Q1 2020 Earnings Call

Thank you so much and welcome. Everyone Emerson's first quarter 2020 earnings conference call. I'm joined today by David for chairman and chief executive officer Frank Junior Executive Vice President and Chief Financial Officer. Mike train president. And of course Henry's director of investor relations Emeritus Emeritus. I graduated with emotion. I encourage you all to follow along in the slide presentation, which is available on our website. I'll start on slide for with the results of the quarter underlying sales wage growth came in slightly below expectations flat year-over-year driven by softness and Global discrete markets and North American Upstream oil and gas activity despite lower sales applications executed well to deliver adjusted EPS of sixty seven cents spot on the guidance. We provided and the fourth quarter call automation Solutions underlying. What's up 1% off.

Which was somewhat below.

His expectations primarily due to the aforementioned discreet and Upstream markets office.

Demanded other Global process and hybrid markets remain stable importantly. We also saw several large LNG projects book in the quarter after delays from the second half of the year off of the last year.

Commercial and residential Solutions was in line with expectations down 1% reflecting continued softness in global professional tools and cold chain markets somewhat offset by Saundra markets in Europe and Asia Middle East and Africa, the company initiated ninety-seven million of restructuring actions in the quarter. Well above the 70 million discussed on a quarters call these actions combined with incremental actions from the second half of last year are expected to drive improve profitability in 2020.

Cash for performance was solid in the quarter with free cash flow up significantly versus prior-year reflecting 94% conversion of net income turning off for review the piano.

Quarter gross margin was roughly flat at 42.4% as favorable price cost was offset by unfavorable business and Regional mix primarily due to lower us chef and highly profitable obstetric upstream and discreet markets.

Sg&a, as a percent of sales increased 110 basis points to 27.1% However, this includes a hundred fifty basis points of unfavorable impact from higher stock compensation package little higher stock price.

Adjusted ebit and ebitda margins which exclude restructuring and related costs declined 180 basis points and 170 basis points respectively importantly with these changes include 220 basis points of combined unfavorable impact from stock compensation pension and FX losses.

Excluding these impacts adjusted ebit and ebitda margins were up forty and fifty basis points respectively reflecting strong read through a prior-year restructuring actions thoughts turning to slide six.

From a geographic perspective. We saw mixed underlying sales results in q1. The Americas were down below expectations due to weak us Upstream oil and gas and discreet in markets across the United States and Canada were down 3% and 1% respectively and Latin America up 4% Europe was down slightly with 2% growth in Western Europe authors that by sluggishness in Eastern Europe. Asia Middle East and Africa was up 6% led by China up 6% and strong growth in the Middle East off.

Turning now to slide seven.

Total segment adjusted ebit margin dropped 40 basis points to 15.4 15.4% reflecting the negative impacts of foreign transaction losses as well as unfavorable business and Regional Mickey Mouse.

these items total 80 basis points unfavorable impact

as previously mentioned stock compensation costs increased due to a higher stock price and pension costs increased to the lower discount rates corporate another costs, excluding restructuring and related costs. Just favorable. Do you want cash flow performance with solid operating cash flow increased by over 30% to 424 million and free cash flow of of three thousand ten million represented 94% conversion.

Journey

Flight eight. We will Bridge first quarter eps.

X stock compensation pension and foreign exchange transactions total $0.13 headwind for the quarter which was in line with guidance operation share repurchases and lower interest costs delivered $0.05 also in line with guidance to net sixty seven cents and EPS on an adjusted basis in summary operations and balance sheets balance sheet delivered our Target EPS contribution on lower-than-expected sales.

We will now review the business platforms turning to slide ten.

Automation Solutions underlying sales came in somewhat below expectations at 1% growth for the quarter December trailing 3-month underlying orders were up 2% driven by several large LNG bookings that had been delayed from the second half of last year of note backlog grew by 7% to nearly five billion dollars on a sequential basis compared to last quarter.

Cuz underlying sales were down 1% as discreet and Upstream markets continue to soften your sales were also down 1% as low single-digit growth in Western Europe was more than offset a weakness in life.

Asia Middle East and Africa grew 6% led by China in the Middle East

a long cycle big business has continued steady growth with both systems and final control up mid-single digits.

Adjusted ebitda margin was down sixty basis points reflecting fifty basis points unfavorable impact of FX transaction losses as well as unfavorable mix resulting from the year-over-year decline in the more profitable North American upstream and discrete markets.

Excluding these impacts the business delivered improved adjusted segment ebitda margins on lower-than-expected sales reflecting the benefit of 2019 or structuring actions.

In the quarter restructuring actions total 83 million across the platform.

these actions

This together with approximately Thirty million of incremental actions in the second half of 2019 are expected to support improved adjusted segment margins on flat to slightly positive underlying sales for the month now turning to slide 11.

Commercial and residential Solutions underlying sales were down 1% December trailing 3-month. Underlying orders were were also down 1%

The Americas underlying sales were down 3% as North American Residential markets remain soft and slower industrial markets way down professional tools and cold chain demand wage in America grew by 6% Asia Middle East and Africa grew 5% with mid single-digit growth across China the rest of Asia and the Middle East Commercial potential Solutions adjusted ebitda margin increased 90 basis points primarily reflecting favorable price costs and the benefit of prior-year restructuring actions.

for the corner

Structuring actions total ten million combined with approximately five million of incremental actions from the second half of 2019. We expect improved profitability for the year on slightly negative underline a sales.

Turning to slide 13 will cover the updated guidance.

Despite some progress toward trade resolution. We continue to expect geopolitical tensions pending elections and corporate focus on cost-cutting to drive a know a low to no growth environment in place for the full year. There's no change to our expectations for underlying sales of note. This Outlook does not include any potential impacts from the unfolding coronavirus, which will be discussed later in the fall.

It's highlighted on the last call Emerson has managed multiple economic slowdowns in our history and in the current environment. We have shifted our management investment Focus from a growth mindset to accost mindset off.

We initiated this process last year increasing restructuring Investments $35 million in the second half of 2019 today. We announce the next phase of that point.

For fiscal year 2020 we expect total restructuring spend to be approximately $215 of which $175 million will happen within the automation Solutions Plattsburgh commercial and residential Solutions in corporate reach take thirty-five million and five million of actions, respectively.

Of note during our upcoming investor conference. We expect to present an additional detail the outcome of the board's review announced on October 1st as well as update the longer-term guidance framework Beyond 20000.

We now expect adjusted EPS in the range of $3.55 to $3.80 an increase of $0.07 at the midpoint reflecting. The benefit of twenty-twenty cost actions would expect minimal net cash impact from a structuring actions operate operating cash flow is now expected to be 3.15 billion and capex spending is increased to 650 million month free cash flow Target unchanged at 2.5 billion, please turn to slide 14.

It's like Bridges our 2020 adjusted EPS Guidance. The starting point for the bridge is 2019 Mbps a $3.71 walking across to the right. We have adjusted 2019 EPS of $3.69, which excludes fourteen cents of favorable discrete tax items and adds back $0.12 of restructuring charges.

Continuing from $3.69. We expect a total of twenty-six cents of headwind this year for tax and pension largely offset in these headwinds. We now expect fifteen cents of operational Improvement on flat to slightly down sales up from 8 cents discussed in our prior guidance reflecting the benefit of twenty-twenty restructuring of we also expect $0.09 of eps from from improved debt cost structure and a strong balance sheet with 1.5 billion + plan share repurchases.

This gets us to a full.

Adjusted EPS midpoint a $3.57. Please turn to slide 15.

It's white lays out our second quarter 2020 Guidance the underlying sales outlook for the for the quarter is flat reflecting continued headwinds in North American upstream and Global the Street Markets note that the the Outlook does not include any potential impact of the coronavirus despite continued North America mix headwinds, we expect total segment adjusted ebit margin of twenty basis points and I'm up sixty basis points driven by the benefit of prior-year restructuring actions. We expect adjusted EPS of $0.81, which excludes fifty million a planned restructuring in the quarter.

Please turn to slide 15.

This slide lays out the first and second half adjusted ebitda margin progression for our business, assuming the midpoint of their respective underlying sales guides. We expect first-half restructuring structuring spend totaling approximately 145 million across both platforms these Investments together with easing mix headwinds and favorable Price Club Drive significant margin Improvement in the second half was automation Solutions adjusted ebitda margin up approximately 150 basis points and commercial and residential Solutions up approximately 100 basis points. We plan to exit 20 20 with an improved cost structure that yields stronger earnings and cash as we go forward and we look forward to laying out our long-term plans at the investor conference on February 13th, and now please turn to slide eighteen and with that I will turn it up to call over to. Mr. Davis. Thank you very much. I want to welcome all the Emerson ambassadors. Yep.

afternoon, and the analysts that follow

Merced in our markets we serve as we discuss our first quarter results and what we expect for the full year also on thank all the Emmerson leaders around the world and for all the Emerson employees that make them made this quarter happen and are implementing the total aggressive cost resetting programs to make Emerson stronger more competitive as we deal with it's challenging and uncertain Global Industrial and Commercial, Thank you very much for your efforts. As you can see for the first quarter press release. It's been a busy busy first cord executing around our two and half year cost Thursday. It's

As you know, we accelerate the fourth quarter cost resetting by about $35 million dollars that money will savings are floated into this year built into the plan originally from a savings of $4, maybe a little bit more than $1,000 based on the it was a headcount Reduction Program. And the first quarter we did $97 part of that include corporate where we took down the Emmerson plane Fleet to 5 and wage. So the helicopter

We are.

Acting for the total year around $215 million dollars of of restructuring and in total, you'll see next next week well over $420 in four and twenty five million dollars of cost reductions during this time period or this 2 and 1/2 year time. But the savings well north of 425 million, and we're expecting incremental savings on the wage first quarter restructuring around fifty million. The big issue now is we're starting to attack and go after the excess facilities in the higher cost structures will pay back more and 21 and 22, but we're going to continue to drive you could see well into the second half this year and well into 2021

We will have over dollar-for-dollar savings when it's all said and done and the execution is going pretty well at this point in time and pleased with it. We reviewed with it in great detail yesterday with a board wage. Well more than 3 and 1/2 hours of details of the board if they understood what we're doing to make sure we're taking permanent cost actions permanent cost setting and not damaging the core quality of invest the technology and the customer service support that we have out there not damaging the long-term viability and franchise businesses that we have at Emerson. As you know, we have our annual investors Conference next week in New York City on February 13th. It's going to be you know, not being on Valentine's Day is unusual for me. So you guys get make sure you do anything special for your spouse Thursday evening, but we're going to be doing our call or investors conference in the morning details around the global cost resetting to drive in the new Peak margins. We laid out very detailed game.

with a lot of you know

Very little growth environment, you'll see what we're trying to undertake and how we're trying to do it the timing the annual savings when they're flowing in when we're going to reach those margins from the e basis in an even basis off at the same time. We're taking a very significant actions around the corporate headquarters structure now here in st. Louis what around the world as we look at best ways to optimize our cost structure wage between the automotive automation Solutions and the commercial residential

this is driven internally by the key Leaders The Business Leaders and the corporate leaders, but also with the support of Mackenzie as we looked at how we can optimize Emerson's efficiency Effectiveness and possibility to drive record levels of margins by each of the major business units while Bob and I will put more color on this next Thursday, but we having very good progress as you can see in the second half of this year automation Solutions margins are starting to pop up five took after this last year Bob and his team Bob Sharpe and there are already seen the underlying possibility of businesses. So the actions are taken hold in there doing a good job and we'll talk a lot more about that as we go forward.

What is the global Emerson employees know and know full well?

We are fast in the execution mode right now and we cannot depend on the fact that there's no growth out there. We are figuring out how to grow our profitability of a grow earnings and grow our cash flow and a no-growth low-growth or maybe in negative growth environment.

Well, I mean or they a coronavirus right now both Mike train and I will talk a little bit about this what we see at this point in time, but it's definitely definitely go to have an impact in the near-term medium-term and potential long-term as we look at this as you can see. Our total orders are trending in the plus 2-2 range right now trending right now towards the zero as we look at the at the current month current quarter. It tells me that we are trending very tightly in the range that we've laid out for underlying sales. We continue to look for those catalysts to drive up in North America and other parts of the world. But as I look at the world order page, so I look at the sales Pace right now North America is weak weaker than we thought Western Europe's about in line to to 3% East near down Prime given by Russia and Turkey the Middle East and Africa, which we were just in was is doing better and several large projects are happening under way in asia-pacific as of dead.

the middle of January was

Getting pretty well and had pretty good growth in in the in the first quarter and we still look at pretty good growth of the full year there.

My concern is I look at the next couple of quarters is I don't see the Catalyst to drive the fundamentals pick back up in the US at this point in time. I don't see Canada nor like seeing Mexico and other parts of Latin America. What we're trying to do right now is control our destiny through our cost and cost resetting to figure out how to drive better earnings and cash flow through this cost reset if growth comes and we get so be it but we're going to have to fight. I believe all year long for incremental pockets of growth and things are continuing to happen to us. As you can see the global markets are not easy at this time. They're definitely not easy. I do see opportunities for growth out there, but I don't see how and when we will get to those levels at this point in time. I know people believe there will be a stronger second-half, but from my standpoint right now, I'm not betting on that. This company is betting on very low growth moderate growth or no growth and we're driving the actions necessary around that. Yep.

Greencastle will be good. You saw the first quarter at very good operating cash flow for the first quarter. Some of that was trapped in my opinion working capital on the balance sheet. We also had some

Cash flow based on taxes Frank had done some restructuring franken's team restructuring taxes that flow through in that first quarter. That should continue to help us as we go into the first half of this year. Overall. I think our capsules going to be it's going to be up nicely and three three point one five to three point two billion dollars right now is review for the board and how we see this assuming no significant acquisition Thursday. We're going to pay back 1.2 billion dollars in dividends. We're working our 64th year of increased Dividends are dividend ratio as as you. Look at free cash flows down up and down below 50 our Chef purchase somewhere around 1.5 assuming no significant Acquisitions this point. I'm so close to 85% of our cash flow issue repay back to shareholders in support of what we're what we're trying to do with our share home. Again. If we have the opportunities for Acquisitions will take them. We're also assuming higher Capital spending this year. We raise Capital spending up to that 650 million range $600 million range in South

Port of the actions were taken as we build new best cost locations around the world as we continue to reset our facility structure and our cost structure.

Acquisition funnel right now is pretty small. People are very nervous about selling assets of this point in time with an uncertainty around the cycle now with China situation we have in the process. We're in the process right now. I'm going to nice little bolt-on Acquisitions worth about a hundred twenty million dollars of sales enough sales hundred twenty five million dollars of value purchase price both one and automation Solutions one in commercial residential service is both in the control element part of the pyramid that we always talk about a Mike and I enjoy we're going to tax him a little bit in China give you some insight to this. Let me give you I'm going to turn over to them and we'll go back and forth here.

The Chinese situation first, I want to say something all my employees or we have eleven thousand employees. There. We are in constant touch with them. We had the ability to communicate to eighty thousand of our employees on an ongoing basis with every minute every day. You know, our hearts hearts are going out with all the people are locked up in their apartments right now. Fortunately, we are all safe at this point in time. But clearly they're they're in their Apartments off work and communicating obviously by phone by email as they try to figure out. You know, how do we get ready to get going as we come out of this but our thoughts are with them at this point in time and it's a concern that we have relative to all of our choice not only there but also around the world as I look at this right now, it will be a negative impact and I'll let Mike go through some points here, but from my perspective assuming that they do Bow was to start manufacturing again, and we started seeing Supply chains again on February 10th. I still believe we'll have somewhere between fifty and a hundred million dollars a sales impact off.

Folks I'm giving you my field.

Knowing China and my feel for what I think's going to happen. If this extends that number will go up and just give you my feel as I look at the sourcing situation will show show you I am concerned about the start-up of them and Michael give you some numbers around that I'm concerned about the customers and how fast they'll come back up in line. We also have a lot of our customers to do a lot of manufacturing and shipping out of there and we have components free in June and I'm concerned about some of that work going on. My perspective is is I look at the number of fifty to a hundred million dollars right now. Some of that will be permanent loss depending on you know, Bob Sharp's business office heating system Marketplace, once the heating systems gone. You're going to wait for the next year. I finally believe that automation Solutions assuming this doesn't go too long should make it up before the fiscal year is done or within a calendar year. But again, what I look at right now is to feel that we have based on how long we're going to be shut down and are sort of estimate of how quick this thing will start up. So Mike once you give a couple of facts and yep,

Go back and forth and talk a bit more right great David great to be with everybody this afternoon. Thank you very much. First of all. I also want to share my thanks to our China team or 11,000 employees, you know, we recently celebrated their fortieth anniversary.

In China today, we have a terrific business in China nearly two billion dollars in size and again almost eleven thousand employees and we had a solid q1 in both platforms and not mid single-digit choice but to keep talk to secondly January 15th. We saw the signing of the US China trade deal, which was pretty important that Phase One deals pretty important to us. I think it also there were announcements on both sides would be phase two discussions convincing shortly. We're excited by that can take our time but we're excited by that so want to highlight that but just about that that same time as when people recognizing that we have this correct the issue of our employees went out on January 24th for their Chinese New Year holiday. They've been out now for 11 or 12 days and currently under the government regulations and guidelines, you know, we intend to start restart our facilities next Monday on February 10th, but we need to make sure that happens and it will be watching that and I think we can report on that a little bit next week this weekend off.

You know, I think some of the issues that we're going to face are going to be around as you restart these facilities. Obviously, we're going to have to manage our facilities and the temperature monitoring. We have travel restrictions. We're doing everything we need to manage but our supply chain I think up something that you know, despite best efforts. It's just going to be a rocky start the logistics and supply-chain some suppliers and all those kinds of things so much. Do we have in our supply chain right now both for China my so off our supply chain and trains about 750 million dollars five hundred stays in China 250 actually goes out to the global business. So so have impacts in China what the impacts Beyond China but in terms and again, as you were highlight, we have several Global customers that use try not to build their projects and modules that kind of thing and and we're going to see some impacts there that would impact business in other reasons. We are trying as well. So Monday, so we're we're starting off with kind of the view of what's going to happen here. I think next week. I'll be a big important. We will learn some more things as we can forward, you know, maybe we could call again next Thursday through that going to happen they're dead.

Thank you Mike. You know as I look at this I referred to as the board yesterday and today I've heard for the people I'm aging myself here, you know the Palo space programs.

The five or six million minutes, we have the re-entry blackouts. We are in that re-entry blackout. We're trying to right now. We do not know what we don't know at this point in time, but clearly the organization for China who I know are listening in this phone or will be listed on his phone when they get wake up are are are doing everything. They possibly can to get ready right now. I just know that the supply chain the uncertainty Logistics. The name is different things. There's a lot of moving Parts the sub Supply chains, you know the feeders to our supply chain. There's a lot of components here. So four people not to think that it would not be a negative short-term. I don't think they're thinking straight. It would be a negative. It will be a negative for the global economy. It will be potentially bigger. If it doesn't get started this thing drags on long time for right now. Our feeling is right. It's not going to drag on but I'm getting ready for it. And we're trying to get we're planning everything around this so we can we can execute and make sure they have the resources. They need to get the job done. They're all geared up.

You come back to work. We'll we'll give you an update on the 14th as we look at or the 13th. I'm sorry as we look at what happens at Tenth eleventh and Twelfth cuz we'll get a good feel for this month. I my gut tells me it'll be a slow recovery and they'll get their act together and things will happen. But again, we are in that Apollo space program re-entry 5 to 6 million minutes where no one knows what's going on Thursday and you when I talked to you on the 13th, you'll get me Houston. We're alive and we'll talk about that. So again, that's how we see at this point in time. I don't want to scare people but it's a fax, you know, we do a very major business in China were very strong in China. We have a good sense of China. I have a Mike and I both men's and worked in China for many years together as a team and we spend a lot of time there and we're supporting our our boys were supporting the government were supporting our government as we try to work through this but that's where we sit at this point in time and we'll keep you informed. So I want to thank all the employees. I want to thank the ports engagement and I also want to thank the chef

Engagements. I've been having the last several.

I will continue to have with our shoulders with that the the lines and we'll take some Q&A to see if we can get some clarity around the concerns and questions people have out there. Thank you who will now begin the question-and-answer session to? Ask the question re press * then 1 on your touchtone phone. If you using a speaker phone, please pick up your handset before pressing the key to life question, please press star then to the first question comes from John Walsh at Credit Suisse.

Hi, good afternoon afternoon, John. So thank you for all that color around China. I guess maybe a point of clarification. You kind of detailed what you think the impact could be but then I guess going through the prepared remarks and looking at the release you have some comments that the guy that excludes any impact from the correct. Just trying to so how do we kind of sensitize that is it in the plus the two- sense that you call around next quarter or would it actually be greater than I would say. It's been a pleasure my two cents right now that John to be honest now, we're assuming that we're going to have a starting up in the town of February 10th, and we have a slow ramp. So I see some potential impacts to the year that fifty to a hundred million dollars that plus or minus two cents. I I would say covers that right now based on what we're saying. Wow.

start now if we're sitting there and

In New York next week and say hey this thing's really grinding and you know, I having a hard time both with our customer standpoint and also our supply chain standpoint want to reconfigure that but right now that's how we have this money into play that plus or minus two cents. You're exactly right. Okay, great. Thank you. And then, you know just thinking about the the margins for the quarter and automation Solutions. You call that a couple of things in the back and remarks, you know, I'm just as I'm looking at mix for the balance of the Year thinking about North America about discreet about you know, maybe some o e greater than aftermarket at some point here. You know, how are you thinking about the Cadence of seeing mix be I guess maybe less negative as we go through the year or how are you thinking about that? So we are both are we're what we would like to see happen is in the Cadence of the Year. Obviously, the first quarter flow North America was really very negative for us. The discrete business is very negative for us relative.

Two are discreet around the world. So I'm very high profit business both of us. So the Cadence will be expect. I think we're going to continue to see strong KOB 3, which does help us.

I think we're arkadas is that we see some stability within the oil and gas market space in North America not growing but stabilizing. So the so as we look at the channels as we look at our Fiber space will see some improvement in the flow and discreet business which will help us a little bit on the margin pressure. And then the rest of the health is going to come from from from all the restructuring but you could write the flow in the street right now in North America is a very challenging issue for us was very difficult the last two quarters and you know as we look at this right now, you know our plan is we see some stability some improvement. I help put a little margin wind to our back as we get into that second half and that's where we see it right now and obviously you'll be able to tell and our order releases are, basically how we're seeing if you start seeing to say, hey things have stabilized things are approved. You'll know John that we're seeing a little bit better improving around that flow business, which is very important to us. Great. Thank you for the call her. I'll pass that along. Yep.

Make it next week. Of course. I'll be there. Yep. Okay, I'm bringing up doing rocketbook with me.

The next question is from Andrew at City. Good afternoon guys. Can't wait for.

Dr. Andrew, how're you doing days? So I know you don't want to give us too much color or more color on the 425 million dollar program before the analyst day. But if you're bored in the Virgin Islands reviewed your cost that opportunity from what it looks like in FY 24 the initial 215 million. It looks like the majority is focused on a there's a cnrs or corporate someone else done how much confidence does the program give you to get as margin back up to the 19% margin that you've previously talked about. So, I mean my conference level in the board has Choice board spent 3 and 1/2 hours on these actions where it's all about. The board, is my counsel extremely high at this point. I'm streaming. We are taking serious actions Bob's business started you will know if Bob's on and off of negative sales is a bob start his costs out seven quarters ago, so you can look back at his his major restructuring. It actually started in late eighteen throughout 29th.

So what he's working on right now our actions around 6 facilities to try to take some pics of series offline and and and consolidate so, he's a a little bit different. That's why you know a lot with Bob right near his business is the next couple of years and he'll be doing that fix savings and he's starting to get that. I feel very very confident. Now. I'm involved in reviewing the work with LA and ROM the board and I look at detailed and we look at the costs. I feel very good about those savings. I feel very good about the bridge charge that we're showing you from the second half. I think the question the previous caller John asks is very real world to that mix issue which needed stability. But as I look at the actions are doing right now in the short-term cuz it's very much people-oriented and then we're starting to take some of the longer-term facilities up. I feel very confident. I'm not seeing that margin move up in the second half anything you want to add to that Frank. I think you know, we've got we've got a good plan going forward. We looking for a significant margin Improvement in a second half and birth.

A lot of it does depend on the pace of businesses.

The next the restructuring actions will kick in and and we pretty confident in the margin development as we go through the year and the Kinsey Report the board yesterday and in the work that we did between the two businesses and corporate office and we have additional actions that we can deal with probably starting in another couple of years. We we want some backup stuff and some other opportunity but our let's put it this way our hands are pretty full right now with actions we got going on and but we're we're going to study and lay them out and see how we can start flowing someone maybe later this year or early next year to give us some protection in case you know, I I'm not supposed to swear by mass where OSHA it's happen. But from my perspective, you know, we're trying to cover that and the kids needed a good job explaining. You know, how we're protecting what makes them unique or franchises and the corporation culture at the same time look at it. We could be more efficient and more effective. It was a very good discussion around for the board perspective as they pull back the the sheets off.

Thanks for that day. And then you mentioned When You released December order that they did display some signs of picking up in a s and really know and you said that again today is backlog 7% sequentially.

So did you see a bit of an upsetting project releases by customers? Do you think they become more cautious forgetting to run a virus continues to spread it may be stepping back. It's been a little while since you update us on a large project funnel still have a billion dollars of projects that you've been told you one but haven't booked and is your project funnel improving decreasing a roughly stable.

So, I mean you you've had a nail on the head here the issue right now. I think the North America projects were starting to see release. I'm I'm very very worried as I'm sure with customers are worried about cuz a lot of business is going to be shipped production would be shipped to China and so my concern is if this coronavirus goes longer, it could delay those projects and could slow down some of the projects. We think that that should be released here in the next couple of months. So this the coronavirus has a impact of many many things relative to our business pays. So therefore that's why we are still convinced that the second half could be a challenge for us and that's how we're we're banking at zero because of things like that now the projects we see releasing and I still believe we'll release are the Middle East and India those projects. Are are are are separate from the work of being going on in China, but I would say the Middle East might you and I were this they're fine. I mean India projects, yep.

I feel good about those and I think that will help us as we fill out that pipeline for the second half of the year. And then as we move into twenty Twenty-One, but we've got to get some settlement some resolution on the Chrome that we've gotten some traveling.

And if we don't then that's going to clearly slowed down some the North America projects.

Thanks, Dave. See you next week your wax mcandrew. Thank you. Next question is from Guatemala Cana and Company. Hey, good afternoon guys. Good afternoon Garden. How you doing? My friend doing well. Thanks to San Francisco friends out there weren't too happy about that Super Bowl game where they wage. That's South. That was tough to watch as a meltdown. You guys are the East Coast team in there? Okay. What do you want to know? I'm just curious. You know, what is your expectation this year for KOB one as a percentage of automation Solutions Revenue

Okay, get let's get some rubbing my rally monkey's head here a little bit got him so I can see if okay, so I'll give you my feeling right now. Okay, I think we're I think we're going to be around 25% for KOB one. I think we will be fifty fifty Seven $57.58 for cable be three. And so what that mean for 18% for KOB to that's what I think we're going to be right now and I don't have any crystal ball game than you but that's where I see. I look at the pipelines that look at the things we're talking about right now. We are we showed share with the board. We're not backing off any of the KOB three Investments. We have the organization money to probably take some market share an install base. We're focusing other things that cut our costs around but that area right now is right for us to continue to take share and we want to build that cable be three up strong liquid.

Projects will start flowing and I'll help us out.

It's got the margin dilution for the projects.

Got it, and not to steal Thunder from next how far out do you anticipate providing long-term Financial targets? Is this a fiscal 22 or you know, what are you thinking like we're going to go we're going to go twenty-three. We will Bridge we will Bridge the 450 and what we see on I mean I as you know, I try to be honest and transparency sort of like life, Iowa caucus, um, I will trust to bridge for the 2021 number of these guys are all can't handle this. They can't handle the truth, you know, they could not be any movies like naked but the real breakdown so you can see what you know, the 450 we talked about and then we'll talk about what we see going on going forward you're going to see a much lower wage is we manage the growth to keep it, you know, we're focusing on the costs and you know until I see some really strengthen what's going to happen underlying growth. We're going to keep that growth rates down and manage around cost so we will give you that bridge.

Think twenty-three, but also I'll tell you.

Do I think about twenty one? And you know what? We told you last year. I always try to bridge what I committed to.

I appreciate it. Thanks. Good luck guys, all the best to you. See you next week.

Next question is from John Gordon Haskell.

Sorry afternoon. Everybody afternoon. Good afternoon. Mr. Inch.

Are you down? Are you down Florida? Are you are you hard working up in New York? I'm hard-working in New York. Although it's almost warm enough to be Florida. So we don't worry about the cold weathers, We're about to get three or four inches Thursday. We had seventy degree weather. It's now raining and snow is coming tonight. So he's coming your way. We're going to put in a little Federal Express package done it too. I like those inches. Okay, so I'm not paying for that. We haven't paid yet. Okay, so the just want to be clear so the 215 of restructuring the 95 that we did last year you'd be talked about reviewing this with the board. Does this mean on the 13th? When you talk about the board's review or you present it that there's no new restructured on top of that the restructuring basically is now confined to what you've articulated or is there more potential I I what I just laid out for this year is locked a lot me. Okay. Is it going to be 2:10? Is there going to be 2:20 a.m.

Yeah, that's what we're talking about right there at this point.

Like then we are and but we're going to show you twenty one. And you know, we're what we're going for is you well know. We wanted to try to get everything done within a 24-month time. It's best we could so we're going to Thursday. We did a little bit last quarter. I mean in the fourth fiscal quarter last year we do we're doing a lot right now in this in this. Right here in 20, we're going to be doing a pretty busy Twenty-One, but when we get out of twenty one that I want to move back towards stability rate run rate of restructuring which typically is around fifty million dollars. So you're going to see how we go up to over four hundred million dollars total in the cycle and how long we're focusing that but it what we told you this year that number ain't changing unless I have okay, I shouldn't say ain't because it could change but if if we had something happens in the world relative to a major life change and we have to refocus, you know, something happens in China something happens with a business, but right now that's what we locked and loaded and I would say that's what that's the keeper a hand full for the for the year.

So what we're going to hear that on the 13th other than the traditional, you know, the traditional analyst review the board, you know, you guys have Mackenzie in there. You've done this obviously top to bottom.

Are you going to be talking about the strategy or the payback or so if there's no more new restructuring? What should we expect like we're we're going to talk about lack of restructuring. You're going to talk about you know outcome is something that took our businesses. We're going to talk about, you know, the cash flow generation and how we're going to allocate that cash flow generation for the next couple of years and some you know, some fundamental strategies. You're going to see a presentation and digital transformation coming out from one of the Wilds keep new platform leaders, which we build. Yeah that platform the business level units presents. And then also going to give you an update on what on the final ramzan ramzan give a presentation on where he's taking us to the next level. So there's a lot going to be a lot of strategy their company in sight. So what we're doing and how we're going to drive but fundamental want you to walk away with the strategies in place and we're driving down costs and we're going to drive around that business. We're also going to give you an update after 18 months of owning the text run tools business. We're going to give you an update around the professional tools that how that program is going both the dog.

In the professional to ones are going very well and there are key part of our our repositioning effort to drive value and you know Tim's down here and and the room done is real happy because he's going to be part of that Navy and we're thinking there's a couple of positions open like 8 and maybe plant management. We're going to put them in there. See if you do anything different. That would be I got a vacancy in Canada open. But yeah, okay. Yep wife doesn't like cold.

I think by one of your heat pumps. Okay. Thanks very much. I appreciate it. You gotta you gotta kind of laughter or something like that. I'm working on it. Yeah. See you next week. We'll see you then, bye-bye.

The next question is from Deepa raghavan. It will security.

Good afternoon, Dave. Just a quick question on the classification on the EPS range that you are maintained understand the coronavirus impacts are not easy to assess but how does the 367 guidance that Bitcoin feel given what we know now it looks like the you know, there's this is in fact that you're not American in a region is trending below your expectations. Just curious do these newer headlines. Just click the upper part of the sales range, but keep the midpoint. I'm sorry about part of the EPS guide ranging tag, but uh, sorry wrist is to the upper part of the EPS range, but keeps the midpoint intact or or is there any risk to the midpoint also at this point in time know I we wouldn't put a guidance out there. I mean we could believe we can hit both ends of this both the top and the bottom of the middle but you know our feeling right now based on the job.

is it the midpoint is the most likely the upper Point even with the coronavirus cuz we're assuming that they'll get it'll come back and and production will start coming back up and it will start coming back from that the fifty to a hundred million dollars of

Sales, so I refunded my believe that you know, that range is still viable even with everything we face around the world at this point in time. The cost actions are happy to be a little bit more costs out, you know from the timing issue is always a lot of time you can help our margins obviously help the EPS. So at this point got that range is very we're very comfortable that range and we feel I mean my my highest probability clearly is that that zero, but I also see I still see some potential on the positive side, too.

All right. Thanks for that. Another clarification question is is I'm trying to again, can you bring Finn's what percent of your trying to sales or profits are in the affected area versus your overall China exposure. I know you gave us a supply chain number and the impact we can we can't do that. It's that China sales are we sell across all of the market, you know depending on where that you know, which customers going on right now and you know, there's a customer going to be further west east north now, we we there's no way we can break that down this point in time. You know, I mean, I mean it's going to be Thursday is going to be kind of fluid as as as we see things moving back up and I know our sales force are going to try figure out how they can call some of the back so, you know these they're going to be pretty energized to figure out how to get that box back in and make them in a different location. So I it's there's nothing that says at this point in time.

All right. Okay. Thank you. See you next week.

The next question is from Julian Mitchell at Barclays.

Hi, good afternoon. That's enough maybe.

Let's question on slide Thirteen the the restructuring costs and earnings Tailwind. So you have the restructuring costs of $0.26 the best choice this year of $0.07 so that balance of sort of $0.19 from do we assume that that's a mix of what's recognized in 2021. And also what's kind of reinvested in twenty-twenty and things like the service network. Just wondered how we thought about that drop through.

So yeah now will we will share with you how the savings are going to flow up, you know in 21 and 22 and I'm not sure that would you yet, but we'll share that out with you. So so I'm trying to see I mean for the you know, say that again Jullian say that one more time. So it's just that on that slide 13, you're spending about $0.26 worth of restructuring of this year and you're recognizing seven cents as the benefit. So I just wondered that balance of $0.19. Is it all coming next year or a portion of that? 1910 Dodge just is reinvested into the business. No, no. No, so a big chunk of our savings will come next year of the of the of the Delta to spend, you know from the standpoint that the area that we took, you know, they will still have some delay out is going to be around the facility restructuring in the facilities cuz that that may not start falling until early twenty-two or late twenty one, but what we see them

There's the reinvestments building.

Into our core plan. We took the class out and we've noted that out already. There's nothing there's nothing else going on here from that standpoint. That's what those savings will flow and there'll be there should be a significant increase in Savings Bank as we move into twenty one and you'll see that and as loud talks about his repositioning effort and as you know that you know, there's very little cash being impacted here cuz we're pretty we've been pretty good about managing that cash. Well, he was trying to keep it cash neutral. So, you know that those savings are multiple. I would say ninety percent of those savings will flow back into Twenty-One and we'll still have a little tail hanging over us in twenty two month from this restriction right there you're talking about thank you that that helps and then my second question just on the top line Outlook and automation Solutions, maybe just focused on the sort of chemicals and petrochemicals piece of automation Solutions, you know some companies last week like Aspen text sounded pretty negative on on chemical spending money.

The customers in petrochem like Chevron or Exxon Mobil or under some pressure. So I know you had good orders growth in your chemicals and petrochemicals. Peace in cute.

Calendar Q4. Do you think that can continue through this year or it's more likely to get sort of lumpier, you know, uh, right now we still feel pretty good about it. And now I don't think I think the first quote number was a little bit stronger than I thought it would be if we had some project business come in there. But Julie I don't we're not too worried about that at this point in time. Now, I like I like to see another quarter of what's going on there for jobs that business that petrochemical the chemical businesses in is we don't we serve a lot a lot broader group of all that customer base than a spectacle serve and we got strong heavy three going on out there. So, you know, I don't feel I don't feel concerned about that. I'm more worried about the Upstream side and you know, the new oil and gas investment. I think what I see coming down the downstream right now, I feel better about it. And that's a very high calorie three Marketplace. And as I said earlier when some of the guys asked me, I I firmly believe will continue to see some improvement in KOB one. So I'm more optimistic about that.

Thank you. See you next week next week. Thank you. The next question is from Jeff Sprague if vertical research.

Yes.

Soon everyone. Good afternoon, Jeff. Hello. Hey are you up in Connecticut or were you paying taxes in Connecticut or what you doing? Yeah. I'm getting creamed by the wage deduction issue every day up here in Connecticut to be carrot you for so long. It's about time. You paid your fair share. Yeah, you want to talk about paying taxes talk to me. All right, you got a little bit bigger than I do Dave. Oh, okay. Now we're playing the sides card okay matters, but I'll see if we get in trouble here. I guess this kind of dovetails off an earlier question, but just kind of thinking about incremental so, you know, obviously if we're going to no growth environment incrementals is kind of you know, a nonsense I guess. Yep.

But are you suggesting to us so that we should you know assume you do some kind of normal?

You know thirty percent or so incremental and growth and we can drop, you know, at the end of this two or three year period of time 425 million of savings on top of that. Yes. That's what I thought about doing here. I mean if we we're going to have we're going to have the incremental growth the sales will show that to you as we lay out our plan and then obviously the restructures that we're going to flow through and and someone I think Julian asked me about the reinvestments so we'll we'll lay that detail we went through that with the board and cuz they want their voice very very interested in making sure we don't cut Key Programs long term, but we're we're trying to stream we make some changes here. So that that it does flow through the key thing right now is we're we're bank and I'm very little growth here for the next 12-18 months. That's the key issue. Yeah, and that's thirty-five thirty-five. Is that kind of the ZIP code? You're comfortable with four increments. I think I think what we're building on 30% from that same password building on Jeff. Yeah. Hey and then on on the club

what you know, so so it was good to see some of the

there's come through just wondering two things was this stuff that was released and hit your order book, you know deliverable from a revenue standpoint for 12, or is it currently stood and you know,

I don't think we'll see any deliveries on that. I think you could have some some progress payments and some of the stuff that went to orders. Yeah it start working on it. So we will probably have some progress payments in the age of twenty twenty be more flown into Twenty-One as you well know that the where these bookings will go you'll see more coming. It goes It goes obviously the compressors and the big LNG projects our systems then the control valves then instrumentation. So we we are in the early stages of this for way right now. So we should we're anticipating here the next two three, four months a continuation of looking some stuff off and I wouldn't see that we're booked money sales this year be more than twenty Twenty-One, but I guarantee well some progress payments probably in the systems in late this year. So if you thought of your total scope on the on these projects kind of total Emerson scope, like what-have-you books so far. We're talking like only ten or 20% of the project values so far, very small. Very small. Very small very small dog.

That's one of the concerns. I think I I can't remember the

You guys mentioned this, you know, my concern is this whole book, you know, coronavirus could have slowed down the process here a little bit again, cuz we've got it going again with the trade deal that Mike mentioned their wage, you know the first page lunch. And now the phone device will that slow things down again that's always a concern of mine and you know, that's why we need to get through this and swing it a little bit more visibility on you know, what everyone's going to do, but right now. We should have a lot more bookings around those major projects. All right. Great. Thanks for the color. Okay. Take care, Jeff.

Next question comes from Steve JP Morgan.

Hey, good afternoon. This is actually Pat, not for Steve to Sir. Oh, how you doing? Good. How you doing? Not too bad. You are you in training today? Is that what's going on here? You would like to see is that why they sent me a text message. Is that why I was wondering why you sent me that text make sure you really arrest them know now Steve's, you know Steve's with his second job, you know these he's working on you to access today. HR. Okay, good. Okay, let's go. Yeah, so you gave me an opportunity to you know to to rescue bots in structuring. Can you explain why you're seeing minimal net cash impacts from the actions you're taking and then what was the comment on the cash flow-based taxes you made about helping results.

Yeah, so go ahead. This is Frank. There's you know on the Spain versus when we put the expense.

That's pretty significant as we get out of the gate here and then not in significant portion of the restructuring is non-cash facilities. It's asset write-downs and things of that nature. So when we walk all through we think the net impact in 2020 will probably be not not terribly significant less than fifty million dollars. Yeah, a lot of times in the people which was our front load late last I took you this cash up front but you could have to eventually you get the cat some of that cash back cuz you're not paying so it it washes out and you know right now, you know in cash generation is pretty good to like, you know, then that's going to be Thursday. The taxes is basically some work that Frank's been doing relative some some are international Subs as we go through this process and it's just ongoing reorganization that that we've been doing. We had several discrete tax benefits wage. I don't expect them to be the same magnitude this year, but we will have we will have a little bit here and there and we had a we getting on the cash tax savings that actually went through into the cash flow in the first quarter. Yep.

Will be the net cash out for that for 25 you mentioned. Well, I I don't have the number on top of my head. It's Frank. You have a number that number I would say in the end. You know, eighty 85% of it is probably going to be cash overtime.

Yeah, but you know, I mean the timing is is the key and the key issue there. Is it the sooner you get some the cash impact one's done the faster you get the cash payback. Is it quickly if you're still going to suck cuz they the cash goes out and and then you don't get the settings for a long time.

Okay, maybe Switching gears. Just can you give us an update on what you're seeing in the AC markets in North America? What are the what are the business do for sales in in the quarter and kind of what's your outlook there or for this year's North America is still in a tough zone right now. We're in you know sort of the middle of winter here, you know flat to slightly down don't I mean it's hard to say how fast I mean, the one thing I like is the residential Market Place truck construction has been good. That's a good sign, you know, typically, you know, we start seeing some payback and some permit. Here's begins at March time. So it's not going to be it's not going to be you know much of a change until we get into a little bit warm weather. We had a good quarter and you know in Asia and China that that was before everything happened there that bothers me and so I'm a I'm a little bit confused about that. Now as we come out of it, you know, we hear from president he's going to he's going to try some financing and try to get some spending going to get the economy going strong stimulus, which could typically that goes after the dog

Get the commercial wrestling residential guys go after verse.

Is the Auto Solution guys on right now our our hvc business North America's week and we're forecasting, you know, probably a you know, are are six down quarter in total of residence globally. And then then the question is can we see some improvements? We move into the second half of the year. Did you see anything in the orders in January at a chatter that made you make sure you concerned at all about the business. There was more just like, you know, what you expect they were they pretty much what we expected was slightly negative. It was not it was not that good. But you know again it's a short month because it's the Chinese New Year and so from that perspective is it was pretty it's a pretty small month. And so I really worried about you know, what we cuz we do not take orders over the phone right now. We're still alive but a lot this is not much business going on. So I'm really worried about as we get into this, you know, post February tenth as we start seeing what people do what time

friends, and that's so it's it's certainly

Five years after that February 10th time. Comes up for the next 2 or 3 weeks to see if there's any slow down or pick back up. We'll see.

Okay, great. Thanks for thanks for taking my call and I appreciate the time.

The next question is from Joe Ritchie Goldman Sachs.

Thank good afternoon. Everyone. Good afternoon.

Hey Dave, so just focused on automation solutions for a second and really just trying to think about the the margin Step Up expected in your fiscal second-quarter. So it's a clearly, you know, definitely some headwinds out there. We talked about coronavirus. I'm just I'm just curious like are things expected to get better much better and difficult to cue versus fiscal one Q from a mix standpoint. But secondly, you know clearly you guys pick a lot of restructuring actions here in the first quarter. And so do we start seeing, you know, a pretty sizable benefit from those actions in fiscal two cubes?

Yeah, okay. So so you did you back into Auto Sales margins a second quarter. Is that what you did? Yeah. Well, I mean, yeah, but you know the package of yeah, so there's two things one Auto auto sales. If you think about progression our second quarter sales typically our seasonally higher and that, you know, obviously the second quarter and we are expecting some stability around the mix of business around that that flow and and the a discreet business. So that is not that's normal for us. So and then we've obviously starting to get some savings some of the $35,000 that we spent addressing the fourth quarter a lot. Most of that was run out of Saul and I'm see a lot of the 97 over almost I think 85 of it was around Auto saw in the first quarter. And so you're suggesting, you know, there's those guys are going to start seeing that benefit more and more about that as they go into that second quarter and clearly ramps up into the in the third and fourth quarters, but that's how we see it right now in the savings are happening cuz yep.

Really near-term costs actions are taken.

Okay. All right. That's that's helpful. And then I guess just my one follow-up. I saw that there was no change to the buyback portion of the of the bridge. I guess I guess the question I have like look your balance sheet is in is in great shape. You guys have the opportunity to toggle it up if you want to and be a little bit more aggressive with the buyback, I guess at this juncture. Like what's holding you back from potentially doing a little more. I mean, first of all, I think you know, if you look at our history by back substantially more stock than most people and secondly, we also continue to want to work on the acquisition fund Investment Company if if we feel that we don't have the opportunity will continue to take that buy back up or right now, you know, I look at what we fought back the last several years has been a pretty high pace and I don't see any reason to take any higher at this point in time. Now the board of review that if we if we see the acquisition front States as you know, very moderate then we're going to have the situation coming for that. We're going to have to to increase the levers and the balance sheet, but keep in mind I said it again. Yep.

Be paying back shareholders 85% of our cash flow and twenty 25% and it's a good number.

Yeah, all right. I appreciate it. Thanks, Dan.

our last question comes from

Robert McCarthy Stevens

Good afternoon, everyone, you know, I guess the first question have you had any contact with the Chinese authorities about the nature of the response what they need to do any kind of come back around that because obviously it seems to be there's you know, definitely a credibility gap that seems to be emerging over the last couple of days and and and you know any thoughts around that just given the fact that you have substantial tendrils in China our organization. We have a leadership there that seems in constant contact with the Chinese government and we get a mic and I in the top. Oh, so you get a daily report back out from that they're being told by the government but both of the national level the local level. I disagree that the Chinese government and misleading people I I feel they've been very open to us. Now, you know, everyone wants a hard answer but you can't get an answer and something that's moving like this. But as I look at the consist information, I'm getting from from the government into the regional governments to my people and my leadership team that reports into Mike. I feel very good about it. So

My comfort level right now is pretty high. The key issue for me is can they get the plants that are a lot of people go back to work if nothing else major happens here and then can the supply chains mobilizing cuz Logistics could be a problem as

Start flowing around but it's just a matter of getting planning and I know Mike and Mike and all the guys and gals across town are working this pretty hard right now. So I feel my comfort level is pretty good assuming they can hold down that tent or if it goes 11:00 to 12. That doesn't big deal within that a couple of days. That's Rob. So I feel I think we're ready at this point in time. But again, it goes back to the power the power Moon shots when it comes back down and say it's we're in that. We're not black out. Right. Now the re-entry blackout. For about the next five or six days. I mean to that point it's almost it seems like yep guidance Outlook could have two very almost binary outcomes or trajectories because one you could see, you know, Global synchronous downturn real problems to the supply chain demand destruction and Thursday will be impacting your projects to a material degree, but then obviously high visibility on you in terms of your cost actions conversely if we do have a dead,

Better than expected resolution to this you could see a pronounced rebound an oil which would probably be broadly stimulative Upstream projects. You could see the the uh, an upside down overall which and and obviously may be attending m&a but that obviously puts a lot more pressure on you to deliver the restructuring in what would be fundamentally a different demand environment off. You know, how do you how do you how do you square the circle in terms of where we could be? I mean, I don't personally I'm not in the in the you know, the you know Pandora's Box, which is your first thing where you can I ask you a couple of locusts the tax and maybe some ships going down in flames going down the same time. They're I'm not now I'm not in that side of the equation. I think that and I you know, I there's I can tell you there could be some positives is this thing recovered pretty put back. I feel that but I'm more in the status right now that this thing's slowly recovers and regrowth comes back. We probably lose a couple points of the you know, the higher wage

No digit growth they were talking about for China which takes a little bit away from our you know from us a little bit. Uh, so I'm morally

I'm not a glass-half-full in the glass empty or glass awful was you just what even if we did stimulus it's going to really be more. Yeah. I I I think we got this, you know, I know I'm going to guess so I can get this I think you got to wait those dates 10th and they've been holding are pretty consistent if those things hold and it's saying the 10th or 11th going back to work and we start seeing the plants up and running then I I feel good about the plan start starting up and they start failing that could be a good thing for us cuz it's obviously business, but I I think we gotta watch that. So you got to listen to all your all the people you follow and listen to them, see how things are wage. And I think that would be the key the key indication of a starting up or not starting up or they getting the supplies, but, you know, I think you're going to hear people communicate that pretty loud and clear. Thank you for answering my questions. I'll see you next week. All the best. I want to thank everybody again. I want to thank for Global organization. Thank the investors and shareholders for supporting us as we go through this process. Thank you very much. Bye.

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