Emerson Electric Co. (EMR) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Emerson's Investor Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, February 7, 2012. 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 can cause actual results to differ very materially from those discussed today is available at Emerson's most recent annual report on the Form 10-K as filed with the SEC. I would now like to turn the conference over to our host, Patrick Fitzgerald, Director of Investor Relations at Emerson. Please go ahead.

Thank you, Luke. 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 2012 results. A conference call slide presentation will accompany my comments and is available in the Investor Relations section of Emerson's website at emerson.com. A replay of this conference call will be available on the website after the call for the next 3 months. I will start with the highlights of the quarter as shown on Page 2 of the conference call presentation. Fourth quarter sales were down 4% to $5.3 billion, caused by several near-term challenges. Our supply chain disruption caused by the Thailand flooding impacted results by approximately $300 million. U.S. telecommunications carriers deferred investments, awaiting the outcome of potential industry consolidation. HVAC OEMs in the U.S. and China pushed inventories very low on economic uncertainty, and there was broad European economic weakness. Operating profit margin declined 220 basis points from the prior year quarter to 13.2%, which is primarily driven by volume deleverage. Earnings per share of $0.50 was down 21% from the prior year quarter. Operating cash flow increased 4% versus the prior year quarter to $334 million. Our balance sheet strength continues to enable us to invest in growth opportunities. Despite the pressure on Q1 from numerous near-term headwinds, our outlook for 2012 remains favorable. Next slide, the P&L summary. Net and underlying sales were down 4%, with negligible impact from currency, acquisitions and divestitures. Operating profit declined 18% as the magnitude of sales declined and resulting unfavorable mix drove substantial volume deleverage. Net earnings were down 23%. We repurchased 4.8 million shares for $226 million and EPS declined 21% in the quarter. Next slide, underlying sales by geography. Gross performance was affected by the previously mentioned challenges. Underlying sales in the U.S. decreased 4%; Europe was flat; Asia was down 8%, with China down 13%; Latin America increased 3%; Canada increased 6%; and the Middle East/Africa was down 4%, resulting in underlying and net sales down 4%. Slide 5, profitability detail. Gross profit margin of 38.7% declined 40 basis points. A favorable price and material inflation relationship partially offset the volume deleverage and unfavorable mix. Operating profit margin of 13.2% decreased 220 basis points. Currency transaction losses of $14 million and higher restructuring of $6 million were partially offset by amortization of $9 million. Pretax margin of 10.4% declined 250 basis points. Slide 6, cash flow and balance sheet. Operating cash flow increased 4% in the quarter as lower investment in working capital offset the earnings decline. Investment in technology and growth programs continued, as capital expenditures increased $130 million. Free cash flow was down 15%. Trade working capital as a percent to sales increased to 19.1% as inventory performance was affected by the Thailand flooding and sales timing and mix impacted receivables. Next slide, business segment earnings. Business segment margin of 12.7% dropped 270 basis points as the volume deleverage, unfavorable mix and higher materials costs more than offset price increases and cost reduction actions. Corporate spend was down $23 million as favorable stock compensation expense and acquisition costs in the prior year offset a $19 million charge to eliminate our retiree medical liability. Moving to Slide 8, Process Management results. Process Management net and underlying sales declined 1% with the U.S. flat; Asia down 8%; Europe up 6%; Latin America down 3%; and Middle East/Africa down 6%. The Thailand flooding supply chain disruption had a broad business and geographic impact. Strong orders growth in the quarter up 15% across all businesses and geographies as oil and gas investment remains robust. Segment margin of 12.4% declined 640 basis points as significant deleverage and unfavorable business mix from the Thailand flooding impact, including costs incurred to resolve the supply chain disruption, affected results. The growth investments were maintained as the business outlook remains positive. $12 million of unfavorable currency transactions also affected earnings. The supply chain disruption has been substantially resolved, and the full year impact should be minimal. Strong backlog in order trends support a favorable outlook for the remainder of 2012. Next slide, Industrial Automation. Industrial Automation net and underlying sales increased 2% with the U.S. flat; Asia up 2%; Europe up 5%; Latin America up 17%; and Middle East/Africa up 14%. Growth was led by the fluid automation, power generating alternators and electrical distribution businesses. U.S. results were affected by softness in the hermetic motors business. Weakness continues in the solar and wind energy business as governments have reduced renewable energy subsidies. We do not expect recovery in this business in the near-term. Segment margin decreased 50 basis points to 14.8% as a favorable price-cost relationship was more than offset by unfavorable mix and other cost increases. Demand for capital goods should remain stable across most end markets, but we expect increasing weakness in Europe. Slide 10, Network Power. Network Power net and underlying sales declined 10%, with the U.S. down 17%; Asia down 6%; Europe down 10%; Latin America down 5%; and Middle East/Africa up 4%. Sales volume was affected by several factors, including deferred spending by U.S. telecommunications carriers, difficult prior comparisons and project timing in the global data center business, Thailand flooding impact on broader electronics components channels, and continued aggressive product line rationalization in the embedded computing and power business. Segment margin of 8.2% decreased 270 basis points, driven by volume deleverage, unfavorable mix and higher restructuring, which was partially offset by cost reduction benefits. There were one-time Chloride acquisition costs of $15 million in the prior year. Telecommunications carrier investment is expected to accelerate in 2012, and the order trends in Network Power show signs of improvement. Next slide, Climate Technologies. Climate Technologies net and underlying sales decreased 9%, with the U.S. down 5%; Asia down 21%; Europe down 11%; Latin America up 23%; and Middle East/Africa down 29%. U.S. residential markets were down on weak economics and channel inventory reductions. There was a significant softening in the China air-conditioning OEM demand. Europe was weak as well. The global refrigeration business continued stable growth, led by strong improvement in transportation. Segment margin declined 260 basis points to 13.6%. Higher material costs were mostly offset by price increases and volume deleverage exceeded cost-containment actions. A modest U.S. recovery is expected in the second half of 2012. Slide 12, Tools and Storage. Tools and Storage net sales increased 2%, while underlying sales grew 5% and the divested heating products business deducted 3%. U.S. was up 6%; Asia up 1%; Europe up 1%; Latin America up 17%; and the Middle East/Africa up 12%. Nonresidential construction in the U.S. drove demand across the segment, with strength in the professional tools and commercial storage businesses. Segment margin of 21.2% increased 40 basis points as price increases offset higher materials costs and cost reductions, volume leverage and mix from the divestiture benefited results. Tools and Storage had solid execution as commercial construction activity increased, and U.S. residential end market should improve as we move through 2012. Next slide, 2012 outlook. It was a challenging start to 2012, but full year expectations remain positive, with strong backlog and positive order trends in capital goods end markets, and expectations for Q1 headwinds to improve as 2012 progresses. However, the economy has weakened further with no sign of recovery. Based on current economic conditions, our revised 2012 outlook is as follows: underlying sales and orders up 4% to 6%; reported sales up 2% to 4%; operating profit margin of approximately 18% and pretax margin approximately 15.5%; restructuring expense, approximately $125 million; tax rate, approximately 31%; earnings per share of $3.45 to $3.60; operating cash flow, approximately $3.5 billion; and capital expenditures, approximately $700 million. We will provide a detailed review of 2012 expectations and strategic plans at our annual investor conference on February 14 in New York. And with that, I'll turn it over to David Farr.

Thank you very much, Pat, and welcome, everybody, this morning. I thank you for joining us. I truly really appreciate it. Yes, we had a very challenging quarter, and as we discussed in December, there's a lot of moving parts. And we still expect a record year in sales, profit margins, net earnings, cash flow, free cash flow and a 20-plus percent return on total capital. The management team, the organization, the people across this company clearly know we have created a huge hole that we have to dig out of in the rest of this year. But we feel confident that we can do it, and we reviewed the detailed plan with the board this morning, a lot of discussions on this issue. And we're focused on getting the job done. Today, I want to do something a little bit different. We have a very unusual situation with this abrupt start in the first quarter. So I want to go through them. I'm actually going to take you through slides, which you'll be able to see if you have your computer up. I will talk through the slides. They're not hard copies out there, but you'll be able to see it. We finished the year very strongly in 2011. Fourth quarter was up to $6.5 billion in sales. It was up 12% quarter-over-quarter. The whole year, the underlying sales were 11% and the fourth quarter was 9%. But clearly, as we moved into this first quarter, we had some sudden challenges, extremely unusual external environment that hit us very quickly. I'm not here about complaining. I just want to give you some insights to what was really going on, just a little more transparency so you have a better understanding what's going on when we talk next week in New York at our investors' conference. As you can see on the chart, our sales dropped in the first quarter to $5.3 billion from $6.5 billion in the fourth quarter and below $5.5 billion last year. And historically, we always have a seasonal pattern this way. Our first quarter is the weakest, then we build up and then drop. This year, it was an extraordinary, extraordinary drop. And so let's talk a little bit about that. As we discussed and mentioned at both in August and in November and then again December, we see the European environment extremely challenging. In fact, I would call Europe in a recession for most our businesses. And it hit all the key businesses from Process, Network Power, Industrial and Climate Technologies. The Thai flood hit us pretty hard within Process Management and Network Power, and I'll talk a little bit further about that. The telecom, the attempted merger of AT&T and T-Mobile clearly created a slowdown in spending for many months across our telecom and IT space, which are overlapping in a couple of places. And then we had an extraordinary, I would say, inventory slowdown correction in Climate Technologies both from Europe, North America and then also China. So we had a lot of going on. Normally, we have a couple of things, but there's extraordinary amount of times. And I have to say that we saw some of it coming, but it was far deeper more impact to our business than we had anticipated clearly. And hence, we have the phone call in December to give you some insights into it. We had clearly 3 of our businesses down year-over-year with Process Management. We had Network Power down. We had Industrial Automation not down but still impacted by it, Climate Technologies down and our Tools and Storage business go down. And we had an impact of $300 million from the Thailand flood, the European recession, unexpected HVAC inventory correction. So we went into the quarter feeling pretty good about it, and we got hit pretty hard. One of the things I'm going to show you and I'll show you again next week is the leading indicators of G7 have gone quite negative, driven primarily by Europe and also by Japan. The U.S. has held up, and therefore, what we've seen right now is we're seeing fairly large segments of our marketplace actually go into a recession type of mode. And I would say that Europe is all -- for intents and purposes in Europe, historically, when this number goes below 1.4 negative, it shows that we're going to have a recession in multiple markets, not all markets, but many of the markets. If you take a look at Europe, the European number has gone extremely negative, down 4.8%. And this has been going on now for several months and this is clearly leading -- from our conclusion, what we see in our own business, recession in Europe are very -- are basically no growth, but a very difficult environment for Europe. I certainly feel better about Europe today than I did a couple of months ago because of the actions being taken by their governments and the actions being taken by the banks, the financial community, to try to bring stability and funding to the marketplace. So even though we see this today and we see a recession, we are still going to say that we have underlying growth in Europe in 2012. It may only be 1% or 3%, but we're still expecting some underlying growth as we go forward into 2012. But taking a look at a little bit more detail in Process in Thailand floods. People ask how could this be such a big impact? The issue is you lose $100 circuit board and it goes into our systems business, it goes into our coils, it goes into Rosemont transmitters, and you can see that we missed sales of $300,000 or $7,000 or $1,500, businesses, as you know, we're very profitable with. We made the decision to continue to build, run our plants. You can see the inventory built in the quarter. Our actual orders were up around 19% for the quarter, and 15%, 19% for the quarter, around that range. And we had spent a lot of money to make sure we mitigate this and fixed the supply chain. We had a mistake clearly allowing one of our key suppliers to be in a floodplain and that won't happen again. And we've moved a lot of supply, it's up and running. And over the next, I would say, 6 to 9 months, we will recover these sales because the orders are out there, and we'll recover the sales and we'll recover profitability. But clearly, the deleveraged impact of this is we're looking at their more profitable businesses. We actually spent a lot of money to support our customer base. We are the global leader in process management, and we made the decision to spend money and invest to protect our customers, even though we were shocking them relative to their overall supply base issue. So we made that commitment and we spent, we worked with our customers and we did whatever possible to help them in the short-term to get some of the products out the door. Even with his disruption, our product -- our basically sales in Process Management were basically flat for the quarter, even with a very difficult supply chain network. In Network Power, the same thing happened. We have many of our customers, less of our supply base, but many of our customers making components and products. We had people in the IT industry also impacted, and it created -- if you're selling a whole package, it created a whole disruption relative to the Thailand flood impact to our end markets, to our customers, to our short-term customers and also in the end customers down the channel. So this business, I believe, will slowly come back. It's clearly -- is it all going to come back? I think that's the question I have on the table right now. And I don't think the answer is yes, it all will come back. Given the slowdown that you're seeing around the world both in Europe, also a little bit in Asia, in China and Japan, I think a part of this unwinding of inventory and obviously some of our customers took back inventory and that took inventory down, it's a function of the slowing global economy. The U.S., I believe, will continue to go forward and see investments in what we saw in some of the delays in what I'd call Network Power Systems business, the data centers, both in the IT world and also in the telecom world, we believe that will continue to go forward. So we think that, that will slowly recover. On the telecom side, we saw a dramatic dropoff in the second half of this year in the key telecom areas, the AT&Ts, the Verizon, Nokia and Samsung. They cut back their capital. The issue here is clearly with the merger and the disruption of potential AT&T and T-Mobile, there's the capacity that was coming in, and the industry was trying to change and react to that. That created a basic gridlock stoppage of customer spending, which backed up quickly onto us. That will also come back as AT&T puts that capacity back online. And they're going to put new capacity online. I believe that will also take at least about 6 to 9, maybe in 12 months, for us to unwind. And I'm not looking for a huge surge in telecom spending in 2012, maybe a slight positive, maybe basically flat telecom spending. So the market will recover, but it's going to take its time. I think the process market will recover faster because the actual order is within the industry. The other impact we saw in the telecom or the IT industry is we saw PC shipments were down. And for the first time in 2011, I expect from quarter 4, 2011 to quarter 1, 2012, they were down double-digit, 12%. We're looking at IT spending still being positive but slowing down. So I think there's been a negative impact out there. And overall, it's definitely a clear slowing, but the growth will return and we're already starting to see that in the current orders that we have currently on the books in January. If you look at Climate Technology, they got hit -- Ed Purvis' business got hit around the world. The residential business in China, the markets were down 30-plus percent, as the Chinese government tried to contract investments and tried to slow down the economy, also redeploying the excesses and maybe some of the real estate and the light commercial. And I do not expect that business to come back much in 2012. I believe the China government will continue to control what's going on in the housing market. I believe that you'll see stimulus going on in China in certain markets. I'm not expecting us to see a major rebound, though some improvement in China second half, but not anywhere close to recovery that would impact us over the last 6 months in that marketplace. Same thing in Europe, the early stages, our business in Climate goes down sooner than anybody else. It started going down in the middle of last year, and it's now stabilized at a lower level. But the recession in Europe will keep that business, I believe, reasonably weak and with a mild recovery, if anything at all, in 2012. In the U.S., we had a situation with obviously the refrigerant issues from R-22 the year before. That's had some changing going on, so the build-up last year is not the same as this year. We're seeing the inventories being taken down both at the end marketplace and into our customer base at all-time lows, and we've had a very warm summer -- winter, I'm sorry, feels like summer. But winter, relative to the heating season, so that's also impacted that market. So overall, Climate Technologies has had a very difficult 4-month period. January orders in Climate Technologies have continued to deteriorate. One of the things we're seeing in a chart that I was showing here right now is that we're seeing the marketplace that has really continued to go up from 2006 to 2009 to 2010, is that basically, our customers, the OEMs, are now waiting and waiting and waiting for the very last second to order. And so this month, January orders were down 22% again in Climate Technologies. So a very specific number, but they have not improved yet. You can see that historically, around 20% of our sales are in the first quarter. 5 years ago, it was more like 28%, 29%. Now it's now under 20%. It bounces way up and comes way back down. So basically with the refrigerant issues coming on, with the energy credits ending in 12/31/11 and then also the OEMs really focusing harder in inventory and waiting until the last second, we have a situation here right now that we're going to have to manage a lot tighter and make sure we react to it, but it's going to definitely be a more seasonal business than we historically had. We can adjust, the only big issue is, we will have our plant shut down here for a while. And the OEMs, if they wait too long, will have consequences relative to what they can get because they're going to wait until the very last second, and you just don't bring compressor plants up, which are reasonably sophisticated, high capital-intensive plants up very quickly and make sure you maintain the quality, which is very important to us. So as you go and look at where we are today, our backlog built significantly in the first quarter. We are sitting at record backlogs right now at $6.7 billion. We had a positive order month in January. Our early indication, we got a quick snap of this, it's plus 7%, approximately 7% on a fixed rate basis. Our underlying orders for December on a fixed rate basis were down or around 4%. So we've seen a turnaround already in the month of January, everywhere except for the Climate Technologies. Network Power systems and embedded power positive, our Process guys still holding well, the Tools and Storage business doing well, even a little bit in IA improvement. So we have seen a little bit of bounce-back. Hopefully, that will continue as we move forward. As we report later this month on the underlying orders for the month, the 3-month roll, it's possible that it could be actually negative on a GAAP basis because of the dollar impact, and also because we're dropping off a very positive, I believe, October and we had a negative December. But I'm very pleased to see that we've actually seen our underlying improvement relative to our orders and our backlog sitting at the highest levels that we've ever seen, and we've added $800 million of backlog. So we have the business. So if you look at next week, and I'm talking about 2012, we now look at an underlying growth around 4% to 6%. We see the emerging markets will continue to slow down a little bit, still grow but slower. We see -- we remain positive about the U.S., especially in the nonres and improvement coming on the residential. I'd expect very little growth in the economic environment in Europe. I do expect us to see a little bit of growth because of our export through Germany and to Eastern Europe, also in Asia and also into Middle East. And our typical European business in Germany looks pretty good right now. But overall, I do not see a lot of strength coming out of Europe. If you look at the underlying growth right now of 4% to 6%, the currency impact is around negative 2%. So hence, that's where the 2% to 4% comes from on a reported sales basis. So I wanted to give you a little bit more insight. We'll clearly get into where our strategy is relative to 2012 coming up next week. We have our challenges here in the first quarter. We have things in focus. We've got -- we're working very hard relative to recovering the backlog and replacing the supply change issue that we faced because of Thailand. We have seen order pick back up in key markets, the climate will come when it comes, and I think it will see improvement in the early stages or the second half of 2012 here in North America. We are -- obviously with the businesses that are struggling, we are taking the cost actions necessary to contain our costs. We're going to keep costs extremely tight until I really see this recovery happen because we feel even with a tough start, we're going to go forward and have record levels of sales, profit margins, profit earnings, EPS, cash flow and a 20-plus percent return on total capital. The management team, the executives and all the people around the world, the 130-some-odd thousand people are working very hard to get this recovery back on track after a very difficult first quarter. We are clearly disappointed at our execution in the first quarter. We're not looking for excuses. We're not looking for any tears here. We are who we are, and we're going to move forward and deliver on what I believe is a record performance in 2012. Next week, I'm looking forward to seeing everybody at the conference. It's going to be very crowded. And I think we have at least 165 people. Hopefully, everyone will show up. Hopefully, people didn't order things and have a lot of no-shows and we only have 2 people there, but so be it. I'll talk to those 2 people personally. My feeling is it's an important communication. We have an interesting strategy. I want to update the 2010 to 2015 time period. We are seeing some different approaches to the strategy, our insights, what we see changing and what we're going to do differently. And it's not the same old, same old strategy. It's the view of what we see today, given the global dynamics that we'll be facing and a slower mature market growth, a slower emerging market growth and how is Emerson going to drive its underlying growth, which I believe we can do. So I look forward to that. It's always a lot of fun to debate and to field the questions. And I look forward to seeing everybody. And again, I want to thank everyone around the world of Emerson. It was not a pretty quarter, it was a challenging quarter. We made money. Our operating cash flow increased. We are continuing to invest in technology and to drive our growth. And I believe that we'll bounce back and deliver a very good year in 2012. With that, with a few minutes we have left, I'll be glad to answer some questions. But I wanted to spend time on a little different approach here today by having some charts and explaining those, so you have a little bit more detail as we go into next week, and as you think about what's going on in the dynamic world where we live in today. So thank you very much. And Pat, let's open the floor.

[Operator Instructions] Your first question today comes from the line of Jeff Sprague of Vertical Research.

So just a question first on Process, the idea of kind of deleveraging and everything, I understand you spent some additional money running around, right? But your sales in the Process are actually flat. And so maybe a little more color on how you had such a large profit decline on flat sales. And is the profit in backlog now somehow hindered by what you had to do to kind of get through this?

I think, Jeff, that's a good question. It's not easy to understand. The businesses that we couldn't ship on are businesses that are very profitable for us, they have very high GPs. So we ran the facilities, we kept people online, even though we couldn't book sales. So clearly, I'm not worried about the profitability in the backlog. I personally believe that we will talk about this next week. But we will have record levels of profitability across Process, even with a difficult first quarter. The key issue there is when you continue to maintain the build, you're not shipping some of your most profitable businesses or products and you're continuing to invest in that technology and stuff, you actually have a significant deleverage. And the numbers make sense from our standpoint, and so I don't see anything unusual there. I do expect them to leverage nicely and come back and deliver record levels of profitability for the remaining parts of 2012.

And could you also just spend an additional minute or so on what's going on in the embedded businesses competitively and from a price standpoint, where you are on kind of your restructure of those businesses?

Yes. I'm going to give you -- the Network Power segment, this next Tuesday, we'll have -- it will be the biggest segment in talk. As I look at the process strategies, some of those strategies are pretty tight. And we know we're going to be able to give you a quick update. But the Network Power business, I'm going to break it down into the 3 pieces that we look at in this business. The systems business is doing pretty well. We had some disruption in relative to delivery because of the end customers couldn't get everything, so they pushed off some slowdown. The telco business was greatly disrupted with what was going on with the AT&T potential acquisition of T-Mobile. And in embedded, we saw a dramatic impact relative to the customers not able to build approximately, just stop ordering the product, and we saw a dramatic dropoff in profitability and deleverage. And we're going through a very, very aggressive repositioning right now within that business to recover that profitability because I personally do not believe that business is going to come back much. I don't see the underlying growth expectation of those customers as all that robust. So I'm planning a year right now that I think we're going to see -- we'll recover some of the growth, but overall, that I think we've potentially got down sales growth in that segment, and we have to get this profitability back to where it should go. So we're going through a very aggressive restructuring at this point in time. And you'll see our restructuring numbers start picking back up a little bit faster here in the second quarter. We will spend somewhere between $125 million and $135 million of restructuring, primarily driven around Europe and also the work we're doing in embedded and embedded power business. We'll talk a little bit more about this and the whole evaluation we're going through right now, Jeff, the next Tuesday. But there's a lot of action going on in that business right now to recover what we really fell behind in those 3 months.

Your next question comes from the line of Mike Wood of Macquarie Capital.

Can you provide an update on Chloride and where you are in the restructuring, cost synergies and how that's tracking to plan after seeing the softness in telecom, data center and just Europe in general?

The overall Chloride integration is going, I would say, very well. We have a lot of restructuring underway this year. We did what I would call the general sales and the overhead last year. And now we're actually getting into the infrastructure part. I will show you next week that from a performance standpoint, we are ahead, slightly ahead of our savings and performance. I'm very pleased with the Chloride integration at this point in time. Yes, we had a little bit of slowdown in the marketplace. That happens at any time, but overall, the integration and the effort underway, I'm very pleased with. And I would say both on Chloride and Avocent we are ahead. The one issue we did get hit real hard on in this quarter, in the first quarter, was Avocent. Avocent's into the server marketplace, which really got hit hard in the fourth calendar quarter, our first quarter. And Avocent sales really got -- came down extremely hard in the fourth quarter, and they deleveraged quite significantly. They have actually started seeing improvement already in orders and shipments in the month of January as people got back online to start buying again. So overall, we're very happy with Chloride and Avocent. The pace is good, and they're getting the job done.

Okay. And on the residential side, we've been seeing some early signs of a potential recovery in the U.S. residential construction market. Where would that impact your business? Where might that positively surprise you versus your expectations?

I think that we're going to have in what we call the Tools and Storage business, you're going to see they had a pretty good first quarter. The order pace is pretty good right now. They've had good order pace. I think that will be the continued positive, which we see that is in the -- primarily, the repair. We've seen a good recovery in the repair, upgrade marketplace in North America. On the Copeland side, our Climate Technologies side, we'll start seeing that later this year as the construction and then also the people move into the cooling season. So I would expect that to be more in the second half. Right now, we are banking on some recovery, but not much a recovery. And with the level of inventories where they are right now, that could be the one upside we see in the second half. I think we'll continue to see momentum and positive performance in the Tools and Storage business because of residential. I agree the recovery in residential is underway. And I think you're going to see probably 5% to 7% underlying residential GFI growth in the United States this year.

Your next question comes from the line of Steven Winoker of Sanford Bernstein. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Those slides were very helpful. So just Industrial Automation, the margin side, I know you called it out. We've got revenue up and margins down. And you talked about cost containment in relative to pricing and additional investment for growth. Can you maybe provide a little more color here so that I can sort of think about what the leverage was here, and was it not enough profitable [ph] mix or...

Yes, there's 2 things. One of the big issues on material is, when our price increases come through -- and it's been a fairly high net material inflation area -- time period. We've got the prices to cover the material costs, but it dilutes our margin. And so this in initial phase right here, upfront what happens is, the price is going through and we get that margin dilution relative to -- because we don't cover margin, we just cover net material costs, that hurts us quite a bit. So from the standpoint overall as a company, we had positive green price costs for the whole company, and we are almost -- we're approximately $20 million, about $18 million positive. So this is the first quarter after 4 quarters of being negative, we've got the price cost coverage, but we don't make margin on the high inflationary time periods. It's not something we build into our contracts. That hurt us from that standpoint. The other area in Industrial Automation is, with a dropoff, in particular, continued dropoff in solar and wind, we've seen a significant deleverage. We had a lot of restructuring going on in that way because we do not see that market coming back. Industrial Automation had a record level of profitability last year. I believe they will set another record level of profitability this year because the cost actions are underway. We will absorb this price cost as we go forward here, and we get our productivity going. So I feel very good about Industrial Automation. Some of the markets will be good, some of the markets will not be good. And again, we'll give you a little bit more insight to that next week, Steve. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And just back to that first question on Process. When you're filling out the backlog now, your capacity utilization and the plans as you go forward, how are you thinking about that backlog fitting in? Are you just scaling that thing up all across-the-board and running full out 80%...

If you had noticed that one chart, we actually built a lot of inventory in the first quarter. So right now, from automations -- process automation standpoint, we're going to spend around $700 million of capital this year, and we're going to have -- a big chunk of that is going to be going to Process. We are going to have to invest in capacity. I mean, we're driving towards an $8 billion Process Management business this year. And our orders are very strong and we need to increase our global capacity. And so you're going to see us having to continue to spend money in Process and capital. Right now, we are okay because we made the decision, even though with the disruption, to go ahead and build inventory. So we have control valves out there without the electronics in. We have pressure transmitters, we have flow devices. And so we have actually built the product that's sitting in warehouses, and now we're going to come back later and put the assembly in there. If we hadn't done that, we would never be able to get this caught up this year. So we made a decision to go ahead and spend the money, costs extra money, inventory -- because we know that with the orders sitting where they are and the backlog sitting where it is, we have the capability of shipping that stuff, assuming we get the electronic boards in. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And Dave, again how much inventory did you build for that?

We built -- in the Process, where I had the chart there, I'm going to give you the exact number. I had it broken out... Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: You flipped it too fast for me, I couldn't write it down.

I'm sorry. I'm really sorry, Steve. We built $130 million, so we had inventory at year end around -- I'll give you $575 million and we're now over -- we're over $700 million. That's a lot of inventory.

Your next question comes from the line of Shannon O'Callaghan of Nomura.

So just on the electronics pieces, I guess, do you now have the components you need? I mean, when do you think you can resume shipping instruments with electronics out of Process? I mean, is this all going to come back in a hurry? Is it going to kind of spread out through the year? How do you see it happening?

We are already starting to see the shipments. I mean, in the month of January, I know the sales in January. We saw the shipments in some of the instrumentation actually come on, so we're seeing that in the simpler product, the instrumentation product, the flow devices, the pressure, the temperature devices. The larger devices were -- I would say, the control valves were more complicated. That's going to take 6, 8 months. So we are starting to get a flow of electronic boards. We are allocating where the boards are going. They're not all the same boards. We are allocating based on our customer pressure points, and we're dealing with that issue right now. So you're going to see a continuing improvement. You'll see our second quarter sales in Process go up unless we have another shock somewhere. I really don't need another shock. And then you're going to start seeing the second quarter, third quarter, fourth quarter sequentially getting better, and as we move out, so it's not -- they're not all going to show up at one time. We're staging them out because that's the only we can deal with it. But they're starting to flow already. I saw the benefit already in January in some of the more easier products to get into.

Okay, great. And then on the restructuring of embedded power, I mean, some of this is tire-related stuff, too, but it sounds like you're -- do you see more of a permanent change? I mean, could you talk about some of the nature of the restructuring you're going after and what the payback period is like?

The restructuring, we're going to start getting payback this year, and it's going to be within a 12-month period starting right now. This is a very near-term, short-term thing we're doing. I'm just making a call on there. I listen to a lot of our customers on their conference calls. Some of them said that the recovery, everything was going to come flying back, some of them said not. I am of the opinion right now, given the slowdown in Europe, the slowdown in Japan, the slowdown in Asia and in the marketplace, the dynamics going across the marketplace with some this customer base, I think the market will be a lot slower for some of this, what I'd call core electronic market space in 2012. And I think a little bit of inventory had been built with the Japanese issue we just had 6 months earlier. And so I think a lot of that got washed out, so I don't see all of it coming back. So if I look at -- we lost about $100 million, in what I would say $100 million to $150 million in certain parts of these businesses, I would say we'd probably get half of that back and that's it. That is just my call right now, knowing the space that I know.

Your next question comes from the line of Deane Dray of Citi Investment Research.

Dave, I was hoping you could take us through Europe and a little bit more color regarding the individual businesses. Because you were flat for the quarter, you're speaking as though you still could get positive growth. Process and Industrial Automation both had better quarters in Europe. So just take us through what the tone is of the customers and your visibility that still gives you a sense that you will outperform the market.

I mean, the Process business did have a decent quarter. I think they have a high level of backlog. That business will continue to start shipping when they get the components, so I think Process will do pretty well. I am concerned about the underlying industrial business of Industrial Automation. I think Industrial Automation Europe is going to struggle this year. I think that business will weaken as the year goes on. Within the last 2 months, we have actually started seeing the stability in the Climate Technologies business in Europe. They're the early indicator. They went down last year, so they had a couple of tough quarters last year. The first quarter was tough. I'm seeing some stability in that order pace. And based on the fact that Germany is still doing reasonably well, we're still seeing that improvement, and I think Climate Technologies will have a better, better year as it progresses. The other area is our Tools and Storage. And we're continuing to see some investments going on within the European business, and that space is not big. But I think Process will be good. I think Climate Technologies will start to recover. I think the Tools and Storage business, we do well. I think the industrial part of Industrial Automation is not going to do well. I think some parts of Industrial Automation, their export out of Europe will do okay. But overall, I mean, you've got to remember, Europe last year for us was 11% underlying growth. This year, I think we're probably somewhere around that 0%, 1%, 2% type of growth. So it's not going to be pure negative, but it's definitely -- we've got the backlog to show we'll have some growth there. That's they way I look at it and feel it right now.

Got it. And then just -- I might have missed this. But on the impact of Thailand, originally, it was a $300 million to $400 million hit. And it looks like it came in towards the lower end of that. Was that just being conservative? Or how did that actually play out?

I've made a commitment -- and Frank's here with me, we made a commitment to the audit committee that we would not just throw everything in the big catch-all, and say, "Hey, s***, it's Thailand." And I'm not supposed to swear, but I did anyway. But what we made is we looked very carefully what type of products we're not able to ship in that. And our best estimate right now and the best that we're going to do is $300 million. The other parts, we believe, from the climate standpoint and the recession slowdown -- so we went through and we categorized it for the audit committees because they wanted to make sure that we weren't playing games. Let's be honest. They wanted to make sure that we know what we're doing here and not just use this as a big cop out. So we did the best we could relative to the products, the customers. And we clearly mapped out between the Network Power, the Process business basically what we could see coming out of from our standpoint on Thailand. And it worked. And so that's where we are right now, it's around $300 million, plus or minus $10 million, $15 million, and the rest came out of just the other activities. That's why I mapped out that one matrix, where we saw the various piece of the impact around the world. That's how it is.

Your next question comes from the line of Julian Mitchell of Credit Suisse. Julian Mitchell - Crédit Suisse AG, Research Division: I guess, my first question was, obviously, you've had a lot of sort of strange issues as you say in your fiscal Q1. And if we look at the gross margin, though, that's been down year-on-year for kind of 3 or 4 quarters in a row. And I guess, if I look at your guidance for the year of an 18% margin, we assume that SG&A grows about 3% for the year as it did in Q1. That implies for the balance of the year, your gross margin has to go up maybe 70, 80 basis points. And so I guess, given that it fell when revenues were up 6, 9 months ago, and given that it fell when revenues were down in the December quarter, what is it you think that's really swinging on the gross margin that gets it growing again year-on-year from this point?

The biggest issue is price cost. Last year, we had a very negative price cost that really hurt our GP margin in a big way. Even though the first quarter was tough, our GP was not that bad relative to what we lost overall. So I would say the big issue for us is price cost. We were green in the first quarter, that makes a big difference for us. We expect to be green next year, which will help us relative to our recovery of GP. And so that's the #1 issue, Julian, that we are tracking internally. If we can deliver that, then our GP margin will go towards that 40% GP, and we'll have that recovery. Last year, we got hit very, very hard at that level and that really hurt us. So that's the #1 issue, being green right now. And we got obviously 3 more quarters, that's the key issue for us. #1, 2, 3 and 4, that's the issues. Julian Mitchell - Crédit Suisse AG, Research Division: Okay. And then on your cost base generally. I mean, looking at your CapEx guidance and what you spent in Q1, that's about flat year-on-year for the next 3 quarters. What's going on with -- your restructuring's going up a little bit, I think, $30 million versus the previous guidance. And your OpEx, the SG&A, as I say, that was up in Q1 even with down revenues. So what's happening on the SG&A line? I mean, is that going to stay at this sort of $1.3 billion, $1.4 billion? Or are you going to try and take some of that out?

We, I mean, the SG&A, from the standpoint of spending, we start curtailing spending and we will continue to curtail spending. I expect our SG&A to be on a percent of sales slightly down when the year finishes as we get the growth coming back. On the capital standpoint -- but there's not going to be -- we are being very careful, we are taking some cutbacks, I would say, overall in spending right now because of our concern of the slowdown, particularly in Europe and some slowdown spending in Asia. But overall, nothing dramatic because our cost structure is in pretty good shape. It's just that we're going to be very careful of where we increase it. And for the businesses that are struggling right now, there will be very significant cutbacks, the Climate Technologies, the embedded power computing, those businesses will have significant cuts relative to their overall spending because their business is not right -- is not there right now. Relative to capital, we're going to spend around $700 million. We actually cut it back a little bit. In some of the businesses that are struggling, I don't see the growth rate, then we've cut back their underlying growth rate. So we're going to be taking some capacity out that we had planned in originally except for Process, which is going to need it. So there's a little shifting going around relative to capacity. So I would expect us to spend less capital than I thought we're going to spend 3 months ago. But we're going to be spending around $700 million, which is still under 3% of our total sales. So overall, the cost structure of the company is in pretty good shape, though we're going to trim, and the capital plans are going to be cut back a little bit. But overall, I think we're in pretty good shape.

Your next question comes from the line of Nigel Coe of Morgan Stanley.

Dave, so you mentioned early on that you still think that this will be a record year for Process Management profitability. Does that still mean that you think even though you've got a tough 1Q that you can still do 20-plus margins this year?

Yes.

Awesome, great. And any way of scaling what the impact of the Thai floods was? Because if you just look at the sales and the deleverage on the sales, you get to about $0.15. But it sounds like there are other costs as well. I mean, do you have that number to mind?

No. I have not gone and spent a lot of time on having the guys track what we had to spend to meet with customers, to redirect stuff, airship stuff. I mean, right now, that business is in a crisis mode. So we have a global leader, and I told the guys, "Spend what it takes to get this business back on track, back up in line." That's far more important to us. With bookings, orders coming in on 15%, 18% and we're expecting to drive towards an $8 billion number this year, we need to figure out how to get the shipments going again. So they did a lot of extra spending, and I'm not -- I have a lot of confidence that management team that they don't waste and they got the job done because it's important for us to take care of that customer base.

Sure. And then we spent a lot of time talking about Climates and Network Power, but we haven't spent so much time talking about Industrial Automation. And we did see a big dropoff from 4Q to 1Q. And you talked about solar, wind, and I think, hermetics as the big drive to downside. But can you maybe just talk a bit more about that, Dave? How much of this is inventory? How much is CapEx?

I mean, from our standpoint, the hermetics business is obviously tied to our compressor business being dropped off that hard. The big issue for us that we're seeing in Industrial Automation is the slowdown we're seeing in Europe right now in the underlying -- what they call the pure industrial, the industrial motors and drive touch [ph] that we're seeing some slowdown in that area in the core business. We're also seeing a slowdown, we actually saw a slowdown in China in the first quarter. As China really -- it started dialing back on spending money, we saw the industrial marketplace really slow down a little bit. I do expect that to pick back up because that's going to be an area, I think, the Chinese government will focus their money relative to the stimulus they're going to put in place. I'm a little bit positive -- less positive about the housing and residential and the light commercial. But I think in industrial, as companies continue to spend to go after that growth as that stimulus comes in, I think you're going to see that money spending there. But the overall industrial marketplace both in Europe and in Asia, we saw weaken in that first quarter, but we're seeing some signs of picking back up. So I feel okay. There are segments in there that are struggling, but those segments will do very well. So it's going to be a mixed bag this year, very lower growth. But I believe as we'll talk about next week, they'll be setting record levels of profitability.

But quickly, finally, on the shale gas. Your exposure there is quite low, right?

Pretty low. We sell into the shale gas market. We sell a lot of equipment to the shale -- when it comes to -- anything to do with natural gas around the world, we are a player relative to equipment and measurement and custody transfer. So we have a lot of money being spent in that area.

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

I wanted to come back to the Process Management margin discussion with regards to the implications for the longer-term from what you're saying. And I think the implications are that you're going to be kind of 50% incrementals for the balance of the year. And there was this earlier discussion, "Hey, as you get deeper into the cycle, you'll shift more to solutions that dampens the incrementals." We've got a lot of investment to do to make sure we're in position for the long-term there. As we think about the 2013, '14 picture for Process margins, what are the implications of the kind of profile that's really implied by this last 3 quarter guidance on Process? Is it that you're just seeing the underlying as stronger, you're doing a better job on productivity than you thought, pricing's a little stronger and that can carry forward? Or how would you like us to think about that?

I think there's one thing that's going, the price cost is turning so that's helping us right now. So that's a slight positive, even for Process. I wouldn't say we can say we're executing better because we just had a really challenging quarter here, so I wouldn't say we are executing better from that standpoint from our productivities. We have not seen a shift yet into the big projects, which will eventually kick in probably '13, '14 relative to some of the dilution on the overall P&L structure, as some of these big projects start shipping. We have seen a continuing, I would say, upgrading of spending, what we call brownfield-type expansions. And brownfields are less competitive market space than greenfields, which are extremely competitive. So right now, the mix is still going our way, and I think that's what's going to help us in the second half of this year. And we'll see how that order book goes in the second half of this year and that will tell me, Terry, how that's going to look as we go into '13. But this right now, I see no fundamental reason why we can't maintain fairly high levels of profitability and continue to make the investments we need. But I don't see any reason why we can't do that yet, but that mix could change in the second half of this year relative to orders. We've got to wait for those orders to come in.

Okay. And then I guess, the next question is trying to get a feel for the key levers in your mind between the new high end and low end of EPS guidance range for the year. And from the standpoint of organic growth around that question, it sounds like with the January up 7% orders and some of your commentary to earlier questions, that the organic pattern, if you will, over the next 3 quarters you're seeing is relatively the same. 6%, 7%, 8%, I guess, is what you need to get the high end of the 4% to 6%. Have we got that about right?

Yes, you do. I mean, the key issue, you're going to see -- the key issue for us is, unfortunately, we ran loaded this year. And that is not something I like from a growth standpoint. The key lever for us right now, Terry, is underlying growth. If I -- from a cost structure, we are driving to get the cost structure in line. We're taking the actions we need to. And from my standpoint, as we can get that 5-plus percent underlying growth, then we'll be at the high end. If we start going -- if underlying growth starts slipping down, we will be fighting down towards that low end in EPS. It's going to be underlying growth. This company knows how to deliver profitability and getting the costs in line. It's going to be that underlying growth. After the first quarter, the price cost was in good shape. If I can deliver another positive price cost in the second quarter, I'll take that one off the table. So right now, I would say, can we continue the positive green price cost and then underlying growth. Those are the 2 levers that I'm watching and tracking extremely closely right now to relative to this company.

Okay. And then lastly, maybe give Frank some airtime here and save Pat a bunch of time later on. Frank, can you give us any thoughts on the segment corporate line for the year, how you're thinking about that? And anything on interest expense as it relates to use of free cash and so forth through the year that you can talk about as well?

Segment corporate line?

Relative to the $80 million you did in the first quarter. Typically, it comes off as you move into the last 3 quarters. But any other commentary would be helpful.

Yes, the first quarter is actually a bit favorable so that $80 million is not a good run rate. You need to bump that a little bit for the balance of the year. And interest expense...

How much -- relative to last year, what kind of line is it going to be, plus or minus? Where are you going to be?

No, we're going to be up a little bit. A little bit versus last year.

But that's relative to $220 million?

We're up a little bit versus last year. And I'm talking about the noninterest expense, the other corporate, which is mainly incentive comp. And in interest expense, we should be a little bit better than last year.

But just to be clear, the corporate number you just referenced, you're talking about the $129 million? Or are you talking about the $80 million from the first quarter?

I'm talking about the $80 million from the first quarter.

Your next question comes from the line of Rich Kwas of Wells Fargo Securities.

A follow-up from the December call regarding Europe. In December, I think you talked about market share gains in Network Power in Europe. You didn't mention that in one of the earlier questions. I just wanted to get your thoughts there.

I don't remember saying that. But very unusual when we talk about market share on a quarterly phone call. But I have to be honest, Rich, I don't know if I said that or not, so I have to check in. You can talk to Pat on that. I don't know. Coming off the top of my head, I don't remember that conversation.

Okay, I'll follow with Pat, but I thought you said there will be some gains in the business in Europe in 2012. But I'll follow up.

We'll go back and look at what I said and try to make sure. If I messed up, he'll go back and clarify it. But we'll go back and look at the transcript and see what I said, and then I want you to follow up with Pat on that one because I don't want you to leave that out there.

And then just on M&A, what are your thoughts here? You had another -- we're 45 days past our last update with you. What are your thoughts there between share repurchases and then bolt-on M&A?

We'll be talking about that in detail next Tuesday. Let's leave it until then. But I'm going to give my thoughts on the capital structure, where we're going to spend our money and how we're going to shift it, and I have some different thoughts on that. So I'd rather talk in the session next week.

Your next question comes from the line of Steve Tusa of JPMorgan. C. Stephen Tusa - JP Morgan Chase & Co, Research Division: I know you don't give quarterly guidance. But obviously, the last 3 months, quarterly guidance has kind of been a key sticking point here. And I think maybe just move beyond the focus on that, is there any way you can kind of give us a little bit of color on how we should think about the second quarter, given all of these -- the multitude of moving parts? I think that normal seasonality, I guess, if you adjust the first quarter would get you something in the $0.80 range. I mean, can you give us any kind of an over-under on that? Or just any color on the second quarter would be, I think, helpful for people.

Steve, I think the key issue for us is the recovery in sales. As I think I said to Terry, I think the key issue for us is the recovery of what our underlying growth is and starting to get after some of that backlog. We are expecting our sales to be up for the quarter. And right now, I think from the standpoint of -- the question is how fast that recovery happens, and that's going to be the key issue. And just for that, it's hard for me to say what our earnings per share is. And again, unfortunately, we're going to be ran loaded this year because of the recovery of the sales and the backlog. And that's going to be a very difficult thing. And I'm going to have to keep my board updated on a month-by-month basis from that standpoint. But all I can tell you right now is all are going to be coming off of our sales pace. And if we get a good sales pace, then we should start seeing a recovery in our OP margin, and then we're going to see an increase in restructuring. But you should start seeing a recovery in our earnings, and I expect a positive, obviously positive growth in earnings to positive growth in sales. But it's not going to get back to the pace that we need to get that second half done. And so I'm hoping we can do a better job here, but that's the best I can give you right now. C. Stephen Tusa - JP Morgan Chase & Co, Research Division: And I guess, that just kind of leads me to my next question, which is just the visibility you have. I mean, you went through a bunch of fundamental, I guess, macro issues, whatever you want to call them in the quarter. But despite kind of the January order comment, whether it's telecom, whether it's Climate -- Process, I think is its own animal, which you guys are -- that's kind of understandable. Whether it's Industrial Automation, it still has pretty tough comps in the second half of the year. It's just unclear to me how you guys envision this kind of ramp in second half sales. A lot of the telco guys are talking about things not coming back until later in 2012. So I'm just wondering how do we kind of get to that -- what are you watching for? Europe, you said, was going to remain tough. I mean, is it China that we're really banking on here? What is the -- is the U.S. economy? It's just unclear to me what really comes back in the second half of the year.

Well, I'm not banking on much of a telco recovery. I'm not banking on much of the Climate Technologies recovery, although I am banking of some recovery in Climate Technologies. We're expecting recovery plus some growth from the Process guys. I am banking on some recovery in the Industrial Automation, in particular, in Asia Pacific and some of the other markets stabilizing and improving. So I do have a little bit of recovery coming on there in Industrial Automation. I'm expecting an improved performance out of our Tools and Storage business better than we have been running there, so I expect that to be positive. But definitely, I don't see much telco. I also expect some recovery in the embedded power and computing and we're seeing that, but we're not going to recover back everything we lost. So that's how we see it right now. There's clearly a lot of moving parts in this thing, and that's why, as I said to somebody earlier, how we deal with that range. If our underlying growth rate starts slipping down, then I will be at a lower range of that EPS clearly. But I think that if the order pace keeps coming by the segments as we saw in January and we see that again in February and March, then we're going to see that visibility we need. But right now, the ball is around execution, getting that backlog down and getting some recovery pace in, I would say, North America residential and a continuing strong pace in nonres in North America. C. Stephen Tusa - JP Morgan Chase & Co, Research Division: And then one last quick question, just on the Process side. I think Jeff asked a good question around the margin being down despite the flat sales. You talked about mix a little bit. But CapEx in that business was running at about 2% of sales, basically for the entire cycle last cycle. It bumped up to 2.8% of sales last year, and now you're saying it's going to be -- it's a pretty significant part of the healthy increase you're seeing in the first quarter and maybe throughout the year. Does this kind of get to the point that -- 20%-plus margin is great this year. I agree, I think you have to do that to update your guidance. But does this get to the point where like you have to kind of begin to throw more investment and money at this business, given the competitive landscape is just a lot different than it was last cycle? Or why are we throwing so much more money at the business early this cycle than we were last cycle?

Because the last cycle, I took capacity offline -- I took it offline and I did not redeploy it. I took it offline because I wanted to move it into where the growth is going to be. And so now that growth is starting to happen and I'm starting to redeploy that capacity and where that growth's going to come from, Middle East, India, Asia, China, and parts of Latin America, that's the issue. We took capacity offline and we did not redeploy it. I used the capacity I had to mount that, and now I'm putting capacity in. I don't see that we have to have some extraordinary amount of higher levels of capital spending. I mean, I think the Process guys are probably going to be around that 3% level. It could run down to 2%, but it's not going to be an extraordinary number here.

Your final question comes from the line of John Inch of Bank of America.

Dave, just based on your relatively upbeat comments towards nonresi or towards resi construction and then sort of some of what the Tools business is seeing on the nonresi side, isn't this sort of a -- aren't there sort of decent lead indicators for Climate that, all else equal, you could perhaps argue that actually had a cycle bottom? The business almost seems to be locked and loaded. I'm just curious on your thoughts.

If you look at the leading indicators, you look at all the numbers, your statement is 110% correct. Now we've got to see it happen. And the other issues, there's a lot of capacity and there's a lot of product that's been taken offline right now, and we are taking our capacity down at this point in time. We're taking plants down because the orders are not there. And so in order to protect our deleverage the best we can, we are actually taking out cost at this point in time, and we're putting and turning lights out. And so our customer base expect us to be able to turn on a dime and hire 500,000 people or whatever it takes. They better be thinking about that. That's all I can tell them, because I'm furloughing my plants right now. So they've been warned.

So does that -- I was wondering about that actually as it pertains to the rest of the channel. I mean, does that, to a degree, give you leverage, whether it be on pricing or otherwise when the cycle actually turns? I mean, there's a bit of a compounding effect that you don't necessarily need big turns to these end markets to actually get a big profit contributions for this business.

Well, if we actually get the orders and the shipments, the answer is yes because there's not going to be a pricing standpoint because we lock up agreements with them for a 12-, 18-month time period. So it's just a function of they're playing us so tight right now that they're expecting a large compressor plant that's fairly sophisticated to turn on and get going. And so my warning to all the customers out there in this area is they've got to be very careful because I am furloughing my plants right now because their demand has dropped off so dramatically that I have no reason to keep my workers in the plant working, period. They have been warned.

I'm also just wondering sort of big picture with respect to lessons learned perhaps from Thailand. Are there implications as you look out -- as the CEO of Emerson and your global operations, you're clearly a very well-entrenched company in all these different emerging markets. Are there implications for perhaps other, call it, geographic supply chain concentrations that you're going to be trying to work through? Or is really Thailand just an isolated event that you're going to...

I don't think it's isolated. I think that we looked at a couple of things happen. One, we shouldn't allow a major supplier in a floodplain, which had -- that was one thing, that was one flag. We don't allow our plants to be built in floodplains. And so why allow one of our major suppliers have a plant on a floodplain is beyond me, it's my fault. I would say, John, that we are taking a look at across all the major suppliers and seeing -- going through with a backup plan. Are the plants in a risky spot? We don't locate plans in an earthquake zone. We're going through right now, this is a wake-up call for us. We've had 2 whacks here. We've got one whack upside the head in Japan, then we got a whack up with Thailand. So now okay, I'm not going to go for the third one because the third strike and I should be out type of situation. So I'm looking at right now from a supply chain, are we setting ourselves up in a situation where we're asking for more problems? Or we're looking at that from a standpoint of just safety from an environmental standpoint, a concentration and backup. So we're stressing a lot of places around here because I'm trying to learn from both of these events. And I never can foresee everything, but I want to mitigate this because this was a very damaging thing. And it's not just us, the whole electronics industry that got hit by it pretty hard. And so we, as an industry, need to think about that. Thank you, everybody. Again, I want to thank everybody today. It was a different approach. I wanted to give you a little more insight to what's happened in the last 3 or 4 months. I hope that helps you. I want that off the table, so we got into next week. I'm looking forward to talk about strategy, looking forward to talk about what I see out there right now from the standpoint of our end markets and how we're going to attack differently. We are going to have to make some different moves from a strategy standpoint, and we'll talk about those. And then we'll give you some quick insights relative to the various business, some of the businesses are just a matter of executing some of our stuff. Some are a little bit more obviously insights that we're going to have to spend some time on. So we're looking forward to it, looking forward to seeing everybody both from an investor standpoint and the sell side standpoint. I appreciate with all the patience. And again, I want to thank all the employees around the world working their way through this very challenging time for the company because we intend to recover and have a record year in 2012. Thank you very much. Bye.

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation, and you may now disconnect your lines.