Emerson Electric Co. (EMR) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Emerson's investor conference call. [Operator Instructions] This conference is being recorded today, November 4, 2014. Emerson's commentary and responses to your questions may contain forward-looking statements, including 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 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, Danny. I'm joined today by David Farr, Chairman and Chief Executive Officer of Emerson; Frank Dellaquila, Executive Vice President and Chief Financial Officer; and Craig Rossman, who will be succeeding me as Director of Investor Relations in the coming weeks. Today's call summarizes Emerson's fourth quarter and fiscal 2014 results. A conference call slide presentation will accompany my comments and is available on Emerson's website at emerson.com. A replay of this conference call and slide presentation will be available on the website after the call for the next 3 months. We'll start with the highlights of the quarter, as shown on Page 2 of the conference call slide presentation. Net sales were unchanged in the quarter at $6.8 billion, with underlying sales up 4%, reflecting increases in all segments, with Climate Technologies strongest. Growth was strong in North America and modest in Asia, while Europe was flat. Emerging markets improved to 5% growth after 2% growth in the third quarter, but remain mixed across regions. Profitability improvement continued, with a gross profit margin of 42.4%, up 120 basis points and secular margin up 70 basis points to 20.2%. An impairment charge of $508 million was recognized in the Chloride business, which has been impacted by protracted economic weakness since its acquisition in 2010 and a deteriorating outlook in Europe and Middle East/Africa over the next 2 to 3 years. Earnings per share of $1.30 increased 10%, excluding charges in both years. It was a strong close in fiscal 2014 with margin, earnings and cash generation exceeding expectations. Slide 3, P&L summary. As previously stated, net sales were flat, while underlying sales grew 4%, reflecting the impact of currency translation and divestitures. Gross profit margin expansion benefited from improved business and technology mix, which enabled funding of strategic investments as reflected in higher SG&A expense. The decrease in other deductions was primarily driven by cyclical currency comparisons of $43 million. Excluding charges, EBIT margin expanded 160 basis points to 20.1% with a strong contribution from segment margins and favorable stock compensation expense. Share repurchase of $267 million contributed to EPS of $1.30, up 10%. Next slide, sales by geography. In the fourth quarter, sales growth was led by the United States, up 8%, while Europe was flat, Asia grew 2%, including unchanged sales in China on challenging comparisons, Latin America increased 3%, Canada was up 10% and Middle East and Africa was up 5%. Total underlying sales increased 4% and acquisitions added 2%, while divestitures deducted 5% and currency translation deducted 1% for flat reported sales. For fiscal 2014, 4% growth in the U.S. and 7% growth in China drove the majority of the underlying sales increase. Europe and Canada were up 1%, Latin America was up 2% and Middle East and Africa declined 1%. Full year underlying sales grew 3% and acquisitions contributed 1%, while divestitures deducted 5%, for reported sales in 2014 down 1%. Strong market conditions in the U.S. and improvement in emerging markets drove higher accelerated -- excuse me, drove growth acceleration in the fourth quarter, the highest quarterly rate of growth of the year. Slide 5, segment earnings and cash flow. Segment margin expansion of 70 basis points led by strong improvement in Process Management and Industrial Automation. Lower corporate expense was primarily driven by cyclical flat comp comparisons of $54 million. Reported pretax earnings reflected the previously mentioned charge. Cash generation exceeded expectations with strong conversion and working capital management to finish the year. Trade working capital improved by 10 basis points. Next slide, Process Management. Process Management underlying sales grew 5% in the fourth quarter, with North America up 13%, Asia up 1%, Europe flat, Latin America up 3% and Middle East and Africa up 5%. Acquisitions added 4% and currency translation deducted 1% for net sales growth of 8%. Momentum continued in global energy and chemical industries with growth strongest in North America driven by robust investment in oil and gas production and processing projects. Asia was slow, as strength in Southeast Asia and India was offset by challenging comparisons in China and Australia. Europe reflected improvement in Russia, offset by lumpy project timing in the North Sea region. Market conditions in Latin America and Middle East and Africa were mixed. Margin remained strong, up 130 basis points in Q4, driving 20.9% margin for the full year. Robust order trends have resulted in double-digit year-end backlog growth providing strong momentum into 2015. Slide 7, Industrial Automation. Industrial Automation net and underlying sales increased 5% in the fourth quarter, with North America up 12%, Asia up 5%, Europe and Latin America down 2%, and Middle East and Africa down 9%. Demand for our capital goods continued to improve with mixed trends across markets and geographies. All businesses grew except for motors and drives, reflecting short-cycle economic weakness in Europe. Strength in North America was led to over 20% growth in hermetic motors business. Asia benefited from continued strength in China, particularly in the power transmission and electrical distribution businesses. Strong interest has been received in the power transmission business, and a decision is expected by end of calendar year. Very good market conditions are expected in the near term with favorable momentum in North America and Asia and soft demand in Europe. Next slide, Network Power. Network Power underlying sales increased 1%, with North America up 1%, Asia down 3%, Europe up 7%, Latin America down 2% and Middle East and Africa up 9%. The divested Artesyn and Connectivity Solutions businesses deducted 20% and currency translation deducted another 1%, for a reported sales decrease of 20%. Data center markets have gradually improved globally. Strong growth in Europe benefited from a large project in Sweden, along with better market conditions in North America and modest growth in Asia. Telecommunications infrastructure investment slowed in all geographies, declining at a double-digit rate after strong growth in the third quarter. It was a solid finish to the year on margin for the segment, up 400 basis points sequentially. As mentioned previously, we have taken that cautious economic outlook in Europe and Middle East and Africa during the next 2 to 3 years. And as a result, we have recognized an impairment charge in the Chloride business that is not reflected in the segment results. Business conditions are expected to remain mixed, with gradual improvement in the data center business, and inconsistent demand in telecommunications markets in the near term. Slide 9, Climate Technologies. Climate Technologies net and underlying sales increased 7% with North America up 7%, Asia up 8%, Europe down 3%, Latin America up 17%, and Middle East and Africa up 25%. Growth was strong globally in the air conditioning business, led by strength in the U.S., with residential up over 20%, reflecting demand driven by upcoming regulatory changes. U.S. commercial markets improved as well. International air conditioning demand was mixed, with strength in Asia, Middle East/Africa and Latin America, partially offset by declines in Europe. The refrigeration business grew moderately, led by continued strength in transportation markets. Demand for sensors and controls declined moderately. Segment margin declined with an unfavorable mix, higher investment spending and customer accommodation expense related to a manufacturing process improvement. Market conditions are expected to remain favorable with growth momentum in North America and Asia, while regulatory demand will slow. Commercial & Residential Solutions on Slide 10. Commercial & Residential Solutions net and underlying sales grew 5%, with North America up 7%, Asia up 3%, Europe down 2%, Latin America down 5% and Middle East and Africa down 22%. Strong demand in North America more than offset the slight decline in international markets. The growth was led by the professional tools, wet/dry vacuums and food waste disposer businesses. Sales increased slightly in the storage business. Segment margin remained strong at 23.2%. Solid trends in residential and commercial construction markets in North America are expected to continue, supporting a moderate growth outlook for the next year. Next slide, 2014 summary. Fiscal 2014 net sales declined 1% and underlying sales increased 3% with emerging markets up 4% and mature markets up 3%. Gross profit margin, again, reached a record level and EBIT margin of 16.5% expanded 50 basis points. EPS, excluding charges of $3.75, came in above previously communicated expectations on the strong year-end close. Emerson completed the 58th year of consecutive dividend increase supported [ph] record operating cash flow, with a payout ratio over 60% for the fourth consecutive year. Next slide, 2014 performance versus plan. Most financial targets were achieved or exceeded in the year, with gross profit margin and operating cash flow ahead of plan, EBIT margin [indiscernible] plan, and earnings per share just above the midpoint of the range. The solid operational execution of return [ph] , lower-than-expected macroeconomic growth as emerging markets, excluding China, struggled to maintain economic momentum falling short of expectations. Next slide, 2015 outlook. Underlying orders growth of 9% in the fourth quarter drove year-end backlog to a record $6.7 billion. The global macroeconomic trends mixed, but gradually improving. There continues to be solid momentum in the NAFTA region and China, with balance of increasing uncertainty in Europe and some other emerging markets. We're planning cautiously for global gross fixed investment of 3% to 4% growth next year. Based on current business conditions, the following is expected in 2015: underlying sales growth of 4% to 5%; reported sales change of 0% to 1%; reflecting a 2% deduction from currency translation and a 2% deduction from the potential power transmission divestiture. Modest profitability improvement is expected as well. Business segment and other financial metric forecasts will be provided at our Annual Investor Conference in February 2015. Additionally, the first quarter 2015 dividend has been increased 9% to $0.47 a share, equivalent to an annual rate of $1.88 and representing 44% of 2014 free cash flow. With that, I'll turn it over to David Farr.

Thank you very much. First, I want to thank everybody for joining us today. We truly appreciate your interest and your support, as we continue to invest, grow and enhance the value of Emerson's long-term sustainable value. And as you all know, I have a strong focus at this company on giving money back to our shareholders. In 2014, we ended up passing back to our shareholders almost $2.3 billion, $1.2 billion of dividend and $1.1 billion in share repurchase. A focus on this Corporation to generate cash, invest that cash for growth and give the money back to the shareholders that we do not need. Today, the board did increase our dividends per share, as Pat just stated, to an annual run rate of $1.88 versus last year's $1.72. We had a very strong cash flow year. And as our targets are set up for dividends, we look at 40% to 50% of our dividend payment coming out of free cash flow and last year's free cash flow almost an all-time record, we made the decision to pass back more money to our shareholders and increase dividends to $1.88, starting our 59th straight year of dividend increases for our shareholders. As I look at -- I want to thank the operations for their strong operational performance across the board. As in any company of this size and complexity, you have some pluses, you have some minuses, but in total, the team worked hard, and they delivered. They delivered a very strong sales growth. They delivered a very strong orders growth, strong cash flow and conversion relative to their programs that we've been investing in, in the last couple of years. So we see good momentum, as we move into 2015, which we'll talk about. But the business leaders, the presidents, the global operational leaders and the corporate executives that make things happen here at Emerson got the job done, and I believe in a very uncertain environment -- global economic environment, delivered record levels of profits and earnings and cash for our shareholders. As Pat mentioned, he has given up on me, and he will be stepping aside here at the end of this calendar year, moving to Asia, working for Climate Technology. Pat has been a lot of fun to work with. Pat's had the joy of going through ups and downs of this marketplace, and my mood's up and downs and managing shareholders. And we truly appreciate what he's done for us and his insights, and we wish him well as he moves on to his next role with Climate Technology located in Asia. With that, we're bringing a senior-level player in, a relief pitcher, Craig Rossman, almost 20 years with the corporation. Craig worked for me at one time in the process world, then moved him over somewhere else, a couple of other divisions, came out of Therm-O-Disc. He's coming in from a business leader -- a business perspective. So he'll have a lot of background in business. He's not quite used to the corporate people here, and he'll have a fun time learning what it's like to work in St. Louis. But we'll welcome Craig, and he'll do a great job, and he'll bring a different perspective to the business world, given all the businesses he's been involved with in his job at Emerson for the last 20 years. As I mentioned -- as we look at the company and look at the performance this year, obviously, we can always say there's some good things, and I can equally say there's some bad things. And I know my shareholders out there, and investors are out there will gladly point out the goods and the bads. They're real good at that. But I look at the company today from where we are and where we started. And I say the company is in a stronger position today than when we started this fiscal year. We grew orders nicely. We made strategic investments. We did a couple of strong acquisitions, got a couple of divestitures done, we're in the middle of one right now, and hopefully we'll get it done sometime in the second fiscal quarter of 2015 in Power Transmission Solutions. We've improved the order run rate. We've improved our margins. We improved our profitability. We had a -- without the Chloride charge, we had [indiscernible] the return on total capital over 20% after-tax. We had a record level operating cash flow, and we had a near record in free cash flow. So operationally, yes, some good, some bad, but in total, they got it done, and they did a great job in creating a stronger company, as we go into 2015. 2015 is going to be an interesting year. We go in with a record level backlog. We go in with strong orders. We go in with record levels of profitability. We go in with strong investments. We have a very good U.S., Canada and Mexico marketplace. The NAFTA region looks very solid right now. However, this year, versus last year, we're going into a situation where Europe is weakening. Europe is clearly heading down potentially for its third recession since the 2008 peak, which is a concerning issue for global companies like Emerson and global leaders like myself. One of the reasons why, as I looked at the Chloride acquisition we made several years ago, it was hard to justify the good will out there, given the fact that I'm really concerned about the European environment for the next several years. So concerned about Europe. Well, the concern about the Eastern Europe, Middle East/Africa, they have a lot of issues going on in those regions right now, and I would say the wind has turned from our back to our face in the last 6 months, and I would expect those to be in our face for the next 6 to 12 months. In South America, I'm concerned, driven by my concern over Brazil and Venezuela, Chile, Argentina, concerns there. I think those economies are still struggling and will not give us a whole lot of growth in 2015, but will give us some growth, but not to a level I would expect in a normal economic cycle down there. Asia Pacific, in general, we had a decent year. China was very strong for us. China, we grew 7%. I would expect China to grow again next year, but not at the same level, probably closer to 5%. I expect Southeast Asia, India -- in India, India and then also Australia, to have a decent year for us in growth. But net-net, a slightly more positive global economic environment for us to operate in, though there is also more uncertainty, as I look at today's economic environment than we faced as we started this fiscal 2014. I look at underlying sales to be up slightly, in the 4% to 5% range. I see improvement in our profitability, and I see probably most likely cash flow being flat, more function around what happens with our growth rates and also what happens relative to just the overall performance of the growth around the company around the world. But clearly, running at record levels, high levels of cash flow. We'll clearly give a lot more color in the markets, as we always do in February, where we break down and give you a different underlying growth rates, what we see out there. But in general, total, I see a little bit better growth. I see a lot more concern than I did last year at this point in time. But I feel good about where we're going into with our programs, investments, and I feel good that we'll start 2015 on a good, positive foot. And clearly, we'll talk about that, as we get into February time period. We will clearly give you a lot more inputs in February. We don't always give guidance in November, contrary to what people believe. We sometimes give you pieces of the action of what's going on, but clearly, with the uncertainty that we see around the world, in particular right now in Europe, Eastern Europe, Middle East and Africa, we're being cautious. We're being concerned, and we're being careful about what we're going to say. We'll get better clarity as we move into the next calendar year, as we move into that February time frame. Albeit, we seek better underlying growth at the top, we see margin improvement, therefore, we'll see some improvement in earnings, and we'll talk about that in February. But in the end, a solid year. Got there a little bit differently than I -- we originally thought. But it the end, it finished very nicely, very strong, good earnings per share, good cash flow. And you also noticed on the cash flow conversion, free cash earnings, we did 110% this year on top of last year's 115%. So good, high-quality earnings and from a cash flow generation and a net earnings standpoint. So I feel good about what the operations delivered. I want to thank them one more time, and we'll turn it over, to the call -- to the shareholders out there, I'm sure they have questions. They always do. And I'm sure they'll have questions that I'm not going to answer, but we'll obviously talk a little bit about those. So with that, I want to thank everybody for delivering a strong finish to 2014, and looking forward to a strong start to 2015. Thank you very much.

[Operator Instructions] And we'll take our first question from Josh Pokrzywinski with Buckingham Research.

So first -- I guess, first and foremost, on the correction in oil prices that we've seen. Obviously, you guys are carrying high levels of backlog. Order intake remains strong. What kind of feedback are you getting from your customers on any sensitivity to some of these projects, if oil stays down and what kind of duration would it need to stay down before you see risk or your customers see risk to some of these bigger projects?

It's -- I mean, clearly, there's not one simple answer here in this, Josh. It is a concern to us. It's a concern from our customer base, when I talk to them. There is not just one number. But clearly, as this price of oil drops down into the 70s, there's a concern that they will start slowing down some of the incremental new projects from the standpoint of what they do next. So my concern will be, as their concern is, that the price of oil continues to slip down into the 60s, into the 50s, and it goes that low, that clearly, that would cause them to really start pulling back on their spending, which will obviously impact us in a significant way. We'll see it -- we'll start seeing this in the, I would say, early 2015 calendar quarter, if the price of oil stays down. I think it needs to stay down for at least 30 days to 60 days, depending on the type of -- the oil and gas, which they're going after. But clearly right now, with this downward slope in the price of oil, it is a concern relative to our core businesses and where the money is being spent. So a little bit nervous about that at this point in time, and a lot of volatility. So flags are up and we're going to watch it very carefully. And if we have to modulate our spending and things like that, we'll obviously, clearly, start doing that. But it won't take long. We'll know early on in that first calendar quarter where things are trending.

Got you. That's helpful. And then, you mentioned in your prepared remarks about capital return to shareholders. I guess, one thing that you guys have always wrestled with is some of the trapped cash. Been discussion that if certain things go right politically tonight, that maybe there's some tax holidays and repatriation. Have you guys thought about what you might do if you get better access to the international cash?

We'd bring it back, and I would say the number would have a 2 in front with a B in the back side of it. And so we take that money, we bring over $2 billion back into the United States. And we invest it here in the United States. I would give some back to our shareholders and we, internally, we invest it. And so clearly, that would be a positive, positive source of cash for U.S. companies, if we're able to bring that back at a reasonable tax rate. Let's say they have a 5%, 6%, 7% -- 7% tax rate on that, you'd see that money come back in into the United States and get invested in this country and passed back to our shareholders.

You think bulk goes to internal investment? Or back to shareholders? Or is that a nebulous question still?

That's a nebulous -- yes, yes, that's a nebulous question. I'll be very, it's -- some of it will go internally. I mean, obviously, what we see right now is the stronger North America, which means there's going to be more investments. And so if I had that cash versus going to a commercial paper market, clearly, I'd use that cash to invest. It's not going to drive incremental investment per se, but it will obviously -- we know that money will go to use here in the United States because of the strong U.S. environment we see right now, for both growth and investment. So it would be a good thing for the U.S. economy because you invest the dollars into capital, it's going to create jobs.

And we'll take our next question from Rich Kwas with Wells Fargo Securities.

On Process, what's the profile of the order base at this point between upstream, midstream, downstream? How would you characterize that?

I couldn't give you the number off the top of my head. I -- it's not a number I'd see. I mean, clearly, we're involved in all aspects of that, but I don't have the number off the top of my head. I mean, some of the large projects, obviously, are upstream, from an investment standpoint, relative to go in and get the gas and go in and get the oil. But right now, let's say, we're still predominantly downstream across the board.

Okay. All right. And then, when you look at CapEx, the -- almost $770 million this year, I mean, are you expecting a slight increase next year? How are you thinking about spending?

We're looking at -- right now, our target all year long was going to be somewhere around $775 million to $800 million. We got a little bit under $800 million at $776 million. I would say, next year, the target is going to be somewhere in the $800 million, $825 million. We still have some investments we're making on our global reach and other investments. So at this point in time, we're looking to spend around $800 million to $825 million. That's about as close as I can call it.

Okay. And then, on Climate, with the pull-forward here with the regulatory stuff, I assume that's going to hit mostly in the fiscal Q1, maybe a little bit in the calendar Q1. But how would you characterize the growth rate here? I would assume you'd see a pretty strong growth number here in the fiscal Q1 number -- quarter?

The pull-up due to the efficiency change is going to place on January 1. The production has to be produced by our customer, the carriers, the terrains, the [indiscernible]. It has to be produced by 12/31/14. So we'll see all -- our pull-up impact will be done within -- by the end of November, early December. So it will be all finished. And then, we'll start seeing the payback in some of that -- the drop-off in our second quarter and our third quarter, as we go into 2015, which would be the first and second calendar quarter. And that's how we're going to see it at this point in time. And the overall growth rate, I think -- we'll talk about it. But the overall growth rate right now we're looking at, I mean, if you look through the cycle, it looks to me -- I think it's going to be mid to upper single-digit for North America this year. It's the best I can tell. It's a function of what happens to some of the housing, but right now, it's a, 5% to 10% type of range.

Okay. And then helps your leverage here in fiscal Q1, if I -- in terms of climate, right? You should get some pretty good operating leverage.

Yes, that would clearly help us from our -- yes, the cost absorption standpoint, we're usually -- at this point in time, our plants are at the lowest level. And then, we're starting -- now we're going to be running at the highest level. And then, unfortunately, will give some of that back in the second, third quarter because of what happens as demand goes down. But that's what's going to happen. It's going to be a little bit different forecast in our view of Climate Technology in 2015.

Our next question is from Mark Douglass with Longbow Research.

[indiscernible] years of starting -- what's that?

No, go head. I'm sorry, I didn't know. I thought I might have lost you, but go ahead.

Okay. After a couple of years of starting the year thinking we're going to go one direction and then it tends to slow, you said in your prepared remarks that your 3% to 4% GFI growth is considered conservative. I mean, in light of what we've been seeing and your comments on Europe, it doesn't feel particularly conservative. Can you kind of square that circle a little bit?

I mean, if you look at -- [indiscernible] forecasts out there are still higher than those numbers. And so I -- we've been trying to figure out how to make adjustments. So I mean, if you look at our forecast right now for, what I would say the fixed investment around the world, it's still -- the number would still be higher than that number. So that's where I'm coming from. And obviously, Europe is definitely weakening and I'm concerned about that, but just the underlying forecast that I see right now is a little bit lower than the economists would say.

Okay. Looking at Process and the margins, a couple of things. On the acquisitions, Virgo, Enardo, were they dilutive in the year? And if so, by how much? And then, next year, qualitatively, do you think your investment spending keeps pace with sales growth? Or would we expect at least a little bit of margin expansion?

We'll let Frank -- Frank's got it.

Mark, the acquisitions were not dilutive. They actually were slightly accretive even after the purchase accounting charges that we took when we first acquired them. So they were good high-margin companies that we bought.

And what was the second part of that question, the capital spend, you said?

No, no, no. On your investment spending, within Process, would you allow Process margins to expand next year? Or do you think investment -- you've had a lot of investment spending in Process and...

Yes, I would say, right now -- Process is running, they're running at pretty good margin level. We're going to -- we'll look at, obviously, the mix comes into play a lot here. What markets are up and down, but their growth investments were going to be pretty well -- I would say a little -- their growth investments going to be a little less than the sales growth. And then, a function of the margin, slightly plus or minus, about the same, there's not going to be much change there. It's really a function of what mix is -- is North America, good? You have a couple of big projects. So it's always hard to dial in the margin for Process, but Process is going to be running at higher levels of margins with their growth investments trending down just a little bit slower than the underlying sales growth.

Our next question is from Julian Mitchell with Credit Suisse. Julian Mitchell - Crédit Suisse AG, Research Division: I wanted to say thank you to Pat for all the help. In terms of the overall kind of incremental margins, you've said before that at 4% organic sales growth, you should get a very good operating leverage. And I guess, your guidance for the year ahead is for 4% to 5% organic growth, but the leverage, it doesn't sound as if it's quite there. So maybe just explain what's happening there to drive only kind of modest earnings improvement?

One, we're looking at continuing to invest in the businesses across the company. And secondly, right now, when I talk about stronger leverages, you get a little bit as you get forward and you get, obviously, greater as you go up towards 5-plus percent. So right now, Julian, I'm a little bit nervous going back to the questions we've had about some of the mix around the world and some of the oil and gas investments. So we're being -- we're just being very cautious about what type or level of profitability we see at this point in time and not make commitments on the profitability that we don't feel we can deliver. It's just a cautious outlook and concern about and what we're seeing out there, as we go into 2015, which is a completely different world, in my opinion, than we -- when we saw -- when we saw going into 2014. Julian Mitchell - Crédit Suisse AG, Research Division: Got it. And in terms of the overall incremental investment, 6 to 12 months ago, you talked about $110 million step-up company-wide in 2014. Just wondered where did that number end up for the year as a whole, and what are you initially thinking for fiscal '15 on that extra spend?

It was within a couple of million dollars of that. I mean, we don't track it that tightly. It's about the same level, when I look at where the money was spent, and I would say that, that number is going to go up pretty much in line with what we're seeing right now for sales. So if sales are going up 4% or 5%, we're looking at probably increasing that number 4% to 5% next year, incrementally. We're looking at some key programs, which are multiple-year programs, to make sure that we invest in those programs at this point in time. And we move it around the various businesses to make sure we're making the right investments. Julian Mitchell - Crédit Suisse AG, Research Division: And then, lastly, just thinking about the earnings growth year-on-year, you've given us sort of an indication of where you're thinking for the year as a whole. But is it fair to say that you'll start the year at a much stronger rate than for the full year? And then you're kind of embedding some tail off in the second half?

I would expect -- right now, we're expecting the year to be -- I would hope to see in the first half that it would be a little bit better than the total year, but I do expect a slowdown in some of the businesses. I'm a little bit nervous relative to some of the longer-cycle business if the price of oil continues to weak -- go down, and we start seeing the knock-on effect of some of the economies around the world continue to weaken. So my concern is that we will have a better growth rate in the first half and it will definitely weaken in the second half.

Next, we have Andrew Obin with Bank of America Merrill Lynch.

Just a question. So you outlined how 2014 played out versus plan by geography. And I was just wondering, given that you're repositioning the company to sort of focus on new areas of growth, the fact that U.S. continues to be one of the fastest-growing areas, does that accelerate anything internally in terms of how you're thinking spending money internally and which businesses to push forward?

It did last year. We started accelerating North America spending about 18 months ago, and we'll continue to do -- we'll continue to invest more in North America. That's therefore -- if we were able to bring some cash back in, you'd see a lot of that cash get invested in North America. So I would say -- but I see right now, the NAFTA region looks very good here for the next couple of years. And so we're continuing to increase our investments in the NAFTA region. And some regions, we're actually scaling back, installing those growth rates down or maybe what I'd say disinvesting a little bit.

But the question on North America, are you thinking about accelerating versus the original plan? Or are we still on track versus what we thought?

We're pretty well on track. I don't think North America is -- North America is trending pretty much like we thought it would trend. I mean, we saw this coming, and I'd still think it's going to keep trending that way. So from our perspective, we're not going to accelerate any faster than we already had laid out the last couple of years. So we're pretty well right there.

Can you -- I don't know if you can talk about it, but what's your underlying assumption about the run rate of business in Russia over the next year? I was assuming it's -- and I'm not asking you to comment on what's happening in Russia, but what's built into your forecast?

Our forecast is Russia will be down next year. We've had a decent run, but obviously -- clearly, our business will be impacted by what's going on from all of the restrictions being put on Russia. So our forecast right now is Russia will be down in 2015.

But do you make any assumptions about the run rate of the projects in Russia? Or this is just your compliance with the sanctions? Or maybe we can just simply take it offline, it's getting too complex? But any more color beyond that?

No, we just -- we just look at where the money investment is going and what's going to happen, and we know what projects we're involved with. It's not -- we can figure that out. It's nothing to do necessary -- it's just, we see what's happening in our customer base and the lack of cash and it reached some of the restrictions and sanctions. And so we have a feel for what our business is going to do next year, and it's going to be lower.

Our next question is from Jeremie Capron with CLSA.

This is Grace Lee sitting in for Jeremie Capron. I have a -- we have a question for Network Power. It seems that Network Power seems to have the weakest outlook for 2015, not so surprisingly. So I'm wondering whether you could tell us how you think about the attractiveness of that asset in going-forward basis? And also, it would be great if you can share some of the metrics that you track in order to evaluate that business?

We track the same metrics we track that business. We track all businesses. Growth, profitability, cash and returns. So those metrics are the same ones. And from my expectations right now, Network Power has continued to make progress. It's clearly not as much progress as we would like to see. We have certain markets which are struggling and particularly, I'm very concerned about the European and Eastern Europe and Middle East. So yes, I'm concerned about it. I look for decent growth next year, and I look for improvement in profitability. So right now, I have solid expectations. And as I've told the outside world, we continuously evaluate that. And at this point in time, I still believe, over the next couple of years, we can create incremental value for our shareholders from where we are. So that's where we sit.

I see. Just one follow-up. If the business doesn't pan out in a way that you expected at this point, would you consider some aggressive changes in the portfolio structure?

The answer is yes, we do that -- yes we do that at Emerson. We do look at businesses -- getting out of businesses, and if we feel like they cannot create the value for our shareholders, Emerson is not reluctant to do that, and we've divested a lot of businesses under my 14 years of CEO leadership. And I guarantee you that we will continue to evaluate that, and we'll continue to evaluate all businesses, if they're not going to create value for our shoulders, we'll get out of them. It's a part of doing business.

Next, we have Steve Tusa with JPMorgan. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: So just first on Climate. What -- could you just describe what you mean by customer accommodation expense?

Yes. Very easy. We changed a coating on our motor to reduce rust inside the compressor. And by doing that, we created a chemical reaction within the new refrigerant and the new process and with a new electronic expansion valves. It created a clogging. So they had some failures out in the marketplace. And so we've had to work with our customer base to figure out how to compensate them, and so that's what we do. And we had to take a charge in the fourth quarter to -- in anticipation of what that's going to cost. But while it's not around, actually, a quality improvement in the product end, it clearly -- it backfired a little bit with the new expansion valve, electronic expansion valves, and also the new refrigerant chemicals. So it's one of the things we tested for and we missed it. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: And then, that's a resi dynamic?

Yes. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Resi related?

Oh, yes. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. And then, just on the geographic guide. I mean, you talked about China being a little bit weaker, Southeast Asia being a little bit better, Europe being weaker. I mean, it looks like that incrementally, there are not too many geographies that are actually getting better this year. So to get from the 3% to the 4% to 5% underlying, is that just backlog conversion? I'm just trying to reconcile that.

I think the NAFTA region, which last time I saw North America was still our largest market. I'm actually having a little bit faster growth rate next year. So that's how I square the circle. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: I got it. And then, one last question, just on the -- on kind of the order flow here. You talked about Process potentially slowing down. You're obviously going to have the tougher comps in Climate. I mean, is it possible that the orders have been pretty strong up kind of the high single-digits here? Is it possible that in the second quarter, that those orders could go negative because of those comps? Or is there enough going on in the rest of the business where the orders can kind of hold up here, in a reasonable way?

I mean, it's always possible -- Steve, it's hard for us to map out the trend line of orders, but if you look at the order trend last year, I would say that there is a chance that we can have a negative 3-month roll or negative quarter. I'd say the answer is always positive, Steve. I mean, always, potentially yes. I haven't mapped them out per se, but if I look at the trend line knowing where it came up, I would say there's a chance you could see that, just like you potentially could see it in the -- you could see it in the -- the next fourth quarter could have a problem, too. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: One last quickie. You gave an EPS range last year of 4% to 7%, the margin comment is slight improvement. Could you maybe just provide a little bit of context around kind of EPS dynamics and if there's some moving parts here around pension and there's a little bit of share count benefit all that kind of stuff...

It will grow next year. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Earnings will grow next year?

Earnings will grow next year. I'm not going to give any more, Steve. Earnings will grow next year.

Our next question is from John Baliotti from Janney Capital Markets.

I just had a -- if we kind of go up in altitude, I was just -- if you take a step back, I know we, as a practice, take out onetime charges, nonrecurring events to look at the underlying business. But as you pointed out being CEO for 14 years, there's been a number of these, I guess, events, over the last couple of years, deals that were done before you were CEO. And I'm just curious, in terms of going forward, what kind of governors have you been able to put in place? So, to mitigate the risk. Obviously, global things change, there's not a lot you can do about that. Currency moves around, but given what you've learned over the last 14 years, what have you added to the due diligence process as you look to deploy capital going forward?

I think a couple of issues from the standpoint of, I would say, from different technologies. I think we're looking today at more of an industry that will be, obviously, less volatile and from a technology standpoint. There's always been a trade-off of how we tried to figure out how to drive a little bit faster growth and sometimes you take a little bit more risk. And so I think we spent a lot more time around that issue, John, after the impact of the charges which have been very painful for the management team, including myself and the board. So I -- we spent a lot more time around that risk and the volatility and the reward or the downside from that standpoint on the charge. And secondly, I would say that if you look at where we've been making acquisitions the last several years, we've been focusing more on the industrial, the Climate and the Process sides. So I think we've changed our profile a little bit to where we've been making our acquisitions.

Okay, great. And just as a follow-up. On -- obviously, currency is beyond your control, but what kind of, just academically, what do you think on a reported revenue base, if we used the context of modest improvement in margins, what would you see as a, let's say, as an inflection point in reported growth that would -- given the investments you've made in the businesses over the years that would kind of step that up? In terms of the [indiscernible]...

Not from a currency standpoint. You just take an underlying margin profitability standpoint...

Yes, so if you're saying 4% to 5% core growth. Obviously, currency is nothing you can control, so you lose a couple of points there. You're going to lose a couple of points in divestitures. But if including those things, you were able to have a reported growth of a of couple points higher, how much higher do you think -- would you need to get to the 4% to 5% on a reported basis to get a nice -- a more significant improvement in profitability? Or could it be a little bit less?

It's gonna to be more in the 5% range before to get that type of leverage point from the standpoint of what we see at this point, given where we are. Given we're running at profit margins that, I would say, last time I saw were record levels. And so I would say that we have to get above that 5% range to really have a nice leverage point, but it's -- just from the standpoint of -- unless I wanted to dial back the long term investments, which we have not done because we feel quite strongly that over the long term making those investments will strengthen our position in the market leadership, which we are today. We're a stronger company than -- today in the short term, thinking I could cut, I could cut, I could cut, and I think, then, I would have a much weaker company and then you have a whole different situation in your hands.

Right. And so obviously, the working capital comes down through that, your cash flow, all those things are -- positively benefit from that?

Yes.

Our next question is from Steven Winoker with Sanford Bernstein.

This is Peter Lennox-King on for Steve. Just a couple of questions. The first one being on -- could you talk about the release of your backlog and in terms of timing across the segments and how that links to expectations for revenue growth given that you were talking about H1 probably being a bit stronger than H2 in 2015?

I -- from the perspective of Network Power backlog, it's historically within -- we expect that backlog to come out in the first and second quarter. I mean, obviously we also expect the order rate to keep growing, too. So -- and we see it Network Power growing next year. And if the order rate keeps growing, I wouldn't be surprised that the backlog doesn't keep growing because backlog will grow with your orders if you have a vibrant business. On the process side, historically, you would start seeing that backlog be eaten away here in the first half. [indiscernible] would expect that to happen this year. And then, again, it will start building back up as the order pace picks back up in second half of the year. Those are the 2 big backlog players. I mean, Industrial Automation and Climate are smaller backlog and those typically will come out within -- Climate comes out within 2 or 3 months and Industrial Automation usually within 3 to 4 months, 5 months.

Great. And could you talk about -- have you been seeing any changing in pricing -- price versus [indiscernible] in the order book?

No. Pricing has pretty been -- pretty consistent all year long. From the standpoint, our price cost has been pretty consistent all year long, our net material inflation. And that tells you that the marketplace is not growing all that rapidly. And I would say with the -- on the flip side, the oil price dropping, that'll obviously put -- help our net material inflations. And so, right now, we're slightly positive in price and slightly negative on net material inflation, so we're doing okay. So the price cost is fine. And we haven't seen any changes there.

And then, finally, could you -- do you have any early returns on order trending by segment through October that you could share with us?

No. Nothing yet. Nothing at this point in time.

Our next question is from Nigel Coe with Morgan Stanley.

This is Jiayan, filling in for Nigel. One, just quickly, on the power transmission divestiture, would you guys use the proceeds to buy back shares, that what you usually do? And if so, do you effectively offset a dilution by year-end '15?

The answer is yes. We are expecting to do that, and it will -- based on what we're -- based on the expectations that we will -- we want to make those dilutions by the time we finish the fourth quarter. So yes and yes.

Okay, great. That's helpful. And a second one, just a quick follow-up, on climate margins. So in the press release you called out some unfavorable mix impact. Just wondering if that's related to the [indiscernible] previewed? And if so, should we expect this headwind to continue into 1Q '15?

No, I think -- there are 2 things that are going on in the margin in the fourth quarter. We had -- our Asia business was very strong, and it is slightly lower-margin. And our North America, obviously, with the customer accommodation, that hurt us from a margin standpoint. So that's been -- that's assuming we've got everything sized like we believe we have it sized. That's behind us now in the fourth quarter. And so I think from a profitability standpoint for Climate next year, we'll probably look at getting back to where we were trending on a positive way and so we should be fine. Maybe a slight improvement in profitability at Climate, based on a total year number.

Okay, great. Just lastly, can you share some initial thoughts on gross investment and restructuring spending for fiscal '15?

The growth investments will probably be up from the -- up, I think, it was 110 last year, it will probably be about like 4% or 5%. Restructuring spending will be down slightly. I'm talking about -- I mean, nuance. What did we finally spent last year, Frank?

$52 million.

$52 million?

Yes.

So I would look at -- if I pick a number, I'd pick $50 million, nice round number. The restructuring next year would be $50 million. I mean, it could be -- if we had something pop-up, it may go to $60 million. And so right now, maybe $50 million to $55 million, something right around there. So was it $63 million?

No, it was at $50 million.

Okay, $50 million, okay. [indiscernible] $55 million. Okay.

Our next question is from Jonathan Wright with Nomura Securities.

So in the release you called out a significant favorable currency comparisons in the Process Management segment. I was wondering how much of the 130 basis points of margin improvement there was from the currency?

It was a pretty significant portion of that in the quarter. We had a lot of current -- transactional currency inside of the businesses. So it was a significant portion of that improvement.

Was that related to the weaker euro? What's -- what drives that?

Partially, it relates to the euro, but it has to do with various contracts they have in place with customers. So it's really a number of currencies, not even predominantly the euro, but the A dollar, the Sing dollar, the Brazil, it's a number of currencies where they have contracts denominated into third currencies. It's kind of a complicated accounting thing, but it is -- it just flushed through to be a positive in the fourth quarter.

If you go back and look at it -- if you go back and look at the quarter, Q2 was a big negative. So it moves around and it's almost impossible to forecast.

And that's a one-off impact then we shouldn't expect stronger U.S. dollar over the first 3 quarters of next year to have a similar impact on Process margins?

I don't think so. We don't plan on it. It really is a function, as Frank was saying, it's a function of where we get the contracts and which currencies move against us or are positive both ways. And sometimes, some years, it hurts us, some years that help us, some quarters that helps us, it hurts us, it's -- it just had to be one of those quarters where the contracts flipped the right way for us. And it's almost impossible to forecast.

Okay, great. And then, on the corporate line, the first half of 2014, you had a number of one-off items in there. The acquisition costs in Process, for the Process acquisitions. The others and restructuring charge, is there any reason or is there any offsets to a sort of a $50 million reduction in corporate, in 2015?

Yes. We'll have some headwinds that partially offset that in '15. Pension will be slightly higher, we'll have equity comp, which will be slightly higher. So we wouldn't expect to see all of that flow through in '15 versus '14.

Okay, great. And if I just squeeze one more in, if you don't mind. On Industrial Automation, you called up the hermetic motors business up 20% plus, but overall motors and drives down. Is there any -- I know that business is more levered to Europe, but is there anything else going on there, any sort of competitive dynamics sort of weighing on motors and drives as a whole?

No. It's primarily driven via the Middle East and Western Europe. They have a very strong presence there. It was a very difficult marketplace for them. And that's what caused them.

At this time, we have no further questions in our queue. I'd like to turn it over to our speakers for any closing and additional remarks.

Thank you very much. Again, I want to thank everybody for joining us today. Again, thanks, Pat, for the last several years working with us, and I'm looking forward to working with Ross. And appreciate everyone joining us, and thank all the operational people out there delivering '14 and looking forward to have another strong 2015. Thank you.

Ladies and gentlemen, this does conclude today's presentation. We appreciate everyone's participation.