Emerson Electric Co
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Earnings Call Transcript

Earnings Call Transcript
2020-Q2

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Operator

Welcome to the call. I would like to turn the call over to Pete Lilly, Investor Relations. Please go ahead.

P
Pete Lilly
Director, Investor Relations

Good morning, and thank you, and welcome, everyone, to Emerson's Second Quarter 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 Dellaquila, Senior Executive Vice President and Chief Financial Officer; Mike Train, Emerson President; Lal Karsanbhai, Executive President of Automation Solutions; Bob Sharp, Executive President of Commercial and Residential Solutions; and we are also joined by a special guest, President of Professional Tool Business in Europe. Mr. Tim Reeves is 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.

D
David Farr
Chairman and CEO

Thank you very much, Pete. 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 10th when I came back from a conference in New York when I was presenting at J.P. Morgan as always you all showed up.

And so, I made the decision with the OCE to stay open. We have the OCE here every day. We are properly spread out. As you guys know this office complex. We also have about 15 other executives throughout this floor. We get together on an ongoing basis to make sure we are making decisions, constantly making decisions.

We shut the rest of salary workforce down and send them home and they are working from home. But I was – I felt it was important with this crisis that we were here, arrive 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 and 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 that are quite running up in Rhode Island. That’s a slight new plant coming up in Arizona. We work very closely with Honeywell with Darius and I actually talked several times on this issue to make sure they got equipment where we allocated Branson makes welding equipment that makes the masks around the world and testing equipment.

And so, this is currently the facility in Rhode Island, which is the picture up with our equipment and the Honeywell mask and this is where CEOs around the world what I call frenemies work very closely together to get things done for the nation, for the world and I just want to make comment to that because this is a situation where Honeywell and I are working together to do something right for America and not necessarily speaking up as something out.

So, I want to turn it back over to Pete. But again, here we are sitting here. We are properly spread out. Tim is holding my Raleigh monkey and making sure that it doesn’t get Coronavirus. So with that, Pete it’s all yours.

P
Pete Lilly
Director, Investor Relations

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-19 pandemic quickly spread in March. Trailing three month orders were down 3% also reflected by the decaying demand environment, but indicating some modest backlog build-up.

GAAP earnings per share were flat and adjusted earnings per share were up 7% to $0.89, driven primarily by lower stock compensation cost 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 three month orders were down 1%, also well below initial expectations due to the pandemic demand environment taken 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 million and free cash flow of $477 million, up 10% and 15% respectively. The business returned over $1.1 billion to shareholders including over $800 million in share repurchases and over $300 million in dividends.

Lastly, the company continued and built upon its aggressive cost reset plans initiating $40 million of restructuring actions in the quarter.

Turning to Slide 5, we’ll cover the P&L. Second quarter gross margin was flat at 42.1%, that’s favorable price costs and cost containment actions offset the declining revenues. SG&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 reflect the lower stock compensation cost 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 a broad based weakness unfold in the quarter for particularly and the U.S., down 8% and over 20% respectively. Europe, which finished down 2% showed strength really in the quarter which was quickly forwarded in March as the virus rapidly spread and most countries closed their doors.

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 cost decreased $97 million as the stock price moved dramatically lower in the quarter.

Q2 cash flow performance was solid. Operating cash flow increased by 10% to $588 million and free cash flow increased by 15% to $477 million representing 91% converting. 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 second 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-19, while share repurchases and lower interest cost delivered $0.02. Adjusted EPS finished at $0.89.

In summary, non-operating tailwinds were largely offset by the effects of Covid-19 on operations. Importantly, total segment adjusted EBIT increased by 50 basis points and total segment adjusted EBITDA increased by a 120 basis points reflecting just 9% deleverage on $400 million 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 three months underlying orders were down 1% driven by the early quarter relative strength of the longer cycle businesses, panel control and systems, which grew 3% and 7% respectively. Of note, backlog grew by 3% to nearly $5.1 billion on a sequential basis compared to the last quarter. The platform delivered strong profitability in a very challenging demand environment.

Adjusted EBIT and adjusted EBITDA margins were up 50 basis points and a 130 basis points respectively reflecting aggressive cost actions taking effect. Restructuring actions totaled $29 million across the platform which brought the total to $112 million 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-19. North America dropped low-single-digits while Europe dropped 1% as modest momentum in the ecom business was more than offset by declines in the tools business.

Asia, Middle East and Africa were down 15% driven by China which was down sharply over 30%. Trailing three months underlying orders were down 5% at 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 & 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 million, which crossed a total figure to $19 million for the first half.

Turning to Slide 13, we will review the updated guidance. The speed and breadth of the impact of the Covid-19 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 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 in 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 million with approximately $230 million comes from – coming from the Automation Solutions platform and $45 million coming from the Commercial and Residential Solutions platform.

We now expect adjusted EPS in the range of $3 to $3.20, a reduction of approximately 16% at the midpoint. We expect operating cash flow to come in at approximately $2.75 billion and CapEx spending expectations have been decreased by $100 million to $550 million resulting in a free cash flow target of approximately $2.2 billion.

Lastly, our share repurchase program for the year is now complete at approximately $950 million. Please turn to Slide 14, which bridges our updated 2020 adjusted EPS guidance. The starting point of 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 $1.8 billion from prior year resulting in a $0.50 - $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 and resumes average 42% to 43% of full year estimate EPS by the end of the first half. This year our first half adjusted EPS fell over $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 third quarter 2020 guidance. The underlying sales outlook for the quarter is dramatically negative reflecting near-term challenges and in a elongated recovery in industrial markets from the Covid-19 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 million 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 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.

F
Frank Dellaquila
Senior EVP and Chief Financial Officer

Good morning, everybody. We wanted to spend just a few minutes here on liquidity, to spell any concerns anyone has. We are in really good shape. We believe we never take this for granted. We are never complacent but we believe we are in very, very strong position as we enter the downturn here.

We have the capacity to fund all of our internal needs and our dividends despite the fact that we – as you just saw, we expect reduced operating cash flow over the next several quarters.

We have a modest amount of leverage even in downturn in less than two 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 and we will begin at Slide 17, just walk you down those points.

At March 31, we had $2.6 billion of cash. More than half of that is available on a same day or at most next day notice. So we are in very, very good shape if there should be a market disruption and we also have a $3.5 billion 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 we are in all 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 we begin to – when we began to see this coming in mid-February, we started to extend maturities in the CP program. At first, it was difficult, because the market wants somewhat royal.

It improved when the Fed stepped in and announced a couple of programs to indirectly and directly support the commercial payment 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 including that – included in that, we built a $1 billion 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 are also evaluating an issuance of term debt. Credit spreads– pretty significantly in 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 they are on chart 18, kind of the maturity profile CP plays out. And then finally on chart 19, we’ve always maintained a very conservative debt matter.

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 matter as we hit the open spots between that towers we have there.

So, again, in sum, I think we are in very, very good shape regarding liquidity. We are 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 this downturn.

D
David Farr
Chairman and CEO

Thank you. I ask Frank to talk to shareholders this morning about this issue. Frank and his team, I have to give tremendous kudos for accomplishing what they’ve done. They came to us in early February long, and basically say and we need to start take an action.

Frank also worked very closely with the finance committee, the Chairman and several of the members of the finance committee who are very knowledgeable of what’s going on in the marketplace and they instructed us very well of the time.

We also have several executives, but we had a Executive Board Meeting that discussed this issue and other actions. And then we also – last week we pulled up our Board Meeting and had a four hourBoard Meetingwith the Board and then, yesterday we had the audit Committee Meeting. So we are trying to communicate to our Board to get their inputs.

But most importantly, it was our look at this, the liquidity, the financial structure, the ability to finance this company and times like this are very, very crucial. And Frank and his team has done an outstanding job with that.

Before Mike has a comment about the battles he has been fighting around the world, I want to remind people on start 2020 for the new sell-side or investors out there. Emerson had a very global retail strategy since back – since the day I started running the company as a CEO back in 2000. And we’ve had this strategy when we looked the world on an 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 tick back chart.

We look at ways that we could serve the global marketplaces out of one or two and maybe even three of the retail areas.

This has been one of our strategies from day one. I also want to thank the audit committee and the work that the Head of Audit, Lisa Flavin who runs audit for us here onsite, work on an enterprise rich strategy which analyzes this chart and making sure that it works and it has worked. As we’ve gone through this strategy, we first tested it clearly in February and early March with the China shutdown.

And we’ve tested it again. Now there are issues we will deal with when we get out of this, but from my perspective, this whole retail strategy when you hear now even the President of United States talk about that 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 so much concentration in China. About eight years ago, and many of you know that I started making moves with the team and moved some production out of China and diversify it more around the world.

But again, I want to thank Frank and the work in the finance committee and then also want to thank the globe 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 tax boards led by the OCE It wasn't that one throat to choke here.

We had everyone involvedand one of thethings thatMike 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 a sales operations and supply chain.

And Mike has extremely broad and deep knowledge of 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 am turning over to you and update the shareholders of how we see it right now.

M
Michael Train
President and Chairman, Automation Solutions

Yes, David. Thank you. A pleasureto be with you here today. Just on that start 2020 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.

Let’s go to chart 21. We’d obviously recall last time we were together it was our Investor Meeting on February 13. Our China operations were just getting restarted after a government mandate we closed for two weeks. And then the days were a bit rugged as suppliers took some time to get clear 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. Now as the Coronavirus again 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 and with great effort we’ve been able to gain government recognition and designation. China led to the South Korea, Italy impacts, which then 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 who are 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 and early April, we saw a multitude of states in U.S. and multiple countries around the world implement these orders which tens of thousands of our own employees who have been to work from home mode and it’s been amazing watch the Emerson teams deal with a sudden reality and come through in every aspect.

Not great timing from the end of a quarter perspective but our plans on balance stayed up and running and we get our best to deliver to customers. As we sit here today, we are still working some major issues.

The India lockdown which was recently extended to May 3rd has proven exceptionally challenging with logistics and the ability to operate where shutdown practically overnight and we worked down 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 really get back some solid points. We have worked closely with the government officials there and I appreciate their engagement.

In Europe, we witnessed some rough times in Italy, but things are much improved now. We are still working through some supplier issues and community sentiment in Europe. But again, directionally things are going in the right way.

In the Americas, the USA has been incredibly interesting to navigate. I need to highlight the guidance the Department of Homeland Security issued on critical infrastructure and essential services and with a few exceptions, our states and cities are aligned on this guidance.

Right now I am spending my time on Mexico, where there is still significant efforts to manage the virus and I am 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 investors. Hopefully this gives some good snapshot of how the world is dealing with the virus inclining its way back. I know we have some China conversation coming up which maybe important thinking throughout things play out over the next few quarters.

Again to my Emerson colleagues, thanks for the tremendous effort and collaboration, real importance as we keep food, medicines, energy, electricity, medical goods, everything else in touch falling to our communities.

D
David Farr
Chairman and CEO

Well, Mike, I want to thank you very much for this issue. This is not easy to the 24 hours a day, seven days a week, day in and day out over the weekend you and I were talking a lot. You are talking to various people, dealing with political leaders at all levels to make sure they understand the importance of this and then working very close with hands-in-hands with operation.

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 how 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 contracted the Coronavirus, anyone has become tested positive, who is being isolated.

Steve has organized this right now. He is now in a process 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 and 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 realized before will we had to work governments at the highest level. This iswhere having those relationships that all of us have, everybody at this level and also retired executives that Emerson have that really may come home and help us in times like this.

But for the people out there before I go into and I want to make out a comment, as you can imagine, we are fighting a global pandemic war and giving the CEO that runs this company you guys know me pretty well. I strongly believe that leaders need to be at the front. We don’t need to be hiding in the bunkers or hiding at home, leaders to be at the front and fighting the war and winning this war.

And I want to make sure that a special recognition goes to the Board who has been working with us very closely with special meetings. The OCE, the senior executives, and all the world area people that are been engaged in the work in this – on the daily issues. It’s amazing work comes up in a daily basis. But being together allows us to walk down the hall, colloquially stay apart from each other, other than every once in a while screaming at somebody.

So, they are too close. But it’s important that we have this eyeball to eyeball contact to deal 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 Qs hopefully by Friday at the latest on Monday.

Also very important to all the employees around the world and customers is communications. And everyone of us might felt, and Bob and Lal and Steve and Mike, we’ve all had videos. I am doing those sort of videos today. It 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 are 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 and in a conversation I had with the executive board a couple weeks ago, we made the decision at the OCE level that we, at the Board level, at the OCE, we took a 15% base salary cut effective April 1st which 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 of 5% which you are going to see cutbacks. You are going to furloughs. There is a lot of things that’s going to be happening here.

We pushed out all salary increases for twelve months. So it’s a rolling process that people like me who know me 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 wanted to give you a sense of the orders. Now keep in mind, I know people are wondering how does Emerson only had 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. It’s a meeting in New York around a 100 million and then we raised it a couple weeks later to about a 150 million. 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 is only down 1%. If you look at Bob’s five, he basically is in line. He is a book and ship company who 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 it’s a pretty strong drop off in the month of April, May and June and July.

And you are going to see orders that are now going to start bouncing in the negative 10%, negative 20%. And I know Lal 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 tree and say, well, Emerson will be okay in the third quarter.

That’s not the case. It started dropping, but that – so I wanted to give you an understanding of why auto held up. We are 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 third quarter that Pete outlined with you earlier.

As you look at the underlying sales growth, that the OCE and we held web access around the world of our – leaders around the world over the last several weeks, in fact the last 45 days as we live together here, we now see a pretty strong downturn here in the third quarter, also in the fourth quarter. We see this is a four to six quarter reduction. This is on chart 24 and at that point in time we are structuring our cost 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 2021 numbers, those are directional only. We think that we are going 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 governments stimulus comes into play. How fast is our some of our customers come in to play. We are now modeling what we think is going to be the 2021, 2022, 2023, but both from our internal standpoints we see more and more endpoints every day coming in from the customers, every day coming from around the world.

But you look at this, we are looking at a pretty strong negative third quarter, down 14% ROI growth. Plus or minus prior two – third 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 are hunkering down into a very, very challenging 2020 and a challenging first half of 2021 and hence, the work that the operations and also the corporate done relative to cost and as I look at what’s going on right now and we are in this pandemic work, we basically look at the situations of what we are evaluating everything. What we really need, what – I am evaluating the organization, which ones are rising these challenges. Which ones have the right stock 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 is no golf going on, I basically spend ten 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 in Emerson right now as I think true 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 drop in the second quarter $240 million, the deleverage is only 15%. That’s tremendous and you’ll see Bob and Lal will give you little bit more detail on that.

Versus last year, if I look at from the second quarter standpoint, we dropped $408 million and we only deleveraged 9%. And now it’s fundamental 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 are looking at a much tougher cash flow in the second half. But we still 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 a cash flow in the first half, we are now starting to liquidate our balance sheet which is not unusual for Emerson.

We are 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 would be the inventory, because the inventory – the volume has dropped dramatically right now and then what will happen to us as we go into 2021, we’ll start and have to add the balance sheet as we start growing the company again sometime in late 2021.

Restructuring has truly helped us both at the corporate level. I talked to you about the cutbacks we are taking across the world on salaries, on cutbacks and delays in salary increases, but also our bonuses will be – will significantly reduced. We are not going to zero 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 are working on right now as a corporation and I’ll work with the full cost committee and the full Board. We are also accelerating restructuring. We had a major restructuring program underway already. In 2020, we are going to spend 215, it’s now up to 280. Both businesses are using this opportunity to really valuate how do we set the cost structure even stronger for us going forward, looking at layers, looking the organization and what do we really need to do relative to the organization to make sure we win, but also have a right cost structure and so we go through this time period.

We don’t know exactly how things are dealt, 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 want to run this room and ask how many years these senior executives in this room have been, these guys are well into the 20 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 are really looking at keeping the cost in line and making sure we stay aggressive. One of the things we’ve done over the years, as you all know is we’ve continued to diversify the company. Today, 80% of our – we have non-oil and gas end-markets. Oil and gas markets clearly upstream oil and gas, the pipeline and terminals. Even pipelines and terminals right now is a questionable market.

Some of the terminals are actually growing. They are investing in terminals, because they are storing oil. But typically, we are down to basically 20% driven by this oil gas fluctuation. Our 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. And so it makes it a little bit different than we’ve had in the past. Yes, we are going to get hurt by oil and gas investments when 20% of the company is 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.

The market is not going to zero. We are going to support these organizations and you will see the numbers are quite significant in the investments we’ve made over the last ten 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 the North America, we obviously do very well. We have a very strong position in oil and gas. However, we also continued to diversify ourselves against our way from this marketplace and still support it. We are not walking away from it. We just have other businesses and from the standpoint of pharmaceutical, medical, chemical, whatever industries, power.

So if we look at where we see today, we think about the percent of automation sales. This year we are 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 zero.

You can see last year with $900 million upstream, this year we are looking around $750 million. I guarantee you that majority of that will be KOB 3 aftermarket business to keep the facilities safe and running and producing.

If you look back at the last industrial recession, we’re well over $1 billion that dropped a little bit upstream, but it didn’t go away. We don’t have the numbers relative to the 2008, 2009 numbers, but you are going to see there, it’s little bit higher percentage at that point in time. So we have continued to diversify.

We have continued to work our aftermarket business and what I really want to do for the guys and turn it over Lal in a second, but I wanted to give them to give you an insight relative to the business issue right now, also to give you some really strong insight that you are not going to get from a lot other people around China, actually giving you numbers, showing the shape of the curves of recovery.

But we have done a lot of work here thinking about what our investors would like to know about what’s going inside Emerson and what we see day-to-day which clearly 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 representation here.

L
Lal Karsanbhai
Executive President of Automation Solutions

Yes. 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 works from an orders and sales perspective in what is a significant demand-driven cycle. Orders were down eight tenths of a point in Q2 versus a 2.3% plan and weakening trough in Q3 and stay negative for five consecutive quarters as we have modeled the next four quarters.

From a global perspective, these are 2015, 2016 type of numbers. However in 2015 and 2016, it took us essentially four 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 Oil Commission and others meet and vote later this morning. Rig count is down 35% in Western Texas in the last 30 days and our RFUs 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 revoke in May that we have a 100% team assigned, operating at about 2000 hours a week to deliver an FDA approved validated system in September. That is record time for – sustain that pharma plant.

Let me turn to Asia. The good news is China’s recovery is better than expected. We will beat the orders plan 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 in 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. The Europe had a very good close to Q2 and we have very few cancelations to-date. Customers are working to seize aggressively and RFUs in total have dropped about 15%. Well, I’ll give you an example to 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 million per month in those four countries. We will book $38 million 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 on line 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 that 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 and Brazil outside of Petrobras, particularly at Modec continues to be a good story for us.

Turning to sales, the plan for Q2 is a positive five tenths. We were down 8%. As we pointed out, again, we will trough to 12% in Q3 and we will stay negative as planned here for five consecutive quarters.

At this point it’s very important for me to highlight our backlog position. In the first half of 2020, we built $600 million of backlog predominantly across our final control, systems and measurement solutions business. The assumption in this plan is that we reduced backlog by $300 million 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 a $100 million, Q4 will be down 12% and 2020 sales will be down approximately 8%. That’s a sensitivity on the sales plan.

Let’s turn to chart 29. The last portion of this chart is an exact replica of the chart I shared with you during our February Investor Conference. The 2023 peak margin plan I defined has $325 million of restructuring spend impacting 2300 salaried headcount and a 110 facility reductions yielding approximately $400 million of savings.

Focusing on 2020 specifically, we committed to spend a $177 million of restructuring. In the first half, we spent a $112 million including $83 million which we spent in Q1 and that was prior to our February meeting in New York. The team has identified an additional $53 million of restructuring bringing the total for 2020 to $230 million and driving annualized savings of $314 million.

This means that we have to execute $118 million of action in the second half, $85 million in Q3. This incremental plan impacts an additional 1100 individuals and results in $40 million of savings in the year, an additional $40 million 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 3 points from the 2019 historical high. The $120 billion 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 have 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 had only represented approximately 20% of total oil and gas sales.

While we do see capital spending coming down in all geography, we continue to win and execute critical projects around the world. The all logistics challenge is creating opportunities across the globe for terminals, terminal projects both modernizations and Greenfield 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? One, a strong global team of sales and service continue to engage with our customer bases. In some cases in person, but also using the digital tool I described.

Two, 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. Three, we are actively working with customers to schedule shutdown and turnaround activity into the fall season.

Four, 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 eight to ten weeks or longer as they lack the regional manufacturing footprint capability.

Turning to Page 32. The project funnel currently sits at $7 billion versus $7.1 billion we communicated in February. The oil price shock has triggered projects to be deferred into 2021 or 2022. Approximately, $900 million of jobs have shifted to 2021. That is 2x the pace of FDI 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 million that we booked out of the funnel since February. We removed $203 million out of the funnel, $27 million of scope change occurred and we added approximately $270 million to the funnel.

The major reductions as I said were North America predominantly privately funded LNG jobs. The predominant additions were Modec, FPSOs, three shifts, 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 to chemicals and the Ratnagiri Refinery in India, which is a GD between ADNOC, Aramco and Indian Oil.

Let’s turn to Chart 33. I would like to turn to a segment of our business that have significantly accelerated through this challenging time, a medical and life science business which will be close to $550 million in 2020 sales growing double-digits.

In the Medical it’s predominantly in our discrete and industrial segment of business. This includes Branson ultrasonic welders that David highlighted the offset for medical PPE, ASCO medical regulators for application such as ventilators and oxygen therapy machine, pneumatic controls for lateral turning mattresses on intensive care beds. The business is projected to be up 40% in 2020 to $188 million.

The life science business is largely now process business, systems, measurements 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 as they will 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, best fitted for batch applications. Today, we have over 40% participation in what is a $0.5 billion life science DCS market that’s two times greater than the next nearest competitor and we plan across the entire industry value chain, from development to production and sales.

Turning to chart 34. I would 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 markdowns in China were extended beyond Chinese New Year, but most of our operations resumed by February the 10th. We always expect that dip to occur in February as you saw there it occurred in 2019. Obviously, more stream this year.

By March, our orders were $125 million, down 90% versus 2019 and I expect it 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 seven new tank farms, as well as petrochemical activity ramping up 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% 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, but very good recovery as we get out 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 will turn it over to Bob Sharp. Thank you.

R
Robert Sharp

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 nine tenths of adjusted EBITDA improvement.

We held SG&A in line with sales even though again that sales drop 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. And that’s what we need to do to produce and ship our product and I’d certainly want to extend a special thanks to that groups and we’ve taken many measures to make sure they are safe following the government and local health guidelines, as well as doing additional actions as well.

For the chart here, what I am showing, the sales and orders for our commercial residential largely go in line with each other. We are very much a book to ship business. But what I am showing here is our sales outlook for this year into next year and then I am going to use the financial prices as a reference, because there is not really any direct reference to what’s happening right now.

But the closest thing I think we see is probably the financial crisis. So you can see going in last quarters have been kind of flattish if you will down a bit. You’d expected it to be very similar to the rest of 2020 even a month or two 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 the 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 condition problems that we have.

You can see right now, directionally, and it is certainly directionally because we are focused primarily on this period in this quarter more than anything. But going into 2021 as it follows similar downturns of the past, we would expect by the second half to be turning up and the magnitude that is certainly to be determined by a lot of things.

At the bottom again, the 2008 to 2010 reference. We had a little more growth going into the financial crisis up a couple percent being down. You can see we went down tens and twenty percents and four 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 million, down to $0.5 million in 2009 and 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 million jobs. So far we see that has been 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 are buckling down through a very challenging quarter that we are in. Still continued challenges in Q3 and now we’ll watch out things develop and doing lot of external factors around the Covid virus as far as what’s going to dictate for 2021 outlook.

The next chart I am showing is the – on the left is the exact chart I used in February for the Investor Meeting. You can see the peak plan summary, about $330 million of total actions, 500 salaried headcount actions on only about 8000 salaried headcount in this business.

That’s a substantial percentage. A number of moves, the best costs, 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 than 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 are 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 expect this ideally to be a relatively short lived thing. Once the virus comes under control, we are trying to manage through by getting the cost down quickly in this half. Still have the opportunity with the workforce and next year – of course if next year changes we still have other levers to pull. But that’s one where we are going after right now.

On top of the restructuring activities, there is also $31 million of other additional cost actions which is again basically all levers we can pull on the SG&A side. Our second half SG&A spend versus our original plan is now down over 10%. So we are working to adjust the volume decline.

And certainly as Mike mentioned, there is 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 factor on the second half profitability and the GP as well.

The next chart talks about China and you can see again, we had a very 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 week in cases for some operations. So we also had a very significant downturn. March was a bit better, down 19%. April continues to improve within the 10%, 15% kind of a dynamic right now.

And as you can see, we do expect at this point to be at to steadily return again to 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 fourth quarter.

Down below on the left, there is a number of project investments going on right now across the provinces. You can see about $1 billion in total or close to that. Many projects, a lot of these effect buildings, a lot of these effect bus and rail where we have air conditioning and refrigeration. So we see this as a proxy.

The channel partners we have in China have strong visibility on projects. The key thing is going to be the execution of them. Everybody is tight on cash right now. So everybody wants to release orders until they are getting paid by the customers and our channel is in that same condition as well.

So, again, the China, right now is playing out in this way and as – 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 our customers and suppliers. And so we are hopeful that this is going to play out.

We got a couple of charts here on Emerson’s supporting the fight against Covid-19. Chart 39 from the commercial residential standpoint. Certainly, one of the things we have 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 plans, 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 basically the Chinese standard of their N95 masks.

We’ve given away nearly 40,000 of these to many different care facilities around the U.S. and other countries as far as gloves and other things too. We are providing our home employees the surgical masks, cloth masks and other things. And from a prioritization standpoint, we are basically saying that the medical community need 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 silicon transmitter 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 the lay over due to freezing. And so, they contacted us on a Sunday for a Monday shipment. We gave – got some devices to them and helped to preserve the product as it came across to the U.S.

In the bottom left, the Cold Chain business, Thermo Fisher, an important customer of ours use refrigeration for some of their Covid test stations, some of the testing environment and we are able to supply a number of those quickly. We 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, 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 understanding our products as a central business for society and again, it’s something that we help – helps our employees understand why it is that we do need to coming to work every day, because we got a lot of important things we have to make sure we are providing to customers.

I’ll turn it over to Lal.

L
Lal Karsanbhai
Executive President of Automation Solutions

Thanks, Bob. I want to share a few examples from an Automation Solutions perspective, as well and four specific examples of the efforts our teams are making to support the Covid-19 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-19 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 million and will be book and ship this fiscal year.

In the testing realm, our Coriolis meters are being used for the precise filling of reagents in testing equipment. This will move over to medical PP&E. We have been awarded orders from Honeywell over the past five weeks for ultrasonic welders to be used in the manufacturing of medical masks.

And lastly, in patient therapy, we have received nearly $20 million 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.

D
David Farr
Chairman and CEO

Thank you. Thank you, very much, Lal and thanks everybody again. We made the decision as we listen to our investors in the calls, in the sell-side analysts and also the buy side investors. So we felt that we needed to go 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 make sure. But I think it’s important that our investors understand what we are living in day in and day out.

And again, I want to thank everybody both in this room, the entire OCE, the 15, 20 people that put up to me for the last 45 days and also the people around the world as both Bob and Lal and Mike and Frank have communicated. It takes a team effort and we’ve divided and conquered and formed taskforce and worked this on a day-to-day, phase-to-phase basis.

And I want to make sure that everyone is recognized for that. I am doing a video again this afternoon. 2 O’clock two 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 2015, 2016, 2017, 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 am still the CEO.

I am not dead though people have tried to kill me. I am still quite strongly in charge and as long as I am here, our dividend will not be cut and we will maintain our dividend payments in history. We have the financial flexibility and capability to do that going forward.

We also are looking clearly one of the things I want to make comment on is acquisition. We clearly see some opportunities that will start emerging and we want to make sure, we are strong, financially set and what the work that Frank is doing and the work everyone is doing right now gives us that flexibility to pickup unique opportunities like we did D&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 I am going to open the line and take Q&A. And we’ll start.

So off the back to the announcer. Since you wouldn’t do a live – Saturday night live, this is live from St. Louis and the first question is coming from I guess, Mike Halloran. So let's open the lines, so Mike can ask the question.

Operator

Yes. First question comes from Mike Halloran from Baird. Please go ahead.

M
Mike Halloran
Robert W. Baird & Co.

Hey. Good morning everyone and thanks.

D
David Farr
Chairman and CEO

Thank you, Mike. Good morning to you.

M
Mike Halloran
Robert W. Baird & Co.

So, first question, just some historical context on how you are looking at the oil and gas cycle here. Obviously, you've been through a few of these days. And certainly appreciate the slide that Lal put together and 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?

D
David Farr
Chairman and CEO

Yes. So, Michael to give you some context, I’ve been around a quite long time. I ran the process business back in 1996, 1997 when we had the financial crisis of Asia and the price of oil went below $10, almost went to zero. I think you are exactly right. We are going to see – I’ll let Lal answer couple of things. We will see a structural change.

I think we’ll see an acceleration over time from liquid to gas. I think you are going to see a structural change in the power industry, a topic what’s going to be used in the power industry 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 are going to hunker down and protect the cash. They are going to try and maintain the current liquid production, the revenue. So therefore they are going to have spend KOB 3 type of dollars and a little bit of KOB 2 dollars.

I think this been transitioned more out there in the 2023, 2024 and 2025 time period. Based on my historical knowledge of this, and I appreciate that. By the way, I am assuming Covid can’t go over the virus. You get me sick. I’d be very upset with you, Mike, especially since you're a Brewer fan, Milwaukee Brewer fan. So Lal, anything you want to add to that?

L
Lal Karsanbhai
Executive President of Automation Solutions

Yes. Thanks, David. What we’ve seen in recent announcements by the majors cutting CapEx down 22% versus 2019 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 that 80 players will be – the 50 players, excuse me, will be very disciplined. As we go through this, the thousands, many of them will be in trouble as we go through it. So typically, when I think about the two 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 are reducing utilization rates as I pointed out. Some of the idling units. And some are trying to figure out how do 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 reining 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 this oversupply element that we have. That’s how we see it right now in the two. But I think structurally upstream oil production will be more challenging cycle here.

D
David Farr
Chairman and CEO

One of the things we are doing, Mike, because you are exactly right. There is going to be some structural changes. We are starting – we are evaluating the organization too and we are putting investments and how we are going. As you well know, we can adjust our people, but we are working very quickly because clearly there is not going to be any major projects for a while in the liquids side.

There will be more in the gas side and obviously we are 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, Vidya in the Middle East, we have obviously Roel in Europe, our leaders there are all adjusting because of the same issues that you bring up and it’s going to be very fluid and live I think for two or three years.

M
Mike Halloran
Robert W. Baird & Co.

And David, to your point around gas, you are absolutely right. Golden Pass continues to move forward. That’s said LNG jobs – Saudi’s Marjan project is the 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.

D
David Farr
Chairman and CEO

Mike one more question. Sorry please.

M
Mike Halloran
Robert W. Baird & Co.

Yes. So that's actually a good segue. Then how do you think about the structural changes that we are seeing on that piece and what that means for the AS segment over time? And Hybrid discrete, some of these medical life science applications seem to doing very well in certainly better tale as we look forward, particularly as we basically step back and some more regionalization come on that side.

How quickly can you move 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 you think about inorganically versus organically?

D
David Farr
Chairman and CEO

Yes, I think that we are – one of the things that Lal and his team are really – we are obviously looking at our internal investments. I’ll answer the first and then Lal answer those two. But we are obviously changing our investments towards serving the more discrete marketplace. The other marketplace is not the liquid side, because I think the gas investments will continue to come back.

The aftermarket gas is very, very strong and then it will be a liquid but it will be changed as you are saying. So you are going to see that we continue to invest at higher levels around the areas that are in the hybrid space, the discrete space of the space both from an acquisition standpoint and also this internal development.

We have a lot of projects underway right now working clearly within the discrete space, within the systems space that move outside the oil in that marketplace. We are also looking potentially some acquisitions, can we shake out some acquisition that are little more software based along those lines.

So, Mike, I think you are right and obviously, as we’ve seen in every other structured 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, and it’s going to continue to shipped away from the liquid 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 industry is dependent on our technologies. But you are right, we will reallocate some of the new innovation around the other areas and our portfolio continue that mixing away from the oil and gas. So anything else you want to add to Lal?

L
Lal Karsanbhai
Executive President of Automation Solutions

Just two things, David. We 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 is a significantly longer runway to continue to drive that.

The two other areas, David that I am particularly focused on from a diversification perspective are in the Hybrid segment, life science, particularly meaning 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.

D
David Farr
Chairman and CEO

And I think that – will you Mike, also like to add on up in Minneapolis, right now they are working on a lot of sensors for the hybrid life sciences, food and beverage space which is important area. So, the next question, come on.

Operator

Next question comes from Nicole DeBlase from Deutsche Bank. Please go ahead.

N
Nicole DeBlase
Deutsche Bank

Yes. Thanks. Good morning Dave.

D
David Farr
Chairman and CEO

Good morning, Nicole.

N
Nicole DeBlase
Deutsche Bank

So, I just wanted to ask about margins in the second half of the year. It looks like you guys are embedding decremental is getting about worst in the third quarter 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 restructuring payback?

D
David Farr
Chairman and CEO

Yes. I think the big issue right now, Nicole, is in the second quarter why our detrimental margin was so much better is obviously we had a lot undergone in the first quarter and then the drop-off in the sales be it significant, but not the same level we are talking about in the third quarter. So, right now, the acceleration and the decline of our sales are overwhelming basic to the restructuring we’ve done in the first half and the incremental restructuring we have going on at this point of time.

We are still looking at 12 months left on the total pipe. We are also looking at some longer term ones that we are doing relative to our international markets. So we can sort of set ourselves up for a better 2021 and 2022. But the third quarter in particular is really – is because the drop off you see in those sales, I think when we drop-off $1 billion something in the third quarter sales, $700 million.

It’s just overwhelmed everything we’ve done at this point of time. So we’ve been a little bit more cautious on that. But we are 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 has hit us so hard in April, May and June.

N
Nicole DeBlase
Deutsche Bank

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 were both phased similar decremental as in the second half just thinking about the fact that most of the restructuring spend has been focused on AS?

D
David Farr
Chairman and CEO

Bob, why don't you answer first? What's your decremental second half right now? You are going to be close to 30.

R
Robert Sharp

Yes, we are going to deleverage around 30% order of magnitude that’s where sales down and went to the teens. So it’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 the very strong SG&A reduction versus last year, and certainly many activities in the plants.

The deleverage of volume, as well as again the Covid-19, which is very disruptive to the plants right now is going to be very challenging.

D
David Farr
Chairman and CEO

From a productivity. I think the other thing I want to add, Bob, you are still trying to target some EBITDA margin improvement for the whole year, even with the down sales we are looking at. So that’s still the case.

R
Robert Sharp

Adjusted EBITDA in total for the whole year we are looking to hold versus last year. But we are going to be hurt at this point. Yes, there is going to be very strong for volume decline, but it’s going to be difficult at this point to be up.

D
David Farr
Chairman and CEO

And the big issue and I’ll let Lal answer to, Nicole, the big issue right now, the plant, some plants will operate for a day, two days and then get shutdown as we have to clean. And that productivity impact is very, very hard to overcome in which safety within our facilities is very, very important. It’s frustrating. You have a situation often you have to shut down, then you got your people back up.

So it’s another hand tied behind your back. But overall I think with that all that situation is doing pretty well. So, Lal, anything you want to add?

R
Robert Sharp

Yes. Thanks David. Hi, Nicole. The third quarter is clearly our most challenging quarter within leverage rates in the 44% range for us. That’s driven by predominantly two factors. One being the North America impact which is most significant in the third quarter accelerates from March into Q3 and the book to ship business’ impact. For the short cycle businesses in our instrumentation and KOB 3 in 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 2020 on a pure EBIT basis, which is more normalized. But the third we think a significant hit.

N
Nicole DeBlase
Deutsche Bank

Got it. Thanks guys.

D
David Farr
Chairman and CEO

Thank you very much Nicole. See you soon.

Operator

The next question comes from Andrew Obin from Bank of America. Please go ahead.

A
Andrew Obin
Bank of America

Yes. Good morning.

D
David Farr
Chairman and CEO

Good afternoon or good morning, Andrew. I guess, it is morning.

A
Andrew Obin
Bank of America

Yes.

D
David Farr
Chairman and CEO

I just use this morning stuff. Don’t get used for either. Go ahead.

A
Andrew Obin
Bank of America

Just some the questions. Looking at the comparison you guys making with 2008, 2009 and I understand the bottoms up back that the company is better. But it seems that the GDP forecasts for 2020 are going to be weaker than what we even saw in the great financial crisis.

Yes, your revenue performance seems to be better than in the financial crisis. Is that all driven by just changes in the portfolio or are there other assumptions from a macro perspective embedded there as well?

D
David Farr
Chairman and CEO

The number one issue, Andrew, is we went into the financial crisis wanting hot, strong. We are very strong. We are growing double-digits. So that was the biggest – so we are in a growing curve and then we got hit and we dropped hard of that hit. As you well know we were structured this year for a basically a flat year.

We had a couple – last year it’s a bit bottom, this is flat to slightly down. Lal was way up what he thought it was originally. So we are 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 to that one, we are growing very strongly and then the bottom fell out.

This one we were ready for it. The bottom had already started collapse last year. That’s the biggest difference, Andrew.

A
Andrew Obin
Bank of America

And just a second question. In terms of restructuring, you are talking about spending more money, but can you just talk in terms of logistically what is that you are 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 fast or is it just you are being more aggressive on footprint and if you just us more detail as to specifically what if you could share that publicly. Thank you.

D
David Farr
Chairman and CEO

Yes. So, there is two avenues here. One we are – what we are trying to do is accelerate the programs sort of the fixed cost programs, the facility programs that we had built more into 2021. We are 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 at 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 the corporate and the two platforms, we are looking at the structural of the overall company and what layers we can take out and what layers we don’t necessarily need more as we learn how to run the company in a different world which we are right now.

So those are things we are doing and we are just looking at everything very carefully and sort of – if we don’t need it, we are not going to do it. And that’s from that perspective. So that’s what’s going on a lot different view of that as we go through this pandemic war. I think, Lal you want to add?

L
Lal Karsanbhai
Executive President of Automation Solutions

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, that’s obviously building plants this time accelerating as best we can. So to David’s point, a lot of what we’ve identified Andrew 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 two categories. As we talked about it New York, Andrew the quicker the payback on restructuring and quick as to execute and that’s what we leaning on very hard here in 2020 as we accelerate this second half restructuring.

D
David Farr
Chairman and CEO

Bob, do you want to add?

R
Robert Sharp

Well, I’d 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-existence. And frankly, as we are just going into the organization at a level, part of it’s volume-related but a lot of the SG&A isn’t necessarily easy to do with volume.

So we are making some tough choices right now and 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 we’ll 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 we hope in the last two ones.

But again, the operational side, the plants that’s all going. There is not a whole lot more we can do that will affect the second half of this year. Even in the manufacturing salary, rents and costs, we are not returning over at this down right now and trying to deal with a pretty dramatic volume slide here quickly. Does that answers?

A
Andrew Obin
Bank of America

Yes. Just a question, have you essentially your definition of what low-cost facilities are in this environment given this fracturing of global supply chains that people talked about?

D
David Farr
Chairman and CEO

We use the word best cost and the answer is no. We always look at evaluation relative to logistics. If you think about our regional strategy, we think about logistics, supply chain. I think there fundamentally will be some changes as people look at rebalancing that matrix site that we use and we did a rebalancing about five or six years or seven years ago. We will take a look at that as we go forward here.

But from our perspective, we are – 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.

A
Andrew Obin
Bank of America

Really appreciate it. Thanks a lot.

Operator

Next question comes from Julian Mitchell from Barclays. Please go ahead,

Julian Mitchell
Barclays Bank PLC

Hi, good morning, and thanks for giving the details. And morning. Maybe just a first question, David, looking at Slide 24, and you got that scenario there is a 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 two main segments which end-markets do you think will lead that recovery?

And which ones might be lag on, understand that maybe upstream 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?

D
David Farr
Chairman and CEO

Yes. I think if you – I’ll comment and I’ll let both these guys comment on the specific businesses and what will be different. And clearly the liquid side of Lal’s business is going to be very slow. I think you are going to see starting in the first half of next year some companies look at bringing some facilities back in the United States.

So they’ll be spending around pharmaceutical, and medical, they’ll be spending around some of the chemical side and the materials that go into that space. I think you are going to see – the only laggard we see probably early on will be the liquid side on the new contract – in the new business.

Historically, 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 the business that we look at, I think will start bouncing back pretty quickly as they go through their own matrix and see where they are 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 are going to come back. Liquids and the gas side that would worry about which is about 20% of the total business. Anything else you want to add to that?

L
Lal Karsanbhai
Executive President of Automation Solutions

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% define is what is required from an automation perspective to keep the plants running. Be it a pharmaceutical plant, a refinery or coal powered fired station. So, it’s that that we are focused on.

I agree with David as this comes back it will be predominantly on that – not be in that production, but that will lag. It will be more downstream as we hear. But we are currently already scheduling SPOs shutdown turnaround activity into the fall season. That’s across the broad scale of process industries and power. That we’ll see accelerate and return very quickly as people allow background sites. And we should see the benefit of that.

D
David Farr
Chairman and CEO

But you are going to see a lot of the – as the White House, that I am sure every governments around the world look at as all the areas that went into the healthcare, the medical, the type of chemicals, whatever they need, the pharmaceutical, I guarantee they are going to look at how do you – around the world, not just in the U.S. but also Europe and Asia they are going to look at.

Okay, where do we need to make those investments and that’s what’s help drive a company like Emerson back in the early 2021 time period. Bob anything you want, as you see a change coming back?

R
Robert Sharp

Yes, certainly for us, certainly a key leading end 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 – that can come back quickly as well. Cold chain right now, again the restaurant industry is largely frozen in the United States or on hiatus. Even supermarkets which were all realizing a critical infrastructure are very limiting as far as really in the sites.

So they are very careful about doing any project activity right now. And then again, certainly, if 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 development as the heat develops that’s going to be a key factor. And it might be a more of a replacement market here than a…

D
David Farr
Chairman and CEO

Yes, they certainly talked about replacement, but about 85% of our business is already on to that replacement anyway. So certainly the housing, new housing will have some factor and whether people do require – repair their systems, replacement matters of that too, although margins on the repair side, the compressors are quite good.

So, there is certainly some mixed out if it gets down into component repairs. Thank you. Julian, anything else?

Julian Mitchell
Barclays Bank PLC

Just a quick one. I mean, I know that you always looked 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 2010 and 2011?

D
David Farr
Chairman and CEO

Well, I mean, from the standpoint of – we are not backing off our peak margin plans. So, obviously as we come out of the incremental margins should be better in the near term because we are 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, structural cost will be lower as we come out of this and that will be a good thing and the key is for you is for the next CEO is to make sure that he or she does not allow those structural cost to come back in. But I would say that, as we try out of this thing incremental margins could be better for us.

Julian Mitchell
Barclays Bank PLC

Great. Thank you.

D
David Farr
Chairman and CEO

Thank you, Julian. Next.

Operator

Next question comes from Andy Kaplowitz from Citigroup. Please go ahead.

A
Andy Kaplowitz
Citigroup

Hey, good morning guys. Dave thanks for all the color here.

D
David Farr
Chairman and CEO

Good morning, Andrew. How are you doing my friend? Where are you hiding these days? Are you hiding in some place? Are you bunkered?

A
Andy Kaplowitz
Citigroup

Hiding in Jersey. Hiding in Jersey. Very exciting place to hide. But…

D
David Farr
Chairman and CEO

Very good place.

A
Andy Kaplowitz
Citigroup

Exactly. By the way, let me ask you about China, just in the context of obviously down 20% in AS in Q2 and 30% in CNRS. So how much did you use China a roadmap for Covid-related impacts across the rest of the company where you are 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 in there better than China? And then can you give us your take on the shape of China’s recovery?

I know you gave us lot of color. Do you think it’s ultimately U, L? What do you think there, Dave?

D
David Farr
Chairman and CEO

China recovery is going to be a more of a V shape. And you could just quickly say I think it’s going to be sharper for a while, a little bit more flattened for Bob and the reason for it is, it allows businesses, 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 that building tank farms to buy $10 price of oil.

I mean, China, for a while business is going to stack much faster. Now, I don’t think the rest of the world is just – I’ll talk to 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 how they control the economy. I think the other economies will have a slower come back from the standpoint of how they open up.

We just look at our measured opening that we are going to have inside the United States. I see the same thing happening in the middle of Asia, in the Middle East, Asia South and Middle East and also in Europe. So, I – what we are 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 on the political leadership and also the financial wherewithal is not that good.

On Bob’s business, clearly, historically, Bob’s business, he is coming back quite strongly in Asia, or China and Asia. Not 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 is he get snapped, as he has a chart he shows historically, maybe by the third or fourth quarter of next year, he could see things accelerate and it goes back to the distribution channel which we are liquidating because the financial wherewithal of that channel and then also may see some strengthening that can stack. 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.

A
Andy Kaplowitz
Citigroup

China is definitely been very proactive about getting businesses, getting the 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 a stimulus side of injecting things with programs.

So, I think you are just seeing a lot more organized collective effort, if you will, to get the economy back running and then we are going to see in the number of countries right now?

D
David Farr
Chairman and CEO

Bob, do you want to add anything?

R
Robert Sharp

Yes, just very quickly. Obviously, China doesn’t have the production elements of our marketplace. Europe is the other area that has very little production left than – has been depressed for a long time and we are seeing Europe being more resilient than the Americas for example, as well. So those will be two nuances on that.

A
Andy Kaplowitz
Citigroup

Thanks. That’s helpful guys. And then, Dave, there has been a lot of talk. I mean, you mention about reassuring and how that might impact taking multi-national companies. You did talk about your strong local-for-local strategy. So maybe talk about how your supply chain has been impacted, little more color there and how you might benefit us?

In fact, we do see more emphasis on localization of supply chain. 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?

D
David Farr
Chairman and CEO

Well, nationalism, it has been calling on now. It started back about five or six years ago. But nothing new, it’s obviously just escalated a little bit higher that has been going on for some time. I totally believe based on what we are seeing in our customer base in both the chemical industry, what we see in obviously the food and beverage, the hybrid, the medical industry.

We are seeing a push to our rebalance some of these supply chains and also where they make stuff. The fact that Honeywell is opening a mask – a plant in Rhode Island, a mask plant in the Arizona, the fact that we are seeing some first vaccine production that we are working on right now and going after to be in the United States.

I think the legislation has to be changed to protect the medical and pharmaceutical industry and the vaccine industry. But I think you are going to see that. I think clearly, the negative side of that will be companies like Emerson and the multinationals that we serve the global industries, we are going to have to work that issue.

But it’s not going just with the U.S. I think Western Europe will be the same way, Andrew. I think you are going to see Western Europe, be it the French, the German, the Italians, the Spanish, the Belgians, they are going to look at what happened and what they could depend on, be it the Asians or be it an American and they are going to say okay, we need to redo some stuff here.

So I think this is going to happen globally over the next two or three years and I think the good solid global industrial companies which you guys all know about, many of you follow I think will benefit from this. I think the guys are – the companies are still going through massive changes are going to struggle.

There is going to be pluses and minuses, in the end I think I put a plus on our side. I do have a couple negatives as you point out and we’ll have to manage those accordingly.

A
Andy Kaplowitz
Citigroup

Thanks, Dave. Stay well.

D
David Farr
Chairman and CEO

You too. All the best to you, Andrew. Especially in New Jersey. I think I like my hand better in St. Louis.

A
Andy Kaplowitz
Citigroup

I hear you there.

D
David Farr
Chairman and CEO

Okay. Next.

Operator

Next call comes from Josh Pokrzywinski from Morgan Stanley. Please go ahead.

D
David Farr
Chairman and CEO

Good try. Good try. That’s damn close. Good try. You want to pronounce your last name for this guy?

J
Josh Pokrzywinski
Morgan Stanley

Yes, I hope it was, eight out of twelve letters – Dave. So…

D
David Farr
Chairman and CEO

Eight out of ten. Oh, that’s pretty good. I loved it. Josh, you did got the humor award this morning. Okay, Josh.

J
Josh Pokrzywinski
Morgan Stanley

I appreciate it. We talked a lot about the supply chain. Anything in your own supply chain, your own sourcing that you are looking at saying, gosh, this is gotten too long and much we manufacture locally.

We are having to cross a few too much – few too many borders to get components or other kind of sub-assembly, looking less at your customers and kind of more yourself as the purchaser?

D
David Farr
Chairman and CEO

Yes, the answer is yes. And so, what we are 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 and early February, we are looking obviously, what's happening towards 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 businesses and evaluated through our audit side and through the audit committee under Lisa Flavin and the audit committee.

We will go through this process most like I asked the audit committee yesterday to wait a little longer, probably it will be more like August this year. I want things to stabilize. But we are going to look at things like, how did our supply network do from a financial crisis standpoint. Do they have the money?

Did we have to help them? Which ones we are going to keep up for this as we ramped up and down. So I think that from, as we look at right now, Josh, we are not going to be getting fundamental changes. As you know, our strategies we have multiple suppliers. But the big issue for the first time we are seeing not just one or two countries closing down, we have three countries closing down.

And so, what we are going to have to do is evaluate this from an economic standpoint and a enterprise risk standpoint is looking at this model and say okay, do we have to have four. And so, those are things that we will do. Nothing right now I am more interested in stabilizing and then recovering. But we do know what happens with 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 little too earlier at. We’ve been able to overcome it and in the mean time I do know we will make some changes as we go forward here in late 2020 and in early 2021.

J
Josh Pokrzywinski
Morgan Stanley

Got it. I appreciate that. And then, just as I think about some of your kind of longer cycle customers or folks who don’t make decisions likely, I’d imagine that the speed of which doesn’t happened is maybe hard to kind of calibrate what they want to do, just show up one morning and kind of erase the zero 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. So I would imagine you are not quite in that moment yet where – what they want to do?

D
David Farr
Chairman and CEO

Josh, this one is a lot faster and the reason – this one is a lot faster. I mean, is it a 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 in financial crisis. So, they really had to jump on this thing very early on in February and March.

Now will there be some changes? The answer is yes. But I think that you missed – you don’t represent as well that if you don’t think that these guys have made some fundamental changes. We are living in it daily. At the OCE, we get together at 2 O’clock every day. The OCE downstairs is the big board room and we are spread out and both of us, both Lal and Bob were talking from a customers’ input.

So these guys are moving much faster. So, maybe the last pieces will be finalized as they get finished 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 we are looking at from a financial market standpoint.

So this one is a little bit faster pace and being together allowed us to make some adjustments as 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?

R
Robert Sharp

No I think that’s right. And a lot of that is because nobody really knows what to expect. So in that event they freeze quickly. Whether it’s a small customer or a large customer, everybody is freezing very bad.

D
David Farr
Chairman and CEO

So, I think don’t underestimate this. It’s happened pretty quickly.

J
Josh Pokrzywinski
Morgan Stanley

Got it. I appreciate the color. I’ll leave it there. Stay safe.

D
David Farr
Chairman and CEO

Okay. It’s good. Next.

Operator

Next question comes from Steve Tusa from JPMorgan. Please go ahead.

D
David Farr
Chairman and CEO

Thanks, Scott. That was easier name to pronounce. Steve Tusa.

S
Steve Tusa
JPMorgan

Sorry. I was just out fixing myself in dinner. On slide..

D
David Farr
Chairman and CEO

You are facing yourself at dinner? Right, you mean, lunch or breakfast? What did you mean?

S
Steve Tusa
JPMorgan

Well, I am just saying this is a pretty comprehensive conference call you are having here. It’s been a while …

D
David Farr
Chairman and CEO

Oh, you have to go to the bathroom? Oh okay. You are complaining. Oh, god, Tusa.

S
Steve Tusa
JPMorgan

I was going to ask about the sequential downtick from June to July on Slide 34, but I will leave that. I’ll take that offline, ask Pete about that one. You have a modest sequential downtick there. Okay, 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 save? I think you said $46 million 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?

D
David Farr
Chairman and CEO

We do have the numbers here. Let’s work this number and work it. We basically – what we showed the Board last week, Steve, is the second half, quarter-by-quarter and then also what we showed in them is the first half next year. So Lal, what do you have queued for savings to fall into this at this point in time?

L
Lal Karsanbhai
Executive President of Automation Solutions

What goes into the plan, just to kind of reset, we spent $112 million in the first half. We recognized savings from the restructuring and other activities in the first half of $46 million.

D
David Farr
Chairman and CEO

Okay.

L
Lal Karsanbhai
Executive President of Automation Solutions

Okay. Second half restructuring will be a $118 million. We combined savings in the year and – excuse me, in the second half of $186 million.

D
David Farr
Chairman and CEO

So, the incremental would be about a 140 something? And then what you are running out – what did you tell the Board going into the first half of next year? Clearly, has to make…

L
Lal Karsanbhai
Executive President of Automation Solutions

I do not changed off the plans from February. There will be runrate obviously impacts, because what we are doing incrementally this year.

D
David Farr
Chairman and CEO

The big savings allows them in the second half and then will go into the first quarter next year.

S
Steve Tusa
JPMorgan

Okay. Thanks. 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 2021?

D
David Farr
Chairman and CEO

What you saw on the board, 10 and 21.

L
Lal Karsanbhai
Executive President of Automation Solutions

Right, I will share with you – well, I did not go into 2021 spend, but our spend in 2021 is expected to be $83 million.

D
David Farr
Chairman and CEO

$83 million.

L
Lal Karsanbhai
Executive President of Automation Solutions

I have not changed that number.

D
David Farr
Chairman and CEO

$83 million. So, we’d accelerate some stuff in and therefore on the $83 million you’ll have – they will still have some savings although that’s going to be dollar-to-dollar because they are going to be some longer term ones. But it will still have some carry over. So, we’ll probably have another $80 million in the whole year next year.

L
Lal Karsanbhai
Executive President of Automation Solutions

Just to give you a perspective, David, there was $55 million in 2019.

D
David Farr
Chairman and CEO

Yes.

L
Lal Karsanbhai
Executive President of Automation Solutions

There will be $230 million in 2020.

D
David Farr
Chairman and CEO

Yes.

L
Lal Karsanbhai
Executive President of Automation Solutions

And then another $83 million in 2021.

D
David Farr
Chairman and CEO

Yes. We’ll get dollar for dollar savings pretty quickly in that.

R
Robert Sharp

And for commercial residential, for the restructuring programs we are doing this year, about 60% of the savings benefit we will capture this year. So we got carry over about 40% and then of course we had to hold another set of actions in 2021, for 2021 and beyond that will lay into that as well.

S
Steve Tusa
JPMorgan

Okay.

R
Robert Sharp

Steve, I think we’ll still have savings coming into the first half of next year. But once we will have to offset in the first half of the year will be things like the salary cut, because we will institute that. So those numbers will have to come back. That’s doing around $6.5 million for the second half. So $3.5 million per quarter.

The salary planning numbers will hit us all for next year too, because that will roll back out. So, furloughing, there is a number of things again we are doing in the second half to be dramatically if you will that depending on how the sales curve returns. Certainly, some of this thing to return.

D
David Farr
Chairman and CEO

Yes, the key thing is prior bridge is much of the cost right now and then 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 inefficient plants and the savings are flowing through pretty nicely.

S
Steve Tusa
JPMorgan

And why in the background mind do I feel, there was a $70 million number you threw out there earlier in the year and said you had embedded some of that. I mean these numbers seems substantially higher than that. I thought a little more is going to be pushed into kind of 2021 or do you just kind of accelerate those?

D
David Farr
Chairman and CEO

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 are obviously higher now because we have more savings and we are trying to accelerate. So, the costs are going up. But the savings are going up at the same time.

We’ll have probably more carry over because we are doing more action right now. I mean, the issue is we are living in a dark period right now that we have to figure out how to drive our cost 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.

S
Steve Tusa
JPMorgan

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 third quarter and the fourth quarter, and the fourth quarter 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 second quarter, because of how hard revenue is going down, but you really see it in kind of the fourth quarter. Just trying to reconcile this $0.60 moving to kind of the $0.80 to $0.90 or whatever it is in the fourth quarter?

D
David Farr
Chairman and CEO

100% correct, Steve. I think that, right now, we started, the team started working extremely hard about March 10th and we started taking, okay guys, we got something coming out of here. And so, what you are seeing right now is this wave is hitting us a lot harder as we saw around the world. So we’ve taken actions and we fundamentally believe will stabilize by the time we get into June.

Business will still be down, but our cost actions are happening and while as the volume stabilizes we will – at a obviously lot more level our savings will start flowing through. That’s why we have that stepping up. The other thing I’ll make a comment to you – I think you all know is that, we’ve always had a variable performance share program going back since early 1970.

It started that we showed on Chart 8 when we showed the first quarter we got hit very hard by $0.10 because the stock price is going up. On Chart 8 of – on the first quarter report in February, this quarter what’s happened is obviously the stock dropped dramatically a lot of wealth has been locked – locked off of our shareholder base including people like me and Frank and Bob and Lal.

But the variable plan obviously is that lot lower cost. So therefore we got a benefit this quarter. We are assuming our stock price will stabilize and start coming back up. So we are factoring a little bit of recovery. So we will have a negative number based on right now in the second half of the year. We’ve always had a variable plant and we mark-to-market as you all know and we’ve pointed out over the times.

S
Steve Tusa
JPMorgan

Got it. Your dog is probably not too happy about that one. Thank you, Dave. I appreciate it.

D
David Farr
Chairman and CEO

He's getting food right now. So don’t worry about it,

R
Robert Sharp

He likes the home quarantine.

D
David Farr
Chairman and CEO

He likes home quarantine. He got lot more place on the bed.

Operator

The next question comes from Robert McCarthy from Stephens. Please go ahead.

R
Robert McCarthy
Stephens Inc.

Good morning, Dave and team. Thank you for all the details.

D
David Farr
Chairman and CEO

Good morning, Rob. Where are you holding up? Where are you hiding? You are not..

R
Robert McCarthy
Stephens Inc.

Cambridge Massachusetts. Rejected three times, but they couldn’t keep me out. So…

D
David Farr
Chairman and CEO

You guys got still lot of activity going on right now. I don’t know if I am going to want you talking to me. You could be fast in stuff…

R
Robert McCarthy
Stephens Inc.

I think No, I think Elizabeth Warren is going to erect a guillotine and start taking out anybody over a $100,000. But I digress.

D
David Farr
Chairman and CEO

Well, thank, you don’t make a $100,000. You should be safe because you don’t make $100,000.

R
Robert McCarthy
Stephens Inc.

Yes, no. I know. I work for peanuts. You know that. So, in any event, expanding upon Mr. Tusa's excellent inquiry as always. The – 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 are part of the industrial working group. So I don’t want to prejudge the recommendations you are making there and I better be careful because my monthly guy writes my checks. The gentleman who owns my firm is on that committee as well. I wanted to get a sense on all seriousness of how 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 big political discussion despite my earlier rhetoric.

But I do want to get a sense of how you are 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?

D
David Farr
Chairman and CEO

I mean, I think what we see right now is that, the business layers, 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 are starting to see – they are starting to it here in this town. The medical professions are having to lay people off and cut costs because all the businesses disappeared revenue and other than this the crisis around Coronavirus.

And the same thing in the business world. So I think that we are 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 the geopolitical standpoint.

I watch politicians and business leaders, business leaders are business leaders. There has been a lot more collaboration than the press would ever, ever, ever talk about. And so, I see right now to be honest, Rob, I think you are going to see the next two quarters are going to be pretty tough for America.

There is a lot of things have been stopped and slow down. There is 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 we are factoring in the U.S. right now is a very, very weak third and fourth quarter.

We are not looking for much recovery here and I think that we are going to see the recovery happening internationally first. And I think that’s what we are starting to see already in the month of April. So, I think you are going to see a very gradual get back to work. I think that hopefully, we’ll start seeing some travel come back in.

Thank, we're not in the travel industry. I don't know how they are 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 the reality is so much wealth and so much you get on this wealth has been lost that there is not enough money in Washington to flood this world to bring it back.

So we just got to get people back to the work making things and generating, and that’s going to take a long time and that’s how we are factored into. We are not factoring much of an economic impact in North America at all. What do you see, Bob?

R
Robert Sharp

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 can 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.

D
David Farr
Chairman and CEO

Yes. I mean, you look at over 330 million unemployed people in the United States. Let alone the people and climate, and let alone people that are fairly hold up in their homes right now that done 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 pull up sooner and it’s going to be tough one. Rob, anything else you want to add?

R
Robert Sharp

No.

D
David Farr
Chairman and CEO

Anything else Rob?

R
Robert McCarthy
Stephens Inc.

Yes, no, that’s very sobering. I guess, on top of that, I think your President of Safety in attendance so that’s right.

D
David Farr
Chairman and CEO

Yes.

R
Robert McCarthy
Stephens Inc.

And again, I don’t want to get into too much policy discussion, but one thing that’s been mettlesome for everyone, bureaucracy and policy aside has been some of the shortages around testing. I guess, the question I would have is 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 an environment for your workers to go back with confidence of safety?

D
David Farr
Chairman and CEO

The big issue, I mean, everything we can work around the right equipment, the right spacing, the right environment, the right cleanliness, having cleaning your hands you probably gotten the facility to be clean and everything else. Staggering the workforce, heat, temperature of this virus, a little bit different temperature.

You could have a 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 are going to have to have, what I call quick testing at facilities. So we are going to go back assuming and I mean, I am hearing more and more work yesterday out of Washington.

They are coming along with quick testing that will allow us to have a much faster impact. So if we have someone comes 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 are 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 to wait for a vaccine. We’ve got to have the testing ability to find out who had it. Who has got it right now and I think that’s the big push both at in Washington in the medical communities, 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 are ramping up the news upon millions of the testing that puts testing. And that’s going obviously – we’ll benefit from that, because that’s going to come from pharmaceutical industry, the drug industry.

But in the mean time Rob, we are going to do everything around that and that quick testing things got to come. It’s got to come to give confidence to the workers. In the mean time, we are 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 on this community that meets every morning. 40 people are tested. We've unfortunately had one individual part-time worker in England passed away, guy. It was a very unfortunate situation. Our isolations really dropped off right now. The new faces have really dropped off. But safety is a paramount to what we are doing and when we got top, top people on this thing and they are countering people like me who has, from my standpoint you charge forward.

You are out there. You are dealing with issues. I mean, I am the type of the guy that would lead in World War II, if you got that impression. So that's where we are. I am going to take one more question from the sell-side, one more sell-side analyst and then we are going to lock it down.

Operator

Next question comes from Joe Ritchie from Goldman Sachs. Please go ahead.

J
Joe Ritchie
Goldman Sachs

Thanks. Good morning, everyone. Thanks for fitting me in.

D
David Farr
Chairman and CEO

Hey, Joe.

J
Joe Ritchie
Goldman Sachs

So, Dave, just, I guess, my first question, when you think about that 14% number, the organic decline in the third quarter, can you just talk about April specifically? Is that been trending at that number already or below that number? I am just curious, like where you stand today, month-to-date or quarter-to-date on – versus that number?

D
David Farr
Chairman and CEO

Our order pattern right now is below negative 15. So we are tracking below that at this point in time on Bob’s business. Lal’s business is probably a little bit better than that. Lal has going to get some backlog.

So we will look at that 14, we go plus and minus one-and-a-half, most likely to be around 14%, 15%. The key thing that we will come out with – we will come out with the orders in April, May. We will get that out for everybody, Joe. But right now, the trend line dropping quite rapidly. But we are starting to see some stabilization in our international markets including Europe.

So the key is the big wildcard for us right now of substitute is the U.S. going back from my comments for Rob. This is still in a free fall and the question will be, 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 talk to the audit committee yesterday morning, this 14%, 15% negative third quarter is well in tune.

And I expect our orders when we come back and we’ll see that our orders are probably around that 14%, 15% in the month of April.

J
Joe Ritchie
Goldman Sachs

Got it. Okay. And maybe just kind of following on there and like, I’ll let go everybody else’s comments. Really appreciate all the rigor and level of detail that you guys wanted to give us is much information as you did today.

But just following on that last point, Dave, so, when you think about that in 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? So 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?

D
David Farr
Chairman and CEO

I think that from my perspective, I said earlier Joe, that people like to make that earlier comparison – same comparison. It’s not to happen the same way. China is a controlled society. They work extremely hard. They shut it down hard. It seems somehow this sickness was only in a couple of regions.

And they came in structurally. What we learned in China from our facilities, obviously, we are using from a safety standpoint in other facilities around the world. So I think the China structure is completely different. It will help us obviously. But we are looking at here and the U.S. is a completely different cycle and Europe a completely different cycle.

It’s in a different world. So we are looking at U.S. is far more negative, far more muted and much more I would say a U shaped type of a structure it’s what we are going to stay down longer and then gradually come back out of it in the second half of 2021. We do not see a quick snap back at this point in time in the U.S.

Now, if there somehow that everyone got back to work right away, we got the testing that we needed, maybe the fourth – the third calendar quarter, we could start seeing stuff. But I think that’s going to be more in the fourth quarter of this year. So I am very negative on the U.S. sales model and I’ll let Lal and Bob talk about this.

But that’s how we see it right now. We are structuring a completely different cycle for each of the world areas based on historical norms and based on what we are seeing from our custom right now. So, Lal?

L
Lal Karsanbhai
Executive President of Automation Solutions

Yes, absolutely agree. And so I went around the horn with my world area leaders yesterday, it was clearly a North America challenge significantly more so than anywhere else.

D
David Farr
Chairman and CEO

So, why don’t give me couple colors? We got some colors in North America.

L
Lal Karsanbhai
Executive President of Automation Solutions

Yes. I’ll give you.

D
David Farr
Chairman and CEO

I’ll never give this much information again. You have to rip my tongue out there if we give this much information.

L
Lal Karsanbhai
Executive President of Automation Solutions

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 million a month. That was our runrate as we went through 2019 into the first quarter of 2020.

In P7, we book somewhere around $680 million. But that’s kind of drop off is very significant. That 15-ish plus percent…

D
David Farr
Chairman and CEO

P7 for him is April. Let’s say work on period.

L
Lal Karsanbhai
Executive President of Automation Solutions

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 plan. But the Americas particularly will be challenged therein. So, Asia will be very closely, honestly to a normal – we call, a normal month in booking. Surprisingly, as they return and Europe doesn’t look as bad. But it’s really not America impact.

D
David Farr
Chairman and CEO

And Europe is getting a lot of medical bookings because that's..

L
Lal Karsanbhai
Executive President of Automation Solutions

I would call, lot of life science, David, and oil and gas honestly downstream we won a significant order with BP yesterday in Azerbaijan for our controls, a digital twin control system.

D
David Farr
Chairman and CEO

So, I think it’s an international market and so that’s what we see right now. I think the companies that are very international will have the benefits. Bob, you want to add anything. Anything, Bob you want to add?

R
Robert Sharp

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 us stay down longer. So, that will take a little time. Again, it all depends. If people get back to work, if there is a vaccination all this kind of things, second half of next year could be a very exciting second half for us.

If that plays our longer, then that could change. But we will 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.

D
David Farr
Chairman and CEO

We need the testing and the medical support to happen. And I think that’s what business people tell you. But I want to thank everybody for the calls and I appreciate everyone calling and listening. And 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 phone to talk about the follow-ups here for the day. But I appreciate everyone. And I hope – hopefully we’ll be able to see everybody and unlike that the famous doctor that works for Donald Trump, I intend to shake hands and hug people at some point in time before I die.

And so, I am a hand shaker and I don’t believe this hand shake will disappear. I mean, if we are all going to be that word, you might as well 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 is at business.

Emerson is working and Emerson is working as 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.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.