Welcome to the call. I'd like to turn the call over to Pete Lilly, Investor Relations. Please go ahead.
Good morning, and thank you, and welcome, everyone, to Emerson's Q2 2020 earnings conference call. I hope everyone is staying safe and healthy. Today, I am joined by David Farr, Chairman and Chief Executive Officer Frank Della Coa, Senior Executive Vice President and Chief Financial Officer Mike Train, Emerson President Lal Carstenvai, Executive President of Automation Solutions Bob Sharp, Executive President of Commercial and Residential Solutions and we're also joined by a special guest, President of Professional Tools Business in Europe, Mr. Tim Reeves, who is unfortunately still stuck in the United States. And before we begin, I'll turn it over to Mr.
David Farr for some opening remarks.
Thank you very much, Pete, and I want to welcome everyone here. For your information, we are sitting in my conference room, properly spread out. And we have been operating Emerson has been open throughout this whole process. We made the decision as OCE on March 10 when I came back from a conference in New York when I was presenting at JPMorgan. So the only CEO showed up.
And so I made the decision with the OCE to stay open. We have the OCE here every day. We're properly spread out, as you guys know, in this office complex. We also have about 15 other executives throughout the floor. We get together on an ongoing basis to make sure we're making decisions, constantly making decisions.
We shut the rest of the salaried workforce down and send them home. They're working from home. But it was I felt it was very important with this crisis that we were here live and we can make quick decisions and deal with the issues very, very quickly, both from a structural standpoint but also from a competitive standpoint to look at opportunities to keep winning as a company. The opening slide I want to share with you, Honeywell has been involved with making masks. They have a plant running up in Rhode Island.
They have a plant new plant coming up in Arizona. We worked very closely with Honeywell. Darius and I talked several times on this issue to make sure they got equipment. We reallocated. Branson makes welding equipment that makes the mask around the world and testing equipment.
And so this is currently the facility in Rhode Island. We took a picture up with our equipment and the Honeywell mask, and we've this is where CEOs around the world, what I call frenemies, work very closely together to get things done for the nation and for the world. And I just wanted to make comments to that because this is a situation where Honeywell and I are working together to do something right for America and not necessarily beaten up on something else. So I want to turn it back over to Pete. But again, here we're sitting here.
We're properly spread out. Tim is holding my Raleigh monkey and my STAM usual bat and making sure that it doesn't get coronavirus. So with that, Pete, it's all yours.
Thanks, Dave. As usual, I encourage everyone to please follow along the slide presentation, which is available on our website. Moving to Slide 4 with the results of the quarter. Underlying sales growth was well below expectations, down 7%, driven by the dramatic drop in global demand as the COVID-nineteen pandemic quickly spread in March. Trailing 3 month orders were down 3%, also reflective of the decaying demand environment, but indicating some modest backlog buildup.
GAAP earnings per share were flat and adjusted earnings per share were up 7% to $0.89 driven primarily by lower stock compensation costs due to a lower stock price and aggressive restructuring actions started in Q3 of last year starting to take effect. Despite lower sales, both platforms executed well on profitability, exceeding their adjusted EBIT and adjusted EBITDA peak margin plans for the quarter due to previously initiated and ongoing restructuring actions. Automation Solutions underlying sales were down 8% and trailing 3 month orders were down 1%, also well below initial expectations due to the pandemic demand environment taking shape in March. Commercial and Residential Solutions underlying sales and orders were both down 5%. Cash flow performance was solid in the quarter, with operating cash flow of $588,000,000 and free cash flow of 477,000,000 dollars up 10% and 15%, respectively.
The business returned over $1,100,000,000 to shareholders, including over $800,000,000 in share repurchases and over $300,000,000 in dividends. Lastly, the company continued and built upon its aggressive cost reset plan, initiating $40,000,000 of restructuring actions in the quarter. Turning to Slide 5, we'll cover the P and L. 2nd quarter gross margin was flat at 42.1% as favorable price cost and cost containment actions offset the declining revenues. SG and A as a percent of sales decreased 130 basis points, reflective of the drop in stock compensation costs due to a lower share price.
Adjusted EBIT and adjusted EBITDA margins, which exclude restructuring and related costs, increased 240 basis points and 300 basis points, respectively. These improvements primarily reflected lower stock compensation costs combined with aggressive cost containment actions taking effect. Overall, the company continued to execute on peak margin plans, which were laid out at our February investor conference, in addition to responding quickly with additional actions as sales deteriorated in March and the economic outlook for the remainder of the year became increasingly challenging. Now turning to Slide 6. Geographically, we saw broad based weakness unfold in the quarter, but particularly in China and the U.
S, down 8% and over 20%, respectively. Europe, which finished down 2%, showed strength early in the quarter, which was quickly thwarted in March as the virus rapidly spread and most countries closed their borders. Please turn to Slide 7. Total segment adjusted EBIT margin increased 50 basis points to 17.6%, reflecting the aggressive cost control measures and strong operational execution as sales declined. Stock compensation costs decreased 97,000,000 dollars as the stock price moved dramatically lower in the quarter.
Q2 cash flow performance was solid. Operating cash flow increased by 10% to $588,000,000 and free cash flow increased by 15% to $477,000,000 representing 91% conversion. Trade working capital ended higher as a percentage of sales as ending inventory increased due to the sharp drop in demand in March. Turning to Slide 8, we will bridge 2nd quarter EPS. Working from our 2019 adjusted EPS of $0.83 you see that non operating tailwinds totaled $0.14 led by lower stock compensation due to a lower share price.
Operations declined $0.10 reflective of the volume declines due to COVID-nineteen, while share repurchases and lower interest costs delivered $0.02 Adjusted EPS finished at $0.89 In summary, non operating tailwinds were largely offset by the effect of COVID-nineteen on operations. Importantly, total segment adjusted EBIT increased by 50 basis points and total segment adjusted EBITDA increased by 120 basis points, reflecting just 9% deleverage on $400,000,000 of lower sales versus prior year. Now we will review the business platforms. Turning to Slide 10. Automation Solutions' underlying sales finished down 8% for the quarter as sharp declines in oil and gas more than offset some growth in life sciences and food and beverage.
The U. S. Dropped 12%, while China was down sharply over 20%. Trailing 3 month underlying orders were down 1%, driven by the early quarter relative strength of the longer cycle business, Final Control and Systems, which grew 3% 7%, respectively. Of note, backlog grew 3% to nearly $5,100,000,000 on a sequential basis compared to the last quarter.
The platform delivered strong profitability in a very challenging demand environment. 130 basis points, respectively, reflecting aggressive cost actions taking effect. Restructuring actions totaled $29,000,000 across the platform, which brought the total to $112,000,000 for the first half of the year. Turning to Slide 11. Commercial and Residential Solutions underlying sales were down 5%, also reflective of the deteriorating demand environment with COVID-nineteen.
North America dropped low single digits, while Europe dropped 1% as modest momentum in the heat pump business was more than offset by declines in the tool business. Asia, Middle East and Africa were down 15%, driven by China, which was down sharply over 30%. Trailing 3 month underlying orders were down 5% as each of the HVAC, cold chain and tools businesses were down mid single digits. Asia orders dropped 14%, driven by China, which dropped over 25%. Commercial and Residential Solutions also delivered strong profitability with adjusted EBIT and adjusted EBITDA up 40 basis points and 90 basis points, respectively.
This outcome was driven primarily by aggressive cost control, cost actions and favorable price cost dynamics. For the quarter, restructuring actions totaled $9,000,000 which brought the total figure to $19,000,000 for the first half. Turning to Slide 13, we will review the updated guidance. The speed and breadth of the impact of the COVID-nineteen outbreak has been truly unprecedented. As such, we see a very challenging demand environment, certainly for the remainder of the fiscal year and into the first half of next year.
Additionally, we assume that oil prices will stabilize in the $20 to $30 range per barrel. Later in the call, management will elaborate on our outlook in detail, but here is the summary. Based on conversations with customers, government officials, internal analysis and comparison to previous downturns, we now expect underlying sales to be down 9% to 7% and net sales to be down 11% to 9% for the year. Due to the deteriorating demand environment, we've increased restructuring spend to be approximately $280,000,000 with approximately $230,000,000 coming from the Automation Solutions platform and $45,000,000 coming from the Commercial and Residential Solutions platform. We now expect adjusted EPS in the range of 3 dollars to $3.20 a reduction of approximately 16% at the midpoint.
We expect operating cash flow to come in at approximately $2,750,000,000 and CapEx spending expectations have been decreased by $100,000,000 to $550,000,000 resulting in a free cash flow target of approximately $2,200,000,000 Lastly, our share repurchase program for the year is now complete at approximately $950,000,000 Please turn to Slide 14, which bridges our updated 2020 adjusted EPS guidance. The starting point for the bridge is 2019 GAAP EPS of $3.71 Walking across, we have 2019 adjusted EPS of $3.69 which excludes $0.14 of favorable discrete tax items and adds back $0.12 of restructuring. Now walking across from $3.69 we expect a total of $0.11 of headwinds this year for FX, stock comp and pension. Operational headwinds have dramatically increased. We have reduced our full year sales plan by approximately $1,800,000,000 from prior year, resulting in a $0.57 headwind.
We expect $0.09 of EPS from interest and share repurchase tailwinds. This gets us to a full year adjusted EPS midpoint of $3.10 Of note, since the major portfolio transformation of 2015 to 2016, Emerson has averaged 42% to 43% of full year estimate EPS by the end of the first half. This year, our first half adjusted EPS totals $1.56 which is approximately 50% of the full year EPS guidance, well ahead of normal pace. Please turn to Slide 15, which lays out our Q3 2020 guidance. The underlying sales outlook for the quarter is dramatically negative, reflecting near term challenges and an elongated recovery in industrial markets from the COVID-nineteen lockdown combined with low oil prices and associated spending reductions.
Underlying sales is expected to be down 16% to 13%. We expect adjusted EPS of $0.60 plus or minus $0.04 which excludes roughly $100,000,000 of planned restructuring actions in the quarter. We see total segment adjusted EBIT in the 15% to 15.5% range and adjusted EBITDA in the 20% to 20.5% range, reflective of aggressive cost control measures somewhat offsetting the reduction in volume. And now please turn to Slide 17. I will hand the call over to Mr.
Frank Dellaquila and Mr. Mike Train to discuss liquidity and operations.
Good morning, everybody. We wanted to spend just a few minutes here on liquidity to dispel any concerns anyone has. We're in really good shape, we believe. We never take this for granted. We're never complacent, but we believe we're in very, very strong position as we enter the downturn here.
We have the capacity to fund all of our internal needs and our dividend despite the fact that we, as you just saw, expect reduced operating cash flow over the next several quarters. We have a modest amount of leverage even in the downturn. It will be less than 2 times debt to EBITDA at year end on this plan. 65% of our total debt is term debt. And as a result, we have very good liquidity in our capital structure.
I'm looking here at Slide 17, just walking down those points. At March 31, we had $2,600,000,000 in cash, more than half of that is available on a same day or at most next day notice. So we're in very, very good shape if there should be a market disruption. And we also have a $3,500,000,000 revolver, which is not drawn and it's committed through April of 2023. We also have the right to extend it under the current terms and there are no financial covenants in the revolver.
So all in all, as we look at our ability to fund our needs short term and longer term, we feel like we are in very good shape. If you please turn to Slide 18, when when we began to see this coming in mid February, we started to extend maturities in the CP program. At first, that was difficult because the market was somewhat roiled. It improved when the Fed stepped in and announced a couple of programs to indirectly and directly support the commercial paper market. And as a result, over the last month and a half, we've been able to extend the CP maturities from about 20 days out to 45 days.
And included in that, we built a $1,000,000,000 cash buffer here in the United States, which we will revisit as we go through time here. And if we get comfortable that things are improving, we'll start to work that down. But for now, we think it's prudent to have that on the balance sheet, just in case that there should be a downward turn in market conditions. We're also evaluating the issuance of term debt. Credit spreads gapped out pretty significantly at the beginning of this crisis.
They've come in quite a bit since then and all in cost for term debt for investment grade companies are pretty attractive. So we are obviously looking at that now with a view toward injecting more liquidity into the capital structure. So you can see there on Chart 18 how the maturity profile of the CP plays out. And then finally on Chart 19, we've always maintained a very conservative debt ladder, always been very conscious of spreading out maturities. So you can see that we have a lot of places there where if we choose to issue term debt over the next month or so here, we can do that in size and still have a very conservative debt ladder as we hit the open spots between the towers that we have there.
So again, in sum, I think we're in very, very good shape regarding liquidity. We're going to watch it very closely, but we feel pretty good about our ability to do everything we need to do as we go through downturn.
Thank you. I asked Frank to talk to the shareholders this morning about this issue. Frank and his team, I have to give tremendous kudos to for accomplishing what they've done. They came to us in early February long basically saying we need to start taking action. Frank also worked very closely with the Finance Committee, the Chairman and several other members of the Finance Committee who are very knowledgeable of what's going on in the marketplace, and he structured this very well over the time.
We also had several executives we had an executive Board meeting to discuss this issue and other actions. And then we also last week, we pulled up our Board meeting and had a a board meeting with the Board. And then yesterday, we had the audit committee meeting. So we're trying to communicate to our Board to get their inputs. But most importantly, as I look at this, liquidity, the financial structure, the ability to finance this company and the times like this are very, very crucial.
And Frank and his team have done an outstanding job with that. Before Mike has a comment about the battles he's been fighting around the world, I want to remind people on Part DART 20 for the new sell side or investors out there. Emerson's had a very global regional strategy since back since the day I started running the company as a CEO back in 2000. And we've had this strategy where we look at the world on Americas, Europe and Asia Pacific. We go from manufacturing, engineering, supply chain, customer sales and support service.
And we look at ways, I call it the tic tac toe chart. We look at ways that we can serve the global marketplaces out of 1 or 2 and maybe even 3 of the regional areas. This has been one of our strategies from day 1. I also want to thank the audit committee and the work that so many our Head of Audit, Lisa Plavin, who runs audit for us here inside, work on our enterprise risk strategy, which analyzes this chart and making sure that it works and our and it has worked as we've gone through this strategy. We first tested it clearly in February early March with the China shutdown, and we've tested it again.
Now there are issues we'll deal with when we get out of this. But from my perspective, this whole regional strategy, one you hear now even the President of the United States talk about, is something that's been very effective for this company relative to serving our customers, and I want to make sure people remember that we have this. We will fine tune this a little bit when we come out of this because I see some different issues in today's world. But this is a living document that we've obviously adjusted over the years, including when we had too much concentration in China about 8 years ago. And many of you know that I started making moves with the team to move some production out of China and diversify it more around the world.
But again, I want to thank Frank and the work of the Finance Committee and then also want to thank the global operations. And I'll have more comments on this in a second. Before I turn it over to Mike, when we got the OCE together in early March, we formed many, many task force led by the OCE. It wasn't that one throat to choke here. We had everyone involved.
And one of the things that Mike stood up to do is dealing with the international markets, international governments and making sure that we can keep our facilities open, both from a manufacturing standpoint and sales operations and supply chain. And Mike has extremely broad and deep knowledge of the international markets. He's been working for pretty much his whole life here at Emerson. And so Mike has been leading this battle with the operating leaders at the same time, taking care of this battle. So Mike, I'm turning it over to you and update the shareholders on how we see it right now.
Yes. David, thank you. A pleasure to be with you here today. Just on that chart 20 before we leave that, I think Emerson's critical nature of the work we do and being able to be responsive and resilient in each of these regions is really, really important. So let's go to Chart 21.
If you recall, last time we were together was our investor meeting on February 13th. Our China operations were just getting restarted after a government mandate to be closed for 2 weeks. Early days were a bit rugged as suppliers took some time to get cleared to restart and there was quite a challenge on intra province and international logistics. This has significantly improved in the past month as we've seen our China business starting to come back in a stronger way. And I know Lal and Bob will provide some insights on that in a moment.
As the coronavirus began to make its way around the world, we saw challenges to our operational capability imposed by governments as they implemented various forms of stay home, shelter in place and lockdown orders. Emerson provides critical infrastructure products and essential services. With great effort, we've been able to gain government recognition and designation. China led to the South Korea and Italy impacts, which they moved along to France and Russia, Middle East and the Americas. It's been a highly dynamic environment and I must give our global Emerson team for likely listening into today's call, a big thank you for their collective efforts in working with customers, suppliers and governments to keep these critical industries running, running when it's needed most.
In the last weeks of March early April, we saw a multitude of states in the U. S. And multiple countries around the world implement these orders. We saw tens of thousands of our own employees leap into a work from home mode, and it's been amazing to watch the Emerson team deal with a sudden new reality and come through in every aspect. Not great timing from the end of a quarter perspective, but our clients on balance stayed up and running and we did our best to deliver to customers.
As we sit here today, we're still working some major issues. The India lockdown, which was recently extended to May 3rd, has proven exceptionally challenging as logistics and the ability to operate were shut down practically overnight. And we've worked now to get all of our plants designated critical and up and running to some extent. Things are now moving in the right direction, but we have several weeks to go before we really get back a solid place. We have worked closely with the government officials there and I appreciate their engagement.
In Europe, we went through some rough times in Italy, but things are much improved now. We're still working through some supplier issues and community sentiment in Europe. But again, directionally, things are going the right way. In the Americas, the USA has been incredibly interesting to navigate. I need to highlight the guidance that the Department of Homeland Security issued on critical infrastructure and essential services and with a few exceptions, our states and cities have aligned on guidance.
Right now, I'm spending my time on Mexico, where there's still significant efforts to manage the virus and I'm working to get alignment on critical infrastructure guidance both within Mexico and in concert with the U. S. And Canada. David, a lot of detail here for our investors, but hopefully this gives them a good snapshot of how the world's dealing with the virus and climbing its way back. I know we have some China conversation coming up, which may be important to thinking through how things play out over the next few quarters.
Again, to my Emerson colleagues, thanks for the tremendous effort and collaboration, really important as we keep food, medicines, energy, electricity, medical goods, everything else we touch flowing to our communities. Well, Mike, I want
to thank you very much for this issue. This is not easy. This is 24 hours a day, 7 days a week, day in and day out. Over the weekend, you and I were talking a lot. You were talking to various people, dealing with political leaders at all levels to make sure they understand the importance of this and then working very closely with hands in the hands of operations.
I also want to make a call out to Steve Pelch and the organization relative to the work they've done on safety and all the task force that we've rolled out with help of Bob and Lal and the other team around the world, knowing what's going on every day. We get reports around the world of what's happening with employees. If any of them have contracted the coronavirus, anyone has become tested positive, who's being isolated. Steve has organized this right now. He is now in the process of working with the HR teams and the global manufacturing teams to get the how
do we come back out
of this. On a measured way, in a safe way, how do we come back out of this operation and get everyone back to work and back into the buildings that we have from a salary standpoint and support our global manufacturing and technology. But Mike, in this area here, this is something that we've never had to realize before where we've had to work government at the highest level. This is where having those relationships that all of us have, everybody at this level and also times like this. But for the people out there, before I go into it, I want to make other comments.
You can imagine, we are fighting a global pandemic war. And given the CEO that runs this company, you guys know me pretty well, I firmly believe that leaders need to be at the front. We don't need to be hiding in bunkers or hiding at home. Leaders need to be at the front and fighting the war and winning this war. And I want to make sure that special recognition goes to the Board, who's been working with us very closely with special meetings, the OCE, the senior executives and all the world area people that have been engaged and are working this on the daily issues.
It's amazing what comes up on a daily basis, but being together allows us to walk down the hall, properly stay apart from each other other than every once in a while maybe screaming at somebody. So a little too close. But it's important that we have this eyeball to eyeball contact to deal with the issues. But again, the Board accelerated a Board meeting. They accelerated the review of the numbers, and the audit committee approved the numbers yesterday.
And we will be filing our Q hopefully by Friday at the latest on Monday. Also very important to all the employees around the world and customers is communications. And every one of us, myself and Bob and Lal and Steve and Mike, we've all had videos. I'm doing another set of videos today, as is Bob, I believe. We've had notes.
We've had letters, and we've communicated constantly to our employees so they know what's going on. It's important that they're not too worried about this because we are clearly in a war, and we've got to keep fighting this. So from my perspective also, I want to make one other comment. You'll see in the slide here on a conversation I had with the Executive Board a couple of weeks ago. We made a decision at the OC level that we at the Board level of the OC, we took a 15% base hour cut effective April 1, which is now in place.
We went to the next senior level executive levels, pretty high level all the way out, down to 10%. And then the rest of the global people involved on our bonus programs took a cut at 5%. But you're going to see cutbacks. You're going to see furloughs. There's a lot of things that are going to be happening here.
We pushed out all salary increases for 12 months. So it's a rolling process that people like me would normally get my salary increase in November time period. That will not happen in November of 2020. I won't get one until 2021, which most likely means I'll get nothing because I will be retiring. So be it.
On Chart 23, I want to give you a sense of the orders. Now keep in mind, I know people are wondering how did Emerson only have negative 3% in the quarter. Well, the real impact started in the last 2.5 weeks in March. We as a company talked to you all in February at the meeting in New York around $100,000,000 and then we raised it a couple of weeks later to about $150,000,000 Then what happened is the world started engaging. We saw the impact in the second half of March.
So overall, we are only down 3%. Automation Solutions only down 1%. If you look at Bob's 5%, he basically is in line. He's a book and ship company. He was pretty well in line with his orders and sales for the quarter.
So what this chart shows you, though, is clearly what we see now is a pretty strong drop off in the month of April, May June July. And you're going to see orders that are now going to start bouncing in the negative 10%, negative 20%. And I know Lyle and Bob will give you some color on this, but that's what we'll be facing right now because historically, you would see that negative 3% and say, Oh, Emerson will be okay in the Q3. That's not the case. It started dropping, but that so I want to give you an understanding of why the order held up.
We're doing well from the standpoint of what's going on in the economy, but it's still going to start dropping down and hence the very weak Q3 that Pete outlined with you earlier. As you look at the underlying sales growth, as the OCE and we held WebExes around the world with all of our key leaders around the world over the last several weeks, in fact, the last 45 days as we've lived together here. We now see a pretty strong downturn here in the 3rd quarter and also in the Q4. We see this as a 4 to 6 quarter reduction. This is on Chart 24.
And at that point in time, we're structuring our costs accordingly. This is not going to be a quick bang up, bang down, bang up. No, it's not. It's going to take time. Now if you look at the 'twenty one numbers, those are directional only.
We think they're going to have the first half will be negative, and then it will start turning back up. The question will be how fast the governments open up certain parts of the world, how fast the government stimulus comes into play, how fast does some of our customers come into play. We are now modeling what we think is going to be the 'twenty one, 'twenty two, 'twenty three. For both our internal standpoints, we see more and more implants every day coming in from the customers, every day coming in from around the world. As you look at this, we're looking at a pretty strong negative 3rd quarter, down 14% underlying growth, plus or minus probably 2 points 3rd quarter, which we'll talk about, Lal will talk further about, minus 10%, plus or minus 3 points.
So and then you see some negative growth as we move into the first half of next year. So we're hunkering down into a very, very challenging 2020 and a challenging first half of 'twenty one and hence the work that the operations and also corporate has done relative to costs. And as I look at what's going on right now and we're in this pandemic war, we basically look at the situations of what we're evaluating everything, what we really need, what's or I'm evaluating the organization, which ones are rising these challenges, which ones have the right stuff and which ones are bunkering. And so all these things are very, very important to me as we go in and spend our time every day here in the office. And since there's no golf going on, I basically spend 10 hours a day at the office, and I go home and walk for about an hour and a half every night with my wife.
And then I start thinking about things, and I get back to the office. So a lot of time on Emerson right now as I think through with this team, OCE team, and talk about what's happening. If you look at the aggressive cost actions that we started last year, and that's what's really helped us. As you saw the close both at Lal's business and Bob's business, if you think about what we did versus our guidance, our sales dropped in the Q2 of $340,000,000 The deleverage is only 15%. That's tremendous.
And you'll see Bob and Lal will give you a little bit more detail on that. Versus last year, if I look at from the 2nd quarter standpoint, we dropped $408,000,000 and we only deleveraged 9%. And that was fundamentally because of the work that Bob did last year, And that was fundamentally because of the work that Bob did last year early on and then also the work that Lal did in the second half of calendar year 2019. So that really paid off. Cash flow, the guys around the world did a great job, but now earnings are dropping, and we're looking at a much tougher cash flow in the second half.
We still will generate strong cash flow but not at the same level because earnings are dropping. We clearly, right now, as you look at the analysis on our cash flow in the first half, we are now starting to liquidate our balance sheet, which is not unusual for Emerson. We're very, very good at managing cash flow. Hence, we generate strong cash flow in the first half of the year. But as we liquidate the balance sheet in the second half of the year, the toughest is going to be the inventory because inventory, the volume has dropped dramatically right now.
And then what will happen to us as we go into 'twenty one, we'll start to have to add the balance sheet as we start growing the company again sometime in late 'twenty one. Restructuring has truly helped us both at the corporate level. I talked to you about the cutbacks we're taking across the world on salaries, on cutbacks and delays in salary increases, but also our bonuses will be significantly reduced. We are not going to 0 bonus. We've cut them back significantly.
We'll be setting targets around margins and cash, and this is very important right now as we go through this positioning, how to protect and maintain those margins and how to generate cash. And that's something that we're working on right now as a corporation and our work with the full comp committee and the full Board. We're also accelerating restructuring. We had a major restructuring program underway already. In 2020, we're going to spend $215,000,000 It's now up to $280,000,000 Both businesses are using this opportunity to really evaluate, okay, how do we set the cost structure even stronger for us going forward, looking at layers, looking at organizations and what do we really need to do relative to the organization to make sure we win but also have the right cost structure and so we go through this tough time period.
We don't know exactly how things are going to go, but we have a good sense. I mean this team has been around a long time. As you know, I've been at Emerson for 40 years. If I went around this room and asked how many years these senior executives in this room have been, these guys are well into the 20s, into the 30s. So they know we know what's going on.
We have very strong indications of what we've seen before and what we see today. So we're really looking at keeping the costs in line and making sure we stay aggressive. One of the things we've done over the years, as you well know, as we've continued to diversify the company. Today, 80% of our we have non oil and gas end markets. So oil and gas markets, clearly upstream oil and gas, the pipelines and terminals.
Even pipelines and terminals right now is a questionable market. Some of the terminals are actually growing. They're investing in terminals because they're storing oil. But typically, we're down to basically 20% driven by this oil gas fluctuation. The rest of the business, we've continued to diversify on, and both Lal and Bob will talk a little bit about this.
But we clearly have a different mix today, and you'll see it here in a few minutes. And Bob has a very broad diversification around some key industries. So it makes it a little bit different than we've had in the past. Yes, we were going to get hurt by oil and gas investments when 20% of the companies are around that upstream oil and gas. But you're also going to quickly see that we have a very strong KOB 3 business here in this marketplace.
So the market is not going to 0. We are going to support these organizations, and you'll see the numbers. They're quite significant in investments we've made over the last 10 years in our service organization and penetration in the aftermarket, and Lal will talk about that. One of the other things is clearly North America. In North America, we obviously do very well.
We have a very strong position in oil and gas. However, we also continue to diversify ourselves against away from this marketplace and still support it. We're not walking away from it. We just have other businesses that and from the standpoint of pharmaceutical, medical, chemical, whatever industry is power. So if you look at where we see today, you think about the percent of Automation sales, this year, we're going to be in 10% to 12% on oil and gas North America.
It's not going to go away. It's not going to go to 0. You can see last year was $900,000,000 upstream. This year, we're looking around 750 dollars I guarantee you the majority of that will be KOB 3 aftermarket business to keep the facility safe and running and producing. If you look back at the last industrial recession, we're well over $1,000,000,000 It dropped a little bit upstream, but it didn't go away.
We don't have the numbers relative to the 'eight, 'nine numbers, but you can see that it was a little bit higher percentage at that point in time. So we have continued to diversify. We have continued to work on our aftermarket business. And what I really want to do for
the guys, and I'll turn
it over to Lalor in a second, but I wanted to give them to give you an relative to the business they see right now, also to give you some really strong insights that you're not going to get from a lot of other people around China, actually giving you numbers, showing the shape of the curves and the recovery. But we've done a lot of work here thinking about what our investors would like to know about what's going on inside Emerson and what we see day to day, which clearly is fluid, but we as a team are working very quickly to react to this. And so Lal, why don't you take them through this your presentation here?
Yes, sir. Thank you, David, and good morning. I'd like to begin by acknowledging the Global Automation Solutions team for a tremendous close to Q2, particularly as we faced rapidly deteriorating market conditions. This team has momentum in executing our peak margin plan and is focused on the additional challenges we now face. So turning to Chart 28.
This is how the plan looks from an orders and sales perspective in what is a significant demand driven cycle. Orders were down 0.8. In Q2 versus a 2.3% plan and will weaken and trough in Q3 and stay negative for 5 consecutive quarters as we have modeled the next 4 quarters. From a global perspective, these are 2015, 2016 type of numbers. However, in 2015 2016, it took us essentially 4 quarters to unwind, whereas in this cycle, it really happened in a quarter.
North America is very challenged. I'll give you a little bit of color on the world areas now. North America is very challenged. Obviously, the oil prices and what's happening in the marketplace is unsettling, and it presents a huge challenge to the upstream business. We will see production quotas imposed as the Texas Will Commission and others meet and vote later this morning.
Rig count is down 35% in Western Texas in the last 30 days and our RFQs in the upstream business is down about 25%. There are only 35 operating rigs left in Alberta, and we believe production will be curtailed by at least 20% in North America. Downstream, refiners are continuing production as well. Some are shutting down units and other smaller refiners are shutting down completely. This is partially offset by strength in medical and life sciences, as Pete pointed out.
We won a major biopharm job, which we will book in May, and we have a 100 person team assigned, operating at about 2,000 hours a week to deliver an FDA approved validated system in September. That is record time for us to stand up a pharma plant. Let me turn to Asia. The good news is China's recovery is better than expected. We will beat orders the orders planned in April, significantly driven by semiconductor and medical.
The near term demand in China is relatively strong as the economic stimulation takes hold. And I'll show you the specific details on a monthly basis on China. India is a bigger risk, as Michael pointed out, with significant lockdowns across the country and more restrictive measures instituted today, making it increasingly challenging from a sales executing perspective. So we got to keep working that. However, across Asia, customers are resilient and anxious to do business, but the restrictions are prohibitive at times on the sales side.
Let me turn to Europe. Europe had a very good close to Q2, and we have very few cancellations to date. Customers are working the Ts and Cs aggressively and RFQs in total have dropped about 15%. Well, I'll give you an example of Southern Europe, which is interesting. For us, Southern Europe is Italy, France, Spain and Portugal, arguably the hardest hit part of the world when it comes to the virus impact.
On average, we book $40,000,000 per month in those four countries. We will book $38,000,000 per month in April, in the month of April. That's less than that's down less than 10%. Our Italian plants and suppliers are back online and goods are flowing as the Port of Genoa is now reopened, albeit very busy. Turning to the Middle East.
Very strong environment continues with strength in Saudi Arabia, offset by weaknesses in Iraq and Kuwait. The project funnel continues to move positively with Aramco remaining committed to their jobs. And virtual meetings are taking place across the region, and we have significant digital transformation wins as well. And lastly, in Latin America, we have seen a significant impact, particularly in Mexico. The Chile copper mining and Peru gold mining continue to be bright spots.
In Brazil, outside of Petrobras, particularly at MODEC, continues to be a good story for us. Turning to sales. The plan for Q2 was a positive 0.5%. We were down 8%, as we pointed out. Again, we will trough to 12% in Q3 and will stay negative as planned here for 5 consecutive quarters.
At this point, it's very important for me to highlight our backlog position. In the first half of twenty twenty, we built $600,000,000 of backlog, predominantly across our Final Control, Systems and Measurement Solutions businesses. The assumption in this plan is that we reduced backlog by $300,000,000 in the second half of the year. That results in Q4 being down in the 8% range and 2020 being down in that 7% midpoint range. If we can only convert a third of that backlog assumption, meaning about $100,000,000 Q4 will be down 12% and 2020 sales will approximately 8%.
That's the sensitivity on the sales plan. Let's turn to Chart 29. The last portion of the chart is an exact replica of the chart I shared with you during our February investor conference. The 2023 peak margin plan, as defined, had $325,000,000 of restructuring spend, impacting 2,300 salaried headcount and 110 facility reductions yielding approximately $400,000,000 in savings. Focusing on 2020 specifically, we committed to spend prior to our February meeting in New York.
The team has prior to our February meeting in New York. The team has identified an additional $53,000,000 of restructuring, bringing the total for 2020 to $230,000,000 and driving annualized savings of $314,000,000 This means that we have to execute $118,000,000 of actions in the second half, dollars 85,000,000 in Q3. This incremental plan impacts an additional 1100 individuals and results in $40,000,000 of savings in the year. An additional $40,000,000 of savings are generated by pullback of discretionary spending and other cost actions. In 2020 alone, we will impact over 8% of our salaried workforce.
Let's turn to Chart 30. One of the most fundamental differences in our business today versus prior cycles is our KOB 3 position. We have essentially professionalized our MRO strategy since 2011 when we added significant focus to this program and have subsequently expanded KOB 3 as a percent of total sales by 20 points. Through March of 2020, KOB 3 makes up 60% of our global business, up three points from the 2019 historical high. The $120,000,000,000 installed base of our technology around the world has created tremendous trust and credibility with the customer base.
We are not relying on large orders through this challenging cycle, but we are significantly more dependent on day to day small orders that have become an increasingly important element to our business. Nowhere is this more relevant than in North America, where KOB 3 now represents 67% of our sales. Let's turn to Chart 31, please. Most of the industry's focus has been on the dramatic cuts from the shale operators in North America. And while we drive a large percentage of our oil and gas sales from North America, 44% as indicated on the chart, our exposure to the shale segment specifically of customers has only represented approximately 20% of total oil and gas sales.
While we do see capital spending coming down in all geographies, we continue to win and execute critical projects around the world. The oil logistics challenge is creating opportunities across the globe for terminals terminal projects, both modernizations and green field developments and several funded new jobs in Mexico, in Abu Dhabi and in China. Additionally, upstream projects are still moving forward with limited new awards in international markets. And projects in execution are progressing, leveraging digital tools for remote collaboration for engineering and acceptance tests. So what does this mean for Emerson?
1, our strong global team of sales and service continue to engage with our customer base, in some cases, in person but also using the digital tools I described. 2, Emerson's digital transformation business is a competitive advantage for us. We have well developed connected solutions that enable customers to take people out of the process. 3, we are actively working with customers to reschedule shutdown and turnaround activity into the fall season. 4, we have increased engagement with customers using our remote educational services.
And lastly, we have developed targeted competitive displacement programs as many of our peers have extended product lead times 8 to 10 weeks or longer as they lack the regional manufacturing footprint capability. Turning to Page 32. The project funnel currently sits at $7,000,000,000 versus $7,100,000,000 we communicated in February. The oil price shock has triggered projects to be deferred into 2021 or 2022. Approximately $900,000,000 of jobs have shifted to 2021.
That is 2x the pace of FID push outs that we have seen to date. Cancellations have predominantly occurred in North America. And to help you bridge between the February meeting and what we see today as a business, we had approximately $135,000,000 that we booked out of the funnel since February. We removed $203,000,000 out of the funnel. Dollars 27,000,000 of scope change occurred, and we added approximately $270,000,000 to the funnel.
The major reductions, as I said, were North America predominantly privately funded LNG jobs. The predominant additions were MODEC FPSOs, 3 ships Asia Petrochemical Jobs, predominantly in China and BHP job in the Gulf of Mexico. Three large projects remain in the funnel: the Qatar NFE LNG, the Aramco Crude 2 Chemicals and the Rafnagiri refinery in India, which is a JV between ADNOC, Aramco and Indian Oil. Let's turn to Chart 33. I'd like to turn to a segment of our business that has significantly accelerated through this challenging time, our Medical and Life Science business, which will be close to $550,000,000 in 2020 sales, growing double digit.
In the medical, it's predominantly in our discrete and industrial segment of business. This includes Branson Ultrasonic welders that David highlighted pneumatic controls for lateral churning mattresses on intensive care beds. Pneumatic controls for lateral churning mattresses on intensive care beds. The business is projected to be up 40% in 2020 to 188,000,000 The Life Science business is largely in our process business, systems, measurement and final control, where we have built a significant amount of technology around a leading DCS position in the life science market. This offering involves control as well as hygienic valves and single use instrumentation.
Our position in the life science business is very strong. It goes back to the foundation of Delta V as a smaller IO system that's fitted for batch applications. Today, we have over 40% participation in what is a $500,000,000 life science DCS market. That's 2x greater than the next nearest competitor. And we play across the entire industry value chain from development to production and fill.
Turning to Chart 34. I'd like to give you some perspectives of what we've experienced in China over the fiscal year. This chart depicts orders and sales for 2020 by month. The lockdowns in China were extended beyond Chinese New Year, but most of our operations resumed by February 10. We always expect that dip to occur in February as you saw there, it occurred in 2019, obviously more extreme this year.
By March, our orders were $125,000,000 down 9% versus 2019 and are expected to be down 10% in April as well, although I could see us closing that gap. The acceleration in orders in the second half is driven by oil storage. Sinopec recently announced the construction of 7 new tank farms as well as petrochemical activity ramping up for the elements like fiber production, a key feedstock for medical PPE. Much of this is visible in the Q4 plan. Sales in March were down 22% versus 2019 despite our capacity being back to 96 percent by the end of the month.
In April, capacity and manpower availability are both at 98% and sales are expected to be down 2% to flat versus 2019. So very quick recovery as we get out of March into April. For 2020, right now, I see orders projected to be slightly up at around 1% and sales to be flat versus 2019. Now I'll turn it over to Bob Scharf. Thank you.
Thanks, Lal. Like Lal did, I want to start by recognizing the team out there. Q2 ended very differently than what we thought, starting with the China downturn in February, coming out of a delayed coming out of Chinese New Year and then going into March as we'll talk about. Despite that, we had a very strong quarter gross profit, drove the 0.9 of adjusted EBITDA improvement. We held SG and A in line with sales, even though again sales dropped by about 5% just in the last weeks.
And that was certainly a strong effort. As essential business, we keep running around 84% of the commercial residential solutions employees are still going to work every day at the site because that's what we need to do to produce and ship our product. And I certainly want to extend a special thanks to that group. And we've taken many measures to make sure they're safe following the government and local health guidelines as well as doing additional actions as well. For the chart here, what I'm showing, the sales and orders for commercial residential largely go in line with each other.
We have very much a book to ship business. So what I'm showing here is our sales outlook for this year into next year. And then I'm going to use the financial crisis as a reference because I don't there's not really any direct reference to what's happening right now. But the closest thing I think we see is probably the financial crisis. You can see going in, the last quarters have been kind of flattish, if you will, down a bit.
We expected it to be very similar through the rest of 2020, even a month or 2 ago, and then things started changing pretty quickly. In Q2, China ended up being down 33%. The U. S. Still held pretty closely around 3% down.
And you can see now as the COVID effect has carried through into Europe and U. S. And other places, the second half changes significantly. Again, China was down 33%. We expect China to actually be moderating, if you will, and coming back.
I'll show some more specifics on that. And then things are really going to turn where it's U. S. And Europe, in particular, down significantly in the second half. So a bit of a flip flop.
Certainly, the two keys for us for the second half are going to be what China does from a trajectory standpoint. And then U. S. Summer is always a key variable for us with the heavy air conditioning presence that we have. You can see right now directionally and it is certainly directionally because we're focused primarily on this period and this quarter more than anything.
But going into 2021, if it follows similar downturns in the past, we would expect by the second half to be turning up and the magnitude of that is certainly to be determined by a lot of things. At the bottom, again, the 2,008 to 20 10 reference, we had a little more growth going into the financial crisis, up a couple percent being down. You can see we went down 10% 20% in 4 quarters and then had a pretty sharp snap back in 2010. There are some differences I think in this one. The housing starts in the U.
S. Went from about 2.5 down to a half 1000000 in 2,009. It was very much financial oriented. This is obviously a very different crisis. Certainly substantial job loss right now, especially in the U.
S, over 22,000,000 jobs. So far, we see that as being probably less housing oriented kind of positions, but certainly as that plays out, that could also be a key factor as well. So again, at this point, we're buckling down for a very challenging quarter that we're in, still continued challenges in Q3. And then we'll watch how things develop, including a lot of the external factors around the COVID virus as far as what's going to dictate for 2021 outlook. The next chart I'm showing is the on the left is the exact chart I used in February for the investor 500 salaried headcount actions on only about 8,000,000 500 salaried headcount actions on only about 8,000 salaried headcount in this business, that's a substantial percentage.
A number of moves, the best cost, a number of factory changes. This is a very GP oriented plan, so driven heavily by factory activities, automation and other programs. And then certainly price cost is always a big factor for us. On the right, you can see from an update, we beat this plan for H1 again despite the fact that the second quarter changed significantly in the last weeks. To this plan, we've added 300 additional salaried actions.
That's a combination of restructuring and then pulling open jobs and basically every possible move with respect to the workforce. We're very tight right now and the organizations are managing to that. We are going to be using widespread furloughing in the business. It's an unusual practice for us, if you will, but partly because we do expect this ideally to be a relatively short lived thing. Once the virus comes under control, we're trying to manage through by keeping getting the cost down quickly in this half, still have the opportunity with our workforce and next year.
Of course, if next year changes, we still have other levers to pull, but that's the one we're going after right now. On top of the restructuring activities, there's also $31,000,000 of other additional cost actions, which is again basically all levers we can pull on the SG and A side. Our second half SG and A spend versus our original plan is now down over 10%. So we're working to adjust to the volume decline. And certainly, as Mike mentioned, there's a lot of supplier, internal customer and other disruptions to our operations as we work to keep running, work to keep our customers going.
And that's certainly going to be a factor on the second half profitability in the GP as well. The next chart talks about China, and you can see again, we had a very strong 2018 in China. It started turning down. The first half of last year was down 20 plus percent, and we felt we were coming out of that with some ups and downs. But then as you can see again, Q2 changed substantially.
At the bottom, you see January was down 43%. That was largely a factor of the Chinese New Year timing versus last year. February, which normally would have been stronger, turned into effectively an extended Chinese New Year by a matter of weeks in some cases for some operations. So we also had a very significant downturn. March was a bit better, down 19%.
April continues to improve. It's in the 10%, 15% kind of a dynamic right now. And as you can see, we do expect at this point to be it to steadily return again through May, June. And then up above, you can see in Q3 and Q4. And certainly, under ideal conditions, if you will, or under the right conditions, perhaps even turning positive in the Q4.
Down below on the left, there's a number of project investments going on right now across the provinces. You can see around $1,000,000,000 in total or close to that, many projects. A lot of these affect buildings, a lot of these affect bus and rail where we have air conditioning and refrigeration. So we see these as a proxy. The projects.
The key thing is going to be the execution of them. Everybody is tight on cash right now, so nobody wants to release orders until they're getting paid by their customers. And our channel is in that same condition as well. So again, the China right now is playing out in this way. And just as Lal mentioned, certainly, as we came out of the Chinese New Year, we had some challenges in the initial days, I'll say.
But really, by and large, we're back to running very normally in China and as are our customers and suppliers. And so we're hopeful that this is going to play out. We've got a couple of charts here on Emerson's supporting the fight against COVID-nineteen. Chart 39 from a commercial residential standpoint, certainly one of the things we've done is to help out particularly the first responders, the medical organizations, other care facilities. We typically have a number of safety things in our plants, gloves, masks, goggles and things like that.
And frankly, we've done a lot of work to give away a lot of these things initially, particularly N95 and KN95 masks, which are different care different care facilities around the U. S. And other countries as far as gloves and other things too. We are providing our own employees with surgical masks, cloth masks and other things. From a prioritization standpoint, we're basically saying that the medical community needs the N95s more than us.
And then from our product standpoint, a number of good examples. On the right, our cargo solutions business, that device that you see keeps the temperature tracking and it also transmits cellular, so it can transmit the conditions in a shipment. A customer was trying to move some COVID test kit materials from Korea into the U. S. The first time they did this, they were all destroyed during a layover due to freezing.
And so they contacted us on a Sunday for a Monday shipment. We gave got some devices to them and helps to preserve the product as it came across to the U. S. In the bottom left, the cold chain business, Thermal Fisher, an important customer of ours, needs refrigeration for some of their COVID test stations, similar testing environment, and we're able to supply a number of those quickly. We've got a number of other examples, pop up medical facilities for air conditioning and other things.
The bottom right shows in our professional tools business, the core of engineers in the U. S, pop up care facilities in Denver and Miami, and we provided a lot of equipment for them to be able to get that infrastructure established. So again, it really plays to the importance of Emerson and our products as essential businesses for society. And again, it's something that we help our employees understand why it is that we do need them coming to work every day, because we've got a lot of important things we have to make sure we're providing to customers.
So I'll
turn it over to Lal.
Thanks, Bob. I want to share a few examples from an automation solutions perspective as well and for specific examples of the efforts our teams are making to support the COVID-nineteen crisis response. Starting in drug development, I've already mentioned a major pharmaceutical bio firm announced a significant expansion recently. This is in response to a positive response of one of their drugs in COVID-nineteen treatment. I can't mention the name of the firm or the drug as we are in an NDA.
However, this contract is north of $20,000,000 and will be booked and shipped this fiscal year. In the testing realm, our Coriolis meters are being used for the precise filling of reagents and testing equipment. If we move over to medical PP and E, we have been awarded orders from Honeywell over the past 5 weeks for ultrasonic welders to be used in the manufacturing of medical masks. And lastly, in patient therapy, we've received nearly $20,000,000 of orders for valves, manifolds to be used in oxygen therapy machines and sanitary regulator solutions for ventilator applications. So very broad set of offerings that support the response that's occurring around the world.
Thank you very much, Lal. I want to thank everybody. Again, we made the decision as we listened to our investors and the calls and the sell side analysts and also the buy side investors that we felt that we needed to go a little bit above and beyond normal in our communication. Don't expect this type of detail all the time. A lot of work goes into this.
I just want you to make sure. But I think it's important that our investors understand what we're living in day in and day out. And again, I want to thank everybody, both in this room, the entire OCE, 15, 20 people that put up with me for the last 45 days and also the people around the world as Bob and Lal and Mike and Frank have communicated. It takes a team effort, and we've divided and conquered and formed task force and worked this on a day to day, face to face basis. And I want to make sure that everyone is recognized for that.
I'm doing a video again this afternoon, 2 2 videos, one for the employees and then also one for our website to thank everybody. I also want to make one special emphasis on this. People know me quite well. In 20 15, 'sixteen, 'seventeen, we went through a major repositioning effort, and I made a very strong statement that we would not cut our dividend. We would not break our dividend history.
I want to make sure people understand that. I'm still the CEO. I'm not dead. Though people have tried to kill me, I'm still quite strongly in charge. And as long as I'm here, our dividend will not be cut, and we will maintain our dividend payments in history.
We have the financial flexibility and capabilities to do that going forward. We also are looking clearly, one of the things I want to make comments on is acquisitions. We clearly see some opportunities that will start emerging, and we want to make sure we're strong, financially set. And while the work that Frank's doing and the work everyone's doing right now gives us that flexibility to pick up unique opportunities like we did at B&C many years ago. But with that, I want to thank everybody in the situation room here, and I want to thank everybody around the world that has listened to us for Emerson.
And now we're going to open the lines and take Q and A, and we'll start. So off the bat, so the announcer, since you wouldn't do Live from Saturday Night Live, this is Live from St. Louis. And the first question is coming from, I guess, Mike Holland. So let's open the line so Mike can ask the question.
Yes. First question comes from Mike Halloran from Baird.
Good morning, everyone. And thanks for taking my questions. Thank you, Mike. Good morning to you. So first question,
just some historical context on how you're looking at the oil and gas cycle here. Obviously, you've been through a few of these days. Can certainly appreciate the slide that Lal put together on the amount of KOB 3 that's now in the portfolio. But how
do you think about puts
and takes, structural concerns as you move forward, gas versus liquid and how quickly you think your customers can start responding by putting more capital dollars and OpEx dollars back into the market?
Yes. So Michael, to give you some context, I mean, I've been around a quite long time. I ran the process business back in 1996, 'ninety seven when we had the financial crisis of Asia, and the price of oil went below $10 almost went to 0. I think you're exactly right. We're going to see I'll let Lal answer a couple of things here, too, but we'll see a structural change.
I think we'll see an acceleration over time from liquids to gas. I think you're going to see a structural change in the power industry, a topic what's going to be going used in the power industry to generate energy and electricity. I think they'll take their time with this situation. I think some of our gas projects are still on the table. I'll let Lal talk about Golden Pass plus the one going on in the Middle East right now.
But the first thing right now, Mike, is they're going to hunker down and protect cash. They're going to try and maintain the current liquid production for revenue. They're going
to so therefore, they're going to
have to spend KOB 3 type of dollars and a little bit of KOB2 dollars I think this thing transition will be more out there in the 'twenty three, 'twenty four and 'twenty five time period based on my historical knowledge of this. And I appreciate that. And by the way, I'm assuming COVID can't go over the wires when you get me sick. And if you get me sick, I'll be very upset with you, Mike, especially since you're a brewer fan, Milwaukee brewer fan. So, Lyle, anything you want to add
to that? Yes. Thanks, David. Well, we've seen recent announcements by the majors cutting CapEx down 22% versus 'nineteen, those kinds of ranges. It is important to note that here in North America, it's a heavily concentrated space.
Approximately 50 players generate 80% of the oil production in the United States. The other 20% is done by thousands of players. I think the 80 players will be the 50 players, excuse me, will be very disciplined as they go through this. The 1,000, many of them will be in trouble as we go through it. So typically, when I think about the 2 segments, the downstream refining and the upstream oil and gas, I believe they have different economic cycles.
However, in this, both are grappling with that fundamental lack of demand, Mike, as you pointed out. Refiners are facing difficult decisions. They're reducing utilization rates, as I pointed out, some are the idling units. And some are trying to figure out how to adjust maintenance and turnaround intervals to manage this tough environment. For us, upstream is significantly more weighted to CapEx historically and refining has been more weighted to OpEx.
That's one aspect where we see some difference. The other aspect is that we believe that the refining segment will rebound a little quicker as demand normalizes. However, oil, the oil production is more structurally impacted, I believe, and that will be significantly more challenging because of the silver supply element that we have. So that's how we see it right now in the 2, but I think structurally up stream, oil production will be a more challenging cycle here.
One of the things
we're doing, Mike, and because you're exactly right, there's going to be some structural changes here. We're starting we're evaluating the organization, too, and we're putting investments in how we're going to support. As you well know, we can adjust our people, but we're working very quickly because clearly, there's not going to be any major projects for a while in the liquid side. There'll be more in the gas side, and obviously, we're going to redirect our people and support the aftermarket business. So a lot of adjusting going on by the world area people.
Jamie out in Asia Pacific, WIDIA in the Middle East, we have, obviously, Rule in Europe, our leaders there, all adjusting because of the same issue that you bring up. And it's going to be very fluid and live for, I think, for 2 or 3 years.
And David, to your point around gas, you're absolutely right. Golden Pass continues to move forward. That's an LNG job. Saudi's Marjan project is an offshore gas production, continues to move forward, and we continue to book the awards there. So I think they're looking long term gas opportunity still as a dynamic they want to continue to fund.
Mike, one more question for me, please.
Yes. So that's actually a good segue.
And how do you think about the structural changes that you're seeing on that piece and what that means for the AS segment over time? Hybrid discrete, some of these medical life science type applications seem to be doing very well and certainly a better tail as we look forward, particularly as you bring some stuff back and some more regionalization come on that side. How quickly can you morph the portfolio? What does it look like? Obviously, you don't stop supporting the KOB 3 piece and
you still have a lot
of breadth and depth there. But how quickly can you move and what are you thinking about inorganically versus organically?
Yes. I think that we are one of the things that Lal and his team are really we're obviously looking at our internal investments. I'll answer first, and I'll let Lal answer this, too. But we're obviously changing our investments towards serving more the discrete marketplace, the other marketplaces, not the liquid side. I think the gas investments will continue to come back.
The aftermarket gas is very, very strong. And there will be a liquid, but it will be changed, as you're saying. So you're going to see that we continue to invest at higher levels around the areas that are in the hybrid space, the discrete space, other space, both from an acquisition standpoint, then also this internal development. We have a lot of projects underway right now working clearly within the discrete space, within the systems space to move outside the oil in that marketplace. We're also looking at potentially some acquisitions.
Can we shake out some acquisitions that are a little more software based along those lines? So Mike, I think you're right. And obviously, as we've seen in every other structure time like this, our liquid business will be less and our other business will be higher. So that percentage will continue to drop. So if you think about the revenues and you think about the business that we have today, it's going to continue to shift away from the liquids side.
We are not going to walk away from these important customers that we support in the oil and gas area. These are very important customers. The industries depend on us and our technologies. But you're right, we will reallocate some of the new innovation around the other areas in our portfolio, continue to have mixing away from oil and gas. So anything else you want to add there, Lal?
There's 2 things, David. We have made significant efforts both organically and inorganically in developing our portfolio around the discrete space, both with acquisitions in Europe and internal investments in that business around our core ASCO technology. And there's a significantly longer runway to continue to drive that. The 2 other areas, David, that I'm particularly focused on from a diversification perspective are in the hybrid segment, life science particularly, as we touched on, Mike, in the power segment. I think there are opportunities to expand our power market beyond our traditional generation control system into other areas.
Yes. And I think that what you also, Mike, could add on, he's up in Minneapolis right now, they're working on a lot of sensors for the hybrid life sciences, food and beverage space, which is an important area. So with our next question, come on.
Next question comes from Nicole DeBlasey from Deutsche Bank. Please go ahead.
Yes, thanks. Good morning, Dave.
Good morning, Nicole.
So I just wanted to ask about margins in the second half of the year. It looks like you guys are embedding decrementals getting a bit worse in the Q3 despite the fact that I would suspect restructuring payback is stepping up. So if you could speak to decremental margins as well as the expectation for is obviously we
had a lot under done in the first quarter and then we had a lot under done in the first quarter. And then we had a lot is obviously we had a lot under done in the Q1. And then the drop off in the sales, be it significant, but it's not the same level we're talking about in the Q3. So right now, the acceleration and the decline of our sales are overwhelming basically the restructuring we've done in the first half and the new and the incremental restructuring we have going on at this point in time. We are still looking at 12 months or less on the total pot.
We are also looking at some longer term ones that we're doing relative to our international markets. So we can sort of set ourselves up for a better 'twenty one and 'twenty two. But the Q3 in particular is really is because the drop off you see in those sales, I think what did we drop off, dollars 1,000,000,000 something in the 3rd quarter sales? $700,000,000 $700,000,000 $700,000,000 $700,000,000 It's just overwhelmed everything we've done at this point in time. So we've been a little bit more cautious on that.
But we're still looking at a very good payback of 12 months and from that standpoint, very focused on that. But I just don't see us overwhelming that drop off in sales that's hit us so hard in April, May June.
Okay. Fair. That makes sense. And then just piggybacking on to that question, is there any big difference in the margin expectation by segment or will both face similar decrementals in the second half? Just thinking about the fact that most of the restructuring spend has been focused on AS.
Bob, why don't you answer first. What's your decremental second half Right now, you're going to
be close to 30%. We're going to deleverage at around 30% order of magnitude. That's with sales down well into the teens. So there's a pretty there's a bit of a sales difference in the second half between the two platforms. But as Dave mentioned, that magnitude of sales decline, even with a very strong SG and A reduction versus last year and certainly many activities in the plants.
The operating the deleverage of volume as well as again the COVID-nineteen impact, which is very disruptive to the plants right now, is going to
be very challenging. I think the only thing you might want to add, Bobby, Bob, you're still trying to target some EBITDA margin improvement for the whole year even with the down sales you're looking at. Is that still
the case? Adjusted EBITDA in total for
the whole year, we're looking to hold versus last year. It's going to be hard at this point. Yes, that's going to be very strong with the volume decline, but it's going to be difficult to, at this point, to be up.
Yes. The big issue and I'll let Lal answer too, Nicole, the big issue right now is the plants. Some plants will operate for a day, 2 days and then get shut down as we have to clean. And that productivity impact is very, very hard to overcome And safety within our facilities is very, very important. It's frustrating.
You have a situation also, and you have to shut down, then you got to get people back up. So it's another hand tied to 100 back here. But overall, I think without all that situation, it's doing pretty well. So Lal, anything you want to add to that?
Thanks, David. Hi, Nicole. The Q3 is clearly almost challenging quarter with the leverage rates in the 42% range for us. That's driven by predominantly 2 factors, one being the North America impact, which is most significant in the 3rd quarter, accelerates from March into Q3 and the book to ship businesses impact. So the short cycle businesses in our instrumentation and KOB3 and Final Control being impacted.
Those are higher margin businesses than some of
the longer cycle businesses that we do have.
Things do get better for us sequentially into Q4 from a deleverage perspective, and we fall back into the 20s on a pure EBIT basis, which is more normalized. But the 3rd, we take a significant hit in
call. The next question comes from Andrew Obin from Bank of America.
Yes. Good morning.
Good afternoon or good morning, Andrew. I guess it is morning. We're used to reporting out the afternoon. I'm not used to sporting stuff. Don't get used to that either.
Go ahead.
Just a simple question. Looking at the comparison you guys making with 'eight, 'nine, and I understand the bottoms up fact that the company is better. But it seems that the GDP forecast for 2020 are going to be weaker than what we even saw in the great financial crisis. Yet your revenue performance seems to be better than in the financial crisis. Is it all driven by just changes in the portfolio or there are other assumptions from a macro perspective embedded there as well?
Number one issue, Andrew, is we went into the financial crisis running hot, strong. We were very strong. We were growing double digits. So that was the biggest issue. We were in on a growing curve, and then we got hit, and we dropped hard off that hit.
As you well know, we were structured this year for basically a flat year. We had a couple last year for Bob's business, he was flat or slightly down. Lal was way off what he thought he was originally. So we're going into the cycle differently. And the second thing is we are differently structured from a mix of the business since the last cycle.
But the big issue is when we went into that one, we were growing very strongly, and then the bottom fell out. This one, we were ready for it. The bottom had already sort of collapsed last year. That's the biggest difference, Andrew.
And just the second question. In terms of restructuring, you are talking about spending more money. But can you just talk in terms of logistically, what is it you're doing in 2020 now that a couple of months ago you didn't think you would have to or you couldn't do it. Are there opportunities to move faster or is it just you're being more aggressive on footprint and if you just give us more detail as to specifically where if you could share that publicly? Thank you.
Yes. So there's 2 avenues here. 1, we are what we're trying to do is accelerate the programs sort of the fixed cost programs, the facility programs that we had built more into 2021. We're trying to accelerate those into the second half of 2020 so we can get those done sooner because when the spike does come back, we want to have those new facilities up and running lower cost structure. Secondly, we are being a little bit more aggressive on some of these consolidations and how we do them and how fast we get them done from that perspective.
And the third thing is, as I said earlier, both at corporate and the two platforms, we're looking at the structure of the overall company and what layers we can take out and what layers we don't necessarily need anymore as we learn how to run a company in a different world, which we are right now. So those are things we're doing, and we're just looking at everything very carefully. And sort of if we don't need it, we're not going to do it, and that's from that perspective. So that's what's going on, a lot different view of this as we go through this pandemic war. Anything, Lyle, you want to add?
Yes. Thanks, David. Obviously, on the facility rationalization, it is dependent on us building the best cost sites so that we can execute some of those plans. They are underway, but obviously building plants takes time, accelerating as best we can. So to David's point, a lot of what we've identified incrementally has been purely around volume related headcount, decisions on what we do and don't do and then identifying further delayering opportunities across the businesses.
Those are
the those 2 categories, as we talked about in New York, Andrew, are the quickest payback on restructuring and quickest to execute. And that's what we're leaning on very hard here in 2020 as we accelerate the second half restructuring.
Bob, do you want to
add? Well, I'll just say that our peak plan did not have things like wage freezes and cuts. Certainly, discretionary. I think most everybody else is doing the same thing is practically non existent. And frankly, we're just going into the organization at a level part of its volume related, but a lot of SG and A isn't necessarily easy to do with volume.
So we're just making some tough choices right now on positions that we hope to at least be able to work have without for at least a year or so to get the payback on it. But some of this stuff when we do get volume will certainly come back and it's I wouldn't say it's really part of the peak plan. It's part of dealing with just a very dramatic sales cycle that we hope doesn't last too long. But again, the operational side, the plants and that's all going. There's not a whole lot more we can do that will affect the second half of this year.
Although I will say even in the manufacturing's average ranks and costs, we're not returning over every stone right now and trying to deal with a pretty dramatic volume slide here quickly.
Just a question.
Have you changed your definition of what low cost facilities are in this environment given this fracturing of global supply chains that people talk about?
We use the word best cost, and the answer is no. We've always we always look at evaluation relative to logistics. If you think about our regional strategy, we think about logistics, supply chains. I think there will be some changes as people look at rebalancing that matrix that we use. And we did a rebalancing about 5 or 6 years ago, 7 years ago.
We'll take a look at that as we go forward here. But from our perspective, we tweak that matrix on a constant basis. We'll tweak it again at the end of 2020. But right now, the definition of best cost has not changed, no.
The next question comes from Julian Mitchell from Barclays. Please go ahead.
Hi, good morning and thanks for all the detail. Good morning. Maybe just the first question, David, looking at Slide 24, and you've got that scenario of the big dip in fiscal Q3 and then staggering back towards a sort of flattish line a year out. Maybe just help us understand within each of the 2 main segments, which end markets you think will lead that recovery and which ones might be laggards? I understand that maybe stream CapEx is definitely a laggard that Lal had called out, but maybe any other color across the two platforms of the slope of end market trajectory?
Yes. I think if you I'll comment, and I'll let both these guys comment on their specific business because it will be different. I mean, clearly, the liquid side of Lal's business is going to be very slow. I think you're going to see, starting in the first half of next year, some companies look at bringing some facilities back in the United States. So there will be some spending around pharmaceutical and medical.
There will be spending around some of the chemical side and the materials that go into that space. I think you're going to see the only laggard we see probably early on will be the liquid side on the new contract and the new business. Historically, I mean, that would lag with this type of shock. I would also probably be cautious about the gas. I think the gas capital investments will probably be a little bit slow recovering back.
But the rest of the 80% of business that we look at, I think, will start bouncing back pretty quickly as they go through their own metrics and see where they're making stuff and how they rebalance that. But the power industry, I think, will continue to spend as it is right now. If I look at the food and beverage, I look at the chemical, all these guys are reevaluating those their spending. So I think those are they're going to come back. It's either liquid and the gas side that I would worry about, which is about 20% of the total business.
Anything else you want to add to that?
Yes, David, just very quickly. Obviously, in the 60% KOB 3 business, Julian, that's a lot of day to day small orders. Essentially, what that 60% defines is what is required from an automation perspective pharmaceutical plant, a refinery or a coal powered fired station. So it's that that we're focused on. I agree with David that as this comes back, it will be predominantly on that it will not be in that production side.
That will lag. It will be more downstream as we see it. But we're currently already scheduling STOs, shutdown turnaround activity into the fall season. That's across the broad scale of our process industries and power. That will see accelerate and return very quickly as people are allowed back on-site, and we should see the benefit of that.
But you're going to see a lot of the as the White House, and I'm sure every government around the world is looking at, all the areas that went into the health care, the medical, the type of chemicals, whatever they need, the pharmaceutical, I guarantee you they're going to look at how do you around the world, not just the U. S. But also Europe and Asia, they're going to look at, okay, where do we need to make those investments? And that's what's going to help drive a company like Emerson back in the early 'twenty one time period. Bob, anything you want as you see a change coming back?
Yes. Certainly for us, certainly a key leading in was obviously China and that's also we anticipate being a key as far as coming out of it as they work on stimulating the economy. Construction, both in terms of real activity, if you will, but also especially the channel just getting very cautious about carrying inventory, snaps very quickly on us. And depending on the sell through picture that could come out and that can come back quickly as well. Cold chain right now, again, the restaurant industry is largely frozen in the United States or on a hiatus.
Even supermarkets, which we're all realizing are critical infrastructure, are very limiting as far as who they want in the sites. So they're very careful about doing any project activity right now. And then again, certainly just the general customer, both individuals as well as companies freezing right now with uncertainty about what's going to happen. And then again, coming out to China and certainly again for us the summer cycle in the U. S.
With air conditioning is going to be quite important and that we always watch as the spring develops and as the heat develops, that's going to be a key factor.
Yes. It might be more of a replacement market this year than
Yes, there's certainly talk about replacement, but about 85% of our business is oriented at replacement anyway. So certainly the housing, new housing will have some factor. And whether people do repairs or a system replacement matters a bit too. Although our margins on the repair side, the compressors are quite good. So there's certainly some mix help if it gets down into component repairs.
Thank you. Julien, anything else? Just a quick one.
I mean, I know that you always look sort of further out into the medium term. So maybe whenever we come out of this downturn, would you expect anything different about the incremental margins whenever we come out of this slump versus, say, your experience in 2017 or 20102011?
Well, if we I mean, from the standpoint of we're not backing off our peak margin plan. So obviously, as we come out of the incremental margins, it should be better in the term because we're taking fundamental structural changes to the company, and we are evaluating all the touch points between the two businesses and the corporate entity. So I would say structurally, cost will be lower as we come out of this, and that will be a good thing. And the key issue is for the next CEO is to make sure that he or she does not allow those structural costs to come back in. But I would say that as we fly out of this thing, incremental margins should be better for us.
Next question comes from Andy Kaplowitz from Citigroup. Please go ahead.
Hey, good morning, guys. Dave, thanks for all the color here.
Where are you hiding these days? Are you hiding someplace?
Hiding in Jersey, very exciting place to hide.
Very exciting place.
Exactly. Let me ask you about China just in the context of down 20% in AS in Q2 and 30% in C and RS. So how much did you use China as a roadmap for COVID related impacts across the rest of the company when you're thinking about your guidance? Because you don't seem to be guiding to that kind of impact for the rest of the world in the second half. Is that mostly because of the expected China recovery?
Or are there any other geographies that are hanging there better than China? And then can you give us your take on the shape of China's recovery? I know you gave us a lot of color. Do you think it's ultimately U, L? What do you think there, Dave?
China recovery is going to be more of a V shape, and you can just quickly see, I think it's going to be sharper for Lal, a little bit more flattened for Bob. And the reason for it is Lal's business is I mean, from a nationalistic approach, China is investing in things that will help them as a country, be it the medical area, be it the power area, be it the other different energy areas, given the fact they're building tank farms to buy $10 price of oil. I mean China for Lal's business is going to snap much faster. Now I don't think the rest of the world you just I'll talk Lal's business first. I don't think the rest of this world will snap this way.
China has a little bit different agenda from the standpoint of how they control the economy. I think the other economies will have a slower comeback from the standpoint of how they open up. We just look at our measured opening that we're going to have inside the United States. I see the same thing happen in the Middle Asia, in the Middle East not Asia, yes, Asia South and Middle East and also in Europe. So I what we're mapped out here, Andrew, is a different a slower recovery within the markets outside of China.
I also see that I look at Latin America. I think Latin America is going to struggle under political leadership and also the financial wherewithal is not that good. Now on Bob's business, clearly, historically, Bob's business, he's coming back quite strongly in Asia or China and Asia, not as snapping as Lal's because money is being more allocated to where they want to put the money, but still it's going to be a pretty strong recovery. And I don't we don't see that type of recovery in the other markets. So we see more of a flattened, slow recovery.
Now the one thing that Bob has historically as he has snapped, as he has a chart, he shows historically, maybe by the 3rd or Q4 of next year, he could see things accelerating. It goes back to the distribution channel, which are liquidating because of the financial wherewithal of that channel, and then also they see some strength they can snap. He actually historically has a stronger snap. And so we've not factored in any snaps other than in China because it's just I don't see the other markets behaving like China at this point in time, Andrew. I could add, Dave.
Yes, second, Andrew.
China has definitely been very proactive about getting businesses, getting the economy back going, which is not necessarily the case you see in other countries. And both in terms of getting plants operational, getting people back to work and also then on the stimulus side of injecting things with programs. So I think you're just seeing a lot more organized collective effort, if you will, to get the economy back running we're going to see in a number of countries right now.
Bob, do you want
to add anything? Yes. Just very quickly, obviously, China doesn't have the production element of our marketplace. Europe is the other area that has very little production left and RC has been depressed for a long time. And we're seeing Europe being more resilient than the Americas, for example, as well.
So those would be just 2 nuances on that.
Good. Thanks.
That's helpful, guys. And then Dave, there's been
a lot of talk.
I mean, you mentioned about reshoring and how that might impact big multinational companies. You did talk about your strong local for local strategy. So maybe talk about how your supply chain has been impacted, a little more color there and how you might benefit if fact we do see more emphasis on localization of supply chains? And then conversely, how much concern do you have about being a big industrial player in China if we do have more call for nationalism over the next couple of years?
Well, nationalism has been calling on now. It started back about 5 or 6 years ago. So that's nothing new. It's obviously just escalated a little bit higher, but it's been going on for some time. I firmly believe, based on what we're seeing in our customer base in both the chemical industry, what we see in obviously in the food and beverage, the hybrid, the medical industries, we are seeing a push to try to rebalance some of these, the supply chains and also where they mix up.
The fact Honeywell is opening a mass plant in Rhode Island and a mass plant in Arizona, the fact that we're seeing some first vaccine production that we're working on right now and going after it's going to be in the United States, I think legislation has to be changed to protect the medical and pharmaceutical industry and the vaccine industry, but I think you're going
to see that. I think clearly,
the negative side of that will be companies like Emerson or the multinationals that we serve the global industries. We're going to have to work that issue, but it's not going to just be the U. S. I think Western Europe will be the same way, Andrew. I think you're going to see Western Europe, be it the French, the Germans, the Italians, the Spanish, the Belgians.
They're going to look at what happened and what they could depend on, be it the Asians or be it the Americans, and they're going to say, Okay, we need to redo some stuff here. So I think this is going to happen globally over the next 2 or 3 years. And I think the good solid global solid global industrial companies, which you guys all know about and many of you follow, I think will benefit from this. I think the guys the companies are still going through massive changes, are going to be struggling, but there's going to be pluses and minuses in the end. I think I put a plus on our side.
I do have a couple of negatives, as you point out, and we'll have to manage those accordingly. You too. I'll invest to you, Andrew, especially in New Jersey. I think I like my hand better in St. Louis.
I hear you there.
Okay. Next.
Next call comes from Josh Pokrzywinski from Morgan Stanley. Please go ahead.
Good try. Good try. That's damn close. Good try. Gosh, love it.
Do you want to pronounce your last name for this guy?
Yes. Pokrzywinski, but 8 out of 12 letters aren't too
bad, Dave. So I That's pretty good. I love it. Josh, you just got the HUGO award this morning. Okay, Josh.
I appreciate
it. Dave, so we've talked a lot about the supply chain. Anything in this whole on shoring dynamic, anything in your own supply chain, your own sourcing that you're looking at and saying, gosh, this has gotten too long and as much as we manufacture locally, we're having to cross a few too much few too many borders to get components or other kind of sub assemblies, looking less at your customers and kind of more at yourself as the purchaser?
Yes. The answer is yes. And so what we're going through right now is the first wave we obviously hit was the China wave. And as we looked at the China impact at the end of January early February, we're looking obviously what's happening to us right now as we look at the India, Malaysia, Mexico, U. S.
What we have is a very good enterprise risk strategy driven by the business. It's sort of evaluated through our audit side and through the audit committee under Lisa Flavin and the audit committee. We will go through this process. Most likely, I asked the Audit Committee yesterday, we're going to wait a little longer, probably be more like August this year. I want things to stabilize, but we're going to look at things like how did our supply network do from a financial crisis standpoint?
Did they have the money? Did we have to help them? Which ones were we able to keep up with this as we ramped up and down? So I think that from as we look at it right now, Josh, we're not going to make any fundamental changes. We as you know, our strategy is we have multiple suppliers.
But the big issue for the first time we're seeing not just 1 or 2 countries closing down, we have 3 countries closing down. And so what we're going to have to do here is evaluate this from an economic standpoint and an enterprise risk standpoint is looking at this model now and say, okay, do we have to have 4? So those are things that we will do. Nothing right now. I mean, I'm more interested in stabilizing and then recovering.
But we do know what happened to us, and I guarantee there will be changes as we leave this year on a calendar year basis and as we move into 2021 on a calendar year basis. So I think it's a little too early to react. We've been able to overcome it. And in the meantime, I do know we'll make some changes as we go forward here in 'twenty late 'twenty and early 'twenty one.
Got it. Appreciate that. And then just as I think about some of your kind of longer cycle customers or folks who don't make decisions lightly, I would imagine that the speed at which this has happened is maybe hard to kind of calibrate what they want to do, just show up one morning and kind of erase a 0 from the budget and go forward. At what point do you think you get clarity from your customers, I. E, they've had enough time to scrub everything and get back to you?
Because I would imagine you're not quite in that moment yet where they really determine what they want to do.
Josh, this one's a lot faster. And the reason is this one's a lot faster. I mean is it 100%? No. But it's a lot higher percent than you think.
And the reason for it goes back to what Frank covered is the liquidity financial crisis. So they really had to jump on this thing very early on in February March. Now will there be some changes? The answer is yes. But I think that you missed you don't represent them well that if you don't think that these guys have made some fundamental changes.
We're living it daily. Now at the OC, we get together at 2 o'clock every day. The OC downstairs is the big boardroom, and we're spread out. And we both of us, both Lal and Bob, were talking from a customer's input. So these guys are moving much faster.
So maybe the last pieces will be finalized as they finish out this reporting this quarter. But if I look at our customer base from a financial standpoint, they had to take action very, very quickly, both from internally, cash flow generation and then also what they're looking at from a financial market standpoint. So this one is a little bit faster pace, and hence, being together allowed us to make some adjustments much faster. But I would say these guys are further down that pipe than you think. And probably this quarter, we'll finalize it.
Bob, anything you want to add on that?
No, I think that's right. And a lot of it is because nobody just nobody really knows what to expect. So in that event, they freeze quickly.
Same for you.
Whether it's a small customer or a large customer, everybody's freezing very fast.
Yes.
So I
think don't underestimate this. It's happened pretty quickly.
Got it. Appreciate the color. I'll leave it there.
Okay, good. Next?
Next question comes from Steve Tusa from JPMorgan. Please go ahead.
Thanks, got it. Easier name to pronounce, Steve Tusa.
Sorry, I was just out fixing myself some dinner. On Slide
You're fixing yourself some dinner? You mean lunch or lunch or breakfast? What do you mean?
What does that mean?
Well, I'm just saying this is a pretty comprehensive conference call you're having here. It's been a long time.
Oh, you had to go to the bathroom? Oh, okay. You're complaining? Oh, God.
I was going to ask about the sequential downtick from June to July on Slide 34, but I'll leave that I'll take that offline. I'll ask Pete about that one. You have a modest sequential downtick there. Okay. So anyway, we really appreciate all the detail.
Most So anyway, we really appreciate all the detail. Most companies are withdrawing guidance. Obviously, you guys have given a lot of detail here. Just a very simple question. How much of this cost saves, I think you said $46,000,000 of the cost saves have been booked kind of in the first half.
How much do you have queued up for the second half?
And then how much do
you have visibility on for 2021?
So I'm just restructuring.
So we do have the numbers here. Let's work this number and work
it for you. But we basically what
we showed the Board last week, Steve, is the second half, quarter by quarter. And then also what we showed them is the first half picture. So, Lal, what do you have queued up for savings built into this at this point in time?
So built into the plan, just to kind of reset. We spent $112,000,000 in the first half. We recognized savings from the restructuring and other activities in the first half of $46,000,000 Okay. 2nd half restructuring will be $118,000,000 We'll combine savings in the year and then excuse me, in the second half of 180 $6,000,000
So incrementally about $140,000,000 something. And then what do you what you're running out what did you tell the Board going into the first half of the next year? You're going clearly estimate the math. I think it will not
change off the plan from February. There will be run rate obviously impact because of what we're doing incrementally this year.
Yes. So the big savings allows me the second half and then we'll go into the Q1 next year.
Okay. So there will be some carryover into so did you pull all of that into this year or you still have a pretty decent year over year kind of variance heading into 'twenty one?
What did you tell the Board? So on '21.
Right. I'll share with you. Well, I did not go into 'twenty one spend, but our spend on 'twenty one is expected
to be $83,000,000 I cannot change that number. $83,000,000 So we've accelerated some stuff in. And therefore, the $83,000,000 he'll have he'll still have some savings. I don't know if it's going to be dollar for dollar because there's going to be some longer term ones, but it'll still have some carryover. So they'll probably have another $80,000,000 for the whole year next year.
Just to give you perspective, David, there was $65,000,000 in 'nineteen.
It
will be $230,000,000 in 'twenty and then another $83,000,000 in 'twenty one.
Yes. And you'll get dollar for dollar savings over pretty quickly on that.
For commercial residential, for the restructuring programs we're doing this year, about 60% of the savings benefit will capture this year. So we've got carryover about 40%. And then of course, we got a whole another set of actions in 'twenty one for 'twenty one and beyond that will lay into that
as well. So the key issue, Steve, I think we'll still have savings coming into the first half of next year. The ones we will have to offset in the first half of the year will be things like the salary cuts because we will institute that. So that those numbers will have
to come
back. That's to around $6,500,000
per second half, so $3,500,000 per quarter. The salary planning numbers will hit us all for next year or 2 because that will roll back out. Furloughing, there's a number
of things, again, we're doing in the second half to be dramatically, if you will, that depending on how the sales curve returns, certainly some of that spending can return.
Yes. The key thing is try to bridge as much of the cost right now, and then our real cost savings will flow in as we finish this year. But I like the pace right now. I look at what's going on with the decremental and the inefficient plants, and the savings are flowing through pretty nicely.
And why in the back of my mind do I feel like that there was like a $70,000,000 number that you threw out there earlier in the year and said you had embedded some of that? I mean these numbers seem substantially higher than that. I thought a little more is going to be pushed into kind of 'twenty one or did you just kind of accelerate those?
Yes, we had a 35% number for last year. I think they are bigger numbers now, Steve, because what's happened is we've done a lot more short term numbers. And I think that the numbers that we shared with you in February are very similar to this, but they're obviously higher now because we have more savings and we're trying to accelerate. So the costs are going up, but the savings are going up at the same time. We'll have probably more carryover because we're doing more action right now.
I mean the issue is we're living in a period right now that we have to figure out how to drive our costs down, and that's where we are at this point. So the numbers are bigger than I talked about earlier, but it's always hard to tie back to other things I've said over the phone.
Right. And then just one quick one. Yes, I just wanted to kind of nail down kind of the quarterly sequencing because you gave the Q3 and the Q4. And the Q4 obviously is a step up sequentially on an EPS basis. Is that essentially kind of the mechanics of basically revenue stabilization and then all this kind of cost cutting flowing through that you get you don't see that in the Q2 because of how hard revenue is going down, but you really see it in kind of the Q4, just trying to reconcile the $0.60 moving to kind of the $0.80 to $0.90 or whatever it is in the Q4.
100% correct, Steve. I think that right now, we started I mean, the team started working extremely hard about March 10, and we started taking, okay, guys, we got something coming out of here. And so what you're seeing right now is this wave that's hitting us a lot harder as we saw around the world. So we've taken actions, and we fundamentally believe we'll stabilize by the time we get into June. Business will still be down, but our cost actions are happening, and that'll allow us, as the volume stabilizes a little bit obviously, at a lot lower level, our savings will start flowing through.
That's why we have that from stepping up. The other thing I'd make a comment I think you well know is that we've always had a variable performance share program going back since early '70s. In the chart that we showed on Chart 8 when we showed the Q1, we got hit very hard by $0.10 because the stock price was going up on Chart 8 of the Q1 report in February. This quarter, what's happened is, obviously, with the stock dropped dramatically, a lot of wealth has been locked off of our shareholder base, including people like me and Frank and Bob and Lal. But the favorable plan obviously is at a lot lower cost.
So therefore, we got a benefit this quarter. We're assuming our stock price will stabilize and start coming back up. So we're factoring a little bit of recovery. So we'll have a negative number based on right now in the second half of the year. We've always had a variable plan, and we mark to market, as you well know and you've pointed out to me over the times.
Got it. Yes, your dog is probably not
too happy about that one. Thanks, Dave.
Appreciate it. He's getting food right now, so don't worry about it. He likes the home court team. He likes home court team. He's got a lot more play time with dad.
The next question comes from Robert McCarthy from Stephens. Please go ahead.
Good morning, Dave and team. Thank you for all the time.
Good morning, Rob. Where are you holding up? Where are you hiding? You're not out.
Cambridge, Massachusetts rejected three times, but they couldn't keep me out. You could
be you guys got still a lot of activity going out there right now. I don't know if I'm going to want you talking to me. You could be passing stuff to us.
Well, I think Elizabeth Warren is going to erect a guillotine and start taking out anybody over $100,000 but I digress.
Thank you, guys. You don't make $100,000 You should be safe because you don't make $100,000 Yes. No, I know.
I work for Peanuts, you know that. So in any event, expanding upon Mr. Tuohs' excellent inquiry as always, I wanted to ask a little bit about the underlying cadence of at least the near term. Obviously, you sit on the one of the committees that was just announced, the committee to reopen the economy. I think you're part of the industrial working group.
So I don't want to prejudge the recommendations you're making there. And I better be careful because my the guy who writes my checks, the gentleman who owns my firm is on that committee as well.
Yes, he's well enough. Yes. I wanted to get a
sense, in all seriousness, of how do we think about the near term short cycle in North America? How do you think about what is a return to at least economic normalcy, people getting back to work? Obviously, we've heard a lot about kind of a red blue state divide here. And I don't want to get into a political discussion despite my earlier rhetoric. But I do want to get a sense of how you're thinking about the industrial short cycle plays out in North America and perhaps Bob can amplify some of those comments.
What's embedded in your guidance as we roll it out going forward?
I mean, I think that what we see right now is that the business leaders, a lot of political leaders are starting to realize the tax revenue shortfall. The cost of this of shutting down the economy is enormous, and they're starting to see you're starting to see it here in this town. The medical professions are having to lay people off and to cut costs because all the businesses disappeared, revenue and other than just the crisis around coronavirus and the same thing in the business world. So I think that we're all fighting to save our lives as companies and institutions. A lot will not make it.
So from my perspective, the push forward is trying to get the economy open and get business open. We can do this safely. We've learned a lot from how this isolation and how we go about this and how we work together, both from a company standpoint and a geopolitical standpoint. There's been a lot more collaboration than the press would ever, ever talk about. And so what I see right now, to be honest, Rob, I think you're going to see the next two quarters are going to be pretty tough for America.
There's a lot of things have been stopped and slowed down. There's a lot of concern even in our workforce of coming back to work and being exposed to this because people look at this as like it's a killing zone if you leave your house. And so I think that so what we're factoring in the U. S. Right now is a very, very weak 3rd Q4.
We're not looking for much recovery here. And I think that we're going to see the recovery happening internationally first. And I think that's what we're starting to see already in the month of April. So I think you're going to see a very gradual get back to work. I think it hopefully, we'll start seeing some travel come back in.
Thank God we're not in the travel industry.
I don't know how they're going to recover here for
a while. But this is going to be a very slow recovery, and the money is being put out there. But in reality is so much wealth and so much economic wealth has been lost that there's not enough money in Washington to flood this world to bring it back. So we've just got to get people back to work making things and generating, and that's going to take a long time. And that's how we're factoring into.
We're not factoring much of an economic impact in North America at all. What do you see, Bob?
Yes. I mean, the U. S. Outlook for us in the second half is dramatically more difficult than any other region. The general industrial, the construction environment, as I mentioned, the cold chain environment, frankly, we just see all of that being challenged for a while, again, until we have the comfort until the job losses ebb and we get the comfort of people getting back to work, which is going to take a little time probably.
Yes. I mean, you look at over 30,000,000 unemployed people in the United States, let alone the people in climate and let alone the people that are very hold up in their homes right now that don't want to come out. So I think this is going to be quite dramatic. It's going to take some time. It's not going to be like the China.
I think Europe and those guys will probably fall off sooner, and it's going to be a tough one. Anything else you want to add? No. Okay. Anything else, Bob?
Yes. No, that's very sobering. I guess, on top of that, I think you're President of Safety in attendance, if that's right.
Yes.
And again, I don't want
to get into too much policy discussion, but one thing that's been nettlesome for everyone, bureaucracy and policy aside, has been some of the shortages around testing. I guess the question I would have is, as you kind of flex across your facilities and you look at Mike's chart, have you instituted your own kind of captive testing program for Emerson or what have you done to make sure that you can create the best information and environment for your workers to go back with some confidence of safety?
The big issue means that everything we can work around, the right equipment, the right spacing, the right environment, the right cleanliness, having cleaning your hands before you go to the facility, be clean, everything else, staggering the workforce, heat, temperature of this virus, a little bit different in temperature. You could have the virus for several days before your temperature starts moving. The big issue that we've all talked to the President about, and he knows this from a business standpoint, is we're going to have to have what I call quick testing at facilities. So we're going to go back, assuming and I mean, I'm hearing more and more words. I heard it yesterday out of Washington.
They are coming along with quick testing to allow us to have a much faster impact. So if we have someone come sick in the facility, we can test him or her, find out if they are really sick. And if they are sick, isolate them and quickly isolate people around them and then cleanse and then get back to work. So we're going to be in this game here, I think, for the rest of this year. The vaccine thing, we can't wait for a vaccine.
There won't be any business left if we wait for a vaccine. We've got to have the testing ability to find out who's had it, who's got it right now. And I think that's the big push both in Washington and the medical community because they know from business we need that. We can do everything around that except that. And so the quicker that we get that, and I know they know that, and that's why I heard yesterday they're ramping up the millions upon millions of that testing, that quick testing.
And that's going to obviously we'll benefit from that because that's going to come from the pharmaceutical industry, the drug industry. But in the meantime, Rob, we're going to do everything around that, and we that quit testing thing has got to come. It's got to come to give confidence to the workers. In the meantime, we're going to do everything we can to keep things safe, and that's where we are right now. But we as a company, I think the number is under 40 people globally, have had tested.
Lal is on this meeting that meets every morning, 40 people tested. We've unfortunately had one individual, part time worker in England, passed away, die. It was a very unfortunate situation. Our isolation has really dropped off right now. The new cases have really dropped off.
But safety is paramount to what we're doing, and we've got our top, top people on this thing. And they're countering people like me who, from my standpoint, you charge forward, you're out there, and you're dealing with issues. I mean I'm the type of guy that would lead in World War II if you got that pressure. So that's where we are. I'm going to take one more question from a sell side or 2 one more sell side analyst, and then we're going to lock it down.
Next question comes from Joe Ritchie from Goldman Sachs. Please go ahead.
Thanks. Good morning, everyone. Thanks for fitting me in.
Hey, Joel.
So Dave, just I guess my first question, when you think about that 14% number, organic decline in the Q3, can you just talk about April specifically? Has that been trending at that number already or below that number? I'm just curious like where you stand today, month to date or quarter to date on versus that number?
It's our order pattern right now is below negative 15%. So we're tracking below that at this point in time On Bob's business, Lal's business is probably a little bit better than that. Lal's still got some backlog. So when we look at that 14%, we go plus or minus 1.5%. Most likely, it's going to be around 14%, 15%.
The key thing that we'll come out with, we will come out with the orders in April May. We'll get that out for everybody, Joe. But right now, the trend line is dropping quite rapidly. But we're starting
to see some stabilization in our
international markets, including Europe. So the key issue, the big the wildcard for us right now of substance is the U. S, going back to my comments with Rob. This is still in a free fall, and the question will be is how do we stabilize this from a business standpoint in the near term. So I think that I feel very comfortable even today.
As I talked to the audit committee yesterday morning, this 14%, 15% negative Q3 is well in tune. And I expect our orders, when we come back in, we'll see that our orders are probably around that 14%, 15% in the month of April.
Got it. Okay. And maybe just kind of following on there and like I'll echo everybody else's comments. Really appreciate all the rigor and level of detail that you guys went to give us as much information as you did today. But just following on that last point, Dave.
So when you think about then the U. S. As we progress through the year, I mean, it's really hard to know exactly how the shape of the recovery is going to be. How much is China, I guess, influencing your thoughts around the U. S.
And kind of that improvement in the growth pattern as we head into 4Q and into 2021?
I think that from my perspective, as I said earlier, Joe, it's people would like to make that early comparison same comparison. It's not going to happen the same way. China's controlled society, they worked extremely hard. They shut it down hard. It seems somehow the sickness was only in a couple of regions.
And they came in structurally. What we learned in China from our facilities, obviously, we're using from a safety standpoint other facilities around the world. So I think the China structure is completely different. It will help us, obviously. But what we're looking at here is the U.
S. Is a completely different cycle and Europe, a completely different cycle. It's in a different world. So we're looking at the U. S.
As far more negative, far more muted and much more, I would say, a U shaped type of structure. It's we're going to stay down longer and then gradually come back out of it in the second half of 'twenty one. We do not see a quick snapback at this point in time in the U. S. Now if there's somehow that everyone got back to work right away, we got the testing that we needed, Maybe the 4th the 3rd calendar quarter, we could start seeing stuff.
But I think that's going to be more in the Q4 of this year. So I'm very negative on the U. S. Growth model, and I'll let Lal and Bob talk about this. But that's how we see it right now.
We're structuring a completely different cycle for each of the world areas based on historical norms and based on what we're seeing from our customer base right now. So allow what we Yes.
Absolutely agree. As I went around the horn with my world area leaders yesterday, it's clearly a North America challenge, significantly more so than anywhere else.
So why don't you give a couple of colors? You got some colors North America.
Yes. I'll give you a brief
We'll never give this much information again. I'll have to rip my tongue out to ever give this much information.
Yes. I've already given you the color around what's happening with quotation rates. RFQ is down in that 25% rate in our across our businesses. But just to give you perspective globally, globally, we were booking approximately $850,000,000 a month. That was our run rate as we went through 'nineteen into the Q1 of 'twenty.
In P7, we'll book somewhere around $680,000,000 dollars That kind of drop off is very significant. That's that 15 ish plus percent
of savings.
P7 for him is April. That's
April. And the biggest hit in that is the U. S. And Canada. The other world areas, Europe, Asia and Middle East will exceed their plans, but the Americas particularly will be challenged therein.
So Asia will be very close honestly, to a normal what we call a normal month in bookings. Surprisingly, they've returned, and Europe doesn't look as bad. But it's really that America impact. And Europe, we're getting a lot
of medical bookings because that's about A
lot of medical, a lot of life science, David, and oil and gas. Honestly, downstream, we won a significant order BP yesterday in Azerbaijan for a controls a digital twin control system. So Joe, it's going to
be a I think it's in an international market, and so that's what we see right now. I think the companies are very international, a lot of that benefit. Bob, do you want to add anything to that? Anything, Bob, you want to add?
No. Again, I think we don't expect to see the U. S. Go down as hard as China did, but we expect to see it stay down longer. So it's going to take a little time.
Again, it all depends. If people get back to work, if there's a vaccination, all this kind of thing, second half of next year could be a very exciting second half for us. If it plays out longer, then that could change. But
when we've come out of
these before, we've had some pretty strong quarters. And again, hopefully, that scenario will build up in this one as well.
Yes. We need the testing and the medical support to happen. And I think that's what business people tell you. Well, I want to thank everybody for the calls, and I appreciate everyone calling and listening. I know it's a lot of material.
I apologize, but I thought it was important for everyone to have that input and look forward. I know Pete will be very busy in the follow-up here for the day, but I appreciate everyone. And hopefully, we'll be able to see everybody. And unlike the famous doctor, the worst with Donald Trump, I intend to shake hands and hug people at some point in time before I die. And so I'm a handshaker, and I don't believe this handshaker will disappear.
I mean if we're all going to be that worried, you must as though jump the water right now. But I look forward to seeing everybody, and I look forward to seeing what unfolds here in the coming months. But rest assured, Emerson's at business. Emerson's working, and Emerson is working us extremely hard to make sure that we can take advantage and solve everything that needs to be solved here in the coming months. Thank you.