Craig M. Rossman - Emerson Electric Co. David N. Farr - Emerson Electric Co. Frank J. Dellaquila - Emerson Electric Co..

Julian Mitchell - Credit Suisse Securities (USA) LLC (Broker) Andrew Kaplowitz - Citigroup Global Markets, Inc. (Broker) Nigel Coe - Morgan Stanley & Co. LLC Steven Eric Winoker - Sanford C. Bernstein & Co. LLC Gautam Khanna - Cowen & Co. LLC Robert McCarthy - Stifel, Nicolaus & Co., Inc. Jeffrey Todd Sprague - Vertical Research Partners LLC John G.

Inch - Deutsche Bank Securities, Inc. Deane Dray - RBC Capital Markets LLC Rich M. Kwas - Wells Fargo Securities LLC Charles Stephen Tusa - JPMorgan Securities LLC Eli Lustgarten - Longbow Research LLC.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Emerson's Investor Conference Call. During today's presentation by Emerson management, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. The conference is being recorded today, November 1, 2016.

Emerson's commentary and responses to your questions may contain forward-looking statements, including the company's outlook for the remainder of the year. Information on factors that could cause actual effects to vary materially from those discussed today is available at Emerson's most recent annual report on Form 10-K as filed with the SEC.

I would now like to turn the conference over to our host, Craig Rossman, Director of Investor Relations at Emerson. Please go ahead, sir..

Thank you, William. I am joined today by David Farr, Chairman and Chief Executive Officer of Emerson, and Frank Dellaquila, Executive Vice President and Chief Financial Officer. Today's call will summarize Emerson's fourth quarter and fiscal year 2016 results.

A conference call slide presentation will accompany my comments and is available on Emerson's website. A replay of this conference call and slide presentation will be available on the website for the next 90 days.

In the fourth quarter results for the Network Power, Leroy-Somer and Control Techniques businesses were reported in discontinued operations.

Considering this, and to aid in comparisons to prior quarters, we have provided results both on a continuing operations basis and on an adjusted basis, which includes these discontinued operations and excludes such items as separation cost for consistency. A further explanation of the reporting formats can be found on slide 2.

Detailed bridges can also be found in the appendix to this presentation. Please turn to slide 3 for a summary of the fiscal year results. Fiscal year sales of $20.2 billion decreased 9% versus the prior year, with underlying sales down 6%.

The fiscal year results reflected a more challenging economic environment than we expected as we entered the year, as the company has faced difficult conditions in its key served markets for seven consecutive quarters.

Within our industrial businesses, the most significant factors have been the impact on energy-related customer spending from persistently low oil and gas prices as well as weak general industrial and emerging market spending. Across our other businesses, we did find bright spots related to generally more favorable market conditions in U.S.

construction; data center spending, particularly cloud-based and co-location customers; telecommunications infrastructure; and global air-conditioning and refrigeration. Adjusted earnings per share decreased 6% to $2.98.

As a result of the continuation of difficult market conditions, restructuring spending totaled $112 million for the fiscal year, exceeding our previous guidance of $90 million to $100 million. The completion of the actions also positions us for what we expect to be a challenging 2017.

Finally, solid earnings, conversion and improved trade working capital performance resulted in strong operating cash flow generation of $2.9 billion, or $3.1 billion, which was 15.1% of sales, excluding $179 million of separation costs. Turning to slide 4, net sales of $5.5 billion were down 6%, with underlying sales down 5% in the quarter.

Served market conditions in the fourth quarter remained generally consistent to previous quarters, with weak oil and gas and general industrial spending outweighing favorable data center, telecommunications, air conditioning and refrigeration spend. Adjusted earnings per share of $0.96 increased 3%.

For the quarter, working capital improvement drove operating cash flow generation of $957 million. Turning to slide 5, favorable materials cost containment, restructuring benefits and solid operational execution led to gross profit of 41.7%, which was up 100 basis points, and EBIT margin of 16.8%, up 60 basis points versus the prior year.

Turning to slide 6, the continuation of a low-growth environment led to underlying sales decreases in all geographies for the fiscal year. Fourth quarter underlying sales were generally representative of the full year but improved in some regions such as Asia, China and the United States.

Turning to slide 7, total segment margin was up 140 basis points to 17.1%, primarily driven by benefits from restructuring actions and operational execution. Capital spending was held to $169 million, equal to the prior year.

Turning to slide 8, Process Management sales decreased 11% as spending levels in energy-related markets remained low for both capital and operational expenditures, while power and life sciences customers continued to provide growth opportunities. Restructuring spending in the quarter was $54 million, slightly above the prior year.

Segment margin decreased 280 basis points, primarily due to volume deleverage partially offset by savings from restructuring actions. The Automation businesses will remain under pressure through the majority of fiscal 2017, with the possibility of orders recovery in the second half assuming stability in oil and gas prices.

Turning to slide 9, Industrial Automation sales decreased 7% resulting from a continuation of low levels of spending in upstream oil and gas and weak but slightly improving conditions in general industrial markets.

Segment margin increased 190 basis points to 16.3%, primarily due to business mix, benefits from restructuring actions and lower restructuring spend in the quarter. The divestitures of the Leroy-Somer and Control Techniques businesses remain on track to close by the end of the calendar year.

Looking ahead to 2017, general industrial markets will remain challenging, with slightly improving conditions as the year progresses. Turning to slide 10, Network Power underlying sales were flat in the quarter supported by favorable demand in power products, thermal management and service.

Strong growth in North America was led by cloud-based and co-location data center customers as well as telecommunication spending by mobile and broadband providers. Segment margin improved 650 basis points to 13.1%, benefiting from favorable mix, savings from restructuring actions and gross profit improvement programs.

The Network Power divestiture also remains on track for completion by the end of the calendar year. Turning to slide 11, Climate Technologies' sales increased 6%, driven by strong growth in U.S. residential and commercial air conditioning as well as refrigeration and residential air conditioning markets in China.

Segment margin increased 320 basis points to 21.1%, primarily due to volume leverage, savings from restructuring actions and material cost containment, partially offset by lower pricing. The 2017 outlook for global demand in air conditioning and refrigeration markets supports our expectation for low-single-digit growth for our Climate businesses.

Turning to slide 12, Commercial and Residential Solutions' underlying sales were equal to the prior year as growth in food waste disposers and wet-dry vacuums offset declines in other businesses. Segment margin improved 370 basis points to 25.9% from the benefits of restructuring actions and the impact of the InterMetro divestiture.

Favorable conditions in U.S. construction markets are expected to support our outlook for low-single-digit growth in fiscal 2017. Turning to slide 13, fiscal year 2016 was more difficult than we had expected, impacted by a significant and unprecedentedly long global industrial downturn that we expect to continue into 2017.

Our automation businesses will remain under pressure from these market headwinds while our commercial businesses will benefit from favorable conditions in global air conditioning and refrigeration and from construction markets in the United States and Asia. Considering these factors, we provide the following guidance for fiscal year 2017.

Net and underlying sales will be down 1% to 3%, with the Automation Solutions platform down 4% to 7% and the Commercial and Residential Solutions platform up 2% to 4%.

The Automation Solutions platform will be comprised of our current Process Management segment and the remaining businesses from the Industrial Automation segment, while the Commercial and Residential Solutions platform will be comprised of the businesses within our current Climate Technology and Commercial and Residential Solutions segments.

Earnings per share are expected to be in the range of $2.35 to $2.50, which compares to earnings per share on a continuing basis and excluding divestiture gains of $2.45 in 2016 and $2.81 in 2015. The 2017 EPS guidance also excludes any impact from the pending acquisition of Pentair's valves and controls business. And now I'll turn it over to Mr.

David Farr..

Thank you very much, Craig. And in case you guys don't realize, Craig is rooting for the Cleveland Indians tonight to win and take the World Series, so he's not totally paying attention right now. He's focused on the Cleveland Indians. I want to thank everybody for joining us today.

Again, it's a good way to finish a very challenging global industrial world that was not an easy year, but a very challenging year nonetheless. And I think we continue to execute and get our position in the right condition for better growth in the future.

I want to thank all the employees, the corporate leaders, the OC members for their support and your effort this year. We got a lot done in a very tough global business environment, which has been challenging for us for the last two years.

And with a good finish on the fiscal 2016 in the fourth quarter, even though sales were down, margins were close to record levels from last year. We had strong cash flow, we had good conversion.

In the quarter we also announced the cash sale for Network Power, cash sale for Leroy-Somer CT, generating over $5.2 billion of cash, and an agreement to purchase the Pentair valves and control business for $3.15 billion. As Craig mentioned, most likely we'll get the divestiture done by the end of this quarter.

We clearly are driving, trying to get the valves control business closed by the end of this quarter. We still have to get global government approvals on that acquisition, and we're moving forward with that.

That acquisition is uniquely strategic to us relative to our end markets, our solutions package and our ability to really integrate that and fit it well within our broad global customer offering. And so we're very excited about the opportunity there to generate future growth, earnings and cash flow. We executed for the second year on restructuring.

Restructuring, remember, was down from the prior year because we had very high levels of restructuring in fiscal 2015, but still over $100 million of restructuring throughout the year in 2016, and the savings are flowing through.

We nearly maintained a 17% operating profit this year despite sales being down 9%, which is quite a major task given a big drop-off that we saw in the Automation Solutions business. We had strong cash flow again this year, better than last year when you take out the cost of doing the repositioning, excellent conversion.

So we're exiting the year with two strategic divestitures, one unique strategic acquisition, strong balance sheet, good cash position, and we have a very good vision where we see things unfolding here for the next 12 months. You now have the new GAAP P&L and balance sheet for Emerson. I'm sure you'll have a lot of questions about it.

We will supply five years of history in the end report. We'll also give you a very good 2014, too, and I think three-year details. And it will give you a chance to start to understand the new Emerson.

Also we'll start giving out the sales and orders relative to our platform, the two platforms, Automation Solutions and then also the Commercial Residential Solutions.

So we'll start giving some information, Craig has the information, he'll start feeding it out to you, and we'll get more to you as we go forward here in the 10-K, and then also we'll give more as we report our first quarter in fiscal 2017.

We made a decision to give you a little bit more insight into what we see for next year given what the new company is structured, what the new P&L looks like, what the new balance sheet looks like.

Right now we see underlying sales down 1% to 3% with Automation Solutions being still in a challenging mode down 4% to 7%, which will be a third year in a row that Automation Solutions is down. Our Commercial Residential business has turned the corner and has grown, and we expect that will continue to grow 2% to 4% next year.

Both will deliver solid operating margins and both will be better. Restructuring around the Automation Solutions will continue but at a little lower level, excluding our integration of Pentair valves and control.

Some minor restructuring going on underneath the Commercial Residential Solutions, but primarily we're making significant increased investments in the infrastructure to create best cost locations, to create a more efficient structure within the new Commercial Residential underneath Bob Sharp and Jim Lindemann.

A lot of integration work going on there. And then eventually when we get clearance from the governments we'll get integration work under Pentair valves and control. We're ready to go.

We already have our day one through six month plans ready to implement and working very, very hard on it, so a lot underway relative to our execution around this acquisition. So we feel good about how we finish the year, feel good about how we're going into our position relative to our repositioning effort.

With EPS it's all about how do we maintain or have a slight increase in EPS next year. We gave you the range of $2.35 to $2.50 but we're very much focused, can we deliver some moderate, low-single, negative-single growth in underlying sales and execute better margins and deliver a little bit better earnings per share.

We're very much focused on running this business now that we have the repositioning effort underway. It's been a tough market. There's not a lot of growth out there. It's a challenging market, but we know where we have to go.

From our perspective, from the management team, we downsized around the world, both in the operating units and also the corporate units. We have a very solid team ready to execute around our plan for 2017 and 2018 and beyond. Restructuring, our cost position is in pretty good shape right now.

There's always more restructuring to do, but we've got the majority of the big heavy lifting behind us, when you exclude the Pentair valves and control, but we've really got our position from our perspective in good shape. We're very much focused on trying to, again, bring in some additional acquisitions in 2017.

We will end from the positioning and the acquisition, we'll end up with over $4.5 billion of cash positioned in the right place to invest, and so we'll continue to look on at the small bolt-ons, strategic-type acquisitions, to rebuild our base as we've talked about back to $20 billion within this five-year time period, getting our operating cash flow back to over $3.2 billion, which will allow us to drive a modest increase in dividends and get that free cash flow to – dividend payout ratio back under 50%.

We've showed that plan, we did that in the Morgan Stanley conference a couple weeks ago, a couple months ago. We are on course to make sure we execute around that vision, so that's what we're all about. I want to thank the organization for the work they've done the last 12 months.

We have changed a lot in Emerson in the last 12 months, from the change in the businesses, from the restructuring, to delivering very solid earnings and cash in a very challenging year, to improving our cost structure, to making a big acquisition hopefully we'll get finalized at the end of this calendar year, and then moving forward in a new company.

Yes, it's a smaller company. It's a very profitable company, but a company that's well-positioned I think to grow and recover as global investments start happening again. So I like where we are right now.

We had a good session with the board today, talking about how we wrapped up the year and where we're going to go forward, but I think we're in really good shape. We have a very, very difficult first quarter. We had a very good first quarter last year. The Automation Solutions business is looking at probably down 10% sales in the first quarter.

If you've been watching this, the orders for the last several, six or eight months, the orders have been down around the 10%, 12%, 13% range. They've got to get through that, and so we have a very difficult first quarter from Automation Solutions, and we know that and we're built for that.

We'll try to get some more restructuring done, but that's the facts at this point in time. That's built into our forecast, and the year will get better as we go forward. But clearly we've got to get through the next two or three months here, finish the divestitures, make the acquisition, and then move forward with the new company.

So with that, I'll open up the door and the windows and the phone lines and let people talk. Ask any questions you want. No one gave me the questions ahead of time. I tried to call CNN, but unfortunately they didn't return my phone call. So I don't have the questions ahead of time.

And Craig was so focused on reading the damn box score from the baseball game, which they lost the other night, that he didn't give me any questions, either. So with that, we'll open up the phone lines and take questions. Thank you..

Thank you. We will now begin the question-and-answer session..

You up first, Julian?.

And the first question today comes from Julian Mitchell with Credit Suisse. Please go ahead..

Hi. Good afternoon..

You didn't send me the question, did you, Julian?.

No, no, no, not intentionally, that's for sure. On the guidance of sort of margins to be I think up in both platforms in 2017, maybe just give some color on what the incremental savings are this year in your continuing business. And also maybe expand a little bit on the restructuring spend. As you said, it was about $96 million continuing last year.

Is it sort of more like $60 million, $70 million this year?.

It's going to be – on an incremental savings standpoint, I mean, the numbers we laid out, and we have those; we laid them out – let me give you the numbers, Julian.

We'll give you the numbers before we get off this call here, but we laid out – I can't the exact numbers the restructuring saved, I don't have them on a piece of paper right in front of me, but I can give you the delta year-to-year.

On the restructuring number that we're going to turn around $50 million in the core company and somewhere between $50 million to $70 million once we start getting the valves and controls business approval and integrated. So go ahead, Frank. You can go ahead and tell him..

So built into the plan next year is about $100 million – this year, I should say – of op savings. A lot of that is carryover from actions already taken, and we've got, as Dave said, about $50 million of new spend in the plan. And given the timing and the nature of the actions, we'll see about half of that flow through the end of the year..

Yeah, yeah..

Great. Thank you. And then just on the top line, so your continuing sales, organic guidance is a decline of about 2% at the midpoint. The orders on a continuing basis are falling in September about 8% to 9% organically. So maybe just give us some help around when you think those orders may level out, and particularly in that Process Automation piece..

Yeah, the key here, Julian, is Automation Solutions. I mean, clearly, right now as we look at the early stage of October, they were slightly better in orders in October. Automation Solutions were pretty much in line to what they were last month that we put out there – I mean, I'm sorry, Commercial and Residential Solutions, I apologize.

I mean, right now we're saying late third quarter we'll start seeing a positive Automation Solutions, and so they'll start bottoming out and coming up in the new calendar year. That will be the key issue to watch.

And I mean from our perspective right now we're hoping to have obviously positive Automation Solution orders by that number above the line by the time we get out of this year, and that's where the bet is here right now, and that's how we see everything laying out basically from our customers and our initial reactions.

So that's the $15 billion question right there is where does that number turn up? Right now, we're saying it's going to start getting better in the early calendar year of 2017 but will not go positive until late, on the Automation Solutions standpoint, until late 2017. That's what it is..

Is that true of the sort of the MRO piece within Process?.

Yes. MRO has got to lead us up. I mean, small projects, what we call brownfield projects, additions into a current facility, they will come but that will come later. We've got to start seeing some turnaround. We're starting to see some early indication right now in some of the international markets.

The market we have not seen stabilize right now is North America. And so that's the marketplace that we have to see that stability and we have to see them starting to spend some MRO in this North America market.

And how long can they keep deferring that? I think we will not get clarity until that first calendar quarter from our major investors as they finish out their fiscal year, as they see their cost structure.

So that's why I think the first fiscal quarter, which is the fourth calendar quarter, will be very difficult because I think our customer base will be tight, tight, tight with cash and be concerned. So that's where I see it right now, Julian..

Great. Thank you..

You're welcome. Take care..

Our next questioner today is Andrew Kaplowitz with Citigroup. Please go ahead..

Hello, Andrew..

Hey, Dave, Good afternoon.

How you doing?.

Good afternoon, my friend..

So China, I mean it looks like it turned a bit for you in the quarter, especially in Climate markets.

Did you see an end to inventory destocking in Climate? Or did business just simply get better there? And what do you think for 2017 in China?.

There's not one simple – I mean China's a big country, big market.

Clearly what we see right now are some of the investments around the environment, some of the investments around energy efficiency, we're seeing the Climate Technology investments or the Automated Solutions – I mean Commercial Residential Solutions, those markets are picking back up for us.

They've continued here early on in this fiscal quarter, first quarter. So we see that market turning. Now obviously, after being down real negative for a while, you get a nice bounce. And that's where we are right now. So we're expecting moderate growth in China in our Commercial Residential Solutions business for 2017.

Our orders in Automation Solutions have stabilized in China. Again, you keep in mind the markets we serve in China are not necessarily in the big oil and gas new fields and things like that. We're looking at efficiency. We're looking at power plants. We're looking at programs to help incremental capacity and save energy and things like that.

Those markets are actually starting to solidify in China. So we are cautiously optimistic about China, that we will see low-single-digit positive growth in 2017. Now ask me that question in February, I might give you a different answer. But right now that's what we're seeing based on our indication of orders the last couple of months and our customers.

So I feel good about that. The other market I feel good about will be Europe. If you look at the new Emerson, the Automation Solutions, the Commercial Residential, Europe grew last year and I think will grow again this year. Those are the two positive markets. And then it gets real short after that..

That's helpful, Dave..

Yeah..

Look, you've obviously done a lot of restructuring in the last couple of years. You've done a great job of holding margin, as you said. At some point as you know you start cutting into the bone a bit.

So how much low-hanging fruit do you have if markets don't improve? How much more can you hold margin? I mean, you've got that again for 2017 where you've got the clientele (26:45) and it looks like you're going to hold margins again.

So can you talk about that, Dave?.

Yeah, I can talk about that. The key issue, let's break it down in two pieces and I'll give you a total perspective from a CEO industry perspective, okay? On the Commercial Residential Solutions, Bob Sharp and Jim Lindemann laid out a plan. They're integrating these businesses today.

And we see some opportunities in between the creases, let's say, to improve plant efficiency, plant costs, distribution, things like that.

So we see the ability to basically get a point out of cost structure and improve the profitability by a point over the next couple of years, get some working capital out, take some of that money, invest it, try to continue to grow that business but also let some of that money flow through.

So there we're looking at by emerging, putting the business together, some inefficiencies that we have today by separate business, by putting them together. But once that's done we've got to grow because the cost structure will be very, very, very, very good.

On the Automation Solutions standpoint, we probably have $40 million, $50 million of the core company left. And then you've got some very, very difficult issues there. From the – just starting to go after things you don't want to go after because it jeopardize the future technology innovation and the value base of this company.

The acquisition of Pentair valves and controls gives us a chance to go after even more. And that's why we're going to be looking at $50 million to $75 million in the first year, depending on when we get this done, on the restructuring. And there's potentially we'll do even more than that in the next two years.

So the acquisition of Pentair valves and controls gives us a chance to refresh opportunities for us to integrate again a much larger business. You take the $7 billion Automation Solutions business today, you add $1.6 billion in there, you have a chance to do things.

Now if the economy doesn't grow and we continue to struggle for growth, hence you're going to continue to see acquisitions. That's why you're seeing acquisitions. U.S. companies have been going through a lot of restructuring, taking costs out.

We're running at pretty high levels of profitability for the level of sales we have, and hence that's why you're seeing acquisitions. That's why you're going to see that continue I think in the short term, unless there's some kind of growth in 2017 which I don't see at this point in time.

So if this thing keeps going and gets sloppy, then we're going to have to add to our acquisition pool, and that's why we're going to be looking at an additional $3 billion to $4 billion of acquisitions over the next two or three years to continue to feed our chance to reposition and restructure and derive top-line growth through acquisitions, because the core economic growth we do not see coming through for the next couple of years.

That's what this CEO sees from a cost perspective and growth perspective..

That's great, Dave. Thanks very much..

You're welcome..

Our next questioner today is Nigel Coe from Morgan Stanley. Please go ahead..

Hello, Nigel..

Yeah, hey, Dave.

How's it going?.

Not too bad..

I did send my questions to Craig. He's lying, he's got them..

Well, he's working that box score, Nigel, you know that. He's working that box score. He's got some kind of voodoo baby down there he's playing around with trying to make sure they win tonight..

I'm sure, I'm sure. So all's fair in love and war. So Automation Solutions is down 4% to 7%. Obviously, how do we think about – the legacy sort of industrial automation stuff flat this quarter. You've got some components of that segment performing very well. Process I'm assuming will be below the 4% to 7%.

So how do we think about the various moving pieces within that portfolio? And then valves and controls obviously comes in as an acquisition line, but is the kind of down 4% to 7% the same for that portfolio....

No..

...

or was that a bit later cycle?.

No, Nigel, think about the chart that we showed you, that I gave you when we did the Pentair valves and control chart, the $260 billion market we broke down in three pieces. You had the Process, you had the high grade and then you had the discrete.

You think about – remember that chart we handed out?.

Yeah..

The Process side will be worse than negative 4% to 7% and our Hybrid/Discrete business will basically be flat growth next year. And therefore that's how we get the 4% to 7% combined, okay? We're looking at the marketplace, that $260 billion marketplace that we showed you when we did the valves and control acquisition.

The Process piece will be down more than 4% to 7% and the other Hybrid piece will be flat or slightly up, maybe 1%, plus or minus 1%. And that's why the Process business will be a little bit more negative than we said, the 4% to 7%, to your point..

Okay. And then the Pentair portfolio, does that come in at a similar kind of organic decline as the Emerson Process business or....

I think, as I said when we did the acquisition, I have a little bit more pessimistic view of what that business is going to look like for the next 12 to 18 months. One, the order pace has not been very good.

Secondly, there's going to be a lot of disruption and integration work going on I think that will negatively impact this business for 12 to 18 months.

Once it comes on board, it will be the same growth rate as the overall Process business, but I think as you look at 2017 and 2018, I think they're going to be a little bit less than the underlying what we call Process Automation business. And we're going to be creating that problem ourselves probably..

Okay. And then a quick one, Dave. The comments on acquisitions are obviously very interesting. You've made it very clear that you're done with the portfolio disposals, you've got one more coming up. But looking at the tools markets, there's been a fair amount of consolidation talked about in the tools market.

You've got a great plumbing tools business, high multiples are getting paid.

Does that make you kind of re-think about your portfolio as maybe perhaps one or two more sales to accelerate your acquisitions into Automation?.

No. I think that from within our tool business base right now there's some good leverage across some of the other core Automation and Solutions businesses. There's some good leverage there so if there's no strategic lever between on the Commercial Residential and Automation Solutions, we will get out of that business.

But right now the portfolio that's remaining, other than the one storage business, there's some good leverage of channel, leverage of technologies, leverage of things that we can do that we will stay pat..

Understood. Thanks, Dave..

You're welcome. Take care, Nigel..

Our next questioner today is Steven Winoker from Bernstein. Please go ahead..

Hey. Thanks. Good afternoon, guys..

Good afternoon, Steve.

Hey, just maybe starting you talked about margins up in 2017. You just walked through the restructuring side of that story, but maybe complete that bridge in terms of how you're thinking about it.

Assuming that you do get that 1% to 3% low organic growth, what about price versus cost? Material costs? What about other productivity? What about other puts and takes that get you to stay positive next year?.

You want me to give you all the answers?.

Well, Dave, it simplifies everybody's life right now..

You know me, I'll give you my interpretation.

I'll give you what I feel, okay, Steve?.

Yep. Yeah, that's good..

I'll give you the best feel I have at this point in time. I fundamentally believe right now we are about as close as we've been for a while relative to this price cost pressures, being pricing has been, as you know, has been basically flat for us I think last year, last two years basically slightly up, slightly down, 0.1%, 0.2%.

Now we've been able to offset that with stronger net material inflation. What I see coming into us right now, either this quarter or next quarter, is our price-cost ratio pressures are going to build.

And so we're factoring into higher cost reduction efforts within the company because I wouldn't be surprised if we do not go red for one or two quarters on our price-cost ratios in 2017. I've told people at the Fed this same issue.

There is inflation brewing relative to specific skill set, material deflation is slowing down if not starting to come up, and our pricing capability is not that strong right now because there's plenty of capacity out there and there's not a lot of demand. So the pressure is building on this whole price-cost scenario.

So what we're building in right now in our plan is basically to stay neutral because I think if you let it run its course we're going to be slightly red on a price-cost situation. We have to increase our cost reductions, and it's going to be primarily around cost reduction. Productivity is going to be tough.

We'll probably be 1% or 2% next year on productivity. We're better than the U.S. economy, but there's not a lot of growth out there. So it's extremely hard to get a lot more productivity without some additional growth. So right now we're having to ramp up our cost reductions around sort of discretionary things and keep the place kind of tight.

So that's how I see the unfolding next year. We're going to get – we've got the savings from the restructuring we did last year, early this year. But in order to hold our margins and improve our profitability next year, we're going to have to come up with more stronger discretionary cost savings because I think price-cost will be working against us.

That's my call. I'm sure you've not heard that from anybody, but that's my call.

No, and since you're being so generous answering questions, let me ask you one more here, which is – and this one, you continue to get in advance because we ask it every time. So you talk about Pentair valves and controls....

Are you telling me you gave me this question ahead of time? Is that what you're telling me?.

I'm telling you we ask you the same question over and over again..

Okay..

So it's good. So....

I'm a slow learner..

Pentair valves and controls, you talk about it being uniquely strategic to generate future growth for the company. Clearly there are a lot of people in the market who are having more skepticism about understanding that.

Since you've had more time with it, is there anything in there that you can kind of point to that sort of provides a little more encouragement to you and maybe to investors that, hey, this is something that people should appreciate more than they do?.

We've now had the opportunity to talk to our customer base about this. I mean the most strategic opportunity for us is that we can get them into a lot bigger customers that they couldn't get into themselves. We can get them on to large projects which we win, which they never won because they don't have the control system or the whole package.

We can now offer a much larger service package. We can service a whole host of product for our customers so now we can be this sort of the core service organization for them. The leverage across the total portfolio, now people, all they want to do is think about that's a dumb valve, then that's very narrow thinking.

You could say, oh yeah, that's not that strategic. But what we're talking about is, when we go out and bid for projects, when we go out for the type of packages we get with our large global customer base, we now will be able to offer them a much larger solution both up front and the service and tie that technology together.

So we see a lot more growth synergies from that leverage of our organization on a global basis than a person who only thinks, only thinks about a valve company standalone operation. And I think in five years people will look back and say, hey, you did get a lot more growth than we thought you would. But that's what I see right now..

Fantastic. Thanks, Dave. Good luck..

You take care, Steve..

Our next questioner today is Gautam Khanna from Cowen & Company. Please go ahead..

Yeah, thanks. Good afternoon, guys..

Good afternoon..

Hey. So a couple of questions. First, I just wanted to maybe better understand the comment on lower pricing at Climate Tech in the quarter.

Was this just surcharge-related linked to material cost? Or was it actual incremental price pressure or something we should be concerned about?.

No, Gautam. It's not. It's not incremental price pressure. Again, it relates back again to – again, we talked about this before. Most of the OEMs are on some kind of contractual matrix-type pricing. So as commodities go up or down, pricing is adjusted. So in this environment when commodities are low, pricing goes down to match that.

So there's a bit of a lag occasionally, but that's what the impact is..

Yeah..

Okay. And then just to follow on Nigel's question about the split at the remaining Industrial Automation business. Can you remind us of how much of the remaining business is linked directly to oil and gas? If I recall, it was pretty small, something like 10%, 15%, but I want to make sure of that..

It's pretty small. Yeah, I mean, I would say we're – by the way, when we report a new segments or new – it's going to be one. It's going to be called Automation Solutions..

Yeah, no, I hear you..

You're going to get one number, Automation Solutions. So I was all of you guys' thinking right now. We gave you a chart relative to our total Process business, Automation Solutions, Hybrid and Discrete. You may want to learn those numbers because that's how we're going to be talking about this business, Automation Solutions.

So I was being nice to whoever asked me that question. But from my perspective we are looking at one company as being integrated, period..

Understood. But in the splits in terms of the growth rates, I guess the point is at the legacy Remainco Industrial Automation business, most of that is not related – it's not linked to the same markets, the legacy process businesses, and that's why....

There are some crossovers. There's some crossovers. They sell the chemical business. Yeah, they sell the Hybrid space, the pharmaceuticals. So there are some crossover spaces there. And so you have to – so that if you think about we gave the chart and so you can see how that breaks down across those three entities.

And some of those businesses do a small piece. Small piece will go into the core process marketplace. It's a small piece of that..

Okay..

It's not going to....

Okay. And then just....

It's not going to wag the tail, as you say..

Understood. Understood..

Yeah..

And then just below the line, could you calibrate us on items like corporate expense this year, what we should put in there for buybacks this year and maybe any other moving pieces below the line?.

Yeah, I think the corporate number, I mean I'm just talking about a corporate number. I don't have a number. I mean the corporate number, we'll give it to you later. I don't have that. We're still going through this. Let's get through all the closures and stuff like that and divestitures as we get into the year.

So we'll give you a better feel for that in February at the Investors conference. You dial in about $500 million of share repurchase. We'll have some pension headwind this year. Interest rates did go down, if you didn't notice. They went down. And so we'll have, what, what's the pension headwind is what....

$40 million. $40 million to $50 million..

$40 million to $50 million headwind for us as a corporation. Those are the two issues right there. Currency right now is kind of neutral. And so the two headwinds for us are really going to be that, and then we'll see how things settle down from a corporate standpoint once we get all the divestitures and acquisitions done.

And we'll give that number to you in February..

All right. Thanks a lot, guys. Good luck..

You're welcome. Take care..

Our next questioner today is Robert McCarthy from Stifel. Please go ahead..

Good afternoon, everyone.

How you doing today?.

How you doing, Rob? You got those kids buying Emerson stock yet, I hope?.

We're levering up. Hope the SEC is not listening. Okay. In any event. Moving on, earning....

You know I'm just kidding, Rob..

Earnings is earnings but cash is cash, okay? So from that standpoint, could you talk, Dave, about your cadence for operating cash and free cash flow generation over the next couple of years? And kind of what are your – given what you're planning for a difficult environment, can you give investors some confidence that the dividend remains sacrosanct in the context of this transitional period?.

$2.5 billion operating cash flow and $2 billion free cash flow, a number that's pretty tight to our modeling and we're going to manage according – as the organization is talking about it.

So if we can beat it, we can beat it, but that would put us at 62% of dividend to free cash flow cover, okay? Then as we move into 2018 and 2019, we're not assuming any big breakout or anything like that, but we're trying to get back into adding about $100 million of cash to $150 million of operating cash flow per year.

Now our plan is to continue to keep the dividend going up modestly, as I told the people, you know, two pennies. We'll have share repurchase of around $500 million per year. That allows us to basically keep the dividend – the actual payments flat or slightly down.

And so we'll see as we get into right now 2020, 2021, we'll be back down toward that 50% level. If we do not make any more additional acquisitions, that's what's going to happen.

If we make additional acquisitions on top of Pentair, our game plan is to get that number back – our operating cash flow back up to $3.2 billion, spending around $600 million of capital. That gets us back into the high-40%s free cash flow to dividends from that perspective.

So our model right now says that we'll continue to make acquisitions, we'll continue to integrate them, generate cash from those. We'll continue to buy stock back and continue to increase our dividend modestly, so that's what we're looking at right now.

And our model looks at do we do nothing other than Pentair, and if it does that, we'll get closer to 50%. If we do some additional deals, which we want to do, then we'll obviously get back under 50% in the next five years..

And then just as a follow up, I mean, obviously Julian asked kind of a line-in-the-sand question for Automation Solutions in terms of the order trends, the cadence for the year. But usually kind of how you lay out the year is basically you guide fiscal 1Q and then get a peek into next year kind of for your full-year guidance.

You've given us the full-year guidance now, given all the puts and takes.

I guess, looking at kind of known-unknowns going into February, Dave, I mean, what are the three or four key things that you want to come in hat in hand in February to have a better sense of kind of the macro variables so that you can have a better sense of whether you're going to actually grow earnings next year? What are the kind of three or four things we should be looking for, given your increased line of sight, February versus now?.

The number one issue, the number two issue, and one, two and three will be the trend line of Process – or Automation Solutions orders, in particular North America orders. We need that chart – we need that line coming up, like I thought it was going to do last year. I made the call, and I was wrong.

We need that line coming up towards that flat line, that zero line, and that's going to be very – that's number one, two and three. And so I haven't totally mapped it out yet.

I want to see how the next couple months – right now, when a lot of things happen, as we close out our fiscal year, the first couple months are tough with our customer base, so I want to see what happens here October, November, December and January in order pace.

That will give me a clear idea how much has flushed through the system, and then we need to see that trend line coming up. If we do not see a pretty good slope of those orders in particular in North America, then we'll have a hard, hard time growing earnings next year. But that's the top couple of issues right there.

The second issue from our perspective will be – or the third or fourth issue will be I'm watching the Commercial Residential in Asia. As Asia continues to grow for us in the Commercial Residential, and then we – because I think we'll see a pretty good transitional growth in North America. I think we'll still see pretty good growth there.

If Asia continues to grow for us in Commercial Residential Solutions, then I'll feel good about that segment holding up throughout 2017. So that will be the key thing I'm watching for those guys. And then clearly Automation Solutions' order trending line up and the lines pointing towards hitting that cross point sometime late in our fiscal 2017.

And that's what we'll be watching like a hawk. You know we're (48:02) too so....

Donna Brazile signing off..

Okay. That's good. That's really good..

Our next question today comes from Jeffrey Sprague with Vertical Research Partners. Please go ahead..

Hey, Jeff..

Thank you. Hey.

How's it going, Dave?.

Okay. Pretty good..

Good. Good. Hey. Two questions. The first one, just back to Process and I don't know, just trying to kind of figure out the secret decoder ring here for what the turn might look like.

Are you seeing MRO turning in other regions outside the U.S., so is there something to glean from the pace of activity in other areas that give us a little bit of roadmap to think about how North America and the U.S.

market could play out?.

I don't think the other markets really have anything to do with North America. MRO in Europe, MRO in Asia Pacific has been decent, trending – Europe's been positive and Asia Pacific's starting to trend the right way. They don't really drive North America.

I mean, that's the wild card we've got to watch and when we start saying North America Automation Solutions, so get the phrase right there, Automation Solutions trending the right way, it's going to be the key phrase for us.

If you don't see us saying that, then we're really going to start struggling and we will not be able to deliver what we laid out in that range earlier this year..

Yeah..

But I really think we will..

Yeah, I was thinking a handoff from CapEx to MRO....

Yeah....

And how that played out in other areas is maybe....

No, it's a different game plan here. North America, the way the multinationals going to do, because they have a lot more control, in North America they cut here deeper, and it's just the way that it is. When you think about labor and restructuring, there's always more in North America because we have a lot more flexibility. That's the same thing here.

So around MRO, there's no decoder rings relative to, you say, relative to what happens in Europe or what happens in Latin America or what happens in Asia Pacific.

It's a whole different game, okay?.

Okay. And then on the M&A side, Dave, do you see a relatively active pipeline? Are there chunky things that you might do? There's a big water asset that's for sale, filtration asset that's for sale now for example..

We never got into that business because there was a good reason for it, so I'll pass on that one. A lot of hype around water filtration. No, I think there are opportunities out there. I think you're going to see opportunities for us emerge and I think we have capabilities that will emerge as we get into the new calendar year.

We're highly focused right now on trying to get all the approvals for – when you think about, we've got two major divestitures and a major acquisition underway. There are a massive number of approvals we have to get around the world on three of those capabilities.

So right now, we've sort of got our tools down and there are opportunities out there, we're working them, but we'll really gear back up once we get all these approvals done. But there are....

Are there any....

... opportunities out there. I wouldn't worry about that..

Are there any particular snags on those approvals that you're seeing?.

No. It just takes time..

Yeah, all right. Thank you..

I mean, it takes time.

And I mean have you heard of any approvals flying through quickly?.

Our next question today comes from John Inch with Deutsche Bank. Please go ahead..

Thank you. Good afternoon, everyone..

Good afternoon, John..

Hey, Dave. Going back to the trajectory of Process turning in the second half of fiscal 2017....

Automation Solutions. I will not be using the word Process today. Sorry..

Automation Solutions, sorry..

Automation Solutions, John..

Yes, I got it..

Two platforms. Automation Solutions and Commercial Residential Solutions..

I've got the tags in front of me..

Okay. Check, Automation Solutions. Okay..

But going back to the trajectory of Automation Solutions, the line crossing, I guess, in orders and then the results in the second half of 2017 per what you're aspiring, is there a threshold level of oil prices that you think have to sustain itself or maybe move to a certain level to kind of get the....

No..

Customers that you've been talking with to kind of stimulate it here, or no?.

It's stability here. I think it's stability between the mid-$40s up to the mid-$50s right now. I think that's what – they just need to see where they are. Our customer needs to see where they are from a cash flow standpoint, a cost structure standpoint.

This industry – our end customer in this industry has been going through a lot of restructuring also for the last 18 months, and so they're trying to get stabilized like we're trying to get stabilized. So I think the key issue for me, John, is stability.

And we've seen a little bit of stability, though it's drifted back down again on the oil side, but I mean the key thing for us is to see some stability around that, not some high-level mark.

And I think that way these guys can plan their cash flow, they can plan their capital allocation from a dividend standpoint or share repurchase, whatever they're trying to do, and then allocate back to capital. And I'm hoping that we'll see some more capital reallocate back to MRO versus some finishing off of projects like they had last year.

Okay?.

And so is there a way to then sort of drill down into ultimately the reasons that you feel that – sort of going back to February, right, when we thought that things were going to turn and they ultimately didn't, why is it that things are going to turn in the second half of 2017? Is it just because we've been in a downturn for much longer or you actually are seeing more stability? Or what is it? Obviously, the comparison issues I get.

But I think you're talking more on the fundamental side. So I'm just trying to go....

Yeah..

Back to what are the reasons for the progress in your confidence?.

John, you've got to go back and think about where the price of oil was. It was not – it was trending. It was in the $50s and they made a call that it was go in the $20s. And it went down into $30.

And the oil, our customer base did a quick reevaluation in the spring, summer about, oh, my God, how do I protect my capital structure? How do I protect all these things with a much lower oil price? So they cut capital much deeper than they said originally; they had told us in January, February, we get the early indications from them.

So that's what happened there. Now we go forward here. Now we're out here sitting in late in the year, we're sitting here in the November time period, oil pricing and the gas prices have been stabilizing here for several months. And the trend line has been a little bit better. It does go up and down.

They have now got a year behind them relative to their whole capital structure, some of the big projects had to get done. They cut really heavily on the day-to-day spending, and I think you're going to see that stability in the pricing if it stays that way and within a range, then you'll see some more money go back into the day-to-day capital.

And that's the difference..

No, perfectly clear. Dave, you're sounding reasonably constructive on the European markets. And I know you're a steward of geopolitical events. Are you not – I mean a couple of companies have called out European softening even of late.

Are you not a little bit concerned about Brexit now actually moving forward, possibly causing a European improvement scenario to fizzle? Or....

Yeah, if you listened to me talk the last couple of times, I said Europe is weaker..

Yep..

All I said, Europe will grow. We grew this year. I think it will grow less in 2017 than it did in 2016..

Okay..

But I've been openly been telling people – and if anyone's hear me talk, they've heard me say Europe has definitely weakened. Europe is definitely growing. The euro is weaker, so again it's going to help our European operation. The euro went back down into the $1.09 to $1.10. If it gets back up to $1.15, it'll make it tougher.

But it's definitely going to weaken. And I think the hoopla around Brexit is hoopla. And so I think from my perspective Europe will grow next year but it won't be as much growth as this year..

And just lastly, do you feel that China in terms of the levels it's achieved, is it sustainable? Or is it – because some are sort of concerned, is this just a function of Chinese stimulus that then goes away? I'm just – it sounds like you've got a little more conviction in the China market right now..

I think based on what we're seeing in order patterns, based on our customer inputs, based on what we started seeing the last couple of months, as I've said earlier, I think China will grow low single digit, from zero to 2%, 3%. And that's where I see it right now.

And if someone asked me the question a couple of calls back about in February, what would make me feel better relative to your forecast, I think that's – China, Asia Pacific is the number two thing I would say, after one, two and three were our Automation Solutions orders.

But China order pace and sales pace will be the number two thing in that case..

Yeah, and low single digits seems like a pretty reasonable hurdle. So thank you much..

It's better than shrinking..

Exactly. Thank you..

Thank you very much, John..

Our next questioner today is Deane Dray from RBC. Please go ahead..

Good afternoon, Dave..

Good afternoon, Deane..

Hey. Could we go back to your free cash flow targets for 2017? It looks like you've got a $500 million CapEx plan that's embedded in that. That looks like it's up 12% year-over-year, but I'm not sure that....

No, it's not. No, it's not. No, it's not. No, it's not. We did $523 million last year, John – or sorry – Deane..

No, no, no. I meant for looking for 2016, I'm not sure that's a comparable number. It looks like a $447 million number..

$447 million is the new Emerson. We'll be flat basically on a comparable basis there. We have an obligation. We still own the – accounting, we had the disc ops, but we still own the businesses, so I'm actually still getting cash and I'm having to spend money.

Contrary to what the county told me, I still own these businesses and I've still got the deed of control. Yes, there's been discontinued operations. I will get the cash and we have some capital spending obligations, so it's going to be around $500 million next year with that, from that perspective.

Okay?.

Where's that money being spent? If you had just kind of big buckets, how would you describe that?.

Incrementally the biggest pockets is we're freeing up capital to go into the Commercial Residential Solutions business, relative to the whole efficiency thing that I was talking about earlier. So we basically have several new facilities being built in best-cost locations. We're re-laying out some facilities, we're going to consolidate some facilities.

So of that core business, $50 million is going to go to the discontinued operations business around that number, and then we'll have $450 million going to the Emerson remaining businesses, and a big chunk of that will be going into that work around – that Jim Lindemann and Bob Sharp are doing relative to the Commercial Residential organization.

We also have some capacity going in for our compressor business in some best-cost locations. And then the other big chunk, there's nothing really big in Automation Solutions from the standpoint of it's just restructuring. And when you do restructuring and you do plant moves and stuff like that, you have to spend capital.

So that's where the big chunks are, Deane..

So you did not get the memo that everyone got, that everyone's supposed to be cutting CapEx next year?.

We've cut it pretty hard the last 18 months, and we actually generate pretty good cash flow too, Deane.

You didn't get that memo?.

No, it's fabulous cash flow. I just think it's impressive that you're adding capacity in this environment and that's a pretty bullish sign..

Well, the key issue, Deane, and I think you and I have talked about this, if we do not spend some money, you will not get productivity. And that's one of the signs it's a nasty loop right now, people in the industry. If you do not spend, you will not drive productivity.

And that's where we're spending money, and we are growing some of our businesses and so they need capacity..

Exactly. Thank you..

Thank you very much, Deane..

Our next question today comes from Rich Kwas from Wells Fargo Securities. Please go ahead..

Hey. Good afternoon, everyone..

Good afternoon, Rich.

Are you rooting for the Indians or are you rooting for the Cubs?.

My friend, Mr. Rossman, I know, has got a vested interest in this, so....

Yeah, that's why I didn't get any of the questions, because he was working the line score again..

I know he is. He's emailing Francona as we speak, I'm sure, so....

He's got the new lineup for him..

Rich, it's all about dedication. I had a ticket for tonight's game, let me just tell you that..

Oh, my God. Rich, you got any Kleenex because I'm out of Kleenex this year..

Two quick ones. On Commercial & Residential Solutions, so a number of....

All right. You get the ding, ding, ding, ding, ding, ding. You win the prize..

A number of building product companies have kind of squishy numbers, outlooks for particularly as it relates to more of the residential side of things here going into year-end. Just curious, I mean the order growth was decent in September on a trailing three-quarter basis.

It seems like maybe you saw something different, but just curious underlying, particularly in North American market, how you characterize the state of the market right now in terms of order momentum and what you're seeing as you're going into year-end right now..

It really breaks down in different segments. But clearly inventories within what I'd call our sort of air conditioning, both the commercial and the residential channel, is pretty tight right now; they had late heat.

And so that channel has gotten pretty tight, so some work going on there, so I would expect us to have a good first fiscal quarter there as they get the channel to where they need it, Rich.

The other thing that's going on right now is there's a lot of changes relative to the efficiencies, to the refrigerants, and new products coming out from our customer base, so there's a lot of work being done on that which is driving some incremental growth for us.

We're seeing that both in efficiency stuff going on in China, we see that across Asia and we're seeing that in Europe.

So when any time you start seeing a lot of changes and some of the new targets coming out relative to the HSEs and the efficiencies, we get a benefit from that a little bit earlier than most people because they have to build up ahead of time. So we've see a decent pattern of growth.

And then our housing business has held up reasonably well, but it's definitely stalled where it was. The growth rate has definitely stalled.

And then a couple of our businesses within the Commercial Residential Solutions business actually get benefit from what I would call environmental problems like flooding and bad weather and stuff like that, and there's been some across North America here the last couple of months. And so things have gone our way there for a change.

And so I think Bob and his team have got a great cost structure right now with all the restructuring, so they're driving very good margins. They've got a couple – the environmental things, the trend is going their way right now, so hopefully they make hay for this quarter because who knows what's going to happen next quarter there.

So that's where we are right now..

And does the global summit a few weeks ago with the changes, the Montreal Protocol, I mean, does that have any tangible benefit the next couple of years or is that more out toward the beginning of next decade?.

In Europe and U.S., and we reviewed that with the board today, in fact, U.S. and Europe is definitely the next two years we'll start seeing some benefit there. The good thing about it is they now come down on what they would – they've agreed to certain standards and certain targets.

So now our customer base, including us, can work a solution to get there. And so that's a good sign.

That will help us, and we've been, as you know, one of the reasons we made the Helix investment the last couple of years up there in Dayton is because we know we're going to have to help drive some of these solutions, and that will help us probably late 2017 but more 2018 and 2019.

The Asia ones, if you look at the standards, they're still out another 10 years. So our gut right there, they'll stay with old technologies. It will just drive the older technologies, not the newer technologies. But that definitely helps us because it's getting them set into the right direction for us..

Okay. And then on valves and controls with the portfolio there, from an intelligence standpoint, you kind of talked a little bit about this earlier in the call. You did a pervasive sensing acquisition I think early or late September, early October, and I know that's an area of focus for you.

How quickly can you increase the intelligence in the valves and controls portfolio?.

I think it will take us two to three years to really have an impact. But there's a lot of things around their actuation stuff. There's a lot of things around some of their safety in the Crosby area.

There are areas that we can bring in some technology which we have, we can port over to them, so it will take us – there's a lot of things, you have standards you have to meet and pass, so it's going to take two or three years. But within this planning cycle, we'll start getting some benefit from that..

Okay. Great. Thank you. Have fun..

Take care, Rich..

Our next questioner today is Steve Tusa from JPMorgan. Please go ahead..

Hey. Good afternoon..

Good afternoon, Steve..

Can you list another 10 factors that you're going to watch for next year's trend line order rate?.

10 factors? I don't have that many....

I'm just kidding. I'm just kidding. I'm just kidding. I'm just kidding. I'm just giving Rob a little bit of a....

I know you're kidding. You can get me in trouble with the SEC if I give you 10 factors..

On the free cash flow, so I guess if CapEx is not adjusting out the disc ops, how much of the free cash flow is coming from the disc ops? And then I assume that basically whatever cash you're going to lose there for the year forward would be replaced by the kind of solid cash accretion you're getting from Pentair, which I think is around $100 million to start for this year.

Is that kind of the right equation?.

Yeah, I think to cut it through simple, Frank and I, because first of all we don't own Pentair valves and controls, as you well know..

Yeah..

I think we're going to be slightly north, when you push and shove everything back and forth, slightly north of $2.5 billion with Pentair. I think we can hold capital $500 million with Pentair-type stuff in there, with pluses and minuses across the whole company.

So there's not much cash flow coming from the companies we're selling in the stub period, but we do have capital spending obligations. So I think overall I feel good that we will meet or slightly exceed the $2.5 billion operating cash flow.

I have a lot of control over capital, as you can imagine, and so the $2 billion next year is a number that we've got locked in stone. And I told the board we're going to be monitoring that on a monthly basis and we'll be keeping the board informed and therefore we'll keep you guys informed, because that's a very important number to us.

We want to make the 62% dividend to free cash flow ratio the worse that we see in my tenure, and then we'll start driving that back down in 2019..

Okay. And then just on Process, how much of that do you think is – you mentioned North America MRO, et cetera. How much of that do you think is kind of pulled along with the chain of U.S. land rig count? I don't know how you – maybe you don't classify it that way. But obviously that's an area that people are a lot more optimistic on for next year.

How much of a variable is that in the trend in the Automation – I didn't say Process Automation – the Industrial Automation business..

Automation Solutions..

Automation Solutions, sorry..

Steve, I think that for me the way our business mix up because we're not really down-well stuff. We have some stuff, but that's not going to drive our sales. What you really want to watch for us is the stability around the pricing of oil and the pricing of gas and within this range in the $45 to $55 range for oil and the equivalent level to gas.

That number is very, very important to my customer base. Rig count is more down the road for us, and that means the overall health of the industry, that will help us, too. But in the near term, if I'm thinking 2017, stability in the price of oil and gas is pretty important relative to what I see our end customers will spend.

And when they do their capital allocations, Steve, from based on, okay, I have to spend this much money for share repurchase, this much for dividend, this much for capital. How much do I have left over? That's how they're going to be calculating it. And I think that those are the numbers I'm watching right now and that stability's critical to me..

Okay. Congrats on the good execution and the cash. And obviously a pretty choppy and volatile year, so kudos to you guys for the execution there..

Thank you very much, Steve. All the best to you..

Yep..

Our next questioner today is Eli Lustgarten from Longbow Securities. Please go ahead..

Good afternoon. Thanks for waiting..

Good afternoon, Eli. I was just thinking about cutting you off, so you're lucky..

I knew I wouldn't get my line in if you set up an Indian summer with the 80 degrees..

If it wasn't that you're a St. Louis boy, I probably would have cut you off. But go Cards. Oh, we're not in the World Series, are we? Oh, shoot. Go ahead, Eli..

Two quick questions.

One, with all the changes below the line, is there any structural change in what the tax rate is going to look like for the company as we go through all the shenanigans?.

No. If I was a good guy I'd put 31% down next year..

Yeah, but the structural doesn't change. Okay..

Eli, I'm going to give you – I'm going be honest with you, right? We will have some benefits as we go forward here in probably the first six months, or maybe the first quarter, on some things that we're going to get benefits for. So it might drive the tax rate down as real cash coming back for us. But the underlying tax rate, 31% is a good number..

Yeah, it was really the structural I'm looking at..

I know that..

And with all the difficulties in the first half in Process – well, excuse me – Automation Solutions....

All right, Eli..

Yeah, okay. Real question. How tough will holding profitability in that sector to fourth quarter levels, given the declines that we're looking at? I mean it's going to be a tale of two halves. First half's tough and hopefully you get bailed out in the second half.

How tough is holding the profitability in the first half in Automation Solutions as we go through it?.

Ain't going to happen. It's going to come down the first half. Restructuring, we've got more restructuring. Mike Train got a lot more restructuring done in the last three or four months in Automation Solutions. As you notice, our restructuring number went up. But his volume's going to be down 10% in the first quarter.

And Mike's a good business leader, but he ain't that – he can't work miracles. So it's going to come down. And then we should start seeing that come back up as we move into the second quarter.

So we're all hands on deck in this first quarter right now because Automation Solutions has got a very difficult – the order pattern's been weak for a while and we know the mix is not going to be good. So Bob's businesses are trying hard as possible, but that Automation Solutions going to be a tough number.

So I think that's going to be the big issue for us. We're going to be definitely very weak in the first quarter in profitability, and we'll start coming back, because the restructuring's getting done. And we just – the volume's dropping so hard in this first quarter..

But you should still be a double-digit-teen kind of number, I suspect..

Yes..

Good..

You're talking about margins, Frank..

Yeah..

Yeah, yeah..

The operating profitability, yeah..

I mean, it's not – yes. It's still going to be – it'll still be better than most people would make in Automation Solutions but it's not an Emerson standard, you know..

Yeah..

And they've got the restructuring done so the savings are flowing through. But it's going to be definitely the second half because of the way the sales will flow for that business, anyway..

All right. Thank you very much..

You take care. All the best, Eli.

We'll see you around town, okay, friend?.

Absolutely..

And with that, we're going to wrap it up. I want to thank everybody. Appreciate the – asked you a couple of jokes here and there. And sorry if I picked on you too much, Rossman, but you've been so enamored with those Cleveland Indians, I haven't gotten a lot of Q&A out of you lately. So thank you, everybody. Take care and we'll see everybody around.

And we'll definitely see everybody in February at our Investors conference. Take care now. Bye..

The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines..