Good afternoon, and welcome to the Emerson third quarter 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Pete Lilley, Investor Relations. Please go ahead.
Good afternoon. Thank you, and welcome everyone to Emerson's third quarter 2020 earnings conference call. I hope everyone is staying safe and healthy. Today, I am joined by Dave Farr, Chairman and Chief Executive Officer, Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer, Lal Karsanbhai, Executive President of Emerson Automation Solutions, and Bob Sharp, Executive President of Emerson Commercial & Residential Solutions. As usual, I'd encourage you to follow along in the slide presentation, which is available on our website. Starting with the cover slide. In the era of COVID-19, safety and health have been rightfully brought to the forefront of the global conversation. At Emerson, safety is a core value, and in June, our employees celebrated Global Safety Day to reflect on the importance and personal responsibility of each individual to foster healthy and safe behavior.
Additionally, Emerson has a passion for STEM education and innovative thinking as critical enablers for the needs of business and society, both today and in the future. Emerson recently hosted a virtual STEM competition in cooperation with our impact partner here in North America, Spartan Controls. The winners designed wearable devices that gave alerts when within a 6 ft social distance barrier. Congrats to the winners, Caden and Caleb Monge. Please join me in turning to slide three. I'd like to briefly highlight the Emerson Corporate Social Responsibility Report, which is also available on our website. This document highlights in detail all of Emerson's aspirations and accomplishments within the environmental, social, and governance realms. COVID-19 and the ongoing social discussions are catapulting many of these important ESG topics to the forefront.
As problem-solvers at our core, Emerson strives to advance the discussion, share our own progress and strategies, and also to be a valued resource for our customers as they embark on their own ESG journeys. Emerson takes very seriously our role as a critical enabler and partner for digital monitoring, measurement, optimization, and efficiency management across our broad customer base. Please turn with me to slide four. Despite the challenges presented by COVID-19 in the quarter, there were also many reasons for cautious optimism. I'd like to briefly share a few. First, Emerson remains steadfast in our commitment to health and safety for our employees, customers, and communities. Business continuity, disciplined cost control, and positioning to outperform as we emerge from COVID-19 remain our additional key thematic priorities.
Our regionalized supply chain and operations remain resilient and stable in the current environment, and we continue to work hard to ensure we can serve our customers and their essential industries. In the quarter, the team was able to exceed adjusted EPS guidance by $0.20, with $0.16 being attributable to strong operational execution. A lower effective tax rate also contributed to the overall adjusted EPS beat. Cash flow was strong in the quarter, representing 181% conversion of net earnings. Additionally, the team was able to manage decremental margins to the mid-twenties level at adjusted EBITDA. Despite the uncertainty and continuing challenge to demand environment, sales and orders finished in line with guidance given in April. As expected, China is leading the emergence from the downturn with positive sales growth of 3%.
Additionally, we are seeing trailing three-month orders starting to stabilize, highlighted by Commercial and Residential Solutions month of June year-over-year orders turning positive. Finally, based on current recovery trends, we expect sales to turn positive in either Q2 or Q3 of next year. Moving to slide six, which summarizes results of the quarter. Underlying sales growth was within guidance, down 15%. Trailing three-month underlying orders were also within expectations, down 19%, reflective of the ongoing challenging demand environment. GAAP earnings per share were down 31% to $0.67, and adjusted earnings per share were down 18% to $0.80, which was $0.20 above guidance. Despite lower sales, both platforms executed well on profitability due to COVID-19 related cost control measures, in addition to the ongoing aggressive restructuring reset actions. Automation Solutions underlying sales were down 13%. However, China sales were up 9% as it emerged from lockdown.
Trailing three-month underlying orders were down 19%. Commercial and Residential Solutions underlying sales and orders were both down 19%. However, as previously mentioned, June orders turned positive, which continued a positive trend in month-over-month orders. Cash flow performance was solid in the quarter, with operating cash flow of $842 million and free cash flow of $738 million. Year-to-date operating cash flow and free cash flow of $1.85 billion and $1.53 billion were up 3% and 8% over prior year, respectively. Lastly, the company continued to build upon its aggressive cost reset plan, initiating a total of $94 million of restructuring actions in the quarter. Turning to slide seven, we will bridge adjusted EPS.
Beginning with third quarter of 2019 adjusted EPS of $0.97, you will see that non-operational items of foreign exchange effects, stock price effects, and pension detracted $0.09, which was offset by a more favorable tax rate than expected due to R&D credits and other items. The net effect was a $0.01 tailwind. Operations contained the deleverage to $0.20, and share repurchases added $0.02 for a net $0.18 headwind. Overall, we finished the quarter at $0.80, which was $0.20 above previous guidance. Additionally, total segment adjusted EBIT and EBITDA margins of 16.8% and 21.9% exceeded their respective guidance ranges of 15%-15.5% and 20%-21.5%. Slide eight depicts the key elements and magnitude of operational performance on adjusted EPS. Starting with adjusted EPS guidance of $0.60, we saw both business platforms as well as corporate contribute to the SG&A containment.
Automation Solutions contributed $0.10, Commercial & Residential Solutions $0.02, and corporate $0.04, for a total effect of $0.16. The effective tax rate came in at 11% compared to the guided 18%, which provided a $0.05 tailwind. Subtracting $0.01 for other items, the adjusted EPS landed at $0.80. De leverage was contained to 26% at adjusted EBITDA. Moving to slide nine, we will review the P&L. Starting with gross margin, we saw a reduction of 140 basis points to 41.3% as deleverage and unfavorable mix were partially offset by favorable price cost. SG&A as a percent of sales declined by 20 basis points as aggressive cost control actions went into effect as volume declined. Adjusted EBIT and adjusted EBITDA margins, which exclude restructuring and related costs, decreased 240 basis points and 150 basis points respectively.
This outcome reflected deleverage from the decline in revenue being offset by restructuring savings and cost containment actions. Lastly, our effective tax rate dropped from 20.3%-1 1.2%, driven by non-recurring tax items, including R&D credits. Overall, the adjusted EPS decline of 18%, from $0.97- $0.80, was in line with the revenue decline of 16%. Turning to slide 10, we will look at underlying sales by geography. The Americas showed the steepest declines, down 20%, with the United States down 20%, driven by broad-based weakness in all industries except medical and life sciences. Europe and Middle East, Africa, and Asia were both down 9%. China, however, grew at 3% as the economy was the first to broadly reemerge from lockdowns. Please turn now to slide 11, and we will discuss total business segment performance.
Total segment adjusted EBIT margin decreased 170 basis points to 16.8%, reflecting aggressive cost control measures and strong operational execution as sales declined. As previously mentioned, total segment adjusted EBITDA deleverage was 26%. Stock price-related costs increased $20 million as the stock price improved from lows at the end of the prior quarter. Adjusted corporate and other costs dropped by $14 million as aggressive cost controls, travel restrictions, salary reductions, and other measures took effect. Adjusted pre-tax earnings dropped 270 basis points to 14.1%. However, 180 basis points of that movement can be explained by pension, stock price, and foreign exchange losses. Q3 cash flow performance was solid given the challenging environment. Operating cash flow and free cash flow both decreased by 11% to $842 million and $738 million, respectively. Free cash flow represented 181% conversion of net earnings.
Lastly, the drop in net sales resulted in an increase in ending inventory and lower payables. Turning to slide 13, we will review the business platforms. Automation Solutions underlying sales finished down 13% for the quarter as broad-based declines in most end markets were only slightly offset by life sciences, medical, and food and beverage. North America saw the steepest declines, down 20%. Meanwhile, China led the recovery, growing by 9%. The final control and systems businesses were down high single digits and mid-single digits respectively. Trailing three-month underlying orders remained within expectations at down 19%, again reflecting broad-based demand challenges.
Aggressive restructuring actions totaled $80 million across the platform, which brought the total to $192 million year to date. The platform delivered on profitability in a very challenging demand environment, with adjusted EBIT and adjusted EBITDA margins down 120 basis points and 30 basis points respectively, reflecting the aggressive cost actions taking effect. Incremental margins were held to 22% at adjusted EBITDA. Of note, sequential backlog was unchanged at $5.1 billion. Turning to Slide 14. Commercial & Residential Solutions underlying sales were down 19%, also reflective of the broadly weak demand environment due to COVID-19. North America led the declines, down over 20%, while Europe dropped 12% as momentum in the heat pump business was more than offset by declines in Professional Tools and cold chain. Asia, Middle East and Africa was down 18%, with China down 9%.
Order rates varied dramatically during the quarter, from down 35% in April year-over-year to positive 1% in June. Trailing three-month underlying orders were down 19%, driven by weakness across the distribution and OEM-based businesses. In contrast, businesses exposed to big box retail and do-it-yourself markets fared better and were down mid-single digits. Asia orders dropped by 20%, while China was down 7%. For the quarter, restructuring actions totaled $12 million, which brought the total figure to $31 million year-to-date. Commercial & Residential Solutions also delivered solid profitability given the demand environment, with adjusted EBIT and adjusted EBITDA down 270 basis points and 160 basis points respectively. Incremental margins at adjusted EBITDA were 32%. Turning to Slide 16, we will review the updated guidance. The impact of COVID-19 certainly continues to present a challenging demand environment.
However, we are raising guidance due to early signs of stabilization and good momentum in cost containment and restructuring actions. First, we assume demand will continue to stabilize and gradually improve. There are no major operational or supply chain disruptions, no changes in discrete tax items, and oil prices remain in the $35-$45 range. With those assumptions in mind, we now expect underlying sales to be down 9%-7.5%, and net sales down 10%-9% for the year. Only slight refinements from previous guidance. We are raising expected adjusted EPS to the range of $3.20-$3.35, an increase of approximately 6% from the previous midpoint of $3.10 to the new midpoint to $3.27.
Expected total restructuring spend has increased by approximately $20 million- $300 million, with approximately $235 million coming from Emerson Automation Solutions, $55 million coming from Emerson Commercial & Residential Solutions, and the balance from corporate. Please note that we will review the updated restructuring reset spend and savings plan, as well as the COVID-19 related cost savings in detail later during the presentation. We expect operating cash flow to come in at approximately $2.8 billion, and CapEx spending expectations remain $550 million, resulting in a free cash flow target of approximately $2.25 billion. Lastly, our share repurchase program remains complete for the fiscal year. Now please turn to Slide 18, and I will hand the call over to Mr. Dave Farr.
Thank you very much, Pete. Appreciate your inputs. Pete wants to be called Commander Pete. He's got a new name from the military background. I didn't have to deal with this with Tim, Pete I do. By the way, I did see Tim today. We had a board call. Tim was in Germany with our German director, his family has arrived in Germany. He's the president of Professional Tools in Germany. He's doing well, his family are now there, his kids will be going to school live. It was good to see Tim. He seemed to be pretty happy today, never had to call him Commander, he couldn't kill me with two fingers like you.
On the order trend chart, as I would say, the trends for orders were pretty much in line to what we thought would happen in the quarter from month-by-month basis. You can see the Commercial Residential has seemed to have found the bottom in the month of June. I think you'll see that that has improved again in the month of July. I'll let Bob talk about that. Lal continues to seem to be stabilizing around this bottom, and I'll let him talk a little bit about his businesses. Overall, month-by-month, we saw the quarter unfold exactly like we thought it was going to unfold relative to orders, relative to sales. Margins came in much better, as you've seen, from the cost reset actions and what we call the COVID-related savings. Cash flow came in better, too.
Overall execution was extremely good, and I really want to thank the global leaders relative to their strength of operation throughout the quarter. I want to thank the whole team around the world. As you know, the OCE and top 10 or 15 other people in this building, the corporate headquarter, never left the building. We now have the whole building back. We have our campus back. Obviously, from time to time, we might lose somebody, but we're all here. Operations are working around the world. We have not had really many hiccups. We've lost a couple of days here and there in Bob's case and Lal's case. Overall, great execution by the team around the world as I share that with the board. We are acting and running this company live, in person, in our offices as best as we can.
Not everywhere, but as much as we can. I really thank them for what they have done. Because it's been a very challenging quarter. As you know, we laid out our forecast in mid-April. We went out early. We executed around the plan from an order standpoint, sales, manufacturing, and we really did a great job around the cost reductions, both from the reset actions, which we started last June, which have accelerated, and we'll talk a little bit more about those, to the COVID-related adjusted savings from the one-time cut, the furloughs, delays of salaries, obviously no travel, entertainment, all those things, and we'll talk more about those. All those came in very well and helped us from a profitability standpoint.
In particular, what I was extremely pleased to see is, as we laid out that detailed major cost reduction reset program back in February to the shareholders, but the board, last year in August time period, they really have stayed ahead of it, and they've actually increased the numbers. You'll see that in the charts coming up. That's not easy to do in an environment where you're not able to travel. You have hard times having meetings. These guys have done a phenomenal job relative to really driving those programs forward. We're in a different phase right now. We're in the phase of actual consolidation of facilities, shutdown facilities, new facilities. We're moving stuff at this point in time versus the initial phase. A lot tougher phase.
Both of the businesses are on track, and I think are doing extremely well, and I'm very pleased with that. With the effort in the quarter, which was better than I thought from the earnings, better than I thought from a cash flow, we have raised the year. We have confidence in the year, and I'll let Bob and Lal talk a little bit about that. Really, from the execution around operations, we really did a great job, and from that perspective I just was pleased to see from the standpoint of that execution and what we saw. We'll see as we go into the quarter. I think from my standpoint, that we will see some strength emerge from the businesses. I think the profitability will continue to do well.
I think that we're going to have a very good order from the standpoint. What I'd like Bob and Lal to talk about briefly here first, about the orders first, and then we're going to go in to talk a little bit about the quarters. Bob, why don't you give a little color what you're seeing right now in orders, and Lal, you do the same thing, and then we'll go into a couple other charts here.
Okay. Thanks, Dave. As Pete mentioned earlier, the front end of the quarter was very much unlike the back end of the quarter. April really dropped severely, really everywhere. North America AC in particular, with a lot of plants being down, including customer facilities and Professional Tools. A lot of the channel basically just shutting down and offices being closed. Of course, we ended with June swinging up positive. Quite a dramatic change. The numbers we have for July right now is right around flat. We're holding pretty solid again. The three months for June was down 19, and that'll bring the July three month into the five to 10 range. Definitely going in the right direction. Coming out of it, as going in was broad, coming out of it is really quite broad, too.
Again, North America AC, if you all follow a lot of the HVAC producers in North America, clearly when the heat hit in late June, that made a dramatic difference, and we felt it very quickly. The DIY space continues to be very strong, the vac business and InSinkErator, in particular, quite good. Pro Tools was very strong. Part of that, I think is basically branches reopening, and it's kind of a little bit of a channel bullwhip, I would say, more than the market itself. June was certainly quite different. Europe in July was quite strong as well. The European heat pump business is very dynamic right now in total, and we've got some very good relationships with some OEMs and are enjoying some very strong growth right now.
Yeah. I think, Bob, one of the key issues we talked about on the lines, and I've had a lot of investors on the line over the last two or three months, is we knew the bounce would happen. The question and the key issue for us is to keep those factories going. That's where Bob right now is very focused because on a global basis, his demand's coming back, and what we want to make sure is we deliver on that demand and not miss this bounce. We've gone through these before, and I think that right now his teams are very much focused on that. I've been to a couple of the sites, and they're all getting ready for a sequential bounce this quarter, and that's going to be a key milestone for us in that respect.
Yeah. Factory is very much in focus right now, being able to deliver against these numbers.
Yeah. Lal, You're obviously a different part of the cycle and from that perspective, but you are, I would say, forming the bottom at this point in time, and you clearly have the same issues relative of mix, but you're a broad industry capability. Why don't you give a flavor of what you see relative to your orders right now before we even get into sales and the global businesses?
Thank you, Dave. Good afternoon, everyone. Yes. Actually July came in on a daily basis about 4% above the month of June, as we saw broad stabilization, particularly in Europe and driven by some growth in China and stabilization in North America. Really, there's three phenomena, Dave, as we think about the order rates. Obviously, oil and gas upstream is one. That predominantly impacts our strong upstream markets in North America and Europe to some extent. Has had an impact, particularly on the short cycle businesses to begin with.
Right.
Now extending into some of the longer cycle businesses. We've seen reduced CapEx, and we've seen deferred CapEx as a result. Secondly, people are not quite back in the plants yet. That's had a detrimental impact in day-to-day KOB3 orders. As plants have been kept open and safe with less folks in them, and consequently, projects aren't being executed, modernizations aren't happening. Some of that will come back as people return to work. That's had an impact through the quarter and where we sit today. Lastly, I'll highlight that China has recovered.
Sure.
We had a good quarter in China, positive orders and sales, and we're seeing that broader stabilization across Europe and hopefully North America here as we go through July as well.
Thanks. As we expected, we would expect Lal to lag in this cycle. He went down slower. He did not have a minus 20% in the early stages. He could easily have that in a quarter, a month here, but he's in a different cycle right now. I feel very good about where they sit, and we're starting to see pretty good insights in around that. If you go on the next chart, Chart 19. If you look at the underlying sales, from our perspective, we were dead on from the underlying number that we talked about for the quarter, maybe slightly better than we thought originally. You can see that what we're going into now in the fourth quarter, very similar to what we had before, but I would say just slightly better.
I think Bob's business, he'll talk a little bit about it here in the next chart or two, will slightly better. I think Lal business is going to be the key issue for him is the backlog reduction. As we move in this trend line and directionally right now, what we're seeing based on the customer inputs, based on economic trend lines, based on the opening of the world, is that we have a chance to go positive in the second quarter in sales. Slightly positive. Everything has to move right, last quarter, I would never be able to say that to you. Right now it looks like that case, things have to go the right way. Overall, the direction and the trend lines of this cycle feel pretty well understood at this point in time, we're managing around that.
We're having to really allocate a lot of resources because we have businesses within Lal's business who are up 20%, like in life sciences or in power, he's very strong. Bob's got businesses, too, that are growing right now. We're having to move resources around, and we're having to be very careful relative to our plant restructuring and modernization, as we see this trend line change. It's very interesting. I've been around a long time, as you all know, as CEO and at Emerson. I've never seen a cycle quite like this, where we've had sudden surges in certain pieces and other pieces drop off.
It's really by being together as a management team day to day and looking at each other eyeball to eyeball, no spitting, but just eyeball to eyeball, we have a chance to actually manage this very well, and I feel good about it. What I'd like to do is turn to Lal first and give a little bit of update on your chart relative to see what your underlying growth in China, and what you see as your point of inflection right now. I think he feels very good about what's happening.
I do, Dave. I think you said it correctly, and I think what you said generally applies to automation, to the automation market, and our sales performance over the next six quarters. Essentially, the story for us in Q4 is going to be stabilization of the book-to-ship order environment in North America.
Yeah
Backlog execution. Consistent with the plan that we shared with you last quarter, we have to execute about $300 million of backlog in the quarter. The good news there is that in the month of July, we took $96 million of backlog out. We're well on that path, but it works to do in August and September. That'll land us somewhere in the 10%-12% down range. The offsetting there is the book-to-ship. We see an additional two challenging quarters. We have a shot to get flat in Q2, depending, as Dave described, how things swing on the order environment.
Yeah.
Clearly, we see a positivity in the second half of the year on a global basis.
Yeah.
Work on orders and sales, Dave.
One of the interesting things Lal showed today to the board, just to give you information. You had five customers you did a lot of work around looking at the trend lines of cars, where you can pick up trend line of cars, how many people in a factory. Factories are operating at 30%, 40% levels. That you can directly correlate that to our sales to those individual factories, which was pretty interesting insight that you shared with the board today.
Yes, sir. We used the Google mobility data and plotted it against our daily order run rates in North America. There clearly is a linear relationship there.
Wow.
Particularly as people are just They've been working from home, and folks aren't in the plants to place POs and that kind of stuff. We need those folks to get back in the plants, clearly, particularly here in North America. On the bottom of the chart, we've got China, which was a tough story, down 21% in the second quarter, but came back very strongly for us in Q3. We see good activity broadly in China. Orders on a definition basis were also positive in the quarter in China. We see some good momentum there on the order rates. The sales comparisons get very challenging in Q4, which is why you see that 2%-5% down range for us in the Q4.
It's nothing more than just an incredibly tough comparison to Q4 last year, which was a record on just about every measure for us in China. It will still be a very strong number to execute within that range. In China, sales year to date are positive, which is helping us. We see an environment that's positive as we go through fiscal 2021.
Okay.
I'll turn it to Bob.
Bob, why don't you give an update on what you see unfolding in the quarterly sales at this point in time?
Okay. Again, you can see that Q3, we ended up coming in at down 19%. Right now, the fiscal year guidance has been updated to 8%-10%. If you do that math, that puts us in probably in the 5%-11% range for Q4. If things keep going the way they're going, we do feel like there's some potential upside. Again, June and July single month orders were a bit stronger. Part of that, again, I think is catch up on April and May, were much lower than 2019, down. There actually, we have a small amount of long cycle business. We do gas compression for recovery in landfills and digesters and farms and such for green activity. That stuff's actually pretty strong right now.
That'll give us some projects for 2021 as well. You can see right now, Q1 down. Q2 right now is a bit hard to tell. We expect Asia and DIY kind of strength to be kind of leading us out, if you will, and then the other stuff should come in broadly, certainly in Q3, especially with the comp we'll have against this year. Again, overall, feeling good about a strong recovery. We've seen that before, like in the financial crisis, and of course, there's still a lot of unknowns what's going to happen in the next 12 months.
Yeah.
China, as mentioned, that's been a roller coaster for us. We were down heavily in early 2019. It was moving up. We had talked about potentially being up in Q4 of last year, and then it kind of stumbled a bit. We did get positive in Q1, and then with COVID-19 hitting Q2, it was very dramatic in terms of the hit. Q3 came in down nine. It's mixed, basically, is kind of the best description. It's not a broad strength right now for our areas. Some of the stuff is happening, and we look for that to keep going up again. It'll probably go sideways a little bit for a while here, and then certainly, again, as we get into Q2-
with the comparisons, should be good. Outside of China, the rest of Asia is a bit of a factor, too, in terms of the total numbers. Hopefully, if we get the U.S. strength we're looking at in China, it should follow the line with those.
Yeah. Thank you. Appreciate that. If you go to the next chart, one of the things we wanted to do is lay out and give you the detail by the first half, second half of what we call the reset restructuring. I want to make sure the whole total program is well understood, both what's in it, what's going to be moved around both this year and next year. Also, we wanted to give you an insight relative to what we call the COVID-related savings, which are from actions we took, from furloughs to pay cuts to bonus cuts to also traveling and all the different things that unfolded in the COVID number, which for this year, it's worth about $150 million to us.
If you look at the total program that we've laid out over the last, since February to the outside world, you can see in 2019, we spent $95 million. This year, we're spending around $300 million. I believe that's up a tad from the last time we talked. We're looking at $125 million, which again, up a little bit from what we talked about as we continue to really focus on the programs and the reset programs, which are our permanent program actions, which we've got benefit already. We're already feeling it. As you can see, the savings on the reset program in the first half was $75 million, in the second half, it's going to be $145 million, and if you go into next year, it's going to be $210 million in total.
It's a very important program, and it's actually working, and then we're going to have benefits in 2022 and 2023 from the initial actions are going on right now at the facility levels around the world, which take longer to get done. Overall, our payback, our costs, total program's maybe around $500 million+ of restructuring, and we'll have over $500 million of savings from the reset programs, ignoring the COVID-related areas. On the chart, you can see, we talk about, as we look at, we want to give you an estimate. We see as business does come back, it's a function of how fast business comes back, how fast we can travel again, and what we can do. Right now, our best estimate is we have $150 million savings this year from COVID-related, $70 million of that will start flowing back.
The pay cuts we took in place, the furloughs, all those things will start reversing here, and they will start flowing back into the P&L. It will be a headwind for us. Right now, our best guess at this point in time is $70 million- $150 million will flow back in over time in 2020 and 2021. If growth takes off faster and we're able to travel, clearly those numbers will shrink, and we'll have more cost coming back into the P&L next year. It's our best guess at this point in time as we look at it. I wanted to make sure you had a distinction between the reset cost reduction programs, which are really well done by the global organizations, both the Lal side and Bob side, and also corporate, and then also what we see going on the COVID-related.
You've got a lot of detail there, and you can track everything that's going on at this point in time, but I think it's necessary for you to understand what's going on and a lot of hard work. When I look at what the organization got done from a profitability standpoint this quarter, it really paid off, all the work we did last year as we started, as we continue to go forward. Our margins, our cash flow is better. It's allowing us to stay on track relative to the savings, despite sales being down as far as they are at this point in time. I feel as we look at the next couple of months, let's say the next three, four, five, six months, I think we have a pretty good vision of what's going to unfold here. I see the savings flowing through.
We are obviously going to be very cautious at how we put money back into it as we start seeing that growth happen. We want to make sure that we are serving our customers, and we're making sure we support our customers around the world as we go forward. The organization on a global basis have had to do a lot of things without a day-to-day contact with leaders. I guarantee none of the leaders at the OCE level have been able to travel to Europe. We've not been into Asia. We've not been to Latin America. I am traveling in North America, as is Lal and Bob, and we're doing site reviews. We're getting out. The first time I got to walk a factory, the first time I really felt safe walking in a factory.
One, I didn't want to contaminate people in the factory or them contaminate me. We walked into a couple factories here recently. This is important. Our people want to see. In fact, I've been in three factories now in the last couple of weeks. The people want to see us, and we're out. It's important to go out. What they're doing in the factories today is not easy, and I really want to make sure they understand how much we appreciate that, what they're doing. That's where we sit. We feel good about. It was a great quarter execution. I want to thank the team. They did a phenomenal job.
I want to thank the OCE for standing by me, coming to the office every day, even though they may not want to go in the office every day. We are here, and it's important for the people around the world that are in the office working very hard at this point in time. Factories are working well. Now we see the trend lines coming our way. Bob's business first. Lal will follow second. I feel good about where we sit right now overall. Let's open the floor for Q&A, and let's go from there. Thank you very much.
We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble a roster. Our first question comes from Scott Davis with Melius Research. Please go ahead.
Hey, good afternoon, guys. Can you hear me, Dave?
Good afternoon, Scott. Good afternoon. Good to hear from you.
Thank you. Got a bit of a power outage here. Hopefully you can hear me with the backup generator running with an Emerson transfer switch, by the way, as I remember.
Yeah, that's good to hear. We had a little damage down in North Carolina. I came through last night from nine till one o'clock in the morning. That thing moved fast. It's all the way up to you. It went through Southern North Carolina where we have our place. Go ahead. What'd you want to know, Scott?
I have a tree through my roof, so I've got a problem I got to deal with after this call.
Well, if you can find some RIDGID vacs, go to Home Depot. We'll ship them out to you, and we'll put it in the quarter.
Well, I just bought one of your InSinkErators. There's a shortage of those things out there, by the way. I'm sure you know that.
Yeah, we do know that. Thank you very much for that nice comment there. Yeah, we're working on it. Issue. Yeah.
Hot topic.
Yeah.
Dave, just to think about your own business, the guidance on the restructuring is great, what else changes as you think about when you get into 2021? I mean, your own capital spending, cash flow probably isn't quite as easy. How do you think about ramping up your own spend?
I think that as we look at it right now, to be honest, I think we'll probably spend a little less this year, Scott. I think we're forecasting around $550. I think we'll probably be a little lower. The reason for that is the inability to travel and get to the projects and get them organized. Those are very important projects. There's a lot of automation work going on right now. We have the plant reposition, what we want to do is use automation now because of the whole COVID situation and distancing and trying to get the production out of the facilities. We're going to be putting a lot more automation into these facilities as we relay them out. I would say our capital spending will be a little bit higher next year.
We're not going crazy on this because our volumes are still going to be on average down in total probably for the next year. I would expect capital to be coming up as we go in to automate the facilities, as we have several new facilities underway. I would say overall, betting man right now, slightly less than $550 million capital this year. Next year number will have a 6 in front of it, in my opinion. Could be $600 million or $601 million, but I think that's where we are right now. Our cash flow overall, you're exactly right. I think we'll be up a little bit. The fight issue next year is going to be the following. We are clearly right now, receivables are going to start building because sequentially, we're going to have a very strong fourth quarter.
Sequentially, we're going to have a stronger fourth than first quarter because of what's going on here right now is what we feel. That's going to increase our receivables in the first half of the year, which is from the standpoint, we'll make more earnings, but we're going to have more receivables. Our balance sheet, which we've been liquidating a little bit this year, will be a headwind for us next year. Those things we know, and we're obviously working on that right now. I would say that we'll generate the cash. We'll be more than 100% free cash flow at earnings, but it'll be a little bit tougher next year, because of the growth, which is a good thing to have, growth in the balance sheet. That's how I see it right now, Scott.
Okay. Helpful. Dave, I think I know the answer to this, but I want to hear your view. What is your lowest visibility end market? Is it still oil and gas?
Yeah.
Is there any hope at all in finding a bottom there?
I'm going to answer first, then I'll let Lal answer first. I would say the toughest visible market is North America oil and gas. North America oil and gas. I think we're starting to see some of the formation of the bottom here a little bit. I think you see an automation come in. The key issue for us right now is when will they start doing some work around the fields, around the facilities? That will be the toughest issue. We are not seeing it yet. We track this stuff day to day to day. This market has not turned up in the month of July like the rest of the markets that Lal saw. I think that's what we see. I think that will be well into 2021.
I wouldn't be surprised if MRO or our KOB 3 business doesn't pop at some point in time. It's so low at this point. Lal, what's your feeling on that?
No, I couldn't agree more, Dave. I think you've said it. We're going to be through 2021. Clearly, there are traditional roles in the oil and gas market that are being impacted, and some are disappearing as a result of this.
Correct.
Interestingly enough, and you touched on it, Dave, and for Scott, this virus has been a catalyst for adoption of automation.
Correct
in the oil and gas industry. We're seeing automation and remote operations becoming more prevalent across the board, which poses an opportunity for us as people come back and as decisions in spending occurs.
We have a lot of remote automation software equipment, and we see that being a great demand as they automate their facility. There's an upside to this. We just got to get through it. I feel good about where we are right now. Lal's business is going through this trend. He's restructuring the heck out of things. Bob will come through this faster. He will spike faster. I feel very good about where we are, and I feel extremely good and proud about the organization, and having to deal with what's going on with them. Not only worrying about their families, but worrying about being sick and worrying about the customer. The big decision right now for North America, Scott, to be very honest, the OC, because the OC gets together several times a week now, is this whole school thing.
We got a situation where we have a lot of young parents, single parents, two parents, two parents working, single home parents with kids. How are we going to help them get through this school thing? Where our schools, our government tax dollars are not helping us here. Business has to pick this up, and that's an important decision because we're not going to let our kids get hurt again in this environment, and that's a tough call that we're all making right now one-on-one, looking at each other in the mirror, let's be honest. With that, Scott, thank you very much.
Thank you. Good luck, Dave. Good luck to your team.
Thanks.
See you.
Our next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.
Thanks. Good afternoon, everyone.
Good afternoon, Joe.
Dave, first question for you. Just thinking about your guidance for the fourth quarter, specifically as it relates to Commercial & Residential Solutions. It seems like you guys are implying like a mid-single digit down quarter, yet the trends seem pretty good, right? Like towards the end of June and early July. Maybe talk a little bit about what's kind of dragging the growth there and if you could specifically touch on resi HVAC in North America. I'd be curious to see what you guys are seeing there specifically.
Good. Certainly. I'll comment first, and I'll let Bob comment. I think the key issue for us, I think you're right, the order pattern is returning. Bob saw it in mid-June. We saw it through July. I think it's across all of your business units had a pretty good July in orders. The big issue for us, Joe, is manufacturing output. You're taking facilities that historically would not be doing this much sequentially from quarter to quarter. You obviously have attendance issues. You have issues relative to if you have a positive COVID in your plant. All these different things are working through us right now, and Bob and his team have the challenge of actually trying to improve output in an environment where workers can be a troublesome force at this point in time. That's one of the biggest issue he has.
I think from the standpoint of we're being cautious relative to recovery. Things have hit pretty well, the heat wave, so residential HVAC has taken off, and Bob can talk further about that. That's not unexpected when you get this type of heat, which we had the last couple of weeks. At the same time, we've got to keep the plants up and running, and we've got to be able to serve, and that's the biggest issue we face at this point in time. Keep in mind, sequentially, I think we typically do, Frank, around $250 million, $300 million from third to fourth quarter. This year, we're going to do $500 million. We're going to do $500 million. We could be doubling our sequential growth rate from quarter to quarter, which is something that with the plants just getting ramped down, ramped back up is a challenge.
I feel optimistic about that. I think Lal will have the plan, the question is can he get the book to ship and can he get the backlog out, which so far he's done reasonably well in July. Bob, any comment you want to add and color in that from that side?
I'll just say right now, there's a lot of bull whipping or whipsawing kind of stuff going on right now. There's the sell-through. Distribution has been in very different states. E-commerce is going gangbusters. The big box are doing very well. You got a lot of professional distribution that has had branches closed for an extended period of time. OEMs, just like us, have got challenges at times with plants and absenteeism and other issues. It's just there's a lot of noise in the system right now. Certainly, the June and July orders are very encouraging. We're working our S&OP, our operating plans to be able to work that, as you mentioned. There can be challenges in some areas like disposer inventory and including the distribution linkages of our customers. Again, June and July orders, no question, are very encouraging.
Pretty broad reporting, I think, in the HVAC on residential being very strong, commercial still being difficult, refrigeration still being quite difficult with food service in particular. We're seeing the same kind of thing. I think, again, it's a bit of a range for a quarter, I suppose, for us to be talking about anywhere from 5-11 or so. We're already in the quarter, but it's just emblematic of what's going on right now.
Yeah. Great. Joe, anything else you want to ask?
Yeah, no, that was great color. I guess just my one follow-up, I know last quarter you guys talked a little bit about getting the decremental margins back into the 20s by the fourth quarter. Expecting a little bit better growth out of Bob's business, but a little worse growth out of Lal's business. Be curious from both of them on your ability to get there in 4Q.
I think we did it in the third quarter. I feel very good that we'll do it again in the fourth quarter. The only thing that would be a problem would be a supply chain shock, which is with Bob ramping up, you could have a supply chain shock. I think right now, our cost controls, our reset programs, we got great restructuring done in the third quarter. Obviously, the COVID-19, I feel very good that we'll be in the 20s again in the fourth quarter.
Yeah. We had several down plant days in April and May, either caused by us or caused by perhaps customers not being able to take anything. There's a lot of disruption in Q3. A good amount of that's clearing out.
We both had plants in Mexico that we're paying people to stay home because.
Yep
our government asked us to make these people stay home because they potentially are risks. We are paying people to stay home.
Yep.
And-
Yeah, clearly, we've had the impact of the hard restructuring that we went after very hard. Now a year into the program.
Yeah
As you highlighted, Dave. We do have a step-up in volume sequentially. In Q3 to Q4, which will also help. We did hit those low 20 incrementals in Q3 already.
Yeah.
We're there, and I think we've got no reason to believe that won't hold as we get to Q4.
I think the one thing I'd be worried about, of all the stuff, to be honest, Joe, it's the supply chain. As we start now ramping up here in the fourth quarter, can our supply chain keep up with us on a global basis? There's a lot of work going on that we've been working on it now for two months because we knew this was coming at us, we've been getting ready for it for two months.
Thank you.
Thanks, guys. Okay. Take care, Joe.
Our next question comes from John Walsh with Credit Suisse. Please go ahead.
Hi. Good afternoon.
Good afternoon, John.
All right. I also am in the same storm as Scott, so hopefully don't cut out.
Do you have a tree in your house?
I don't have a tree in the house, things are looking up. Thanks for all the color on slide 22. Just thinking about that $140 million net, as you see it today, is there anything related to price cost or productivity net of inflation that you see as a detractor to that number?
Not right now, John. I think that the big issue for us right now will be the balance of the net material inflation relative to price. Fundamentally, we see that we're going to have a little bit different environment next year. I think pricing will be tougher, and therefore, the net material inflation is going to be the key issue for us. Pricing will be tougher. That will be in the red, and then therefore, we need to have positive net material inflation. This is not something that we didn't expect. We expected this to happen. I know both Bob's business, the corporate organization, and Lal's business have been focusing on this. It's going to be a very important issue relative to next year because we're trying to get through the year, as we say, neutral, not have a slightly green or slightly positive or red number here.
Right now, I think we're in pretty good shape. I feel good about the balance. I feel good about that 140 number that we talked about there. There's nothing really causing a big issue for us at this point in time. The plan right now, I'd say, is a little bit red built into the plan, and I think that we're really working hard, the net material inflation at this point in time, without stressing our supply chain too much because of what we got expect in the fourth quarter and in the first quarter. One of the things you're going to see this year, which is a little bit different, two things, from the fourth to first, John, for companies thinking about this. The year has been tough for companies.
For companies like us, if there are programs out there that you get X dollars, you get rebates and stuff like that, no one is going to be earning their rebates this year. Our customers are not going to be going and saying, "Let's pull into the quarter." They're going to be pushing. That's one thing you're going to see. Secondly, sequentially, from fourth to first, I think you're going to see consistent demand improvement in Bob's business, and so inventory will continue to be flowing into the channel, which normally we would not be seeing. Those two things would say that we'd have a better first fiscal quarter or fourth calendar quarter because the trend line is what happened to us in the shock in the middle of the year.
There's a lot of things that we're putting on the table right now relative to our own planning, both in sales and also the S&OP, the manufacturing, because we know there's moving parts relative to the way our customers are going to deal with this. Right now, I feel good about the price cost. I feel good about our savings and just got to keep managing it day to day.
Great, thanks. Then, as a follow-up, maybe digging a little bit more into the margin performance at Automation. You talked about some challenges in the KOB-3 order rate, can you actually talk a little bit about the mix of KOB-3 year-on-year, if that was a good guy, or I'm just trying to understand a little bit behind that margin performance.
I'll let Lal answer that question because Lal's got the facts. I'd be making it up, and you know me, John, I don't want to make it up for you because you'll call me on the mat on this one. Lal, why don't you to tell them how year-to-date KOB-3 looks versus KOB-2 and KOB-1.
Yeah.
I mean, kind of business for people who don't know.
That kind of business three, which is KOB-3 being the MRO, the small order sizes, typically what you see in day-to-day business or short cycle business. That's continued to increase relative to where we finished the last fiscal year as we've navigated through this year. Part of that is a reflection of the size of POs that are being issued. Part of it is a reflection of deferments in the larger capital modernization projects. We're sitting north of 60% as we close the quarter. We don't have the exact numbers yet. There's a little bit of a systems work that needs to be done for us to have the final number. We'll be north of 60%, KOB-3, which is over a five-point improvement where we finished, I believe.
Last year
last year. It's definitely moved that way, John, but the fact of the matter is there's less of it.
Yes.
The pie, the percentage, has increased.
One of the keys you hear that we are tracking is very tight on, in particular, going back to, I think, Joe's question on the North America oil and gas. What we're watching very carefully is the order intake on a daily basis. This is important to us, in particular in North America, because that's where we're going to see the KOB-3 pop back up first. When you're running a factory at 30%, 40% with people in it, you're not doing much. That's what we're watching because when that rate comes up, that tells us the short-term stuff's starting to kick in and our KOB-3 will be very good, and it helps our profitability, and we'd like to see some of that in the fourth quarter. We're not banking a lot in the fourth.
We see it more in the first. It sure would be a nice thing to have for us in the fourth, because that would give us better leverage and better margins and better cash.
maybe just a little color on that, Dave.
Yeah
in terms of North America specifically through May and June.
Yeah.
Across our short cycle businesses, the number of physical POs that we received was actually equal to last year's.
That's a good sign.
It's a good sign. However, the quantity of units within each PO dropped.
That's reflected in that sequential or daily order drop of the $20 million a day to the $15 million a day.
That's what we're watching.
We're continuing to drive the POs, but there's just less units in them.
That's what we're watching, John, and we have that in detail, because we can tell you very quickly when this thing's going to turn. You could smell Bob's business. We were out talking to his guys, you could smell it. Lal's business, we know it's being brewed right now, so it's coming.
Yeah. Just on the other end, we have not seen any decremental pricing on KOB3 to us.
Yeah.
The price has held, and it continues to be very strong there.
Yeah. Project-wise, since we're on KOB3, KOB1, you've seen some push out, some cancellations.
Yeah
a lot of new stuff.
Yes, Dave. Honestly, we've had some wins. We booked a significant amount as we went through the quarter.
Yeah.
We've also seen some deferments on-
Yeah
on KOB-1.
There's not been a lot of movement in the bubbles or the pipeline. We do know that what we're going to be living off is KOB-3 and KOB-2 here for the next, I would say, 18 months, because the projects are going to be smaller.
Right.
We're doing a lot of refresh right now with a lot of inputs, and I think we'll give you more input as the next quarter, because there's not enough movement right now, and even to say it's changed that much. It's clearly, it's in flux right now, but we feel pretty good about where we sit at this point in time, because there are new projects and installed projects. Overall, we're holding pat. Our backlog right now is still holding right in there, which is pretty good.
Yeah.
It's not being canceled. It's holding right in. Next question. John, do you have another question?
No, I'll pass the baton. Thank you.
Thank you very much, John. Hopefully no tree will fall on top of you.
Our next question comes from Andy Kaplowitz with Citigroup. Please go ahead.
Dave, good afternoon.
Good afternoon, Andy. Good to hear from you. Are you in the storm, too?
I'm in the storm, too. Backup generation, no trees, so we all feel for Scott. We know how that is. Hopefully, things get better for him soon. How you doing?
Yes. I'm doing pretty well. We're not having a storm here. It's kind of cloudy, but it's.
Pleasant
it's quite pleasant, to be honest. I'd like it to be a little warmer. We've had very warm-.
Yeah, it's warm enough.
Let the East Coast get all the rain. Let you guys have all that fun.
Yeah. Thanks for that. Look, you guys seem relatively confident about at least modest recovery in FY 2021, and I know a lot of that is based on your orders turning here. You also talk, Dave, to a lot of customers, and what we hear from other CEOs is that confidence is pretty mediocre out there. Maybe you could tell us sort of the conversations you're having, and are you hearing more confidence out of the customers you're talking to, despite the concerns around the infection resurgence that we've seen?
The answer is yes. First of all, we did put a forecast out there, Andy, and we did hit our forecast from April 24th. I had enough confidence to put our neck out there on the line, and we hit it, and we actually did a little bit better. Yes, we've had conversations. We are seeing the markets around the world. I would say the more cautious markets on the industrial side is the U.S. As you look into Europe, as you look into Middle East, as you look into Asia, China, we're seeing those markets, there's a lot more confidence of the incremental spending, and we're seeing that business get a little bit better. That's why we feel reasonably confident. Now, we're not changing much of our forecast from what we laid out in April relative to the fourth quarter. It's very similar.
I think the key issue will be is, Bob, going back to a couple of questions earlier, if Bob's business orders continue to hold, he's able to produce it, then I would say Bob's going to have a stronger quarter, and that bounce is coming back after it was down 20, 30, 40% in some of those months. Andy, that's why we feel confident about it. We've been here, done this before. This turn is very similar to Bob's financial crisis turn. Lal's business is a little bit different based on North America oil and gas. I think we have enough confidence and enough, I would say, conservatism in the underlying sales forecast that it was right now, based on what we're hearing from our customers, that we can say that. We're very in tune to our customers right now. We're out talking to them.
We're out visiting them, and so Lal, anything you want to add there?
Yeah. Thanks, Dave. Myself and the leadership team, Dave's been engaged in this. We've Zoomed our way into many customer rooms.
Yeah
Participated in many meetings. Starting really in the mid-May to early June timeframe, our salespeople started to get out and see customers again. Obviously, our service people have been engaged throughout the crisis, engaged in plants. The projection really hasn't changed, and the sentiment from the customer base hasn't changed a whole lot, Andy. There's conservatism and concern in oil and gas, as Dave described, but there's optimism in medical, in life sciences, in food and beverage, and power. We're having a record year in North America power. It's a bit of a mixed bag there. Oil and gas really is where we're concerned, but that's no different than what we spoke about on April 24th.
Yeah. Being so broad industry, we have a lot of industries doing better than other industries from that standpoint. Bob said it right. They cut back so rapidly in Bob's business between inventory and shutdown, couldn't make stuff, that we knew there was going to be a sharp bounce at some point in time, and that's what we're seeing right now. The question is it sustainable?
Right.
Can we produce? That's where we see right now.
Very helpful, guys. That's helpful, Dave. Let me just ask you specifically then about China, because you know that region very well as well. There always seems to be some stimulus tailwind. You do have some geopolitical issues to deal with, and some people think improvement in production is ahead of demand, but it seems like it's picked up for you guys. What's the outlook for you initially as we go into 2021 in China?
I think what we're seeing right now is Lal's business is, in a broad basis, is pretty good. I think he's going to see a pretty strong, high single-digit growth as we go into 2021. The wild card for us is Bob's business because the consumer in China has really pulled back in some of the programs. The question will be is when do they start spending money again, feeling confident of spending money? If you look at the air travel inside China, it's back pretty close to where it was before the COVID situation. Now, international, no. The movement's starting to happen, and that will be a big impact for Bob as that starts happening. We're waiting for a consistent improvement. I don't know what you saw in June and July, Bob, out of China, but he's being cautious at first.
He does know he'll start getting easy comparisons. What I'm trying to see is the underlying demand. Are you seeing any sense of improvement from your standpoint in China?
It's kind of going. It's in the high single digit decline right now, 5%-10% down.
Yeah.
Again, the orders have been bouncy. We've gotten some bright spots at times, and then it flips. Like you said, I think on the commercial side, there's a lot of stimulus programs that are being worked. In the consumer side, including housing, purchasing and everything, people are being very cautious.
Very cautious.
Just like U.S., the savings rate and everything, and yeah.
Right. Yeah. I think what we're going to see, Andy, is Lal will have a very solid year next year as they continue to make investments both in the life science area, the power area, the energy area, some chemical area. I think Bob will be the wild card. Will he be a zero or will he be a 10 plus? That will be the wild card for Bob next year in China. My gut tells me the spending will start coming as they see some stability in the consumer, in some travel, in the investments. We're in pretty good shape right there right now.
Yeah. The picture we had on the 2021 is China gets positive in Q2 and stays positive. Again, the magnitude is hard to say, so.
Yeah, it's very hard. Thanks, Andy.
Very much appreciated, guys. Stay well.
Thank you. You too.
Our next question comes from Andrew Obin with Bank of America. Please go ahead.
Good afternoon.
Good afternoon, Andrew.
A couple of questions. Could you just talk about how you guys are doing in Automation Solutions relative to your peer? Do you think it's an opportunity to take market share? Some of your competitors had some reorg. How is the market share trending in this downturn?
It's pretty hard. We've got one quarter under it right now, or two quarters, let's say. I would say if I look at the final control business, I would say Ram and his team have done a phenomenal job in final control in the last several quarters, both in execution. I think that they'll probably end up down somewhere around 5% or 6% this year, both in orders and sales. That is better than historically. If you think about the combination of our final control and V&C final control, they're doing much better. He's raising his profitability. His GP margins are doing better. His cash flow is doing better. I would say on that side of the business, we're winning. I just had a site review with him, and I like both of them. We're making technology investments. On the system side, I'd say we're doing pretty well.
We had systems this quarter, which is not in there. Our systems were up for the quarter. What were we up overall?
Actually, we were.
Down
sales for the quarter.
Okay.
7%.
Okay.
Compared to the down 11%-15% on peers.
Okay. We're down seven overall. Okay.
We had a decent quarter in systems. I think in instrumentation, not much movement in that thing from that perspective. Overall, in a quarter, I feel good about where we are, but I'm thinking about the next two or three, four quarters. I think we are well-positioned. The key issue for us, Andrew, is the execution around the plant moves right now. The technology moves are pretty good, but the plant moves. Because that's how we lose share if we're not able to deliver. The key issue for me right now, if we continue to invest and get the plant moves done, then as the economy gets better, I would say we're going to have a good move in the downturn, and we'll pick up share.
One quarter is a good sign, but we got several quarters more to go, but I like where we sit at this point in time.
to add on to your systems
Yeah
on the power side with Ovation, that's been a phenomenal quarter, and they were positive.
They were positive.
They were positive.
That's right. They were positive. I got the wrong one. Okay. Next one, Andrew?
Yeah.
Yeah.
Just to follow up on facility moves, can you just give us more color? You had a head start on everybody else because you announced your program several months before that, what are the challenges of moving facilities in the midst of COVID and this huge sort of whipsaw effect in terms of manufacturing, and how have you adjusted your plans in terms of facility moves?
It takes a lot of planning, let's put it that way. We've moved some plans in and out based on the areas of where we can get people in and out. One of the problems we will face is that we're not able to fly resources around the world right now, so we're going to depend on our local resources, both in Americas or Asia or in Europe. Typically, we would be flying resources around. From our standpoint, we've planned so that they're going to take a little longer, Andrew. We have had a couple from the standpoint we might have moved a month or two. One is we work with the government, and also two, relative to resources.
On average, I would say they're on track. We've had a couple slippages, but I think we've planned in. This COVID thing was something we knew was coming at us, and so as we finalized the plans and we started moving these plans, we had that pretty well in shape at this point in time. The big issue we would face, Andrew, to be all honest, if we had a huge breakout of COVID in, say, certain parts of the region we have a plant going into, that would clearly slow us down. Fortunately, knock on wood, we have not had that yet. That's something we actually reviewed with the board today, what I'd call the more challenging moves that we have underway, both in Lal's business and Bob's business, to make sure the board understands the magnitude of what we're trying to do.
As you know, we restructure all the time, but this is a much higher magnitude, and we are in the middle of COVID-19. So far, the teams around the world have done a great job, and I expect them to execute on them, and I feel good about it.
If I could just squeeze one more, just because Google mobility data, it does line up with your industrial orders. Is that a fair statement?
If I may, Dave?
Yeah, go ahead.
The Google mobility data, what we did, Andrew, is we segmented purely the commuting hours.
Yeah.
It's North America data only. Obviously, as you know, that data is an opt-in location tracking data.
Yeah.
The location services data off of the Google phones. It does track very well to daily bookings in North America.
Yeah. You got to pick the location, facilities, and cities. We know where the facilities are, we know the customers, and it does seem to track pretty well.
Yeah, just wanted to clarify. Thank you so much.
Yeah. It's nice that people are monitoring all of this right now as I go back and forth to work. It makes me feel real good. Not. Okay. Next question, please.
Our next question comes from Steve Tusa with J.P. Morgan. Please go ahead.
Mr. Tusa.
Hey, guys. Good afternoon.
How you doing? Are you safe someplace in New York or?
I don't really ever feel safe. It's all relative, I guess.
I heard there was a person on the Mars rover. I thought maybe you, because I would think that you would like to do that, go on that Mars rover thing that's been shot off last week. Even safer than that.
Yeah, I think I'd probably do better up there than on this planet right now. Not sure what planet I'm on these days. Anyway, what do you think price cost is going to end up for this year? What are you guys embedding?
I think we have positive price this year. Price cost will be slightly positive. These guys are looking at the chart right now. Frank would be the key for this. It'd be less than one. Obviously, with a good net material inflation and we had pricing set in earlier on, and I think that will cause us to have to give some of it back next year.
Our second half is in the half to a full point positive.
Yeah. Overall, Steve, I think it'd be less than 1% positive for the year. Yeah. Less than 1% positive.
That's price or price cost?
That's price cost.
I think you guys said like uncertain on the margin front is what you're saying?
Yeah.
Okay. Got it.
I think we're tracking pretty well right where we said to you at the beginning of the year. Yeah.
Just on this CR&S business, these OEMs are obviously talking about eye-popping order numbers here in June and July. Some guys up like 50%.
Yeah.
You're basically saying you guys are having kind of fulfillment issues?
Totally
Beyond that, I guess, into the kind of back part of the year, into the kind of the calendar fourth quarter, they're also kind of being a little bit cautious. Do you think the market goes from being a heat-driven market where the consumer is going to do what they have to do to stay cool, to a market in the fourth quarter that kind of recouples more to the fundamentals of the consumer? In other words, high unemployment and weak consumer confidence. Is that what's on the board right now as far as the variables you're looking at, or is that the wrong way to look at it?
Part of the popping now is April was pretty dramatic the other direction. On a dollar basis, our June orders for HVAC in North America were 2x what they were in April. I think our customers have talked about it, we've talked about it, where there were a number of plants down, and sometimes for as much as a couple weeks.
Our customers were down.
Our customers, even us in April, as we first kind of learned how to deal with the first COVID-19 incidence inside and cleaning and other things like that. Again, part of this is a makeup. You write the reports, I read the reports. Distribution's gotten very thin. There's a lot of examples of wholesalers and others considering other brands because one particular supplier can't do it. We supply them all, we see that dynamic play out. It's very strong right now. I think there's a bit of a pent-up, both of getting the channel back established, as well as certainly the sell-through with the heat in June and July. About 35% or so of the units are heat pump units, they are relevant for the wintertime as well.
You got a lot of people sitting at home and frankly, sitting on a decent amount of cash with the unemployment benefits, which is probably not skewed to homeowners exactly. Bottom line is, I don't think there's a reason this won't stay pretty strong through the season. Also to get the channel in play, in step for coming out of season.
Yeah.
It's really thin right now.
Steve, right now, I think we see a couple of quarters of pretty good demand here, a little bit different. Again, the key issue for us, like with them, we're shipping right now. We're keeping up with them. It's a strong demand, we're keeping up with them. The big issue to us is clearly, if all of a sudden you had an outbreak where our plants are located, and their plants are located, a supply chain disruption. Right now, we went from basically not producing much to full out, to what you're talking about. That's where we are at this point in time. We are able to keep up with them, and we're working it pretty hard. The key issue for us is we've got to keep those plants running, and we've got to keep the plants running safely.
It's one thing to run a plant full out when you're non-COVID environment. When you have a COVID environment, you have to be very careful to not stress the workforce, and all of a sudden have something get in there and create an environment where you have half the plant come down with COVID. We're running hard right now, and we're keeping up with them, but I'm always concerned that one break, because we've seen it, both at our customer's level and our level. This is something, I feel the demand's there, and we're going to see it for the next couple of quarters, and we'll keep going at it. Someone said the housing market's going to be pretty good, and so we're going to see construction and things like that, and repair.
We just got to keep the plants running and the supply chain going, which right now we are.
Right.
One last one for you, just on software. I don't even know if you guys track kind of software sales outside of the systems business. Any way to give us any color on that kind of line item, or that metric? I know you guys don't pretend to be a software company like some others do, but are you seeing growth in those areas, or is that just kind of in that systems and services bucket on the automation side?
Correct.
Sure. Hi, Steve Lal here. Yeah, no, as we spoke about in New York, the software business is predominantly in the systems side, although we do have a significant ingoing amount of software that's outside of that.
Correct.
That sits in our digital transformation business. The software within systems is closely tied to Ovation and DeltaV, that's embedded in there. The standalone software packages, albeit smaller in scale, over $500 million dollars in size already today, continue to grow.
Yeah.
Continue to grow, not at the rate that we expected, obviously, back in New York, but it continued to be positive there.
Yeah.
continues to be very interesting.
Sorry, did you say $500 million for that business?
Yeah, the standalone software.
Yeah, $500 million .
$500 million.
Yeah, you guys should change your name to Emerson Technologies or something like that. Maybe you'll get some more attention around that business. All right. I appreciate it. Thanks, guys.
Yeah, figure it out. Take care, Steve.
Our final question comes from Julian Mitchell with Barclays. Please go ahead.
Hi, good afternoon.
Yes, go ahead, Julian.
Afternoon. Maybe just the first question, Dave, on how you're thinking about capital deployment at this point. The buyback, you've kept a ceiling on it for the past few months now. In general, you're seeing global M&A start to warm up again after a freeze. How are you thinking about acquisitions at this point?
Right now, we're going to keep the hold on the share repurchase for the rest of this, I would say, this quarter, and then we reviewed it with the finance committee this morning. We'll review it again the next finance committee at the end of this fiscal year. Right now, we are focusing very much on acquisitions. We have several things underway. As you said, they are freeing up, and we're working that. If we get into the period that we're not able to close acquisitions and we see, obviously, from our cash flow standpoint, that we have the flexibility to do the share repurchase, we'll quickly go to that. Right now, as we talk to the board, we're focusing pretty hard on some unique opportunities around the acquisition front that we'd like to get done here in the next quarter or so.
That's what we're looking at. If they don't happen, obviously, we generate cash, then we'll look at, again, reinstituting the share repurchase. Most likely, we will reinstitute the share repurchase in fiscal 2021, but I don't know the magnitude of it right now. It really is a function of can we close any acquisitions here in the rest of this calendar year. That's how we're looking at it, Julian.
Thanks. Just a quick follow-up maybe for Lal on the automation solutions backlog. I think you'd said, Lal, that that was flattish or stable sequentially ending the June quarter. The sales decline is obviously a lot less than the orders decline that you've seen. That suggests you're sort of pulling revenue down from that backlog into the P&L. How do you think the backlog trends from here, let's say, the rest of this calendar year?
Yeah, sure, Julian. What we're planning, it's embedded in the plan that I communicated to you, is about a $300 million takedown in backlog.
it finished four-
$4.8 billion.
$4.8 billion.
$4.8 billion on a fixed-rate basis, so adjusted for currency, $4.8 billion at the end of September.
Which is a normal trend for us.
It's a normal trend. We took $96 million out in the month of July.
Yeah.
We're well on that path over the next two months, Julian.
Yeah. I mean, it's going pretty well. The orders are pretty well holding up there.
They're holding.
The project business is going in there, and it's not cancellations. Our backlog's holding in there nicely. Lal, in particular around final control in the systems, they're executing the backlog, and that's a good sign for us, and I think that's going to hold. It'll start building again as we go into next year.
Good execution in the plants.
Yeah, the plants are up and running well right now. I'm more worried about some of Bob's business. Bob's had some businesses that have been jerked around. When you go -40 to +20, that's pretty tough to do in a plant level, especially if you've got COVID floating around out there. That's the concern we have with Bob. Overall, I think that as I wrap up here, again, I want to thank everyone joining us today. Again, I want to thank everybody out there across Emerson that worked so hard to make this quarter happen. We delivered a quarter we laid out. We were one of the few companies that laid it out as we did. We delivered it.
We did a better job execution around the cash flow and the earnings, and I feel very confident that we are well-structured to go through this final quarter and really have a good rest of this calendar year, which will be our first quarter too. It's just a question of where this thing trend line goes, and just working hard to keep things going, get the restructuring done, generate the earnings, and then also make sure we make those long-term investments we have to make. I feel good where we sit today. Earnings, cash, and momentum is on our side. Organization's pretty strong, and so I look forward to a good finish of the year, and we'll go forward with that. I appreciate everyone joining us today. Thank you very much.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.