Emerson FY 3Q17 Earnings Call Notes

David N. Farr – Emerson Electric Co.

Global demand conditions strengthened

“Global demand conditions strengthened versus the second quarter. Emerging markets were up low single digits and mature markets grew mid-single digits. Growth was supported by improving end markets in the U.S. and Asia and early signs of improving demand conditions in Canada. Growth in Asia accelerated during the quarter, led by China. Excluding China, the rest of the region also improved, growing at low single digits in the quarter.”

We have a lot of markets going our way

“we’re still seeing a very good performance relative to the fixed investments around the U.S., around Western Europe, around China, Asia. We’re seeing some improvement from Middle East. If you remember the last call, I was somewhat concerned about the Middle East, but that’s turning right now. Investments are starting to happen. And maybe, and I mean maybe, Mexico might actually start growing again, and so that will be good to see if they get some money freed up. So we have a lot of markets going our way at this point in time.”

Steel pricing still very manageable

“Steel pricing has been a little bit more negative from the standpoint, but still very manageable at this point in time. I think it’s going to take us one more quarter to settle it out as we get into fiscal 2018 it will be a little bit better. But as you’ve been hearing on the calls, it’s been a little bit tougher out there this year relative to price cost. But fortunately, we have a pretty good process. We got ahead of it and Bob’s team was able to offset it with incremental margins relative to the price cost this quarter. And it’s just – it’s a little bit more challenging now than what it was, but still very manageable.”

Emerson 1Q17 Earnings Call Notes

David N. Farr

I don’t see a snap but I do see strong momentum

“That’s a lot of ask. I mean since I’ve been pretty bad at forecasts in the last couple years, Andrew, I mean you remember I did call that we’d turn last year at this time. But – so keep that in mind. And from my perspective right now, I think that what we’re seeing is the increased investments going on from a – just from pent-up – a situation for many years. We’re starting to see some of that flow out both in the sort of in the Automation space but even also in the Commercial space. So I see a pretty steady recovery here. I don’t see a snap. As I’ve said, I’ve always felt that 2017 would be a good year of building that foundation and see a improvement. I see a much stronger 2018 than I see 2017. But I see right now, based on what I’m seeing from the customer base, based on what I’m hearing from some of our customers and what they’re saying they’re going to spend on capital next year, overall, I think the pressure is upward, as I say. So I see a pretty steady improvement for the trend line. I do not see a strong snap, but I do see pretty good momentum going into 2018 as I look at it right now. Clearly, what goes on in Washington can have a big impact and a major shift in the sentiment around tax policies or trade policies. Those things all could have a big impact. But right now, I think momentum is going the right way, and we’re seeing that. And I don’t see it slowing down at this point in time. But I do not see a snap, as you said.”

It’s slow but there is a pickup

“I think we’ve started seeing the MRO, when I went out and talk – and the shareholders I think in November and December, we started seeing this pick back up. The oil and gas companies, some of our key oil and gas companies, some of our chemical companies, some of our pharmaceutical companies started increasing their spending. They had kept it really, really tight, and I think as they saw, okay, there’s going to be better, favorable policies to spend, encourage it, and to really encourage people to spend money, they started spending. It’s a slow, okay, here’s a little bit more money; you can go ahead and spend it. And I’ve seen the budgets being set the same way.”

A little more inflation

“Relative to price cost. As I’ve been talking for the last two quarters, we’ve seen the shift. So our net material inflation is less negative, i.e., we’re not getting as much commodity benefits from the cost benefits from materials as there’s been a slight inflating in the economy which is a good thing in reality. And from a pricing standpoint, we are still, probably, as we usually were six months behind. So as we said, the last four or five years, we’ve been green. Our price costs have been both slightly negative, from a negative price, negative net material inflation and we’re green and they’re offsetting it.”

Currency/competitive environment stable

“No. No. I don’t think the global competitive dynamic’s changed much right now. The euro’s been bouncing pretty tight between $1.06 and $1.08. If it goes to $1.10 it’ll be a real nice wind at my back. We’ve got our European structure right now pretty good, because we went through this process where the euro really weakened. So right now the dynamic world is pretty set and we haven’t had a lot of changes. It’s been more of a, I would say, what’s coming out of the political arena more than anything else is creating some changes. But we’ll see what happens here. Right, we’re all – I’m watching very clearly what the Washington folks decide to do relative to trade, what they do to tax. Because we are in a situation in pretty good from the standpoint of a cost structure and so we’re going to have to adjust and figure out where we go from there.”

Hoping for tax reform clarity by late summer, early fall

“I think we will get clarity as a nation by late summer, early fall. I think it will take time to get it rolled out and so that means that’s why we’re getting ready from the standpoint. I believe we will get some kind of tax reform which will include probably some trade renegotiations around that and what that means relative to how we bring products in and out of the country back-and-forth. But I think it’ll be tied around tax approaches to come up with a more equal tax policy and structure for the U.S. companies which will be good for us. But I think it’s going to take a while for them to get that done because there’s a lot of gives and takes and it will obviously include repatriation type of approach on an ongoing basis around the world so we pay it, no matter where we make the money and get the money back. So I’m looking for clarity by late summer, early fall and that gives me time, as I get into execution later this year, early 2018 based on if I have to change anything.”

Emerson Electric 4Q16 Earnings Call Notes

Emerson Electric (EMR) Q4 2016 Results

If the economy doesn’t grow you’re going to see acquisitions

“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.”

We’re as close as we’ve been to price cost pressures, and I’ve told the people at the Fed this

“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.”

We’re going to have to come up with cost savings to offset price pressures next year

” 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”

Europe is weaker but it will grow

“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.”

Emerson Electric FY 3Q16 Earnings Call Notes

Emerson Electric (EMR) David N. Farr on Q3 2016 Results

A very tough third quarter

“Now the third quarter. Yes, it was a tough quarter, a very tough quarter. June was a very challenging industrial marketplace for us, especially on process. Given the recent announcements of the GDP numbers, it shouldn’t surprise any of us. The numbers announced last week from business investment for the last nine months were negative and declining. Restatements for the last couple of years made it worse.”

Customers are being cautious, careful with how they are spending

“But we have to face the reality of what we see today. It’s a tough market. We did see a bounce back in July in our process orders, which is a good sign. But in reality, we are look at a marketplace right now where people are being very cautious, they are being very careful with what they’re spending money on and they are very uncertain relative to what’s going on around the world from a political standpoint relative to just a business environment standpoint and where things are heading. So we’re staying very focused on trying to drive the necessary actions to protect the short-term profitability, at the same time, staying very focused on making the right, relevant, long-term investments to drive the necessary change that we’ll see in this business, this industry when we come out. We will come out. This industry will come out. But clearly, a challenging marketplace right now and one that we fully understand that we have to deal with and we will deal with it.”

I thought we may have flat or up sales in FY 4Q but that’s not going to happen

“Fourth quarter is going to be tough too. Wasn’t long ago I thought that maybe we’d actually have flat or up sales in the fourth quarter. That’s not going to happen. So we’re having to deal with that. And from our perspective, as we continue to restructure and get ready for a challenging 2017, it will be more favorable coming through a very difficult last 18 months, but still a challenging environment for us. But we are well positioned and will continue to be well positioned to derive levels of profitability that will generate great cash flow and returns and over time will continue to return to the growth mode that we know with inside Emerson.”

Did have some inventory liquidation that should help going forward

“We are also seeing, on a positive standpoint, we are seeing – we had a lot – we had some inventory liquidation in some of our channel in the month of June and – May and June in some of the Commercial and Residential. We expect that that – some of that will return in the fourth quarter. We also expect some of our compressor-type of business, which is the heat and the refrigeration markets, we expect a little bit of lift in that, which will help us as we go into the fourth quarter.”

Not really seen and improvement in MRO

“We’ve seen very weak – and North America has been the real challenge for us. It would be Canada, U.S. and Mexico. The MRO business and the – what we call the transactional business had a very, very weak June, as people really – some of our customers curtailed spending, they’re doing the turnarounds of the facilities and changes, for the facilities and maintenance, but they’re doing it very, very carefully and really cutting back on the extent of how much money is being spent. So that has not seen an improvement. We expected that to stabilize, but it’s not yet. That will be a key sign for us. And I think that is also a reflection that you see in the GDP. When you deconstruct the GDP in the United States the last three quarters, you’ll see that business investment continues to deteriorate. ”

Going to be a tough environment until customers start investing in next gen capacity

” until I see our customer base willing to invest more for productivity, invest for next-generation capacity or whatever it takes, that it’s going to be a tough environment.”

I don’t have confidence

“I don’t have confidence. I mean, from our perspective, just go read the transcripts from any of the oil and gas companies reported, all we do is we look at our businesses, we look at what’s going on in transaction, look at the day-to-day order book and what comes in. We have good systems, we can see that. The fact that I look at the stability and the flattening of certain things and we make a call. So that’s the type of confidence level I have. And I know of no customer out there saying, oh, things are great, we’re looking at increasing spending. But we have a very broad and diverse business, global business, a lot of industries. And so that’s how we make that call. And I was just – I am encouraged by the fact that we did see a bounce back in July because June was a very – I mean a knock-you-over-the-head type of month for our Process business, so that’s where I’m coming from.”

The deeper we go the faster we snap back

“My opinion is the deeper we go, the longer we stay down here, the faster the snap back. I’ve been here once before. I saw it. And so, the more pain you have, the better in the end. No fun having the pain upfront, but the better a snap back. So right now it’s a deeper pain going down; it’s a longer pain going down. And that tells me one thing, that spending will have to bounce back at a faster rate.”

Emerson Electric 2Q16 Earnings Call Notes

David N. Farr – Chairman & Chief Executive Officer

Poor profitability has now begun to improve

“Poor profitability has now begun to improve, and we’re exhibiting strong cash flow and very good performance. And again, I want to thank the global Emerson organization out there for doing some very difficult heavy lifting in a very challenging marketplace.”

Europe has continued to improve

“From my perspective right now, as I look at the global marketplace, I just came back from Europe. Europe, our Western European business has continued to improve. I finally see some good momentum there. No, the economy is not going to be robust there, but they clearly are making investments.”

US has continued to be challenging

“To the U.S., the U.S. economy in particular around the industrial segment has continued to be challenging. And in certain segments, I would say even weaker within the U.S. marketplace.”

Capital budgets continue to be curtailed by oil and gas

“Relative to North America and particularly the U.S., it’s primarily just the day-to-day type of spending that you see on the oil projects, not really big project specific. It’s all around the day-to-day type of what we’d call the MRO type of – normal type of spend. But capital budgets are definitely being curtailed by most oil and gas guys. There are companies within North America, both in Canada and the United States. And so they’re continuing to tighten those belts up, and we’re seeing that business and that day-to-day business given our strength in this marketplace, which has been hurting us more on what I would call the shorter-cycle type of products.”

You’ve got to see stability in oil prices

“I think that the price of oil, I’ve talked about my opinion on the price of oil over the months here. I still think there’s a chance that we could slip back in the $30s and then start trailing back up towards $50. You’ve got to see stability in the $50-plus range toward $60 and then a continued growth of demand, which we see today around the world, the demand for oil and gas.”

Been shifting resources to small and mid sized projects because not as many large large projects out there right now

“From our perspective, we’ve been really pushing resources because there’s not as many large, large, large projects out there right now. So we redirect our resources back into the small and medium-sized projects to pick up that business because you’re right. If you look at our share, we go very high to large. We’re very, very strong in the day-to-day. In the middle, we’re probably the weakest, as you said. So we’ve been shifting some of the resources down from the large down to the medium and go after those – off to the smaller projects”

CEOs are being very cautious relative to spending

” If you look at our capital spending in the first half of the year, we’re down significantly from last year. I don’t think I’m any different from any other CEO out there, and I think that CEOs right now are being very, very cautious relative to spending, and particularly given they keep seeing weakness emerging in the industrial space. So I think that part is going to be pretty challenging here for the next six months until CEOs feel okay, I can let go of a little bit more money and reinvest back into the company.”

One surprise is that we have seen the US spending rate come back down again

“The one surprise we had is in the last couple months we’ve seen the U.S. spending rate come back down again, which bothers us. And that’s what’s created probably this delay by one month relative to April, the April target, which we have – I don’t know yet for sure, but just intuition tells me where we were at negative 4% that should have been closer to negative 2%.”

US is slow to start turning that nose up in sales

“I feel a little bit more worried about sales because of the U.S. marketplace in particular. I feel better about Europe, as you can tell. I feel a little bit nervous about Latin America because I still think these guys are still struggling. But the U.S., this I would say slow to start turning that nose up really bothers me.”

Emerson Electric FY 1Q16 Earnings Call Notes

Emerson Electric’s (EMR) CEO David Farr on Q1 2016 Results

The last 30 days have been the most unusual in my time at Emerson

“As I look at our current marketplace, the last 30 days have been what I would call the most unusual in my time at Emerson. I have never seen a marketplace go so volatile from the standpoint of the end markets, the stock markets, the interest rates, I guess the attitudes. It’s just a very amazing marketplace right now and one that clearly global CEOs like myself have to deal with and be prepared for whatever comes at us.”

We’re in the 4th quarter of the recession, maybe one more

“But we are now basically in our fourth quarter of the recession. I see, as we will talk about next week, I see at least one more quarter, maybe another quarter.”

Oil market may not recover until late ’17

“We are looking at a situation, in my opinion in the oil and gas marketplaces, that will not recover until well past middle of ’17, maybe late ’17.”

I think the psychology is very tense at big oil

“I think the psychology is very nervous and tense within the big oil and gas investors at this point in time…I would say that my concern is the psyche of a Chevron or psyche of Exxon Mobil, psyche of these Shells and the BPs and things like that. I think they can freeze up some of that spending level. They can’t go to zero but I think it’s going to make it tougher. So my gut tells me that it is going to be more challenging I the near term”

Inventory levels are in pretty good shape

“I would say what my knowledge is right now, inventory levels within the channel including ourselves, our levels that, they are pretty good levels, low. And so the pace of business right now and the run rate where I see, I would say the inventory levels are pretty good for us. I don’t see much of a downward draft on that now. I think it’s pretty well over with, probably very minor downward draft. I think it’s pretty well there, around the world. I’ve been in Asia, have been around the world and I don’t see the inventory being a big issue for us right now. So that’s a good thing.”

I think China will be -5,6,7 range, but our team there is more optimistic

“I think that China in my opinion today, the forecast when we put that out there, I still think it’s going to be that mid-single plus digit. I think it’s going to be in that 5%, 6%, 7% range negative. I don’t see it changing. I would say my China organization is more optimistic than that. They are less negative. But I think that looking at what I see going on in China and the marketplaces around the world, I think that that’s going to be a tough one for them to do though they are working through the inventory that was built up in the first part of 2015.”

Hopefully we will start to see capital freed back up in oil and gas

“I think we are going to see a slow down and then hopefully as we get into the year, we will start seeing that capital freed back up. It can’t to go zero. It’s not going to go to zero but they are clearly going to reallocate and they are doing that really fast right now from our customer base”

Industrial automation sitting towards the bottom of the cycle

“relative to IA, I think IA got hit harder, sooner relative to the space they are in. And so there might be a little downside risk in IA but not that much. I think these guys are sitting really down, pretty far right now. I mean things can always go down further but my gut tells me they are pretty close to that cycle right now.”

My forecast for China is probably worse than what most people expect, so I’m concerned

“My forecast of China is worse than probably most people would say out there. So I am a little concerned about that one.”

There are some verticals that will do better than people think

“I think the answer is yes. I think there are some verticals that are going to do better than people think… We had a very very good run in oil and gas upstream and we gained a lot of growth, gained a lot of market share. And now what we are doing is refocusing those resources”

A leader has to take action

“I can’t speak to other people. I mean they’ve got to be looking at the same issues from the standpoint of too much cost, too much capital, fix that investments invested. They’ve got to be looking at that and so eventually they are going to have to say look, we’ve got to take action. A good leader — if they don’t take action I think there will be some other people coming and working on that issue. But from our standpoint I feel quite strongly as you know. We’re trying to deal with this issue. We make calls. I make calls, as you know my for a long time. I make a call. Sometimes I call right, sometimes I call wrong. But you have to make calls and say we’ve got too much capacity, things are going to be down longer, you’ve got to deal with it.”

Some companies are dealing with this well, others not so much

“I think there are several companies out there in my opinion in the industry right now that are doing a good job in dealing with this issue. There are several companies that are not and you know that. You can see it.”

Emerson 3Q15 Earnings Call Notes

In a global industry recession

It’s been a very challenging year. And as we know, we are in a global industry recession for our businesses right now. We just incurred our third negative underlying sales growth and we will have two more, and I’ll talk a little bit about that.

Starting to see stabilization of some markets

As I look at the effort and the performance the last several months, we’re starting to see the stabilization of some of the markets. We’re also seeing the benefits of the restructuring, which we started back in February aggressively and ended up spending over $221 million as the year got more challenging, we’re starting to see the benefits flow through.

Should see stability after the first five or six months of next year

We have about $60 million to $70 million more restructuring to get done that will benefit 2016. It will be front-end loaded. It’s worked extremely hard program by program. We will get it done in the first five or six months, and we’re ready for what I would say, the first negative quarter and then the second negative quarter, which I believe underlying sales could be down somewhere in the 5% to 6% range. And then we’ll start coming out of this both from an easy comparison but also seeing some stability in the markets we serve.

Not assuming there is a global recession

I am not assuming there is a global recession. I’m assuming the global environment is very similar to what we’re facing today, challenging, in certain markets doing okay, certain markets not doing okay. But we get to a point that you get low enough and our pace of business and the type of marketplace we serve, they will start investing in certain space again.

Usually recover comes after five or six quarters

I mean, after you go down for three tough quarters, after we go down 10% this quarter, after we go down 6% the next quarter, it’s not unusual to see historically a company like Emerson, who’s globally well established with installed base quite significant, to have a little bit of recovery coming in that sixth type of quarter.

Risk is global recession

the risk would be if we truly went into a global broad recession, then you clearly say okay, the industrial space will be a little bit weaker than I’m thinking. But I don’t see any indication we’re going to go to a global broad recession at this point in time.

Companies are going to stop cutting back by spring or summer of ’16

And I anticipate as we get into the spring and early summer of 2016, some of the companies that have been cutting back on capital and cutting back on, what I would say, necessary investments are going to have to let the money go. I mean, they’ve got other costs adjusted. So I think that our underlying MRO, which is a good business for us, will improve and get better as we get into 2016. So, it’s not totally dead out there. The big oil and gas projects obviously are struggling. But the other investments around the chemical and petrochemical are still happening for us.

We are planning for a down ’16 in China, but I think the worst is behind us

We are planning for a down 2016 in China. From my perspective, we’ve had two very challenging quarters. I fundamentally believe there has been a destocking going on. Basically what we can tell, Scott, right now I think the worst of that is behind us. I do believe we will have a challenging first quarter because we had a very good first quarter last year. So I mean it’s probably going to be strong double digits down in sales. But I personally don’t think it’s getting worse. I think that they are trying to reposition. And I expect that we will have a down year next year. But we’ll manage our way through it, get a little bit better as we go forward as they start reprioritizing their investments.

Inventories are getting into decent shape

My inventories in Europe are – I look at our channel and it’s pretty good. Because of the channel partners and the channel you sell into, money was hard to come by so the European channel’s in pretty good shape. I look at my channel in North America, I would say it’s in decent shape right now in the businesses we sell into. The last piece of this working through would be the climate areas is all the pre-build we have there.
But I would say the channel is in decent shape. Probably as we get through this calendar year, it will be in really good shape. And so we saw the inventories being built and people anticipated the second half being stronger. We saw the destocking happen this quarter. I think the plan in, we have built into our plan for this quarter where underlying sales might be down say 10%. I think that will work its way through it on the destock from my perspective, as I see the channels.

People are planning for very very low growth

Right now, I think people are planning for very, very, very low growth and they’re getting their inventories down and they’re working it very hard. It’s the same thing we’ve been doing as a company here. I’d say we have one more quarter basically of getting our inventories down, and then typically we’re no different than the global distribution channel anyway.

The Chinese usually overbuild then take it down

I think what will happen is the typical plan in China is they over-build, they take it back down, and then they’ll start building back up again. So I would expect that China would start seeing some improved second half numbers, most likely still negative for the first two or three quarters, and then getting up and positive in that fourth quarter. So the destocking is still underway. I think the major destocking will be done by the end of that first quarter in China.

We should have comps stabilize by the March quarter

So when we report orders in the end of, let’s say the March quarter, the March timeframe, you should start seeing that number approaching that 0% range. And if not, and if it’s still negative 5% or 6% then we’ll go back to the conversation I had earlier that we will not see the positive recovery in that third quarter, and then we’ll have a sixth down underlying sales quarter. So that’s the benchmark you need to look at.

It’s possible that there could be some inflation pressure next year

I know the pricing environments out there, I know the net material environments out there. You could have a couple of things go a wrong way and you could have a slight negative net material price pressure, but it’s going to be very, very slight if at all.

Emerson Electric FY 3Q15 Earnings Call Notes

Continued pressure from lower oil prices pressuring industrial spending

“The continued pressure from lower oil prices has resulted in further capital spending reductions by global oil and gas customers, particularly those in upstream markets. Industrial spending remains sluggish on a global basis, but most significantly, in energy related and commodity markets.”

Order rates were under pressure by sustained headwinds

“Order rates were under pressure by the sustained headwinds from lower oil prices and gas prices, capital spending weakness, across many of our global manufacturers, weakness in data center and global telecommunications infrastructure investment and the effect of the U.S. residential air conditioning customer pre-build.”

Consumer spending has been lackluster

“U.S. consumer spending has been lackluster as recovery has been muted. Modest growth is expected in the fourth quarter, as favorable trends in U.S. construction markets are expected to continue.”

Not expecting things to get much better for the remainder of the year

“Turn to slide 12 for the 2015 outlook. Little change is expected in market conditions for the remainder of our fiscal year. Underlying sales will continue to be affected by reduced levels of capital spending in oil and gas markets, most significantly in upstream project activity, a continued broad slowdown in industrial spending, particularly energy related and commodity markets, a general weakness in capital spending by global manufacturers and sluggish growth in certain emerging and mature markets.””

The negative surprise for us was the weakness in China

“Clearly, extremely tough quarter and it got tougher as the quarter went on as we got into June. The big negative surprise for us in the month of June was the extreme weakness in China. We saw China drop over $100 million from prior year, down 14%-plus versus prior year. The bottom fell out in many of the core markets in China and we do not see that recovering anytime soon.”

Oil and gas continues to weaken and we’re concerned about the pace of the recovery

“Our oil and gas investments continued to weaken, as the price of oil, the price of gas has continued to slide. We now expect pretty weak orders in this space for at least the next 12 months to 15 months. And we’re a bit concerned about the pace of recovery.”

Next quarter is going to be equally challenging

“Fourth quarter’s going to be equally as challenging as we’ve had sessions with the operating leaders here in the last couple of weeks, and again, we’re going to be meeting with them again on Thursday, Friday this week. It’s all about getting the actions necessary to get the cost down, to get the production down, and deal with the marketplace that we’re dealing with right now.”

State owned enterprises have cut back on spending very suddenly

“In China, we don’t firmly believe we’re losing business at this point in time. I mean we don’t see any indication of that. But we’re – in China, we have very strong markets relative to the strategic owned enterprises, the state owned enterprises, which have really cut back on spending here in the last three months or four months as that government has ratcheted back some of the issues they’re dealing with.

So if you look at our Process business, as you look at our Enterprise business in China and if you look at some of the other Climate businesses, we’re seeing these where the state run enterprises have really curtailed, stopped spending and they did it very suddenly.”

Telcos in China and North America have cut back spending

“our telco space in China and North America telco have really cut back in spending. So that’s why you see those numbers are a little bit more drastic than our competitors.”

Foreign competitors have a cost advantage

“we have Japanese and European competitors across most of our businesses, both on the – Process side, Industrial side and Climate side. And clearly, with the weaker currencies, they have the opportunity to price, to drive that business their way. We’re working extremely hard. And one of the reasons we’re working so hard on the costs is because we do not want to lose any position in this situation where we are at a huge disadvantage with a stronger dollar against our European and Japanese competitors.”

The one advantage is that we will feel the benefits of weaker commodity prices into 2016

“The one advantage we do have is we get into the 2016 environment is with the weaker commodity environment, the weaker material environment, we will start getting benefit from that as we get into the first half of next year. And that’s a big advantage for us and will help us offset this price cost.'”

Power and chemical segments have held up well

“The downstream, in particular the Power, has held up extremely well, and certain chemical segments held up extremely well.”

I don’t know if there are any bright spots here

“I owe you a glass of wine for that one. I don’t know if there are any bright spots here, but…”

I don’t see another step down at this point in time

“At this point in time, we do not see it stepping down on the order pace. We look at the trend lines, we look at the various businesses; it looks like it’s bouncing around this bottom. The question is, is there anything that’s going to pull it back up? We know what the comparisons are like for the next couple of quarters, but I mean I don’t think – I don’t see it as a step-down at this point in time. I mean it looks like it’s trying to bottom here. And I mean I’ve called this before and I’ve got my ass kicked, to be honest, and that’s not a swear word, Steve, you know. It’s kickboxing here. I’ve been kicked around the ring a couple of times here this year. And it looks like it’s forming; I don’t see another step-down at this point in time”

If you saw a sudden break in commodity prices, that would create a problem

“Unless you saw a sudden break in oil or – I mean you saw another sudden break in commodities down, say, into the $30s or below, then that would create another problem.”

Eventually the oil companies will start to cut MRO spend

“We’ve not seen the MRO come off yet, but I’ve gone through enough these cycles, as you guys well know, I’m a little bit older than you. And when I see the oil companies really under the pressure right now, they cut capital even more from their shareholder base. I know eventually what that means is they’ll cut into the core MRO.”

There’s a leadership problem at SOEs in China

“The major state owned enterprises, there has been a lot of continued crackdown on the ethical issues, the arresting and replacement of management team. A lot of people are afraid to make decisions. They’re going to make bad decisions. So we’ve seen this on a broad base and a lot of our customer base across China where there’s been a curtailment of spending as they figure out what’s going to go on relative to the leadership.”

Up till now oil companies have just been cutting project spending

“up till now they’ve been cutting the project spending – the capital spending, and now, my concern is with the most recent two weeks of all the announcements coming out of the major oil and gas customer base out there, they’re cutting capital again, they’re cutting project again, and my concern is they’re going to start cutting into the MRO base which has held up until now. I’m just giving you my gut feel for this thing, that’s what I was telling people, that is they continue to get pushed by their shareholder base to cut their capital spending and protect their free cash flow, they’re going to start going into MRO here in the Process world. We’ve seen it in the past.”

Would expect incremental improvement to come from Europe or North America, not China

“From our perspective, the stability will come in from Europe. I think there’s not been a robust recovery in Europe. I think Europe has sort of muddled along at a low pace. But that’s where I would see some improvement versus our – China. I would expect us to see some improvement in North America, as we come into this time period. And that’s where I’m seeing it right now and that’s where I’ll see it. And we’re not going to see it in China.”

Have to bring inventories down in a way that wont shock the supply base

“Across the board. Across the board. I mean, obviously, Process and Network Power are the biggest dollars of inventory, but it’s across the board and no one’s really out of line. It’s just that where we see the pace of business going which is going to be weak for several quarters now, we need to get that inventory back down. So we’ll do it very systematically, one, not to shock the heck of our supply base, but also work it down over a six-month, seven-month time period. We’ve been working on it for the last couple months. Clearly, the orders have been weaker here in the last several months, which creates a situation where we have to lower that water even further. So we do it very systematically.”