we are well within the boundaries of what we put out there.

All right. Okay. Fair enough. And maybe talking about the cost actions then for a second, I just want to make sure I've got my numbers straight. You spent a little over $220 million in restructuring in 2015. I think it was another $13 million in 1Q. Can you talk a little bit about the benefits that came through this quarter? Clearly, they are helping the margins a little bit and maybe your expectations on cadence as we progress through the year?

Yes. I think that what we see right now is that around $80 million improvement came through in the first quarter. There will be—from the standpoint of restructuring, there is still a big number in the second quarter. My gut tells me that we will probably be on restructuring around $20 million in the second quarter. We are going to be increasing this. The question is, can I get it done in the third or fourth quarter? Is it going to be more in the early part of next year? But clearly, you are going to be looking at the 20-page report for each quarter now as we start pushing in anticipation of concerns that we may have in the marketplace. Savings-wise, you are going to be building from this 80, incrementally coming up towards, I would say, the 90 level by the time we get into that fourth quarter. And that’s basically how we see that happening per quarter.

Good job executing in a very tough backdrop. I'd like to follow up on an earlier question on price. Have you actually begun to see the increased price competition in process, and has that been rational? Just given the fact there's very little project activity out there, I'm just curious how you actually measure that price change.

We measure price change, obviously on the contracts; we also measure the price change that we have to give on short-term actions from the standpoint of a day-to-day business. So it's very measurable because we can see the average pricing within the structure of the business. But you are right. There has not been a lot of big bids, and I would say the pricing has been rational. The other issue is that right now, like our European competitors, we are also a major player in the process sector in Europe. We are seeing the benefit of that too. What I see happening is that we are shifting sales to our European operation because we have been working on this in the last 12 months. You know the dollar started appreciating last year, well over a year ago. We have been working to get our rebalanced cost structure, which we will continue to do. So our U.S. operations right now are seeing the benefit of the lower cost structure, and they are winning in, I would say, they are going to see other regions of the world. So I feel reasonably comfortable with our pricing forecast. We track this extremely closely. I don’t know how long you have been following us, but when I met in early 2002-2003, I got side-swiped on how fast these things move. We have created a much tougher tracking process, and so I can tell what's going on across this company. It's going to be a little more negative this year than last year, but well within what I thought we were going to see, and well within the net material inflation level. And people are acting rationally; it's going to be an interesting year.

Understood. And given the recent volatility you mentioned in crude, how does that impact the downstream businesses and MRO and your investments that you are making?

Two things: I am concerned because I think we need to get our actions together and think about if it takes longer to recover as we go into late '16, early '17 in the process side. I think there will be a freeze as our customers say we are reallocating capital; we are cutting capital again 10%. What that number is going to be, we will see in the next 30 to 60 days. This will create pressure on our base relative to smaller and MRO projects. So the initial reaction is that we are going to see a slowdown, and hopefully as we progress through the year, we will start seeing that capital freed back up. It can't go to zero; it's not going to go to zero, but they are clearly going to reallocate and they are doing that really fast right now from our customer base. My concern right now is looking at downward pressure relative to our total sales in underlying process. We need to take capacity offline. From my perspective right now, the focus has been on people, on restructuring the overall overhead cost. Now, where I want to look is if we are going to look at a longer recovery here in this particular part of the process world, we will look at taking fixed assets offline. That’s what Frank and Ed Purvis and the business leaders will be doing at their upcoming reviews that will start, I think, in a week or two from now. We will assess what extra capacity we may need to take offline permanently if we are looking at a different environment, and where should that capacity be and not be. So I think that will lead to a higher level of restructuring later this year to early '17.

You mentioned earlier that your thought process would lag a recovery in some of the other businesses. But I guess if we look at industrial automation, it does seem that it got hit pretty bad. So maybe just comment on how you see IA playing out. And related to that, any color you can give on orders in January?

I don’t have orders for January yet. This is February 2, so I don’t have that yet. It's a little quick for me and the company. But relative to IA, I think IA got hit harder, sooner relative to the space they are in. So there might be a little downside risk in IA but not that much. I think they are sitting really low right now. Things can always go down further, but my gut tells me they are pretty close to that cycle right now. The process guys, because of the type of business they have, are still coming off some of the wins and things they won the last couple of years. I think they will continue to slide a little bit here, and that’s my biggest concern right now. If I look at the '16 forecast, I always have little IA concern, but my biggest concern would be the process guys at this point in time.

Thanks. And then Network Power, orders look a little less bad than a few months ago. Margins are up. You have a big project in Europe you are working on. But outside and beyond that, do you think that you have succeeded now in stabilizing the earnings in Network Power and the rest of the year we should see that stable margin play out?

Yes. If you look at the underlying order pace of our Network Power business, it is actually on an upward trend. As of right now, I was talking to Scott Barbour and his team, and they are doing a great job out there. The trend is up, and the profitability is continuing to head in the right direction. These guys took some serious actions in the last 12 or 18 months, and right now I feel good about it; it's a broad base, and I feel good that these guys are on the right track. As of today, that’s how I feel.

Dave, given all the commentary and sort of how obviously the volatility is right now, what's going on with the process, the capital deployment process or should I say the sale process for industrial automation, some of those assets, and the separation activities for Network Power? Is that delayed in any way?

The Network Power asset—there is no delay going on. We have the fuel path looking at strategic buyers within that business. We also have the fuel path moving right down toward the spend. So that half is well underway. On the industrial automation assets, I would say that based on what we see right now, we are probably two to three months behind where I want to be relative to discussions with strategic buyers. So I would say Network Power is heading okay. Industrial automation, given the tactical customer base, a lot of my potential customers or buyers are clearly seeing some tough times too. So I would say that one is a little bit delayed by a couple of months.

Okay, Dave. And then also the combination of process and industrial, in other words, the future structure of the business, the future Emerson here. Are you taking actions already to combine overhead or other elements of these two businesses yet, or is it just standalone until you get that other process down and then you will go down this one?

We are—I would be very careful here—relative to this business we are taking some actions early on the combination. Not totally across the board, but in certain select areas in preparation for it. By the time we get into the middle of this year, those actions will be underway. On the commercial residential solutions business, we are embarking on it as we speak. Both are well on their way. I made a commitment to the board, I made a commitment to the individuals, and I probably told you guys that by the end of the second or halfway through the third quarter, we are going to have these things structured properly. Now, it doesn’t mean things are done, but that’s what the game plan is at this point in time.

One quick question on the process side. You talk about the upstream projects, some on completion, new projects. What portion of the business at this point still relates to the upstream projects that are being completed, and how much does that disappear? In what sense does that go to as you look through the year? Does that basically go to a very minor part or how do we handle that?

I don’t have those exact numbers. I can't give that. I can't break it out that way. I know what our oil and gas percentage will be this year in upstream. I mean I know it's still going to be a significant percentage of our total business and it will be next year too because it's not going to zero. People just don’t stop it. We will give you our best feel on that next week. I have some ideas about where we think that segment is going to go, but they don’t move that fast. It's really hard to say because what we talk about, what you think about is not necessarily how everyone looks at this business in a day-to-day standpoint. So I can't give you that information, to be honest.

I am just trying to sense, is that the part that’s disappearing? Are you trying to say are we closer to bottom of that impacting or sort of indicating that by middle of the year?

No. I don’t think it is. We will talk next week.

And you talk about having to do more restructuring in process because of the market—that’s quite easily understood. But can you talk about whether you're starting to look at industrial automation in the same way? I mean it's a very weak market. Conditions are such that there's more, or a second level of restructuring there to try to hold profitability better because that profitability could be under a lot of pressure if the demand stays in the current way.

Well, we have laid out the restructuring that we intended to do this year relative to the industrial automation business, and that’s well on its way. I am also in the process of selling that business. So from my perspective, I believe that there is more additional restructuring that we will have to do if we don’t sell this industrial automation asset. Then, if we are going to sell that asset—which we are down the path on—then we will approach it differently.

So last quarter you called out, in general, incremental concerns possibly about the Middle East. Has your thought process changed? Because there's obviously been some conjecture around possible efforts to curtail production, and you called it volatile. I'm just curious if anything has changed in the last few months with respect to your perspective on the Middle East?

No. My perspective on the Middle East hasn’t changed. I think that the risk I see today in the world for spending, and your talking about oil and gas, the type of spending that goes on, just the process of spending—North America, China, and Latin America. Those are three concern areas I have relative to the spending around that industry. I was just coming back from the Middle East. I mean the national oil companies have a certain level of spending because they have been cutting back. I think we probably have that build-in. I feel okay there right now as of today. But I see some major crises going to erupt in the Middle East—things falling apart—and stuff like that. But right now I feel reasonably good about that. My concerns are North America investments and the potential consolidations that could happen. And then China—clearly concerns. My forecast for China is worse than what most people would say out there. So I have a little concern there.

No, that makes sense. Dave, a year ago at the analyst meeting, you made comments that you thought Canada's petroleum industry was probably going to be better than people expected because there were obviously reasons for it—efforts to support domestic businesses and that sort of thing. Do you think that's changed? The dollar has collapsed a lot, and I guess debatably it makes that country a little more export competitive or not. I'm just wondering if you think because it's such an important trading partner with the United States, if you think the outlook for Canada is kind of where you thought it was before. It's sort of a similar question on the Middle East, only for Canada.

I would say it's worse. One, they have a new type of government there that doesn’t care for this industry. Secondly, the price where it is right now, it's not good. So I would say, from our perspective, we have been restructuring and downsizing in Canada. It’s an important market, but strategically it is going to be tough for the next two years.

Just lastly, Dave. You obviously touch on a lot of verticals, right? Lots of different things. So kind of ex-petroleum, do you think that—you guys are tracking some end markets or verticals or other things within Emerson that could actually contribute positively or surprise to the upside in the next 6-12 months?

Yes. I will give—we are going to give you a different view of the verticals and growth rate next week. I think the answer is yes. I think there are some verticals that are going to do better than people think. We started reallocating our resources, really pushing hard to do that. We had a very good run in oil and gas upstream and gained a lot of market share. Now we are refocusing those resources, and we will talk a little bit about that next week because what you just said is exactly right. There are markets out there, and the whole organization in process management is focused on how they can go after those markets and re-energize their workforce.

Maybe we can just go back to, I think, kind of a question I asked on the last call. But just given what you see in process and obviously your commentary throughout the last 30 days, I think implicit in your guidance for fiscal '16 was some firming of order trends in terms of the March-April timeframe. I'm not trying to put words in your mouth, but I think it was to that effect. And then, you know…

I mean exactly what I said—you are not putting words in my mouth, and I will tell you again today that I will show you a chart next year that I am saying we will, I'd say right now, call April 1, our orders go positive. It's total positive. I said that last time on the call, and I am still saying that. Now for whatever, you know, but I am making that call, and I will stand by that call.

All right. And you don't want to move the call to April 2, maybe but...?

Well, because it's April Fool's Day, so I can get that. I made that call back then, and I am standing by that call.

Okay, fair enough. I guess the only other question I have is, you did mention, and this dovetails with the question I just asked, but I think you did mention like we've come through four quarters of what looks like an industrial recession. You think there's about one to two left. Are you seeing anything in the GFI or just the order patterns or trajectory, absent the process management vertical—where it's obviously dynamic and tied to the commodity price—where you can point to an upward trajectory or reason for recovery there in terms of the macro?

Yes. The answer is yes. The call is April 1. And I am talking about the April orders going positive and the third quarter sales will be with a positive in underlying sales. And we will not be standing there talking to you.

Well, we've got our line in the sand. I'll see you next week.

I like to draw lines. You know me.

I'm trying to reconcile, I think like everybody else. I mean you're bearish, but you're still calling things getting better in April. And I think the angle I want to take is that, and there's good and bad here, and the good is that you mentioned the comment about fixed assets offline and we've been writing and we think the entire industry needs to do this. But you guys are the only ones that are really doing it. So how do we get out of this mess if you're one of the only companies that's willing to admit that it's, for lack of a better word, a bit of a sideshow. How do we get out of this mess to where even if your orders turn, call it slightly positive, I mean it's probably more flattish than positive to be more realistic, but how do we get out of this?

It will be above the line. I have actually got my nose above the water, it counts Scott.

Well, what's it going to take to get us out of this mess is my question really, Dave. Because again, unless everybody capitulates—which we saw in 2002 and 2009—doesn't it just start to bleed into different components of the economy and different businesses that you sell into that aren't being impacted right now, starting to see impact as we get later on in the, call it cycle?

I can't speak to other people. They have got to be looking at the same issues from the standpoint of too much cost, too much capital, and too many invested investments. They've got to be looking at that, and eventually, they are going to have to say, look, we’ve got to take action. A good leader—if they don't take action, I think there will be some other leaders coming to work on that issue. From our standpoint, I feel strongly as you know. We are trying to deal with this issue. We make calls. I make calls, as you know, I have been here for a long time. I make a call. Sometimes I call it right; sometimes I call it wrong. But you have to make calls and say we've got too much capacity. Things are going to be down longer, and you've got to deal with it. We started seeing this happen last year, and I think other people are now maybe just starting to see it and starting to deal with it. If you don't have the capability of dealing with it, sometimes you just sit there and tread water and watch your profitability get hit. There are several companies out there in my opinion in the industry right now that are doing a good job dealing with this issue. There are several companies that are not, and you know that. You can see it. I don't have that magic call. I can tell you what we could do. I know right now that certain things are going the right way, and I have a feel for what things are, but I do know that given where the price of oil and gas is and potentially where it could go, we will have a capacity issue on that industry which we didn't have say 12 months ago. We have got to think about how we deal with that issue. And as you know, it also takes time. But that's on the table right now, and no one wants to deal with that because that’s really a hard thing to deal with. But you got to deal with it, period.

Yes, understood, and I'm encouraged by your comment on price being relatively rational. It was in the last cycle as well, but there's always little tidbits out there. Caterpillar has been talking about the alternator contract they have with you guys and trying to drive the price down. You view that as more of a one-off or do you have multiple situations going on like that where you've been able to hold on price because the competing bids haven't been any better?

From the standpoint of capital contracts—they have the right to do what they want to do, but those contracts are set. The biggest issue right now is because volumes are dropping for people, and they have excess capacity. Trying to fill plants up with a lower price is not a smart thing to do because it doesn't work for them. That's why I think it's been more rational here. And so far we mapped it out, and Frank and Ed Purvis and all the business leaders laid out their plan last summer, early fall. We will look at it again right now on pricing, and it's pretty well in line. I feel good about it. But like I said from 10 years ago, or was it 12 years ago? I got side-swiped, and that’s why we spend more time on it than probably the average company.

Hey, Dave, just within the process spending that you are seeing. We went through this period which seems like in a lot of cases we are still in where seemingly everything was getting cut upstream, midstream, downstream, maintenance spending. The spending that you are seeing happening, whether it's some of the downstream stuff or the chemical, what are the projects exactly? What are people willing to spend on right now?

On the big projects, say upstream, if it's a project to a certain extent where they see spending another billion dollars will get them cash flow, that project is going to move forward because if they stop 75% of their projects, they will have a problem. Completing the project will still yield results. Most people are being more selective these days. When things were going their way, they threw a lot of money at everything. The money is still being spent; it's just a lot more selective. It's going to be on how can I prove the investments we've made over the last ten years and get more out of that given the fact that my oil prices or down or my inputs are down. That’s where they are focusing right now. This is a good business for us, but you don’t have the big projects which give you a lot of top line growth.

Okay. And then on Network Power, nice margin result there in the quarter. It's been a while since Network Power margin has beat my expectations. Is that a function of having cleared any major part of the restructuring or just a lag of getting this stuff to show up in what you're shipping in terms of the numbers, or is there a reason why it sort of finally came through?

I think that across Network Power, from the standpoint of actions they started undertaking last summer is finally starting to flow through. We've been working on that. It's really starting to reflect in the final P&L. So it started last month or at the end of the fiscal year in September, and it's gradually moving each month. Our expectation is that this will continue to take hold based on what we see happening in that market. We should see a sequential improvement in that business. Which would be good because Scott and his team have really attacked this. They are getting out of certain businesses and investing in others. I think they have done a great job in evaluating where they want to be and the cost structure they have, and now they are executing around that flexibility. My hats off to that team in a very dynamic marketplace. I think they are heading in the right direction, and I feel good about that. They did a great job executing the first quarter.

So, Dave, just broadly speaking, given what's going on in oil and gas here in North America, are you seeing any signs in your other businesses of meaningful contagion in CRNS or climate? Anything that you would point out here? You talked about the last 30 days being volatile. Just any thoughts there because obviously there are a lot more concerns in the market in the last 60 days or so?

Yes. I would say we have not seen it yet, Rich, from the order pattern that we saw in December. I didn’t see anything even in the forecasts for January. It could take a little while, but we don’t see it yet. I think the market has definitely been very volatile. The market is digesting the news we have been seeing in earnings report and the comments people are making right now. Let's say a little bit more negative about 2016. We have been trying to get ahead of that, and at this point in time I feel that we have that size. I don’t see the knock-on effect of what we saw the volatility both from the market and the commodity prices in January. We will have to watch it very carefully as it unfolds. If I look at construction, residential construction, and consumer spending in areas we are involved in, they are still holding up pretty well right now. So we will see. I mean 30 days is pretty short.

Understood.

I know you are very quick compared to me.

On process in terms of M&A, you talked about deploying some capital there for this year. With what's happened here, incrementally more interested or less interested? How should we gauge that over the course of '16 in terms of the opportunities you're seeing right now?

I am interested. Higher interest. You can never call when the right time to buy is. From my perspective right now, I think there are unique assets out there that I would like to buy. Our cash—Frank is over here working on how we are going to get cash back in the United States with the spin and the divestitures. We will talk a little bit about that next week. From my standpoint, I see this as a buying opportunity. I talked with my board today, and the board is solidly behind me to make sure we execute and execute as hard as possible around this repositioning and restructuring. We have got opportunities here, and so let’s think about how hard we can play with it. That’s what we are all about.

Okay, thanks. By the way, I thought Rossman was up for the Cavs coaching job. I guess that didn't play out.

He just missed it. They called me about it, and I said he was questionable with his leadership capability and I also felt that he would have a hard time coaching a guy that’s seven feet tall.

Just thought it was interesting how in a period of significant volatility we've all been questioning you about what you're seeing here, but you're also giving quarterly guidance. That's not really what—Emerson didn't use to be in the quarterly guidance business, but where is the additional confidence? Where's the additional visibility? I mean it's certainly welcome, but it's a change.

The change, I may go back, you know me, I have been around for few years. It's all about right now that we are on a detailed plan that we started executing last June, and I want to make sure you guys understand where we are relative to that transition. I want to give you clarity on what I see happening each quarter. The management team has been working very aggressively, and I think it’s very important for you to understand where we see the trends each quarter. We see what is on our mind and where we are positioned each quarter. So we are going to provide you with clarity on things next week on the second quarter, which you probably wouldn’t get from us before. I think it’s important that we stay joined-at-the-hip here. Some of you are right there with me; some of you don’t necessarily agree with us. It's all about execution. Can we execute? I am telling you what the roadmap looks like, what the band looks like each quarter, and I will get through this quarter and then share outlook for the third quarter.

Yes. It's a great perspective. It is a change, and in a period of this uncertainty to have your line of sight on this is appreciated. And then just have a niche follow-up on commercial and residential solutions. It was interesting for professional tools; you wanted to blame that also on upstream spending, and I just never thought professional tools was as tied to that, but maybe I'm wrong.

Now you are talking to one of the former presidents of Ridge Tool. I know. And the former president of Ridge Tool that went through the last recession, a really tough recession we had. We have a significant part of that business that sells specialty tools and equipment to the oil and gas producers and users, upstream and downstream. If this whole industry stops spending, the first thing is that it just drives right up around the world. That is a big chunk of our business, and it's significant enough from a profitability standpoint. I thought I was going to be fired at the division president in my first year when I came in here, and oil and gas hit me back in the early 1990s. It's tough. That’s what it is. It's not made up; trust me, it's there.

Understood. See you next week.

Look forward to it, guys. I have to get going. I apologize. I know we have a lot of questions and I know I have cut some people off. I want to appreciate everybody for calling; I appreciate the questions. I am going to try to be as open and honest as possible in this situation and give you an idea of where we are trying to go. But clearly, I am providing clarity; this is what my management team sees right now and it's our call, and that’s what we will do this year to ensure that we are all on the same journey together as we come out of 2016. Thank you very much. Bye.