Good day, ladies and gentlemen. Thank you for standing by. Welcome to Emerson's third quarter investor conference call. During today's presentation by Emerson management, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. This conference is being recorded today, August 7, 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 in 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, Timothy Reeves, Director of Investor Relations at Emerson. Please go ahead, sir.
Thank you very much, Rocco. I'm joined today by David Farr, Chairman and Chief Executive Officer; Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer; Mike Train, Executive President, Emerson Automation Solutions; Bob Sharp, Executive President, Emerson Commercial & Residential Solutions. Welcome to Emerson's third quarter 2018 earnings conference call. Please follow along in the slide presentation, which is available on our website. Let's start with the third quarter summary on slide three. Sales in the quarter of $4.5 billion increased 10%, with underlying sales up 8%. Trailing three-month underlying orders continue to trend in the 5%-10% range, with June orders up 9%. Profitability improved across all metrics, with gross margin up 220 basis points and EBIT margin up 180 basis points. Price cost was slightly positive in the quarter.
GAAP EPS was $1.12, including a $0.24 tax benefit related to the Tax Cuts and Jobs Act. Excluding this benefit, EPS was $0.88, up 40% compared with the prior year. Q3 cash flow was very strong. Free cash flow of $804 million is 18% of sales, and free cash flow conversion was over 110% in the quarter. We've continued to buy back shares. In Q3, we repurchased 3.7 million shares. Year-to-date, we've repurchased over 15 million shares for a total of $1 billion, and we've returned over $1.9 billion to shareholders through both dividends and share repurchases. Turning to slide four. Third quarter gross margin was up 220 basis points. This improvement includes a tailwind from prior year Valves & Controls purchase accounting charges.
This tailwind is partially offset by timing of the VNC acquisition, which closed in late April last year, resulting in two months of dilution from the acquisition last year versus three months this year. On a comparable basis, that is excluding the impact of the prior year purchase accounting charge and the additional month of VNC dilution in the current year, gross margin was up 180 basis points. Reported EBIT margin was up 180 basis points and on a comparable basis was up 140 basis points. Again, that is excluding the prior year purchase accounting charge and the extra month of VNC dilution this year. Turning to slide five. From a geographic perspective, the momentum we've seen this past year continued in Q3 with broad-based demand and favorable trends across the world areas. Mature markets were up high single digits led by North America.
Europe returned to growth in Q3 after a flat first half, reflecting steady growth in air conditioning and refrigeration markets and improving trends in key process automation markets. Emerging markets were up high single-digits in the quarter led by Asia. Latin America grew 7% after being down slightly in the first half, reflecting favorable trends across both business platforms. Turning now to slide six. Total segment margin was up 40 basis points, including the aforementioned timing impact of the Valves and Controls acquisition. On a comparable basis, excluding the additional month of VNC dilution in the current year, total segment margin was up 100 basis points. Operating cash flow was up 19% to $924 million, driven by high-quality earnings and strong working capital performance. Trade working capital improved 150 basis points, driven by receivables and inventory improvement. Turning to slide seven.
Automation Solutions underlying sales were up 12% in the quarter. Strong growth continues to be driven by MRO, small and midsize projects, and turnaround activity across our key end markets. North America continued the trends we saw in the first half, with both the U.S. and Canada up in the mid-teens. China likewise continued strong growth with broad-based investment and project wins across our key end markets. Outside of China, modest growth continued across the rest of Asia, supported by solid MRO demand and improving investment activity, especially in India. Europe turned positive this quarter after being flat through the first half, reflecting oil and gas investment in Eastern Europe and improving industrial investment across Eastern and Western Europe. Latin America was positive this quarter after being down slightly in the first half. The region continues to show some signs of stabilizing and improving.
Middle East and Africa growth was supported by strong MRO and improving investment across the region. Automation Solutions segment margin was up 170 basis points, including the timing impact of the VNC acquisition. On a comparable basis, excluding the additional month of VNC dilution in the current year, segment margin was up 250 basis points. This improvement was driven by leverage, the benefit of prior period restructuring actions, and operational improvements at Valves and Controls. Please turn to slide eight, and I will hand the call over to Mr. Mike Train.
Thanks, Tim. Pleasure to join the call again. Steve had asked me to provide a little bit of an update on our large project funnel. We shared that with you at the February investor meeting. We've updated it for today's discussion. On slide eight, you'll see for August 2018, we're at about $6.8 billion in funnel size. That has increased significantly since the February timeframe. We've seen projects going into the funnel really across all the different industry types that are listed there. I would say at this stage of the game, we're probably not anticipating the funnel to grow any more, given that there's smaller projects that don't make the funnel and there's investment decision dates beyond 2020. Right now, I think this is a very good set of projects that we're working with.
There have been awards against this funnel, probably on the order of $700 million-$800 million that we've been tracking over these last six months. Emerson has won a good number of those. I'm very satisfied with our hit rate on those awards. Generally, those have to be engineered by the EPCs before they become orders, and then ultimately, they become sales reps. There's still a little bit of that out in front of us for the large part. We are seeing great take-up in our Main Valve Partner concept. We've launched that here in the last year, talking to customers as we've built a larger final control business. We are already seeing some very serious discussions around that, I think there's going to be end users and engineering contractors that want to take advantage of that.
All in all, I think, again, the project pace is strong. I think the activities are there. I've been around the world twice in the last four months, talking with EPCs and customers. We see customers stationed at the EPCs. They're doing the pre-work, the Pre-FEED, the FEED work, it looks pretty robust, I think, as we look forward. That is slide eight. Slide nine, I just wanted to kind of pull in some other indicators from around the industry, if you will. Left-hand side talks to the CapEx across the oil and gas value chain, it's the upstream, the midstream, and the downstream. Really, based on what we're seeing in the global data, we are seeing that CapEx numbers are starting to lean forward, grow positively. I think there's outlook and expectations for that.
I think those will firm up as people are talking about their 2019 year here in the next quarter or two. Then down the right-hand side of the chart, just some of the different perspectives. BP trying to add to their net oil capability, raising their production. TechnipFMC is one of the many engineering contractors that have recently announced their expectations. They're seeing their backlogs come higher. We've seen that now with a number of others as well. Then laid out a little bit of what's going on in Mexico here. We've had some change in the government regime there. They're already starting to lean forward into some of the investment activities they want to put forward here, which I think are going to be pretty robust for Emerson as we move forward here.
I think the insight from customers, what we're seeing across the market, I think it all suggests that we've got a pretty strong automation marketplace, certainly over the next two to three years as we move forward. Tim, that's it.
Thanks, Mike. We'll continue now on slide 10. With Commercial & Residential Solutions, underlying sales were up 2% in the quarter. In North America, air conditioning demand accelerated versus the second quarter. Underlying demand and macroeconomic trends remained strong, and we expect air conditioning growth to further accelerate into Q4. Growth in China was impacted by timing of government subsidies for heat pump units. Outside of China, demand remained strong across the rest of Asia in air conditioning and refrigeration markets. Solid growth continues in Europe, reflecting steady demand for professional tools and strong growth in air conditioning, heating, and refrigeration markets. Margin decreased 80 basis points as material inflation and unfavorable mix was partially offset by operational leverage, higher price realization, and the benefit of prior period restructuring actions, and aided by the divestiture of the ClosetMaid business, which was sold in October of 2017.
Now if you'll turn please to slide 11, and I will hand the call over to Bob Sharp.
Thanks, Tim. First of all, I'll give everybody an update. We closed on Textron Tools & Test right at the beginning of the quarter. As Q4 is reported, you'll see it starting to come into the numbers. I'll say we're off to a very good start here. Very good combination. We have merged Ridge Tool and Tools & Test together into a single professional tools organization with a singular management team. That's well underway. A lot of activities now around our global footprint, especially from a sales coverage and a customer standpoint at the beginning. A lot of work right now with optimizing our North America sales presence. Again, good progress on that. We'll be having some actions here soon. Focusing heavily right now on the spend. You saw a lot of opportunities we presented as far as margin potential. Materials is a big piece of that.
We've already done a heavy analysis of the material buy of the Tools & Test business combined with Ridge and have a number of activities underway. Certainly applying Emerson's terms around payables and other things with some very good quick progress there. Overall, good organization. We've had several meetings with these management team and employees throughout the sites. We've been in all the factories doing a lot of work in the factories around safety and operational activities. I'll say there's a very good vibe right now as far as people feeling the combination, both from the Ridge folks as well as the Textron Tools folks recognizing that this is a very obvious cultural combination, if you will. Everybody's seeing some good opportunities and really good reaction from the customers as well. We've talked about synergies. You see synergies around $40 million, a lot of that cost-driven.
A number coming from sales in the time, and then cash flow. These two businesses combined generate very good, healthy cash flow, and we see a tremendous opportunity to increase that combination over the next four or five years as we have the plan that plays out. Good start there. Chart 12, I think it is, on Asia. China was a change. We have enjoyed a very nice string of extreme growth, I'll say, in China, and certainly had some amount of a pause here in Q3. Very much timed to heating, as we start getting in focus the heating season and releasing government contracts and subsidy activities and things. Some pause in that activity. I will say July was a good month. August is looking well, and as we show here, we're expecting to be back on a double-digit track in Q4.
For this year, cold chain, commercial AC, heating, all 20+% kind of growth dynamics. Residential AC up in the 10% territory. Certainly, we would have liked to seen a stronger number in Q3, but do not see that as any sign of any fundamental change right now. The market is going well, and as we've talked about recently, the industrial heating side of things has really actually kicked in quite a bit, and we certainly see quite a bit of visibility on that one as that one, frankly, is just getting started after the residential play. Overall, you can see the map here shows there's a number of areas in the coldest environments, the low ambient environments up north. The scroll technology we have is a very good fit for that.
When you get into the south and more in the sanitary and residential, where the performance factors aren't quite as critical, but good presence in total. We also continue to have some very excellent solutions activity. Major convenience store chain in China we've been working with on a monitoring solution that pulls in information from their refrigeration as well as the HVAC lighting in other parts of the locations. There's a number of other franchises and customers that that's relevant to. Certainly with the cold chain activity going in China, supermarkets and all the other infrastructure build-out remain strong. Here's highlighting some integrated scroll rack solutions. Cooper-Atkins is also playing into both of these kind of opportunities as well, as we have the chance to internationalize that business.
Again, we would have liked to have seen a stronger Q3 in China, but fundamentally feel good about how things are playing out and how Q4 will get us back here.
All right. Thanks, Bob. Turn to slide 13, which steps through our changes to our EPS guidance. The table starts with our May 1st GAAP EPS guidance of $3.10 to $3.20. As shown here, we are raising the guidance range $0.05 for stronger performance and $0.24 for a one-time tax benefit in Q3 associated with clarifications on U.S. tax reform implementation. The $150 million tax benefit in Q3 drove a 6% GAAP tax rate and reduced our full-year expected tax rate from 25%-27% to approximately 19%. Also included in the guidance update is $0.06 in Q4 for purchase accounting and restructuring charges associated with the Tools & Test and Aventics acquisitions. For these acquisitions, we expect to have little, if any, additional purchase accounting charges carry over into fiscal 2019.
Finally, as discussed on our Q1 call, in response to U.S. tax reform legislation, the company reviewed U.S. comp and benefits programs and has enacted numerous improvements. As part of this, in the fourth quarter, we will take a charge of $24 million or $0.03 per share for a discretionary one-time 401 contribution to every member of our U.S. workforce. The net impact of these changes is to raise our GAAP guidance range $0.20 to $3.30 to $3.40. We turn now to slide 14, which outlines our updated full-year guidance. Please note that this framework now includes the sales and earnings impact of the recently closed Tools & Test and Aventics acquisitions. We expect total Emerson underlying sales to grow 7.5%, with Automation Solutions up 9% and Commercial & Residential Solutions up 4.5%.
The GAAP EPS range of $3.30 to $3.40 represents growth of 30%-34% compared with the prior year. This guidance assumes a neutral price cost impact as we continue to offset material inflation with price realization and cost reduction efforts. The expected effective tax rate for 2018 is reduced to 19% due to the one-time benefit in Q3, and we expect the tax rate in 2019 and thereafter to be 25%. The fourth quarter will be our fifth consecutive quarter of strong sales and earnings per share growth as Q4 of last year was the first time since our strategic repositioning that we delivered both strong sales growth and earnings per share growth.
In this fourth quarter, we expect 7%-8% underlying growth and earnings per share of $0.86 ±$0.05, including the $0.09 of acquisition charges and one-time 401 contribution shown on the bridge. For 2018, we expect free cash flow conversion of 110%, reflecting our high-quality earnings. This guidance is in line with our prior guidance of 115%, excluding the one-time tax benefit in the third quarter. Now please turn to slide 15, I will hand the call over to Mr. David Farr.
Thank you very much, Tim. I also want to thank Bob and Mike for joining us today and updating everybody. They'll obviously be on the call to answer questions for the people that want to ask questions. As you look at the order trend chart, the trends have continued to stay within the band that we outlined in February of 2018 at the conference in New York. In total, I expect this will continue in the fourth quarter. I would expect us to be at the high end of this band as we've moved up towards that greater than 5%. Emerson Automation Solutions orders will continue to do well. From the standpoint of both Mike's business and Bob's business, Mike's now starting to come into tougher and tougher comps, because last year at this time, he had a very strong July, and he'll start continuing to bounce up against that.
Bob's business clearly has been positive in the 5%-10% range. It's a little slower over the last two years, and so his comparisons are getting tougher and tougher. Overall, I feel very good about the momentum. The pace of business is not slowing down. Our growth and opportunities are out there, and we're seeing our customers continue to spend. We are seeing the positive impact of the new Tax Law in the U.S., and people are spending money, and we are clearly getting that pace of business. If you look at our North America sales and orders, they've been very strong since the enactment of the Tax Law. I want to thank everybody for joining us today.
One thing you might notice on the first page, that we had a recent STEM program, and I was addressing my new employees, and I had one in the front row here in the little green outfit. You'll go back and look at that photograph. She was asking me a great question. Her parents are shareholders, and she was asking me a very delicate question. She said, "Mr. Farr, are you going to break the dividend string in 2019?" I said, "I see no reason to break the dividend string in 2019." She said, "Good. I'll be able to afford some more milk" or whatever I needed for eating here. She was very diligently asking me questions about the dividends, which is quite interesting.
Good shareholder.
Yeah, a very good shareholder. I like those type of shareholders. As you know, one of the things that we've been doing and working across the company since the new platform structure is to make sure we have the right benefit structure, the right compensation structure across the global world. Clearly, we try to make sure that we make the right enhancements to stay competitive. As we said in the press release, we have continued to make changes to our package, both on the health and medical side, also parental leave improvements, better vacation plans. Now, the most recent one is the improvement in our 401(k), and we're making a one-time contribution to our U.S. employees, which is going to cost us around $24 million.
It's all about making sure we have the best group of employees that we need around the world as we continue to enhance our benefits around the world. In today's competitive environment, this is very important, and we wanted to make sure that we did it. We'll continue to tune things a little bit, but the major actions have been undertaken, and we'll continue to make sure that we stay competitive on a global basis. It's extremely important to us. If you look at everything that's going on, it's been a very good six months. If I look at the improvement of sales, I look at the improvement of orders, I look at our gross margins, our EBIT margins, our cash flow. Both businesses are operating at very high levels of performance. We had two days of planning conference with the new final control business.
The total integration of VNC was outstanding. They are ahead relative to sales expectations. Our orders this year in both businesses are growing. We did not expect the orders of VNC would recover so fast, but they're growing in line with the final control and the whole process business, which is exciting to see. We're seeing improvement in profitability. We're ahead of margins that we expected, and we're seeing very strong cash flow, as you can see in our cash flow conversion from the total company. A really great job by both Mike's and Bob's organization around the world, and I want to thank his teams globally for doing an outstanding job. Mike and Bob really appreciate that. If I look at the global market today, we have all of our global businesses now basically in the markets growing.
We have the various marketplaces showing positive growth, both in orders and sales. When we first started the year, we still had a couple of markets that had not recovered and started growing, but now you see in total, you're seeing all our markets growing. As I look at the order pace and I look at the interest in business right now, that's a good thing to have as you move into 2019. You remember, we talked about that initially the mature markets would take over and grow first, which we've seen. We are now starting to see the emerging markets take off, and I would expect to see our emerging markets sometime in early 2019 outgrow our mature markets. Our mature markets will continue to grow at a good pace, but I expect the emerging markets to take off as the investments continue to go forward.
As you look at the performance, last year at this time, our underlying sales were growing around 4%. We grew underlying sales 8%. As we go into the fourth quarter, last year, underlying sales were growing 3%. We're talking about underlying sales growing around the 7.5% range at this point in time. Comparisons are getting tougher, the pace of business remains to be very strong, and we have very good momentum across this company in many areas. I'm very pleased about that. I know that Bob now has his hands wrapped around, and his team have their hands wrapped around the acquisition of the Textron Tools & Test business. They're quickly going about how they can integrate. They're quickly going about how they can grow this business, how they can improve the profitability.
You'll clearly see, like we saw in VNC, the profitability in the segment will be hurt by this acquisition because it's clearly lower profit margin than we have today. They have plans to get that margin back up and stop it from being diluted in a relatively short time period. I also see improvements relative to cash flow, which is very important to us relative to that acquisition. Equally important, the organization are working together very quickly, and it's really exciting to see. We closed Aventics a couple of weeks ago, and Mike and his team report to the board today, as did Bob and his acquisition, and talked about what they see and what they see after the first couple of weeks. In Bob's case, after the first 30 days. A lot of opportunities here, and they're continuing to work it.
Both of them will have a negative impact on initial margins, but will work its way through to make sure that it contributes to overall profitability as we move into 2019. From the standpoint of where we stand with VNC and these two other major acquisitions, we've done a lot of acquisitions in the last 18 months, and I would expect us to have bolt-on opportunities going into 2019. Not the same magnitude of what we've done here in the last 18 months. Very strong performance earnings and cash flow, and I fully believe that, as I said early on in the year, VNC will contribute to our overall earnings for the year, and they will contribute very strongly in cash flow, and their margins are getting to where they need to be, as we talked about.
In fact, they're ahead of plan as we move forward here. Really running well going into that fourth quarter. I would like to make one other comment relative to the corporate organization, and in particular, around Frank's team and Alex Pang and his team relative to tax. The tax planning with the new tax laws. We were really well prepared, and we were able to take advantage of our tax laws and really minimize the impact of the overall cost of the corporation. The true-up of picking up this much money, $150 million, both earnings and cash over time, but really reducing our rate for the quarter. Again, investing in people, investing back in the company.
Really, this is a great job by Frank and Alex and the whole team down there on behalf of all shareholders, to make sure that we have the right rate structure and make sure that we're doing the right thing on a global basis for tax payments, and really helped us for the quarter and also as we move forward into the coming years. Our effective tax rate will be in this 25% range. That's down 5 or 6 points from where it used to be. That's a lot of value creation, and the question for us is how we put that money to use to grow the company a little bit faster, more profitable, and using that cash flow to also pay back more money to the shareholders over time, too. I'm very pleased.
Frank, you know the team's done a great job down there. I appreciate that. As I look at that fourth quarter, and I look at where we're heading into the fourth quarter. As we sat here 3 months ago talking about the third quarter, we talked about a quarter that it would be plus or minus, I believe around $0.85. I said $0.85, ±$0.02. That's basically how I think. I'm thinking within $0.05. It's difficult for us to call within $0.05. I know people always think we say plus or minus, it's always going to be plus. You should never think that. When I say that, I'm trying to give you the best range that I can give you at that point in time.
We look at the fourth quarter, we feel the momentum right now gives us about 7.5% underlying growth. We see pretty good growth relative to acquisitions. The currency will hurt us as we end the fourth quarter, but I still believe that we'll be over 10% on a GAAP basis. Clearly, the comps are getting tougher and tougher, but we have strong momentum going into this quarter. I expect this quarter to be, as we're saying here, around $0.86 ±$0.02-$0.03. Clearly, we'll push for the quarter ending and see what we can do. That's about the range we see right now in the pace of business as we look at everything that we're dealing with across this company.
Again, the operations are doing well, and we're performing well, and it was a very good quarter, and we hope to continue to drive this over the next couple of quarters, and I don't see any reason why not at this point in time. As every day is a new day in this world, and we'll see what happens. The momentum is behind, really with us right now, and also from the standpoint of strong opportunities around the world for orders and for growth and for profit improvements. I like what we see at this point in time, and so we have a lot more positive working for us than we do against us. With that, I'll open the door, or I'm sorry, the phone for calls, and we'll take some Q&A, and look forward to talking to you.
Absolutely. We will now begin the question and answer session. To ask a question, you may press star then one on a touch-tone phone. If you're using a speakerphone, we ask you to please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Nicole DeBlase of Deutsche Bank. Please go ahead.
Yeah, thanks. Good afternoon, everyone.
Afternoon, Nicole.
I guess last quarter, on the second quarter call, you commented that you expected Automation Solutions organic growth could accelerate in 2019, and we now have another quarter under our belt. Things were stronger than expected. Order growth was really healthy. I guess, would you sit here and make that same comment today, Dave?
Yeah. The issue was, I've always said from early on in the beginning of the year, Nicole, what I saw, I looked at this as a 2-year type of band of growth. We always felt that the growth was going to accelerate throughout the year. We thought this year would be more of a not double-digit. We didn't think we'd cross that 10% mark. Clearly now, as I look at the two years, I've always felt that we would have somewhere around 16% to 18% and 19% combined growth. We have a lot of momentum right now, so we have a stronger front-end load.
From my perspective right now, I'm looking probably equal years from the standpoint of, I don't see-- there's certain things that our customers can work on, as Mike said, as we see the funnels come up towards this top number, it could go up maybe a little bit higher, but at some point in time, they only can work on so many projects. The momentum's pretty strong. We're going to have, obviously, a stronger year this year. We're getting close to 10% for the whole year underlying growth rate for the automation business. I'm looking next year, probably going to be in that 9-10% range now because I look at a two-year cycle for this business, and it's not any different than I said last year or earlier this year.
I said, "If we have a seven, eight, then I expect us to be a nine, 10 next year." Now I'm looking more equal-equal, Nicole, for the year, just based on the way our customer base. Mike, do you want to add anything to that?
Yeah, I'd say, we've seen very strong KOB3, the aftermarket business-
Yeah
throughout the year. It's been probably stronger than we even anticipated in February. It's been good for our business. It's a relatively fast turn business. I think that's helped contribute to the second half here in a major way. The KOB1 projects, the greenfield projects will come along. They have their pace, as you pointed out, David. They got to get engineered. Again, I think there was a lot of pent-up demand on the KOB3 side, and we've seen a lot of that come through here as these customers have felt better with their cash flows and where they're sitting. I can't tell you that it can't be a double-digit year next year, but I think something in that seven, eight, nine range right now feels about right.
We'll obviously have to play it out and see what happens.
Yeah. Historically, we've seen a two-year cycle. If you look back at our cycles, where typically when we're taking off on combined basis is at 16%, 17%, 18%, 19% on a 24-month time period. That's how I look at it. I thought we were going to be less front-end loaded. Now it looks like we're stronger. It's going to be a good year any way you look at it, Nicole. Right now, our backlog, our growth and orders are strong. We're very positive about it. Now we got to make sure we have enough people. That's the big issue now.
Got it. Thanks, Dave. I guess for my follow-up, I know you've talked about in the past that one of your top concerns from a macro perspective is trade war. Have to ask, have you quantified the risk to Emerson from the tariffs that have been enacted to date? I guess just level of flexibility in your supply chain, your manufacturing footprint to handle what we're seeing today.
We have quantified it. We've not gone out publicly. It's not that huge of a number relative to what we're doing. The teams have done a great job of offsetting both with material containment or pricing actions. We're staying slightly green. I think that will be the case for the fourth quarter and again next year. Obviously, Bob's business is more challenging. He has less flexibility in the short term, but over the long term, he can adjust. We have the flexibility around the world. We talked about this with the board. One of our global strategy is to have that flex manufacturing capability, and we've had that flex manufacturing capability. Fortunately, our businesses are not in the, let's say, the bullseye of a lot of the tariff activity. It's smaller, and we can react to it.
Just as much as maybe some of our competitors are hurt, we're helped and vice versa. It's been a pretty good trade-off. I don't like the way it's unfolding, and hopefully things will settle. Right now, it's manageable, as we told the board. Next year, what will happen is we'll have to have more material containment. We'll have to have a little bit more pricing. Clearly, it's creating an inflationary environment, which helps us both at the top line, faster growth, but also forces us to do a lot more material containment around it. It's very manageable at this point in time, even with the current actions underway. I have much bigger issues in the world than that.
Understood. Thanks, Dave.
Thank you.
Our next question today comes from Julian Mitchell of Barclays. Please go ahead.
Hi, good afternoon. Maybe a first question just on the incremental margins in automation. I think you've been pretty clear on the top-line drivers. Your incremental margins in the third quarter, I think, were close to 30% or so. Just wondered when you're looking at the good progress on Valves & Controls and the changing mix of sort of revenues in AS over the next 12 months, do you think that 30% level is a good incremental margin to aim at?
If you look at the true underlying performance, we're around 35% for the quarter. As we've talked about, this is Julian, correct?
Yep. Yes.
Julian, as we talked about is, what Mike's having to do right now with a faster order pace running at 10%-12%, Mike is starting to have to, and we talked about this, he'll have to start adding some incremental people around the world to deal with the projects. I feel very comfortable in this 30%-35% range at this growth level. If the growth level slows down, we'll expect that to go up a little bit higher. Right now, we're having to put people in place. We're having to make investments both in capacity and from a capital standpoint to take care of some of this growth. Many of Mike's businesses right now in North America are actually getting back to peak performance from the last cycle in actual sales. What that means is we're having to get our plants geared up.
We're having to get the people geared up, and that's something that we got to make sure we stay ahead of, given our presence around the world and given how fast we're leading out of this relative to our competitors. I feel very good about the margin at this point in time, Mike and I also have to keep having the debate back and forth. What's the right balance of adding new people, adding new capacity? It's a debate that we have a lot. I think our margin right now, this quarter's around 35%. I think we're going to stay in this 35% range. If we have to drift it down a little bit for Mike, we'll do that. Also if he slows, we're going to take it back up. That's how we see it right now.
Mike, anything you want to add from a Julian standpoint?
No, I think that's right. Again, we've had a very nice mix of business so far.
Yeah.
Turnarounds, KOB3, North America.
Correct.
It's all been-
Very good.
It's all been very positive, very good for us.
We don't see, going back to both what Nicole asked and what you're talking about here, our project load right now, if you look at it's still very KOB1, KOB2 centric. The big projects have just started coming. As you know me, Julian, I like to take guesses. As I look at the project funnel right now and what Mike's talking about and his business they're talking about, it looks to me like it's really 2020, 2021, that the KOB1 mix are really going to put pressure on us. We have to get ready for that, up to that, because it looks like that's where the bigger projects are heading. If you look at classic example, if you look at what happened to ExxonMobil last quarter, I've always felt that our industry underspent and was not ready for the downturn.
You saw that from the standpoint of now people are having to spend, quickly have to spend on maintaining their facilities, the production is having to come up much faster. If they had not maintained their facilities or not ready for this, they obviously suffer. This is happening across the world in this case. It's something we saw because they cut so deeply from a capital standpoint. That's where we are.
Thank you. Then just maybe for my follow-up, switching to Bob's business. The North America growth has been pretty soft in the last few quarters, I guess, in commercial and resi.
Yeah.
It looks like in residential HVAC, at least the OEMs have seen high single digit growth on average the last couple of quarters. Just wondered, is there just some timing that's weighing on the commercial and resi North America numbers, some market share moving around, or just kind of what's going on there and when do you see that North America piece re-accelerating?
Before I turn it on to Mike, keep in mind too also, our OEMs have been getting price now for 18 months. They've been going out with some very large price increases. Some of those numbers, they had good underlying volume, but some of those numbers also are price inflated. Bob, I'll let you answer the question now.
Right. I think you're going to see that pretty heavily. I think everybody knows that we've got material clauses that we do with our, especially the large U.S. OEMs on pricing. In a deflationary time, we enjoy that a lot. If you remember back in 2016, we had over two points of EBIT margin improvement for climate, and obviously now that's in a different zone. Again, that's kind of normal. That is certainly widening the sales reported numbers as well. I think we've got a pretty strong presence in the industry. We think we know very well what's going on. We don't see participation issues. Frankly, there are some advantages. You've probably seen in the industry a compressor manufacturer very recently announcing that they're going to be moving away from the industry.
Frankly, there's a lot of activity right now we're involved with helping out some customers respond to that quickly. That's good news for us. 301, there are some compressors coming this way. We don't ship compressors from here to China, but there are compressors that come in this way from some of the competition.
From China to here.
From China to here. That has also created some conversations, let's say, with OEMs. Again, there's a gap right now, no question. We model it 100 different ways, and frankly, I can't say we ever found the perfect way to correlate between what we report and what they do. There's distribution, there's timing, there's pre-builds, there's a lot of things that play out. Overall, again, we think we understand our position in this space, and that it's playing out pretty normally, I guess.
Julian, we watch it very closely because we know everyone reports around this space here, and we play with all the players. I would expect Bob's business here to probably have pretty good for the next five to six months of good order pace as these guys do a lot of moving around and shuffling and replace the backlog of the pipeline. Overall, we feel very good about it, and we'll see how it unfolds, but it's definitely a different mix this year than we've seen in the past. Service levels, service type of, service products have been different this year and how service has been doing, it's a good year overall.
It's good. Q4, it's been a warm quarter, and we feel good about the way this quarter is playing out as well.
Thanks.
Great. Thank you.
Thank you.
Our next question today comes from Steve Tusa, JPMorgan. Please go ahead.
Hello, David.
Good afternoon, Steve. How you doing?
Looks like.
I had to bring a couple friends to take you on today, so I got three guys here. I got my baseball bat. I've got my rally monkey. The rally monkey's really keeping a very close eye on Tim because.
It's really staring Tim down.
It's staring Tim down right now. And so.
It's making me nervous.
Yeah, he's right behind Tim's head looking at him. What can I do for you, Mr. Tusa?
It must've been nice to have that kind of engaged and thoughtful crowd in that auditorium versus some of the investor days, that looks like an engaged crowd there.
It's kind of similar.
None of them had iPhones.
A new audience for you.
Steve, none of them had iPhones taking pictures of my chart. You notice I had the one chart rolled up because I was afraid to show her because she wanted to take it home, but it was our dividend history.
They did. They were playing Fortnite. Yeah.
Nice to refresh the audience every once in a while. That's key. Got to keep them fresh. How many years has it been now? Geez.
Funky sweaters on either. None of them had those little funky sweater shirts on either.
On this climate thing, what will your volumes grow in North America resi for the year now on a seasonally adjusted basis? I guess your fiscal year is aligned with the OEM's calendar year. I'm just curious what that number will be ultimately. What do you think it will be when all is said and done?
What will the volume numbers be for this year?
Yeah.
Yeah.
Yeah. Like mid-singles? I just want to get a number on the board.
Yeah, we'll be in the mid-singles.
Okay.
I need to be honest, the compressor shipments this year are hitting an all-time high for us.
Right.
I think we are hitting an all-time high. The plants are running pretty strong right now, and a lot of our customers are starting to level load more production, Steve, versus where they used to try cycle. We're starting to see more and more customers to try to keep things level, which smooths us out more, so we're not seasonal. It's a different view. We're starting to see some different habits of our customers now.
The last few years, we've had quarters where it's been down in a quarter, and we've had quarters that have been high single and double digits. Even quarter to quarter, there can be several points swing.
Yeah.
And
We're okay.
I guess I'm just struggling a little bit with the fourth quarter because you said about six ways from Sunday, $0.86 and maybe plus, maybe minus. Normal seasonality to us looks more like $0.90, and I'm just trying to figure out, if climate is bouncing back, and the orders here at Automation quite frankly accelerated, did you pull something forward here into the third quarter? It doesn't seem like that.
No, we didn't. You also got to keep in mind in the $0.86 we're taking care of the one-time accounting stuff for Aventics, we're taking care of the $0.03.
Right
those are two restructuring. You're right. Normally, we're also taking care of some issues as we close some deals and as we do the one time 401(k). As you well know, Steve, I really can't call a quarter within a nickel. When I look at that and say, "That feels about right," and it would be, as you say, the normal seasonal thing would be around that $0.90 plus. That's what we have to deal with relative to the.
Got it.
that's what's going on. You're not that far off. It's just, don't forget about the $0.06 and the $0.03 from what we're doing there.
Right. I guess just as a follow-up to that, on climate, you guys have these escalators that I guess that would mean your pricing is going to lag by maybe a quarter to a quarter plus, relative to raw materials. It's not necessarily like, "Hey, we're an OEM, and we're going to do a price increase at the beginning of the year, and then this kind of unusual price increase in the middle of the year." You guys are a bit more on a rolling basis. If raws stabilize here, can you be in climate green at some point here in 2019 and start to flip the other way for a period of time, given the way your escalators are working?
Yeah, it depends on the timing of when it happens. Again, if it happens later in the year, it's difficult because we're still carrying that drag. Again, you saw it happen when it turned unfavorable on us about 18 or so months ago. Like you said, it takes a quarter or two to sink in, and as it subsides or even stabilizes, that's about the same kind of a lag timing to go the other way.
We'll start seeing the benefit.
Right.
Well, he'll see the benefit next coming in now in early next year, 2019.
Right. That's a good guide
Outside of the lags, we are green already.
Got it.
Yeah.
It's going to play out that way again through next year.
Got it.
Steve, we work a very fine line with our OEMs because we know that we're trying to make sure they stay competitive, we stay competitive, but also we're trying to keep it really tight around that plus or minus line relative to the price cost type of situation.
Right. One last one for you. Valves & Controls, what kind of revenues for that business finish at in fiscal 2018?
I don't think the revenue's going to change much. I think they're going to be slightly down. On a reported basis, they'll be slightly down because the divestitures and the product lines we got rid of.
Right.
The ROI growth rate is now growing. Now next year we're going to have a growth, the underlying order growth is around nine, 10%. They were slightly down because of what we divested and we're getting out of. Now they're coming off, and if you look at the order pattern, they're growing faster. Now they're going to start growing. Overall, we're going to grow that business, and we got a good couple of years here between that business and what we're trying to do with it.
Yeah, looks like it. All right.
Okay.
Thanks a lot.
Thank you very much, Steve. I appreciate it.
Take it easy. Yep.
Our next question today comes from Steve Winoker of UBS. Please go ahead.
Hey, thanks. Good afternoon.
Afternoon, Steve.
Hey, Dave. I can't resist also on that front page, I know you guys turn over every stone for some new investors and applause, in that one, it looks like you got both.
It was definitely, and as Tusa said, this is a little bit more friendly audience, other than the fact they never shut up.
Well, that's not that different.
But I-
Anyway
that was an unbelievable time. We had, I don't know how many kids. We had 400 kids in that room. Tim was around here. Tim, the tool man, was around here somewhere, too.
He's in the back there.
His kids were there.
You should let the analysts bring their kids next time, too. Probably be a better day.
Oh, yeah. In New York? Yeah, we're doing it in New York. You can bring your kids in. Now, have your kids ever heard anyone swear before?
All the time, because I let them play, I play your replays for them, so.
Listen, on page eight for you and Mike, that large project funnel, I just want to go back to that and the resilience of that sliver that there are large projects in the 2018 timeframe through 2019. How resilient are those in terms of the decision dates, all of this macro turmoil? You've already addressed it a little bit. Once these things get started, they're very hard to stop, and how deep into that do you think we are for the kind of KOB 1 and 2?
Sounds like two.
I'd say for the, we'll call them the megas, the big ones. We showed you a little depiction of that when we were together in February. If I drew that chart again, it would look similar.
Yep.
Some megas and a lot of smaller projects, and kind of the positions timing-wise similar. The big space there is the LNG space. There are 10 plus projects there that are on the mega sizes. They are gearing up. Again, I've been around the world to meet the EPCs that specifically touch those projects. They are doing a lot of work right now getting ready. We're doing a lot of budgetary quotations to them so they can plan their projects.
You're talking about trying to tie some capacity.
I told them they better start reserving capacity. You can just see this bow wave coming at us.
Yeah.
They need to start thinking that way.
Yeah.
They want all of our valves. They want all of the engineers that work on these projects. They need to get in line with us pretty early, they're doing that.
Yeah.
They are doing that. They are supporting.
How does that relate to that $700 million-$800 million number that you gave in terms of awards versus your wins, and should we think about therefore that piece of it stepping up significantly?
Yeah. The largest ones, they're still out there.
Yeah.
A lot of the awards are back in the smaller size.
Yeah, most of his awards have been in the $1 million-$10 million range. You've had a couple bigger ones, but most of them are smaller.
Yeah, they're not in the $100 plus. When we get an award, it could be for a piece of the business. We might get the systems early, we might get the valves early. We're tracking all of the puts and takes around that. Take 800 out of the funnel. We saw about $2 billion go into the funnel to kind of make all the math work out. That's why I kind of think, I don't think we'll see the funnel get larger because I think anything that works at 70, $80 oil is identified, it's out there.
Working them
If it's going to have a decision date within two and a half years, it's got to be being worked right now.
Steve, what goes on at the CEO level in these projects, I'll give you my perspective of what goes on here, is the projects, they have them prioritized right now, but the prioritization will change. What will happen is the CEO, the executive, will look at, okay, the people, the location of the world, there might be issues popping up in regions of the world, or they need more gas, they need more oil, or we need the more issues relative to our own manufacturing. They'll move some of these projects. You can see a project move six months in, six months out. These projects will slip, moving in and out. What we see is we track them, and we move them back. You can see other ones come in front.
Right now, what we've been seeing is the projects have been moving around a little bit, sort of like, it's like a motion. This doesn't look like a motion, but those things are moving. The funnel is pretty tight and consistent, and where some of these projects are moving around is pretty good right now. What we didn't have in February, and we don't have it here now, is that we had only a few of the, what do you call the big megas sitting in 2019, early 2020. We now look at that chart, and there's a lot more of the megas coming in in late 2019, early 2020.
That tells me when I made my earlier statement, I think our KOB1 business is really going to start getting up there in that level in the late 2020, 2021 type of period, because that's what's going to happen. That's where we are right now. The funnel's shaping up pretty nicely. We might get up to $7 billion total, but that's a lot of work going on out there at this point in time.
Dave, I don't think you put a finer point, but if you could, on the July order experience in AS and maybe the C&RS too.
Mike was real close around the 10%, C&RS was probably very consistent where we were before, I think, in the 3%-4% range. That's very preliminary numbers, and we pushed them hard to get a number for this call here. I still think we're in the good side of that band. Overall, we're in pretty good shape.
Okay. Just lastly, Mike, sorry Bob, we talked a lot about cold chain and Asia commercial opportunity when we last saw each other. This China heat pump subsidy push out slightly doesn't change any of the math you've got on a kind of a 1-year view, 2-year view?
No, not at all. Like I said, cold chain this year, we're going to be in the high teens, let's say, territory. We've done a lot of things to put that organization together for a full solutions play. The Cargo and Cooper-Atkins acquisitions. We are putting infrastructure in Asia and Europe to internationalize. No, those are progressing well.
Steve, before we go, I'm going to ask Bob or Mike to comment. No one's really talked much, I'll ask this question, but Mike had a phenomenal quarter in China, and it's a very broad base because we were just over there, and we did a review, and you're up, what, sales 20-some odd percent for the quarter? Orders have been very strong. We're seeing, Mike, you want to comment? We're seeing very broad across all industries, a lot of new players coming in and starting to build stuff both in China and moving outside. That's been a very pleasant surprise for the last couple of quarters. You may want to comment.
China's been strong for us. I think locally we've seen a lot of state-owned is busy.
Yeah.
A lot going on with the privately owned enterprises. We've seen these chemical companies rise up over the last five, six, seven years. They're getting very serious. They don't want to buy the mid-tier product anymore. They want the high-quality stuff, and they're leaving the borders. We've got one that we're working on that's going to go to Louisiana, take advantage of gas prices. China for us is broad-based. Again, I think I referenced February. There's a refining wave that's going to come at us in China, a smaller one in India to go along with it.
The power wave.
A lot of spin there. Power is still very solid for us. We saw the nuclear plants start up here in the last few months. We've got some of those behind us now, so we can get onto the next ones that we've been ready to work on.
I was impressed.
I'd say, I think that thing in China really aligned.
I was impressed, Steve. I was there with Mike and his team just recently. Bob was there too. Bob tried to get me run over in a car or something like that. You were with me too.
Yeah, I didn't try because I was next to you.
Yeah. I was impressed with the broad base of all the orders and the type of industries going on, and the customer list. One of the good things in this cycle here is a lot of the smaller players that we are competing against do not have financing. They don't have the money to get access to money. The big multinational companies continue to make investments, which we have continued to do, including upgrading our manufacturing capability in China, with the Aventics stuff. We are really actually separating ourselves again in China.
Okay, thanks. Good luck.
Outside of China, we're talking all about China. Commercially, we were double digit outside of China in Q3.
Yeah. Very good.
We were in Q2 also. There's plenty of activity going on in Asia broadly.
Yeah.
Great.
We have the same.
Good job. Who's next?
Thanks.
Our next question today comes from Jeff Sprague of Vertical Research. Please go ahead.
Thank you. Good day, everyone.
Hey, Jeff, you notice how our orders and sales stay pretty consistent and how they sort of track together?
Yeah, that's amazing. I cover a bunch of companies that that doesn't happen.
Really?
The lines don't.
One of the disciplines we have, Sprague, and a lot of people give me a hard time about releasing orders. All these guys are going, "Shit, I can't believe you'd say that," but that's okay. The issue is, one of the disciplines we have across this company is making sure the order pace and monitoring those and what we tell you guys are consistent. Because if you don't get an order and eventually get sales, something's not going on. I just had to tweak you a little bit, my friend.
Well, I always give you credit for those orders, but thanks for calling it out. I guess even the kids in the audience probably know that if sales don't catch up with orders, the orders aren't real, right?
I'll explain that. That was the next question I'd got. She asked about the dividend. She didn't quite get the connection between I tell the guys, "Orders are great, but without a sale, I can't pay a dividend." These guys hear me say that all the time.
I thought you were actually trying to suggest we were children, by the way you put that on the slide.
Not a bad thought.
We sure are, everybody.
things look extremely robust, and everything you said about projects sounds very encouraging. How do you put in context the fact, though, that you're looking at CapEx in your served markets actually now exceeding the 2014 peaks when oil prices are lower, and there's other maybe countervailing forces? Would that reflect that maybe some of those projects just got truncated in 2014 and didn't happen, or just what kind of big picture perspective would you add to that?
Wow.
Well, I think as we came off the 2014 and the peak, there were projects that were planned and did not move, and they got parked, and they kind of idled, and they've gotten resurrected. A little bit of Pre-FEED work's been done on them, and now people are making those decisions to move forward. We've certainly seen some like that have been hanging out there for-
Yeah
a couple of years, Jeff.
I think, Jeff, the biggest issue we've seen in North America is North America's been very strong in this capital. If you look at the GFI in the U.S., you'll see the numbers are quite strong, is that the pressure on our customer base was so enormous relative to cut capital so quickly that they stopped stuff very quickly in North America. They did not stop as quickly internationally. In North America. That's why you've seen a North America bounce back. I'm sitting there in the Valves & Controls conference, the final control, and we're seeing North America numbers coming back to levels we saw in 2014 so quickly. That tells me that things were cut off abruptly, and they had to come right back on, and they were ready to do it right.
I think that's a very good observation because that's what we're seeing right now.
One other insight there is the movement of energy to different parts of the world has gone up. The U.S. is exporting LNG. It was not doing that back in 2014. We're seeing terminal and midstream spend build.
They're all good things for us.
We're seeing it in Mexico, we're seeing it in the Middle East, we're seeing it in Asia.
Right.
I think those are some of the things that are different now.
You're seeing resources becomes a throttle too on those projects, right?
Yeah. That's happened before in the peak time.
Exactly. The other thing I would say that when I talk about VNC, I think VNC and the Valves & Controls, they did not have the capability of manufacturing the products here in the United States. One of the things Mike's team has gone on and ride rapidly is now we have huge opportunities here in North America that we could address very quickly with our channels. The market's turned our way. We're now getting VNC products into customers that they've never been in before. Now we're having to quickly accelerate manufacturing and spend money. That's given us another little bump here in North America that we were not anticipating. My hat's off to Robin and his team, and Mike for getting that done because that was not easy to do. We still have 18, 24 months of fairly good investments to make here.
Things moved to our way pretty quickly, and the team executed very rapidly. The timing of the VNC acquisition has been perfect as I look at it.
I'd say all across the platform. Everybody stepped up.
We need them.
Everybody's going fast.
We needed them.
Very clear. Just one quick thing. There's obviously been a disconnect in automation this year, kind of observed incremental versus underlying as you digested Aventics. Should those numbers be very similar now in 2019? You've got a little Aventics noise.
Should be kind of what we see is what we get on the incrementals?
Aventics is on a good path to improve. They will continue to improve. They're not there yet. Aventics, a sizable number. It's going to come in lower. It's going to average us down. We will work that over time. Take a couple of years.
I think the big issue is what we're having to go through right now is we're having to spend some different capacity and some investment both in some of the service centers around the world. I think we'll probably still have one more year of a slight dilution there from an impact. The profitability is going to be still very good, but I don't think it'll be quite as accelerating as you're thinking there, Jeff, because I still see some dilution impact, and I still seem the incremental investments that we're making faster than we had originally planned.
We got a lot of potential.
Yeah.
Solid. Thank you.
Thank you.
Our next question today comes from Nigel Coe, Wolfe Research. Please go ahead.
Thanks. Good afternoon, Dave.
Go ahead.
Yeah. Just want to go back to the product funnel, the obviously very impressive buildup of projects. I just want to broaden out Jeff's question. What do you think this implies for the broader cycle? I'm talking here about some of your shorter cycle businesses. The spirit of the question is that the view out there is that we're late cycle, but my read of this is that we know probably mid-cycle. Any views there, Dave?
I'll give you my two cents. First of all, this is my gut feeling, as you well know, Nigel. I've been in business a long time, almost finished my 18th year. I've been around this stuff for a long time. This is my best feel at this, okay? It's a little bit different cycle. I think we're early stage of this cycle. There's been such a significant underinvestment. There's a stronger growth globally. There's a shift in energy usage to the gas and alternative fuels. Oil is still used quite strongly around the world as a commodity. What we see right now is a fairly large investment up right now early on to fine-tune the facilities and to deal with the short-term capacity, and then longer term. I think we're earlier cycle on this process.
That's why I feel very good about this point in time, and from the standpoint of where we see the projects going, as Bob said, it's going to be a people capacity issue for not only our customers, but also for all of us, too, at the same time. Right now, I think we've got it under control, and it's going to take a little bit more investment and use of technology. I feel pretty good about where we are in that cycle.
I'd just add, four quarters ago, we were still negative.
Yeah.
We just looked at it a year ago. This year, obviously, the comp against that, we've been able to focus these nice growth rates. I think the momentum's there. We're going to grow next year along the lines we've talked about earlier.
Yeah.
I think some of these projects are three, four, five-year length playouts with the sales and everything coming with them. Unless something really wild happens in the world, this stuff's going to happen. They have not been exploring.
No, they haven't been.
They have not been developing.
They're still reducing reserves.
Some of these guys have gotten actually caught behind. They got to move. I think it's going to be pretty robust here. I would still call it early cycle.
Historically, Nigel, I've been talking about two years, but if you go and look at three years and these bundles of three years in the beginning to the peak and the next year down, you're typically talking on average around 26%-28%, 29%, three-year type of average numbers of a growth. We're just starting into that cycle at this point in time. On an average, if you take the three years and average it out.
Right. I want to come back to the two-year comments. You mentioned the two-year cycle. What you're saying now is three years. If it's two years of 8%, 9% growth, then the third year would be in that sort of slightly lower rate but still 6%, 7%.
Yeah, 6%, 8% type of stuff. Exactly. That's historically what we've seen.
Yeah.
Exactly.
The fourth question. With the dilution on the Aventics and Textron hitting in full Q, it sounds like you got nice tailwinds to M&A in 2019. Can you just maybe fill in some gaps on 2019? You gave us the tax rate, how about corporate? I think this year was a double year on the benefits. How does corporate look into next year, and any other color on 2019 would be helpful as well.
You mean for corporate cost expense standpoint?
Yes.
Well, I think we're in pretty good shape for the year because a couple of things happened. We no longer have an overlap relative to our long-term performance share plan because we've now got that totally engaged, so we don't have that delta. The pension right now is still looking good. I think our pension costs are coming down. From an acquisition standpoint, we've done on average, what, $1.5 billion-$2 billion over the last two years. I think we're going to be less than $1 billion next year at this point in time. From a corporate standpoint, we're in pretty good shape.
Awesome.
We should be positive. We're in pretty good shape there. I don't see anything extraordinary coming at us at this point in time. We're still trying to manage the capital. You guys think it's really easy to spend money. Sometimes it takes time to spend money, and we're managing at that and trying to get production geared up from that standpoint. Overall, I think the cost containment's pretty good. We're just selectively having to make some investments to deal with the long term, the project that Mike sees coming out of, and we want to make sure we're ready. We don't want to lose them. We want to make sure we can serve our customers on a global basis.
Well, that's a good example of capital, right? Because commercial construction ability to execute is limited by the industry.
Right.
Yeah. That's amazing.
Yeah. The corporate overlap, is that about $50 million of benefit next year?
I don't know. I haven't looked at that tightly. We'll talk to you in a week or so.
We'll figure it out and tell us.
Nigel, we haven't looked at 2019 that tightly yet. Is this not Nigel? Is this Andrew?
Nigel.
Nigel, we haven't looked at that closely yet. Gee, we're trying to get the fourth quarter done.
Right. Okay, thanks.
It will be a positive. I don't know. It'll be a positive. I couldn't tell the banker.
Can't size it like that right now.
Yeah. God, I wish I was that good.
Okay, thanks.
Thank you. You must think we're that accurate.
Our next question today comes from Andrew Obin of Bank of America Merrill Lynch. Please go ahead.
Hello, Andrew.
Hey, how are you guys?
Not too bad. We're still trying to calculate the corporate cost. Frank barely got the tax planning done in the third quarter. Now he can't give me a total year corporate cost for next year. What's wrong with you, Frankie?
Oh, God. What do you do with these guys?
What do you think, Andrew? What should we do with his budget, I mean, his bonus this year?
I think you should raise it. I seem to get right answers.
Whoa.
I've always liked you.
Exactly. I need as many allies as I can get.
That's very smart, Andrew.
Just a question on taxes. It's interesting that it took you guys until this quarter to figure out that you guys want to give this 401 contribution. There's still tax adjustments. When you talk to your customers, how far along do you think they are in figuring out their taxes, and what kind of impact the new tax structure will have on their behavior? I would imagine you guys are among the more sophisticated guys. It took you nine months to figure this out. Where do you think that your customer base is in terms of figuring out, "Okay, what do I do with these taxes?
There's a couple things going on here. One, the Treasury, when they passed the law back in December, hadn't really promulgated the laws yet. It took a long time for them to get all the rules and regulations out. As you know, this year, everyone had provisionals. We took provisionals, and we took a provisional in our first quarter, correct, Frank?
Yes.
Everyone's done that. Now, because we're a 930 company, the laws have been promulgated, and we have a clear vision of what's going on. I would expect most companies are calendar year companies, I would expect them to really get this sort of figured out in November of late November, December, this timeframe. We just happened to get the rules came out a couple of weeks ago, about 30 days, about 45 days ago. We were able to get this thing hammered out pretty quickly, we moved forward with all the ins and outs of this thing and got it clean. Most companies will take all the way to the end of this calendar year to clean this up because there's a lot of things going on around the rules and regulations on the tax laws.
That's why I wanted to thank Frank and Alex, those guys, because there's a lot of work here, and you got to make sure once you make that call, that you don't reverse it. I don't want to reverse it because we're paying taxes along those lines. Anything else you want to add there, Frank?
No. I think our large customers obviously have a good sense of it, but many of them are calendar year, so they'll probably, as Dave said, wait till the end of the year. Smaller customers, it's hard for me to generalize. I think they figured out the CapEx portion of it pretty quick.
Yeah.
In terms of getting the accelerated deduction. I think it's pretty well known. Some of these clarifications just came out in the last week.
Right. That's exactly.
This has still moved around on us.
Relative to the 401, we've been planning things and studying things, we looked at all the benefits, this was the last big thing we wanted to do. Typically, we look at things like this would be more in the fourth quarter for us when we do things for our employees, our fiscal fourth quarter. That's why we did that. Could we have done it earlier? The answer is yes, this was after we looked at everything we were trying to do and magnifying and looked at everything, we made the decision to do it. It's normally when we go out and communicate increases and everything. This is one more way you could just thank the employees for what they've done for us.
Just to follow up on the funnel. My understanding is that a big debate in the industry is that large international oil companies are sort of committed publicly to returning money to shareholders. At least publicly, they have not committed to CapEx in 2019 or 2020. Some of the funnel that you are seeing, are you actually having discussions with people other than-- It seems like Exxon is the only one and the stock got shellacked over it. Are you having discussions with people who have not publicly committed to spending money that, in fact, they are thinking about it?
Oh, absolutely.
Absolutely.
I would say every customer is in that funnel with something. They've all got their priorities. They all got their programs.
They don't like to talk about it publicly.
CapEx is going up a lot next year. I don't know. It's built in. They're working on it.
Yeah. We talked about this early on, Andrew. The first phase of capital this year were short-term stuff for these guys.
A lot of that was compensation stuff.
Quick payback. They may not be publicly talking to you guys, but they know they've got to increase their reserves. They've got to increase the sales, the top line. The investment discussions are underway, and it's happening. It's also from a competitive standpoint, they're not going to tell people where they're going for their money because that's a competitive advantage. I think that you may not be seeing it, but we see it because we have to work with not only the ExxonMobils or the BPs or the Shells of the world, but we're also working with the EPCs right now. The EPCs are getting very busy. All these different things are coming together. Going back to what Nigel said, I think this is fairly early on in the medium size, the large size projects at this point in time.
I like where we are at this point, and I'm more worried about how am I going to produce it now as I get into late 2019, early 2020.
Look at those LNG projects. These guys are partnering with each other, and then they're going to a partner of EPCs to work things out.
Yeah.
There's some complexities around all of that. Once they kind of get lined up, I think as you said, Dave, they kind of got to go.
Total project in LNG right now you see out there, what's the total magnitude of projects seen being discussed? The total number.
Over $1 billion out there. For us.
Yeah, total projects.
Yeah.
What's the total project?
Oh my God.
Probably 5% to 10%.
We're-
A billion dollars for us.
5%.
Yeah.
It'll be 20%.
There's a lot going on out there, Andrew.
Absolutely.
They're talking it. Okay, next.
Okay, thanks a lot. Fantastic.
All the best to you, my friend. Frank likes you.
Our next question today comes from Gautam Khanna of Cowen and Company. Please go ahead.
This is going to have to be our last question here, Gautam. You're coming up. You're the caboose, man.
All right. Pressure's on. A lot of things have already been asked.
No pressure. Just want to make sure you're The caboose is pretty important. Make sure no one runs into us.
Yeah, no, I hear you. I had a lot of questions have been asked, but been answered. On incremental margins, just to get it calibrated, the two acquisitions, Aventics and Tools and Test, bring with it how much of intangibles amortization next year and on an ongoing basis? Recognizing Q4 has done a lot of those one-time things.
Give us one second. We'll give you the numbers here, my friend.
The full year amortization for Tools and Test we gave as $25 million.
Right.
Aventics should be in the same ballpark.
It's about $50 million on a run rate basis for the two of them.
Got it. Net of that, we're still talking north of 30% incrementals.
That's where we want to drive it.
I like south.
He likes south, I like north. I'm talking for my shareholders.
You know, we have discussions once in a while.
Yes, Gautam.
Okay. Just wanted to be clear. Then getting back to your earlier comment, Dave, about next year not being as rich in M&A opportunity set, is that a function? There's opportunities out there, or is there some internal constraint given the amount of activity you're doing just to integrate what you got, let alone grow?
It's not an internal constraint. It's a function of what we're trying to get our hands on right now, Gautam. If you look at the acquisitions, the Aventics, you look at the Textron acquisition, you look at the Aventics acquisitions, all three of those major acquisitions in the paradigm we have been working on for years. It's just a function of what we see we're working on right now and trying enticing, encouraging. We may have something new come out of the blue we don't know about at this point in time, but I'm just looking at what we see working on and what we think we can shake loose as a cooperation where the acquisitions are coming from. It goes in cycles like that.
We're working very hard as we get into 2019 and early 2020 to try to shake loose a couple more good ones, nice little bolt-on acquisitions. It just takes time. That's how I see it.
Thank you very much, gentlemen.
Okay. Thank you very much. I want to thank everybody for joining us today. Very much appreciate you for joining us on the call. Again, Mike and Bob and Frank, your whole team's out there around the world. Thank you very much for what you accomplished this quarter. We got one more quarter to get done this year, then we can go home and have a drink. Thank you very much, everybody.
Thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.