Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Emerson's Fourth Quarter and Full Investor Conference Call. [Operator Instructions]. This conference is being recorded today, November 3, 2020. Emerson's commentary and responses to your questions may contain forward-looking statements, including the company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson's most recent annual report on Form 10-K as filed with the SEC. I would now like to turn the conference over to our host, Pete Lilly, Director of Investor Relations at Emerson. Please go ahead.

Thank you, and welcome, everyone, to Emerson's Fourth Quarter and Full Year 2020 Earnings Conference Call. I hope everyone is staying safe and healthy. Today, I am joined by David Farr, Chairman and Chief Executive Officer; Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer; Lal Karsanbhai, Executive President of Emerson Automation Solutions; and welcoming Jamie Froedge, our New Executive President of Emerson Commercial & Residential Solutions. As usual, I encourage everyone to follow along in the slide presentation, which is available on our website. Starting with the cover slide. Despite the overarching challenges of COVID-19, Emerson has continued to invest in key technologies and solutions for future growth and value creation. We are excited to welcome OSI Inc. to the Emerson family, a leading provider of software-based technology for advanced grid management. Additionally, we also welcome Progea Group to Emerson, a leader in software-based HMI, SCADA and analytics solutions. We will also be -- we will also review other important strategic 2020 acquisitions later in the call. Now please turn to Slide 3. Similar to last quarter, I'd like to briefly highlight the Emerson Corporate Social Responsibility report, which is available on our website, emerson.com. This document reviews in detail many of Emerson's aspirations and accomplishments within the environmental, social and governance realms. Many of these important topics remain at the forefront of the national and international conversation. As problem solvers at our core, Emerson strives to advance the discussion, share our own progress and strategies and also be a valued resource for our customers as they embark on their own individual sustainability journey. Emerson takes very seriously our role as a critical enabler and partner for digital monitoring, measurement, control, optimization and efficiency management across our broad customer base. Fundamentally, we believe that this role and responsibility…

Thank you very much. Thank you very much, Pete. And Jamie, welcome to the group here.

Thanks, David.

And Frank, and obviously, Lal. But Chart 21 is clearly the underlying orders forecast, and I'll talk about that in a second. But first, I do want to welcome everybody from the investor world, the shareholder world, our employees, thanks for joining us today. And thank you for your continued support and engagement over this quarter and the total fiscal year. And as we all know, it's been a truly unusual fiscal year for this company, but I think this team has risen to the challenge. I want to make a special call out to the global Emerson employees, the leadership team and our new members from acquisitions this year and thank them for their commitment to safety, our customers, our fellow employees and shareholders and community as we return to work starting in March and throughout the years, we continue to reengage and be successful as a company. I want to appreciate -- I appreciate everything you've done. I want to thank you for the job you did. And thank you for everything you did over the last 8 months as we got back into our offices, as we got back in the manufacturing plants and we opened and produced product for our customers. I want to thank all of you very, very much. I know that this was not easy to do, but you all did it. You rose to the challenge. And you delivered to our customers, our shareholders and the communities and the fellow employees. As we know, 2020 was an exceptional year in sales, profit margins, earnings and cash flow. Our free cash flow to earnings, our conversion was close to 140% this year. It's our 64th year dividend increase. Our dividend free cash flow came in at 47.5%. As many of you know, we…

Thank you. Thank you, David, for those words. It's very meaningful for all of us in the business. It was an extraordinary year as you described, and I'm so grateful and humbled by all the efforts and the results that this team delivered. Very proud, as you said. A few words, if I may, on 2020. The second half of 2020 was weaker than we expected when we first talked, David, back in April as we reset the plan. And we did not see that acceleration in orders in the second half, in the latter half of the year as we expected into Q4. However, the team did a tremendous job, and I'll call out 5 fronts here: the first being identifying and executing the restructuring programs; secondly, converting $400 million of backlog in the second half of the year, meeting that commitment that we had made; thirdly, growing our life science and medical segment by over $100 million in sales value through the year, that's through participation gains in therapeutics, in vaccine development as well as medical PPE manufacturing; fourthly, stay committed to the digital transformation journey across our business; and then lastly, working very, very diligently on the diversification and software elements of our business, including through acquisition and internal development. So just tremendous work across the business to deliver 26% quarterly adjusted EBITDA leverage and 23% annual adjusted EBITDA leverage on almost $1.5 billion down sales. So great work on the year. Now turning to '21. We do expect 2 additional challenging quarters in the first half prior to turning positive in the second half of the year as we laid out the plan here. So we are watching 3 key leading indicators in the business. First, the discrete industry orders and the inventory levels in the…

Before we turn it over to Jamie, I just want to thank Lal and the team for a couple of things here. One, major effort on the restructuring cost reductions to get -- driving the margins back up, the peak margin improvement and to drive higher margins in 2021 they're going to have, even though sales are still going to struggle for them in the first half of the year. But I also want to say that they made sure they made the right investments. As we had site reviews, as we did talks and had WebExes or face-to-face meetings, we made sure we talked about the new products, the next-generation technologies. We wanted to make sure that we continue to make the right investments. They've got the right monies where they need to be to make sure we did not jeopardize the future franchises within this company. And at the same time, we made some very unique, as you saw, acquisitions that strengthen our hand in many, many core places that we think that will have long-term growth and long-term sustainability from the standpoint of value creation for Emerson and diversification for Emerson. So Lal and your team, a phenomenal job. So Jamie, your first call, I mean, I hate to say Bob Sharp set it up for you. And now you've got a growth, and you just got to keep the plants open and start growing. You've got a growing tiger in your hands. So here it is, let me -- let's talk about it.

Yes. I was in Asia, working with Lal as we were working through the depth of the COVID impact, and it's great to come back here to see that the team put a tremendous number of investments in place, both in terms of improving our operational capabilities and transforming our structures and our business, so that we can have improved profitability as we grow going forward, but they also invest in the technology. And as we go through these charts, I think you'll see a combination of those two things. Looking at Chart 27, we saw a return to growth in underlying sales in the fourth quarter of 2020 across many of our product lines driven by strength in the North America residential markets. We also experienced sequential improvement across our businesses as the quarter unfolded. Trailing 3-month orders in September were 6.4% and will improve to be double-digit as we finalize the October numbers. Residential markets globally typically represent between 40% to 50% of our mix in a given quarter, and North America is by far the largest portion of that. Inventory restocking across residential segments provided -- is providing additional order sales growth opportunities beyond the demand being driven by home sales and home improvement. So I think we're very well positioned for 5% to 6% underlying sales growth in the first quarter. Second quarter outlook in growth percentage is slightly lower than Q1 as we believe the inventory rebuild restocking activities will start to level out a little bit. And the North America A/C strength, we think, could continue potentially into fiscal third quarter, given seasonal trends. We see growth occurring in the Europe, heating and A/C technologies group businesses throughout the year and overall growth for the broader European portfolio returning in the second quarter. And…

Thank you very much, Jamie. Again, I want to thank the commercial and residential organization for the work you got done. Bob, in 2018 and 2019 and the first half of 2020 really got into the restructuring. They kept the investments going. We knew that we return to growth. And they are that. But they have -- the return to growth of major new innovation, major new product portfolio is second to none. And I think it's pretty exciting. The markets are returning. The key issue for them right now is they have several plants within their structure running full out. In the midst of COVID, increased COVID, that's not easy to do. They have plants. They have to keep running and producing at record levels, and we have a major competitor to disappear on the marketplace. He will return, but we don't know exactly when. At the same time, they'll have other industries across their business that will start growing in the second half of 2020. So the team got ready for this. They executed. And I give them high marks. Before I go to Q&A, just want to make a couple of comments here. First of all, 2020 was my 20th year as CEO, a year that I'll never forget. We started out with activism. Then we launched a massive, massive restructuring effort across the company to drive increasing margins in a tough year. And then we just happen to have this thing called COVID-19 pandemic with a resulting recession around the world. But the Emerson team rose to this challenge, and we drove, I think, less down sales than people thought. Our earnings minimization of the decreasing was less than people thought. And we drove increased cash flow, a very strong 2020. Some people say, "Well, what are you going to do for us in 2021?" Well, we had a heck of a 2020. We've got a little bit tougher base to come off of, but we're going to make 2021 a better year." As I move into my final year as the Emerson CEO, I think our plans to drive top line growth, improve margins and earnings and cash flow, as we get into the second half of the year, are very strong and very positive. And we'll be ready to hand this over to the next CEO and his leadership team, and I want to thank everyone for that support. But we've got a tough 2000 -- 2021 ahead of us. But we -- I think we have a lot of confidence that we can deliver improved sales, earnings and cash flow and turn that over to that next leadership team as Mr. Knight get back to me in early 2020. So with that, we'll open the mic for Q&A. So let us have it.

[Operator Instructions]. Our first question comes from Jeff Sprague from Vertical Research.

Congrats to Jamie. Glad they've had the chance to meet you a few years back in Austin. Good luck in the new position.

Thanks, Jeff. Look forward to seeing you again soon.

Yes, absolutely. Well, Dave, I mean, you've been signaling your impending retirement for a while, but you made some pretty explicit comments just there, right? I think, I guess, some of us have nothing better to do than speculating whether you're going to stay around longer and all that sort of thing. So really, my question -- first question is, though, how does this play out? What's kind of the timing of naming your successor? And how long a transition period might there be?

From the standpoint, that's obviously a Board decision. I mean I'm just one member of the Board as Chairman, Chairman of the Board. But as I basically be communicating, I would say that we will name my successor sometime in late 2021, in second half of 2021. In my opinion, there will be very little transition. I mean it's up to the next CEO, does he even need Dave Farr, the old man around. We can hear. People would so many -- okay. Someone came in, and said they can't hear us, but I think they can hear us. They -- yes, I thought so. And so I think that what will happen is what Mr. Knight did to me is I got announced. He threw the keys in my chest and said, "It's all yours. I'm out of here." And so I'll probably throw a couple of bats at him and a couple of rally monkeys and say, "I'm out of here. Give me a call if you need me." And I think that Emerson management team is strong. They don't need old farts like me around. Maybe I know how to fight COVID, maybe I know how to fight recessions, but I will -- my door is always open. My keys -- the house is always open for people to ask me questions. So it'll be quick, bam-bam. And I'm not a big believer in transition. The guys will be ready. They don't need Dave. And so that's where it is right now. But I would say I'm in charge still, and I will most likely name it with the Board sometime in late 2021. That's how it looks right now, Jeff.

Yes. We'll definitely miss you when that day comes. I had a question for Lal, too, is just a follow-up, and I'll pass the baton.

Just assuming I don't die in between now and then, okay, Jeff, okay?

Yes. No, please don't. Stay safe. On -- Lal, on the KOB 3, I mean, everything you said was pretty crystal clear. I'm just wondering, though, in terms of dialogue with customers or other indicators that you look at, do you actually have some visibility on when this may begin to turn? And can you just level set us, too, so we have the base correct? What was KOB 3 as a percent of the total mix for 2020?

Jeff. Yes. Thank you. So KOB 3, right now, we're still crunching the numbers. We'll be close to flat from 2019. That was 57% of sales in 2019. That's what we expect right now. And the reason for that, I actually expected it to come up. The reason it hasn't is that we had a significant drop-off in the latter half of the year, particularly in that short-cycle business, instrumentation and the discrete side and consequently impacted Q3. So it sits at flattish to 2019. That's the way to think through it right now, Jeff. Now in terms of indicators, there are a couple of others. The shutdown turnaround activity is a very relevant indicator to us of KOB 3 activity on sites. We talked about at the prior earnings call of what occurred in spring and the summer shutdowns. They obviously didn't occur. We have seen reschedule of activity into the fall, and we acted -- actively working those now. I will tell you that they tend to be more systems-driven upgrades than valves and instrumentation right now. So whether it's cybersecurity upgrades or various other things, that's what they're really focused on. So we haven't seen a tremendous uplift yet in what will drive core device, valve instrument uplift in new orders. So that's another one to watch carefully. And then last, Jeff, I will mention just it is important what I stress in terms of getting the customer back on site. And we're watching those numbers very carefully, and that will be a telltale sign to activity. But ultimately, as you and I talked, Jeff, in the past, it's got to be demand-driven. You've got to see that underlying demand in the end products come back versus an acceleration. David?

Thanks. We just -- what we're talking about internally, people who dialed in can hear us, but the people on the WebEx couldn't hear us.

They can't.

I think it was with Jeff because I told him I was retiring and stepping down next year. They all cut off.

You blew up the website, yes.

I blew up the website. They said, "Oh my God." Celebrations, people are saying like, "God, we finally got rid of this guy after 40 years."

Our next speaker is Josh Pokrzywinski, and he is from Morgan Stanley.

A couple of questions for me. I guess, first, just looking at the Auto Sol orders and how they've been trending the last few months, not just what we've seen here more recently in September and trying to square that away with the outlook for fiscal '21. And I guess, part of that mix is also considering that you guys said you did a better job of working down some of the backlog. So carrying a little less backlog into the year, if I understand it right. It seems like orders are still a little mushy, and the underlying sales outlook doesn't quite jive with it. What am I missing in that? And what should we watch for that order cadence to really need to pick up to support it? I see the chart in there, obviously, but any milestones that you would really need to hit on?

I'll give you my two cents, and I'll give the expert, Lal. But -- and my two cents is what we're still watching for is North America, U.S.A. KOB 3. And we are not -- and we're seeing some early life on that and some planned turnaround right now. But we're not expecting anything of substance to return to that until we get into the new calendar year. So we're going sideways. And then what we expect going to happen is those investments will start unfolding in the U.S.A. We'll start seeing some additional investments in aftermarket and some KOB 2 coming in, allowing us to have a little bit of growth in the second half of the year. So we're watching, and we'll continue to communicate to you all about this KOB 3 when we start seeing it happen. The problem will be if we get into February, March, April and we don't see any turnaround in KOB 3, if something happens, that will be a problem for Lal and his business. So that's why he has chosen to do additional restructuring in the first half of the year and the first quarter in particular to try to give some protection as this thing -- as we wait for this thing to turn. But that's the way we look at it right now. We've been here before. It is probably a little bit on the -- as we say on the comm, for the second half of the year. But I feel confident that the customers will start spending as we see that capital coming in. So Lal, why don't you go ahead and give what you feel? You're the expert.

No, I think you're an expert. You said it well, David. We've been running between $38 million and $40 million a day in bookings. And through October, that has not changed. We actually expected to see a drop-off in October. We did not see it. It stayed very stable at $39 million a day in October.

That's good.

Which is good, which is good. So David, you're absolutely right. We've got to watch that KOB 3 environment, Europe, North America predominantly and Asia, very telling as to the pace of business as we see those early short-cycle orders come in. But I will also say that there are elements where we can control our own destiny. We've set very aggressive new product sales goals, our competitive displacement activities that we worked in the power industry and are now working in the chemical segment and then really going after the life cycle and the medical opportunities that are out there in our business.

So Josh, what we'll do, as you know, we are a company that puts out orders and dialogue. What we'll come in to do, Lal and I will commit to the shareholders right now and obviously, the sell-side analysts here, is we'll continue to put out any dialogue we see on the day-to-day, the daily order number that he just put out there, $39 million a day right now. And also, most importantly, the North America KOB 3. That's what you got to watch. That's what we're watching. And the fact that the plants now are getting a 70% population, that's a good sign. That means they're getting ready, and they'll start spending money. They have to spend money or those plants will have safety or quality issues. And that's not a good thing for the facilities we operate in. So that's what we're watching, Josh.

And it's perhaps a...

That's helpful.

Sorry, Josh. Perhaps anecdotal, but I'll throw it out. Customers are actually inviting us into sites, that particular business line in Houston in a couple of weeks. So that's encouraging, again, as we see activity pick up.

Yes. Just a quick follow-up. I heard both Lal and Jamie mentioned restocking in some of their comments. Any sense on what that might be embedded in the guide over the next presumably not more than the next 1 or 2 quarters, but whatever time frame you want to say that that's baked into numbers, how much of that is restocked?

So yes, I'll let Jamie answer that. But the restocking mostly will be in Jamie's side of the business. Lal only have -- he's watching restocking on the hybrid and the discrete side, the early stages of that because inventories have been taken way down. So Jamie has the biggest restocking going on because the -- his customer base liquidate inventory when we went into COVID, demand came up, and now he's behind the curve. So why don't you do your...

Yes, that's right, Dave. I mean, it's -- I hate to give you a little bit of answer, but it's a little hard to tell right now because these levels were taken down so low historic levels. Big box retailers, the CEOs in those spaces have been very public about their comments about what happened there. They took them down almost nothing. Our A/C industry did the same thing. So what you have is there's a lot of noise in the system right now as they chase -- people are chasing to restock inventories. There's real demand by home improvement and home sales. And we don't know how long that cycle is going to last. So if you ask the A/C folks, I think right now, how much of this is going to be restocking versus real demand, it's too early to tell because the cycle could run into the third quarter, if you have a hot summer. By the time you catch up to the demand we're seeing right now and you get caught up, all of a sudden, you hit peak season, and it could keep running. So we're seeing similar things. How long does SharkVac have challenges supplying the industry? Okay, we're not sure yet. So there's a lot of unknowns. And I think we'll have more clarity as we get into the first part of the calendar quarter -- first quarter of calendar year, it will get a little more clearer to us.

So Josh, what we're looking at right now from my -- this is Dave's expertise from being 40 years in the company and 20 years as CEO is we're adding capacity in Jamie's business right now. I think we have a unique window here to pick up some share. Jamie and his team are -- I mean, the innovation that Jamie inherited from Bob and those guys is phenomenal. And I think that we have a unique opportunity. So we're adding capacity at this point in time. At the same time we have -- we're running at peak levels, we're adding capacity. Right now, Lal's business is -- we're more interested in getting some of the capacity moved around into a better cost structure, and he's got to get that done because he doesn't want to be in the position that Jamie is right now, where he's trying to do some massive restructuring with capacity moving out. So we're betting on things will get better in Jamie's business and that the restocking will go and then the paid online business will continue to go, assuming nothing happens relative to the election or some crazy happens with the COVID. But we're adding capacity in Jamie's business right now because we think we'll be better as we get into the second half of this year.

The only other comment I would add is that as you look at our first half outlook for sales, especially first quarter, we are being prudent right now, though, as we assess those orders. So I don't want to give the exact numbers, but just know that as we see the orders unfolding, they're good. As I said, October is a double-digit quarters number. Again, we know some of that's restocking. And so we're being prudent in what we put into the sales forecast at this time.

But we'll keep you informed as we go forward -- as we go with the order. That's our vehicle to let you guys know think things are better or worse, okay?

Next question comes from Gautam Khanna at Cowen.

My question is more on how you look at the business with the oil and gas exposure because time and again, we hear from investors that this is not just a cyclical challenge. It's more secular as the world moves to alternative fuel sources and the like, and how Emerson is going to react and position to be ahead of that trend and maybe help in that trend with your customers. If you could just talk a little bit about your perspectives on what might be a structural change and how the company is going to emerge on the other side of it.

Yes. I mean it definitely is a structural change, Gautam. And if you look at this year's sales as a percent of our total sales, we're going to be down to 23%, 24% as a total company. As we continue to invest in other technologies, as we make acquisitions, we are still a major supplier, a very important supplier, especially in KOB 3, which if you look in the oil and gas industry, our KOB 3 is probably closer to 70%. It's primarily an aftermarket business. So what we'll do, and we'll talk more about this in February, but we're continuing to make investments in the next-generation renewables, be it hydrogen, be it hydro, be it the investment we made in the -- in OSI power. We continue to make investments around other uses of power and energy to replace oil and gas. We'll continue to do that. But we're not going to -- it's not something you can say, okay, we're going to sell that segment off because a lot of the technologies we use from a DeltaV or sensors or pressure or whatever we're doing are very similar to what we use in other industries. But I think what you're going to see, we'll continue to serve this industry. At the same time, we'll continue to invest in other technologies. As we talk to the Board today about the innovation we're doing in the medical field and also are doing the sensing field and other -- in the renewable fields, we'll continue to do that. So that percentage will continue to move downwards. We're still -- we're not going to walk away from it. Don't -- we can have a spike as they make investments come back in it, but we fundamentally believe as we look -- show…

Our next question comes from Steve Tusa from JPMorgan.

Speaking of dogs jumping over targets or whatever you used to say, I kind of calculate a bit more tailwinds just mechanically. You do have a bit of a tailwind, whether it's restructuring and some of these other things, buyback. So on kind of flat revenues, a flat EPS number, I know you got a little bit of tax headwind, some of these temporary costs coming back, but is there anything in the mix that we should be aware of? I mean KOB 3 is already kind of down. CR&S is a higher-margin platform that should outperform. So is there anything in the mix or anything like that? You've given us price cost. Anything in the mix that's negative that would be kind of holding you guys back from converting whatever little kind of revenue you get on top of some of these tailwinds?

No. Okay, Steve. I mean what we try to put forth for our shareholders, we had a very, very strong second half of the year. You know that. I mean our earnings per share, our margins, our cash flow is much better. One of the things that we're all worried about is my concerns about what happens in election, in particular in North America, what happens to the global -- if COVID comes back in our plans and things don't -- investments happening. But you're right. I would say that we put forth what I would call conservative forecast in a somewhat uncertain world. The only bad mix we have coming at us right now that I can tell you about is I know that Lal in the first half of this year, his most profitable business being instrumentation and flow, our -- without the return to KOB 3, he'll struggle, and that's a 60-plus percent GP margin business. So all these cost reductions are very helpful, but 60%-plus GP margin business when it has a struggling in the short term. But you're right. He's taken additional actions. I think that if we get any volume, our leverage, our upside is there, but I want to make sure that we laid out a foundation forecast for that little -- I have two dogs right now. Both of them can jump a little bit higher than Zorro can do because they're younger. They're only -- one's 2.5 and one's 1.5. So they can jump a little higher. They can jump higher than dad can jump now. So I think the key issue for us is the only headwind we see is the mix on KOB 3 North America. If we start seeing that turn around, especially around instrumentation and flow, Lal's business will do pretty well. As it is right now, he's targeting internally a 20% deleverage in 2021 as he's got this forecast. But the only thing we're watching very carefully and we'll be conservative about is to see North -- is this North America not turn around in KOB 3. If it doesn't, he's going to have a really tough -- I don't care what he does. That instrumentation and flow business will deleverage pretty hard because he's got it down to the bare minimums at this point in time. So that's the only thing we're really cautious about, Steve. So you're right.

Yes. I guess what I kind of like -- maybe this is just too stupid of a way to look at it. But your sales are down.

I'd never call you stupid, Steve. I'd never call you stupid.

Your underlying is down. You have your toughest comp in the first quarter, yet your adjusted EPS is going to be flat. And then you're calling for the year to be flat. So it just is kind of like if you're starting the first quarter at kind of flat EPS and that's your toughest revenue comp, it just -- I kind of like struggle with like why you're going to be flat for the rest of the year on an EPS basis.

I just want to make sure that we -- I'm not trying to be too crazy here. There's so much uncertainty around it in the timing, I think as Josh said earlier in talking about the signs. Our biggest uncertainty right now is the U.S.A. KOB 3, and I did not want to put a forecast out there that really gave us a lot of leverage around KOB 3 and the U.S.A. until we start seeing the whites of those eyes. And so that's why we're being a little bit cautious, Steve. I mean if you go...

Okay. And then one...

Go ahead.

And then -- sorry, one for Jamie. Congrats, first of all. Second of all, what will your -- why not more of a catch-up on resi, North American resi HVAC? I mean is that just all coming now? Is there a particular -- now that we've seen all the resi guys report, the numbers are obviously very strong. In fact, Carrier up ridiculously. Lennox, you may not serve as much, not up as much. Is there a particular customer out there that you guys serve that may have kind of missed out a bit on this season and is now kind of restocking for next? Like, it's just a little bit strange to me that you guys as a component supplier would be having this big channel fill in kind of the first quarter of this year as opposed to a catch-up in the third or maybe a catch-up in the second going into the third or next year or whatever it is, the next spring. Maybe you could just talk about kind of resi HVAC, what you saw there.

Yes. Look, the A/C orders have been strong going back into June, especially July, August, September. So this isn't brand-new thing, okay? As you know, there's a timing differential between our order rates, our sales rates and when these guys -- our customers are reporting out, and they have a different mix than we do. Actually, Steve, it's quite the contrary to your question. We believe, based upon what our customers are sharing with us and what we've been asked to do to help the industry out, that we're doing very, very well during this recovery. Now there are uncertainties with everyone's operations. But overall, I think we've done a nice job, maybe better than the competitors on the operations side, and we're being asked to fill some holes. So if anything, it's kind of the opposite of what I think the question maybe implies. So we've seen strong orders now 3, 4 months. We see strong orders going into the next few months and sales following right along. And we've not lost track with any major customers.

I think it's just a function of trying to keep up with them right now. And we always will lag them a little bit. We'll always lag them a little bit, but I don't see -- our underlying growth rate is the same as their growth rates from the standpoint of components. We're not seeing any problems there.

Yes. I mean you look at...

And then, Dave, just one last quick one. Who did you mention? You mentioned some competitor that's exited the market. Is that -- was that on the HVAC side? Is that Bristol? Or are you talking about somebody on the -- what you said on the automation side, somebody exited or something like that, somebody is not there. Who was it?

ShopBack. ShopBack went bankrupt. And ShopBack is the #2 player.

Oh, ShopBack. All right. I'll have to add that to my watch list. Okay. All right. Awesome.

Well, it's a private company, you can't add it to your watch list, let me say. It's private -- it's the major supplier in the industry, and they had half the industry. We had the other half. It's -- so it's going to come back, but I think that we have a window here to pick up some of that business over the next, I would say, the next 6 months before they get their act back together. They literally shut down their plants in Asia, Vietnam and United States right now, and they've been shutdown for probably 30 days. And so that's a unique opportunity for us right now. But you hit the nail in the head there, Steve. We're -- I want to be very careful with the uncertainty out there. And as we see things getting better, as Lal's business picks back up North America, we will leverage. That's the whole game here. That's what we want to play this year.

Our next question comes from Andrew Obin from Bank of America.

A question on oil and gas. So you did talk about structural change in oil and gas. But the question I have, as your customers sort of think about -- we've seen headlines, for example, Exxon is reducing CapEx to protect its dividend. So clearly, they're thinking about the world differently. What does it mean for what they're going to spend money on going forward? Does it change the mix dramatically? And in particular, does it change the conversation, you have this, if I have it right, top-quartile initiative? How did they change their thinking about efficiency? And as I said, just going back, what do they spend on going forward if there is no more growth long term?

I'll take a shot in. Lal's there, but I think the -- it is going to change the mix. It's going to change. You're not going to see a lot of new energy resources going to play. What they're going to figure out how to do is get more out of it, more efficiency, more productivity, safety and all those different things which will be good for us. It's a good thing, other than the fact that there won't be any new fields for many, many years for us to deal with from an installed base. So we'll be -- the KOB 3 will become more and more significant for us, and the upgrades they're going to have to spend around that to be from a productivity and quality and safety issue, which are all good things for us because that's not a jump ball type of big project. It's going to be -- you're going to be mining your installed base. And we have the strongest, the strongest by far of the global service support organization around the world for all the oil and gas industry. And as you know, we've made huge investments in that over the last couple of years, and that will really pay dividends for us as they start changing that mix. But that's why I think what's going to happen is we'll see that industry continue to shrink relative to investments. But our profitability should be pretty good once they start spending that money. So that's the way I see it. Lal, what are you hearing from your guys in the field right now?

Yes. I think that's right, David. And just 3 things to add there, Andrew. The first is I still believe that we still are executing around the investments for the globalization of natural gas. Methane will continue to be a viable energy source in industry and in power generation combined cycle, and we're seeing those investments continue, be it on Exxon, Shell or anyone around the world. So that's important to note that it's not purely an oil and gas across the board. The second is the technology investments that drive reliability, safety, smart operations are still -- will continue to be very viable. A lot of those fall within our digital information business, and we continue to see those go forward. And then lastly, Andrew, we talked about a little bit earlier is the applicability of our technology for the decarbonization efforts and for the sustainability efforts that these customers are driving in a very broad set of applications, which we'll flush out in more detail for you in February and highlight. But that's an opportunity for us to change our mix within the customer spend.

Yes. So all the big oil and gas customers right now are engaging pretty heavy with Stuart Harris and Lal's business profile on digitalization and how they're going to try to reduce their carbon use. And that's where -- that's a benefit to us because it's a sensor business. It's more of a technology business and works. That's our strength. So as that shift happens, we'll still have pretty good sales, and we'll definitely have better profitability over the long term. So it is a shift that we're all going through, but I think it's going to benefit us as a company, given our presence and our digitalization position and everything we've been doing relative to that over the last 20 years. And I like the hand we have right now.

Got you. And just a follow-up question on Commercial & Residential Solutions. Asia and Middle East & Africa down, just a little bit surprising given the pace of recovery in China. Is it China? Is it something else? And maybe more color on what's happening, specifically what are you seeing in China specifically?

Go ahead, Jamie.

Well, look, October, there were some positive signs in Asia. But I think it's too soon to say that we've turned a corner. At this point, I still think it's a quarter, maybe 1.5 quarters away. But what you see there is we participate in industries like the hospitality as far as servicing hotels and restaurants and foodservice, food retail. And those industries are industries that are still pretty heavily impacted in China and across large parts of Asia. So although we've got some growth that's come back like our -- we serve some of the appliances in China out of our -- our Therm-O-Disc business has been very good. So there's pockets where we're strong. We've seen some good strength in the residential side. But the cold -- some of the cold chain and some -- especially around food service food retail, hospitality is still a tough, tough market. However, again, October results were promising. We had positive results in Asia and China. And so we'll see if that's sustainable or if it's just a blip on the radar here. But too early to tell, but some positive signs.

So Andrew, as you know, we -- our thrust in Asia and the Middle East was all around commercial, not residential. And so those markets have been hurt pretty hard relative to the end markets of this COVID situation. And we continue to develop the new products and new technologies around that. They'll come back. But until we start seeing movement of people, I think you're going to have a struggle there. And -- but I think it will start bouncing back as we go forward this year. Obviously, it's been down, tough for us so you get an easier comp. But more importantly to me is what I'm watching people spend the money on. Lal bounced back pretty nicely in China and Southeast Asia. Jamie ran that. He probably stuffed the channel before he came back and make a good year. But -- and so Susan Hughes, who follows him, will have a hard time with that, if she ever gets over there.

She got to work from it.

She got to work from it? That's fantastic. So I think I'm more optimistic about 2021 in Asia for Jamie than it was last year. I see signs picking back up.

Yes, it should be a good year. I mean what we're outlooking for the full year is extraordinarily positive. It's just the growth really starts to accelerate kind of more in the second half.

But it's been disappointing. I would say the second half of '20 was disappointing for us. It didn't come back like it always do.

Our next question comes from Andy Kaplowitz from Citibank -- or from Citigroup.

So you've talked about $650 million of annualized cost savings. It's a big program. I think it might be the biggest you've done in your tenure. So maybe you can just talk about -- put it in perspective for us. So you did talk about reaching your margin targets still that I think you set for FY '23, despite $2 billion less of sales. And I think you already answered Steve's question regarding conservatism around decrementals and incrementals. But if Lal's business does turn, does we get to see better than historical incrementals, especially if KOB 3 is coming back faster than KOB 1?

I'll answer that question right away. It's better or he won't be around, but I might step down. So that was an easy answer to that one. I mean to be honest, he wants it, too. I mean his organization to be -- they've gone through pain, step up, he's doing the first half. I mean he wants to get back to peak margins. He wants to do that. And his whole organization is very much focused on it, but at the same time, not cutting. So the answer is, yes, you'll get very good leverage as it comes back in the peak margin plan. We presented to the Board. We didn't -- we haven't talked to you this time, but we'll update you. I updated the planning conference group last week with our planning conference where we had 700 people, 600 of them are on the WebEx, and 100 in our conference room live face-to-face. And then -- but I think the key issue for the restructuring number, it is the largest number. Now the next largest would have been back, I would say, in the year that we broke the -- back in 2002, '03, '04, that time period there, '05, as we repositioned the whole company, as we globalized the company, that would be the next largest. And we had a very strong margin run-off of that if you go back, you look at those historical charts we put out there. But I think the most important thing we're doing here, we're also going back to the questions people have been asking. We're resetting the industries we're going after, where we're putting the resources, where we're putting our facilities, what type of plans we want to have. And from the perspective of what we're trying to get…

Andrew, I think you know he said it well. We didn't want to waste the opportunity. And it's not purely about taking costs out. It's about thinking about how we can do business differently, the way we're resetting the platform and how we interface with our customers and how we interface internally as an organization through this process. And that's really what this is. A heavy element of that is also realigning our vast cost structure into Eastern Europe, Mexico and Asia, a very important part of this journey as well. So both components are very well thought out. Our entire plan runs across 17 different individual tracks of execution that we manage month to month and has been done very, very well with the leadership of Ram and others across the organization.

Yes. We're trying to totally reset Automation Solutions. I mean there's not as much of that with Jamie. There's a little bit of that, but it's been far more with Lal's business because we know Lal's business, as we've been talking about, there will be different customer base, different customer needs as he thinks forward 10, 15, 20 years from now. And that's what this is, a reset.

Yes. On the commercial side, it's different SG&A profile. And so as Dave said, we did take out around 11% of SG&A head count over the last few years because the business wasn't growing in '19 either. And there'll be a little that comes back, but there's still a lot of work that we're doing that we're able to get done on the facility side. So our footprint, and to Lal's point, where the footprint is and how efficient that footprint is to serve our markets, how regionalized we are, we'll be able to do 6, 7 years' worth of work in 2 or 3 years. And so, like Lal said, we didn't want to waste the opportunity, and it's going to pay huge dividends for our business going forward.

And that's why I keep telling everyone out there thank you very much because that's not easy to do in the middle of a friggin' COVID recession pandemic.

Very helpful. And then just talking about free cash flow, it probably doesn't get talked about enough, but I mean, obviously, strong conversion in Q4. Can you talk about how you're thinking about sort of the puts and takes of working capital as you go into '21? Obviously, you mentioned a little bit more CapEx. But again, good conversion going to continue.

Okay. So 2021 is going to be a fun one. We've set ourselves up for a very challenging 2021 because, obviously, we really performed well in the second half of the year in operating cash flow and free cash flow. We almost set a new record as free cash flow as a percent of sales at 15.1%. I think all-time record is probably around 15.5%, 15.6%. The big issue for us, Andrew, it's going to -- Andy, has got to be around we need earnings. We need earnings because what's going to happen as the year progresses, our balance sheet is -- other than a little bit of extra inventory that we brought in to make sure we protected our customers from a channel standpoint and a supply chain standpoint, we're in pretty good shape on the balance sheet. So what's going to happen is that balance sheet is actually going to get bigger from a working capital standpoint because we're going to be growing in the second half of the year. So the way for us to get back to the very challenging operating cash flow and free cash flow number next year, which will still be very, very good, is we've got to get higher earnings because as we -- as Frank and I have communicated to all the lead people out there, earnings is going to drive cash flow this year, not the liquidation of the balance sheet. In fact, the balance sheet is going to go the opposite way. So this is -- we thought last year was a lot of fun. This one's a higher degree of difficulty for the operating people because they're going to try to figure out how to not to put a lot of working capital on but they're going to have to put some on because our receivables are growing, our inventory will be growing a little bit but at the same time, how we get more earnings. So now if we want to keep a $3 billion or $3.1 billion in front of the operating earnings or cash flow next year, we've got to really work hard on the earnings side. It's not going to be on the working capital side. And that -- and everyone has been communicating. Frank's been beating everyone up on that one from the standpoint of CFO. We can see that, period.

Our next question comes from Julian Mitchell from Barclays.

I'll keep it quite brief. Maybe just two quick ones. So one would be for Jamie, and welcome again to this forum. But what are your thoughts around the operating...

Forum?

Yes. I think a virtual forum, perhaps the -- how is the operating leverage in the business this year? You've got that mid-single-digit-plus sales growth. What kind of incremental margin should we expect? And any big variation through the year? And then the second question would just be for Lal around China. How did that business finish up fiscal '20 in Auto Sol? And what's the expectation for China in fiscal '21 in your business, please?

Okay, Jamie?

Yes. I mean it will be somewhat just north of 30%. And exactly what number will be, it will depend a little bit around -- on the mix and all the other factors. But it will be in that range, and so we feel very positive about it. We've not lost any momentum on the cost actions that we're taking, and those are going to continue throughout the year. So we feel pretty good about that. I don't look at the year right now and say, well, this quarter, we're fine. This quarter, we're not. Price in the mine was very good for us. Last year, it's good for us in the first quarter. It gets a little tougher as the year develops, but we knew that. We've known that. And that's normal for our cycle, and so we've got plans around it. So I don't see anything extraordinary at this moment as the way of the cycle. We have profitable businesses growing right now. We have other profitable -- very profitable businesses at a similar profit profile that start to grow in the second half. So right now, that's the way the plan looks.

So yes, Julian. On China, the first -- obviously, we had a very significant downturn in the second quarter, fiscal quarter of the year. But the market recovered very aggressively in the second half. We ended up flat for the year in China destination sales for 2020. So it was a flat, but as Jamie will tell you, hasn't been there, it felt like a plus 10 or more because of the tremendous second half work and what our teams have to encounter on that $1 billion-plus business. Now looking at '21, I'll give you a range of plus 1 to plus 4, somewhere in there, is where I'm landing right now. I think there's some positives in chemical, life science, automotive, as I said earlier, and that's offset by some challenges around power generation and refining. So the plus 1, plus 4 is where we're working at right now. I think it will be low single digits. It may turn better as we go through the year.

Our next question comes from Joe Ritchie from Goldman Sachs.

So I'll just keep it to one question since we're bumping up against some time here. But like just if I look at your portfolio, you guys referenced, especially within Automation Solutions, some good growth on the hybrid and discrete side. Just talk to us a little bit about how you feel about the portfolio there and whether you need to add on via M&A, just given some of the growth that you're seeing, especially, whether it's on medical or life sciences. Or do you have the right portfolio in place today to go after the opportunity?

From our perspective, as we went through Lal and his team this year from a strategy standpoint, we are acquirers in this space. We would like to add more, again, help us diversify into the hybrid space. We've been doing some software acquisitions, not many hardware at this point in time. We have the primary software. We would like to continue to acquire in the space to help us diversify and also drive a little bit faster growth. It's a tough market right now to do it, but we're outlooking pretty hard. And we're trying to shake it out. And I know Lal has his wish list, working with Mark Bulanda and the team there. So we are acquirer in this space right now, and we will continue to push that pretty hard from that perspective. I know Lal is very interested and has a very strong preference to that from that standpoint. So anything else you want to add?

No, you mentioned it earlier, David, I think that's well said, but there's also internal development ongoing in this space, including single-use devices for pharmaceutical bioproductions. So that's very relevant as well. So it's a combination, too, but absolutely acquisitive in that segment, and we'll continue to do that.

A lot of investment in that area right now, try to make that more relevant and more significant for all of us. So with that, I want to thank everybody for joining today. It was an amazing year. It's quite an unusual year as we wrap up 2021 -- our 2020 as move into '21. I want to again thank everybody out there for attending today and talking. I apologize, we lost our webcast -- WebEx, I guess, webcast for everybody. So the -- I guess...

For a few minutes, but the recording will be available.

The recording will be available. Unfortunately, it tells you that Mr. Farr is stepping down or something like that. So you can't go back and change that. But I want to appreciate everybody for joining, and I want to thank everyone for this year. And we're looking forward to have a very good 2021 in an uncertain time, but we feel good about going into '21 based on what we got done in self-help in 2020. We got a strong team at the top here. We got Jamie here, Lal here, Frank and everybody else working around here. So we're looking forward to have a great year and making another record year for us in '21. So thank you, everybody, and look forward to seeing everybody soon.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.