Emerson Electric Company

Good afternoon and welcome to the Emerson third quarter 2020 earnings conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Peter Lilly, Investor Relations. Please go ahead.

Good afternoon. Thank you and welcome, everyone, to Emerson's third quarter 2020 earnings conference call. I hope everyone is staying safe and healthy. Today, I am joined by David Farr, Chairman and Chief Executive Officer, Frank Della Flora, Senior Executive Vice President and Chief Financial Officer, Lal Karsanbhai, Executive President of Emerson Automation Solutions, and Bob Sharpe, Executive President of Emerson Commercial and Residential Solutions. As usual, I encourage you to follow along in the slide presentation, which is available on our website. Starting with the cover slide. In the era of COVID-19, safety and health have been rightfully brought to the forefront of the global conversation. At Emerson, safety is a core value, and in June, our employees celebrated Global Safety Day to reflect on the importance and personal responsibility of each individual to foster healthy and safe behavior. Additionally, Emerson has a passion for STEM education and innovative thinking as critical enablers for the needs of business and society, both today and in the future. Emerson recently hosted a virtual STEM competition in cooperation with our impact partner here in North America, Spartan Controls. The winners designed wearable devices that gave alerts when within a six-foot social distance barrier. Congrats to the winners, Kayden and Caleb Manji. Please join me in turning to slide three. I'd like to briefly highlight the Emerson Corporate Social Responsibility Report, which is also available on our website. This document highlights in detail all of Emerson's aspirations and accomplishments within the environmental, social, and governance realms. COVID-19 and the ongoing social discussions are catapulting many of these important ESG topics to the forefront. As problem solvers at our core, Emerson strives to advance the discussion, share our own progress and strategies, and also to be a valued resource for our customers as they embark on their own ESG journeys. Emerson takes very seriously our role as a critical enabler and partner for digital monitoring, measurement, optimization, and efficiency management across our broad customer base. Please turn with me to slide four. Despite the challenges presented by COVID-19 in the quarter, there were also many reasons for cautious optimism. I'd like to briefly share a few. First, Emerson remains steadfast in our commitment to health and safety for our employees, customers, and communities. Business continuity, disciplined cost control, and positioning to outperform as we emerge from COVID-19 remain our additional key thematic priorities. Our regionalized supply chain and operations remain resilient and stable in the current environment, and we continue to work hard to ensure we can serve our customers and their essential industries. In the quarter, the team was able to exceed adjusted EPS guidance by 20 cents, with 16 cents being attributable to strong operational executions. A lower effective tax rate also contributed to the overall adjusted EPS beat. Cash flow was strong in the quarter, representing 181% conversion of net earnings. Additionally, the team was able to manage decremental margins to the mid-20s level at adjusted EBITDA. Despite the uncertainty and continuing challenge to the demand environment, sales and orders finished in line with guidance given in April. As expected, China is leading the emergence from the downturn with positive sales growth of 3%. Additionally, we are seeing trailing three-month orders starting to stabilize, highlighted by commercial and residential solutions month of June year-over-year orders turning positive. Finally, based on current recovery trends, we expect sales to turn positive in either Q2 or Q3 of next year. Moving to slide six, which summarizes results of the quarter. Underlying sales growth was within guidance, down 15%. Trailing three-month underlying orders were also within expectations, down 19%, reflective of the ongoing challenging demand environment. Gap earnings per share were down 31% to 67 cents, and adjusted earnings per share were down 18% to 80 cents, which was 20 cents above guidance. Despite lower sales, both platforms executed well on profitability, due to COVID-19-related cost control measures, in addition to the ongoing aggressive restructuring reset actions. Automation solutions underlying sales were down 13%. However, China sales were up 9% as it emerged from lockdown. Trailing three-month underlying orders were down 19%. Commercial and residential solutions underlying sales and orders were both down 19%. However, as previously mentioned, June orders turned positive, which continued a positive trend in month-over-month orders. Cash flow performance was solid in the quarter, with operating cash flow of $842 million and free cash flow of $738 million. Year-to-date operating cash flow and free cash flow of $1.85 billion and $1.53 billion were up 3% and 8% over prior year, respectively. Lastly, the company continued to build upon its aggressive cost reset plan, initiating a total of $94 million of restructuring actions in the quarter. Turning to slide seven, we will bridge adjusted EPS. Beginning with third quarter of 2019 adjusted EPS of $0.97, you will see that non-operational items of foreign exchange effects, stock price effects, and pension detracted 9 cents, which was offset by a more favorable tax rate than expected due to R&D credits and other items. The net effect was a 1-cent tailwind. Operations contained the deleverage to 20 cents, and share repurchases added 2 cents for a net 18-cent headwind. Overall, we finished the quarter at 80 cents, which was 20 cents above previous guidance. Additionally, total segment adjusted EBIT and EBITDA margins of 16.8% and 21.9% exceeded their respective guidance ranges of 15 to 15.5% and 20 to 20.5%. Slide 8 depicts the key elements and magnitude of operational performance on adjusted EPS. Starting with adjusted EPS guidance of 60 cents, we saw both business platforms as well as corporate contribute to the SG&A containment. Automation Solutions contributed $0.10, Commercial and Residential Solutions $0.02, and Corporate $0.04 for a total effect of $0.16. Additionally, the effective tax rate came in at 11% compared to the guided 18%, which provided a $0.05 tail end. Subtracting a cent for other items the adjusted EPS landed at $0.80. The leverage was contained to 26% at adjusted EBITDA. Moving to slide 9, we will review the P&L. Starting with gross margin, we saw a reduction of 140 basis points to 41.3% as the leverage and unfavorable mix were partially offset by favorable price cost. Importantly, SG&A as a percent of sales declined by 20 basis points, as aggressive cost control actions went into effect as volume declined. Adjusted EBIT and adjusted EBITDA margins, which exclude restructuring and related costs, increased 240 basis points and 150 basis points, respectively. This outcome reflected deleverage from the decline in revenue being offset by restructuring savings and cost containment actions. Lastly, our effective tax rate dropped from 20.3% to 11.2%, driven by non-recurring tax items, including R&D credits. Overall, the adjusted EPS decline of 18% from $0.97 to $0.80 was in line with the revenue decline of 16%. Turning to slide 10, we will look at underlying sales by geography. The Americas showed the steepest declines, down 20%, with the United States down 20%, driven by broad-based weakness in all industries except medical and life sciences. Europe and Middle East, Africa, and Asia were both down 9%. China, however, grew at 3% as the economy was the first to broadly reemerge from lockdown. Please turn now to slide 11, and we will discuss total business segment performance. Total segment adjusted EBIT margin decreased 170 basis points to 16.8%. reflecting aggressive cost control measures and strong operational execution as sales declined. And as previously mentioned, total segment adjusted EBITDA deleverage was 26%. Stock price-related costs increased 20 million as the stock price improved from lows at the end of the prior quarter. Adjusted corporate and other costs dropped by 14 million as aggressive cost controls, travel restrictions, salary reductions, and other measures took effect. Adjusted pre-tax earnings dropped 270 basis points to 14.1%. However, 180 basis points of that movement can be explained by pension, stock price, and foreign exchange losses. Q3 cash flow performance was solid given the challenging environment. Operating cash flow and free cash flow both decreased by 11% to $842 million and $738 million, respectively. Free cash flow represented 181% conversion of net earnings. Lastly, the drop in net sales resulted in an increase in ending inventory and lower payables. Turning to slide 13, we will review the business platforms. Automation Solutions' underlying sales finished down 13% for the quarter as broad-based declines in most end markets were only slightly offset by life sciences, medical, and food and beverage. North America saw the steepest declines, down 20%. Meanwhile, China led the recovery, growing by 9%. The final control and systems businesses were down high single digits and mid-single digits, respectively. Trailing three-month underlying orders remained within expectations at down 19%, again reflecting broad-based demand challenges. Aggressive restructuring actions totaled 80 million across the platform, which brought the total to $192 million year-to-date. The platform delivered on profitability in a very challenging demand environment, with adjusted EBIT and adjusted EBITDA margins down 120 basis points and 30 basis points, respectively, reflecting the aggressive cost actions taking effect. Decremental margins were held to 22% at adjusted EBITDA. Of note, sequential backlog was unchanged at 5.1 billion. Turning to slide 14. Commercial and residential solutions underlying sales were down 19%, also reflective of the broadly weak demand environment due to COVID-19. North America led the declines down over 20%, while Europe dropped 12% as momentum in the heat pump business was more than offset by declines in professional tools and cold chain. Asia, Middle East, and Africa was down 18%, with China down 9%. Order rates varied dramatically during the quarter, from down 35% in April year over year to positive 1% in June. Trailing three-month underlying orders were down 19%, driven by weakness across the distribution and OEM-based businesses. In contrast, businesses exposed to big-box retail and do-it-yourself markets fared better and were down mid-single digits. Asia orders dropped by 20%, while China was down 7%. For the quarter, our structuring actions totaled $12 million, which brought the total figure to $31 million year-to-date. Commercial and residential solutions also delivered solid profitability given the demand environment, with adjusted EBIT and adjusted EBITDA down 270 basis points and 160 basis points, respectively. Decremental margins at adjusted EBITDA were 32%. Turning to slide 16, we will review the updated guidance. The impact of COVID-19 certainly continues to present a challenging demand environment. However, we are raising guidance due to early signs of stabilization and good momentum in cost containment and restructuring actions. First, we assume demand will continue to stabilize and gradually improve. There are no major operational or supply chain disruptions, no changes in discrete tax items, and oil prices remain in the $35 to $45 range. With those assumptions in mind, we now expect underlying sales to be down 9 to down 7.5% and net sales down 10 to down 9% for the year, only slight refinements from previous guidance. We are raising expected adjusted EPS to the range of $3.20 to $3.35, an increase of approximately 6% from the previous midpoint of $3.10 to the new midpoint of $3.27. Expected total restructuring spend has increased by approximately $20 million to $300 million, with approximately $235 coming from automation solutions, $55 coming from commercial and residential solutions, and the balance from corporate. Please note that we will review the updated restructuring reset spend and savings plan as well as the COVID-19 related cost savings in detail later during the presentation. We expect operating cash flow to come in at approximately $2.8 billion and capex spending expectations remain $515 million, resulting in a free cash flow target of approximately $2.25 billion. Lastly, Our share repurchase program remains complete for the fiscal year. And now please turn to slide 18, and I will hand the call over to Mr. David Clark.

Thank you very much, Pete. Appreciate your input. Pete wants to be called Commander Pete, and he's got a new name from the military background. I didn't have to deal with this with Tim, but Pete, I do. By the way, I did see Tim today. We had a board call, and Tim was in Germany with our German director and His family has arrived in Germany. He's the president of Professional Tools in Germany. He's doing well, and his family are now there. And his kids will be going to school live. And so it's good to see Tim. They seem to be pretty happy today. And never had to call him commander, but, again, then again, he couldn't kill me with two fingers like you. With that, on the order trend chart, as I would say – The trends for orders were pretty much in line to what we thought would happen in the quarter from month-by-month basis. Clearly, you can see the commercial residential has found the bottom in the month of June. I think you'll see that that has improved again in the month of July. I'll let Bob talk about that. Lyle continues to seem to be stabilizing around this bottom, and I'll let him talk a little bit about his businesses. But overall, month by month, we saw the quarter unfold exactly like we thought it was going to unfold relative to orders, relative to sales. Margins came in much better, as you've seen, from the cost reset actions and what we call the COVID-related savings. Therefore, cash flow came in better, too. Overall, execution was extremely good. And I really want to thank the global leaders relative to their strength of operation throughout the quarter i want to thank the whole team around the world as you know the oce and the and top 10 or 15 other people in this building the corporate court never left the building we now have the whole building back we have our campus back obviously from time to time we might lose somebody but we're all here operations are working around the world we have not had really many hiccups we've lost a couple days here and there in bob's case and lyle's case but overall great execution by the team around the world I share that with the board and we are acting and we're running this company live in person in our offices as best that we can not everywhere but as much as we can and I really thank them for what they have done because it's been a very challenging quarters you know we laid out our forecasts in April mid-april we went out early we executed around the plan from a order standpoint sales manufacturing, and we really, really did a great job around the cost reductions, both from the reset actions, which we started last June, which have accelerated, and we'll talk a little bit more about those, to the COVID-related adjusted savings from the one-time cut, the furloughs, the late salaries, obviously no travel, entertainment, all those things, and we'll talk more about those. All those came in very well and helped us from a profitability standpoint. But in particular, what I was extremely pleased to see is as we laid out that detailed major cost reduction reset program back in February to the shareholders but to the board last year in August time period, They really have stayed ahead of it, and they've actually increased the numbers. You'll see that in the charts coming up. And that's not easy to do in an environment where you're not able to travel. You have hard times having meetings. But these guys have done a phenomenal job relative to really driving those programs forward. We're in a different phase right now. We're in the phase of actual consolidation of facilities, shutdown facilities, new facilities. We're moving stuff at this point in time versus the initial phase. A lot tougher phase. And both of the businesses are on track and I think are doing extremely well. And I'm very pleased with that. With the effort in the quarter, which was better than I thought from the earnings, better than I thought from a cash flow, we have raised the year. We have confidence in the year. And I'll let Bob and Lyle talk a little bit about that. But really, from the execution on operations, we really did a great job. And from that perspective, we're But I just was pleased to see from the standpoint of that execution and what we saw. And we'll see as we go into the quarter. I think from my standpoint, I think that we will see some strength emerge from the businesses. I think the profitability will continue to do well. And I think that we're going to have a very good order from the standpoint. And what I'd like Bob and Lyle to talk about briefly here first about the orders first. And then we're going to go in to talk a little bit about the quarters. But Bob, why don't you give them a little cover of what you're seeing right now in orders. And Lyle, you do the same thing. And then we'll go into a couple other charts here.

Okay, thanks, Dave. As Pete mentioned earlier, the front end of the quarter was very much unlike the back end of the quarter. April really dropped severely, really everywhere, North America AC in particular, with a lot of plants being down, including customer facilities and professional tools, a lot of the channel basically just shutting down and offices being closed. And then, of course, we ended with June swinging up positive. So quite a dramatic change. And the numbers we have for July right now is right around flat. So we're holding pretty solid again. The three months for June was down 19. And that'll bring the July three month into the 5 to 10 range. So definitely going the right direction. Coming out of it, as going in was broad, coming out of it is really quite broad too. But, again, North America AC, you all follow a lot of the HVAC producers in North America. Clearly, when the heat hit in late June, that made a dramatic difference, and we felt it very quickly. The DIY space continues to be very strong, so the VAC business and Incinquerator in particular, quite good. Pro Tools was very strong. Part of that, I think, is basically branches reopening, and it's kind of a little bit of a channel bullwhip, I would say, more than the market itself. But June was certainly quite different. And Europe in July was quite strong as well. The European heat pump business is very dynamic right now in total, and we've got some very good relationships with some OEMs and are enjoying some very strong growth right now.

Yeah. I think, Bob, one of the key issues we talked about on the lines, and I've had a lot of investors on the line over the last two or three months, is we knew the bounce would happen. The question, the key issue for us is to keep those factories going. And that's where Bob's right now is very focused because on a global basis, his demand is coming back. And what we want to make sure is we deliver on that demand and not miss this bounce. And we've gone through these before, and I think that right now his teams are very much focused on that. I've been to a couple of the sites. and they're all getting ready for a sequential bounce this quarter, and that's going to be a key milestone for us in that perspective.

Yeah, factory is very much in focus right now, being able to deliver against these numbers.

Yeah. Lyle, you're obviously a different part of the cycle from that perspective, but you are, I would say, forming the bottom at this point in time, and you clearly have the same issues relative of mix, but you're a broad industry capability. So why don't you give them a favor of what you see relative to your orders right now before we even get into sales and the global businesses?

Thank you, David. Good afternoon, everyone. Yes, clearly operating around the bottom of this order cycle as we feel it through June. And actually July came in on a daily basis about 4% above the month of June as we saw broad stabilization, particularly in Europe and driven by some growth in China and stabilization in North America. But really there's three phenomena, David, as we think about the order rates. Obviously, oil and gas upstream is one. That predominantly impacts our strong upstream markets in North America and Europe to some extent. And it's had an impact particularly on the short cycle businesses to begin with and now extending into some of the longer cycle businesses. We've seen reduced topics and we've seen deferred capex as a result. Secondly, people are not quite back in the plants yet. That's had a detrimental impact in day-to-day KOP3 waters. As plants have been kept open and safe, but with less folks in them. And consequently, projects aren't being executed, modernizations aren't happening, and some of that will come back as people return to work. But that's had an impact through the quarter and where we sit today. And then lastly, I'll highlight that China has recovered. And we had a good quarter in China, positive orders and sales, and we're seeing that broader stabilization across Europe and hopefully North America here as we go through July as well.

Thanks. As we expected, we would expect Lyle to lag in the cycle. He went down slower. He did not have a minus 20% in the early stages. He could easily have that in a quarter, a month here, but he's in a different cycle right now. But I feel very good about where they sit, and we're starting to see pretty good insights around that. You go in the next chart, chart 19, you look at the underlying sales. From our perspective, we were dead on from the underlying number that we talked about for the quarter, maybe slightly better than we thought originally. You can see that what we're going into now in the fourth quarter, very similar to what we had before, but I would say just slightly better. I think Bob's business, he'll talk a little bit about it here in the next chart or two. will slightly be better. I think Laos businesses is going to be the key issue for him is the backlog reduction. But as we move in this trend line and directionally right now, what we're seeing based on the customer inputs, based on the economic trend lines, based on the opening of the world is that we have a chance to go positive in the second quarter and sell. Slightly positive, it will be everything has to move right. But last quarter, I would never say that to you. Right now, it looks like that case, and things have to go the right way. But overall, you know, the direction and the trend lines of this cycle feel pretty well understood at this point in time, and we're managing around that. And we're having to really allocate a lot of resources because we have businesses that Within Lyle's business, we're up 20%, like in life sciences or in power. He's very strong. And Bob's got businesses, too, that are growing right now. So we're having to move resources around, and we're having to be very careful relative to our plant restructuring and modernization as we see this trend line change. And it's very interesting. I've been around a long time, as you all know, as CEO and at Emerson. I've never seen a cycle quite like this where we've had sudden surges in certain pieces and other pieces drop off. So it's really by being together as a management team day to day and looking at each other eyeball to eyeball, no spitting, but just eyeball to eyeball, we have a chance to actually manage this very well, and I feel good about it. So what I'd like to do is turn to Lau first and give a little bit update on your chart relative to see what your underlying growth at China is. and what you see is your point of inflection right now, but I think he feels very good about what's happening.

I do. I do, David. I think you said it correctly, and I think what you said generally applies to automation, to the automation markets and our sales performance over the next six quarters. But essentially the story for us in Q4 is going to be stabilization of the book-to-ship order environment in North America and backlog execution. Consistent with the plan that we shared with you last quarter, we have to execute about $300 million of backlog in the quarter. The good news there is that in the month of July, we took $96 million of backlog out. So we're well on that path, but it works to do in August and September. That will land us somewhere in the 10% to 12% down range. The offsetting there is the book to ship. And then we see an additional two challenging quarters. We have a shot to get flat in Q2, depending on, as David described, how things swing on the order environment. But clearly we see a positivity in the second half of the year on a global basis. Both on orders and sales.

What are the interesting things Lyle showed today to the board, just to give you information? You had five customers. You did a lot of work around looking at the trend lines of cars, where you can pick up trend line cars, how many people are in factories. Factories are operating at 30%, 40% levels. And you can directly correlate that to our sales to those individual factories, which was pretty interesting insight that you shared with the board.

Yes, sir. We used the Google Mobility data and plotted it against our daily order runways in North America, and it clearly is a linear relationship there. particularly as people have been working from home and folks aren't in the plants to place POs and that kind of stuff. So we need those folks to get back in the plants clearly, particularly here in North America. On the bottom of the chart, we've got China, which was a tough story, down 21% in the second quarter, but came back very strongly for us in Q3. We see good activity broadly in China. Orders on a destination basis were also positive in the quarter. in China, so we see some good momentum there on the order rates. The sales comparisons get very, very challenging in Q4, which is why you see that 2 to 5 downrange for us in the Q4. It's nothing more than just an incredibly tough comparison to Q4 last year, which is a record on just about every measure for us in China. It will still be a very strong number to execute within that range. And China sales year-to-date are positive, which is helping us. And then we see an environment that's positive as we go through fiscal 21. Okay. I'll turn it to Bob.

Bob, why don't you give an update on what you see unfolding in the quarterly sales at this point in time?

Okay. So, again, you can see that Q3 we ended up coming in at down 19. Right now, you know, the fiscal year guidance has been updated to 8 to 10. So if you do that math, that puts us in probably in the 5 to 11 range for Q4. Okay. If things keep going the way they're going, we do feel like there's some potential upside. Again, June and July single month orders were a bit stronger. Part of that, again, I think is catch up on April and May. We're much lower than 19 down. We have a small amount of long cycle business. We do gas compression for recovery and landfills and digesters and farms and such for green activity. And that stuff's actually pretty strong right now. So that'll give us some projects for 21 as well. So you can see right now Q1 down. Q2 right now is a bit hard to tell. We expect Asia and DIY kind of strength to be kind of leading us out, if you will. And then the other stuff should come in broadly, certainly in Q3, especially with the comp we'll have against this year. So again, overall feeling good about a strong recovery. We've seen that before, like in the financial crisis. And of course, there's still a lot of unknowns what's going to happen next 12 months. China is mentioned, you know, that's been a roller coaster for us. We were down heavily in early 19. It was moving up. We had talked about potentially being up in Q4 of last year. And then it kind of stumbled a bit. We did get positive in Q1. And then with COVID hitting Q2 was very dramatic in terms of the hit. Q3 came in down nine. It's mixed, basically, is kind of the best description. It's not a broad strength right now for our areas. Some of the stuff is happening. And we look for that to keep going up. Again, it'll probably go sideways a little bit for a while here. And then certainly, again, as we get into Q2, with the comparisons, should be good. And then outside of China, the rest of Asia is a bit of a factor, too. in terms of the total numbers, and hopefully if we get the U.S. strength we're looking at in China, it should follow in line with those. Thank you. Appreciate that.

If you go to the next chart, one of the things we wanted to do is lay out and give you the detail by the first half, second half, what we call the reset restructuring. I want to make sure the whole total program is well understood, both what's in it, what's going to be moved around both this year and next year. Also, we want to give you an insight relative to what we call the COVID-related savings, which are from actions we took from furloughs, the pay cuts, to bonus cuts, to also traveling and all the different things that unfolded in the COVID number, which this year it's worth about $150 million to us. But if you look at the total program that we've laid out since February to the outside world, you can see in 2019 we spent $95 million. This year we're spending around $300 million. I believe that's up a tad from the last time we talked. And we're looking at $125 million, which, again, up a little bit from what we talked about as we continue to really focus on the programs and the reset programs, which are permanent program actions, which we've got benefit already. We're already feeling it. As you can see, the savings and the reset program in the first half was $75 million. In the second half, it's going to be $145 million. And if you go into next year, it's going to be $210 million in total. So it's a very important program and it's actually working. And then we're going to have benefits in 22 and 23 from the initial reactions or the actions are going on right now at the facility levels around the world, which take longer to get done. But overall our payback, our costs, you know, total programs may around 500 plus million dollars are restructuring and we'll have over $500 million of savings from the reset programs, ignoring the COVID related areas. On the chart, you can see we talk about, as we look at, we want to give you an estimate we see as business does come back. It's a function of how fast business comes back, how fast we can travel again and what we can do. But right now, our best estimate is we have $150 million savings this year from COVID-related. $70 million of that will start flowing back. You know, the pay cuts we took in place, the furloughs, all those things will start reversing here, and they will start flowing back into the P&L. It will be a headwind for us. But right now our best guess at this point in time is 70 to 150 will flow back in over time in 2021. If growth takes off faster and we're able to travel, clearly those numbers will shrink and we'll have more costs coming back into the P&L next year. But that's our best guess at this point in time as we look at it. But I wanted to make sure you had a distinction between the reset cost reduction programs, which are really well done by the global organizations, both the loud side and Bob's side, and also corporate. and then also what we see going on on the COVID related. So you've got a lot of detail there, and you can track everything that's going on at this point in time, but I think it's necessary for you to understand what's going on and a lot of hard work. When I look at what the organization got done from a profitability standpoint this quarter, it really paid off all the work we did last year as we started, as we continue to go forward. Our margins, our cash flow is better. It's allowing us to stay on track relative to the savings, despite sales being down as hard as they are at this point in time. So I feel as we look at the next couple months, let's say the next three, four, five, six months, I think we have a pretty good vision of what's going to unfold here. I see the savings flowing through. We are obviously going to be very cautious in how we put money back into us as we start seeing that growth happen, but we want to make sure that we are serving our customers and we're making sure we support our customers around the world as they go forward but the organization on a global basis of how to do a lot of things without a day-to-day contact with leaders i guarantee none of the leaders at the oc level have been able to travel into europe we've not been into asia we've not been in latin america i am starting i am traveling that's where i am traveling in north america as is lyle and bob and we're doing site reviews we're getting out uh we're actually the first time i got to walk a factory for you know the first time i really felt safe walking a factory One, I didn't want to contaminate people in the factory or them contaminate me. But we walked into a couple of factories here recently. This is important. Our people want to see, in fact, I've been in three factories now in the last couple of weeks. The people want to see us. And we're out. It's important to go out. For what they're doing in the factories today is not easy. And I really want to make sure they understand how much we appreciate that, what they're doing. But that's where we sit. We feel good about it. It was a great quarter execution. I want to thank the team. They did a phenomenal job. I want to thank the OCE for standing by me, coming to the office every day, even though they may not want to go in the office every day, but we were here, and it's important for the people around the world that are in the office working very hard at this point in time. Factories are working well, and now we see the trend lines coming our way, and Bob's business first, and Raul will follow second. And I feel good about where we sit right now overall. And let's open the floor for Q&A, and let's go from there. Thank you very much.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Scott Davis with Milius Research. Please go ahead.

Hey, good afternoon, guys. Can you hear me, David?

Good afternoon, Scott. Good afternoon. Good to hear from you.

Thank you. Got a bit of a power outage here, so hopefully you can hear me with the backup generator running. With an Emerson transfer switch, by the way, as I remember. Yeah, that's good to hear.

We had a little damage down in North Carolina. I came through last night from 9 to 1 o'clock in the morning. That thing moved fast. That's all we have to you. So it went through southern North Carolina where we have our place. So go ahead. What do you want to know, Scott?

I have a tree through my roof, so I've got a problem I've got to deal with after this call.

Well, if you need to buy some rigid backs, go to Home Depot. We'll ship them out to you, and we'll put it in the quarter. Yeah.

I just bought one of your insincorators. There's a shortage of those things out there, by the way. I'm sure you know that.

Yeah, we do know that. Thank you very much for that nice comment. They're hard to – yeah, we're working on it.

Hot topic. Dave, just to think about your own business, the guidance on the restructuring is great, but what else changes as you think about when you get into 2021? I mean, your own capital spending – You know, cash flow probably isn't quite as easy. I mean, how do you think about ramping up your own spend?

I think that, you know, as we look at it right now, to be honest, I think we'll probably spend a little less this year, Scott. So I think we're forecasting around $550. I think we'll probably be a little lower. The reason for that is the inability to travel and get to the projects and get them organized. And those are very important projects. There's a lot of automation work going on right now. We have the plant reposition, but what we want to do is use automation now because of the whole COVID situation and distancing and trying to get the production out of the facilities. We're going to be putting a lot more automation into these facilities as we relay them out. So I would say our capital spending will be a little bit higher next year. Um, but we're not going crazy on this because our volumes are still going to be on average, you know, down in total probably for the next year. And I think that, you know, but I, I would expect capital to be coming up as we go into automate the facilities as we have several new facilities underway. Uh, so I would say overall betting man right now, slightly less than five 50 capital this year, next year number will be, have a six in front of it. And in my opinion, and it could be 6 0 0 6 0 1, but I think that's where we are right now. Our cash flow overall, you're exactly right. I think we'll be up a little bit. The fight issue next year is going to be the following. We are clearly right now, receivables are going to start building because sequentially, we're going to have a very strong fourth quarter. Sequentially, we're going to have a stronger fourth the first quarter because of what's going on here right now is what we feel. That's going to increase our receivables in the first half of the year, which is From the standpoint we'll make more earnings, we're going to have more receivables. So our balance sheet, which we've been liquidating a little bit this year, will be a headwind for us next year. And those things we know, and we're obviously working on that right now, but I would say that we'll generate the cash. We'll be more than 100% pre-cash billed earnings, but it will be a little bit tougher next year because of the growth, which is a good thing to have, growth in the balance sheet. So that's how I see it right now, Scott.

Okay, helpful. And then Dave, I think I know the answer to this, but I want to hear your view. I mean, what is your lowest visibility end market? Is it still oil and gas? Is there any hope at all in finding a bottom there?

Yeah, I think I'll answer first. I'll let Lyle answer first. I would say the toughest visible market is North America oil and gas, North America oil and gas. And I think we're starting to see some of the formation at the bottom here a little bit. I think you see an automation come in. The key issue for us right now is when will they start doing some work around the fields, around the facilities? And that will be the toughest issue. We are not seeing it yet. And we practice stuff day to day to day. But this market has not turned up in the month of July like the rest of the markets that Lyle saw. So I think that's what we see. I think that will be well into 2021. But I wouldn't be surprised if MRO or our KOB3 business doesn't pop at some point down. It's so low at this point. Lal, what's your feeling on that?

No, I couldn't agree more, David. I think you've said it. We're going to be through 21. But clearly, there are traditional roles in the oil and gas market that are being impacted and some are disappearing as a result of this. Correct. And interestingly enough, and you touched on it, David, and for Scott, This virus has been a catalyst for adoption of automation in the oil and gas industry, and we're seeing automation and remote operations becoming more prevalent across the board, which poses an opportunity for us as people come back and as decisions and spending occurs.

Yeah. So we have a lot of remote automation software equipment, and we see that being a great demand as they automate their facility. So there's an upside to this. We just got to get through it. And I feel good about where we are right now. I mean, Lyle's business is going through this trend. He's restructuring like a heck of a lot of things. Bob will come through this faster. He will spike faster. But I feel very good about where we are, and I feel extremely good and proud about the organization and having to deal with what's going on with them. And not only worry about their families, but worrying about getting sick and worrying about the customer. And the big decision right now for North America, Scott, to be very honest, the OC, because the OC gets together several times a week now, is this whole school thing. We've got a situation where we have a lot of young parents, single parents, two parents, two parents working, single home parents with kids. And how are we going to help them get through this school thing? Our schools, our government tax dollars are not helping us here. And so business has to pick this up, and that's an important decision because we're not going to leave let our kids get hurt again in this environment. And that's a tough call that we're all making right now, one-on-one, looking at each other in the mirror, let's be honest. So with that, Scott, thank you very much. Thank you. Good luck, Dave. Good luck, Dave's team. See you.

Our next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.

Thanks, Zach. Good afternoon, everyone. Good afternoon, Joe. Dave, first question for you. Just thinking about your guidance for the fourth quarter, specifically in the early to commercial residential solutions, it seems like you guys are implying like a mid-single-digit down quarter, yet, you know, the trends seem pretty good, right, like towards the end of June and early July. So maybe talk a little bit about what's kind of dragging the growth there and And if you could specifically touch on Resi HVAC in North America, I'd be curious to see what you guys are seeing there specifically.

Good, certainly. I'll comment first, and I'll let Bob comment. I think the key issue for us, I think you're right, the order pattern is returning. Bob saw it in mid-June. We saw it through July. I think it's across all of your business units had a pretty good July in orders. The big issue for us, Joe, is manufacturing output. You're taking facilities that historically would not be doing this much sequentially from quarter to quarter. You obviously have attendance issues. You have issues relative to if you have a positive COVID in your plant. All these different things are working through us right now, and Bob and his team have the challenge of actually trying to improve output in an environment where workers can be troublesome for us at this point in time. That's one of the biggest issues we have. I think from the standpoint of We're being cautious relative to the recovery. You know, things have hit pretty well, the heat waves. So residential HVAC has taken off, and Bob can talk further about that. That's not unexpected when you get this type of heat, which we had the last couple weeks. But at the same time, you know, we've got to keep the plants up and running, and we've got to be able to serve, and that's the biggest issue we face at this point in time. Keep in mind, sequentially, I think we typically do, Frank, around 250, 300 from third to fourth quarter. This year, we're going to do 500. We're going to do 500. So we could be doubling our sequential growth rate from quarter to quarter, which is something that with the plants just getting ramped down, ramped back up is a challenge. But I think I feel optimistic about that. I think Lau will have the plans. The question is can he get the book to ship and can he get the backlog out, which so far he's done reasonably well in July. Bob, any comment you want to add in color on that?

I'll just say right now there's a lot of bull whipping or whipsawing kind of stuff going on right now. There's a sell-through. Distribution has been in very different states. E-commerce is going gangbusters. The big box are doing very well. You've got a lot of professional distribution that has had branches closed for an extended period of time. OEMs, just like us, have got challenges at times with plants and absenteeism and other issues. So it's just, you know, there's a lot of noise in the system right now. Certainly the June and July orders are very encouraging. We're working our S&OP, our operating plans to be able to work that, as you mentioned. There can be challenges in some areas, like disposer inventory, and including the distribution linkages of our customers. So, you know, again, June and July orders, no question, are very encouraging. Pretty broad reporting, I think, in the HVAC on residential being very strong, commercial still being difficult, refrigeration still being quite difficult with food service in particular. We're seeing the same kind of thing. So I think we're given, you know, again, it's a bit of a range for a quarter, I suppose, for us to be talking about anywhere from 5 to 11 or so. We're already in the quarter, but it's just emblematic of what's going on right now.

Yeah. Great.

Joe, anything else you want to ask?

Yeah, no, that was a great caller. I guess just my one follow-up. I know last quarter you guys talked a little bit about, you know, getting the decremental margins back into the 20s by the fourth quarter. So expecting, you know, a little bit better growth out of Bob's business, but a little worse growth out of Lyle's business. So be curious for both of them on your ability to get there in fourth year.

I think we did it in the third quarter. I feel very good that we'll do it again in the fourth quarter. The only thing that would be a problem would be a supply chain shock, which is, you know, with Bob ramping up, you could have a supply chain shock. But I think right now our cost controls, our reset programs, we've got great restructuring done in the third quarter. Obviously, the COVID, I mean, I feel very good that we'll be in the 20s again in the fourth quarter.

Yeah, I mean, we had several down plant days in April and May, either caused by us or caused by perhaps customers not being able to take anything. There's a lot of disruption in Q3. and a good amount of that clearing out.

And you both had plans in Mexico that we were paying people to stay home because the governor asked us to make these people stay home because they potentially could risk. So we were paying people to stay home.

Yeah, and clearly we've had the impact of the hard restructuring that we went after very hard. Now, a year into the program, as you highlighted, David, we do have a step-up in volume sequentially. Okay. Q3 to Q4, which will also help. But we did hit those low 20 decrementals in Q3 already. So we're there. And I think with that, no reason to believe that won't hold as we get to Q4.

So I think the one thing I'd be worried about of all the stuff, to be honest, Joe, is the supply chain. As we start now ramping up here in the fourth quarter, can our supply chain keep up with us on a global basis? And there's a lot of work going on that we've been working on now for two months because we knew this was coming at us. And so we've been getting ready for it for two months. Thank you. Okay, take care, Joe.

Our next question comes from John Walsh with Credit Suisse. Please go ahead.

Hi, good afternoon. Good afternoon, John. All right. I also am in the same storm as Scott, so hopefully don't cut out.

Do you have a tree in your house? Do you have a tree in your house?

I don't have a tree in the house, so things are looking up. Okay. So thanks for all the color on slide 22. Just thinking about that $140 million net, as you see it today, is there anything related to price cost or productivity net of inflation that you see as a detractor to that number?

Not right now, John. I think that the big issue for us right now will be you know, the balance of, you know, the net material inflation relative to price. We, you know, fundamentally, we see that we're going to have a little bit different environment next year. I think pricing will be tougher, and therefore the net material inflation is going to be the key issue for us. So pricing will be tougher. That will be in the red. And then, therefore, we need to have positive net material inflation. This is not something that we didn't expect. We expected this to happen. I know both Bob's business, the corporate organization, and Lau's business have been focusing on this. It's going to be a very important issue relative to next year because we're trying to get through the year, as we say, neutral, not have a slightly green or a slightly positive or red number here. So right now I think we're in pretty good shape. I feel good about the balance. I feel good about that 140 number that we talked about there. So there's nothing really causing a big issue for us at this point in time. But the plan right now, I'd say, is a little bit red, building the plan. And I think that we're really working hard to net material inflation at this point in time without stressing our supply chain too much because of what we got to expect in the fourth quarter and in the first quarter. One of the things you're going to see this year, which is a little bit different, two things, from the fourth to first, John, for companies thinking about this. So the year has been tough for companies. For companies like us, you know, if there are programs out there that you get X dollars, you get rebates and stuff like that, no one is going to be earning their rebates this year. So our customers are not going to be going and saying, let's pull into the quarter. They're going to be pushing. So that's one thing you're going to see. Secondly, sequentially, from fourth to first, I think you're going to see consistent demand improvement in Bob's business, and so inventory will continue to be flowing into the channel, which normally we would not be seeing. So those two things would say that we'd have a better first fiscal quarter or fourth calendar quarter because the trend line is what happened to us in the shock in the middle of the year. So there's a lot of things that we're putting on the table right now relative to our own planning, both in sales and also revenue. the S&OP, the manufacturing, because we know there's a moving parts relative to the way our customers are going to deal with this. But right now, I feel good about the price-cost. I feel good about our savings and just got to keep managing it day-to-day.

Great. Thanks. And then, you know, as a follow-up, maybe digging a little bit more into the margin performance at automation, you talked about some challenges in the KOB3 order rate, but Can you actually talk a little bit about the mix of KOB3 year on year, if that was a good guy? I'm just trying to understand a little bit behind that margin performance.

I'll let Lyle answer that question because, you know, Lyle's got the facts. I'd be making it up, and you know me, John. You know, I don't want to make it up for you because you'll call me on the mat in this one. So, Lyle, why don't you tell them how your day-to-day KLV-3 looks versus KLV-2 and KLV-1?

Yeah, clearly.

I mean, the kind of business, but people don't know it.

The kind of business, three, which is KLV-3 being the MRO, the small order sizes, typically what you see in day-to-day business or short cycle business. That's continued to increase relative to where we finished the last fiscal year as we've navigated through this year. Part of that is a reflection of the size of POs that are being issued. Part of it is a reflection of deferments in the larger capital modernization projects. So we're sitting north of 60% as we close the quarter. We don't have the exact numbers yet. There's a little bit of a systems work that needs to be done for us to have the final, final number. We'll be north of 60%. K will be three, which is an over five-point improvement where we finished, I believe, last year. So it's definitely moved that way, John, but the fact of the matter is there's less of it.

Yes.

But the pie, the percentage has increased.

So one of the key issues here that we are tracking is very tight on, and particularly going back to, I think, Joe's question on – the North America oil and gas, what we're watching very carefully is the order intake on a daily basis. This is important to us, in particular in North America, because that's where we're going to see the KLB3 pop back up first. And when you're running a factory at 30%, 40% with people in it, you're not doing much. But that's what we're watching, because when that rate comes up, I mean, that tells us the short-term stuff is starting to kick in, and our KLB3 will be very good, and it helps our profitability. and we'd like to see some of that in the fourth quarter. We're not banking a lot in the fourth. We see it more in the first, but it sure would be a nice thing to have for us in the fourth because that would give us better leverage and better margins and better cash.

And maybe just a little color on that, David, in terms of North America specifically through Maine, June, across our short cycle businesses, the number of physical POs that we received was actually equal to last year's.

That's a good sign.

It's a good sign. However, the quantity of units within each PO dropped. And that's reflected in that sequential or daily order drop of the $20 million a day to the $15 million a day. So we have to continue to drive the POs, but there's just less units in them.

So that's what we're watching, John. And we have that in detail because we can tell you very quickly when these things are going to turn. I mean, you can smell Bob's business. We were out talking to his guys. You can smell it. Lyle's business, we know it's being brewed right now, so it's coming.

And then just on the other end, we have not seen any. decremental pricing on KOB3 through this. The price has held, and it continues to be very strong.

And project-wise, since we're at KOB3, KOB1, you've seen some push out, some cancellation, a lot of new stuff.

Yes, David, honestly, we've had some wins. We booked a significant amount as we went through the quarter. We've also seen some deferments on KOB1.

So there's not been a lot of movement in the bubbles or the pipeline, but we do know that we're going to be living off of KLB 3 and KLB 2 here for the next, I would say, next 18 months because the projects are going to be smaller. And we're doing a lot of refresh right now with a lot of inputs, and I think we'll give you more input as the next quarter because there's not enough movement right now to say it's changed that much, but it's clearly – It's in flux right now, but we feel pretty good about where we sit at this point in time because there are new projects and installed projects. Overall, we're holding pat. Our backlog right now is still holding right in there, which is pretty good. It's not being canceled. It's holding right in. Next question. John, do you have another question?

No, I'll pass the baton. Thank you.

Thank you very much, John, and hopefully no tree will fall on top of you.

Our next question comes from Andy Kaplowitz with Citigroup. Please go ahead.

Dave, good afternoon.

Good afternoon, Andy. Good to hear from you. Are you in the storm too?

I'm in the storm too. Backup generation, no tree. So we all feel for Scott. You know, we know how that is. Hopefully things get better for him soon. So how are you doing?

I'm doing pretty well. We are not having a storm here. It's kind of cloudy, but it's quite pleasant, to be honest. I'd like it to be a little warmer.

We've had a very warm...

We'll let the East Coast get all the rain. Let you guys have all that fun.

Yeah, thanks for that. So look, you see, you guys seem relatively confident about at least modest recovery in FY21. And I know a lot of that is based on your orders turning here. But you also talk, Dave, to a lot of customers. And what we hear from other CEOs is, you know, that confidence is pretty mediocre out there. So maybe you could tell us sort of the conversations you're having and, Are you hearing more confidence out of the customers you're talking to despite the concerns around the infection resurgence that we've seen?

The answer is yes. First of all, we did put a forecast out there, Andy, and we did hit our forecast from April 24th. And so, you know, I had enough confidence to put our neck out there on the line, and we hit it, and we actually did a little bit better. Yes, we've had conversations. We are seeing the markets around the world. I would say the more cautious markets on the industrial side is the U.S. But as you look into Europe, as you look into the Middle East, as you look into Asia, China, we are seeing those markets. There's a lot more confidence of the incremental spending, and we're seeing that business get a little bit better. And so that's why we feel reasonably confident. Now, we're not changing much of our forecast from what we laid out in April relative to the fourth quarter. It's very similar. I think the key issue will be is Bob going back to a couple of questions earlier. If Bob's business orders continue to hold, he's able to produce it, then I would say Bob's going to have a stronger quarter, and that bounce is coming back after it's down 20%, 30%, 40% in some of those months. Okay. Andy, that's why we feel confident about it. We've been here, done this before. You know, this turn is very similar to Bob's financial crisis turn and allows business a little bit different based on North America oil and gas. But I think we have enough confidence and enough, I would say, conservatives in the underlying sales forecast right now based on what we're hearing from our customers that we can say that. And we're very in tune to our customers right now. We're out talking to them. We're out visiting them. And so, Lyle, anything you want to add there?

Yeah, thanks, David. Myself and the leadership team has been engaged in this. We've zoomed our way into many customer rooms and participated in many meetings. Starting really in the mid-May to early-June timeframe, our salespeople start to get out and see customers again. Obviously, our service people have been engaged throughout the crisis, engaged in plans. And so the projection really hasn't changed, and the sentiment from the customer base hasn't changed a whole lot, Andy. There's conservatism and concern in oil and gas, as David described, but there's optimism in medical and life sciences and food and beverage and power, but we're having a record year in North America power. So it's a bit of a mixed bag there, but oil and gas really is where we're concerned, but that's no different than what we spoke about on April 24th.

Yeah, being so broad industry, we have a lot of industries doing better than other industries and from that standpoint. And Bob said, I mean, they cut back so rapidly in Bob's business between inventory and shutdown, couldn't make stuff, that we knew there was going to be a sharp bounce at some point in time. And that's what we're seeing right now. The question is, is it sustainable? And can we produce? So that's where we see right now. Very helpful, guys.

That's helpful, Dave. And let me just ask you specifically then about China, because you know that region very well as well. You know, there always seems to be some stimulus tailwinds. You do have some geopolitical issues to deal with, and some people think improvement in production is ahead of demand, but it seems like it's picked up for you guys. So what's the outlook for you initially as we're going to 21 in China?

I think what we're seeing right now is Lao's business on a broad basis is pretty good. And so I think he's going to see a pretty strong – High single-digit growth as we go into 2021. The wild card for us is Bob's business because, you know, the consumer in China has really pulled back in some of the programs. And the question will be, when do they start spending money again, feeling confident of spending money? You know, if you look at the air travel inside China, it's back pretty close to where it was before the COVID situation. Now, international, no. So the movement's starting to happen, and that will be a big impact for Bob as that starts happening. So we're waiting for a consistent improvement. I don't know what you saw in June and July, Bob, out of China, but he's being cautious at first. He does know he'll start getting easy comparisons. But what I'm trying to see is the underlying demand. So are you seeing any sense of improvement from your standpoint in China?

It's in the high single-digit decline right now, 5 to 10 down. Again, the orders have been bouncy. We've gotten some bright spots at times, and then it flips. Like you said, I think on the commercial side, there's a lot of stimulus programs that are being worked. But then on the consumer side, including housing, purchasing, and everything – People are being very cautious, just like U.S., the savings rate and everything.

Yeah. So I think what we're going to see, Andy, is Laos will have a very solid year next year as they continue to make investments, both in the life science area, the power area, the energy area, some chemical area. I think Bob will be the wild card. I mean, will he be a zero or will he be a 10 plus? And so that will be the wild card for Bob next year in China. But my gut tells me the spending will start coming as they see some stability in the consumer and some travel and investments. But we're in pretty good shape right there right now.

Yeah, the picture we had on the 21 is China gets positive in Q2 and stays positive. But, again, the magnitude is hard to say. Yeah, it's very hard. Thanks, Andy.

Very much appreciate it, guys. Stay well. Thank you. You too.

Our next question. comes from Andrew Obin with Bank of America. Please go ahead. Good afternoon.

Good afternoon, Andrew. So a couple of questions. Could you just talk about how you guys are doing in automation solutions relative to your peers? Do you think it's an opportunity to take market share? I think some of your competitors have some real work. How is the market share trending in those downturns?

You know, it's pretty hard. We've got one quarter under it right now, or two quarters, let's say. I would say if I look at the final control business, I would say Rahm and his team have done a phenomenal job in final control in the last several quarters, both in execution. I think they'll probably end up down somewhere around 5% or 6% this year, both in orders and sales. That is better than historically. If you think about the combination of our final control and VNC final control, they're doing much better. He's raising his profitability. His GP margins are doing better. His cash flow is doing better. So I would say on that side of the business, you know, we're winning. And I just had a site review with him, and I like both of them. We're making technology investments. On the system side, I'd say we're doing pretty well. You know, we had systems this quarter, which we didn't – it's not in there, but our systems were up. For the quarter, what were we up overall?

Actually, we were down sales for the quarter, 7%, but compared to the down 11 to 15 on Pierce.

Okay, so we're down 7 overall. Okay. So we had a decent quarter in systems. I think in instrumentation, not much movement in that thing from that perspective. So overall, in a quarter, I feel good about where we are, but I'm thinking about the next two or three, four quarters. I think we are well-positioned. The key issue for us, Andrew, is the execution around the plant moves right now. The technology moves are pretty good, but the plant moves, because that's how we lose share if we're not able to deliver. So the key issue for me right now, if we continue to invest and get the plant moves done, then as the economy gets better, I would say we're going to have a good move in the downturn, and we'll pick up share. But one quarter is a good sign, but we've got several quarters more to go, but I like where we sit at this point.

I'd like to add on to your systems on the power side with Ovation. that's been a phenomenal quarter. And they were positive.

They were positive.

They were positive.

That's right. They were positive. I got the wrong one. Okay. Next one, Andrew.

Yeah, just a follow-up on facility moves. Can you just give us more color? I mean, you had a head start on everybody else because you announced your program several months before that. But what are the challenges of moving facilities in the midst of COVID and this huge pandemic? sort of whipsaw effect in terms of manufacturing, and how have you adjusted your plans in terms of facility moves?

It takes a lot of planning, let's put it that way. We've moved some plans in and out based on the areas of where we can get people in and out. One of the problems we will face is that we're not able to fly resources around the world right now, so we're going to depend on our local resources, both in Latin America or Asia or in Europe, and typically we would be flying resources around. But, you know, from our standpoint, we've planned so that they're going to take a little longer, Andrew. And we have had a couple from the standpoint we might have moved a month or two, one as we work with the government, and also two relative to resources. So on average, I would say they're on track. We've had a couple slippage. But I think we've planned in this COVID thing was something we knew was coming at us. And so as we finalize the plans and we start moving these plans, we have that pretty well in shape at this point in time. The big issue we would face, Andrew, to be all honest, if we had a huge breakout of COVID and, say, certain parts of the region we have a plant going into, that would clearly slow us down. Fortunately, knock on wood, we have not had that yet. But that's something we actually reviewed with the board today, what I'd call a more challenging issue. moves that we have underway, both in Lyle's business and Bob's business, to make sure the board understands the magnitude of what we're trying to do. As you know, we restructure all the time, but this is a much higher magnitude, and we are in the middle of COVID. But, you know, so far the teams around the world have done a great job, and I expect them to execute on them, and I feel good about it.

And if I could just squeeze one more, just Google mobility data. it does line up with your industrial orders. Is that a fair statement?

If I may, David. Yeah, go ahead. The Google Mobility data, what we did, Andrew, is we segmented purely the commuting hours. It's North American data only. Obviously, as you know, that data is an opt-in location tracking data, the location services data off of the Google phones. But it does track very well to daily bookings in North America.

Yeah, you've got to pick the location, facilities, and cities. And so that's what these guys, we know where the facilities are, we know the customers, and it does seem to track pretty well.

Yeah, I just wanted to clarify. Thank you so much.

Yeah, it's nice that, you know, people are monitoring all this right now as I go back and forth to work. You know, it makes me feel real good. Nah. Okay. Okay. Next question, please.

Our next question comes from Steve Tusa with J.P. Morgan. Please go ahead.

Mr. Tusa. Hey, guys. Good afternoon. Are you safe someplace in, like, New York?

I don't really ever feel safe, so it's all relative, I guess.

Well, I heard there was a person on the Mars rover side. I thought maybe that was good. Maybe you, because I would think that you would like to do that, go on that Mars rover thing that's been shot off last week.

Yeah, maybe. Yeah, I think it's probably, I'd probably do better up there than on this planet right now. Not sure what planet I'm on these days. Anyway, what do you think price cost is going to end up for this year? What are you guys embedding?

I think we have positive price this year. Price cost would be slightly positive. I mean, these guys are looking at the chart right now. Frank would be the keeper of this. It would be less than one. I mean, less than one. We've had, obviously, with the With a good net material inflation, and we had pricing set in earlier on, and I think that will cause us to have to give some of it back next year. Our second half is in the half to a full point.

Positive.

Yeah, so overall, Steve, I think it would be less than 1% positive for the year.

Yeah, less than 1% positive. But that's price, but that's price or price cost? That's price cost. Okay, got it, got it. So a percent on the margin front is what you're saying. Yeah, yeah, yeah.

I think we're tracking pretty well right where we said to you at the beginning of the year.

And then just on this CR&S business, I mean... These OEMs are obviously talking about eye-popping order numbers here in June and July. Some guys up like 50%. You're basically saying you guys are having fulfillment issues? And then beyond that, I guess into the back part of the year, into the calendar fourth quarter, they're also kind of being a little bit cautious. Do you think the market, you know, goes from being a heat-driven market where, you know, the consumer, you know, is going to do what they have to do to stay cool to a market in the fourth quarter that kind of recouples more to the fundamentals of the consumer? In other words, you know, high unemployment and weak consumer confidence? I mean, is that kind of, is that what's on the board right now as far as the variables you're looking at, or is that? the wrong way to look at it.

Part of the popping now is April was pretty dramatic the other direction. On a dollar basis, our June orders for HVAC in North America were 2x what they were in April. And I think our customers have talked about it. We've talked about it, where there were a number of plants down, and sometimes for as much as a couple weeks. Our customers, yes. our customers, and then even us in April as we first kind of learned how to deal with the first COVID incidents inside and cleaning and other things like that. So, again, part of this is a makeup. I think the, you know, I mean, you write the reports. I read the reports. You know, distribution has gotten very thin. There's a lot of examples of wholesalers and others considering other brands because one particular supplier can't do it. We supply them all, so we see that dynamic play out. And so it's very strong right now. I think there's a bit of a pent-up, both of getting the channel back established, as well as certainly the sell-through with the heat in June and July. About 35% or so of the units are heat pump units, so they are relevant for the wintertime as well. And you've got a lot of people sitting at home and, frankly, sitting on a decent amount of cash. with the unemployment benefits, which is probably not skewed to homeowners exactly. So, you know, bottom line is I think the market, I don't think there's a reason this won't stay pretty strong through the season. And also to get the channel in play, you know, in stuff for coming out of the season.

It's really thin right now. So, Steve, right now I think we see a couple quarters of pretty good demand here, a little bit different. Again, the key issue for us, like with them, when I – We're shipping right now. We're keeping up with them. It's a strong demand. We're keeping up with them. The big issue to us is clearly if all of a sudden you had an outbreak where our plants are located and their plants are located, a supply chain disruption, right now we went from basically not producing much to full out to what you're talking about. And so that's where we are at this point in time. We are able to keep up with them, and we're working it pretty hard. And the key issue for us is we've got to keep those plants running. And we've got to keep the plants running safely. You know, it's one thing to run a plant full out when you're non-COVID environment. When you have a COVID environment, you have to be very, very careful to not stress the workforce and all of a sudden have something get in there and create an environment where you have half the plant come down with COVID. So, you know, we're running hard right now and we're keeping up with them. But I'm always concerned that one break, as we've seen it, both at our customer's level and our level. So, This is something I feel the demand there, and we're going to see it for the next couple quarters, and we'll keep going at it. Someone said the housing market's going to be pretty good, and so we're going to see construction and things like that and repair. We've just got to keep the plants running and the supply chain going, which right now we are.

One last one for you, just on software. I don't even know if you guys track software sales outside of you know, the systems business, but, and any way to give us any color on, on, on that kind of line item or, or that, that metric. I know you guys don't, you know, pretend to be a software company like some others do, but are you, you know, are you seeing growth in those areas or is that just kind of like in that systems and services bucket on the process, on the automation side?

Hi, Steve Law here. Yeah, no, as we spoke about in New York, the software business is predominantly in the system side, although we do have a significant and growing amount of software that's outside of that, that sits in our digital transformation business. The software within systems is closely tied to Ovation and Delta V. That's embedded in there. The standalone software packages, albeit smaller in scale, over half a billion dollars in size already today, continue to grow. They continue to grow, not at the rate that we expected. Obviously, back in New York, they continue to be positive there. It continues to be very interesting.

Sorry, did you say half a billion for that business?

Yeah, the standalone software.

Yeah, half a billion.

Half a billion.

Yeah, you guys should change your name to Emerson Technologies or something like that. Maybe you get some more attention around that business. All right, I appreciate it. Thanks, guys. Yeah, break it out. Take care, Steve.

Our final question comes from Julian Mitchell with Barclays. Please go ahead.

Hi, good afternoon. Good afternoon. Maybe just the first question, David, on how you're thinking about capital deployment at this point. The buyback, you've kept a ceiling on it for the past few months now. In general, you're seeing global M&A start to warm up again after a freeze. How are you thinking about acquisitions at this point?

So right now, we're going to keep the hold on the share we purchased for the rest of this quarter, and then we reviewed it with the Finance Committee this morning. We'll review it again, the next Finance Committee at the end of this fiscal year. Right now, we're focusing very much on acquisitions. We have several things underway. As you said, they are freeing up and working that. If we get into the period that we're not able to close acquisitions and we see, obviously, from our cash flow standpoint that We have the flexibility to do the share repurchase. We'll quickly go to that. But right now, as we talk to the board, we're focusing pretty hard on some unique opportunities around the acquisition front that we'd like to get done here in the next quarter or so. So that's what we're looking at. But if they don't happen, obviously we generate cash, then we'll look at, again, reinstituting the share repurchase. Most likely we will reinstitute the share repurchase in June. fiscal 21, but I don't know the magnitude of it right now. It really is a function of can we close any acquisitions here in the rest of this calendar year. So that's how we're looking at it, Julian.

Thanks. And then just a quick follow-up maybe for Lal on the automation solutions backlog. I think you'd said, Lal, that that was splattish or stable sequentially ending the June quarter. The sales decline is obviously a lot less than the orders decline that you've seen. And that suggests you're sort of pulling revenue down from that backlog into the P&L. How do you think the backlog trends from here, let's say, the rest of this calendar year?

Yeah, sure, Julian. So what we're planning, it's embedded in the plan that I communicated to you, is about a $300 million takedown in backlog. So it finished at 4.8. 4.8 on a fixed rate basis. 4.8. For currency, 4.8 billion at the end of September.

Which is a normal trend for us.

It's a normal trend. We took 96 million out in the month of July. Yeah. So we're well on that path over the next two months, Julian.

Yeah, so this is pretty, I mean... It's going pretty well. The orders are pretty well holding up there. The project business is going in there, and it's not cancellations. Our backlog is holding in there nicely. And while, and particularly around final control in the systems, they're executing the backlog. And that's a good sign for us. And I think that's going to hold. It'll start building again as we go into next year. But this is, I think.

Execution in the plants.

Yeah, the plants are up and running well right now. Sure. I'm more worried about some of Bob's business. Bob's had some businesses that have been jerked around. When you go minus 40 to plus 20, that's pretty tough to do in a plant level, especially if you've got COVID floating around out there. And so that's the concern we have with Bob. But overall, I think that as I wrap it up here, again, I want to thank everyone who joined us today. Again, I want to thank everybody out there across Emerson that worked so hard to make this quarter happen. We delivered a quarter. We laid out. We were one of the few companies that laid it out as we did. We delivered it. We did better job execution around the cash flow and the earnings. And I feel very confident that we are well-structured to go through this final quarter and really have a good rest of this calendar year, which will be our first quarter, too. And so it's this question of, you know, where this thing trend line goes and just working hard to keep things going, get the restructuring done, generate the earnings, and then also make sure we make those long-term investments we have to make. So I feel good where we sit today. Earnings, cash, and momentum is on our side. Organization is pretty strong. And so I look forward to a good finish of the year, and we'll go forward with that. And I appreciate everyone joining us today. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.