Good afternoon, and welcome to the Emerson Third Quarter 2020 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Peter Lilley, Investor Relations.
Please go ahead.
Good afternoon. Thank you, and welcome, everyone, to Emerson's Q3 2020 earnings conference call. I hope everyone is staying safe and healthy.
Today, I
am joined by David Farr, Chairman and Chief Executive Officer Frank Delacloa, Senior Executive Vice President and Chief Financial Officer Lal Carsenby, Executive President of Emerson Automation Solutions and Bob Sharp, Executive President of Emerson Commercial and Residential Solutions. As usual, I encourage you to follow along in the slide presentation, which is available on our website. Starting with the cover slide. In the era of COVID-nineteen, 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 celebrate a 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 foot social distance barrier. Congrats to the winners, Kaden and Caleb Manji. Please join me in turning to Slide 3.
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-nineteen 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 4. Despite the challenges presented by COVID-nineteen 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-nineteen 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 percent conversion of net earnings. Additionally, the team was able to manage decremental margins to the mid-20s level EBITDA.
Despite the uncertainty and continuing challenged 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 3 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 6, which summarizes results of the quarter.
Underlying sales growth was within guidance, down 15%. Trailing 3 months 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-nineteen 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 3 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 $842,000,000 and free cash flow of 738,000,000 dollars Year to date operating cash flow and free cash flow of $1,850,000,000 $1,530,000,000 were up 3% 8% over prior year respectively.
Lastly, the company continued to build upon its aggressive cost reset plan, initiating a total of $94,000,000 of restructuring actions in the quarter. Turning to Slide 7, we will bridge adjusted EPS. Beginning with Q3 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 and 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% 21.9% exceeded their respective guidance ranges of 15% to 15.5% and 20% to 20.5%. Slide 8 depicts the key elements and magnitude of operational performance on adjusted EPS. Starting with adjusted EPS guidance of $0.60 we saw both business platforms as well as corporate contribute to the SG and A containment. Automation Solutions contributed $0.10 commercial and residential solutions $0.02 and corporate $0.04 for a total effect of $0.16 Additionally, the effective tax rate came in at 11% compared to the guided 18%, which provided a $0.05 tailwind.
Subtracting a cent for other items, the adjusted EPS landed at $0.80 The leverage was contained to 26% at adjusted EBITDA. Moving to Slide 9, we will review the P and 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. Importantly, SG and 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 percent to 11.2 percent driven by non recurring tax items including R and D credits. Overall, the adjusted EPS decline of 18% from $0.97 to $0.80 was in line with the revenue decline of 16%. Turning to Slide 10, we will look at underlying sales by geography. The Americas showed the steepest declines, down 20%, with the United States down 20%, driven by broad based weakness in all industries except medical and life sciences.
Europe and Middle East, Africa and Asia were both down 9%. China, however, grew at 3% as the economy was the first to broadly reemerge from lockdown. Please turn now to Slide 11 and we will discuss total business segment performance. Total segment adjusted EBIT margin decreased to 170 basis points to 16.8 percent, reflecting aggressive cost control measures and strong operational execution as sales declined. And as previously mentioned, total segment adjusted EBITDA deleverage was 26%.
Stock price related costs increased $20,000,000 as the stock price improved from lows at the end of the prior quarter. Adjusted corporate and other costs dropped by $14,000,000 as aggressive cost controls, travel restrictions, salary reductions and other measures took effect. Adjusted pre tax earnings dropped 270 basis points to 14.1 percent. 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 $842,000,000 $738,000,000 respectively. Free cash flow represented 181 percent 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 Automation Solutions' underlying 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 3 month underlying orders remained within expectations at down 19%, again reflecting broad based demand challenges. Aggressive restructuring actions totaled $80,000,000 across the platform, which brought the total to $192,000,000 year to date. The platform delivered on profitability to profitability in a very challenging demand environment with adjusted EBIT and adjusted EBITDA margins down 120 basis points and 30 basis points respectively, reflecting the aggressive cost actions taking effect.
Decremental margins were held to 22% and adjusted EBITDA. Of note, sequential backlog was unchanged at 5,100,000,000 dollars Turning to Slide 14. Commercial and Residential Solutions underlying sales were down 19%, also reflective of the broadly weak demand environment due to COVID-nineteen. 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 3 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 $12,000,000 which brought the total figure to $31,000,000 year to date.
Commercial and Residential Solutions also delivered solid profitability given the demand environment with adjusted EBIT and adjusted EBITDA down 270 basis points and 160 basis points respectively. Decremental margins and adjusted EBITDA were 32%. Turning to Slide 16, we will review the updated guidance. The impact of COVID-nineteen certainly continues to present a challenging demand environment. However, we are raising guidance due to early signs of stabilization and good momentum in cost containment and restructuring actions.
First, we assume demand will continue to stabilize and gradually improve. There are no major operational or supply chain disruptions, no changes in discrete tax items and oil prices remain in the $35 to $45 range. With those assumptions in mind, we now expect underlying sales to be down 9% to down 7.5% and net sales down 10% to down 9% for the year, only slight refinements from previous guidance. We are raising expected adjusted EPS to the range of $3.20 to $3.35 an increase of approximately 6% from the previous midpoint of $3.10 to the new midpoint of $3.27 Expected total restructuring spend has increased by approximately $20,000,000 to $300,000,000 with approximately $235 coming from Automation Solutions, 55 coming from Commercial and Residential Solutions and the balance from corporate. Please note that we will review the updated restructuring reset spend and savings plan as well as the COVID-nineteen related cost savings in detail later during the presentation.
We expect operating cash flow to come in at approximately $2,800,000,000 and CapEx spending expectations remain $550,000,000 resulting in a free cash flow target of approximately $2,250,000,000 Lastly, our share repurchase program remains complete for the fiscal year. And now please turn to Slide 18 and I will hand the call over to Mr. David Farr.
Thank you very much, Pete. Appreciate your inputs. Pete wants to be called Commander Pete and he's got a new name from the military background. I didn't have to deal with this with Tim, but Pete, I do. By the way, I did see Tim today.
We had a Board call and Tim was in Germany with our German Director and his family has arrived in Germany. He's the President of Professional Tools in Germany. He's doing well and his family are now there and his kids will be going to school live. And so it's good to see Tim. They seem to be pretty happy today and never had to call him commander, but again, then again, he couldn't kill me with 2 fingers like you.
With that, I want on the order trend chart, as I would say, the trends for orders were pretty much in line to what we thought would happen in the quarter from month by month basis. Clearly, you can see the commercial residential has seen 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.
But overall, month by month, we saw the quarter unfold exactly like we thought it was going to unfold relative to orders, relative to sales. Margins came in much better as you've seen from the cost reset actions and what we call the COVID related savings. Therefore, cash flow came in better too. Overall execution was extremely good. And I really want to thank the global leaders relative to their strength of operation throughout the quarter.
I want to thank the whole team around the world. As you know, the OCE and top 10 or 15 other people in this building or the corporate network 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 couple of days here and there, in Bob's case and Lal's case. But overall, great execution by the team around the world as I share that with the Board. And we are acting and running this company live, in person, in our offices as best that we can, not everywhere, but as much as we can.
And I really thank them for what they have done because it's been a very challenging quarter. As you know, we laid out our forecast in mid April. We went out early. We executed around the plans from an order standpoint, sales, manufacturing, and we really, really did a great job around the cost reductions, both from the reset actions, which we started last June, which have accelerated and we'll talk a little bit more about those, to the COVID related adjusted savings from the one time cut, the furloughs, 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.
But in particular, what I was extremely pleased to see is, as we laid out that detailed major cost reduction reset program back in February to the shareholders, but to the Board, last year in August time period, they really have stayed ahead of it. And they've actually increased the numbers. You'll see that in the charts coming up. And that's not easy to do in an environment where you're not able to travel. You have hard times having meetings.
But these guys have done a phenomenal job relative to really driving those programs forward. We're in a different phase right now. We're in the phase of actual consolidation of facilities, shutdown facilities, new facilities. We're moving stuff at this point in time versus initial phase, a lot tougher phase. And both of the businesses are on track and I think are doing extremely well and I'm very pleased with that.
With the effort in the quarter, which was better than I thought from the earnings, better than I thought from a cash flow, we have raised the year. We have confidence in the year And I'll let Bob and Lal talk a little bit about that. But really, from the execution around operations, we really did a great job. And from that perspective, But I just was pleased to see from the standpoint of that execution and what we saw. And we'll see as we go into the quarter.
I think from my standpoint our I think that we will see some strength emerge from the businesses. I think the profitability will continue to do well. And I think that we're going to have a very good order from the standpoint. And what I'd like Bob and Lal to talk about briefly here first about the orders first, and then we're going to go into talk a little bit about the quarters. But Bob, why don't you give them a little color of what you're seeing right now in orders?
And Lal, you do the same thing. And then we'll go into a couple of other parts here.
Okay. Thanks, Dave. As Pete mentioned earlier, the front end of the quarter was very much unlike the back end of the quarter. April really dropped severely, really everywhere. North America AC in particular with a lot of plants being down, including customer facilities and professional tools, a lot of the channel basically just shutting down and offices being closed.
And then, of course, we ended with June swinging up positive. So, quite a dramatic change. And the numbers we have for July right now is right around flat. So, we're holding pretty solid again. The 3 month for June was down 19% and that will bring the July 3 month into the 5% to 10% range.
So definitely go in the right direction. Coming out of it, as going in was broad, coming out of it is really quite broad too. But again, North America AC, follow a lot of the HVAC producers in North America. Clearly, when the heat hit in late June, that made a dramatic difference and we felt it very quickly. The DIY space continues to be very strong.
So the vac business and in Syncorator, in particular quite good. Pro Tools was very strong. Part of that I think is basically branches reopening and it's a little bit of a channel bullwhip I would say more than the market itself, but June was certainly quite different. In Europe in July was actually 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.
Yes.
I think, Bob, one of the key issues we talked about on the lines, I've had a lot of investors on the line over the last 2 or 3 months, is we knew the bounce would happen to the question. The key issue for us is to keep those factories going. And that's where Bob right now is very focused because on a global basis, his demand is coming back and what we want to make sure is we deliver on that demand and not miss this bounce. And we've gone through these before and I think that right now his teams are very much focused on that. I've been to a couple of the sites and they're all getting ready for a sequential bounce this quarter and that's going to be a key milestone for us
from that perspective. Yes. Factory is very much in focus right now, being able to deliver against these numbers. Yes.
Lal, you want to give a you're obviously a different part of the cycle and from that perspective, but you are, I would say, form of the bottom at this point in time and you clearly have the same issues relative to a mix but you have broad industry capabilities. So why don't you give a favor of what you see relative to your orders right now before we even get into sales in the global businesses?
Thank you, David. Good afternoon, everyone. Yes, clearly operating around the bottom of this order cycle as we feel it through June. And actually July came in on a daily basis about 4% above the month of June as we saw broad stabilization, particularly in Europe and driven by some growth in China and stabilization in North America. So really there's 3 phenomena, David, as we think about the order rates.
Obviously, oil and gas upstream is one that predominantly impacts our strong upstream markets in North America and Europe to some extent. And has had an impact particularly on the short cycle businesses to begin with and now extending into some of the longer cycle businesses. We've seen reduced OpEx 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 KOB 3 orders.
As plants are being kept open and safe with less folks in them. And consequently, projects aren't being executed, modernizations aren't happening and some of that will come back as people return to work, but that's had an impact through the quarter and where we sit today. And then lastly, I'll highlight that that China has recovered. And we had a good quarter in China, positive orders and sales, and we're seeing that broader stabilization across Europe and hopefully North America here as we go through July as well. Thanks.
As we expected, we would expect Lal to lag in the cycle. He went down slower. He did not have a minus 20% in the early stages. He could easily have that in a quarter, a month here, but he's in a different cycle right now, but I feel very good about where they sit and we're starting to see pretty good insights in around that. If you go to 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 Q4, very similar to what we had before, but I would say just slightly better. I think Bob's business will he'll talk a little bit about it here in the next chart or 2, will slightly better. I think Lal business is going to be the key issue for him as the backlog reduction. But as we move in this trend line and directionally right now what we're seeing based on the customer inputs, based on the economic trend lines, based on the opening of the world is that we have a chance to go positive in the 2nd quarter in sales, slightly positive. It will be everything has to move right.
But last quarter, I would never say that to you. Right now, it looks like that case and things have to go the right way. But overall, the direction and the trend lines of this cycle feel pretty well understood at this point in time and we're managing around that. And we're having to really allocate a lot of resources because we have businesses within Lal's business who are up 20%, like in life sciences or in power, he's very strong. And Bob's got businesses too that are growing right now.
So we're having to move resources around and we're having to be very careful relative to our plant restructuring and modernization as we see this trend line change. And it's very interesting. I've been around a long time, as you all know, as CEO and at Emerson, I've never seen a cycle quite like this where we've had sudden surges in certain pieces and other pieces drop off. So it's really by being together as a management team day to day and looking at each other eyeball and eyeball, no spitting, but just eyeball to eyeball, we have a chance to actually manage this very well and I feel good about it. So what I'd like to do is turn to Lal first and give a little bit of update on your chart relative to see where your underlying growth in China and what you see as your point of inflection right now.
But I think he feels very good about what's happening.
I do, I do, David. I think you said it correctly. And I think what you said generally applies to the automation markets and in our sales performance over the next six quarters. But essentially, the story for us in Q4 is going to be stabilization of the book to ship order environment in North America and backlog execution. Consistent with the plan that we shared with you last quarter, we have to execute about $300,000,000 of backlog in the quarter.
The good news there is that in the month of July, we took $96,000,000 of backlog out. So we're well on that path, but it works to do in August September. That land is somewhere in the 10% to 12% down range. The offsetting there is the book to ship. And then we see an additional 2 challenging quarters.
We have a shot to get flat in Q2 depending, as David described, how things swing on the order environment. But clearly, we see a positivity in the second half of the year on a global basis. Both on orders and sales, Dave.
One of the interesting things Lal showed today to the Board, just give you information, you had 5 customers you did a lot of work around looking at the trend lines of cars where you can pick up trend line of cars, some of these are going to factory. Factories are operating at 30%, 40% levels and that you can directly correlate that to our sales of those individual factories, which was pretty interesting insight that you shared with the Board.
Yes, sir. We used the Google Mobility data and plotted it against our daily order run rates in North America, and it clearly is a linear relationship there, particularly as people are just not being they've been working from home and folks aren't in the plants to place PLs and that kind of stuff. So we need those folks to get back in the plants clearly, particularly here in North America. On the bottom of the chart, we've got China, which was a tough story, down 21% in the second quarter, but came back very strongly for us in Q3. We see good activity broadly in China.
Orders on a destination basis were also positive in the quarter in China. So we see some good momentum there on the order rates. The sales comparisons get very, very challenging in Q4, which is why you see that 2% to 5% down range for us in the Q4. It's nothing more than just an incredibly tough comparison to Q4 last year, which is a record on just about every measure for us in China. You'll still be a very strong number to execute within that range.
In China, sales year to date positive, which is helping us. And then we see an environment that's positive as we go through fiscal 2021. I'll turn it to Bob.
Bob, why don't you give an update on what you see unfolding the quarterly sales at this point in time?
Okay.
So again, you can see that Q3, we ended up coming in at down 19%. Right now, the fiscal year guidance has been updated to 8% to 10%. So, if you do that math, that puts us in probably in the 5 to 11 range for Q4. So, if things keep going the way they're going, we do feel like there's some potential upside. Again, June July single month orders were a bit stronger.
Part of that, again, I think is catch up on April May. We're much lower than 2019 down. And then and there actually we have a small amount of long cycle business. We do gas compression for recovery in like landfills and digesters and farms and such for green activity and that's actually pretty strong right now. So that will give us some projects for 2021 as well.
So, you can see right now, Q1 down, Q2 right now is a bit hard to tell. We expect Asia and DIY kind of strength to be kind of leading us out, if you will. And then the other stuff should come in broadly certainly in Q3, especially with the comp we'll have against this year. So again, feeling 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.
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 hitting Q2 was very dramatic in terms of the hit. Q3 came in down 9%. 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 will probably go sideways a little bit for a while here. And then certainly again as we get into Q2 with the comparisons should be good. And then outside of China, the rest of Asia is a bit of a factor too in terms of the total numbers. And hopefully, if we get the U. S.
Strength we're looking at in China,
we should follow the line with those. Yes. Thank you. Appreciate that. If you go to the next chart, one of the things we wanted to do is lay out and give you the detail by the first half, second half, what we call the reset restructuring.
I want to make sure the whole total program is well understood, both what's in it, what's going to be moved around both this year and next year. Also, we 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 to this year, it's worth about $150,000,000 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 $95,000,000 This year we are spending around $300,000,000 I believe that's up a tad from the last time we talked. And we're looking at $125,000,000 which is 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 and the reset program in the first half was $75,000,000 In the second half, it's going to be $145,000,000 And if you go into next year, it's going to be $210,000,000 in total. So 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 that are going on right now at the facility levels around the world, which take longer to get done. But overall, our payback, our costs, total programs may be around $500 plus 1,000,000 of restructuring and we'll have over $500,000,000 of savings from the reset programs, ignoring the COVID related areas. On the chart, you can see we talk about as you look at, we want to give you an estimate we see as business does come back, it's a function of how fast business comes back, how fast we can travel again and what we can do.
But right now, our best estimate is we have $150,000,000 savings this year from COVID related, $70,000,000 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 and L. It will be a headwind for us. But right now, our best guess at this point in time is 70 to 150 will flow back in over time in 202021. 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 and L next year.
But it's our best guess at this point in time as we look at it. But I wanted to make sure you had a distinction between the reset cost reduction programs, which are really well done by the global organizations, both the Lal's side and Bob's side and also corporate and then also what we see going on the COVID related. So you've got a lot of detail there and you can track everything that's going on at this point in time. But I think it's necessary for you to understand what's going on and a lot of hard work. When I look at what the organization got done from a profitability standpoint this quarter, they really it really paid off all the work we did last year as we started, as we continue to go forward.
Our margins, our cash flow is better. It's allowing us to stay on track relative to the savings despite sales being down as hard as they are at this point in time. So I feel as we look at the next couple of months, the next, let's say, next 3, 4, 5, 6 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.
But we want to make sure that we are serving our customers and we're making sure we support our customers around the world as they go forward. But the organization on a global basis of how to do a lot of things without a day to day contact with leaders, I guarantee none of the leaders at the OC level have been able to travel into Europe. We've not been into Asia. We've not been to Latin America. I am starting I am traveling I am traveling in North America as is Lal and Bob.
And we're doing site reviews, we're getting out. We're actually the first time I got to walk a factory, it's the first time I really felt safe walking to a factory. One, I didn't want to contaminate people in the factory or them can contaminate me. But we walked into a couple of factories here recently. This is important.
Our people want to see, in fact, I've been 3 factories now in the last couple of weeks. The people want to see us and we're out. It's important to go out for what they're doing in the factories today is not easy. And I really want to make sure they understand how much we appreciate that, what they're doing. But that's where we sit.
We feel good about it. It was a great quarter execution. I want to thank the team. They did a phenomenal job. I want to thank the OCE for standing by me, coming in the office every day, even though they may not want to go in the office every day, but 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 and now we see the trend lines coming our way and Bob's business first and Lal will follow second. And I feel good about where we sit right now overall. And let's turn the open the floor for Q and A and let's go from there. Thank you very much.
We will now begin the question and answer session. 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. So hopefully you can hear me with the backup generator running with an Emerson transfer switch by the way
as I I remember. Yes, that's good to hear. We had a little damage down in North Carolina. I came through last night from 9 till 1 o'clock in the morning. That thing moved fast, it's all the way up to you.
It's one through Southern North Carolina where we have our place. So go ahead. What do you want to know, Scott?
I have a tree through
my roof. So I've got a problem I got to
deal with after this call. But Well, if I talk, Richard Vax go to Home Depot, we will ship them out to you and we will put it in the quarter.
Well, I just bought one of your in sync raters. There's a shortage of those things out there,
by the way. I'm sure you know that.
Yes, we do know that. Thank you very much for that nice comment. So hard to
we're working on an issue. Yes. Hot topic.
Dave, just to think about your own business, the guidance on the restructuring is great, but what else changes as you think about when you get into 2021? I mean, your own capital spending, cash flow probably isn't quite as easy. I mean, 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. So I think we're forecasting around $550,000,000 I think we'll probably be a little lower. The reason for that is the inability to travel and get to the projects and get them organized. And those are very important projects. There's a lot of automation work going on right now.
We have the plant repositioning, but what we want to do is use automation now because of the whole COVID situation and distancing and trying to get the production out of the facilities. We're going to be putting a lot more automation into these facilities as we relay them out. So I would say our capital spending will be a little bit higher next year. But 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. And I think that I would expect capital to be coming up as we go into automate the facilities, as we have several new facilities underway.
So I would say overall, betting man right now, slightly less than $550,000,000 capital this year. Next year number will be have a 6 in front of it, in my opinion. And could be 600 or 601, 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 4th quarter. Sequentially we're going to have a stronger 4th to 1st 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 where we have more receivables. So our balance sheet, which we've been liquidating a little bit this year, will be a headwind for us next year. And those things we know and we're obviously working on that right now. But I would say that we'll generate the cash. We'll be more than 100% free cash flow to earnings, but it will be a little bit tougher next year because of the growth, which is a good thing to have, growth in the balance sheet.
So that's how I see it right now, Scott. Okay,
helpful. And then, Dave, I think I know the answer to this, but I want to hear your view. I mean, what is your lowest visibility end market? Is it still oil and gas? Is there any hope at all in finding a bottom there?
Yes. I think I will let I am going to answer first and I will let Lal answer first. I would say the toughest visible market is North America oil and gas, North America oil and gas. And I think we're starting to see some of the formation 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. And that will be the toughest issue. We are not seeing it yet, and we track this up day to day to day. But this market has not turned up in the month of July like the rest of the markets that Lal saw. So I think that's what we see.
I think that will be well into 2021, but I wouldn't be surprised if MRO or KOB 3 business doesn't pop at some point in time, it's so low at this point. Bilal, what's your feeling on that?
No, I couldn't agree more, David. I think you've said it. We're going to be through 2021. But clearly, there are traditional roles in the oil and gas market that are being impacted and some are disappearing as a result of this. Correct.
And interestingly enough, and you touched on it, David. And for Scott, this virus has been a catalyst for adoption of automation in the oil and gas industry. And we're seeing operations as decisions in spending occurs. Yes. Equipment and we see that
being a great demand as they automate their facility. So there's a lot of equipment and we see that being a great demand as they automate their facility. So there's an upside to this. We just got to get through it. And I feel good about where we are right now.
I mean, Lal's business is going through this trend. He is 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.
And not only worry about their families, but worrying about getting sick and worrying about the customer. And the big decision right now for North America, Scott, to be very honest, the OC, because the OC gets together several times a week now, is this whole school thing. We got a situation where we have a lot of young parents, single parents, 2 parents, 2 parents working, single home parents with kids. And what are we going to how are we going to help them get through this school thing? Where our schools, our government tax dollars are not helping us here.
And so business has to pick this up and that's an important decision because we're not going to leave, let our kids get hurt again in this environment. And that's a tough call that we're all making right now, 1 on 1, looking at each other in the mirror, let's be honest. So with that, Scott, thank you very much.
Thank you. Good luck, Dave. Good luck, Dave, team.
See you.
Our next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.
Thanks, Zach. Good afternoon, everyone.
Good afternoon, Joe.
Dave, first question for you. Just thinking about your guidance for the 4th quarter, specifically as early as to Commercial and 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 early July. So 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 negative or some positive COVID in your plant. All these different things are working through us right now. And Bob and his team had the challenge of actually trying to improve output in an environment that where workers can be troublesome for us at this point in time. 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. But 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 $250,000,000 $300,000,000 from 3rd to 4th quarter. This year, we're going to do 500.
We're going to do 500. So we could be doubling our sequential growth rate from quarter to quarter, which is something that with the plants just getting ramped down, ramped back up is a challenge. But I think I feel optimistic about that. I think Lal will have the plants is the question is, can he get the book to ship and can he get the backlog out, which so far he's done reasonably well in July. Bob, any comment you want to add in color on that from that standpoint?
I'd just say right now, there's a lot of bull whipping or whipsaw kind of stuff going on right now. There's a sell through. Distribution has been in very different states. E commerce is going gangbusters. The big box are doing very well.
You've got a lot of professional distribution that has had branches closed for an extended period of time. OEMs just like us have got challenges at times with plants and absenteeism and other issues. So it's just there's a lot of noise in the system right now. Certainly, the June July orders are very encouraging. We're working our S and OP, our operating plans to be able to work that, as you mentioned.
There can be challenges in some areas like disposer inventory and including the distribution linkages of our customers. So, again, June July orders, no question, very encouraging. Pretty broad reporting, I think, in the HVAC on residential being very strong, commercial still being difficult, refrigeration still being quite difficult with food service in particular. We're seeing the same kind of thing. So, I think we're given and again, it's a bit of a range for a quarter, I suppose, for us to be talking about anywhere from 5 to 11 or so.
We're already in the quarter, but it's just emblematic of what's going on right now. Yes. Great.
Joe, anything else you want to ask?
Yes. 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 detrimental margins back into the 20s by the Q4. So expecting a little bit better growth out of Bob's business, but a little worse growth at Lal's business.
So be curious for both of them on your ability to get there in 4Q?
I think we did it in the Q3. I feel very good that we'll do it again in the Q4. 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. But I think right now, our cost controls, our reset programs, we got great restructuring done in the 3rd quarter. Obviously, the COVID I mean, I feel very good that we'll be in the 20s again in the Q4.
I think mean we had several down plant days in April May either are caused by us or caused by perhaps customers not being able to take anything. There's a lot of disruption in Q3 and a good amount of that clearing out.
And you had we both had plants in Mexico that we're paying people to stay home because the government asked us to make these people stay home because they potentially could could risk. So we are paying people to stay home.
Yes. And clearly, we've had the impact of the heart restructuring that we went after very hard. Now a year into the program, as you highlighted, David, we do have a step up in volume sequentially, Q3 to Q4, which will also help, but we did hit those low 20 decrementals in Q3 already. So we're there. And I think we've got no reason to believe that won't hold as we execute for it.
So I think the one thing I'd be worried about of all the stuff, to be honest, Joe, is the supply chain. As we start now ramping up here in the Q4, can our supply chain keep up within our gold base? And there's a lot of work going on that. And we've been working on it now for 2 months because we knew this was coming at us. And so we've been getting ready for it for 2 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, you don't cut out.
Do you have a tree in your house?
Do you have a tree in your house?
I don't have a tree in the house. So things are looking up. So thanks for all the color on Slide 22. Just thinking about that $140,000,000 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. We fundamentally we see that we're going to have a little bit different environment next year. I think pricing will be tougher and therefore the net material inflation is going to be the key issue for us. So pricing will be tougher.
That will be in the red And then therefore, we need to have positive net material inflation. This is not something that we didn't expect. We expected this to happen. I know both Bob's business, the corporate organization and 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.
So right now, I think we're in pretty good shape. I feel good about the balance. I feel good about that $140,000,000 number that we talked about there. So, there's nothing really causing a big issue for us at this point in time. But the plan right now, I'd say, is a little bit red built into the plan.
And I think that we're really working hard to net material inflation at this point in time without stressing our supply chain too much because of what we got to expect in the Q4 and in the Q1. One of the things you are going to see this year, which is a little bit different, two things from the 4th to 1st, John, for companies thinking about this. So 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. So our customers are not going to be going and saying let's pull into the quarter.
They're going to be pushing. So we're going to that's one thing you're going to see. Secondly, sequentially from 4th to 1st, I think you're going to see consistent demand improvement in Bob's business and so inventory will continue to be flowing into the channel, which normally we would not be seeing. So those two things would say that we'd have a better better first fiscal quarter or 4th calendar quarter because the trend line is what happened to us in the shock in the middle of the year. So there's a lot of things that we're putting on the table right now relative to our own planning, both in sales and also the S and OP, the manufacturing, because we know there's a moving parts relative to the way our customer is going to deal with this.
And but right now, I feel good about the price cost. I feel good about our savings and just got to keep managing it day to day.
Great. Thanks. And then 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, but 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 has 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. So why don't you tell them how year to date KOB 3 looks versus KOB 2 and KOB 1? Yes, clearly. I mean, it's kind of business, but people don't know.
It's kind of business
3, which is KOB 3 being
the MRO, the small order size is 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 are being issued. Part of it is a reflection of deferments in the larger capital modernization projects. So we're sitting north of 60% as we close the quarter.
We don't have the exact numbers yet. There's a little bit of a systems work that needs to be done for us to have the final, final number. But we'll be north of 60% KOB 3, which is over 5 point improvement where we finished, I believe Last year. Last year. So it's definitely moved that way, John.
But the fact of the matter is there's less of it. Yes. But the pie, the percentage has increased.
So one of the key issues here that we are tracking is very tight on and particularly going back to I think Joe's question on the North America oil
and gas.
What we're watching very carefully is the order intake on a daily basis. This is important to us, in particular in North America, because that's where we're going to see the KOB 3 pop back up first. When you're running a factory at 30%, 40% with people in it, you're not doing much. But that's what we're watching because when that rate comes up, I mean, it makes that tells us the short term stuff starting to kick in and our KOB 3 would be very good and it helps our profitability. And we'd like to see some of that in Q4.
We're not banking a lot in the 4th. We see it more in the first. But it sure would be a nice thing to have for us in the 4th because that would give us better leverage and better margins and better cash.
And maybe just a little color on that, David, in terms of North America specifically through May and June, across our short cycle businesses, the number of physical POs that we received was actually equal to last year's.
That's a good sign. It's a good sign.
However, the quantity of units within each PO dropped. And that's reflected in that sequential or daily order drop, both of the 20,000,000 a day to the 15,000,000 a day.
So that's what we are watching.
So that's what
we are watching, John. And we have that in detail because we can tell you very quickly when this thing is are going to turn. I mean, you could smell Bob's business. Like 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 common.
Yes. And then just on the other hand, we have not seen any decremental pricing on KOB3 through this. The price has held and it continues to be very strong.
Yes. And project wise, since we're at KOB 3, KOB 1, you've seen some push out, some cancellations, a lot of new stuff?
Yes, David, honestly, we've had some wins. We booked a significant amount as we went through the quarter. We've also seen some deferments on KOB1.
So there's not been a lot of movement in the bubbles or the pipeline. But we do know that we're going to be living off as KOB 3 and KOB 2 here for the next, I would say, next 18 months because the projects are going to be smaller. And we're doing a lot of refresh right now with a lot of inputs and I think we'll give you more input as the next quarter, because there's not enough movement right now and even to say it's changed that much, but it's clearly there's influx right now, but we don't 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 pad. Our backlog right now is still holding right in there, which is pretty good.
It's not being canceled. It's holding right in. Next question. John, do you have another question?
No. I'll pass the baton. Thank you.
Thank you very much, John. And hopefully no tree will fall on top of you.
Our next question comes from Andy Kaplowitz with Citigroup. Please go ahead.
Dave, good afternoon. Good afternoon, Andy. Good to hear from you.
Are you in the storm too?
I'm in the storm too, backup generation, no tree. So we all feel for Scott. We know how that is. Hopefully, things get better for him soon. So how are you doing?
Yes. I'm doing pretty well. We are not having a storm here. It's kind of cloudy, but it's quite pleasant, to be honest. I'd like it to be a little warmer.
We'll let the East Coast get all the rain. Let you guys have all that fun.
Yes. Thanks for that. So look, you see 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, but you also talked, Dave, to a lot of customers. And what we hear from other CEOs is that confidence is pretty mediocre out there.
So maybe you could tell us sort of the conversations you're having. And are you hearing more confidence out of the customers you're talking to despite the concerns around the infection resurgence that we have seen?
The answer is yes. First of all, we did put a forecast out there, Andy, and we did hit our forecast from April 24. And so I had enough confidence to put our neck out there in the line and we hit it and we actually did a little bit better. Yes, we've had conversations. We are seeing the market around the world.
I would say the more cautious markets on the industrial side is the U. S. But as you look into Europe, as you look into the Middle East, as you look into Asia, China, we are seeing those markets, there's a lot more confidence of the incremental spending and we are seeing that business get a little bit better. And so that's why we feel reasonably confident. Now we're not changing much of our forecast from what we laid out in April relative to the Q4.
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 balance is coming back after it's down 20%, 30%, 40% in those some of those months. So 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 and the turn on Lal's business is a little bit different based on North America oil and gas. But I think we have enough confidence and enough, I would say, conservatives in the underlying sales forecast that are going to strike right now based
on what we're hearing from our customers that
we can say that. And that's how and we're very in tune to our customers right now. We're out talking to them. We're out visiting them. And so Lal, I mean anything you want to add there?
Yes. Thanks, David. We myself and the leadership team that has been engaged in this, we've zoomed our way into many customer rooms and participated in many meetings. Starting really in the mid May to early June timeframe, our sales people start to get out and see customers again. Obviously, our service people have been engaged throughout the crisis, engaged in plants.
And so the projection really hasn't changed and the sentiment from the customer base hasn't changed a whole lot, Andy. There's conservatism and concern in oil and gas, as David described, but there's optimism in medical and life sciences, in food and beverage and power, but we're having a record year in North America power. So it's a bit of a mixed bag there. But oil and gas really is where we're concerned, but that's no different than what we spoke about on April 24.
Being so broad industry, we have a lot of industries doing better than other industries from that standpoint. And Bob said it right, I mean, they cut back so rapidly in Bob's business between inventory and shutdown, couldn't make stuff that we knew there was going to be a sharp bounce at some point in time. And that's what we're seeing right now. The question is, is this sustainable and can we produce? And so that's where we see revenue.
That's very
helpful, guys. That's helpful, Dave. And let
me just ask you specifically then about China because you know that region very well as well. There always seems to be some stimulus tailwinds. You do have some geopolitical issues to deal with. And some people think improvement in production is ahead of demand, but it seems like it's picked up for you guys. So what's the outlook for you initially as we go into 'twenty one in China?
I think the what we're seeing right now is Lal's business is in a broad basis is pretty good. And so I think he's going to see a pretty strong high single digit growth as we go into 2021. The wild card for us is Bob's business, because the consumer in China has really pulled back in some of the programs. And 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. But so the movement is starting to happen and that will be a big impact for Bob as that starts happening. So we're waiting for a consistent improvement. I don't know what you saw in June July, Bob, out of China, but he's being cautious at first. He does know he'll start getting easy comparisons, but what I'm trying to see is the underlying demand.
So are you seeing any sense of improvement from your standpoint of China?
That is going. It's in the high single digit decline right now, 5 to 10 down. Again, the orders have been bouncy. We've gotten some bright spots at times and then it flips. Like you said, I think on the commercial side, there's a lot of stimulus programs that are being worked.
But then on the consumer side, including housing, purchasing and everything, people are being very cautious, just like U. S. Savings rate and everything. Yes.
So 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. I mean, will he be a 0 or will he be a 10 plus? And so that will be the wild card for Bob next year in China. But my gut tells me that spending will start coming as they see some stability in the consumer and some travel and investments.
But we're in pretty good shape right there right now.
Yes.
The picture we laid out in 'twenty one is China gets positive in Q2 and stays positive. But again, the magnitude is hard to say.
So Yes, 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.
So a couple of questions. Could you just talk about how you guys are doing in automation solutions relative to your peers? Do you think it's an opportunity to take market share? I think some of your competitors had some reorg. How is the market share trending in this downturn?
It's pretty hard. We've got 1 quarter under it right now or 2 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 we would if you think about the combination of our Final Control and V and 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. So I would say on that side of the business, we're winning. I just had a site review with them and I like both of them.
We're making technology investments. On the systems side, I'd say we're doing pretty well. We had systems this quarter, which we didn't is not in there, but our systems were up for the quarter. What were we up overall? Actually, we were down sales for the quarter.
Okay. 7%,
but compared to the down 11% to 15% on peers.
Okay. So we're down 7% overall. Okay. So we had a decent quarter in systems. I think in instrumentation, not much movement in that thing from that perspective.
So overall, in a quarter, I feel good about where we are, but I'm thinking about the next 2 or 3, 4 quarters. I think we are well positioned. The key issue for us, Andrew, is the execution around the plant moves right now. The technology moves are pretty good, but the plant moves because that's how we lose share if we're not able to deliver. So the key issue for me right now, if we continue to invest and get the plant moves done, then as the economy gets better, I would say we're going to have a good move in the downturn
and we'll pick up share.
But 1 quarter is a good sign, but we got several quarters more to go, but I like where we sit at this point.
And then to add on to your power systems on the power side with Ovation, that's been a phenomenal quarter and they were positive.
They were positive. They were positive. That's right. They were positive. I got the wrong one.
Okay. Next one, Andrew?
Yes. Just a follow-up on facility moves. Can you just give us more color? I mean, you had a head start on everybody else because you announced your program several months before that. But what are the challenges of moving facilities in the midst of COVID and this huge sort of whipsaw effect in terms of manufacturing?
And how have And
we've moved some plans in and out And we've moved some plans in and out based on the areas of where we can get people in and out. One of the problems we will face is that we're not able to fly resources around the world right now, so we're going to depend on our local resources both in Latin America or Asia or in Europe and typically we would be flying resources around. But from our standpoint, we planned so that they're going to take a little longer, Andrew. And we have had a couple from the standpoint we might have moved a month or 2. One is we work with the government and also 2 relative to resources.
So on average, I would say they're on track. We've had a couple of slippage, but I think we've planned in this COVID thing was something we knew was coming at us. And so as we finalize the plans and we start moving these plans, we have that pretty well in shape at this point in time. The big issue we would face, Andrew, to be all honest, if we had a huge breakout of COVID and say certain parts of the region we have a plant going into, that would clearly slow us down. Fortunately, knock on wood, we have not had that yet, but that's something we actually reviewed with the Board today, the more 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. But so far, the teams around the world have done a great job and I expect them to execute on them and I feel good about it. And if I could just squeeze one more,
it does line up with your industrial orders. Is that a fair statement?
If I may, David. Yes, go ahead. The Google Mobility data, what we did, Andrew, is we took we segmented purely the commuting hours. It's North America data only. Obviously, as you know, that data is an opt in location tracking data, the location services data offering the Google phones.
But it does track very well to daily bookings in North America. Yes. You got to pick
the location, facilities and cities. And so that's what these guys we know where the facilities are, we know the customers, And it does seem to track pretty well.
Yes. I just wanted to clarify. Thank you so much.
Yes. It's nice that people are monitoring all of this right now. So I go back and forth to work. It makes me feel real good. Not.
Okay. Okay. Next question, please.
Our next question comes from Steve Tusa with JPMorgan. Please go ahead.
Mr. Tusa. Hey, guys. Are you safe someplace in New York or?
I don't really ever feel safe. So it's all relative, I guess.
Well, I thought I heard there was a person on the Mars Rover side. I thought maybe that was good. Maybe you, because I would think that you would like to do that, go in that Mars Rover thing that's been shot off last week.
Yes, I think it's probably I'd probably do better up there than on this planet right now. Not sure what planet I'm on these days. Anyway,
what was 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 costs will be slightly positive. I mean these guys are looking at the chart right now. Frank would be the key for this. It would be less than one percent, I mean, less than 1.
We've had, obviously with a good net material inflation and we had pricing set in earlier on and I think that that will cause us to have to get some of it back next year.
Our second half is in the half to a full point positive.
Yes. So overall, Steve, I think it'd be less than 1% positive for the year. Yes, less than 1%.
But I mean, but that's price or price cost?
That's price cost.
I think you guys said like a 100 okay, got it, got it. So 1% on the margin front is
what you're saying? Yes. Yes. Okay.
So I think we're tracking pretty well right where we said to you at the beginning of the year.
Yes. So and then just on this CR and S business, I mean, these OEMs are obviously talking about like eye popping order numbers here in June July, some guys up like 50%. Are you guys like is there you're basically saying you guys are having kind of like fulfillment issues? And then beyond that, I guess, into the kind of back part of the year, into the kind of the calendar Q4, 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 have to stay cool to a market in the Q4 that kind of recouples more to the fundamentals of the consumer?
In other words, high unemployment and weak consumer confidence. I mean, is that kind of is that what's on the board right now as far as the variables you're looking at? Or is that the wrong way to look at it?
We're going to part
of the popping now is April was pretty dramatic the other direction. On a dollar basis, our June orders for HVAC in North America were 2x what they were in April. And I think our customers have talked about it. We've talked about it where there were a number of plants down and sometimes for as much as a couple of weeks. Our customers and then even us in April, as we first kind of learned how to deal with the first COVID incidents inside and cleaning and other things like that.
Again, part of this is a makeup. I think the I mean, you write the reports, I read the reports. Distribution has gotten very thin. There's a lot of examples of wholesalers and others considering other brands because one particular supplier can't do it. We supply them all, so we see that dynamic play out.
And so it's very strong right now. I think there's a bit of a pent up both of getting the channel back established as well as certainly the sell through with the heat in June July. About 35% or so of the units are heat pump units, so they are relevant for the wintertime as well. And you got a lot of people sitting at home and frankly sitting out a decent amount of cash with the unemployment benefits, which is probably not skewed to homeowners exactly. So bottom line is, I think the market I don't think there's a reason this won't stay pretty strong through the season.
And also to get the channel in play in step for coming out of the season. It's really thin right now.
So 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, when I we're shipping right now, we're keeping up with them. It's a strong demand, we're keeping up with them. The big issue to us is clearly, if all of a sudden you had an outbreak in where our plants are located and their plants are located, a supply chain disruption. Right now, we went from basically not producing much to full out to what you're talking about.
And so that's where we are at this point in time. We are able to keep up with them and we're working it pretty hard. And the key issue for us is we've got to keep those plants running and we've got to keep the plants running safely. It's one thing to run a plant full out when you're non COVID environment. When you have COVID environment, you have to be very, very careful to not stress the workforce and also to have something get in there and create an environment where you have half the plant come down with COVID.
So 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 customers level and our level. So this is something I feel the demand is there and we're going to see it for the next couple of quarters and we'll keep going at it. And someone said the housing market is going to be pretty good and so we're going to see construction and things like that and repair. Just we just got to keep the plants running and the supply chain going, which I right now we are.
One last one for you, just on software. I don't even know if you guys track kind of software sales outside of
pretend to
be pretend to be a software company like some others do. But are you seeing growth in those areas? Or is that just kind of like in that systems and services bucket on the automation side?
Yes.
No, as we spoke about in New York, the software business is predominantly in the systems side, although we do have a significant and growing amount of software that's outside of that that sits in our digital transformation business. The software within systems is closely tied to Ovation and Delta V that's embedded in there. The standalone software packages, albeit smaller in scale, over $500,000,000 in size already today, continue to grow. They continue to grow not at the rate that we expected, obviously, back in New York, but it continued to be positive there. And it continues to be very interesting Sorry,
did you say $500,000,000 for that business?
Yes, the standalone software. Yes, dollars 500,000,000 dollars 500,000,000
Yes, you guys should like change your name to Emerson Technologies or something like that. Maybe you get some more attention around that business. All right. I appreciate it. Thanks guys.
Yes, break it out. Take care, Steve.
Our final question comes from Julian Mitchell with Barclays. Please go ahead.
Hi, good afternoon. Maybe just the first question, a ceiling on it for the past few months now. In general, you're seeing global M and A start to warm up again after a freeze. How are you thinking about acquisitions at this point?
So right now,
we're going to keep the hold
on the share 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 working that.
If we get into a period that we're not able to close acquisitions and we see obviously from a cash flow standpoint that we have the flexibility to do the share repurchase, we'll quickly go to that. But right now, as we talk to the Board, we're focusing pretty hard on some unique opportunities around the acquisition front that we'd like to get done here in the next quarter or so. So that's what we're looking at. But if they don't happen, obviously, we generate cash, then we'll look at again, reinstituting the share repurchase. Most likely, we will reinstitute the share repurchase in 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. So that's how we're looking at it, Julien.
Thanks. And then just a quick follow-up maybe for Lal on the Automation Solutions backlog. I think you'd said, Lal, 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. And so that suggests you're sort of pulling revenue down from that backlog into the P and L.
How do you think the backlog trends from here, let's say, the rest of this calendar year? Yes, sure, Julian. So what we're planning, it's embedded in the plan that I communicated to you is about a $300,000,000 take down in backlog. So it pays 4.8, 4.8 on a fixed rate basis or capital for currency, 4,800,000,000 dollars at the end of September.
Which is a normal trend for us.
It's a normal trend. We took $96,000,000 out in the month of July. So we're well on that path over the next 2 months, Julian.
Yes. So this is pretty I mean, it is going pretty well. The orders are pretty well holding up there. The project business is going in there and it's not cancellation. So our backlog is holding in there nicely.
And in particularly around final control in the systems, they're executing the backlog and that's a good sign for us. And I think that's going to hold it will start building again as we go into next year. But this
is I think Good execution in the plants.
Yes. The plants are up and running well right now. I'm more worried about some of Bob's business. Bob has had some businesses that have been jerked around. When you go minus 40 to plus 20, that's pretty tough to do in a plant level, especially if you've got COVID floating around out there.
And so that's the concern we have with Bob. But overall, I think that as I wrap up here, I want to again, I want to thank everyone joining us today. Again, I want to thank everybody out there across Emerson who worked so hard to make this quarter happen. We delivered a quarter we laid out. We were one of the few companies that laid it out.
As we did, we delivered it. We did better job execution around the cash flow and the earnings. And I feel very confident that we are well structured to go through this final quarter and really have a good rest of this calendar year, which would be our Q1 too. And so, 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. So I feel good where we sit today.
Earnings, cash and momentum is on our side. Organization is pretty strong. And so I look forward to a good finish to the year and we'll go forward with that. And I appreciate everyone joining us today. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.