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Transcription modifiée de la conférence téléphonique ou de la présentation des résultats du DME 21-Apr-20 13:00 GMT

ST. LOUIS 5 mai 2020 (Thomson StreetEvents) – Transcription modifiée de la conférence téléphonique ou présentation des résultats d’Emerson Electric Co le mardi 21 avril 2020 à 13:00:00 GMT

* David N. Farr

Emerson Electric Co. – Président et chef de la direction

* Frank J. Dellaquila

Emerson Electric Co. – Vice-président exécutif et directeur financier principal

* Michael H. Train

Emerson Electric Co. – Président et président de Automation Solutions

Emerson Electric Co. – Directeur d’IR

* Robert T. Sharp

Emerson Electric Co. – Président exécutif d’Emerson Automation Solutions

Citigroup Inc, Division de la recherche – Chef du secteur industriel MD et États-Unis

* Julian C.H. Mitchell

Robert W. Baird & Co. Incorporated, Division de la recherche – Directeur associé de la recherche et analyste principal de la recherche

Bienvenue à l’appel. J’aimerais adresser l’appel à Pete Lilly, Relations avec les investisseurs. Allez-y.

Pete Lilly, Emerson Electric Co. – Directeur d’IR [2]

Bonjour, merci et bienvenue à tous lors de la conférence téléphonique d’Emerson sur les résultats du deuxième trimestre 2020. J’espère que tout le monde reste en sécurité.

Aujourd’hui, je suis accompagné de David Farr, président et chef de la direction; Frank Dellaquila, vice-président directeur et directeur financier; Mike Train, président d’Emerson; Lal Karsanbhai,

Président exécutif d’Automation Solutions; Bob Sharp; Président exécutif des solutions commerciales et résidentielles. Et nous sommes également rejoints par un invité spécial, le président du secteur des outils professionnels en Europe; Tim Reeves, qui est malheureusement toujours coincé aux États-Unis.

Et avant de commencer, je cède la parole à M. David Farr pour quelques remarques liminaires.

David N. Farr, Emerson Electric Co. – Président et chef de la direction [3]

Merci beaucoup, Pete. Et je souhaite la bienvenue à tous ici. Pour votre information, nous sommes assis dans ma salle de conférence, bien répartis. Et nous avons opéré. Emerson a été ouvert pendant tout le processus. Nous avons pris la décision en tant qu’OCE le 10 mars, à mon retour d’une conférence à New York. Lorsque je me suis présenté à JPMorgan, j’étais le seul PDG à me présenter, et j’ai donc décidé avec l’OCDE de rester ouvert. Nous avons l’OCE ici tous les jours. Comme vous le savez, nous sommes bien répartis dans ce complexe de bureaux.

Nous avons également une quinzaine d’autres cadres à travers le plan. Nous nous réunissons sur une base continue pour nous assurer que nous prenons des décisions, prenons constamment des décisions. Nous avons fermé le reste de la main-d’œuvre rémunérée et les avons renvoyés chez eux, ils travaillent à domicile. Mais il était – je sentais qu’il était très important dans cette crise que nous soyons ici vivants et que nous puissions prendre des décisions rapides et traiter les problèmes très, très rapidement, à la fois structurellement et de manière compétitive, pour rechercher des opportunités pour continuer à gagner en tant qu’entreprise.

La diapositive d’ouverture que je veux partager avec vous. Honeywell a participé à la fabrication de masques. Ils ont une usine qui fonctionne dans le Rhode Island. Ils ont une nouvelle installation qui arrive en Arizona. Nous travaillons en étroite collaboration avec Honeywell. Darius et moi avons parlé de ce problème à plusieurs reprises pour nous assurer qu’ils ont de l’équipement. Nous avons réaffecté. Branson fabrique du matériel de soudage qui produit des masques dans le monde entier et du matériel d’essai. Et c’est donc actuellement l’installation dans le Rhode Island dont nous avons pris une photo, avec notre équipement et le masque Honeywell.

Et nous avons: c’est là que les PDG du monde entier, ce que j’appelle la frénésie, travaillent en étroite collaboration pour faire des choses pour la nation, pour le monde. Et je veux juste commenter cela parce que c’est une situation où Honeywell et moi travaillons ensemble pour faire quelque chose de bien pour l’Amérique et pas nécessairement battre autre chose.

Je veux donc retourner à Pete. Mais encore une fois, ici, nous sommes assis ici, nous sommes très détendus. Tim tient mon club Rally Monkey et Stan Musial dans sa main et s’assure qu’il n’a pas de coronavirus.

Alors, Pete, tout est à toi.

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Pete Lilly, Emerson Electric Co. – Directeur d’IR [4]

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Merci, Dave. Comme d’habitude, j’encourage tout le monde à suivre la présentation de diapositives, disponible sur notre site Web.

Passons à la diapositive 4 avec les résultats trimestriels. La croissance des ventes sous-jacentes a été bien inférieure aux attentes, en baisse de 7% en raison de la chute spectaculaire de la demande mondiale, la pandémie de COVID-19 s’étant rapidement propagée en mars. Les commandes pour les 3 derniers mois ont diminué de 3%, reflétant également la baisse de la demande mais indiquant une modeste accumulation de commandes en souffrance. Le bénéfice par action GAAP est resté inchangé et le bénéfice ajusté par action a augmenté de 7% à 0,89 $, principalement en raison de la baisse des coûts de compensation des actions en raison de la baisse du cours de l’action et des mesures de restructuration agressives lancées. au troisième trimestre de l’année dernière, ils ont commencé à prendre effet.

Malgré la baisse des ventes, les deux plates-formes ont enregistré de bonnes performances en termes de rentabilité, surperformant leur EBIT ajusté et leurs plans de marge de pointe d’EBITDA ajustés pour le trimestre en raison d’actions de restructuration initiées et en cours. Les ventes sous-jacentes d’Automation Solutions ont baissé de 8% et les commandes à échéance dans les 3 mois ont baissé de 1%, également bien en deçà des attentes initiales en raison du contexte de demande pandémique qui prend forme en mars . Les ventes et les commandes sous-jacentes de solutions commerciales et résidentielles sont toutes deux en baisse de 5%.

La performance des flux de trésorerie a été solide au cours du trimestre avec des flux de trésorerie d’exploitation de 588 millions de dollars et des flux de trésorerie disponibles de 477 millions de dollars, respectivement 10% et 15%. L’entreprise a rapporté plus de 1,1 milliard de dollars aux actionnaires, dont plus de 800 millions de dollars en rachats d’actions et plus de 300 millions de dollars en dividendes. Enfin, la société a continué de – poursuivi et développé son plan agressif de réinitialisation des coûts, initiant 40 millions de dollars d’actions de restructuration au cours du trimestre.

Passons à la diapositive 5. Nous traiterons du compte de résultat. La marge brute du deuxième trimestre est restée stable à 42,1%, les mesures favorables de limitation des coûts et de limitation des coûts ayant compensé la baisse des revenus. Les frais de vente, dépenses administratives et autres frais généraux en pourcentage des ventes ont diminué de 130 points de base, reflétant la baisse des coûts de compensation des stocks due à une baisse du cours de l’action. L’EBIT ajusté et les marges d’EBITDA ajusté, qui excluent les coûts de restructuration et les coûts connexes, ont augmenté respectivement de 240 points de base et 300 points de base. Ces améliorations reflètent principalement la baisse des coûts de compensation des stocks combinée à des mesures agressives de limitation des coûts qui ont un effet. Dans l’ensemble, la société a continué de mettre en œuvre les plans de marge de pointe qui ont été présentés lors de notre conférence des investisseurs de février, ainsi que de réagir rapidement avec de nouvelles mesures en raison de la détérioration des ventes en mars et des perspectives économiques pour le reste de l’année. année sont devenues de plus en plus difficiles.

Passons maintenant à la diapositive 6. Géographiquement, nous avons observé une faiblesse généralisée au cours du trimestre, mais en particulier en Chine et aux États-Unis, respectivement de 8% et de plus de 20%. L’Europe, qui a clôturé en baisse de 2%, a montré une vigueur au début du trimestre, qui a été rapidement contrée en mars lorsque le virus s’est propagé rapidement et que la plupart des pays ont fermé leurs frontières.

Passez à la diapositive 7. La marge EBIT ajustée par segment total a augmenté de 50 points de base à 17,6%, reflétant des mesures agressives de contrôle des coûts et une solide exécution opérationnelle avec une baisse des ventes. Le coût de compensation des actions a diminué de 97 millions de dollars, le cours de l’action ayant chuté de façon spectaculaire au cours du trimestre. La performance des flux de trésorerie au deuxième trimestre a été solide. Les flux de trésorerie liés à l’exploitation ont augmenté de 10% pour atteindre 588 millions de dollars et les flux de trésorerie disponibles ont augmenté de 15% pour atteindre 477 millions de dollars, entraînant une conversion de 91%. Le fonds de roulement commercial a clôturé avec une augmentation des pourcentages de vente, les stocks de clôture ayant augmenté en raison de la forte baisse de la demande en mars.

Passons à la diapositive 8. Nous connecterons le BPA du deuxième trimestre. À partir de notre BPA ajusté de 0,83 $ en 2019, vous constatez que les vents arrière non opérationnels se sont élevés à 0,14 $, entraînés par une rémunération des capitaux propres inférieure en raison d’un cours de l’action plus bas. Les transactions ont diminué de 0,10 $, reflétant la baisse des volumes due à COVID-19, tandis que les rachats d’actions et la baisse des frais d’intérêt ont généré 0,02 $. Le BPA ajusté s’est terminé à 0,89 $. En résumé, les vents arrière non opérationnels ont été largement compensés par l’effet de COVID-19 sur les opérations. Fait important, le BAII ajusté total du secteur a augmenté de 50 points de base et le BAIIA ajusté total du secteur a augmenté de 120 points de base, reflétant seulement un désendettement de 9% des ventes 400 millions de dollars de moins que l’année précédente le précédent.

Nous allons maintenant examiner les plateformes commerciales. Passons à la diapositive 10. Les ventes sous-jacentes d’Automation Solutions ont diminué de 8% au cours du trimestre, les fortes baisses du pétrole et du gaz ayant plus que compensé la croissance des sciences de la vie et des aliments et boissons. Les États-Unis ont baissé de 12% tandis que la Chine a chuté de 20%. Les commandes sous-jacentes à 3 mois ont baissé de 1%, tirées par la vigueur relative des premiers trimestres des activités à cycle plus long, Contrôle Final et Systèmes, qui ont augmenté respectivement de 3% et 7%. Il convient de noter que le carnet de commandes a augmenté de 3% pour atteindre près de 5,1 milliards de dollars séquentiellement au cours du dernier trimestre.

La plateforme a généré une forte rentabilité dans un environnement de demande exigeant. L’EBIT ajusté et l’EBITDA ajusté ont augmenté respectivement de 50 points de base et 130 points de base, reflétant les mesures agressives de coûts en vigueur. Les actions de restructuration ont totalisé 29 millions de dollars sur l’ensemble de la plateforme, ce qui a porté le total à 112 millions de dollars au premier semestre.

Passons à la diapositive 11. Les ventes sous-jacentes de solutions commerciales et résidentielles ont diminué de 5%, reflétant également la détérioration de l’environnement de la demande avec COVID-19. L’Amérique du Nord a perdu de faibles chiffres à un chiffre tandis que l’Europe a perdu 1%, car l’élan modeste dans le secteur des pompes à chaleur a été plus que compensé par les baisses dans le secteur de l’outillage. L’Asie, le Moyen-Orient et l’Afrique ont baissé de 15%, tirés par la Chine qui a enregistré une forte baisse de 30%. Les commandes au cours des 3 derniers mois ont baissé de 5%, chacune des sociétés HVAC, chaîne du froid et outillage ayant enregistré une baisse de moitié. Les commandes asiatiques ont baissé de 14%, tirées par la Chine, qui a perdu plus de 25%.

Les solutions commerciales et résidentielles ont également produit une forte rentabilité avec un EBIT ajusté et un EBITDA ajusté de 40 points de base et 90 points de base respectivement. Ce résultat est principalement dû à une maîtrise agressive des coûts, à des actions sur les coûts et à une dynamique prix-coût favorable. Au cours du trimestre, les mesures de restructuration ont totalisé 9 millions de dollars, ce qui a porté le chiffre total à 19 millions de dollars au premier semestre.

Passons à la diapositive 13. Nous passerons en revue le guide mis à jour. La vitesse et l’ampleur de l’impact de l’épidémie de COVID-19 sont vraiment sans précédent. À ce titre, nous constatons un environnement de demande très exigeant, certainement pour le reste de l’exercice et au premier semestre de l’année prochaine. De plus, nous supposons que les prix du pétrole se stabiliseront de 20 $ à 30 $ le baril. Plus tard dans l’appel, la direction élaborera nos perspectives en détail, mais voici le résumé.

Sur la base des conversations avec les clients, les responsables gouvernementaux, l’analyse interne et la comparaison avec les baisses précédentes, nous nous attendons à ce que les ventes sous-jacentes chutent de 9% à 7% et les ventes nettes à 11% à 9% pour l’année. En raison de la détérioration de l’environnement de la demande, nous avons augmenté les coûts de restructuration à environ 280 millions de dollars, dont environ 230 millions de dollars de la plateforme de solutions d’automatisation et 45 millions de dollars de la plateforme de solutions commerciales et résidentielles.

Nous prévoyons maintenant un BPA ajusté de l’ordre de 3 $ à 3,20 $, avec une réduction d’environ 16% de moitié. Nous prévoyons que les flux de trésorerie d’exploitation s’élèveront à environ 2,75 milliards de dollars et que les prévisions de dépenses en capital ont été réduites de 100 à 550 millions de dollars, avec un objectif de flux de trésorerie disponibles d’environ 2,2 milliards de dollars. Enfin, notre programme de rachat d’actions pour l’année est maintenant achevé à environ 950 millions de dollars.

Passez à la diapositive 14, qui relie notre guide EPS 2020 mis à jour. Le point de départ du pont est l’EPS GAAP 2019 de 3,71 $. Dans l’ensemble, nous avons enregistré un BPA ajusté pour 2019 de 3,69 $, ce qui exclut 0,14 $ d’éléments fiscaux discrets favorables et ajoute 0,12 $ de restructuration. Maintenant à partir de 3,69 $, nous prévoyons un total de 0,11 $ de vents contraires cette année pour FX, comp. Équité et pension. Les vents de fonctionnement ont considérablement augmenté. Nous avons réduit notre plan de ventes en année pleine d’environ 1,8 milliard de dollars par rapport à l’année précédente, ce qui a entraîné un vent contraire de 0,50 $ à 0,57 $. Nous prévoyons un BPA de 0,09 $ d’intérêt et des vents de rachat d’actions. Cela nous amène à un point médian du BPA corrigé pour l’année entière de 3,10 $.

Il est à noter, depuis la grande transformation du portefeuille de 2015 à 2016, à la fin du premier semestre, Emerson a enregistré une moyenne de 42% à 43% de l’estimation de l’ensemble du BPA. Cette année, notre BPA ajusté du premier semestre s’élève à 1,56 $, ce qui représente environ 50% du guide du BPA pour toute l’année, bien avant le rythme normal.

Passez à la diapositive 15, qui présente notre guide pour le troisième trimestre de 2020. Les perspectives de ventes sous-jacentes pour le trimestre sont dramatiquement négatives, reflétant des défis à court terme et une reprise prolongée des marchés industriels à partir du bloc COVID-19, combinée à un faible prix du pétrole et réductions connexes des dépenses. Les ventes sous-jacentes devraient passer de 16% à 13%. Nous prévoyons un BPA ajusté de 0,60 $, plus ou moins 0,04 $, ce qui exclut environ 100 millions de dollars d’actions de restructuration prévues au cours du trimestre. Nous voyons un EBIT ajusté pour le segment total dans la gamme de 15% à 15,5% et un EBITDA ajusté dans la gamme de 20% à 20,5%, reflétant des mesures agressives de contrôle des coûts qui compensent en quelque sorte la réduction du volume.

Passons maintenant à la diapositive 17. Je cède la parole à M. Frank Dellaquila et à M. Mike Train pour discuter de la liquidité et des opérations.

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Frank J. Dellaquila, Emerson Electric Co. – Premier vice-président exécutif et directeur financier [5]

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Bonjour a tous. Nous voulions consacrer quelques minutes à la liquidité pour dissiper les inquiétudes de quiconque. Nous sommes en excellente forme, croyons-nous. Nous ne tenons jamais cela pour acquis. Nous ne sommes jamais complaisants, mais nous pensons que nous sommes dans une position très, très forte alors que nous entrons dans la crise ici. Nous avons la capacité de financer tous nos besoins internes et notre dividende malgré le fait que, comme vous venez de le voir, nous prévoyons une réduction des flux de trésorerie d’exploitation au cours des prochains trimestres. Nous avons un levier financier modeste même pendant la récession. A ce niveau, la dette sur EBITDA à la fin de l’année sera inférieure à 2 fois. 65% de notre dette totale est une dette à terme. Par conséquent, nous avons une excellente liquidité dans notre structure de capital.

Je regarde la diapositive 17 ici, en passant par ces points. Au 31 mars, nous avions 2,6 milliards de dollars en espèces. Plus de la moitié sont disponibles le même jour ou tout au plus le lendemain. Nous sommes donc en excellent état en cas de coupure du marché. Et nous avons également un revolver de 3,5 milliards de dollars qui n’est pas sorti et engagé jusqu’en avril 2023. Nous avons également le droit de le prolonger dans les conditions actuelles et il n’y a pas d’alliances financières dans le revolver. Donc, dans l’ensemble, si nous examinons notre capacité à financer nos besoins à court et à long terme, nous avons l’impression d’être en excellente forme.

Veuillez passer à la diapositive 18. Lorsque nous commençons à – lorsque nous avons commencé à le voir arriver à la mi-février, nous avons commencé à repousser les délais du programme CP. Au départ, cela a été difficile car le marché était quelque peu torréfié. Il s’est amélioré lorsque la Fed est intervenue et a annoncé quelques programmes pour soutenir le marché du papier commercial de manière indirecte et directe. En conséquence, au cours des 1,5 derniers mois, nous avons pu prolonger les délais du CP d’environ 20 jours à 45 jours. Et en incluant ceci – inclus dans cela, nous avons construit un tampon de 1 milliard de dollars ici aux États-Unis, que nous réexaminerons pendant que nous y passerons du temps. Et si nous pensons que les choses s’améliorent, nous commencerons à les résoudre. Mais pour l’instant, nous pensons qu’il est prudent de garder cela à l’esprit dans l’éventualité d’un changement à la baisse des conditions du marché.

Nous envisageons également d’émettre la dette à terme. Les écarts de crédit se sont considérablement rétrécis au début de cette crise. Ils sont entrés en jeu depuis lors et les coûts globaux de la dette à terme pour les sociétés investment grade sont assez attractifs. Il est donc évident que nous l’examinons maintenant afin d’injecter plus de liquidités dans la structure du capital. Vous pouvez donc voir dans le graphique 18 comment se déroule le profil de maturité du CP.

Enfin, dans le graphique 19, nous avons toujours maintenu une échelle d’endettement très prudente, toujours soucieuse de répartir les échéances. Vous pouvez donc voir que nous avons de nombreux endroits où, si nous choisissons d’émettre de la dette à terme au cours du mois prochain, nous pouvons le faire en termes de taille et avoir toujours une échelle de dette très conservatrice lorsque nous atteignons les espaces ouverts entre les tours que nous avons Là.

Encore une fois, je pense que nous sommes en excellente forme en matière de liquidité. Nous le surveillerons de près, mais nous nous sentons suffisamment bien pour pouvoir faire tout ce que nous avons à faire au cours de cette récession.

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David N. Farr, Emerson Electric Co. – Président et chef de la direction [6]

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Merci. J’ai demandé à Frank de parler aux actionnaires de ce problème ce matin. Frank et son équipe, je dois vous féliciter énormément pour ce qu’ils ont fait. Ils sont venus vers nous au début de février, pendant longtemps – et ont essentiellement dit que nous devions commencer à jouer. Frank a également travaillé en étroite collaboration avec le comité financier, le président et plusieurs autres membres du comité financier, qui sont très bien informés de ce qui se passe sur le marché et qui se sont très bien structurés à l’époque.

Nous avons également eu plusieurs managers: nous avons eu une réunion du comité exécutif pour discuter de cette question et d’autres actions. Et puis – également la semaine dernière, nous avons organisé notre réunion du conseil d’administration et tenu une réunion du conseil d’administration de 4 heures avec le conseil d’administration. Et puis hier, nous avons eu la réunion du comité de vérification. Nous essayons donc de communiquer avec notre conseil pour obtenir ses commentaires. Mais surtout, compte tenu de cela, la liquidité, la structure financière, la capacité de financer cette entreprise dans des moments comme celui-ci sont très, très cruciales. Et Frank et son équipe ont fait un excellent travail.

Avant que Mike n’ait un commentaire sur les batailles qu’il a menées dans le monde, je tiens à rappeler aux gens de côté – le graphique 20 pour la nouvelle vente ou les investisseurs. Emerson a adopté une stratégie régionale très globale depuis – depuis le jour où j’ai commencé à diriger l’entreprise en tant que PDG en 2000. Nous avons cette stratégie dans laquelle nous regardons le monde en Amérique, en Europe et en Asie-Pacifique. Nous passons de la production, l’ingénierie, la chaîne d’approvisionnement, les ventes et le support client. Et regardons les façons – je l’appelle le graphique tic-tac-toe. Voyons comment nous pourrions desservir les marchés mondiaux sur 1 ou 2 et peut-être même 3 des régions. Cela fait partie de nos stratégies depuis le premier jour.

Je tiens également à remercier le comité d’audit et le travail que certains – notre responsable de l’audit, Lisa Flavin, qui dirige l’audit pour nous ici, a travaillé sur notre stratégie de gestion des risques qui analyse ce tableau et s’assure ça marche. Et cela a fonctionné pendant que nous adoptions cette stratégie. Nous l’avons testé clairement pour la première fois en février et début mars avec l’arrestation de la Chine. Et nous l’avons testé à nouveau.

Maintenant, nous – il y aura des problèmes auxquels nous serons confrontés lorsque nous en sortirons. Mais de mon point de vue, toute la stratégie régionale, dont le président des États-Unis entend parler maintenant, est quelque chose qui a été très efficace pour cette entreprise par rapport à servir nos clients. Et je veux m’assurer que les gens se souviennent que nous avons cela. Nous le perfectionnerons un peu lorsque nous en sortirons car je vois des problèmes différents dans le monde d’aujourd’hui. Mais c’est un document vivant que nous avons évidemment modifié au fil des ans, même lorsque nous avons eu trop de concentration en Chine. Il y a environ 8 ans, et beaucoup d’entre vous savent que j’ai commencé à déménager avec l’équipe pour déplacer une partie de la production hors de Chine et la diversifier davantage dans le monde entier. Mais encore une fois, je tiens à remercier Frank et le travail du Comité financier et je remercie donc également les opérations mondiales. Et j’aurai plus de commentaires à ce sujet dans une seconde.

Avant de céder la parole à Mike, lorsque nous avons réuni l’OCE début mars, nous avons formé de très nombreuses équipes spéciales dirigées par l’OCDE. Ce n’était pas cette gorge qui s’étouffait ici. Nous avons tous participé. Et l’une des choses que Mike s’est levé pour faire est de traiter avec les marchés internationaux, les gouvernements internationaux et de s’assurer que nous pouvons garder nos structures ouvertes, à la fois en termes de production et de ventes et de ventes, d’opérations et chaîne d’approvisionnement. Et Mike possède une connaissance extrêmement large et approfondie des marchés internationaux. Il a travaillé la majeure partie de sa vie ici à Emerson. Et donc Mike a mené cette bataille avec les chefs opérationnels en même temps, face à cette bataille.

Alors Mike, je te le donne. Et il met à jour les actionnaires sur la façon dont nous le voyons en ce moment.

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Michael H. Train, Emerson Electric Co. – Président et président de Automation Solutions [7]

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Oui, David, merci. C’est un plaisir d’être avec vous ici aujourd’hui. Juste sur ce graphique 20, avant de le quitter, je pense que la nature critique d’Emerson du travail accompli et la capacité d’être réactif et résilient dans chacune de ces régions est vraiment, très importante.

Passons donc au graphique 21. Si vous vous souvenez de la dernière fois que nous étions ensemble, c’était notre réunion des investisseurs le 13 février. Nos opérations en Chine étaient sur le point d’être relancées après un mandat gouvernemental qui serait fermé pendant 2 semaines. Les débuts ont été un peu difficiles car les fournisseurs ont mis un certain temps à redémarrer, et il y avait un vrai défi pour la logistique intra-provinciale et internationale. Cela s’est considérablement amélioré au cours du mois dernier, car nous avons vu nos activités en Chine commencer à se redresser. Et je sais que Lal et Bob fourniront quelques informations à ce sujet dans un instant.

Lorsque le coronavirus a commencé à faire son chemin dans le monde, nous avons vu les défis de notre capacité opérationnelle imposés par les gouvernements lors de la mise en œuvre de diverses formes de séjour à domicile, de réparations sur place et d’ordonnances de blocage. Emerson fournit des produits d’infrastructure essentiels et des services essentiels. Et avec beaucoup d’efforts, nous avons pu obtenir la reconnaissance et la désignation du gouvernement.

La Chine a provoqué les impacts de la Corée du Sud et de l’Italie, qui se sont ensuite déplacées vers la France et la Russie, le Moyen-Orient et les Amériques. Cet environnement a été très dynamique et je dois remercier notre équipe mondiale Emerson, qui écoute probablement l’appel d’aujourd’hui, un grand merci pour leurs efforts collectifs en travaillant avec les clients, les fournisseurs et les gouvernements pour faire fonctionner ces industries critiques en cas de besoin. plus.

Au cours des dernières semaines de mars et début avril, nous avons vu une multitude d’États aux États-Unis et plusieurs pays à travers le monde appliquer ces ordonnances. Nous avons vu des dizaines de milliers de nos employés se lancer dans le travail à domicile. Et c’était génial de voir l’équipe d’Emerson faire face à une nouvelle réalité soudaine et venir à tous égards. Pas beaucoup de temps à la fin d’un quart de perspective, mais nos usines sont restées actives et nous avons fait de notre mieux pour livrer aux clients.

Alors que nous siégeons ici aujourd’hui, nous travaillons toujours sur certains problèmes importants. Le blocus en Inde, qui a été récemment prolongé jusqu’au 3 mai, s’est révélé exceptionnellement difficile, car la logistique et la capacité d’opérer ont été pratiquement fermées du jour au lendemain. Et nous avons maintenant travaillé pour rendre toutes nos installations désignées essentielles et fonctionnelles dans une certaine mesure. Les choses avancent maintenant dans la bonne direction, mais il nous reste encore plusieurs semaines avant de vraiment revenir à un endroit solide. Nous avons travaillé en étroite collaboration avec des représentants du gouvernement et apprécions leur engagement.

En Europe, nous avons traversé des moments difficiles en Italie, mais maintenant les choses se sont beaucoup améliorées. Nous travaillons toujours sur certains problèmes de fournisseurs et le sentiment de la communauté en Europe. Mais encore une fois, directionnellement, les choses vont dans le bon sens.

Dans les Amériques, les États-Unis ont été incroyablement intéressants à naviguer. Je dois souligner les lignes directrices que le Département de la sécurité nationale a publiées sur les infrastructures essentielles et les services essentiels. Et à quelques exceptions près, nos États et nos villes se sont alignés sur ce guide.

En ce moment, je passe mon temps au Mexique où il y a encore des efforts importants pour gérer le virus. Et je travaille pour obtenir un alignement sur le guide des infrastructures essentielles, à la fois au Mexique et de concert avec les États-Unis et le Canada.

David, beaucoup de détails ici pour les investisseurs, mais j’espère que cela leur donnera une bonne image de la façon dont le monde gère le virus et recule. Je sais qu’il y a des conversations en Chine, qui pourraient être importantes pour réfléchir à la suite des choses dans les prochains trimestres.

Encore une fois, pour mes collègues Emerson, merci pour l’énorme effort et la collaboration, très importants parce que nous gardons la nourriture, les médicaments, l’énergie, l’électricité, les produits médicaux, tout ce que nous touchons, qui coule dans le nos communautés.

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David N. Farr, Emerson Electric Co. – Président et chef de la direction [8]

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Eh bien, Mike, je tiens à vous remercier beaucoup pour ce problème. Ce n’est pas facile, c’est 24 heures sur 24, 7 jours sur 7, jour après jour. Au cours du week-end, vous et moi avons beaucoup parlé. Vous avez parlé à diverses personnes, traité avec des dirigeants politiques à tous les niveaux pour vous assurer qu’ils en comprenaient l’importance, puis vous avez travaillé en étroite collaboration – main dans la main avec les opérations.

Je veux également téléphoner à Steve Pelch et à l’organisation en ce qui concerne le travail de sécurité et l’ensemble du groupe de travail que nous avons lancé avec l’aide de Bob, Lal et de l’autre équipe du monde entier, sachant ce qui se passe. Chaque jour, nous recevons des rapports du monde entier sur ce qui se passe avec les employés, si l’un d’entre eux a contracté un coronavirus, quel qu’il soit devenu – un résultat positif, qui est isolé. Steve l’a organisé en ce moment. Est-il maintenant en train de travailler avec des équipes de ressources humaines et des équipes de production mondiales pour savoir comment nous en sortir de manière mesurée et sûre? Comment pouvons-nous sortir de cette opération et ramener tout le monde au travail et retourner dans les bâtiments que nous avons d’un point de vue salarial et soutenir notre production et notre technologie mondiales?

Mais Mike, dans ce domaine ici, est quelque chose que nous n’avions jamais eu à faire auparavant, où nous avons dû travailler avec les gouvernements au plus haut niveau. C’est là que nous avons ces relations que nous avons tous, et à ce niveau, et même les cadres à la retraite d’Emerson, qui rentrent vraiment à la maison et nous aident dans des moments comme celui-ci.

Mais pour les gens là-bas, avant d’aller plus loin, je veux faire d’autres commentaires. Comme vous pouvez l’imaginer, nous menons une guerre pandémique mondiale. Et étant donné le PDG qui dirige cette entreprise, vous me connaissez assez bien, je crois fermement que les dirigeants devraient être au premier rang. Nous n’avons pas à nous cacher dans des bunkers ou à nous cacher à la maison. Les dirigeants doivent être au front et mener la guerre et gagner cette guerre. E voglio assicurarmi che il riconoscimento speciale vada al Consiglio, che ha lavorato a stretto contatto con noi con riunioni speciali; l’OCE; i dirigenti senior; e tutte le persone del mondo che sono state impegnate e stanno lavorando su questo – sulle questioni quotidiane.

È incredibile quello che succede quotidianamente, ma stare insieme ci permette di camminare per il corridoio, stare bene separati l’uno dall’altro, a parte ogni tanto, forse urlando a qualcuno. Quindi sono un po ‘troppo vicini. Ma è importante avere questo contatto occhio per occhio per affrontare i problemi. Ma ancora una volta, il Consiglio ha accelerato una riunione del Consiglio, ha accelerato la revisione dei numeri e ieri il Comitato di verifica ha approvato i numeri. Speriamo di presentare la nostra Q entro venerdì, al più tardi lunedì.

Inoltre, molto importante per tutti i dipendenti di tutto il mondo e i clienti è la comunicazione. E ognuno di noi, io, Bob, Lal, Steve e Mike, abbiamo avuto tutti dei video. Oggi sto facendo un altro set di video, come Bob, credo. Abbiamo avuto note, abbiamo avuto lettere e abbiamo comunicato costantemente ai nostri dipendenti in modo che sappiano cosa sta succedendo. È importante che non siano troppo preoccupati per questo perché siamo chiaramente in guerra e dobbiamo continuare a combatterlo.

Quindi, anche dal mio punto di vista, voglio fare un altro commento. Vedrai sulla diapositiva qui. In una conversazione che ho avuto con il Consiglio esecutivo un paio di settimane fa, abbiamo preso la decisione a livello di OCE che a livello di Consiglio, l’OCE, abbiamo preso una riduzione del 15% della retribuzione di base a partire dal 1 aprile, che è ora a posto. Siamo passati al livello senior successivo, livelli executive, livello abbastanza alto fino al 10% (sic) [down 10%]. E poi il resto della gente globale coinvolta nei nostri programmi di bonus è – ha preso un taglio del 5%.

Ma vedrai tagli, vedrai i furlough. Ci sono molte cose che succederanno qui. Abbiamo eliminato tutti gli aumenti salariali per 12 mesi. Quindi è un processo continuo che persone come me, che normalmente ottengono il mio aumento di stipendio nel periodo di novembre, non avverranno nel novembre 2020. Non ne avrò uno fino al 2021, il che molto probabilmente significa che non otterrò nulla perché Mi ritirerò. Così sia.

Nel grafico 23, voglio darti un’idea degli ordini. Ora tieni a mente: so che la gente si sta chiedendo, come ha fatto Emerson a registrare solo un 3% negativo nel trimestre? Bene, il vero impatto è iniziato nelle ultime 2,5 settimane a marzo. Come azienda abbiamo parlato con voi tutti a febbraio alla riunione di New York, circa $ 100 milioni, e poi l’abbiamo sollevata un paio di settimane dopo a circa $ 150 milioni. Poi, quello che è successo quando il mondo ha iniziato a impegnarsi, abbiamo visto l’impatto nella seconda metà di marzo. Quindi, nel complesso, siamo solo in calo del 3%, le soluzioni di automazione solo in calo dell’1%. Ma se guardi il 5% di Bob, in pratica è in linea. È una compagnia di libri e navi. Era abbastanza in linea con i suoi ordini e le vendite per il trimestre.

Quindi, ciò che questo grafico ti mostra, tuttavia, è chiaramente quello che vediamo ora è un calo abbastanza forte nei mesi di aprile, maggio, giugno e luglio. E vedrai gli ordini che ora inizieranno a rimbalzare nel 10% negativo, 20% negativo. E so che Lal e Bob ti daranno un po ‘di colore su questo, ma è quello che dovremo affrontare in questo momento. Perché storicamente, vedresti quel 3% negativo e dirai: « Oh, Emerson andrà bene nel terzo trimestre ». Non è così. Ha iniziato a cadere. Ma quello – quindi voglio darti una comprensione del motivo per cui gli ordini hanno resistito. We’re doing well from the standpoint of what’s going on in the economy, but it’s still going to start dropping down. And hence, the very weak third quarter that Pete outlined with you earlier.

As you look at the underlying sales growth, as the OCE and we held WebExes around the world with all our key leaders around the world over the last several weeks, in fact, the last 45 days, as we lived together here, we now see a pretty strong downturn here in the third quarter and also in the fourth quarter. We see this as a 4- to 6-quarter reduction. This is on Chart 24. And at that point in time, we’re structuring our costs accordingly. This is not going to be a quick bang up, bang down, bang up. No non lo è. It’s going to take time.

Now if you look at the ’21 numbers, those are directional only. We think that we’re going to have the first half, will be negative and then it’ll start turning back up. The question will be how fast the governments open up certain parts of the world, how fast the government stimulus comes into play, how fast do some of our customers come into play.

We are now modeling what we think is going to be the ’21, ’22, ’23, for both our internal standpoint as we see more and more inputs every day coming in from the customers, every day coming in from around the world. As you look at this, we’re looking at a pretty strong negative third quarter, down 14% online growth, plus or minus probably 2 points. Third quarter, which we’ll talk about, Lal will talk further about, minus 10%, plus or minus 3 points. So — and then you see some negative growth as we move into the first half of next year.

So we’re hunkering down into a very, very challenging 2020 and a challenging first half of ’21. And hence, the work that the operations and also corporate’s done relative to cost. And as I look at what’s going on right now and we’re in this pandemic war, we basically look at the situations of what — we’re evaluating everything. What we really need, what — or I’m evaluating the organization, which ones are rising to these challenges, which ones have the right stuff and which ones are bunkering.

And so all these things are very, very important to me as we go in and spend our time every day here in the office. And since there’s no golf going on, I basically spent 10 hours a day at the office and I go home and walk for about at 1.5 hours every night with my wife and then I start thinking about things and I get back to the office. So a lot of time in Emerson right now as I think through with this team, most of the team and talk about what’s happening.

If you look at the aggressive cost actions that we started last year, and that’s what’s really helped us. As you saw the close both at Lal’s Business and Bob’s business, if you think about what we did versus our guidance, our sales dropped in the second quarter $340 million, the deleverage is only 15%. That’s tremendous. And you’ll see Bob and Lal will give you a little bit more detail on that.

Versus last year, if I look at — from the second quarter standpoint, we dropped $408 million and we only deleveraged 9%. And that was fundamentally because of the work that Bob did last year early on, and then also the work that Lal did in the second half of calendar year 2019. So that really paid off.

Cash flow. The guys around the world did a great job, but now earnings are dropping and we’re looking at a much tougher cash flow in the second half. We still will generate strong cash flow, but not at the same level because earnings are dropping.

We clearly, right now, as you look at the analysis on our cash flow in the first half, we are now starting to liquidate our balance sheet, which is not unusual for Emerson. We’re very, very good at managing our cash flow. Hence, we generate strong cash flow in the first half of the year. But as we liquidate the balance sheet in the second half of the year, the toughest of it will be inventory because inventory — the volume has dropped dramatically right now. And then what will happen to us as we go into ’21, we’ll start and have to add the balance sheet as we start growing the company again sometime in late ’21.

Restructuring has truly helped us. Both at the corporate level, I talked to you about the cutbacks we’re taking across the world on salaries, on cutbacks and delays in salary increases; but also our bonuses will be — was significantly reduced. We are not going to 0 bonus. We’ve cut them back significantly. We’ll be setting targets around margins and cash. And this is very important right now as we go through this positioning, how to protect and maintain those margins and how to generate cash. And that’s something that we’re working on right now as a corporation, and I’ll work with the full comp committee and the full Board.

We’re also accelerating restructuring. We had a major restructuring program underway already. In 2020, we were going to spend $215 million. It’s now up to $280 million. Both businesses are using this opportunity to really evaluate, okay, how do we set the cost structure even stronger for us going forward, looking at layers, looking at organizations? And what do we really need to do relative to the organization to make sure we win but also have the right cost structure and so we go through this tough time period?

We don’t know exactly how things are going to go, but we have a good sense. I mean this team has been around a long time. As you know, I’ve been at Emerson for 40 years. If I went around this room and asked how many years these senior executives in this room have been, these guys are well into the 20s, into the 30s. So they know — we know what’s going on. We have very strong indications on what we’ve seen before and what we see today. So we’re really looking at keeping the costs in line and making sure we stay aggressive.

One of the things we’ve done over the years, as you well know, is we’ve continued to diversify the company. Today, 80% of our — we have non-oil and gas end markets. So oil and gas markets, clearly, upstream oil and gas, the pipelines and terminals. Even pipelines and terminals right now, it’s a questionable market. Some of the terminals are actually growing. They’re investing in terminals because they’re storing oil. But typically, we’re down to basically 20%, driven by this oil, gas fluctuation. Our rest of the business, we’ve continued to diversify on. And both Lal and Bob will talk a little bit about this, but we clearly have a different mix today, and you’ll see it here in a few minutes. And Bob has a very broad diversification around some key industries. And so it makes it a little bit different than we’ve had in the past.

Yes, we’re going to get hurt by oil and gas investments when 20% of the company is around that upstream oil and gas, but you’re also going to quickly see that we have a very strong KOB 3 business here in this marketplace. So the market is not going to 0. We are going to support these organizations, and you’ll see the numbers, they’re quite significant investments we’ve made over the last 10 years in our service organization and penetration in the aftermarket, and Lal will talk about that.

One of the other things is, clearly, North America. In North America, we obviously do very well. We have a very strong position in oil and gas. However, we also continue to diversify ourself against — away from this marketplace, and still support it. We’re not walking away from it, we just have other businesses that — and from the standpoint of pharmaceutical, medical, chemical, whatever industries. Energia. So if you look at where we see today, you think about percentage of automation sales, this year, we’re going to be in 10% to 12% in oil and gas in North America. It’s not going to go away. It’s not going to go to 0. You can see last year, it was $900 million upstream. This year, we’re looking around $750 million. I guarantee you, the majority of that will be KOB 3 aftermarket business to keep the facilities safe and running and producing.

If you look back at the last industrial recession, we’re well over $1 billion. It dropped a little bit upstream, but it didn’t go away. We don’t have the numbers relative to the ’08, ’09 numbers, but you can see that it was a little bit higher percentage at that point in time.

So we have continued to diversify. We have continued to work on our aftermarket business. And what I really want to do for the guys, and I’ll turn it over to Lal in a second, but I wanted to give — them to give you an insight relative to the business you see right now, also to give you some really strong insights that you’re not going to get from a lot of other people around China, actually giving you numbers, showing the shape of the curves and the recovery. But we’ve done a lot of work here thinking about what our investors would like to know about what’s going on inside Emerson and what we see day to day, which clearly is fluid, but we as a team are working very quickly to react to this.

And so Lal, why don’t you take them through this, your presentation here?

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [9]

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Si signore. Thank you, David, and good morning. I’d like to begin by acknowledging the global Automation Solutions team for a tremendous close to Q2, particularly as we faced rapidly deteriorating market conditions. This team has momentum in executing our peak margin plan and is focused on the additional challenges we now face.

So turning to Chart 28. This is how the plan looks from an orders and sales perspective in what is a significant demand-driven cycle. Orders were down 0.8 points in Q2 versus a 2.3% plan and will weaken in trough in Q3 and stay negative for 5 consecutive quarters as we have modeled the next 4 quarters. From a global perspective, these are 2015, 2016 type of numbers. However, in 2015 and ’16, it took us essentially 4 quarters to unwind; whereas in this cycle, it really happened in a quarter.

North America is very challenged. I’ll give you a little bit of color on the world areas now. North America is very challenged. Obviously, the oil prices and what’s happening in the marketplace is unsettling, and it presents a huge challenge to the upstream business. We will see production quotas imposed as the Texas Railroad Commission and others meet and vote later this morning. Rig count is down 35% in Western Texas in the last 30 days, and our RFQs in the upstream business is down about 25%. There are only 35 operating rigs left in Alberta, and we believe production will be curtailed by at least 20% in North America. Downstream, refiners are curtailing production as well. Some are shutting down units and other smaller refiners are shutting down completely.

This is partially offset by strength in medical and life sciences, as Pete pointed out. We won a major biopharm job, which we will book in May. And we have a 100-person team assigned operating at about 2,000 hours a week to deliver an FDA-approved, validated system in September. That is record time for — to stand up a pharma plant.

Let me turn to Asia. The good news is China’s recovery is better than expected. We will beat order — the orders plan in April, significantly driven by semiconductor and medical. The near-term demand in China is relatively strong as the economic stimulation takes hold. And I’ll show you the specific details on a monthly basis on China.

India is a bigger risk, as Michael pointed out, with significant lockdowns across the country and more restrictive measures instituted today, making it increasingly challenging from a sales-executing perspective. So we got to keep working that. However, across Asia, companies are resilient and anxious to do business, but the restrictions are prohibitive at times on the sales side.

Let me turn to Europe. Europe’s had a very good close to Q2. And we have very few cancellations to date. Customers are working the Ts and Cs aggressively. And RFQs in total have dropped about 15%.

Well, I’ll give you an example of Southern Europe which is interesting. For us, Southern Europe is Italy, France, Spain and Portugal, arguably the hardest-hit part of the world when it comes to the virus impact. On average, we booked $40 million per month in those 4 countries. We will book $38 million per month in April — in the month of April. That’s less than — that’s down less than 10%. Our Italian plants and suppliers are back online, and goods are flowing as the Port of Genoa is now reopened, albeit very busy.

Turning to the Middle East. Very strong environment continues with strength in Saudi Arabia offset by weaknesses in Iraq and Kuwait. The project funnel continues to move positively with Aramco remaining committed to their jobs. And virtual meetings are taking place across the region, and we have significant digital transformation wins as well.

And lastly, in Latin America, we have seen a significant impact, particularly in Mexico. The Chile copper mining and Peru gold mining continue to be bright spots in Brazil outside of Petrobras, particularly at MODEC, continues to be a good story for us.

Turning to sales. The plan for Q2 was a positive 0.5, we were down 8% as we pointed out. Again, we will trough to 12% in Q3, and we’ll stay negative as planned here for 5 consecutive quarters.

At this point, it’s important for me to highlight our backlog position. In the first half of 2020, we built $600 million of backlog, predominantly across our Final Control, Systems and Measurement solutions businesses. The assumption in this plan is that we reduced backlog by $300 million in the second half of the year. That results in Q4 being down in the 8% range and 2020 being down in that 7% midpoint range. If we can only convert 1/3 of that backlog assumption, meaning about $100 million, Q4 will be down 12%, and 2020 sales will be down approximately 8%. That’s the sensitivity on the sales plan.

Let’s turn to Chart 29. The last portion of this chart is an exact replica of the chart I shared with you during our February investor conference. The 2023 peak margin plan as defined had $325 million of restructuring spend impacting 2,300 salaried headcount and 110 facility reductions, yielding approximately $400 million in savings.

Focusing on 2020 specifically. We committed to spend $177 million of restructuring. In the first half, we spent $112 million, including $83 million, which we spent in Q1. And that was prior to our February meeting in New York. The team has identified an additional $53 million of restructuring, bringing the total for 2020 to $230 million and driving annualized savings of $314 million. This means that we have to execute $118 million of actions in the second half, $85 million in Q3. This incremental plan impacts an additional 1,100 individuals and results in $40 million of savings in the year. An additional $40 million of savings are generated by pullback of discretionary spending and other cost actions. In 2020 alone, we will impact over 8% of our salaried workforce.

Let’s turn to Chart 30. One of the most fundamental differences in our business today versus prior cycles is our KOB 3 position. We have essentially professionalized our MRO strategy since 2011, when we had a significant focus to this program and have subsequently expanded KOB 3 as a percent of total sales by 20 points. Through March of 2020, KOB 3 makes up 60% of our global business, up 3 points from the 2019 historical high.

The $120 billion installed base of our technology around the world has created tremendous trust and credibility with the customer base. We are not relying on large orders through this challenging cycle, but we are significantly more dependent on day-to-day small orders that have become an increasingly important element to our business. Nowhere is this more relevant than in North America, where KOB 3 now represents 67% of our sales.

Let’s turn to Chart 31, please. Most of the industry’s focus has been on the dramatic cuts from the shale operators in North America. And while we drive a large percentage of our oil and gas sales from North America, 44% as indicated on the chart, our exposure to the shale segment specifically of customers has only represented approximately 20% of total oil and gas sales.

While we do see capital spending coming down in all geographies, we continue to win and execute critical projects around the world. The oil logistics challenge is creating opportunities across the globe for terminals — terminal projects, both modernizations and greenfield developments and several — it’s funded new jobs in Mexico, in Abu Dhabi and in China. Additionally, upstream projects are still moving forward with limited new awards in international markets. And projects in execution are progressing, leveraging digital tools for remote collaboration for engineering and acceptance tests.

So what does this mean for Emerson? One, our strong global team of sales and service continue to engage with our customer base, in some cases, in person, but also using the digital tools I described. Two, Emerson’s digital transformation business is a competitive advantage for us. We have well-developed connected solutions that enable customers to take people out of the process. Three, we are actively working with customers to reschedule shutdown and turnaround activity into the fall season. Four, we have increased engagement with customers using our remote educational services. And lastly, we have developed targeted competitive displacement programs as many of our peers have extended product lead times 8 to 10 weeks or longer as they lack the regional manufacturing footprint capability.

Turning to Page 32. The project funnel currently sits at $7 billion versus the $7.1 billion we communicated in February. The oil price shock has triggered projects to be deferred into 2021 or 2022. Approximately $900 million of jobs have shifted to 2021. That is 2x the pace of FID pushouts that we have seen to date. Cancellations are — predominantly occurred in North America. And to help you bridge between the February meeting and what we see today as a business, we had approximately $135 million that we booked out of the funnel since February, we removed $203 million out of the funnel, $27 million of scope change occurred, and we added approximately $270 million to the funnel.

The major reductions, as I said, were North America, predominantly privately funded LNG jobs. And the predominant additions were MODEC FPSOs, 3 ships; Asia petrochemical jobs, predominantly in China; and BHP job in the Gulf of Mexico. Three large projects remain in the funnel: The Qatar NFE LNG; the Aramco crude to chemicals; and the Ratnagiri Refinery in India, which is a JV between ADNOC, Aramco and Indian oil.

Let’s turn to Chart 33. I would like to turn to a segment of our business that have significantly accelerated through this challenging time: Our medical and life science business, which will be close to $550 million in 2020 sales, growing double digit.

In the medical, it’s predominantly in our discrete and industrial segment of business. This includes Branson ultrasonic welders that David highlighted at the outset for medical PPE, ASCO medical regulators for applications such as ventilators and oxygen therapy machines, pneumatic controls for lateral-turning mattresses on intensive care beds. The business is projected to be up 40% in 2020 to $188 million.

The life science business is largely in our process business: Systems, Measurement and Final Control, where we have built a significant amount of technology around a leading DCS position in the life science market. This offering involves control as well as hygienic valves and single-use instrumentation.

Our position in the life science business is very strong. It goes back to the foundation of DeltaV as a smaller IO system best fitted for batch applications. Today, we have over 40% participation in what is a $0.5 billion life science DCS market. That’s 2x greater than the next-nearest competitor. And we play across the entire industry value chain, from development to production and fill.

Turning to Chart 34. I would like to give you some perspectives of what we’ve experienced in China over the fiscal year. This chart depicts orders and sales for 2020 by month. The markdowns in China were extended beyond Chinese New Year, but most of our operations resumed by February 10. We always expect that dip to occur in February. As you saw there, it occurred in 2019, obviously more extreme this year. By March, our orders were $125 million, down 9% versus 2019 and are expected to be down 10% in April as well, although I could see us closing that gap.

The acceleration in orders in the second half is driven by oil storage. SINOPEC recently announced the construction of 7 new tank farms as well as petrochemical activity ramping up for the elements like fiber production, a key feedstock for medical PPE. Much of this is visible in the Q4 plan.

Sales in March were down 22% versus ’19 despite our capacity being back to 96% by the end of the month. In April, capacity and manpower availability are both at 98%, and sales are expected to be down 2% to flat versus 2019. So a very quick recovery as we get out of March into April. For 2020, right now, I see orders projected to be slightly up, around 1%, and sales to be flat versus 2019.

Now I’ll turn it over to Bob Sharp. Merci.

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Robert T. Sharp, Emerson Electric Co. – Executive President of Commercial & Residential Solutions [10]

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Thanks, Lal. Like Lal did, I want to start by recognizing the team out there. Q2 ended very differently than what we thought, starting with the China downturn in February coming out of — delayed coming out of Chinese New Year and then going into March, as we’ll talk about. Despite that, we had a very strong quarter. Gross profit drove the 0.9 of adjusted EBITDA improvement. We held SG&A in line with sales, even though, again, that sales dropped by about 5% just in the last weeks. And that was certainly a strong effort.

As essential business, we keep running. Around 84% of the Commercial, Residential Solutions (sic) [Commercial & Residential Solutions] employees are still going to work every day at the site because that’s what we need to do to produce and ship our product. And I certainly want to extend a special thanks to that group. And we’ve taken many measures to make sure they’re safe, following the government and local health guidelines as well as doing additional actions as well.

Now for the chart here, what I’m showing, the sales and orders for Commercial, Residential largely go in line with each other. We have very much a book-to-ship business. So what I’m showing here is our sales outlook for this year into next year. And then I’m going to use the financial crisis as a reference because I don’t — there’s not really any direct reference to what’s happening right now, but the closest thing I think we see is probably the financial crisis.

So you can see it going in, last quarters have been kind of flattish, if you will, down a bit. We expected it to be very similar through the rest of 2020 even a month or 2 ago, and then things started changing pretty quickly. In Q2, China ended up being down 33%. The U.S. still held pretty closely, around 3% down. And you can see now as the COVID effect has carried through into Europe and U.S. and other places, the second half changes significantly.

Again, China was down 33%. We expect China to actually be moderating, if you will, and coming back. I’ll show some more specifics on that, and then things are really going to turn. Whereas the U.S. and Europe, in particular, down significantly in the second half. So a bit of a flip-flop. Certainly, the 2 keys for us for the second half are going to be what China does from a trajectory standpoint. And then U.S. summer is always a key variable for us with the heavy air-conditioning presence that we have.

You can see right now, directionally, and it is certainly directionally because we’re focused primarily on this period in this quarter more than anything. But going into 2021, if it follows similar downturn to the past, we would expect by the second half to be turning up, and the magnitude of that is certainly to be determined by a lot of things.

At the bottom, again, the 2008 to ’10 reference. We had a little more growth going into the financial crisis, up a couple percent being down. You can see we went down 10s and 20 percents in 4 quarters, and then had a pretty sharp snapback in 2010.

There are some differences, I think, in this one. The housing starts in the U.S. went from about 2.5 million down to 0.5 million in 2009. It was very much financial-oriented. This is obviously a very different crisis. Certainly, substantial job loss right now, especially in the U.S., over 22 million jobs. So far, we see that as being probably less housing-oriented kind of positions. But certainly, as that plays out, that could also be a key factor as well. So again, at this point, we’re buckling down for a very challenging quarter that we’re in. Still continued challenges in Q3, and then we’ll watch how things develop, including a lot of the external factors around the COVID virus as far as what’s going to dictate for 2021 outlook.

The next chart I’m showing is — on the left is the exact chart I used in February for the investor meeting. You can see the peak plan summary, about $330 million of total actions, 500 salaried headcount actions on only about 8,000 salaried headcount in this business. That’s a substantial percentage, a number of moves, the best cost, a number of factory changes. This is a very GP-oriented plan, so driven heavily by factory activities, automation and other programs. And then certainly, price-cost is always a big factor for us.

On the right, you can see from an update, we beat this plan for H1, again, despite the fact that the second quarter changed significantly in the last weeks. To this plan, we’ve added 300 additional salaried actions. That’s a combination of restructuring and then pulling open jobs and basically every possible move with respect to the workforce. We’re very tight right now, and the organizations are managing to that. We are going to be using widespread furloughing in the business. It’s an unusual practice for us, if you will, well, probably because we do expect this ideally to be a relatively short-lived thing. Once the virus comes under control, we’re trying to manage through by keeping — getting the cost down quickly in this half. Still have the opportunity with our workforce next year. Of course, if next year changes, we still have other levers to pull, but that’s the one we’re going after right now.

On top of the restructuring activities, there’s also $31 million of other additional cost actions, which is, again, basically all levers we can pull on the SG&A side. Our second half SG&A spend versus our original plan is now down over 10%. So we’re working to adjust to the volume decline. And certainly, as Mike mentioned, there’s a lot of supplier, internal customer and other disruptions to our operations as we work to keep running, work to keep our customers going, and that’s certainly going to be a factor on the second half profitability in the GP as well.

The next chart talks about China, and you can see again, we had a very strong 2018 in China. It started turning down. The first half of last year was down 20-plus percent. And we felt we were coming out of that, with some ups and downs. But then as you can see, again, Q2 changed substantially.

At the bottom, you see January was down 43%. That was largely a factor of the Chinese New Year timing versus last year. February, which normally would have been stronger, turned into effectively an extended Chinese New Year by a matter of weeks, in some cases, for some operations. So we also had a very significant downturn. March was a bit better, down 19%. April continues to improve, it’s in the 10%, 15% kind of a dynamic right now. And as you can see, we do expect at this point to be — to steadily return again through May, June and then up above, you can see in Q3 and Q4. And certainly, under ideal conditions, if you will, or under the right conditions, perhaps even turning positive in the fourth quarter.

Down below on the left, there’s a number of project investments going on right now across the provinces. You can see around $1 billion in total or close to that, many projects. A lot of these affect buildings. A lot of these affect bus and rail, where we have air-conditioning and refrigeration. So we see this as a proxy. The channel partners we have in China have strong visibility on projects. The key thing is going to be the execution of them. Everybody is tight on cash right now. So nobody wants to release orders until they’re getting paid by their customers, and our channel is in that same condition as well.

So again, the — China right now is playing out in this way. And just as Lal mentioned, certainly, as we came out of the Chinese New Year, we had some challenges in the initial days, I’ll say, but really, by and large, we’re back to running very normally in China and as are our customers and suppliers. And so we’re hopeful that this is going to play out.

We’ve got a couple of charts here on Emerson’s supporting the fight against COVID-19. Chart 39 from the Commercial, Residential standpoint, certainly, one of the things we’ve done is to help out, particularly the first responders, the medical organizations, other care facilities. We typically have a number of safety things in our plants, gloves, masks, goggles and things like that. And frankly, we’ve done a lot of work to give away a lot of these things initially, particularly N95 and KN95 masks, which are basically the Chinese standard of the N95 masks. We’ve given away nearly 40,000 of these to many different care facilities around the U.S. and other countries as far as gloves and other things, too. We are providing our own employees with surgical masks, cloth masks and other things. From a prioritization standpoint, we’re basically saying that the medical community needs the N95s more than us.

And then from our product standpoint, a number of good examples. On the right, our Cargo Solutions business, that device that you see keeps the temperature tracking. And it also transmits cellular, so it can transmit the conditions in a shipment. A customer was trying to move some COVID test kit materials from Korea into the U.S. The first time they did this, they were all destroyed during a layover due to freezing. And so they contacted us on a Sunday for a Monday shipment. We gave — got some devices to them and helps to preserve the product as it came across to the U.S.

In the bottom left, the Cold Chain business, Thermo Fisher, an important customer of ours, needs refrigeration for some of their COVID test stations, some of the testing environment, and we’re able to supply a number of those quickly. We’ve got a number of other examples, pop-up medical facilities for air-conditioning and other things.

The bottom right shows in our professional tools business, the Corps of Engineers in the U.S., pop-up care facilities in Denver and Miami. And we provided a lot of equipment for them to be able to get that infrastructure established.

So again, it really plays to the importance of Emerson and our products as essential businesses for society. And again, it’s something that we help — helps our employees understand why it is that we do need them coming to work every day because we’ve got a lot of important things we have to make sure we’re providing to customers.

So I’ll turn it over to Lal.

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [11]

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Grazie Bob. I want to share a few examples from an Automation Solutions perspective as well and 4 specific examples of the efforts our teams are making to support the COVID-19 crisis response.

Starting in drug development, I’ve already mentioned a major pharmaceutical bio firm announced a significant expansion recently. This is in response to a positive response of one of their drugs in COVID-19 treatment. I can’t mention the name of the firm or the drug as we are in an NDA. However, this contract is north of $20 million and will be booked and shipped this fiscal year.

In the testing realm, our Coriolis meters are being used for the precise filling of reagents and testing equipment. If we move over to medical PP&E (sic) [medical PPE], we have been awarded orders from Honeywell in the — over the past 5 weeks for Ultrasonic Welders to be used in the manufacturing of medical masks.

And lastly, in patient therapy, we’ve received nearly $20 million of orders for valves, manifolds, to be used in oxygen therapy machines and sanitary regulator solutions for ventilator applications. So a very broad set of offerings that support the response that’s occurring around the world. Merci.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [12]

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Merci. Thank you very much, Lal. And thanks, everybody. Again, we made the decision as we listen to our investors in the calls and the sell-side analysts and also the buy-side, investors, that we felt that we needed to go a little bit above and beyond normal in our communication. Don’t expect this type of detail all the time. A lot of work goes into this, I just want you to make sure. But I think it’s important that our investors understand what we’re living in day in and day out.

And again, I want to thank everybody, both in this room, the entire OCE, the 15, 20 people that put up with me for the last 45 days and also the people around the world as both Bob and Lal and Mike and Frank have communicated. It takes a team effort, and we’ve divided and conquered and formed task force and worked this on a day-to-day, face-to-face basis, and I want to make sure that everyone’s recognized for that. I’m doing a video again this afternoon, 2:00, 2 videos, one for the employees and then also one for our website to thank everybody.

I also want to make one special emphasis on this. People know me quite well. In 2015, ’16, 17, we went through a major repositioning effort, and I made a very strong statement that we would not cut our dividend. We would not break our dividend history. I want to make sure people understand that. I’m still the CEO. I’m not dead though people have tried to kill me. I’m still quite strongly in charge. And as long as I’m here, our dividend will not be cut, and we will maintain our dividend payments in history. We have the financial flexibility and capabilities to do that going forward.

We also are looking clearly — one of the things I want to make a comment on is acquisitions. We clearly see some opportunities that will start emerging. And we want to make sure we are strong, financially set. And while the work that Frank’s doing and the work everyone’s doing right now gives us that flexibility to pick up unique opportunities like we did V&C many years ago.

But with that, I want to thank everybody in the situation room here. And I want to thank everybody around the world that has listened to us for Emerson. And now we’re going to open the lines and take Q&A.

And we’ll start. So off the bat, so announcer, since you wouldn’t do live from Saturday Night Live, this is live from St. Louis. And the first question is coming from, I guess, Mike Halloran. So let’s open the line, so Mike can ask the question.

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Domande e risposte

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Operator [1]

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First question comes from Mike Halloran from Baird.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division – Associate Director of Research & Senior Research Analyst [2]

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So first question, just some historical context on how you’re looking at the oil and gas cycle here. Obviously, you’ve been few through — through a few of these days. I can certainly appreciate the slide that Lal put together on the amount of KOB 3 that’s now in the portfolio. But how do you think about puts and takes, structural concerns as you move forward, gas versus liquid? And how quickly you think your customers can start responding by putting more capital dollars and OpEx dollars back into the market.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [3]

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Sì. So I — Michael, to give you some context, I’ve been around for quite a long time. I ran the process business back in 1996 and ’97 when we had the financial crisis of Asia, and the price of oil went below $10, almost went to $0. I think you’re exactly right. We’re going to see — I’ll let Lal answer a couple of things here, too. But we’ll see a structural change. I think we’ll see an acceleration over time from liquids to gas. I think you’re going to see a structural change in the power industry, a topic — what’s going to be going — used in the power industry to generate energy and electricity. I think they’ll take their time with this situation. I think some of our gas projects are still on the table. I’ll let Lal talk about Golden Pass plus the one going on in the Middle East right now.

But the first thing right now, Mike, is they’re going to hunker down and protect cash. They’re going to try and maintain the current liquid production, the — for revenue. They’re going to — so therefore, they’re going to have to spend KOB 3 type of dollars and a little bit of KOB 2 dollars. I think this thing — transition will be more out there in the ’23, ’24 and ’25 time period based on my historical knowledge of this, and I appreciate that.

And by the way, I’m assuming COVID can’t go over the wires and you get me sick. Because if you get me sick, I’ll be very upset with you, Mike, especially since you’re a Brewers fan, Milwaukee Brewers fan.

So Lal, anything you want to add to that?

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [4]

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Sì. Grazie David. Well, we’ve seen recent announcements by the majors cutting CapEx down 22% versus ’19, those kinds of ranges. It is important to note that here in North America, it’s a heavily concentrated space. Approximately 50 players generate 80% of the oil production in the United States. The other 20% is done by thousands of players. I think the 80 players will be — the 50 players, excuse me, will be very disciplined. As we go through this, the thousands, many of them will be in trouble as we go through it.

So typically, when I think about the 2 segments, the downstream refining and the upstream oil and gas, I believe they have different economic cycles. However, in this, both are grappling without fundamental lack of demand, Mike, as you pointed out. Refiners are facing difficult decisions. They’re reducing utilization rates, as I pointed out, some are idling units, and some are trying to figure out how to just maintenance and turnaround intervals to manage this tough environment.

For us, upstream is significantly more weighted to CapEx historically, and refining has been more weighted to OpEx. That’s one aspect where we see some difference. The other aspect is that we believe that the refining segment will rebound a little quicker as demand normalizes. However, oil — the oil production is more structurally impacted, I believe, and that will be significantly more challenging because of this oversupply element that we have. So that’s how we see it right now in the 2. But I think structurally, upstream oil production will be a more challenging cycle here.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [5]

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One of the things we’re doing, Mike, in the — because you’re exactly right, there’s going to be some structural changes here. We’re starting — we’re evaluating our organization, too, and we’re putting investments [and how we are going to support it]. As you well know, we can adjust our people but we’re working very quickly because, clearly, there’s not going to be any major projects for a while in the liquids side, they’ll be more on the gas side. And we’re — and obviously, we’re going to redirect our people and support the aftermarket business. So a lot of adjusting going on by the world area people. Jamie out in Asia Pacific, Vidya in the Middle East. We have, obviously, Roel in Europe, our leaders there are all adjusting because of the same issue that you bring up. And it’s going to be very fluid and live for — I think, for 2 or 3 years.

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Michael H. Train, Emerson Electric Co. – President & Chairman of Automation Solutions [6]

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And David, to your point around gas, you’re absolutely right. Golden Pass continues to move forward. That’s an LNG job. Saudi’s Marjan project is the offshore gas production, continues to move forward, and we continue to book the awards there. So I think they’re looking long-term gas opportunity still as a dynamic they want to continue to fund.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [7]

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Mike, one more question [from you], please?

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division – Associate Director of Research & Senior Research Analyst [8]

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Sì. So that’s actually a good segue. Then how do you think about the structural changes that you’re seeing on that piece and what that means for the AS segment over time? Hybrid discrete, some of these medical life science type of applications seem to be doing very well and certainly a better tail as we look forward. You basically — you — particularly, as you bring some stuff back, and some more regionalization come on that side, how quickly can you morph the portfolio? Che cosa sembra? Obviously, you don’t stop supporting the KOB 3 piece, and you still have a lot of breadth and depth there. But how quickly can you move? And what do you think about inorganically versus organically?

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David N. Farr, Emerson Electric Co. – Chairman & CEO [9]

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Sì. I think that we are — one of the things that Lal and his team are really in — they’re — we’re obviously looking at our internal investments. I’ll answer first and let Lal answer this, too. But we’re obviously changing our investments towards serving the — more the discrete marketplace, the other marketplaces, not the liquids side because I think the gas investments will continue to come back. The aftermarket gas is very, very strong. And there will be a liquid, but it will be changed, as you’re saying. So you’re going to see that we continue to invest at higher levels around the areas that are in the hybrid space, the discrete space, other space, both from an acquisition standpoint and also this internal development. We have a lot of projects underway right now working clearly within the discrete space, within the systems space, that move outside the oil in that marketplace. We’re also looking at potentially some acquisitions. Can we shake out some acquisitions that are little more software-based or along those lines?

So Mike, I think you’re right. And obviously, as we’ve seen in every other structure time like this, our liquid business will be less and our other business will be higher. So that percentage will continue to drop.

So if you think about the revenues and you think about the business that we have today, it’s going to continue to shift away from the liquid side. We are not going to walk away from these important customers that we support in the oil and gas area. These are very important customers. The industry is dependent on our technologies. But you’re right, we will reallocate some of the new innovation around the other areas in our portfolio, continue that mixing away from the oil and gas.

So anything else you want to add there, Lal?

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [10]

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Yes, 2 things, David. We have made significant efforts, both organically and inorganically in developing our portfolio around the discrete space, both with acquisitions in Europe and internal investments in that business around our core ASCO technology, and there’s a significantly longer runway to continue to drive that. The 2 other areas, David, that I’m particularly focused on from a diversification perspective are in the hybrid segment, life science, particularly, as we touched on, Mike, and the power segment. I think there are opportunities to expand our power market beyond our traditional generation control system into other areas.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [11]

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Sì. I think that on what you — also, Mike, to add on, he’s — up in Minneapolis right now, they’re working on a lot of sensors for the hybrid life sciences, food and beverage space, which is an important area.

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Operator [12]

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Next question comes from Nicole DeBlase from Deutsche Bank.

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Nicole Sheree DeBlase, Deutsche Bank AG, Research Division – Director & Lead Analyst [13]

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So I just wanted to ask about margins in the second half of the year. Looks like you guys are embedding decrementals getting about worse in the third quarter despite the fact that I would suspect restructuring payback is stepping up. So if you could speak to decremental margins as well as the expectation for restructuring payback.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [14]

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Sì. I think the big issue right now, Nicole, is in the second quarter, why our decremental margins were so much better is, obviously, we had a lot under — done in the first quarter. And then the drop-off in the sales is significant, but not the same level we’re talking about in the third quarter.

So right now, the acceleration of the decline of our sales are overwhelming basically the restructuring we’ve done in the first half and the new — and the incremental restructuring we have going on at this point in time. We are still looking at 12 months or less on the total pot. We are also looking at some longer-term ones that we’re doing relative to our international markets, so we can sort of set ourselves up for a better ’21 and ’22.

But the third quarter in particular is really — is because the drop-off you see in those sales, I think — what did we drop off, $1 billion something in the third quarter sales?

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Frank J. Dellaquila, Emerson Electric Co. – Senior EVP & CFO [15]

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$700 million.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [16]

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$700 million? It’s just overwhelmed everything we’ve done at this point of time. So we’ve been a little bit more cautious on that. But we’re still looking at a very good payback of 12 months from that standpoint, very focused on that. But I just don’t see us overwhelming that drop-off in sales that’s hit us so hard in April, May and June.

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Nicole Sheree DeBlase, Deutsche Bank AG, Research Division – Director & Lead Analyst [17]

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Va bene. Fair. Questo ha senso. And then just piggybacking on to that question. Is there any big difference in the margin expectation by segment? Or will both face similar decrementals in the second half? Just thinking about the fact that most of the restructuring spend has been focused on AS?

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David N. Farr, Emerson Electric Co. – Chairman & CEO [18]

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Bob, why don’t you answer first? What’s your decremental in second half? You’re going to be close to 30…

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Robert T. Sharp, Emerson Electric Co. – Executive President of Commercial & Residential Solutions [19]

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Sì. We’re going to deleverage at around 30% order of magnitude. That’s with sales down well into the teens. So there’s a pretty — there’s a bit of a sales difference in the second half between the 2 platforms. But as Dave mentioned, that magnitude of sales decline, even with a very strong SG&A reduction versus last year and certainly many activities in the plants, the operate — the deleverage of volume as well as, again, the COVID-19 impact, which is very disruptive to the plants right now, is going to be very challenging.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [20]

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From a productivity — I think the only thing you want — might want to add to that, Bob, is you’re still trying to target some EBITDA margin improvement for the whole year even with the down sales you’re looking at. Is that still the case?

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Robert T. Sharp, Emerson Electric Co. – Executive President of Commercial & Residential Solutions [21]

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Adjusted EBITDA in total for the whole year, we’re looking to hold versus last year. But it’s going…

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David N. Farr, Emerson Electric Co. – Chairman & CEO [22]

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It’s harder doing that…

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Robert T. Sharp, Emerson Electric Co. – Executive President of Commercial & Residential Solutions [23]

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But it’s going to be hard at this point. Yes, that’s going to be very strong with the volume decline, but it’s going to be difficult to, at this point, be up.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [24]

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Sì. The big issue — and I’ll let Lal answer, too, Nicole. The big issue right now is the plant. Some plants will operate for a day, 2 days and then get shut down as we have to clean. And that’s — that productivity impact is very, very hard to overcome, in which — safety within our facilities is very, very important. It’s frustrating. You have a situation, all of a sudden, you have to shut down, then you got to get people back up. So it’s another hand tied behind your back here. But overall, I think with all that situation, it’s going pretty well.

So Lal, anything you want to add?

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [25]

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Sì. Grazie David. Nicole, the third quarter is clearly our most challenging quarter with deleverage rates in the 44% range for us. That’s driven by predominantly 2 factors: one being the North America impact, which is most significant in the third quarter accelerates from March into Q3; and the book-to-ship businesses impact. So the short-cycle businesses in our instrumentation and KOB 3 and Final Control being impacted, those are higher-margin businesses than some of the longer-cycle businesses that we do have.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [26]

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Corretta.

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [27]

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Things do get better for us sequentially into Q4 from a deleverage perspective, and we fall back into the 20s on a pure EBIT basis, which is more normalized. But the third, we take a significant hit, Nicole.

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Operator [28]

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

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Andrew Burris Obin, BofA Merrill Lynch, Research Division – MD [29]

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Just a simple question. Looking at the comparison you guys making with ’08, ’09, and I understand the bottoms-up fact that the company is better. But it seems that the GDP forecasts for 2020 are going to be weaker than what we even saw in the great financial crisis, yet your revenue performance seems to be better than in the financial crisis. Is that all driven by just changes in the portfolio? Or are there other assumptions from a macro perspective embedded there as well?

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David N. Farr, Emerson Electric Co. – Chairman & CEO [30]

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The number one issue, Andrew, is we went into the financial crisis running hot, strong. We are very strong. We are growing double digit. So that was the big issue. We were in on a growing curve, and then we got hit, and we dropped hard off that hit. As you well know, we were structured this year for basically a flat year. We had a couple — last year for Bob’s business, he was flat or slightly down; Lal was way off what he thought it was originally. So we’re going into the cycle differently. And the second thing is we are differently structured from a mix of the business since the last cycle. But the big issue is when we went into that one, we were growing very strongly, and then the bottom fell out. This one, we were ready for it. The bottom had already sort of collapsed last year. That’s the biggest difference, Andrew.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division – MD [31]

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And just the second question, in terms of restructuring, you are talking about spending more money, but can you just talk in terms of logistically, what is it you’re doing in 2020 now that a couple of months ago, you didn’t think you would have to or you couldn’t do it? Are there opportunities to move faster? Or is it just you being more aggressive on footprint? And if you could just give us more detail as to specifically [where], if you could share that publicly.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [32]

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Sì. So there’s 2 avenues here. One, we are — what we’re trying to do is accelerate the programs, sort of the fixed cost programs, the facility programs that we had built more into 2021. We’re trying to accelerate those into the second half of 2020 so we can get those done sooner because I — when the spike does come back, we want to have those new facilities up and running, lower cost structure.

Secondly, we are being a little bit more aggressive on some of these consolidations and how we do them and how fast we get them done from that perspective.

And the third thing is, as I said earlier, both at corporate and the 2 platforms, we’re looking at the structure of the overall company and what layers we can take out and what layers we don’t necessarily need anymore as we learn how to run the company in a different world, which we are right now. So those are things we’re doing. And we’re just looking at everything very carefully and sort of if we don’t need it, we’re not going to do it. And that’s from that perspective.

So that’s what’s going on, a lot different view of this as we go through this pandemic war. Anything you — Lal, you want to add?

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [33]

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Sì. Grazie David. Obviously, on the facility rationalization, it is dependent on us building the best cost sites, so that we can execute some of those plans. They are underway, but obviously, building plants takes time, accelerating as best we can.

So to David’s point, a lot of what we’ve identified, Andrew, incrementally has been purely around volume-related headcount, decisions on what we do and don’t do and then identifying further delayering opportunities across the businesses. Those are the — those 2 categories, as we talked about in New York, Andrew, are the quickest payback on restructuring and quickest to execute. And that’s what we’re leaning on very hard here in 2020 as we accelerate the second half restructuring.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [34]

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Bob, anything you want to add?

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Robert T. Sharp, Emerson Electric Co. – Executive President of Commercial & Residential Solutions [35]

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Well, I’d just say that our peak plan did not have things like wage freezes and cuts. Certainly, discretionary, I think most everybody else is doing the same thing is practically nonexistent. And frankly, we’re just going into the organization at a level — part of it’s volume-related, but a lot of SG&A isn’t necessarily easier to do with volume. So we’re just making some tough choices right now on positions that we hope to at least be able to work — have without for at least a year or so to get the payback on it. But some of the stuff, when we do get volume, will certainly come back. And it’s — I wouldn’t say it’s really part of the peak plan, it’s part of dealing with just a very dramatic sales cycle that we hope doesn’t last too long.

But again, the operational side, the plants, and that’s all going, there’s not a whole lot more we can do that will affect the second half of this year. Although I will say, even in the manufacturing, [salary ranks] and costs, we’re not — we’re turning over every stone right now and trying to deal with a pretty dramatic volume slide here quickly.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division – MD [36]

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Just a question, have you [changed] your definition of what low-cost facilities are in this environment, given this fracturing of global supply chains that people talk about?

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David N. Farr, Emerson Electric Co. – Chairman & CEO [37]

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We don’t — we use the word best cost. And the answer is no. We’ve always — we always look at valuation relative to logistics. If you think about our regional strategy, we think about logistics, supply chains. I think there fundamentally will be some changes as people look at rebalancing that matrix site that we use. And we did a rebalancing about 5 or 6 years ago, 7 years ago. We’ll take a look at that as we go forward here.

But from our perspective, we’re — we tweak that matrix on a constant basis. We’ll tweak it again at the end of 2020. But right now, the definition of best cost has not changed, no.

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Operator [38]

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The next question comes from Julian Mitchell from Barclays.

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Julian C.H. Mitchell, Barclays Bank PLC, Research Division – Research Analyst [39]

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Maybe just a first question, David, looking at Slide 24, and you’ve got that scenario of the big dip in fiscal Q3 and then staggering back towards a sort of flattish line a year out. Maybe just help us understand within each of the 2 main segments, which end markets you think will lead that recovery and which ones might be laggards? Understand that maybe upstream CapEx is definitely a laggard that Lal had called out, but maybe any other color across the 2 platforms of the slope of end market trajectory.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [40]

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Sì. I think if you — I’ll comment, and I’ll let both these guys comment on their specific business because it will be different. I mean clearly, the liquid side of Lal’s business is going to be very slow. I think you’re going to see, starting in the first half of next year, some companies look at bringing some facilities back in the United States. So there will be some spending around pharmaceutical and medical, there will be spending around some of the chemical side and the materials that go into that space. I think you’re going to see — the only laggard we see probably early on will be the liquids side on the new contract — in the new business. Historically, I mean, that would lag with this type of shock.

I would also, probably, be cautious about the gas. I think the gas capital investments will probably be a little bit slow recovering back. But the rest of the 80% of business that we look at, I think, will start bouncing back pretty quickly as they go through their own matrix and see where they’re making stuff and how they rebalance that. But the power industry, I think, will continue to spend as it is right now. If I look at the food and beverage, I look at the chemical, all these guys are reevaluating those — their spending. So I think those are — they’re going to come back. And it is the liquids and the gas side that I would worry about, which is about 20% of the total business.

Anything else you want to add to that, Lal?

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [41]

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Yes, David, just very quickly. Obviously, you know 60% KOB 3 business, Julian, that’s a lot of day-to-day small orders. Essentially, what that 60% defines is what is required from an automation perspective to keep the plant running, be it a pharmaceutical plant, a refinery or a coal-powered fire station (sic) [coal-fired power station]. So it’s that, that we’re focused on. I agree with David that as this comes back, it will be predominantly on that — it will be — not be in the production side that will lag, it will be more downstream as we see it. But we’re currently already scheduling STO, shutdown, turnaround activity into the fall season. That’s across the broad scale of our process industries and power. That we’ll see accelerate and return very quickly as people are allowed back on site, and we should see the benefit of that.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [42]

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But you’re going to see a lot of the — as the White House, and I’m sure every government around the world is looking at is, all the areas that went into the health care, the medical, the type of chemicals, whatever they need, the pharmaceutical, I guarantee you they’re going to look at how do you — around the world, not just the U.S., but also Europe and Asia, they’re going to look at, okay, where do we need to make those investments? And that’s what’s going to help drive a company like Emerson back in the early ’21 time period.

Bob, anything you want — do you see a change coming back?

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Robert T. Sharp, Emerson Electric Co. – Executive President of Commercial & Residential Solutions [43]

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Sì. Certainly, for us. Certainly, key leading in was obviously China, and that’s also, we anticipate, being a key as far as coming out of it as they work on stimulating the economy. Construction, both in terms of real activity, if you will, but also especially the channel just getting very cautious about carrying inventory snaps very quickly on us. And depending on the sell-through picture, that can come back quickly as well.

Cold Chain right now, again, the restaurant industry is largely frozen in the United States or on hiatus. Even supermarkets, which we’re all realizing are critical infrastructure, are very limiting as far as who they want in the sites. So they’re very careful about doing any project activity right now.

And then again, certainly, just a general customer, both individuals as well as companies, freezing right now with uncertainty about what’s going to happen. And then, again, coming out to China. And certainly, again, for us, the summer cycle in the U.S. with air-conditioning is going to be quite important. And that we always watch as the spring develops and as the heat develops, that’s going to be a key factor.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [44]

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Yes, it might be more of a replacement market this year than a…

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Robert T. Sharp, Emerson Electric Co. – Executive President of Commercial & Residential Solutions [45]

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Sì. Yes, there’s certainly talk about replacement, but about 85% of our business is oriented at replacement anyway. So certainly, the housing — new housing will have some factor. And whether people do repairs or a system replacement matters a bit, too, although our margins on the repair side, the compressors are quite good. So there’s certainly some mix help if it gets down into component repairs.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [46]

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Merci. Julian, anything else?

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Julian C.H. Mitchell, Barclays Bank PLC, Research Division – Research Analyst [47]

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Solo uno veloce. I mean I know that you always look sort of further out into the medium term. So maybe whenever we come out of this downturn, would you expect anything different about the incremental margins whenever we come out of this slump versus, say, your experience in 2017 or 2010 and ’11?

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David N. Farr, Emerson Electric Co. – Chairman & CEO [48]

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Well, if we — I mean from the standpoint of — we’re not backing off our peak margin plan. So obviously, as we come out of that, incremental margins should be better in the term because we’re taking fundamental structural changes to the company, and we are evaluating all the touch points between the 2 businesses and the corporate entities. So I would say structurally, costs will be lower as we come out of this, and that will be a good thing. And the key issue is — for the next CEO is to make sure that he or she does not allow those structural costs to come back in. But I would say as we fly out of this thing, incremental margins should be better for us.

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Operator [49]

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Next question comes from Andy Kaplowitz from Citigroup.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division – MD and U.S. Industrial Sector Head [50]

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Let me ask you about China just in the context of, obviously, down 20% in AS in Q2 and 30% in C&RS. So how much did you use China as a road map for COVID-related impacts across the rest of the company when you’re thinking about your guidance? Because you don’t seem to be guiding to that kind of impact for the rest of the world in the second half. Is that mostly because of the expected China recovery? Or are there any other geographies that are hanging in there better than China? And then can you give us your take on the shape of China’s recovery? I know you gave us a lot of color. Do you think it’s ultimately U, L? What do you think there, Dave?

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David N. Farr, Emerson Electric Co. – Chairman & CEO [51]

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China recovery is going to be more of a V shape. And you can just quickly see, I think it’s going to be sharper for Lal, a little bit more flattened for Bob. And the reason for it is Lal’s businesses — I mean from a nationalistic approach, China is investing in things that will help them as a country, be it the medical area, be it the power area, be it the other different energy areas, given the fact they’re building tank farms to buy $10 price of oil.

I mean China is — for Lal’s business is going to staff much faster. Now I don’t think the rest of the world, if you just — I’ll talk Lal’s business first. I don’t think the rest of this world will snap this way. China had a little bit different agenda from the standpoint of how they control the economy. I think the other economies will have a slower comeback from the standpoint of how they open up.

We just look at our measured opening that we’re going to have inside the United States. I see the same thing happened in the middle of Asia — in the Middle East, not Asia, South and Middle East and also in Europe. So I — what we’re mapped out here, Andrew, is a different — a slower recovery within the markets outside of China. I also see that — look at Latin America. I think Latin America is going to struggle under political leadership and also the financial wherewithal is not that good.

Now on Bob’s business, clearly, historically, Bob’s business, he’s coming back quite strongly in Asia — or China and Asia, not snapping as Lal’s because money is being more allocated to where they want to put the money but still can be a pretty strong recovery. And I don’t — we don’t see that type of recovery in the other markets. So we see more of a flattened slow recovery.

Now the one thing that Bob has historically is he has snapped, as he has a chart, he shows historically, maybe by the third or fourth quarter of next year, he could see things accelerate. And it goes back to the distribution channel, which are liquidating because of the financial wherewithal of that channel. And then also, they see some strengthening, they can staff. He actually historically has a stronger snap. And so we’ve not factored in any snaps other than in China because it’s just — I don’t see the other markets behaving like China at this point in time, Andrew.

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Robert T. Sharp, Emerson Electric Co. – Executive President of Commercial & Residential Solutions [52]

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If I could add, Dave. China has definitely been very proactive about getting businesses, getting the economy back going, which is not necessarily the case you see in other countries, and both in terms of getting plants operational, getting people back to work and also then on the stimulus side of injecting things with programs. So I think you’re just seeing a lot more organized collective effort, if you will, to get the economy back running that we’re going to see in a number of countries right now.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [53]

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Lal, do you want to add anything?

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [54]

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Yes, just very quickly. Obviously, China doesn’t have the production element of our marketplace. Europe is the other area that has very little production left, and [RC] has been depressed for a long time. And we’re seeing Europe being more resilient than the Americas, for example, as well. So those will be 2 nuances on that.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division – MD and U.S. Industrial Sector Head [55]

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That’s helpful, guys. And then, Dave, there’s been a lot of talk. I mean you mentioned about reshoring and how that might impact big, multinational companies. You did talk about your strong local-for-local strategy. So maybe talk about how your supply chain has been impacted, a little more color there, and how you might benefit if, in fact, we do see more emphasis on localization of supply chains? And then conversely, how much concern do you have about being a big industrial player in China if we do have more call for nationalism over the next couple of years?

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David N. Farr, Emerson Electric Co. – Chairman & CEO [56]

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Well, nationalism has been calling on now, it started back about 5 or 6 years ago. So that’s nothing new. It’s obviously just escalated a little bit higher, but it’s been going on for some time. I firmly believe based on what we’re seeing in our customer base in both the chemical industry, what we see in, obviously, the food and beverage, the hybrid, the medical industries, we’re seeing a push to try to rebalance some of these — the supply chains and also where they make stuff.

The fact that Honeywell is opening a mask plant in Rhode Island, a mask plant in Arizona, the fact that we’re seeing some first vaccine production that we’re working on right now and going after is going to be in the United States. I think legislation has to be changed to protect the medical and pharmaceutical industry and the vaccine industry. But I think you’re going to see that.

I think clearly, the negative side of that will be companies like Emerson or the multinationals that we serve, the global industries, we’re going to have to work that issue. But it’s not going to just be in the U.S. I think Western Europe will be the same way, Andrew. I think you’re going to see Western Europe, be it the French, the German, the Italians, the Spanish, the Belgians, they’re going to look at what happened and what they could depend on, be it the Asians or be it Americans. And they’re going to say, « Okay. We need to redo some stuff here. »

So I think this is going to happen globally over the next 2 or 3 years. And I think the good, solid global industrial companies, which you guys all know about and you — many of you follow, I think, will benefit from this. I think the guys are — the companies are still going through massive changes, are going to — struggling, but I — there’s going to be pluses and minuses. In the end, I think I’d put a plus on our side. I do have a couple of negatives, as you point out, and we’ll have to manage those accordingly.

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Operator [57]

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Next call comes from Josh Pokrzywinski from Morgan Stanley.

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Joshua Charles Pokrzywinski, Morgan Stanley, Research Division – Equity Analyst [58]

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So we’ve talked a lot about the supply chain. Anything — in this whole onshoring dynamic, anything in your own supply chain, your own sourcing that you’re looking at and saying, « Gosh, this has gotten too long and as much as we manufacture locally, we’re having to cross a few too much — few too many borders to get components or other kind of subassemblies, » looking less at your customers and kind of more at yourself as the purchaser.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [59]

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Sì. The answer is yes. And so what is — what we’re going through right now is the first wave we, obviously, hit was the China wave. And as we looked at the China impact at the end of January and early February, we’re looking, obviously, what’s happening to us right now as we look at the India, Malaysia, Mexico, U.S., what we have is a very good enterprise risk strategy driven by the businesses, and so evaluated through our audit side and through the Audit Committee. Under Lisa Flavin and the Audit Committee, we will go through this process most likely. I asked the Audit Committee yesterday to — we’re going to wait a little longer, probably be more like August this year. I want things to stabilize, but we’re going to look at things like how did our supply network do from a financial crisis standpoint? Do they have the money? Did we have to help them? Which ones were able to keep up with us as we ramped up and down?

So I think that from — as we look at it right now, Josh, we’re not going to make any fundamental changes. We — as you know, our strategy is we have multiple suppliers, but the big issue for the first time we’re seeing not just 1 or 2 countries closing down, we have 3 countries closing down. And so what we’re going to have to do here is evaluate this from an economic standpoint and an enterprise risk standpoint is looking at this model now and say, « Okay. Do we have to have 4? » So those are things that we will do. Nothing right now. I mean I’m more interested in stabilizing and then recovering. But we do know what happened to it, and I guarantee there will be changes as we leave this year on a calendar year basis and as we move into 2021 on a calendar year basis.

So I think it’s a little too early to react. We’ve been able to overcome it. And in the meantime, I do know we’ll make some changes as we go forward here in ’20, late ’20 and early ’21.

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Joshua Charles Pokrzywinski, Morgan Stanley, Research Division – Equity Analyst [60]

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Fatto. Appreciate that. And then just as I think about some of your kind of longer-cycle customers or folks who don’t make decisions lightly, I would imagine that the speed at which this has happened has made it hard to kind of calibrate what they want to do, just show up one morning and kind of erase the 0 from the budget and go forward. At what point do you think you get clarity from your customers, i.e., they’ve had enough time to scrub everything and get back to you because I would imagine you’re not quite in that moment yet where [they’re really firm in] what they want to do?

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David N. Farr, Emerson Electric Co. – Chairman & CEO [61]

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Josh, this one’s a lot faster. And the reason — this one’s a lot faster. I mean is it 100%? No, but it’s a lot higher percent than you think. And the reason for it goes back to what Frank covered is the liquidity financial crisis.

So they really had to jump on this thing very early on in February and March. Now will there be some changes? The answer is yes. But I think that you missed — you don’t represent them well then if you don’t think that these guys have made some fundamental changes. We’re living it daily. Like the OC — we get together at 2:00 every day, the OC downstairs, the big board room, and we’re spread out. And we — both of us, both Lal and Bob, we’re talking from a customer’s input. So these guys are moving much faster.

So maybe the last pieces will be finalized as they would finish out this reporting this quarter. But if I look at our customer base from a financial standpoint, they had to take actions very, very quickly, both from internally, cash flow generation, and then also what we’re looking at from a financial market standpoint. So this one is a little bit faster pace. And hence, being together allowed us to make some adjustments much faster. But I would say these guys are further down that pipe than you think. And probably this quarter, we’ll finalize it.

Bob, anything you want to add on that?

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Robert T. Sharp, Emerson Electric Co. – Executive President of Commercial & Residential Solutions [62]

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No, I think that’s right. And a lot of it is because nobody just — nobody really knows what to expect. So in that event, they freeze quickly. Whether it’s a small customer or a large customer, everybody is freezing very fast.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [63]

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Sì. So I think — don’t underestimate this. It’s happened pretty quickly.

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Operator [64]

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Next question comes from Steve Tusa from JPMorgan.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division – MD [65]

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On slide — I was going to ask about the sequential downtick from June to July on Slide 34, but I’ll leave that — I’ll take that off-line, I’ll keep that one. You have a modest sequential downtick there.

Va bene. So anyway, we really appreciate all the detail. Most companies are withdrawing guidance, obviously. You guys have given a lot of detail here.

Just a very simple question. How much of these cost saves — I think you said $46 million of the cost saves have been booked kind of in the first half. How much do you have queued up for the second half? And then how much do you have visibility on for 2021?

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David N. Farr, Emerson Electric Co. – Chairman & CEO [66]

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So we do have the numbers here, let’s work this number and work [it for him]. But we basically — what we showed the Board last week, Steve, is the second half quarter-by-quarter and then also what we showed them is the first half next year.

So Lal, what do you have queued up for savings built into this at this point of time?

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [67]

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So built into the plan, just to kind of reset, we spent $112 million in the first half. We recognized savings from the restructuring and other activities in the first half of $46 million, okay? Second half restructuring will be $118 million. We combined savings in the year — excuse me, in the second half of $186 million.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [68]

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So incrementally, it’d be about $140 million something. And then what are you — what’s your running out — what did you tell the Board going into the first half of next year? You’re going to clearly estimate the…

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [69]

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I did not change off the plan from February. There will be run rate, obviously, impact because of what we’re doing incrementally this year.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [70]

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So the big savings for Lal is going to be in the second half and then will go into the first quarter next year.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division – MD [71]

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Va bene. So there will be some carryover into — so did you pull all of that into this year? Or you still have a pretty decent year-over-year kind of variance heading into ’21?

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David N. Farr, Emerson Electric Co. – Chairman & CEO [72]

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What did you tell the Board spend on ’21?

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [73]

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Giusto. I’ll share with you — well, I did not go into ’21 spend, but our spend on ’21 is expected to be $83 million.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [74]

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$ 83 milioni.

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [75]

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I have not changed that number.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [76]

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$ 83 milioni. So we’ve accelerated some stuff in, and therefore, $83 million. You’ll have — they’ll still have some savings. I don’t know if it’s going to be dollar-for-dollar because there’s going to be some longer-term ones, but it will still have some carryover. So he’ll probably have another $80 million for the whole year next year.

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [77]

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So to give you perspective, David, it was $65 million in ’19, it will be $230 million in ’20, and then another $83 million in ’21.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [78]

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Sì. You’ll get dollar-for-dollar savings over — pretty quickly on that.

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Robert T. Sharp, Emerson Electric Co. – Executive President of Commercial & Residential Solutions [79]

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And for Commercial, Residential, for the restructuring programs, we’re doing this year, about 60% of the savings benefit we’ll capture this year, so we’ve got carryover about 40%. And then of course, we got a whole another set of actions in ’21 for ’21 and beyond that will lay into that as well.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [80]

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So the key is, Steve, I think we’ll still have savings coming into the first half of next year, but ones we will have to offset in the first half of the year will be things like the salary cuts because we will institute that. So that — those numbers will have to come back. That’s to the tune of around $6.5 million for second half, so $3.5 million per quarter. The salary planning numbers will hit us all for next year or 2 because that will roll back out. Così…

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Robert T. Sharp, Emerson Electric Co. – Executive President of Commercial & Residential Solutions [81]

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Furloughing. There’s a number of things, again, we’re doing in the second half to be dramatically, if you will, that — depending on how the sales curve returns, certainly, some of that spending can return.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [82]

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Sì. The key thing is trying to bridge as much of the cost right now, and then our real cost savings will flow in as we finish this year. But I like the pace right now. I look at what’s going on with the decremental and the inefficient plants and the savings are flowing through pretty nicely.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division – MD [83]

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And why in the back of my mind do I feel like that there was like a $70 million number that you threw out there earlier in the year and said you had embedded some of that? I mean these numbers seem substantially higher than that. I thought a little more is going to be pushed into kind of ’21. Or did you just kind of accelerate those?

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David N. Farr, Emerson Electric Co. – Chairman & CEO [84]

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30 — yes, we had a 35 number for last year. I think they are bigger numbers now, Steve, because what’s happened is we’ve done a lot more short-term numbers. And I think that the numbers that we shared with you in February are very similar to this. But they’re obviously higher now because we have more savings, and we’re trying to accelerate.

So the costs are going up, but the savings are going up at the same time. We’ll have probably more carryover because we’re doing more action right now. I mean the issue is we’re living in a period right now that we have to figure out how to drive our cost down, and that’s where we are at this point. So the numbers are bigger than I talked about earlier, but it’s always hard to tie back to other things I’ve said over the phone. But then I think you just…

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division – MD [85]

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Giusto. And then just a — just one quick one. Yes, I just wanted to kind of nail down kind of the quarterly sequencing because you gave the third quarter and the fourth quarter. And the fourth quarter, obviously, is a step up sequentially on an EPS basis. Is that essentially kind of the mechanics of basically revenue stabilization and then all this kind of cost-cutting flowing through that you get? You don’t see that in the second quarter because of how hard revenue is going down, but you really see it in kind of the fourth quarter. Just trying to reconcile the $0.60 moving to kind of the $0.80 to $0.90 or whatever it is in the fourth quarter.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [86]

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100% correct, Steve. I think that — right now, we started — I mean the team started working extremely hard about March 10. And we started taking — okay, guys, we’ve got something coming at us here. And so what you’re seeing right now is this wave is hitting us a lot harder as we saw around the world. So we’ve taken actions and we fundamentally believe will stabilize by the time we get into June. Business will still be down, but our cost actions are happening, and that allow us — as the volume stabilizes a little bit in, obviously, a lot lower level, our savings will start flowing through. That’s why we have that from stepping up.

The other thing I’d make a comment, you — I think you well know is that we’ve always had a variable performance share program going back since early ’70s. In the chart that we showed on Chart 8, when we showed the first quarter, we got hit very hard by $0.10 because the stock price is going up, on Chart 8 of the first quarter report in February. This quarter, what’s happened is, obviously, with the stock dropping dramatically, a lot of wealth has been locked off of our shareholder base, including people like me and Frank and Bob and Lal. But the variable plan, obviously, is a lot lower cost. So therefore, we’ve got a benefit this quarter. We’re assuming our stock price will stabilize and start coming back up, so we’re factoring a little bit of recovery so we’ll have a negative number based on right now in the second half of the year. We’ve always had a variable plan, and we mark to market, as you well know and you’ve pointed out to me over the times.

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Operator [87]

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The next question comes from Robert McCarthy from Stephens.

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Robert Paul McCarthy, Stephens Inc., Research Division – MD & Analyst [88]

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I guess I have a question — so in any event, expanding upon Mr. Tusa’s excellent inquiry, as always, the — I wanted to ask a little bit about the underlying cadence of at least the near term. Obviously, you sit on the — one of the committees that was just announced, the committee to reopen the economy. I think you’re part of the industrial working group. So I don’t want to prejudge the recommendations you’re making there. And I better be careful because my monthly guy who writes my checks, the gentleman who owns my firm is on that committee as well.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [89]

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Si si. You well know. Si si.

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Robert Paul McCarthy, Stephens Inc., Research Division – MD & Analyst [90]

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I wanted to get a sense, in all seriousness, of how we think about the near-term short cycle in North America. How do you think about what is a return to at least economic normalcy, people getting back to work? Obviously, we’ve heard a lot about kind of a red-blue state divide here. And I don’t want to get into a big political discussion, despite my earlier rhetoric. But I do want to get a sense of how you’re thinking about the industrial short-cycle plays out in North America. And perhaps Bob can amplify some of those comments. What’s embedded in your guidance as we roll it out going forward?

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David N. Farr, Emerson Electric Co. – Chairman & CEO [91]

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I mean I think that what we see right now is that the business leaders, a lot of political leaders are starting to realize the tax revenue shortfall, the cost of this, of shutting down the economy, is enormous. And they’re starting to see — you’re starting to see it here in this town. The medical professionals are having to lay people off and to cut costs because all the businesses disappeared, revenue and other than just the crisis around coronavirus and the same thing in the business world. So I think that we’re all fighting to save our lives as the companies and institutions, a lot will not make it. So from my perspective, the push forward is trying to get the economy open and get business open. We can do this safely. We’ve learned a lot from how this isolation and how we go about this and how we work together, both from a company standpoint and the geopolitical standpoint. I’ve watched politicians and business leaders, business leaders with business leaders, there’s been a lot more collaboration than the press would ever, ever, ever talk about.

And so what I see right now, to be honest, Rob, I think you’re going to see the next 2 quarters are going to be pretty tough for America. There’s a lot of things that have been stopped and slowed down. There’s a lot of concern even in our workforce of coming back to work and being exposed to this because people look at this as like it’s a killing zone if you leave your house. And so I think that — so what we’re factoring in the U.S. right now is a very, very weak third and fourth quarter. We’re not looking for much recovery here. And I think that we’re going to see the recovery happening internationally first. And I think that’s what we’re starting to see already in the month of April. So I think you’re going to see a very gradual get back to work. I think it — hopefully, we’ll start seeing some travel come back in. Thank God we’re not in the travel industry. I don’t know how they’re going to recover here for a while. But this is going to be a very slow recovery. And the money is being put out there, but in reality is, so much wealth and so much economic wealth has been lost that there’s not enough money in Washington to flood this world to bring it back. So we’ve just got to get people back to work, making things and generating, and that’s going to take a long time. And that’s how we’re factoring into. We’re not factoring much of an economic impact in North America at all.

What do you see, Bob?

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Robert T. Sharp, Emerson Electric Co. – Executive President of Commercial & Residential Solutions [92]

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Sì. I mean the U.S. outlook for us in the second half is dramatically more difficult than any other region. The general industrial, the construction environment, as I mentioned, the Cold Chain environment, frankly, we just see all of that being challenged for a while, again, until we have the comfort — until the job losses ebb and we get the comfort of people getting back to work, which is going to take a little time, probably.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [93]

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Sì. I mean you look at over 3 — 30 million unemployed people in the United States, let alone the people [inclining], and let alone the people that are [very] holed up in their homes right now that don’t want to come out. So I think this is going to be quite dramatic. It’s going to take some time. It’s not going to be like the China. I think Europe and those guys will probably fall off sooner, and it’s going to be a tough one.

Lal, anything else you want to add?

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [94]

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Non.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [95]

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Va bene. Anything else, Rob?

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Robert Paul McCarthy, Stephens Inc., Research Division – MD & Analyst [96]

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Sì. No, that’s very sobering. I guess on top of that, I think you have your President of Safety in attendance, if that’s right?

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David N. Farr, Emerson Electric Co. – Chairman & CEO [97]

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Oui.

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Robert Paul McCarthy, Stephens Inc., Research Division – MD & Analyst [98]

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And again, I don’t want to get into too much policy discussion, but one thing that’s been meddlesome for everyone, bureaucracy and policy aside, has been some of the shortages around testing. I guess the question I would have is, as you kind of flex across your facilities and you look at Mike’s chart, have you instituted your own kind of captive testing program for Emerson? Or what have you done to make sure that you can create the best information and environment for your workers to go back with some confidence of safety?

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David N. Farr, Emerson Electric Co. – Chairman & CEO [99]

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The big issue — I mean the — everything we can work around, the right equipment, the right spacing, the right environment, the right [cleanses], having — cleaning your hands before you go into the facility, be clean, everything else, staggering the workforce, heat, temperature. With this virus, a little bit different in temperature. You could have the virus for several days before your temperature starts moving. The big issue that we’ve all talked to the President about and he knows this from a business standpoint, is we’re going to have to have, what I call, quick-testing facilities. We’re going to go back assuming — I mean I’m hearing more and more words. I heard it yesterday out of Washington. They are coming along with quick testing to allow us to have a much faster impact. So if we have someone come sick in the facility, we can test him or her, find out if they are really sick. And if they are sick, isolate them and quickly isolate people around them and then cleanse and then get back to work.

So we’re going to be in this game here, I think, for the rest of this year. The vaccine thing, you — we can’t wait for a vaccine. There won’t be any business left if we wait for a vaccine. We’ve got to have the testing ability to find out who’s had it, who’s got it right now. And I think that’s the big push, both in Washington and the medical community because they know from business we need that. We can do everything around that, except that. And so the quicker that we get that and I know they know that, and that’s why I heard yesterday, they’re ramping up the millions upon millions of that testing, that quick testing. And that’s going to — obviously, we’ll benefit from that because that’s going to come from the pharmaceutical industry, the drug industry. But in the meantime, Rob, we’re going to do everything around that, and we — that quick testing thing’s got to come. It’s got to come to give confidence to the workers. In the meantime, we’re going to do everything we can to keep things safe. And that’s where we are right now.

But we, as a company, I think the number is under 40 people globally have had tested. Lal’s on this meeting that meets every morning. 40 people are tested. We’ve unfortunately had 1 individual, part-time worker in England who passed away, a guy. It was a very unfortunate situation. We’ve — our isolation has really dropped off right now. The new cases have really dropped off. But safety is a paramount to what we’re doing, and we’ve got our top, top people on this thing. And they’re countering people like me who was — from my standpoint, you charge forward, you’re out there and you’re dealing with issues. I mean I’m the type of guy that would lead in World War II, if you got that impression. So that’s where we are.

I’m going to take one more question from a sell-side — or two — one more sell-side analyst, and then we’re going to lock it down.

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Operator [100]

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Next question comes from Joe Ritchie from Goldman Sachs.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division – VP & Lead Multi-Industry Analyst [101]

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So Dave, just — I guess my first question, when you think about that 14% number organic decline in the third quarter, can you just talk about April specifically? Has that been trending at that number already or below that number? I’m just curious like where you stand today month-to-date or quarter-to-date on — versus that number.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [102]

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It’s — our order pattern right now is below negative 15%. So we’re tracking below that at this point in time on Bob’s business. Lal’s business is probably a little bit better than that. Lal has got some backlog. So when we look at that 14%, we go plus or minus 1.5%, most likely it’s going to be around 14%, 15%. The key thing that we’ll come out with, we will come out with the orders in April and May. We’ll get that out for everybody, Joe. But right now, the trend line is dropping quite rapidly. But we’re starting to see some stabilization in our international markets, including Europe.

So the key issue, the big wildcard for us right now of substance is the U.S., going back to my comments with Rob. This is still in a free fall. And the question will be is how do we stabilize this from a business standpoint in the near term. So I think that I feel very comfortable even today, as I talked to the Audit Committee yesterday morning, this 14%, 15% negative third quarter is well in tune. And I expect our orders when we come back in, we’ll see that our orders are probably around that 14%, 15% in the month of April.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division – VP & Lead Multi-Industry Analyst [103]

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Fatto. Va bene. And maybe just kind of following on there, and like, I’ll echo everybody else’s comments. I really appreciate all the rigor and level of detail that you guys went to, to give us as much information as you did today. But just following on, on that last point, Dave. So when you think about then the U.S., as we progress through the year, I mean it’s really hard to know exactly how the shape of the recovery is going to be. How much is China, I guess, influencing your thoughts around the U.S. and kind of that improvement in the growth pattern as we head into 4Q and into 2021?

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David N. Farr, Emerson Electric Co. – Chairman & CEO [104]

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I think that from my perspective, as I said earlier, Joe, it’s — people would like to make that early — same comparison, it’s not going to happen the same way. China is a controlled society. They worked extremely hard. They shut it down hard. It seems somehow the sickness was only in a couple of regions. And they came in structurally. What we learned in China from our facilities, obviously, we’re using from a safety standpoint, other facilities around the world. So I think the China structure is completely different. It will help us, obviously. But what we’re looking at here is the U.S. is a completely different cycle; and Europe, a completely different cycle. It’s in a different world. So we’re looking at the U.S. as far more negative, far more muted and much more, I would say, a U-shape type of a structure. It’s — we’re going to stay down longer and then gradually come back out of it in the second half of ’21.

We do not see a quick snapback at this point in time in the U.S. Now if there’s somehow that everyone got back to work right away, we got the testing that we needed, maybe the fourth — the third calendar quarter, we could start seeing stuff. But I think that’s going to be more in the fourth quarter this year. So I’m very negative on the U.S. growth model, and I’ll let Lal and Bob talk about this, but that’s how we see it right now. We’re structuring a completely different cycle for each of the world areas based on historical norms and based on what we’re seeing from our customer base right now.

So Lal, over to you…

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [105]

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Yes, I absolutely agree. As I went around the horn with my world area leaders yesterday, it was clearly a North America challenge, significantly more so than anywhere else.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [106]

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So why don’t you give a couple of colors? You got some colors in North America.

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [107]

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Sì. I’ll give you…

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David N. Farr, Emerson Electric Co. – Chairman & CEO [108]

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We’ll never give this much information again. You have to rip my tongue out there if we give this much information.

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [109]

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Sì. I’ve already given you the color around what’s happening with quotation rates. RFQ is down in that 25% rate in our — across our businesses. But just to give you perspective globally, globally, we were booking approximately $850 million a month. That was our run rate as we went through ’19 into the first quarter of ’20. Dans [P7], we’ll book somewhere around $680 million. So that kind of drop-off is very significant. That’s that 15-ish-plus percent…

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David N. Farr, Emerson Electric Co. – Chairman & CEO [110]

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[P7] for him is April for work on period.

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [111]

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That’s April. And the biggest hit in that is the U.S. and Canada. The other world areas, Europe, Asia and Middle East, will exceed their plans, but the Americas particularly, will be challenged therein. So Asia will be very close, honestly, to a normal — what we call, a normal month in bookings. Surprisingly, the return in Europe doesn’t look as bad. But it’s really that America impact…

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David N. Farr, Emerson Electric Co. – Chairman & CEO [112]

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And Europe, we’re getting a lot of medical bookings because that’s a lot…

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Surendralal Lanca Karsanbhai, Emerson Electric Co. – Executive President of Emerson Automation Solutions [113]

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A lot of medical, a lot of life science, David, and oil and gas. Honestly, downstream, we won a significant order with BP yesterday in Azerbaijan for a control — a digital twin control system.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [114]

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So Joe, it’s going to be — I think it’s going to be an international market and so that’s what we see right now. I think the companies that are very international will have that benefit.

Bob, you want to add anything to that? Anything, Bob, you want to add?

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Robert T. Sharp, Emerson Electric Co. – Executive President of Commercial & Residential Solutions [115]

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No. Again, I think — I mean we don’t expect to see the U.S. go down as hard as China did, but we expect to see it stay down longer. So it’s going to take a little time. Again, it all depends. If people get back to work, if there’s a vaccination, all this kind of thing, second half of next year could be a very exciting second half for us. If it plays out longer, then that could change. But when we’ve come out of these before, we’ve had some pretty strong quarters. And again, hopefully, that scenario will build up in this one as well.

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David N. Farr, Emerson Electric Co. – Chairman & CEO [116]

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Sì. We need the testing and the medical support to happen. And I think that’s what business people will tell you.

Well, I want to thank everybody for the calls, and I appreciate everyone calling and listening. I know it’s a lot of material, I apologize, but I thought it was important for everyone to have that input. And looking forward, I know Pete will be very busy in the phone in the follow-up here for the day, but I appreciate everyone. And I hope — hopefully, we’ll be able to see everybody.

And unlike the famous doctor that works for Donald Trump, I intend to shake hands and hug people at some point in time before I die. And so I’m a handshaker, and I don’t believe that the handshake will disappear. I mean if we’re all going to be that worried, you might as well jump the water right now.

But I look forward to seeing everybody, and I look forward to seeing what unfolds here in the coming months. But rest assured, Emerson’s at business, Emerson is working, and Emerson is working extremely hard to make sure that we can take advantage and solve everything that needs to be solved here in the coming months. Merci.

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Operator [117]

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The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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