Good day, ladies and gentlemen. Thank you for standing by. Welcome to Emerson's 3rd 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. Ever since 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 of Emerson. Please go ahead, sir.
Thank you very much, Rocco. I'm joined today by David Farr, Chairman and Chief Executive Officer Frank Del Aquila, Senior Executive Vice President And Chief Financial Officer Mike Trane, Executive President Emerson Automation Solutions Bob Sharp, Executive President, Emerson Commercial And 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 3.
Sales in the quarter of 4,500,000,000 increased 10% with underlying sales up 8%. Demand conditions remain favorable and trailing 3 month underlying orders continue to trend in the 5% to 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 $804,000,000 is 18% of sales and free cash flow conversion was over 110 in the quarter. We continued to buy back shares. In Q3, we repurchased 3,700,000 shares Year to date, we've repurchased over 15,000,000 shares for a total of Turning to slide 4.
3rd quarter gross margin was up 220 basis points. This improvement includes a tailwind from prior year valves and controls purchase accounting charges. This tailwind, partially offset by timing of the VNC acquisition, which closed in late April last year, resulting in 2 months of dilution from the acquisition last year versus 3 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 month of E and C dilution this year. Turning to Slide 5. 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 1st half reflecting favorable trends across both business platforms. Turning now to slide 6. 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 E and C dilution in the current year, Total segment margin was up 100 basis points. Operating cash flow was up 19% to $924,000,000 driven by high quality earnings and strong working capital performance. Trade working capital improved 150 basis points driven by receivables percent 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 across Eastern And Western Europe.
Latin America was positive this quarter after being down slightly in the first half. And 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 VNT acquisition. On a comparable basis, excluding the additional month of E and C dilution in the current year, segment margin was up 250 basis points.
This improvement was driven by at valves and controls. Now, please turn to slide 8 and I will hand the call over to Mr. Mike Train.
Thanks, Tim. Pleasure to join the call again. Steven asked me to provide a little bit of an update and we shared that with you at the February investor meeting. And we've updated it for today's discussion. On Slide 8, you'll see for August 2018, we're at about $6,800,000,000 in funnel size.
Now, 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. You know, we're I would say at this stage of the game, we're probably not anticipating the phone to grow anymore, you know, given that there's smaller projects that don't make funnel and there's investment decision dates beyond 2020. Right now, I think this is a very good set of projects that we've been that we're working with. There have been awards against this funnel probably on the order of $700,000,000 to $800,000,000 that we've been tracking, over these last 6 months.
Emerson has won a good number of those. I'm very satisfied with our hit rate on those awards. And, you know, generally, you know, those have to be engineered by the EPCs before they become orders and ultimately become the same. So, you know, there's still a little bit of that out in front of us, for the large fire. You know, we are seeing great, take up in our main out 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. And I think there's going to be end users and engineering contractors that want to take advantage of that. So, 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 4 months. Talking with EPCs and customers, you know, we see customer station at EPCs are doing the pre work the pre fee, the fee work. And, it looks pretty robust, I think, as we look forward. So that is Slide 8. Slide 9, 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 their own gas value chain. So it's the upstream, the midstream and the downstream. And really, based on what we're seeing in the global data, we are seeing CapEx numbers are starting to lean forward pro 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 2. And then down the right hand side of the chart, just some of the different perspectives, he's trying to add their net oil capability raising their production. Technipa FMC is one of the many engineering contractors that we recently announced their tensions. They're seeing their backlogs move higher.
We've seen that now with a number of others as well. And then, laid out a little bit of what's going on go here. We've had some change in the government regime there. We're already starting to lean forward into some of the investment activities want to put forward here. I think are going to be pretty robust for Emerson as we look forward here.
So, you know, 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 2 to 3 years. Timothy.
Thanks, Mike. So we'll continue now on Slide 10. Commercial And Residential solutions, underlying sales were up 2% in the quarter. In North America, air conditioning demand accelerated versus the 2nd quarter. Underlying demand and macroeconomic trends remain strong and we expect air conditioning growth to further accelerate into Q4.
Growth in China was impacted 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. And 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 and Test right at the beginning of the quarter. So as Q4 is reported, you'll see it starting to come into the numbers. And I'll have to say we're off to a very good start here, very good combination.
We have merged, Ridge tool and tools and tests 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 And again, good progress on that.
We'll be having some actions here soon. I'm 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 and 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. So overall, good organization. We've had several meetings with these, management team and employees throughout the sites. And we've been in all the factories doing a lot of work in the factories around, safety and operational activities. And, 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, and everybody's seeing some good opportunities.
And really good reaction from the customers as well. So we've talked about synergies. You see synergies around $40,000,000. A lot of that cost driven also 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 4 or 5 years as we have the plan that plays out. Good start there. Chart 12, I think it is on Asia. Certainly, 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 time to heating, you know, as they start getting and focus the heating season. And releasing government contracts and subsidy activities and things. Clearly 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 plus percent kind of growth dynamics residential AC up in the 10% territory So certainly we would have liked to see 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.
So 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, a 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 and other parts of the locations. There's a number of other franchises and customer that that's relevant to.
And then certainly with the cold chain activity going in China, supermarkets and all the other infrastructure build out remains strong. Here's highlighting some integrated scroll rack solutions and, Cooper Atkins is also playing into both of these kind of opportunity as well as we have the chance to internationalize that business. So again, we would have liked to see in 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. So turn to Slide 13, which steps through our team to our EPS guidance, the table starts with our May 1, 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 $150,000,000 tax benefit in Q3 drove a 6% GAAP tax rate and reduced our full year expected tax rate from 25% to 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 and tests and Aventics acquisitions. For these acquisitions, we expect to have little, if any, additional purchase accounting charges carryover into fiscal 2019. And finally, as discussed on our call 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 4th quarter, we will take a charge of $24,000,000 or $0.03 per share for discretionary one time 401 contribution to every member of dollars to $3.30 to $3.04. Please turn now to slide 14, which outlines our updated full year guidance And please note that this framework now includes the sales and earnings impact of the recently closed Tools and Test and Aventics acquisitions.
We expect total Emerson underlying sales to grow 7.5% with automation solutions up 9% and commercial and residential solutions up 4.5 dollars. The GAAP EPS range of $3.30 to $3.40 represents growth of 30% to 34% compared with the prior year. Production 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 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% to 8% underlying growth and earnings per share of $0.86 plus or minus $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 percent, reflecting our high quality guidance of team, and I will hand the call over to Mr. David Farr.
Thank you very much, Jim. I also want to thank Bob and Mike for joining us today. And updating everybody will 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. 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 of greater than 5%. Automation Solutions orders will continue to do well. From the standpoint, both my 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% to 10% range.
Now it's a little slower over the last couple 2 years. And so his comparisons are getting tougher and tougher. But 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 impact, the positive impact of the new tax law in the United States and people are spending money and we are clearly getting that piece of business. If you look at our North America sales and orders that have been very strong since the enactment of the tax law. But I want to thank everybody for joining us today. One thing you might notice in 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.
And She was asking me a very question. She her parents are shareholders, and she was asking me a very, a very delicate question. She said that Mister Farr are you going to break the dividend string in 2019? And I said, I see no reason to break the dividend string in 2019. So She said, good.
I'd be able to afford about, you know, some more milk or whatever I needed for, for eating here. So, she was very diligently asking me questions about the dividends, which is quite interesting. Yeah, they're 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 a 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're making the right enhancements and stay competitive.
And as we said in the press release, we have continued to make changes and to our package and both on the health and medical side, also parental leave improvements, better vacation plans, And now the most recent one, is the improvement in our 401, and we're making a one time contribution to our U. S. Employees. Is going to cost us around $24,000,000, but it's all about making sure we have the best group employees that we need around the world as we continue to enhance our benefits around the world. And in today's competitive environment, this is very, 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. But that's extremely important to us. If you look at everything that's going on, it's been a very good 6 months. If I look at the improvement of sales, I look at 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 2 days of planning business, the total integration of VNC was outstanding.
They are ahead relative to sales expectations. We're Our orders this year in both businesses are growing. We did not expect the orders of ENC 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, but a really great job by both Mike's and Bob's organization and 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, started growing, but now you see in total, you're seeing all our markets growing.
And 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'll 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, you know, last year at this time, our underlying sales were growing around 4%. We grew underlying sales 8%. As we go into the 4th quarter last year, underlying sales were growing 3%. We're talking about underlying sales growing around the percent range at this point in time. You know, comparisons are getting tougher, but the pace of business remains to be very strong and we have very good momentum across this company and many areas.
So I'm very, very pleased about that. But I know that Bob now has his hands wrapped around and his team have their hands wrapped around the acquisition of the Textron Tools and Test business. They're quickly going about how they can integrate the quickly going about how they can grow this business, how they can improve the profitability. You'll clearly see like we saw on VNC, the profitability in the segment will be hurt by this acquisition because it's clearly lower profit margin than we have today, but they have plans to get that margin back up and stop it from being diluted a relatively short time period. I also see improvements relative to cash flow, which is very important to us relative to that acquisition.
But equally important, the organization are working together very quickly and it's really exciting to see. We closed Avantix a couple of weeks ago, and Mike 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 1st couple of weeks, and Bob's case after the 1st 30 days. A lot of opportunities here and they continue to work in both of them will have a negative impact initial margin, but we'll work its way through to make sure that contributes to overall profitability as we move into 2019. But from the standpoint of where we stand with VNC and these 2 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, but I would not the same magnitude of what we've done here in the last 18 months.
But very strong performance earning to cash flow. And I fully believe that as I said early on in the year, you know, 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. So really running well going into that fourth quarter. I would like to make one of the comment relative to the corporate organization 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 their overall cost of the corporation, the true up of picking up this much money, $150,000,000, both earnings and cash over time but really reducing our rate for the quarter. Again, investing in people, investing back in the company, but 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 for 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. And so 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.
So I'm very pleased and Frank and 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 in the 4th quarter, as we sat here 3 months ago talking about the 3rd quarter, we talked about quarter that it would be plus or minus I believe around $0.85, I said $0.85 plus or minus $0.02. I mean, that's based how I think I'm thinking was in a nickel it's difficult for us to call it at nickel and you know, I know people always think we say plus or minus is always going to be plus. You should never think when I say that, I'm trying to give you the best range that I can give you at that point in time.
As we look at the fourth quarter, we feel the momentum right now gives us about 7.5 online growth. We see pretty good growth relative to acquisitions. The currency will hurt us as we in the 4th quarter, but I still believe that we'll be over 10% on a GAAP basis and clear 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 plus or minus $0.02 to $0.03. Clearly, we'll push for the quarter ending and see what we can do, but we 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.
And again, the operations are doing well and we're performing well and it was a very good quarter and it's we hope to continue to drive this in the next couple of quarters. And I don't see any reason why not at this point in time, but is every day is a new day in this world and we'll see what happens, but the momentum is behind really where this was right now and also from the standpoint of strong opportunities around the world for orders and for growth and for profit improvements. So I like what we see at this point in time. And so we have more positive working for us than we do against this. So with that open the door or I'm sorry, the phone for calls and we'll take some Q and A and and look forward to talking to you.
Today's first question comes from Nicole DeBlase of Deutsche Bank. Please go ahead.
Afternoon, Nicole.
So 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. So I guess would you sit here and make that same comment today, Dave?
Yes. The issue was I've always said from the early on, at 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 maybe a more of a not double digit. We didn't think we crossed that 10% mark.
Clearly now, as I look at the 2 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 and so we have a stronger front end load And so from my perspective right now, I'm looking probably equal years from the standpoint. I don't see mean, there's certain things that our customers can work on. And 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, only can work on so many projects. So the momentum is 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 the automation business. And therefore, so I'm looking next year, probably gonna be in that 9% to 10% range now because I'm looking at that combined. I look at a 2 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 7, 8, then I expect us to be a 9, 10.
Now year. So now I'm looking more equal, equal, Nicole for the year, just based on the way our customer base. And Mike, do you want to add anything to that?
I'd say, you know, we've seen very KOB3, the aftermarket business throughout the year. It's been probably stronger than we even anticipated in February. And it's been good for our business. It's a relatively turn business. I think that's helped contribute to the second half here in a major way.
You know, the KOB 1 projects, the greenfield projects will come along. They have their pace as you can. They gotta get engineered. And I think, again, I think there was a lot of pent up demand on the Kv3 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.
So, you know, I can't tell you that it can't be a double digit year next year. But I, you know, I think something in that 7, 8, 9 range right now feels about right. And we always have to play it out and see what happens.
Mean historically, we've seen a 2 year cycle. If you look back at our cycles, we're typically when we take it off on combined basis is that 16, 17, 18, 19% on a 24 month time period. So 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 but it's going to be a good year anyway to look at, Nicole.
Right now our backlog, our growth and orders are strong. So we're very positive about it. Now we got to make sure we end up people. That's a big issue now.
Got it. Thanks, Dave. And 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. So have to ask, you know, have you quantified the risk to Emerson from the tariffs that have been enacted to date? And I guess just level of flexibility in your supply chain, your manufacturing footprint to to handle what we're today?
We have quantified it. We not, you know, go out publicly. It's it's it's not that huge of a number relative to, you know, 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 He has less flexibility in the short term over the long term. He can adjust. We have the flexibility around the world. We talked about this, the board, where today 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 bull's eye of a lot of tariff activity. So it's smaller and we can react to it. So just as much as, you know, maybe some of our competitors are hurt, we're helped and vice versa. It's been a pretty good trade off, but I don't, I don't like the way it's unfolding and hopefully, well, things will settle. But right now, it's manageable as we told the board.
And, next year, what will happen is we'll have to have more material containment. We'll have to have a little bit more pricing and clearly it's creating an inflationary environment, which helps us both at the top line, you know, faster growth, but also forces us to do a lot more material containment around it. So it's very manageable at this point in time, even with the current actions underway. And, you know, I have much bigger issues than that.
And our next question today comes from Julian Mitchell of Barclays. Please go ahead.
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. So just wondered when you're looking at the good progress on valves and controls and the changing mix of months, do you think that 30% level is a good incremental margin to AMAT?
If you look at the true underlying performance, we're around 35% for the quarter. And, as we've talked about, this is Julian, correct? Yes. Julian, as we talked about is What Mike's having to do right now with a faster order pace running at 12%, 10%, 12%. Mike is starting to happen.
We talked about this. He'll have to start adding some incremental people around the world to deal with the project. So I feel very comfortable in this 30%, 35% range at this growth level. And the growth level slows down that we'll expect that to grow up a little bit higher. But right now, we're going to we're having to put people in place.
We're having to make investments both in capacity from a capital standpoint and to take care of some of this growth. Many of Mike's businesses right now in North America are actually getting back peak performance in the last cycle and actual sales. So 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 ought to make sure we stay ahead of given our presence around the world and given how fast we're leading out this relative to our competitors. I feel very good about the margin at this point in time, but Mike and I also have keep having the debate back and forth, what's the right balance of adding new people, adding new capacity.
And that's not it's a debate that we have a lot But I think our margin right now this quarter is around 35. I think we're going to stay in this 35 range and if we have drift it down a little bit for Mike, then we'll do that, but also if he slows, we're going to take it back up. So that's how we see it right now. Mike, anything you want to add from a Julian standpoint?
That's right. Again, we've had a very nice mix of business so far. Okay. Further rounds in 3 North America.
Correct.
All been
Very good.
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 and if you look at it, it's still a very KOB 1 KOB 2 Centric. The big projects that just start coming And as you know me, Julian, I'd like to take guesses. So as I look at the project funnel right now, what Mike's talking about in his business they're talking about, it looks to me like it's really 2020, 2021 that the KOB 1 mix are really going to put pressure on us. And then we'll, but we have to get ready for that. To that because it looks like that's where those projects are, the bigger projects are heading.
I mean, if you look at classic example, if you look at what happened to ExxonMobil last quarter, I mean, I've always felt that our industry under spent and was not ready for the downturn. And, and you saw that from the standpoint and how people are having to spend quickly have to spend on maintaining their facilities in the production as having to come up much faster. And if they had not maintained their facilities, we're not ready for this, they obviously suffer. And this is happening across the world in this case and it's something we saw because they cut so deeply from a capital standpoint. That's where we are.
Thank you. And 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 resi. It looks like the residential HVAC at least the OEMs have seen high single digit growth on average the last couple of quarters. So 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 reaccelerating?
Mind too also, our OEMs have been getting priced now for 18 months. They've been going out with some very large price increases. And so, some of those numbers, they had good underlying volume, but some of those numbers also are price inflated. So Bob, I'll let you answer the question
I think you're going to see that pretty heavily. I mean, I think everybody knows that we've got material clauses that we do with our especially the large U. S. OEMs on pricing. And when the, in the deflationary time, we enjoy that a lot If you remember back in 2016, we had over 2 points of EBIT margin improvement for climate.
And obviously now that's in a different zone. But again, that's kind of normal. That is certainly a widening the sales reported numbers as well. I think, you know, we've 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, compressor manufacturer very recently announcing that they're going to be moving away. From the industry. And frankly, there's a lot of activity right now we're involved with with, helping out some customers respond to that quickly.
So that's a 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, that has also created some conversations, let's say, with OEMs. So, again, there's there's a gap right now.
No question. We we model it a 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. But, overall, again, we think we understand our position in this space and that it's playing out pretty normally, I guess so.
I
mean, Julian, it's, we watch it very closely because we know everyone reports around this space here and we we play with all the players. I mean, I would expect Bob because business here probably have pretty good for the next 5 to 6 months. A good order pace is these guys do a lot of moving around in shuffling and replace the backlog of the pipeline. So overall, I feel we feel very good about it and we'll see how it unfolds but it's definitely different mix this year than we see in the past, service levels, service type of, you know, server products have been different this year and you know, how service has been doing. And so it's a good year overall.
So, yeah, I
mean That's good. And Q4, it's been a warm quarter and we feel good about the way this quarter is playing out as well.
And our next question today comes from Steve Cusso of JP Morgan. Please go ahead.
Hello, David.
Good afternoon, Steve. How you doing? Looks like a I had to bring a couple of friends to take you on today. So, I got 3 guys here. I got my baseball bat.
I got my rally monkey. The rally monkey's really keeping a very close line Tim because it's really staring it's staring Tim down right now.
And so, it's making me it's making me nervous.
Okay. He's right behind Tim's head looking as So what can I do for you, Mr? Tusa?
It must have been
nice to have that kind of engaged and thoughtful crowd in that auditorium versus some of the investor days, you know, that looks like an engaged crowd there. So a new audience for you.
See, none of that iPhone taking pictures of my chart.
You know, if I had the I had the
what I had the one chart rolled up because I was afraid to show her because she wanted to take it 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. You got to keep them fresh.
How
many years have been now? I mean, jeez.
These funky sweaters on either. No one had those little funky sweaters shirts on either.
Anyway, anyway, on this climate thing, what what will your volumes grow in kind of North America resi for the year now kind of on a seasonal adjusted I mean, I guess your fiscal year is kind of aligned with their with their count, the OEMs 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?
Will the volume numbers be for this year? Yeah.
Yeah. Like mid singles, I mean, it just seems like I just want to kind of get
a number on the board.
We'll be able to get signals. Okay. I mean, to be honest, the compressor shipments this year are hitting an all time high for us.
Right.
I think we are hitting all time high. And so the plants are running pretty strong right now and a lot of our customers are starting to level load more production, Steve, versus, you know, where they used to try cycle, we're starting to see more and more customers to, to try to keep things level, which which smooths us out more. So we're not seasonal. It means it's a different view than we we're starting to see some different habits of our customers now.
I mean, 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. So even quarter to quarter could be several points swing.
And
I guess I'm just kind of struggling a little bit with the fourth quarter because you you said about 6 waves 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. I mean, you also got to keep in mind in, you know, our the $0.86 we're taking care of, you know, the one time accounting stuff, for Avontex, we're taking care of, the 3¢. And so, I mean, so in real life, so those those are 2 restructuring. So you're looking at so you're right. I mean, normally, but we're I, you know, we're also taking care of some issues as we close some deals and as we do the one time, 401 k.
So that, I mean, as you well know, Steve, I I really can't call a quarter within a net call. And so when I look at that and say, you know, that feels about right. And it would be, as you say, the normal seasonal thing would be around that 90 plus if we that's why if you that's what we have to deal with relative that's what's going on. So 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. And then I guess just as a follow-up to that, on Climate, you guys have these kind of escalators that I guess that would mean your pricing is going to kind of 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 were 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. So I mean, if raw is kind of stabilized here, can you be in climate green at some point here in 20 nineteen and start to kind of flip the other way for a period of time given the way your escalators are working?
Yes, 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, but 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 2 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.
What you'll see the benefit
next coming in now in early next year 2019. So.
Right. That's a good question.
Outside of the lags, we are green. Already. Got it. Got it. Got it.
That way, again, through next year.
Got it.
See, 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 when 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 and controls, what will kind of revenues for that business
finish at in 2000, you know, fiscal 18.
I don't I don't think the revenue's gonna change much. I think they're gonna be slightly down on a reported basis. They're gonna be slightly down because of institures in the product lines we get rid of. But the underlying growth rate is now growing. So now next year we're going to have a growth.
And so the underlying order growth is around 9%, 10% So they were slightly down because of what we divested and where we get out of. But now they're coming off and if you look at the order pattern, they're growing faster. So now they're going to start growing. So overall, we're going to grow that business and it's going to be a we got a good couple of years here between that business and what we're trying to do with
Yeah, looks like it. All right.
Thanks a lot.
Thank you very much, Steve. I appreciate
it. And
our next question today comes from Steve Winoker of UBS. Please go ahead.
Hey, thanks. Good afternoon. And Hey, Dave. Hey, Dave. I I can't resist also on that front page.
I know you guys turn over every stone for some new investors and applause. And in that one, it looks like you got both.
So definitely, and as Tusa said, This is a little bit more friendly audience other than the fact they they never shut up.
I mean
Well, that's not that different. But I that was unbelievable time we had, I don't know how many kids we had 4 hundred kids in that room. I mean, this Tim was around here. Tim, the tool man was around here somewhere too.
Probably be a better day.
Oh, yeah. We're in New York. Yeah. We're doing it in New York. You can bring your kids in.
And, now can your have your kids ever here and swear before? All the time because I let them play I play your replays for them. So anyway.
So listen, on, on page 8, for you and Mike, that large project funnel, I just want to go back to that and the resilience of that sliver that's
the there are large, 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, how
deep into that do you think we are for the kind of KOB 1, 2, into?
Don't like that.
So I'd say for the we'll call them the megs, the big ones that, we showed you a little depiction of that when we were together in February. If I drew that chart again, it would look similar. Omegas on 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, mega sizes.
They are gearing up.
Again, I've been around the world to
meet that specifically touched 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 create types and capacity?
I told them they better start reserving capacity. You can just see this bow wave coming up. They need to start thinking that way. They want all of our valves. They want, you know, all of the engineers to work on these projects.
They need to get in line with us pretty early. And they're doing that. They are doing their support.
How does that relate to that $700,000,000 to $800,000,000 number that you gave in terms of awards versus your wins? And should we think about therefore
that piece of it stepping up significantly? Yes. The largest ones, they're still out
there. Yeah. The big
A lot of the awards are better than the smaller size. Yeah.
He's been he's most of the awards have been in the in the $1,000,000 to $10,000,000 range. I mean, you've had a couple bigger ones, but most of our smaller
they're not in the 100 plus, but we've had, we, you know, and when we get an award, it could be for a piece of the business. You know, we might get, systems earlier. We might get the Mows or So, you know, we're tracking all of the puts and takes around that. So take 800 out of the funnel, we saw about $2,000,000,000 go into the funnel. Kind of make all the math work out.
So so that's why I kind of think. I don't think we'll see the fellow get larger because I think anything that works at 78 ago in oil is identified. It's out there, and
we're gonna
it's going to have a decision date within two and a half years, it's going to be being worked right.
Steve, what's going what goes on at the CEO level on these projects? And I'll give you my expect of what goes on here is the projects, they haven't prioritized right now, but the prioritized prioritization will change. And what will happen is the CEO is exactly to look at, okay, you know, the people, the location of the world, there might be issues popping up and reaches the world or they need, you know, they need more gas, they need more oil. Where we need the more issues relative to our own manufacturing.
They will move they will move some of these projects.
You can see a project move 6 months 6 months out these projects will slip moving in and out. But what we see is we track them and we move them back. You can see other ones come in front. So right now what we've been seeing is the have been moving around a little bit. So it's like a motion.
This doesn't look like a motion where those things are moving, but the funnel is pretty tight and consistent and where some of these projects are moving around is pretty good right now. But what we didn't have in February and we don't have it here now is that we had only a few other what do you call the big mega sitting in 2019 early 2020. We now look at that chart and there's a lot more of the megs coming in late 2019 or early 2020. So that tells me when I made my earlier statement, I think these our KOB 1 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 will shape it up pretty nicely. We might get up to $7,000,000,000 total, but that's a lot of work going on out there at this point in time.
And and, Dave, I don't think you put a final point, but if you could, on the July order experience in AS and and maybe the NC and RS too,
It was, you know, Mike was real close to around 10% and ARS was probably very consistent where you were before, I think, in the 3% to 4% range. And that that's a very preliminary numbers, and and we we push them hard to get a number for this call here, but I still think we're we're we're in a good size of that band. And so overall, we're in pretty good shape.
Okay. And just lastly, Mike, sorry, Bob, we talked a lot about coal chain in 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 to your 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.
You know, 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. So now those are progressing well.
Steve, before I want to, I want to, I'm going to ask Bob or Mike to comment I mean, no one's really talked much about 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 know, you're up with sales 20% to 9% for the quarter. Orders have been very strong. So 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. And that's been a very pleasant surprise for the last couple of quarters. You may want to comment.
China has been strong for us. I think locally, we've seen a lot of No, the state owned is busy. There's a lot going on with the privately owned enterprises. We've seen these chemical companies rise up over the last 5, 6, 7 years. They're getting very serious.
They don't wanna buy the mid tier product anymore. They want the high, the high quality stuff, and they're leaving the border. We've got one that we're working on that's going to go to Louisiana to gas prices. But China for us is broad based. And again, I think I referenced February, you know, there's a refining wave that's going to come at us in China, a smaller one in India to go along with it.
So a lot
of spend there. Power is still very solid for us. We saw the nuclear plant start up here in the last few months. So, you know, we got some of those behind us now. So we can get on to the next ones that we've been ready to work them.
I would say I was impressed. I think it's trying to really, really apply it.
I was impressed if I was there with Mike and his team, just recent Bob was there too. Bob tried to do it and try to get me run over to cars. I'm not sure.
You're with me, so. Yeah. I didn't try because I was next year.
Yeah. So, but it, I would have tested the plot a broad base of all the orders and the type of industry is going on in the customer list. And one of the things good things in this cycle here is a lot of smaller players that we are competing as do not have financing. They don't have the money to get access to money. And so the big multinational companies that make continue to make investments, which we have continued to do, including upgrading our manufacturing capability in China, with the v with the VNC stuff is, you know, we are really, really, actually separating our stuff again in China.
And
outside of China, we'll see you know, we're talking all about about China. We were double digit outside of China. In Q3 and we are good. We were in Q2 also. So there's plenty of activity going on in Asia broadly.
Great. We
have the same.
Good job. Concludes me. Thanks.
And our next question today comes from Jeff Sprague of Vertical Research. Please go ahead.
Thank you. Good day, everyone.
Hey, Jeff, you know us 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? One of
the disciplines
we have Sprag, and a
lot of people give me a hard time on releasing orders. All these guys are going, shit. I can't you'd say that, but 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 actually get sales. Something's not going on. So, 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 kids in the audience probably know that if, sales don't catch up with orders, then the orders aren't real, right?
I have to I'll explain that to that. That's the next question I've got. She asked about the dividends. She didn't quite get the connection between me. I tell the guys, the orders are great, but what I would say can't pay a dividend.
Is these these guys every day the whole time?
I thought you're trying to I thought you're trying
to suggest WeWork Children, by the way, you put that on the slide, but
Not bad, a bad thought. Pretty sure everybody.
So, hey, obviously things look extremely robust and everything you said about project 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 you know, we came off the 14 and the peak, you know, there were projects that that were planned and did not move and they got parked and they kind of idled and they've gotten resurrected and a little bit of police being work's been done on them and people are making those decisions to move forward. So we've certainly seen some, some like that that have been hanging out there for a couple of years, Jeff.
Think, Jeff, the biggest issue, right, we see in North America is North America has 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 up very quickly in North America. They did not stop as quickly and Internationally in North America.
And that's why we've seen a North America bounce back And so I'm sitting there in the valves control conference, the final control, and we're seeing North America numbers coming back to levels we saw in 2014 so quickly. And that tells me that things were cut up abruptly and they had to come right back on and they're ready to do it right. And I think that's a very good observation because that's what we're seeing right now.
One other insight there is, you know, the movement of energy to different parts of the world has gone up. You know, the U. S. Exporting LNG was not doing that back in 2014. Sort of 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 in Asia. You know, so I think those are some of the things that are different.
And you're saying resources becomes a throttle too on those projects, right? I mean, yeah, that's happened before in the peak time.
Exactly. The other thing I would say that, with the why I talk about BNC, I think BNC and the valves control is They did not have the capability of manufacturing the products here in the United States. And one of the things Mike's team has gotten on it right rapidly is now we have huge opportunities here in North America that we could address very quickly with our channels. And the market turned our way. So we're now getting VNC products into customers that they never been in before.
And now we're we're having to quickly accelerate manufacturing and spend money that's give us another little bump here in North America that we were not anticipating. And my hats off to Ram 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. But it's things move our way pretty quickly and the team executed very rapidly And the timing of the VNCA acquisition has been a perfect as I look at it.
I'd say all across the platform. Everybody stepped
We need them. Everybody's going fast. We needed them.
Very clear. Just one quick thing. There's obviously been a disconnect in in, automation this year kind of observed incremental versus underlying as you digested, VNC. Should those numbers be very similar now in 2019, you've got a little Aventics noise, but, should be kind of what we see is what we get on the incrementals.
You know, VNC is on a good path to improve. They will continue to improve. You know, they're not there yet. Authentix, you know, sizable number. We're 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. And I think we're going to we'll probably still have a 1 more year of a slight dilution there from impact, but profitability is going to be still very good, but I don't think it'd be quite accelerating as you're thinking there, Jeff, because I still see some dilution impact. I still see some incremental investments that we're making fast than we originally planned.
And our next question today comes from Nigel Coe of Research. Please go ahead.
Yes. So, just want to go back to the project 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 mean, I'm talking here about some of your shorter cycle businesses.
And the start of the question is that the view out there is that we're late cycle, but my read of this is that we're no probably mid cycle. Any views there, Dave?
Yes, I'll give you my 2¢. First of all, this is my gut feeling, as you well know, Nigel, I mean, I've been in business a long time, almost finished my 18th year. I've been around this stuff for a long time. So it's my best feel at this, okay? A little bit different cycle.
I think we're in early stage of this cycle. I don't think we're this there's been such a significant under investment. There's a there's a on a growth globally. There's a shift in energy usage to the gas and alternative fuels, but oil still used quite strongly around the world as a commodity. So what I what we see right now is a fairly large investment up right now early on to fine tune the facilities and to deal with our short term capacity and then a long term.
So I think we're earlier cycle on this process and And so that's why, I mean, I feel very good about this point in time and from the standpoint of where we see the projects going it's it's going to be, 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. But right now, I think we've got it under control. It's going to take a little bit more investment and use the technology, but I feel pretty good about that where we are in that cycle.
At four quarters ago, we were still negative. I mean, we just looked at it a year ago. And so this year, obviously, the comp against that, we've been able to have these nice growth rates. But I think the momentum is there. We're going to grow next year along the lines we've talked about earlier.
And I, again, I think these some of these projects are 3, 4, 5 year links playouts, you know, with the sales and everything coming with them. And unless something really wild happens in the world, this this stuff's going to happen. They have not been exploring
they haven't been they
have not been developing.
They're still reducing reserves.
Some of these guys have gotten actually caught the behind. They got to, they got to move. So I think it's I think it's going to be pretty robust here for us. I would still call it early cycle.
Historically, Nigel, I mean, I've been talking about 2 years, but if you go and look at 3 years and bundles of 3 years in the beginning to the peak and the next year down. You're typically talking on average around 26 to 28, 29% 3 year type of average numbers of our growth. And so we're just starting into that cycle at this point in time. On an average, if you take the 3 years and average it out,
Right. So I want to come back to the 2 year comments. You mentioned a 2 year cycle. So what you're saying now is 3 years. So if it's 2 years of 8, 9% growth, then 3rd year would be in that sort of slightly lower rates are still?
Yes, 68% type of stuff. Exactly. That's historically what we've seen.
Yes. Okay. Great. And then the 4th question. So with the dilution on the VENTechs and tech on hitting in 4Q.
It sounds like you've got nice tailwinds to M and A in 2019. Can you just maybe fill in some gaps on 2019? You've given tax rate, but how about corporate? I think this year was a double year on the benefits. So how does corporate look into into next year and any other color on 2019 would be helpful as well.
So the corporate cost expense standpoint? Yes. Mean, I think we're in pretty good shape for the year because a couple of things happen. 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, I mean, my plan, done on average what $1,500,000,000 to $2,000,000,000 over the last 2 years. I think we're going to be less than a $1,000,000,000 next year at this point in time. So from a corporate standpoint, we're in pretty good shape. 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 real easy to spend money. Sometimes it takes time to spend money and we're managing at that and I'm trying to get production geared up from that standpoint.
But overall, I think the cost containment is pretty good. We're just selectively making 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. And 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.
Yes, the corporate overlap, is that about $50,000,000 of benefit next year?
I don't know. I couldn't I haven't looked at that tight leg. We'll talk to
you in a week or so.
We'll figure out and tell them.
Nigel, we're not we haven't looked at we haven't looked at I see that tightly yet. Or this is not is this Andrew? Nigel, we haven't looked at that closely yet. Gee, we're trying to get the 4th quarter to
Right. Okay.
Thanks. It it will be a positive. I don't know. It'll be a positive. I couldn't tell the bag.
I just can't size it like that. Yeah. Gotta wish I had that good. Thank you. You must think we're that accurate.
And our next question today comes from Andrew Urban of Bank of America Merrill Lynch. Please go ahead.
Hello. Hey. How are you guys?
Not too bad. We're we're we're still trying to calculate the corporate costs. I mean, you know, Frank barely got the tax planning done in the third quarter. Now he he can't give me a 4th
a total year corporate cost for
next year. Which one are you, Frank?
Oh, gosh. You know?
I mean, what do you think, Andrew?
What should
I what should we do with this budget? I mean, his his bonus this year, you know?
I think you should raise it. I I think that you're right now, sir.
Woah. Yeah.
So I'm always like to. Exactly.
I need as many allies as I can get.
That's pretty smart, Andrew.
Just a question on taxes. You know, it's interesting
that it took you guys until this
quarter. To figure out that you guys want to give this 401 k contribution. You know, 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 because I would imagine you guys are more sophisticated than among the more sophisticated guys. So 2Q like 9 months to figure this out, what do you think your customer base is in terms of figuring out, okay, what do I do with these taxes?
There's a couple of things going on here. 1, the treasure when they passed the law back in December hadn't really promulgated the law said. I mean, so it took a long time for them to get all the rules and regulations out. So, as you know, this year, everyone had provisionals. We took provisionals and we took a provisional in our first quarter, correct, Frank?
Yes. And, and so everyone's done that. Now, because we're a 9 30 company, the laws been promulgated and we have a clear vision of what's going on. So I would expect most companies are calendar year company. So I would expect them to really get in this sort of figured out in November of late November, December, this time frame.
We just happened to get the rules came out, a couple of weeks ago, 30 days, about 45 days ago, we were able to get this thing hammered on pretty quickly. And so we move forward with all the what we've ins and outs of this thing in to clean. Most companies are gonna will take all the way to 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 and 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.
And
I don't want to reverse it. So because we're paying taxes along those lines. So anything else you want to add there, Frank?
No, no, I mean, I think our large customers obviously have a good sense of it, but many of them are calendar years. So they're probably as Dave said, wait till the end of the year. Smaller customers, it's hard for me to generalize. I mean, I think they figured out the CapEx portion of it pretty quick. In terms of getting the accelerated deductions.
So, I mean, I think it's pretty well done. Some of these clarifications just came out in the last week. So this is still moved around on us. You know, and relative
to the 401 K, I mean, we've been planning things and studying things and we looked at all the benefits and this is the last, the last big thing we wanted to do. And, you know, 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, And, and so that's why we did that. I mean, you know, could we tell our earlier answer is yes, but this was after we looked at everything we were trying to do and and defined and looked at everything and so we made the decision to do it. And it's a normal when we go out and communicate, you know, increases and everything. This is one more way you could do, you know, thank employees for what they've done for us.
Sure. And just to follow-up on, the funnel, You know, 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. And, at least publicly, they have not committed to CapEx in, 2019 or 2020. So some of the funnel that you are seeing, are you actually having discussions, with people other than it seems like Axon is the only one on I got shellacked over it. But 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 public.
Flex is going up a lot next year. I don't know, but it's built in. They're working on it. Yeah. I
think that we talked about this early on Julien. We the 1st phase of capital this year were short term stuff. And these guys, a lot of that quick payback, quick payback, quick payback, They may not be publicly talking to you guys, but they know they've got, they've got to increase their, reserves. They've got to increase the sales of the top line. So the investment discussions are underway and it's happening.
And 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. So I think that you may not be seeing it, but we see it because we have to work with none of the Exxon mobiles or the BP's or the of the shelves or what, but we're also working on the EPCs right now. So the EPCs are getting very busy and so all these different things are coming together. So Going back to what Nigel said, I think this is fairly early on in the medium size, large size projects at this point in time. I like where we are at this point.
And I'm more worried about how I can produce it now as I get into late 2019 or early 2020. And look at
those LNG projects. These guys are partnering with each other. And then they're going to a partner of EPCs to work it out. So there's some complexities around all of that. But once they kind of get lined up, I think as you said,
So what do you kind of got to go? LNG right now, you see out there with the total magnitude of projects seen being discussed, the total number.
For us,
total projects, what's the total project?
Oh my god. I mean, probably 5% to 10% of the
we're $1,000,000,000 for us. It'll be 20.
There's a lot going on out there, Andrew. Absolutely. They're talking Okay. Thanks
a lot. Fantastic.
All the best to you, my friend. Frank likes you.
And our next question today comes from Gautam Khanna of Cowen and Company. Please go ahead.
Question here, Connor. You you're coming up. You're you're the caboose, man.
Alright. Pressures on.
A lot of things, but
I just wanna make sure,
you know, you're the Kabusa Supreme Court, make sure no one runs into us.
Yeah. So I hear you. I I had a lot of questions have been asked, but in answering, but, on incremental margins, just to get it calibrated, the 2 acquisitions, Aventis, tools and tools and test, bring with it how much of intangibles amortization next year and on an ongoing basis? Recognized that Q4 said a lot of those one time.
Give us one second. We'll give you the numbers here, my friend.
The full year of amortization for tools and tests we gave as $25,000,000 and then Aventics should be in the same ballpark.
It's about $50,000,000 on a run rate basis for the 2 of them.
Got it. And so net of that, we're still talking north of 30 incrementals.
That's where we wanna drive.
I like south.
He likes south, but I'm like north. Talking for my shareholders.
Okay. We have discussions once in a while. Yes. Got them.
Okay. Just wanted to be clear. And then getting back to your earlier comment, Dave, about next year not being as rich in M And A opportunity set. Is that is that a function of 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 it's not it's not an internal constraint. It's it's a fun of what we're trying to, we're trying to get our hands on right now, Gautam. And, you know, we, if you look at the acquisitions of ENC, if you look at the Textron acquisition, you look AVontics officers. All three of those major acquisitions in the Paradigm had been we've been working on for years. So it's just a function of what we see we're working on right now and trying to icing encouraging.
We may have something new come out of the blue. We don't know about 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. And that's just it goes in cycles like that. And so we're working very, very hard. And as we get into 2019 early 2020 to try to shake loose a couple more good ones, nice little bolt on acquisitions.
This takes on. 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. And, very much appreciate your joining us call. And again, Mike and Bob and Frank, your whole teams out there.
Around the world. Thank you very much for what you accomplished this quarter. And we got 1 more quarter get done this year, then we can go home and have a drink. Thank you very much, everybody.
And 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.