Good morning, and welcome to the Emerson investor webcast and conference call. All participants will be in listen only mode. After today's presentation, there will be an opportunity 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 Belanda, Senior Vice President of Planning And Development. Welcome, and 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.
And 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 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. Also want to thank Mark Belanda and his team, Kala and Lynn.
Vanessa, a lot of hard work the last several weeks as we work through this, and I really appreciate it. Now comes the fun part as we try, we should get this closed and integrate it within, and that's going to be up to Larry Flatt and Manish. And a lot of great opportunities across our automation business. And this is an acquisition that we've looked at for many, many years. And fortunately, the private equity owner decided to allow us to buy the company.
And so that's where we are right now. If you look at the chart, the pyramid chart, It shouldn't be surprised as with the tools acquisition we just recently did. This one fits right in with a technology pyramid. It fits right down in the devices and sensors area fits in with a hybrid discrete marketplace. It really ties in, as you'll see in a second, nicely with our SCO in the hybrid business that we have today, it really goes to the whole solutions package.
And fits in actually with the smart plant web strategy that we've embarked upon, we bring the industrial Internet thing to our customers. And 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. But again, it fits in very tightly with where we're trying to go. And as I said in February, just think about those boxes and that's where we're looking. And that's what we're gonna 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. Avontex is a very nice company. It was spun off a boss many years ago. And owned, 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 largest piece, and then a little bit in America is a little bit of Asia Pacific. So really the addition of Bontics 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, sales were $425,000,000 for 2000 employees. I do want to welcome the Avontex people who are 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 flat web. Automation business.
But, very much a discrete business, and also an 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. And again, I want to thank Mark and Phelan, and Vanessa and the team getting this done because it's not been easy. As you look at page 4, It is complimentary. It fits very nicely with our $1,500,000,000 business that we have in this space right now is a key a key sensor or key data point, key input point to our whole factory automation technologies.
It really does add some additional 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 a broader solutions package. And so that's why we're excited about. We believe that with our global reach and the technologies we have in the technologies that Evontic brings that we will be able to expand this and really have a nice package 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, $13,000,000,000 is the total market. It's within the definition that we've been giving out. It's, I believe, Mark, it's $205,000,000,000. Is that the level? So it's within this space that we've been talking about.
It's within the space that we presented in February. And Mark and his team has done a really good job of looking at where we can go and 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. We're going to continue to work up and 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 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 the total package, Jim, and how we pull that off. I believe it expands our capabilities, the food and beverages, the packaging and life sciences areas that we serve today, but clearly, we need to continue to invest and be stronger. And I think it really brings in unique opportunities on synergistic growth and customer and technology areas that I'm very, very excited about. And Avontex is a really well well on business. It's possible.
It's, and I believe that we're 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. But really lots of areas for us to add value over process to hybrid the discrete. Again, this whole market that we look at is around $205,000,000,000. Is that what we'll use $205,000,000,000.
We have been much stronger in the fluid control, though we've had the hybrid and we've had but this one really strengthens and broadens our capability on and the two packages you'll see in a second. But from the applications and the markets is a really nice fit for us. And it's, again, goes back to inputs that you think about automation, you think about ability 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 mean, 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's really complimentary. And I'm looking forward to, working with Evontics and trying to figure out what we can do with that technology and what technology they could bring to us into our businesses and what technologies we can take into them to make them a stronger communication and control company. Here's a classic example in the factory automation space. If you look at where we are today, Emerson, ASCO diematic business, Since the blue check, Avontex comes in, in some cases, we have a very tight fit with each other. In some cases, we're stronger and they're stronger.
And so it really does come in very nicely up and down that whole factory automation space. Clearly, as you look at above the box, we'd like to continue to add to that, and we will continue to add to that over time. But as we look at the space within that box, Now, we're one of the major players and we'll 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 and our whole platform architecture. If you think about how this fits in and going out there into a control architecture or a cloud or within a hybrid approach, which we've now, as you know, we've brought out some hybrid PKS within the, within the, assistance side or the process side.
We also have the OCC 100 within power side, which allows us to go after certain hybrid markets with the integrated PLC. So we really continue to add to the space, which allows us to move across strength in our position, both in the process world, but the hybrid world and the discrete world, and 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 the left hand side, those bubbles are Emerson's fluid motion control today, run by Larry Flat and really directly run by Manish. And then, Avantix comes in and then you see the combination.
You'll see that we're very strong in Americas. We're very strong in Asia. We have within Europe, we have about 30% of the market mean, not on 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 rest of Europe. And so if you put them together, you can see that we have a better balance between the two businesses between America being 39%, rest of the year being around 28% and then Germany getting close to 16%, 17% than Asia 'seventeen.
So mix. And I think over the next several years, we'll be able to figure out how to leverage this geographic mix on both sides of the business We have a pretty good presence in discrete. You see where they come in, they come in very nicely in discrete, very nicely in industrial, and we both have a flow piece in the hybrid side. And again, I think that over time, we'll move that, I mean, further and further into that process hybrid marketplace. It's a good growing market.
As we look at the this automation space here, it's around 3% to 5% market growth, I firmly believe that with our technologies and global reach that we could add a point of incremental growth in this, And 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 might be slightly below it, but on average, they'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 run into capital. Deployment. We always have opportunities, I think, and, capital leverage and working capital leverage. I think here, what we're looking at is primarily a little bit faster growth, a little bit faster margins, opportunities.
And obviously, really unique customer packages. The cash purchase price as we've put in announcement was around EUR 527,000,000, around 12 times 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 will obviously have some additional restructuring.
We'll have some typical accounting charges 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 and anything. So you have to figure out how to revalue this stuff. Probably one of the most asset and accounting rules I've seen out there in the world. But, and that's my opinion, clearly, but I think it is. No one's really logically told me how that makes sense to have to revalue backlog and revalue inventory, but go bigger.
I'm just a CEO. That's all. We'll have some obviously amortization and acquisition things. We'll tell you what they are. In the next couple of months as we get close to closing, we're probably we're still working.
It's still early days and we'll figure out that out. We'll have this closed by the end of this fiscal year. At the latest, I would say, October, mean, hopefully not October, but it's a very strong bolt on acquisition. And, I look forward to answer some questions. Also, you think about the chart that we showed in New York relative to our bridge of the sales acquisitions and earnings acquisitions with with Paradigm, Cooper Atkins, Avanx, and now the Textron Tools and Test business, we've put them on gotten the sales and earnings per share that we're trying to target from the bolt on acquisitions, clearly with the faster growth, clearly with a better prop ability and the tax law, as we've talked about, we have additional capacity from the balance sheet, and we'll start working on that as we go forward here.
But right now, our hands are all on deck relative to the closing of the Textron Tools and Test business, clearly getting a Vontics approved and closing that. The Pentair Valves and Control business continues to go extremely well. We bought that at a very good time relative to the market. So 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. So really well down the path of our bridge chart that we presented to you in the investor conference in New York in February.
So with that, we'll open the floor up for some questions.
The first question is from Andrew Obin of Bank of America Merrill Lynch. Please go ahead.
Hi, guys. Good morning.
Good morning, Andrew. How are you doing?
I'm doing well. I'm doing well. Just a question. So it does double your Pneumatic Motion business. How do you think about your positioning with it because I think ASCO was is more of an issue 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? And if you can just explain to us how your pneumatics business is positioned relative to the big pneumatics players?
We'll be, 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. Now 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 its market space as is, as is Festo. But I think that a strong number 3, and I like it.
There's this marketplace, if you understand this marketplace, it's highly it's not as fragmented anymore. The mergers have happened with the IMI's and the parkers and the other people out there, the CKD into pan. And so there's not a lot of room for movement here. So this is a unique bolt on acquisition that Mark and his team worked on. And so I mean, we'll have a great position because we'll have so many sensors around this space.
We'll have control around this space. And that's not some those competitors do not have that.
And there's, Andrew, there's also a trend towards more of a combination between the fluid control and the pneumatic side. And ASCO is such a global franchise in their strength fluid Control really will play into providing more of a package to the customers. And so 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.
And just looking at the Slide 6, just so I under stand. You know, the Aventics capability and Emerson capability, is it geographically is ASCO stronger in U. S. And Aventics much stronger in Europe? Or do you also have synergies on these devices as well, the technology is complimentary on the devices as well?
We have both, but your first name is true. Avantex is much stronger in Germany. And, and ASCO is also strong in Germany, but also very strong in Europe outside of Germany. And then on the to devices, technology cases, there's some unique capabilities that we can share amongst each other from a levels leverage standpoint. There's probably some synergy relative some of the manufacturing process and the capacity issues.
But if you think back at it right now with acquisitions we've been doing in Europe and here up in Germany. We're now becoming one of the major automation players in Germany. And, between the acquisitions we did here with Cloudcock, In our current if you think about the acquisitions we did with D And C, we pick up some very strong German presence. So 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.
Thing. It's hard to describe the nuances of this product family through all the different end markets. And so you'll see that the ASCO currently had some strength in certain end markets and certain geographies and Aventics has strength in others from a technology perspective. So it may not be as duplicative as these check marks may show, because there's a lot of subtleties and nuances across the end markets in the discrete and hybrid space.
Thank you very much. Congratulations.
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 now today?
I'm in Stanford hoping the sun comes out.
Did your daughter graduate yet? Tomorrow is Villanova. Graduation. Are you giving the commencement speech? Are you giving the commencement speech?
No, I think I only write checks, Dave.
I just gave a commencement speech out of Vanderbilt, but you should, you should feel different. They want to hear your dynamic presentation something?
Yes. I'll be on there as the CEO of Vertical Research Partners, just like the CEO of End
of America.
That's not the same cloud as CEO of Emerson. I'm from St. Louis, what do I have? Relations. As you know, it's a great school.
It is. Hey, just a couple of things. I was wondering if you could elaborate a little bit more on the comment about a trend between fluid automation and pneumatics. And I was also just curious too, is there any technological disruption in that market, perhaps, for example, electrification nudging out pneumatic or other applications in the market?
Well, to comment
on the combination, there's a couple of different ways to look at it. Number 1 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. And 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 ends 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. It is quite a bit. I mean, 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 brings to it, but we don't see any huge threat of electrical taking over the pneumatics.
Yes, 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 some electronics stuff too. We brought some monitoring to it, but to the case of the price point, it's not something they want yet. And should we think of this business being
I don't know, 90% machine builders or really what is the mix 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's highly goes through OEMmachine Builders.
Thank you very much.
Thank you, Jeff. Now, great graduation with your daughter. Thank you. We'll see you all next week. Stop right, Jeff.
The next question is from Steve Tusa of JPMorgan. Please go ahead.
Hey, guys. Good morning. Good morning, Steve.
So 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, were 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 bit on that?
No, I'm not going to give you the each pieces, but if you think about what I believe we told you in February in those bridge charts, I think Mark, we've said around $0.15 for these acquisitions by 2021. So right now, I think we're probably a tad higher than that, maybe a couple pennies higher than that. So, that's what we see at this point, Tom, right now. I don't see anything beyond that.
We can grow them faster,
we could grow them faster, obviously, better. But right now, within this window, we're talking 18 to 21. And so there's only so much to see, but it's still definitely accretive. And that I think with $0.15 I see right now, we're above what we thought we would 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 your, what you're seeing out there in your order trends in your core business. Are things holding up and within that 5 to 10?
Yes, they are. And just testified yesterday in Congress. I was down in the House Ways of Means Committee. I finally 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 are 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%.
So I, I firmly believe the people are starting to invest, the tax reform really did have an impact. Now 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, the $80 range, you're going to continue to see expansion from the small, medium, large projects. And I think that will help us as you get out there in the 2019 2020 range. My profile that I've been about now for a while hasn't changed.
And I'm optimistic about where we sit in our order pattern still stays right in that tight range that we've been talking about.
Right. The $5,000,000 to $10,000,000, you're kind of reaffirming that?
Yes, I confirm that. I'll confirm it down EPG, EPG too, Jeff. Are you going to talk about, that's right. That's right.
I could definitely be called worse, the guy will look up to for a long time. Are you going to talk at all about 2019 ADTG next week?
No.
I understand. Thanks, Dave.
The next question is from Robert McCarthy of Stifel. Please go ahead.
Good morning, Dave. How are you doing?
Not too bad. These guys ruined my workout this morning. I had a rush there. So I'm sitting here with my fat and my Riley monkey and my smelly t shirt on. So other than I'm doing well.
Well, let them be cake, Dave, in any event. Moving from the ridiculous to the sublime. What I would say is the following. How competitive was this transaction? Was closed negotiated sale?
Was there 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, this asset, it would be coveted?
There was a process. It was coveted.
At some time, 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 year. So I think in the end, private equity firms just don't give things away. You have to hit the process.
You could pay for it and you
have to develop to figure out when you can and cannot walk away. So, it was a very tough process.
Understood. And 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 I'd like to get this thing approved first. I made a statement one time in VNC and it caused me to have to go through a structure. So I'm going to be very careful this time, Rob, on that issue. So we'll, at the point in time, we get close to closing and we got approval, I'll give you more insights into it, okay.
Perfect. I'll see you then next week.
See you. Thank you very much.
The next question is from Simon Tennison of Berenberg. Please go ahead.
The first question, I mean, the deal overall looks pretty similar to your Tools and Test deal being sort of niche bolt on deal in areas where you want spend to. I'm looking at the pyramid that you provide, where your highlights are the key areas that you want to focus on. It seems to be quite a nice complimentary degree. Where do you say the focus is from here on? Is it would you say it's rather in this what you call data management side, so more of the MES type business?
And just generally how should we think about potential deal activity for the rest of the year? And then Just a question on obviously discrete exposure. You're boosting it quite a bit now in the fluids space. And obviously, you tried end of last year to push your overall discrete exposure quite materially. How should we how should we think about it going forward?
Is it does it actually increase your need to invest in areas like Discrete Controls and PLCs, in also an 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?
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 focused areas are and it's somewhat a question of what's available and what we can go get we are very interested in all three levels. And it really depends on availability and how it fits together. So 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 convert that data into information and monetize it for our customers. And that's really we've been doing it for over 20 years and making our devices intelligent On your question on does this increase need to get into control? It doesn't. I think it stays the same as we've always thought about 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, we both the Textron deal in this deal are 2 unique assets that we've been very interested for a long, long time. And tech on going back to point in time that I actually ran Rich School back in 1989 in 1990. And this acquisition has become very interested in the last 3 or 4 years as we try to work out in the hybrid space. But, we're going to continue to drive out, can we acquire some nice bolt on apps, what I call software and data management and control assets? But it's those are 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. So we'll continue to bolt on there. But at the same time, we're developing internally as we announced the embedded PLC on both the automation side and both the power the process side. So I think that we'll continue to nip and talk about it.
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 in the software and control side. But as Mark said, we don't need to increase our emphasis on control point and we have enough control and capabilities to do what we need to do in this space.
The next question is from Ashae Gupta of Goldman Sachs.
So I'm just on for Joe and Harry a couple of questions here. Number 1, 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. But historically, we've been very good at leveraging the 2 businesses. And they said, there are unique opportunities out there.
Got it. And then Just secondly, going forward from here, like, are you still looking at more bolt ons or like, does the focus now shift to M and A or maybe even raising the dividend? Thank you.
No, as we talked about in our, you think about our capital allocation, analysis that we've talked about. If we think about the cash generation we see right now, we're going to focus on the same profile that we've had before. We're looking at over any type of year, we're looking at, acquisitions, dividends, and share repurchase will represent around 40% to 50% of our cash distribution. And then clearly internal is be in the 50% to 60% range. So that's what I've communicated.
So the profile we're looking at right now with an incremental benefit from the higher growth, the tax we form and the, and also our federal profitability, we're looking right now about a $4,000,000,000 incremental opportunity I'm hoping to do about 60% of that. And again, acquisitions, share repurchase and dividends, and that'd be about 40 and 60% in the internal. The key issue for us as we talked about in Ashi in February is we're going to maintain our incremental, dividend increase all the way till we get back to the, around the 45% of our dividends of free cash flow which right now looks like it's going to be sometime in 2019 or 2020. And then we'll look at it accelerating our dividends at that point in time. In the meantime, We're looking at acquisitions, bolt on internal investments.
We're going to do about we're going to do $1,000,000,000 of share repurchase this year. We'll probably be doing somewhere between $750,000,000,000 $1,000,000,000 next year. That's how we sit.
Got it. Thanks, Dave.
Thank you very much. All the best. Again, I want to thank everyone 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 at work can get down there. I think that's the the benefit of being there. And I will be there the night before I have a drink, and look forward to seeing everybody and to have a chance to update everybody on Emerson. Thank you very much.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.