Good morning, welcome to the Emerson Investor Webcast and Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. Emerson's commentary and responses to your questions may contain forward-looking statements, including the company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson's most recent annual report on Form 10-K as filed with the SEC. I would now like to turn the conference over to Tim Reeves, Director of Investor Relations. Please go ahead.
Thank you, Kate. I'm joined today by David Farr, Chairman and Chief Executive Officer, and Mark Bulanda, Senior Vice President of Planning and Development. Welcome, thank you for joining us this morning for a discussion of the deal we announced this morning. We've agreed on terms to acquire Aventics, a global leader in smart pneumatics technologies. Please note the accompanying slide presentation is available on our website. Now I will turn the call over to Mr. David Farr.
Thank you very much. First, I want to welcome everybody thanks for joining us. This is the new approach to try and make sure everyone understands the acquisitions, giving you a couple of key charts to come off it, just to make sure that people understand the strategic rationale. I also want to thank Mark Bulanda and his team, Clell and Lim, Vanessa. A lot of hard work the last several weeks as we worked through this, I really appreciate it. Now comes the fun part as we try to get this closed and integrated within, that's going to be up to Larry Flatt and Manish, a lot of great opportunities across our automation business. This is an acquisition that we've looked at for many, many years. Fortunately, the private equity owner decided to allow us to buy the company.
So that's where we are right now. If you look at the chart, the pyramid chart, you shouldn't be surprised, as with the tools acquisition we just recently did. This one fits right in with the technology pyramid. It fits right down in the device instrument sensors area, fits in with a hybrid discrete marketplace. It really ties in, as you'll see in a second, nicely with our ASCO and the hybrid business that we have today. It really goes to the whole solutions package and fits in actually with the smart Plantweb strategy that we've embarked upon as we bring the industrial internet thing to our customers. This is one piece that really fits in and really ties in nicely and be one of the major players in the world that really have this to offer in a unique package.
Again, it fits in very tightly with where we're trying to go. As I said in February, just think about those boxes, and that's where we're looking, and that's what we're going to go forward. I'm not going to tell you names, but clearly, we're giving you enough idea where we're trying to aim our guns at this point in time as we move forward here. If you go to the next chart, Aventics is a very nice company. It was spun off of Bosch many years ago and bought out by the private equity firm. You can see that it's a very German-based company, and Germany represents the largest piece of sales. The rest of Europe, the other large piece, and then a little bit in the Americas and a little bit of Asia-Pacific.
Really, the addition of Aventics really helps us in Germany and Western Europe, and we have a very strong presence there already, but they truly solidify our presence, and then we really will help take this technology around the world, which we are, you'll see in a second, very strong in other parts of the world. They are located in Germany. Last year's sales were around $425 million with 2,000 employees. I do want to welcome the Aventics people if they're on the call. We're looking forward to working with you, looking forward to supporting what we're trying to do with this whole strategy around our automation solutions and our Plantweb automation business. But very much a discrete business, and also in the industrial marketplace and the hybrid marketplace. Fits exactly what we're trying to do with our automation solutions business.
It is a very core bolt-on acquisition, a very nice asset. Again, I want to thank Mark and Clell and Vanessa and the team getting this done because it's not been easy. As you look at page four, it is complementary. It fits very nicely with our $1.5 billion business that we have in this space right now. It's a key sensor or key data point, key input point to our whole factory automation technologies and really does add some additional market presence on the hybrid space and the discrete space and really does give us a lot of leverage point relative to working with our customers on our broader solutions package. That's what we're excited about.
We believe that with our global reach and the technologies we have, and the technologies that Aventics brings, that we will be able to expand this and really have a nice package. Only a couple of people will have this package in the world just like this, and this is a very nice strategic fit with us. It is a very large market space in the hybrid and discrete market. As you can see there, $13 billion is the total market. It's within the definition that we've been giving out, I believe, Mark-
Yeah
at the $205 billion.
Yeah.
That's the level. It's within this space that we've been talking about. It's within the space that we presented in February. Mark and his team have done a really good job of looking at where we can go and try to nip and tuck in the bolt-on acquisitions, which we'll continue to do. Some obviously won't be as large as this one, but we're going to continue to work up and down that right-hand side of the pyramid. From my perspective, it gives a really unique customer addition to our package. They have a unique customer base with our unique customer base, and I'm hoping what we'll be able to do is, I've been talking to the people within our automation business is how do we leverage the customers if we take that total package to them, and how we pull that off.
I believe it expands our capabilities in the food and beverages, in the packaging and life sciences areas that we serve today. Clearly, we need to continue to invest and be stronger. I think it really brings in unique opportunities on synergistic growth in customer areas and technology areas that I'm very excited about. Aventics is a really well-run business. It's profitable. I believe that over time, with the leverage that we can do across the two businesses, I think we can grow it faster and also improve the profitability of our combined businesses. Really lots of areas for us to add value over time. If you go to the next page, the way we look at the marketplace today, from the process, the hybrid to discrete, again, this whole market that we look at is around $205 billion. Is that what we use?
205.
$205 billion. We have been much stronger in the fluid control, though we've had the hybrid, and we've had some of the pneumatics, this one really strengthens and broadens our capability on the two packages you'll see in a second. From the applications and the markets, is a really nice fit for us, and it, again, goes back to inputs that you think about automation, you think about the management of automation, the control, the data management. This is one more capability that we have that now allows us to communicate and manage that information and manage the process across the food and beverage, pharmaceutical, and other hybrid markets. I firmly believe this will go across. We'll even get into some of the process side over time.
Now, obviously, we have to live and learn a little bit more about the technologies, but it really strengthens our offering, and it is really complementary. I am looking forward to working with Aventics and trying to figure out what we can do with that technology and what technology they can bring to us, into our businesses, and what technologies we can take into them to make them a stronger communication and control company. Here is a classic example in the factory automation space. If you look at where we are today, Emerson, the ASCO Numatics Joucomatic business sits in the blue check. Aventics comes in. In some cases, we have a very tight fit with each other. Some cases, we are stronger and they are stronger. It really does come in very nicely up and down that whole factory automation space.
Clearly, as you look at above the box, we would like to continue to add to that, and we will continue to add to that over time. As we look at the space within that box now, we are one of the major players, and we will continue to strengthen our capabilities and take it across the whole marketplace. This actually fits in, as the people watch and understand this, within our whole system architecture, our whole platform architecture. If you think about how this fits in in going either into a control architecture or a cloud or within a hybrid approach, which we have now, as you know, we have brought out some hybrid PKS within the system side or the process side. We also have the OCC100 within the power side, which allows us to go after certain hybrid markets with an integrated PLC.
We really continue to add to this space, which allows us to move across, strengthen our position both in the process world, but the hybrid world and the discrete world. This acquisition over time will touch on all three of those spaces. If you look at the mix between the two companies, if you think about on the left-hand side, those bubbles are Emerson's fluid motion control today, run by Lal Karsanbhai and really directly run by Manish. Then Aventics comes in, and then you see the combination. You will see that we are very strong in Americas. We are very strong in Asia. Within Europe, we have about 30% of the market. I mean, not 30% of the market, 30% presence there today with our businesses.
You can see how it fits, and you measure it back together with their strong presence in Germany, their strong presence in the rest of Europe. You see, if you put them together, you can see that we have a better balance between the two businesses, between Americas being 39%, rest of Europe being around 28%, and then Germany getting close to 16%-17%, and then Asia, 17%. So a very nice mix, and I think over the next several years, we will be able to figure out how to leverage this geographic mix on both sides of the business and both sides across automation solutions. From the end market standpoint, you can see we are very strong in, obviously, process and hybrid. We are very strong in industrial. We have a pretty good presence in discrete.
You see where they come in, they come in very nicely in discrete, very nicely in the industrial, and we both have a nice little piece in the hybrid side. Again, I think that over time, we'll move them even further into that process hybrid marketplace. It's a good growing market. As we look at this automation space here, it's around 3%-5% market growth. I firmly believe that with our technologies and global reach, that we could add a point of incremental growth in this. Clearly, I think we have some significant margin improvement across the space. This business is typically the type of business and marketplace they serve. They're pretty close to the corporate average of Emerson today. Parts of it are above it, parts of it might be slightly below it.
On average, we're pretty close to our average today, and I firmly believe that we have unique opportunities around that margin. They're well run relative to working capital. They're well run relative to capital deployment. We always have opportunities, I think, in capital leverage and working capital leverage. I think here, what we're looking at is primarily a little faster growth, a little bit faster margins opportunities, and obviously, really unique customer packages. The cash purchase price, as we put in the announcement, was around EUR 527 million, around 12x 2018 EBITDA. It'll be slightly accretive next year in 2019. Most likely, we'll close this right towards the end of our fiscal year. We obviously have some additional restructuring.
We'll have some typical accounting charges that we have to take with acquisitions as we revalue the backlog, as we revalue the inventory, as we revalue everything that. Accountings don't like you to have profit in anything, so you have to figure out how to revalue this stuff. Probably one of the most asinine accounting rules I've seen out there in the world. That's my opinion, clearly, but I think it is. No one's really logically told me how it makes sense to have to revalue backlog and revalue inventory, but go figure. I'm just a CEO, that's all. We'll have some, obviously, amortization and acquisition things, and we'll tell you what they are in the next couple of months as we get close to closing. We're still working on it. It's still early days, and we'll figure that out.
We'll have this closed by the end of this fiscal year. At the latest, I would say October. I mean, hopefully not October, but it's a very strong bolt-on acquisition, and I look forward to answer some questions. If you think about the chart that we showed in New York relative to our bridge of the sales acquisitions, the earnings acquisitions with Paradigm, Cooper-Atkins, Aventics, and now the Textron Tools & Test business, we pretty much have gotten the sales and earnings per share that we're trying to target from the bolt-on acquisitions. With the faster growth, clearly with the better profitability and the tax law, as we talked about, we have additional capacity from the balance sheet, and we'll start working on that as we go forward here.
Right now, our hands are all on deck relative to the closing of the Textron tools and test business. Clearly getting Aventics approved and closing that. The Pentair Valves & Controls business continues to go extremely well. We bought that at a very good time relative to the market. Right now, I really like where we sit, and we're driving a very strong underlying growth in both sales and reported sales and underlying earnings and reported earnings. Really well down the path of our bridge chart that we presented to you in the [next] investor conference in New York in February. With that, we'll open the floor up for some questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question is from Andrew Obin of Bank of America, Merrill Lynch. Please go ahead.
Hi, guys. Good morning.
Good morning, Andrew. How you doing?
I'm doing well. Just a question. It does double your pneumatic motion business. How do you think about your positioning with it? I think ASCO is more of a niche business, but the business overall is dominated by big German company and big Japanese company. What share in pneumatics do you think you will have after you're done? If you can just explain to us how your pneumatics business is positioned relative to the big pneumatics players.
We'll be, and Mark, you can confirm this, but I think we'll be number 3 in the global marketplace. SMC is the world's largest, as we know. Festo, and how many CEOs would know all these things, are number 2. We have a very strong presence. The difference is we actually have more capability around this pneumatic and control piece than anybody else. From the standpoint, SMC is very much focused in this market space, as is Festo. I think that a strong number 3, and I like it. If you understand this marketplace, it's not as fragmented anymore. The mergers have happened, with the IMI and the Parker and the other people out there, the CKD in Japan. There's not a lot of room for movement here. This is a unique bolt-on acquisition that Mark and his team worked on.
We'll have a great position because we'll have so many sensors around this space. We'll have control around this space, and those competitors do not have that.
Just looking at-
Wait a second. Hey.
Andrew, there's also a trend towards more of a combination between the fluid control and the pneumatic side. ASCO is such a global franchise, and their strength in fluid control really will play into providing more of a package to the customers. That's where we see that we can continue to grow above market against the SMCs, Festos, and the rest of the competitors in the market.
Just looking at the slide six, just so I understand, the Aventics capability and Emerson capability, is it geographically, is ASCO stronger in U.S. and Aventics much stronger in Europe? Do you also have synergies on these devices as well? Are the technologies complementary on the devices as well?
We have both, but your first statement is true. Aventics is much stronger in Germany, and ASCO is also strong in Germany, but also very strong in Europe, outside of Germany. Then on the devices technology cases, there's some unique capabilities that we can share amongst each other from a leverage standpoint. There'll probably be some synergy relative to some of the manufacturing process and the capacity issues. If you think back at it right now, with acquisitions we've been doing in Europe, in Western Europe and Germany, we're now becoming one of the major automation players in Germany. Between the acquisitions we did here with Klauke. In our current, if you think about the acquisitions we did with V&C, we picked up some very strong German presence. We've become a very good competitor in Germany now relative to our whole automation solutions space.
I like what I'm seeing right now, and we have a great position there, and these guys bring that to us, but at the same time, there's a lot of sharing of technology.
Terrific. Thanks.
One other thing. It's hard to describe the nuances of this product family through all the different end markets. You'll see that the ASCO currently has some strength in certain end markets and certain geographies, and Aventics has strength in others from a technology perspective. It may not be as duplicative as these check marks may show.
Yeah
There's a lot of subtleties and nuances across the end markets in the discrete and hybrid space.
Thank you very much. Congratulations.
Take care, Andrew. Thanks.
Thanks.
The next question is from Jeffrey Sprague of Vertical Research Partners. Please go ahead.
Thank you. Good morning.
Good morning, Jeff. Where are you hiding out today?
I'm in Stamford, hoping the sun comes out.
Did your daughter graduate yet?
Tomorrow's Villanova graduation. I'll be there.
Are you giving the commencement speech? Are you giving the commencement speech?
No, I think I only write checks, Dave.
You gave the commencement speech down at Vanderbilt. You should be able to give I mean, they want to hear your dynamic presentation on something.
Yeah. I'll be on there as the CEO of Vertical Research Partners, just like the CEO of Emerson.
That's not the same clout as CEO of Emerson. I'm from St. Louis, and what clout do I have?
Hey, well, we're looking forward to it. Thanks for asking.
Well, I wish you well. It's a fun event, and congratulations. As you know, it's a great school.
It is. Hey, just a couple things. I was wondering if you could elaborate a little bit more on the comment about a trend between fluid automation and pneumatics. I was also just curious too, is there any technological disruption in that market? Perhaps, for example, electrification nudging out pneumatics or other applications in the market.
Well, to comment on the combination, there's a couple of different ways to look at it. Number one is actually the two products can work together in certain industries, and it's happening today and will continue to kind of happen in the future and maybe grow further. I'd say the second one is just our customers are expecting companies, their vendors, to provide broader solutions. While they may not work exactly together, they're looking at getting the product from the same vendor because of the demographics that everyone's facing on reduced employments and everything. In terms of the electrical versus pneumatic, I think you've got to look at the price points on a lot of these things, and they're really significantly different. I don't know exactly how many units are sold in the pneumatic area, but, I mean, it's millions.
Yeah.
It is quite a bit. Over time, as we look at the predictive diagnostics that you can bring with the valve islands connected with pneumatics, you can offer some of the same advantages that electrical brings to it. We don't see any huge threat of electrical taking over the pneumatics.
Yeah, we've been in this business for a long time, and the technology comes in, but this is such a competitive and reliable technology for the machine builders or automation builders or the factories that there hasn't been a whole lot of substitution going on at this point in time, Jeff. We've brought some electronic stuff to it. We've brought some monitoring to it, but to the case of the price point, it's not something they want yet.
Should we think of this business being, I don't know, 90% machine builders, or really, what is the mixed machine builders versus other applications?
If you're talking the whole new business of fluid and motion controls, no, that's off. If you're thinking of Aventics, it's probably closer to 80%, but it highly goes through OEM/machine builders.
Thank you very much.
Thank you, Jeff. Have a great graduation with your daughter.
Thank you. See you next week.
Stop writing checks.
The next question is from Steve Tusa of JPMorgan. Please go ahead.
Hey, guys. Good morning.
Good morning, Steve.
Just on the kind of year 2021 type of accretion that we should be thinking about from both the cash as well as GAAP. I mean, on a GAAP basis, I think we're getting to like, I don't know, $0.09, $0.10, something like that. Is that about the right range or a little better than that?
No, I'm not going to give you each pieces, but if you think about what I believe we told you in February in those bridge charts, I think, Mark, we said around $0.15.
Correct.
$0.15 for these acquisitions by 2021. Right now, I think we're probably a tad higher than that, maybe a couple pennies higher than that. That's what we see at this point in time right now. I don't see anything beyond that.
Okay.
If we can grow them faster, obviously better. Right now, within this window, we're talking 2018 to 2021, and so there's only so much you can see. It's still definitely accretive, and I think with the $0.15 I see right now, we're above what we thought we'd be at relative to what we presented in February.
I would assume if you're buying an asset like this that's a little more discrete, perhaps industrial, that you remain relatively bullish on kind of what you're seeing out there in your order trends in your core business.
That's a very good assumption.
Are things holding up within that 5 to 10?
Yes, they are. I just testified yesterday in Congress. I was down in the House Committee on Ways and Means. I firmly see the investment in capital continues to expand. I think that it takes time for people to expand their capital. As I testified yesterday, this year in North America or the U.S., our capital spend will be up around 20%. In the U.S. next year, our capital will be up again around 20%. I fundamentally believe that people are starting to invest. The tax reform really did have an impact. The other addition is, as you know, I've always been more optimistic about the use of energy demand around the world.
I think that with the oil price in the $70 to $80 range, you're going to continue to see expansion from the small, medium, large projects. I think that will help us as you get out there in the 2019 and 2020 range. My profile that I've been talking about now for a while hasn't changed. I'm optimistic about where we sit. Our order pattern still stays right in that tight range that we've been talking about.
Right. The 5 to 10? You're kind of reaffirming that?
Yeah, I confirm that.
Okay.
I'll confirm it on EPG too, Jeff.
Are you going to talk about the-.
I'm sorry.
That's all right. I could definitely be called worse. Jeff's the guy we looked up to for a long time. Are you going to talk at all about 2019 EPG next week?
No.
Okay, great. Thanks a lot.
No, don't you understand? N-O. No.
I understand. Thanks, Dave.
See you later. I'm not webcasted either.
The next question is from Robert McCarthy of Stifel. Please go ahead.
Good morning, Dave. How you doing?
Not too bad. These guys ruined my workout this morning. I had to rush out of there. I'm sitting here with my bat and my rally monkey and my smelly T-shirt on. Other than that, I'm doing well.
Well, rhythm and cake, Dave.
That's good, Rob. That's good.
Moving from the ridiculous to the sublime. What I would say is the following. How competitive was this transaction? Was it a closed negotiated sale? Was it an auction process? Anything you can give us in terms of color, because obviously you would think, given how you've conceived and articulated this asset, it would be coveted.
It was.
There was a process.
It was coveted.
At some times through the process, it was a bit opaque, but it was a process.
There's only several people that really could leverage this asset, and all of them are there, just like the last deal.
Okay.
I think in the end, private equity firms just don't give things away. It's a process. You compete for it, and you have to develop, and you have to figure out when you can and cannot walk away. It was a very tough process.
Understood. Then anything you can give us about kind of the gross margin or capital intensity characteristics around the businesses and anything you can talk about, perhaps, explicit cost synergies?
Not yet. I'd like to get this thing approved first. I made a statement one time in V&C, and it caused me to have to go through a divestiture. I'm going to be very careful this time, Rob, on that issue. At the point in time we get close to closing and got approvals, then I'll give you more insights into it, okay?
Perfect. I'll see you down next week.
See you. Thank you very much.
The next question is from Simon Toennessen of Berenberg. Please go ahead.
Yes. Good morning, gents.
Good morning, Simon.
The first question. The deal overall looks pretty similar to your Tools & Test deal, being a sort of niche bolt-on deal in areas where you want to expand to. Looking at the pyramid that you provide, where you highlight sort of the key areas that you want to focus on, it seems to be quite a nice complementary deal for you. Where do you say the focus is from here on? Would you say it's rather in this, what you call data management side, so more of the MES-type business? Just generally, how should we think about potential deal activity for the rest of the year? Then just a question on, obviously, discrete exposure. You're boosting it quite a bit now in the fluids space. Obviously, you tried end of last year to push your overall discrete exposure quite materially.
How should we think about it going forward? Does it actually increase your need to invest into areas like discrete controls and PLCs, and also in inorganic way going forward and maybe in a smaller fashion? Or do you think you're just going to focus on the discrete areas more in the sort of type deals that you've announced today?
Well, a couple of different things. The way to, I guess, think about the pyramid on whether it's automation solutions or commercial and residential solutions, I think we've been pretty clear on where our focus areas are, and it's somewhat a question of what's available and what we can go get. We are very interested in all 3 levels, and it really depends on availability and how it fits together. I can't comment on everything that's going on, but we're looking at all the different layers. We love devices. They contribute the data into the architectures of the control and allows us to convert that data into information and monetize it for our customers. We've been doing it for over 20 years and making our devices intelligent. On your question on does this increase our need to get into control? It doesn't.
I think it stays the same as we've always thought about the control layer in any of our industries. As part of the ecosystem, it's an important part, but we don't need a control to make this work. We're going to create value with this deal, and as we think about our deals we need to create value for our shareholders.
I think from my perspective, Both the Textron deal and this deal are two unique assets that we've been very interested in for a long time. Textron, going back to the point in time that I actually ran Ridge Tool back in 1989 and 1990. This acquisition, we've become very interested in the last three or four years as we try to work out in the hybrid space. We're going to continue to try to figure out, can we acquire some nice bolt-on, what I call software and data management and control assets. Those only come up only so often, and we work them constantly. Right now, there seems to be a lot more opportunities around the device instruments and sensors area, which is fine, we'll continue to bolt on there.
At the same time, we're developing internally, as we announced, the embedded PLC on both the automation side and both the power and the process side. I think that we'll continue to nip and tuck. The bigger deals will most likely be on the sensor side and the instrument side, and the medium tuck-on deals will be up there on the software and the control side. As Mark said, we don't need to increase our emphasis on control at this point in time. We have enough control and capabilities to do what we need to do in this space.
Great. Thanks, David.
You're welcome. Thanks, Simon.
The next question is from Akshay Gupta of Goldman Sachs. Please go ahead.
Hi, good morning, guys.
Good morning, Akshay.
I'm just on for Joe, and I have a couple of questions here. Number one, can you talk about specifically the areas where you're aiming to get out the 500 basis points of cost?
No, we're not going to do that yet. No, not yet. I already said that we will not touch that until we get ready to get things closed. Historically, we've been very good at leveraging the two businesses, and there are unique opportunities out there.
Got it. Then just secondly, going forward from here, are you still looking at more bolt-ons, or does the focus now shift to M&A or maybe even raising the dividend? Thank you.
You think about our capital allocation analysis that we talked about. If you think about the cash generation we see right now, we're going to focus on the same profile that we've had before, where we're looking at any type of year, we're looking at acquisitions, dividends, and share repurchase will represent around 40%-50% of our cash distribution, and then clearly internal is hopefully be in the 50%-60% range. That's what I've communicated. The profile we're looking at right now with the incremental benefit from the higher growth, the tax reform, and also our better profitability, we're looking right now about a $4 billion incremental opportunity, and I'm hoping to do about 60% of that in, again, acquisitions, share repurchase, and dividends, and that'd be about 40%, and then 60% in the internal.
The key issue for us, as we talked about, Akshay, in February, is we're going to maintain our incremental dividend increase all the way till we get back to around the 45% of our dividends to free cash flow, which right now looks like it's going to be sometime in 2019 or 2020, and then we'll look at accelerating our dividends at that point in time. In the meantime, we're looking at acquisitions, bolt-ons, internal investments. We're going to do $1 billion of share repurchase this year. We'll probably be doing somewhere between $750 and $1 billion next year. That's how we sit.
Got it. Thanks, Dave.
Thank you very much. All the best. Again, I want to thank everybody joining us this morning. Look forward to seeing many of you at EPG. Again, I will not be webcasting, and that's my profile, as you all know. The people that work can get down there. I think that's the benefit of being there, and I will be there the night before to have a drink. Look forward to seeing everybody and look forward to have a chance to update everybody on Emerson. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.