Good day, ladies and gentlemen. Thank you for standing by. Welcome to Emerson's investor conference call. During today's presentation by Emerson Management, questions. This conference is being recorded today, November 6, 2018.
Emerson's commentary and responses to your questions may contain forward looking statements, including the company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson's most recent annual report on Form 10 K as filed with the SEC. I would now like to turn the conference over to our host, Tim Reeves, Director of Investor Relations at Emerson. Please go ahead.
Okay. Thank you, Gary. I am joined today by David Farr, Chairman and Chief Executive Officer and Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer. Welcome to Emerson's 4th quarter 2018 earnings conference call. Please follow along in the slide presentation, which is available on our website.
I'll start on Slide 3 with the full year summary. 2018 was a year of strong growth, operating performance and cash flow execution. This slide compares our actual results to the initial 2018 guidance from a year ago and which we over delivered on almost every metric. Emerson underlying sales grew 8%, Automation Solutions was up 10% underlying with growth across all world areas. Commercial And Residential Solutions grew 4% in 2018, following 5% growth in 2017, and has delivered 9 consecutive quarters of underlying growth.
GAAP EPS included over $0.20 of net one time items including $0.30 benefit of tax reform adoption, partially offset by acquisition accounting and other charges we highlighted throughout the year. EPS growth was strong and benefited from core operating leverage as well as the lower US corporate tax rate due to tax reform. Operating cash flow of $2,900,000,000 is 17% of sales and free cash flow is 2,300,000,000 and reflects 114 percent conversion, excluding non cash discrete tax items recognized in net earnings. In 2018, we completed our 62nd year of consecutive dividend increases and returned more than $2,200,000,000 to investors. Including $1,000,000,000 of share repurchases.
We also deployed $2,200,000,000 for acquisitions across both business platforms. These acquisitions represent important components of our long term strategy and our path to 2021, 2021 EPS of $4.50 laid out at our February investor conference. So turning now to Slide 4. Our 4th quarter results were at the high end of guidance discussed on our third quarter conference call. Underlying sales growth was 8% in the quarter, and September trailing 3 month underlying orders were also up 8%.
GAAP EPS was $0.97, including an $0.08 discrete tax benefit. Excluding this item, EPS of $0.89 was up 16%. Turning now to Slide 5. 4th quarter gross margin was up 150 basis points on strong operating leverage and the including dilution from acquisitions that closed in the fourth quarter and the impact of a $24,000,000 discretionary one time 401 contribution to From a geographic perspective, the momentum we've seen over the past year continued in Q4 with broad based demand and favorable trends across the Underlying sales were up 8% in both Q4 and full year. Matured markets were up 7% in Q4 and in the full year, led by North America and likewise, emerging markets were up 8% in Q4 and in the full year led by Asia.
Turning now to Slide 7. Total segment margin was down 10 basis points, including recent acquisitions. Total segment margin was up 70 basis points to 19.9 percent, excluding Q4 acquisitions, Aventics and Tools and Test. This improvement reflects 30% core incremental margins in the quarter. Q4 cash flow was very strong Free cash flow of $721,000,000 is 15% of sales and free cash flow conversion was over 125% excluding the non cash discrete tax benefits from net earnings.
Trade working capital improved 50 basis points driven by receivables and inventory performance. Turning now to quarter and up 10% for the full year. September trailing 3 month underlying orders were up 11%. Strong demand for MRO continued through the quarter. KOB 2 upgrade and optimization projects also continue to drive growth across our key markets.
Project like the 1 Emerson announced yesterday, a $32,000,000 contract to modernize a gas processing facility in North Africa. Strong demand continued in North America and China with broad based investment and project wins across our key end markets. Outside of China, growth continued across the rest of Asia, supported by solid MRO demand and improving investment activity, especially in India. Growth in Latin America accelerated in Q4 as the investment climate continued to improve in the region, especially in Brazil and Chile. Automation Solutions segment margin was up 80 basis points and was up 140 basis points, excluding the Aventics acquisition.
This improvement was driven by Turning to Slide 9. Commercial And Residential Solutions underlying sales grew 5% in the quarter and were up 4% for the year. September trailing 3 month underlying orders were up 3%. North America growth was driven by very strong commercial and residential air conditioning demand, as well as strong demand in cold chain and professional tools markets. China growth was driven by cold chain and air conditioning markets, offset by slower heating demand.
Solid growth continued in Europe, reflecting favorable trends in cold chain and professional tools markets. Margin decreased 150 basis points as material inflation and other inflation was partially offset by price realization, operational leverage, the benefit of prior period restructuring actions. Let's turn to Slide 10, which outlines our 2019 guidance framework and Q1 expectations. With a strong macroeconomic environment and favorable trends in our short cycle end markets, as well as longer cycle capital investments, we believe our momentum in 2018 will continue in 2019. For the full year, we expect underlying sales growth of 4% to 7% with automation solutions up 5% to 8% and commercial and residential solutions up 3% to 5%.
The stronger dollar results in an FX translation headwind for the year. Assuming October 31, FX FX rates hold for the remainder of 2019, we anticipate a $330,000,000 unfavorable impact in net sales. With solid underlying growth, we expect to deliver incremental margins of approximately 30% across our business platforms. Driving GAAP EPS of $3.55 to 3 $0.70 or growth of 3% to 7%. Including over $0.20 of net headwinds from discrete tax benefits and other one time items recognized in 2018.
Excluding these prior year one time items, our EPS target reflects double digit growth. Our exceptional 2018 results and outlook for 2019 keeps us firmly on the path to $4.50 EPS in 2021 as presented at our investor conference in February. We anticipate also another strong year in cash flow as we continue to drive operations execution and incremental cash flow from recent acquisitions. 2019 operating cash flow is expected to be 3,200,000,000 and free cash flow conversion north of 100%. For Q1, we anticipate 6% to 7% underlying sales and EPS of $0.65, plus or minus $0.02.
FX is expected to be a 2 point headwind to net sales and $0.01 to 0 point 0 $2 drag on EPS. Please turn to Slide 11, which bridges our 2019 GAAP EPS guidance. In 2018, we had discrete in 2019 and going forward. This $0.34 headwind is somewhat offset by one time charges in 2018 that created a tailwind in 2019, including $0.09 of acquisition accounting charges and $0.03 for the one time 401 contribution charge in Q4 'eighteen. Together, these items net to execution and acquisitions or more than 10% EPS growth.
The strength of the dollar against most major currencies drives a foreign currency translation headwind next year. Assuming October 31 rates for the remainder of 'nineteen, we expect currency to result in a 0 point 0 $6 drag on EPS. And now, please turn to Slide 12, and I will hand the call over to Mr. David Farr.
Thank you very much. Welcome, everybody. The first thing you got to know, as many of the people have been following me for a long time, over a year ago, I lost oral, my wife and I lost oral, And, exactly 14 months later, we decided to add a new member to the team. So I'm introducing rocket, a tricolored King Charles Spaniel, who's now eleven weeks old. And ROCCAT is an individual that can moved a little faster than Zorlkidd in the later years, a little bit more versatile.
And he's bringing new life and energy. As you can see in the order chart, we had a good finish to orders and a little bit about orders and where I see the growth going forward in 2019. But again, rocket is engaged He is ready to go and take us to the stronger performance in 2019 2020 beyond. So want to welcome everybody to Rocket and I will obviously use him as I did Zorl for many or the years as, comparisons and jumping in earnings growth and things like that. So With that, I want to 1st of all, I want to welcome everybody today.
I want to thank the global organization of Emerson for their support and tremendous execution over the last 12 months. We had a very strong fourth quarter. We did exceed what we communicated to you in August. We said that we'll be delivering good solid growth around 7% in underlying sales. And we said that EPS would be at 86 dollars plus or minus $0.02 and we came in at $0.89 plus a unique tax restructuring that Frank and his tax team put in, which benefits us over the long term.
So a very strong 4th quarter on top of the rest of the year. It was an exceptional year of growth in earnings and sales, cash flow returns, Return in total capital broke through 20% again this year in 2018. And the Emerson team did an outstanding job We also returned over $2,200,000,000 of cash to our shareholders, and we've made continued excellent progress on the free cash flow to the cash dividends ratio. This year, we've got it down to 54%. And the OCE is totally focused on getting that number under 50% and 2019, which is basically 18 months ahead of what Frank and I presented over the last couple of years since a repositioning effort in 2016.
But more importantly, great 2018 moment of joy we're moving on to 2019. And And I really want to make sure the global team understands a great year in 2018, but we've got to continue to drive the growth, the improvement margins, the improvement in cash flow, we need to make sure that we continued successful integration of the acquisitions, investments we've made over the last two and a half years, relative to the Pentair Valves and Controls, relative to Ventyx, relative to Paradigm, the Textron Tools and Test business, we need to make sure that they deliver accretion and earnings and they deliver incremental positive cash flow for the corporation for us to invest and pay back to our shareholders. But as we look at the orders and we finished the orders last year, you can see that we had a continued trend On a positive note, I think up in around the 6%, 7%, 8% range for several, several, several months. We see that trend continuing in the 1st part of this year. But clearly, the global economy is changing.
And if you think about our underlying sales growth that, that Tim presented on Chart 6, and And I look at what we're saying this year in the 4% to 7% guide, let me give you a feel for what we see happening around the world right now. Tied to that 4% to 7% guide. Last year, the United States grew over basically a tad or a 9% We believe that U. S. Growth underlying growth this year being the 6% to 8% growth.
We see still good momentum of in our customer base of spending money the U. S. Economy is still solid, it's still growing. Yes, people can say the marginal growth rate is slipping, but it's still a pace where people are investing, including companies like Emerson. We look at Encana, which grew last year around 12%.
We see Canada slowing down in this 5%, 6% to 8% range like the United States as they continue to invest in the materials and the oil and gas in those mining areas that are important to Canada. We look at Latin America, we see momentum in Latin America. From the standpoint of overall last year was 4% in the 4th quarter, they did 10%. As I look at next year, I think that we're going to be in this 5, 6, 7, 8. Maybe if we're lucky, I'll be talking in the quarters that we have double digit quarter growth.
Latin America. That's one area that I believe that are now kicking in. As I said, last year, they had to prove it to me, and they're now starting to prove it to me. So I would say that, that is one of the places I feel good about. Europe last year was around 2%.
I don't see much change. I think Europe is going to grow in this 2% to 3%. The economy is settled down to a lower growth environment. We have unique opportunities there, but still I don't see a very strong robust Europe at this point in time. Asia last year outside of China was at 10%.
As I look at it now, I think we're going to be in the 6%, 8%, 9% range, where we're seeing good investments in India, Southeast Asia, Australia is investing well right now in some of the raw materials and mining areas. So pretty good environment for us right now in Asia. The China situation clearly as people are concerned about it, our order pace is continuing to be very strong in China. And automation solutions. Overall, we delivered 17% growth last year.
I'm looking at growth in more in the 7 8, 9, maybe 10, if we see a little pickup in the second half of the year and Bob Sharp's business around commercial residential solutions. But a slower growth, but still a pretty good growth pace for us as we see it. I would say it's going to be driven by Automation Solutions. Where last year, this was driven by commercial residential. Middle East And Africa, which had a good year around 6%, 6%.
I think we're going to see a very similar type of growth rate 4%, 5%, 6% in Middle East and Africa. So again, we're having all of the world area, our global world areas contributing to our growth. Our emerging markets last year grew faster than the mature markets. I expect that to happen again this year. The other key issue is we see it right now.
Last year, at this time, the wins were basically to our back. As I sold the board today, I see cross winds today. We have winds cutting in front of us and back of us on the side. Overall, though, it's still pushing forward and I'm optimistic for our business profile where we are right now that we'll still see good underlying growth That's why we put the 4% to 7% underlying growth sales out there. We'll know more as we get into February as we see what happens relative to some of the discussions going on in Asia.
But overall, we feel very good about where we're going. We have some issues that we have to overcome, as Tim said, relative to the headwinds, little bit around $0.20, but our incremental margins, our acquisitions, and the benefits that we have from our share repurchase program clearly will help us. On the negative side, clearly, the stronger dollar does hurt us at this point in time. But we put, we're putting forth, I think, a very good earnings forecast a very good sales forecast. And I think we'll continue to outperform the market as we did this year relative to our global spaces as we performed extremely well.
Across Emerson and around the world. So again, I want to thank everybody across Emerson for an outstanding year, a year that's really exciting. We have a lot of work cut out for us. The forecast we put in place right here keeps us well on the line towards the 2021 plan that we laid out. In February to the investors, both from a sales standpoint and execution around acquisitions on a share repurchase program and then obviously margin incremental margin performance.
So that's where we sit right now. We feel good about it. I feel good about how the team executed this year. As did the board today as we reviewed the final results with them. And I look forward to, delivering a strong performance for Emerson for our shareholders again and fiscal 2019.
And so with that, I'll open the mic for questions and look forward to an interesting debate with my investors and sell side analysts. Questions. Session.
Our first question comes from Jeff Sprague with Vertical Research. Please go ahead.
Not too bad. Rockets says hello to you, Jeff. He's right at nibble on you.
All right. Well, he's a cute little guy. Actually looks a lot like the pokey little pup that, I learned to read with and I, I, I guess, if you put up 4% organic growth, poking's going to be a little bit better name perhaps. What has to happen to get down to Florida? Those ranges you laid out there don't really seem to even bring 4 into the conversation?
I think that
the range 4 comes into play the following, we do have a lot of tension with China. And what we see with it would be the consequences of that that would slow down I would call it not only China growth, but all across Asia Pacific growth. So I think that's why I'm putting that stake down there, Jeff. You're right. If you add up the numbers, it would be more like a 5 at the low end.
I don't, my core belief does not believe, say that, but at the same time, I want to make sure investors understand the concerns that I would have would be in Asia, would be around China. I think Europe potentially could weaken as you know, there's a lot of political uncertainty in Europe right now. Even though we don't have a robust growth, I'm always concerned about when the political uncertainty a year. So those are the markets I'm worried about. But, my gut tells me we're still going to be in this solid single digit range.
And, and, we're not going to be as strong as this year. At 7.7, it was a really strong year. But we're going to do better than the underlying GFI, which is probably going to be around 3.84%. So that's how I see it.
And Dave, on the question of projects, right, on the last call or maybe it was 2 calls ago, there was a sense that things were really kind of getting to the altar and people needed to pull the trigger or the resources weren't going to be there. I assume that still stands, but do you see people hitting the pause button a little bit on bigger projects because of all these uncertainties? Or do you think the bigger projects that are in your funnel actually do start to kind of come into play here?
We believe they're going to come into play. We review with the board today, Lal, review with the board today. About 6 or 7 significant projects. We're seeing more KOB 2 right now, like you just saw one today, which is people that mean kind of business too, which means upgrades and brownfields. The big projects are still being worked on.
I'm going in with Lal and Mike into Japan next week on a couple of large projects for the Middle East. So right now, I don't see any delay happening. I still believe that the larger products will be rear end loaded in this year and then we won't really see much of that growth coming into probably 2020, but we'll see a little bit in the fourth quarter based on the projects. But the project size are getting larger. Right now, we saw bigger ones as Frank's sell today with, while reviewing with the board.
And we have seen, we see no delay right now, but clearly, as I said, there's a lot of crosswinds going on. And so if some of these wind shift and do a little sheer work on it, you could see a company like Emerson get sheared. But right now, I still feel very good about it. We'll give you an update on the overall projects and the funnel, again, in February. But as we finish the year, their order pace was pretty good.
I mean, the early indication that October was decent again, a solid growth number for that green line on the Chart 12. The concern is clearly around commercial residential in Asia after China is really starting to pull back and some of the funding. But I feel good about right now. So the new rocket, the new day feel pretty good.
Great. I'll leave it there. Enjoy the puppy. Best of luck. All
the best to you. Thanks.
The next question comes from Steve Tusa with JP Morgan. Please go ahead.
Hey, Dave. Thanks for taking the second. I appreciate that.
Jeff, I just I would have never thought about it.
It's fine.
I mean, but you didn't Jeff sent me a beautiful vest. You didn't never sent me a frigging vest.
Right. I'm not in the bribing management team. So I'll leave it at that.
That is not a bribery, one of those little JPMorgan funkyvest that you wear sometimes. So that's okay. Let's go on, Jim.
I'm sure you can go in for Jamie. So, just on the first quarter, on the first quarter guide, you know, $0.65 plus or minus was a little bit below where I was expecting. Anything going on in the quarter that would kind of make that below average from kind of a normal seasonality perspective? Because if I just do kind of the way your seasonality worked last year, you need a bit of a bit more EPS in kind of the final three quarters to kind of get to the midpoint of your range. Obviously, this is a different portfolio than it's been in the past, but I'm just curious if there's anything in the first quarter that plays around with that dynamic?
Nothing right now from my perspective, obviously, we have the currency probably around $0.02 currency hits us in the EPS. We had some things that came through the P and L in the first quarter last year that won't come back. I would say that, if we can drive a little faster growth, I think we'll be better execution. From my perspective, I know there's nothing going on in the business. I just think that after you have a good fourth quarter, I've come out of the year sometimes.
I'm a little bit nervous about how that quarter comes to unfold, but nothing's happening in the business at all at this point in time. And, let's see how the orders unfold here couple of months and I'll give you a better feel for it. But there's nothing going on at all, Steve. Nothing.
I guess when you're thinking about a lot of the management teams so far giving some pretty good color on impact of tariffs and maybe you put that into the kind of price cost bucket, but what are you guys kind of seeing? What are you incorporating over the next 12 months as far as the impact from all these new lists that are out?
Quickly, I'm going to go back to the point real quick before I go to that question. Frank just point out that our last year, our tax rate in the 1st quarter was under 22%. This year, we're going to be probably a little bit over 25%. So we have, there's going to be a lot of tax things going in and out is that, that tax reform came through and hit us. So that's one of the biggest headwinds that we've got from the standpoint of quarter to quarter.
And if we can make that 25% better, then we'll just figure out how to do it, but that's the biggest headwind that we see right now in the 1st quarter. I just want to clarify.
But that shouldn't impact kind of the normal seasonality on the entire year, right? I mean, because
No, it's not that impact. Yes, it will change because it's going to be the tax rate in the first quarter. Last year was a little bit earned $22.21 this year. It's going to be around $25. And so that does impact that seasonality.
Let's go back to the our headwinds right now that we're looking at is basically we're looking a little bit over $100,000,000 I'm assuming that the president does not implement the second tranche. And so it's more like $120,000,000 at this point in time. We are obviously executing the pricing around that. Clearly, the pricing is going in. It does not give you any margin.
So that obviously gives you a little pressure from the standpoint. We have to figure out how to get cost reductions offset a little bit more of that pricing is going in and we're making that happen. But clearly, as you well know, is the number this year significantly higher than last year, which was closer to more like the 25 effective costs impact to us. This year, it's going to be closer to 120. And therefore, we're going to have a much higher pricing in that margin.
There'll be a little tad degradation in the margin because of the offsets from obviously the price, but you don't get, you don't get leverage in that price. But
does that incorporate everything you know on kind of all these lists today? Everything kind of Okay. Okay. Got it. It's all
in. The only thing we don't have in there right now is if the president makes a decision on the most recent list, he said that he He may increase it to 25% and on January 1st. So that does not incorporate that because then we do not have that as very hard for us to trigger price increases on anticipatory, anticipatory tariff types of stuff. So right now, it's a little bit under $125,000,000 and that's what we've got set in motion and that's how our plan has been unfolded.
Got it. I was just getting back to you by the way. Nothing respects for Jeff.
I know that. And I respect you. You take care, my friend. Take care.
The next question comes from Rich Kwas with Wells Fargo Securities. Please go ahead.
You want to complain about your order too? You want, I mean, you're, in fact, your number 3 in the list. You want to complain? I got, I mean, spray complains. Steve complains.
You might as well complain too. You want file complaint at the front of the line, okay? No, I'm going to pay my bullets for something in the future, so. That's a really smart guy. Just a follow-up on Steve's question.
So the so it doesn't include the 20 the increase of the 25%. So do we multiply by two and a half times or if we go to 25, I mean, that's probably wrong. But I mean, just can you give us a flavor for, for, if the way it goes to 25? Our rate will be around 25. This year, our effective rate was 16.6% as we showed.
No, no, no, I meant the tariff increase. So the tariff rate for China. So Oh, no, no, no, no, you can't just, you can't, you can't multiply. It's
a Okay.
Yeah, it's, I mean, it's going to be, I mean, Frank, you think it's what you think is going to be less
than 20,000,000 order of magnitude, 15,000,000 dollars, $20,000,000 if it goes from 10% to 25% on the list 3.
Yes, that's and I got to believe that he made this the president may look at it or the commerce department, look and see, okay, which ones will go. Some may go to 25, some may not go. So we'll keep you informed, but I would say you probably think of another $10,000,000 to $15,000,000 on top of that, if that triggers and what obviously that means we have the pricing to try to offset that. Okay, good. And then on the on the mix of business.
So it seems like for the year, at least in Automation Solutions, more mix of MRO still pretty healthy. Some KOB 2 coming in, but you're still pretty comfortable about 30 plus on a core basis for incremental margins. And then what does that assume investments, because I know you had talked about making investments in 2019 ahead of project activity and getting people around etcetera. As soon as we make the investments, we have to be very selective when we make these investments. I mean, This incremental margin is very important to the OCE and to the whole company.
And so we'll have Lal and his team will be happy to make the trade offs. And we expect them to deliver a 30 plus percent incremental margins, and they've got to make those trade offs where they're going to make we've got to make the investments in
the support of the larger projects. We've got to make the investments in the service
organization as we continue to try increase our share and around KOB 3 on the kind of business 3, the aftermarket business. So we're going to make investments. We're not cutting back on that. But this incremental margin is very, very important to us. And their growth rate is now up and running at a good pace, which last year started out slower and they build up.
So Lal and his team's got to figure out how to make that margin be a little bit more efficient and deal with that world because we need him to deliver the 30%. The commercial residentials had a good couple of years and most likely, their growth rate is going to dial back a little bit. And so, automation solutions has to carry a little bit heavier load right now. Okay. And then last one on buyback.
How should we think about buyback for 2019? $1,000,000,000. Okay. $1,000,000,000. And as we laid out in February, our target is basically to do $1,000,000,000 between each year between now 2021.
Our target is to get down the total cash flow back to our shareholders down to a little bit on our 60%, which would include getting our our dividend payout better than the ratio aligned to. But we always believe in giving money back to our shareholders at the same time, we want to make sure we make some incremental investments and acquisitions and so on. All right, great. Good luck with that. Thank you very much.
Thank you.
I'll pass it in regard to Rocket. He's much nicer than Zorro.
The next question comes from Julian Mitchell with Barclays. Please go ahead.
Hey, Dave.
How you doing?
Very good. Thank you. Just a first question on the commercial and solutions?
I always like to have a little bit niceties before you just jump in. I'd like to have a little, you know, chitchat of the date here before you sort of jump right at asked me to go out or something, you know?
Well, I guess it's a limited time, 60 minutes. So,
Chillian, there's rules to follow. There's rules not to follow, okay?
Yes, two questions is a good rule. So I think Maybe the first one around the commercial and residential margins. Those were down in both climate and Tool And Home in Q4. Just wondering how quickly you expect the margins to recover, particularly in the climate piece? Understanding that Tool And Home has acquisition impacts through the whole of 2019, when do we get Climate back up?
I think it's going to be more in the middle of this fiscal year, 2019. Our pricing actions are going in based on our agreements with our large OEMs it does it takes time. And I think we probably have 1 more quarter of challenging margin out of them. And I think that they've had a lot of things hit them pretty hard and they have to offset that, but at the same time, and they are taking the action. So I feel comfortable that overall, our price cost will be probably neutral this year at a much higher, higher level because we're going to be probably north of $120,000,000 of the pricing action to offset the tariffs and the other costs coming in.
So think they probably have another quarter or 2 left of that Julien. And so, but I think Bob and his team are highly focused on getting that margin back and getting back up and having a good margin this year. And we're banking on him to make that happen. And so his organization is out there listening to him. This is a year we need you guys to bounce back in.
And give the margin back to us for our for the shareholders. So that's where we see right now, Julien.
Thanks. And then just secondly on balance seat usage, you've laid out the buyback pretty clearly. How are you thinking about the M and A environment, the 12 months have been very busy on deals. Do you think there's a lot of management capacity left to do a bunch more in the 6 to 12 months? Or you think you'd rather hold off and make sure Aventics, tool and test, intelligent platforms are all integrated well?
As we review with the board today, that we most likely will be looking at significantly less than $1,000,000, a $1,000,000 of acquisitions this year. So I would say we're probably going to be somewhere in the $500,000,000 to $750,000,000 at this point in time. The focus of of integration and the focus of delivering returns to our shareholders on the acquisitions we've made over the last two and a half years is very important. So we have $200,000,000 relative to the acquisition from the GE. And then I would say, as I look at right now, we'll be somewhere $3,000,000 to $400,000,000 elsewhere.
And that's how I see it at this point in time. If I see anything different, we will know by February, nothing's going to come out before February. So right now that's why I see it. I see that we'll do $1,000,000,000 of share repurchase. We'll do $1,200,000,000 a little bit over $1,200,000,000 in dividends.
And I would say right now, I would dial in between $500,000,000 $750,000,000 on acquisitions. And from an acquisitions are capital spending standpoint, our dollar is $650,000,000. Is that right? $650,000,000. Joey, take care.
Thanks.
The next question comes from Steven Winoker with UBS. Please go ahead.
Hello, Steve. Hey, good afternoon.
And I know you'd like to ease into it. So, I'm going to say it's important to pause and celebrate these milestones. Congrats on 62 years of increasing dividends, which every company we're able to do that. So very impressive.
There's a lot of people that gave me a hard time, and Frank, a hard time Frank and I had a hard time when we made the decision to reposition, shrink the company and maintain the dividend. But I felt quite strongly from this organization and for our Cheryl standpoint, that was the right thing to do. And we're not quite out of it. I think Frank and I want to see us get out of it this year in 2019. And I think it is an important milestone, Steve, to support our shareholders around the world.
A lot of people depend on that shareholder. Of that dividend, including a lot of our retirees at Emerson.
Okay. That's not one of my questions, though. So for the
2 I
know that. That was the moment of joy, and I appreciate that moment of joy. I appreciate that little hug and I didn't give you a back end, so get out of your damn question.
All right. So, the first one is, just a little more color around this 30 percent incremental margin in terms of the puts and takes. So what I'm hearing so far is, is price material cost to excluding tariff, is that, are you thinking that that's going to be green for this year? And then mix sounds like it is, you've got KOB 2 picking up, and KOB 3 as a percentage of sales sounds like it may be lower, which would be a headwind, and then volume leverage and versus labor inflation, wage inflation, just a little color for how you're getting that 30% plus the investment you talked about?
So on the price cost situation, we, I believe in the end will be plus or minus a couple of $1,000,000 on green red. Now clearly from a pure dollar standpoint of the GP line, it's a wash, but it's a little it'll be a tad, could be a tenth negative on the business overall as the headwind, but not not meaningful headwind relative to that. Relative to mix, I think the mix is one of the United States and Canada and Latin America and stay reasonably strong for our growth next year. Our mix with the KOB 3, which is the aftermarket and repair, in the earliest KOB 2, our mix should be okay. I start worrying about the mix for us more in the fourth quarter of of this count of this fiscal year fourth quarter of 2019 and then the fourth quarter, our first quarter of 2020.
So I don't think the mix is going to be bad for us at this point in time. So that's why the incremental margins this year could actually be a little bit easier for our team. They're up and running. We have an understanding of the price cost situations. We've got, I think we've got our capacity pretty well structured.
Frank and Steve Peltz as he went through the plans, operating plans put the capital out there for these guys for productivity for incremental capacity. So Right now, I feel better about the margins, incremental margins this year than I did last year. And that's how I feel at this point in time.
Okay. And what is the biggest, driver to support? I mean, pretty specific about 3.8% to 4% GS by view globally given all these uncertainties. So if you had to kind of take the biggest question that would sort of support that in your outlook, what are the what is it that you're looking at?
The biggest support continues to invest and grow, which we've saw. If you think about those 4 that entity was last year for us was 9 at U. S. 12 in Canada and 4 in Latin America. If they can deliver on average, what I'm looking at this forecast next year, most likely around 6%.
That tells me that I'm I'm looking at a decent year for us. And that's the core place. If we see that happening, I feel good about it. And as I told Jeff, early on, my concern remains in Asia with as everybody would. But right now, we do not our orders are still okay.
Obviously, Bob's business is struggling a little bit right now, but Bob out loud's business is doing better. So on the good side, North America, on this concerned side, is definitely China and Southeast Asia. That's how I see it.
The next question comes from Nicole DeBlase with Deutsche Bank. Please go ahead.
Yes, thanks. Good morning, Dave or good afternoon, I guess.
Good afternoon, Nicole. Where it depends where you are.
I don't even know.
No, you didn't know, you didn't know Zorro, but, no, you got to get to know ROCCAT here. ROCCAT's Rockett's a key guy. That's all I'm saying.
He's super cute. So hopefully we get to meet him. Oh,
I guarantee you will.
Okay. So I guess, starting with, growth in AS, 5% to 8% for 2019, I think this time, you know, 3 months ago, we were talking about maybe 9 to 10 percent growth. I'm just curious, has anything really changed from your perspective, or is it just some conservatism around some of these potential global growth headwinds?
So the key issue is I've talked about the 2 year window here. I've always talked about, basically, a 17% to 18% type of 2 year window here. And so with the basic 10% last year, I'm now looking this is I've been in this business a long time typically around the 'seventeen-'eighteen, a really good year would be 'nineteen on a 2 year basis. So we had a 7 as we look at the 2 years, the 1st year is 10. So now of 7 to 8.
So maybe my downside concern would be as relative to around Asia. And so I still think if I was putting a number of the paper right now, it's going to be around 7%, 7%, 8% for automation solutions, with my concern being clearly the China, Asia Pacific with the whole turmoil relative to the tariffs going on there. But I feel good. So from my perspective, nothing's changed in the marketplace. Order pace is still pretty good, but I'm always concerned about what could happen with North Asia in this next couple of quarters.
Okay, got it. That's fair. And I guess just kind of like elaborating a little bit on that comment. You'd spend a lot of time China, talking to your customers quite often. Is there anything that you've seen that suggests that we are seeing a slowdown, or is this just, you know, turns over what could materialize over the next three quarters or so?
Okay. On the automation solutions side, the answer is we've not seen anything at all. The order pace still pretty good. On the commercial residential, we are seeing it. We will have a tough first quarter.
We could have a tough first half. As you know, a lot of programs that we had going underway were we're being around the environment. The government was supporting investments to try to improve the environment from the standpoint of burning coal and getting into cleaner, cleaner energy, they have cut that back. And so we're going to after basically, I think 7 straight quarters over 20% growth in box business in China. The funds are now are starting to dry up.
And that is definitely as the government refocused as investments. And I would say Bob will have a tougher year in China and our Automation Solutions investments are still going forward. So that's how we see the profile changing. That's where we see the negative. So if you think about other companies that tied to that within the space you file, I would expect them to be seeing a similar type of trade offs going on right now in China.
Got it. Thanks, Dave. I'll pass it on.
Take care, Nicole. All the best.
The next question comes from Nigel Coe with Wolfe Research. Please go ahead.
Hey, Dave. Good afternoon.
Good afternoon, Nigel. Good to see you. Wolf. Wolf, where are you located?
Ransendal, it couldn't be better for me. It's great. Yes, so cute, congratulations on Rocket and congratulations on a great 2018.
Thank you.
So you mentioned China and you mentioned Europe sort of the two areas that you're watching most closely for next year? Correct. No evidence yet of problems. But if you think about crude and you think about the U. S.
Dollar, what are the break points on those 2, where you become more concerned about the next quarters?
So, from a from the standpoint of the just the dollar strength, I get nervous in particular around Europe. When the euro gets down towards parity. We've got a long way to go from there. We've always structured our structure relative to our European competitors around parity. I get a little tighter at 105 than I do, but it's typically a round parody.
So as long as the dollar stays, it has been pretty tight band here. From the standpoint of just competitiveness, we're in very good shape at this point in time, but I do have a concern if the dollar continues to strengthen and it gets relative to the European and gets all the way down towards parity, which is no indication that's going to happen at this point in time. That's where I get concerned. Overall relative to, again, the dollar strength hurts us in certain cases, but also helps me from a cost structure and some of my other from the standpoint buying, obviously, commodities around the world at a stronger dollar pace. So it helps me from certain respects, but my European competitors right now are not as, let's say, strongly in focus relative to the competitive strength as we are today.
And so I think that I like our hand. We've made some major investments in being competitive in Europe. I've got some major investments on our way being competitive in North America and then in San Antonio. So From a competitive standpoint, I like where we sit at this point in time. Frank, and the operations made some good investments that should help us as we get into 2019 2020.
Being a stronger competitiveness. But the dollar gets a parity, I get nervous. Okay.
And then the GE acquisition, I know you haven't closed it yet, but it's definitely a Tier 2 PLC. Supplier. Is the ambition here to build it into something that's going to compete with Rockwell Siemens, or do you have more of a niche strategy here? Maybe, you know, compatibility with the DCSs? I mean, how do you see that acquisition evolving?
We will, clearly, it's a
Tier 2, but we're a Tier 6. Before this. So, it's a step up. And I would you give me that, wouldn't you? I think our focus, as I've talked about, I'm being careful because the deal has not been approved by anybody yet and close.
But clearly, our focus is going to definitely be on the core process markets of oil and gas and power. And chemical and the hybrid space. We're very focused on the life science, food and beverage and mining. And what we want to focus hard on is hard integration of between our Ovation Power platform and the Delta V on the process side. And then basically go after those islands and automation sitting out there in the marketplace that we can really go after.
And then also integrate that, as you know, we have a couple of our own PLCs that we've developed at this point in time, try to make sure they have a place to play. We'll get into more description of that as we get forward, but that's the game plan we want. And over time, it will be an investment, but we now have the core technologies and we have a core market presence that we can grow over time. And many of you may or may not know when we brought out Delta V, we were number 7th in the world in DCS. So I wouldn't underestimate our ability to go after this marketplace and given our installed base around those core process markets and our installed base around they'll select hybrid spaces I went after.
I wouldn't underestimate that.
The next question comes from Andrew Obin with Bank of America Merrill Lynch. Please go ahead.
I guess it's morning where I am. How are you? It's
where are you? I'm in Beijing. Oh, congratulations. If you is your office moved to Beijing, Andrew? Is that what's going on?
Or Yeah. It was an outsource, not quite. We we we visiting some wonderful Chinese companies.
Good. Congratulations. And how's how's the weather
Oh, it it's actually it's quite clean. I don't know if it's good or bad. You know, I've seen Sunshine and Shanghai and Beijing. I don't know if it's a good thing or bad thing.
So a good thing. It's a good thing. I mean, the investments we're making to clean up theirs, it's good for us. So, well, thanks for joining the call today. I know that's not easy to do And I appreciate your interest in the company.
So fire away, what are your questions, my friend?
Well, just a question, in terms of capacity ramp up in automation systems. How should we think about, over the next 2 years And what does it do to, incrementals in those business as you sort of bring on people to deal with the backlog?
Yes. From our standpoint, as we ramp up both from the capacity, the capital standpoint, which we we basically got a good jump on this year when we spent almost $620,000,000 of capital, up well, almost 30% or something like that in capital spending this year. From a capital standpoint, typically that hasn't hurt us too much, from incremental because of how we, how we feathered in But I don't feel uncomfortable with our expansion relative that I think at 30% leverage, we should be able to handle the incremental investments in people and the capital. The business is there and the key issue for us is clearly to make sure we get that further that capacity in and around the world where it needs to feather in. We will slow down the capital spending this year.
It'd be more in the $6.50 range as we digest what we spent last year and sort of the incremental work that we want to spend this year. But I think we're in pretty good shape. My concern on the capacity is basically making sure that we have it in a certain locations around the world where the U. S. In particular has been very strong.
So my North America capacity is being stressed at this point in time and we're having to add some incremental capacity here in North America, including the United States, which we need to get up pretty quickly if we want to deliver as we get into 2020. So I think we're in pretty good shape, Andrew. Think we're going to have an issue here relative to complaining about de leverage of the people and ramping up. I don't see that or feel that at this time.
And just a question also for revenue growth. What's the impact of the latest Delta B upgrade that you just announced How much does it help revenue growth in 2019?
I think it's going to be a positive. I mean, right now, our systems business will have a good year next year. I think that we saw that our Delta V system had had a very good year. I mean, our power business grew in 2018. We were one of the few companies that grew in the power world.
We grew. We had a very strong 4th quarter. I would expect, I expect our process systems down in Austin with upgrades should do pretty well. And if we do If we do say 7%, growth, underlying growth for the automation business, the systems business should be north of that 7%. I mean, I would say they should be closer to 9 or 10.
I mean, that's off the top of my head to think about it. If we grow 7 underlying for the company, then systems should be those system systems of Delta V should be closer to 10. That's Delta V, not the power, the Delta V piece. I think the upgrades going well.
Thanks a lot.
All the best to you, Andrew.
The next question comes from John Inch with Gordon Haskett. Please go ahead.
Good afternoon, everyone. Good afternoon, Dave.
Hey, John. How are you doing?
I'm doing well. I'm doing well.
I don't know. We got a little we got a hitch. I think we got something that's tapping into our line is probably the Russians because of the voting here going on in Missouri today. So the Russians are probably tapping into our line.
They're tapping into a lot of things. Hey, just a bit of a follow-up on this GE acquisition. I realize it hasn't closed, but did a lot of these businesses, that have been sold by us find afterwards they're in need of investment. Are you sort of anticipating that as well? And is the play really more of trying to get after their installed base where you can maybe cross leverage a bunch of other things?
It's definitely going after their installed base. They have a couple of places extremely strong in the installed base. So that's number 1, we want to play and leverage that across. On the this is from this This company is more of a technology play from the standpoint of investing in technology. It's not a it's not necessarily a heavy capital play.
We will lay out we we're going to be when we get this deal closed, we will lay out an accelerated investment of dollars for the technology to make sure we can take it to the different process industries and the hybrid industries that GE didn't necessarily serve, but we have tremendous access to because of our Delta V and also our Instrumentation. But to your second point, the number one for us is what we want to do is tap into their installed base, take that and really leverage that with our current capabilities. But it will take what we're going to do is we're going to ramp up as Mr. Knight get back when we acquired Fisher and we started building on Delta V, we're going to ramp up our investment in the leverage of this technology and we'll lay that out while we're talking about when we close it. But that's clearly the game strategy for us.
We're going to have to ramp up their investment. This is one asset that I have to say Jeff and his team kept investment going in. I was we're pleased with the technology and the capabilities. And it's because it's not capital is making sure they had the right R and D, which was important. And we feel good about that, but we're going to make some more investments for sure.
Okay. So that makes sense. And just in terms of the Automation Solutions business, you guys called out that September orders were up 11. Was implication that September's cadence was a lot better than the prior 2 months. And doesn't that if that's the case, doesn't that give you actually a little bit more encouragement for kind of this 1st quarter guide here, or is that more of a longer term, those orders, I guess?
Out?
I think the key issue for us is you got to keep in mind, their incentive plans put out there for sales and orders and stuff like that. And there's the last month. And so So the automation business had a far better year than we thought originally. So they were gunning. I think it does.
If we see another strong double digit order pace in October November. That makes me feel much better relative to the start of the fiscal year. And then also the first half of the year. So, give me how the follow through goes, initial read on October is good and probably in line with what we saw here. In September.
But I want to see October, November. You've heard me say this before. The fiscal year, which you have a great year in the bonus payments for the automation guys are going to be good because they earned them. Now can they follow through that? And does order patterns stay in this 10, 11, 12?
Percent range for the next couple of months. If that's the case, we'll have a stronger start and I'll feel better about it. So that's how it reads right now, as you think about it, John, okay?
Sounds good. Thanks, Dave. Appreciate it.
Yes, Betsy. Hope to see you soon.
See you soon.
The next question comes from Josh Pokrzywinski with Morgan Stanley. Please go ahead.
Hey, good afternoon, Dave.
How you doing?
Not too bad. Just to echo everyone, I was wondering, Craig, congrats on the new puppy as well. I guess to stick with that theme, the bottom end of the, of the AS guidance, at 5% looks a little bit more zorro than ROCCAT here. And you spent a lot of time talking about the sensitivity to China, but I guess within that, what's your sense on if we do see demand roll over? I mean, aren't the more infrastructure heavy type end markets where traditionally they would stimulate first.
I mean, it couldn't be kind of a casual beneficiary if things do get weaker that self fulfilling prophecy says that they also pick back up with stimulus?
The answer is yes. And we're trying to be cautious relative to the guide and from that perspective, but my concern is, I've watched China, I've been we've been doing this our 40th year doing business in China. And, my only concern is that if we get into a trade tension, and they decide to start saying, okay, Emerson, yeah, you are a local company in China because we manufacture there. We are going to sort of block you a little bit. And that's my biggest concern in China.
Right now, if the China thing was moving down towards a resolution, I would sit here and tell you today that we're going to have a strong 10 plus year in China from Automation Solutions and that means we're going to have a 7%, 8%, 9% a total year for automation solutions. But I'd like to have a little bit more time on that and that's why I'm being more cautious about trying to I'd like to see some resolution. I also know how how they can come back and maybe come after companies like Emerson if there's is attention continues to ramp up between the two countries. I don't feel that at a point in time, but I'd be foolish not to be concerned about that and paranoid about that. And hence, I'm going to spend time going over there and work this issue.
But right now, you're right. If they shift like they're shifting away from commercial residential right now, all the commercial residential businesses are getting hurt. Automation typically in the past would be helped. That would be the norm. So you're exactly right.
I want to see it and then then I'll I'll feel it. But right now, I'm just being a little concerned about that, the China U. S. Impact.
Got it. Fair enough. And then I guess similar question on the bottom of the range. I know there's some discretionary investment in there and presumably some restructuring that's going on as well. If we hit 5%, probably the world has changed to your earlier points, how much wiggle room is there on the incremental margin or kind of on a dollar cost base?
Just anything we can use to conceptualize how much discretionary spend could come out if demand is weak?
Yes. I mean, the biggest, this is where the rub comes into play. Let's say the world starts really starting to get struggling. And so we start going towards the 4% or 5% underlying growth. We're going to have to and for the people from Emerson on the phone, And as I've talked to the OC, if we go to that route and to your point, what we're going to have to do is start cutting discretionary and we're going to have to cut some of that incremental investment because what we're going to have to do is actually raise incremental margins.
And that would be something that we normally would do. If our growth rate slows down a 4% or 5% range. We thought that was working at B, then we would drive higher incremental margins. That means we will start cutting back on some of those incremental investments I talked about earlier in this call and I've been talking about around the world. If I see this normal growth rate at more than 6%, 7% range, then we can go forward and we'll be fine.
We do have flexibility. So what we're watching Frank and I and Steve and the two platform leaders are If underlying growth is going to be more in the 4% to 5% as a corporation, then we're going to have to cut that marginal and drive higher incremental margins to make sure we can grow and hit positive earnings per share growth. And that's the game that we're going to have to play here. It's way too early to make that call, but that's what those are trade offs that we have. And we have those trade offs.
We can make those trade offs. And so that's what we're watching right now. We talked about that to the board I had a dinner last time with the board talking about the same plan that I presented to you guys here today. And this is the very question that they dived in. I mean, how much flexibility do you have around that?
And that will be the game we'll have to play. And we'll have to start playing very, very fast if we see underlying growth rates going towards 4% or 5%. And so and you know Emerson, we can move. We'll start moving.
Perfect. Thanks. I'll leave it there.
That's why I got rocket. He's much faster than Zoro. 14s are always kind of slow times.
The next question comes from John Walsh with Credit Suisse. Please go ahead.
Hi, good afternoon.
Good afternoon, John. How are you doing?
Doing well. Thank you. Fun earning season to launch into.
Yes, it is. It's kind of busy. I mean, and the industry is a lot different. If you don't know all the different ins and outs of this industry, it's really hard.
Yes. Well, it's been a good experience and it's a lot of fun. So, I guess maybe one quick modeling question and then a broader topic, but we can do the math on the acquisition impact for 2018. Can you just kind of help us put a finer point on the acquisition impact for next year implied in the 30 percent segment incremental margins?
Well, we're look that's without the acquisitions. We're that's just the underlying. What we're trying to what we want from our acquisitions here is on the we expect $3 of earnings per share of the acquisitions we've done. And the key issue for us is the underlying the growth rate is the incremental growth rate from the acquisition top line is 5 point. No, no, what is it not 5 points?
What is it this year? 2 points, what's it next year? 4 points. 4 points of growth. The top line is going to be 4 points of growth from acquisitions.
We have a negative currency of 2. And then acquisitions will will add EPS, but will hurt the overall margins. And so that's how we have factored in at this point in time. All acquisitions. VNC will hurt the margin because they're coming up, but they're not, they're not at 18%, 19% margin yet obviously at Bon 6.
Tools and tests in Paradigm are all margin hurting at this point and will be for several years.
Okay. Thank you. And then, I guess just thinking about tariffs, clearly you talked about your impact, but are you seeing any market share shifts in any of your markets? And I guess I was thinking more around commercial and residential side of the business, or has there not been any big movement in shares due to the tariffs?
There's been no big movements yet. Clearly, in our commercial residential space, there are imports obviously coming out of China that are being hit by tariffs. The question will be, do those tariffs stay in place for some point in time or, and if that's the case, then you could start seeing some share movement. But clearly, at this time, the share has not moved and it will not move until you see some indication that they're going to stay there for a longer time and it's going to be more painful some of the international suppliers shipping stuff in, but not yet.
It hasn't moved yet.
And I don't think we'll start seeing that until it does tariffs stay in place well into 2019. Then I think you'll start seeing some shifts. But it's got to be well into 2019. Again, I want to thank everybody for joining us today. It was an exceptional year in 2018.
I want to thank the organization around the world. Bremberson. You did a great job. Just take a deep breath, say congratulations, and now we're moving on to 2019. And as you can tell from this call here, our investors are keenly interested us having a very strong 2019.
And I fundamentally believe we have the opportunity to do that again in 2019. So with that, good Goodbye and everyone have a good luck. Thank you.
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