Emerson Electric Co. (EMR) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Emerson First Quarter Fiscal 2011 Results Conference Call. [Operator Instructions] Emerson's commentary and responses to your question may contain forward-looking statements, including the company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson's most recent annual report on Form 10-K as filed with the SEC. I would now like to turn the conference over to our host, Lynne Maxeiner, Director of Investor Relations. Please go ahead.

Thank you. I am joined today by David Farr, Chairman and Chief Executive Officer of Emerson; and Frank Dellaquila, Senior Vice President and Chief Financial Officer. Today's call will summarize Emerson's first quarter 2011 results. A conference call slide presentation will accompany my comments and is available in the Investor Relations section of Emerson's corporate website at emerson.com. A replay of this conference call and slide presentation will be available on the website after the call for the next three months. I will start with the highlights of the quarter as shown on Page 2 of the conference call slide presentation. First quarter sales were up 15% to $5.5 billion with increases in all segments. Underlying sales were up 11% with strong growth in Industrial Automation and Process Management. Operating profit margin increased 20 basis points to 15.4%; earnings per share from continuing operations, $0.63, up 15%; operating cash flow, $322 million; and free cash flow of $240 million. We had a slower start to the year but should recover as the year progresses. Our balance sheet remained strong and flexible with our operating cash flow-to-total debt solid at 57%. Our foundation is strong, which creates enormous potential for the long term. Next slide, the P&L. Sales in the quarter of $5.535 billion, again up 15%. Our underlying sales were up 11%, acquisitions added five points and currency subtracted a point. Operating profit of $852 million or 15.4% of sales, the improvement driven by cost reduction benefits and volume leverage, offset by higher material costs and wage costs. Earnings from continuing ops, up 15% to $480 million. Diluted average shares in the quarter of $758.1 million, which gets you to an EPS from continuing ops of $0.63. Slide 4, underlying sales by geography. Growth was balanced globally in the quarter with the U.S. up 10% and international up 11%. By region, Europe was up 10%, Asia up 9%, Latin America up 15%, Canada up 25% and Middle East/Africa up 11%, getting you to the total underlying sales up 11%. Currency subtracted a point and acquisitions added five points, getting you to a consolidated sales in the quarter up 15%. Slide 5, some income statement detail. Gross profit dollars of $2.163 billion or 39.1% of sales, up 40 basis points with improvement driven by volume leverage and cost reductions, which were partially offset by material inflation as we saw commodity costs continue to increase. Operating profit dollars of $852 million or 15.4% of sales. Other deductions net of $78 million, which includes lower restructuring and acquisition deal costs partially offset by higher amortization from acquisitions. Interest expense of $61 million gets you to pretax earnings of $713 million or 12.9% of sales. Taxes in the quarter of $222 million for a tax rate of 31.2%. As a reminder, our first quarter of last year included a tax benefit from the reorganization of international subsidiary. We expect the full year fiscal '11 tax rate to be approximately 31%. Next slide, cash flow and balance sheet. Operating cash flow of $322 million, down 53% versus a strong Q1 of last year. Operating working capital increased $430 million, the increase used to support strong growth. Capital spending of $82 million gets you to the free cash flow of $240 million. We expect capital expenditures of approximately $600 million in fiscal 2011. Trade working capital balances are at the bottom of the slide. Our trade working capital as a percent of sales was 17.7% in the quarter, and we're driving for full year improvement in the trade working capital ratio to 16% of sales. Slide 7, the business segment P&L. Business segment EBIT of $873 million or 15.4% of sales, up 20% or 80 basis points. We saw benefits from volume leverage and cost reductions, which were partially offset by material and wage inflation and increased amortization from acquisition. Difference in accounting methods of $53 million, corporate and other of $152 million. We had higher stock option expense of $18 million in the first quarter fiscal '11 from our triennial stock award and the recording of that expense upfront in the quarter. Interest of $61 million gets you to a pretax earnings of $713 million. Next, we'll go through the business segments starting with Process Management. Sales in the quarter of $1.542 billion, up 12%. Underlying sales were up 13%, and currency subtracted a point. By region, the U.S. was up 18%, Asia was up 11% and Europe was down 1%, Latin America up 21%. We've seen broad strength across businesses and processes. Global capital goods end markets continue to recover. EBIT dollars of $290 million or 18.8% of sales, driven by volume leverage and cost reduction benefits. Large project wins continued through the quarter, setting up good growth for this next cycle, and we believe end markets are in the early stages of a strong global recovery. Next slide, Industrial Automation. Sales in the quarter of $1.21 billion, up 23%. Underlying sales increased 24%, currency subtracted two points and acquisitions added a point. By geography, the U.S., Europe and Asia were all up 24%. We saw broad growth across the portfolio and very strong growth in the Power Generating Alternator and Electrical Drives businesses. EBIT dollars of $185 million or 15.3% of sales, an increase of 70% driven by volume leverage, cost reduction benefits and lower restructuring. We saw substantial material inflation that was only partially offset by pricing increases. The delayed customer capital spending over the last two years should result in a catch-up phase of spending in the next two years. Next slide, Network Power. Sales in the quarter of $1.669 billion, up 21%. Underlying sales were up 6%, and the Chloride and Avocent acquisitions added 15 points. By geography, the U.S. was up 9%, Asia was up 3% and Europe was up 6%. We saw strong growth in the North American Uninterruptible Power Supply and Precision Cooling businesses and the Embedded Power business. The Systems business in Asia declined versus tough prior year comparisons that included strong stimulus programs in China. EBIT dollars of $182 million or 10.9% of sales. There was increased Chloride and Avocent amortization of $25 million and other Chloride acquisition costs of $15 million in the quarter. EBIT was also impacted by unfavorable price, material inflation and expediting costs. We expect the EBIT margins to strengthen in the second half of fiscal 2011 as the integration of Chloride and Avocent acquisitions take hold. Next slide, Climate Technologies. Sales in the quarter of $810 million, up 3%. Underlying sales were up 4% and currency subtracted one point. By region, the U.S. was down 3%, Europe was up 14% and Asia was up 12%. Strong growth in the Refrigeration business was partially offset by a decline in U.S. Residential. EBIT dollars of $123 million or 15.2% of sales impacted by favorable mix from higher technology products and benefits from cost reduction. Material inflation was only slightly offset by price. Last year, China's stimulus programs and the R-410A refrigerant conversion in the U.S. benefited sales, making comparisons tougher. Next slide, Tools and Storage. Sales in the quarter of $446 million, up 3% with underlying sales also up 3%. By region, the U.S. was up 2%, Europe up 8% and Asia up 14%. Strong growth in the Professional Tools business was partially offset by weakness in Residential Storage. EBIT dollars of $93 million or 20.8% of sales was driven by benefits from cost containment actions, volume leverage and pricing action, which were partially offset by material inflation. We expect a weak recovery in consumer discretionary spending. Next slide is a summary of Emerson's historical financial performance over the last few years. You can see in 2010 it was really the beginning of the recovery period for Emerson. Our EPS from continuing ops rebounded in 2010 and increased 15% from the prior year. Today, we provided EPS guidance for 2011 of $3.15 to $3.30, which is a 21% to 27% growth over an already solid 15% growth last year. Next slide, the summary and outlook. We had a good start to the year. Underlying sales growth is strong at 11%. Capital goods end markets are favorable, and we're at the early stages of a strong recovery. Order trends support our growth objectives. We do expect the order trends will continue to moderate from the peak as comparisons get tougher. For fiscal 2011, we expect earnings per share of $3.15 to $3.30; underlying sales up 10% to 13%; net sales up 14% to 17%; operating profit margin, 17.4% to 17.7%; operating cash flow in the range of $3.3 billion to $3.5 billion; restructuring costs, between $80 million to $100 million; and capital expenditures, approximately $600 million. We will review our 2011 expectations and strategic plans at Emerson's annual investor conference on February 3 and 4 in St. Louis, which is Thursday and Friday this week, and we look forward to seeing you all in St. Louis. So with that, I'll turn it over to David Farr.

Thank you very much, Lynne. I want to welcome everybody today visiting us in St. Louis by phone. We had a very exciting board meeting today. And we did have a shareholders meeting where a couple of shareholders did show up despite the weather, and everything went as planned. We are looking forward to meeting with the sell-side and buy-side analysts along with our investors this Thursday afternoon and Friday morning. All the top executives will be here, the business leaders, and we are bringing in 20 or more of our top global operating executives to participate in the conference, so everyone has access to the next leadership and what's going on across the company. I also want to thank all the global operating leaders for delivering a strong quarter in Q1 here on top of a 2010 recovery. As I look at it and talked to our shareholders today, our foundation is extremely strong, and we are planning a very strong 2011, I would call a breakout year with underlying sales in the 10% to 13% range, operating profit record level 17.5-or-so percent, record cash flow, record EPS in the $3.15 to $3.30 range, which is up 25% or so relative to last year's $2.60 continuing ops number. So a very good year. And I believe the wind is to our back, and this is just the beginning of a good recovery in the markets that we serve based on the return to investment profile around the world. In addition, our trade working capital and operating cash flow will be at record levels this year. We will invest that money both back to the shareholders and also to strengthen the balance sheet and do a couple of acquisitions. Our global infrastructure investments are increasing. We're investing for growth around the world. We have been continuing to push forward on what we call the accelerated 2012 programs and making those investments, which will be discussed later this week when you're in St. Louis. But fundamentally, the foundation of the company right now is extremely strong and we're moving into a very, I call, profitable growth phase for the company as we have done in the past. The quarter was within what I thought would happen from the standpoint of orders and sales. They're in line with my expectations. There were three misses as I saw the quarter based on, if you ask me, three or four months ago what I thought the quarter would do. Number one, the acceleration of material inflation. We had planned on a negative quarter relative to net material inflation and our price-cost situation. It actually turned out to be twice the level we thought. In round numbers, the actual number was a $40 million hit to us. We thought it'd be only $20 million hit. Inflation is not going away. Inflation around the world is a big issue. It's something I've been talking about and we will talk about this week. Material is 3x our level, approximately 3x the cost of our labor if you look at material costs. Price increases have been put in place, underway. We're going to have to significantly increase those price increases around the world because this is not a momentary blip. In my opinion, I think net material inflation could run at higher levels for the next two or three years. That's a plus and a minus in many regards. But in reality, this is an issue we're going to have to deal with. It's not going away. Second issue. I was a little bit disappointed with trade working capital performance. But not on all businesses. There were two specific businesses, our Industrial Automation business and our Network Power business in the power and computing area. Both of these had disappointing first quarter trade working capital performances as I looked at them. Both of them are fixing the issue and they will fix it. The rest of the company actually had better performance and performed extremely well. So I have a lot of confidence that we will get these back under control. The third miss was mine. I apologize for it. I remember talking to you last time about the cost of stock would be a tailwind for us this year. I was wrong. I forgot about the fact that we now accelerate our stock option awards, and we make the awards every three years, and we actually put 40% of the cost of a three-year option in the first quarter for various reasons and our options actually stay outstanding for seven years. My mistake. I take that, my fault. It cost us around $18 million in the quarter. I did not anticipate that. But for the rest of the year, our stock programs will be what I'd call a positive to us because of the program. But we've got 40% of our stock option program now written off in the first quarter. The one thing I want to keep repeating because I think people are missing is in September, we made a special phone call to talk about our acquisitions and divestitures, and we told people very specifically that we would have, in the first part of 2011, onetime Chloride costs of $0.03 or $0.04 and operational costs of Chloride this year as we integrate of $0.03. That is happening. It hasn't changed. They're on track. They're doing a great job. There's nothing different. That's still happening. The other thing we reminded people is that we did divest our Motor Company last year, and that will hurt us $0.05 this year. So those two things alone, I think, people from time to time forget about them. I just want to remind you all, those are not in our numbers this year from the standpoint of helping or hurting us. It's just that's what's happening. As I said, I think we have a great start to the year. We are well positioned. We'll have a lot of conversation this Thursday and Friday relative to where we see things unfolding in the next couple of years and also longer term. We have some great presentations and discussions. We also have a trade show this year updating people relative to our investments and technology investments in Process, Industrial Automation, Network Power and Climate Technology, a very good way to inform our investors on where we're going and why we're so excited about our growth prospects as we look at it going forward. Fundamentally, the company is extremely in solid position right now. The operating people are executing. We will work through the price-cost situation this year. It will be a challenge all year long. We are not going to be alone in this issue. It will happen. We will get the necessary price actions, and we'll get the necessary cost reduction actions. But we'll be fighting this all year long, and we'll be fighting it again next year, in my opinion. So as we sit today, we're looking forward to a record-setting year in 2011. We're looking forward to having the opportunity to talk to people this week and have everyone have a chance to meet with the young management team and the management team that's driving this company forward as we go forward here in the next couple of years. With that, I want to thank everybody for joining us again today. And we'll open the lines up so we can answer some questions. But relative to strategies discussion, we'll be doing that when we go live here on Thursday and Friday of this week. Thank you very much. The phone line is open.

Can we go ahead and open up for questions?

[Operator Instructions] Our first question comes from the line of Bob Cornell with Barclays Capital.

Network Power, a lot of moving parts there. And I think despite your comments, I think most of us got the numbers plugged in right.

I can disagree.

But maybe you can help us understand what's really going on with how the Chloride operation integration is going and then talk about some of the unfavorable price material. And then just sort of help us understand how we're going to sequence from this quarter into the second half. You talked about where margins are going. And then embedded in guidance, what are the margins in Network Power going to be?

You'll see that this week, Bob, if you choose to come. We'll have a long conversation in Network Power and we'll give you a forecast. Relative to the price-cost situation, what we're seeing in Network Power given the fact that there's been material shortages in the electronic area. We've had to basically expedite. We've had to pay premiums. And we've had a squeeze sometimes, we're not able to deliver and actually ship products. So we missed, obviously, some sales in that area, and it caused some inefficiencies. So that will work off over the next three or four months. Relative to the integration, again, we'll talk about that. We'll have Ed Feeney talk about that and how things are going. He's better to discuss that. But things are proceeding well. As we look at the first half of this year and the second half of this year relative to Network Power, I would expect us to have another struggling quarter this quarter as we go through the full integration. We still have some costs that we still have to run through the second quarter. And then you'll start seeing margin improvement as we go forward. And we're going to give you a range of EBIT margin on Thursday. So I think that's the best time to see it so you can see how this goes. But we're going to see another struggling quarter in Network Power in the second quarter, and then you're going to start to see them improve sequentially as we go into the second half of this year. And as we move into next year, clearly if we get our synergies going then our profitability should be much better. But that's how we see it right now.

Can I have a follow-up question?

Yes, sure.

Yes, for Frank. For modeling purposes, I mean, I think we got the notion that the amortization of intangibles in the first quarter includes a little bit of Avocent and then some Chloride. But frankly, I had a higher number than $67 million in there. So could you just help us understand where the OIOD [ph] [32:43] number is going quarterly basis and, specifically, where are the amortization of intangibles, how that's going to track?

Well, we had -- this quarter, we have the full complement from Chloride and we have three months versus one month on Avocent. But I think it's going to track pretty much as you saw this quarter.

It's going to be around $70 million.

It's $70 million.

Oh, $70 million a quarter. So I think that for a while, we were thinking that the swing would be $100 million for the year and that there would be a bit of a higher number in the first quarter relative to the balance of the year. That's not a case? It'll be $70 million a quarter?

Pretty much straight line that number there, as long as they come in. I think the restructuring number will be lower, but the amortization number is going to be probably around $70 million a quarter. And we do a couple of more small acquisitions, it could go up a little bit. But it's going to be around that level, $70 million, $75 million a quarter.

Hey, I forgot to ask, too, I get the second quarter struggles in Network Power. But from time to time, you'll give us some guidance on where Network Power margins will go. I mean, what is the second half margin embedded in the guidance for Network Power?

You'll see it when we talk about it Thursday. I'm not going to play out that call. We'll give you a range for the whole year, and you'll see where it comes in, in the second half of the year once you see those numbers. I'd rather wait till then.

And our next question comes from the line of Jeff Sprague with Vertical Research Partners.

Except for the noise in Network Power on integration and the like, I mean, the incrementals in the businesses actually were very strong actually, notwithstanding kind of the price-cost dynamic. And I'm wondering if you could just give us a little sense, Dave, on the durability of that in isolation. In other words, I mean, obviously, the restructuring is coming off a little bit, but are we just kind of in a sweet spot on utilization ramping up? How should we think about that playing out now that we're getting kind of more into a tempo of better revenues kind of off the bottom?

We will have pretty good flow-through profitability this year in total. I mean, for us to get up into that mid-17% range, we'll have very good flow-through profitability. The one concern I do have is on the price-cost and the timing. We're going to have to go out and increase our pricing actions here early on this year. We've already gone out once and we're going to have to go back out again. So I think that on the incremental profitability, the only one issue I'd be worried about would be the impact of a higher net material inflation and that we're not able to totally get it offset this year by the time we finish it on the price-cost. But I think we're in a sweet spot relative to profitability right now and relative to our underlying growth. And the mix of business, as you can see, is swinging our way relative to profitability.

And is there any particular segment of your business where you're worried about demand destruction as you go out with price? I mean, I know resi compressors kind of come to mind for me in that question. But is that a relevant thought? And is there any place where you're seeing just kind of difficult pushback?

I think there's always, relative to the U.S., anything to do with the U.S. consumer market, some pushback. But I don't think that we have a situation where we're going to lose dramatic amounts of volume. I mean, typically, on our customer base, we will have to work over a quarter or two to work through this issue. But they're facing the same issue themselves because we're not the only material component on the residential side. In fact, if you look at an air-conditioning/heating system, there's a lot of metal in that. So, I mean, we might be a little bit negative impact. But on the positive side, I also have a positive impact up because you have a little bit higher price, you get a little bit higher growth. But we have other businesses that serve that industry, too. So it's a two-edged sword in certain respects. The Process guys like this type of commodity inflation, to be honest.

And then just a final one for me. Can you give us a -- you mentioned big project wins. Can you give us a sense of kind of where the tempo is really picking up in the business by vertical market or geography, some sense of how broad it is?

We'll have a lot more on that on Thursday, Friday. But I would say on the overall market pace, I just came back from Middle East and India, that business pace is very good. Asia, China in projects is pretty good. And the Latin America projects are still pretty good. So the project pace is picking up around the world, and it's pretty well set and it's moving that way forward. And we have -- the price of commodities, the price of oil are trending upwards, so that also gives you a little bit stability relative to the cash to invest. The project business looks pretty good right now around the world.

Our next question comes from the line of Scott Davis with Morgan Stanley.

Dave, one of the things that's occurred in the last couple of months, I mean, you closed Chloride and GE announced the deal with Lineage. I mean, what does that transaction mean for you guys? Is it good because it further consolidates? Is it bad because you have a more deep-pocketed competitor? I mean, can you talk to that a bit?

I guess one competitor can bow at the Fed and one cannot. Let me see. Lucent Power has nothing to do with Chloride, okay? Lucent Power is more on the Embedded Computing side. It's competing against people like Astec, myself - Emerson, Delta, guys like that. It's not anything to do with Precision Cooling or precision UPS that Snyder, Emerson and Eaton compete in. So I know the business well. We've looked at it over the years. At one time, that business between Tyco, PECO and Cherokee was over $2 billion in volume. We passed a couple of times on it. It's a friendly competitive environment, and I'm looking forward to competition.

This is one of the first quarters, David. I know you've commented a bit on Asia, but I think it's one of the few quarters where we've seen that greater deceleration in your Asian businesses than you've seen in a while. And I understand the tough comps and such, but can you give us a read? I think you've got pretty good local guys over there. I mean, is there impact from tightening? Are there timing issues on contracts, projects? Is there anything that explains some of that deceleration other than just tough comps?

China is clearly slowing the economy down. And we're already seeing the ramifications of that. And I still believe they will be successful. The growth rate will still be a reasonable growth rate within China. From my perspective, Southeast Asia has had a little bit of disruption relative to the whole inflation that's running across most of the emerging markets both in Southeast Asia and also in India. So I think the market has slowed down a little bit. Certain markets will pick back up. I think India. The question in my opinion: Will Southeast Asia and China pick back up? I think those markets will be slowed down, and you're see a shifting from the shorter cycle stuff to the longer cycle stuff. In Asia, for us, we'll have a very good year, but it'll still be a more challenging year for us as we mix and match a little bit differently than we were last year. So we're in a transition period right now between the various businesses and where we go with it. So the China slowdown is definitely -- is having an impact already, I think, in the business.

Our next question comes from the line of Steven Winoker with Sanford Bernstein.

Just can you get into a little more detail on the material inflation side, that extra incremental $20 million, and sort of across the businesses where you're seeing it?

You're seeing it primarily in steel, copper, any of our oil-based type commodities. You're fundamentally seeing -- anything metal based, particularly, you're seeing inflation coming in right now. And I see no indication that, that's going to slow down, and it's sort of building. And from the standpoint -- if you look at a scenario that we're going to grow, underlying growth rate of 10% to 13% this year, and I still think 2012 will also be a pretty good year, you're going to see a strong demand in the raw materials. And then you also have issues around the world relative to some of the material shortages, be it Australia, be it certain parts of Latin America and even Africa. So you're seeing parts of the world that are having troubles delivering some of the raw materials. So I think that you're going to have this issue for quite some time. And we've had a accommodating Fed here in the U.S. and accommodating feds in Europe that have been pumping money. And now all of a sudden, you're going to see growth take off and you're going to see inflation across most of the hard commodities.

Which business unit would you say is sort of most vulnerable with sort of also the least pricing power to be able to sort of deal with that or design initiatives in terms of substitutions and things like that?

The toughest pricing material area is typically Network Power, and I think, someone asked earlier, would definitely be Climate Technology from a timing standpoint. Those two would typically have the most challenging areas. One of the other problems we will clearly have is in the U.S. marketplace. What I would call the discretionary consumer has not come back in yet, and that will put a lot of pressures relative to the pricing action there, too, because that marketplace is still has not recovered much, and I don't expect much of that recovery this year. So it's going to be an interesting year as we go back out and we work this issue. And I think that we're going to have to pick up our pace in cost reductions. We're going to have to get some leverage on the higher volume as we come forward. And it'd be one of these years we're earning our money again. Let's put it that way.

And with the very good incrementals that you showed this quarter, excluding price-costs, as Jeff pointed out, are you stepping up the or did you step up in the quarter the R&D and other sales investments that you've been talking about last year?

Yes, we did. And so the $40 million additional on top of what we normally do, you can't divide that by four. But it's not totally front-end loaded. It'll start building as the year goes out. But we are spending money now and we'll to continue spend money. And that's all about driving faster growth for us as we leave 2011 going in to 2012 as we need to have that extra shift to be at that point in time. So we're spending the money. And you're going to see that the money -- we have the money, we can spend it. The question is, can we get the operational issues relative to price-cost back in line? And I think that's going to be the key issue for all of us.

Our next question comes from the line of Julian Mitchell with Credit Suisse.

My first question was just about the $40 million and I guess how you see that playing out over the balance of the year. I mean, do you see that as being a run rate now or is it a gross number and, as your prices go up, you can start to eat into that from the price increases that you're pushing through?

No, the $40 million is going to have -- I mean, that's a cost that we build into our P&L for the year, and we will spend that money. That's investments in people and technology. And look, we're not at the run rate of $40 million yet. We will not be there probably until late second quarter, early third quarter. And most likely, that number, we'll continue that going into 2012 and maybe even add more money to it. But that is an investment that we're making right now. Based on what I see at this point on, we're moving forward. This is about investing in additional growth and technologies for the future of this company, and we can afford it based on the investments that we've made and restructuring we made over the last couple of years. So I feel very good about it. Price-cost situation. I'm not going to go out to say, okay, stop that spending that money. We'll deal with price-costs other ways. But this is investment in the long term of the company, for faster growth and higher technology levels.

And then finally, just in terms of the price increases that you want to push through, are you seeing generally your competitors are being pretty disciplined on that as well? So you're seeing most of your peers globally pushing up prices at the same time?

Well, I think that every person that we compete against in this space are having the same material issues that we're having. So I think that you're going to see most of the competitors working this issue. It's a fairly disciplined industry that we participate in. So I would expect everyone being rationale will work this issue. And we're going out and I know our competitors are going out, too. So it's something we're all facing. It's not just a U.S. situation here.

You have a question from the line of Deane Dray with Citi Investment Research.

I would be very interested in hearing more color on the Industrial Automation point, on the reference about the catch-up in customer CapEx spending. You said it's expected over the next two years. So kind of interested hearing why that time frame is -- I trust you'd see more in the first year, but just if you could expand on that thought.

I think we'll talk about this Thursday and Friday this week. The cycle is -- we cut back so drastically across the world as the liquidity crisis hit us in late 2008 and 2009. So we went down extraordinarily hard. If you look at most of us in this world today as we've gone through this sort of this restructuring and repositioning around the world, we have taken our capacity to a point, in my opinion, that's pretty tight. You have a situation where the material inflation is coming at you. You have a situation where we're moving around the world. You're going to need capital for productivity and also both for labor and also material. So I think you're going to see a window here. I personally believe for potentially three years where you're basically looking at a pretty good rate of capital spending across this industry as we reinvest in for growth and reinvest in productivity. And this is not atypical. And I think the first year might be a bigger percent increase, but next, in 2012, you have a dollar increase and going back up. The other issue is, we all -- companies have very strong balance sheets and we are now looking for where we can invest for growth and for productivity. And so I think you're going to see we're all turning to that. We went through a restructuring mode for almost two years. My restructuring mode is now tailing off. And now when that happens, what we do is then we turn to internal capital spending, and that's why our capital is going to go from probably up $100 million this year. That's why.

And then the comment on we've gone through the higher material costs. But be interested in hearing more about the higher wage costs. It came up a couple of different times. Is this a snapback in all the different compensation, 401(k), et cetera, or are you seeing any new wage inflation?

No, we're not having, I mean, we're not having a high wage -- our wages are in check. It's not an issue. We didn't do any special one-offs, we didn't cancel our 401(k), we did not cut people's salary, we did not do all those things. What we did is last year we had our three-year program relative to what we call our long-term stock program, the performance shares, which we paid for as an overlap year. And then in October, we issued -- or once every three years, we issue stock options, and we issued those out. And with the new rules coming out of Enron, we basically have to now write those off a lot faster, and we actually wrote off 40% in the first quarter of the total three-year stock option award. And that's all it is. And now we'll revert back, and you'll see our compensation package will actually be a tailwind for us. So we don't have any wage inflation at all.

Good. And then just last one for me, if I could. Hopefully, you could comment on the Control magazine Reader Choice Awards. And you've commented on this in the past, and I know it's an industry popularity poll, but Emerson did downtick on a number of categories. Maybe, this you want to defer to the Analyst Day, but is this sign of any competitive shifts? Is it a change in categories? What kind of color could you give around it?

I haven't seen it yet.

Hey, Dean. Even though some of the categories move around a bit, I think the order of magnitude shift is still at 3x our first place versus anyone else. So I think in any given year, they'll move around a little bit. But I think if you look order of magnitude, we're still much further ahead in that space.

So we'll talk about it. I'll get the numbers. I haven't seen it yet, Dean, so.

Well, just to clarify. And Lynne, you're absolutely right. You're 3x ahead of next competition. But just at the margin, I was wondering if there was anything interesting.

We'll take a look at it. I'll look at the pieces where it shifted, and I'll give you my two cents worth.

I'm sure we'll get more than that.

I'll give you a nickel then. I'll give you a nickel.

And our next question comes from the line of Shannon O'Callaghan with Nomura Securities.

So just on the onetime charges and the operational $0.03 for Chloride, I mean, can you give us how you see the quarters flowing out at this point? I mean, how much of that in total hit in 1Q and what 2Q and forward look like?

I don't give quarterly forecasts and haven't for almost nine years. I worry about the long term.

Well, how much hit in 1Q?

Well, I think -- hey, Shannon, this is Lynne. I think we had in the press release today. We showed you what the increase in amortization was, which was the $25 million, and then we had some Chloride onetime for $15 million in the quarter.

Right. So and there wasn't any in corporate, right?

There's a little bit in incorporate.

Yes.

And of the $25 million, how much was Chloride versus Avocent?

I think the point is we're on target for the September 9 call in terms of the onetime charges, negative $0.03 to $0.04, and operationally, Chloride, negative $0.03. So we can parse out the quarters, but I think directionally, you have a lot of information there.

I mean, there wasn't any onetime charges for Avocent in the first quarter.

Yes, it was the amortization [indiscernible] [52:12].

There's a delta amortization for Avocent but no onetime.

I try and look at the bigger picture typically.

I'm just trying to get a sense of what's kind of the underlying margins or there is obviously a lot of noise. And so how is this noise going to kind of go away as we walk through the year?

ROI margins will go up as we walk through the year.

How about on the top line perspective? I mean, you talked about Network Power being up double digits for the year. Obviously, you had the Asian stimulus comp and things in 1Q. What are the kind of top line colors there in terms of how the year flows out and timing of projects, things like that, that might lead to acceleration for Network Power?

I mean, Network Power, as I've been saying for some time now, I expect the Network Power, reliable power side, where Chloride and Liebert and all those things, I think you're going to see an improvement as the year goes on relative to their orders and sales. And then you'll see the Embedded Power and Computing business, which has gone through their early phases and ramp up, that will slow down. So you're going to see as we go in the second half this year, the reliable power business will pick up pace and their orders will be better. But I don't think there's anything extraordinary. That's a normal shift that we would see. The Galp [ph] [53:31] marker business, which is Embedded Power and Computing, comes out first. They started coming out last year. That slows down. And then the other Network Power business comes in once NPD runs. So that's typically how it runs. I don't see -- I think the cycle right now is pretty normal. The wildcard will be what the U.S. consumer does a little bit in the residential side. I think Europe has continued to do well. I expect Asia to do reasonably well even with the slowdown. And I expect the U.S. to be pretty good this year. And I think our fastest growing market space this year will be Latin America.

We have a question from the line of Richard Kwas with Wells Fargo Securities.

A question, Dave, on investment in R&D. You talked about material price inflation over the next couple of years. Are you diverting some dollars toward redesigning and re-engineering of products to lower material footprint and material costs in the future? How should we think about that?

I don't think we're, I mean, we are -- definitely, the last 12 months, we've increased our spending in that area. I don't think we're or, I would say, diverting a lot of dollars in the margin. But clearly, in certain areas, we're definitely going through a major redesign effort on trying to figure out how to get certain materials out and reduce those materials. It's an ongoing process. It's what we do. But given the fact that now we're seeing certain commodities like copper running at much higher levels, we're going to have to figure out how to use less copper. And so I would say that you won't be able to see that from a material standpoint. It won't really impact us from the standpoint of growth opportunities, things like that. But it definitely has picked up per se relative to the cost reduction priorities list. But it's very true.

And then on non-resi within Climate. A couple of quarters ago, you were more positive on that and we've had some leading indicators turning the right direction here. How are you feeling about that business right now as you move deeper into '11 and into '12?

I feel very good about it around the world. I think it's -- from our non-res type of business in both on the Climate Technology area, I feel very good about that, and I also feel very good about a couple of other places. We are seeing that improvement coming. It will not be a rocket shot, but it'll definitely stabilize and come back up. And I think it will be an important growth area for the next 12 to 18 months for us.

Do you think that could be a source of upside either later this year?

Yes. Later in the calendar year '11, yes.

Our next question comes from the line of Steve Tusa with J.P. Morgan. C. Stephen Tusa - JP Morgan Chase & Co: So I'm just curious. When you look at the Network Power orders have decelerated here and I guess it's shown in the growth rate, your guidance for the year is, I guess, 10% to 14% underlying [indiscernible] [56:31]. What would need to happen to get you guys to the high end of that range given that the CapEx businesses, comps get obviously tougher the more we mature here through the back half of the year and it doesn't sound like Network Power picking up? And so is it Climate that gets a lot better? I'm just trying to kind of figure out how we kind of move through the year given that you just did 11% and you're guiding to kind of 14% at the high end, which has implied that you're exiting at a lot stronger rate?

I think the key -- two issues. Relative to Network Power, we build up a pretty big backlog from the early cycle business, and we've had that buildup because of material issues. And we should start working that off that will help our growth rates as we get into the second and third quarter. That's going to be a positive. Relative to the Industrial Automation and Process businesses, those businesses will start picking up and have better growth rates as we go through the second half of this year. Even though they're good right now, they should be pretty good in the second half this year. Relative to the...

I think the only caveat is just comparisons. Keep in mind, Steve, so like for an IA, they have pretty easy comparisons for the front end of this year compared to a year ago. C. Stephen Tusa - JP Morgan Chase & Co: Right, which is kind of what I'm -- but the order rates are still very strong. So I guess that's what you're saying, is that even though the comps gets tougher, these are lumpy businesses and the order rates strengthening drives acceleration in the CapEx businesses, I guess, is what you're saying.

Yes. As I see it, I think you're going to see a pretty good bump in the middle of the year for us, in the second, third quarter, for our growth rates. Then it'll probably slow down a little bit and then it'll come back up, cycle around. But we're going to that mode right now where you could have a quarter strong and a weaker quarter strong, up and down like a little sawtooth here. The middle part of this year is going to be pretty good from a growth rate comparison standpoint. C. Stephen Tusa - JP Morgan Chase & Co: And then just last question on just price-cost in general. I mean, everybody gets woofed up about price-costs in HVAC, which is kind of interesting to me because last cycle, you guys actually got a pretty decent amount of price in Climate, and this is a business that goes to distribution and the ultimate buyer really has no frame of reference as to what they paid 15 years ago for a unit. So it seems like your pricing power there is actually not too bad. When I look back in Network Power in '05 and '06, you had negative 3% and negative 2% price. That's per your 10-K. So is there something more structural about Network Power and the competition and pricing pressure there? And I guess this quarter, just kind of remind us of that? Or maybe you can talk about how competitive that business is going to be over the long term --

I think you look at where a lot of growth is coming from in the Network Power business -- by the way, I agree with your comment on Climate. I think the issue there with Climate, with all our customers, as you sit down and you work through them, you work that channel over time, it's something you do. As long as you don't go crazy, you just work it very deliberately, you can get that price through, as you said. On the Network Power thing, the key issue there is, the big growth in that space, is a lot of it is international and emerging market where the pricing structure is a lot more competitive. And that creates these pockets of somewhat negative for a quarter or two and then you work your way back in. So that's the difference. Because those -- the growth coming -- and typically, in Network Power, a lot of it is in emerging market in a very competitive space. And that creates that discontinuity relative to the price-cost. And also, the industry has historically been working on a chain of trying to reduce cost at all times, make it smaller, use less cost. So that's what just that industry in general. So that industry has always given us the hardest price-cost. But we also can move the quickest in that industry to close that gap. C. Stephen Tusa - JP Morgan Chase & Co: And then one last question just to make sure everybody's on the same page here. I know you don't give quarterly guidance. But seasonality, you guys have been all over the map for the last 10 years in the second quarter, during the downturn, it's down. During the upturn, it's been up as much as 25% to 30%. I mean, is 2Q kind of normal seasonality? It looks like it's a pretty decent pickup from 1Q, at least in consensus, and I just want to make sure we understand all the moving parts so that we -- like you said, people didn't kind of pick up on some things this quarter. Just to make sure that those that don't do their own modeling, that doesn't happen again, maybe you could help us out there.

I want to get the volume, where we sit with the volume right now. We just reported a $5.51 billion first quarter volume. Right now, we're looking at -- because we do sequentially, our sales will go up. And so see we're looking at our sales going up. I wouldn't be surprised our sales, we just did a $5.5 billion, I wouldn't be surprised if our sales aren't $300 million or a little bit better above the $5.5 billion. So you have that impact. The other thing is we're going to be looking in our operating margin we'll be moving up and moving back up -- from the right now in the mid-15s, we'll be moving back up into the 16% range. So typically, if we have the type of volume picking up, which we're having right now, and the seasonality, we will see a much better second quarter here. You're exactly right.

Our next question comes from the line of Eli Lustgarten with Longbow Securities.

You were the only company I covered whose tax rate actually was higher than I expected, particularly with the business [ph] [1:02:41] on Dec. 17 given the -- for your R&D tax credit retroactive since -- 100% write-off retroactive since December 9. Can you help me? Why is your tax rate up and staying up at 31% this year?

Because we make money. We make money in the U.S.

Is it particularly because U.S. did -- did you get any benefit from the R&D tax credit or something?

Eli, this is Frank. We did get benefit from the R&D tax credit and the DMD [ph] [1:03:06]. What we have, though, is a mix shift in terms of where the profits are being earned and higher effective tax rate areas. And we have a delay in the renewal of a tax holiday in Asia and another one that's phasing out. So we've got a couple of onetime things that are running into the tax rate this year.

I mean, we fundamentally are very profitable in North America. We don't shelter our North America profitability. We're incorporated here in Missouri, as you know, Eli, and we pay taxes. And we believe that's something we try to do, obviously. I mean, obviously, we try to minimize them, but we still pay taxes. And as you look around the world right now, the U.S. has the highest corporate tax rate, and something we're working very hard on. And I expect us to be in the low 30s here until there actually is a resolution relative to the U.S. tax code.

So it will actually creep up this year and then creep up again next year is what you're saying?

It potentially could. But, I mean, I would look around this 30% to 32% range here. I mean, that's where we're going to be. And it's depending on what happens to the growth cycle. I look at it as a good thing because the U.S. business is doing well. That means we're producing a lot of good product here, we're making pretty good money at of it.

And I have a question on the Process margins, which were much higher. Very impressed in the first quarter. If you're winning all the project business, when is that bigger business pie hitting [ph] [1:04:29], that and the margin improvement sort of leveling out at close to 20%? How does that impact...

Most of the projects -- right now, we're having an increased MRO. We're having a pretty good spending rate on that area. The small projects are hitting now. The larger projects, we'll hit later this year, early next year. So from that standpoint, what we try to do is get our cost reductions ahead of the game right now, which drives are margin up. And then we fight very hard at this higher level, at this 20% up, I guess, what do we have 19%, 20%, 18%. We'll fight it the -- we'll back up to that 20% level, and we'll fight it there during the cycle from the standpoint of our cost reduction repositioning. But fundamentally, we have a very competitive structure within our Process business. The guys do a great job delivering. Even with projects, we deliver pretty good profitability.

Margins will build up to 20%, whatever it is, and then you can sort of level out as you mix-shift to the bigger projects?

You got it.

Our next question comes from the line of Terry Darling with Goldman Sachs.

I just want to revisit a couple of items from previous callers. So I guess the first one would be on the North America HVAC outlook. Since the last update, can you just tell us really what has changed and in the context of taking up the revenue growth expectations for the year? How did Climate change within that context?

I would say the Climate business hasn't changed. When you see the forecast by the business segments this week, it hasn't changed much. We've been talking around 7%, 8% all year long. I still believe that's what's going to be, and I don't think that's changed much. I think the places we see improvements clearly are Industrial Automation and Process have been the big drivers for our improvement. And Climate had a very strong year last year, and I think you're going to see Climate, as you'll see us, in the 7% to 8% range. There's always a wild card. We don't know what's going to happen, as you know, Terry. But I think right now my gut tells me that 7% to 8%. There was a lot of scaleback, if you well know, in the second half of the calendar 2010. So we'll see what happens. I feel pretty good about that, though. I'm hoping we'll have a better second half in the Tools and Storage area. I mean, it would be nice to see some recovery there. These guys have fought hard in a very difficult environment, not having any growth for almost three years now. I mean...

And then in terms of the Network Power's business ability to offset raw material pressure relative to the last cycle, there's been a lot of change in the industry structure, ownership. Some consolidation, global customers and so forth. How do you feel about the industry landscape, this cycle versus last cycle in terms of obviously, there'll be some lag? Price increases hit you before you can pass those on. We're seeing some of that now. But how do you feel about the ability on a full cycle basis this cycle versus last cycle given those changes?

There's been a little bit of consolidation, but it's still a very competitive world. And again, I go back to -- from a standpoint in the mature markets, the U.S. and Europe, obviously there's been a pretty strong consolidation. But in emerging markets, there's still a lot of competition, and that's where the price pressure, the tougher time will be. I don't think there's going to be any discernible difference between the ability of recapturing price or not recapturing price. I think it will be a little bit better, but it's not going to be a big difference, Terry.

And would you characterize that any differently Embedded versus the UPS business?

Yes, I would say on the reliable power side, it's a little bit better marketplace from that standpoint. They're more disciplined, let's put it that way.

And then on the comment that you look to do a couple of acquisitions this year, $2.8 billion of free cash flow, $1 billion on dividends, $1.8 billion for other fun things, can you provide a little bit more color in terms on where your higher levels of interest lie or where you're seeing some opportunities there?

We went through a period. We did $4 billion and now we're digesting. We got ahead of most people on this acquisition world. I would say that I still believe we're going to do somewhere between $400 million and $500 million of acquisitions. It was not a big year at this point in time. And I also expect us to do share repurchase in the $400 million to $500 million range. I don't see that changing at this point in time. We are out working the acquisition front, and if we have to strike, we'll strike. But for right now, I haven't found a lot of assets that get me real excited at this point in time.

So you're building cash, paying down debt with the balance?

You got it. And then the pressure will build on us, as you could imagine, because right now, we're less than 50% payback to our shareholders in operating in cash flow and dividend [ph] [1:09:30]. And so that pressure will build. The board, we talked about it today, about this issue. That pressure will build as we go through the year as we move into 2012. And I fully understand that.

And you did $50 million of buyback in the first quarter?

Yes. And now we'll pick that up. We're going to start ramping up to a run rate around $400 million.

And we have a question from the line of John Inch with Merrill Lynch.

Network Power margin. So if pricing, let's just say, was more neutral-ish and you hadn't seen the extra rise in raws and the expediting cost for supply chain, what would margin basically come in at in the first quarter, all else equal?

I have no idea. I mean, obviously, it would be higher. I mean, we'll talk about where we think the year is going to end and how the year will progress as we go forward here. But I've always felt that this business over time will trend up towards the 15% EBIT and we trend down the low end around the 9% to 10% range. I mean, we're in the early stages of the consolidation and restructuring mode here. So this business will continue to trend upward towards that 13%, 14%, 15% EBIT over time here. Unfortunately , we have the amortization we have to deal with here for a couple of years. But this business is inherently profitable, as you know, so we will work that way.

But, I mean, it sounds like it would be a few points higher, anyway, right?

Yes, of course it would. But, unfortunately, we have -- shit happens. We got things we have to deal with here in restructuring.

Dave, working capital. You called out a couple of the businesses that maybe had little excess working capital. But I kind of thought that the $450 million of working capital, I thought a little bit as more opportunistic or an investment based on the outlook of your businesses. Is that not the way you would characterize it to a degree, that you guys are getting ready a little bit for some of the expected demand ramp? And if so, where?

The answer is, yes. But also, I also don't want to give people excuse for that, too. We did definitely build inventory in preparation of a stronger second and third quarter, which, based on our forecast, which we told you, tells we're going to have a strong second and third quarter. But also, in the two businesses, in particular of Industrial Automation and Network Power, Embedded Power and Computing, we did have a situation where we went off-track and we brought in too much material because we were trying to -- obviously, we just couldn't match up in the electronics area, and we couldn't get the stuff out the door in the IA areas. So what you're going to see from a growth standpoint is the Industrial Automation is having a very good couple of quarters here, and we should also have a pretty good couple of quarters here in Embedded Power and Computing as we work our way through that. Inventory building is fine, but I don't use that as an excuse relative to allowing people to bring in too much. And I would say we brought in too much.

How much was the overbuild in Automation and Network Computing?

My gut tells me we put in $200 million too much inventory. That's my rule of thumb. And that's where -- we'll have to work that off. And we'll work that off in the next two quarters.

So the other $200 million to $250 million could have been seen as opportunistic investment, right?

Yes.

Just lastly, Dave. BP, I think they're now...

British Petroleum?

Yes. I don't think they call it that anymore. BP decided, I think, they're going to sell off half of their U.S. refineries. Big customer of yours. Does that have any kind of an impact? And I'm thinking more in the context that the new owner might want to do some upgrading.

Look, I mean, it depends who buys it. Let me see. I don't know, have they announced? I've not seen that. I've been locked up today. But who they announced they're selling it to?

They just said that they're selling half their U.S. refineries, including Texas City.

Texas is a big one down -- I mean, whoever buys them and they want to go through the process, it'd be good because BP had basically -- they haven't been making investments necessary. They've been focused on other things. So that would be good from a U.S. customer base standpoint depending on who buys that business. Yes, it would be good. Not near term. I would say more like six months after they buy it.

We have a question from the line of Brian Langenberg with Langenberg & Company.

Dave, just touch on one thing. I mean, plus 11%, very strong core growth. You've run the company very efficiently. Just talk about head count that you may have been having to start to add in the quarter, what that looks like? What kind of, frankly, pickup in heads to do things are we going to see at the growth rates do you need to do that?

I mean, our acceleration in head count has not been all that rapid, let's put it that way. If I look at the head count, we're getting pretty good productivity, we're mixing a little bit right now. So I would say in the last six months we probably brought on, globally, we probably brought on less than 5,000 people globally.

That's a net number?

Yes. I mean, if I look at it right now, it's not been -- I mean, I'm not taking out the divestitures. I'm just looking at the underlying businesses. I mean, because if I use the divestitures, it looks like we went down. But if I just look over the last six months, I think we're less than 5,000 people we brought in. At this point in time, if I look at what I would call the U.S. and I look at the Western Europe and what we'd call the more higher cost areas over the last six months, the number is -- it's still flat or slightly down-ish.

Are we at or near an inflection point where you simply do have to add people, or do you feel like you can achieve the growth targets that you have without really doing that based upon what you own today?

Our plans are adding people. I would say that in total, if you look at the total, total company, we ended the year around -- a little bit under 130,000. I would say we're going to trend towards the 135,000, 136,000, maybe 137,000 as the year progresses. So in total, we're going to be adding people around the world in all locations. It is definitely a point in time that we're going to have to start bringing people in. The other issue we have going on is you always have retirements, too. So we have a lot of that replacement going on. So you always hear people talking about, "Oh, I've added 5,000 people." But they forgot to tell you they probably had 4,000 retirements.

And we have a question from the line of Christopher Glynn with Oppenheimer % Company. Christopher Glynn - Oppenheimer & Co. Inc.: A lot of questions coming at Climate Tech, and you gave a growth for the year. But, looking at tougher -- a lot of moving pieces and tougher comps coming on, but you had some China capacity adds and maybe some acceleration in Refrigeration trends. So seasonality always shapes shifts a little year-to-year. But can you kind of just speak a little bit more to the Climate Tech trajectory?

I'm optimistic about Climate Tech. And from the standpoint of the recovery we're seeing a little bit in Europe and a recovery we're seeing both in, I would say, India area, in Southeast Asia and China. I feel very good that we'll have a pretty good year in Climate Tech this year from the standpoint of the technologies, the new products and things like that. First quarter, what, are we down the first quarter? Flat? Were we down?

Yes, we were up.

4%. So I think as I look at the year, that was a very difficult comp, as you know, from last year. So I think the year, we will progress well. And from my perspective, I don't expect -- we haven't billed any extraordinary warm weather here in the United States. So I think that if we have any good, warm weather based on the opposite cold weather we're having right now, we'll see a pretty reasonable Climate Tech year. I feel we have a pretty good run here. Like I said, if we can do a 7% this year after doing 15%, 16% last year, that's a pretty good year for us. Christopher Glynn - Oppenheimer & Co. Inc.: And then with the U.S. revs up in line with the international and higher margin business, it just kind of raises the question. What are your thoughts on U.S. corporate tax policy? Obviously, some noise about being more competitive.

I think fundamentally, we need to restructure the total U.S. corporate tax policy, including for repatriation. I think what we need to do is basically get rid of all the special one-off deals that have been struck out there over the year and then say, look it, this is tax rate, this is what our competitor, this is what Germany does, that's why Germany is so good. Germany is set up. This is a tax rate is. There's no special discounts or no special credits and things like that. This is what the tax rate is. You write a check. It's going to be 20% or 25%. You repatriate the money. You're going to repay the rate at -- you're going to pay taxes no matter what, 5%. I think that's what we need to do. I think we got to take out these special deals that certain industries have gotten out there and force companies to pay what I call their fair share of taxes and make this country competitive once again. We have become the least competitive country out there. And it's real simple, but you've got to stop all those special deals that are sitting there in Washington D.C. and pay your taxes.

And our last question is a follow-up question from the line of Nigel Coe with Deutsche Bank.

So basically, I know you're going to talk about this in a bit more depth on Thursday and Friday, but the three-point bump up in your organic growth this year, that's a big move for Emerson. How much of that is due to the order trend you saw the last three months versus an updated view of the next 12 months?

Two things have happened from my perspective. One, the underlying, what I would say fixed investment is recovering much faster than I thought it would recover, and that's created a one or two points of the bump. The second thing that's happened is, the U.S., in particular, have people who are starting to invest from the standpoint of trying to figure out how to drive productivity and drive their profitability. So I'm seeing a stronger U.S., and I'm seeing a recovery around the world relative to people spending capital, going after from the standpoint of productivity and growth. So that in last six months have really started to solidify and stay there. And I think now it's going to be there for a couple of years. And so I think we're on a good phase right now. We're also coming off a very low bottom from the standpoint of how bad it got. So the comparison is relative to capital. But everyone you look at, capital spending is going up on the global companies and going up significantly.

And that's a good point because last cycle, you did -- I think you only had one year where you had double-digit organic growth. And you're going to do one in basically the second year of your recovery actually the first year of your recovery. Do you think that you're going to have multiple years of double-digit growth?

I'm not ready to say that 2012 is going to be double digit. Basically, though, I think that, and you'll see on Thursday, I believe the underlying GFI growth will be higher in 2012 than 2011. That's the global GFI.

Firstly, North American resi down in 4Q. I mean, I understand the OEMs would cover their inventory quite aggressively during the quarter. How much of the decline was due to inventory adjustments versus end markets?

That's hard for us to tell. But there's no doubt, I would say a chunk of that, I mean, I'm taking a guess. Let's say a third of that was what I would say inventory reductions and people being cautious about having inventory. And we're sitting real good relative to inventories out there right now.

And then Canada. It isn't quite often you see Canada growing 25%. I mean, can you just maybe talk about is that oil sands or something else?

I mean, it's definitely Process, guys, oil sands coming back and other process investments oil and gas. But also, they had a bad year last year, so the comps are really easy. But, I mean, I think Canada's going to have a very good year this year because of the investments going on up there. It's just it goes in cycles. So I would expect Canada to be a pretty good year. But it's definitely the Process side driving that.

With that, I want to say thanks, everybody, for joining us today, and I look forward to seeing you Thursday. I think the weather will clear, so you guys can get in. And we have a very exciting day and a half for you from the standpoint of presentations, but also a chance to see to what's going on across the company and have a chance to meet people who really run the company. I mean, the business leaders and the OCE are important, but also, we have a lot of other good people out there that run the company day-to-day that you'll have a chance to sit down and talk to as you spend the day and a half here. So I wish you well and thanks, everybody, for joining us today. Goodbye.

Ladies and gentlemen, this concludes the Emerson First Quarter Fiscal 2011 Results Conference Call. If you'd like to listen to a replay of today's call, you may dial 1-800-406-7325 and enter the access number of 4401178. ACT would like to thank you for your participation, and you may now disconnect.